<PAGE>
As filed with the Securities and Exchange Commission on July 26, 1996
Securities Act File No. 33-
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
--------------------
FORM N-14
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 /X/
Pre-Effective Amendment No. ___ / /
Post-Effective Amendment No. ___ / /
--------------------
PIPER FUNDS INC.--II
(Exact name of Registrant as specified in charter)
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402-3804
(Registrant's telephone number, including area code: (800) 866-7778
--------------------
William H. Ellis
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402-3804
(Name and address of agent for service)
--------------------
Copies to:
Kathleen L. Prudhomme, Esq. Stuart M. Strauss, Esq.
Dorsey & Whitney LLP Gordon Altman Butowsky
220 South Sixth Street Weitzen Shalov & Wein
Minneapolis, MN 55402-1498 114 West 47th Street
New York, NY 10036
--------------------
It is proposed that this filing will become effective on the thirtieth day
after the date of filing pursuant to Rule 488.
--------------------
No filing fee is due because the Registrant has previously elected to register
an indefinite number of shares under the Securities Act of 1933 pursuant to the
provisions of Rule 24f-2 under the Investment Company Act of 1940 and such
election under Rule 24f-2 has not been terminated.
--------------------
================================================================================
<PAGE>
FORM N-14
PIPER FUNDS INC.--II
Cross Reference Sheet
Pursuant to Rule 481(a) under the Securities Act of 1933
Part A of Form N-14
Item No. Proxy Statement and Prospectus Heading
- - - ------------------- --------------------------------------
1(a) Cross Reference Sheet
(b) Front Cover Sheet
(c) *
2(a) *
(b) Table of Contents
3(a) Fee Table
(b) Synopsis
(c) Principal Risk Factors
4(a) The Reorganization
(b) The Reorganization--Capitalization Table
(Unaudited)
5(a) Incorporation by Reference; Synopsis;
Comparison of Investment Objectives, Policies
and Restrictions; Additional Information
About the Fund and Adjustable Rate Fund
(b) *
(c) *
(d) *
(e) Available Information
(f) Available Information
6(a) Incorporation by Reference; Synopsis;
Comparison of Investment Objectives, Policies
and Restrictions; Additional Information
About the Fund and Adjustable Rate Fund
(b) Available Information
(c) *
(d) *
7(a) Introduction--Proxies
(b) *
(c) Introduction; The Reorganization--Dissenters'
Rights
8(a) The Reorganization
(b) *
9 *
Part B of Form N-14
Item No. Statement of Additional Information Heading
- - - ------------------- -------------------------------------------
10(a) Cover Page
(b) *
11 *
12(a) Cover Page (Incorporation by Reference)
(b) *
13(a) Cover Page (Incorporation by Reference)
(b) *
(c) *
14 Cover Page (Incorporation by Reference)
Part C of Form N-14
Item No. Other Information Heading
- - - ------------------- -------------------------
15 Indemnification
16 Exhibits
17 Undertakings
- - - --------------------
* Not Applicable or Negative Answer
<PAGE>
PIPER CAPITAL MANAGEMENT
222 South Ninth Street
Minneapolis, Minnesota 55402-3804
800 866-7778
August __, 1996
Dear Shareholder:
A special meeting of shareholders of Institutional Government Adjustable
Portfolio (the "Fund") will be held at the offices of the Fund on September 12,
1996 at 10:00 a.m., central time, at 222 South Ninth Street, Eleventh Floor,
Minneapolis, Minnesota.
This meeting has been called to seek shareholder approval of the merger
of the Fund into Adjustable Rate Mortgage Securities Fund ("Adjustable Rate
Fund"), a series of Piper Funds Inc. -- II. The merger will be accomplished
by selling the assets of the Fund to Adjustable Rate Fund in exchange for
shares of Adjustable Rate Fund. If approved, Fund shareholders will become
shareholders of Adjustable Rate Fund and will receive shares with a value
equal to the value of their Fund shares.
Piper Capital proposed this reorganization to the Fund's Board of Directors
because the Fund has been unable to attract and retain sufficient assets to make
its continued operation economically viable. We urge you to read all of the
enclosed materials carefully but direct your attention to the following
important points:
- The Board of Directors has unanimously approved the reorganization and
recommends that you vote FOR the reorganization.
- The two funds have nearly identical investment objectives. The Fund's
objective is high current income consistent with low principal
volatility. The investment objective of Adjustable Rate Fund is
to provide the maximum current income that is consistent with low
volatility of principal.
- Tom McGlinch currently manages both funds and would remain responsible
for the Adjustable Rate Fund's day-to-day management.
- Shareholders will not incur any commissions, sales loads or other
charges in connection with the reorganization and Piper Capital has
agreed to pay for all direct expenses including the proxy
solicitation.
- While reimbursements currently keep the expense ratios of both the
Fund and the Adjustable Rate Fund artificially
<PAGE>
low, Piper Capital does not currently intend to continue reimbursing
expenses for either fund in fiscal 1997. Absent any such expense
reimbursements, the expense ratio for Adjustable Rate Fund is lower
than the Fund's expense ratio.
- The reorganization will not result in any federal taxable income to
the Fund or its shareholder.
PLEASE MARK, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD AS SOON AS
POSSIBLE, AS YOUR PROMPT RESPONSE WILL ELIMINATE THE NEED FOR ADDITIONAL
MAILINGS. A postage-paid envelope is enclosed with each proxy mailing for your
convenience. As the meeting date approaches, if you haven't voted you may
receive a telephone call reminding you to vote.
Attached are the formal Notice of Special Meeting and the Proxy
Statement/Prospectus. Also enclosed are a number of other documents that will
provide you with more information about the Fund and Adjustable Rate Fund. If
you have additional questions, please contact your investment professional or
call Piper Capital at 1 800 866-7778 and press 2.
Sincerely,
William H. Ellis
President
<PAGE>
PIPER INSTITUTIONAL FUNDS INC.
Institutional Government Adjustable Portfolio
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402-3804
-----------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD SEPTEMBER 12, 1996
-----------------------------
TO THE SHAREHOLDERS OF INSTITUTIONAL GOVERNMENT ADJUSTABLE PORTFOLIO, A SERIES
OF PIPER INSTITUTIONAL FUNDS INC.
Notice is hereby given that a Special Meeting (the "Meeting") of
shareholders of Institutional Government Adjustable Portfolio (the "Fund"), one
of two portfolios of Piper Institutional Funds Inc. (the "Company"), will be
held at the offices of the Company, 222 South Ninth Street, Eleventh Floor,
Minneapolis, Minnesota 55402, on September 12, 1996 at 10:00 a.m., central time.
The purposes of the Meeting are:
I. To consider and vote upon an Agreement and Plan of Reorganization,
dated as of _____, 1996 (the "Plan"), by and between the Company, on behalf
of the Fund, and Piper Funds Inc. -- II ("Piper Funds II"), on behalf of
Adjustable Rate Mortgage Securities Fund ("Adjustable Rate Fund"), pursuant
to which substantially all of the assets of the Fund will be acquired by
Adjustable Rate Fund and shareholders of the Fund will become shareholders
of Adjustable Rate Fund receiving shares of Adjustable Rate Fund with a
value equal to the value of their holdings in the Fund. A vote in favor of
the Plan will be considered a vote in favor of an amendment to the articles
of incorporation of the Company required to effect the reorganization as
contemplated by the Plan.
II. To consider and act upon such other matters as may properly come
before the Meeting or any adjournment thereof.
YOUR DIRECTORS UNANIMOUSLY RECOMMEND THAT YOU
VOTE IN FAVOR OF THE ABOVE PROPOSAL.
The attached Proxy Statement/Prospectus describes the above proposal in
detail and is being sent to shareholders of record as of the close of business
on July 22, 1996, who are the shareholders entitled to notice of and to vote at
the Meeting. Please read the Proxy Statement/Prospectus carefully before
telling us through your proxy or in person how you wish your shares to be voted.
By Order of the Board of Directors
SUSAN SHARP MILEY
SECRETARY
August , 1996
---
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
IMPORTANT
THE BOARD OF DIRECTORS URGES YOU TO MARK, SIGN AND RETURN THE
ENCLOSED PROXY AS SOON AS POSSIBLE WHETHER OR NOT YOU EXPECT
TO ATTEND THE MEETING IN PERSON. THE ENCLOSED ADDRESSED
ENVELOPE REQUIRES NO POSTAGE AND IS PROVIDED FOR YOUR CONVENIENCE.
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
<PAGE>
ADJUSTABLE RATE MORTGAGE SECURITIES FUND
A SERIES OF PIPER FUNDS INC. -- II
PIPER JAFFRAY TOWER
222 SOUTH NINTH STREET
MINNEAPOLIS, MINNESOTA 55402-3804
(800) 866-7778 (TOLL FREE)
---------------------------
ACQUISITION OF THE ASSETS OF INSTITUTIONAL GOVERNMENT ADJUSTABLE PORTFOLIO
A SERIES OF PIPER INSTITUTIONAL FUNDS INC.
BY AND IN EXCHANGE FOR SHARES OF ADJUSTABLE RATE MORTGAGE SECURITIES FUND
A SERIES OF PIPER FUNDS INC. -- II
---------------------------
This Proxy Statement/Prospectus is being furnished to shareholders of
Institutional Government Adjustable Portfolio (the "Fund"), a series of Piper
Institutional Funds Inc. (the "Company"), in connection with an Agreement and
Plan of Reorganization dated as of ____, 1996 (the "Plan") pursuant to which
substantially all of the assets of the Fund will be combined with those of
Adjustable Rate Mortgage Securities Fund ("Adjustable Rate Fund"), a series of
Piper Funds Inc. -- II ("Piper Funds II"), in exchange for shares of Adjustable
Rate Fund. As a result of this transaction, shareholders of the Fund will
become shareholders of Adjustable Rate Fund and will receive shares of
Adjustable Rate Fund with a value equal to the value of their holdings in the
Fund as of the date of the transaction. The terms and conditions of this
transaction are more fully described in this Proxy Statement/ Prospectus and in
the Plan, attached hereto as Exhibit A.
Adjustable Rate Fund is a diversified series of Piper Funds II, an open-end
management investment company the shares of which may be offered in more than
one series. The investment objective of Adjustable Rate Fund is to provide the
maximum current income that is consistent with low volatility of principal.
Adjustable Rate Fund seeks to achieve that objective by investing primarily (at
least 65% of its total assets under normal market conditions) in adjustable rate
mortgage securities (as herein defined).
This Proxy Statement/Prospectus sets forth concisely information about
Adjustable Rate Fund that shareholders of the Fund should know before voting on
the Plan. This Proxy Statement also constitutes a Prospectus of Adjustable Rate
Fund filed with the Securities and Exchange Commission (the "Commission") as
part of its Registration Statement on Form N-14. The following documents
accompany this Proxy Statement/Prospectus: Adjustable Rate Fund's Prospectus
dated December 18, 1995; the Company's Prospectus dated November 1, 1995, as
supplemented June 24, 1996; a Statement of Additional Information relating to
the reorganization described in this Proxy Statement/ Prospectus dated ________,
1996; Adjustable Rate Fund's Statement of Additional Information dated
<PAGE>
December 18, 1995; Adjustable Rate Fund's Annual Report for the fiscal year
ended August 31, 1995; Adjustable Rate Fund's Semiannual Report for the six
months ended February 29, 1996; the Company's Statement of Additional
Information dated November 1, 1995; and the Company's Annual Report for the
fiscal year ended June 30, 1996. Adjustable Rate Fund's Prospectus dated
December 18, 1995, and the Company's Prospectus dated November 1, 1995, as
supplemented June 24, 1996, are incorporated herein by reference.
INVESTORS ARE ADVISED TO READ AND RETAIN THIS PROXY STATEMENT/PROSPECTUS
FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
PROXY STATEMENT/PROSPECTUS
Page
----
INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . 1
General. . . . . . . . . . . . . . . . . . . . . . . . . . 1
Record Date; Share Information . . . . . . . . . . . . . . 2
Proxies. . . . . . . . . . . . . . . . . . . . . . . . . . 2
Expenses of Solicitation . . . . . . . . . . . . . . . . . 3
Vote Required. . . . . . . . . . . . . . . . . . . . . . . 3
SYNOPSIS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
The Reorganization . . . . . . . . . . . . . . . . . . . . 4
Fee Table. . . . . . . . . . . . . . . . . . . . . . . . . 4
Tax Consequences of the Reorganization . . . . . . . . . . 6
Dissenting Shareholders' Rights of Appraisal . . . . . . . 6
Comparison of the Fund and Adjustable Rate Fund. . . . . . 6
PRINCIPAL RISK FACTORS. . . . . . . . . . . . . . . . . . . . . 10
Risks of Investments . . . . . . . . . . . . . . . . . . . 10
Litigation Risk. . . . . . . . . . . . . . . . . . . . . . 12
THE REORGANIZATION. . . . . . . . . . . . . . . . . . . . . . . 14
Background . . . . . . . . . . . . . . . . . . . . . . . . 14
The Board's Consideration. . . . . . . . . . . . . . . . . 14
The Plan . . . . . . . . . . . . . . . . . . . . . . . . . 16
Tax Aspects of the Reorganization. . . . . . . . . . . . . 18
Dissenters' Rights . . . . . . . . . . . . . . . . . . . . 20
Description of Shares. . . . . . . . . . . . . . . . . . . 20
Capitalization Table (unaudited) . . . . . . . . . . . . . 21
Interests of Certain Persons . . . . . . . . . . . . . . . 21
COMPARISON OF INVESTMENT OBJECTIVES, POLICIES AND
RESTRICTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . 21
Investment Objectives. . . . . . . . . . . . . . . . . . . 21
Investment Policies. . . . . . . . . . . . . . . . . . . . 21
Investment Restrictions. . . . . . . . . . . . . . . . . . 24
ADDITIONAL INFORMATION ABOUT THE FUND AND
ADJUSTABLE RATE FUND. . . . . . . . . . . . . . . . . . . . . . 25
General. . . . . . . . . . . . . . . . . . . . . . . . . . 25
Financial Information. . . . . . . . . . . . . . . . . . . 25
Management . . . . . . . . . . . . . . . . . . . . . . . . 25
Description of Securities and Shareholder Inquiries. . . . 25
Dividends, Distributions and Taxes . . . . . . . . . . . . 25
Purchases and Redemptions. . . . . . . . . . . . . . . . . 25
Pending Legal Proceedings. . . . . . . . . . . . . . . . . 25
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE . . . . . . . . . . 26
FINANCIAL STATEMENTS AND EXPERTS. . . . . . . . . . . . . . . . 26
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . 26
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . 26
OTHER BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . 27
EXHIBIT A--Agreement and Plan of Reorganization, dated as
of_____, 1996, by and between the Company, on
behalf of the Fund, and Piper Funds II, on behalf
of Adjustable Rate Fund . . . . . . . . . . . . . . A-1
<PAGE>
--------------------------
PROXY STATEMENT/PROSPECTUS
INSTITUTIONAL GOVERNMENT ADJUSTABLE PORTFOLIO
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD SEPTEMBER 12, 1996
--------------------------
INTRODUCTION
GENERAL
This Proxy Statement/Prospectus is being furnished to shareholders of
Institutional Government Adjustable Portfolio (the "Fund"), a diversified series
of Piper Institutional Funds Inc. (the "Company"), an open-end management
investment company, in connection with the solicitation by the Board of
Directors of the Company (the "Board") of proxies to be used at the Special
Meeting of Shareholders of the Fund to be held at the offices of the Fund, 222
South Ninth Street, Eleventh Floor, Minneapolis, Minnesota 55402-3804 on
September 12, 1996 at 10:00 a.m., central time, and any adjournments thereof
(the "Meeting"). It is expected that this Proxy Statement/Prospectus will be
mailed on or about August __, 1996.
At the Meeting, Fund shareholders will consider and vote upon an Agreement
and Plan of Reorganization, dated as of _______, 1996 (the "Plan") by and
between the Company, on behalf of the Fund, and Piper Funds Inc. -- II ("Piper
Funds II"), on behalf of Adjustable Rate Mortgage Securities Fund ("Adjustable
Rate Fund"), pursuant to which substantially all of the assets of the Fund will
be acquired by Adjustable Rate Fund in exchange for shares of Adjustable Rate
Fund. As a result of this transaction, shareholders of the Fund will become
shareholders of Adjustable Rate Fund and will receive shares in Adjustable Rate
Fund equal to the value of their holdings in the Fund on the date of such
transaction (the transactions described above are referred to as the
"Reorganization"). The shares to be issued by Adjustable Rate Fund pursuant to
the Reorganization ("Adjustable Rate Fund Shares") will be issued at net asset
value without a sales charge. Further information relating to Adjustable Rate
Fund is set forth in the current Prospectus of Adjustable Rate Fund accompanying
this Proxy Statement/Prospectus and is incorporated herein by reference. A vote
in favor of the Plan will be considered a vote in favor of an amendment to the
articles of incorporation of the Company required to effect the reorganization
as contemplated by the Plan.
1
<PAGE>
RECORD DATE; SHARE INFORMATION
The Board has fixed the close of business on July 22, 1996 as the record
date (the "Record Date") for the determination of the holders of shares of the
Fund entitled to notice of, and to vote at, the Meeting. As of the Record Date,
there were 538,180 shares of the Fund issued and outstanding. The holders of
record on the Record Date of shares of the Fund are entitled to one vote per
share held and a fractional vote with respect to fractional shares held on each
matter submitted to a vote at the Meeting. The holders of 10% of the shares
outstanding and entitled to vote will constitute a quorum at the meeting.
The following table sets forth information concerning those persons
known to Fund management to own of record or beneficially 5% or more of the
outstanding shares of the Fund as of the record date. The persons named below
have both record and beneficial ownership.
Name and Address of Record Holder Percentage Ownership
--------------------------------- --------------------
Norwest Bank Minnesota, N.A. 37.8%
as Trustee for St. Louis Park/Methodist Hospital
733 Marquette Avenue South, Mail Stop 0036
Minneapolis, Minnesota 55479-0031
Midsouth National Bank 18.5%
Attention: Karen L. Hail, Executive Vice President
102 Versailles
Lafayette, Louisiana 70501-6750
Greer State Bank 18.5%
1111 West Poinsett Street
P.O. Box 1029
Greer, South Carolina 29650-1395
As of the Record Date, the directors and officers of the Company, as
a group, owned less than 1% of the outstanding shares of the Fund.
To the knowledge of Piper Fund II's management, as of the Record Date no
person owned of record or beneficially 5% or more of the outstanding shares of
Adjustable Rate Fund. As of the Record Date, the directors and officers of
Piper Funds II, as a group, owned less than 1% of the outstanding shares of
Adjustable Rate Fund.
PROXIES
The enclosed form of proxy, if properly executed and returned, will be
voted in accordance with the choice specified thereon. The proxy will be voted
in favor of the Plan unless a choice is indicated to vote against or to abstain
from voting on the Plan. The Board knows of no business, other than that set
forth in the Notice of Special Meeting, to be presented for consideration at the
Meeting. However, the proxy confers discretionary authority upon the persons
named therein to vote as they determine on other business, not currently
contemplated, which may come before the Meeting.
Abstentions will be included for purposes of determining whether a quorum
is present at the Meeting and for purposes of calculating the vote but shall not
be deemed to have been voted in favor of such matters. Broker non-votes are
shares held in street name for which the broker indicates that instructions have
not been received from the beneficial owners or other persons entitled to vote
and for which the broker does not have discretionary voting authority. Broker
non-votes will be included for purposes of determining whether a quorum is
present at the Meeting, but will not be deemed to be represented at the Meeting
for purposes of calculating whether matters to be voted upon at the Meeting have
been approved. Because approval of the Plan requires an affirmative vote by a
majority of the outstanding shares, abstentions and broker non-votes all have
the same effect as a negative vote.
2
<PAGE>
If a shareholder executes and returns a Proxy Card but fails to indicate
how the votes should be cast, the proxy will be voted in favor of the Plan. The
proxy may be revoked at any time prior to the voting thereof by: (a) delivering
written notice or revocation to the Secretary of the Company at 222 South Ninth
Street, Minneapolis, Minnesota 55402-3804; (b) attending the Meeting and voting
in person; or (c) signing and returning a new Proxy Card (if returned and
received in time to be voted). Attendance at the Meeting will not in and of
itself revoke a proxy.
In the event that sufficient votes to approve the Plan are not obtained by
the Meeting date, or, subject to approval of the Board, for other reasons, an
adjournment or adjournments of the Meeting may be sought. Any adjournment would
require a vote in favor of the adjournment by the holders of a majority of the
shares present at the Meeting (or any adjournment thereof) in person or by
proxy. The persons named as proxies will vote all shares represented by proxies
which they are required to vote in favor of the Plan, in favor of an
adjournment, and will vote all shares which they are required to vote against
the Plan, against an adjournment. Approval of the Plan will be deemed approval
of the amendment to the articles of incorporation of the Company attached to the
Plan.
EXPENSES OF SOLICITATION
All expenses of this solicitation, including the cost of preparing and
mailing this Proxy Statement/Prospectus, will be borne by Piper Capital
Management Incorporated ("Piper Capital"), investment manager to the Company and
Piper Funds II. In addition to the solicitation of proxies by mail, proxies may
be solicited by officers and regular employees of the Company, Piper Capital or
the Fund's distributor, without compensation other than regular compensation,
personally or by mail, telephone, telegraph or otherwise. Brokerage houses,
banks and other fiduciaries may be requested to forward soliciting material to
the beneficial owners of shares and to obtain authorization for the execution of
proxies. For those services, if any, they will be reimbursed by Piper Capital
for their reasonable out-of-pocket expenses.
VOTE REQUIRED
Approval of the Plan by the Fund's shareholders requires the affirmative
vote of a majority (I.E., more than 50%) of the outstanding shares of the Fund.
If the Plan is not approved by shareholders, the Fund will continue in existence
and the Board will consider alternative actions.
3
<PAGE>
SYNOPSIS
THE FOLLOWING IS A SYNOPSIS OF CERTAIN INFORMATION CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROXY STATEMENT/PROSPECTUS. THIS SYNOPSIS IS
ONLY A SUMMARY AND IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION
CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROXY STATEMENT/PROSPECTUS AND
THE PLAN. SHAREHOLDERS SHOULD CAREFULLY REVIEW THIS PROXY STATEMENT/PROSPECTUS
AND THE PLAN IN THEIR ENTIRETY AND, IN PARTICULAR, THE CURRENT PROSPECTUS OF
ADJUSTABLE RATE FUND WHICH ACCOMPANIES THIS PROXY STATEMENT/PROSPECTUS AND WHICH
IS INCORPORATED HEREIN BY REFERENCE.
THE REORGANIZATION
The Plan provides for the transfer of substantially all of the assets of
the Fund, subject to stated liabilities, to Adjustable Rate Fund in exchange for
Adjustable Rate Fund Shares. The aggregate net asset value of Adjustable Rate
Fund Shares issued in the exchange will equal the aggregate value of the net
assets of the Fund received by Adjustable Rate Fund. On or after the closing
date scheduled for the Reorganization (the "Closing Date"), the Fund will
distribute Adjustable Rate Fund Shares received by the Fund to holders of shares
of the Fund issued and outstanding as of the Valuation Date (as hereinafter
defined) in complete liquidation of the Fund. As a result of the
Reorganization, each Fund shareholder will receive that number of full and
fractional Adjustable Rate Fund Shares equal in value to such shareholder's
shares of the Fund. The Board has determined that the interests of existing
Fund shareholders will not be diluted as a result of the Reorganization.
FOR THE REASONS SET FORTH BELOW UNDER "THE REORGANIZATION -- THE BOARD'S
CONSIDERATION," THE BOARD, INCLUDING ALL OF THE DIRECTORS WHO ARE NOT
"INTERESTED PERSONS" OF THE COMPANY ("INDEPENDENT DIRECTORS"), AS THAT TERM IS
DEFINED IN THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED (THE "1940 ACT"), HAS
UNANIMOUSLY CONCLUDED THAT THE REORGANIZATION IS IN THE BEST INTERESTS OF THE
FUND AND ITS SHAREHOLDERS AND RECOMMENDS APPROVAL OF THE PLAN.
FEE TABLE
The funds each pay a variety of expenses for management of their assets,
distribution of their shares and other services, and those expenses are
reflected in the net asset value per share of each of the Fund and Adjustable
Rate Fund. The following table sets forth the expenses and fees that
shareholders of the Fund incurred during the fiscal year ended June 30, 1996
and that shareholders of Adjustable Rate Fund are expected to incur for the
fiscal year ending August 31, 1996, provided that expenses are set forth absent
any expense reimbursements by Piper Capital. Piper Capital has voluntarily
limited Total Fund Operating Expenses for the Fund and Adjustable Rate Fund to
.60% of average daily net assets for the Fund's fiscal year ended June 30, 1996
and Adjustable Rate Fund's fiscal year ending August 31, 1996. Piper Capital
does not intend to continue expense reimbursements
4
<PAGE>
for either Fund during the 1997 fiscal year. The Pro Forma Combined fees
reflect the estimated fee schedule for the fiscal year ending August 31, 1996
assuming the Reorganization had occurred 12 months prior to that date and
assuming no voluntary expense reimbursements by Piper Capital.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
Adjustable Pro Forma
Fund Rate Fund Combined
------ ---------- ---------
<S> <C> <C> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) (1) 1.00% 1.50% 1.50%
Exchange Fee (2) $ 0 $ 0 $ 0
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES AS A PERCENTAGE OF AVERAGE NET ASSETS
Adjustable Pro Forma
Fund Rate Fund Combined
------ ---------- ---------
<S> <C> <C> <C>
Management Fees. . . . . . . . . . . . . . . . . 0.30% 0.35% 0.35%
12b-1 Fees (3) . . . . . . . . . . . . . . . . . 0.00% 0.15% 0.15%
Other Expenses . . . . . . . . . . . . . . . . . 1.45% 0.24% 0.24%
Total Fund Operating Expenses (4). . . . . . . . 1.75% 0.74% 0.74%
</TABLE>
_______________
(1) No sales charge will be imposed on Shares acquired in the Reorganization.
On unrelated purchases, the front-end sales charge of 1.00% for the Fund and
1.50% for Adjustable Rate Fund applies to purchases of less than $250,000 for
the Fund and $100,000 for Adjustable Rate Fund and scales down to 0% for each
fund on purchases of $500,000 or more.
(2) For each fund, there is a $5 fee for each exchange in excess of four
exchanges per year.
(3) Adjustable Rate Fund's Rule 12b-1 fee is characterized as a service fee
within the meaning of the National Association of Securities Dealers, Inc.
("NASD") guidelines.
(4) Total Fund Operating Expenses are set forth absent any expense
reimbursements by Piper Capital. Piper Capital has voluntarily limited Total
Fund Operating Expenses for the Fund and Adjustable Rate Fund to .60% of average
daily net assets for the Fund's fiscal year ended June 30, 1996 and Adjustable
Rate Fund's fiscal year ending August 31, 1996.
EXAMPLE
To attempt to show the effect of these expenses on an investment over time,
the example shown below has been created. You would pay the following expenses
on a $1,000 investment over various time periods assuming (a) 5% annual return
and (b) redemption at the end of each time period:
1 year 3 years 5 years 10 years
------ ------- ------- --------
The Fund . . . . . . . . $28 $65 $104 $214
Adjustable Rate Fund . . $22 $38 $56 $105
Pro Forma Combined . . . $22 $38 $56 $105
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR PERFORMANCE. ACTUAL OPERATING EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN.
TAX CONSEQUENCES OF THE REORGANIZATION
As a condition to the Reorganization, the Fund will receive an opinion of
the law firm of Dorsey & Whitney LLP that, upon the Reorganization, no gain or
loss will be recognized by the Fund or its shareholders for federal income tax
purposes. The holding period and aggregate tax basis of Adjustable Rate Fund
shares that are received by each Fund shareholder will be the same as the
holding period and aggregate tax basis of the Fund shares previously held by
such shareholders. In addition, the holding period and tax basis of the assets
of the Fund in the hands of Adjustable Rate Fund as a result of the
Reorganization will be the same as in the hands of the Fund immediately prior to
the Reorganization. For further information about the tax consequences of the
Reorganization see "The Reorganization -- Tax Aspects of the Reorganization"
below.
DISSENTING SHAREHOLDERS' RIGHTS OF APPRAISAL
Although under Minnesota law shareholders of a company acquired in a
reorganization who do not vote to approve the reorganization generally have
"appraisal rights" (where they may elect to have the "fair value" of their
shares (determined in accordance with Minnesota law) judicially appraised and
paid to them), the Division of Investment Management of the Commission has taken
the position that Rule 22c-1 under the 1940 Act preempts appraisal provisions in
state statutes. This rule provides that no open-end investment company may
redeem its shares other than at net asset value next computed after receipt of a
tender of such security for redemption. For further information about rights of
appraisal, see "The Reorganization -- Dissenters' Rights."
COMPARISON OF THE FUND AND ADJUSTABLE RATE FUND
INVESTMENT OBJECTIVES AND POLICIES. The Fund and Adjustable Rate Fund have
nearly identical investment objectives. The Fund's investment objective is high
current income consistent with low principal volatility. The investment
objective of Adjustable Rate Fund is to provide the maximum current income that
is consistent with low volatility of principal. The investment objectives of the
Fund and Adjustable Rate Fund are fundamental and may not be changed without
shareholder approval.
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The Fund seeks to achieve its investment objective by investing, under
normal circumstances, at least 65% of its total assets in a portfolio of
Mortgage-Backed Securities (securities which represent interests in or are
collateralized by mortgages) that have adjustable interest rates which reset at
periodic intervals ("adjustable rate mortgage securities" or "ARMS") and that
are issued or guaranteed as to payment of principal and interest by the U.S.
Government or its agencies or instrumentalities ("U.S. Government Securities").
Adjustable Rate Fund seeks to achieve its investment objective by investing,
under normal circumstances, at least 65% of its total assets in a portfolio of
ARMS. Thus, the principal difference between the two funds is that the Fund
invests primarily in ARMS which are U.S. Government Securities, whereas
Adjustable Rate Fund's ARMS investments, for purposes of meeting its 65% test,
may be both U.S. Government Securities and ARMS issued by private organizations.
The balance of the Fund's assets (up to 35% of total assets) may be
invested in ARMS issued by private organizations, Mortgage-Backed Securities
other than ARMS, other types of U.S. Government Securities, Canadian government
securities, foreign index linked instruments and corporate debt securities.
Investments in each of Canadian government securities, foreign index linked
instruments and corporate debt securities are limited to 10% of total assets.
The balance of Adjustable Rate Fund' assets (up to 35% of total assets) may be
invested in Mortgage-Backed Securities other than ARMS, U.S. Government
Securities (including, with respect to 10% of net assets, U.S. Government
zero-coupon securities), asset-backed securities and corporate debt securities.
Adjustable Rate Fund's investments in Mortgage-Backed Securities are more
restricted than are the Fund's. Adjustable Rate Fund will not invest in inverse
floating, interest-only, principal-only or Z tranches of collateralized mortgage
obligations ("CMOs"), in residual interests of CMOs, or in stripped
Mortgage-Backed Securities. The Fund's investments in Mortgage-Backed
Securities may include any tranche of a CMO, provided that the Fund may not
invest in residual interests of CMOs, and the Fund may invest in stripped
Mortgage-Backed Securities.
Securities in which the Fund invests (other than U.S. Government
Securities) must be rated, as of the date of purchase, AAA by Standard & Poor's
Rating Group ("S&P") or, if unrated, be of a comparable quality as determined by
Piper Capital. Adjustable Rate Fund may invest in securities rated lower than
AAA. At least 85% of Adjustable Rate Fund's total assets (other than U.S.
Government Securities) must be rated, as of the date of purchase, AA or better
by S&P, 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 comparable quality as determined by Piper Capital.
Adjustable Rate Fund may not invest in any security rated, as of the date of
purchase, lower than A by S&P or Moody's (or below a comparable rating by any
other NRSRO) or, if unrated, of a quality lower than A as determined by Piper
Capital.
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<PAGE>
The Fund may engage in options and financial futures transactions which
relate to the securities in which it invests, may engage in foreign currency
exchange transactions with respect to its investments in Canadian government
securities, may enter into interest rate swaps and purchase and sell interest
rate caps and floors, may purchase or sell securities on a when-issued or
forward commitment basis, including the use of mortgage dollar rolls, and may
lend its portfolio securities. Adjustable Rate Fund may also engage in such
transactions, except that Adjustable Rate Fund may not engage in foreign
currency exchange transactions, enter into interest rate swaps, or enter into
mortgage dollar roll transactions (although Adjustable Rate Fund may otherwise
purchase or sell securities on a when-issued or forward commitment basis). In
addition, Adjustable Rate Fund may make investments in Eurodollar instruments
for hedging purposes.
For a more detailed comparison of the investment objectives and policies of
the Fund and Adjustable Rate Fund, see "Comparison of Investment Objectives,
Policies and Restrictions" below.
INVESTMENT MANAGEMENT AND DISTRIBUTION PLAN FEES. The Fund and Adjustable
Rate Fund have the same Board of Directors. In addition, the Fund and
Adjustable Rate Fund obtain management services from Piper Capital. For each
fund, fees are payable monthly based on the average net asset value of such fund
as of the close of business each day. The Fund pays a management fee at an
annual rate of .30% of its average daily net asset value and Adjustable Rate
Fund pays at the annual rate of 0.35% 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.
Adjustable Rate Fund has adopted a distribution plan ("12b-1 Plan")
pursuant to Rule 12b-1 under the 1940 Act pursuant to which Adjustable Rate 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 Adjustable Rate Fund shareholder
accounts and the costs incurred in connection therewith. Payments made under
Adjustable Rate Fund's 12b-1 Plan are not tied exclusively to expenses actually
incurred by the Distributor and may exceed such expenses. The Fund does not
have a 12b-1 Plan.
OTHER SIGNIFICANT FEES. Both the Fund and Adjustable Rate Fund pay
additional fees in connection with their operations, including legal, auditing,
transfer agent and custodial fees. See "Fee Table" above for the percentage of
average net assets represented by such Other Expenses.
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<PAGE>
PURCHASES, REDEMPTIONS AND EXCHANGES.
PURCHASES. The Fund and Adjustable Rate Fund each continuously issue their
shares to investors at a price equal to net asset value at the time of such
issuance, plus a maximum sales charge of 1.00% for the Fund and 1.50% for
Adjustable Rate Fund. The sales charge is reduced on a graduated scale on
purchases of $250,000 or more for the Fund and $100,000 or more for Adjustable
Rate Fund. For each fund, there is no initial sales charge in connection with
purchases of $500,000 or more. For Adjustable Rate Fund, however, a .20%
contingent deferred sales charge ("CDSC") will be imposed in the event of a
redemption transaction occurring within 24 months following such a purchase.
The Fund does not impose a CDSC in connection with initial purchases of $500,000
or more. Shareholders of the Fund who acquire Adjustable Rate Fund Shares in
the Reorganization will not pay the front-end sales charge on such Shares;
however, such sales charge will be applied to additional purchases of Adjustable
Rate Fund Shares. Shares of the Fund and Adjustable Rate Fund are distributed
by the Distributor and other broker-dealers who have entered into selected
broker-dealer agreements with the Distributor. Purchase orders for shares of
the Fund will not be accepted after the date on which the Plan is approved by
Fund shareholders. The minimum initial investments for the Fund and Adjustable
Rate Fund are $100,000 and $250, respectively. Neither Fund imposes a minimum
on subsequent investments.
REDEMPTIONS. Shareholders of the Fund and Adjustable Rate Fund may redeem
their shares for cash at any time at the net asset value per share next
determined. With respect to Adjustable Rate Fund, however, shareholders who
invested more than $500,000 and accordingly paid no front-end sales charge are
in most circumstances subject to a CDSC if shares are redeemed within 24 months.
The CDSC is 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. No CDSC will be applied to
Adjustable Rate Fund Shares acquired in the Reorganization on redemption of such
shares. The Fund and Adjustable Rate Fund offer reinstatement privileges
whereby a shareholder whose shares have been redeemed may, within 120 days or 30
days, respectively, after the date of redemption, invest any portion or all of
the proceeds thereof in another fund managed by Piper Capital without payment of
an additional sales charge, or, in the case of Adjustable Rate Fund, if such
redemption was subject to a CDSC, a pro rata credit will be given for such CDSC.
The Fund and Adjustable Rate Fund may redeem involuntarily, at net asset value,
accounts valued at less than $50,000 and $200, respectively.
EXCHANGES. Each of the Fund and Adjustable Rate Fund makes available to
its shareholders exchange privileges allowing exchange of shares for shares of
certain other funds. Shares of the Fund and Adjustable Rate Fund Shares may be
exchanged for shares of any of the other open-end funds open to new investors
that are advised by Piper Capital. Both the Fund and Adjustable Rate Fund
provide telephone exchange privileges to their shareholders.
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<PAGE>
For a more detailed discussion of purchasing, redeeming and exchanging
Adjustable Rate Fund shares, see "Shareholder Guide to Investing -- How to
Purchase Shares," "-- How to Redeem Shares" and "-- Shareholder Services" in
Adjustable Rate Fund's current Prospectus.
DIVIDENDS. For each fund net investment income is declared as dividends
daily and paid monthly. Net realized capital gains, if any, are distributed
annually by the Fund and at least once annually by Adjustable Rate Fund.
Dividends and capital gains distributions of both the Fund and Adjustable Rate
Fund are automatically reinvested in additional shares of such fund or another
fund managed by Piper Capital at net asset value unless the shareholder elects
to receive cash.
PRINCIPAL RISK FACTORS
RISKS OF INVESTMENTS
Because Adjustable Rate Fund and the Fund each seek to achieve their
investment objective by investing primarily (at least 65% of total assets under
normal market conditions) in ARMS, they are subject to many of the same risks.
Each fund is subject to interest rate risk, which is the potential for a decline
in bond prices due to rising interest rates. In addition, each 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. The Fund is required
to invest primarily in ARMS that are U.S. Government Securities. Because
Adjustable Rate Fund is not subject to this requirement, it may have more
exposure to credit risk than the Fund. In addition, Adjustable Rate Fund's
credit quality standards may expose it to more credit risk than the Fund.
Adjustable Rate Fund's non-U.S. Government Securities may be rated as low as A
at the time of purchase (or, if unrated, be of comparable quality as determined
by Piper Capital), whereas the Fund may not invest in any non-U.S. Government
Securities rated lower than AAA by S&P (or, if unrated, of comparable quality as
determined by Piper Capital). Each Fund's investments in ARMS and other
Mortgage-Backed Securities are also subject to prepayment risk and extension
risk. Prepayment risk results because, as interest rates fall, homeowners are
more likely to refinance their home mortgages. When home mortgages are
refinanced, the principal on Mortgage-Backed Securities is "prepaid" earlier
than expected. The unanticipated principal payments must then be reinvested at
a time when interest rates on new mortgage investments are falling. Extension
risk is the possibility that rising interest rates may cause prepayments to
occur at a slower than expected rate. This particular risk may effectively
change a security which was considered short- or intermediate-duration at the
time of purchase into a long-duration security. Long-duration securities
generally fluctuate more widely in response to changes in interest rates than
short- or intermediate-duration securities.
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<PAGE>
The funds may invest the balance of their assets in many of the same types
of securities and therefore are subjected to the same risks with respect to such
investments. Unlike Adjustable Rate Fund, however, the Fund may invest up to
10% of its total assets in foreign index linked instruments. Foreign index
linked instruments are fixed income securities which are issued by U.S. issuers
(including U.S. subsidiaries of foreign issuers) and are denominated in U.S.
dollars but return principal and/or pay interest to investors in amounts which
are linked to the level of a particular foreign index. Foreign index linked
instruments may offer higher yields than comparable securities linked to purely
domestic indices but also may be more volatile.
Only the Fund may enter into mortgage "dollar rolls" in which the Fund
sells securities for delivery in the current month and simultaneously contracts
with the same counterparty to repurchase similar (same type, coupon and
maturity) but not identical securities on a specified future date. The use of
mortgage dollar rolls by the Fund while remaining substantially fully invested
increases the amount of the Fund's assets that are subject to market risk to an
amount that is greater than the Fund's net asset value, which could result in
increased volatility of the price of the Fund's shares.
The Fund may invest in certain Mortgage-Backed Securities which are not
permissible investments for Adjustable Rate Fund. Adjustable Rate Fund may not
invest in inverse floating, interest-only, principal-only or Z tranches of
collateralized mortgage obligations or in stripped Mortgage-Backed Securities,
whereas the Fund may invest in such securities. Such securities may be more
volatile than other Mortgage-Backed Securities and involve other additional
risks.
The Fund may engage in foreign currency exchange transactions in connection
with its investments in Canadian government securities and may enter into
interest rate swaps. These transactions involve certain risks as set forth in
detail in the Fund's Prospectus under "Special Investment Methods -- Interest
Rate Transactions" and in Appendix A to the Fund's Prospectus. Adjustable Rate
Fund does not engage in such transactions.
In addition to ARMS that are U.S. Government Securities, each of the funds
may invest in other types of U.S. Government Securities. Adjustable Rate Fund's
investments in U.S. Government zero-coupon securities are limited to 10% of net
assets, whereas the Fund's investments are not so limited. 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. Because
such income may not be matched by a corresponding cash distribution to a fund
holding such
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<PAGE>
securities, the fund may be required to borrow money or dispose of other
securities to be able to make distributions to shareholders.
Only Adjustable Rate Fund purchases 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. Through the use of trusts and special purpose
corporations, various types of assets, primarily automobile and credit card
receivables, are securitized in structures similar to those of Mortgage-Backed
Securities. However, 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 law, 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 of repossessed collateral may not, in some cases, be available to
support payments on these securities.
In addition, only Adjustable Rate Fund may invest in Eurodollar
instruments. Such investments are made for hedging purposes only. Eurodollar
instruments are essentially U.S. dollar denominated futures contracts or options
thereon that are linked to the London Interbank Offered Rate ("LIBOR").
Eurodollar instruments are subject to the same limitations and risks as other
futures contracts and options thereon, which are set forth in Adjustable Rate
Fund's Prospectus.
The foregoing discussion is a summary of the principal risk factors. For a
more complete discussion of the risks of each fund, see "Investment Objectives
and Policies -- Institutional Government Adjustable Portfolio" in the Fund's
Prospectus and "Investment Objective, Policies and Risk Factors" in Adjustable
Rate Fund's Prospectus.
LITIGATION RISK
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 Adjustable Rate Fund on
September 1, 1995. Adjustable Rate Fund may be deemed to be a successor by
merger to the Trusts and, as such, may succeed to their liabilities, including
damages sought in any litigation.
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A complaint was filed by Herman D. Gordon on October 20, 1994, in the
United States District Court, District of Minnesota, against DDJ, EDJ, Piper
Capital, the Distributor, Piper Jaffray Companies Inc. and certain associated
individuals. 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 BDJ, CDJ, DDJ, EDJ, Piper Capital, 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. The parties have reached an
agreement-in-principle to settle all outstanding claims of the purported class
action. If approved by the Court and a sufficiently large percentage of the
class, a settlement agreement consistent with the terms of the
agreement-in-principle would provide $14 million in principal payments
consisting of $500,000 payable upon execution of the settlement agreement, $1.5
million payable upon final approval by the Court, and payments of $3 million on
each anniversary of the final court approval for the next four years, with
accrued interest payments of up to $1.8 million. These payments would be made
by Piper Capital and Piper Jaffray Companies Inc. and would not be an obligation
of Adjustable Rate Fund.
Two additional complaints relating to the Trusts, which are based on claims
similar to those asserted in the Gordon/Donio Consolidated Complaint, remain
pending. The first of these additional complaints was filed against the
Distributor on August 11, 1995 in Washington State District Court, King County,
by plaintiff Ernest Volinn. The second complaint was filed against the
Distributor on November 1, 1995 in the United States District Court, District of
Idaho, by plaintiff Ewing Company Profit Sharing Plan. In addition to the above
complaints, a number of actions have been commenced in arbitration by individual
investors in the Trusts.
Piper Capital and Piper Jaffray Companies Inc. have agreed, pursuant to an
indemnification agreement between and among Piper Capital, Piper Jaffray
Companies Inc. and Piper Funds II, to indemnify Piper Funds II against any
losses incurred in connection with such litigation. This indemnification
agreement will also protect Fund shareholders who become Adjustable Rate Fund
shareholders pursuant to the Reorganization.
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<PAGE>
THE REORGANIZATION
BACKGROUND
The Fund began operations in February 1993 and reached its peak net assets
of approximately $67 million in January 1994. Since that time, the Fund has
experienced a steady decline in assets, with net assets of approximately $6
million as of the date of this Proxy Statement/Prospectus. From February 1994
to February 1995, the Federal Reserve Board increased short-term rates seven
times. Resets on ARMS did not keep pace with these rate increases and, as a
result, the Fund performed poorly and experienced significant redemptions.
Since that time, shareholder redemptions have continued to exceed shareholder
purchases. Because of the continuing inability to attract and retain assets,
Piper Capital believes that the continued operation of the Fund is not
economically viable. In addition, Piper Capital believes that, because
Adjustable Rate Fund has a nearly identical investment objective and similar
investment policies, the likelihood of increased sales of Fund shares in the
future is remote. Accordingly, Piper Capital recommended to the Board of
Directors of the Company that substantially all of the assets of the Fund be
acquired by Adjustable Rate Fund in exchange for shares of Adjustable Rate Fund.
THE BOARD'S CONSIDERATION
At a meeting of the Board of Directors held on June 18, 1996, Piper Capital
reviewed for the Board the basis for its recommendation and the Board, including
all of the Independent Directors, unanimously approved the Reorganization. The
Plan was unanimously approved by the Board, including all of the Independent
Directors, on August 9, 1996, and the Board recommended that shareholders
approve the Plan.
In determining whether to recommend that shareholders of the Fund approve
the Plan, the Board, with the advice and assistance of independent legal
counsel, inquired into a number of matters. In particular, the Board considered
the Fund's prospects for future growth and the effect upon shareholders should
assets remain at current levels or continue to be reduced further. The Board
considered in this regard that Piper Capital has voluntarily limited total
expenses of the Fund and of Adjustable Rate Fund and that Piper Capital does not
currently intend to continue these limitations. The Board noted that absent any
expense limitations, total operating expenses are significantly lower for
Adjustable Rate Fund than for the Fund.
The Board carefully considered the compatibility of the investment
objectives, policies, restrictions and portfolios of the Fund and Adjustable
Rate Fund. The Board noted that the funds have nearly identical investment
objectives and noted that the most significant difference between the two, as
discussed more fully below in "Comparison of Investment Objectives, Policies and
Restrictions --
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Investment Policies," is that the Fund invests primarily in ARMS that are U.S.
Government Securities whereas Adjustable Rate Fund invests primarily in ARMS
that may be either privately issued or U.S. Government Securities.
Consequently, the Reorganization will result in the potential for greater
exposure to privately issued ARMS for Fund shareholders.
The Board also considered that, as discussed in more detail above under
"Principal Risk Factors," Piper Funds II may succeed to the liabilities of
certain closed-end funds that were merged into Piper Funds II and that are
subject to litigation. Piper Capital and Piper Jaffray Companies Inc. have
agreed, pursuant to an indemnification agreement between and among Piper
Capital, Piper Jaffray Companies Inc. and Piper Funds II, to indemnify Piper
Funds II against any losses incurred in connection with such litigation. The
Board noted that, to the extent there are claims against Adjustable Rate Fund as
a result of such litigation, this indemnification agreement would also protect
Fund shareholders who become Adjustable Rate Fund shareholders pursuant to the
Reorganization.
In addition, the Board considered the terms and conditions of the proposed
Reorganization, the comparative performance of the funds, the indirect costs
(E.G., brokerage) likely to be incurred by the Fund in the Reorganization, and
Piper Capital's undertaking to pay all the direct costs (E.G., proxy
solicitation) of the Reorganization and any unamortized organizational expenses
on the books of the Fund. In recommending the Reorganization to the
shareholders of the Fund, the Board considered that the Reorganization would
have the following benefits for shareholders of the Fund:
(1) Absent any expense reimbursements, the total expenses borne by
shareholders of the combined fund should be lower on a percentage basis
than the total expenses per share of the Fund. As a result of expense
reimbursements that Piper Capital has undertaken to make, the Fund's
expense ratio for its fiscal year ended June 30, 1996 was, and Adjustable
Rate Fund's expense ratio for its fiscal year ending August 31, 1996 will
be, .60% of average daily net assets. Piper Capital does not intend to
continue expense reimbursements for either Fund during the 1997 fiscal
year. Absent such reimbursements, the expense ratio for the Fund would have
been 1.75% for the fiscal year ended June 30, 1996. By contrast, the
expense ratio for Adjustable Rate Fund for its fiscal year ending August
31, 1996 is expected to be approximately .74% of total assets absent any
voluntary expense reimbursements (based on the semiannual period ended
February 29, 1996). Thus, despite the fact that Adjustable Rate Fund has a
12b-1 Plan and a slightly higher advisory fee than the Fund, because
Adjustable Rate Fund is significantly larger than the Fund its total
operating expenses, absent any expense reimbursements, are significantly
lower than those of the Fund.
(2) Shareholders of the Fund will be able to acquire Adjustable Rate
Fund Shares, which are otherwise subject to a maximum 1.50% front-end
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sales charge, at net asset value and pursue a nearly identical investment
objective in a larger and more economically viable fund without having to
sell their shares.
(3) The Fund's shareholders will retain the capabilities and
resources of Piper Capital and its affiliates in the areas of management,
operations, distribution, shareholder servicing and marketing.
(4) It is anticipated that the Reorganization will constitute a
tax-free reorganization for federal income tax purposes, and no gain or
loss will be recognized by the Fund or its shareholders for federal income
tax purposes as a result of the Reorganization.
Based on the foregoing, the Board determined that the Reorganization is in
the best interests of the shareholders of the Fund and that the interests of
Fund shareholders will not be diluted as a result thereof.
The Board of Directors of Adjustable Rate Fund, including all of the
Independent Directors, has also determined, after considering the aforementioned
factors, that the Reorganization is in the best interests of Adjustable Rate
Fund and that the interests of existing shareholders of Adjustable Rate Fund
will not be diluted as a result thereof. The transaction will enable Adjustable
Rate Fund to acquire investment securities which are consistent with its
objectives without the brokerage costs attendant to the purchase of such
securities in the market. Also, the addition of the Fund's assets should result
in some cost savings to the extent that fixed expenses of Adjustable Rate Fund
can be spread over a larger asset base. A larger asset base could also lead to
reduced management fees as a result of "breakpoints" in the management fees
payable by Adjustable Rate Fund.
THE PLAN
The terms and conditions under which the Reorganization would be
consummated are set forth in the Plan and are summarized below. This summary is
qualified in its entirety by reference to the Plan, a copy of which is attached
as Exhibit A to this Proxy Statement/Prospectus.
The Plan provides that (a) the Fund will transfer all of its assets,
including appropriate portfolio securities, cash, cash equivalents, securities,
commodities, futures and interest receivables, to Adjustable Rate Fund on the
Closing Date in exchange for the assumption by Adjustable Rate Fund of the
Fund's stated liabilities, including all expenses, costs, charges and reserves,
as reflected on an unaudited statement of assets and liabilities of the Fund
prepared by the Treasurer of the Company as of the Valuation Date in accordance
with generally accepted accounting principles consistently applied from the
prior audited period, and the delivery of Adjustable Rate Fund Shares; and (b)
such Adjustable Rate Fund Shares will be distributed to the shareholders of the
Fund on the Closing Date or as soon as
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practicable thereafter and outstanding Fund shares will be cancelled and
retired. The distribution of Adjustable Rate Fund Shares and the cancellation
and retirement of outstanding Fund shares is to be accomplished under the Plan
by amending the articles of incorporation of the Company in the manner provided
in the amendment set forth in Exhibit 1 to the Plan.
For technical reasons, certain of the Fund's existing investment
limitations may be deemed to preclude the Fund from consummating the
Reorganization to the extent that the Reorganization would involve the Fund
holding all of its assets as shares of Adjustable Rate Fund until such shares
are distributed to the Fund's shareholders. By approving the Plan, the Fund's
shareholders will be deemed to have agreed to waive each of these limitations.
The number of Adjustable Rate Fund Shares to be delivered to the Fund
will be determined by dividing the value of the Fund assets acquired by
Adjustable Rate Fund (net of stated liabilities assumed by Adjustable Rate
Fund) by the net asset value of an Adjustable Rate Fund Share; these values
will be calculated as of the close of business of the New York Stock Exchange
on a business day not later than the fifth business day following the receipt
of the requisite approval of the Plan by the shareholders of the Fund or at
such other time as the Fund and Adjustable Rate Fund may agree (the
"Valuation Date"). The net asset value of an Adjustable Rate Fund Share
shall be the net asset value per share computed on the Valuation Date, using
the valuation procedures set forth in Adjustable Rate Fund's then-current
Prospectus and Statement of Additional Information. As an illustration, if
on the Valuation Date the Fund were to have securities with a market value of
$95,000 and cash in the amount of $5,000, the value of the assets which would
be transferred to Adjustable Rate Fund would be $100,000. If the net asset
value per share of Adjustable Rate Fund were $10 per share at the close of
business on the Valuation Date, the number of Adjustable Rate Fund Shares to
be issued would be 10,000 ($100,000 DIVIDED BY $10). These 10,000 shares of
Adjustable Rate Fund would be distributed to the former shareholders of the
Fund. This example is given for illustration purposes only and does not bear
any relationship to the dollar amounts or shares expected to be involved in
the Reorganization. Adjustable Rate Fund will cause its transfer agent to
credit and confirm an appropriate number of Adjustable Rate Fund Shares to
each Fund shareholder. Neither the Fund nor Adjustable Rate Fund issues
stock certificates.
The Closing Date will be 5:00 p.m., Eastern Time, on the Valuation Date, or
at such other time as the Fund and Adjustable Rate Fund may agree. The
consummation of the Reorganization is contingent upon the approval of the
Reorganization by the shareholders of the Fund and the receipt of the other
opinions and certificates set forth in Sections 6, 7 and 8 of the Plan and the
occurrence of the events described in those Sections, certain of which may be
waived by the Fund or Adjustable Rate Fund. The Plan may be amended in any
mutually agreeable manner, except that no amendment may be made subsequent to
the Meeting which would detrimentally affect the value of the Adjustable Rate
Fund
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Shares to be distributed. Piper Capital will bear all direct costs associated
with the Reorganization, including preparation, printing, filing and proxy
solicitation expenses incurred in connection with obtaining requisite
shareholder approval of the Reorganization. In addition, Piper Capital will pay
any unamortized organizational expenses on the books of the Fund immediately
prior to the Reorganization.
The Plan may be terminated and the Reorganization abandoned at any time,
before or after approval by the Fund's shareholders, by mutual consent of the
Fund and Adjustable Rate Fund. In addition, either party may terminate the Plan
upon the occurrence of a material breach of the Plan by the other party or if,
by December 31, 1996, any condition set forth in the Plan has not been fulfilled
or waived by the party entitled to its benefits.
Prior to the Valuation Date, the Fund will declare and pay a dividend to
distribute all of its investment company taxable income and net capital gain, if
any, for the taxable year during which the Reorganization occurs. The proceeds
of such distribution will be taxable to Fund shareholders subject to taxation.
See "Tax Aspects of the Reorganization" below. All contracts entered into by or
on behalf of the Fund will terminate upon consummation of the Reorganization.
Shareholders of the Fund will continue to be able to redeem their shares at
net asset value next determined after receipt of the redemption request until
the close of business on the business day next preceding the Closing Date.
Redemption requests received by the Fund thereafter will be treated as requests
for redemption of shares of Adjustable Rate Fund.
TAX ASPECTS OF THE REORGANIZATION
At least one but not more than 20 business days prior to the Valuation
Date, the Fund will declare and pay a dividend or dividends which, together with
all previous such dividends, will have the effect of distributing to the Fund's
shareholders all of the Fund's investment company taxable income for the current
taxable year (computed without regard to any dividends-paid deduction), and all
of the Fund's net capital gain, if any, realized in such year (after reduction
for any capital loss carry-forward).
It is intended that the Reorganization will qualify for federal income tax
purposes as a tax-free reorganization under Section 368(a)(1)(C) of the Internal
Revenue Code of 1986, as amended (the "Code"), and that, for federal income tax
purposes, no income, gain or loss will be recognized by the Fund's shareholders
(except that the dividend or dividends discussed in the preceding paragraph will
be taxable to Fund shareholders subject to taxation). The Fund has not asked,
nor does it plan to ask, the Internal Revenue Service to rule on the tax
consequences of the Reorganization.
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As a condition to the closing of the Reorganization, the two funds will
receive an opinion from Dorsey & Whitney LLP, counsel to the funds, based in
part on certain representations to be furnished by each fund, substantially to
the effect that the federal income tax consequences of the Reorganization will
be as follows:
(i) the Reorganization will constitute a reorganization within the
meaning of Section 368(a)(1)(C) of the Code, and Adjustable Rate
Fund and the Fund each will qualify as a party to the Reorganization
under Section 368(b) of the Code;
(ii) Fund shareholders will recognize no income, gain or loss upon
receipt, pursuant to the Reorganization, of Adjustable Rate Fund
shares. Fund shareholders subject to taxation will recognize income
upon receipt of any net investment income or net capital gains of
the Fund which are distributed by the Fund prior to the
Reorganization;
(iii) the tax basis of Adjustable Rate Fund shares received by each Fund
shareholder pursuant to the Reorganization will be equal to the tax
basis of the Fund shares exchanged therefor;
(iv) the holding period of Adjustable Rate Fund shares received by each
Fund shareholder pursuant to the Reorganization will include the
period during which the Fund shareholder held the Fund shares
exchanged therefor, provided that the Fund shares were held as a
capital asset on the date of the Reorganization;
(v) the Fund will recognize no income, gain or loss by reason of the
Reorganization;
(vi) Adjustable Rate Fund will recognize no income, gain or loss by
reason of the Reorganization;
(vii) the tax basis of the assets received by the Fund pursuant to the
Reorganization will be the same as the basis of those assets in the
hands of the Fund immediately prior to the Reorganization;
(viii) the holding period of the assets received by Adjustable Rate Fund
pursuant to the Reorganization will include the period during which
such assets were held by the Fund; and
(ix) Adjustable Rate Fund will succeed to and take into account the
earnings and profits, or deficit in earnings and profits, of the
Fund immediately prior to the Reorganization.
The foregoing advice is based in part upon certain representations
furnished by the Fund, Piper Capital and certain 5% shareholders of the Fund, of
which two
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principal ones are: (a) that assets representing at least 90% of the fair
market value of the Fund's net assets and at least 70% of the fair market value
of the Fund's gross assets immediately prior to the Reorganization are exchanged
solely for Adjustable Rate Fund shares with unrestricted voting rights, and (b)
that there is no plan or intention by the shareholders of the Fund who own 5% or
more of the Fund's shares and, to the best knowledge of management of the Fund,
there is no plan or intention on the part of the remaining Fund shareholders to
sell, exchange or otherwise dispose of a number of Adjustable Rate Fund shares
to be received pursuant to the Reorganization that would reduce such
shareholders' interest to a number of Adjustable Rate Fund shares having, in the
aggregate, a value as of the Closing Date of less than 50% of the total value of
Fund shares outstanding immediately prior to the consummation of the
Reorganization.
SHAREHOLDERS OF THE FUND SHOULD CONSULT THEIR TAX ADVISORS REGARDING THE
EFFECT, IF ANY, OF THE PROPOSED REORGANIZATION IN LIGHT OF THEIR INDIVIDUAL
CIRCUMSTANCES. SINCE THE FOREGOING DISCUSSION RELATES ONLY TO THE FEDERAL
INCOME TAX CONSEQUENCES OF THE REORGANIZATION, SHAREHOLDERS OF THE FUND SHOULD
CONSULT THEIR TAX ADVISORS AS TO STATE AND LOCAL TAX CONSEQUENCES, IF ANY, OF
THE REORGANIZATION.
DISSENTERS' RIGHTS
Pursuant to Sections 302A.471 and 302A.473 of the Minnesota Business
Corporation Act (the "MBCA Sections"), record holders of shares of the Company
are entitled to assert dissenters' rights in connection with the Reorganization
and obtain payment of the "fair value" of their shares, provided such
shareholders comply with the requirements of the MBCA Sections. NOTWITHSTANDING
THE PROVISIONS OF THE MBCA SECTIONS, THE DIVISION OF INVESTMENT MANAGEMENT OF
THE COMMISSION HAS TAKEN THE POSITION THAT ADHERENCE TO STATE APPRAISAL
PROCEDURES BY A REGISTERED INVESTMENT COMPANY ISSUING REDEEMABLE SECURITIES
WOULD CONSTITUTE A VIOLATION OF RULE 22c-1 UNDER THE 1940 ACT. THIS RULE
PROVIDES THAT NO OPEN-END INVESTMENT COMPANY MAY REDEEM ITS SHARES OTHER THAN AT
NET ASSET VALUE NEXT COMPUTED AFTER RECEIPT OF A TENDER OF SUCH SECURITY FOR
REDEMPTION. IT IS THE VIEW OF THE DIVISION OF INVESTMENT MANAGEMENT THAT RULE
22c-1 PREEMPTS APPRAISAL PROVISIONS IN STATE STATUTES.
In the interests of ensuring equal valuation of all interests in the Fund,
the Company will determine dissenters' rights in accordance with the Division's
interpretation. It should be emphasized that Fund shareholders may sell their
shares at net asset value at any time prior to the Closing Date.
DESCRIPTION OF SHARES
Shares of Adjustable Rate Fund to be issued pursuant to the Plan will, when
issued, be fully paid and nonassessable by Adjustable Rate Fund and transferable
without restrictions and will have no preemptive or conversion rights.
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<PAGE>
CAPITALIZATION TABLE (UNAUDITED)
The following table sets forth the capitalization of Adjustable Rate Fund
and the Fund as of June 30, 1996 and on a pro forma combined basis as if the
Reorganization had occurred on that date:
Shares Net Asset
Net Assets Outstanding Value Per
(000s omitted) (000s omitted) Share
-------------- -------------- ---------
Fund . . . . . . . . . . $ 5,774 609 $9.48
Adjustable Rate Fund . . $307,424 38,291 $8.03
Pro Forma Combined . . . $313,198 38,997 $8.03
INTERESTS OF CERTAIN PERSONS
The following persons affiliated with the Fund and Adjustable Rate Fund
receive payments from the Fund and Adjustable Rate Fund for services rendered
pursuant to contractual arrangements with both funds: (a) Piper Capital, as the
investment adviser and manager to each fund, (b) the Distributor, as the
distributor of shares of each fund and for providing certain transfer agent and
dividend disbursing agent services for shareholder accounts held at the
Distributor, and (c) Piper Trust Company, an affiliate of Piper Capital and the
Distributor, for providing certain transfer agent and dividend disbursing agent
services for shareholder accounts held at Piper Trust Company.
COMPARISON OF INVESTMENT OBJECTIVES,
POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVES
The Fund and Adjustable Rate Fund have nearly identical investment
objectives. The Fund's objective is high current income consistent with low
principal volatility. The investment objective of Adjustable Rate Fund is to
provide the maximum current income that is consistent with low volatility of
principal. The investment objectives of the Fund and Adjustable Rate Fund are
fundamental and may not be changed without shareholder approval.
INVESTMENT POLICIES
GENERAL. The Fund seeks to achieve its investment objective by investing,
under normal circumstances, at least 65% of its total assets in a portfolio of
Mortgage-Backed Securities (securities which represent interests in or are
collateralized by mortgages) that have adjustable interest rates which reset at
periodic intervals ("adjustable rate mortgage securities" or "ARMS") and that
are issued or guaranteed as to payment of principal and interest by the U.S.
Government or its agencies or instrumentalities ("U.S. Government Securities").
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<PAGE>
Adjustable Rate Fund seeks to achieve its investment objective by investing,
under normal circumstances, at least 65% of its total assets in a portfolio of
ARMS. Thus, the principal difference between the two funds is that the Fund
invests primarily in ARMS which are U.S. Government Securities, whereas
Adjustable Rate Fund's ARMS investments, for purposes of meeting its 65% test,
may be both U.S. Government Securities and ARMS issued by private organizations.
The balance of the Fund's assets (up to 35% of total assets) may be
invested in ARMS issued by private organizations, Mortgage-Backed Securities
other than ARMS, other types of U.S. Government Securities, Canadian government
securities, foreign index linked instruments and corporate debt securities.
Investments in each of Canadian government securities, foreign index linked
instruments and corporate debt securities are limited to 10% of total assets.
The balance of Adjustable Rate Fund' assets (up to 35% of total assets) may be
invested in Mortgage-Backed Securities other than ARMS, U.S. Government
Securities (including, with respect to 10% of net assets, U.S. Government
zero-coupon securities), asset-backed securities and corporate debt securities.
The investment policies of both the Fund and Adjustable Rate Fund are
non-fundamental and may be changed by their respective Boards of Directors
unless otherwise noted herein.
MORTGAGE-BACKED SECURITIES. Adjustable Rate Fund's investments in
Mortgage-Backed Securities are more restricted than are the Fund's. Adjustable
Rate Fund will not invest in inverse floating, interest-only, principal-only or
Z tranches of collateralized mortgage obligations ("CMOs"), in residual
interests of CMOs, or in stripped Mortgage-Backed Securities. The Fund's
investments in Mortgage-Backed Securities may include any tranche of a CMO,
provided that the Fund may not invest in residual interests of CMOs, and the
Fund may invest in stripped Mortgage-Backed Securities. Inverse floating,
interest-only, principal-only and Z tranches of CMOs and stripped
Mortgage-Backed Securities may be more volatile than other Mortgage-Backed
Securities and involve certain additional risks. See "Investment Objectives and
Policies" in the Fund's Prospectus.
U.S. GOVERNMENT SECURITIES. In addition to ARMS that are U.S. Government
Securities, each of the funds may invest in other types of U.S. Government
Securities. Adjustable Rate Fund's investments in U.S. Government zero-coupon
securities are limited to 10% of net assets, whereas the Fund's investments are
not so limited. 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. See
"Principal Risk Factors" above and "Investment Objective, Policies and Risk
Factors" in Adjustable Rate Fund's Prospectus.
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<PAGE>
CANADIAN GOVERNMENT SECURITIES. The Fund may invest up to 10% of its total
assets in Canadian government securities, which are debt securities issued or
guaranteed by the Canadian federal government, Canadian provincial governments
and political subdivisions, agencies or instrumentalities thereof. Adjustable
Rate Fund may not invest in such securities. Investing in Canadian government
securities involves considerations and possible risks not typically associated
with investing in U.S. securities. See "Investment Objectives and Policies" in
the Fund's Prospectus.
FOREIGN INDEX LINKED INSTRUMENTS. The Fund may invest up to 10% of its
total assets in foreign index linked instruments. Adjustable Rate Fund may not
invest in such securities. Foreign index linked instruments are fixed income
securities which are issued by U.S. issuers (including U.S. subsidiaries of
foreign issuers) and are denominated in U.S. dollars but return principal and/or
pay interest to investors in amounts which are linked to the level of a
particular foreign index. Foreign index linked instruments may offer higher
yields than comparable securities linked to purely domestic indices but also may
be more volatile. See "Investment Objectives and Policies" in the Fund's
Prospectus.
CORPORATE DEBT SECURITIES. Each Fund may invest in corporate debt
securities. The Fund may invest up to 10% of its total assets in such
securities; Adjustable Rate Fund is not subject to this limitation and thus
could invest up to 35% of its total assets in corporate debt securities.
Corporate debt securities are debt obligations of U.S. corporations (other than
ARMS or Mortgage-Backed Securities). The values of corporate debt securities
typically will fluctuate in response to general economic conditions, to changes
in interest rates and, to a greater extent than the values of ARMS or
Mortgage-Backed Securities, to business conditions affecting the specific
industries in which the issuers are engaged. Corporate debt securities will
typically decrease in value as a result of increases in interest rates.
ASSET-BACKED SECURITIES. Only Adjustable Rate Fund purchases 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. Through the use
of trusts and special purpose corporations, various types of assets, primarily
automobile and credit card receivables, are securitized in structures similar to
those of Mortgage-Backed Securities. However, asset-backed securities do not
have the benefit of the same security interest in the related collateral as do
Mortgage-Backed Securities and are subject to different risks. See "Principal
Risk Factors" above and "Investment Objective, Policies and Risk Factors" in
Adjustable Rate Fund's Prospectus.
SECURITIES RATINGS. Securities in which the Fund invests (other than U.S.
Government Securities) must be rated, as of the date of purchase, AAA by
Standard & Poor's Rating Group ("S&P") or, if unrated, be of a comparable
quality as determined by Piper Capital. In the event that a security held by
the Fund is downgraded to a rating below AAA or, if unrated, is no longer of a
quality
23
<PAGE>
comparable to a security rated AAA, as determined by Piper Capital, the Fund
will sell such a security as promptly as possible. Adjustable Rate Fund may
invest in securities rated lower than AAA. At least 85% of Adjustable Rate
Fund's total assets (other than U.S. Government Securities) must be rated, as of
the date of purchase, AA or better by S&P, 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 comparable quality
as determined by Piper Capital. Adjustable Rate Fund may not invest in any
security rated, as of the date of purchase, lower than A by S&P or Moody's (or
below a comparable rating by any other NRSRO) or, if unrated, of a quality lower
than A as determined by Piper Capital. 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 Piper Capital, Adjustable
Rate Fund will sell such a security as promptly as possible.
OTHER INVESTMENT PRACTICES. The Fund may engage in options and financial
futures transactions which relate to the securities in which it invests, may
engage in foreign currency exchange transactions with respect to its investments
in Canadian government securities, may enter into interest rate swaps and
purchase and sell interest rate caps and floors, may purchase or sell securities
on a when-issued or forward commitment basis, including the use of mortgage
dollar rolls, may lend its portfolio securities and may enter into repurchase
agreements and reverse repurchase agreements. Adjustable Rate Fund may also
engage in such transactions, except that Adjustable Rate Fund may not engage in
foreign currency exchange transactions, enter into interest rate swaps, or enter
into mortgage dollar roll transactions (although Adjustable Rate Fund may
otherwise purchase or sell securities on a when-issued or forward commitment
basis). In addition, Adjustable Rate Fund may make investments in Eurodollar
instruments for hedging purposes.
The foregoing discussion is a summary of the principal differences and
similarities between the investment policies of the funds. For a more complete
discussion of each fund's policies, see "Investment Objectives and Policies" in
each fund's respective Prospectus and "Investment Objectives, Policies and
Restrictions" in each fund's respective Statement of Additional Information.
INVESTMENT RESTRICTIONS
Each fund has adopted certain fundamental and non-fundamental investment
restrictions. A fundamental investment restriction cannot be changed without
the vote of a majority of the fund's outstanding voting securities, as defined
in the 1940 Act. As fundamental investment restrictions, the Fund may borrow
money only from banks for temporary or emergency purposes in an amount up to one
third of the value of its total assets, and the Fund may not mortgage, pledge or
hypothecate its assets except to secure temporary or emergency borrowing. As
fundamental investment restrictions, Adjustable Rate Fund may borrow only for
temporary or emergency purposes (including borrowing through reverse repurchase
agreements) in an amount up to 10% of the value of its total assets, and
Adjustable
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<PAGE>
Rate Fund may not 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. Complete descriptions of the other fundamental and
non-fundamental investment restrictions adopted by the Fund and Adjustable Rate
Fund appear under the caption "Special Investment Methods -- Investment
Restrictions" in each fund's Prospectus and under the caption "Investment
Objectives, Policies and Restrictions" in each fund's Statement of Additional
Information.
ADDITIONAL INFORMATION ABOUT THE FUND
AND ADJUSTABLE RATE FUND
GENERAL
For a discussion of the organization and operation of the Fund, see
"Introduction," "Management," "Investment Objectives and Policies," "Special
Investment Methods" and "General Information" in its Prospectus. For a
discussion of the organization and operation of Adjustable Rate Fund, see
"Introduction," "Management," "Investment Objective, Policies and Risk Factors,"
and "General Information" in its Prospectus.
FINANCIAL INFORMATION
For certain financial information about Adjustable Rate Fund and the Fund,
see "Financial Highlights" and "Performance Comparisons" in their respective
Prospectuses.
MANAGEMENT
For information about Adjustable Rate Fund's and the Fund's Board of
Directors, investment manager and distributor, see "Management" and
"Distribution of Fund Shares" in Adjustable Rate Fund's Prospectus and
"Introduction" and "Management" in the Fund's Prospectus.
DESCRIPTION OF SECURITIES AND SHAREHOLDER INQUIRIES
For a description of the nature and most significant attributes of shares
of the Fund and Adjustable Rate Fund, and information regarding shareholder
inquiries, see "General Information" and "Introduction -- Shareholder Inquiries"
in their respective Prospectuses.
DIVIDENDS, DISTRIBUTIONS AND TAXES
For a discussion of Adjustable Rate Fund's and the Fund's policies with
respect to dividends, distributions and taxes, see "Shareholder Guide to
Investing -- Dividends and Distributions" and "Tax Status" in their respective
Prospectuses.
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<PAGE>
PURCHASES AND REDEMPTIONS
For a discussion of how each fund's shares may be purchased and redeemed,
see "Shareholder Guide to Investing" in the funds' respective Prospectuses.
PENDING LEGAL PROCEEDINGS
For a discussion of pending legal proceedings see "General Information --
Pending Legal Proceedings" in the funds' respective Prospectuses.
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
For management's discussion of Adjustable Rate Fund's performance as of the
fiscal year ended August 31, 1995 and six-month period ended February 29, 1996,
see Adjustable Rate Fund's Annual and Semiannual Reports for such periods
accompanying this Proxy Statement/Prospectus. For management's discussion of
the Fund's performance, see the Company's Annual Report for the fiscal year
ended June 30, 1996 accompanying this Proxy Statement/Prospectus.
FINANCIAL STATEMENTS AND EXPERTS
The annual financial statements of Adjustable Rate Fund and the Fund
incorporated by reference in the Statement of Additional Information have been
audited by KPMG Peat Marwick LLP, independent accountants, for the periods
indicated in its respective reports thereon. Such financial statements have
been incorporated by reference in reliance upon such reports given upon the
authority of KPMG Peat Marwick LLP as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters concerning the issuance of shares of Adjustable Rate
Fund will be passed upon by Dorsey & Whitney LLP, Minneapolis, Minnesota.
AVAILABLE INFORMATION
ADDITIONAL INFORMATION ABOUT THE FUND AND ADJUSTABLE RATE FUND IS
AVAILABLE, AS APPLICABLE, IN THE FOLLOWING DOCUMENTS WHICH ACCOMPANY THIS PROXY
STATEMENT/PROSPECTUS: (a) ADJUSTABLE RATE FUND'S PROSPECTUS DATED DECEMBER 18,
1995, WHICH PROSPECTUS FORMS A PART OF POST-EFFECTIVE AMENDMENT NO. 2 TO PIPER
FUND II'S REGISTRATION STATEMENT ON FORM N-1A (FILE NOS. 33-60515; 811-07279);
(b) ADJUSTABLE RATE FUND'S STATEMENT OF ADDITIONAL INFORMATION DATED DECEMBER
18, 1995; (c) ADJUSTABLE RATE FUND'S ANNUAL REPORT FOR THE FISCAL YEAR ENDED
AUGUST 31, 1995; (d) ADJUSTABLE RATE FUND'S SEMIANNUAL REPORT FOR THE SIX MONTHS
ENDED FEBRUARY 29, 1996; (e) THE COMPANY'S PROSPECTUS DATED NOVEMBER 1, 1995, AS
SUPPLEMENTED JUNE 24, 1996, WHICH PROSPECTUS FORMS A PART OF POST-EFFECTIVE
AMENDMENT NO. 5 TO THE COMPANY'S REGISTRATION STATEMENT ON FORM N-1A (FILE
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NOS. 33-53718; 811-7320); (f) THE COMPANY'S STATEMENT OF ADDITIONAL INFORMATION
DATED NOVEMBER 1, 1995; AND (g) THE COMPANY'S ANNUAL REPORT FOR THE FISCAL YEAR
ENDED JUNE 30, 1996.
The Company and Piper Funds II are subject to the informational
requirements of the Securities and Exchange Act of 1934, as amended, and, in
accordance therewith, file reports and other information with the Commission.
Proxy materials, reports and other information about the Fund and Adjustable
Rate Fund which are of public record can be inspected and copied at public
reference facilities maintained by the Commission at Room 1204, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 and certain of its regional
offices, and copies of such materials can be obtained at prescribed rates from
the Public Reference Branch, Office of Consumer Affairs and Information
Services, Securities and Exchange Commission, Washington, D.C. 20549.
OTHER BUSINESS
Management of the Company knows of no business other than the matters
specified above which will be presented at the Meeting. Since matters not known
at the time of the solicitation may come before the Meeting, the proxy as
solicited confers discretionary authority with respect to such matters as
properly come before the Meeting, including any adjournment or adjournments
thereof, and it is the intention of the persons named as attorneys-in-fact in
the proxy to vote this proxy in accordance with their judgment on such matters.
By Order of the Board of Directors,
SUSAN SHARP MILEY
SECRETARY
August , 1996
--
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EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
INSTITUTIONAL GOVERNMENT ADJUSTABLE PORTFOLIO AND
ADJUSTABLE RATE MORTGAGE SECURITIES FUND
THIS AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") is made as of
this___ day of ___, 1996, by and between Piper Institutional Funds Inc. ("Piper
Institutional"), on behalf of its series Institutional Government Adjustable
Portfolio ("Institutional Fund"), and Piper Funds Inc. -- II ("Piper Funds II"),
on behalf of its series Adjustable Rate Mortgage Securities Fund ("Adjustable
Rate Fund"). Piper Institutional and Piper Funds II are Minnesota corporations.
As used in this Agreement, the terms "Adjustable Rate Fund" and "Institutional
Fund" shall be construed to mean, respectively, "Piper Funds II on behalf of
Adjustable Rate Fund" and "Piper Institutional on behalf of Institutional Fund,"
where necessary to reflect the fact that a corporate series is generally
considered the beneficiary of corporate level actions taken with respect to the
series and is not itself recognized as a person under law.
This Agreement is intended to be and is adopted as a "plan of
reorganization," within the meaning of Treas. Reg. 1.368-2(g), for a
reorganization under Section 368(a)(1)(C) of the Internal Revenue Code of 1986,
as amended (the "Code"). The reorganization (the "Reorganization") will consist
of the transfer to Adjustable Rate Fund of substantially all of the assets of
Institutional Fund in exchange for the assumption by Adjustable Rate Fund of all
stated liabilities of Institutional Fund and the issuance by Adjustable Rate
Fund of shares of common stock, par value $0.01 per share ("Adjustable Rate Fund
Shares"), to be distributed, after the Closing Date hereinafter determined, to
the shareholders of Institutional Fund in liquidation of Institutional Fund as
provided herein, all upon the terms and conditions hereinafter set forth in this
Agreement. The distribution of Adjustable Rate Fund Shares to Institutional
Fund shareholders and the retirement and cancellation of Institutional Fund
shares will be effected pursuant to an amendment to the Articles of
Incorporation of Piper Institutional in the form attached hereto as Exhibit 1
(the "Amendment"), to be adopted by Piper Institutional in accordance with the
Minnesota Business Corporation Act.
In consideration of the premises and of the covenants and agreements
hereinafter set forth, the parties hereto covenant and agree as follows:
1. REORGANIZATION AND LIQUIDATION OF INSTITUTIONAL FUND
1.1. Subject to the terms and conditions set forth herein and in the
Amendment and on the basis of the representations and warranties contained
herein, Institutional Fund agrees to assign, deliver and otherwise transfer the
Institutional Fund Assets (as defined in paragraph 1.2(a)) to Adjustable Rate
Fund
A-1
<PAGE>
and Adjustable Rate Fund agrees in exchange therefor to assume all stated
liabilities of Institutional Fund on the Closing Date (as defined in paragraph
3.1) as set forth in paragraph 1.3 and to deliver to Institutional Fund
Shareholders (as defined in paragraph 1.5) the number of Adjustable Rate Fund
Shares, including fractional Adjustable Rate Fund Shares, determined in
accordance with paragraph 2.2. Such transactions shall take place at the
closing provided for in paragraph 3.1 (the "Closing").
1.2. (a) The "Institutional Fund Assets" shall consist of all property,
including, without limitation, all cash, cash equivalents, securities,
futures and interest receivables owned by Institutional Fund, and any
deferred or prepaid expenses shown as an asset on Institutional Fund's
books, on the Valuation Date (as defined in paragraph 2.1).
(b) Institutional Fund reserves the right to sell any of the
securities in its portfolio but will not, from the date on which the Proxy
Materials (as defined in paragraph 4.3) are mailed to Institutional Fund
shareholders, acquire without the prior written approval of Adjustable Rate
Fund any additional securities or other instruments other than securities
or instruments of the type in which Adjustable Rate Fund is permitted to
invest and in amounts agreed to by Adjustable Rate Fund. In the event that
Institutional Fund holds any assets that Adjustable Rate Fund is not
permitted to hold, Institutional Fund will dispose of such assets on or
prior to the Valuation Date. In addition, if it is determined that the
portfolios of Institutional Fund and Adjustable Rate Fund, when aggregated,
would contain investments exceeding certain percentage limitations imposed
upon Adjustable Rate Fund with respect to investments (including, among
others, percentage limitations necessary to satisfy the diversification
requirements of the Code), Institutional Fund if requested by Adjustable
Rate Fund will, on or prior to the Valuation Date, dispose of and/or
reinvest a sufficient amount of such investments as may be necessary to
avoid violating such limitations as of the Closing Date.
1.3. Institutional Fund will endeavor to discharge all of its liabilities
and obligations on or prior to the Valuation Date. Adjustable Rate Fund will
assume all stated liabilities, which include, without limitation, all expenses,
costs, charges and reserves reflected on an unaudited Statement of Assets and
Liabilities of Institutional Fund prepared by the Treasurer of Institutional
Fund as of the Valuation Date in accordance with generally accepted accounting
principles consistently applied from the prior audited period ("Valuation Date
Statement").
1.4. In order for Institutional Fund to comply with Section 852(a)(1) of
the Code and to avoid having any investment company taxable income or any net
capital gain subject to tax in the taxable year ending with its dissolution,
Institutional Fund will, on or before the Valuation Date, declare and distribute
dividends in an amount large enough so that it will have declared dividends of
all
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of its investment company taxable income and net capital gain, if any, for such
taxable year (determined without regard to any deduction for dividends paid).
1.5. On the Closing Date or as soon as practicable thereafter, pursuant to
paragraph 1.1 hereof and the Amendment, Institutional Fund will distribute
Adjustable Rate Fund Shares received by Institutional Fund pro rata to its
shareholders of record determined as of the close of business on the Valuation
Date ("Institutional Fund Shareholders"). Thereafter, no additional shares
representing interests in Institutional Fund shall be issued. Such distribution
will be accomplished by an instruction, signed by Institutional Fund's
Secretary, to transfer Adjustable Rate Fund Shares then credited to
Institutional Fund's account on the books of Adjustable Rate Fund to open
accounts on the books of Piper Funds in the names of the Institutional Fund
Shareholders and representing the respective pro rata number of Adjustable Rate
Fund Shares due each such Institutional Fund Shareholder. All issued and
outstanding shares of Institutional Fund simultaneously will be canceled on
Institutional Fund's books.
1.6. Ownership of Adjustable Rate Fund Shares will be shown on the books
of Piper Fund II's transfer agent. Adjustable Rate Fund Shares will be issued
in the manner described in Piper Fund II's then-current Prospectus and Statement
of Additional Information, except no front-end sales charges will be incurred by
Institutional Fund Shareholders in connection with Adjustable Rate Fund Shares
received in the Reorganization.
1.7. Any transfer taxes payable upon issuance of Adjustable Rate Fund
Shares in a name other than the registered holder of Institutional Fund Shares
on Institutional Fund's books as of the close of business on the Valuation Date
shall, as a condition of such issuance and transfer, be paid by the person to
whom Adjustable Rate Fund Shares are to be issued and transferred.
1.8. Any reporting responsibility of Institutional Fund is and shall
remain the responsibility of Institutional Fund.
1.9. All books and records maintained on behalf of Institutional Fund will
be delivered to Adjustable Rate Fund and, after the Closing, will be maintained
by Adjustable Rate Fund or its designee in compliance with applicable record
retention requirements under the 1940 Act.
2. VALUATION
2.1. The "Valuation Date" shall be a business day not later than the 5th
business day following the receipt of the requisite approval of this Agreement
by shareholders of Institutional Fund or such other date after such shareholder
approval as may be mutually agreed upon. The value of the Institutional Fund
Assets shall be the value of such assets computed as of 4:00 p.m., Eastern time,
on
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the Valuation Date, using the valuation procedures set forth in Piper Fund II's
then current Prospectus and Statement of Additional Information.
2.2. The net asset value of an Adjustable Rate Fund Share shall be the net
asset value per share computed on the Valuation Date, using the valuation
procedures set forth in Piper Fund II's then-current Prospectus and Statement of
Additional Information.
2.3. The number of Adjustable Rate Fund Shares (including fractional
shares, if any) to be issued hereunder shall be determined by dividing the value
of the Institutional Fund Assets, net of the liabilities of Institutional Fund
assumed by Adjustable Rate Fund pursuant to paragraph 1.1, determined in
accordance with paragraph 2.1, by the net asset value of an Adjustable Rate Fund
Share determined in accordance with paragraph 2.2.
2.4. All computations of value shall be made by Piper Capital Management
Incorporated ("PCM") in accordance with its regular practice in pricing
Adjustable Rate Fund. Adjustable Rate Fund shall cause PCM to deliver a copy of
its valuation report at the Closing.
3. CLOSING AND CLOSING DATE
3.1. The Closing shall take place on the Valuation Date as of 5:00 p.m.,
Eastern time, or at such other day or time as the parties may agree (the
"Closing Date"). The Closing shall be held in a location mutually agreeable to
the parties hereto. All acts taking place at the Closing shall be deemed to
take place simultaneously as of 5:00 p.m., Eastern time, on the Closing Date
unless otherwise provided.
3.2. Portfolio securities held by Institutional Fund (together with any
cash or other assets) shall be delivered by Institutional Fund to Investors
Fiduciary Trust Company (the "Custodian"), as custodian for Adjustable Rate
Fund, for the account of Adjustable Rate Fund on or before the Closing Date in
conformity with applicable custody provisions under the 1940 Act and duly
endorsed in proper form for transfer in such condition as to constitute good
delivery thereof in accordance with the custom of brokers. The portfolio
securities shall be accompanied by all necessary federal and state stock
transfer stamps or a check for the appropriate purchase price of such stamps.
Portfolio securities and instruments deposited with a securities depository (as
defined in Rule 17f-4 under the 1940 Act) shall be delivered on or before the
Closing Date by book-entry in accordance with customary practices of such
depository and the Custodian. The cash delivered shall be in the form of a
Federal Funds wire, payable to the order of "Investors Fiduciary Trust Company,
Custodian for Adjustable Rate Mortgage Securities Fund, a series of Piper Funds
Inc. -- II."
3.3. In the event that on the Valuation Date, (a) the New York Stock
Exchange shall be closed to trading or trading thereon shall be restricted or
(b) trading or the reporting of trading on such Exchange or elsewhere shall be
disrupted
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so that, in the judgment of both Adjustable Rate Fund and Institutional Fund,
accurate appraisal of the value of the net assets of Adjustable Rate Fund or the
Institutional Fund Assets is impracticable, the Valuation Date shall be
postponed until the first business day after the day when trading shall have
been fully resumed without restriction or disruption and reporting shall have
been restored.
3.4. At the Closing, each party shall deliver to the other such bills of
sale, checks, assignments, share certificates, if any, receipts or other
documents as such other party or its counsel may reasonably request.
4. COVENANTS OF ADJUSTABLE RATE FUND AND INSTITUTIONAL FUND
4.1. Except as otherwise expressly provided herein with respect to
Institutional Fund, Adjustable Rate Fund and Institutional Fund each will
operate its business in the ordinary course between the date hereof and the
Closing Date, it being understood that such ordinary course will include
customary dividends and other distributions.
4.2. Piper Funds II will prepare and file with the Securities and Exchange
Commission (the "Commission") a registration statement on Form N-14 under the
Securities Act of 1933, as amended (the "1933 Act"), relating to Adjustable Rate
Fund Shares (the "Registration Statement"). Piper Institutional will provide
Piper Funds II with the Proxy Materials as described in paragraph 4.3 below for
inclusion in the Registration Statement. Piper Institutional will further
provide Piper Funds II with such other information and documents relating to
Institutional Fund as are reasonably necessary for the preparation of the
Registration Statement.
4.3. Institutional Fund will call a meeting of its shareholders to
consider and act upon this Agreement and the Amendment and to take all other
action necessary to obtain approval of the transactions contemplated herein,
including, if necessary, the waiver of any existing investment limitations that
might otherwise preclude Institutional Fund from holding all of its assets as
Adjustable Rate Fund Shares until such shares are distributed to Institutional
Fund shareholders. Piper Institutional will prepare the notice of meeting, form
of proxy and proxy statement (collectively, "Proxy Materials") to be used in
connection with such meeting. Piper Funds II will furnish Piper Institutional
with a currently effective Prospectus relating to Adjustable Rate Fund Shares
for inclusion in the Proxy Materials and with such other information relating to
Adjustable Rate Fund as is reasonably necessary for the preparation of the Proxy
Materials.
4.4. Subject to the provisions of this Agreement, Adjustable Rate Fund and
Institutional Fund will each take, or cause to be taken, all action, and do or
cause to be done, all things reasonably necessary, proper or advisable to
consummate and make effective the transactions contemplated by this Agreement.
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4.5. As soon after the Closing Date as is reasonably practicable, Piper
Institutional (a) shall prepare and file all federal and other tax returns and
reports of Institutional Fund required by law to be filed with respect to all
periods ending on or before the Closing Date but not theretofore filed, and (b)
shall pay all federal and other taxes shown as due thereon and/or all federal
and other taxes that were unpaid as of the Closing Date, including without
limitation, all taxes for which the provision for payment was made as of the
Closing Date (as represented in paragraph 5.2(k)).
4.6. Adjustable Rate Fund agrees to use all reasonable efforts to obtain
the approvals and authorizations required by the 1933 Act, the 1940 Act and such
of the state blue sky and securities laws as it may deem appropriate in order to
continue its operations after the Closing Date.
5. REPRESENTATIONS AND WARRANTIES
5.1. Piper Funds II represents and warrants to Piper Institutional as
follows:
(a) Adjustable Rate Fund is a series of Piper Funds II. Piper Funds
II is a corporation validly existing and in good standing under the laws of
Minnesota with corporate power to carry on its business as presently
conducted.
(b) Piper Funds II is a duly registered management investment company,
and its registration with the Commission as an investment company under the
1940 Act and the registration of its shares under the 1933 Act are in full
force and effect;
(c) All of the issued and outstanding shares of common stock of
Adjustable Rate Fund have been offered and sold in compliance in all
material respects with applicable registration requirements of the 1933 Act
and state securities laws. Shares of Adjustable Rate Fund are registered
in all jurisdictions in which they are required to be registered under
state securities laws and other laws, and Piper Funds II is not subject to
any stop order and is fully qualified to sell Adjustable Rate Fund shares
in each state in which such shares have been registered.
(d) The current Prospectus and Statement of Additional Information of
Adjustable Rate Fund conform in all materials respects to the applicable
requirements of the 1933 Act and the 1940 Act and the regulations
thereunder and do not include any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which
they are made, not misleading.
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(e) Adjustable Rate Fund is not in, and the execution, delivery and
performance of this Agreement will not result in, a materials violation of
any provision of Piper Funds II's Articles of Incorporation or Bylaws or of
any agreement, indenture, instrument, contract, lease or other undertaking
to which Adjustable Rate Fund is a party or by which it is bound.
(f) Other than as disclosed in Piper Fund II's currently effective
Prospectus and Statement of Additional Information or in the Proxy
Materials, no material litigation or administration proceeding or
investigation of or before any court or governmental body is presently
pending or, to its knowledge, threatened against Piper Funds II or
Adjustable Rate Fund or any of its properties or assets which, if adversely
determined, would materially and adversely affect its financial condition
or the conduct of its business; and Adjustable Rate Fund is not a party to
or subject to the provisions of any order, decree or judgment of any court
or governmental body which materially and adversely affects, or is
reasonably likely to materially and adversely affect, its business or its
ability to consummate the transactions herein contemplated.
(g) Piper Fund II's Statement of Assets and Liabilities, Statement of
Operations, Statement of Changes in Net Assets and Financial Highlights as
of August 31, 1995, and for the year then ended, certified by KPMG Peat
Marwick LLP, and Piper Fund II's unaudited Statement of Assets and
Liabilities, Statement of Operations, Statement of Changes in Net Assets
and Financial Highlights as of February 29, 1996 and for the six-month
period then ended (copies of which have been furnished to Institutional
Fund), fairly present, in all material respects, Piper Fund II's financial
condition as of such dates in accordance with generally accepted accounting
principles, and its results of operations, changes in its net assets and
financial highlights for such periods, and as of such dates there were no
known liabilities of Adjustable Rate Fund (contingent or otherwise) not
disclosed therein that would be required in accordance with generally
accepted accounting principles to be disclosed therein.
(h) Since the date of the most recent unaudited financial statements,
there has not been any material adverse change in Piper Fund II's financial
condition, assets, liabilities or business, other than changes occurring in
the ordinary course of business, or any incurrence by Adjustable Rate Fund
of indebtedness maturing more than one year from the date such indebtedness
was incurred, except indebtedness incurred in the ordinary course of
business. For the purpose of this subparagraph (h), neither a decline in
Piper Fund II's net asset value per share nor a decrease in Piper Fund II's
size due to redemptions by Adjustable Rate Fund shareholders shall
constitute a material adverse change.
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(i) All issued and outstanding Adjustable Rate Fund shares are, and
at the Closing Date will be, duly and validly issued and outstanding, fully
paid and nonassessable with no personal liability attaching to the
ownership thereof. Adjustable Rate Fund does not have outstanding any
options, warrants or other rights to subscribe for or purchase any of its
shares, not is there outstanding any security convertible into any of its
shares.
(j) The execution, delivery and performance of this Agreement have
been duly authorized by all necessary action on the part of Piper Funds II,
and this Agreement constitutes a valid and binding obligation of Adjustable
Rate Fund enforceable in accordance with its terms, subject as to
enforcement to bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance and other laws relating to or affecting creditors
rights and to general equity principles. No other consents, authorizations
or approvals are necessary in connection with Piper Fund II's performance
of this Agreement, except such as have been obtained under the 1933 Act,
the Securities Exchange Act of 1934, as amended (the "1934 Act"), and the
1940 Act and such as may be required under state securities laws;
(k) Adjustable Rate Fund Shares to be issued and delivered to
Institutional Fund, for the account of the Institutional Fund Shareholders,
pursuant to the terms of this Agreement will at the Closing Date have been
duly authorized and, when so issued and delivered, will be duly and validly
issued Adjustable Rate Fund Shares, and will be fully paid and
nonassessable with no personal liability attaching to the ownership
thereof;
(l) All material federal and other tax returns and reports of
Adjustable Rate Fund required by law to be filed on or before the Closing
Date have been filed and are correct, and all federal and other taxes shown
as due or required to be shown as due on said returns and reports have been
paid or provision has been made for the payment thereof and, to the best of
Piper Fund II's knowledge, no such return is currently under audit and no
assessment has been asserted with respect to any such return and there are
no facts that might form the basis for such proceedings
(m) For each taxable year since its inception, Adjustable Rate Fund
has met the requirements of Subchapter M of the Code for qualification and
treatment as a "regulated investment company" and neither the execution or
delivery of, nor the performance of its obligations under, this Agreement
will adversely affect, and no other events, to the best of Piper Fund II's
knowledge, are reasonably likely to occur which will adversely affect the
ability of Adjustable Rate Fund to continue to meet the requirements of
Subchapter M of the Code;
(n) Since Piper Fund II's most recent fiscal year-end, there has been
no change by Adjustable Rate Fund in accounting methods, principles or
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practices, including those required by generally accepted accounting
principles;
(o) The information furnished or to be furnished by Adjustable Rate
Fund for use in registration statements, proxy materials and other
documents which may be necessary in connection with the transactions
contemplated hereby shall be accurate and complete in all material respects
and shall comply in all material respects with federal securities and other
laws and regulations applicable thereto.
(p) The Proxy Materials to be included in the Registration Statement
(only insofar as they relate to Adjustable Rate Fund) will, on the
effective date of the Registration Statement and on the Closing Date, not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which such statements were
made, not materially misleading.
5.2 Piper Institutional represents and warrants to Piper Funds II as
follows:
(a) Institutional Fund is a series of Piper Institutional. Piper
Institutional is a corporation validly existing and in good standing under
the laws of Minnesota.
(b) Piper Institutional is a duly registered management investment
company, and its registration with the Commission as an investment company
under the 1940 Act and the registration of its shares under the 1933 Act
are in full force and effect.
(c) All of the issued and outstanding shares of common stock of
Institutional Fund have been offered and sold in compliance in all material
respects with applicable registration requirements of the 1933 Act and
state securities laws. Shares of Institutional Fund are registered in all
jurisdictions in which they are required to be registered under state
securities laws and other laws, and Piper Institutional is not subject to
any stop order and is fully qualified to sell Institutional Fund shares in
each state in which such shares have been registered.
(d) The current Prospectus and Statement of Additional Information of
Institutional Fund conform in all material respects to the applicable
requirements of the 1933 Act and the 1940 Act and the regulations
thereunder and do not include any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which
they were made, not misleading.
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(e) Institutional Fund is not in, and the execution, delivery and
performance of this Agreement will not result in, a material violation of
any provision of Piper Institutional's Articles of Incorporation or Bylaws
or of any agreement, indenture, instrument, contract, lease or other
undertaking to which Institutional Fund is a party or by which it is bound.
(f) No material litigation or administrative proceeding or
investigation of or before any court or governmental body is presently
pending or, to its knowledge, threatened against Institutional Fund or any
of its properties or assets which, if adversely determined, would
materially and adversely affect its financial condition or the conduct of
its business; and Institutional Fund knows of no facts that might form the
basis for the institution of such proceedings and is not a party to or
subject to the provisions of any order, decree or judgment of any court or
governmental body which materially and adversely affects, or is reasonably
likely to materially and adversely affect, its business or its ability to
consummate the transactions herein contemplated.
(g) Institutional Fund's Statement of Assets and Liabilities,
Statement of Operations, Statement of Changes in Net Assets and Financial
Highlights of Institutional Fund as of June 30, 1996 and for the year then
ended, certified by KPMG Peat Marwick LLP, fairly present, in all material
respects, Institutional Fund's financial condition as of such date, and its
results of operations, changes in its net assets and financial highlights
for such period in accordance with generally accepted accounting
principles, and as of such date there were no known liabilities of
Institutional Fund (contingent or otherwise) not disclosed therein that
would be required in accordance with generally accepted accounting
principles to be disclosed therein.
(h) Since the date of the most recent audited financial statements,
there has not been any material adverse change in Institutional Fund's
financial condition, assets, liabilities or business, other than changes
occurring in the ordinary course of business, or any incurrence by
Institutional Fund of indebtedness maturing more than one year from the
date such indebtedness was incurred, except as otherwise disclosed in
writing to and acknowledged by Adjustable Rate Fund prior to the date of
this Agreement and prior to the Closing Date. All liabilities of
Institutional Fund (contingent and otherwise) are reflected in the
Valuation Date Statement. For the purpose of this subparagraph (h),
neither a decline in Institutional Fund's net asset value per share nor a
decrease in Institutional Fund's size due to redemptions by Institutional
Fund shareholders shall constitute a material adverse change.
(i) Institutional Fund has no material contracts or other commitments
(other than this Agreement) that will be terminated with liability to it
prior to the Closing Date.
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(j) All issued and outstanding shares of Institutional Fund are, and
at the Closing Date will be, duly and validly issued and outstanding, fully
paid and nonassessable with no personal liability attaching to the
ownership thereof. Institutional Fund does not have outstanding any
options, warrants or other rights to subscribe for or purchase any of its
shares, nor is there outstanding any security convertible into any of its
shares. All such shares will, at the time of Closing, be held by the
persons and in the amounts recorded by Institutional Fund's transfer agent.
(k) The execution, delivery and performance of this Agreement will
have been duly authorized prior to the Closing Date by all necessary action
on the part of Piper Institutional and, subject to the approval of
Institutional Fund's shareholders, this Agreement constitutes a valid and
binding obligation of Institutional Fund enforceable in accordance with its
terms, subject as to enforcement to bankruptcy, insolvency, reorganization,
moratorium, fraudulent conveyance and other laws relating to or affecting
creditors' rights and to general equity principles. No other consents,
authorizations or approvals are necessary in connection with Institutional
Fund's performance of this Agreement, except such as have been obtained
under the 1933 Act, the 1934 Act and the 1940 Act and such as may be
required under state securities laws.
(l) All material federal and other tax returns and reports of
Institutional Fund required by law to be filed on or before the Closing
Date shall have been filed and are correct and all federal and other taxes
shown as due or required to be shown as due on said returns and reports
have been paid or provision has been made for the payment thereof and, to
the best of Institutional Fund's knowledge, no such return is currently
under audit and no assessment has been asserted with respect to any such
return and there are no facts that might form the basis for such
proceedings.
(m) For each taxable year since its inception, Institutional Fund has
met all the requirements of Subchapter M of the Code for qualification and
treatment as a "regulated investment company" and neither the execution or
delivery of, nor the performance of its obligations under, this Agreement
will adversely affect, and no other events, to the best of Institutional
Fund's knowledge, are reasonably likely to occur which will adversely
affect the ability of Institutional Fund to continue to meet the
requirements of Subchapter M of the Code.
(n) At the Closing Date, Institutional Fund will have good and valid
title to the Institutional Fund Assets, subject to no liens (other than the
obligation, if any, to pay the purchase price of portfolio securities
purchased by Institutional Fund which have not settled prior to the Closing
Date), security interests or other encumbrances, and full right, power and
authority to assign,
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deliver and otherwise transfer such assets hereunder, and upon delivery and
payment for such assets, Adjustable Rate Fund will acquire good and
marketable title thereto, subject to no restrictions on the full transfer
thereof, including any restrictions as might arise under the 1933 Act.
(o) On the effective date of the Registration Statement, at the time
of the meeting of Institutional Fund's shareholders and on the Closing
Date, the Proxy Materials will (i) comply in all material respects with the
provisions of the 1933 Act, the 1934 Act and the 1940 Act and the
regulations thereunder and (ii) not contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading.
Neither Institutional Fund nor Piper Institutional shall be construed to
have made the foregoing representation with respect to portions of the
Proxy Materials furnished by Adjustable Rate Fund. Any other information
furnished by Institutional Fund for use in the Registration Statement or in
any other manner that may be necessary in connection with the transactions
contemplated hereby shall be accurate and complete and shall comply in all
material respects with the applicable federal securities and other laws and
regulations thereunder.
(p) Institutional Fund has maintained or has caused to be maintained
on its behalf all books and accounts as required of a registered investment
company in compliance with the requirements of Section 31 of the 1940 Act
and the Rules thereunder.
(q) Institutional Fund is not acquiring Adjustable Rate Fund Shares
to be issued hereunder for the purpose of making any distribution thereof
other than in accordance with the terms of this Agreement.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF INSTITUTIONAL FUND
The obligations of Institutional Fund to consummate the transactions
provided for herein shall be subject, at its election, to the performance by
Adjustable Rate Fund of all the obligations to be performed by it hereunder on
or before the Closing Date and, in addition thereto, the following conditions:
6.1. All representations and warranties of Adjustable Rate Fund contained
in this Agreement shall be true and correct in all material respects as of the
date hereof and, except as they may be affected by the transactions contemplated
by this Agreement, as of the Closing Date with the same force and effect as if
made on and as of the Closing Date.
6.2. Adjustable Rate Fund shall have delivered to Institutional Fund a
certificate of its President and Treasurer, in a form reasonably satisfactory to
Institutional Fund and dated as of the Closing Date, to the effect that the
representations and warranties of Piper Funds II made in this Agreement are true
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and correct at and as of the Closing Date, except as they may be affected by the
transactions contemplated by this Agreement, and as to such other matters as
Piper Institutional shall reasonably request.
6.3. As of the Closing Date, there shall have been no material change in
the investment objective, policies and restrictions, nor any increase in the
investment management fees or annual fees payable pursuant to Piper Fund II's
12b-1 plan of distribution, from those described in the Prospectus and Statement
of Additional Information of Adjustable Rate Fund in effect on the date of this
Agreement.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF ADJUSTABLE RATE FUND
The obligations of Adjustable Rate Fund to complete the transactions
provided for herein shall be subject, at its election, to the performance by
Institutional Fund of all the obligations to be performed by it hereunder on or
before the Closing Date and, in addition thereto, the following conditions:
7.1. All representations and warranties of Piper Institutional contained
in this Agreement shall be true and correct in all material respects as of the
date hereof and, except as they may be affected by the transactions contemplated
by this Agreement, as of the Closing Date with the same force and effect as if
made on and as of the Closing Date.
7.2. Institutional Fund shall have delivered to Adjustable Rate Fund at
the Closing a certificate of its President and its Treasurer, in form and
substance satisfactory to Adjustable Rate Fund and dated as of the Closing Date,
to the effect that the representations and warranties of Institutional Fund made
in this Agreement are true and correct at and as of the Closing Date, except as
they may be affected by the transactions contemplated by this Agreement, and as
to such other matters as Adjustable Rate Fund shall reasonably request.
7.3. Institutional Fund shall have delivered to Adjustable Rate Fund a
statement, certified by the Treasurer of Piper Institutional, of the
Institutional Fund Assets and its liabilities, together with a list of
Institutional Fund's portfolio securities and other assets showing the
respective adjusted bases and holding periods thereof for income tax purposes,
such statement to be prepared as of the Closing Date and in accordance with
generally accepted accounting principles consistently applied.
7.4. On the Closing Date, the Institutional Fund Assets shall include no
assets that Adjustable Rate Fund, by reason of Piper Funds II's Articles of
Incorporation, investment limitations or otherwise, may not properly acquire.
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8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF ADJUSTABLE RATE FUND AND
INSTITUTIONAL FUND.
The obligations of Institutional Fund and Adjustable Rate Fund hereunder
are each subject to the further conditions that on or before the Closing Date:
8.1. This Agreement and the Amendment and the transactions contemplated
herein and therein shall have been approved by the requisite vote of the holders
of the outstanding shares of Institutional Fund in accordance with the
provisions of Piper Institutional's Articles of Incorporation, and certified
copies of the resolutions evidencing such approval shall have been delivered to
Adjustable Rate Fund.
8.2. On the Closing Date, no action, suit or other proceeding shall be
pending before any court or governmental agency in which it is sought to
restrain or prohibit, or obtain damages or other relief in connection with, this
Agreement or the transactions contemplated herein.
8.3. All consents of other parties and all other consents, orders and
permits of federal, state and local regulatory authorities (including those of
the Commission and of state blue sky and securities authorities, including
"no-action" positions of and exemptive orders from such federal and state
authorities) deemed necessary by Adjustable Rate Fund or Institutional Fund to
permit consummation, in all material respects, of the transactions contemplated
herein shall have been obtained, except where failure to obtain any such
consent, order or permit would not involve risk of a material adverse effect on
the assets or properties of Adjustable Rate Fund or Institutional Fund.
8.4. The Registration Statement shall have become effective under the 1933
Act, no stop orders suspending the effectiveness thereof shall have been issued
and, to the best knowledge of the parties hereto, no investigation or proceeding
for that purpose shall have been instituted or be pending, threatened or
contemplated under the 1933 Act.
8.5. On or prior to the Valuation Date, Institutional Fund shall have
declared and paid a dividend or dividends and/or other distribution or
distributions that, together with all previous such dividends or distributions,
shall have the effect of distributing to its shareholders all of Institutional
Fund's investment company taxable income (computed without regard to any
deduction for dividends paid) and all of its net capital gain (after reduction
for any capital loss carry-forward and computed without regard to any deduction
for dividends paid) for the taxable year during which the Reorganization occurs.
8.6 The parties shall have received an opinion of the law firm of Dorsey &
Whitney LLP (based on such representations as such law firm shall reasonably
request), addressed to Piper Funds II and Piper Institutional, which opinion may
be
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relied upon by the shareholders of Institutional Fund, substantially to the
effect that the federal income tax consequences of the Reorganization will be as
follows:
(i) the Reorganization will constitute a reorganization within the meaning
of Section 368(a)(1)(C) of the Code, and Adjustable Rate Fund and
Institutional Fund each will qualify as a party to the Reorganization
under Section 368(b) of the Code;
(ii) Institutional Fund shareholders will recognize no income, gain or loss
upon receipt, pursuant to the Reorganization, of Adjustable Rate Fund
shares. Institutional Fund shareholders subject to taxation will
recognize income upon receipt of any net investment income or net
capital gains of Institutional Fund which are distributed by
Institutional Fund prior to the Reorganization;
(iii) the tax basis of Adjustable Rate Fund shares received by each
Institutional Fund shareholder pursuant to the Reorganization will be
equal to the tax basis of Institutional Fund shares exchanged
therefor;
(iv) the holding period of Adjustable Rate Fund shares received by each
Institutional Fund shareholder pursuant to the Reorganization will
include the period during which the Institutional Fund shareholder
held the Institutional Fund shares exchanged therefor, provided that
the Institutional Fund shares were held as a capital asset on the date
of the Reorganization;
(v) Institutional Fund will recognize no income, gain or loss by reason of
the Reorganization;
(vi) Adjustable Rate Fund will recognize no income, gain or loss by reason
of the Reorganization;
(vii) the tax basis of the assets received by Adjustable Rate Fund pursuant
to the Reorganization will be the same as the basis of those assets in
the hands of Institutional Fund immediately prior to the
Reorganization;
(viii) the holding period of the assets received by Adjustable Rate Fund
pursuant to the Reorganization will include the period during which
such assets were held by Institutional Fund; and
(ix) Adjustable Rate Fund will succeed to and take into account the
earnings and profits, or deficit in earnings and profits, of
Institutional Fund immediately prior to the Reorganization.
A-15
<PAGE>
Notwithstanding anything herein to the contrary, neither Adjustable Rate
Fund nor Institutional Fund may waive the condition set forth in this paragraph
8.6.
8.7 The Amendment shall have been filed in accordance with applicable
provisions of Minnesota law.
9. FEES AND EXPENSES
9.1. (a) PCM shall bear all direct expenses incurred in connection with
entering into and carrying out the provisions of this Agreement, including
expenses incurred in connection with the preparation, printing, filing and
solicitation of proxies to obtain requisite shareholder approvals.
(b) PCM shall pay any unamortized organizational expenses on the
books of Institutional Fund immediately prior to the Reorganization.
(c) In the event the transactions contemplated herein are not
consummated by reason of Institutional Fund's being either unwilling or
unable to go forward (other than by reason of the nonfulfillment or failure
of any condition to Institutional Fund's obligations specified in this
Agreement), PCM's obligations, on behalf of Institutional Fund, shall be
limited to reimbursement of Adjustable Rate Fund for all reasonable
out-of-pocket fees and expenses incurred by Adjustable Rate Fund in
connection with those transactions.
(d) In the event the transactions contemplated herein are not
consummated by reason of Piper Fund II's being either unwilling or unable
to go forward (other than by reason of the nonfulfillment or failure of any
condition to Piper Fund II's obligations specified in the Agreement), Piper
Fund II's only obligation hereunder shall be to reimburse Institutional
Fund for all reasonable out-of-pocket fees and expenses incurred by
Institutional Fund in connection with those transactions.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1. This Agreement constitutes the entire agreement between the parties.
10.2. The representations, warranties and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection herewith
shall survive the consummation of the transactions contemplated herein.
A-16
<PAGE>
11. TERMINATION
11.1. This Agreement may be terminated and the transactions contemplated
hereby may be abandoned at any time prior to the Closing:
(a) by the mutual written consent of Piper Institutional and Piper
Funds II;
(b) by either Piper Funds II or Piper Institutional by notice to the
other, without liability to the terminating party on account of such
termination (providing the terminating party is not otherwise in material
default or breach of this Agreement) if the Closing shall not have occurred
on or before December 31, 1996; or
(c) by either Adjustable Rate Fund or Institutional Fund, in writing
without liability to the terminating party on account of such termination
(provided the terminating party is not otherwise in material default or
breach of this Agreement), if (i) the other party shall fail to perform in
any material respect its agreements contained herein required to be
performed on or prior to the Closing Date, (ii) the other party materially
breaches any of its representations, warranties or covenants contained
herein, (iii) the Institutional Fund shareholders fail to approve this
Agreement at any meeting called for such purpose at which a quorum was
present, or (iv) any other condition herein expressed to be precedent to
the obligations of the terminating party has not been met and it reasonably
appears that it will not or cannot be met.
11.2. (a) Termination of this Agreement pursuant to paragraphs 11.1(a) or
(b) shall terminate all obligations of the parties hereunder and there
shall be no liability for damages on the part of Adjustable Rate Fund or
Institutional Fund or the directors or officers of Adjustable Rate Fund or
Institutional Fund, to any other party or its directors or officers.
(b) Termination of this Agreement pursuant to paragraph 11.1(c) shall
terminate all obligations of the parties hereunder and there shall be no
liability for damages on the part of Adjustable Rate Fund or Institutional
Fund or the directors or officers of Adjustable Rate Fund or Institutional
Fund, except that any party in breach of this Agreement shall, upon demand,
reimburse the non-breaching party for all reasonable out-of-pocket fees and
expenses incurred in connection with the transactions contemplated by this
Agreement, including legal, accounting and filing fee.
A-17
<PAGE>
12. AMENDMENTS
This Agreement may be amended, modified or supplemented in such manner as
may be mutually agreed upon in writing by the parties; PROVIDED, HOWEVER, that
following the meeting of Institutional Fund's shareholders called by
Institutional Fund pursuant to paragraph 4.3, no such amendment may have the
effect of changing the provisions for determining the number of Adjustable Rate
Fund shares to be issued to the Institutional Fund Shareholders under this
Agreement to the detriment of such Institutional Fund Shareholders without their
further approval.
13 MISCELLANEOUS
13.1. The article and paragraph headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
13.2. This Agreement may be executed in any number of counterparts, each
of which shall be deemed an original.
13.3. This Agreement shall be governed by and construed in accordance with
the laws of the State of Minnesota.
13.4. This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or obligations hereunder shall be made by any
party without the written consent of the other party. Nothing herein expressed
or implied is intended or shall be construed to confer upon or give any person,
firm or corporation, other than the parties hereto and their respective
successors and assigns, any rights or remedies under or by reason of this
Agreement.
13.5. The obligations and liabilities of Piper Funds II hereunder are
solely those of Adjustable Rate Fund. It is expressly agreed that no
shareholder, nominee, director, officer, agent or employee of Piper Funds II on
behalf of Adjustable Rate Fund shall be personally liable hereunder. The
execution and delivery of this Agreement have been authorized by the directors
of Piper Funds II and signed by authorized officers of Piper Funds II acting as
such, and neither such authorization by such directors nor such execution and
delivery by such officers shall be deemed to have been made by any of them
individually or to impose any liability on any of them personally.
13.6. The obligations and liabilities of Piper Institutional hereunder are
solely those of Institutional Fund. It is expressly agreed that no shareholder,
nominee, director, officer, agent or employee of Institutional Fund shall be
personally liable hereunder. The execution and delivery of this Agreement have
been authorized by the directors of Piper Institutional and signed by authorized
officers of Piper
A-18
<PAGE>
Institutional acting as such, and neither such authorization by such directors
nor such execution and delivery by such officers shall be deemed to have been
made by any of them individually or to impose any liability on any of them
personally.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed by a duly authorized officer.
PIPER INSTITUTIONAL FUNDS
INC., on behalf of Institutional
Government Adjustable Portfolio
By
-----------------------------
Name: William H. Ellis
Title: President
PIPER FUNDS INC. -- II, on behalf of
Adjustable Rate Mortgage Securities
Fund
By
------------------------------
Name: Robert H. Nelson
Title: Senior Vice President
A-19
<PAGE>
EXHIBIT 1 TO AGREEMENT AND PLAN OF REORGANIZATION
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
PIPER INSTITUTIONAL FUNDS INC.
The undersigned officer of Piper Institutional Funds Inc. ("Piper
Institutional"), a corporation subject to the provisions of Chapter 302A of the
Minnesota statutes, hereby certifies that Piper Institutional's (a) Board of
Directors, at a meeting held August 9, 1996, and (b) shareholders, at a meeting
held September 12, 1996, adopted the resolutions hereinafter set forth; and such
officer further certifies that the amendments to Piper Institutional's Articles
of Incorporation set forth in such resolutions were adopted pursuant to Chapter
302A.
WHEREAS, Piper Institutional is registered as an open-end management
investment company (I.E., a mutual fund) under the Investment Company Act of
1940 and offers its shares to the public in more than one series, each of which
represents a separate and distinct portfolio of assets;
WHEREAS, it is desirable and in the best interest of the holders of the
Institutional Government Adjustable Portfolio ("Institutional Fund"), a series
of Piper Institutional, that the assets belonging to such series, subject to its
stated liabilities, be sold to Adjustable Rate Mortgage Securities Fund
("Adjustable Rate Fund"), a series of Piper Funds Inc. -- II ("Piper Funds II"),
a Minnesota corporation and an open-end management investment company registered
under the Investment Company Act of 1940, in exchange for shares of Adjustable
Rate Fund;
WHEREAS, Piper Institutional wishes to provide for the PRO RATA
distribution of such shares of Adjustable Rate Fund received by it to holders of
shares of Institutional Fund and the simultaneous cancellation and retirement of
the outstanding shares of Institutional Fund;
WHEREAS, Piper Institutional and Piper Funds II have entered into an
Agreement and Plan of Reorganization providing for the foregoing transactions;
and
WHEREAS, the Agreement and Plan of Reorganization requires that, in order
to bind all shareholders of Institutional Fund to the foregoing transactions,
and in particular to bind such shareholders to the cancellation and retirement
of the outstanding shares of Institutional Fund, it is necessary to adopt an
amendment to Piper Institutional's Articles of Incorporation.
1
<PAGE>
NOW, THEREFORE, BE IT RESOLVED, that Piper Institutional's Articles of
Incorporation be, and the same hereby are, amended to add the following Article
5A immediately following Article 5 thereof:
5A. (a) For purposes of this Article 5A, the following terms shall
have the following meanings:
"PIPER INSTITUTIONAL" means the Corporation.
"PIPER FUNDS II" means Piper Funds Inc. -- II, a Minnesota
corporation.
"ACQUIRED FUND" means Institutional Government Adjustable Portfolio,
the Series A Shares of the Corporation.
"ACQUIRING FUND" means Piper Fund II's Adjustable Rate Mortgage
Securities Fund.
"VALUATION DATE" means the day established in the Agreement and Plan
of Reorganization as the day upon which the value of the Acquired Fund's
assets is determined for purposes of the reorganization.
"CLOSING DATE" means 5:00 p.m., Eastern time, on the Valuation Date or
such other date and time upon which Piper Funds II and Piper Institutional
agree.
(b) At the Closing Date, the assets belonging to the Acquired Fund,
the Special Liabilities associated with such assets, and the General Assets
and General Liabilities allocated to the Acquired Fund shall be sold to and
assumed by the Acquiring Fund in return for Acquiring Fund shares, all
pursuant to the Agreement and Plan of Reorganization. For purposes of the
foregoing, the terms "Assets belonging to," "Special Liabilities," "General
Assets" and "General Liabilities" have the meanings assigned to them in
Article 7(b), (c) and (d) of Piper Institutional's Articles of
Incorporation.
(c) The number of Acquiring Fund shares to be received by the
Acquired Fund and distributed by it to the Acquired Fund shareholders shall
be determined as follows:
(i) The value of the Acquired Fund's assets and the net asset
value per share of the Acquiring Fund's shares shall be computed as of
the Valuation Date using the valuation procedures set forth in the
Acquiring Fund's then-current Prospectus and Statement of Additional
Information, and as may be required by the Investment Company Act of
1940, as amended (the "1940 Act").
2
<PAGE>
(ii) The total number of Acquiring Fund shares to be issued
(including fractional shares, if any) in exchange for assets and
liabilities of the Acquired Fund shall be determined as of the
Valuation Date by dividing the value of the Acquired Fund's assets,
net of its stated liabilities on the Closing Date to be assumed by the
Acquiring Fund, by the net asset value of the Acquiring Fund's shares,
each as determined pursuant to (i) above.
(iii) On the Closing Date, or as soon as practicable thereafter,
the Acquired Fund shall distribute PRO RATA to its shareholders of
record as of the Valuation Date the full and fractional Acquiring Fund
shares received by the Acquired Fund pursuant to (ii) above.
(d) The distribution of Acquiring Fund shares to Acquired Fund
shareholders provided for in paragraph (c) above shall be accomplished by
an instruction, signed by Piper Institutional's Secretary, to transfer
Acquiring Fund shares then credited to the Acquired Fund's account on the
books of the Acquiring Fund to open accounts on the books of the Acquiring
Fund in the names of the Acquired Fund shareholders in amounts representing
the respective PRO RATA number of Acquiring Fund shares due each such
shareholder pursuant to the foregoing provisions. All issued and
outstanding shares of the Acquired Fund shall simultaneously be canceled on
the books of the Acquired Fund and retired.
(e) From and after the Closing Date, the Acquired Fund shares
canceled and retired pursuant to paragraph (d) above shall have the status
of authorized and unissued Shares of Piper Institutional, without
designation as to series.
IN WITNESS WHEREOF, the undersigned officer of Piper Institutional has
executed these Articles of Amendment on behalf of Piper Institutional on
__________, 1996.
PIPER INSTITUTIONAL FUNDS INC.
By
------------------------------
Its
---------------------------
3
<PAGE>
Adjustable Rate Mortgage Securities Fund
a series of
PIPER FUNDS INC.--II
Supplement dated January 24, 1996 to
Prospectus dated December 18, 1995
The section of the prospectus on page 24 entitled "Special Purchase Plans --
Purchases by Other Individuals Without a Sales Charge" is amended by adding
the following paragraph:
American Government Term Trust Inc. ("AGT"), a closed-end
fund which was managed by the Adviser, recently dissolved and
distributed its net assets to shareholders. Former AGT shareholders
may invest the distributions received by them in connection with
such dissolution in shares of the Fund without payment of a sales
charge. (Any such sales are subject to the eligibility of Fund share
purchases in the shareholder's state as well as the minimum investment
requirements and other applicable terms set forth in this Prospectus.)
<PAGE>
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."
<PAGE>
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."
<PAGE>
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
<PAGE>
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
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%
* 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.
<PAGE>
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.
<PAGE>
<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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
* 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
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
* 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
<PAGE>
"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.
<PAGE>
* 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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
ADJUSTABLE RATE
MORTGAGE
SECURITIES
FUND
PROSPECTUS
DECEMBER 18, 1995
<PAGE>
PROSPECTUS DATED NOVEMBER 1, 1995, AS SUPPLEMENTED JUNE 24, 1996
PIPER INSTITUTIONAL FUNDS INC.
PIPER JAFFRAY TOWER
222 SOUTH NINTH STREET, MINNEAPOLIS, MINNESOTA 55402-3804
(612) 342-6387 (LOCAL CALLS), (800) 866-7778 (TOLL FREE)
---------------------
Piper Institutional Funds Inc. (the "Company") is an open-end mutual fund
whose shares are currently offered in two series: Institutional Money Market
Fund and Institutional Government Adjustable Portfolio (the "Funds"). Each Fund
has its own investment objective and policies designed to meet different
investment goals.
INSTITUTIONAL MONEY MARKET FUND has an investment objective of maximum
current income consistent with preservation of capital and maintenance of
liquidity. Institutional Money Market Fund will invest only in securities issued
or guaranteed by the U.S. Government or its agencies or instrumentalities and
repurchase agreements and reverse repurchase agreements with respect to such
securities.
INSTITUTIONAL GOVERNMENT ADJUSTABLE PORTFOLIO has an investment objective of
high current income consistent with low principal volatility. The Fund will seek
to achieve that objective by investing primarily (at least 65% of its total
assets under normal market conditions) in adjustable rate mortgage securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities. The Fund's investments in mortgage-related securities include
derivative mortgage securities.
ON JUNE 18, 1996, THE BOARD OF DIRECTORS OF PIPER INSTITUTIONAL FUNDS INC.
(THE "COMPANY") UNANIMOUSLY APPROVED THE MERGER OF INSTITUTIONAL GOVERNMENT
ADJUSTABLE PORTFOLIO INTO ADJUSTABLE RATE MORTGAGE SECURITIES FUND ("ARMS
FUND"), A SERIES OF PIPER FUNDS INC. -- II. SEE "INVESTMENT OBJECTIVES AND
POLICIES -- INSTITUTIONAL GOVERNMENT ADJUSTABLE PORTFOLIO."
INVESTMENTS IN THE FUNDS ARE NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. THERE IS NO ASSURANCE THAT INSTITUTIONAL MONEY MARKET FUND WILL BE
ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE. INSTITUTIONAL
GOVERNMENT ADJUSTABLE PORTFOLIO MAY INVEST IN "RESTRICTED SECURITIES." SEE
"SPECIAL INVESTMENT METHODS -- ILLIQUID SECURITIES".
This Prospectus concisely describes the information about the Funds that you
should know before investing. Please read the Prospectus carefully before
investing and retain it for future reference.
A Statement of Additional Information about the Funds dated November 1, 1995
is available free of charge. Write to the Funds at Piper Jaffray Tower, 222
South Ninth Street, Minneapolis, Minnesota 55402-3804 or telephone (612)
342-6387 (local calls) or (800) 866-7778 (toll free). The Statement of
Additional Information has been filed with the Securities and Exchange
Commission and is incorporated in its entirety by reference in this Prospectus.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
INTRODUCTION
Institutional Money Market Fund ("Money Market Fund") and Institutional
Government Adjustable Portfolio ("Adjustable Portfolio") (sometimes individually
referred to herein as a "Fund" or, collectively, as the "Funds") are series of
Piper Institutional Funds Inc. (the "Company"), an open-end management
investment company organized under the laws of the State of Minnesota in 1992.
Each Fund has a different investment objective, as described on the cover page
of this Prospectus, and is designed to meet different investment needs. The
Funds are classified as diversified mutual funds.
THE INVESTMENT ADVISER
The Funds are managed by Piper Capital Management Incorporated (the
"Adviser"), a wholly owned subsidiary of Piper Jaffray Companies Inc. Each Fund
pays the Adviser a fee for managing its investment portfolio. The fees for Money
Market Fund and Adjustable Portfolio are paid at annual rates of .15% and .30%,
respectively, of each Fund's average daily net assets. See "Management --
Investment Adviser."
THE DISTRIBUTOR
Piper Jaffray Inc. ("Piper Jaffray" or the "Distributor"), a wholly owned
subsidiary of Piper Jaffray Companies Inc. and an affiliate of the Adviser,
serves as Distributor of the Funds' shares.
OFFERING PRICES
Shares of Money Market Fund are offered to the public at their net asset
value of $1.00 per share with no sales charge. There can be no assurance,
however, that the net asset value per share of Money Market Fund will be
maintained at $1.00.
Shares of Adjustable Portfolio are offered to the public at the next
determined net asset value after receipt of an order by a shareholder's Piper
Jaffray Investment Executive or other broker-dealer, plus a maximum sales charge
of 1.00% of the offering price (1.01% of the net amount invested) on purchases
of less than $250,000. The sales charge is reduced to .50% of the offering price
on purchases of $250,000 or more, with no sales charge incurred on purchases of
$500,000 or more.
MINIMUM INITIAL AND SUBSEQUENT INVESTMENTS
The minimum initial investment for each Fund is $100,000. There is no
minimum for subsequent investments. The minimum initial investment for
Adjustable Portfolio may be waived by the Distributor for 401(k) employee
benefit plans administered by Piper Trust Company. See "How to Purchase Shares
- - - -- Minimum Investments."
EXCHANGES
You may exchange your shares for shares of any other mutual fund managed by
the Adviser which is open to new investors and eligible for sale in your state
of residence. All exchanges are subject to the minimum investment requirements
and other applicable terms set forth in the prospectus of the fund whose shares
you acquire. Exchanges are made on the basis of the net asset values of the
funds involved, except that investors exchanging into a fund which has a higher
sales charge must pay the difference. You may make four exchanges per year
without payment of a service charge. Thereafter, there is a $5 service charge
for each exchange. See "Shareholder Services -- Exchange Privilege."
REDEMPTION PRICE
Shares of the Funds may be redeemed at any time at their net asset value
next determined after a redemption request is received by your Piper Jaffray
Investment Executive or other broker-dealer.
2
<PAGE>
The Funds reserve the right, upon 30 days' written notice, to redeem an account
if the net asset value of the shares in that account falls below $50,000. See
"How to Redeem Shares -- Involuntary Redemption."
CERTAIN RISK FACTORS TO CONSIDER
An investment in either of the Funds is subject to certain risks, as set
forth in detail under "Investment Objectives and Policies" and "Special
Investment Methods." As with other mutual funds, there can be no assurance that
either Fund will achieve its objective. There is no assurance Money Market Fund
will be able to maintain a stable net asset value of $1.00 per share. Adjustable
Portfolio is subject to interest rate risk (the risk that rising interest rates
will make bonds issued at lower interest rates worth less). As a result, the
value of Adjustable Portfolio's shares will vary. Adjustable Portfolio is also
subject to credit risk (the risk that a bond issuer will fail to make timely
payments of interest or principal) to the extent it invests in non-U.S.
Government securities. Adjustable Portfolio may engage in the following
investment practices: the use of repurchase agreements, the lending of portfolio
securities, borrowing from banks, the use of reverse repurchase agreements
(reverse repurchase agreements involve the speculative technique known as
leverage), the use of hedging techniques, including interest rate transactions,
options, futures contracts and options on futures contracts, and the purchase or
sale of securities on a "when-issued" or "forward commitment" basis, including
the use of mortgage dollar rolls. These techniques may increase the volatility
of the Fund's net asset value. Adjustable Portfolio purchases mortgage-related
securities which, in addition to interest rate risk, are subject to prepayment
risk. Adjustable Portfolio's investments in mortgage-related securities include
securities commonly referred to as derivative mortgage securities. Recent market
experience has shown that certain derivative mortgage securities may be
extremely sensitive to changes in interest rates and in prepayment rates on the
underlying mortgage assets and, as a result, the prices of such securities may
be highly volatile. Adjustable Portfolio may also invest up to 10% of its total
assets in securities denominated in Canadian dollars. Money Market Fund may
engage in the use of repurchase agreements and, with respect to 5% of its net
assets, reverse repurchase agreements fully collateralized by securities issued
or guaranteed by the U.S. Government or its agencies or instrumentalities. All
of these transactions involve certain special risks, as set forth under
"Investment Objectives and Policies" and "Special Investment Methods."
SHAREHOLDER INQUIRIES
Any questions or communications regarding a shareholder account should be
directed to your Piper Jaffray investment executive or, in the case of shares
held through another broker-dealer, to IFTC at (800) 874-6205. General inquiries
regarding the Funds should be directed to the Funds at the telephone number set
forth on the cover of this Prospectus.
3
<PAGE>
FUND EXPENSES
<TABLE>
<CAPTION>
MONEY MARKET ADJUSTABLE
FUND PORTFOLIO
------------ ----------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a
percentage of offering price).................. None 1.00%(1)
Exchange Fee (2)................................ $0 $0
ANNUAL FUND OPERATING EXPENSES (as a percentage of
average net assets)
Management Fees................................. .15% .30%
Rule 12b-1 Fees................................. None None
Other Expenses (after voluntary expense
reimbursements)................................ .20% .30%
--
---
Total Fund Operating Expenses (after voluntary
expense reimbursements)........................ .35% .60%
<FN>
- - - ------------------------
(1) The sales charge is reduced to .50% of the offering price on purchases of
$250,000 or more. In connection with purchases of $500,000 or more, there
is no initial sales charge. See "How to Purchase Shares -- Public Offering
Price."
(2) There is a $5.00 fee for each exchange in excess of four exchanges per
year. See "How to Purchase Shares -- Exchange Privilege."
</TABLE>
EXAMPLE
You would pay the following expenses on a $1,000 investment assuming a 5%
annual return and redemption at the end of each time period:
<TABLE>
<CAPTION>
MONEY MARKET ADJUSTABLE
FUND PORTFOLIO
------------ ----------
<S> <C> <C>
1 Year......................................... $ 4 $16
3 Years........................................ $11 $29
5 Years........................................ $20 $43
10 Years........................................ $44 $84
</TABLE>
The purpose of the above Fund Expenses table is to assist you in
understanding the various costs and expenses that investors in the Funds will
bear directly or indirectly. THE EXAMPLE CONTAINED IN THE TABLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE
GREATER OR LESS THAN THOSE SHOWN.
Under an Investment Advisory and Management Agreement between the Funds and
the Adviser, the Adviser is entitled to receive fees from Money Market Fund and
Adjustable Portfolio equal on an annual basis to .15% and .30%, respectively, of
each Fund's average daily net assets. The Adviser has voluntarily agreed, for
the fiscal year ending June 30, 1996, to reimburse Money Market Fund and
Adjustable Portfolio to the extent that total operating expenses exceed .35% and
.60% per annum, respectively, of average daily net assets. The Total Fund
Operating Expenses set forth in the above table are based on this agreement.
Voluntary reimbursements by the Adviser may be discontinued at any time
following the Funds' fiscal year end, at the Adviser's discretion. For the
fiscal year ended June 30, 1995, the Adviser voluntarily agreed to pay all
operating expenses of Money Market Fund and Adjustable Portfolio which exceeded
.35% and .55%, respectively, of average daily net assets. Absent such voluntary
expense reimbursements, Total Fund Operating Expenses would have been .49% and
.75% of average daily net assets, respectively. For additional information,
including a more complete explanation of management fees, see "Management --
Investment Adviser" and "Management -- Expenses."
4
<PAGE>
FINANCIAL HIGHLIGHTS
The following financial highlights have been audited by KPMG Peat Marwick
LLP, independent auditors, and should be read in conjunction with the financial
statements and the related notes thereto appearing in the Fund's annual report
to shareholders. An annual report of the Funds can be obtained without charge by
contacting the Funds at (612) 342-6387 (local calls) or (800) 866-7778 (toll
free). In addition to financial statements, the annual report contains further
information about the performance of the Funds.
MONEY MARKET FUND
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED JUNE 30
--------------- PERIOD FROM
1995 1994 2/2/93* TO 6/30/93
------ ------ ------------------
<S> <C> <C> <C>
Net asset value, beginning of period.... $1.00 $1.00 $1.00
Operations:
Net investment income................. 0.05 0.03 0.01
------ ------ -----
Total from operations............... 0.05 0.03 0.01
------ ------ -----
Distributions from net investment
income................................. (0.05) (0.03) (0.01)
------ ------ -----
Net asset value, end of period.......... $1.00 $1.00 $1.00
------ ------ -----
------ ------ -----
Total return+........................... 5.26% 3.23% 1.24%
Net assets, end of period (in
millions).............................. $ 52 $ 35 $ 40
Ratio of expenses to average daily net
assets++............................... 0.35% 0.35% 0.35%**
Ratio of net investment income to
average daily net assets++............. 5.17% 3.26% 3.02%**
<FN>
- - - ------------------------
* Commencement of operations.
** Adjusted to an annual basis.
+ Total return is based on the change in net asset value during the period,
assumes reinvestment of all distributions at net asset value and does not
reflect a sales charge.
++ Various fees and expenses were voluntarily waived or absorbed by the
Adviser during the years ended June 30, 1995 and 1994. Had the Fund paid
all expenses, the ratios of expenses and net investment income to average
daily net assets would have been 0.49%/5.03% in fiscal 1995 and 0.61%/3.00%
in fiscal 1994.
</TABLE>
5
<PAGE>
ADJUSTABLE PORTFOLIO
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
JUNE 30
----------------- PERIOD FROM
1995 1994 2/2/93* TO 6/30/93
------- ------- ------------------
<S> <C> <C> <C>
Net asset value, beginning of period.... $ 9.46 $10.04 $10.00
Operations:
Net investment income................. 0.52 0.49 0.18
Net realized and unrealized gains
(losses) on investments.............. (0.04) (0.57) 0.04
------- ------- -------
Total from operations............... 0.48 (0.08) 0.22
------- ------- -------
Distributions to shareholders:
From net investment income............ (0.41) (0.50) (0.18)
Tax return of capital................. (0.09) -- --
------- ------- -------
Total distributions................. (0.50) (0.50) (0.18)
------- ------- -------
Net asset value, end of period.......... $ 9.44 $ 9.46 $10.04
------- ------- -------
------- ------- -------
Total return+........................... 5.26% (0.91%) 2.18%
Net assets, end of period (in
millions).............................. $ 15 $ 35 $ 41
Ratio of expenses to average daily net
assets++............................... 0.55% 0.55% 0.74%**
Ratio of net investment income to
average daily net assets++............. 5.54% 5.13% 4.73%**
Portfolio turnover rate (excluding
short-term securities)................. 43% 110% 26%
<FN>
- - - ------------------------
* Commencement of operations.
** Adjusted to an annual basis.
+ Total return is based on the change in net asset value during the period,
assumes reinvestment of all distributions at net asset value and does not
reflect a sales charge.
++ Various fees and expenses were voluntarily waived or absorbed by the
Adviser during the years ended June 30, 1995 and 1994. Had the Fund paid
all expenses, the ratios of expenses and net investment income to average
daily net assets would have been 0.75%/5.34% in fiscal 1995 and 0.60%/5.08%
in fiscal 1994.
</TABLE>
6
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives listed below cannot be changed without shareholder
approval. In view of the risks inherent in all investments in securities, there
is no assurance that these objectives will be achieved. The investment policies
and techniques employed in pursuit of the Funds' objectives may be changed
without shareholder approval, unless otherwise noted.
INSTITUTIONAL MONEY MARKET FUND
RULE 2A-7. Money Market Fund will be subject to the investment restrictions
of Rule 2a-7 under the Investment Company Act of 1940 in addition to its other
policies and restrictions discussed below. Rule 2a-7 requires that the Fund
invest exclusively in securities that mature within 397 days and that the Fund
maintain an average weighted maturity of not more than 90 days. Rule 2a-7 also
requires that all investments by the Fund be limited to United States
dollar-denominated investments that: (1) present "minimal credit risks," and (2)
are at the time of acquisition "Eligible Securities." Eligible Securities
include, among others, securities that are rated by two Nationally Recognized
Statistical Rating Organizations ("NRSROs") in one of the two highest categories
for short-term debt obligations, such as A-1 or A-2 by Standard & Poor's
Corporation ("Standard & Poor's") or P-1 or P-2 by Moody's Investors Service,
Inc. ("Moody's"). It is the responsibility of the Adviser to determine that the
Fund's investments present only "minimal credit risks" and are Eligible
Securities. The Funds' Board of Directors has established written guidelines and
procedures for the Adviser and oversees the Adviser's determination that Money
Market Fund's portfolio securities present only "minimal credit risks" and are
Eligible Securities.
Under Rule 2a-7, 95% of the assets of non-tax-exempt money funds (such as
Money Market Fund) must be invested in Eligible Securities that are deemed First
Tier Securities, which include, among others, securities rated by two NRSROs in
the highest category (such as A-1 and P-1). Rule 2a-7 requires that (1) a fund
may not invest more than 5% of its total assets in securities of a single
issuer, other than U.S. Government securities, (2) a fund may not invest more
than 5% of its total assets in Second Tier Securities (I.E., Eligible Securities
that are not First Tier Securities) and (3) a fund's investment in Second Tier
Securities of a single issuer may not exceed the greater of 1% of the fund's
total assets or $1,000,000.
INVESTMENT OBJECTIVE. Money Market Fund has an investment objective of
maximum current income consistent with preservation of capital and maintenance
of liquidity.
INVESTMENT POLICIES AND TECHNIQUES. Money Market Fund will invest only in
U.S. Government Securities (as defined below) and in repurchase agreements and
reverse repurchase agreements with respect to such securities. See "Special
Investment Methods -- Repurchase Agreements" and "-- Reverse Repurchase
Agreements." The Fund will purchase only those securities with a remaining
effective maturity of 397 calendar days or less on the date of purchase and will
maintain a dollar-weighted average maturity of its portfolio of 90 days or less.
U.S. Government Securities are obligations issued or guaranteed as to
payment of principal and interest by the U.S. Government or its agencies or
instrumentalities. These securities include direct obligations of the U.S.
Treasury, such as U.S. Treasury bills, notes and bonds, and obligations of U.S.
Government agencies or instrumentalities, including, but not limited to, Federal
Home Loan Banks, the Farmers Home Administration, Federal Farm Credit Banks, the
Federal National Mortgage Association, the Government National Mortgage
Association, the Federal Home Loan Mortgage
7
<PAGE>
Corporation, the Financing Corporation and the Student Loan Marketing
Association. Obligations of U.S. Government agencies or instrumentalities are
backed in a variety of ways by the U.S. Government or its agencies or
instrumentalities. Some of these obligations, such as Government National
Mortgage Association mortgage-backed securities, are backed by the full faith
and credit of the U.S. Treasury. Others, such as those of the Federal Home Loan
Banks, are backed by the right of the issuer to borrow from the Treasury. Still
others, such as those issued by the Federal National Mortgage Association, are
backed by the discretionary authority of the U.S. Government to purchase certain
obligations of the agency or instrumentality. Other obligations may be backed by
an irrevocable letter of credit of an agency or instrumentality of the U.S.
Government. Finally, obligations of other agencies or instrumentalities are only
backed by the credit of the agency or instrumentality issuing the obligations.
INSTITUTIONAL GOVERNMENT ADJUSTABLE PORTFOLIO
ON JUNE 18, 1996, THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY APPROVED
THE MERGER OF ADJUSTABLE PORTFOLIO INTO ADJUSTABLE RATE MORTGAGE SECURITIES FUND
("ARMS FUND"), A SERIES OF PIPER FUNDS INC. -- II. PIPER CAPITAL MANAGEMENT
INCORPORATED, ADJUSTABLE PORTFOLIO'S INVESTMENT ADVISER, RECOMMENDED THE MERGER
TO THE BOARD BECAUSE ADJUSTABLE PORTFOLIO HAS BEEN UNABLE TO ATTRACT AND RETAIN
SUFFICIENT ASSETS FOR ITS CONTINUED OPERATION TO BE ECONOMICALLY FEASIBLE. THE
MERGER IS SUBJECT TO SHAREHOLDER APPROVAL. IF THE MERGER IS APPROVED BY
SHAREHOLDERS, ARMS FUND WILL ACQUIRE SUBSTANTIALLY ALL OF THE ASSETS OF
ADJUSTABLE PORFOLIO IN EXCHANGE FOR ARMS FUND SHARES WITH A VALUE EQUAL TO THE
VALUE OF THEIR ADJUSTABLE PORTFOLIO SHARES. THE COMPANY WILL CALL A SPECIAL
MEETING OF ADJUSTABLE PORTFOLIO SHAREHOLDERS AT A DATE TO BE ANNOUNCED FOR THE
PURPOSE OF VOTING ON THE PROPOSED MERGER. ADDITIONAL INFORMATION CONCERNING THE
PROPOSED MERGER WILL BE INCLUDED IN THE PROXY MATERIALS FOR SUCH MEETING.
INVESTMENT OBJECTIVE. Adjustable Portfolio has an investment objective of
high current income consistent with low principal volatility. Despite the Fund's
investment objective of low principal volatility, investors should expect some
fluctuation in the net asset value of their shares. See "Investment Risks"
below.
INVESTMENT POLICIES AND TECHNIQUES. Adjustable Portfolio, under normal
conditions, will seek to achieve its investment objective by investing primarily
(at least 65% of its total assets) in a portfolio of Mortgage-Backed Securities
(as defined herein) having adjustable interest rates which reset at periodic
intervals ("adjustable rate mortgage securities" or "ARMS") and which are U.S.
Government Securities, as defined above under "Investment Objectives and
Policies -- Institutional Money Market Fund." ARMS include both pass-through
securities representing interests in adjustable rate mortgage loans and floating
rate collateralized mortgage obligations. The balance of the Fund's assets (up
to 35% of total assets) may be invested in ARMS issued by private organizations,
Mortgage-Backed Securities other than ARMS, other types of U.S. Government
Securities, Canadian Government Securities, Foreign Index Linked Instruments and
Corporate Debt Securities. Investments in each of Canadian Government
Securities, Foreign Index Linked Instruments and Corporate Debt Securities are
limited to 10% of total assets. Securities in which Adjustable Portfolio invests
(other than U.S. Government Securities) must be rated, as of the date of
purchase, AAA or better by Standard & Poor's or, if unrated, be of a comparable
quality as determined by the Adviser. In the event that a security held by
Adjustable Portfolio is downgraded to a rating below AAA or, if unrated, is no
longer of a quality comparable to a security rated AAA, as determined by the
Adviser, the Fund will sell such a security as promptly as possible. For a
discussion of Standard & Poor's ratings, see Appendix A to the Statement of
Additional Information.
8
<PAGE>
The Fund may engage in options and financial futures transactions which
relate to the securities in which it invests, may engage in foreign currency
exchange transactions with respect to its investments in Canadian Government
Securities, may enter into interest rate swaps and purchase and sell interest
rate caps and floors, may purchase or sell securities on a when-issued or
forward commitment basis, including the use of mortgage dollar rolls, and may
lend its portfolio securities. The Fund's investments in options and futures
contracts will not be included in the 65% of total assets that must be invested
in ARMS which are U.S. Government Securities, even if they relate to such
securities. For temporary defensive purposes, the Fund may invest without
limitation in cash or in high-quality debt securities with remaining maturities
of one year or less. Such securities may include (a) commercial paper rated A-1+
by Standard & Poor's, (b) certificates of deposit, time deposits and bankers'
acceptances with any bank the unsecured commercial paper of which is rated A-1+
by Standard & Poor's (or, in the case of the principal bank in a bank holding
company, the unsecured commercial paper of the bank holding company), and (c)
U.S. Government Securities.
INVESTMENT RISKS. Adjustable Portfolio is subject to certain risks which
could result in fluctuation of the net asset value of the Fund's shares. The
Fund is subject to interest rate risk, which is the potential for a decline in
bond prices due to rising interest rates. In general, bond prices vary inversely
with interest rates. When interest rates rise, bond prices generally fall.
Conversely, when interest rates fall, bond prices generally rise. Although the
ARMS in the Fund's portfolio should generally be more resistant to price swings
than other debt securities because the interest rates of ARMS move with market
interest rates, the adjustable rate feature of ARMS will not eliminate price
fluctuations. See "Adjustable Rate Mortgage Securities -- Interest Rate Risk"
below. The Fund's investments in ARMS and other Mortgage-Backed Securities are
also subject to prepayment risk. See "Adjustable Rate Mortgage Securities --
Prepayment Risk" below. In addition, the Fund is subject to credit risk to the
extent it invests in non-U.S. Government securities. Credit risk, also known as
default risk, is the possibility that a bond issuer will fail to make timely
payments of interest or principal. These and other risks of Adjustable
Portfolio's investments are described in detail below.
Adjustable Portfolio's investments in mortgage-related securities include
derivative mortgage securities such as collateralized mortgage obligations and
stripped mortgage-backed securities which may involve risks in addition to those
found in other mortgage-related securities. Recent market experience has shown
that certain derivative mortgage securities may be highly sensitive to changes
in interest and prepayment rates and, as a result, the prices of such securities
may be highly volatile. In addition, recent market experience has shown that
during periods of rising interest rates, the market for certain derivative
mortgage securities may become more unstable and such securities may become more
difficult to sell as market makers choose not to repurchase such securities or
offer prices, based on current market conditions, which are unacceptable to
Adjustable Portfolio.
Adjustable Portfolio also may engage in investment practices which involve
certain special risks. See "Special Investment Methods" below. The use of these
investment practices may increase the volatility of Adjustable Portfolio's net
asset value.
ADJUSTABLE RATE MORTGAGE SECURITIES
U.S. GOVERNMENT MORTGAGE PASS-THROUGH SECURITIES. Adjustable Portfolio may
invest in ARMS which are "pass-through" securities issued or guaranteed by the
U.S. Government or one of its agencies or instrumentalities ("U.S. Government
Pass-Throughs"). Pass-through securities constituting ARMS represent ownership
interests in underlying pools of adjustable rate mortgage loans
9
<PAGE>
originated by private lenders. Such securities differ from conventional debt
securities, which provide for periodic payment of interest in fixed amounts
(usually semi-annually) and principal payments at maturity or on specified call
dates, in that pass-through securities provide for monthly payments that are a
pass-through of the monthly interest and principal payments (including any
prepayments) made by the individual borrowers on the pooled mortgage loans, net
of any fees paid to the guarantor of such securities and the servicers of the
underlying mortgage loans.
The U.S. Government Pass-Throughs in which Adjustable Portfolio may invest
are issued or guaranteed by the Government National Mortgage Association
("GNMA"), the Federal National Mortgage Association ("FNMA") and the Federal
Home Loan Mortgage Corporation ("FHLMC"). Each of GNMA, FNMA and FHLMC guarantee
timely distributions of interest to securities holders. GNMA and FNMA also
guarantee timely distribution of scheduled principal. FHLMC generally guarantees
only ultimate collection of principal on the underlying loans, which collection
may take up to one year. GNMA is a wholly owned corporate instrumentality of the
U.S. Government within the Department of Housing and Urban Development and its
guarantee is backed by the full faith and credit of the U.S. Government. FNMA
and FHLMC are federally chartered corporations and their respective guarantees
are not backed by the full faith and credit of the U.S. Government.
The mortgages underlying ARMS issued by GNMA are fully guaranteed by the
Federal Housing Administration ("FHA") or Veterans Administration ("VA"). The
mortgages underlying ARMS issued by FNMA or FHLMC may be backed by conventional
adjustable rate mortgages not guaranteed by FHA or VA.
PRIVATE MORTGAGE PASS-THROUGH SECURITIES. Private Mortgage Pass-Through
Securities ("Private Pass-Throughs") are structured similarly to the GNMA, FNMA
and FHLMC mortgage pass-through securities described above and are issued by
originators of and investors in mortgage loans, including savings and loan
associations, mortgage bankers, commercial banks, investment banks and special
purpose subsidiaries of the foregoing. Private Pass-Throughs constituting ARMS
are backed by a pool of conventional adjustable rate mortgage loans. Since
Private Pass-Throughs are not guaranteed by an entity having the credit status
of GNMA, FNMA or FHLMC, such securities generally are structured with one or
more types of credit enhancement. See "Investment Objectives, Policies and
Restrictions -- Mortgage-Backed Securities -- Credit Support" in the Statement
of Additional Information.
CMOS AND MULTI-CLASS PASS-THROUGH SECURITIES. ARMS in which Adjustable
Portfolio may invest also include adjustable rate tranches of collateralized
mortgage obligations and multi-class pass-through securities, which are
derivative mortgage securities. Collateralized mortgage obligations are debt
instruments issued by special purpose entities which are secured by pools of
mortgage loans or other Mortgage-Backed Securities. Multi-class pass-through
securities are equity interests in a trust composed of mortgage loans or other
Mortgage-Backed Securities. Payments of principal and interest on underlying
collateral provide the funds to pay debt service on the collateralized mortgage
obligation or make scheduled distributions on the multi-class pass-through
security. Collateralized mortgage obligations and multi-class pass-through
securities (collectively "CMOs" unless the context indicates otherwise) may be
issued by agencies or instrumentalities of the U.S. Government or by private
organizations.
10
<PAGE>
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMO, often referred to as a "tranche," is issued at a specified
coupon rate and has a stated maturity or final distribution date. Principal
prepayments on collateral underlying a CMO may cause it to be retired
substantially earlier than the stated maturities or final distribution dates.
The principal and interest on the mortgages underlying a CMO may be
allocated among the CMO's tranches in many ways. See "Mortgage-Backed Securities
- - - -- CMOs," below. One or more tranches of a CMO may have coupon rates which reset
periodically at a specified increment over an index such as the London Interbank
Offered Rate ("LIBOR"). These adjustable rate tranches, known as "floating rate
CMOs," will be considered as ARMS by Adjustable Portfolio. Floating rate CMOs
may be backed by fixed rate or adjustable rate mortgages; to date, fixed rate
mortgages have been more commonly utilized for this purpose. Floating rate CMOs
are typically issued with lifetime caps on the coupon rate thereon. These caps,
similar to the caps on adjustable rate mortgages, represent a ceiling beyond
which the coupon rate on a floating rate CMO may not be increased regardless of
increases in the interest rate index to which the floating rate CMO is geared,
which may cause the security to be valued at a greater discount than if the
security was not subject to a ceiling.
HOW INTEREST RATES ARE SET. The interest rates on ARMS are reset at
periodic intervals (generally one year or less) to an increment over some
predetermined interest rate index. There are two main categories of indices:
those based on U.S. Treasury securities and those derived from a calculated
measure such as a cost of funds index or a moving average of mortgage rates.
Commonly utilized indices include the one-year and five-year constant maturity
Treasury note rates, the three-month Treasury bill rate, the 180-day Treasury
bill rate, rates on longer-term Treasury securities, the 11th District Federal
Home Loan Bank Cost of Funds Index, the National Median Cost of Funds, the one-
month or three-month LIBOR, the prime rate of a specific bank, or commercial
paper rates. Some indices, such as the one-year constant maturity Treasury note
rate, closely mirror changes in market interest rate levels. Others, such as the
11th District Home Loan Bank Cost of Funds Index (often related to ARMS issued
by FNMA), tend to lag changes in market rate levels and tend to be somewhat less
volatile. The Adviser will seek to diversify Adjustable Portfolio's investments
in ARMS among a variety of indices and reset periods to reduce the Fund's
exposure to the risk of interest rate fluctuations. In selecting a type of ARMS
for investment, the Adviser will also consider the liquidity of the market for
such ARMS.
The underlying adjustable rate mortgages which back ARMS in which Adjustable
Portfolio invests will frequently have caps and floors which limit the maximum
amount by which the loan rate to the residential borrower may change up or down
(1) per reset or adjustment interval and (2) over the life of the loan. Some
residential adjustable rate mortgage loans restrict periodic adjustments by
limiting changes in the borrower's monthly principal and interest payments
rather than limiting interest rate changes. These payment caps may result in
negative amortization; i.e., increase in the balance of the mortgage loan.
Floating rate CMOs are generally backed by fixed rate mortgages and generally
have lifetime caps on the coupon rate thereon.
INTEREST RATE RISK. The values of ARMS, like other debt securities,
generally vary inversely with changes in market interest rates (increasing in
value during periods of declining interest rates and decreasing in value during
periods of increasing interest rates); however, the values of ARMS should
generally be more resistant to price swings than other debt securities because
the interest rates of ARMS move with market interest rates. The adjustable rate
feature of ARMS will not, however, eliminate fluctuations in the prices of ARMS,
particularly during periods of extreme fluctuations in
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interest rates. Also, since many adjustable rate mortgages only reset on an
annual basis, it can be expected that the prices of ARMS will fluctuate to the
extent that changes in prevailing interest rates are not immediately reflected
in the interest rates payable on the underlying adjustable rate mortgages.
PREPAYMENT RISK. ARMS, like other Mortgage-Backed Securities, differ from
conventional bonds in that principal is paid back over the life of the ARMS
rather than at maturity. As a result, the holder of the ARMS (I.E., Adjustable
Portfolio) receives monthly scheduled payments of principal and interest, and
may receive unscheduled principal payments representing prepayments on the
underlying mortgages. When the holder reinvests the payments and any unscheduled
prepayments of principal it receives, it may receive a rate of interest which is
lower than the rate on the existing ARMS. For this reason, ARMS are less
effective than longer-term debt securities as a means of "locking-in" long-term
interest rates.
ARMS, while having less risk of price decline during periods of rapidly
rising rates than other investments of comparable maturities, will have less
potential for capital appreciation due to the likelihood of increased
prepayments of mortgages as interest rates decline. In addition, to the extent
ARMS are purchased at a premium, mortgage foreclosures and unscheduled principal
prepayments will result in a loss of some or all of the premium paid. On the
other hand, if ARMS are purchased at a discount, both a scheduled payment of
principal and an unscheduled prepayment of principal will increase current and
total returns and will accelerate the recognition of income which, when
distributed to shareholders, will be taxable as ordinary income.
MORTGAGE-BACKED SECURITIES
In addition to ARMS, Adjustable Portfolio may invest in other types of
Mortgage-Backed Securities. Mortgage-Backed Securities are securities which
represent interests in or are collateralized by mortgages. Such securities are
issued by GNMA, FNMA, FHLMC and by private organizations and take the same
structure as ARMS, i.e., pass-through securities and CMOs. Adjustable Portfolio
may invest in any type of Mortgage-Backed Security, including traditional fixed
rate Mortgage-Backed Securities and more recently developed instruments such as
Stripped Mortgage-Backed Securities and CMOs. Adjustable Portfolio may also
invest in Mortgage-Backed Securities backed by fixed rate mortgages and, in
conjunction therewith, pursuant to an interest rate swap, exchange its right to
receive payments at fixed rates of interest for floating rate payments. The
intended net effect of the transaction would be the creation of a security with
the economic characteristics of an adjustable rate mortgage security. Such
"synthetic ARMS" will not be considered as ARMS for purposes of the requirement
that the Fund invest at least 65% of its total assets in ARMS.
Adjustable Portfolio's investments in Mortgage-Backed Securities other than
ARMS, together with its investments in ARMS issued by private organizations,
U.S. Government Securities other than ARMS and Mortgage-Backed Securities, and
Canadian Government Securities, are limited to 35% of its total assets.
CMOS. As discussed above, Adjustable Portfolio's investments in ARMS
include floating rate CMOs. Adjustable Portfolio's investments in
Mortgage-Backed Securities other than ARMS may include any other tranche of a
CMO, provided that Adjustable Portfolio may not invest in the residual interests
of CMOs.
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The principal and interest on the mortgages underlying a CMO may be
allocated among the CMO's several tranches in many ways. For example, certain
tranches may have variable or floating interest rates and others may be stripped
securities which provide only the principal or interest feature of the
underlying security. See "Stripped Mortgage-Backed Securities," below.
Generally, the purpose of the allocation of the cash flow of a CMO to the
various tranches is to obtain a more predictable cash flow to certain of the
individual tranches than exists with the underlying collateral of the CMO. As a
general rule, the more predictable the cash flow is on a CMO tranche, the lower
the anticipated yield will be on that tranche at the time of issuance relative
to prevailing market yields on mortgage-related securities. As part of the
process of creating more predictable cash flows on most of the tranches of a
CMO, one or more tranches generally must be created that absorb most of the
volatility in the cash flows on the underlying mortgage loans. The yields on
these tranches are generally higher than prevailing market yields on
mortgage-related securities with similar maturities. However, as a result of the
uncertainty of the cash flows of these tranches, market prices and yields may be
more volatile than for other CMO tranches. The more volatile CMO tranches
include inverse floaters, IOs, POs and Z tranches, discussed below.
Adjustable Portfolio's investments in CMO tranches may include "inverse
floaters" and "Z tranches." An inverse floater is a CMO tranche with a coupon
rate that moves inversely to a designated index, such as LIBOR or COFI (Cost of
Funds Index). Like most other fixed-income securities, the value of inverse
floaters will decrease as interest rates increase and increase as interest rates
decrease. Inverse floaters, however, may exhibit greater price volatility with
changes in interest rates than the majority of mortgage pass-through securities
or CMOs. Coupon rates on inverse floaters typically change at a multiple of the
changes in the relevant index rate. Thus, any rise in the index rate (as a
consequence of an increase in interest rates) causes a correspondingly greater
drop in the coupon rate of an inverse floater while any drop in the index rate
causes a correspondingly greater increase in the coupon of an inverse floater.
Some inverse floaters also exhibit extreme sensitivity to changes in
prepayments.
Z tranches of CMOs defer interest and principal payments until one or more
other classes of the CMO have been paid in full. Interest accretes on the Z
tranche, being added to principal, and is compounded through the accretion
period. After the other classes have been paid in full, interest payments begin
and continue through maturity. Z tranches have characteristics similar to zero
coupon bonds. See "Zero Coupon Treasury Securities," below. Like a zero coupon
bond, during its accretion period a Z tranche has the advantage of eliminating
the risk of reinvesting interest payments at lower rates during a period of
declining market interest rates. At the same time, however, and also like a zero
coupon bond, the market value of a Z tranche can be expected to fluctuate more
widely with changes in market interest rates than would the market value of a
tranche which pays interest currently. In addition, changes in prepayment rates
on the underlying mortgage loans will affect the accretion period of a Z
tranche, and therefore also are likely to influence its market value.
STRIPPED MORTGAGE-BACKED SECURITIES. Adjustable Portfolio's investments in
Mortgage-Backed Securities other than ARMS may include Stripped Mortgage-Backed
Securities ("SMBS"), which are derivative multi-class mortgage securities. SMBS
may be issued by agencies or instrumentalities of the U.S. Government or by
private originators of, or investors in, mortgage loans, including savings and
loan associations, mortgage bankers, commercial banks, investment banks and
special purpose subsidiaries of the foregoing.
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There are generally two types of classes of SMBS, one of which (the interest
only or "IO" class) entitles the holders thereof to receive distributions
consisting solely or primarily of all or a portion of the interest on the
underling pool of mortgage loans or Mortgage-Backed Securities ("Mortgage
Assets") and the other of which (the principal only or "PO" class) entitles the
holders thereof to receive distributions consisting solely or primarily of all
or a portion of the principal of the underlying pool of Mortgage Assets. IOs and
POs issued by the U.S. Government or its agencies and instrumentalities may be
determined to be liquid pursuant to procedures adopted by the Board of
Directors. Otherwise, Adjustable Portfolio will treat IOs and POs as illiquid
and subject to Adjustable Portfolio's restriction of investing no more than 15%
of its net assets in illiquid securities. See "Special Investment Methods --
Illiquid Securities."
The cash flows and yields on IO and PO classes are extremely sensitive to
the rate of principal payments (including prepayments) on the related underlying
Mortgage Assets. For example, a rapid or slow rate of principal payments will
have a material adverse effect on the yield to maturity of IOs or POs,
respectively. If the underlying Mortgage Assets experience greater than
anticipated prepayments of principal, an investor in an IO class may incur
substantial losses, even if the IO class is rated AAA. Conversely, if the
underlying Mortgage Assets experience slower than anticipated prepayments of
principal, the yield on a PO class will be affected more severely than would be
the case with a traditional Mortgage-Backed Security.
Under the Internal Revenue Code, Adjustable Portfolio will be required to
accrue a portion of the original issue discount on a PO as income each year even
though Adjustable Portfolio receives no cash distribution on the security during
the year.
RISKS OF MORTGAGE-BACKED SECURITIES. Mortgage-Backed Securities (other than
ARMS) are subject generally to the same risks as ARMS; however, such other
Mortgage-Backed Securities can be expected to be affected to a greater extent
than ARMS by fluctuating interest rates and prepayments and to have different
yield characteristics, due to the fact that fixed rate rather than adjustable
rate mortgages underlie such securities. Generally, prepayments on fixed rate
mortgages will increase during a period of falling interest rates and decrease
during a period of rising interest rates. Accordingly, amounts available for
reinvestment are likely to be greater during a period of declining interest
rates than during a period of rising interest rates and the yield on the
securities in which such amounts are reinvested is likely to be lower than the
yield on the securities that were prepaid or the yield that could be achieved if
such amounts were reinvested during a period of rising interest rates. If
Adjustable Portfolio purchases Mortgage-Backed Securities at a premium, a
prepayment rate that is faster than expected will reduce both the market value
and the yield to maturity from that which was anticipated, while a prepayment
rate that is slower than expected will have the opposite effect of increasing
yield to maturity and market value. Conversely, if Adjustable Portfolio
purchases Mortgage-Backed Securities at a discount, faster than expected
prepayments will increase, while slower than expected prepayments will reduce,
yield to maturity and market value. Mortgage-Backed Securities may decrease in
value as a result of increases in interest rates and may benefit less than other
fixed income securities from declining interest rates because of the risk of
prepayment.
Mortgage-Backed Securities derive their value from underlying pools of
mortgages and, as such, could be considered "derivative" securities. Certain
derivative mortgage securities, such as the more volatile CMO tranches and
Stripped Mortgage-Backed Securities, discussed above, may involve risks in
addition to those found in other Mortgage-Backed Securities. Recent market
experience has shown
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that certain derivative mortgage securities may be highly sensitive to changes
in interest and prepayment rates and, as a result, the prices of such securities
may be highly volatile. In addition, recent market experience has shown that
during periods of rising interest rates, the market for certain derivative
mortgage securities may become more unstable and such securities may become more
difficult to sell as market makers either choose not to repurchase such
securities or offer prices, based on current market conditions, which are
unacceptable to Adjustable Portfolio.
ZERO COUPON TREASURY SECURITIES
Adjustable Portfolio may invest in "zero coupon" Treasury securities which
are U.S. Treasury bills, notes and bonds which have been stripped of their
unmatured interest coupons and receipts or certificates representing interests
in such stripped debt obligations and coupons. A zero coupon security pays no
interest to its holder during its life. Its value to an investor consists of the
difference between its face value at the time of maturity and the price for
which it was acquired, which is generally an amount significantly less than its
face value (sometimes referred to as a "deep discount" price).
Currently U.S. Treasury securities issued without coupons include Treasury
bills and Treasury STRIPS. In addition, a number of banks and brokerage firms
separate the principal portions from the coupon portions of U.S. Treasury bonds
and notes and sell them separately in the form of receipts or certificates
representing undivided interests in these instruments (which instruments are
generally held by a bank in a custodial or trust account). Such securities are
currently not deemed by the Fund to be U.S. Government Securities but rather
securities issued by the bank or brokerage firm involved.
Zero coupon Treasury securities do not entitle the holder to any periodic
payments of interest prior to maturity. Accordingly, those securities usually
trade at a deep discount from their face or par value and will be subject to
greater fluctuations of market value in response to changing interest rates than
debt obligations of comparable maturities which make current distributions of
interest. In certain circumstances, Adjustable Portfolio could fail to recoup
its initial investment in those securities. Current federal tax law requires
that a holder (such as Adjustable Portfolio) of a zero coupon security accrue a
portion of the discount at which the security was purchased as income each year
even though Adjustable Portfolio receives no interest payment in cash on the
security during the year. In addition, as a registered investment company,
Adjustable Portfolio will be required to distribute this income to shareholders.
See "Dividends, Distributions and Tax Status." These distributions will be made
from the Fund's cash assets or, if necessary, from the proceeds of sales of
portfolio securities. Adjustable Portfolio will not be able to purchase
additional income producing securities with cash used to make such
distributions, and the Fund's current income ultimately may be reduced as a
result.
CANADIAN GOVERNMENT SECURITIES
Adjustable Portfolio may invest up to 10% of its total assets in Canadian
Government Securities. Canadian Government Securities are debt securities issued
or guaranteed by the Canadian federal government, Canadian provincial
governments and political subdivisions, agencies or instrumentalities thereof.
The Adviser anticipates that the Fund's portfolio of Canadian Government
Securities will consist primarily of Mortgage-Backed Securities issued or
guaranteed by the Canadian government or an agency or instrumentality thereof.
Investing in Canadian Government Securities involves considerations and possible
risks not typically associated with investing in U.S. securities, including
possible application of Canadian tax laws (including possible future withholding
taxes), potential difficulties in enforcing contractual obligations, changes in
governmental administrations or economic or monetary
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policy (in this country or Canada) or changed circumstances in dealing between
the United States and Canada. Canadian brokerage commissions may be higher than
those in the United States and Canadian securities markets may be less liquid,
more volatile and less subject to governmental supervision than those in the
United States.
The value of Adjustable Portfolio's investments denominated in Canadian
dollars could be adversely affected by a decline in the value of the Canadian
dollar relative to the U.S. dollar. In connection with such investments, the
Fund may from time to time enter into foreign exchange transactions, currency
forward and futures contracts and foreign currency options. These investment
techniques, and the risks incident thereto, are explained in Appendix A to this
Prospectus.
FOREIGN INDEX LINKED INSTRUMENTS
Adjustable Portfolio may invest up to 10% of its total assets in Foreign
Index Linked Instruments. Foreign Index Linked Instruments are fixed income
securities which are issued by U.S. issuers (including U.S. subsidiaries of
foreign issuers) and are denominated in U.S. dollars but return principal and/or
pay interest to investors in amounts which are linked to the level of a
particular foreign index. Foreign Index Linked Instruments may offer higher
yields than comparable securities linked to purely domestic indices but also may
be more volatile. Foreign Index Linked Instruments are relatively recent
innovations for which the market has not yet been fully developed and,
accordingly, they typically are less liquid than comparable securities linked to
purely domestic indices. In addition, the value of Foreign Index Linked
Instruments will be affected by fluctuations in foreign exchange rates or in
foreign interest rates, factors which do not typically bear on the values of
ARMS or most other securities in which the Fund invests. If the Adviser is
incorrect in its prediction as to the movements in the direction of particular
foreign currencies or foreign interest rates, the return realized by the Fund on
a Foreign Index Linked Instrument may be lower than if the Fund had invested in
a similarly rated domestic security. The skills needed to predict foreign
currency and foreign interest rates are different from those needed to select
domestic portfolio securities. Foreign currency gains and losses with respect to
Foreign Index Linked Instruments may affect the amount and timing of income
recognized by the Fund.
CORPORATE DEBT SECURITIES
Adjustable Portfolio may invest up to 10% of its total assets in Corporate
Debt Securities. Corporate Debt Securities are debt obligations of U.S.
corporations (other than ARMS or Mortgage-Backed Securities). The values of
Corporate Debt Securities typically will fluctuate in response to general
economic conditions, to changes in interest rates and, to a greater extent than
the values of ARMS or Mortgage-Backed Securities, to business conditions
affecting the specific industries in which the issuers are engaged. Corporate
Debt Securities will typically decrease in value of a result of increases in
interest rates.
Adjustable Portfolio may invest in certain types of Corporate Debt
Securities that have been issued with original issue discount or market
discount. An investment in such securities poses certain economic risks and may
have certain adverse cash flow consequences to the Fund.
NEW INSTRUMENTS
Investors should note that new types of ARMS, other Mortgage-Backed
Securities, hedging instruments and other securities in which Adjustable
Portfolio may invest are developed and marketed from time to time and that,
consistent with its investment limitations, Adjustable Portfolio expects to
invest in those securities and instruments that the Adviser believes may assist
the Fund in
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achieving its investment objective. Adjustable Portfolio will provide written
notice to shareholders in advance of investments to a significant degree (I.E.,
in excess of 5% of the Fund's net assets) in any type of security other than the
types disclosed in this Prospectus.
SPECIAL INVESTMENT METHODS
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with respect to U.S.
Government Securities. A repurchase agreement involves the purchase by a Fund of
securities with the condition that after a stated period of time the original
seller (a member bank of the Federal Reserve System or a recognized securities
dealer) will buy back the same securities ("collateral") at a predetermined
price or yield. Repurchase agreements involve certain risks not associated with
direct investments in securities. In the event the original seller defaults on
its obligation to repurchase, as a result of its bankruptcy or otherwise, the
Fund will seek to sell the collateral, which action could involve costs or
delays. In such case, the Fund's ability to dispose of the collateral to recover
such investment may be restricted or delayed. While collateral will at all times
be maintained in an amount equal to the repurchase price under the agreement
(including accrued interest due thereunder), to the extent proceeds from the
sale of collateral were less than the repurchase price, a Fund would suffer a
loss. In the event of a seller's bankruptcy, a Fund might be delayed in, or
prevented from, selling the collateral to the Fund's benefit. Repurchase
agreements maturing in more than seven days are considered illiquid and subject
to each Fund's restriction on investing in illiquid securities. See "Illiquid
Securities," below.
REVERSE REPURCHASE AGREEMENTS
Each Fund may engage in "reverse repurchase agreements" with banks and
securities dealers. Reverse repurchase agreements are ordinary repurchase
agreements in which the Fund is the seller of, rather than the investor in,
securities and agrees to repurchase them at an agreed upon time and price. Use
of a reverse repurchase agreement may be preferable to a regular sale and later
repurchase of the securities because it avoids certain market risks and
transactions costs. Because certain of the incidents of ownership of the
security are retained by the Fund, reverse repurchase agreements are considered
a form of borrowing by the Fund from the buyer, collateralized by the security.
At the time the Fund enters into a reverse repurchase agreement, cash, U.S.
Government Securities or other liquid high-grade debt obligations having a value
sufficient to make payments for the securities to be repurchased will be
segregated, and will be maintained throughout the period of the obligation.
Reverse repurchase agreements will be used as a means of borrowing for
investment purposes. This speculative technique is referred to as leveraging.
Leveraging may exaggerate the effect on net asset value of any increase or
decrease in the market value of the Fund's portfolio. Money borrowed for
leveraging will be subject to interest costs which could possibly exceed
interest income earned by the Fund on the investment of such borrowed money, and
therefore could adversely affect yield. No more than 25% of the total assets of
Adjustable Portfolio and 5% of the net assets of Money Market Fund will be
subject to reverse repurchase agreements.
BORROWING
Each Fund may borrow money from banks for temporary or emergency purposes in
an amount up to one-third of the value of its total assets in order to meet
redemption requests without immediately selling any of its portfolio securities.
Reverse repurchase agreements are not included in this limitation. If, for any
reason, the current value of either Fund's total assets falls below an amount
equal to three times the amount of its indebtedness from money borrowed, such
Fund will, within three days,
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reduce its indebtedness to the extent necessary. To do this, the Fund may have
to sell a portion of its investments at a time when it may be disadvantageous to
do so. Interest paid by a Fund on borrowed funds would decrease the net earnings
of that Fund. Neither Fund will purchase portfolio securities while outstanding
borrowings (other than reverse repurchase agreements) exceed 5% of the value of
the Fund's total assets. Each Fund may mortgage, pledge or hypothecate its
assets to secure permitted temporary or emergency borrowing. The policies set
forth in this paragraph are fundamental and may not be changed with respect to a
Fund without the approval of a majority of that Fund's shares.
WHEN-ISSUED SECURITIES
Adjustable Portfolio may purchase securities on a "when-issued" basis and
may purchase or sell securities on a "forward commitment" basis. When such
transactions are negotiated, the price is fixed at the time the commitment is
made, but delivery and payment for the securities take place at a later date.
Adjustable Portfolio will not accrue income with respect to when-issued or
forward commitment securities prior to their stated delivery date. Pending
delivery of the securities, the Fund maintains in a segregated account cash or
liquid high-grade debt obligations in an amount sufficient to meet its purchase
commitments. The Fund will likewise segregate securities it sells on a forward
commitment basis.
The purchase of securities on a when-issued or forward commitment basis
exposes Adjustable Portfolio to risk because the securities may decrease in
value prior to their delivery. Purchasing securities on a when-issued or forward
commitment basis involves the additional risk that the return available in the
market when the delivery takes place will be higher than that obtained in the
transaction itself. The Fund's purchase of securities on a when-issued or
forward commitment basis while remaining substantially fully invested increases
the amount of the Fund's assets that are subject to market risk to an amount
that is greater than the Fund's net asset value, which could result in increased
volatility of the price of the Fund's shares.
MORTGAGE DOLLAR ROLLS
In connection with its ability to purchase securities on a when-issued or
forward commitment basis, Adjustable Portfolio may enter into mortgage "dollar
rolls" in which the Fund sells securities for delivery in the current month and
simultaneously contracts with the same counterparty to repurchase similar (same
type, coupon and maturity) but not identical securities on a specified future
date. The Fund gives up the right to receive principal and interest paid on the
securities sold. However, the Fund would benefit to the extent of any difference
between the price received for the securities sold and the lower forward price
for the future purchase plus any fee income received. Unless such benefits
exceed the income, capital appreciation and gain or loss due to mortgage
prepayments that would have been realized on the securities sold as part of the
mortgage dollar roll, the use of this technique will diminish the investment
performance of the Fund compared with what such performance would have been
without the use of mortgage dollar rolls. Adjustable Portfolio will hold and
maintain in a segregated account until the settlement date cash or liquid
high-grade debt securities in an amount equal to the forward purchase price. The
benefits derived from the use of mortgage dollar rolls may depend upon the
Adviser's ability to predict correctly mortgage prepayments and interest rates.
There is no assurance that mortgage dollar rolls can be successfully employed.
In addition, the use of mortgage dollar rolls by the Fund while remaining
substantially fully invested increases the amount of the Fund's assets that are
subject to market risk to an amount that is greater than the Fund's net asset
value, which could result in increased volatility of the price of the Fund's
shares.
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For financial reporting and tax purposes, Adjustable Portfolio treats
mortgage dollar rolls as two separate transactions: one involving the purchase
of a security and a separate transaction involving a sale. The Fund does not
currently intend to enter into mortgage dollar rolls that are accounted for as a
financing.
No more than one-third of Adjustable Portfolio's total assets may be
committed to the purchase of securities on a when-issued or forward commitment
basis, including mortgage dollar roll purchases.
LENDING OF PORTFOLIO SECURITIES
In order to generate income, Adjustable Portfolio may lend portfolio
securities up to one-third of the value of its total assets to broker-dealers,
banks or other financial borrowers of securities. As with other extensions of
credit, there are risks of delay in recovery or even loss of rights in the
collateral should the borrower of the securities fail financially. However, the
Fund will only enter into loan arrangements with broker-dealers, banks or other
institutions which the Adviser has determined are creditworthy under guidelines
established by the Fund's Board of Directors and will receive collateral in the
form of cash, U.S. Government Securities or other high-grade debt obligations
equal to at least 100% of the value of the securities loaned. The value of the
collateral and of the securities loaned will be marked to market on a daily
basis. During the time portfolio securities are on loan, the borrower pays the
Fund an amount equivalent to any interest paid on the securities and the Fund
may invest the cash collateral and earn income or may receive an agreed upon
amount of interest income from the borrower. However, the amounts received by
the Fund may be reduced by finders' fees paid to broker-dealers. Collateral
(including any securities purchased with cash collateral) will be maintained by
the Fund's custodian in a segregated account.
INTEREST RATE TRANSACTIONS
To preserve a return or spread on a particular investment or portion of its
portfolio, to create synthetic adjustable rate mortgage securities (see
"Investment Objective and Policies -- Institutional Government Adjustable
Portfolio -- Mortgage-Backed Securities") or for other non-speculative purposes,
Adjustable Portfolio may enter into interest rate swaps and may purchase or sell
interest rate caps and floors. The Fund does not intend to use these
transactions for speculative purposes. Interest rate swaps involve the exchange
by the Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments.
The purchase of an interest rate cap entitles the purchaser, to the extent a
specified index exceeds a predetermined interest rate, to receive payments of
interest on a contractually-based principal amount from the party selling such
interest rate cap. The purchase of an interest rate floor entitles the
purchaser, to the extent a specified index falls below a predetermined interest
rate, to receive payments of interest on a contractually-based principal amount
from the party selling such interest rate floor.
Adjustable Portfolio may enter into interest rate swaps, caps and floors on
either an asset-based or liability-based basis, depending upon whether it is
hedging its assets or its liabilities, and will usually enter into interest rate
swaps on a net basis, i.e., the two payment streams are netted out, with the
Fund receiving or paying, as the case may be, only the net amount of the two
payments. The net amount of the excess, if any, of the Fund's obligations over
its entitlements with respect to each interest rate swap will be accrued on a
daily basis and an amount of cash or high quality liquid securities having an
aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account by the Fund's custodian. If the Fund enters
into an interest rate swap on other
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than a net basis, the Fund would maintain a segregated account in the full
amount accrued on a daily basis of the Fund's obligations with respect to the
swap. To the extent Adjustable Portfolio sells (I.E., writes) caps and floors,
it will maintain in a segregated account cash or high quality liquid debt
securities having an aggregate net asset value at least equal to the full
amount, accrued on a daily basis, of the Fund's obligations with respect to any
caps or floors. The Fund will not enter into any interest rate swap, cap or
floor transaction unless the unsecured senior debt or the claims-paying ability
of the other party thereto is rated at least AA by Standard & Poor's. The
Adviser will monitor the creditworthiness of contra-parties on an ongoing basis.
If there is a default by the other party to such a transaction, the Fund will
have contractual remedies pursuant to the agreements related to the transaction.
The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. The Adviser has determined that, as a
result, the swap market has become relatively liquid. Caps and floors are more
recent innovations for which standardized documentation has not yet been
developed and, accordingly, they are less liquid than swaps.
There is no limit on the amount of interest rate swap transactions that may
be entered into by Adjustable Portfolio. These transactions do not involve the
delivery of securities or other underlying assets or principal. Accordingly, the
risk of loss with respect to interest rate swaps is limited to the net amount of
interest payments that the Fund is contractually obligated to make. If the other
party to an interest rate swap defaults, the Fund's risk of loss consists of the
net amount of interest payments that the Fund contractually is entitled to
receive. The aggregate purchase price of caps and floors held by the Fund may
not exceed 5% of the Fund's total assets. The Fund may sell (I.E., write) caps
and floors without limitation, subject to the segregated account requirement
described above.
OPTIONS TRANSACTIONS
WRITING COVERED OPTIONS. Adjustable Portfolio may write (I.E., sell)
covered put and call options with respect to the securities in which it may
invest. By writing a call option, the Fund becomes obligated during the term of
the option to deliver the securities underlying the option upon payment of the
exercise price if the option is exercised. By writing a put option, the Fund
becomes obligated during the term of the option to purchase the securities
underlying the option at the exercise price if the option is exercised. With
respect to put options written by Adjustable Portfolio, there will have been a
predetermination that acquisition of the underlying security is in accordance
with the investment objective of the Fund.
The principal reason for writing call or put options is to obtain, through
the receipt of premiums, a greater current return than would be realized on the
underlying securities alone. The Fund receives premiums from writing call or put
options, which it retains whether or not the options are exercised. By writing a
call option, the Fund might lose the potential for gain on the underlying
security while the option is open, and by writing a put option the Fund might
become obligated to purchase the underlying security for more than its current
market price upon exercise.
PURCHASING OPTIONS. Adjustable Portfolio may purchase put options, solely
for hedging purposes, in order to protect portfolio holdings in an underlying
security against a substantial decline in the market value of such holdings
("protective puts"). Such protection is provided during the life of the put
because the Fund may sell the underlying security at the put exercise price,
regardless of a decline in the underlying security's market price. Any loss to
the Fund is limited to the premium paid for, and transaction costs paid in
connection with, the put plus the initial excess, if any, of the market
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price of the underlying security over the exercise price. However, if the market
price of such security increases, the profit the Fund realizes on the sale of
the security will be reduced by the premium paid for the put option less any
amount for which the put is sold.
Adjustable Portfolio may also purchase call options solely for the purpose
of hedging against an increase in prices of securities that the Fund ultimately
wants to buy. Such protection is provided during the life of the call option
because the Fund may buy the underlying security at the call exercise price
regardless of any increase in the underlying security's market price. In order
for a call option to be profitable, the market price of the underlying security
must rise sufficiently above the exercise price to cover the premium and
transaction costs. By using call options in this manner, Adjustable Portfolio
will reduce any profit it might have realized had it bought the underlying
security at the time it purchased the call option by the premium paid for the
call option and by transaction costs.
Adjustable Portfolio may purchase and write exchange-traded put and call
options, and over-the-counter ("OTC") put and call options in negotiated
transactions with the writers of the options since options on many of the
portfolio securities held by the Fund are not traded on an exchange. The Fund
will purchase OTC options only from investment dealers and other financial
institutions (such as commercial banks or savings and loan associations) deemed
creditworthy by the Adviser.
OTC options are two-party contracts with price and terms negotiated between
buyer and seller. In contrast, exchange-traded options are third-party contracts
with standardized strike prices and expiration dates, and are purchased from a
clearing corporation. Exchange-traded options have a continuous liquid market
while OTC options may not. The staff of the SEC has taken the position that
purchased OTC options and the assets used to "cover" written OTC options are
illiquid securities, provided that the entire amount of assets used to cover OTC
options written by Adjustable Portfolio will not be treated as illiquid in
certain circumstances, as set forth in the Statement of Additional Information.
Adjustable Portfolio will treat OTC options, to the extent set forth in the
Statement of Additional Information, as subject to the Fund's limitation on
investments in illiquid securities. See "Investment Restrictions," below.
For further information concerning the characteristics and risks of options
transactions, see "Investment Objectives, Policies and Restrictions -- Options"
in the Statement of Additional Information.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
Adjustable Portfolio may enter into contracts for the purchase or sale for
future delivery of fixed-income securities or contracts based on financial
indices including any index of securities in which the Fund may invest ("futures
contracts"). A "sale" of a futures contract means the acquisition of a
contractual obligation to deliver the securities called for by the contract at a
specified price on a specified date. The purchaser of a futures contract on an
index agrees to take or make delivery of an amount of cash equal to the
difference between a specified dollar multiple of the value of the index on the
expiration date of the contract ("current contract value") and the price at
which the contract was originally struck. No physical delivery of the
fixed-income securities underlying the index is made. The futures contracts in
which the Fund may invest have been developed by and are traded on national
commodity exchanges.
The purpose of the acquisition or sale of a futures contract by Adjustable
Portfolio is to hedge against fluctuations in the value of its portfolio without
actually buying or selling securities. For
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example, if the Fund owns long-term debt securities and interest rates are
expected to increase, the Fund might sell futures contracts. If interest rates
did increase, the value of the debt securities in the Fund's portfolio would
decline, but the value of the Fund's futures contracts would increase at
approximately the same rate, thereby keeping the net asset value of the Fund
from declining as much as it otherwise would have. If, on the other hand, the
Fund held cash reserves and short-term investments pending anticipated
investment in long-term obligations and interest rates were expected to decline,
the Fund might purchase futures contracts for U.S. Government Securities. Since
the behavior of such contracts would generally be similar to that of long-term
securities, the Fund could take advantage of the anticipated rise in the value
of long-term securities without actually buying them until the market had
stabilized. At that time, the Fund could accept delivery under the futures
contracts or the futures contracts could be liquidated and the Fund's reserves
could then be used to buy long-term securities in the cash market. The Fund will
engage in such transactions only for hedging purposes, on either an asset-based
or a liability-based basis, in each case in accordance with the rules and
regulations of the Commodity Futures Trading Commission. See Appendix B to the
Statement of Additional Information.
Adjustable Portfolio may purchase and sell put and call options on futures
contracts and enter into closing transactions with respect to such options to
terminate existing positions. The Fund may use such options on futures contracts
in connection with its hedging strategies in lieu of purchasing and writing
options directly on the underlying securities or purchasing and selling the
underlying futures contracts.
There are risks in using futures contracts and options on futures contracts
as hedging devices. The primary risks associated with the use of futures
contracts and options thereon are (a) the prices of futures contracts and
options may not correlate perfectly with the market value of the underlying
security held by the Fund and (b) the possible lack of a liquid secondary market
for a futures contract and the resulting inability to close a futures position
prior to its maturity date. The risk that the Fund will be unable to close out a
futures position will be minimized by entering into such transactions on a
national exchange with an active and liquid secondary market.
Additional information with respect to futures contracts and options on
futures contracts is set forth in Appendix B to the Statement of Additional
Information.
The effective use of futures contracts, options on futures contracts and the
other hedging techniques discussed above is dependent upon the Adviser's
judgment regarding interest rate movements and other economic factors. To the
extent that this judgment is incorrect, the Fund will be in a worse position
than if such hedging techniques had not been used.
ILLIQUID SECURITIES
Adjustable Portfolio may invest up to 15% of its net assets in illiquid
securities and Money Market Fund may invest up to 10% of its net assets in
illiquid securities. Illiquid securities may offer a higher yield than
securities which are more readily marketable, but they may not always be
marketable on advantageous terms.
The sale of illiquid securities often requires more time and results in
higher brokerage charges or dealer discounts than does the sale of securities
eligible for trading on national securities exchanges or in the over-the-counter
markets. A Fund may be restricted in its ability to sell such securities at a
time
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when the Adviser deems it advisable to do so. In addition, in order to meet
redemption requests, a Fund may have to sell other assets, rather than such
illiquid securities, at a time which is not advantageous.
"Restricted securities" are securities which were originally sold in private
placements and which have not been registered under the Securities Act of 1933
(the "1933 Act"). Such securities generally have been considered illiquid, since
they may be resold only subject to statutory restrictions and delays or if
registered under the 1933 Act. In 1990, however, the SEC adopted Rule 144A under
the 1933 Act, which provides a safe harbor exemption from the registration
requirements of the 1933 Act for resales of restricted securities to "qualified
institutional buyers," as defined in the rule. The result of this rule has been
the development of a more liquid and efficient institutional resale market for
restricted securities. Thus, restricted securities are no longer necessarily
illiquid. Neither Fund is subject to any limitation on its ability to invest in
securities simply because such securities are restricted. (Money Market Fund,
however, will invest only in U.S. Government Securities, which are not
considered restricted securities.) These securities will be treated as liquid
when they have been determined to be liquid by the Board of Directors of the
Funds or by the Adviser subject to the oversight of and pursuant to procedures
adopted by the Board of Directors. See "Investment Objectives, Policies and
Restrictions -- Illiquid Securities" in the Statement of Additional Information.
Similar determinations may be made with respect to commercial paper issued in
reliance upon the so-called "private placement" exemption from registration
under Section 4(2) of the 1933 Act and with respect to IO and PO classes of
Mortgage-Backed Securities issued by the U.S. Government or its agencies and
instrumentalities.
INVESTMENT RESTRICTIONS
Each Fund has adopted certain investment restrictions, which are set forth
in detail in the Statement of Additional Information under "Investment
Objectives, Policies and Restrictions." Certain of these restrictions are
fundamental and may not be changed without shareholder approval, including the
following: (1) Neither Fund will invest 25% or more of its total assets in any
one industry. (This restriction does not apply to securities of the U.S.
Government or its agencies and instrumentalities and repurchase agreements
relating thereto or to obligations of United States banks, domestic branches
thereof and United States branches of foreign banks subject to United States
regulation. The various types of utility companies, such as gas, electric,
telephone, telegraph, satellite and microwave communications companies, are
considered as separate industries.) (2) Neither Fund will, with respect to 75%
of its total assets, invest more than 5% of the value of its total assets in the
securities of any one issuer or acquire more than 10% of the outstanding voting
securities of an issuer, in each case other than securities issued or guaranteed
by the U.S. Government or any agency or instrumentality thereof and securities
of other investment companies.
Except with respect to each Fund's policy concerning borrowing, if a
percentage restriction set forth in this Prospectus is adhered to at the time of
an investment, a later increase or decrease in percentage resulting from changes
in values or assets will not constitute a violation of such restriction.
PORTFOLIO TURNOVER
While it is not the policy of Adjustable Portfolio to trade actively for
short-term profits, the Fund will dispose of securities without regard to the
time they have been held when such action appears advisable to the Adviser.
Frequent changes may result in higher transaction and other costs for the
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Fund. The method of calculating portfolio turnover rate is set forth in the
Statement of Additional Information under "Investment Objectives, Policies and
Restrictions -- Portfolio Turnover." Portfolio turnover rates for Adjustable
Portfolio are set forth in "Financial Highlights."
MANAGEMENT
BOARD OF DIRECTORS
The Company's Board of Directors has the primary responsibility for
overseeing the overall management of the Company and electing its officers.
INVESTMENT ADVISER
Piper Capital Management Incorporated (the "Adviser") has been retained
under an Investment Advisory and Management Agreement with the Company to act as
the Funds' investment adviser subject to the authority of the Board of
Directors.
In addition to acting as the investment adviser for the Funds, the Adviser
also serves as investment adviser to a number of other open-end and closed-end
investment companies and to various other concerns, including pension and profit
sharing funds, corporate funds and individuals. As of September 30, 1995, the
Adviser rendered investment advice regarding approximately $9.4 billion of
assets. The Adviser is a wholly owned subsidiary of Piper Jaffray Companies
Inc., a publicly held corporation which is engaged through its subsidiaries in
various aspects of the financial services industry. The address of the Adviser
is Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota
55402-3804.
The Adviser furnishes each Fund with investment advice and, in general,
supervises the management and investment programs of the Funds. The Adviser
furnishes at its own expense all necessary administrative services, office
space, equipment and clerical personnel for servicing the investments of the
Funds. The Adviser also provides investment advisory facilities and executive
and supervisory personnel for managing the investments and effecting the
portfolio transactions of the Funds. In addition, the Adviser pays the salaries
and fees of all officers and directors of the Company who are affiliated with
the Adviser.
Under the Investment Advisory and Management Agreement, the Adviser receives
a monthly fee computed separately for each Fund. Such fees are paid at an annual
rate of .15% and .30%, respectively, of the average daily net assets of Money
Market Fund and Adjustable Portfolio.
PORTFOLIO MANAGEMENT
Nancy S. Olsen has been primarily responsible for the day-to-day management
of Money Market Fund's portfolio since the Fund's inception in 1993. Ms. Olsen,
who joined the Adviser in 1987, is a Senior Vice President and fixed income
portfolio manager for the Adviser and directs the Adviser's cash reserve
management department. Ms. Olsen has an M.B.A. from the University of Minnesota.
Thomas S. McGlinch has been primarily responsible for the day-to-day
management of Adjustable Portfolio's investment portfolio since October 1994.
Mr. McGlinch is a vice president and fixed-income portfolio manager for the
Adviser. Prior to joining the Adviser in 1992, Mr. McGlinch was an institutional
mortgage-backed securities trader for Piper Jaffray Inc. during 1992. From 1988
to January 1992, Mr. McGlinch was a specialty products trader at FBS Investment
Services. He is a Chartered Financial Analyst ("C.F.A.") with an M.B.A. from the
University of St. Thomas.
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TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND CUSTODIAN
Investors Fiduciary Trust Company ("IFTC"), 127 West Tenth Street, Kansas
City, Missouri 64105, (800) 874-6205, serves as Custodian for the Funds'
portfolio securities and cash and as Transfer Agent and Dividend Disbursing
Agent for the Funds.
The Company has entered into a Shareholder Account Servicing Agreement with
the Distributor pursuant to which the Distributor provides certain transfer
agent and dividend disbursing agent services for the underlying individual
shareholder accounts. For more information, see "Investment Advisory and Other
Services -- Transfer Agent and Dividend Disbursing Agent" in the Statement of
Additional Information.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
The Adviser selects brokers and futures commission merchants to use for the
Fund's portfolio transactions. In making its selection, the Adviser may consider
a number of factors, which are more fully discussed in the Statement of
Additional Information, including, but not limited to, research services, the
reasonableness of commissions and quality of services and execution. A broker's
sales of either of the Funds' shares may also be considered a factor if the
Adviser is satisfied that a Fund would receive from that broker the most
favorable price and execution then available for a transaction. Portfolio
transactions for the Funds may be effected through the Distributor on a
securities exchange in compliance with Section 17(e) of the 1940 Act. For more
information, see "Portfolio Transactions and Allocation of Brokerage" in the
Statement of Additional Information.
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SHAREHOLDER GUIDE TO INVESTING
HOW TO PURCHASE SHARES
GENERAL
The Funds' shares may be purchased at the public offering price from the
Distributor and from other broker-dealers who have sales agreements with the
Distributor. The address of the Distributor is that of the Funds. The
Distributor reserves the right to reject any purchase order. You should be aware
that, because the Funds do not issue stock certificates, Fund shares must be
kept in an account with the Distributor or with IFTC. All investments must be
arranged through your Piper Jaffray Investment Executive or other broker-dealer.
PURCHASE PRICE
Shares of Money Market Fund are offered without a sales charge at the net
asset value per share next calculated after receipt of your order by your Piper
Jaffray Investment Executive or other broker-dealer. The net asset value per
share of such Fund is normally expected to be $1.00. See "Valuation of Shares".
Shares of Adjustable Portfolio are offered at the net asset value per share
next calculated after receipt of your order by your Piper Jaffray Investment
Executive or other broker-dealer, plus a front-end sales charge as follows:
<TABLE>
<CAPTION>
DEALER
SALES CHARGE AS SALES CHARGE AS CONCESSION AS
PERCENTAGE OF PERCENTAGE OF NET PERCENTAGE OF
AMOUNT OF TRANSACTION AT OFFERING PRICE OFFERING PRICE ASSET VALUE OFFERING PRICE
- - - ----------------------------------------------------- ----------------- ------------------- ---------------
<S> <C> <C> <C>
Less than $250,000................................... 1.00% 1.01% .75%
$250,000 but less than $500,000...................... .50% .50% .375%
$500,000 and over.................................... 0% 0% 0%
</TABLE>
The Adviser and/or the Distributor, out of their own assets, may pay for
certain expenses incurred in connection with the distribution of shares of the
Funds. In particular, in connection with sales of Adjustable Portfolio of
$500,000 or more, Piper Jaffray Investment Executives and other broker-dealers
are paid an amount equal to .15% of the offering price of Fund shares purchased
by their clients. In addition, Piper Jaffray Investment Executives and other
broker-dealers receive ongoing payments for their servicing and/or maintenance
of shareholder accounts in an amount equal to .06% of the average daily net
assets of Money Market Fund attributable to shares sold by them and .15% of the
average daily net assets of Adjustable Portfolio attributable to shares sold by
them.
The Distributor or the Adviser, at their own expense, provide promotional
incentives to Investment Executives of the Distributor and to broker-dealers who
have sales agreements with the Distributor in connection with sales of shares of
the Funds, and other mutual funds for which the Adviser acts as investment
adviser. In some instances, these incentives may be made available only to
certain Investment Executives or broker-dealers who have sold or may sell
significant amounts of such shares. The incentives may include payment for
travel expenses, including lodging at luxury resorts, incurred in connection
with sales seminars.
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SHAREHOLDER GUIDE TO INVESTING
MINIMUM INVESTMENTS
A minimum initial investment of $100,000 is required for each Fund. There is
no minimum for subsequent investments. The Distributor may waive the minimum
initial investment for clients of Piper Trust Company.
REDUCING YOUR SALES CHARGE
Purchasers of Adjustable Portfolio may qualify for a reduced sales charge
through one or more of several plans. You must notify your Piper Jaffray
Investment Executive or broker-dealer at the time of purchase to take advantage
of these plans.
AGGREGATION
Front-end or initial sales charges of Adjustable Portfolio may be reduced or
eliminated by aggregating your purchase with purchases of certain related
personal accounts. In addition, purchases made by members of certain organized
groups will be aggregated for purposes of determining sales charges. Sales
charges are calculated by adding the dollar amount of your current purchase to
the higher of the cost or current value of shares of any Piper fund sold with a
sales charge that are currently held by you and your related accounts or by
other members of your group.
QUALIFIED GROUPS. You may group purchases in the following personal
accounts together:
- Your individual account.
- Your spouse's account.
- Your children's accounts (if they are under the age of 21).
- Your employee benefit plan accounts if they are exclusively for your
benefit. This includes accounts such as IRAs, individual 403(b) plans or
single-participant Keogh-type plans.
- A single trust estate or single fiduciary account if you are the trustee
or fiduciary.
Additionally, purchases made by members of any organized group meeting the
requirements listed below may be aggregated for purposes of determining sales
charges:
- The group has been in existence for more than six months.
- It is not organized for the purpose of buying redeemable securities of a
registered investment company.
- Purchases must be made through a central administration, or through a
single dealer, or by other means that result in economy of sales effort or
expense.
An organized group does not include a group of individuals whose sole
organizational connection is participation as credit card holders of a company,
policyholders of an insurance company, customers of either a bank or
broker-dealer or clients of an investment adviser.
RIGHT OF ACCUMULATION
Sales charges for purchases of Adjustable Portfolio shares into Piper
Jaffray accounts will be automatically calculated taking into account the dollar
amount of any new purchases along with the
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SHAREHOLDER GUIDE TO INVESTING
higher of current value or cost of shares previously purchased in the Piper
funds that were sold with a sales charge. For other broker-dealer accounts, you
should notify your Investment Executive at the time of purchase of additional
Piper fund shares you may own.
LETTER OF INTENT
Your sales charge for Adjustable Portfolio may be reduced by signing a
non-binding Letter of Intent. This Letter of Intent will state your intention to
invest $100,000 or more in any of the Piper funds sold with a sales charge over
a 13-month period, beginning not earlier than 90 days prior to the date you sign
the Letter. You will pay the lower sales charge applicable to the total amount
you plan to invest over the 13-month period. Part of your shares will be held in
escrow to cover additional sales charges that may be due if you do not invest
the planned amount. Please see "Purchase of Shares" in the Statement of
Additional Information for more details. You can contact your Piper Jaffray
Investment Executive or other broker-dealer for an application.
SPECIAL PURCHASE PLANS
For more information on any of the following special purchase plans, contact
your Piper Jaffray Investment Executive or other broker-dealer.
PURCHASES BY PIPER JAFFRAY COMPANIES INC., ITS SUBSIDIARIES AND ASSOCIATED
PERSONS
Piper Jaffray Companies Inc. and its subsidiaries may buy shares of
Adjustable Portfolio without incurring a sales charge. The following persons
associated with such entities also may buy such shares without paying a sales
charge:
- Officers, directors and partners.
- Employees and retirees.
- Sales representatives.
- Spouses or children under the age of 21 of any of the above.
- Any trust, pension, profit-sharing or other benefit plan for any of the
above.
PURCHASES BY BROKER-DEALERS
Employees of broker-dealers who have entered into sales agreements with the
Distributor, and spouses and children under the age of 21 of such employees, may
buy shares of Adjustable Portfolio without incurring a sales charge.
PURCHASES BY OTHER INDIVIDUALS WITHOUT A SALES CHARGE
The following other individuals and entities also may buy shares of
Adjustable Portfolio without paying a sales charge:
- Clients of the Adviser buying shares in their advisory accounts.
- Discretionary accounts at Piper Trust Company and participants in
investment companies exempt from registration under the 1940 Act that are
managed by the Adviser.
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SHAREHOLDER GUIDE TO INVESTING
- Trust companies and bank trust departments using funds over which they
exercise exclusive discretionary investment authority and which are held
in a fiduciary, agency, advisory, custodial or similar capacity.
- Investors purchasing shares through a Piper Jaffray Investment Executive
if the purchase of such shares is funded by the proceeds from the sale of
shares of any non-money market open-end mutual fund. This privilege is
available for 30 days after the sale.
- American Government Term Trust Inc. ("AGT"), a closed-end fund which was
managed by the Adviser, recently dissolved and distributed its net assets
to shareholders. Former AGT shareholders may invest the distributions
received by them in connection with such dissolution in shares of the Fund
without payment of a sales charge.
PURCHASES BY EMPLOYEE BENEFIT PLANS AND TAX-SHELTERED ANNUITIES
- Shares of Adjustable Portfolio will be sold at net asset value, without a
sales charge, to employee benefit plans containing an actively maintained
qualified cash or deferred arrangement under Section 401(k) of the
Internal Revenue Code of 1986, as amended (the "Code") (a "401(k) Plan").
In the event a 401(k) Plan of an employer has purchased shares in the Fund
during any calendar quarter, any other employee benefit plan of such
employer that is a qualified plan under Section 401(a) of the Code also
may purchase shares of the Fund during such quarter without incurring a
sales charge.
- Custodial accounts under Section 403(b) of the Code (known as
tax-sheltered annuities) also may buy shares of Adjustable Portfolio
without incurring a sales charge.
HOW TO REDEEM SHARES
NORMAL REDEMPTION
You may redeem all or a portion of your shares on any day that a Fund values
its shares. (Please refer to "Valuation of Shares" below for more information.)
Your shares will be redeemed at the net asset value next calculated after the
receipt of your instructions in good form by your Piper Jaffray Investment
Executive or other broker-dealer as explained below.
PIPER JAFFRAY INC. ACCOUNTS. To redeem your shares, please contact your
Piper Jaffray Investment Executive with an oral request to redeem your shares.
OTHER BROKER-DEALER ACCOUNTS. To redeem your shares, you may either contact
your broker-dealer with an oral request or send a written request directly to
the Funds' transfer agent, IFTC. This request should contain: the dollar amount
or number of shares to be redeemed, your Fund account number and either a social
security or tax identification number (as applicable). You should sign your
request in exactly the same way the account is registered. If there is more than
one owner of the shares, all owners must sign. A signature guarantee is required
for redemptions over $25,000. Please contact IFTC or refer to "Redemption of
Shares" in the Statement of Additional Information for more details.
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SHAREHOLDER GUIDE TO INVESTING
PAYMENT OF REDEMPTION PROCEEDS
After your shares have been redeemed, the cash proceeds will normally be
sent to you or your broker-dealer within three business days. In no event will
payment be made more than seven days after receipt of your order in good form.
However, payment may be postponed or the right of redemption suspended for more
than seven days under unusual circumstances, such as when trading is not taking
place on the New York Stock Exchange. Payment of redemption proceeds may also be
delayed if the shares to be redeemed were purchased by a check drawn on a bank
which is not a member of the Federal Reserve System, until such checks have
cleared the banking system (normally up to 15 days from the purchase date).
REDEMPTION IN KIND
Although it is the current policy of Adjustable Portfolio to pay redemption
proceeds in cash, redemption proceeds for redemption requests of $100,000 or
more may be paid, at the sole option of Adjustable Portfolio, in whole or in
part by a distribution in kind of securities or other assets held by Adjustable
Portfolio. The determination of which of Adjustable Portfolio's assets will be
distributed to meet such redemption requests will be made by the Adviser, in
consultation with the redeeming shareholder. Securities or other assets so
distributed will be valued in the same manner as Adjustable Portfolio's
securities. In order to dispose of such securities or other assets, the
redeeming shareholder would most likely be required to bear transaction costs.
INVOLUNTARY REDEMPTION
Each Fund reserves the right to redeem your account at any time the net
asset value of the account falls below $50,000 as the result of a redemption or
exchange request. You will be notified in writing prior to any such redemption
and will be allowed 30 days to make additional investments before the redemption
is processed.
SHAREHOLDER SERVICES
REINSTATEMENT PRIVILEGE
If you have redeemed shares of Adjustable Portfolio, you may reinvest in
shares of Adjustable Portfolio without payment of an additional sales charge.
The reinvestment request must be made within 120 days of the redemption. You may
also reinvest within this time period in shares of any other mutual fund managed
by the Adviser except that, if that fund has a higher sales charge than
Adjustable Portfolio, you must pay the difference. This privilege is subject to
the eligibility of share purchases in your state as well as the minimum
investment requirements and any other applicable terms in the prospectus of the
fund being acquired.
EXCHANGE PRIVILEGE
If your investment goals change, you may prefer a fund with a different
objective. If you are considering an exchange into another mutual fund managed
by the Adviser, you should carefully read the appropriate prospectus for
additional information about that fund. A prospectus may be obtained through
your Piper Jaffray Investment Executive, your broker-dealer or the Distributor.
To exchange your shares, please contact your Piper Jaffray Investment Executive,
your broker-dealer or IFTC.
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SHAREHOLDER GUIDE TO INVESTING
You may exchange your shares for shares of any other mutual fund managed by
the Adviser that is open to new investors. All exchanges are subject to the
eligibility of share purchases in your state as well as the minimum investment
requirements and any other applicable terms in the prospectus of the fund being
acquired. Exchanges are made on the basis of the net asset values of the funds
involved, except that investors exchanging into a fund which has a higher sales
charge must pay the difference.
You may make four exchanges per year without payment of a service charge.
Thereafter, you will pay a $5 service charge for each exchange. The Company
reserves the right to change or discontinue the exchange privilege, or any
aspect of the privilege, upon 60 days' written notice.
TELEPHONE TRANSACTION PRIVILEGES
PIPER JAFFRAY INC. ACCOUNTS. If you hold your shares in a Piper Jaffray
account, you may telephone your Investment Executive to execute any transaction
or to apply for many shareholder services. In some cases, you may be required to
complete a written application.
OTHER BROKER-DEALER ACCOUNTS. If you hold your shares in an account with
your broker-dealer or at IFTC, you may authorize telephone privileges by
completing the Account Application and Services Form. Please contact your
broker-dealer or IFTC (800-874-6205) for an application or for more details. The
Funds will employ reasonable procedures to confirm that a telephonic request is
genuine, including requiring that payment be made only to the address of record
or the bank account designated on the Account Application and Services Form and
requiring certain means of telephonic identification. A Fund employing such
procedures will not be liable for following instructions communicated by
telephone that it reasonably believes to be genuine. If a Fund does not employ
such procedures, it may be liable for any losses due to unauthorized or
fraudulent telephone transactions. It may be difficult to reach the Funds by
telephone during periods when market or economic conditions lead to an unusually
large volume of telephone requests. If you cannot reach the Funds by telephone,
you should contact your broker-dealer or issue written instructions to IFTC at
the address set forth herein. See "Management -- Transfer Agent, Dividend
Disbursing Agent and Custodian." The Funds reserve the right to suspend or
terminate their telephone services at any time without notice.
DIRECTED DIVIDENDS
You may direct income dividends and capital gains distributions to be
invested in any other mutual fund managed by the Adviser (other than a money
market fund) that is offered in your state. This investment will be made at net
asset value. It will not be subject to a minimum investment amount except that
you must hold shares in such fund (including the shares being acquired with the
dividend or distribution) with a value at least equal to such fund's minimum
initial investment amount.
SYSTEMATIC WITHDRAWAL PLAN
If your account has a value of $5,000 or more, you may establish a
Systematic Withdrawal Plan for either of the Funds. This plan will allow you to
receive regular periodic payments by redeeming as many shares from your account
as necessary. As with other redemptions, a redemption to make a
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SHAREHOLDER GUIDE TO INVESTING
withdrawal is a sale for federal income tax purposes. Payments made under a
Systematic Withdrawal Plan cannot be considered as actual yield or income since
part of the payments may be a return of capital.
A request to establish a Systematic Withdrawal Plan must be submitted in
writing to your Piper Jaffray Investment Executive or other broker-dealer. There
are no service charges for maintenance; the minimum amount that you may withdraw
each period is $100. You will be required to have any income dividends and any
capital gains distributions reinvested. You may choose to have withdrawals made
monthly, quarterly or semiannually. Please contact your Piper Jaffray Investment
Executive, other broker-dealer or IFTC for more information.
With respect to Adjustable Portfolio, you should be aware that additional
investments in an account that has an active Systematic Withdrawal Plan may be
inadvisable due to sales charges and tax liabilities. Please refer to
"Redemption of Shares" in the Statement of Additional Information for additional
details.
ACCOUNT PROTECTION
If you purchased your shares of either Fund through a Piper Jaffray
Investment Executive, you may choose from several account options. Your
investments in a Fund held in a Piper Jaffray account (except for non-"PAT"
accounts) would be protected up to $25 million. Investments held in non-"PAT"
Piper Jaffray accounts are protected up to $2.5 million. In each case, the
Securities Investor Protection Corporation ("SIPC") provides $500,000 of
protection; the additional coverage is provided by The Aetna Casualty & Surety
Company. This protection does not cover any declines in the net asset value of
Fund shares.
CONFIRMATION OF TRANSACTIONS AND REPORTING OF OTHER INFORMATION
Each time there is a transaction involving your Fund shares, such as a
purchase, redemption or dividend reinvestment, you will receive a confirmation
statement describing that activity. This information will be provided to you
from either Piper Jaffray, your broker-dealer or IFTC. In addition, you will
receive various IRS forms after the first of each year detailing important tax
information. Each Fund is required to supply annual and semiannual reports that
list securities held by the Fund and include the current financial statements of
the Fund.
HOUSEHOLDING. If you have multiple accounts with Piper Jaffray, you may
receive some of the above information in combined mailings. This will not only
help to reduce Fund expenses, it will help the environment by saving paper.
Please contact your Piper Jaffray Investment Executive for more information.
DIVIDENDS AND DISTRIBUTIONS
The net investment income of each Fund will be declared as dividends daily
and will be paid monthly. Net realized capital gains, if any, will be
distributed on an annual basis. For Adjustable Portfolio, shares begin accruing
dividends on the date on which payment for such shares has been received by the
Distributor or IFTC, as appropriate, and shares redeemed will earn dividends
through the day prior to settlement of the redemption. For Money Market Fund,
shares will begin accruing
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SHAREHOLDER GUIDE TO INVESTING
dividends on the date on which payment is received, provided such payment is
received by 12:00 noon, New York time. If a redemption request for shares of
Money Market Fund is received by 12:00 noon, New York time, shares will be
redeemed that day and a dividend will not be earned.
Adjustable Portfolio may at times pay out less than the entire amount of net
investment income earned in any particular period in order to permit the Fund to
maintain a more stable level of distributions. Any such amount retained by the
Fund would be available to stabilize future distributions. As a result, the
distributions paid by the Fund for any particular period may be more or less
than the amount of net investment income earned by the Fund during such period.
DISTRIBUTION OPTIONS. All net investment income dividends and net realized
capital gains distributions for a Fund generally will be payable in additional
shares of that Fund at net asset value ("Reinvestment Option"). If you wish to
receive your distributions in cash, you must notify your Piper Jaffray
Investment Executive or other broker-dealer. You may elect either to receive
income dividends in cash and capital gains distributions in additional shares of
the Fund at net asset value ("Split Option"), or to receive both income
dividends and capital gains distributions in cash ("Cash Option"). You may also
direct income dividends and capital gains distributions to be invested in
another mutual fund managed by the Adviser. See "Shareholder Services --
Directed Dividends," above. The taxable status of income dividends and/or net
capital gains distributions is not affected by whether they are reinvested or
paid in cash.
33
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VALUATION OF SHARES
The Funds determine their net asset value on each day the New York Stock
Exchange (the "Exchange") is open for business. The calculation is made as of
the regular close of the Exchange (currently 4:00 p.m. New York time) after the
Funds have declared any applicable dividends. The net asset value of Money
Market Fund is also determined each business day at 12:00 noon (New York time).
The net asset value per share for Adjustable Portfolio is determined by
dividing the value of the securities owned by the Fund plus any cash and other
assets (including interest accrued and dividends declared but not collected)
less all liabilities by the number of Fund shares outstanding. For the purpose
of determining the aggregate net assets of Adjustable Portfolio, cash and
receivables will be valued at their face amounts. Interest will be recorded as
accrued and dividends will be recorded on the ex-dividend date.
The value of certain fixed-income securities held by Adjustable Portfolio
will be provided by an independent pricing service, which determines these
valuations at a time earlier than the close of the Exchange. Pricing services
consider such factors as security prices, yields, maturities, call features,
rating and developments relating to specific securities in arriving at
securities valuations. Fixed-income securities for which prices are not
available from an independent pricing service but where an active market exists
will be valued using market quotations obtained from one or more dealers that
make markets in the securities. Occasionally events affecting the value of such
securities may occur between the time valuations are determined and the close of
the Exchange. If events materially affecting the value of such securities occur
during such period, or if management determines for any other reason that
valuations provided by the pricing service are inaccurate, such securities will
be valued at their fair value according to procedures decided upon in good faith
by the Company's Board of Directors. In addition, any securities or other assets
of Adjustable Portfolio for which market prices are not readily available will
be valued at their fair value in accordance with such procedures.
It is the policy of Money Fund to attempt to maintain a net asset value per
share of $1.00. The securities held are valued on the basis of amortized cost,
in accordance with the Fund's election to operate under the provisions of Rule
2a-7 under the 1940 Act. The amortized cost method of valuation involves valuing
an instrument at its cost and thereafter assuming a constant amortization to
maturity of a discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument. While this method provides
certainty in valuation, it may result in periods during which value as
determined by amortized cost is higher or lower than the price the Fund would
receive if it sold the instrument. Under the direction of the Board of
Directors, procedures have been adopted to monitor and stabilize the price per
share. Calculations are made to compare the value of the Fund's portfolio valued
at amortized cost with market values. In the event that a deviation of one-half
of 1% or more exists between the $1.00 per share net asset value for the Fund
and the net asset value calculated by reference to market quotations, or if
there is any other deviation which the Board of Directors believes would result
in a material dilution to shareholders or purchasers, the Board of Directors
will promptly consider what action, if any, should be initiated. See "Net Asset
Value and Public Offering Price" in the Statement of Additional Information.
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TAX STATUS
Each Fund is treated as a separate corporation for federal tax purposes.
Therefore, each Fund is treated separately in determining whether it qualifies
as a regulated investment company and for purposes of determining the net
ordinary income (or loss), net realized capital gains (or losses) and
distributions necessary to relieve such Fund of any federal income tax
liability. Each Fund qualified as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"),
during its last taxable year and intends to qualify as a regulated investment
company during the current taxable year. If so qualified, a Fund will not be
liable for federal income taxes to the extent it distributes its taxable income
to shareholders.
Distributions by a Fund are generally taxable to shareholders, whether
received in cash or additional shares of the Fund (or shares of another mutual
fund managed by the Adviser). Distributions of net capital gains (designated as
"capital gain dividends") by Adjustable Portfolio, if any, are taxable to
shareholders as long-term capital gains, regardless of the length of time the
shareholder has held the shares of the Fund.
A shareholder will recognize a capital gain or loss upon the sale or
exchange of Fund shares if, as is normally the case, the shares are capital
assets in the shareholder's hands. This capital gain or loss will be long-term
if the shares have been held for more than one year.
The foregoing relates to federal income taxation as in effect as of the date
of this Prospectus. For a more detailed discussion of the federal income tax
consequences of investing in shares of the Funds, see "Taxation" in the
Statement of Additional Information. Before investing in either of the Funds,
you should check the consequences of your local and state tax laws.
PERFORMANCE COMPARISONS
Advertisements and other sales literature for Adjustable Portfolio may refer
to the Fund's "average annual total return" and "cumulative total return." In
addition, both Funds may provide yield calculations in advertisements and other
sales literature. All such yield and total return quotations are based upon
historical earnings and are not intended to indicate future performance.
Yield calculations for Adjustable Portfolio will be based upon a 30-day
period stated in the advertisement and will be calculated by dividing the net
investment income per share (as defined under SEC rules and regulations) earned
during the advertised period by the offering price per share (including the
maximum sales charge) on the last day of the period. The result will then be
"annualized" using a formula that provides for semi-annual compounding of
income. Money Market Fund may advertise its "yield" and "effective yield." The
"yield" of Money Market Fund refers to the income generated by an investment in
the Fund over a seven-day period stated in the advertisement. This income is
then "annualized." That is, the amount of income generated by the investment
during that week is assumed to be generated each week over a 52-week period and
is shown as a percentage of the investment. The "effective yield" is calculated
similarly but, when annualized, the income earned by an investment in the Fund
is assumed to be reinvested. The "effective yield" will be slightly higher than
the "yield" because of the compounding effect of this assumed reinvestment.
Average annual total return is the average annual compounded rate of return
on a hypothetical $1,000 investment made at the beginning of the advertised
period. Cumulative total return is calculated by subtracting a hypothetical
$1,000 payment to the Fund from the redeemable value of such
35
<PAGE>
payment at the end of the advertised period, dividing such difference by $1,000
and multiplying the quotient by 100. In calculating average annual and
cumulative total return, the maximum sales charge is deducted from the
hypothetical investment and all dividends and distributions are assumed to be
reinvested.
In addition to advertising total return and yield, comparative performance
information may be used from time to time in advertising the Funds' shares. For
example, advertisements may compare a Fund's performance to that of various
unmanaged market indices, or may include performance data from Lipper Analytical
Services, Inc., Morningstar, Inc. or other entities or organizations which track
the performance of investment companies.
For additional information regarding comparative performance information and
the calculation of yield, average annual total return and cumulative total
return, see "Performance Comparisons" in the Statement of Additional
Information.
Advertisements and other sales literature may also refer to Adjustable
Portfolio's effective duration. Effective duration estimates the interest rate
risk (price volatility) of a security, I.E., how much the value of the security
is expected to change with a given change in interest rates. The longer a
security's effective duration, the more sensitive its price is to changes in
interest rates. For example, if interest rates were to increase by 1%, the
market value of a bond with an effective duration of five years would decrease
by about 5%, with all other factors being constant. It is important to
understand that, while a valuable measure, effective duration is based on
certain assumptions and has several limitations. It is most useful as a measure
of interest rate risk when interest rate changes are small, rapid and occur
equally across all the different points of the yield curve. In addition,
effective duration is difficult to calculate precisely for bonds with prepayment
options, such as mortgage-backed securities, because the calculation requires
assumptions about prepayment rates. For example, when interest rates go down,
homeowners may prepay their mortgages at a higher rate than assumed in the
initial effective duration calculation, thereby shortening the effective
duration of Adjustable Portfolio's mortgage-backed securities. Conversely, if
rates increase, prepayments may decrease to a greater extent than assumed,
extending the effective duration of such securities. For these reasons, the
effective durations of funds which invest a significant portion of their assets
in mortgage-backed securities, particularly mortgage derivative securities, can
be greatly affected by changes in interest rates.
GENERAL INFORMATION
The Company is authorized to issue a total of 10 trillion shares of common
stock with a par value of $.01 per share. One hundred and ten billion of these
shares have been authorized by the Board of Directors to be issued in two
separate series: ten billion shares designated as Series A Common Shares, which
are the shares of common stock of Adjustable Portfolio, and one hundred billion
shares designated as Series B Common Shares, which are the shares of common
stock of Money Market Fund.
The Board of Directors is empowered under the Company's Articles of
Incorporation to issue other series of the Company's common stock without
shareholder approval. In addition, the Board of Directors may, without
shareholder approval, create and issue one or more additional classes of shares
within each Fund, as well as within any series of the Company created in the
future. See "Capital Stock and Ownership of Shares" in the Statement of
Additional Information.
36
<PAGE>
All shares, when issued, will be fully paid and nonassessable and will be
redeemable. All shares have equal voting rights. They can be issued as full or
fractional shares. A fractional share has pro-rata the same kind of rights and
privileges as a full share. The shares possess no preemptive or conversion
rights.
Each share of a series has one vote (with proportionate voting for
fractional shares) irrespective of the relative net asset value of the series'
shares. On some issues, such as the election of directors, all shares of the
Company vote together as one series. On an issue affecting only a particular
series, the shares of the affected series vote separately. Cumulative voting is
not authorized. This means that the holders of more than 50% of the shares
voting for the election of directors can elect 100% of the directors if they
choose to do so, and, in such event, the holders of the remaining shares will be
unable to elect any directors.
The Bylaws of the Company provide that shareholder meetings be held only
with such frequency as required under Minnesota law. Minnesota corporation law
requires only that the Board of Directors convene shareholder meetings when it
deems appropriate. In addition, Minnesota law provides that if a regular meeting
of shareholders has not been held during the immediately preceding 15 months, a
shareholder or shareholders holding 3% or more of the voting shares of the
Company may demand a regular meeting of shareholders by written notice given to
the chief executive officer or chief financial officer of the Company. Within 30
days after receipt of the demand, the Board of Directors shall cause a regular
meeting of shareholders to be called, which meeting shall be held no later than
90 days after receipt of the demand, all at the expense of the Company. In
addition, the 1940 Act requires a shareholder vote for all amendments to
fundamental investment policies and restrictions and for all amendments to
investment advisory contract. The 1940 Act also provides that Directors of the
Company may be removed by action of the record holders of two-thirds or more of
the outstanding shares of the Company. The Directors are required to call a
meeting of shareholders for the purpose of voting upon the question of removal
of any Director when so requested in writing by the record holders of at least
10% of the Company's outstanding shares.
PENDING LEGAL PROCEEDINGS
Complaints have been brought against the Adviser and the Distributor
relating to certain investment companies for which the Adviser acts or has acted
as investment adviser or subadviser. These lawsuits do not involve the Funds. A
number of complaints have been brought in federal and state court against the
Institutional Government Income Portfolio ("PJIGX") series of Piper Funds Inc.,
the Adviser, the Distributor, and certain individuals affiliated or formerly
affiliated with the Adviser and the Distributor. In addition, complaints have
been filed in federal court relating to a number of closed-end investment
companies managed by the Adviser and two open-end investment companies for which
the Adviser has acted as sub-adviser. The complaints, which ask for rescission
of plaintiff shareholders' purchases or compensatory damages, plus interest,
costs and expenses, generally allege, among other things, certain violations of
federal and/or state securities laws, including the making of materially
misleading statements in prospectuses concerning investment policies and risks.
See "Pending Litigation" in the Statement of Additional Information.
On February 13, 1996, a Settlement Agreement became effective for the
consolidated class action lawsuit, titled In Re: PIPER FUNDS INC. INSTITUTIONAL
GOVERNMENT INCOME PORTFOLIO LITIGATION. The Amended Consolidated Class Action
Complaint was filed on October 5, 1994, in the United States District Court,
District of Minnesota, against PJIGX, Piper Capital Management Incorporated
37
<PAGE>
("PCM"), Piper Jaffray Inc., William H. Ellis and Edward J. Kohler, and had
alleged the making of materially misleading statements in the prospectus, common
law negligent misrepresentation and breach of fiduciary duty. The Settlement
Agreement will provide approximately $67.5 million, together with interest
earned, less certain disbursements and attorney fees, to class members in
payments scheduled over approximately three years. Such payments will be made by
Piper Jaffray Companies Inc. and PCM and will not be an obligation of Piper
Funds Inc. Three lawsuits and a number of arbitrations brought by some of the
investors who requested exclusion from the settlement class remain pending.
The Adviser and the Distributor do not believe that the PJIGX settlement or
any outstanding complaint or action in arbitration will have a material adverse
effect on their ability to perform under their agreements with the Company or a
material adverse effect on the Funds, and they intend to defend such lawsuits
and actions vigorously.
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS (AND/OR IN THE STATEMENT OF ADDITIONAL INFORMATION REFERRED TO
ON THE COVER PAGE OF THIS PROSPECTUS), AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
FUNDS OR PIPER JAFFRAY INC. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR
SOLICITATION BY ANYONE IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION.
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APPENDIX A
FOREIGN CURRENCY TRANSACTIONS
As noted in the Prospectus, Adjustable Portfolio may invest up to 10% of its
assets in securities denominated in Canadian dollars. Adjustable Portfolio may
engage in foreign currency exchange transactions to protect against uncertainty
in the level of the rate of exchange between Canadian and U.S. dollars. The Fund
may engage in such transactions in connection with the purchase and sale of
portfolio securities ("transaction hedging") and to protect the value of
specific portfolio positions ("position hedging").
Adjustable Portfolio may engage in transaction hedging to protect against a
change in the exchange rate between the date on which the Fund contracts to
purchase or sell the security and the settlement date, or to "lock in" the U.S.
dollar equivalent of a dividend or interest payment in Canadian dollars. For
that purpose, Adjustable Portfolio may purchase or sell Canadian dollars on a
spot (or cash) basis at the prevailing spot rate in connection with the
settlement of transactions in portfolio securities denominated in Canadian
dollars. If conditions warrant, Adjustable Portfolio may also enter into
contracts to purchase or sell Canadian dollars at a future date ("forward
contracts") and purchase and sell Canadian dollars or futures contracts as a
hedge against changes in Canadian dollars or exchange rates between the trade
and settlement dates on particular transactions and not for speculation. A
foreign currency forward contract is a negotiated agreement to exchange currency
at a future time at a rate or rates that may be higher or lower than the spot
rate. Foreign currency futures contracts are standardized exchange-traded
contracts and have margin requirements. For transaction hedging purposes,
Adjustable Portfolio may also purchase exchange-listed and over-the-counter call
and put options on Canadian dollars or futures contracts thereon. A put option
on a futures contract gives the Fund the right to assume a short position in the
futures contract until expiration of the option. A put option on currency gives
the Fund the right to sell a currency at an exercise price until the expiration
of the option. A call option on a futures contract gives the Fund the right to
assume a long position in the futures contract until the expiration of the
option. A call option on currency gives the Fund the right to purchase a
currency at the exercise price until the expiration of the option.
Adjustable Portfolio may engage in position hedging to protect against a
decline in the value relative to the U.S. dollar in its securities, denominated
in Canadian dollars (or an increase in the value of the Canadian dollar for
securities which the Fund intends to buy, when it holds cash reserves and
short-term investments). For position hedging purposes, Adjustable Portfolio may
purchase or sell Canadian dollar futures contracts and forward contracts, and
may purchase put or call options on Canadian dollars or on futures contracts
thereon on exchanges or over-the-counter markets. In connection with position
hedging, Adjustable Portfolio may also purchase or sell Canadian dollars on a
spot basis.
The precise matching of the amounts of foreign currency exchange
transactions and the value of the portfolio securities involved will not
generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
these securities between the dates the currency exchange transactions are
entered into and the dates they mature.
It is impossible to forecast with precision the market value of portfolio
securities at the expiration or maturity of a forward or futures contract.
Accordingly, it may be necessary for Adjustable Portfolio
A-1
<PAGE>
to purchase additional Canadian dollars on the spot market (and bear the
expenses of such purchase) if the market value of the security or securities
being hedged is less than the amount of Canadian dollars the Fund is obligated
to deliver and if a decision is made to sell the security or securities and make
delivery of the Canadian dollars. Conversely, it may be necessary to sell on the
spot market some of the Canadian dollars received upon the sale of the portfolio
security or securities if the market value of such security or securities
exceeds the amount of Canadian dollars the Fund is obligated to deliver.
Hedging transactions involve costs and may result in losses. Adjustable
Portfolio may write covered call options on Canadian dollars to offset some of
such costs. The Fund may engage in over-the-counter transactions only when
appropriate exchange-traded transactions are unavailable and when, in the
opinion of the Adviser, the pricing mechanism and liquidity are satisfactory and
the participants are responsible parties likely to meet their contractual
obligations. Adjustable Portfolio's ability to engage in hedging and related
option transactions may be limited by tax considerations. See "Taxation" in the
Statement of Additional Information.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which Adjustable Portfolio owns or intends
to purchase or sell. They simply establish a rate of exchange which one can
achieve at some future point in time. Additionally, although these techniques
tend to minimize the risk of loss due to a decline in the value of the hedged
currency, they tend to limit any potential gain which might result from the
increase in the value of such currency.
A forward foreign currency exchange contract involves an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract as agreed by the parties, at a
price set at the time of the contract. In the case of a cancellable forward
contract, the holder has the unilateral right to cancel the contract at maturity
by paying a specified fee. The contracts are traded in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. A forward contract generally has no deposit requirement, and no
commissions are charged at any stage for trades. A foreign currency futures
contract is a standardized contract for the future delivery of a specified
amount of a foreign currency at a future date at a price set at the time of the
contract. Foreign currency futures contracts traded in the United States are
designated by and traded on exchanges regulated by the Commodity Futures Trading
Commission (the "CFTC"), such as the New York Mercantile Exchange. Adjustable
Portfolio would enter into foreign currency futures contracts solely for hedging
or other appropriate risk management purposes as defined in CFTC regulations.
Forward foreign currency exchange contracts differ from foreign currency
futures contracts in certain respects. For example, the maturity date of a
forward contract may be any fixed number of days from the date of the contract
agreed upon by the parties, rather than a predetermined date in any given month.
Also, forward foreign exchange contracts are traded directly between currency
traders so that no intermediary is required. A forward contract generally
requires no margin or other deposit.
At the maturity of a forward or futures contract, Adjustable Portfolio may
either accept or make delivery of the currency specified in the contract, or at
or prior to maturity enter into a closing transaction involving the purchase or
sale of an offsetting contract. Closing transactions with respect to forward
contracts are effected with the currency trader who is a party to the original
forward contract. Closing transactions with respect to futures contracts are
effected on a commodities exchange; a clearing corporation associated with the
exchange assumes responsibility for closing out such contracts.
A-2
<PAGE>
Positions in foreign currency futures contracts may be closed out only on an
exchange or board of trade which provides a secondary market for such contracts.
Although Adjustable Portfolio intends to purchase or sell foreign currency
futures contracts only on exchanges or boards of trade where there appears to be
an active secondary market, there is no assurance that a secondary market on an
exchange or board of trade will exist for any particular contract or at any
particular time. In such event, it may not be possible to close a futures
position and, in the event of adverse price movements, Adjustable Portfolio
would continue to be required to make daily cash payments of variation margin.
Options on foreign currencies operate similarly to options on securities,
and are traded primarily in the over-the-counter market, although options on
foreign currencies have recently been listed on several exchanges. Options
traded in the over-the-counter market are illiquid and it may not be possible
for Adjustable Portfolio to dispose of an option it has purchased or terminate
its obligations under an option it has written at a time when the Adviser
believes it would be advantageous to do so. Options on futures contracts are
affected by all of those factors which influence foreign exchange rates and
investments generally.
The value of a foreign currency option is dependent upon the value of the
foreign currency and the U.S. dollar, and may have no relationship to the
investment merits of a foreign debt security. Because foreign currency
transactions occurring in the interbank market involve substantially larger
amounts than those that may be involved in the use of foreign currency options,
investors may be disadvantaged by having to deal in an odd lot market (generally
consisting of transactions of less than $1 million) for the underlying foreign
currencies at prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
transactions in the interbank market and thus may not reflect relatively smaller
transactions (less than $1 million) where rates may be less favorable. The
interbank market in foreign currencies is a global, around-the-clock market. To
the extent the U.S. options markets are closed while the markets for the
underlying currencies remain open, significant price and rate movements may take
place in the underlying markets that cannot be reflected in the options markets.
In addition, significant price and rate movements that take place while U.S.
markets are closed will not be reflected in the price of Fund shares until net
asset value is next determined (as of the primary closing time of the New York
Stock Exchange).
Although foreign exchange dealers do not charge a fee for currency
conversion, they do realize a profit based upon the difference (the "spread")
between prices at which they are buying and selling various currencies. Thus, a
dealer may offer to sell a foreign currency to Adjustable Portfolio at one rate,
while offering a lesser rate of exchange should the Fund desire to resell that
currency to the dealer.
A-3
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PIPER INSTITUTIONAL FUNDS INC.
INVESTMENT ADVISER
PIPER CAPITAL MANAGEMENT INCORPORATED
DISTRIBUTOR
PIPER JAFFRAY INC.
CUSTODIAN AND TRANSFER AGENT
INVESTORS FIDUCIARY TRUST COMPANY
INDEPENDENT AUDITORS
KPMG PEAT MARWICK LLP
LEGAL COUNSEL
DORSEY & WHITNEY LLP
Table of Contents
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Introduction................................... 2
Fund Expenses.................................. 4
Financial Highlights........................... 5
Investment Objectives and Policies............. 7
Special Investment Methods..................... 17
Management..................................... 24
SHAREHOLDER GUIDE TO INVESTING
How to Purchase Shares....................... 26
Reducing Your Sales Charge................... 27
Special Purchase Plans....................... 28
How to Redeem Shares......................... 29
Shareholder Services......................... 30
Dividends and Distributions.................. 32
Valuation of Shares............................ 34
Tax Status..................................... 35
Performance Comparisons........................ 35
General Information............................ 36
Appendix A -- Foreign Currency Transactions.... A-1
</TABLE>
INSTITUTIONAL MONEY MARKET FUND
INSTITUTIONAL GOVERNMENT ADJUSTABLE PORTFOLIO
NOVEMBER 1, 1995, AS
SUPPLEMENTED JUNE 24, 1996
PIF-05
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
dated ________, 1996
ADUSTABLE RATE MORTGAGE SECURITIES FUND
A Series of Piper Funds Inc. -- II
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402-3804
(800) 866-7778
__________________________________
Acquisition of the Assets of Institutional Government Adjustable Portfolio
A Series of Piper Institutional Funds Inc.
By and in Exchange for Shares of Adjustable Rate Mortgage Securities Fund
a Series of Piper Funds Inc. -- II
__________________________________
This Statement of Additional Information relates to the proposed Agreement
and Plan of Reorganization providing for the acquisition of substantially all of
the assets and the assumption of all stated liabilities of Institutional
Government Adjustable Portfolio ("Adjustable Portfolio"), a series of Piper
Institutional Funds Inc. ("Piper Institutional") by Adjustable Rate Mortgage
Securities Fund ("Adjustable Rate Fund"), a series of Piper Funds Inc. -- II
("Piper Funds II"), in exchange for shares of common stock of Adjustable Rate
Fund.
This Statement of Additional Information consists of this cover page and
the following documents which are incorporated by reference herein:
1. The Statement of Additional Information dated December 18, 1995 of
Piper Funds II.
2. The Annual Report of Piper Funds II for the fiscal year ended August
31, 1995.
3. The Semiannual Report of Piper Funds II for the six months ended
February 29, 1996.
4. The Statement of Additional Information dated November 1, 1995 of
Piper Institutional.
5. The Annual Report of Piper Institutional for the fiscal year ended
June 30, 1996.
Financial statements required pursuant to Form N-14 are included in the
above documents which have been incorporated by reference herein. Pro forma
financial statements are not required because the net asset value of Adjustable
Portfolio does not exceed ten percent of the net asset value of Adjustable Rate
Fund, measured as of the June 30, 1996.
This Statement of Additional Information is not a prospectus. A
Prospectus/Proxy Statement dated ________, 1996 relating to the above-referenced
transaction accompanies this Statement of Additional Information and should be
read in conjunction herewith.
<PAGE>
PART B
ADJUSTABLE RATE MORTGAGE SECURITIES FUND
A series of Piper Funds Inc.--II
STATEMENT OF ADDITIONAL INFORMATION
December 18, 1995
Table of Contents
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.
<PAGE>
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).
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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 &
<PAGE>
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
November 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.
<PAGE>
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
<PAGE>
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.
Pension or
Retirement Estimated Total
Benefits AnnualBenefits Compensation
Accrued as Part Upon from Fund
Director of Fund Expenses Retirement Complex*
David T. Bennett None None $57,500
Jaye F. Dyer None None $68,250
Karol D. Emmerich None None $68,250
Luella G. Goldberg None None $71,250
George Latimer None None $65,250
* Consists of 26 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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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;
<PAGE>
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]
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
Debt rated "A" has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
Debt rated "BBB" is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Moody's Investors Service, Inc. Moody's ratings for corporate bonds include
the following:
Bonds which are rated "Aaa" are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Bonds which are rated "Aa" are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other
elements present which make the long-term risk appear somewhat larger than in
Aaa securities.
Bonds which are rated "A" possess many favorable attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Bonds which are rated "Baa" are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well.
APPENDIX B
INTEREST RATE FUTURES CONTRACTS AND RELATED OPTIONS
Interest Rate Futures Contracts
The Fund may purchase and sell interest rate futures contracts and options
thereon. An interest rate futures contract creates an obligation on the part
of
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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,
<PAGE>
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.
<PAGE>
ADJUSTABLE RATE
MORTGAGE
SECURITIES
FUND
1995
ANNUAL REPORT
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PRESIDENT'S LETTER.............................1
LETTER TO SHAREHOLDERS.........................2
ADJUSTABLE RATE MORTGAGE SECURITIES
FUND (HISTORICAL INFORMATION OF AMERICAN
ADJUSTABLE RATE TERM TRUST -- 1998)
FINANCIAL STATEMENTS AND NOTES...............5
INVESTMENTS IN SECURITIES...................16
INDEPENDENT AUDITORS' REPORT................17
AMERICAN ADJUSTABLE RATE
TERM TRUSTS -- 1996, 1997 AND 1999
FINANCIAL STATEMENTS AND NOTES..............18
INVESTMENTS IN SECURITIES...................34
INDEPENDENT AUDITORS' REPORT................37
FEDERAL TAX INFORMATION.......................38
SHAREHOLDER UPDATE............................39
</TABLE>
On September 1, the American Adjustable Rate Term Trusts 1996, 1997, 1998 and
1999 merged into the Adjustable Rate Mortgage Securities Fund. In this annual
report for the fiscal year ended August 31, 1995, you will find information
in the financial statements and the investments in securities on all four
term trusts. However, only the American Adjustable Rate Term Trust -- 1998 is
featured in the shareholder letter section because it is considered the
predecessor of the new Adjustable Rate Mortgage Securities Fund for
performance and financial reporting purposes.
ADJUSTABLE RATE MORTGAGE SECURITIES FUND
The Adjustable Rate Mortgage Securities Fund is a diversified, open-end
mutual fund with an investment objective of providing the maximum current
income that is consistent with a low volatility of principal. The fund
invests primarily in adjustable rate mortgage (ARM) securities. It may also
invest in mortgage-backed securities other than ARM securities, U.S.
government securities, asset-backed securities and corporate debt securities.
The fund's Nasdaq symbol is PJARX. As with other mutual funds, there can be
no assurance the fund will achieve its objective.
THIS REPORT IS INTENDED FOR SHAREHOLDERS OF ADJUSTABLE RATE MORTGAGE
SECURITIES FUND, BUT IT MAY ALSO BE USED AS SALES LITERATURE IF PRECEDED OR
ACCOMPANIED BY A PROSPECTUS. THE PROSPECTUS GIVES DETAILS ABOUT THE CHARGES,
INVESTMENT RESULTS AND OPERATING POLICIES OF THE FUND.
<PAGE>
PRESIDENT'S LETTER
[PHOTO]
William H. Ellis
PRESIDENT, PIPER CAPITAL MANAGEMENT
Dear Shareholders:
In our last report to you, we announced that the American Adjustable
Rate Term Trusts 1996, 1997, 1998 and 1999 would not be able to reach
their $10 per share objective at their respective termination dates
without taking unacceptable risks. At that time, we proposed the
merger of the term trusts into an open-end mutual fund in order to
eliminate the market discount at which the shares were trading, allowing
shareholders to access their assets at net asset value. On August 10,
shareholders of the term trusts approved the merger of the four
closed-end funds into a single open-end fund called Adjustable Rate
Mortgage Securities Fund.
At the close of business on September 1, the term trusts merged
into the new fund. You received shares of the fund with a total value
that was equal to the total value of your term trust shares. The
Adjustable Rate Mortgage Securities Fund does not have a set termination
date or termination amount. It's an open-end fund with an objective of
providing the maximum current income that is consistent with a low
volatility of principal.
As discussed in the proxy statement, the fund intends to treat the
merger as a tax-free reorganization for federal tax purposes. No facts
have come to our attention at this time that would change this opinion.
Therefore, you will not be required to report any income, gain or loss as
a result of receiving your Adjustable Rate Mortgage Securities
Fund shares in the merger. Of course, if you redeem your shares, you will
generally recognize a gain or loss at that time.
This annual report covers the fiscal year ended August 31, 1995. You
will find information in the financial statements and the investments in
securities on all four term trusts. However, only the American Adjustable
Rate Term Trust -- 1998 (DDJ) is featured in the shareholder letter
section because it is considered the predecessor of the Adjustable Rate
Mortgage Securities Fund for performance and financial reporting
purposes. In the shareholder letter, portfolio managers Mike
Jansen and Tom McGlinch will give an outlook for the new fund and recap
DDJ's performance.
We believe this merger is in the best interests of shareholders and
want to thank you for approving the proposal. We look forward to serving
your investment needs with the new fund.
Sincerely,
/s/ William H. Ellis
William H. Ellis
President, Piper Capital Management
1
<PAGE>
ADJUSTABLE RATE MORTGAGE SECURITIES FUND
WHAT ARE ADJUSTABLE RATE
MORTGAGE (ARM) SECURITIES?*
An ARM security represents ownership in a pool of adjustable rate mortgage
loans. Payments on the ARM securities come from payments on the adjustable
rate mortgages. When a borrower's mortgage rate resets to a higher (lower)
rate due to changes in a market index, the coupon on the ARM security also
resets to a higher (lower) level. This results in a larger (smaller) interest
payment that is then passed through to investors. The borrower's loan
document specifically states the dates on which the rate will change, the
market index on which the new rate is based, and the margin by which the rate
is set over the index rate. For example, many borrowers have loans indexed to
the one-year Treasury rate plus a margin of 2.75%, which reset once a year.
If, on the reset date, the one-year Treasury rate is 5.50%, the borrower's
new rate for the following 12 months will increase to 8.25%. Likewise, the
rate passed through to the investor will increase to 8.25% minus a mortgage
servicer and guarantee fee. Almost all ARM loans have periodic reset caps and
lifetime caps, which limit how often and how high rates can reset. Smaller
periodic caps and lower lifetime caps work to the advantage of the borrower
and to the disadvantage of the investor when rates are rising. Although ARM
pools are made up of thousands of similarly indexed loans, in any particular
month only a portion of the loans reset to a current market rate, creating
lags in the adjustment process.
* ARM SECURITIES ARE DEFINED MORE BROADLY IN THE FUND'S PROSPECTUS. PLEASE
SEE THE PROSPECTUS FOR A COMPLETE DEFINITION.
** FIGURES SHOWN REFLECT PAST PERFORMANCE AND DO NOT GUARANTEE FUTURE
RESULTS. THE RETURN AND MARKET VALUE OF INVESTMENTS IN THE FUND WILL
FLUCTUATE AND SHARES, WHEN SOLD, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST.
October 16, 1995
Dear Shareholders:
WE WOULD LIKE TO THANK YOU FOR RESPONDING TO THE RECENT PROXY CONCERNING THE
MERGER OF THE AMERICAN ADJUSTABLE RATE TERM TRUSTS. Approving the proposal to
merge the term trusts into the new open-end Adjustable Rate Mortgage
Securities Fund benefited shareholders in a couple of ways. First, investors
who want to liquidate all or part of their investment are now able to do so
at net asset value instead of the discounted market price at which the term
trusts were trading. Also, the new fund is not constrained by the term trust
structure and therefore has greater investment flexibility to buy
longer-maturity securities in an effort to obtain a higher return. The fund
will attempt to maintain an average effective duration of one to four years.
In addition, we feel that the new fund's expense cap of 0.60% of the fund's
average daily net assets through at least August 31, 1996, makes it
attractive.
THE FUND INVESTS PRIMARILY IN ARM SECURITIES IN AN EFFORT TO ACHIEVE ITS
OBJECTIVE OF PROVIDING THE MAXIMUM CURRENT INCOME THAT IS CONSISTENT WITH A
LOW VOLATILITY OF PRINCIPAL. Over an interest rate cycle of higher and lower
rates, ARM securities typically produce returns that are between the yields
on money market securities and the total returns generated by one- to
three-year government securities. (See the sidebar for more detailed
information about ARM securities.)
THE NEW FUND IS CURRENTLY POSITIONED WITH APPROXIMATELY 73% OF ITS ASSETS IN
ARM SECURITIES, 18% IN FIXED RATE SECURITIES AND 7% IN SHORT-TERM CASH
EQUIVALENTS (SEE PIE CHARTS ON PAGE 4). Within the ARM securities portion,
51% are issued by a U.S. government agency and 22% are privately issued. Most
of the ARM securities have coupons which are indexed to the one-year Treasury
yield and which reset on an annual basis. The privately issued ARM securities
are rated AAA or AA by Standard and Poor's. The fund cannot own foreign
securities, structured securities, inverse floaters, interest-only
securities, principal-only securities or Z tranches. Also, the fund cannot
employ the sale-forward (dollar-roll) program and may borrow only for
temporary or emergency purposes.
FOR THE YEAR ENDED AUGUST 31, 1995, AMERICAN ADJUSTABLE RATE TERM TRUST --
1998 HAD A NET ASSET VALUE RETURN OF 5.43%.** During this same time frame,
the fund's market price return was 11.38%,** which is due in part to the
elimination of the discount between market price and net asset value at
conversion. The fund's performance is now being compared to both the Lipper
Adjustable Rate Mortgage Funds Average and the Lehman Brothers Adjustable
Rate Mortgage Index.
THE FUND OUTPERFORMED THE LIPPER AVERAGE RETURN OF 1.25% FOR THE ONE-YEAR
PERIOD ENDED AUGUST 31, 1995. This average consists of 70 funds which invest
at least 65% of their assets in ARM securities as
2
<PAGE>
ADJUSTABLE RATE MORTGAGE SECURITIES FUND
categorized by Lipper Analytical Services. The fund's emphasis on
high-quality securities helped it outperform the average of other funds in
its Lipper category. Some funds in the category have experienced poor returns
due to losses suffered in unrated, credit-sensitive securities over the past
year.
THE FUND UNDERPERFORMED THE LEHMAN BROTHERS INDEX, AN UNMANAGED INDEX MADE UP
SOLELY OF U.S. GOVERNMENT AGENCY ARM SECURITIES, WHICH RETURNED 8.24% FOR THE
SAME ONE-YEAR PERIOD. The Lehman Brothers index included a large portion of
Government National Mortgage Association (GNMA) and Cost of Funds Index
(COFI) ARM securities which performed strongly because their prices are more
sensitive to falling interest rates. The fund was positioned in
higher-coupon, Treasury indexed securities that have returns which are more
sensitive to income rather than price appreciation.
SINCE THE MERGER, APPROXIMATELY 50% OF SHAREHOLDERS HAVE TAKEN THE
OPPORTUNITY TO REDEEM THEIR SHARES AT NET ASSET VALUE. We anticipated this
level of redemptions, in part because of the indications we received from
shareholders on their proxy ballots. To prepare for these redemptions, we
accumulated a 20% position in short-term securities. We also sold a number of
privately issued and U.S. government agency ARM securities to meet cashflow
needs. Redemption requests were fulfilled without disruption to the fund's
net asset value or to the marketplace in general.
THE LARGE SHORT-TERM POSITION, IN COMBINATION WITH HIGH PREPAYMENT LEVELS IN
ADJUSTABLE RATE MORTGAGES, CONTRIBUTED TO A SEPTEMBER DIVIDEND OF $0.034.
Borrowers are prepaying adjustable rate mortgages at a faster speed recently
due to the lower rates available on fixed rate mortgages. While short-term
interest rates have dropped only slightly this year, long-term rates have
fallen sharply. Mortgage rates started the year near 9.50% and are now near
7.50%. At the same time, many adjustable rate mortgage borrowers are seeing
their rates rise from 6.00% to 8.00% because of last year's rising rate
environment and are choosing to fix their payments at lower rates. Since many
of the ARM securities held in the fund were purchased at premium prices, the
faster prepayments are causing the fund to amortize these premiums more
quickly which reduces the fund's current income level. Our recent sales of
ARM securities have been made with the objective of minimizing the impact of
prepayments on the fund's income. In addition, we have swapped higher coupon,
higher cost ARM securities for lower coupon, lower cost ARM securities which
are less likely to be prepaid.
OVER TIME, WE BELIEVE THESE ACTIONS, IN ADDITION TO A MUCH SMALLER SHORT-TERM
POSITION IN THE FUND, WILL PROVIDE A HIGHER AND MORE PREDICTABLE STREAM OF
DIVIDEND INCOME TO SHAREHOLDERS. The dividend policy for the fund is to
distribute to shareholders substantially all of the
[PHOTO]
flipped FPO 75%
[PHOTO]
FPO 62%
Thomas S. McGlinch, CFA (above)
SHARES PRIMARY RESPONSIBILITY FOR THE MANAGEMENT OF THE
ADJUSTABLE RATE MORTGAGE SECURITIES FUND. HE HAS 14 YEARS OF
INVESTMENT EXPERIENCE.
Mike Jansen, (below)
SHARES PRIMARY RESPONSIBILITY FOR THE MANAGEMENT OF THE ADJUSTABLE RATE
MORTGAGE SECURITIES FUND. HE HAS 14 YEARS OF INVESTMENT EXPERIENCE.
3
<PAGE>
VALUE OF $10,000 INVESTED
[GRAPHIC]
If you had invested $10,000 in January 1992 and held your investment through
August 31, 1995, reinvesting all distributions, your investment would have
grown to $11,281 (based on historical net asset value performance of American
Adjustable Rate Term Trust--1998, the fund's predecessor for performance and
financial reporting purposes). Fund results reflect the Adjustable Rate
Mortgage Securities Fund's maximum 1.5% sales charge, as if it was applied
since the fund's inception. In comparing the fund to the Lehman Brothers
index and the Lipper average, keep in mind that the fund's performance
reflects the sales charge, while no such charges are reflected in the index
or the average. Past performance does not guarantee future results.
AVERAGE ANNUAL TOTAL RETURNS
(THROUGH 8/31/95; INCLUDES 1.5% SALES CHARGE)
<TABLE>
<S> <C>
One-Year.........................3.85%
Since Inception (1/30/92)........3.42%
</TABLE>
investment income earned during any period. Therefore, we will not
attempt to stabilize monthly distributions by retaining income in a
dividend reserve.
CURRENTLY, THE NARROW SPREAD BETWEEN SHORT- AND LONG-TERM RATES IMPLIES THAT
THE MARKET IS ANTICIPATING THE FEDERAL RESERVE WILL EASE MONETARY POLICY.
Although employment is growing at a lower rate than in 1994, we see the
rebound in important economic sectors such as housing as a reason the Federal
Reserve will move slowly if they choose to ease further. It is likely the
Federal Reserve is comfortable with the rate of economic growth and inflation
anticipated for the remainder of 1995 and will remain fairly neutral with its
monetary policy. If the Federal Reserve fails to ease, the market is
susceptible to higher rates. Nonetheless, we would expect any changes to be
moderate and have positioned the fund to perform best in a market environment
of low interest rate volatility.
Thank you for your investment in the Adjustable Rate Mortgage Securities
Fund. We consider it a privilege to manage your money and look forward to
serving your investment needs with the new fund.
Sincerely,
/s/ Mike Jansen /s/ Tom McGlinch
Mike Jansen Tom McGlinch
PORTFOLIO MANAGER PORTFOLIO MANAGER
PORTFOLIO COMPOSITION BEFORE MERGER
AUGUST 31, 1995
American Adjustable Rate Term Trust--1998
[PIE CHART]
PORTFOLIO COMPOSITION AFTER MERGER
SEPTEMBER 30, 1995
Adjustable Rate Mortgage Securities Fund
[PIE CHART]
INVESTMENT CATEGORIES REFLECT PERCENTAGE OF TOTAL ASSETS.
4
<PAGE>
- - - --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1995
<TABLE>
<CAPTION>
Adjustable Rate
Mortgage
Securities
Fund**
----------------
<S> <C>
ASSETS:
Investments in securities at market value*
(including a repurchase agreement of $70,714,000) (note
2) ................................................... $ 422,173,937
Cash in bank on demand deposit ........................... 101,944
Receivable for investment securities sold ................ 9,015,608
Accrued interest receivable .............................. 2,048,827
Mortgage security principal paydowns receivable .......... 1,249,401
----------------
Total assets ......................................... 434,589,717
----------------
LIABILITIES:
Payable for investment securities purchased on a
when-issued basis (note 2) ............................. 25,109,375
Accrued investment management fee ........................ 121,952
Accrued administrative fee ............................... 52,265
----------------
Total liabilities .................................... 25,283,592
----------------
Net assets applicable to outstanding capital stock ....... $ 409,306,125
----------------
----------------
REPRESENTED BY:
Capital stock - authorized 1 billion shares of $0.01 par
value; outstanding, 47,066,117 shares ................ $ 470,661
Additional paid-in capital ............................... 460,104,831
Accumulated net realized loss on investments ............. (47,094,867)
Unrealized depreciation of investments ................... (4,174,500)
----------------
Total - representing net assets applicable to
outstanding capital stock ........................ $ 409,306,125
----------------
----------------
Net asset value per share of outstanding capital stock ... $ 8.70
----------------
----------------
* Investments in securities at identified cost ........... $ 426,348,437
----------------
----------------
** FORMERLY AMERICAN ADJUSTABLE RATE TERM TRUST 1998
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
5
<PAGE>
- - - --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED AUGUST 31, 1995
<TABLE>
<CAPTION>
Adjustable Rate
Mortgage
Securities Fund*
----------------
<S> <C>
INCOME:
Interest (net of interest expense of $3,384,232) ....... $ 25,824,364
Fee income (note 2) ...................................... 300,962
----------------
Total investment income .............................. 26,125,326
----------------
EXPENSES (NOTE 3):
Investment management fee ................................ 1,462,719
Administrative fee ....................................... 626,880
Custodian, accounting and transfer agent fees ............ 195,314
Reports to shareholders .................................. 181,868
Directors' fees .......................................... 24,161
Audit and legal fees ..................................... 68,994
Other expenses ........................................... 65,964
----------------
Total expenses ....................................... 2,625,900
----------------
Net investment income ................................ 23,499,426
----------------
NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized loss on investments (note 4) ................ (10,259,308)
Net realized loss on closed put option contracts (note
4) ..................................................... (2,113,000)
Net realized loss on closed interest rate swap
transactions ........................................... (8,598,317)
Net realized gain on closed futures contracts ............ 209,151
----------------
Net realized loss on investments ....................... (20,761,474)
Net change in unrealized appreciation or depreciation of
investments ............................................ 17,558,315
----------------
Net loss on investments ................................ (3,203,159)
----------------
Net increase in net assets resulting from
operations ....................................... $ 20,296,267
----------------
----------------
* FORMERLY AMERICAN ADJUSTABLE RATE TERM TRUST 1998
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
- - - --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED AUGUST 31, 1995
<TABLE>
<CAPTION>
Adjustable Rate
Mortgage
Securities Fund*
----------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest and fee income ................................ $ 26,125,326
Expenses ................................................. (2,625,900)
----------------
Net investment income ................................ 23,499,426
----------------
Adjustments to reconcile net investment income to cash
provided by operating activities:
Change in accrued interest and mortgage security
principal paydowns receivable ........................ 929,586
Net amortization of bond discount and premium .......... (3,285,176)
Change in accrued fees and expenses .................... (350,656)
----------------
Total adjustments .................................... (2,706,246)
----------------
Net cash provided by operating activities ............ 20,793,180
----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments ....................... 391,566,255
Purchases of investments ................................. (178,008,758)
Net sales of short-term securities ....................... 31,512,303
Cash paid for interest rate swap transactions ............ (10,301,092)
Net variation margin receipts for futures contracts ...... 209,151
Receipts from closed put option contracts ................ 500,500
----------------
Net cash provided by investing activities ............ 235,478,359
----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Tender of fund shares (note 7) ........................... (79,726,515)
Net payments for reverse repurchase agreements ........... (145,000,000)
Retirement of fund shares (note 6) ....................... (3,756,297)
Distributions paid to shareholders ....................... (27,746,007)
----------------
Net cash used by financing activities ................ (256,228,819)
----------------
Net increase in cash ..................................... 42,720
Cash at beginning of year ................................ 59,224
----------------
Cash at end of year ................................ $ 101,944
----------------
----------------
Supplemental disclosure of cash flow information:
Cash paid for interest on reverse repurchase
agreements ........................................... $ 3,695,590
----------------
----------------
* FORMERLY AMERICAN ADJUSTABLE RATE TERM TRUST 1998
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
- - - --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
ADJUSTABLE RATE MORTGAGE SECURITIES FUND*
<TABLE>
<CAPTION>
Year Ended Year Ended
8/31/95 8/31/94
---------------- ----------------
<S> <C> <C>
OPERATIONS:
Net investment income .................................. $ 23,499,426 33,892,114
Net realized loss on investments ......................... (20,761,474) (25,012,875)
Net change in unrealized appreciation or depreciation of
investments ............................................ 17,558,315 (25,676,685)
---------------- ----------------
Net increase (decrease) in net assets resulting from
operations ........................................... 20,296,267 (16,797,446)
---------------- ----------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ............................... (27,746,007) (31,740,989)
---------------- ----------------
CAPITAL SHARE TRANSACTIONS:
Payments for tender of 9,135,819 shares (note 7) ......... (79,726,515) --
Payments for retirement of 488,000 and 335,000 shares,
respectively (note 6) .................................. (3,579,372) (2,768,772)
---------------- ----------------
Decrease in net assets from capital share
transactions ......................................... (83,305,887) (2,768,772)
---------------- ----------------
Total decrease in net assets ......................... (90,755,627) (51,307,207)
Net assets at beginning of year ............................ 500,061,752 551,368,959
---------------- ----------------
Net assets at end of year ................................ $ 409,306,125 500,061,752
---------------- ----------------
---------------- ----------------
Undistributed net investment income ...................... $ -- 7,060,244
---------------- ----------------
---------------- ----------------
* FORMERLY AMERICAN ADJUSTABLE RATE TERM TRUST 1998
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
- - - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION
These financial statements present financial
information of American Adjustable Rate Term
Trust 1998 (DDJ). For financial reporting
purposes, DDJ is considered the surviving
entity of the merger of American Adjustable
Rate Term Trust 1996 (BDJ), American
Adjustable Rate Term Trust 1997 (CDJ),
American Adjustable Rate Term Trust 1998 (DDJ)
and American Adjustable Rate Term Trust 1999
(EDJ) into Piper Funds Inc. - II Adjustable
Rate Mortgage Securities Fund, which was
effective September 1, 1995. As such, only
historical financial information of DDJ is
relevant with respect to the future financial
reporting of Piper Funds Inc. - II Adjustable
Rate Mortgage Securities Fund.
Piper Funds Inc. - II was incorporated on
April 10, 1995 and is registered under the
Investment Company Act of 1940 (as amended) as
a single, open-end management investment
company. The company currently includes only
the Adjustable Rate Mortgage Securities Fund,
which is classified as a diversified fund. The
company's articles of incorporation permit the
board of directors to create additional funds
in the future.
(2) SUMMARY OF
SIGNIFICANT
ACCOUNTING
POLICIES
INVESTMENTS IN SECURITIES
The values of fixed income securities are
determined using pricing services or prices
quoted by independent brokers. Exchange-listed
options are valued at the last sale price and
open financial futures contracts are valued at
the last settlement price. When market
quotations are not readily available,
securities are valued at fair value according
to methods selected in good faith by the board
of directors. Short-term securities with
maturities of 60 days or less are valued at
amortized cost which approximates market
value.
Securities transactions are accounted for on
the date the securities are purchased or sold.
Realized gains and losses are calculated on
the identified-cost basis. Interest income,
including amortization of bond discount and
premium computed on a level-yield basis, is
accrued daily.
OPTION TRANSACTIONS
For hedging purposes, DDJ could buy put and
call options, write covered call options on
portfolio securities, write cash-secured puts,
and write call options that are not covered
for cross-hedging purposes. DDJ also could
write over-the-counter options where the
completion of the obligation is dependent upon
the credit standing of another party.
Effective September 1, 1995, Adjustable Rate
Mortgage Securities Fund may only purchase and
write put and call options which are
exchange-traded and cannot write call options
that are not covered. The risk in writing a
call option is that the fund gives up the
opportunity for profit if the market price of
the security increases. The risk in writing a
put option is that the fund may incur a loss
if the market price of the security decreases
and the option is exercised. The risk in
buying an option is that the fund pays a
premium whether or not the option is
exercised. The fund also has the additional
risk of not being able to enter into a closing
transaction if a liquid secondary market does
not exist.
Option contracts are valued daily, and
unrealized appreciation or depreciation is
recorded. The fund will realize a gain or loss
upon expiration or closing of the option
transaction. When an option is exercised, the
proceeds on sales for a written call option,
the purchase cost for a written put option, or
the cost of a security for a purchased put or
call option is adjusted by the amount of
premium received or paid.
9
<PAGE>
- - - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
FUTURES TRANSACTIONS
In order to gain exposure to or protect
against changes in the market, the fund may
buy and sell interest rate futures contracts
and related options. Risks of entering into
futures contracts and related options include
the possibility of an illiquid market and that
a change in the value of the contract or
option may not correlate with changes in the
value of the underlying securities.
Upon entering into a futures contract, the
fund is required to deposit either cash or
securities in an amount (initial margin) equal
to a certain percentage of the contract value.
Subsequent payments (variation margin) are
made or received by the fund each day. The
variation margin payments are equal to the
daily changes in the contract value and are
recorded as unrealized gains and losses. The
fund recognizes the realized gain or loss when
the contract is closed or expires.
INTEREST RATE TRANSACTIONS
To preserve a return or spread on a particular
investment or portion of its portfolio or for
other non-speculative purposes, DDJ could
enter into interest rate swaps and could
purchase or sell interest rate caps and
floors. Effective, September 1, 1995,
Adjustable Rate Mortgage Securities Fund may
purchase and sell interest rate caps and
floors but cannot enter into interest rate
swaps. Interest rate swaps involve the
exchange of commitments to pay or receive
interest, e.g., an exchange of floating rate
payments for fixed rate payments. The purchase
of an interest rate cap entitles the
purchaser, to the extent that a specified
index exceeds a predetermined interest rate,
to receive payments of interest on a
contractually based notional principal amount
from the party selling the interest rate cap.
The purchase of an interest rate floor
entitles the purchaser, to the extent that a
specified index falls below a predetermined
interest rate, to receive payments of interest
on a contractually based notional principal
amount from the party selling the interest
rate floor.
If forecasts of interest rates and other
market factors are incorrect, investment
performance will diminish compared to what
performance would have been if these
investment techniques were not used. Even if
the forecasts are correct, there is risk that
the positions may correlate imperfectly with
the asset or liability being hedged. Other
risks of entering into these transactions are
that a liquid secondary market may not always
exist, or that another party to a transaction
may not perform.
For interest rate swaps, DDJ accrued weekly,
as an increase or decrease to interest income,
the net amount due or owed by the fund.
Interest rate swap, cap and floor valuations
are based on prices quoted by independent
brokers. These valuations represent the net
present value of all future cash settlement
amounts based on implied forward interest
rates.
SECURITIES PURCHASED ON A WHEN-ISSUED BASIS
Delivery and payment for securities that have
been purchased by the fund on a
forward-commitment or when-issued basis can
take place one month or more after the
transaction date. During this period, such
securities do not earn interest, are subject
to market fluctuations and may increase or
decrease in value prior to their delivery. The
fund maintains, in a segregated account with
its custodian, cash or securities with a
market value equal to the amount of its
purchase commitments. The purchase of
securities on a when-issued or
forward-commitment basis may increase the
volatility of the fund's NAV to the extent the
fund makes such purchases while remaining
substantially fully invested. As of August 31,
1995, the fund had outstanding when-issued or
forward commitments of $25,109,375.
10
<PAGE>
- - - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Consistent with its ability to purchase
securities on a when-issued or forward-
commitment basis, DDJ entered into mortgage
"dollar rolls" in which the fund sold
securities for delivery in the current month
and simultaneously contracted with the same
counterparty to repurchase similar (same type,
coupon and maturity) but not identical
securities. As an inducement to "roll over"
its purchase commitments, the fund received
negotiated fees. For the year ended August 31,
1995, such fees amounted to $300,962.
Effective September 1, 1995, Adjustable Rate
Mortgage Securities Fund will not enter into
mortgage "dollar rolls" but may purchase
securities on a when-issued basis with the
intention of acquiring such securities for its
portfolio.
FEDERAL TAXES
The fund's policy is to comply with the
requirements of the Internal Revenue Code
applicable to regulated investment companies
and not be subject to federal income tax.
Therefore, no income tax provision is
required.
Net investment income and net realized gains
(losses) may differ for financial statement
and tax purposes primarily because of the
recognition of certain foreign currency gains
(losses) as ordinary income for tax purposes,
and losses deferred due to "wash sale" and
"straddle" transactions. The character of
distributions made during the year from net
investment income or net realized gains may
differ from their ultimate characterization
for federal income tax purposes. Also, due to
the timing of dividend distributions, the
fiscal year in which amounts are distributed
may differ from the year that the income or
realized gains (losses) were recorded by the
fund. The fund will elect to utilize
equalization debits, by which a portion of the
fund's payments for tendered shares which
occurred during the year ended August 31,
1995, will reduce undistributed net investment
income for tax purposes.
On the statements of assets and liabilities,
as a result of permanent book-to-tax
differences, a reclassification adjustment has
been made to decrease undistributed net
investment income by $2,813,663, decrease
accumulated net realized losses by $2,690,897
and increase additional paid-in capital by
$122,766.
DISTRIBUTIONS
DDJ paid monthly distributions from net
investment income. Realized capital gains, if
any, were distributed on an annual basis.
These distributions were recorded as of the
close of business on the ex-dividend date.
Such distributions were payable in cash or,
pursuant to the fund's dividend reinvestment
plan, reinvested in additional shares of the
fund's capital stock.
Effective September 1, 1995, Adjustable Rate
Mortgage Securities Fund's distributions to
shareholders from net investment income will
be declared daily and paid monthly in cash or
reinvested in additional shares. Distributions
from net realized gains, if any, will be made
on at least an annual basis.
REPURCHASE AGREEMENTS
For repurchase agreements entered into with
certain broker-dealers, the fund, along with
other affiliated registered investment
companies may transfer uninvested cash
balances into a joint trading account, the
daily aggregate of which is invested in
repurchase agreements secured by U.S.
government and agency obligations. Securities
pledged as collateral for all individual and
joint repurchase agreements are held by the
fund's custodian bank until maturity of the
repurchase agreements. Provisions for all
agreements ensure the daily market value of
the collateral is in excess of the repurchase
amount in the event of default.
11
<PAGE>
- - - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(3) EXPENSES
DDJ had entered into the following agreements
with Piper Capital Management Incorporated
(the adviser and administrator):
The investment advisory agreement provided the
adviser with a monthly investment management
fee based on fund's average weekly net assets
computed at the per-annum rate of 0.35%. For
its fee, the adviser provided investment
advice and, in general, conducted the
management and investment activity of the
fund.
The administration agreement provided the
administrator with a monthly fee in an amount
equal to an annualized rate of 0.15% of the
fund's average weekly net assets. For its fee,
the administrator provided certain reporting,
regulatory and record-keeping services for the
fund.
Effective September 1, 1995, Adjustable Rate
Mortgage Securities Fund is subject to an
investment management agreement with Piper
Capital Management Incorporated (Piper
Capital) under which Piper Capital manages the
fund's assets and furnishes related office
facilities, equipment, research and personnel.
The agreement requires the fund to pay Piper
Capital a monthly fee based on its average
daily net assets. The fee is equal to an
annual rate of 0.35% of the first $500 million
in net assets and 0.30% of net assets in
excess of $500 million.
Effective September 1, 1995, Adjustable Rate
Mortgage Securities Fund will pay Piper
Jaffray Inc. (Piper Jaffray) a monthly fee for
expenses incurred in the distribution and
promotion of fund shares. The monthly fee is
limited to a maximum of 1/12th of 0.15% of the
fund's average daily net assets and is payable
as a servicing fee.
In addition to these fees the fund is
responsible for paying most other operating
expenses including outside directors' fees and
expenses, custodian fees, registration fees,
printing and shareholder reports, transfer
agent fees and expenses, legal, auditing and
accounting services, insurance, interest,
taxes and other miscellaneous expenses.
(4) SECURITIES
TRANSACTIONS
Cost of purchases and proceeds from sales of
securities (other than temporary investments
in short-term securities) for the year ended
August 31, 1995, were $162,675,184 and
$400,581,863, respectively.
In order to hedge the value of adjustable rate
mortgage securities under certain interest
rate scenarios, the fund had purchased
four-year U.S. Treasury put option contracts.
As a result of the fund's changing investment
strategies due to the impending merger, these
options were closed in fiscal 1995. The
resulting realized losses are disclosed in the
Statement of Operations.
During the year ended August 31, 1995, the
fund paid Piper Jaffray Inc., an affiliated
broker, brokerage commissions of $1,700.
(5) CAPITAL LOSS
CARRYOVER
For federal income tax purposes, the fund had
capital loss carryovers of $47,094,867 at
August 31, 1995. If these loss carryovers are
not offset by subsequent capital gains, they
will expire at various times during 1999
through 2002. It is unlikely the board of
directors will authorize a distribution of any
net realized capital gains until the available
capital loss carryovers have been offset or
expire.
12
<PAGE>
- - - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(6) RETIREMENT OF FUND
SHARES
The board of directors of DDJ approved a plan
to repurchase shares of the fund in the open
market and retire those shares. Repurchases
were only made when the previous day's closing
market price was at a discount from net asset
value. Daily repurchases were limited to 25%
of the previous four weeks average daily
trading volume on the New York Stock Exchange.
Under the plan, cumulative repurchases were
limited to 3% of the total shares originally
issued. The plan was last reviewed and
reapproved by the board of directors on August
18, 1995. Pursuant to the plan, the fund
repurchased and retired 823,000 shares (1.44%
of originally issued shares) as of August 31,
1995.
(7) TENDER OFFER OF
FUND SHARES
On August 22, 1994, shareholders of DDJ
approved a fundamental policy that allowed
shareholders to periodically tender their
shares back to the fund at net asset value.
A tender offer to repurchase up to 25% of the
fund's outstanding shares was mailed to
shareholders on September 6, 1994. The
deadline for participating in the offer was
October 3, 1994. The repurchase price was
determined on October 10, 1994, at the close
of the New York Stock Exchange (4 p.m. Eastern
Time). Proceeds of the tender offer were paid
to shareholders on October 17, 1994. The total
proceeds (including tender fees) paid by the
fund as well as the number and percentage of
shares tendered are as follows:
<TABLE>
<CAPTION>
Percentage Shares Proceeds
Tendered Tendered Paid
--------------- --------- ------------
<S> <C> <C> <C>
16% 9,135,819 $ 79,726,515
</TABLE>
(8) PENDING LITIGATION
On October 20, 1994, a complaint was filed by
Herman D. Gordon in the U.S. District Court
for the District of Minnesota against DDJ,
EDJ, Piper Jaffray Companies Inc. (Piper
Companies), Piper Capital Management
Incorporated (Piper Capital), Piper Jaffray
Inc. (Piper Jaffray) and certain associated
individuals. A second complaint was filed on
April 14, 1995, in the same court by Frank
Donio, I.R.A., and other plaintiffs against
BDJ, CDJ, DDJ and EDJ, Piper Companies, Piper
Capital, Piper Jaffray and certain associated
individuals. Plaintiffs in both actions filed
a Consolidated Amended Class Action Complaint
on May 23, 1995, alleging violations of
certain federal and state securities laws.
Piper Companies and Piper Capital have agreed
to indemnify Piper Funds II Adjustable Rate
Mortgage Securities Fund (as the successor by
merger to BDJ, CDJ, DDJ and EDJ) against any
expenses or losses incurred in connection with
such complaint.
13
<PAGE>
- - - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(9) SUBSEQUENT EVENT--
MERGER
At the close of business on September 1, 1995,
BDJ, CDJ, DDJ and EDJ merged into Piper Funds
Inc. - II Adjustable Rate Mortgage Securities
Fund, a diversified, open end management
investment company. DDJ is considered the
surviving entity for financial reporting
purposes.
The following table presents the results of
operations of DDJ for the period from August
31, 1995 to September 1, 1995 and the
subsequent merger of net assets of BDJ, CDJ,
DDJ and EDJ into Adjustable Rate Mortgage
Securities Fund.
<TABLE>
<S> <C>
Net assets of DDJ (surviving entity for financial
reporting purposes) on 8/31/95 ................ $ 409,306,125
Results of operations on 9/1/95:
Net investment income........................... 57,012
Net realized gain (loss) on investments......... (119,150)
Net change in appreciation or depreciation of
investments.................................... 771,219
--------------
Net increase in net assets resulting from
operations..................................... 709,081
--------------
Capital share transactions:
Redemption of 1,000 shares of DDJ for
dissenters' rights............................. (8,710)
--------------
Net assets of DDJ to be merged into Adjustable
Rate Mortgage
Securities Fund................................ 410,006,496
Merger of BDJ, CDJ and EDJ into Adjustable Rate
Mortgage
Securities Fund.................................. 801,742,686
--------------
Net assets of Adjustable Rate Mortgage Securities
Fund on 9/1/95 ................................ $ 1,211,749,182
--------------
--------------
</TABLE>
14
<PAGE>
- - - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(10) FINANCIAL
HIGHLIGHTS
Per-share data for a share of capital stock
outstanding throughout each period and
selected information for each period are as
follows:
<TABLE>
<CAPTION>
Period from
Year Year Ended Year Ended 1/30/92* to
Ended 8/31/95 8/31/94 8/31/93 8/31/92
------------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period ........... $ 8.82 9.67 9.74 9.58
------ ---------- ---------- -----------
Operations:
Net investment income .......................... 0.51 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 investment 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 1998.
** AMERICAN ADJUSTABLE RATE TERM TRUST 1998 WAS A CLOSED-END INVESTMENT
MANAGEMENT COMPANY AND WAS PERMITTED TO ENTER INTO BORROWINGS FOR OTHER
THAN TEMPORARY OR EMERGENCY PURPOSES. ADJUSTABLE RATE MORTGAGE SECURITIES
FUND MAY BORROW ONLY FOR TEMPORARY OR EMERGENCY PURPOSES.
+ TOTAL INVESTMENT RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE, ASSUMES
REINVESTMENT OF DISTRIBUTIONS AT NET ASSET VALUE AND DOES NOT REFLECT A
SALES CHARGE.
++ ADJUSTED TO AN ANNUAL BASIS.
(11) QUARTERLY DATA
(UNAUDITED)
<TABLE>
<CAPTION>
Net Realized Net Increase
Total and Unrealized (Decrease) in Net Distributions Quarter End
Investment Net Investment Gains (Losses) Assets Resulting From Net Investment Net Asset
Quarter Ended Income Income on Investments from Operations Income Value
- - - ------------------ ---------- ----------------- ------------------- ------------------ ------------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per Per Per Per
Amount Share Amount Share Amount Share Amount Share
---------- ----- ----------- ----- ---------- ----- ----------- -----
11/30/94 $ 7,489,262 6,794,744 0.14 (13,697,529) (0.27) (6,902,785) (0.13) (6,183,665) (0.13) 8.56
2/28/95 5,803,517 5,246,655 0.11 5,743,189 0.13 10,989,844 0.24 (6,027,339) (0.13) 8.67
5/31/95 6,436,106 5,797,320 0.13 4,308,420 0.09 10,105,740 0.22 (6,004,113) (0.13) 8.76
8/31/95 6,396,441 5,660,707 0.13 442,761 -- 6,103,468 0.13 (9,530,890) (0.19) 8.70
---------- ---------- ----- ----------- ----- ---------- ----- ----------- -----
$ 26,125,326 23,499,426 0.51 (3,203,159) (0.05) 20,296,267 0.46 (27,746,007) (0.58)
---------- ---------- ----- ----------- ----- ---------- ----- ----------- -----
---------- ---------- ----- ----------- ----- ---------- ----- ----------- -----
</TABLE>
15
<PAGE>
- - - --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
ADJUSTABLE RATE MORTGAGE SECURITIES FUND*
AUGUST 31, 1995
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- - - --------------------------------------------------------- ---------- -----------
<S> <C> <C>
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS)
U.S. GOVERNMENT SECURITIES (10.2%):
U.S. Treasury Note, 4.75%, 2/15/97 ................. $ 27,000,000 26,613,359
U.S. Treasury Note, 6.38%, 6/30/97 ................... 15,000,000 15,150,000
-----------
Total U.S. Government Securities
(cost: $41,878,373) ................................ 41,763,359
-----------
MORTGAGE-BACKED SECURITIES (75.7%):
U.S. AGENCY ADJUSTABLE RATE MORTGAGES (42.6%):
7.45%, FHLMC, 2/1/22 ................................. 10,785,510 10,932,733
7.81%, FHLMC, 2/1/22 ................................. 15,722,930 16,198,549
7.52%, FHLMC, 8/1/23 ................................. 6,351,483 6,530,849
7.13%, FHLMC, 11/1/16 ................................ 3,475,532 3,526,414
8.00%, FHLMC, 5/1/17 ................................. 3,581,365 3,639,956
7.74%, FHLMC, 1/1/21 ................................. 5,837,805 5,945,688
6.13%, FHLMC, 10/1/23 ................................ 2,929,008 2,974,319
7.54%, FNMA, 9/1/17 .................................. 3,837,284 3,908,043
7.29%, FNMA, 5/1/18 .................................. 5,921,419 6,029,485
7.23%, FNMA, 7/1/17 .................................. 6,204,118 6,320,011
7.80%, FNMA, 7/1/19 .................................. 2,756,865 2,832,320
7.53%, FNMA, 11/1/20 ................................. 5,057,917 5,073,698
7.23%, FNMA, 11/1/17 ................................. 9,818,814 9,931,141
7.89%, FNMA, 7/1/19 .................................. 3,970,383 4,083,658
7.41%, FNMA, 11/1/21 ................................. 7,031,651 7,165,674
7.31%, FNMA, 10/1/20 ................................. 3,445,723 3,355,272
7.01%, FNMA, 12/1/23 ................................. 1,528,113 1,567,935
6.09%, FNMA, 2/1/24 .................................. 3,863,831 3,945,512
6.00%, GNMA II, 7/20/22 .............................. 8,224,187 8,303,139
6.50%, GNMA II, 7/20/22 .............................. 7,882,746 7,985,142
7.00%, GNMA II, 5/20/22 .............................. 3,033,839 3,071,246
7.00%, GNMA II, 6/20/22 .............................. 8,463,131 8,582,969
7.38%, GNMA II, 6/20/23 .............................. 8,072,570 8,205,121
7.00%, GNMA II, 8/20/23 .............................. 8,920,228 9,050,464
6.00%, GNMA II, 9/1/25 ............................... 25,000,000(b) 25,015,750
-----------
174,175,088
-----------
COLLATERALIZED MORTGAGE OBLIGATIONS AND
OTHER MORTGAGE-BACKED SECURITIES (C) (33.1%):
U.S. AGENCY FIXED RATE (0.5%):
8.13%, FNMA, Series 1991-66, Class E, 4/25/18 ........ 2,125,025 2,119,266
-----------
U.S. AGENCY FLOATING RATE (11.1%):
6.44%, FHLMC, Series 1377, Class F, LIBOR, 9/15/07 ... 5,855,599 5,835,222
6.44%, FHLMC, Series 1401, Class K, LIBOR, 9/15/20 ... 2,520,900 2,530,706
6.34%, FHLMC, Series 1508, Class J, LIBOR, 9/15/19 ... 3,025,788 3,025,577
6.44%, FHLMC, Series 1603, Class G, LIBOR, 4/15/21 ... 1,670,525 1,677,424
6.29%, FHLMC, Series 1724, Class F, LIBOR, 5/15/01 ... 12,499,787 12,498,662
6.50%, FHLMC, Series 29, Class FA, LIBOR, 3/25/23 .... 7,000,000 7,025,760
6.57%, FNMA, Series 1992-144, Class FA, LIBOR,
9/25/07 ............................................. 2,153,548 2,162,937
6.42%, FNMA, Series 1994-87, Class F, LIBOR,
3/25/09 ............................................. 10,478,681 10,477,529
-----------
45,233,817
-----------
</TABLE>
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- - - --------------------------------------------------------- ---------- -----------
<S> <C> <C>
PRIVATE FLOATING RATE (21.5%):
7.79%, Donaldson, Lufkin and Jenrette, Series
1992-MF3, Class A3, 5/25/22 ....................... $ 5,000,000 5,078,125
7.94%, Merrill Lynch Mortgage Investor, Series 1988-V,
1/25/19 ............................................. 986,446 971,649
6.73%, Merrill Lynch Mortgage Investors, Series
1992-C, Class A-2, 6/15/17 .......................... 25,000,000 25,136,700
7.69%, Residential Funding Corporation, Series
1992-S25, Class A, 3/25/22 .......................... 11,294,780 11,402,708
7.81%, Residential Funding Corporation, Series
1993-S8, Class A, 2/25/23 ........................... 7,469,956 7,620,888
7.55%, Resolution Trust Corporation, Series 1992-4,
Class B2, 7/25/28 ................................... 10,000,426 9,553,532
7.73%, Resolution Trust Corporation, Series 1992-6,
Class B3, 1/25/26 ................................... 13,342,997 13,342,997
7.15%, Sears Mortgage Securities, Series 1991-K, Class
A1, 9/25/21 ......................................... 15,175,623 15,061,808
-----------
88,168,407
-----------
Total Mortgage-Backed Securities
(cost: $313,756,064) .............................. 309,696,578
-----------
SHORT-TERM SECURITIES (17.3%):
Repurchase agreement with Goldman Sachs in a joint
trading account collateralized by U.S. government
agency securities, acquired on 8/31/95, accrued
interest at repurchase date of $11,275, 5.82%, 9/1/95
(cost: $70,714,000) ................................. 70,714,000 70,714,000
-----------
Total Investments in Securities
(cost: $426,348,437) (d) ......................... $ 422,173,937
-----------
-----------
</TABLE>
NOTES TO INVESTMENTS IN SECURITIES:
(A) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO
THE FINANCIAL STATEMENTS.
(B) ON AUGUST 31, 1995, THE TOTAL COST OF INVESTMENTS PURCHASED ON A
WHEN-ISSUED BASIS WAS $25,109,375.
(C) DESCRIPTIONS OF CERTAIN COLLATERALIZED MORTGAGE OBLIGATIONS ARE AS FOLLOWS:
LIBOR - LONDON INTERBANK OFFERED RATE.
FLOATING RATE - REPRESENT SECURITIES THAT PAY INTEREST AT RATES THAT
INCREASE (DECREASE) WITH AN INCREASE (DECREASE) IN A SPECIFIED INDEX.
(D) ALSO REPRESENTS COST FOR FEDERAL INCOME TAX PURPOSES. THE AGGREGATE GROSS
UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED
ON THIS COST WERE AS FOLLOWS:
<TABLE>
<S> <C>
GROSS UNREALIZED APPRECIATION .... $ 148,172
GROSS UNREALIZED DEPRECIATION ...... (4,322,672)
----------
NET UNREALIZED APPRECIATION: ... $ (4,174,500)
----------
----------
</TABLE>
* FORMERLY AMERICAN ADJUSTABLE RATE TERM TRUST 1998
16
<PAGE>
- - - --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS
PIPER FUNDS INC. - II ADJUSTABLE RATE MORTGAGE SECURITIES FUND:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments in securities, of Piper Funds Inc. - II Adjustable
Rate Mortgage Securities Fund (formerly American Adjustable Rate Term Trust Inc.
- - - - 1998) as of August 31, 1995, and the related statements of operations and cash
flows for the year then ended, the statements of changes in net assets for each
of the years in the two-year period ended August 31, 1995 and the financial
highlights presented in footnote 10 to the financial statements. These financial
statements and the financial highlights are the responsibility of the fund's
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Investment securities held in custody are confirmed to us by the
custodian. As to securities purchased and sold but not received or delivered, we
request confirmations from brokers and, where replies are not received, we carry
out other appropriate auditing procedures. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Piper Funds Inc. - II
Adjustable Rate Mortgage Securities Fund (formerly American Adjustable Rate Term
Trust Inc. - 1998) as of August 31, 1995, the results of its operations and cash
flows for the year then ended, the changes in its net assets for each of the
years in the two-year period ended August 31, 1995 and the financial highlights
presented in footnote 10 to the financial statements, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
October 13, 1995
17
<PAGE>
- - - --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
AUGUST 31, 1995
<TABLE>
<CAPTION>
American American American
Adjustable Adjustable Adjustable
Rate Term Rate Term Rate Term
Trust 1996 Trust 1997 Trust 1999
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS:
Investments in securities at market value*
(including repurchase agreements of
$14,394,000; $54,501,000 and $49,871,000,
respectively) (note 2) .................. $ 186,645,080 373,531,591 256,753,174
Cash in bank on demand deposit .............. 100,302 750,846 102,236
Receivable for investment securities sold ... -- 2,760,877 1,583,544
Receivable for put options closed ........... 100 35,200 --
Accrued interest receivable ................. 1,068,066 2,230,059 1,371,910
Mortgage security principal paydowns
receivable ................................ 1,046,771 736,142 1,723,902
------------ ------------ ------------
Total assets ............................ 188,860,319 380,044,715 261,534,766
------------ ------------ ------------
LIABILITIES:
Payable for investment securities purchased
on a when-issued basis (note 2) ........... -- 10,043,750 20,087,500
Accrued investment management fee ........... 57,256 111,084 71,756
Accrued administrative fee .................. 24,538 47,608 30,753
------------ ------------ ------------
Total liabilities ....................... 81,794 10,202,442 20,190,009
------------ ------------ ------------
Net assets applicable to outstanding capital
stock ..................................... $ 188,778,525 369,842,273 241,344,757
------------ ------------ ------------
------------ ------------ ------------
REPRESENTED BY:
Capital stock - authorized 1 billion shares
of $0.01 par value; outstanding,
21,846,582; 42,433,699 and 28,114,172
shares, respectively ...................... 218,466 424,337 281,142
Additional paid-in capital .................. 211,965,074 413,266,384 274,572,715
Accumulated net realized loss on
investments ............................... (21,547,695) (41,083,019) (31,946,977)
Unrealized depreciation of investments ...... (1,857,320) (2,765,429) (1,562,123)
------------ ------------ ------------
Total - representing net assets
applicable to outstanding capital
stock ................................ $ 188,778,525 369,842,273 241,344,757
------------ ------------ ------------
------------ ------------ ------------
Net asset value per share of outstanding
capital stock ............................. $ 8.64 8.72 8.58
------------ ------------ ------------
------------ ------------ ------------
* Investments in securities at identified
cost ...................................... $ 188,502,400 376,297,020 258,315,297
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
- - - --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED AUGUST 31, 1995
<TABLE>
<CAPTION>
American American American
Adjustable Adjustable Adjustable
Rate Term Rate Term Rate Term
Trust 1996 Trust 1997 Trust 1999
------------ ------------ ------------
<S> <C> <C> <C>
INCOME:
Interest (net of interest expense of $1,525,774;
$3,877,530 and $2,047,360, respectively) ... $ 12,520,399 23,582,776 15,318,759
Fee income (note 2) ............................ 130,648 356,398 197,723
------------ ------------ ------------
Total investment income .................... 12,651,047 23,939,174 15,516,482
------------ ------------ ------------
EXPENSES (NOTE 3):
Investment management fee ...................... 707,664 1,335,931 856,890
Administrative fee ............................. 303,285 572,542 367,239
Custodian, accounting and transfer agent
fees ......................................... 141,073 196,056 136,121
Reports to shareholders ........................ 113,392 187,950 104,909
Directors' fees ................................ 15,711 22,661 22,661
Audit and legal fees ........................... 69,473 74,040 67,639
Federal excise tax expense (note 2) ............ 87,791 -- --
Other expenses ................................. 59,534 63,377 83,071
------------ ------------ ------------
Total expenses ............................. 1,497,923 2,452,557 1,638,530
------------ ------------ ------------
Net investment income ...................... 11,153,124 21,486,617 13,877,952
------------ ------------ ------------
NET REALIZED AND UNREALIZED GAINS (LOSSES) ON
INVESTMENTS:
Net realized loss on investments (note 4) ...... (3,157,265) (6,307,138) (7,106,564)
Net realized loss on closed put option contracts
(note 4) ..................................... (1,528,700) (2,494,400) (870,500)
Net realized gain (loss) on closed interest rate
swap transactions ............................ 527,325 1,284,681 (7,968,122)
Net realized gain on closed futures
contracts .................................... 75,712 148,300 116,228
------------ ------------ ------------
Net realized loss on investments ............. (4,082,928) (7,368,557) (15,828,958)
Net change in unrealized appreciation or
depreciation of investments .................. 4,093,903 7,457,863 12,552,689
------------ ------------ ------------
Net gain (loss) on investments ............... 10,975 89,306 (3,276,269)
------------ ------------ ------------
Net increase in net assets resulting from
operations .............................. $ 11,164,099 21,575,923 10,601,683
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
- - - --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED AUGUST 31, 1995
<TABLE>
<CAPTION>
American American American
Adjustable Adjustable Adjustable
Rate Term Rate Term Rate Term
Trust 1996 Trust 1997 Trust 1999
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest and fee income ................ $ 12,651,047 23,939,174 15,516,482
Expenses ................................. (1,497,923) (2,452,557) (1,638,530)
------------- ------------- -------------
Net investment income ................ 11,153,124 21,486,617 13,877,952
------------- ------------- -------------
Adjustments to reconcile net investment
income to cash provided by operating
activities:
Change in accrued interest and mortgage
security principal paydowns
receivable ............................ 707,294 370,513 (428,229)
Net amortization of bond discount and
premium ............................... (1,330,614) (3,619,847) (1,804,080)
Change in accrued fees and expenses .... (284,376) (373,189) (167,712)
------------- ------------- -------------
Total adjustments .................... (907,696) (3,622,523) (2,400,021)
------------- ------------- -------------
Net cash provided by operating
activities .......................... 10,245,428 17,864,094 11,477,931
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments ....... 160,411,931 370,520,124 264,553,164
Purchases of investments ................. (56,156,777) (168,270,994) (131,072,083)
Net sales of short-term securities ....... 19,391,621 3,383,866 12,489,307
Cash received (paid) for interest rate
swap transactions ...................... 527,325 1,284,681 (9,245,203)
Net variation margin receipts for futures
contracts .............................. 75,712 148,300 116,228
Receipts from closed put option
contracts .............................. -- 46,000 1,139,500
------------- ------------- -------------
Net cash provided by investing
activities .......................... 124,249,812 207,111,977 137,980,913
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Tender of fund shares (note 7) ........... (42,903,162) (65,042,645) (47,240,592)
Net payments for reverse repurchase
agreements ............................. (70,000,000) (125,000,000) (85,000,000)
Retirement of fund shares (note 6) ....... (1,454,560) (3,544,849) (2,045,751)
Distributions paid to shareholders ....... (20,175,730) (30,683,252) (15,320,596)
------------- ------------- -------------
Net cash used by financing
activities .......................... (134,533,452) (224,270,746) (149,606,939)
------------- ------------- -------------
Net increase (decrease) in cash .......... (38,212) 705,325 (148,095)
Cash at beginning of year ................ 138,514 45,521 250,331
------------- ------------- -------------
Cash at end of year ................ $ 100,302 750,846 102,236
------------- ------------- -------------
------------- ------------- -------------
Supplemental disclosure of cash flow
information:
Cash paid for interest on reverse
repurchase agreements ................ $ 1,789,441 4,219,747 2,191,535
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>
- - - --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
AMERICAN ADJUSTABLE RATE TERM TRUST 1996
<TABLE>
<CAPTION>
Year Ended Year Ended
8/31/95 8/31/94
------------ ------------
<S> <C> <C>
OPERATIONS:
Net investment income .................................. $ 11,153,124 17,520,126
Net realized loss on investments ......................... (4,082,928) (10,318,058)
Net change in unrealized appreciation or depreciation of
investments ............................................ 4,093,903 (9,945,239)
------------ ------------
Net increase (decrease) in net assets resulting from
operations ............................................ 11,164,099 (2,743,171)
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ............................... (20,175,730) (12,495,376)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Payments for tender of 4,767,018 shares (note 7) ......... (42,903,162) --
Payments for retirement of 173,700 and 142,700 shares,
respectively (note 6) .................................. (1,394,350) (1,215,470)
------------ ------------
Decrease in net assets from capital share
transactions .......................................... (44,297,512) (1,215,470)
------------ ------------
Total decrease in net assets ......................... (53,309,143) (16,454,017)
Net assets at beginning of year ............................ 242,087,668 258,541,685
------------ ------------
Net assets at end of year ................................ $ 188,778,525 242,087,668
------------ ------------
------------ ------------
Undistributed net investment income ...................... $ -- 10,238,410
------------ ------------
------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
21
<PAGE>
- - - --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
AMERICAN ADJUSTABLE RATE TERM TRUST 1997
<TABLE>
<CAPTION>
Year Ended Year Ended
8/31/95 8/31/94
------------ ------------
<S> <C> <C>
OPERATIONS:
Net investment income .................................. $ 21,486,617 31,764,264
Net realized loss on investments ......................... (7,368,557) (23,803,088)
Net change in unrealized appreciation or depreciation of
investments ............................................ 7,457,863 (19,413,596)
------------ ------------
Net increase (decrease) in net assets resulting from
operations ............................................ 21,575,923 (11,452,420)
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ............................... (30,683,252) (26,867,223)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Payments for tender of 7,396,113 shares (note 7) ......... (65,042,645) --
Payments for retirement of 420,100 and 290,700 shares,
respectively (note 6) .................................. (3,396,318) (2,437,499)
------------ ------------
Decrease in net assets from capital share
transactions .......................................... (68,438,963) (2,437,499)
------------ ------------
Total decrease in net assets ......................... (77,546,292) (40,757,142)
Net assets at beginning of year ............................ 447,388,565 488,145,707
------------ ------------
Net assets at end of year ................................ $ 369,842,273 447,388,565
------------ ------------
------------ ------------
Undistributed net investment income ...................... $ -- 11,548,663
------------ ------------
------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
22
<PAGE>
- - - --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
AMERICAN ADJUSTABLE RATE TERM TRUST 1999
<TABLE>
<CAPTION>
Year Ended Year Ended
8/31/95 8/31/94
------------ ------------
<S> <C> <C>
OPERATIONS:
Net investment income .................................. $ 13,877,952 20,160,682
Net realized loss on investments ......................... (15,828,958) (17,443,179)
Net change in unrealized appreciation or depreciation of
investments ............................................ 12,552,689 (14,015,353)
------------ ------------
Net increase (decrease) in net assets resulting from
operations ............................................ 10,601,683 (11,297,850)
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ............................... (15,320,596) (19,270,500)
In excess of net realized gains (note 2) ................. -- (183,586)
------------ ------------
Total distributions .................................... (15,320,596) (19,454,086)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Payments for tender of 5,535,062 shares (note 7) ......... (47,240,592) --
Payments for retirement of 237,000 and 205,100 shares,
respectively (note 6) .................................. (1,854,628) (1,674,424)
------------ ------------
Decrease in net assets from capital share
transactions .......................................... (49,095,220) (1,674,424)
------------ ------------
Total decrease in net assets ......................... (53,814,133) (32,426,360)
Net assets at beginning of year ............................ 295,158,890 327,585,250
------------ ------------
Net assets at end of year ................................ $ 241,344,757 295,158,890
------------ ------------
------------ ------------
Undistributed net investment income ...................... $ -- 2,115,191
------------ ------------
------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
23
<PAGE>
- - - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION
American Adjustable Rate Term Trusts 1996
(BDJ), 1997 (CDJ) and 1999 (EDJ) are
registered under the Investment Company Act of
1940 (as amended) as diversified, closed-end
management investment companies. BDJ, CDJ and
EDJ commenced operations on September 27,
1990; July 24, 1991; and September 24, 1992;
respectively, upon completion of initial
public offerings of common stock. Shares of
the funds stopped trading on the New York
Stock Exchange and the Chicago Stock Exchange
on August 24, 1995. As discussed in footnote
9, the funds' shareholders approved a plan to
merge all of the funds' net assets, along with
the net assets of American Adjustable Rate
Term Trust 1998 (DDJ) into Piper Funds Inc. -
II Adjustable Rate Mortgage Securities Fund, a
diversified, open-end investment company,
effective September 1, 1995.
(2) SUMMARY OF
SIGNIFICANT
ACCOUNTING
POLICIES
INVESTMENTS IN SECURITIES
The values of fixed income securities are
determined using pricing services or prices
quoted by independent brokers. Exchange-listed
options are valued at the last sale price and
open financial futures contracts are valued at
the last settlement price. When market
quotations are not readily available,
securities are valued at fair value according
to methods selected in good faith by the board
of directors. Short-term securities with
maturities of 60 days or less are valued at
amortized cost which approximates market
value.
Securities transactions are accounted for on
the date the securities are purchased or sold.
Realized gains and losses are calculated on
the identified-cost basis. Interest income,
including amortization of bond discount and
premium computed on a level-yield basis, is
accrued daily.
OPTION TRANSACTIONS
For hedging purposes, the funds may buy and
sell put and call options, write covered call
options on portfolio securities, write
cash-secured puts, and write call options that
are not covered for cross-hedging purposes.
The risk in writing a call option is that a
fund gives up the opportunity for profit if
the market price of the security increases.
The risk in writing a put option is that a
fund may incur a loss if the market price of
the security decreases and the option is
exercised. The risk in buying an option is
that a fund pays a premium whether or not the
option is exercised. A fund also has the
additional risk of not being able to enter
into a closing transaction if a liquid
secondary market does not exist. The funds
also may write over-the-counter options where
the completion of the obligation is dependent
upon the credit standing of another party.
Option contracts are valued daily, and
unrealized appreciation or depreciation is
recorded. A fund will realize a gain or loss
upon expiration or closing of the option
transaction. When an option is exercised, the
proceeds on sales for a written call option,
the purchase cost for a written put option, or
the cost of a security for a purchased put or
call option is adjusted by the amount of
premium received or paid.
FUTURES TRANSACTIONS
In order to gain exposure to or protect
against changes in the market, the funds may
buy and sell interest rate futures contracts
and related options. Risks of entering into
futures contracts and related options include
the possibility of an illiquid market and that
a change in the value of the contract or
option may not correlate with changes in the
value of the underlying securities.
Upon entering into a futures contract, the
fund is required to deposit either cash or
securities in an amount (initial margin) equal
to a certain percentage of the contract
24
<PAGE>
- - - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
value. Subsequent payments (variation margin)
are made or received by a fund each day. The
variation margin payments are equal to the
daily changes in the contract value and are
recorded as unrealized gains and losses. A
fund recognizes a realized gain or loss when
the contract is closed or expires.
INTEREST RATE TRANSACTIONS
To preserve a return or spread on a particular
investment or portion of its portfolio or for
other non-speculative purposes, the funds may
enter into interest rate swaps and the
purchase or sale of interest rate caps and
floors. Interest rate swaps involve the
exchange of commitments to pay or receive
interest, e.g., an exchange of floating rate
payments for fixed rate payments. The purchase
of an interest rate cap entitles the
purchaser, to the extent that a specified
index exceeds a predetermined interest rate,
to receive payments of interest on a
contractually based notional principal amount
from the party selling the interest rate cap.
The purchase of an interest rate floor
entitles the purchaser, to the extent that a
specified index falls below a predetermined
interest rate, to receive payments of interest
on a contractually based notional principal
amount from the party selling the interest
rate floor.
If forecasts of interest rates and other
market factors are incorrect, investment
performance will diminish compared to what
performance would have been if these
investment techniques were not used. Even if
the forecasts are correct, there is risk that
the positions may correlate imperfectly with
the asset or liability being hedged. Other
risks of entering into these transactions are
that a liquid secondary market may not always
exist, or that another party to a transaction
may not perform.
For interest rate swaps, the funds accrue
weekly, as an increase or decrease to interest
income, the current net amount due or owed by
the funds. Interest rate swap, cap and floor
valuations are based on prices quoted by
independent brokers. These valuations
represent the net present value of all future
cash settlement amounts based on implied
forward interest rates. As of August 31, 1995,
the funds had no open interest rate swap
agreements.
SECURITIES PURCHASED ON A WHEN-ISSUED BASIS
Delivery and payment for securities that have
been purchased by the funds on a
forward-commitment or when-issued basis can
take place one month or more after the
transaction date. During this period, such
securities do not earn interest, are subject
to market fluctuations and may increase or
decrease in value prior to their delivery. The
funds maintain, in segregated accounts with
their custodian, securities with a market
value equal to the amount of their purchase
commitments. The purchase of securities on a
when-issued or forward-commitment basis may
increase the volatility of the funds' NAVs to
the extent the funds make such purchases while
remaining substantially fully invested. As of
August 31, 1995, CDJ and EDJ had $10,043,750
and $20,087,500 of outstanding when-issued or
forward commitments, respectively.
Consistent with their ability to purchase
securities on a when-issued or forward-
commitment basis, the funds may enter into
mortgage "dollar rolls" in which the funds
sell securities for delivery in the current
month and simultaneously contract with the
same counterparty to repurchase similar (same
type, coupon and maturity) but not identical
securities. As an inducement to "roll over"
their purchase commitments, the funds receive
negotiated fees. For the year ended August 31,
1995, such fees earned by the funds amounted
to $130,648; $356,398 and $197,723 for BDJ,
CDJ and EDJ, respectively.
25
<PAGE>
- - - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
FEDERAL TAXES
Each fund's policy is to comply with the
requirements of the Internal Revenue Code
applicable to regulated investment companies
and not be subject to federal income tax.
Therefore, no income tax provision is
required. However, BDJ incurred federal excise
taxes of $87,791 ($0.004 per share) on income
retained by the fund during the 1994 excise
tax year.
Net investment income and net realized gains
(losses) may differ for financial statement
and tax purposes primarily because of the
recognition of certain foreign currency gains
(losses) as ordinary income for tax purposes,
and losses deferred due to "wash sale" and
"straddle" transactions. The character of
distributions made during the year from net
investment income or net realized gains may
differ from their ultimate characterization
for federal income tax purposes. The effect on
dividend distributions of certain book-to-tax
differences is presented an as "excess
distribution" in the statement of changes in
net assets and the financial highlights. Also,
due to the timing of dividend distributions,
the fiscal year in which amounts are
distributed may differ from the year that the
income or realized gains (losses) were
recorded by the fund. The funds will elect to
utilize equalization debits, by which a
portion of the funds' payments for tendered
shares which occurred during the year ended
August 31, 1995, will reduce undistributed net
investment income for tax purposes.
On the statements of assets and liabilities,
as a result of permanent book-to-tax
differences, reclassification adjustments have
been made as follows:
<TABLE>
<CAPTION>
BDJ CDJ EDJ
--------- --------- ----------
<S> <C> <C> <C>
Decrease accumulated net realized loss
on investments ..................... $ 1,242,744 2,160,720 1,694,852
Decrease undistributed net investment
income ............................. $ 1,215,804 2,352,028 672,547
Increase (decrease) additional paid-in
capital ............................ $ (26,940) 191,308 (1,022,305)
</TABLE>
DISTRIBUTIONS
The funds pay monthly distributions from net
investment income. Realized capital gains, if
any, will be distributed on an annual basis.
These distributions are recorded as of the
close of business on the ex-dividend date.
Such distributions are payable in cash or,
pursuant to the funds' dividend reinvestment
plan, reinvested in additional shares of the
funds' common stock. Under the plan, fund
shares are purchased in the open market.
REPURCHASE AGREEMENTS
For repurchase agreements entered into with
certain broker-dealers, the funds along with
other affiliated registered investment
companies may transfer uninvested cash
balances into a joint trading account, the
daily aggregate of which is invested in
repurchase agreements secured by U.S.
government and agency obligations. Securities
pledged as collateral for all individual and
joint repurchase agreements are held by the
funds' custodian bank until maturity of the
repurchase agreements. Provisions for all
agreements ensure the daily market value of
the collateral is in excess of the repurchase
amount in the event of default.
26
<PAGE>
- - - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(3) EXPENSES
The funds have entered into the following
agreements with Piper Capital Management
Incorporated (the adviser and administrator):
The investment advisory agreement provides the
adviser with a monthly investment management
fee based on each fund's average weekly net
assets computed at the per-annum rate of
0.35%. For its fee, the adviser provides
investment advice and, in general, conducts
the management and investment activity of the
fund.
The administration agreement provides the
administrator with a monthly fee in an amount
equal to an annualized rate of 0.15% of the
each fund's average weekly net assets. For its
fee, the administrator provides certain
reporting, regulatory and record-keeping
services for the funds.
In addition to the investment management fee
and the administrative fee, the funds are
responsible for paying most other operating
expenses including outside directors' fees and
expenses, custodian fees, registration fees,
printing and shareholder reports, transfer
agent fees and expenses, legal, auditing and
accounting services, insurance, interest,
taxes and other miscellaneous expenses.
(4) SECURITIES
TRANSACTIONS
Cost of purchases and proceeds from sales of
securities (other than temporary investments
in short-term securities) for the year ended
August 31, 1995, were as follows:
<TABLE>
<CAPTION>
Sales
Purchases Proceeds
------------ ------------
<S> <C> <C>
BDJ ......................................... $ 33,098,233 160,411,931
CDJ ......................................... $ 117,981,466 373,281,001
EDJ ......................................... $ 113,965,226 266,136,708
</TABLE>
During the year ended August 31, 1995, the
funds paid Piper Jaffray Inc., an affiliated
broker, brokerage commissions of $850; $1,700
and $850 for BDJ, CDJ and EDJ, respectively.
In order to hedge the value of adjustable rate
mortgage securities under certain interest
rate scenarios, each fund had purchased
four-year U.S. Treasury note put option
contracts. As a result of the funds' changing
investment strategies due to the impending
merger, these options were closed in fiscal
1995. The resulting realized losses are
disclosed in the Statement of Operations.
(5) CAPITAL LOSS
CARRYOVER
For federal income tax purposes, the funds had
capital loss carryovers of $21,547,695;
$41,083,019 and $31,946,977 for BDJ, CDJ and
EDJ, respectively, at August 31, 1995. If
these loss carryovers are not offset by
subsequent capital gains, they will expire at
various times during 1998 through 2002.
(6) RETIREMENT OF FUND
SHARES
The funds' board of directors approved a plan
to repurchase shares of the funds in the open
market and retire those shares. Repurchases
are only made when the previous day's closing
market price was at a discount from net asset
value. Daily repurchases are limited to 25% of
the previous four weeks average daily trading
volume on the New York Stock Exchange. Under
the current plan, cumulative repurchases in
each fund cannot exceed 3% of the total shares
originally issued. The plan was last reviewed
and reapproved by the board of directors on
August 18, 1995. Pursuant to the plan, the
funds have repurchased and retired the
following cumulative number of shares as of
August 31, 1995:
<TABLE>
<CAPTION>
Shares Percent of Shares
Repurchased Originally Issued
------------ -------------------
<S> <C> <C>
BDJ ....................................... 316,400 1.17%
CDJ ....................................... 710,800 1.41%
EDJ ....................................... 442,100 1.30%
</TABLE>
27
<PAGE>
- - - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(7) TENDER OFFER OF
FUND SHARES
On August 22, 1994, shareholders of the funds
approved a fundamental policy that allows
shareholders of BDJ, CDJ and EDJ to
periodically tender their shares back to the
respective fund at net asset value.
A tender offer to repurchase up to 25% of each
fund's outstanding shares was mailed to
shareholders on September 6, 1994. The
deadline for participating in the offer was
October 3, 1994. The repurchase prices were
determined on October 10, 1994, at the close
of the New York Stock Exchange (4 p.m. Eastern
Time). Proceeds of the tender offer were paid
to shareholders on October 17, 1994. The total
proceeds (including tender fees) paid by the
funds as well as the number and percentage of
shares tendered are as follows:
<TABLE>
<CAPTION>
Percentage Shares Proceeds
Tendered Tendered Paid
--------------- --------- ------------
<S> <C> <C> <C>
BDJ ................................. 18% 4,767,018 $ 42,903,162
CDJ ................................. 15% 7,396,113 $ 65,042,645
EDJ ................................. 16% 5,535,062 $ 47,240,592
</TABLE>
(8) PENDING LITIGATION
On October 20, 1994, a complaint was filed by
Herman D. Gordon in the U.S. District Court
for the District of Minnesota against DDJ and
EDJ, Piper Jaffray Companies Inc. (Piper
Companies), Piper Capital Management
Incorporated (Piper Capital), Piper Jaffray
Inc. (Piper Jaffray) and certain associated
individuals. A second complaint was filed on
April 14, 1995, in the same court by Frank
Donio, I.R.A., and other plaintiffs against
BDJ, CDJ, DDJ and EDJ, Piper Companies, Piper
Capital, Piper Jaffray and certain associated
individuals. Plaintiffs in both actions filed
a Consolidated Amended Class Action Complaint
on May 23, 1995, alleging violations of
certain federal and state securities laws.
Piper Companies and Piper Capital have agreed
to indemnify Piper Funds II Adjustable Rate
Mortgage Securities Fund (as the successor by
merger to BDJ, CDJ, DDJ and EDJ) against any
expenses or losses incurred in connection with
such complaint.
28
<PAGE>
- - - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(9) SUBSEQUENT EVENT--
MERGER
At the close of business on September 1, 1995,
BDJ, CDJ, DDJ and EDJ merged into Piper Funds
Inc. - II Adjustable Rate Mortgage Securities
Fund, a diversified, open-end management
investment company. DDJ is considered the
surviving entity for financial reporting
purposes.
The following table presents the results of
operations of BDJ, CDJ and EDJ for the period
from August 31, 1995 to September 1, 1995, and
the subsequent merger of the net assets of
those funds into Piper Funds Inc. - II
Adjustable Rate Mortgage Securities Fund.
<TABLE>
<CAPTION>
BDJ CDJ EDJ
------------ ------------ ------------
<S> <C> <C> <C>
Net assets on 8/31/95 ................ $ 188,778,525 369,842,273 241,344,757
Results of operations on 9/1/95:
Net investment income ................ 27,390 50,782 33,372
Net realized gain (loss) on
investments ......................... (265,318) (110,668) 4,106
Net change in appreciation or
depreciation of investments ......... 426,963 1,018,376 600,778
------------ ------------ ------------
Net increase in net assets resulting
from operations ..................... 189,035 958,490 638,256
------------ ------------ ------------
Capital share transactions:
Redemption of 1,000 shares for
dissenters' rights .................. (8,650) -- --
------------ ------------ ------------
Net assets prior to merger on 9/1/95 ... 188,958,910 370,800,763 241,983,013
Merger into Piper Funds Inc. - II
Adjustable Rate Mortgage Securities
Fund on 9/1/95 representing 21,845,582;
42,433,699 and 28,114,172 shares,
respectively* ......................... (188,958,910) (370,800,763) (241,983,013)
------------ ------------ ------------
Net assets at close of business on
9/1/95 .............................. $ -- -- --
------------ ------------ ------------
------------ ------------ ------------
* SHAREHOLDERS OF BDJ, CDJ AND EDJ RECEIVED 23,619,989; 46,350,330 AND 30,248,037
SHARES, RESPECTIVELY OF PIPER FUNDS INC. - II ADJUSTABLE RATE MORTGAGE
SECURITIES FUND AT AN INITIAL NET ASSET VALUE OF $8.00 PER SHARE.
</TABLE>
29
<PAGE>
- - - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(10) FINANCIAL
HIGHLIGHTS
Per-share data for a share of capital stock
outstanding throughout each period and
selected information for each period are as
follows:
AMERICAN ADJUSTABLE RATE TERM TRUST 1996
<TABLE>
<CAPTION>
Period from
Year Year Ended Year Ended Year Ended 9/27/90* to
Ended 8/31/95 8/31/94 8/31/93 8/31/92 8/31/91
------------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period ........... $ 9.04 9.60 9.74 9.64 9.53
------ ---------- ---------- ---------- -----------
Operations:
Net investment income .......................... 0.51/ / 0.65 0.75 0.82 0.83
Net realized and unrealized gains (losses) on
investments................................... 0.01 (0.75) (0.27) 0.07 0.05
------ ---------- ---------- ---------- -----------
Total from operations ........................ 0.52 (0.10) 0.48 0.89 0.88
------ ---------- ---------- ---------- -----------
Distributions to shareholders:
From net investment income ..................... (0.92) (0.46) (0.62) (0.79) (0.77)
------ ---------- ---------- ---------- -----------
Net asset value, end of period ................. $ 8.64 9.04 9.60 9.74 9.64
------ ---------- ---------- ---------- -----------
------ ---------- ---------- ---------- -----------
Per share market value, end of
period TRIANGLE ............................. $ -- 8.50 9.50 10.25 10.13
------ ---------- ---------- ---------- -----------
------ ---------- ---------- ---------- -----------
SELECTED INFORMATION
Total investment return, net asset value+ ........ 5.86% (1.06%) 5.18% 9.58% 9.55%
Total investment return, market value** .......... 12.79% (5.94%) (1.37%) 9.29% 9.15%
Net assets at end of period (in millions) ...... $ 189 242 259 262 260
Ratio of expenses to average weekly net
assets*** ...................................... 0.74% 0.65% 0.61% 0.62% 0.64%++
Ratio of net investment income to average weekly
net assets*** .................................. 5.52% 6.97% 7.91% 8.44% 9.09%++
Portfolio turnover rate (excluding short-term
securities) .................................... 17% 43% 58% 26% 60%
Amount of borrowings outstanding at end of period
(in millions)+++ ............................. $ -- 70 86 70 70
Per-share amount of borrowings outstanding at end
of period .................................... $ -- 2.61 3.18 2.60 2.60
Per-share amount of net assets, excluding
borrowings, at end of period ................. $ -- 11.65 12.78 12.34 12.24
Asset coverage ratio TRIANGLE TRIANGLE ....... $ -- 446% 402% 475% 470%
</TABLE>
* COMMENCEMENT OF OPERATIONS.
** TOTAL INVESTMENT RETURN, MARKET VALUE, IS BASED ON THE CHANGE IN MARKET
PRICE OF A SHARE DURING THE
PERIOD AND ASSUMES REINVESTMENT OF DISTRIBUTIONS AT ACTUAL PRICES PURSUANT
TO THE FUND'S DIVIDEND
REINVESTMENT PLAN. FOR PURPOSES OF THE FISCAL 1995 COMPUTATION, THE AUGUST
31, 1995 NET ASSET VALUE IS USED AS THE END OF PERIOD VALUE. SEE FOOTNOTE 9
TO THE FINANCIAL STATEMENTS REGARDING THE MERGER INTO AN OPEN-END
MANAGEMENT INVESTMENT COMPANY ON 9/1/95.
*** INCLUDES 0.04% AND 0.01% FROM FEDERAL EXCISE TAXES IN THE FISCAL YEARS 1995
AND 1994, RESPECTIVELY.
+ TOTAL INVESTMENT RETURN, NET ASSET VALUE, IS BASED ON THE CHANGE IN NET
ASSET VALUE OF A SHARE DURING THE PERIOD AND ASSUMES REINVESTMENT OF
DISTRIBUTIONS AT NET ASSET VALUE.
++ ADJUSTED TO AN ANNUAL BASIS.
+++ SECURITIES PURCHASED ON A WHEN-ISSUED BASIS FOR WHICH LIQUID, HIGH-GRADE
DEBT OBLIGATIONS ARE MAINTAINED IN A SEGREGATED ACCOUNT ARE NOT CONSIDERED
BORROWINGS. SEE FOOTNOTE 2 IN THE NOTES TO FINANCIAL STATEMENTS.
TRIANGLE SHARES STOPPED TRADING ON THE NYSE AND CSE ON AUGUST 24, 1995.
TRIANGLE TRIANGLE REPRESENTS NET ASSETS, EXCLUDING BORROWINGS, AT END
OF PERIOD DIVIDED BY BORROWINGS OUTSTANDING AT END
OF PERIOD.
/ / BASED ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD.
30
<PAGE>
- - - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(10) FINANCIAL
HIGHLIGHTS
(CONTINUED)
Per-share data for a share of capital stock
outstanding throughout each period and
selected information for each period are as
follows:
AMERICAN ADJUSTABLE RATE TERM TRUST 1997
<TABLE>
<CAPTION>
Period from
Year Year Ended Year Ended Year Ended 7/24/91* to
Ended 8/31/95 8/31/94 8/31/93 8/31/92 8/31/91
------------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period ........... $ 8.90 9.66 9.68 9.68 9.58
------ ---------- ---------- ---------- -----------
Operations:
Net investment income .......................... 0.53/ / 0.63 0.72 0.78 0.07
Net realized and unrealized gains (losses) on
investments................................... 0.01 (0.86) (0.10) 0.05 0.03
------ ---------- ---------- ---------- -----------
Total from operations ........................ 0.54 (0.23) 0.62 0.83 0.10
------ ---------- ---------- ---------- -----------
Distributions to shareholders:
From net investment income ..................... (0.72) (0.53) (0.63) (0.80) --
From net realized gains ........................ -- -- (0.01) (0.03) --
------ ---------- ---------- ---------- -----------
Total distributions to shareholders .......... (0.72) (0.53) (0.64) (0.83) --
------ ---------- ---------- ---------- -----------
Net asset value, end of period ................. $ 8.72 8.90 9.66 9.68 9.68
------ ---------- ---------- ---------- -----------
------ ---------- ---------- ---------- -----------
Per share market value, end of
period TRIANGLE ............................. $ -- 8.50 9.38 10.00 10.25
------ ---------- ---------- ---------- -----------
------ ---------- ---------- ---------- -----------
SELECTED INFORMATION
Total investment return, net asset value+ ........ 6.23% (2.46%) 6.73% 8.97% 1.04%
Total investment return, market value** .......... 11.54% (3.96%) 0.04% 5.87% 2.50%
Net assets at end of period (in millions) ...... $ 370 447 488 489 212
Ratio of expenses to average weekly net assets ... 0.64% 0.61% 0.58% 0.60% 0.60%++
Ratio of net investment income to average weekly
net assets 5.63% 6.76% 7.55% 7.99% 7.88%++
Portfolio turnover rate (excluding short-term
securities) .................................... 28% 43% 47% 38% 10%
Amount of borrowings outstanding at end of period
(in millions)+++ ............................. $ -- 125 162 143 50
Per-share amount of borrowings outstanding at end
of period .................................... $ -- 2.49 3.20 2.83 2.29
Per-share amount of net assets, excluding
borrowings, at end of period ................. $ -- 11.39 12.86 12.51 11.97
Asset coverage ratio TRIANGLE TRIANGLE ....... $ -- 458% 402% 442% 523%
</TABLE>
* COMMENCEMENT OF OPERATIONS.
** TOTAL INVESTMENT RETURN, MARKET VALUE, IS BASED ON THE CHANGE IN MARKET
PRICE OF A SHARE DURING THE
PERIOD AND ASSUMES REINVESTMENT OF DISTRIBUTIONS AT ACTUAL PRICES PURSUANT
TO THE FUND'S DIVIDEND
REINVESTMENT PLAN. FOR PURPOSES OF THE FISCAL 1995 COMPUTATION, THE AUGUST
31, 1995 NET ASSET VALUE IS USED AS THE END OF PERIOD VALUE. SEE FOOTNOTE 9
TO THE FINANCIAL STATEMENTS REGARDING THE MERGER INTO AN OPEN-END
MANAGEMENT INVESTMENT COMPANY ON 9/1/95.
+ TOTAL INVESTMENT RETURN, NET ASSET VALUE, IS BASED ON THE CHANGE IN NET
ASSET VALUE OF A SHARE DURING THE PERIOD AND ASSUMES REINVESTMENT OF
DISTRIBUTIONS AT NET ASSET VALUE.
++ ADJUSTED TO AN ANNUAL BASIS.
+++ SECURITIES PURCHASED ON A WHEN-ISSUED BASIS FOR WHICH LIQUID, HIGH-GRADE
DEBT OBLIGATIONS ARE MAINTAINED IN A SEGREGATED ACCOUNT ARE NOT CONSIDERED
BORROWINGS. SEE FOOTNOTE 2 IN THE NOTES TO FINANCIAL STATEMENTS.
TRIANGLE SHARES STOPPED TRADING ON THE NYSE AND CSE ON AUGUST 24, 1995.
TRIANGLE TRIANGLE REPRESENTS NET ASSETS, EXCLUDING BORROWINGS, AT END
OF PERIOD DIVIDED BY BORROWINGS OUTSTANDING AT END OF PERIOD.
/ / BASED ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD.
31
<PAGE>
- - - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(10) FINANCIAL
HIGHLIGHTS
(CONTINUED)
Per-share data for a share of capital stock
outstanding throughout each period and
selected information for each period are as
follows:
AMERICAN ADJUSTABLE RATE TERM TRUST 1999
<TABLE>
<CAPTION>
Period from
Year Year Ended 9/24/92* to
Ended 8/31/95 8/31/94 8/31/93
------------- ---------- -----------
<S> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period ........... $ 8.71 9.61 9.58
------ ---------- -----------
Operations:
Net investment income .......................... 0.49/ / 0.60 0.60
Net realized and unrealized losses on
investments .................................. (0.08) (0.93) (0.04)
------ ---------- -----------
Total from operations ........................ 0.41 (0.33) 0.56
------ ---------- -----------
Distributions to shareholders:
From net investment income ..................... (0.54) (0.56) (0.53)
In excess of net realized gains ................ -- (0.01) --
------ ---------- -----------
Total distributions to shareholders .......... (0.54) (0.57) (0.53)
------ ---------- -----------
Net asset value, end of period ................. $ 8.58 8.71 9.61
------ ---------- -----------
------ ---------- -----------
Per share market value, end of
period TRIANGLE ............................. $ -- 8.25 9.63
------ ---------- -----------
------ ---------- -----------
SELECTED INFORMATION
Total investment return, net asset value+ ........ 4.88% (3.61%) 6.05%
Total investment return, market value** .......... 11.07% (8.75%) 1.62%
Net assets at end of period (in millions) ...... $ 241 295 328
Ratio of expenses to average weekly net assets ... 0.67% 0.60% 0.57%++
Ratio of net investment income to average weekly
net assets ..................................... 5.67% 6.40% 6.76%++
Portfolio turnover rate (excluding short-term
securities) .................................... 43% 35% 40%
Amount of borrowings outstanding at end of period
(in millions)+++ ............................. $ -- 85 102
Per-share amount of borrowings outstanding at end
of period .................................... $ -- 2.51 3.00
Per-share amount of net assets, excluding
borrowings, at end of period ................. $ -- 11.22 12.61
Asset coverage ratio TRIANGLE TRIANGLE ....... $ -- 447% 421%
</TABLE>
* COMMENCEMENT OF OPERATIONS.
** TOTAL INVESTMENT RETURN, MARKET VALUE, IS BASED ON THE CHANGE IN MARKET
PRICE OF A SHARE DURING THE
PERIOD AND ASSUMES REINVESTMENT OF DISTRIBUTIONS AT ACTUAL PRICES PURSUANT
TO THE FUND'S DIVIDEND
REINVESTMENT PLAN. FOR PURPOSES OF THE FISCAL 1995 COMPUTATION, THE AUGUST
31, 1995 NET ASSET VALUE IS USED AS THE END OF PERIOD VALUE. SEE FOOTNOTE 9
TO THE FINANCIAL STATEMENTS REGARDING THE MERGER INTO AN OPEN-END
MANAGEMENT INVESTMENT COMPANY ON 9/1/95.
+ TOTAL INVESTMENT RETURN, NET ASSET VALUE, IS BASED ON THE CHANGE IN NET
ASSET VALUE OF A SHARE DURING THE PERIOD AND ASSUMES REINVESTMENT OF
DISTRIBUTIONS AT NET ASSET VALUE.
++ ADJUSTED TO AN ANNUAL BASIS.
+++ SECURITIES PURCHASED ON A WHEN-ISSUED BASIS FOR WHICH LIQUID, HIGH-GRADE
DEBT OBLIGATIONS ARE MAINTAINED IN A SEGREGATED ACCOUNT ARE NOT CONSIDERED
BORROWINGS. SEE FOOTNOTE 2 IN THE NOTES TO FINANCIAL STATEMENTS.
TRIANGLE SHARES STOPPED TRADING ON THE NYSE AND CSE ON AUGUST 24, 1995.
TRIANGLE TRIANGLE REPRESENTS NET ASSETS, EXCLUDING BORROWINGS, AT END
OF PERIOD DIVIDED BY BORROWINGS OUTSTANDING AT END OF PERIOD.
/ / BASED ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD.
32
<PAGE>
- - - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(11) QUARTERLY DATA
(UNAUDITED)
<TABLE>
<CAPTION>
Net Realized Net Increase
Total and Unrealized (Decrease) in Net Distributions Quarter End
Investment Net Investment Gains (Losses) Assets Resulting from Net Investment Net Asset
Quarter Ended Income Income on Investments from Operations Income Value
- - - ------------------ ---------- -------------------- --------------------- -------------------- --------------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AMERICAN ADJUSTABLE RATE TERM TRUST 1996
<CAPTION>
Amount Per-Share Amount Per-Share Amount Per-Share Amount Per-Share
---------- --------- ----------- --------- ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
11/30/94 $ 3,467,478 2,960,212 0.13 (3,750,264) (0.16) (790,052) (0.03) (2,177,611) (0.10) 8.91
2/28/95 2,817,331 2,549,600 0.12 2,062,703 0.09 4,612,303 0.21 (2,136,600) (0.09) 9.03
5/31/95 3,162,431 2,844,355 0.13 1,939,196 0.09 4,783,551 0.22 (2,130,942) (0.10) 9.15
8/31/95 3,203,807 2,798,957 0.13 (240,660) (0.01) 2,558,297 0.12 (13,730,577) (0.63) 8.64
---------- ---------- --- ----------- --------- ---------- --------- ----------- ---------
$ 12,651,047 11,153,124 0.51 10,975 0.01 11,164,099 0.52 (20,175,730) (0.92)
---------- ---------- --- ----------- --------- ---------- --------- ----------- ---------
---------- ---------- --- ----------- --------- ---------- --------- ----------- ---------
AMERICAN ADJUSTABLE RATE TERM TRUST 1997
<CAPTION>
Amount Per-Share Amount Per-Share Amount Per-Share Amount Per-Share
---------- --------- ----------- --------- ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
11/30/94 $ 6,734,775 6,055,630 0.15 (10,412,854) (0.24) (4,357,224) (0.09) (5,200,212) (0.12) 8.69
2/28/95 5,482,168 4,909,476 0.12 5,227,426 0.12 10,136,902 0.24 (5,112,948) (0.12) 8.81
5/31/95 5,818,656 5,257,293 0.13 4,836,150 0.11 10,093,443 0.24 (5,093,960) (0.12) 8.93
8/31/95 5,903,575 5,264,218 0.13 438,584 0.02 5,702,802 0.15 (15,276,132) (0.36) 8.72
---------- ---------- --- ----------- --------- ---------- --------- ----------- ---------
$ 23,939,174 21,486,617 0.53 89,306 0.01 21,575,923 0.54 (30,683,252) (0.72)
---------- ---------- --- ----------- --------- ---------- --------- ----------- ---------
---------- ---------- --- ----------- --------- ---------- --------- ----------- ---------
AMERICAN ADJUSTABLE RATE TERM TRUST 1999
<CAPTION>
Amount Per-Share Amount Per-Share Amount Per-Share Amount Per-Share
---------- --------- ----------- --------- ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
11/30/94 $ 4,210,736 3,781,356 0.13 (9,724,958) (0.32) (5,943,602) (0.19) (3,917,275) (0.13) 8.39
2/28/95 3,675,324 3,347,658 0.12 3,676,280 0.14 7,023,938 0.26 (3,810,767) (0.13) 8.52
5/31/95 3,825,660 3,450,934 0.12 1,825,180 0.07 5,276,114 0.19 (3,797,141) (0.14) 8.57
8/31/95 3,804,762 3,298,004 0.12 947,229 0.03 4,245,233 0.15 (3,795,413) (0.14) 8.58
---------- ---------- --- ----------- --------- ---------- --------- ----------- ---------
$ 15,516,482 13,877,952 0.49 (3,276,269) (0.08) 10,601,683 0.41 (15,320,596) (0.54)
---------- ---------- --- ----------- --------- ---------- --------- ----------- ---------
---------- ---------- --- ----------- --------- ---------- --------- ----------- ---------
</TABLE>
33
<PAGE>
- - - --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
AMERICAN ADJUSTABLE RATE TERM TRUST 1996
AUGUST 31, 1995
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- - - --------------------------------------------------------- ----------- ------------
<S> <C> <C>
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS)
MORTGAGE-BACKED SECURITIES (73.3%):
U.S. AGENCY ADJUSTABLE RATE MORTGAGES (41.2%):
7.66%, FHLMC, 10/1/22 .............................. $ 2,603,005 2,667,091
7.94%, FHLMC, 8/1/23 ................................. 6,697,098 6,848,653
8.38%, FHLMC, 6/1/21 ................................. 2,377,476 2,431,564
7.25%, FHLMC, 11/1/16 ................................ 9,646,301 9,791,478
7.54%, FHLMC, 6/1/18 ................................. 2,019,504 2,062,075
7.63%, FHLMC, 5/1/19 ................................. 2,213,468 2,263,758
7.62%, FHLMC, 10/1/18 ................................ 6,769,519 6,927,791
7.75%, FHLMC, 10/1/19 ................................ 2,583,243 2,657,847
7.63%, FHLMC, 8/1/20 ................................. 10,494,136 10,706,852
5.99%, FHLMC, 1/1/24 ................................. 1,412,966 1,420,497
6.23%, FHLMC, 1/1/24 ................................. 1,815,876 1,872,168
6.98%, FNMA, 7/1/17 .................................. 1,877,083 1,899,364
7.39%, FNMA, 4/1/18 .................................. 4,818,583 4,901,511
7.54%, FNMA, 1/1/28 .................................. 2,317,781 2,360,081
7.75%, FNMA, 5/1/27 .................................. 1,678,135 1,717,370
7.72%, FNMA, 1/1/20 .................................. 2,020,948 2,075,615
7.01%, FNMA, 12/1/23 ................................. 3,438,253 3,527,854
6.18%, FNMA, 8/1/23 .................................. 2,132,298 2,207,760
7.00%, GNMA II, 8/20/23 .............................. 4,765,163 4,834,735
7.00%, GNMA II, 5/20/21 .............................. 4,542,600 4,621,005
------------
77,795,069
------------
COLLATERALIZED MORTGAGE OBLIGATIONS AND OTHER MORTGAGE-BACKED
SECURITIES (C) (32.1%):
U.S. AGENCY FLOATING RATE (14.9%):
6.48%, FHLMC, Series 1249, Class A, LIBOR, 4/15/22 ... 14,242,781 14,310,291
6.34%, FHLMC, Series 1508, Class J, LIBOR, 9/15/19 ... 3,025,788 3,025,577
6.44%, FHLMC, Series 1603, Class G, LIBOR, 4/15/21 ... 3,132,235 3,145,171
6.29%, FHLMC, Series 1724, Class F, LIBOR, 5/15/01 ... 4,227,606 4,227,225
6.42%, FNMA, Series 1994-87, Class F, LIBOR,
3/25/09 ............................................. 3,492,894 3,492,510
------------
28,200,774
------------
PRIVATE FLOATING RATE (17.2%):
7.58%, Donaldson, Lufkin and Jenrette, Series
1992-MF3, Class A3, 5/25/22 ......................... 6,000,000 6,093,750
7.71%, Paine Webber Mortgage Acceptance Corporation,
Series 1993-10, Class M1, 11/25/23 .................. 13,135,441 13,201,119
</TABLE>
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- - - --------------------------------------------------------- ----------- ------------
<S> <C> <C>
8.00%, Paine Webber Mortgage Acceptance Corporation,
Series 1993-8, Class M2, 8/25/23 .................. $ 5,091,075 5,078,348
7.81%, Residential Funding Corporation, Series
1993-S8, Class A, 2/25/23 ........................... 4,979,971 5,080,592
7.10%, Salomon Brothers Mortgage, Series 1987-2, Class
A, 12/25/16 ......................................... 3,029,590 2,931,128
------------
32,384,937
------------
Total Mortgage-Backed Securities
(cost: $140,308,026) .............................. 138,380,780
------------
SHORT-TERM SECURITIES (25.6%):
FHLMC Discount Note, 5.91%, 3/29/96 15,000,000 14,514,300
FNMA Discount Note, 5.85%, 3/29/96 ................... 20,000,000 19,356,000
Repurchase agreement with Morgan Stanley in a joint
trading account collateralized by U.S. government
agency securities, acquired on 8/31/95, accrued
interest at repurchase date of $2,259, 5.65%,
9/1/95 .............................................. 14,394,000 14,394,000
------------
Total Short-Term Securities
(cost: $48,194,374) ............................... 48,264,300
------------
Total Investments in Securities
(cost: $188,502,400) (c) ......................... $ 186,645,080
------------
------------
</TABLE>
NOTES TO INVESTMENTS IN SECURITIES:
(A) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO
THE FINANCIAL STATEMENTS.
(B) DESCRIPTIONS OF CERTAIN COLLATERALIZED MORTGAGE OBLIGATIONS ARE AS FOLLOWS:
LIBOR - LONDON INTERBANK OFFERED RATE.
FLOATING RATE - REPRESENTS SECURITIES THAT PAY INTEREST AT RATES
THAT INCREASE (DECREASE) WITH AN INCREASE (DECREASE) IN A SPECIFIED
INDEX.
(C) ALSO REPRESENTS COST FOR FEDERAL INCOME TAX PURPOSES. THE AGGREGATE GROSS
UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED
ON THIS COST WERE AS FOLLOWS:
<TABLE>
<S> <C>
GROSS UNREALIZED APPRECIATION .... $ 123,601
GROSS UNREALIZED DEPRECIATION ...... (1,980,921)
----------
NET UNREALIZED DEPRECIATION .... $ (1,857,320)
----------
----------
</TABLE>
34
<PAGE>
- - - --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
AMERICAN ADJUSTABLE RATE TERM TRUST 1997
AUGUST 31, 1995
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- - - --------------------------------------------------------- ----------- ------------
<S> <C> <C>
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS)
U.S. GOVERNMENT SECURITIES (14.0%):
U.S. Treasury Note, 6.50%, 11/30/96 ................ $ 12,000,000 12,107,280
U.S. Treasury Note, 4.75%, 2/15/97 ................... 25,000,000 24,642,000
U.S. Treasury Note, 6.63%, 3/31/97 ................... 15,000,000 15,188,850
------------
Total U.S. Government Securities
(cost: $51,954,196) ............................... 51,938,130
------------
MORTGAGE-BACKED SECURITIES (72.2%):
U.S. AGENCY ADJUSTABLE RATE MORTGAGES (40.6%):
7.71%, FHLMC, 5/1/20 ................................. 2,360,845 2,425,437
8.32%, FHLMC, 6/1/21 ................................. 4,282,155 4,414,773
7.66%, FHLMC, 10/1/22 ................................ 5,206,010 5,334,182
8.26%, FHLMC, 8/1/19 ................................. 1,879,325 1,938,768
7.77%, FHLMC, 1/1/19 ................................. 170,800 173,628
7.95%, FHLMC, 4/1/22 ................................. 930,969 958,144
6.13%, FHLMC, 10/1/23 ................................ 1,464,504 1,487,160
5.99%, FHLMC, 1/1/24 ................................. 2,122,197 2,133,508
6.23%, FHLMC, 1/1/24 ................................. 3,981,375 4,104,798
7.53%, FNMA, 1/1/18 .................................. 2,110,477 2,170,520
7.92%, FNMA, 1/1/29 .................................. 3,585,600 3,661,794
7.29%, FNMA, 5/1/18 .................................. 1,519,937 1,547,675
7.41%, FNMA, 8/1/27 .................................. 8,675,614 8,846,437
7.39%, FNMA, 4/1/18 .................................. 8,074,033 8,212,987
7.54%, FNMA, 1/1/28 .................................. 1,253,302 1,276,174
7.27%, FNMA, 3/1/28 .................................. 10,019,983 10,194,531
7.49%, FNMA, 1/1/20 .................................. 3,032,650 3,055,395
8.10%, FNMA, 11/1/20 ................................. 5,305,330 5,461,201
7.50%, FNMA, 12/1/20 ................................. 7,730,529 7,866,509
8.19%, FNMA, 5/1/21 .................................. 5,946,919 6,089,110
7.96%, FNMA, 8/1/21 .................................. 3,239,340 3,301,762
6.01%, FNMA, 12/1/23 ................................. 3,557,054 3,660,031
6.15%, FNMA, 12/1/23 ................................. 3,478,790 3,600,408
6.12%, FNMA, 1/1/24 .................................. 3,355,849 3,472,095
8.12%, FNMA, 7/1/23 .................................. 4,632,679 4,822,758
5.95%, FNMA, 2/1/24 .................................. 8,389,486 8,616,422
6.01%, FNMA, 3/1/24 .................................. 4,451,509 4,581,360
6.63%, GNMA II, 11/20/21 ............................. 3,725,381 3,842,619
7.50%, GNMA II, 6/20/22 .............................. 1,078,349 1,114,225
7.38%, GNMA II, 6/20/23 .............................. 1,614,514 1,641,024
6.50%, GNMA II, 11/20/23 ............................. 4,379,109 4,425,527
5.50%, GNMA II, 4/20/24 .............................. 723,714 714,465
6.00%, GNMA II, 8/20/21 .............................. 7,440,481 7,544,350
6.13%, GNMA II, 10/20/21 ............................. 7,256,504 7,335,383
6.00%, GNMA II, 9/1/25 ............................... 10,000,000(b) 10,006,300
------------
150,031,460
------------
COLLATERALIZED MORTGAGE OBLIGATIONS AND OTHER MORTGAGE-BACKED
SECURITIES (C) (31.6%):
U.S. AGENCY FIXED RATE (0.4%):
8.13%, FNMA, Series 1991-66, Class E, 4/25/18 ........ 1,700,020 1,695,413
------------
U.S. AGENCY FLOATING RATE (9.2%):
6.44%, FHLMC, Series 1401, Class K, LIBOR, 9/15/20 ... 1,890,675 1,898,029
6.34%, FHLMC, Series 1508, Class J, LIBOR, 9/15/19 ... 3,025,788 3,025,577
6.44%, FHLMC, Series 1710, Class AC, LIBOR,
2/15/24 ............................................. 3,000,000 3,004,080
</TABLE>
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- - - --------------------------------------------------------- ----------- ------------
<S> <C> <C>
6.29%, FHLMC, Series 1724, Class F, LIBOR,
5/15/01 ........................................... $ 10,714,103 10,713,139
6.42%, FNMA, Series 1993-103, Class FA, LIBOR,
6/25/19 ............................................. 5,000,000 5,007,000
6.42%, FNMA, Series 1994-87, Class F, LIBOR,
3/25/09 ............................................. 10,478,681 10,477,528
------------
34,125,353
------------
PRIVATE FLOATING RATE (22.0%):
7.58%, Donaldson, Lufkin and Jenrette, Series
1992-MF3, Class A3, 5/25/22 ......................... 17,000,000 17,265,625
7.72%, Glendale Federal Savings, Series 1989-5, Class
A, 4/1/29 ........................................... 17,914,726 18,069,563
6.88%, Merrill Lynch Mortgage Investors, Series
1993-C, Class A4, 3/15/18 ........................... 7,000,000 6,794,340
7.81%, Residential Funding Corporation, Series
1993-S8, Class A, 2/25/23 ........................... 7,469,956 7,620,889
6.68%, Resolution Trust Corporation, Series 1991-2,
Class B, 4/25/21 .................................... 5,000,000 4,981,250
8.12%, Resolution Trust Corporation, Series 1991-8,
Class A-1, 12/25/20 ................................. 11,854,133 12,178,270
7.55%, Resolution Trust Corporation, Series 1992-4,
Class B2, 7/25/28 ................................... 15,000,639 14,330,298
------------
81,240,235
------------
Total Mortgage-Backed Securities
(cost: $269,841,824) .............................. 267,092,461
------------
SHORT-TERM SECURITIES (14.7%):
Repurchase agreement with Goldman Sachs in a joint
trading account collateralized by U.S. government
agency securities, acquired on 8/31/95, accrued
interest at repurchase date of $8,690, 5.82%, 9/1/95
(cost: $54,501,000) ................................. 54,501,000 54,501,000
------------
Total Investments in Securities
(cost: $376,297,020) (d) ......................... $ 373,531,591
------------
------------
</TABLE>
NOTES TO INVESTMENTS IN SECURITIES:
(A) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO
THE FINANCIAL STATEMENTS.
(B) ON AUGUST 31, 1995, THE TOTAL COST OF INVESTMENTS PURCHASED ON A
WHEN-ISSUED BASIS WAS $10,043,750.
(C) DESCRIPTIONS OF CERTAIN COLLATERALIZED MORTGAGE OBLIGATIONS ARE AS FOLLOWS:
LIBOR - LONDON INTERBANK OFFERED RATE
FLOATING RATE - REPRESENTS SECURITIES THAT PAY INTEREST AT RATES
THAT INCREASE (DECREASE) WITH AN INCREASE (DECREASE) IN A SPECIFIED
INDEX
(D) ALSO REPRESENTS COST FOR FEDERAL INCOME TAX PURPOSES. THE AGGREGATE GROSS
UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED
ON THIS COST WERE AS FOLLOWS:
<TABLE>
<S> <C>
GROSS UNREALIZED APPRECIATION .... $ 173,162
GROSS UNREALIZED DEPRECIATION ...... (2,938,591)
----------
NET UNREALIZED DEPRECIATION .... $ (2,765,429)
----------
----------
</TABLE>
35
<PAGE>
- - - --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
AMERICAN ADJUSTABLE RATE TERM TRUST 1999
AUGUST 31, 1995
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- - - --------------------------------------------------------- ----------- ------------
<S> <C> <C>
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS)
U.S. GOVERNMENT SECURITIES (10.7%):
U.S. Treasury Note, 4.75%, 2/15/97 ................. $ 13,000,000 12,813,840
U.S. Treasury Note, 6.38%, 6/30/97 ................... 13,000,000 13,130,000
------------
Total U.S. Government Securities
(cost: $26,019,990) ............................... 25,943,840
------------
MORTGAGE-BACKED SECURITIES (75.0%):
U.S. AGENCY ADJUSTABLE RATE MORTGAGES (36.5%):
8.25%, FHLMC, 6/1/22 ................................. 25,917,342 26,536,507
7.74%, FHLMC, 11/1/22 ................................ 9,601,686 9,805,242
7.74%, FHLMC, 9/1/22 ................................. 5,482,171 5,644,772
7.94%, FHLMC, 8/1/23 ................................. 5,238,324 5,356,867
7.63%, FHLMC, 4/1/23 ................................. 4,202,449 4,286,414
7.38%, FNMA, 11/1/22 ................................. 3,219,526 3,283,917
6.50%, GNMA II, 7/20/22 .............................. 3,941,373 3,992,572
6.50%, GNMA II, 9/20/22 .............................. 3,599,623 3,653,078
7.38%, GNMA II, 6/20/23 .............................. 5,251,359 5,337,586
6.00%, GNMA II, 9/1/25 ............................... 20,000,000(b) 20,012,600
------------
87,909,555
------------
COLLATERALIZED MORTGAGE OBLIGATIONS AND OTHER MORTGAGE-BACKED
SECURITIES (C) (38.5%):
U.S. AGENCY FLOATING RATE (14.9%):
6.44%, FHLMC, Series 1401, Class K, LIBOR, 9/15/20 ... 6,302,249 6,326,765
6.34%, FHLMC, Series 1508, Class J, LIBOR, 9/15/19 ... 2,269,341 2,269,182
6.29%, FHLMC, Series 1724, Class F, LIBOR, 5/15/01 ... 7,142,735 7,142,092
6.50%, FHLMC, Series 29, Class FA, LIBOR, 3/25/23 .... 8,000,000 8,029,440
6.47%, FNMA, Series 1992-141, Class FA, LIBOR,
8/25/07 ............................................. 7,005,378 7,031,298
6.42%, FNMA, Series 1994-87, Class F, LIBOR,
3/25/09 ............................................. 5,239,341 5,238,765
------------
36,037,542
------------
PRIVATE FLOATING RATE (23.6%):
8.22%, California Federal, Series 1987-F, Class A2,
7/1/17 .............................................. 5,235,031 5,077,980
7.58%, Donaldson, Lufkin and Jenrette, Series
1992-MF3, Class A3, 5/25/22 ......................... 10,000,000 10,156,250
7.69%, Merrill Lynch Mortgage Investors, Series
1992-H, Class A1-2, 2/25/23 ......................... 3,781,063 3,808,252
</TABLE>
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- - - --------------------------------------------------------- ----------- ------------
<S> <C> <C>
6.78%, Merrill Lynch Mortgage Investors, Series
1993-B, Class A3, 11/15/17 .......................... 13,650,000 13,756,607
7.13%, Merrill Lynch Mortgage Investors, Series
1993-E, Class A4, 6/15/18 ......................... $ 6,500,000 6,243,250
7.81%, Residential Funding Corporation, Series
1993-S8, Class A, 2/25/23 ........................... 4,979,971 5,080,592
7.55%, Resolution Trust Corporation, Series 1992-4,
Class B2, 7/25/28 ................................... 3,000,128 2,866,060
7.73%, Resolution Trust Corporation, Series 1992-6,
Class B3, 1/25/26 ................................... 10,002,246 10,002,246
------------
56,991,237
------------
Total Mortgage-Backed Securities
(cost: $182,424,307) .............................. 180,938,334
------------
SHORT-TERM SECURITIES (20.7%):
Repurchase agreement with Goldman Sachs in a joint
trading account collateralized by U.S. government
agency securities, acquired on 8/31/95, accrued
interest at repurchase date of $7,925, 5.80%, 9/1/95
(cost: $49,871,000) ................................. 49,871,000 49,871,000
------------
Total Investments in Securities
(cost: $258,315,297) (d) ......................... $ 256,753,174
------------
------------
</TABLE>
NOTES TO INVESTMENTS IN SECURITIES:
(A) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO
THE FINANCIAL STATEMENTS.
(B) ON AUGUST 31, 1995, THE TOTAL COST OF INVESTMENTS PURCHASED ON A
WHEN-ISSUED BASIS WAS $20,087,500.
(C) DESCRIPTIONS OF CERTAIN COLLATERALIZED MORTGAGE OBLIGATIONS ARE AS FOLLOWS:
LIBOR - LONDON INTERBANK OFFERED RATE.
FLOATING RATE - REPRESENTS SECURITIES THAT PAY INTEREST AT RATES THAT
INCREASE (DECREASE) WITH AN INCREASE (DECREASE) IN A SPECIFIED INDEX.
(D) ALSO REPRESENTS COST FOR FEDERAL INCOME TAX PURPOSES. THE AGGREGATE GROSS
UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED
ON THIS COST WERE AS FOLLOWS:
<TABLE>
<S> <C>
GROSS UNREALIZED APPRECIATION .... $ 295,680
GROSS UNREALIZED DEPRECIATION ...... (1,857,803)
----------
NET UNREALIZED DEPRECIATION .... $ (1,562,123)
----------
----------
</TABLE>
36
<PAGE>
- - - --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS
AMERICAN ADJUSTABLE RATE TERM TRUST INC. - 1996,
AMERICAN ADJUSTABLE RATE TERM TRUST INC. - 1997 AND
AMERICAN ADJUSTABLE RATE TERM TRUST INC. - 1999:
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments in securities, of American Adjustable Rate Term
Trust Inc. - 1996, American Adjustable Rate Term Trust Inc. - 1997 and American
Adjustable Rate Term Trust Inc. - 1999 as of August 31, 1995, and the related
statements of operations and cash flows for the year then ended, the statements
of changes in net assets for each of the years in the two-year period ended
August 31, 1995 and the financial highlights presented in footnote 10 to the
financial statements. These financial statements and the financial highlights
are the responsibility of the funds' management. Our responsibility is to
express an opinion on these financial statements and the financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Investment securities held in custody are confirmed to us by the
custodian. As to securities purchased and sold but not received or delivered, we
request confirmations from brokers and, where replies are not received, we carry
out other appropriate auditing procedures. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Adjustable Rate Term
Trust Inc. - 1996, American Adjustable Rate Term Trust Inc. - 1997 and American
Adjustable Rate Term Trust Inc. - 1999 as of August 31, 1995, the results of
their operations and cash flows for the year then ended, the changes in their
net assets for each of the years in the two-year period ended August 31, 1995
and the financial highlights presented in footnote 10 to the financial
statements, in conformity with generally accepted accounting principles.
As discussed in footnote 9 to the financial statements, American Adjustable Rate
Term Trust Inc. - 1996, American Adjustable Rate Term Trust Inc. - 1997 and
American Adjustable Rate Term Trust Inc. - 1999 merged into Piper Funds Inc. -
II Adjustable Rate Mortgage Securities Fund on September 1, 1995.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
October 13, 1995
37
<PAGE>
- - - --------------------------------------------------------------------------------
FEDERAL INCOME TAX INFORMATION
Fiscal Year Ended August 31, 1995
Distributions shown below are taxable as dividend income. None qualify for the
corporate dividends received deduction. In February 1996, each shareholder will
receive a breakdown of income earned by investment category for calendar year
1995.
Information for federal income tax purposes is presented as an aid to
shareholders in reporting the distributions shown below. Shareholders should
consult a tax adviser on how to report these distributions for state and local
income taxes.
<TABLE>
<CAPTION>
American American American American
Adjustable Adjustable Adjustable Adjustable
Rate Term Rate Term Rate Term Rate Term
Payable Date Trust 1996 Trust 1997 Trust 1998 Trust 1999
- - - ------------------------------------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
September 28, 1994 ..................... $ 0.0300 0.0375 0.0400 0.0425
October 26, 1994 ......................... 0.0300 0.0375 0.0400 0.0425
November 23, 1994 ........................ 0.0325 0.0400 0.0425 0.0450
December 28, 1994 ........................ 0.0325 0.0400 0.0425 0.0450
January 13, 1995 ......................... 0.0325 0.0400 0.0425 0.0450
February 22, 1995 ........................ 0.0325 0.0400 0.0425 0.0450
March 29, 1995 ........................... 0.0325 0.0400 0.0425 0.0450
April 26, 1995 ........................... 0.0325 0.0400 0.0425 0.0450
May 24, 1995 ............................. 0.0325 0.0400 0.0425 0.0450
June 28, 1995 ............................ 0.1085 0.0400 0.0425 0.0450
July 27, 1995 ............................ 0.0325 0.0400 0.0425 0.0450
August 23, 1995 .......................... 0.0325 0.0400 0.0425 0.0450
August 24, 1995 .......................... 0.4550 0.2400 0.0750 --
----------- ----------- ----------- -----------
Total distributions .................... $ 0.9160 0.7150 0.5800 0.5350
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
38
<PAGE>
- - - --------------------------------------------------------------------------------
SHAREHOLDER UPDATE
ANNUAL MEETING RESULTS
An annual meeting of the funds' shareholders was held on August 1, 1995 and
adjourned to August 10, 1995 with respect to the third matter set forth below.
Each matter voted upon at the meeting, as well as the number of votes cast for,
against or withheld, the number of abstentions, and the number of broker
non-votes with respect to such matters, are set forth below.
1. The funds' shareholders elected the following six directors:
AMERICAN ADJUSTABLE RATE TERM TRUST 1996 (BDJ)
<TABLE>
<CAPTION>
Shares Shares Withholding
Voted "For" Authority to Vote
----------- ------------------
<S> <C> <C>
David T. Bennett.......................................................... 18,221,539 1,292,019
Jaye F. Dyer.............................................................. 18,210,300 1,303,258
William H. Ellis.......................................................... 18,201,503 1,312,055
Karol D. Emmerich......................................................... 18,223,803 1,289,755
Luella G. Goldberg........................................................ 18,216,862 1,296,696
George Latimer............................................................ 18,207,787 1,305,771
</TABLE>
AMERICAN ADJUSTABLE RATE TERM TRUST 1997 (CDJ)
<TABLE>
<CAPTION>
Shares Shares Withholding
Voted "For" Authority to Vote
----------- ------------------
<S> <C> <C>
David T. Bennett.......................................................... 36,894,551 2,473,129
Jaye F. Dyer.............................................................. 36,868,590 2,499,090
William H. Ellis.......................................................... 36,785,796 2,581,884
Karol D. Emmerich......................................................... 36,816,793 2,550,887
Luella G. Goldberg........................................................ 36,796,122 2,571,558
George Latimer............................................................ 36,798,987 2,568,693
</TABLE>
AMERICAN ADJUSTABLE RATE TERM TRUST 1998 (DDJ)
<TABLE>
<CAPTION>
Shares Shares Withholding
Voted "For" Authority to Vote
----------- ------------------
<S> <C> <C>
David T. Bennett.......................................................... 40,977,588 2,602,924
Jaye F. Dyer.............................................................. 40,969,160 2,611,352
William H. Ellis.......................................................... 40,858,731 2,721,781
Karol D. Emmerich......................................................... 40,892,210 2,688,302
Luella G. Goldberg........................................................ 40,879,022 2,701,490
George Latimer............................................................ 40,850,509 2,730,003
</TABLE>
AMERICAN ADJUSTABLE RATE TERM TRUST 1999 (EDJ)
<TABLE>
<CAPTION>
Shares Shares Withholding
Voted "For" Authority to Vote
----------- ------------------
<S> <C> <C>
David T. Bennett.......................................................... 23,242,175 1,955,524
Jaye F. Dyer.............................................................. 23,219,659 1,978,040
William H. Ellis.......................................................... 23,157,205 2,040,494
Karol D. Emmerich......................................................... 23,187,739 2,009,960
Luella G. Goldberg........................................................ 23,168,192 2,029,507
George Latimer............................................................ 23,179,265 2,018,434
</TABLE>
2. The funds' shareholders ratified the selection by a majority of the
independent members of the funds' Boards of Directors of KPMG Peat
Marwick LLP as the independent public accountants for the funds for the
fiscal year ending August 31, 1995. The following votes were cast
regarding this matter:
<TABLE>
<CAPTION>
Shares Shares Voted Broker
Voted "For" "Against" Absentions Non-Votes
----------- --------------- ----------- -----------
<S> <C> <C> <C> <C>
BDJ................................................. 18,185,913 349,256 979,384 --
CDJ................................................. 36,787,530 753,257 1,836,173 --
DDJ................................................. 39,550,474 783,561 1,973,849 1,272,628
EDJ................................................. 23,263,951 592,815 1,340,931 --
</TABLE>
39
<PAGE>
- - - --------------------------------------------------------------------------------
SHAREHOLDER UPDATE
3. The funds' shareholders approved the Agreement and Plan of Merger whereby
each approving fund merged with and into Piper Funds Inc. - II Adjustable
Rate Mortgage Securities Fund. The following votes were cast regarding
this matter:
<TABLE>
<CAPTION>
Shares Shares Voted Broker
Voted "For" "Against" Abstentions Non-Votes
----------- --------------- ----------- -----------
<S> <C> <C> <C> <C>
BDJ................................................. 14,934,062 1,100,214 767,096 2,712,186
CDJ................................................. 29,393,183 1,634,820 1,618,708 6,720,969
DDJ................................................. 32,499,507 2,022,751 964,496 8,093,758
EDJ................................................. 18,831,029 1,383,124 1,122,038 3,861,508
</TABLE>
40
<PAGE>
- - - --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS OF PIPER FUNDS INC. - II
<TABLE>
<S> <C>
DIRECTORS David T. Bennett, CHAIRMAN, HIGHLAND HOMES, INC., USL PRODUCTS, INC., KIEFER BUILT, INC.,
OF COUNSEL, GRAY, PLANT, MOOTY, MOOTY & BENNETT, P.A.
Jaye F. Dyer, PRESIDENT, DYER MANAGEMENT COMPANY
William H. Ellis, CHAIRMAN OF THE BOARD, PRESIDENT, PIPER CAPITAL MANAGEMENT INCORPORATED,
PIPER JAFFRAY COMPANIES INC.
Karol D. Emmerich, PRESIDENT, THE PARACLETE GROUP
Luella G. Goldberg, DIRECTOR, TCF FINANCIAL, RELIASTAR CORP., HORMEL FOODS CORP.
George Latimer, DIRECTOR, SPECIAL ACTIONS OFFICE, OFFICE OF THE SECRETARY, DEPARTMENT OF
HOUSING AND URBAN DEVELOPMENT
OFFICERS Paul A. Dow, PRESIDENT
Michael P. Jansen, SENIOR VICE PRESIDENT
Robert H. Nelson, SENIOR VICE PRESIDENT
Amy K. Johnson, VICE PRESIDENT
Thomas S. McGlinch, VICE PRESIDENT
David E. Rosedahl, SECRETARY
Charles N. Hayssen, TREASURER
INVESTMENT ADVISER Piper Capital Management Incorporated
222 SOUTH NINTH STREET, MINNEAPOLIS, MN 55402-3804
CUSTODIAN AND TRANSFER Investors Fiduciary Trust Company
AGENT 127 WEST 10TH STREET, KANSAS CITY, MO 64105-1716
LEGAL COUNSEL Dorsey & Whitney P.L.L.P.
220 SOUTH SIXTH STREET, MINNEAPOLIS, MN 55402
INDEPENDENT AUDITORS KPMG Peat Marwick LLP
4200 NORWEST CENTER, MINNEAPOLIS, MN 55402
</TABLE>
41
<PAGE>
PIPER CAPITAL
MANAGEMENT
Bulk Rate
U.S. Postage
PAID
Permit No. 3008
Mpls, MN
PIPER CAPITAL MANAGEMENT INCORPORATED
222 SOUTH NINTH STREET
MINNEAPOLIS, MN 55402-3804
PIPER JAFFRAY INC., FUND DISTRIBUTOR AND NASD MEMBER.
[LOGO] THIS DOCUMENT IS PRINTED ON PAPER MADE FROM
100% TOTAL RECOVERED FIBER, INCLUDING 15% POST-CONSUMER WASTE.
310-95 PJARX-01 10/95
<PAGE>
ADJUSTABLE RATE
MORTGAGE
SECURITIES
FUND
1996
SEMIANNUAL REPORT
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders.................2
Investments in Securities..............5
Financial Statements and Notes.........6
</TABLE>
ADJUSTABLE RATE MORTGAGE SECURITIES FUND
Adjustable Rate Mortgage Securities Fund is a diversified, open-end mutual
fund with an investment objective of providing the maximum current income
that is consistent with low volatility of principal. The fund invests
primarily in adjustable rate mortgage (ARM) securities. It may also invest in
mortgage-backed securities other than ARM securities, U.S. government
securities, asset-backed securities and corporate debt securities. The fund's
Nasdaq symbol is PJARX. As with other mutual funds, there can be no assurance
the fund will achieve its objective.
CALL TO RECEIVE QUARTERLY UPDATES
If you would like to be put on our mailing list to receive quarterly fund
summaries for Adjustable Rate Mortgage Securities Fund, call our Shareholder
Services Department at 1 800 866-7778.
THIS REPORT IS INTENDED FOR SHAREHOLDERS OF ADJUSTABLE RATE MORTGAGE
SECURITIES FUND, BUT IT MAY ALSO BE USED AS SALES LITERATURE IF PRECEDED OR
ACCOMPANIED BY A PROSPECTUS. THE PROSPECTUS GIVES DETAILS ABOUT THE CHARGES,
INVESTMENT RESULTS AND OPERATING POLICIES OF THE FUND.
<PAGE>
SHAREHOLDER SERVICES
AS A SHAREHOLDER IN PIPER FUNDS, YOU HAVE ACCESS TO A FULL RANGE OF SERVICES
AND BENEFITS. IF YOU HOLD YOUR FUND SHARES THROUGH A BROKER/DEALER OTHER THAN
PIPER JAFFRAY, THESE SERVICES MAY NOT BE AVAILABLE TO YOU. CHECK YOUR
PROSPECTUS FOR DETAILS ABOUT SERVICES AND ANY LIMITATIONS THAT MIGHT APPLY TO
YOUR FUND.
LOW MINIMUM INVESTMENTS
You can open most Piper mutual fund accounts with a minimum investment of $250.
QUANTITY DISCOUNTS
If your initial investment exceeds a specified amount, if an investment
combined with the value of your existing Piper shares exceeds a specified
amount, or if your investments combined during a 13-month period exceed a
specified amount, you can reduce or even eliminate the front-end sales charge.
WAIVER OF SALES CHARGES
Money market funds carry no sales charges.* Sales charges on other Piper
funds are waived on purchases of $500,000 or more. However, a contingent
deferred sales charge may be imposed. See your prospectus for details.
AUTOMATIC REINVESTMENT OF DIVIDENDS
For maximum growth of your assets, you can reinvest dividends and capital
gains automatically in additional shares of your fund without a sales charge.
CROSS-REINVESTMENT OF DISTRIBUTIONS
Diversify your holdings by reinvesting dividends and capital gains from one
Piper fund into another.
CASH DISTRIBUTIONS
If you prefer, take your dividends and/or capital gains in cash.
AUTOMATIC MONTHLY INVESTMENT PROGRAM
You may automatically transfer $25 or more each month from any Piper money
market fund into many other Piper funds.*
AUTOMATIC MONTHLY MONEY TRANSFER PROGRAM
If you are starting a savings discipline or seeking a convenient way to
invest, you can transfer a minimum of $100 automatically from your bank,
savings and loan or other financial institution into many of the Piper funds.
EXCHANGE PRIVILEGES
Revise your investment plan without incurring a sales charge by moving assets
from one Piper fund to another with the same fee structure. See your
prospectus for restrictions involving exchanges between funds with different
sales charges.
REINVESTMENT PRIVILEGES
If you buy a fund with a sales charge and later redeem your shares, you may
reinvest all or part of the proceeds in shares of that fund or another Piper
fund within 30 days and pay no additional sales charge, subject to each
fund's minimum investment requirements.
SYSTEMATIC WITHDRAWAL PLAN
If your account has a value of $5,000 or more, you can elect to receive
periodic payments of $100 or more, at no cost, excluding money market funds.
ACCOUNT STATEMENTS
Whenever you add to or withdraw money from your account, you'll receive a
monthly statement from Piper Jaffray. Accounts with no activity receive a
quarterly statement instead. Periodic dividend and capital gain
distributions, if any, also appear on your statement.
CONFIRMATION OF TRANSACTIONS
You receive a confirmation statement following every transaction, except in
the money market funds. All transactions are reflected on your account
statement.
$25 MILLION SHAREHOLDER PROTECTION
If you have a Piper Jaffray PRIME or PAT account, you are protected up to $25
million in the unlikely event that Piper Jaffray were to fail financially.
This is in addition to basic Securities Investor Protection Corporation
(SIPC) coverage, which protects up to $500,000 in cash and securities
($100,000 in cash only) per customer. This protection does not cover market
loss.
* AN INVESTMENT IN A PIPER MONEY MARKET FUND IS NEITHER INSURED NOR
GUARANTEED BY THE U.S. GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THE FUND
WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1 PER SHARE.
1
<PAGE>
ADJUSTABLE RATE MORTGAGE SECURITIES FUND
[PHOTO TOM MCGLINCH]
FPO
65%
[PHOTO WAN-CHONG KUNG]
FPO
52%
TOM MCGLINCH
SHARES PRIMARY RESPONSIBILITY FOR THE MANAGEMENT OF ADJUSTABLE RATE MORTGAGE
SECURITIES FUND. HE HAS 15 YEARS OF INVESTMENT EXPERIENCE.
WAN-CHONG KUNG
SHARES PRIMARY RESPONSIBILITY FOR THE MANAGEMENT OF ADJUSTABLE RATE MORTGAGE
SECURITIES FUND. SHE HAS FOUR YEARS OF INVESTMENT EXPERIENCE.
PORTFOLIO COMPOSITION
FEBRUARY 29, 1996
[CHART]
U.S. Agency ARM Securities 69%
Short-Term 1%
U.S. Treasuries 11%
U.S. Agency Fixed Rate Mortgage-Backed Securities 2%
Privately Issued ARM Securities 16%
Other Assets 1%
INVESTMENT CATEGORIES REFLECT PERCENTAGE OF TOTAL ASSETS.
April 17, 1996
Dear Shareholders:
FOR THE SIX-MONTH PERIOD ENDED FEBRUARY 29, 1996, ADJUSTABLE RATE MORTGAGE
SECURITIES FUND HAD A TOTAL RETURN OF 3.51%* which includes reinvested
distributions but not the fund's sales charge. The fund's emphasis on
high-quality securities helped it outperform the Lipper Adjustable Rate
Mortgage Funds Average return of 1.31% for the same period. The fund
performed in line with the Lehman Brothers Adjustable Rate Mortgage Index
which returned 3.92% for the same six-month period. The slight outperformance
by the Lehman index resulted from its larger allocation to Government
National Mortgage Association (GNMA) securities and securities with coupon
rates that reset to the Cost of Funds Index (COFI). Although these securities
typically experience greater price appreciation during periods of falling
interest rates such as we experienced for most of the six-month period, they
produce less income than the higher-coupon issues held by the fund.
THE FUND'S NET ASSET VALUE HAS EXPERIENCED LITTLE VOLATILITY SINCE IT WAS
BROUGHT OUT AT $8.00 PER SHARE AFTER THE MERGER OF THE FOUR TERM TRUSTS. Over
the last six months, interest rates generally declined as the Federal Reserve
lowered the fed funds rate once in December from 5.75% to 5.50%, and another
time in January from 5.50% to 5.25% to try to stimulate the economy. The rate
cuts helped to move short-term interest rates lower which in turn increased
the prices of ARM securities. This was reflected in a modest rise in the net
asset value of Adjustable Rate Mortgage Securities Fund to a high of $8.08 on
February 2. However, we positioned the fund to emphasize income more than an
increase in net asset value as we expected the Federal Reserve to ease rates
much less aggressively than did the market in general. This strategy paid off
in February when the bond market realized it had effectively
"overanticipated" the number of rate cuts the Federal Reserve would make and
rates began to rise. In late February, the net asset value of the fund
dropped only slightly and is currently $8.03 as of April 17.
SINCE THE MERGER LAST FALL, WE HAVE FOCUSED OUR EFFORTS ON IMPROVING THE
LEVEL AND PREDICTABILITY OF DIVIDEND INCOME TO SHAREHOLDERS. The lower rate
environment throughout most of the period decreased the interest rates on
mortgages, causing investors in ARM securities to experience a gradual
reduction in coupon income as the underlying mortgage loans reset. We took
steps to extend the average number of
* FIGURES SHOWN REFLECT PAST PERFORMANCE AND DO NOT GUARANTEE FUTURE RESULTS.
THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO
THAT FUND SHARES, WHEN SOLD, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST.
2
<PAGE>
ADJUSTABLE RATE MORTGAGE SECURITIES FUND
[CHART]
Adjustable Rate Mortgage Securities Fund (Results include historical net
asset value performance of American Adjustable Rate Term Trust--1998, assume
reinvested distribution and reflect the funds 1.5% sales charge since
inception)
Lehman Brothers Adjustable Rate Mortgage Index, an unmanaged index of all
U.S. agency adjustable rate mortgage securities
Lipper Adjustable Rate Mortgage Funds Average, the average total return, with
distributions reinvested, of similar funds as characterized by Lipper
Analytical Services
IF YOU HAD INVESTED $10,000 IN JANUARY 1992 AND HELD YOUR INVESTMENT THROUGH
FEBRUARY 29, 1996, REINVESTING ALL DISTRIBUTIONS, YOUR INVESTMENT WOULD HAVE
GROWN TO $11,690. IN COMPARING THE FUND TO THE LEHMAN BROTHERS INDEX AND THE
LIPPER AVERAGE, KEEP IN MIND THAT THE FUND'S PERFORMANCE REFLECTS THE SALES
CHARGE, WHILE NO SUCH CHARGES ARE REFLECTED IN THE INDEX OR THE AVERAGE. PAST
PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS.
AVERAGE ANNUAL TOTAL RETURNS
THROUGH 2/29/96, INCLUDING 1.5% SALES CHARGE
<TABLE>
<S> <C>
One Year..............................6.26%
Since Inception (1/30/92).............3.90%
</TABLE>
FUND RESULTS INCLUDE REINVESTED DISTRIBUTIONS AND REFLECT THE ADJUSTABLE RATE
MORTGAGE SECURITIES FUND'S MAXIMUM 1.5% SALES CHARGE AS IF IT WAS APPLIED
SINCE THE FUND'S INCEPTION. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE
RESULTS.
ON SEPTEMBER 1, 1995, FOUR AMERICAN ADJUSTABLE RATE TERM TRUSTS MERGED INTO
THE ADJUSTABLE RATE MORTGAGE SECURITIES FUND. ALL PERFORMANCE RESULTS ABOVE
INCLUDE THE HISTORICAL NET ASSET VALUE PERFORMANCE THROUGH SEPTEMBER 1, 1995,
OF AMERICAN ADJUSTABLE RATE TERM TRUST-1998, THE FUND'S PREDECESSOR FOR
PERFORMANCE AND FINANCIAL REPORTING PURPOSES.
months for coupons to reset by increasing the fund's allocation to GNMA ARM
securities. These securities have coupons ranging from 6.0% to 7.38% that
won't reset until the fourth quarter of 1996. In addition, we overweighted
ARM securities indexed to the one-year Constant Maturity Treasury, which
reset less frequently than LIBOR-based or Treasury bill-based ARM securities.
The lower rates also caused many adjustable rate mortgage borrowers to prepay
their mortgages and lock in a lower rate with fixed rate mortgages. This
level of prepayments also reduced the fund's income level. That's because the
fund purchased many of these mortgages at premium prices and the prepayments
forced the fund to amortize these premiums more quickly. We reduced the
fund's exposure to prepayments by selling higher cost, faster prepaying ARM
securities for lower cost, slower prepaying ARM securities.
THESE ACTIONS, IN ADDITION TO A SMALLER CASH POSITION IN THE FUND, HAVE
RESULTED IN A HIGHER LEVEL OF DIVIDEND INCOME TO SHAREHOLDERS. The dividend
has increased from the September 1995 level of $0.0340 per share to the March
1996 level of $0.0403 per share. The dividend policy for the fund is to
distribute to shareholders substantially all of the investment income earned
during any period. Therefore, we will not attempt to stabilize monthly
distributions by retaining income in a dividend reserve.
THE FUND IS STILL EXPERIENCING REDEMPTIONS THAT BEGAN AFTER THE MERGER LAST
FALL. We have continued to meet redemption requests without disruption to the
fund's net asset value or income. This has been accomplished by maintaining a
small cash position in the fund at all times and by selling privately issued
and U.S. government agency ARM securities or U.S. Treasury securities when
necessary.
THROUGHOUT MOST OF THE SEMIANNUAL PERIOD, THE FUND MAINTAINED A HIGH
PERCENTAGE IN ARM SECURITIES. We believed they represented a good value when
comparing their level of income to their price stability. As of February 29,
85% of the fund's total assets were invested in ARM securities (see pie chart
on page 2), with 69% issued by a U.S. government agency and 16% privately
issued and rated AAA or AA by Standard and Poor's. Nearly all of these ARM
securities had coupons which were indexed to the one-year Constant Maturity
Treasury yield and which reset on an annual basis.
3
<PAGE>
ADJUSTABLE RATE MORTGAGE SECURITIES FUND
WHAT ARE ADJUSTABLE RATE MORTGAGE (ARM) SECURITIES?*
An ARM security represents ownership in a pool of adjustable rate mortgage
loans. Payments on the ARM securities come from payments on the adjustable
rate mortgages. When a borrower's mortgage rate resets to a higher (lower)
rate due to changes in a market index, the coupon on the ARM security also
resets to a higher (lower) level. This results in a larger (smaller) interest
payment that is then passed through to investors. The borrower's loan
document specifically states the dates on which the rate will change, the
market index on which the new rate is based, and the margin by which the rate
is set over the index rate. For example, many borrowers have loans indexed to
the one-year Treasury rate plus a margin of 2.75%, which reset once a year.
If, on the reset date, the one-year Treasury rate is 5.50%, the borrower's
new rate for the following 12 months will increase to 8.25%. Likewise, the
rate passed through to the investor will increase to 8.25% minus a mortgage
servicer and guarantee fee. Almost all ARM loans have periodic reset caps and
lifetime caps, which limit how often and how high rates can reset. Smaller
periodic caps and lower lifetime caps work to the advantage of the borrower
and to the disadvantage of the investor when rates are rising. Although ARM
pools are made up of thousands of similarly indexed loans, in any particular
month only a portion of the loans reset to a current market rate, creating
lags in the adjustment process.
* ARM SECURITIES ARE DEFINED MORE BROADLY IN THE FUND'S PROSPECTUS. PLEASE
SEE THE PROSPECTUS FOR A COMPLETE DEFINITION.
RECENT VOLATILITY IN THE BOND MARKET HAS CAUSED US TO REDUCE THE ARM
SECURITIES PORTION OF THE FUND BY ABOUT 5% AND PURCHASE TWO-YEAR U.S.
TREASURY NOTES. This volatility, and higher rates, were the result of good
economic data concerning job growth that came out in March and April.
Positive job growth data and a stronger economy reignite inflation concerns,
which in turn cause rates to rise.
LOOKING AHEAD, WE EXPECT A RELATIVELY STABLE INTEREST RATE ENVIRONMENT
THROUGH THE FUND'S FISCAL YEAR END IN AUGUST. The higher interest rates we're
experiencing, and the additional income that now comes from extending
maturities, could lead to opportunities in fixed rate securities and a
reduction in the percentage of ARM securities the fund holds.
SINCE WE LAST REPORTED TO YOU IN OCTOBER, WE HAVE ADDED A NEW PORTFOLIO
MANAGER TO THE FUND. Wan-Chong Kung joined the fund as a co-manager in
December. Wan-Chong, a vice president and fixed income portfolio manager at
Piper Capital Management, also assists with the management of Highlander
Income Fund and several separately managed accounts. Prior to joining Piper
Capital in 1993, Wan-Chong was a senior consultant for a financial services
firm. She has four years of financial experience. Mike Jansen, who previously
co-managed the fund, has left Piper Capital to pursue other career
opportunities.
Thank you for your investment in the Adjustable Rate Mortgage Securities
Fund. We remain committed to providing you with top-quality investment
management and service.
Sincerely,
[sig]
Tom McGlinch
Portfolio Manager
4
<PAGE>
- - - --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
ADJUSTABLE RATE MORTGAGE SECURITIES FUND
FEBRUARY 29, 1996
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- - - --------------------------------------------------------- ---------- -----------
<S> <C> <C>
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS)
U.S. GOVERNMENT SECURITIES (10.7%):
U.S. Treasury Note, 6.38%, 6/30/97 ................. $ 10,000,000 10,136,100
U.S. Treasury Note, 6.00%, 11/30/97 .................. 23,000,000 23,218,500
U.S. Treasury Note, 6.63%, 3/31/97 ................... 7,500,000 7,606,200
-----------
Total U.S. Government Securities
(cost: $40,937,953) ............................... 40,960,800
-----------
MORTGAGE-BACKED SECURITIES (87.7%):
U.S. Agency Fixed Rate Mortgages (1.8%):
10.00%, FNMA, 12/1/21 ................................ 2,205,323 2,426,517
9.00%, GNMA, 5/15/16 ................................. 1,272,415 1,359,868
10.00%, GNMA, 2/15/25 ................................ 2,876,741 3,180,554
-----------
6,966,939
-----------
U.S. Agency Adjustable Rate Mortgages (67.4%):
7.95%, FHLMC, 2/1/22 ................................. 14,279,780 14,768,148
8.01%, FHLMC, 9/1/22 ................................. 4,485,622 4,602,651
7.50%, FHLMC, 11/1/16 ................................ 8,889,192 9,066,709
8.00%, FHLMC, 5/1/17 ................................. 3,199,579 3,252,979
7.73%, FHLMC, 6/1/18 ................................. 1,816,259 1,870,638
7.74%, FHLMC, 1/1/21 ................................. 5,230,181 5,340,643
7.72%, FHLMC, 5/1/19 ................................. 1,841,215 1,877,910
7.77%, FHLMC, 10/1/18 ................................ 6,029,254 6,197,712
7.71%, FHLMC, 8/1/20 ................................. 9,633,482 9,866,420
7.69%, FNMA, 1/1/18 .................................. 1,876,024 1,940,165
7.71%, FNMA, 1/1/29 .................................. 3,362,914 3,453,276
7.40%, FNMA, 5/1/18 .................................. 6,690,528 6,827,282
7.33%, FNMA, 3/1/28 .................................. 9,239,020 9,430,637
7.43%, FNMA, 7/1/19 .................................. 2,572,057 2,626,276
7.30%, FNMA, 11/1/17 ................................. 8,863,650 8,981,270
7.81%, FNMA, 1/1/20 .................................. 1,812,091 1,865,185
7.55%, FNMA, 12/1/20 ................................. 7,062,010 7,220,834
7.49%, FNMA, 11/1/21 ................................. 6,319,834 6,466,960
7.33%, FNMA, 10/1/25 ................................. 7,405,840 7,479,899
7.00%, GNMA, 5/20/23 ................................. 10,130,390 10,273,633
7.25%, GNMA, 9/20/23 ................................. 8,020,783 8,150,158
7.00%, GNMA, 6/20/24 ................................. 9,627,184 9,791,423
6.50%, GNMA, 9/20/25 ................................. 14,639,769 14,928,026
6.00%, GNMA, 8/20/25 ................................. 21,155,800 21,411,574
6.00%, GNMA, 9/20/25 ................................. 21,152,554 21,408,712
7.00%, GNMA II, 7/20/22 .............................. 7,667,352 7,800,074
7.25%, GNMA II, 7/20/22 .............................. 10,943,011 11,164,716
7.00%, GNMA II, 6/20/22 .............................. 7,710,315 7,818,414
7.38%, GNMA II, 6/20/23 .............................. 16,515,271 16,784,635
7.00%, GNMA II, 8/20/21 .............................. 6,916,383 7,056,370
7.00%, GNMA II, 10/20/21 ............................. 6,772,966 6,914,047
-----------
256,637,376
-----------
Collateralized Mortgage Obligations (b) (18.5%):
U.S. Agency Floating Rate (2.3%):
4.88%, FHLMC 1693, Class FA, Treasury, 3/15/09 ....... 9,139,139 8,789,568
-----------
</TABLE>
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- - - --------------------------------------------------------- ---------- -----------
<S> <C> <C>
Private Floating Rate (16.2%):
7.79%, Donaldson, Lufkin and Jenrette, Series
1992-MF3, Class A3, LIBOR, 6/18/07 ................ $ 13,000,000 13,130,000
8.16%, Resolution Trust Corporation, Series 1991-8,
Class A1, Treasury, 12/25/20 ........................ 11,002,561 11,105,710
7.85%, Resolution Trust Corporation, Series 1992-6,
Class B3, Treasury, 1/25/26 ......................... 23,345,266 23,491,174
7.15%, Sears Mortgage Securities, Series 1991-K, Class
A1, LIBOR, 9/25/21 .................................. 13,776,414 13,776,414
-----------
61,503,298
-----------
Total Mortgage-Backed Securities
(cost: $335,964,435) .............................. 333,897,181
-----------
SHORT-TERM SECURITIES (1.4%):
Repurchase agreement with Goldman Sachs in a joint
trading account collateralized by U.S. government
agency securities, acquired on 2/29/96, accrued
interest at repurchase date of $803, 5.42%, 3/1/96
(cost: $5,331,000) .................................. 5,331,000 5,331,000
-----------
Total Investments in Securities (99.8%)
(cost: $382,233,388) (c) .......................... 380,188,981
-----------
Other assets in excess of liabilities (0.2%) ....... 599,523
-----------
Net assets (100.0%) ............................... $ 380,788,504
-----------
-----------
</TABLE>
NOTES TO INVESTMENTS IN SECURITIES:
(A) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO
THE FINANCIAL STATEMENTS.
(B) DESCRIPTIONS OF CERTAIN COLLATERALIZED MORTGAGE OBLIGATIONS ARE AS FOLLOWS:
LIBOR - LONDON INTERBANK OFFERED RATE.
FLOATING RATE - REPRESENT SECURITIES THAT PAY INTEREST AT RATES THAT
INCREASE (DECREASE) WITH AN INCREASE (DECREASE) IN A SPECIFIED INDEX.
(C) ALSO REPRESENTS COST FOR FEDERAL INCOME TAX PURPOSES. THE AGGREGATE GROSS
UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED
ON THIS COST WERE AS FOLLOWS:
<TABLE>
<S> <C>
GROSS UNREALIZED APPRECIATION .... $ 631,844
GROSS UNREALIZED DEPRECIATION ...... (2,676,251)
----------
NET UNREALIZED DEPRECIATION .... $ (2,044,407)
----------
----------
</TABLE>
5
<PAGE>
- - - --------------------------------------------------------------------------------
FINANCIAL STATEMENTS (UNAUDITED)
STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 29, 1996
<TABLE>
<S> <C>
ASSETS:
Investments in securities at market value* (including a
repurchase agreement of $5,331,000) (note 2) ......... $ 380,188,981
Cash in bank on demand deposit ........................... 26,385
Mortgage security paydowns receivable .................... 958,307
Accrued interest receivable .............................. 3,052,533
----------------
Total assets ......................................... 384,226,206
----------------
LIABILITIES:
Dividends payable to shareholders ($0.0407 per share) .... 1,924,914
Payable for fund shares redeemed ......................... 1,244,988
Accrued investment management fee ........................ 109,211
Accrued distribution fee ................................. 158,589
----------------
Total liabilities .................................... 3,437,702
----------------
Net assets applicable to outstanding capital stock ....... $ 380,788,504
----------------
----------------
REPRESENTED BY:
Capital stock - authorized 1 billion shares of $0.01 par
value; outstanding, 47,281,277 shares ................ $ 472,813
Additional paid-in capital ............................... 526,223,960
Undistributed net investment income ...................... 57,012
Accumulated net realized loss on investments ............. (143,920,874)
Unrealized depreciation of investments ................... (2,044,407)
----------------
Total - representing net assets applicable to
outstanding capital stock ........................ $ 380,788,504
----------------
----------------
Net asset value per share of outstanding capital stock ... $ 8.05
----------------
----------------
* Investments in securities at identified cost ........... $ 382,233,388
----------------
----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
- - - --------------------------------------------------------------------------------
FINANCIAL STATEMENTS (UNAUDITED)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED FEBRUARY 29, 1996
<TABLE>
<S> <C>
INCOME:
Interest ............................................... $ 17,006,142
----------------
EXPENSES (NOTE 3):
Investment management fee ................................ 916,089
Distribution fees ........................................ 395,218
Custodian, accounting and transfer agent fees ............ 463,088
Shareholder account servicing fees ....................... 21,055
Registration fees ........................................ 69,631
Reports to shareholders .................................. 54,111
Directors' fees .......................................... 17,603
Audit and legal fees ..................................... 26,751
Other expenses ........................................... 29,844
----------------
Total expenses ....................................... 1,993,390
Less expenses waived by the adviser ...................... (375,349)
----------------
Net expenses before expenses paid indirectly ........... 1,618,041
Less expenses paid indirectly ............................ (9,013)
----------------
Total net expenses ................................... 1,609,028
----------------
Net investment income ................................ 15,397,114
----------------
NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized loss on investments (note 4) ................ (1,876,436)
Net change in unrealized appreciation or depreciation of
investments ............................................ 6,268,848
----------------
Net gain on investments ................................ 4,392,412
----------------
Net increase in net assets resulting from
operations ....................................... $ 19,789,526
----------------
----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
- - - --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended
2/29/96 Year Ended
(Unaudited) 8/31/95*
---------------- ----------------
<S> <C> <C>
OPERATIONS:
Net investment income .................................. $ 15,397,114 23,499,426
Net realized loss on investments ......................... (1,876,436) (20,761,474)
Net change in unrealized appreciation or depreciation of
investments . 6,268,848 17,558,315
---------------- ----------------
Net increase in net assets resulting from operations ... 19,789,526 20,296,267
---------------- ----------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ............................... (15,340,102) (27,746,007)
---------------- ----------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from sales of 344,857 shares .................... 2,765,136 --
Proceeds from issuance of 959,489 shares for reinvestment
of distributions ....................................... 7,705,791 --
Payments for 105,492,397 shares redeemed ................. (845,180,658) --
Payments for retirement of 488,000 shares (note 6) ....... -- (3,579,372)
Payments for tender of 9,135,819 shares respectively (note
7) ..................................................... -- (79,726,515)
Net asset value of 104,403,211 shares issued in connection
with merger transaction** (note 9) ..................... 801,742,686 --
---------------- ----------------
Decrease in net assets from capital share
transactions ......................................... (32,967,045) (83,305,887)
---------------- ----------------
Total decrease in net assets ......................... (28,517,621) (90,755,627)
Net assets at beginning of period .......................... 409,306,125 500,061,752
---------------- ----------------
Net assets at end of period .............................. $ 380,788,504 409,306,125
---------------- ----------------
---------------- ----------------
Undistributed net investment income ...................... $ 57,012 --
---------------- ----------------
---------------- ----------------
</TABLE>
* REPRESENTS HISTORICAL FINANCIAL INFORMATION OF AMERICAN
ADJUSTABLE RATE TERM TRUST 1998.
** INCLUDES 100,218,356 SHARES ISSUED IN CONNECTION WITH THE
MERGER OF AMERICAN ADJUSTABLE RATE TERM TRUST 1996, AMERICAN
ADJUSTABLE RATE TERM TRUST 1997 AND AMERICAN ADJUSTABLE RATE
TERM TRUST 1999, AND AN INCREASE OF 4,184,855 SHARES DUE TO
THE DIFFERENCE BETWEEN THE ENDING NET ASSET VALUE PER SHARE
OF AMERICAN ADJUSTABLE RATE TERM TRUST 1998 AND THE INITIAL
NET ASSET VALUE PER SHARE OF THE FUND.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
- - - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(1) ORGANIZATION
Piper Funds Inc. - II (the company) was
incorporated on April 10, 1995 and is
registered under the Investment Company Act of
1940 (as amended) as a single, open-end
investment management company. The company
currently includes only the Adjustable Rate
Mortgage Securities Fund (the fund), which is
classified as a diversified fund. The
company's articles of incorporation permit the
board of directors to create additional funds
in the future.
The fund invests primarily in adjustable rate
mortgage (ARM) securities. It may also invest
in mortgage-backed securities other than ARM
securities, U.S. government securities,
asset-backed securities and corporate debt
securities.
For financial reporting purposes, American
Adjustable Rate Term Trust 1998 (DDJ) (a
closed-end fund) is considered the surviving
entity of the merger of American Adjustable
Rate Term Trust 1996 (BDJ), American
Adjustable Rate Term Trust 1997 (CDJ),
American Adjustable Rate Term Trust 1998 (DDJ)
and American Adjustable Rate Term Trust 1999
(EDJ) into Piper Funds Inc. - II Adjustable
Rate Mortgage Securities Fund, which was
effective September 1, 1995. As such, only
historical financial information of DDJ is
relevant with respect to the future financial
reporting of Piper Funds Inc. - II Adjustable
Rate Mortgage Securities Fund.
(2) SUMMARY OF
SIGNIFICANT
ACCOUNTING
POLICIES
INVESTMENTS IN SECURITIES
The values of fixed income securities are
determined using pricing services or prices
quoted by independent brokers. Exchange-listed
options are valued at the last sale price and
open financial futures contracts are valued at
the last settlement price. When market
quotations are not readily available,
securities are valued at fair value according
to methods selected in good faith by the board
of directors. Short-term securities with
maturities of 60 days or less are valued at
amortized cost which approximates market
value.
Securities transactions are accounted for on
the date the securities are purchased or sold.
Realized gains and losses are calculated on
the identified-cost basis. Interest income,
including amortization of bond discount and
premium computed on a level-yield basis, is
accrued daily.
OPTION TRANSACTIONS
For hedging purposes, the fund may purchase
and write put and call options which are
exchange-traded and cannot write call options
that are not covered. The risk in writing a
call option is that the fund gives up the
opportunity for profit if the market price of
the security increases. The risk in writing a
put option is that the fund may incur a loss
if the market price of the security decreases
and the option is exercised. The risk in
buying an option is that the fund pays a
premium whether or not the option is
exercised. The fund also has the additional
risk of not being able to enter into a closing
transaction if a liquid secondary market does
not exist.
Option contracts are valued daily, and
unrealized appreciation or depreciation is
recorded. The fund will realize a gain or loss
upon expiration or closing of the option
transaction. When an option is exercised, the
proceeds on sales for a written call option,
the purchase cost for a written put option, or
the cost of a security for a purchased put or
call option is adjusted by the amount of
premium received or paid.
9
<PAGE>
- - - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
FUTURES TRANSACTIONS
In order to gain exposure to or protect
against changes in the market, the fund may
buy and sell interest rate futures contracts
and related options. Risks of entering into
futures contracts and related options include
the possibility of an illiquid market and that
a change in the value of the contract or
option may not correlate with changes in the
value of the underlying securities.
Upon entering into a futures contract, the
fund is required to deposit either cash or
securities in an amount (initial margin) equal
to a certain percentage of the contract value.
Subsequent payments (variation margin) are
made or received by the fund each day. The
variation margin payments are equal to the
daily changes in the contract value and are
recorded as unrealized gains and losses. The
fund recognizes the realized gain or loss when
the contract is closed or expires.
INTEREST RATE TRANSACTIONS
To preserve a return or spread on a particular
investment or portion of its portfolio or for
other non-speculative purposes, the fund may
purchase and sell interest rate caps and
floors. The purchase of an interest rate cap
entitles the purchaser, to the extent that a
specified index exceeds a predetermined
interest rate, to receive payments of interest
on a contractually based notional principal
amount from the party selling the interest
rate cap. The purchase of an interest rate
floor entitles the purchaser, to the extent
that a specified index falls below a
predetermined interest rate, to receive
payments of interest on a contractually based
notional principal amount from the party
selling the interest rate floor.
If forecasts of interest rates and other
market factors are incorrect, investment
performance will diminish compared to what
performance would have been if these
investment techniques were not used. Even if
the forecasts are correct, there is risk that
the positions may correlate imperfectly with
the asset or liability being hedged. Other
risks of entering into these transactions are
that a liquid secondary market may not always
exist, or that another party to a transaction
may not perform.
SECURITIES PURCHASED ON A WHEN-ISSUED BASIS
Delivery and payment for securities that have
been purchased by the fund on a
forward-commitment or when-issued basis can
take place one month or more after the
transaction date. During this period, such
securities do not earn interest, are subject
to market fluctuations and may increase or
decrease in value prior to their delivery. The
fund maintains, in a segregated account with
its custodian, cash or securities with a
market value equal to the amount of its
purchase commitments. The purchase of
securities on a when-issued or
forward-commitment basis may increase the
volatility of the fund's NAV to the extent the
fund makes such purchases while remaining
substantially fully invested. As of February
29, 1996, the fund had no outstanding
when-issued or forward commitments.
FEDERAL TAXES
The fund's policy is to comply with the
requirements of the Internal Revenue Code
applicable to regulated investment companies
and not be subject to federal income tax.
Therefore, no income tax provision is
required.
Net investment income and net realized gains
(losses) may differ for financial statement
and tax purposes primarily because of the
recognition of certain foreign currency gains
(losses) as ordinary income for tax purposes,
and losses deferred due to "wash sale" and
"straddle" transactions. The character of
distributions made during the year from net
investment income or net realized gains may
differ from their ultimate characterization
for federal income tax purposes. Also, due to
the
10
<PAGE>
- - - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
timing of dividend distributions, the fiscal
year in which amounts are distributed may
differ from the year that the income or
realized gains (losses) were recorded by the
fund.
DISTRIBUTIONS
Distributions to shareholders from net
investment income for the fund will be
declared daily and paid monthly in cash or
reinvested in additional shares. Distributions
from net realized gains, if any, will be made
on at least an annual basis.
REPURCHASE AGREEMENTS
For repurchase agreements entered into with
certain broker-dealers, the fund, along with
other affiliated registered investment
companies may transfer uninvested cash
balances into a joint trading account, the
daily aggregate of which is invested in
repurchase agreements secured by U.S.
government and agency obligations. Securities
pledged as collateral for all individual and
joint repurchase agreements are held by the
fund's custodian bank until maturity of the
repurchase agreements. Provisions for all
agreements ensure the daily market value of
the collateral is in excess of the repurchase
amount in the event of default.
USE OF ESTIMATES
The preparation of financial statements in
conformity with generally accepted accounting
principles requires management to make
estimates and assumptions that affect the
reported amounts of assets and liabilities,
the disclosure of contingent assets and
liabilities at the date of the financial
statements, and the results of operations
during the reporting period. Actual results
could differ from those estimates.
(3) EXPENSES
The Company has entered into an investment
management agreement with Piper Capital
Management Incorporated (Piper Capital) under
which Piper Capital manages the fund's assets
and furnishes related office facilities,
equipment, research and personnel. The
agreement requires the fund to pay Piper
Capital a monthly fee based on its average
daily net assets. The fee is equal to an
annual rate of 0.35% of the first $500 million
in net assets and 0.30% of net assets in
excess of $500 million.
The fund will pay Piper Jaffray Inc. (Piper
Jaffray) a monthly fee for expenses incurred
in the distribution and promotion of fund
shares. The fee is limited to an annual rate
of 0.15% of the fund's average daily net
assets and is payable as a servicing fee.
The fund has also entered into shareholder
account servicing agreements under which Piper
Jaffray and Piper Trust Company perform
various transfer and dividend disbursing agent
services. The fees, which are paid monthly to
Piper Jaffray and Piper Trust Company for
providing such services, are equal to an
annual rate of $6.00 per active shareholder
account, and $1.60 per closed shareholder
account.
In addition to these fees the fund is
responsible for paying most other operating
expenses including outside directors' fees and
expenses, custodian fees, registration fees,
printing and shareholder reports, transfer
agent fees and expenses, legal, auditing and
accounting services, insurance, interest,
taxes and other miscellaneous expenses.
Sales charges paid to Piper Jaffray for
distributing the fund's shares were $4,792 for
the six months ended February 29, 1996.
11
<PAGE>
- - - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Expenses paid indirectly represent a reduction
of custodian fees for earnings on cash
balances maintained with the custodian by the
fund.
(4) SECURITIES
TRANSACTIONS
Cost of purchases and proceeds from sales of
securities (other than temporary investments
in short-term securities) for the six months
ended February 29, 1996, were $115,831,023 and
$763,165,053, respectively.
During the six months ended February 29, 1996,
the fund paid Piper Jaffray Inc., an
affiliated broker, no brokerage commissions.
(5) CAPITAL LOSS
CARRYOVER
For federal income tax purposes, after giving
effect to capital loss carryovers acquired in
the merger, the fund had capital loss
carryovers of $141,672,558 at September 1,
1995. If these loss carryovers are not offset
by subsequent capital gains, they will expire
at various times during 1999 through 2002. It
is unlikely the board of directors will
authorize a distribution of any net realized
capital gains until the available capital loss
carryovers have been offset or expire.
(6) RETIREMENT OF FUND
SHARES
The board of directors of DDJ (a closed-end
fund) had approved a plan to repurchase shares
of the fund in the open market and retire
those shares. Repurchases were only made when
the previous day's closing market price was at
a discount from net asset value. Daily
repurchases were limited to 25% of the
previous four weeks average daily trading
volume on the New York Stock Exchange. Under
the plan, cumulative repurchases were limited
to 3% of the total shares originally issued.
Pursuant to the plan, DDJ cumulatively
repurchased and retired 823,000 shares (1.44%
of originally issued shares) as of August 31,
1995.
(7) TENDER OFFER OF
FUND SHARES
On August 22, 1994, shareholders of DDJ
approved a fundamental policy that allowed
shareholders to periodically tender their
shares back to the fund at net asset value.
A tender offer to repurchase up to 25% of
DDJ's outstanding shares was mailed to
shareholders on September 6, 1994. The
deadline for participating in the offer was
October 3, 1994. The repurchase price was
determined on October 10, 1994, at the close
of the New York Stock Exchange (4 p.m. Eastern
Time). Proceeds from the tender offer were
paid to shareholders on October 17, 1994. The
total proceeds (including tender fees) paid by
DDJ as well as the number and percentage of
shares tendered were as follows:
<TABLE>
<CAPTION>
Percentage Shares Proceeds
Tendered Tendered Paid
--------------- --------- ------------
<S> <C> <C> <C>
16% 9,135,819 $ 79,726,515
</TABLE>
(8) PENDING LITIGATION
On October 20, 1994, a complaint was filed by
Herman D. Gordon in the U.S. District Court
for the District of Minnesota against DDJ,
EDJ, Piper Jaffray Companies Inc. (Piper
Companies), Piper Capital Management
Incorporated (Piper Capital), Piper Jaffray
Inc. (Piper Jaffray) and certain associated
individuals. A second complaint was filed on
April 14, 1995, in the same court by Frank
Donio, I.R.A., and other plaintiffs against
BDJ, CDJ, DDJ and EDJ, Piper Companies, Piper
Capital, Piper Jaffray and certain associated
individuals. Plaintiffs in both actions filed
a Consolidated Amended Class Action Complaint
on May 23, 1995, alleging violations of
certain federal and state securities laws.
Piper Companies and Piper Capital have agreed
to indemnify Piper Funds Inc. II Adjustable
Rate Mortgage Securities Fund (as the
successor by merger to BDJ, CDJ, DDJ and EDJ)
against any expenses or losses incurred in
connection with such complaint. The parties
have
12
<PAGE>
- - - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
reached an agreement-in-principal to settle
all outstanding claims of the purported class
action. If approved by the Court and a
sufficiently large percentage of the class, a
settlement agreement consistent with the terms
of the agreement-in-principle would provide
$14 million in principal payments consisting
of $500,000 payable upon execution of the
settlement agreement, $1.5 million payable
upon final approval by the court, and payments
of $3 million on each anniversary of the final
court approval for the next four years, with
accrued interest payments of up to $1.8
million.
(9) MERGER
As described in note 1, BDJ, CDJ, DDJ and EDJ
were combined on September 1, 1995 to create
the fund. The merger was accounted for as a
tax free reorganization. The following table
presents the shares issued by the fund in
exchange for the net assets of BDJ, CDJ, DDJ
and EDJ and the composition of such net assets
at September 1, 1995.
<TABLE>
<CAPTION>
BDJ CDJ EDJ Total(a) DDJ
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Shares issued by Adjustable Rate Mortgage
Securities fund on 9/1/95 ....................... 23,619,989 46,350,330 30,248,037 100,218,356 51,250,972
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Net assets of acquired funds on 9/1/95 ......... $ 188,958,910 370,800,763 241,983,013 801,742,686 410,006,496
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Composition of net assets:
Capital stock ................................ $ 212,202,280 413,741,503 274,887,229 900,831,012 460,623,794
Accumulated net realized loss on investments ... (21,813,013) (41,193,687) (31,942,871) (94,949,571) (47,214,017)
Unrealized depreciation of investments.......... (1,430,357) (1,747,053) (961,345) (4,138,755) (3,403,281)
------------ ------------ ------------ ------------ ------------
$ 188,958,910 370,800,763 241,983,013 801,742,686 410,006,496
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
(A) SINCE DDJ IS CONSIDERED THE SURVIVING ENTITY FOR FINANCIAL REPORTING
PURPOSES THE COMBINED NET ASSETS OF BDJ, CDJ AND EDJ ARE PRESENTED AS BEING
ACQUIRED BY THE SURVIVING ENTITY IN THE STATEMENT OF CHANGES IN NET ASSETS.
13
<PAGE>
- - - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(10) FINANCIAL
HIGHLIGHTS
Per-share data for a share of capital stock
outstanding throughout each period and
selected information for each period are as
follows:
<TABLE>
<CAPTION>
Six Months
Ended Year Year Year
2/29/96 Ended Ended Ended Period Ended
(Unaudited) 8/31/95 8/31/94 8/31/93 8/31/92(b)
----------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA (A)
Net asset value, beginning of period ........... $ 7.99 8.10 8.88 8.95 8.80
----- ------- ------- ------- -----
Operations:
Net investment income .......................... 0.25 0.47 0.55 0.63 0.40
Net realized and unrealized gains (losses) on
investments .................................. 0.04 (0.05) (0.82) (0.09) 0.07
----- ------- ------- ------- -----
Total from operations ........................ 0.29 0.42 (0.27) 0.54 0.47
----- ------- ------- ------- -----
Distributions to shareholders:
From net investment income ..................... (0.23) (0.53) (0.51) (0.61) (0.32)
----- ------- ------- ------- -----
Net asset value, end of period ................. $ 8.05 7.99 8.10 8.88 8.95
----- ------- ------- ------- -----
----- ------- ------- ------- -----
SELECTED INFORMATION (A)
Total investment return (c) ...................... 3.51% 5.43% -3.18% 6.24% 5.49%
Net assets at end of period (in millions) ...... $ 381 409 500 551 555
Ratio of expenses to average net assets (d) ...... 0.60%(f) 0.63% 0.60% 0.58% 0.58%(f)
Ratio of net investment income to average net
assets (d) ..................................... 5.73%(f) 5.62% 6.39% 7.25% 7.70%(f)
Portfolio turnover rate (excluding short-term
securities) .................................... 25% 36% 39% 39% 41%
Amount of borrowings outstanding at end of period
(in millions) (e) ............................ $ n/a -- 145 145 145
Average amount of borrowings outstanding during
the period (in millions) (e) ................. $ n/a 57 145 149 90
Average number of shares outstanding during the
period (in millions) (e) ....................... n/a 53 62 62 52
Average per-share amount of borrowings outstanding
during the period (e) ........................ $ n/a 1.09 2.34 2.41 1.67
</TABLE>
(A) ON SEPTEMBER 1, 1995 FOUR CLOSED-END FUNDS, AMERICAN ADJUSTABLE RATE TERM
TRUST 1996, AMERICAN ADJUSTABLE RATE TERM TRUST 1997, AMERICAN ADJUSTABLE
RATE TERM TRUST 1998 (DDJ) AND AMERICAN ADJUSTABLE RATE TERM TRUST 1999
WERE COMBINED TO CREATE THE FUND. DDJ IS CONSIDERED THE SURVIVING ENTITY
FOR FINANCIAL REPORTING PURPOSES. THE FINANCIAL HIGHLIGHTS PRESENTED FOR
THE PERIODS PRIOR TO SEPTEMBER 1, 1995 ARE THOSE OF DDJ. THE PER SHARE
INFORMATION FOR SUCH PERIODS HAS BEEN RESTATED TO REFLECT THE IMPACT OF
ADDITIONAL SHARES CREATED RESULTING FROM THE DIFFERENCE IN THE NET ASSET
VALUE PER SHARE OF DDJ AT THE TIME OF THE MERGER ($8.71) AND THE INITIAL
NET ASSET VALUE PER SHARE OF THE FUND ($8.00).
(B) COMMENCEMENT OF OPERATIONS OF DDJ WAS JANUARY 30, 1992.
(C) TOTAL INVESTMENT RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE, ASSUMES
REINVESTMENT OF DISTRIBUTIONS AT NET ASSET VALUE AND DOES NOT REFLECT A
SALES CHARGE.
(D) VARIOUS FEES AND EXPENSES OF THE FUND WERE VOLUNTARILY WAIVED OR ABSORBED
BY PIPER CAPITAL DURING FISCAL YEAR 1996. THE ANNUALIZED RATIOS OF EXPENSES
AND NET INVESTMENT INCOME TO AVERAGE DAILY NET ASSETS WOULD HAVE BEEN
0.74%/5.59%, RESPECTIVELY, FOR THE SIX MONTHS ENDED 2/29/96. BEGINNING IN
FISCAL YEAR 1996, THE EXPENSE RATIO REFLECTS THE EFFECT OF GROSS EXPENSES
PAID INDIRECTLY BY THE FUND. PRIOR PERIOD EXPENSE RATIOS HAVE NOT BEEN
ADJUSTED.
(E) DDJ WAS A CLOSED-END INVESTMENT MANAGEMENT COMPANY AND WAS PERMITTED TO
ENTER INTO BORROWINGS FOR OTHER THAN TEMPORARY OR EMERGENCY PURPOSES.
ADJUSTABLE RATE MORTGAGE SECURITIES FUND MAY BORROW ONLY FOR TEMPORARY OR
EMERGENCY PURPOSES.
(F) ADJUSTED TO AN ANNUAL BASIS.
14
<PAGE>
- - - --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS OF PIPER FUNDS INC. - II
DIRECTORS David T. Bennett, CHAIRMAN, HIGHLAND HOMES, INC., USL
PRODUCTS, INC., KIEFER BUILT, INC.,
OF COUNSEL, GRAY, PLANT, MOOTY, MOOTY & BENNETT, P.A.
Jaye F. Dyer, PRESIDENT, DYER MANAGEMENT COMPANY
William H. Ellis, CHAIRMAN OF THE BOARD, PRESIDENT, PIPER
CAPITAL MANAGEMENT INCORPORATED,
PIPER JAFFRAY COMPANIES INC.
Karol D. Emmerich, PRESIDENT, THE PARACLETE GROUP
Luella G. Goldberg, DIRECTOR, TCF FINANCIAL, RELIASTAR
CORP., HORMEL FOODS CORP.
George Latimer, CHIEF EXECUTIVE OFFICER, NATIONAL EQUITY
FUNDS
OFFICERS Paul A. Dow, PRESIDENT
Robert H. Nelson, SENIOR VICE PRESIDENT/TREASURER
Thomas S. McGlinch, SENIOR VICE PRESIDENT
Amy K. Johnson, VICE PRESIDENT
Susan Miley, SECRETARY
INVESTMENT ADVISER Piper Capital Management Incorporated
222 SOUTH NINTH STREET, MINNEAPOLIS, MN 55402-3804
CUSTODIAN AND Investors Fiduciary Trust Company
TRANSFER AGENT 127 WEST 10TH STREET, KANSAS CITY, MO 64105-1716
LEGAL COUNSEL Dorsey & Whitney LLP
220 SOUTH SIXTH STREET, MINNEAPOLIS, MN 55402
15
<PAGE>
PIPER CAPITAL
MANAGEMENT ---------------
Bulk Rate
U.S. Postage
PIPER CAPITAL MANAGEMENT INCORPORATED PAID
222 SOUTH NINTH STREET Permit No. 3008
MINNEAPOLIS, MN 55402-3804 Mpls., MN
---------------
PIPER JAFFREY INC., FUND DISTRIBUTOR AND NASD MEMBER.
[LOGO] THIS DOCUMENT IS PRINTED ON PAPER MADE FROM
100% TOTAL RECOVERED FIBER, INCLUDING 15% POST-CONSUMER WASTE.
In an effort to reduce costs to our shareholders, we have
implemented a process to reduce duplicate mailings of
the fund's shareholder reports. This householding
process should allow us to mail one report to each
address where one or more registered shareholders with
the same last name reside. If you would like to have
additional reports mailed to your address, please call our
Shareholder Services area at 1 800 866-7778, or mail
your request to:
Piper Capital Management
Attn: Communications Department
222 South Ninth Street
Minneapolis, MN 55402-3804
http://www.piperjaffray.com
115-96 PJARX-02 5/96
<PAGE>
ADJUSTABLE RATE
MORTGAGE
SECURITIES
FUND
1996
SEMIANNUAL REPORT
<PAGE>
PART B
INSTITUTIONAL MONEY MARKET FUND
INSTITUTIONAL GOVERNMENT ADJUSTABLE PORTFOLIO
Series of Piper Institutional Funds Inc.
STATEMENT OF ADDITIONAL INFORMATION
November 1, 1995
Table of Contents
Page
----
Investment Objectives, Policies and Restrictions . . . . . . . . 2
Directors and Executive Officers . . . . . . . . . . . . . . . . 9
Investment Advisory and Other Services . . . . . . . . . . . . . 14
Portfolio Transactions and Allocation of Brokerage . . . . . . . 18
Capital Stock and Ownership of Shares. . . . . . . . . . . . . . 19
Net Asset Value and Public Offering Price. . . . . . . . . . . . 20
Performance Comparisons. . . . . . . . . . . . . . . . . . . . . 21
Purchase of Shares . . . . . . . . . . . . . . . . . . . . . . . 24
Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
General Information. . . . . . . . . . . . . . . . . . . . . . . 28
Financial Statements . . . . . . . . . . . . . . . . . . . . . . 29
Pending Litigation . . . . . . . . . . . . . . . . . . . . . . . 29
Appendix A - Commercial Paper and Corporate Bond Ratings . . . . A-1
Appendix B - Interest Rate Futures Contracts
and Related Options. . . . . . . . . . . . . . . . . . . . . . B-1
This Statement of Additional Information is not a prospectus.
This Statement of Additional Information relates to the Prospectus dated
November 1, 1995, and should be read in conjunction therewith. A copy of the
Prospectus may be obtained from the Funds at Piper Jaffray Tower, 222 South
Ninth Street, Minneapolis, Minnesota 55402-3804.
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The shares of Piper Institutional Funds Inc. (the "Company") are
currently offered in two series: Institutional Money Market Fund ("Money
Market Fund") and Institutional Government Adjustable Portfolio ("Adjustable
Portfolio") (sometimes referred to herein individually as a "Fund" or,
collectively, as the "Funds"). The investment objectives and policies of the
Funds are set forth in the Prospectus. Certain additional investment
information is set forth below.
REPURCHASE AGREEMENTS
Each Fund may invest in repurchase agreements. The Funds' custodian
will hold the securities underlying any repurchase agreement or such
securities will be part of the Federal Reserve Book Entry System. The market
value of the collateral underlying the repurchase agreement will be
determined on each business day. If at any time the market value of the
collateral falls below the repurchase price of the repurchase agreement
(including any accrued interest), the respective Fund will promptly receive
additional collateral (so the total collateral is an amount at least equal to
the repurchase price plus accrued interest).
The Funds have received from the Securities and Exchange Commission
an exemptive order permitting the Funds, along with other investment
companies currently managed by Piper Capital Management Incorporated (the
"Adviser"), and all future investment companies or series thereof advised by
the Adviser or its affiliates, to deposit uninvested cash balances into a
large single joint account to be used to enter into one or more large
repurchase agreements.
MORTGAGE-BACKED SECURITIES
Many Mortgage-Backed Securities (principally CMOs secured by GNMA,
FNMA and/or FHLMC Certificates) are issued by entities that operate under
orders from the Securities and Exchange Commission (the "SEC") exempting such
issuers from the provisions of the Investment Company Act of 1940, as amended
(the "1940 Act"). Until recently, the staff of the Division of Investment
Management of the SEC had taken the position that such issuers were
investment companies pursuant to Section 3 of the 1940 Act and that,
accordingly, an investment by an investment company (such as Adjustable
Portfolio) in the securities of such issuers was subject to limitations
imposed by Section 12 of the 1940 Act. However, in reliance on a recent SEC
staff interpretation, Adjustable Portfolio may investment in securities
issued by certain "exempted issuers" without regard to the limitations of
Section 12 of the 1940 Act. In its interpretation, the SEC staff defined
"exempted issuers" as unmanaged, fixed asset issuers that (a) invest
primarily in Mortgage-Backed Securities, (b) do not issue redeemable
securities as defined in Section 2(a)(32) of the Act, (c) operate under
general exemptive orders exempting them from "all provisions of the [1940]
Act" and (d) are not registered or regulated under the 1940 Act as investment
companies.
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TYPES OF CREDIT SUPPORT
To lessen the effect of failures by mortgagors to make payments on
underlying mortgages, ARMS and other Mortgage-Backed Securities may contain
elements of credit support. Such credit support falls into two categories:
(a) liquidity protection and (b) protection against losses resulting from
ultimate default by an obligor on the underlying assets. Liquidity
protection refers to the provision of advances, generally by the entity
administering the pool of assets, to ensure that the pass-through of payments
due on the underlying pool occurs in a timely fashion. Protection against
losses resulting from ultimate default enhances the likelihood of ultimate
payment of the obligations on at least a portion of the assets in the pool.
Such protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties,
through various means of structuring the transaction or through a combination
of such approaches. Adjustable Portfolio will not pay any additional fees for
such credit support, although the existence of credit support may increase
the price of a security.
The ratings of securities for which third-party credit enhancement
provides liquidity protection or protection against losses from default are
generally dependent upon the continued creditworthiness of the enhancement
provider. The ratings of such securities could be downgraded in the event of
deterioration in the creditworthiness of the credit enhancement provider even
in cases where the delinquency and loss experience on the underlying pool of
assets is better than expected.
Examples of credit support arising out of the structure of the
transaction include "senior-subordinated securities" (multiple class
securities with one or more classes subordinate to other classes as to the
payment of principal thereof and interest thereon, with the result that
defaults on the underlying assets are borne first by the holders of the
subordinated class), creation of "reserve funds" (where cash or investments,
sometimes funded from a portion of the payments on the underlying assets, are
held in reserve against future losses) and "over-collateralization" (where
the scheduled payments on, or the principal amount of, the underlying assets
exceed those required to make payment on the securities and pay any servicing
or other fees). The degree of credit support provided for each issue is
generally based on historical information with respect to the level of credit
risk associated with the underlying assets. Other information which may be
considered includes demographic factors, loan underwriting practices and
general market and economic conditions. Delinquency or loss in excess of
that which is anticipated (and in excess of the degree of credit support
provided) will adversely affect the return on an investment in such a
security by decreasing the yield and value of such security.
OPTIONS
As set forth in the Prospectus, Adjustable Portfolio may write
covered options and purchase options on securities. The principal reason for
writing call or put options is to obtain, through the receipt of premiums, a
greater current return than would be realized on the underlying securities
alone. Adjustable Portfolio receives premiums from writing call or put
options, which it retains whether or not the
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<PAGE>
options are exercised. Adjustable Portfolio will write only covered options.
This means that so long as the Fund is obligated as the writer of a call
option, it will own the underlying securities subject to the option (or
comparable securities satisfying the cover requirements of securities
exchanges). The Fund will be considered covered with respect to a put option
it writes if, so long as it is obligated as the writer of a put option, it
deposits and maintains with its custodian cash, U.S. Government securities or
other liquid high-grade debt obligations having a value equal to or greater
than the exercise price of the option.
Adjustable Portfolio may wish to protect certain portfolio securities
against a decline in market value at a time when no put options on those
particular securities are available for purchase. The Fund may therefore
purchase a put option on securities other than those it wishes to protect
even though it does not hold such other securities in its portfolio. While
the Fund will only purchase put options on securities where, in the opinion
of the Adviser, changes in the value of the put option should generally
offset changes in the value of the securities to be hedged, the correlation
will be less than in transactions in which the Fund purchases put options on
underlying securities it owns.
The writing by Adjustable Portfolio of options on securities will be
subject to limitations established by each of the registered securities
exchanges on which such options are traded. Such limitations govern the
maximum number of options in each class which may be written by a single
investor or group of investors acting in concert, regardless of whether the
options are written on the same or different securities exchanges or are held
or written in one or more accounts or through one or more brokers. Thus, the
number of options which the Fund may write may be affected by options written
by other investment companies managed by and other investment advisory
clients of the Adviser. An exchange may order the liquidation of positions
found to be in excess of these limits, and it may impose certain other
sanctions.
OVER-THE-COUNTER OPTIONS
Adjustable Portfolio may purchase and write over-the-counter ("OTC")
put and call options in negotiated transactions. OTC options are two-party
contracts with price and terms negotiated between buyer and seller. In
contrast, exchange-traded options are third-party contracts with standardized
strike prices and expiration dates, and are purchased from a clearing
corporation. Exchange-traded options have a continuous liquid market while
OTC options may not. The staff of the Securities and Exchange Commission has
previously taken the position that the value of purchased OTC options and the
assets used as "cover" for written OTC options are illiquid securities and,
as such, are to be included in the calculation of a fund's 15% limitation on
illiquid securities. However, the staff has eased its position somewhat in
certain limited circumstances. Although the Adviser disagrees with the
position of the staff, pending resolution of this issue Adjustable Portfolio
will treat OTC options, to the extent set forth below, as subject to the
Fund's limitation on illiquid securities. Adjustable Portfolio will attempt
to enter into contracts with certain dealers with which it writes OTC
options. Each such contract will provide that the Fund has the absolute
right to repurchase the options
-4-
<PAGE>
it writes at any time at a repurchase price which represents the fair market
value, as determined in good faith through negotiation between the parties,
but which in no event will exceed a price determined pursuant to a formula
contained in the contract. Although the specific details of such formula may
vary among contracts, the formula will generally be based upon a multiple of
the premium received by the Fund for writing the option, plus the amount, if
any, of the option's intrinsic value. The formula will also include a factor
to account for the difference between the price of the security and the
strike price of the option if the option is written out-of-the-money. With
respect to each OTC option for which such a contract is entered into, the
Fund will count as illiquid only the initial formula price minus the option's
intrinsic value.
Adjustable Portfolio will enter into such contracts only with primary
U.S. Government securities dealers recognized by the Federal Reserve Bank of
New York. Moreover, such primary dealers will be subject to the same
standards as are imposed upon dealers with which the Fund enters into
repurchase agreements.
ILLIQUID SECURITIES
As set forth in the Prospectus, the Funds may invest in Rule 144A
securities, commercial paper issued pursuant to Rule 4(2) under the
Securities Act of 1933, and, with respect to Adjustable Portfolio,
interest-only and principal-only classes of Mortgage-Backed Securities issued
by the U.S. Government or its agencies or instrumentalities and treat such
securities as liquid when they have been determined to be liquid by the Board
of Directors of the Fund or by the Adviser subject to the oversight of and
pursuant to procedures adopted by the Board of Directors. Under these
procedures, factors taken into account in determining the liquidity of a
security include (a) the frequency of trades and quotes for the security; (b)
the number of dealers willing to purchase or sell the security and the number
of other potential purchasers; (c) dealer undertakings to make a market in
the security; and (d) the nature of the security and the nature of the
marketplace trades (e.g., the time needed to dispose of the security, the
method of soliciting offers and the mechanics of transfer). With respect to
Rule 144A securities, investing in such securities could have the effect of
increasing the level of Fund illiquidity to the extent that qualified
institutional buyers become, for a time, uninterested in purchasing these
securities.
FOREIGN INDEX LINKED INSTRUMENTS
As set forth in the Prospectus, Adjustable Portfolio may invest up to
10% of its total assets in Foreign Index Linked Instruments. Foreign Index
Linked Instruments are fixed income securities which are issued by U.S.
issuers (including U.S. subsidiaries of foreign issuers) and are denominated
in U.S. dollars but return principal and/or pay interest to investors in
amounts which are linked to the level of a particular foreign index. A
foreign index may be based upon the exchange rate of a particular currency or
currencies or the differential between two currencies, or the level of
interest rates in a particular country or countries or the differential in
interest rates between particular countries. In the case of Foreign Index
Linked Instruments linking the principal amount to a foreign index, the
amount of
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<PAGE>
principal payable by the issuer at maturity will increase or decrease in
response to changes in the level of the foreign index during the term of the
Foreign Index Linked Instrument. In the case of Foreign Index Linked
Instruments linking the interest component to a foreign index, the amount of
interest payable will adjust periodically in response to changes in the level
of the foreign index during the term of the Foreign Index Linked Instrument.
Foreign Index Linked Instruments may be issued by a U.S. governmental agency
or instrumentality or by a private issuer. The Foreign Index Linked
Instruments in which the Fund has invested to date have been debt instruments
closely resembling corporate bonds. However, Foreign Index Linked
Instruments present certain risks in addition to those presented by corporate
bonds. See "Special Investment Methods--Foreign Index Linked Instruments" in
the Prospectus.
PORTFOLIO TURNOVER
Portfolio turnover is the ratio of the lesser of annual purchases or
sales of portfolio securities to the average monthly value of portfolio
securities, not including securities maturing in less than 12 months. A 100%
portfolio turnover rate would occur, for example, if the lesser of the value
of purchases or sales of portfolio securities for a particular year were
equal to the average monthly value of the portfolio securities owned during
such year.
Money Market Fund, consistent with its objective, may attempt to
maximize yield through portfolio trading. This may involve selling portfolio
instruments and purchasing different instruments to take advantage of
disparities of yield in different segments of the high-grade money market or
among particular instruments within the same segment of the market. Since
the Fund's assets will be invested in securities with short maturities and
the Fund will manage its portfolio as described above, the portfolio will
turn over several times a year. However, this will not generally increase
Money Market Fund's brokerage costs, since brokerage commissions as such are
not usually paid in connection with the purchase or sale of the instruments
in which the Fund invests. Because securities with maturities of less than
one year are excluded from required portfolio turnover rate calculations, the
portfolio turnover rate for Money Market Fund will be zero.
While it is not the policy of Adjustable Portfolio to trade actively
for short-term (less than six months) profits, the Fund will dispose of
securities without regard to the time they have been held when such action
appears advisable to the Adviser. In the case of Adjustable Portfolio,
frequent changes may result in higher transaction and other costs for the
Fund. For purposes of calculating portfolio turnover, the maturity of
investment purchases and sales related to "rollover" transactions of
Adjustable Portfolio is considered to be less than 12 months. See "Special
Investment Methods--When-Issued Securities" in the Prospectus. The portfolio
turnover rate is not expected to exceed 100% for Adjustable Portfolio,
although the turnover rate will not be a limiting factor when management
deems portfolio changes appropriate.
-6-
<PAGE>
INVESTMENT RESTRICTIONS
In addition to the investment objectives and policies set forth in
the Prospectus, each Fund is subject to certain investment restrictions, as
set forth below, which may not be changed without the vote of a majority of a
Fund's outstanding shares. "Majority," as used in the Prospectus and in this
Statement of Additional Information, means the lesser of (a) 67% of a Fund's
outstanding shares present at a meeting of the holders if more than 50% of
the outstanding shares are present in person or by proxy or (b) more than 50%
of a Fund's outstanding shares.
Unless otherwise specified below, neither Fund will:
1. With respect to 75% of its total assets, invest more than 5% of
the value of its total assets in the securities of any one issuer or own more
than 10% of the outstanding voting securities of any one issuer, in each case
other than securities issued or guaranteed by the U.S. Government or any
agency or instrumentality thereof and securities of other investment
companies.
2. Invest 25% or more of the value of its total assets in the
securities of issuers conducting their principal business activities in any
one industry. This restriction does not apply to securities of the U.S.
Government or its agencies and instrumentalities and repurchase agreements
relating thereto or to obligations of U.S. banks, domestic branches thereof
and U.S. branches of foreign banks subject to United States regulation. The
various types of utilities companies, such as gas, electric, telephone,
telegraph, satellite and microwave communications companies, are considered
as separate industries.
3. Issue any senior securities (as defined in the 1940 Act), other
than as set forth in restriction number 4 below and except to the extent that
using options, forward foreign currency exchange contracts, futures contracts
and options on futures contracts, purchasing or selling securities on a
when-issued or forward commitment basis or using similar investment
strategies may be deemed to constitute issuing a senior security.
4. Borrow money (provided that either of the Funds may enter into
reverse repurchase agreements) except from banks for temporary or emergency
purposes. Each Fund may borrow money in an amount up to one-third of the
value of its total assets in order to meet redemption requests without
immediately selling any of its portfolio securities. If, for any reason, the
current value of the Fund's total assets falls below an amount equal to three
times the amount of its indebtedness from money borrowed, the Fund will,
within three business days, reduce its indebtedness to the extent necessary.
Neither Fund will purchase portfolio securities while outstanding borrowings
(other than reverse repurchase agreements) exceed 5% of the value of the
Fund's total assets. Neither Fund will borrow money for leverage purposes
(provided that each Fund may enter into reverse repurchase agreements for
such purposes).
5. Mortgage, pledge or hypothecate its assets except to secure
permitted indebtedness. For purposes of this policy, collateral arrangements
for margin
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<PAGE>
deposits on forward foreign currency exchange contracts, futures contracts
and options on futures contracts, with respect to the writing of options,
with respect to reverse repurchase agreements or with respect to similar
investment techniques are not deemed to be a pledge or hypothecation of
assets.
6. Purchase any securities on margin except to obtain such
short-term credits as may be necessary for the clearance of transactions and
except that Adjustable Portfolio may make margin deposits in connection with
permitted transactions in options, forward foreign currency exchange
contracts, futures contracts, options on futures contracts and similar
investment techniques.
7. Write, purchase or sell puts, calls or combinations thereof,
provided that Money Market Fund may purchase securities with demand or put
features and, except that Adjustable Portfolio may write put and call options
with respect to the securities in which it may invest; may purchase put and
call options; and may engage in financial futures contracts and related
options transactions.
8. Purchase or sell commodities or commodity futures contracts
except that Adjustable Portfolio may do so for hedging purposes.
9. Purchase or sell real estate or real estate mortgage loans,
except that the Funds may invest in securities secured by real estate or
interests therein (including ARMS, other Mortgage-Backed Securities and
similar securities) or issued by companies that invest in real estate or
interests therein.
10. Act as an underwriter of securities of other issuers, except
insofar as a Fund may be technically deemed an underwriter under the federal
securities laws in connection with the disposition of portfolio securities.
11. Make loans of money or property to any person, except for loans
of portfolio securities and except through the use of repurchase agreements
or the purchase of debt obligations in which such Fund may invest
consistently with the Fund's investment objective and policies.
In addition, as non-fundamental investment restrictions that may be
changed at any time without shareholder approval, neither Fund will:
(a) Invest more than 5% of the value of its total assets in the
securities of any issuers which, with their predecessors, have a record of
less than three years' continuous operation. (Securities of such issuers
will not be deemed to fall within this limitation if they are guaranteed by
an entity in continuous operation for more than three years. The value of
all securities issued or guaranteed by such guarantor and owned by a Fund
shall not exceed 10% of the value of the total assets of such Fund.)
(b) Make short sales of securities.
(c) Purchase or retain the securities of any issuer if, to the
Fund's knowledge, those officers or directors of the Company or its
affiliates or of its investment
-8-
<PAGE>
adviser who individually own beneficially more than 0.5% of the outstanding
securities of such issuer, together own more than 5% of such outstanding
securities.
(d) Invest for the purpose of exercising control or management.
(e) Purchase or sell oil, gas or mineral leases or interests in oil,
gas or other mineral exploration or development programs.
(f) Invest in the securities of other investment companies except as
part of a merger, consolidation or acquisition of assets, except that
Adjustable Portfolio may invest in money market funds to the extent permitted
by the 1940 Act.
(g) Invest more than 15% of its net assets, with respect to
Adjustable Portfolio, or 10% of its net assets, with respect to Money Market
Fund, in illiquid securities.
(h) Invest in real estate limited partnerships.
(i) Invest more than 5% of its net assets in warrants, valued at the
lower of cost or market. Included within this amount, but not to exceed 2%
of the value of a Fund's net assets, may be warrants which are not listed on
the New York or American Stock Exchange. For purposes of this investment
restriction, warrants acquired by a Fund in units or attached to securities
may be deemed to be without value.
Any investment restriction or limitation referred to above or in the
Prospectus, except the borrowing policy, which involves a maximum percentage
of securities or assets, shall not be considered to be violated unless an
excess over the percentage occurs immediately after an acquisition of
securities or utilization of assets and such excess results therefrom.
DIRECTORS AND EXECUTIVE OFFICERS
The names, addresses and principal occupations during the past five
years of the directors and executive officers of the Company are given below.
The officers and directors of the Company also serve as officers and
directors of various closed- and open-end investment companies managed by the
Adviser.
Name and Address Position with the Company
---------------- -------------------------
William H. Ellis* Chairman of the Board of Directors
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
David T. Bennett Director
3400 City Center
33 South Sixth Street
Minneapolis, Minnesota 55402
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<PAGE>
Name and Address Position with the Company
---------------- -------------------------
Jaye F. Dyer Director
4670 Norwest Center
90 South Seventh Street
Minneapolis, Minnesota 55402
Karol D. Emmerich Director
7302 Claredon Drive
Edina, Minnesota 55439
Luella G. Goldberg Director
7019 Tupa Drive
Edina, Minnesota 55435
George Latimer Director
754 Linwood Avenue
St. Paul, MN 55105
Paul A. Dow President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
David E. Rosedahl Secretary
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Charles N. Hayssen Treasurer
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Robert H. Nelson Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Nancy S. Olsen Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Thomas S. McGlinch Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
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<PAGE>
John Schonberg Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
- - - ------------------
* Directors of the Company who are interested persons (as that term
is defined by the 1940 Act) of Piper Capital Management
Incorporated and the Funds.
William H. Ellis has been President of Piper Jaffray Companies Inc.
and Piper Jaffray Inc. (the "Distributor") since September 1982, Chief
Operating Officer of the same two companies since August 1983, Director and
Chairman of the Board of Piper Capital Management Incorporated ("the
Adviser") since October 1985 and President of the Adviser since December
1994.
David T. Bennett is of counsel to the law firm of Gray, Plant,
Mooty, Mooty & Bennett, P.A., located in Minneapolis, Minnesota. Mr. Bennett
is chairman of a group of privately held companies and serves on the board of
directors of a number of nonprofit organizations.
Jaye F. Dyer has been President of Dyer Management Company, a
private management company, since January 1991. Prior to that he was
President and Chief Executive Officer of Dyco Petroleum Corporation, a
Minneapolis based oil and natural gas development company he founded, from
1971 to March 1, 1989, and Chairman of the Board until December 31, 1990.
Mr. Dyer serves on the board of directors of Northwestern National Life
Insurance Company, The ReliaStar Financial Corp. (the holding company of
Northwestern National Life Insurance Company) and various privately held and
nonprofit corporations.
Karol D. Emmerich has been President of The Paraclete Group, a
consultant to nonprofit organizations, since 1993. Prior to that she had
been Vice President, Chief Accounting Officer and Treasurer of Dayton Hudson
Corporation from 1980 to May 1993. Ms. Emmerich is an Executive Fellow at
the University of St. Thomas Graduate School of Business and serves on the
board of directors of a number of privately held and nonprofit organizations.
Luella G. Goldberg has served on the board of directors of
Northwestern National Life Insurance Company (since 1976), The ReliaStar
Financial Corp. (since 1989), TCF Financial Corporation (since 1988), the
holding company of TCF Bank Savings fsb, and Hormel Foods Corp. (since 1993).
Ms. Goldberg also serves as a Trustee of Wellesley College, and as a director
of a number of other organizations, including the University of Minnesota
Foundation and the Minnesota Orchestral Association. Ms. Goldberg was
Chairman of the Board of Trustees of Wellesley College from 1985 to 1993 and
acting President from July 1, 1993 to October 1, 1993.
George Latimer is Director, Special Actions Office, Office of the
Secretary, Department of Housing and Urban Development since 1993, prior to
which he had been Dean of Hamline Law School, Saint Paul, Minnesota from 1990
to 1993. Mr. Latimer also serves on the board of directors of Digital
Biometrics, Inc. and Payless Cashways, Inc.
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<PAGE>
Paul A. Dow has been a Senior Vice President of the Adviser since
1989 and Chief Investment Officer of the Adviser since 1989.
David E. Rosedahl has been Secretary and a Director of the Adviser
since 1985, a Managing Director of the Distributor since 1986, a Managing
Director of Piper Jaffray Companies Inc. since 1987, Secretary of the
Distributor since 1993 and General Counsel for the Distributor and Piper
Jaffray Companies Inc. since 1979.
Charles N. Hayssen has been a Managing Director of the Distributor
since 1986 and of Piper Jaffray Companies Inc. since 1987, Chief Financial
Officer of the Distributor since 1988, Director and Chief Financial Officer
of the Adviser since 1989 and Chief Operating Officer of the Adviser since
1994.
Robert H. Nelson has been a Senior Vice President of the Adviser
since November 1993, prior to which he had been a Vice President of the
Adviser from 1991 to 1993 and Assistant Vice President from 1989 to 1991.
Nancy S. Olsen has been a Senior Vice President of the Adviser since
November 1991, prior to which she had been a Vice President of the Adviser
from 1987 to 1991.
Mr. McGlinch has been a Vice President of the Adviser since November
1992, prior to which he had been a specialty products trader at FBS
Investment Services from January 1990 to January 1992.
Mr. Schonberg has been a Vice President of the Adviser since
November 1992 and a portfolio manager for the Adviser since July 1989.
Ms. Goldberg, Ms. Emmerich and Mr. Dyer are members of the Company's
Audit Committee. Ms. Goldberg acts as the chairperson of such committee.
The Audit Committee oversees the Funds' financial reporting process, reviews
audit results and recommends annually to the Company a firm of independent
certified public accountants.
The functions to be performed by the Audit Committee are to
recommend annually to the Board a firm of independent certified public
accountants to audit the books and records of the Funds for the ensuing year;
to monitor that firm's performance; to review with the firm the scope and
results of each audit and determine the need, if any, to extend audit
procedures; to confer with the firm and representatives of the Funds on
matters concerning the Funds' financial statements and reports including the
appropriateness of its accounting practices and of its financial controls and
procedures; to evaluate the independence of the firm; to review procedures to
safeguard portfolio securities; to review the purchase by the Funds from the
firm of non-audit services; to review all fees paid to the firm; and to
facilitate communications between the firm and the Funds' officers and
Directors.
The Board of Directors also has a Committee of the Independent
Directors, consisting of Mr. Bennett, who serves as chairperson, Messrs.
Dyer, and Latimer, Ms.
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<PAGE>
Emmerich and Ms. Goldberg, and a Derivatives Committee consisting of Ms.
Emmerich, who serves as chairperson, Ms. Goldberg and Mr. Dyer.
The functions of the Committee of the Independent Directors are: (a)
recommendation to the full Board of approval of any management, advisory,
sub-advisory and/or administration agreements; (b) recommendation to the full
Board of approval of any underwriting and/or distribution agreements; (c)
review of the fidelity bond and premium allocation; (d) review of errors and
omissions and any other joint insurance policies and premium allocation; (e)
review of, and monitoring of compliance with, procedures adopted pursuant to
certain rules promulgated under the 1940 Act; and (f) such other duties as
the independent directors shall, from time to time, conclude are necessary or
appropriate to carry out their duties under the 1940 Act. The functions of
the Derivatives Committee are: (a) to oversee practices, policies and
procedures of the Adviser in connection with the use of derivatives; (b) to
receive periodic reports from management and independent accountants; and (c)
to report periodically to the Committee of the Independent Directors and the
Board of Directors.
The directors of the Company who are officers or employees of the
Adviser or any of its affiliates receive no remuneration from the Company.
Each of the other directors receives fees that are allocated among the series
of the Company on the basis of the total assets of each series. Each
director receives from the Company and Piper Funds Inc., collectively, an
annual retainer of $1,000, plus a fee of $250 for each regular quarterly
Board of Directors meeting attended. (The per-meeting fee is based on the
total assets of the Company and Piper Funds Inc. and will increase to $500
per meeting in the event total assets exceed $200 million, with continuing
increases to as high as $1,500 per meeting in the event total assets reach $5
billion or more. In addition, members of the Audit Committee not affiliated
with the Adviser receive $1,000 for each Audit Committee meeting attended
($2,000 with respect to the chairperson of the Committee), with such fee
being allocated among all open-end and closed-end investment companies
managed by the Adviser. Members of the Committee of the Independent
Directors and the Derivatives Committee currently receive no additional
compensation. Directors are also reimbursed for expenses incurred in
connection with attending meetings.
The following table sets forth the aggregate compensation received
by each director from the Company during the fiscal year ended June 30, 1995,
as well as the total compensation received by each director from the Company
and all other registered investment companies managed by the Adviser or
affiliates of the Adviser during the calendar year ended December 31, 1994.
Directors who are officers or employees of the Adviser or any of its
affiliates did not receive any such compensation and are not included in the
table.
-13-
<PAGE>
<TABLE>
<CAPTION>
Pension or
Retirement Estimated Total
Aggregate Benefits Annual Benefits Compensation
Compensation Accrued as Part Upon from Fund
Director from the Company of Fund Expenses Retirement Complex*
- - - -------- ---------------- ---------------- ---------------- -------------
<S> <C> <C> <C> <C>
David T. Bennett $1,200 None None $57,500
Jaye F. Dyer $1,358 None None $68,250
Karol D. Emmerich $1,358 None None $68,250
Luella G. Goldberg $1,516 None None $71,250
George Latimer $1,200 None None $65,250
</TABLE>
- - - -----------------
* Consists of 21 registered investment companies managed by the Adviser or an
affiliate of the Adviser, including Piper Institutional. Each director
included in the table, other than Mr. Bennet, serves on the board of each
such registered investment company. Mr. Bennett serves on the board of 20
such companies.
INVESTMENT ADVISORY AND OTHER SERVICES
GENERAL
The investment adviser for the Funds is Piper Capital Management
Incorporated (the "Adviser"). Its affiliate, Piper Jaffray Inc. (the
"Distributor"), acts as the Funds' distributor. Each acts as such pursuant
to a written agreement which is periodically approved by the directors or the
shareholders of the Funds. The address of both the Adviser and the
Distributor is Piper Jaffray Tower, 222 South Ninth Street, Minneapolis,
Minnesota 55402-3804.
CONTROL OF THE ADVISER AND THE DISTRIBUTOR
The Adviser and the Distributor are both wholly owned subsidiaries
of Piper Jaffray Companies Inc., a publicly held corporation which is engaged
through its subsidiaries in various aspects of the financial services
industry.
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
The Adviser acts as the investment adviser of the Funds under an
Investment Advisory and Management Agreement which has been approved by the
Board of Directors (including a majority of the directors who are not parties
to the agreement, or interested persons of any such party, other than as
directors of the Company) and the initial shareholder of the Company.
The Investment Advisory and Management Agreement will terminate
automatically in the event of its assignment. In addition, the agreement is
terminable at any time, without penalty, by the Board of Directors or by vote
of a majority of the Company's outstanding voting securities on not more than
60 days' written notice to the Adviser, and by the Adviser on 60 days'
written notice to the Company. The agreement may be terminated with respect
to a particular Fund at any time by a vote of the holders of a majority of
the outstanding voting securities of such Fund, upon 60 days' written notice
to the Adviser. Unless sooner terminated, the agreement shall continue in
effect for more than two years after its
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<PAGE>
execution only so long as such continuance is specifically approved at least
annually by either the Board of Directors or by a vote of a majority of the
outstanding voting securities of the Company, provided that in either event
such continuance is also approved by a vote of a majority of the directors
who are not parties to such agreement, or interested persons of such parties,
cast in person at a meeting called for the purpose of voting on such
approval. If a majority of the outstanding voting securities of any series
of the Company approves the agreement, the agreement shall continue in effect
with respect to such approving series whether or not the shareholders of the
other series approve the agreement.
Pursuant to the Investment Advisory and Management Agreement, Money
Market Fund and Adjustable Portfolio pay the Adviser monthly advisory fees
equal on an annual basis to .15% and .30%, respectively, of the Fund's
average daily net assets. The advisory fees paid by Money Market Fund for
the fiscal period from February 2, 1993 (commencement of operations) through
June 30, 1993 and for the fiscal years ended June 30, 1994 and 1995 and were
$18,155, $44,077 and $51,262, respectively. The fees paid by Adjustable
Portfolio for the fiscal period from February 2, 1993 (commencement of
operations) through June 30, 1993 and for the fiscal years ended June 30,
1994 and 1995 were $37,934, $165,558 and $70,330, respectively.
Although not required under the Investment Advisory and Management
Agreement, the Adviser voluntarily agreed, for the fiscal year ended June 30,
1995, to reimburse Money Market Fund and Adjustable Portfolio to the extent
that total operating expenses (including the Adviser's compensation but
excluding interest, taxes, brokerage fees and commissions and extraordinary
expenses) exceeded .35% and .55% per annum, respectively, of average daily
net assets. Voluntary fee waivers and reimbursements by the Adviser may be
discontinued at any time following the Funds' fiscal year end, at the
Adviser's discretion. For the fiscal year ending June 30, 1996, the Adviser
intends to reimburse Money Market Fund and Adjustable Portfolio for all
expenses in excess of .35% and .60%, respectively. Even in the event of
discontinuance of this arrangement, the Funds will still be subject to the
laws of certain states, which require that if a mutual fund's expenses
(including advisory fees but excluding interest, taxes, brokerage commissions
and extraordinary expenses) exceed certain percentages of average net assets,
the fund must be reimbursed for such excess expenses. The Investment
Advisory and Management Agreement provides that the Adviser must make any
expense reimbursements to the Funds required under state law. The laws of
California provide that aggregate annual expenses of a mutual fund shall not
normally exceed 2-1/2% of the first $30 million of the average net assets, 2%
of the next $70 million of the average net assets and 1-1/2% of the remaining
average net assets. Such expenses include the Adviser's compensation, but
exclude interest, taxes, brokerage fees and commissions and extraordinary
expenses. The Adviser does not believe that the laws of any other state in
which the Funds' shares may be offered for sale contain expense reimbursement
requirements.
Under the Investment Advisory and Management Agreement, the Adviser
provides each Fund with advice and assistance in the selection and
disposition of that Fund's investments. All investment decisions are subject
to review by the
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<PAGE>
Company's Board of Directors. The Adviser is obligated to pay the salaries
and fees of any affiliates of the Adviser serving as officers or directors of
the Company.
The same security may be suitable for both of the Funds and/or for
other funds or private accounts managed by the Adviser or its affiliates. If
and when two or more funds or accounts simultaneously purchase or sell the
same security, the transactions will be allocated as to price and amount in
accordance with arrangements equitable to each fund or account. The
simultaneous purchase or sale of the same securities by both Funds or by
either of the Funds and other funds or accounts managed by the Adviser or its
affiliates may have a detrimental effect on a Fund, as this may affect the
price paid or received by that Fund or the size of the position obtainable or
able to be sold by that Fund.
EXPENSES
The expenses of each Fund are deducted from their total income
before dividends are paid. These expenses include, but are not limited to,
organizational costs, fees paid to the Adviser, fees and expenses of officers
and directors who are not affiliated with the Adviser, taxes, interest, legal
fees, transfer agent, dividend disbursing agent and custodian fees, audit
fees, brokerage fees and commissions, fees and expenses of registering and
qualifying the Funds and their shares for distribution under federal and
state securities laws, expenses of preparing prospectuses and statements of
additional information and of printing and distributing prospectuses and
statements of additional information annually to existing shareholders, the
expenses of reports to shareholders, shareholders' meetings and proxy
solicitations and other expenses which are not expressly assumed by the
Adviser under the Investment Advisory and Management Agreement. Any general
expenses of the Company that are not readily identifiable as belonging to a
particular Fund will be allocated between the Funds based upon the relative
net assets of the Funds at the time such expenses were accrued.
DISTRIBUTION PLAN
Rule 12b-1(b) under the 1940 Act provides that any payments made by
a fund in connection with financing the distribution of its shares may only
be made pursuant to a written plan describing all aspects of the proposed
financing of distribution. The Company had adopted a Distribution Plan for
Adjustable Portfolio in accordance with such Rule; however, the plan was
terminated by the Board of Directors on June 2, 1993 (effective June 24,
1993). The amount paid by the Fund pursuant to this plan from February 2,
1993 (commencement of operations) to June 24, 1993 was $23,771.
UNDERWRITING AND DISTRIBUTION AGREEMENT
Pursuant to an Underwriting and Distribution Agreement, the
Distributor has agreed to act as the principal underwriter for the Funds in
the sale and distribution to the public of shares of the Funds, either
through dealers or otherwise. The Distributor has agreed to offer such
shares for sale at all times when such shares are available for sale and may
lawfully be offered for sale and sold. As
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<PAGE>
compensation for its services, the Distributor receives the sales load on
sales of Adjustable Portfolio shares set forth in the Prospectus. For the
period from February 2, 1993 (commencement of operations) through June 30,
1993 and for the fiscal years ended June 30, 1994 and 1995, Adjustable
Portfolio paid $4,383, $54,430 and $0, respectively in sales charges to the
Distributor. The Distributor receives no compensation from the Fund for its
sales of Money Market Fund shares.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Investors Fiduciary Trust Company ("IFTC"), the transfer agent for
the Company, maintains certain omnibus shareholder accounts for each Fund.
Each such omnibus account represents the accounts of a number of individual
shareholders of the Fund. The Company has entered into a Shareholder Account
Servicing Agreement with the Distributor, pursuant to which the Distributor
provides certain transfer agent and dividend disbursing agent services for
the underlying individual shareholder accounts. Pursuant to such Agreement,
the Distributor has agreed to perform the usual and ordinary services of
transfer agent and dividend disbursing agent not performed by IFTC with
respect to the underlying individual shareholder accounts, including, without
limitation, the following: maintaining all shareholder accounts, preparing
shareholder meeting lists, mailing shareholder reports and prospectuses,
tracking shareholder accounts for blue sky and Rule l2b-1 purposes,
withholding taxes on nonresident alien and foreign corporation accounts,
preparing and mailing checks for disbursement of income dividends and capital
gains distributions, preparing and filing U.S. Treasury Department Form 1099
for all shareholders, preparing and mailing confirmation forms to
shareholders and dealers with respect to all purchases, exchanges and
liquidations of series shares and other transactions in shareholder accounts
for which confirmations are required, recording reinvestments of dividends
and distributions in series shares, recording redemptions of series shares,
and preparing and mailing checks for payments upon redemption and for
disbursements to withdrawal plan holders. As compensation for such services,
the Distributor is paid an annual fee of $9.00 per active shareholder account
for the Money Market Fund and $7.50 per active account for the Adjustable
Portfolio. The Distributor is paid an annual fee of $6.00 per inactive
account (defined as an account that has a balance of shares in a Fund but
that does not require a client statement for the current month) for the Money
Market Fund and $7.50 per inactive account for the Adjustable Portolio. There
is no charge for a closed shareholder account (defined as an account that has
been inactive for at least three consecutive months). Such fee is payable on
a monthly basis at a rate of 1/12 of the annual per-account charge. Such fee
covers all services listed above, with the exception of preparing shareholder
meeting lists and mailing shareholder reports and prospectuses. These
services, along with proxy processing (if applicable) and other special
service requests, are billable as performed at a mutually agreed upon fee in
addition to the annual fee noted above, provided that such mutually agreed
upon fee shall be fair and reasonable in light of the usual and customary
charges made by others for services of the same nature and quality. The
Agreement was in effect for a portion of the fiscal year ended June 30, 1995.
Fees paid during the fiscal year ended June 30, 1995 were $211 for
Adjustable Portfolio and $256 for Money Market Fund.
-17-
<PAGE>
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE
The Adviser is responsible for decisions to buy and sell securities
for the Funds, the selection of broker-dealers to effect the transactions and
the negotiation of brokerage commissions, if any. In placing orders for
securities transactions, the primary criterion for the selection of a
broker-dealer is the ability of the broker-dealer, in the opinion of the
Adviser, to secure prompt execution of the transactions on favorable terms,
including the reasonableness of the commission and considering the state of
the market at the time.
When consistent with these objectives, business may be placed with
broker-dealers who furnish investment research or services to the Adviser.
Such research or services include advice, both directly and in writing, as to
the value of securities; the advisability of investing in, purchasing or
selling securities; and the availability of securities, or purchasers or
sellers of securities; as well as analyses and reports concerning issues,
industries, securities, economic factors and trends, portfolio strategy and
the performance of accounts. This allows the Adviser to supplement its own
investment research activities and enables the Adviser to obtain the views
and information of individuals and research staffs of many different
securities firms prior to making investment decisions for the Funds. To the
extent portfolio transactions are effected with broker-dealers who furnish
research services to the Adviser, the Adviser receives a benefit, not capable
of evaluation in dollar amounts, without providing any direct monetary
benefit to the Funds from these transactions. The Adviser believes that most
research services obtained by it generally benefit several or all of the
investment companies and private accounts which it manages, as opposed to
solely benefiting one specific managed fund or account. Normally, research
services obtained through managed funds or accounts investing in common
stocks would primarily benefit the managed funds or accounts which invest in
common stock; similarly, services obtained from transactions in fixed-income
securities would normally be of greater benefit to the managed funds or
accounts which invest in debt securities. The Funds will not purchase at a
higher price or sell at a lower price in connection with transactions
effected with a dealer, acting as principal, who furnishes research services
to the Adviser than would be the case if no weight were given by the Adviser
to the dealer's furnishing of such services.
The Adviser has not entered into any formal or informal agreements
with any broker-dealers, nor does it maintain any "formula" which must be
followed in connection with the placement of the Funds' portfolio
transactions in exchange for research services provided the Adviser, except
as noted below. However, the Adviser does maintain an informal list of
broker-dealers, which is used from time to time as a general guide in the
placement of the Funds' business, in order to encourage certain
broker-dealers to provide the Adviser with research services which the
Adviser anticipates will be useful to it. Because the list is merely a
general guide, which is to be used only after the primary criterion for the
selection of broker-dealers (discussed above) has been met, substantial
deviations from the list are permissible and may be expected to occur. The
Adviser will authorize the Funds to pay an amount of commission for effecting
a securities transaction in excess of the amount of commission another
broker-dealer would have charged only if the
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<PAGE>
Adviser determines in good faith that such amount of commission is reasonable
in relation to the value of the brokerage and research services provided by
such broker-dealer, viewed in terms of either that particular transaction or
the Adviser's overall responsibilities with respect to the accounts as to
which it exercises investment discretion. Generally, the Funds pay higher
than the lowest commission rates available.
Portfolio transactions for the Funds, including transactions in
futures contracts and options thereon, may be effected through the
Distributor. In determining the commissions to be paid to the Distributor in
connection with transactions effected on a securities exchange, it is the
policy of the Funds that such commissions will, in the judgment of the
Adviser, subject to review by the Board of Directors, be both (a) at least as
favorable as those which would be charged by other qualified brokers or
futures commission merchants in connection with comparable transactions
involving similar securities or similar futures contracts or options on
futures contracts being purchased or sold on an exchange during a comparable
period of time, and (b) at least as favorable as commissions
contemporaneously charged by the Distributor on comparable transactions for
its most favored comparable unaffiliated customers. While the Funds do not
deem it practicable and in their best interest to solicit competitive bids
for commission rates on each transaction, consideration will regularly be
given to posted commission rates as well as to other information concerning
the level of commissions charged on comparable transactions by other
qualified brokers and futures commission merchants. Money Market Fund did
not pay any brokerage commissions and Adjustable Portfolio paid brokerage
commissions of $5,185 for the period from February 2, 1993 (commencement of
operations) through June 30, 1993. For the fiscal year ending June 30, 1994,
Money Market Fund did not pay any brokerage commissions and Adjustable
Portfolio paid brokerage commissions of $20,188. For the fiscal year ending
June 30, 1995, Money Market Fund did not pay any brokerage commissions and
Adjustable Portfolio paid total brokerage commissions of $2,975 from which
$2,550 was paid to Piper Jaffray Inc., an affiliate of the Fund and the
Adviser.
From time to time the Funds may acquire the securities of their
regular brokers or dealers or affiliates of such brokers or dealers. As of
June 30, 1995, Money Market Fund held securities issued by Federal National
Mortgage Association in the amount of $7,369,104 and Adjustable Portfolio did
not hold any such securities. During the fiscal year ended June 30, 1995,
Money Market Fund purchased securities issued by Federal National Mortgage
Association, Goldman Sachs and Lehman Brothers and Adjustable Portfolio did
not purchase any such securities.
CAPITAL STOCK AND OWNERSHIP OF SHARES
Each Fund's shares of common stock have a par value of $.01 per
share, and have equal rights to share in dividends and assets. The shares
possess no preemptive or conversion rights. Cumulative voting is not
authorized. This means that the holders of more than 50% of the shares
voting for the election of directors can elect 100% of the directors if they
choose to do so, and in such event the holders of the remaining shares will
be unable to elect any directors.
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<PAGE>
As of October 16, 1995, no shareholders were beneficial owners of 5%
or more of the outstanding shares of Money Market Fund. As of October 16,
1995, the following shareholders were beneficial owners of 5% or more of the
outstanding shares of Adjustable Portfolio: St. Louis Park Methodist
Hospital, Attn: Janis Williams, 6th & Marquette, Minneapolis, MN (13.6%);
Fairview Hospital & Health Care Service General Fund, Attn: Katrina Jaworski,
2312 S. 6th Street, Minneapolis, MN (7.2%); Hitchcock Industries, 8701 Harriet
Ave, Bloomington, MN (20.3%) and Helath Care Group Self Insurance
Association, Berkley Administrators, Trust Account No. 7, P.O. Box 59143,
Minneapolis, MN (10.2%). The Funds' officers and directors as a group owned
less than 1% of the outstanding shares of each Fund as of such date.
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The method for determining the public offering price of Fund shares
is summarized in the Prospectus in "Purchase of Shares -- Public Offering
Price" and "Valuation of Shares." The net asset value of each Fund's shares
is determined on each day on which the New York Stock Exchange is open,
provided that the net asset value need not be determined on days when no Fund
shares are tendered for redemption and no order for Fund shares is received.
The New York Stock Exchange is not open for business on the following
holidays (or on the nearest Monday or Friday if the holiday falls on a
weekend): New Year's Day, Presidents' Day, Good Friday, Memorial Day, July
4th, Labor Day, Thanksgiving and Christmas.
Money Market Fund values its portfolio securities at amortized cost
in accordance with Rule 2a-7 under the 1940 Act. This method involves
valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the impact
of fluctuations in interest rates on the market value of the instrument and
regardless of any unrealized capital gains or losses. While this method
provides certainty in valuation, it may result in periods during which value,
as determined by amortized cost, is higher or lower than the price the Fund
would receive if it sold the instrument. During periods of declining
interest rates, the daily yield on shares of the Fund computed by dividing
the annualized daily income of the Fund by the net asset value computed as
described above may tend to be higher than a like computation made by the
Fund with identical investments utilizing a method of valuation based upon
market prices and estimates of market prices for all of its securities.
Pursuant to Rule 2a-7, the Board of Directors of the Company has
determined, in good faith based upon a full consideration of all material
factors, that it is in the best interests of Money Market Fund and its
shareholders to maintain a stable net asset value per share by virtue of the
amortized cost method of valuation. Money Market Fund will continue to use
this method only so long as the Board of Directors believes that it fairly
reflects the market-based net asset value per share. In accordance with Rule
2a-7, the Board of Directors has undertaken, as a particular responsibility
within the overall duty of care owed to Fund shareholders, to establish
procedures reasonably designed, taking into account current market conditions
and Money Market Funds' investment objectives, to stabilize such Fund's net
asset value per share at a single value. These procedures include the
periodic determination of any deviation of current net asset value per share,
calculated using available market quotations, from such Fund's amortized cost
price
-20-
<PAGE>
per share, the periodic review by the Board of the amount of any such
deviation and the method used to calculate any such deviation, the
maintenance of records of such determinations and the Board's review thereof,
the prompt consideration by the Board if any such deviation exceeds 1/2 of
1%, and the taking of such remedial action by the Board as it deems
appropriate where it believes the extent of any such deviation may result in
material dilution or other unfair results to investors or existing
shareholders. Such remedial action may include redemptions in kind, selling
portfolio instruments prior to realizing capital gains or losses, shortening
the average portfolio maturity, withholding dividends or utilizing a net
asset value per share as determined by using available market quotations.
Money Market Fund will, in further compliance with Rule 2a-7, maintain a
dollar-weighted average portfolio maturity appropriate to its objective of
maintaining a stable net asset value and not exceeding 90 days, will not
purchase any instrument with a remaining maturity of greater than 397
calendar days, will limit its portfolio investments to those U.S.
dollar-denominated instruments which the Board determines present minimal
credit risks and which are at the time of acquisition Eligible Securities (as
defined in Rule 2a-7), and will record, maintain and preserve a written copy
of the above-described procedures and a written record of the Board's
considerations and actions taken in connection with the discharge of its
above-described responsibilities.
On June 30, 1995, the net asset value per share of the Funds was
calculated as follows:
MONEY MARKET FUND
Net Assets ($52,488,862) = Net Asset Value per Share ($1.00)
---------------------------------
Shares Outstanding (52,488,862)
ADJUSTABLE PORTFOLIO
Net Assets ($14,969,773) = Net Asset Value per Share ($9.44)
--------------------------------
Shares Outstanding (1,585,696)
PERFORMANCE COMPARISONS
Advertisements and other sales literature for Adjustable Portfolio
may refer to "yield," "average annual total return" and "cumulative total
return." Average annual total return figures are computed by finding the
average annual compounded rates of return over the periods indicated in the
advertisement that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
n
P(1+T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return;
n = number of years; and
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<PAGE>
ERV = ending redeemable value at the end of the
period of a hypothetical $1,000 payment made
at the beginning of such period.
This calculation deducts the maximum sales charge from the initial
hypothetical $1,000 investment, assumes all dividends and capital gains
distributions are reinvested at net asset value on the appropriate
reinvestment dates as described in the Prospectus, and includes all recurring
fees, such as investment advisory and management fees, charged to all
shareholder accounts.
The average annual total return for Adjustable Portfolio was 4.21%
for the one-year period ended June 30, 1995 and 2.26% for the period from
February 2, 1993 (commencement of operations) to June 30, 1995.
The Adviser has waived or paid certain expenses of the Fund, thereby
increasing total return and yield. These expenses may or may not be waived
or paid in the future in the Adviser's discretion. Absent any voluntary
expense payments or waivers, the average annual total returns would have been
4.17% and 2.22%, respectively.
Cumulative total return is computed by finding the cumulative
compounded rate of return over the period indicated in the advertisement that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
CTR = (ERV-P) 100
-----
P
Where: CTR = Cumulative total return;
ERV = ending redeemable value at the end of the
period of a hypothetical $1,000 payment made
at the beginning of such period; and
P = initial payment of $1,000.
This calculation assumes all dividends and capital gain distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus and includes all recurring fees, such as investment advisory
and management fees, charged to all shareholder accounts.
The cumulative total return for Adjustable Portfolio from inception
(February 2, 1993) to June 30, 1995 was 5.52%. Absent any voluntary expense
payments or waivers, the cumulative total return would have been 5.48%.
Adjustable Portfolio may issue yield quotations. Yield is computed
by dividing the net investment income per share (as defined under Securities
and Exchange Commission rules and regulations) earned during the computation
period by the maximum offering price per share on the last day of the period
(based on a 30-day or one month period), according to the following formula:
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<PAGE>
YIELD = 2 [ (a-b + 1) 6 - 1]
---
c-d
Where: a = dividends and interest earned during the
period;
b = expenses accrued for the period ( net of
reimbursements);
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends; and
d = the maximum offering price per share on the
last day of the period.
The yield for Adjustable Portfolio for the 30-day period ended June
30, 1995 was 6.31%. Absent any voluntary expense payments or waivers, the
30-day yield would have been 6.11%.
Money Market Fund may issue current yield quotations. Simple yields
are computed by determining the net change, exclusive of capital changes, in
the value of a hypothetical pre-existing account having a balance of one
share at the beginning of a recent seven calendar day period, subtracting a
hypothetical charge reflecting deductions from shareholder accounts, and
dividing the difference by the value of the account at the beginning of the
base period to obtain the base period return, and then multiplying the base
period return by 365/7. The resulting yield figure will be carried to at
least the nearest hundredth of one percent. Effective yields are computed by
determining the net change, exclusive of capital changes, in the value of a
hypothetical pre-existing account having a balance of one share at the
beginning of a recent seven calendar day period, subtracting a hypothetical
charge reflecting deductions from shareholder accounts, and dividing the
difference by the value of the account at the beginning of the base period to
obtain the base period return, and then compounding the base period return by
adding 1, raising the sum to a power equal to 365 divided by 7, and
subtracting 1 from the result, according to the following formula:
EFFECTIVE YIELD = [(BASE PERIOD RETURN +1)365/7] -1
The seven-day yield and effective yield for Money Market Fund as of
June 30, 1995 were 5.67% and 5.83%, respectively. Absent any voluntary
expense payments or waivers, the seven-day yield and effective yield would
have been 5.53% and 5.69%, respectively.
When calculating the foregoing yield or effective yield quotations,
the calculation of net change in account value will include the value of
additional shares purchased with dividends from the original share and
dividends declared on both the original share and any such additional shares,
and all fees, other than nonrecurring accounts or sales charges, that are
charged to all shareholder accounts in proportion to the length of the base
period. Realized gains and losses from the sale of securities and unrealized
appreciation and depreciation are excluded from the calculation of yield and
effective yield.
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In addition to advertising total return and yield, comparative
performance information may be used from time to time in advertising the
Funds' shares. The performance of Money Market Fund may be compared to the
performance of the Donoghue Institutional Money Market Fund Index and the
performance of Adjustable Portfolio may be compared to the performance of the
Merrill Lynch 1-3 Year Governmental Index, the Lipper ARM Fund Average, the
Lipper Short-Intermediate Fund Average and the Lehman 1-3 Year Government
Index.
PURCHASE OF SHARES
An investor in Adjustable Portfolio may qualify for a reduced sales
charge immediately by signing a nonbinding Letter of Intent stating the
investor's intention to invest within a 13-month period, beginning not
earlier than 90 days prior to the date of execution of the Letter, a
specified amount which, if made at one time, would qualify for a reduced
sales charge. Reinvested dividends will be treated as purchases of additional
shares. Any redemptions made during the term of the Letter of Intent will be
subtracted from the amount of purchases in determining whether the Letter of
Intent has been completed. During the term of a Letter of Intent, IFTC will
hold shares representing 5% of the amount that the investor intends to invest
during the 13-month period in escrow for payment of a higher sales charge if
the full amount indicated in the Letter of Intent is not purchased.
Dividends on the escrowed shares will be paid to the shareholder. The
escrowed shares will be released when the full amount indicated has been
purchased. If the full indicated amount is not purchased within the 13-month
period, the investor will be required to pay, either in cash or by
liquidating escrowed shares, an amount equal to the difference in the dollar
amount of sales charge actually paid and the amount of sales charge the
investor would have paid on his or her aggregate purchases if the total of
such purchases had been made at a single time.
REDEMPTION
GENERAL
Redemption of shares, or payment, may be suspended at times (a) when
the New York Stock Exchange is closed for other than customary weekend or
holiday closings, (b) when trading on said Exchange is restricted, (c) when
an emergency exists, as a result of which disposal by the Funds of securities
owned by them is not reasonably practicable, or it is not reasonably
practicable for the Funds fairly to determine the value of their net assets,
or (d) during any other period when the Securities and Exchange Commission,
by order, so permits, provided that applicable rules and regulations of the
Securities and Exchange Commission shall govern as to whether the conditions
prescribed in (b) or (c) exist.
Shareholders who purchased shares through a broker-dealer other than
the Distributor may also redeem such shares by written request to IFTC at the
address set forth in the Prospectus. To be considered in proper form,
written requests for redemption should indicate the dollar amount or number
of shares to be redeemed, refer to the shareholder's Fund account number, and
give either a social security
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or tax identification number. The request should be signed in exactly the
same way the account is registered. If there is more than one owner of the
shares, all owners must sign. If shares to be redeemed have a value of
$10,000 or more or redemption proceeds are to be paid to someone other than
the shareholder at the shareholder's address of record, the signature(s) must
be guaranteed by an "eligible guarantor institution," which includes a
commercial bank that is a member of the Federal Deposit Insurance
Corporation, a trust company, a member firm of a domestic stock exchange, a
savings association or a credit union that is authorized by its charter to
provide a signature guarantee. IFTC may reject redemption instructions if
the guarantor is neither a member of nor a participant in a signature
guarantee program. Signature guarantees by notaries public are not
acceptable. The purpose of a signature guarantee is to protect shareholders
against the possibility of fraud. Further documentation will be requested
from corporations, administrators, executors, personal representatives,
trustees and custodians. Redemption requests given by facsimile will not be
accepted. Unless other instructions are given in proper form, a check for the
proceeds of the redemption will be sent to the shareholder's address of
record.
SYSTEMATIC WITHDRAWAL PLAN
To establish a Systematic Withdrawal Plan for either Fund and
receive regular periodic payments, an account must have a value of $5,000 or
more. A request to establish a Systematic Withdrawal Plan must be submitted
in writing to an investor's Piper Jaffray investment executive or other
broker-dealer. There are no service charges for maintenance; the minimum
amount that may be withdrawn each period is $100. (This is merely the
minimum amount allowed and should not be interpreted as a recommended
amount.) The holder of a Systematic Withdrawal Plan will have any income
dividends and any capital gains distributions reinvested in full and
fractional shares at net asset value. To provide funds for payment, the
appropriate Fund will redeem as many full and fractional shares as necessary
at the redemption price, which is net asset value. Redemption of shares may
reduce or possibly exhaust the shares in your account, particularly in the
event of a market decline. As with other redemptions, a redemption to make a
withdrawal payment is a sale for federal income tax purposes. Payments made
pursuant to a Systematic Withdrawal Plan cannot be considered as actual yield
or income since part of such payments may be a return of capital.
The maintenance of a Systematic Withdrawal Plan for Adjustable
Portfolio concurrent with purchases of additional shares of the Fund would be
disadvantageous because of the sales commission involved in the additional
purchases.
A confirmation of each transaction showing the sources of the
payment and the share and cash balance remaining in the account will be sent.
The plan may be terminated on written notice by the shareholder or the Fund,
and it will terminate automatically if all shares are liquidated or withdrawn
from the account or upon the death or incapacity of the shareholder. The
amount and schedule of withdrawal payments may be changed or suspended by
giving written notice to your Piper
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Jaffray investment executive or other broker-dealer at least seven business days
prior to the end of the month preceding a scheduled payment.
TAXATION
Each Fund qualified during its last taxable year and intends to
qualify each year as a "regulated investment company" under Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Code"). To qualify as a
regulated investment company a Fund must, among other things, receive at
least 90% of its gross income each year from dividends, interest, gains from
the sale or other disposition of securities and certain other types of income,
including income from options and futures contracts.
The Code also forbids a regulated investment company from earning
30% or more of its gross income from the sale or other disposition of
securities held less than three months. This restriction may limit the
extent to which Adjustable Portfolio may purchase futures contracts and
options. To the extent such Fund engages in short-term trading and enter
into futures and options transactions, the likelihood of violating this 30%
requirement is increased.
The Code also requires a regulated investment company to diversify
its holdings. The Internal Revenue Service has not made its position clear
regarding the treatment of futures contracts and options for purposes of the
diversification test, and the extent to which Adjustable Portfolio can buy or
sell futures contracts and options may be limited by this requirement.
If for any taxable year one of the Funds does not qualify as a
regulated investment company, all of its taxable income will be subject to
tax at regular corporate rates without any deduction for distributions to
shareholders, and such distributions will be taxable to the Fund's
shareholders as ordinary dividends to the extent of the Fund's current or
accumulated earnings and profits. To qualify again as a regulated investment
company in a subsequent year the Fund would be required to distribute to
shareholders its undistributed earnings and profits and to pay an interest
charge on 50% of such earnings and profits. In addition, if immediately
after qualifying as a regulated investment company for any taxable year the
Fund failed to qualify for a period greater than one taxable year, the Fund
would be required to recognize any net built-in gains (the excess of
aggregate gains over aggregate losses that would have been realized if it had
been liquidated) in order to again qualify as a regulated investment company.
Each Fund will be subject to a non-deductible excise tax equal to 4%
of the excess, if any, of the amount required to be distributed pursuant to
the Code for each calendar year over the amount actually distributed. No
amount of such excess, however, will be subject to the excise tax to the
extent it is subject to the corporate-level income tax. In order to avoid
the imposition of this excise tax, each Fund generally must declare dividends
by the end of a calendar year representing 98% of the Fund's ordinary income
for the calendar year and 98% of its capital gain net income (both long-term
and short-term capital gains) for the 12-month period ending October 31 of
the calendar year.
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Gain or loss on futures contracts and options is taken into account
when realized by entering into a closing transaction or by exercise. In
addition, with respect to many types of futures contracts and options held at
the end of Adjustable Portfolio's taxable year, unrealized gain or loss on
such contracts is taken into account at the then current fair market value
thereof under a special "marked-to-market, 60/40 system," and such gain or
loss is recognized for tax purposes. The gain or loss from such futures
contracts and options (including premiums on certain options that expire
unexercised) is treated as 60% long-term and 40% short-term capital gain or
loss, regardless of their holding period. The amount of any capital gain or
loss actually realized by the Fund in a subsequent sale or other disposition
of such futures contracts will be adjusted to reflect any capital gain or loss
taken into account by the Fund in a prior year as a result of the constructive
sale under the "marked-to-market, 60/40 system." Notwithstanding the rules
described above, with respect to certain futures contracts, the Fund may make an
election that will have the effect of exempting all or a part of those
identified futures contracts from being treated for federal income tax purposes
as sold on the last business day of the Fund's taxable year. All or part of any
loss realized by the Fund on any closing of a futures contract may be deferred
until all of the Fund's offsetting positions with respect to the futures
contract are closed.
Ordinarily, distributions and redemption proceeds earned by a
shareholder of either of the Funds are not subject to withholding of federal
income tax. However, 31% of a Fund shareholder's distributions and
redemption proceeds must be withheld if a Fund shareholder fails to supply
the Fund or its agent with such shareholder's taxpayer identification number
or if a Fund shareholder who is otherwise exempt from withholding fails to
properly document such shareholder's status as an exempt recipient.
Corporations are generally exempt from these requirements.
Any loss on the sale or exchange of shares of either Fund generally
will be disallowed to the extent that a shareholder acquires or contracts to
acquire shares of the same Fund within 30 days before or after such sale or
exchange. In addition, if a shareholder disposes of shares within 90 days of
acquiring such shares and purchases other shares of the Company or of a
series of another investment company managed by the Adviser at a reduced
sales charge, the shareholder's tax basis for determining gain or loss on the
shares which are disposed of is reduced by the lesser of the amount of the
sales charge that was paid when the shares disposed of were acquired or the
amount by which the sales charge for the new shares is reduced. If a
shareholder's tax basis is so reduced, the amount of the reduction is treated
as part of the tax basis of the new shares.
For federal income tax purposes, Adjustable Portfolio had capital
loss carryovers in the amount of $3,291,023 at June 30, 1995, which, if not
offset by subsequent capital gains, will expire in 2002-2004. It is unlikely
the Board of Directors will authorize a distribution of any net realized
capital gains until the available capital loss carryovers have been offset or
expired.
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Interest income from direct investment by noncorporate taxpayers in
U.S. Government obligations (but not repurchase agreements) generally is not
subject to state taxation. However, certain states attempt to tax mutual
fund dividends attributable to such income. This treatment has been
challenged in a number of lawsuits. Shareholders are encouraged to consult
their tax advisors concerning this matter.
GENERAL INFORMATION
The Board of Directors may, without shareholder approval, create and
issue one or more additional classes of shares within each Fund, as well as
within any series of the Company created in the future. All classes of shares
in a Fund would be identical except that each class of shares would be available
through a different distribution channel and certain classes might incur
different expenses for the provision of distribution services or the
provision of shareholder services or administration assistance by
institutions. Shares of each class would share equally in the gross income
of a series, but any variation in expenses would be charged separately
against the income of the particular class incurring such expenses. This
would result in variations in net investment income accrued and dividends
paid by and in the net asset value of the different classes of a series.
This ability to create multiple classes of shares within each series of the
Company will allow the Company in the future the flexibility to better tailor
its methods of marketing, administering and distributing shares of the Funds
to the needs of particular investors and to allocate expenses related to such
marketing, administration and distribution methods to the particular classes
of shareholders of the Fund incurring such expenses.
On an issue affecting only a particular series, the shares of the
affected series vote separately. An example of such an issue would be a
fundamental investment restriction pertaining to only one series. In voting
on the Investment Advisory and Management Agreement (the "Agreement"),
approval of the Agreement by the shareholders of a particular series would
make the Agreement effective as to that series whether or not it had been
approved by the shareholders of the other series.
The assets received by the Company for the issue or sale of shares
of each series, and all income, earnings, profits and proceeds thereof,
subject only to the rights of creditors, are allocated to such series, and
constitute the underlying assets of such series. The underlying assets of
each series are required to be segregated on the books of account, and are to
be charged with the expenses in respect to such series and with a share of
the general expenses of the Company. Any general expenses of the Company not
readily identifiable as belonging to a particular series shall be allocated
among the series based upon the relative net assets of the series at the time
such expenses were accrued.
Minnesota has enacted legislation which authorizes corporations to
eliminate or limit the personal liability of a director to the corporation or
its shareholders for monetary damages for breach of the fiduciary duty of
"care" (the duty to act with the care an ordinarily prudent person in a like
position would exercise under similar circumstances). Minnesota law does
not, however, permit a corporation to
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eliminate or limit the liability of a director (a) for any breach of the
director's duty of "loyalty" to the corporation or its shareholders (the duty
to act in good faith and in a manner reasonably believed to be in the best
interest of the corporation), (b) for acts or omissions not in good faith or
that involve intentional misconduct or a knowing violation of law, (c) for
authorizing a dividend, stock repurchase or redemption or other distribution
in violation of Minnesota law or for violation of certain provisions of
Minnesota securities laws, or (d) for any transaction from which the director
derived an improper personal benefit. Minnesota law does not permit
elimination or limitation of a director's liability under the 1933 Act or the
Securities Exchange Act of 1934, and the 1940 Act prohibits elimination or
limitation of a director's liability for acts involving willful malfeasance,
bad faith, gross negligence or reckless disregard of the duties of a
director. The Articles of Incorporation of Piper Global limit the liability
of directors to the fullest extent permitted by Minnesota law and the 1940
Act.
FINANCIAL STATEMENTS
The audited financial statements and supplementary schedules for
Money Market Fund and Adjustable Portfolio as of June 30, 1995, have been
incorporated by reference into this Statement of Additional Information from
the Funds' annual report to shareholders in reliance on the report of KPMG
Peat Marwick LLP, 4200 Norwest Center, Minneapolis, Minnesota 55402,
independent auditors of the Funds, given on the authority of such firm as
experts in accounting and auditing.
PENDING LITIGATION
Complaints have been brought in federal and state court relating to
one open-end and twelve closed-end investment companies managed by the
Adviser and to two open-end funds for which the Adviser has acted as
sub-adviser. An Amended Consolidated Class Action Complaint was filed on
October 5, 1994 in the United States District Court, District of Minnesota,
against the Institutional Government Income Portfolio (a series of Piper
Funds Inc.), the Adviser, the Distributor, William H. Ellis and Edward J.
Kohler alleging certain violations of federal and state securities laws,
including the making of materially misleading statements in the prospectus,
common law negligent misrepresentation and breach of fiduciary duty. This is
a consolidated putative class action in which claims brought by 11 persons or
entities have been consolidated under the title IN RE: PIPER FUNDS INC.
INSTITUTIONAL GOVERNMENT INCOME PORTFOLIO LITIGATION. The named plaintiffs
in the complaint purport to represent a class of individuals and groups who
purchased shares of Institutional Government Income Portfolio during the
putative class period of July 1, 1991 through May 9, 1994. The named
plaintiffs and defendants have entered into a settlement agreement which has
received preliminary approval from the Court. The terms of the settlement
are set forth in a Settlement Agreement dated July 20, 1995 (as modified by
an Addendum filed on July 28, 1995). The Settlement Agreement contained a
provision which would have permitted the defendants to cancel the Agreement
if shareholders who had incurred a cumulative "Loss" (as defined under the
Agreement) more than 10% of the Loss sustained by the entire class had opted
out. The deadline for requesting exclusion from the class has passed, and
the Loss sustained by persons requesting exclusion is less than 10%. If
granted
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final approval by the Court, the Settlement Agreement would provide
up to $70 million, together with interest earned, less certain disbursements
and attorneys fees as approved by the Court, to class members in payments
scheduled over approximately three years. Such payments would be made by
Piper Jaffray Companies Inc. and the Adviser and would not be an obligation
of the Institutional Government Income Portfolio or Piper Funds Inc.
Six additional complaints, which are based on claims similar to
those asserted in the first complaint, have been brought relating to the
Institutional Government Income Portfolio. The first of such complaints was
filed in the same court against the same parties on October 21, 1994, by
Eltrax Systems, Inc. A second additional complaint was filed against the
Company, the Adviser, the Distributor and Piper Jaffray Companies Inc. on
September 30, 1994 in the United States District Court, District of Colorado.
Plaintiffs in the complaint are Gary Pashel and Gregg S. Hayutin, Trustees
of the Mae Pashel Trust; Mae Pashel, individually; Gary Pashel and Michael H.
Feinstein, Trustees of the Robert Hayutin Insurance Trust; and Dennis E.
Hayutin, Gregg S. Hayutin and Gary Pashel, Trustees of the Marie Ellen
Hayutin Trust. The third additional complaint, a putative class action, was
filed on November 1, 1994 in the United States District Court, District of
Idaho by the Idaho Association of Realtors, Inc., a non-profit Idaho
corporation. The complaint was filed against the Institutional Government
Income Portfolio, the Adviser, the Distributor, Piper Jaffray Companies Inc.,
William H. Ellis and Edward J. Kohler. The fourth complaint, also a putative
class action, was filed in the United States District Court for the District
of Minnesota, Third Division, on January 25, 1995. The Complaint was brought
by Louise S. Maher and John A. Raetz against Piper Funds Inc., Institutional
Government Income Portfolio, the Adviser, the Distributor, Piper Jaffray
Companies Inc., William H. Ellis and Edward J. Kohler. The fifth complaint
was brought on April 11, 1995, and in the future may be filed in the
Minnesota State District Court, Hennepin County. The plaintiff, Frank R.
Berman, Trustee of Frank R. Berman Professional CP Pension Plan Trust, sued
individually and not on behalf of any putative class. Defendants are the
Distributor, Piper Funds Inc., Morton Silverman and Worth Bruntjen. A sixth
complaint relating to Institutional Government Income Portfolio was filed on
June 22, 1995 in the Montana Thirteenth Judicial District Court, Yellowstone
County by Beverly Muth against the Distributor and Teresa L. Darnielle. In
addition to the above complaints, a number of actions have been commenced in
arbitration by individual investors in the Institutional Government Income
Portfolio. The complaints discussed in this paragraph generally have been
consolidated with the IN RE: PIPER FUNDS INC. action for pretrial purposes
and the arbitrations and litigation have been stayed pending entry of an
order by the Court permitting those class members who have requested
exclusion to proceed with their actions.
A complaint was filed by Herman D. Gordon on October 20, 1994, in
the United States District Court, District of Minnesota, against American
Adjustable Rate Term Trust Inc.--1998, American Adjustable Rate Term Trust
Inc.--1999, the Adviser, the Distributor, Piper Jaffray Companies Inc.,
Benjamin Rinkey, Jeffrey Griffin, Charles N. Hayssen and Edward J. Kohler. A
second complaint was filed by Frank Donio, I.R.A. and other plaintiffs on
April 14, 1995, in the United States District Court, District of Minnesota,
against American Adjustable Rate Term Trust
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Inc.--1996, American Adjustable Rate Term Trust Inc.--1997, American
Adjustable Rate Term Trust Inc.--1998, American Adjustable Rate Term Trust
Inc.--1999, the Adviser, the Distributor, Piper Jaffray Companies Inc. and
certain associated individuals. Plaintiffs in both actions filed a
Consolidated Amended Class Action Complaint on May 23, 1995 and by Order
dated June 8, 1995, the Court consolidated the two putative class actions.
The consolidated amended complaint, which purports to be a class action,
alleges certain violations of federal and state securities laws, breach of
fiduciary duty and negligent misrepresentation.
A complaint was filed by Carson H. Bradley on February 3, 1995 in
the Sixth Judicial District of the State of Idaho against American Government
Income Fund Inc., American Government Income Portfolio Inc., the Adviser, the
Distributor and Worth Bruntjen. The complaint alleges negligent
misrepresentation, breach of fiduciary duty and breach of contract. The
action has been removed to Federal District Court for the District of Idaho.
A complaint was filed by Gary E. Nelson on June 28, 1995 in the
United States District Court for the Western District of Washington at
Seattle against American Strategic Income Portfolio Inc. - II, the Adviser,
the Distributor, Piper Jaffray Companies Inc., Worth Bruntjen, Charles N.
Hayssen, Michael Jansen, William H. Ellis and Edward J. Kohler. A second
complaint was filed by the same individual in the same court on July 12, 1995
against American Opportunity Income Fund Inc., the Adviser, the Distributor,
Piper Jaffray Companies Inc., Worth Bruntjen, Charles N. Hayssen, Michael
Jansen, William H. Ellis and Edward J. Kohler. On September
7, 1995, Christian Fellowship Foundation Peace United Church of Christ, Gary
E. Nelson and Lloyd Schmidt filed an amended complaint purporting to be a
class action in the United States District Court for the District of
Washington. The complaint was filed against American Government Income
Portfolio, Inc., American Government Income Fund Inc., American Government
Term Trust, Inc., American Strategic Income Portfolio Inc., American
Strategic Income Portfolio Inc. -- II, American Strategic Income Portfolio
Inc. -- III, American Opportunity Income Fund Inc., American Select Portfolio
Inc., Piper Jaffray Companies Inc., Piper Jaffray Inc., the Adviser and
certain associated individuals. By Order filed October 5, 1995, the
complaints were consolidated. The amended complaint alleges generally that
the prospectus and financial statements of each investment company were false
and misleading. Specific violations of various federal securities laws are
alleged with respect to each investment company. The complaint also alleges
that the defendants violated the Racketeer Influenced and Corrupt
Organizations Act, the Washington State Securities Act and the Washington
Consumer Protection Act.
Complaints have also been filed relating to two open-end funds for
which the Adviser has acted as sub-adviser, Managers Intermediate Mortgage
Fund and Managers Short Government Fund. A complaint was filed on September
26, 1994 in the United States District Court, District of Connecticut, by
Florence R. Hosea, Bobby W. Hosea, Getrud B. Dale and Peter M. Dale, Andrew
Poffel and Diane Poffel as tenants by the Entireties, Myrone Sarone, Donna M.
DiPalo, Bernard B. Geltner and Gail Geltner and Paul Delman. The complaint
was filed against The Managers Funds, the Managers Funds, L.P., Robert P.
Watson, the Adviser, the Distributor, an individual associated with the
Adviser, Evaluation Associates, Inc. and Managers
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<PAGE>
Intermediate Mortgage Fund. The complaint, which is a putative class action,
alleges certain violations of federal securities laws, including the making
of false and misleading statements in the prospectus, and alleges negligent
misrepresentation, breach of fiduciary duty and common law fraud. A similar
complaint was filed as a putative class action in the same court on November
4, 1994. The complaint was filed by Karen E. Kopelman against The Managers
Fund, The Managers Funds, L.P., Robert P. Watson, the Adviser, the
Distributor, Worth Bruntjen, Evaluation Associates, Inc. and Managers
Intermediate Mortgage Fund. The two putative class actions were consolidated
by court order on December 13, 1994. Plaintiffs filed an Amended and Restated
Complaint on July 19, 1995. A complaint relating to the Managers Short
Government Fund was filed on November 18, 1994 in the United States District
Court, District of Minnesota. The complaint was filed by Robert Fleck as a
putative class action against The Managers Funds, The Managers Funds, L.P.,
the Adviser, the Distributor, Worth Bruntjen, Evaluation Associates, Inc.,
Robert P. Watson, John E. Rosati, William M. Graulty, Madeline H. McWhinney,
Steven J. Pasggioli, Thomas R. Schneeweis and Managers Short Government Fund,
F/K/A/ Managers Short Government Income Fund. The complaint alleges certain
violations of federal securities laws, including the making of false and
misleading statements in the prospectus, and negligent misrepresentation.
The Adviser and Distributor do not believe that the settlement
reached in connection with the first lawsuit described above, or any other of
the above lawsuits, will have a material adverse effect upon their ability to
perform under their agreements with the Fund, and they intend to defend the
remaining lawsuits vigorously.
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APPENDIX A
COMMERCIAL PAPER AND CORPORATE BOND RATINGS
COMMERCIAL PAPER RATINGS
Set forth below are descriptions of the two highest commercial paper
and other short-term rating categories assigned by Standard & Poor's Ratings
Services ("S&P"), Moody's Investors Service, Inc. ("Moody's"), Fitch
Investors Service, Inc. ("Fitch") and Duff & Phelps, Inc. ("Duff"):
The designation A-1 by S&P indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted with a
plus sign (+) designation. Capacity for timely payment on issues with an A-2
designation is strong. However, the relative degree of safety is not as high
as for issues designated A-1.
The rating Prime-1 (P-1) is the highest commercial paper rating
assigned by Moody's. Issuers of P-1 paper must have a superior capacity for
repayment of short-term promissory obligations, and ordinarily will be
evidenced by leading market positions in well established industries, high
rates of return on funds employed, conservative capitalization structures
with moderate reliance on debt and ample asset protection, broad margins in
earnings coverage of fixed financial charges and high internal cash
generation, and well established access to a range of financial markets and
assured sources of alternate liquidity. Issues rated Prime-2 (P-2) have a
strong capacity for repayment of short-term promissory obligations. This
ordinarily will be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound, will
be more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
The rating Fitch-1 (Highest Grade) is the highest commercial paper
rating assigned by Fitch. Paper rated Fitch-1 is regarded as having the
strongest degree of assurance for timely payment. The rating Fitch-2 (Very
Good Grade) is the second highest commercial paper rating assigned by Fitch
which reflects an assurance of timely payment only slightly less in degree
than the strongest issues.
The rating Duff-1 is the highest commercial paper rating assigned by
Duff. Paper rated Duff-1 is regarded as having very high certainty of timely
payment with excellent liquidity factors which are supported by ample asset
protection. Risk factors are minor. Paper rated Duff-2 is regarded as
having good certainty of timely payment, good access to capital markets and
sound liquidity factors and company fundamentals. Risk factors are small.
A-1
<PAGE>
S&P CORPORATE BOND RATINGS
S&P's ratings for corporate bonds have the following definitions:
Debt rated "AAA" has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in a small degree.
Debt rated "A" has a strong capacity to pay interest and repay
principal, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher rated categories.
A-2
<PAGE>
APPENDIX B
INTEREST RATE FUTURES CONTRACTS AND RELATED OPTIONS
INTEREST RATE FUTURES CONTRACTS
Adjustable Portfolio may purchase and sell interest rate futures
contracts and options thereon. An interest rate futures contract creates an
obligation on the part of the seller (the "short") to deliver, and an
offsetting obligation on the part of the purchaser (the "long") to accept
delivery of, the type of financial instrument called for in the contract in a
specified delivery month for a stated price. A majority of transactions in
interest rate futures contracts, however, do not result in the actual
delivery of the underlying instrument, but are settled through liquidation
(I.E., by entering into an offsetting transaction). The interest rate
futures contracts to be traded by the Fund are traded only on commodity
exchanges--known as "contract markets"--approved for such trading by the
Commodity Futures Trading Commission and must be executed through a futures
commission merchant or brokerage firm which is a member of the relevant
contract market. These contract markets, through their clearing
corporations, guarantee that the contracts will be performed. Presently,
futures contracts are based upon such debt securities as long-term U.S.
Treasury bonds, Treasury notes, Government National Mortgage Association
modified pass-through mortgage-backed securities, three-month U.S. Treasury
bills and bank certificates of deposit. In addition, futures contracts are
traded in the Moody's Investment Grade Corporate Bond Index and the Long Term
Corporate Bond Index.
Although most futures contracts by their terms call for actual
delivery or acceptance of commodities or securities, in most cases the
contracts are closed out before the settlement date without the making or
taking of delivery. Closing out a short position is effected by purchasing a
futures contract for the same aggregate amount of the specific type of
financial instrument or commodity and the same delivery month. If the price
of the initial sale of the futures contract exceeds the price of the
offsetting purchase, the seller is paid the difference and realizes a gain.
Conversely, if the price of the offsetting purchase exceeds the price of the
initial sale, the trader realizes a loss. Similarly, the closing out of a
long position is effected by the purchaser entering into a futures contract
sale. If the offsetting sale price exceeds the purchase price, the purchaser
realizes a gain and, if the purchase price exceeds the offsetting sale price,
the purchaser realizes a loss.
The purchase or sale of a futures contract differs from the purchase
or sale of a security in that no price or premium is paid or received.
Instead, an amount of cash or securities acceptable to the Adviser and the
relevant contract market, which varies but is generally about 5% of the
contract amount, must be deposited with the custodian in the name of the
broker. This amount is known as "initial margin," and represents a "good
faith" deposit assuring the performance of both the purchaser and the seller
under the futures contract. Subsequent payments to and from the broker,
known as "variation margin," are required to be made on a daily basis as the
price of the futures contract fluctuates, making the long or short positions
in the futures contract more or less valuable, a process known as "marking
B-1
<PAGE>
to the market." Prior to the settlement date of the futures contract, the
position may be closed out by taking an opposite position which will operate
to terminate the position in the futures contract. A final determination of
variation margin is then made, additional cash is required to be paid to or
released by the broker, and the purchaser realizes a loss or gain. In
addition, a commission is paid on each completed purchase and sale
transaction.
The purpose of the acquisition or sale of a futures contract by the
Fund, as the holder of long-term fixed-income securities, is to hedge against
fluctuations in rates on such securities without actually buying or selling
long-term fixed-income securities. For example, if the Fund owns long-term
bonds and interest rates are expected to increase, the Fund might sell
futures contracts. Such a sale would have much the same effect as selling
some of the long-term bonds in the Fund's portfolio. If interest rates
increase as anticipated by the Adviser, the value of certain long-term
securities in the portfolio would decline, but the value of the Fund's
futures contracts would increase at approximately the same rate, thereby
keeping the net asset value of the Fund from declining as much as it
otherwise would have. Of course, since the value of the securities in the
Fund's portfolio will far exceed the value of the futures contracts sold by
the Fund, an increase in the value of the futures contracts could only
mitigate--but not totally offset--the decline in the value of the portfolio.
Similarly, when it is expected that interest rates may decline,
futures contracts could be purchased to hedge against the Fund's anticipated
purchases of long-term fixed-income securities, such as bonds, at higher
prices. Since the rate of fluctuation in the value of futures contracts
should be similar to that of long-term bonds, the Fund could take advantage
of the anticipated rise in the value of long-term bonds without actually
buying them until the market had stabilized. At that time, the futures
contracts could be liquidated and the Fund's cash could then be used to buy
long-term bonds on the cash market. The Fund could accomplish similar
results by selling bonds with long maturities and investing in bonds with
short maturities when interest rates are expected to increase or by buying
bonds with long maturities and selling bonds with short maturities when
interest rates are expected to decline. However, in circumstances when the
market for bonds may not be as liquid as that for futures contracts, the
ability to invest in such contracts could enable the Fund to react more
quickly to anticipated changes in market conditions or interest rates.
OPTIONS ON INTEREST RATE FUTURES CONTRACTS
Adjustable Portfolio may purchase and sell put and call options on
interest rate futures contracts which are traded on a United States exchange
or board of trade as a hedge against changes in interest rates, and will
enter into closing transactions with respect to such options to terminate
existing positions. An interest rate futures contract provides for the
future sale by one party and the purchase by the other party of a certain
amount of a specific financial instrument (debt security) at a specified
price, date, time and place. An option on an interest rate futures contract,
as contrasted with the direct investment in such a contract, gives the
purchaser the right, in return for the premium paid, to assume a position in
an interest rate futures contract at a specified exercise price at any time
prior to the expiration date of the option. Options on interest rate futures
contracts are similar to options on securities, which give the purchaser the
right, in return for the premium paid, to purchase or sell securities. A
call option gives the purchaser of such option the right to buy, and obliges
its writer to sell, a specified underlying futures contract at a specified
exercise price at any time prior to the expiration date of
B-2
<PAGE>
the option. A purchaser of a put option has the right to sell, and the
writer has the obligation to buy, such contract at the exercise price during
the option period. Upon exercise of an option, the delivery of the futures
position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's future
margin account, which represents the amount by which the market price of the
futures contract exceeds, in the case of a call, or is less than, in the case
of a put, the exercise price of the option on the futures contract. If an
option is exercised on the last trading day prior to the expiration date of
the option, the settlement will be made entirely in cash equal to the
difference between the exercise price of the option and the closing price of
the interest rate futures contract on the expiration date. The Fund will pay
a premium for purchasing options on interest rate futures contracts. Because
the value of the option is fixed at the point of sale, there are no daily
cash payments to reflect changes in the value of the underlying contract;
however, the value of the option does change daily and that change would be
reflected in the net asset value of the Fund. In connection with the writing
of options on interest rate futures contracts, the Fund will make initial
margin deposits and make or receive maintenance margin payments that reflect
changes in the market value of such options. Premiums received from the
writing of an option are included in initial margin deposits.
PURCHASE OF PUT OPTIONS ON FUTURES CONTRACTS. Adjustable Portfolio
may purchase put options on interest rate futures contracts if the Adviser
anticipates a rise in interest rates. Because the value of an interest rate
futures contract moves inversely in relation to changes in interest rates, a
put option on such a contract becomes more valuable as interest rates rise.
By purchasing put options on interest rate futures contracts at a time when
the Adviser expects interest rates to rise, the Fund will seek to realize a
profit to offset the loss in value of its portfolio securities. If interest
rates remain steady or fall such that the futures contract price at
expiration of the option is above the option exercise price, the put option
will expire worthless.
PURCHASE OF CALL OPTIONS ON FUTURES CONTRACTS. Adjustable Portfolio
may purchase call options on interest rate futures contracts if the Adviser
anticipates a decline in interest rates. The purchase of a call option on an
interest rate futures contract represents a means of obtaining temporary
exposure to market appreciation at limited risk. Because the value of an
interest rate futures contract moves inversely in relation to changes to
interest rates, a call option on such a contract becomes more valuable as
interest rates decline. The Fund may purchase a call option on an interest
rate futures contract to hedge against a decline in interest rates in a
market advance when the Fund is holding cash. The Fund can take advantage of
the anticipated rise in the value of long-term securities without actually
buying them until the market is stabilized. At that time, the options can be
liquidated and the Fund's cash can be used to buy long-term securities. If
interest rates remain steady or rise such that the futures contract price at
expiration of the option is below the option exercise price, the call option
will expire worthless.
B-3
<PAGE>
WRITING CALL OPTIONS ON FUTURES CONTRACTS. Adjustable Portfolio may
write call options on interest rate futures contracts if the Adviser
anticipates a rise in interest rates. As interest rates rise, a call option
on such a contract becomes less valuable. If the futures contract price at
expiration of the option is below the exercise price, the option will not be
exercised and the Fund will retain the full amount of the option premium.
Such amount provides a partial hedge against any decline that may have
occurred in the Fund's portfolio securities. If interest rates decline such
that the futures contract price is above the option exercise price and the
option is exercised, the Fund will be liable for the amount by which the
market price of the futures contract exceeds the exercise price of the option.
WRITING PUT OPTIONS ON FUTURES CONTRACTS. Adjustable Portfolio may
write put options on interest rate futures contracts if the Adviser
anticipates a decline in interest rates. As interest rates decline, a put
option on an interest rate futures contract becomes less valuable. If the
futures contract price at expiration of the option has risen due to declining
interest rates and is above the exercise price, the option will not be
exercised and the Fund will retain the full amount of the option premium.
Such amount can then be used by the Fund to buy long-term securities when the
market has stabilized. If interest rates rise such that the futures contract
price is below the option exercise price and the option is exercised, the
Fund will be liable for the amount by which the exercise price of the option
exceeds the market price of the futures contract.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
HEDGING RISKS IN FUTURES CONTRACTS TRANSACTIONS. There are several
risks in using futures contracts as hedging devices. One risk arises because
the prices of futures contracts may not correlate perfectly with movements in
the underlying fixed-income security due to certain market distortions.
First, all participants in the futures market are subject to initial margin
and variation margin requirements. Rather than making additional variation
margin payments, investors may close the contracts through offsetting
transactions which could distort the normal relationship between the security
and the futures market. Second, the margin requirements in the futures
market are lower than margin requirements in the securities market, and as a
result the futures market may attract more speculators than does the
securities market. Increased participation by speculators in the futures
market may also cause temporary price distortions. Because of possible price
distortion in the futures market and because of imperfect correlation between
movements in securities and movements in the prices of futures contracts,
even a correct forecast of general market trends may not result in a
successful hedging transaction over a very short period. Another risk arises
because of imperfect correlation between movements in the value of the
futures contracts and movements in the value of securities subject to the
hedge.
Successful use of futures contracts by Adjustable Portfolio is
subject to the ability of the Adviser to predict correctly movements in the
direction of interest rates. If the Fund has hedged against the possibility
of an increase in interest rates adversely affecting the value of
fixed-income securities held in its portfolio and
B-4
<PAGE>
interest rates decrease instead, the Fund will lose part or all of the
benefit of the increased value of its security which it has hedged because it
will have offsetting losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash, it may have to sell securities
to meet daily variation margin requirements. Such sales of securities may,
but will not necessarily, be at increased prices which reflect the decline in
interest rates. The Fund may have to sell securities at a time when it may
be disadvantageous to do so.
LIQUIDITY OF FUTURES CONTRACTS. Adjustable Portfolio may elect to
close some or all of its contracts prior to expiration. The purpose of
making such a move would be to reduce or eliminate the hedge position held by
the Fund. The Fund may close its positions by taking opposite positions.
Final determinations of variation margin are then made, additional cash as
required is paid by or to the Fund, and the Fund realizes a loss or a gain.
Positions in futures contracts may be closed only on an exchange or
board of trade providing a secondary market for such futures contracts.
Although the Fund intends to enter into futures contracts only on exchanges
or boards of trade where there appears to be an active secondary market,
there is no assurance that a liquid secondary market will exist for any
particular contract at any particular time.
In addition, most domestic futures exchanges and boards of trade
limit the amount of fluctuation permitted in futures contract prices during a
single trading day. The daily limit establishes the maximum amount that the
price of a futures contract may vary either up or down from the previous
day's settlement price at the end of a trading session. Once the daily limit
has been reached in a particular contract, no trades may be made that day at
a price beyond that limit. The daily limit governs only price movement
during a particular trading day and therefore does not limit potential losses
because the limit may prevent the liquidation of unfavorable positions. It
is possible that futures contract prices could move to the daily limit for
several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses. In such event, it will not be
possible to close a futures position and, in the event of adverse price
movements, the Fund would be required to make daily cash payments of
variation margin. In such circumstances, an increase in the value of the
portion of the portfolio being hedged, if any, may partially or completely
offset losses on the futures contract. However, as described above, there is
no guarantee that the price of the securities being hedged will, in fact,
correlate with the price movements in the futures contract and thus provide
an offset to losses on a futures contract.
RISKS OF OPTIONS ON FUTURES CONTRACTS. The use of options on
futures contracts also involves additional risk. Compared to the purchase or
sale of futures contracts, the purchase of call or put options on futures
contracts involves less potential risk to the Fund because the maximum amount
at risk is the premium paid for the options (plus transactions costs). The
writing of a call option on a futures contract generates a premium which may
partially offset a decline in the value of the Fund's portfolio assets. By
writing a call option, the Fund becomes obligated to sell a futures contract,
which may have a value higher than the exercise
B-5
<PAGE>
price. Conversely, the writing of a put option on a futures contract
generates a premium, but the Fund becomes obligated to purchase a futures
contract, which may have a value lower than the exercise price. Thus, the
loss incurred by the Fund in writing options on futures contracts may exceed
the amount of the premium received.
The effective use of options strategies is dependent, among other
things, on the Fund's ability to terminate options positions at a time when
the Adviser deems it desirable to do so. Although the Fund will enter into
an option position only if the Adviser believes that a liquid secondary
market exists for such option, there is no assurance that the Fund will be
able to effect closing transactions at any particular time or at an
acceptable price. The Funds' transactions involving options on futures
contracts will be conducted only on recognized exchanges.
Adjustable Portfolio's purchase or sale of put or call options on
futures contracts will be based upon predictions as to anticipated interest
rates by the Adviser, which could prove to be inaccurate. Even if the
expectations of the Adviser are correct, there may be an imperfect
correlation between the change in the value of the options and of the Fund's
portfolio securities.
REGULATORY MATTERS
To the extent required to comply with applicable Securities and
Exchange Commission releases and staff positions, when entering into futures
contracts, Adjustable Portfolio will maintain, in a segregated account, cash
or liquid high-grade debt securities equal to the value of such contracts.
The Commodity Futures Trading Commission (the "CFTC"), a federal
agency, regulates trading activity on the exchanges pursuant to the Commodity
Exchange Act, as amended. The CFTC requires the registration of "commodity
pool operators," defined as any person engaged in a business which is of the
nature of an investment trust, syndicate or a similar form of enterprise, and
who, in connection therewith, solicits, accepts or receives from others,
funds, securities or property for the purpose of trading in any commodity for
future delivery on or subject to the rules of any contract market. The CFTC
has adopted Rule 4.5, which provides an exclusion from the definition of
commodity pool operator for any registered investment company which meets the
requirements of the Rule. Rule 4.5 requires, among other things, that an
investment company wishing to avoid commodity pool operator status use
futures and options positions only (a) for "bona fide hedging purposes" (as
defined in CFTC regulations) or (b) for other purposes so long as aggregate
initial margins and premiums required in connection with non-hedging
positions do not exceed 5% of the liquidation value of the investment
company's portfolio. Any investment company wishing to claim the exclusion
provided in Rule 4.5 must file a notice of eligibility with both the CFTC and
the National Futures Association. Before engaging in transactions involving
futures contracts, the Adjustable Portfolio will file such notices and meet
the requirements of Rule 4.5, or such other requirements as the CFTC or its
staff may from time to time issue, in order to render registration as a
commodity pool operator unnecessary.
B-6
<PAGE>
ANNUAL REPORT
[LOGO]
JUNE 30, 1996
PIPER
INSTITUTIONAL
FUNDS
MINNEAPOLIS
222 SOUTH NINTH STREET
MINNEAPOLIS, MN 55402
612 342-6402
SEATTLE
1200 FIFTH AVENUE
SEATTLE,WA 98101
206 287-8862
DENVER
1050 17TH STREET
DENVER, CO 80265
303 820-5885
<PAGE>
TABLE OF CONTENTS
Letter to Shareholders . . . . . . . . 1
Financial Statements and Notes . . . . 6
Investments in Securities. . . . . . .16
Independent Auditors' Report . . . . .18
Federal Tax Information. . . . . . . .19
Letter to Shareholders . . . . . . . . 3
Financial Statements and Notes . . . . 6
Investments in Securities. . . . . . .17
Independent Auditors' Report . . . . .18
Federal Tax Information. . . . . . . .19
INSTITUTIONAL MONEY MARKET FUND
Institutional Money Market Fund seeks maximum current income consistent with
preservation of capital and maintenance of liquidity. To realize its objective,
the fund invests in securities that are issued or guaranteed as to payment of
principal and interest by the U.S. government, its agencies or
instrumentalities, and repurchase agreements backed by such securities. The U.S.
government securities held by the fund, not the fund shares, are guaranteed as
to payment of principal and interest. An investment in the fund is neither
insured nor guaranteed by the U.S. government. There can be no assurance the
fund will be able to maintain a stable net asset value of $1 per share.
INSTITUTIONAL GOVERNMENT ADJUSTABLE PORTFOLIO
Institutional Government Adjustable Portfolio seeks high current income
consistent with low principal volatility. The fund invests primarily (at least
65% of its total assets under normal market conditions) in adjustable rate
mortgage (ARM) securities that are issued or guaranteed by the U.S. government,
its agencies or its instrumentalities. The fund also may invest in privately
issued ARM securities, mortgage-backed securities other than ARM securities,
other types of U.S. government securities, Canadian government securities,
structured securities including foreign linked index securities and corporate
debt securities. The fund may also purchase securities through the sale-forward
(dollar-roll) program. This investment technique and investments in certain
types of securities, such as foreign linked index securities, may cause the
fund's net asset value to fluctuate to a greater extent than would be expected
from interest rate movements alone. As with other mutual funds, there can be no
assurance the fund will achieve its objective. Since the fund's inception on
February 2, 1993, it has had a credit rating of AAAf by Standard and Poor's
Mutual Funds Ratings Group (S&P).*
*THE FUND IS RATED AAAf, WHICH MEANS THE FUND'S INVESTMENTS HAVE AN OVERALL
CREDIT QUALITY OF AAA. CREDIT QUALITIES ARE ASSESSED BY STANDARD AND POOR'S
MUTUAL FUNDS RATINGS GROUP. S&P DOES NOT EVALUATE THE MARKET RISK OF AN
INVESTMENT WHEN ASSIGNING A CREDIT RATING. SEE STANDARD AND POOR'S CORPORATE AND
MUNICIPAL RATINGS DEFINITIONS FOR AN EXPLANATION OF AAA. THE FUND HAS BEEN GIVEN
A MARKET RISK RATING BY S&P, WHICH WE CANNOT PUBLISH DUE TO NASD REGULATIONS.
RISK RATINGS EVALUATE VARIOUS INVESTMENT RISKS THAT CAN AFFECT THE PERFORMANCE
OF A BOND FUND AND INDICATE THE FUND'S OVERALL STABILITY AND SENSITIVITY TO
CHANGING MARKET CONDITIONS. THESE RATINGS ARE AVAILABLE BY CALLING S&P AT 1 800
424-FUND.
THIS REPORT IS INTENDED FOR SHAREHOLDERS OF INSTITUTIONAL MONEY MARKET FUND AND
INSTITUTIONAL GOVERNMENT ADJUSTABLE PORTFOLIO, BUT IT MAY ALSO BE USED AS SALES
LITERATURE IF PRECEDED OR ACCOMPANIED BY A PROSPECTUS. THE PROSPECTUS GIVES
DETAILS ABOUT THE CHARGES, INVESTMENT RESULTS AND OPERATING POLICIES OF THE
FUNDS.
<PAGE>
INSTITUTIONAL MONEY MARKET FUND
PORTFOLIO COMPOSITION
JUNE 30, 1996
Federal Home Loan Mortgage
Corporation 24%
Federal Home Loan Bank 8%
Other Government-
Backed Securities 3%
Federal Farm
Credit Bank 1%
[PIE CHART]
Federal National
Mortgage Association 19%
Student Loan Marketing
Association 5%
U.S. Treasury Securities 5%
Repurchase Agreements 35%
INVESTMENT CATEGORIES REFLECT PERCENTAGE OF TOTAL ASSETS.
NANCY SHELLENBERGER OLSEN
IS PRIMARILY RESPONSIBLE FOR THE MANAGEMENT OF INSTITUTIONAL MONEY MARKET FUND.
SHE HAS 18 YEARS OF FINANCIAL EXPERIENCE.
SHAISTA TAJAMAL
ASSISTS WITH THE MANAGEMENT OF INSTITUTIONAL MONEY MARKET FUND. SHE HAS SIX
YEARS OF FINANCIAL EXPERIENCE.
July 19, 1996
Dear Shareholders:
DURING THE PAST YEAR, INSTITUTIONAL MONEY MARKET FUND'S SEVEN-DAY CURRENT YIELD
FELL FROM 5.67% ON JUNE 30, 1995, TO 5.04% ON JUNE 30, 1996.* This decline was
due to a decrease in short-term interest rates brought on by the Federal Reserve
Board (Fed) easing credit in July, December and January. Since January, the Fed
has maintained a neutral monetary policy, meaning they have neither raised nor
lowered interest rates.
SEVERAL ECONOMIC DEVELOPMENTS TOOK PLACE DURING THE PERIOD THAT HAD AN IMPACT ON
THE MARKET. Inflation, as measured by the Consumer Price Index, grew only 2.4%
for 1995, its lowest annual increase since 1986. This kept interest rates
relatively low. Inflation remained subdued during the first six months of 1996,
but the economy showed signs of strength with job creation in the non-farm
sector posting much higher increases than expected -- 624,000 new jobs in
February and 140,000 in March. In addition, there was a substantial, though
short-lived, rally in commodity prices. As a result of these signs of economic
strength, both long- and short-term interest rates rose.
DURING THE YEAR, WE SHORTENED THE FUND'S AVERAGE WEIGHTED MATURITY FROM 68 TO 34
DAYS. Shortening the average weighted maturity is a common strategy that we
employ when we believe short-term interest rates will rise. The benefit is that
we don't have to wait as long for securities to mature in order for us to put
that money to work at higher interest rates.
ONE OF THE WAYS WE SHORTENED THE AVERAGE MATURITY OF THE PORTFOLIO WAS TO ADD
GOVERNMENT AGENCY FLOATING SECURITIES. This helped performance due to the
favorable spreads on those securities and to the rising short-term rates in the
first half of 1996. These securities represent approximately 12% of the fund's
total assets as of June 30.
*PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. THE RETURN OF AN INVESTMENT
WILL FLUCTUATE. AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED BY
THE U.S. GOVERNMENT, AND THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1 PER SHARE.
1
<PAGE>
INSTITUTIONAL MONEY MARKET FUND
[GRAPH]
CURRENT YIELD REFERS TO THE INCOME GENERATED BY THE FUND OVER A 30-DAY
PERIOD. THIS INCOME IS THEN ANNUALIZED. EFFECTIVE YIELD IS CALCULATED
SIMILARLY BUT THE INCOME EARNED IS ASSUMED TO BE REINVESTED. DURING SOME
PERIODS, PIPER CAPITAL WAIVED OR PAID FUND EXPENSES AND/OR PIPER JAFFRAY, THE
FUND'S DISTRIBUTOR, VOLUNTARILY LIMITED 12B-1 FEES FOR THE FUND. HAD THESE
FEES AND EXPENSES NOT BEEN WAIVED, YIELDS WOULD HAVE BEEN: 4.98% 30-DAY
CURRENT YIELD AND 5.10% 30-DAY EFFECTIVE YIELD.
GOING FORWARD, THERE'S A POSSIBILITY THE FED WILL RAISE SHORT-TERM RATES AT THE
FEDERAL OPEN MARKET COMMITTEE MEETING ON OR BEFORE AUGUST 20. Because we believe
the market has already factored in a Fed tightening, we don't expect that a Fed
rate hike will have a significant impact on prices if it does occur. As a
result, a Fed increase may encourage us to increase slightly the fund's average
weighted maturity.
THE SAFETY OF YOUR PRINCIPAL REMAINS OUR PRIMARY CONSIDERATION IN MANAGING
THE FUND AS WE STRIVE TO PROVIDE YOU WITH A CONSERVATIVE ALTERNATIVE FOR YOUR
SHORT-TERM CASH. As of June 30, all of the fund's investments were in
securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities, or in repurchase agreements backed by such securities.We
continue to use a fundamental approach to identify high-quality, liquid money
market securities that provide competitive yields. Our strategy is designed
to add value by active positioning of the portfolio on the short end of the
yield curve, investing in high-quality securities and managing the fund's
average weighted maturity based on our interest rate forecast.
Thank you for your investment in Institutional Money Market Fund. We remain
committed to providing you with quality service and look forward to helping
you achieve your financial goals.
Sincerely,
/s/ Nancy Shellenberger Olsen
Nancy Shellenberger Olsen
30-DAY YIELDS
30-DAY CURRENT AND EFFECTIVE YIELDS ARE AS OF THE END OF
EACH MONTH.
2
<PAGE>
INSTITUTIONAL GOVERNMENT ADJUSTABLE PORTFOLIO
PORTFOLIO COMPOSITION
JUNE 30, 1996
U.S. Agency Adjustable
Rate Mortgage-Backed
Securities 72%
U.S. Agency Fixed
Rate Mortgage-Backed
Securities 14%
[PIE CHART]
U.S. Treasury
Securities 1%
Short-Term
Securities 1%
Other Assets 2%
INVESTMENT CATEGORIES REFLECT PERCENTAGE OF TOTAL ASSETS.
TOM MCGLINCH, CFA
IS PRIMARILY RESPONSIBLE FOR THE MANAGEMENT OF INSTITUTIONAL GOVERNMENT
ADJUSTABLE PORTFOLIO. HE HAS 15 YEARS OF FINANCIAL EXPERIENCE.
July 19, 1996
Dear Shareholders:
DURING THE FISCAL YEAR ENDED JUNE 30, 1996, INSTITUTIONAL GOVERNMENT
ADJUSTABLE PORTFOLIO HAD A TOTAL RETURN OF 6.34%.* This return includes
reinvested distributions but not the fund's sales charge. Comparatively, the
one-year return for the Lipper Adjustable Rate Mortgage Funds Average was
3.30% and the Lehman Brothers Adjustable Rate Mortgage Index's return was
6.31%. During this period, coupon income contributed a significant portion of
the fund's total return. The fund slightly outperformed the Lehman index as a
result of owning securities with slightly higher coupon income and less price
sensitivity to higher interest rates than securities in the index. In
addition, we believe the Lipper average return was lower because several of
the funds in the category experienced credit losses.
BOND MARKET PERFORMANCE WAS MIXED DURING THE FUND'S FISCAL YEAR. In late
1995 and early 1996, the bond market rallied as interest rates continued
their decline. During this period, the Federal Reserve Board (Fed) lowered
the federal funds rate in July, December and January. These moves had
important implications for the adjustable-rate mortgage (ARM) securities
market as many of the underlying loans reset their coupons based on the
one-year Treasury yield. Also, many borrowers began to see the interest rate
on their mortgage decrease, and investors experienced a gradual reduction in
coupon income as the underlying mortgage loans reset to lower rates. Once
economic reports showed stronger-than-expected growth, interest rates began
to rise and bond prices fell sharply, abruptly ending the bond market rally.
Fortunately, adjustable rate mortgages posted slightly better returns in this
environment compared to most fixed income securities. Through the period,
market consensus grew that the Federal Reserve would raise short-term
interest rates in a pre-emptive strike against inflation. That sentiment
began to wane the last few trading days in June, resulting in a slight
improvement in returns.
WE MAINTAINED A RELATIVELY CONSERVATIVE INVESTMENT STRATEGY, WHICH INCLUDED A
NEARLY NEUTRAL EFFECTIVE DURATION IN COMPARISON TO THE FUND'S BENCHMARK
INDEX. The effective duration for the fund was 1.7 years as of June 30. The
fund benefited from its emphasis on ARM securities during the period. As
short-term interest rates fell in late 1995, the coupon rates on these ARM
securities did not fall as quickly or as far
*PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. THE INVESTMENT RETURN
AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT FUND SHARES, WHEN
SOLD, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
3
<PAGE>
INSTITUTIONAL GOVERNMENT ADJUSTABLE PORTFOLIO
VALUE OF $100,000 INVESTED
JUNE 30, 1996
[GRAPH]
$100,000 INVESTED IN FEBRUARY 1993 AND HELD THROUGH JUNE 30, 1996, WOULD HAVE
GROWN TO $112,202. THE FUND'S PERFORMANCE REFLECTS THE MAXIMUM SALES CHARGE
OF 1%, WHILE NO SUCH CHARGES ARE REFLECTED IN THE INDEX OR AVERAGE. ALL
PERFORMANCE FIGURES INCLUDE REINVESTED DISTRIBUTIONS. PAST PERFORMANCE DOES
NOT GUARANTEE FUTURE RESULTS.
AVERAGE ANNUALIZED TOTAL RETURNS
THROUGH 6/30/96, INCLUDING 1% SALES CHARGE
One Year . . . . . . . . . . . . . .5.27%
Since Inception (2/2/93) . . . . . .3.44%
DURING SOME PERIODS, PIPER CAPITAL WAIVED OR PAID FUND EXPENSES AND/OR PIPER
JAFFRAY, THE FUND'S DISTRIBUTOR, VOLUNTARILY LIMITED 12B-1 FEES FOR THE FUND.
HAD THESE FEES AND EXPENSES NOT BEEN WAIVED, THE AVERAGE ANNUALIZED TOTAL
RETURNS INCLUDING REINVESTED DISTRIBUTIONS AND THE FUND'S SALES CHARGE WOULD
HAVE BEEN 4.05% ONE YEAR AND 3.02% SINCE INCEPTION.
as market rates due to the lagging nature of their reset frequency. As a
result, they increased in value. Since the coupons did not experience
significant downward adjustments as rates fell, they offered comparatively
attractive income as rates began to rise, helping to hold their value.
TO MEET FUND REDEMPTIONS DURING THE PAST YEAR, WE SOLD SOME OF THE FUND'S
TREASURY SECURITIES AND, IN TURN, CAUSED A SLIGHT INCREASE IN ITS ALLOCATION
TO U.S. AGENCY ARM SECURITIES. At the end of the period, the fund had
approximately 72% of its net assets in U.S. agency ARM securities. We expect
to maintain our weighting in ARM securities until we see indications of
changing market conditions. Not only does the current market for these
securities appear strong, but we believe they have the potential to generate
high relative income in the rest of 1996.
EARLY PRINCIPAL PAYMENTS IN LATE 1995 HAVE HAD A NEGATIVE IMPACT ON THE
FUND'S INCOME. Borrowers were refinancing their adjustable rate mortgages at
a faster speed due to the lower rates available on fixed rate mortgages.
Since many of the ARM securities held in the fund were purchased at premium
prices, the faster prepayments caused the fund to amortize these premiums
more quickly. That reduced the fund's current income level. We were generally
successful at minimizing the impact of prepayments by selling some of the
fund's ARM securities that we believed were most susceptible to prepayments.
As rates have risen in 1996, the refinancing opportunity has been limited,
further reducing prepayments.
SOME OF THE FUND'S 1995 DIVIDENDS WERE RECLASSIFIED AS A RETURN OF CAPITAL
FOR TAX PURPOSES DUE TO THE SALE OF A CANADIAN MORTGAGE-BACKED SECURITY THAT
RECOGNIZED FOREIGN CURRENCY LOSSES. Tax regulations require that certain
foreign currency losses be treated as ordinary losses and be offset against
net investment income when determining taxable ordinary income. As a result,
some of the fund's distributions to investors were classified as a return of
capital. A return of capital means that the distribution is not reported as
taxable income but can be used to reduce the investor's cost basis in the
fund. This will affect the capital gain or loss calculation upon your sale of
the fund's shares. Your tax adviser can provide more information about how
this will affect you in your tax reporting.
4
<PAGE>
INSTITUTIONAL GOVERNMENT ADJUSTABLE PORTFOLIO
GOING FORWARD, WE HAVE POSITIONED THE FUND TO PERFORM BEST IN A STABLE
INTEREST RATE ENVIRONMENT, though we can't rule out the possibility that the
Fed may raise short-term interest rates in August. The recent rise in yields
has improved bond market fundamentals, and our expectation is that the
economy will grow moderately in the coming months. We intend to maintain a
neutral strategy and expect ARM securities to perform well in the less
volatile market environment we anticipate. The securities in the fund have a
relatively high average coupon, which reduces their price sensitivity to
changing market rates and allows them to maintain relatively high levels of
income.
IN THE NEXT FEW WEEKS, YOU WILL RECEIVE A PROXY IN THE MAIL ASKING YOU TO
APPROVE A PROPOSAL TO MERGE THIS FUND INTO THE ADJUSTABLE RATE MORTGAGE
SECURITIES FUND, ANOTHER PIPER FUND. Piper Capital Management recommended to
the board of directors of Institutional Government Adjustable Portfolio that
a reorganization take place because the fund has been unable to attract and
retain sufficient assets for its continued operation to be economically
feasible. The board of directors approved the recommendation and recommends
shareholders vote for the proposal. If the plan is approved, you will become
a shareholder of the Adjustable Rate Mortgage Securities Fund and will
receive shares equal to the value of your shares in Institutional Government
Adjustable Portfolio. The Adjustable Rate Mortgage Securities Fund shares
would be issued on a net asset value basis, and you would incur no sales
charge. I manage Adjustable Rate Mortgage Securities Fund and would remain
primarily responsible for its day-to-day management.
Thank you for your investment in Institutional Government Adjustable
Portfolio. As always, my efforts are dedicated to reaching the fund's
objective and helping you achieve your financial goals.
Sincerely,
/s/ Tom McGlinch
Tom McGlinch
Portfolio Manager
5
<PAGE>
- - - --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
JUNE 30, 1996
<TABLE>
<CAPTION>
Institutional Institutional
Money Government
Market Adjustable
Fund Portfolio
----------- ------------
<S> <C> <C>
ASSETS:
Investments in securities at market value* (note 2)
(including repurchase agreements of $61,051,000 and
$46,000, respectively) ............................... $ 173,849,628 5,670,773
Cash in bank on demand deposit ........................... 48,026 48,058
Organization costs (note 2) .............................. 27,167 15,295
Mortgage security paydowns receivable .................... -- 28,925
Accrued interest receivable .............................. 575,266 38,165
----------- ------------
Total assets ......................................... 174,500,087 5,801,216
----------- ------------
LIABILITIES:
Dividends payable to shareholders ........................ 664,593 25,308
Accrued investment management fee ........................ 19,863 1,436
----------- ------------
Total liabilities .................................... 684,456 26,744
----------- ------------
Net assets applicable to outstanding capital stock ....... $ 173,815,631 5,774,472
----------- ------------
----------- ------------
REPRESENTED BY:
Capital stock - authorized 100 billion shares of $0.01 par
value of Institutional Money Market Fund and 10 billion
shares of $0.01 par value of Institutional Government
Adjustable Portfolio; outstanding, 173,815,631 and
608,858 shares, respectively ......................... $ 1,738,156 6,089
Additional paid-in capital ............................... 172,077,475 9,124,869
Distributions in excess of net investment income ......... -- (25,308)
Accumulated net realized loss on investments ............. -- (3,355,290)
Unrealized appreciation of investments ................... -- 24,112
----------- ------------
Total - representing net assets applicable to
outstanding capital stock ........................ $ 173,815,631 5,774,472
----------- ------------
----------- ------------
Net asset value per share of outstanding capital stock ... $ 1.00 9.48
----------- ------------
----------- ------------
* Investments in securities at identified cost ........... $ 173,849,628 5,646,661
----------- ------------
----------- ------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
- - - --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
Institutional Institutional
Money Government
Market Adjustable
Fund Portfolio
----------- ------------
<S> <C> <C>
INCOME:
Interest (net of interest expense of $1,750 for
Institutional Government Adjustable Portfolio) ....... $ 5,748,809 673,117
----------- ------------
EXPENSES (NOTE 5):
Investment management fee ................................ 155,276 30,710
Custodian, accounting and transfer agent fees ............ 123,526 52,701
Shareholder account servicing fees ....................... 1,206 365
Registration fees ........................................ 26,964 12,351
Reports to shareholders .................................. 21,026 23,265
Amortization of organization costs ....................... 14,204 7,997
Directors' fees .......................................... 5,611 5,127
Audit and legal fees ..................................... 35,540 30,874
Other expenses ........................................... 12,193 15,433
----------- ------------
Total expenses ....................................... 395,546 178,823
Less expenses waived by the advisor ...................... (32,746) (116,698)
----------- ------------
Net expenses before expenses paid indirectly ......... 362,800 62,125
Less expenses paid indirectly ............................ (490) (424)
----------- ------------
Total net expenses ................................... 362,310 61,701
----------- ------------
Net investment income ................................ 5,386,499 611,416
----------- ------------
NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized loss on investments (note 3) ................ -- (143,585)
Net change in unrealized appreciation or depreciation of
investments ............................................ -- 190,446
----------- ------------
Net gain on investments ................................ -- 46,861
----------- ------------
Net increase in net assets resulting from
operations ....................................... $ 5,386,499 658,277
----------- ------------
----------- ------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
- - - --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Institutional Money Institutional Government
Market Fund Adjustable Portfolio
------------------------------ --------------------------
Year Ended Year Ended Year Ended Year Ended
6/30/96 6/30/95 6/30/96 6/30/95
-------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income .................................. $ 5,386,499 1,764,252 611,416 1,295,309
Net realized loss on investments ......................... -- -- (143,585) (2,209,087)
Net change in unrealized appreciation or depreciation of
investments ............................................ -- -- 190,446 1,791,630
-------------- ------------- ----------- ------------
Net increase in net assets resulting from operations ... 5,386,499 1,764,252 658,277 877,852
-------------- ------------- ----------- ------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ............................... (5,386,499) (1,764,252) (362,543) (1,105,594)
Tax return of capital .................................... -- -- (221,821) (148,061)
-------------- ------------- ----------- ------------
Total distributions .................................... (5,386,499) (1,764,252) (584,364) (1,253,655)
-------------- ------------- ----------- ------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Proceeds from sales ...................................... 590,483,864 168,842,836 187,462 875,301
Proceeds from shares issued for reinvestment of
distributions .......................................... 4,730,393 1,434,995 505,527 983,642
Payments for shares redeemed ............................. (473,887,488) (152,763,914) (9,962,203) (21,423,001)
-------------- ------------- ----------- ------------
Increase (decrease) in net assets from capital share
transactions ......................................... 121,326,769 17,513,917 (9,269,214) (19,564,058)
-------------- ------------- ----------- ------------
Total increase (decrease) in net assets .............. 121,326,769 17,513,917 (9,195,301) (19,939,861)
Net assets at beginning of year ............................ 52,488,862 34,974,945 14,969,773 34,909,634
-------------- ------------- ----------- ------------
Net assets at end of year ................................ $ 173,815,631 52,488,862 5,774,472 14,969,773
-------------- ------------- ----------- ------------
-------------- ------------- ----------- ------------
Distributions in excess of net investment income ......... $ -- -- (25,308) (198,326)
-------------- ------------- ----------- ------------
-------------- ------------- ----------- ------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
- - - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION
Piper Institutional Funds Inc. (the company)
is registered under the Investment Company Act
of 1940 (as amended) as a single, open-end
investment management company. The company
currently includes two diversified series:
Institutional Money Market Fund and
Institutional Government Adjustable Portfolio
(the funds). The company's articles of
incorporation permit the board of directors to
create additional series in the future.
Institutional Money Market Fund invests in
short-term securities that are issued or
guaranteed as to payment of principal and
interest by the U.S. government, its agencies
or instrumentalities, and repurchase
agreements backed by such securities.
Institutional Government Adjustable Portfolio
invests primarily in adjustable rate mortgage
(ARM) securities that are issued and
guaranteed as to payment of principal and
interest by the U.S. government, its agencies
or instrumentalities. The fund may also invest
in privately issued ARM securities,
mortgage-backed securities other than ARM
securities, other types of U.S. government
securities, Canadian government securities,
structured securities including foreign linked
index securities and corporate debt
securities. The fund may also purchase
securities through the sale-forward
(dollar-roll) program.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS IN SECURITIES
For Institutional Money Market Fund, pursuant
to Rule 2a-7 of the Investment Company Act of
1940 (as amended), securities are valued at
amortized cost, which approximates market
value, in order to maintain a constant net
asset value of $1 per share.
For Institutional Government Adjustable
Portfolio, the values of fixed income
securities are determined using pricing
services or prices quoted by independent
brokers. Exchange-listed options are valued at
the last sales price, and open financial
futures contracts are valued at the last
settlement price. When market quotations are
not readily available, securities are valued
at fair value according to methods selected in
good faith by the board of directors.
Short-term securities with maturities of 60
days or less are valued at amortized cost
which approximates market value.
Securities transactions are accounted for on
the date the securities are purchased or sold.
Realized gains and losses are calculated on
the identified-cost basis. Interest income,
including amortization of bond discount and
premium computed on a level-yield basis, is
accrued daily.
OPTIONS TRANSACTIONS
For hedging purposes, Institutional Government
Adjustable Portfolio may buy and sell put and
call options, write covered call options on
portfolio securities, and write cash-secured
puts. The risk in writing a call option is
that the fund gives up the opportunity for
profit if the market price of the security
increases. The risk in writing a put option is
that the fund may incur a loss if the market
price of the security decreases and the option
is exercised. The risk of buying an option is
that the fund pays a premium whether or not
the option is exercised. The fund also has the
additional risk of not being able to enter
into a closing transaction if a liquid
secondary market does not exist.
Option contracts are valued daily and
unrealized appreciation or depreciation is
recorded. The fund will realize a gain or loss
upon expiration or closing of the option
transaction. When an option is exercised, the
proceeds on the sale of a
9
<PAGE>
- - - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
written call option, the purchase cost of a
written put option, or the cost of a security
for purchased put and call options is adjusted
by the amount of premium received or paid.
FUTURES TRANSACTIONS
In order to gain exposure to or protect
against changes in the market, Institutional
Government Adjustable Portfolio may buy and
sell financial futures contracts and related
options. Risks of entering into futures
contracts and related options include the
possibility there may be an illiquid market
and that a change in the value of the contract
or option may not correlate with changes in
the value of the underlying securities.
Upon entering into a futures contract, the
fund is required to deposit either cash or
securities in an amount (initial margin) equal
to a certain percentage of the contract value.
Subsequent payments (variation margin) are
made or received by the fund each day. The
variation margin payments are equal to the
daily changes in the contract value and are
recorded as unrealized gains and losses. The
fund recognizes a realized gain or loss when
the contract is closed or expires.
INTEREST RATE TRANSACTIONS
To preserve a return or spread on a particular
investment or portion of its portfolio or for
other non-speculative purposes, Institutional
Government Adjustable Portfolio may enter into
various hedging transactions, such as interest
rate swaps and the purchase of interest rate
caps and floors. Interest rate swaps involve
the exchange of commitments to pay or receive
interest, e.g., an exchange of floating rate
payments for fixed rate payments. The purchase
of an interest rate cap entitles the
purchaser, to the extent that a specified
index exceeds a predetermined interest rate,
to receive payments of interest on a
contractually based notional principal amount
from the party selling the interest rate cap.
The purchase of an interest rate floor
entitles the purchaser, to the extent that a
specified index falls below a predetermined
interest rate, to receive payments of interest
on a contractually based notional principal
amount from the party selling the interest
rate floor.
If forecasts of interest rates and other
market factors are incorrect, investment
performance will diminish compared to what
performance would have been if these
investment techniques were not used. Even if
the forecasts are correct, there is risk that
the positions may correlate imperfectly with
the asset or liability being hedged. Other
risks of entering into these transactions are
that a liquid secondary market may not always
exist or that the other party to the
transaction may not perform.
For interest rate swaps, caps and floors, the
fund accrues weekly, as an increase or
decrease to interest income, the current net
amount due to or owed by the fund. Interest
rate swaps, caps and floors are valued from
prices quoted by independent brokers. These
valuations represent the present value of all
future cash settlement amounts based on
implied forward interest rates.
SECURITIES PURCHASED ON A WHEN-ISSUED BASIS
Delivery and payment for securities that have
been purchased by Institutional Government
Adjustable Portfolio on a forward-commitment
or when-issued basis can take place a month or
more after the transaction date. During this
period, such securities do not earn interest,
are subject to market fluctuation and may
increase or decrease in value prior to their
delivery. The fund maintains, in a segregated
account with its custodian, assets with a
market value equal to the amount of its
purchase commitments. The purchase of
securities on a when-issued or
forward-commitment
10
<PAGE>
- - - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
basis may increase the volatility of the
fund's net asset value if the fund makes such
purchases while remaining substantially fully
invested. As of June 30, 1996, the fund had no
outstanding when-issued or forward
commitments.
In connection with its ability to purchase
securities on a when-issued or forward-
commitment basis, the fund may enter into
mortgage "dollar rolls" in which the fund
sells securities for delivery in the current
month and simultaneously contracts with the
same counterparty to repurchase similar (same
type, coupon and maturity) but not identical
securities on a specified future date. As an
inducement to "roll over" its purchase
commitments, the fund receives negotiated
fees. For year ended June 30, 1996, the fund
earned no such fees.
FEDERAL TAXES
Each fund is treated separately for federal
income tax purposes. Each fund intends to
comply with the requirements of the Internal
Revenue Code applicable to regulated
investment companies and not be subject to
federal income tax. Therefore, no income tax
provision is required. In addition, on a
calendar-year basis, the funds will distribute
substantially all of their taxable net
investment income and realized gains, if any,
to avoid the payment of any federal excise
taxes.
Net investment income and net realized gains
(losses) may differ for financial statement
and tax purposes primarily because of the
recognition of certain foreign currency gains
(losses) as ordinary income (loss) for tax
purposes and the non-deductibility of
amortization of organization costs.
The character of distributions made during the
year from net investment income or net
realized gains may differ from its ultimate
characterization for federal income tax
purposes. Distributions which exceed the net
investment income or net realized gains for
financial statement purposes are presented as
an "excess distribution" in the statements of
changes in net assets and the financial
highlights. Distributions that exceed the net
investment income or net realized gains
recorded on a tax basis are presented as a
"tax return of capital" in the statements of
changes in net assets and the financial
highlights. In addition, due to the timing of
dividend distributions, the fiscal year in
which amounts are distributed may differ from
the year that the income or realized gains
(losses) were recorded by the funds.
On the statement of assets and liabilities, as
a result of permanent book-to-tax differences,
reclassification adjustments have been made
for Institutional Government Adjustable
Portfolio to decrease additional paid-in
capital by $3,463, increase distributions in
excess of net investment income by $75,855 and
decrease accumulated net realized losses by
$79,318.
DISTRIBUTIONS TO SHAREHOLDERS
Distributions to shareholders from net
investment income are declared daily and paid
monthly. Net realized gains distributions, if
any, will be made at least annually.
Distributions are payable in cash or
reinvested in additional shares.
REPURCHASE AGREEMENTS
For repurchase agreements entered into with
certain broker-dealers, the funds, along with
other affiliated registered investment
companies, may transfer uninvested cash
balances into an individual, joint or
tri-party trading account, the daily aggregate
of which is invested in repurchase agreements
secured by U.S. government or agency
obligations. Securities pledged as collateral
for all individual and joint repurchase
agreements are held by the funds' custodian
bank until maturity of the repurchase
agreement. Securities pledged as collateral
for all tri-party repurchase agreements are
11
<PAGE>
- - - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
held by a third-party custodian until maturity
of the repurchase agreement. Provisions for
all agreements ensure that the daily market
value of the collateral is in excess of the
repurchase amount, including accrued interest,
to protect the funds in the event of a
default.
ORGANIZATION COSTS
Organization costs were incurred in connection
with the start up and initial registration of
the funds. These costs are amortized over 60
months on a straight-line basis. If any or all
of the shares representing initial capital of
the fund are redeemed by any holder thereof
prior to the end of the amortization period,
the proceeds will be reduced by the
unamortized organization cost balance in the
same proportion as the number of shares
redeemed bears to the number of initial shares
outstanding preceding the redemption.
USE OF ESTIMATES
The preparation of financial statements in
conformity with generally accepted accounting
principles requires management to make
estimates and assumptions that affect the
reported amounts of assets and liabilities.
Management is also required to make
disclosures of contingent assets and
liabilities at the date of the financial
statements and the reported results of
operations during the reporting period. Actual
results could differ from those estimates.
(3) INVESTMENT SECURITY TRANSACTIONS
Cost of purchases and proceeds from sales of
securities, other than temporary investments
in short-term securities (for Institutional
Government Adjustable Portfolio), for the year
ended June 30, 1996 were as follows:
<TABLE>
<CAPTION>
Institutional
Institutional Government
Money Market Adjustable
Fund Portfolio
-------------- -----------
<S> <C> <C>
Purchases .......................................... $ 3,703,354,777 4,288,478
Proceeds from sales ................................ $ 3,581,950,731 13,282,084
</TABLE>
For the year ended June 30, 1996, no brokerage
commissions were paid to Piper Jaffray Inc.,
an affiliated broker.
(4) CAPITAL SHARE TRANSACTIONS
Transactions in shares of each fund for the
years ended June 30, 1996, and June 30, 1995,
were as follows:
<TABLE>
<CAPTION>
Institutional
Institutional Government
Money Market Adjustable
Fund Portfolio
------------- -----------
<S> <C> <C>
1996:
Sold .............................................. 590,483,864 19,737
Issued for reinvested distributions ............... 4,730,393 53,334
Redeemed .......................................... (473,887,488) (1,049,909)
------------- -----------
Increase (decrease) ........................... 121,326,769 (976,838)
------------- -----------
------------- -----------
1995:
Sold .............................................. 168,842,836 95,422
Issued for reinvested distributions ............... 1,434,995 104,898
Redeemed .......................................... (152,763,914) (2,304,441)
------------- -----------
Increase (decrease) ......................... 17,513,917 (2,104,121)
------------- -----------
------------- -----------
</TABLE>
(5) EXPENSES
The company has entered into an investment
management agreement with Piper Capital
Management (Piper Capital) under which Piper
Capital manages each fund's assets and
furnishes related office facilities,
equipment, research and personnel. The
12
<PAGE>
- - - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
agreement requires each fund to pay Piper
Capital a monthly fee based on average daily
net assets. The fee for Institutional Money
Market Fund is equal to an annual rate of
0.15%. The fee for Institutional Government
Adjustable Portfolio is equal to an annual
rate of 0.30%.
The company has also entered into shareholder
servicing agreements under which Piper Jaffray
Inc. (Piper Jaffray) and Piper Trust Company
perform various transfer and dividend
disbursing agent services. The fees, which are
paid monthly to Piper Jaffray and Piper Trust
Company for providing these services, are
equal to an annual rate of $9.00 per active
shareholder account and $6.00 per inactive
account for Institutional Money Market Fund
and $7.50 per active shareholder account and
$1.60 per closed account for Institutional
Government Adjustable Portfolio.
In addition to the investment management and
shareholder account servicing fees, each fund
is responsible for paying most other operating
expenses including: outside directors' fees
and expenses; custodian fees; registration
fees; printing and shareholder reports;
transfer agent fees and expenses; legal,
auditing and accounting services; organization
costs; insurance; interest; taxes and other
miscellaneous expenses. For the year ended
June 30, 1996, Piper Capital voluntarily
limited total fees and expenses, excluding
interest and income tax expenses, to an annual
rate of 0.35% and 0.60% of average daily net
assets on an annual basis for Institutional
Money Market Fund and Institutional Government
Adjustable Portfolio, respectively.
Expenses paid indirectly represent a reduction
of custodian fees for earnings on cash
balances maintained by the funds.
Sales charges received by Piper Jaffray for
distributing shares of Institutional
Government Adjustable Portfolio were $4 for
the year ended June 30, 1996.
(6) CAPITAL LOSS CARRYOVER
For federal income tax purposes, Institutional
Government Adjustable Portfolio had capital
loss carryovers of $3,355,290 at June 30,
1996, which, if not offset by subsequent
capital gains, will expire in 2002 through
2005. It is unlikely the board of directors
will authorize a distribution of any net
realized capital gains until the available
capital loss carryovers have been offset or
expired.
(7) PROPOSED REORGANIZATION
The board of directors has approved, subject
to shareholder approval, a reorganization
pursuant to which Adjustable Rate Mortgage
Securities Fund ('Adjustable Rate Fund'), a
series of Piper Funds Inc. - II, will acquire
substantially all of the assets of
Institutional Government Adjustable Portfolio.
Shareholders of Institutional Government
Adjustable Portfolio will become shareholders
of Adjustable Rate Fund, receiving shares of
Adjustable Rate Fund with a value equal to the
value of their holdings in Institutional
Government Adjustable Portfolio. The
reorganization is subject to the approval of a
majority of the outstanding shares of
Institutional Government Adjustable Portfolio.
A special meeting to vote on the
reorganization is currently scheduled for
September 12, 1996.
13
<PAGE>
- - - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(8) FINANCIAL HIGHLIGHTS
Per-share data for a share of capital stock
outstanding throughout each period and
selected information for each period are as
follows:
INSTITUTIONAL MONEY MARKET FUND
<TABLE>
<CAPTION>
Year Year Year Period
Ended Ended Ended Ended
6/30/96 6/30/95 6/30/94 6/30/93(c)
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ................................ $ 1.00 1.00 1.00 1.00
------- ------- ------- -------
Operations:
Net investment income ............................................... 0.05 0.05 0.03 0.01
------- ------- ------- -------
Total from operations ............................................ 0.05 0.05 0.03 0.01
------- ------- ------- -------
Distributions from net investment income .............................. (0.05) (0.05) (0.03) (0.01)
------- ------- ------- -------
Net asset value, end of period .................................. $ 1.00 1.00 1.00 1.00
------- ------- ------- -------
------- ------- ------- -------
Total return (a) ...................................................... 5.42% 5.26% 3.23% 1.24%
Net assets at end of period (in millions) ........................... $ 174 52 35 40
Ratio of expenses to average daily net assets (b) ..................... 0.35% 0.35% 0.35% 0.35%(d)
Ratio of net investment income to average daily net assets (b) ........ 5.22% 5.17% 3.26% 3.02%(d)
</TABLE>
(A) TOTAL RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE DURING THE PERIOD,
ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND DOES NOT REFLECT A SALES
CHARGE.
(B) DURING THE YEARS REFLECTED ABOVE, THE ADVISOR VOLUNTARILY WAIVED FEES AND
EXPENSES. HAD THE FUND PAID ALL FEES AND EXPENSES, THE RATIOS OF EXPENSES
AND NET INVESTMENT INCOME TO AVERAGE DAILY NET ASSETS WOULD HAVE BEEN AS
FOLLOWS: 0.38%/5.19%, 0.49%/5.03% AND 0.61%/3.00% IN FISCAL YEARS 1996,
1995 AND 1994, RESPECTIVELY. BEGINNING IN FISCAL 1996, THE EXPENSE RATIO
REFLECTS THE EFFECT OF GROSS EXPENSES PAID INDIRECTLY BY THE FUND. PRIOR
PERIOD EXPENSE RATIOS HAVE NOT BEEN ADJUSTED.
(C) COMMENCEMENT OF OPERATIONS WAS FEBRUARY 2, 1993.
(D) ADJUSTED TO AN ANNUAL BASIS.
14
<PAGE>
- - - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(8) FINANCIAL HIGHLIGHTS (CONTINUED)
Per-share data for a share of capital stock
outstanding throughout each period and
selected information for each period are as
follows:
INSTITUTIONAL GOVERNMENT ADJUSTABLE PORTFOLIO
<TABLE>
<CAPTION>
Year Year Year Period
Ended Ended Ended Ended
6/30/96 6/30/95 6/30/94 6/30/93(d)
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ............................... $ 9.44 9.46 10.04 10.00
------- ------- ------- -------
Operations:
Net investment income .............................................. 0.59(f) 0.52 0.49 0.18
Net realized and unrealized gains (losses) on investments .......... (0.01) (0.04) (0.57) 0.04
------- ------- ------- -------
Total from operations ........................................... 0.58 0.48 (0.08) 0.22
------- ------- ------- -------
Distributions to shareholders:
From net investment income ......................................... (0.25) (0.41) (0.50) (0.18)
Tax return of capital .............................................. (0.29) (0.09) -- --
------- ------- ------- -------
Total distributions to shareholders ............................. (0.54) (0.50) (0.50) (0.18)
------- ------- ------- -------
Net asset value, end of period ................................. $ 9.48 9.44 9.46 10.04
------- ------- ------- -------
------- ------- ------- -------
Total return (a) ..................................................... 6.34% 5.26% (0.91)% 2.18%
Net assets at end of period (in millions) .......................... $ 6 15 35 41
Ratio of expenses to average daily net assets (b) .................... 0.61% 0.55% 0.55% 0.74%(e)
Ratio of net investment income to average daily net assets (b) ....... 5.98% 5.54% 5.13% 4.73%(e)
Portfolio turnover rate (excluding short-term securities) ............ 43% 43% 110% 26%
Amount of borrowings outstanding at end of period (in millions)
(c) .............................................................. $ 0 0 9 6
Average amount of borrowings outstanding during the period (in
millions) ........................................................ $ -- 1.62 11.71 5.87
Average number of shares outstanding during the period (in
millions) .......................................................... 1.03 2.41 5.38 3.37
Average per-share asset amount of borrowings outstanding during the
period ........................................................... $ 0.03 0.67 2.18 1.74
</TABLE>
(A) TOTAL RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE DURING THE PERIOD,
ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND DOES NOT REFLECT A SALES
CHARGE.
(B) DURING THE YEARS REFLECTED ABOVE, THE ADVISOR VOLUNTARILY WAIVED FEES AND
EXPENSES. HAD THE FUND PAID ALL FEES AND EXPENSES, THE RATIOS OF EXPENSES
AND NET INVESTMENT INCOME TO AVERAGE DAILY NET ASSETS WOULD HAVE BEEN AS
FOLLOWS: 1.75%/4.84%, 0.75%/5.34% AND 0.60%/5.08% IN FISCAL YEARS 1996,
1995 AND 1994, RESPECTIVELY. BEGINNING IN FISCAL 1996, THE EXPENSE RATIO
REFLECTS THE EFFECT OF GROSS EXPENSES PAID INDIRECTLY BY THE FUND. PRIOR
PERIOD EXPENSE RATIOS HAVE NOT BEEN ADJUSTED.
(C) SECURITIES PURCHASED ON A WHEN-ISSUED BASIS FOR WHICH LIQUID, HIGH-GRADE
DEBT OBLIGATIONS ARE MAINTAINED IN A SEGREGATED ACCOUNT ARE NOT CONSIDERED
BORROWINGS. SEE NOTE 2 IN THE NOTES TO FINANCIAL STATEMENTS.
(D) COMMENCEMENT OF OPERATIONS WAS FEBRUARY 2, 1993.
(E) ADJUSTED TO AN ANNUAL BASIS.
(F) BASED ON AVERAGE SHARES OUTSTANDING DURING THE YEAR.
15
<PAGE>
- - - --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
INSTITUTIONAL MONEY MARKET FUND
JUNE 30, 1996
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- - - --------------------------------------------------------- ---------- -----------
<S> <C> <C>
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS)
U.S. GOVERNMENT AND AGENCY SECURITIES (62.0%):
Federal Farm Credit Bank Floating Rate Notes (b) (0.9%):
5.19%, 2/13/97 ...................................... $ 1,500,000 1,499,460
-----------
Federal Home Loan Bank Discount Notes (6.1%):
5.30%, 8/12/96 ........................................ 985,000 978,909
5.17%, 8/19/96 ........................................ 2,640,000 2,621,422
5.12%, 9/20/96 ........................................ 1,000,000 988,480
5.18%, 10/4/96 ........................................ 1,000,000 986,332
5.27%, 7/22/96 ........................................ 5,000,000 4,984,629
-----------
10,559,772
-----------
Federal Home Loan Bank Floating Rate Notes (b) (1.7%):
5.45%, 9/2/97 ......................................... 1,000,000 997,109
5.35%, 11/21/96 ....................................... 2,000,000 1,999,813
-----------
2,996,922
-----------
Federal Home Loan Mortgage Corporation Coupon Notes (1.7%):
7.88%, 12/20/96 ....................................... 2,000,000 2,021,274
5.56%, 11/7/96 ........................................ 1,000,000 999,848
-----------
3,021,122
-----------
Federal Home Loan Mortgage Corporation Discount Notes (22.6%):
5.25%, 8/6/96 ......................................... 3,000,000 2,984,250
5.21%, 8/8/96 ......................................... 1,650,000 1,640,926
5.32%, 9/3/96 ......................................... 2,000,000 1,981,084
5.33%, 9/20/96 ........................................ 2,000,000 1,976,015
5.23%, 10/16/96 ....................................... 1,255,000 1,235,491
5.18%, 7/3/96 ......................................... 3,000,000 2,999,137
5.19%, 7/3/96 ......................................... 2,475,000 2,474,286
5.17%, 7/9/96 ......................................... 3,000,000 2,996,553
5.27%, 7/10/96 ........................................ 5,000,000 4,993,413
5.25%, 7/15/96 ........................................ 3,000,000 2,993,875
5.28%, 7/15/96 ........................................ 2,000,000 1,995,893
5.18%, 7/16/96 ........................................ 5,000,000 4,989,208
5.19%, 7/16/96 ........................................ 3,000,000 2,993,513
5.25%, 7/18/96 ........................................ 3,000,000 2,992,563
-----------
39,246,207
-----------
Federal National Mortgage Association Discount Notes (14.0%):
5.15%, 8/1/96 ......................................... 1,500,000 1,493,348
5.24%, 8/6/96 ......................................... 3,000,000 2,984,280
5.29%, 8/13/96 ........................................ 2,000,000 1,987,363
4.80%, 8/16/96 ........................................ 2,000,000 1,987,733
5.23%, 8/20/96 ........................................ 3,000,000 2,978,208
5.18%, 7/24/96 ........................................ 8,000,000 7,973,525
5.27%, 7/25/96 ........................................ 5,000,000 4,982,433
-----------
24,386,890
-----------
Federal National Mortgage Association Floating Rate Notes (b) (5.2%):
5.54%, 10/4/96 ........................................ 2,000,000 2,000,000
5.44%, 5/1/97 ......................................... 3,000,000 2,998,741
5.47%, 6/20/97 ........................................ 2,000,000 1,998,084
5.45%, 6/2/99 ......................................... 2,000,000 1,986,422
-----------
8,983,247
-----------
</TABLE>
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- - - --------------------------------------------------------- ---------- -----------
<S> <C> <C>
Student Loan Marketing Association Floating Rate Notes (b) (4.6%):
5.59%, 10/30/97 ..................................... $ 2,360,000 2,360,000
6.08%, 7/1/96 ......................................... 2,700,000 2,700,000
6.13%, 6/30/97 ........................................ 1,000,000 999,585
5.45%, 12/20/96 ....................................... 2,000,000 2,000,000
-----------
8,059,585
-----------
U.S. Treasury Notes and Bonds (5.2%):
6.50%, 11/30/96 ....................................... 1,500,000 1,506,483
6.88%, 2/28/97 ........................................ 3,000,000 3,029,435
6.63%, 3/31/97 ........................................ 3,000,000 3,023,173
8.50%, 4/15/97 ........................................ 1,500,000 1,533,001
-----------
9,092,092
-----------
Total U.S. Government and Agency Securities (cost:
$107,845,297) ...................................... 107,845,297
-----------
OTHER U.S. GOVERNMENT AGENCY-BACKED (2.9%):
Downey Savings & Loan, LOC Federal Home Loan Bank San
Francisco, 5.50%, 7/12/96 ............................ 1,000,000 998,319
Downey Savings & Loan, LOC Federal Home Loan Bank San
Francisco, 5.25%, 8/16/96 ............................ 1,000,000 993,292
Fidelity Federal Bank, LOC Federal Home Loan Bank San
Francisco, 5.22%, 9/27/96 ............................ 3,000,000 2,961,720
-----------
Total Other U.S. Government Agency-Backed (cost:
$4,953,331) ........................................ 4,953,331
-----------
REPURCHASE AGREEMENTS (35.1%):
Repurchase agreement with Goldman Sachs in a joint
trading account, collateralized by U.S. government
agency securities, acquired on 6/28/96, accrued
interest of $486, 5.55%, 7/1/96 ...................... 1,051,000 1,051,000
Repurchase agreement with Goldman Sachs in a tri-party
account, collateralized by U.S. government agency
securities, acquired on 6/26/96, accrued interest of
$5,889, 5.30%, 7/1/96 ................................ 8,000,000(c) 8,000,000
Repurchase agreement with Goldman Sachs in a tri-party
account, collateralized by U.S. government agency
securities, acquired on 6/26/96, accrued interest of
$7,950, 5.30%, 7/2/96 ................................ 9,000,000(c) 9,000,000
Repurchase agreement with Goldman Sachs in a tri-party
account, collateralized by U.S. government agency
securities, acquired on 6/5/96, accrued interest of
$12,015, 5.34%, 7/2/96 ............................... 3,000,000(c) 3,000,000
Repurchase agreement with Goldman Sachs in a tri-party
account, collateralized by U.S. government agency
securities, acquired on 6/6/96, accrued interest of
$14,187, 5.32%, 7/8/96 ............................... 3,000,000(c)(d) 3,000,000
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
16
<PAGE>
- - - --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
INSTITUTIONAL MONEY MARKET FUND
(CONTINUED)
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- - - --------------------------------------------------------- ---------- -----------
<S> <C> <C>
Repurchase agreement with Goldman Sachs in a tri-party
account, collateralized by U.S. government agency
securities, acquired on 6/6/96, accrued interest of
$15,517, 5.32%, 7/11/96 ............................ $ 3,000,000(c)(d) 3,000,000
Repurchase agreement with Morgan Stanley in a tri-party
account, collateralized by U.S. government agency
securities, acquired on 5/28/96, accrued interest of
$39,825, 5.31%, 8/26/96 .............................. 3,000,000(c)(d) 3,000,000
Repurchase agreement with Morgan Stanley in a tri-party
account, collateralized by U.S. government agency
securities, acquired on 6/24/96, accrued interest of
$18,865, 5.39%, 7/1/96 ............................... 18,000,000(c) 18,000,000
Repurchase agreement with Morgan Stanley in a tri-party
account, collateralized by U.S. government agency
securities, acquired on 6/26/96, accrued interest of
$8,338, 5.36%, 7/3/96 ................................ 8,000,000(c) 8,000,000
Repurchase agreement with Morgan Stanley in a tri-party
account, collateralized by U.S. government agency
securities, acquired on 6/7/96, accrued interest of
$20,689, 5.32%, 7/5/96 ............................... 5,000,000(c) 5,000,000
-----------
Total Repurchase Agreements
(cost: $61,051,000) ................................ 61,051,000
-----------
Total Investments in Securities (100.0%)
(cost: $173,849,628) (e) ........................... 173,849,628
-----------
Liabilities in excess of other assets (-0.0%) ....... (33,997)
-----------
Net assets (100.0%) ................................ $ 173,815,631
-----------
-----------
</TABLE>
NOTES TO INVESTMENTS IN SECURITIES:
(A) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO
THE FINANCIAL STATEMENTS.
(B) INTEREST RATE VARIES TO REFLECT CURRENT MARKET CONDITIONS; RATE SHOWN IS
THE EFFECTIVE RATE ON JUNE 30, 1996. THE MATURITY DATE REPRESENTS FINAL
MATURITY. HOWEVER, FOR PURPOSES OF RULE 2A-7, MATURITY DATE IS THE NEXT
INTEREST RATE RESET DATE.
(C) TRI-PARTY REPURCHASE AGREEMENTS REPRESENT AGREEMENTS WHERE UNINVESTED CASH
BALANCES ARE TRANSFERRED TO AN INDEPENDENT THIRD-PARTY CUSTODIAN (BANK OF
NEW YORK) AND THE COLLATERAL PLEDGED BY THE COUNTERPARTY TO THE AGREEMENT
IS HELD AT THE SAME THIRD-PARTY CUSTODIAN FOR THE BENEFIT OF THE FUND.
(D) REPURCHASE AGREEMENTS WITH GREATER THAN SEVEN DAYS TO MATURITY ARE
CONSIDERED ILLIQUID. THE AGGREGATE VALUE OF SUCH REPURCHASE AGREEMENTS
REPRESENTS 5.2% OF NET ASSETS.
(E) ALSO REPRESENTS COST FOR FEDERAL INCOME TAX PURPOSES.
INSTITUTIONAL GOVERNMENT ADJUSTABLE PORTFOLIO
JUNE 30, 1996
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- - - --------------------------------------------------------- ---------- -----------
<S> <C> <C>
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS)
U.S. GOVERNMENT AND AGENCY SECURITIES (97.4%):
U.S. Government Securities (11.3%):
U.S. Treasury Note, 6.00%, 11/30/97 ................ $ 650,000 650,325
-----------
U.S. Agency Mortgage-Backed Securities (86.1%):
Fixed Rate (14.3%):
7.50%, FNMA, 2/1/10 .................................. 823,589 828,473
-----------
Adjustable Rate (71.8%):
7.25%, FHLMC, 1/1/17 ................................. 926,788 942,423
7.59%, FNMA, 2/1/22 .................................. 1,460,184 1,510,268
6.50%, GNMA, 11/20/25 ................................ 1,678,081 1,693,284
-----------
4,145,975
-----------
Total U.S. Government and Agency Securities
(cost: $5,600,661) ................................ 5,624,773
-----------
REPURCHASE AGREEMENTS (0.8%):
Repurchase agreement with Goldman Sachs in a joint
trading account, collateralized by U.S. government
agency securities, acquired on 6/28/96, accrued
interest of $21, 5.55%, 7/1/96
(cost: $46,000) ..................................... 46,000 46,000
-----------
Total Investments in Securities (98.2%)
(cost: $5,646,661) (b) ............................ 5,670,773
-----------
Other assets in excess of liabilities (1.8%) ....... 103,699
-----------
Net assets (100.0%) ............................... $ 5,774,472
-----------
-----------
</TABLE>
NOTES TO INVESTMENTS IN SECURITIES:
(A) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO
THE FINANCIAL STATEMENTS.
(B) ON JUNE 30, 1996, THE COST OF INVESTMENTS IN SECURITIES FOR FEDERAL INCOME
TAX PURPOSES WAS $5,646,661. THE AGGREGATE GROSS UNREALIZED APPRECIATION
AND DEPRECIATION OF INVESTMENTS IN SECURITIES WERE AS FOLLOWS:
<TABLE>
<S> <C>
GROSS UNREALIZED APPRECIATION .... $ 46,668
GROSS UNREALIZED DEPRECIATION ...... (22,556)
-----------
NET UNREALIZED APPRECIATION .... $ 24,112
-----------
-----------
</TABLE>
17
<PAGE>
- - - --------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS
PIPER INSTITUTIONAL FUNDS INC.:
We have audited the accompanying statements of
assets and liabilities, including the schedule
of investments in securities, of Institutional
Money Market Fund and Institutional Government
Adjustable Portfolio (funds within Piper
Institutional Funds Inc.) as of June 30, 1996,
the related statements of operations for the
year then ended, the statements of changes in
net assets for each of the years in the two-
year period then ended and the financial
highlights presented in note 8 to the
financial statements. These financial
statements and the financial highlights are
the responsibility of the funds' management.
Our responsibility is to express an opinion on
these financial statements and the financial
highlights based on our audits.
We conducted our audits in accordance with
generally accepted auditing standards. Those
standards require that we plan and perform the
audit to obtain reasonable assurance about
whether the financial statements and the
financial highlights are free of material
misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts
and disclosures in the financial statements.
Investment securities held in custody are
confirmed to us by the custodian. As to
securities purchased and sold but not received
or delivered, we request confirmations from
brokers and, where replies are not received,
we carry out other appropriate auditing
procedures. An audit also includes assessing
the accounting principles used and significant
estimates made by management, as well as
evaluating the overall financial statement
presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements and
the financial highlights referred to above
present fairly, in all material respects, the
financial position of Institutional Money
Market Fund and Institutional Government
Adjustable Portfolio as of June 30, 1996, and
the results of their operations, the changes
in their net assets and the financial
highlights for the periods stated in the first
paragraph above, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
July 19, 1996
18
<PAGE>
- - - --------------------------------------------------------------------------------
FEDERAL INCOME TAX INFORMATION
The following per-share information describes
the federal tax treatment of distributions
made during the fiscal year. Distributions for
the calendar year will be reported to you on
Form 1099-DIV. Please consult a tax adviser on
how to report these distributions at the state
and local levels.
INCOME DISTRIBUTIONS
(TAXABLE AS ORDINARY DIVIDENDS, NONE
QUALIFYING FOR DEDUCTION BY CORPORATIONS)
<TABLE>
<CAPTION>
Institutional
Institutional Government
Money Market Adjustable
Payable Date Fund Portfolio
- - - ----------------------------------------------------- --------------- -------------
<S> <C> <C>
July 31, 1995.......................................$ 0.0047 0.0417
August 31, 1995...................................... 0.0047 0.0417
September 30, 1995................................... 0.0045 0.0448
October 31, 1995..................................... 0.0046 0.0467
November 30, 1995.................................... 0.0044 0.0492
December 31, 1995.................................... 0.0046 0.0473
January 31, 1996..................................... 0.0045 0.0467
February 29, 1996.................................... 0.0040 0.0470
March 31, 1996....................................... 0.0043 0.0464
April 30, 1996....................................... 0.0041 0.0464
May 31, 1996......................................... 0.0042 0.0452
June 30, 1996........................................ 0.0041 0.0410
------- -------------
Total...........................................$ 0.0527 0.5441*
------- -------------
------- -------------
</TABLE>
* $0.2921 per share of the total distributions
of $0.5441 per share represents a return of
capital for tax purposes.
19
<PAGE>
- - - --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
DIRECTORS David T. Bennett, CHAIRMAN, HIGHLAND HOMES, INC.,
USL PRODUCTS, INC., KIEFER BUILT, INC., OF
COUNSEL, GRAY, PLANT, MOOTY, MOOTY & BENNETT,
P.A.
Jaye F. Dyer, PRESIDENT, DYER MANAGEMENT COMPANY
William H. Ellis, PRESIDENT, PIPER JAFFRAY
COMPANIES INC., PIPER CAPITAL MANAGEMENT
INCORPORATED
Karol D. Emmerich, PRESIDENT, THE PARACLETE GROUP
Luella G. Goldberg, DIRECTOR, TCF FINANCIAL,
RELIASTAR FINANCIAL CORP., HORMEL FOODS CORP.
George Latimer, CHIEF EXECUTIVE OFFICER, NATIONAL
EQUITY FUNDS
OFFICERS William H. Ellis, CHAIRMAN OF THE BOARD
Paul A. Dow, PRESIDENT
Thomas S. McGlinch, SENIOR VICE PRESIDENT
Robert H. Nelson, SENIOR VICE PRESIDENT AND
TREASURER
Nancy S. Olsen, SENIOR VICE PRESIDENT
Molly J. Destro, VICE PRESIDENT
Amy K. Johnson, VICE PRESIDENT
Paul D. Pearson, VICE PRESIDENT
Susan Sharp Miley, SECRETARY
INVESTMENT ADVISER Piper Capital Management Incorporated
222 SOUTH NINTH STREET, MINNEAPOLIS, MN 55402-3804
CUSTODIAN AND Investors Fiduciary Trust Company
TRANSFER AGENT 127 WEST 10TH STREET, KANSAS CITY, MO 64105-1716
LEGAL COUNSEL Dorsey & Whitney LLP
220 SOUTH SIXTH STREET, MINNEAPOLIS, MN 55402
INDEPENDENT KPMG Peat Marwick LLP
AUDITORS 4200 NORWEST CENTER, MINNEAPOLIS, MN 55402
20
<PAGE>
[LOGO]
PIPER CAPITAL MANAGEMENT INCORPORATED
222 SOUTH NINTH STREET
MINNEAPOLIS, MN 55402-3804
PIPER JAFFRAY INC., FUND DISTRIBUTOR AND NASD MEMBER.
THIS DOCUMENT IS PRINTED ON PAPER MADE FROM
100% TOTAL RECOVERED FIBER, INCLUDING 15% POST-CONSUMER WASTE.
In an effort to reduce costs to our shareholders, we have
implemented a process to reduce duplicate mailings of
the fund's shareholder reports. This householding
process should allow us to mail one report to each
address where one or more registered shareholders with
the same last names reside. If you would like to have
additional reports mailed to your address, please call our
Shareholder Services area at 1 800 866-7778, or mail
your request to:
Piper Capital Management
Attn: Communications Department
222 South Ninth Street
Minneapolis, MN 55402-3804
http://www.piperjaffray.com/
#10700 7/96 190-96
<PAGE>
PART C
PIPER FUNDS INC.--II
ADJUSTABLE RATE MORTGAGE SECURITIES FUND
OTHER INFORMATION
ITEM 15. INDEMNIFICATION.
Incorporated by reference to Post-Effective Amendment No. 2 to the
Registrant's Registration Statement on Form N-1A, File No. 33-60515, filed
December 18, 1995.
ITEM 16. EXHIBITS.
1.1 Articles of Incorporation (1)
1.2 Amendment to Articles of Incorporation (1)
2 Bylaws (1)
3 Not Applicable
4 Agreement and Plan of Reorganization is attached as Exhibit A to the
Prospectus/Proxy Statement included in Part A of this Registration
Statement on Form N-14.
5 See 1.1, 1.2 and 2 above.
6 Investment Advisory and Management Agreement (2)
7.1 Underwriting and Distribution Agreement (2)
7.2 Dealer Agreement (2)
8 Not Applicable
9 Custody and Investment Accounting Agreement (2)
10 Rule 12b-1 Plan (1)
11 Opinion and Consent of Dorsey & Whitney LLP with respect to the
legality of the securities being registered *
12 Opinion and Consent of Dorsey & Whitney LLP with respect to tax
matters **
C-1
<PAGE>
13 Not Applicable
14 Consent of KPMG Peat Marwick LLP *
15 Not Applicable
16 Power of Attorney *
17.1 Rule 24f-2 Election of Registrant (2)
17.2 Form of Proxy Card*
- - - ----------------------
* Filed herewith.
** To be filed by post-effective amendment.
(1) Incorporated by reference to the Registrant's Registration Statement on
Form N-14, File No. 33-58849, filed April 26, 1995.
(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. 2 to the
Registrant's Registration Statement on Form N-1A, File No. 33-60515, filed
December 18, 1995.
ITEM 17. UNDERTAKINGS.
(1) The undersigned Registrant agrees that prior to any public reoffering
of the securities registered through the use of a prospectus which is a part of
this Registration Statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the Securities Act, the
reoffering prospectus will contain the information called for by the applicable
registration form for reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
(2) The undersigned Registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as a part of an amendment to the
Registration Statement and will not be used until the amendment is effective,
and that, in determining any liability under the 1933 Act, each post-effective
amendment shall be deemed to be a new registration statement for the securities
offered therein, and the offering of the securities at that time shall be deemed
to be the initial bona fide offering of them.
C-2
<PAGE>
(3) The undersigned Registrant undertakes to file, by post-effective
amendment, an opinion of counsel supporting the tax consequences of the proposed
reorganization within a reasonable time after the receipt of such opinion.
C-3
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this registration statement has
been signed on behalf of the registrant, in the City of Minneapolis, State of
Minnesota, on the 25th day of July, 1996.
PIPER FUNDS INC.--II
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.
SIGNATURE TITLE DATE
/S/ PAUL A. DOW President (principal July 25, 1996
- - - ---------------------------- executive officer)
Paul A. Dow
/S/ ROBERT H. NELSON Treasurer (principal July 25, 1996
- - - ---------------------------- financial and accounting
Robert H. Nelson 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/ ROBERT H. NELSON July 25, 1996
-----------------------
Robert H. Nelson
Attorney-in-Fact
C-4
<PAGE>
EXHIBIT 11
D O R S E Y & W H I T N E Y L L P
Pillsbury Center South
220 South Sixth Street
Minneapolis, Minnesota 55402-1498
Telephone: (612) 340-2600
Fax: (612) 340-2868
July 25, 1996
Piper Funds Inc. -- II
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Re: Adjustable Rate Mortgage Securities Fund (Series A of Piper Funds
Inc. -- II)
Shares to be Issued Pursuant to Agreement and Plan of Reorganization
Ladies and Gentlemen:
We have acted as counsel to Piper Funds Inc. -- II, a corporation
organized under the laws of the State of Minnesotal (the "Company"), in
connection with its authorization and proposed issuance of its Series A common
shares, $.01 par value (the "Shares"). The Shares are to be issued pursuant to
an Agreement and Plan of Reorganization (the "Agreement"), by and between the
Company and Piper Institutional Funds Inc., a corporation organized under the
laws of the State of Minnesota, the form of which Agreement is included as
Exhibit A to the Prospectus/Proxy Statement relating to the transactions
contemplated by the Agreement included in the Company's Registration Statement
on Form N-14 filed with the Securities and Exchange Commission (the
"Registration Statement").
In rendering the opinion hereinafter expressed, we have reviewed the
proceedings taken by the Company in connection with the authorization and
issuance of the Shares, and we have reviewed such questions of law and examined
copies of such records of the Company, certificates of public officials and of
responsible officers of the Company, and other documents as we have deemed
necessary as a basis for such opinion. As to the various matters of fact
material to such opinion, we have, when such facts were not independently
established, relied to the extent we deem proper on certificates of public
officials and of responsible officers of the Company. In connection with such
review and examination, we have assumed that all copies of documents provided to
us conform to the originals; that all signatures are genuine; and that prior to
the consummation of the transactions contemplated thereby, the Agreement will
have been duly and validly
<PAGE>
executed and delivered on behalf of each of the parties thereto in substantially
the form included in the Registration Statement.
Based on the foregoing, it is our opinion that the Shares, when issued and
delivered by the Company pursuant to, and upon satisfaction of the conditions
contained in, the Agreement, will be duly authorized, validly issued, fully paid
and non-assessable by the Company.
In rendering the foregoing opinion (a) we express no opinion as to the
laws of any jurisdiction other than the State of Minnesota; and (b) we have
assumed, with your concurrence, that the conditions to closing set forth in the
Agreement will have been satisfied.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the Company's final Prospectus/Proxy Statement relating to
the Shares included in the Registration Statement.
Very truly yours,
/s/ Dorsey & Whitney LLP
2
<PAGE>
EXHIBIT 14
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Piper Institutional Funds Inc. and
Piper Funds Inc.--II:
We consent to the incorporation by reference in the registration statement on
Form N-14 of Adjustable Rate Mortgage Securities Fund (a series of Piper Funds
Inc.--II) of our report dated July 19, 1996, relating to the June 30, 1996
financial statements and financial highlights of Institutional Government
Adjustable Portfolio (a series of Piper Institutional Funds Inc.) and our report
dated October 13, 1995, relating to the August 31, 1995 financial statements and
financial highlights of Adjustable Rate Mortgage Securities Fund. We also
consent to the reference to our Firm under the heading "Financial Statements and
Experts" in the registration statement.
/s/ KPMG Peat Marwick LLP
Minneapolis, Minnesota
July 24, 1996
<PAGE>
EXHIBIT 16
PIPER FUNDS INC.--II
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Paul A. Dow, William H. Ellis,
Robert H. Nelson and Susan S. Miley, and each of them, his or her true and
lawful attorneys-in-fact and agents, each acting alone, with full power of
substitution and resubstitution, for him or her and in his or her name, place
and stead, in any and all capacities, to sign a Registration Statement on Form
N-14 of Piper Funds Inc. -- II (the "Company"), and any and all amendments
thereto, including post-effective amendments, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, each acting alone, full power and authority to do and perform to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, each acting alone, or
the substitutes for such attorneys-in-fact and agents, may lawfully do or cause
to be done by virtue hereof.
SIGNATURE TITLE DATE
/S/ PAUL A. DOW President July 19, 1996
- - - ---------------------------
Paul A. Dow
/S/ ROBERT H. NELSON Treasurer July 19, 1996
- - - ---------------------------
Robert H. Nelson
/S/ DAVID T. BENNETT Director July 19, 1996
- - - ---------------------------
David T. Bennett
/S/ JAYE F. DYER Director July 19, 1996
- - - ---------------------------
Jaye F. Dyer
/S/ WILLIAM H. ELLIS Director July 19, 1996
- - - ---------------------------
William H. Ellis
/S/ KAROL D. EMMERICH Director July 19, 1996
- - - ---------------------------
Karol D. Emmerich
/S/ LUELLA G. GOLDBERG Director July 19, 1996
- - - ---------------------------
Luella G. Goldberg
/S/ GEORGE LATIMER Director July 19, 1996
- - - ---------------------------
George Latimer
<PAGE>
EXHIBIT 17.2
PROXY
INSTITUTIONAL GOVERNMENT ADJUSTABLE PORTFOLIO
(A SERIES OF PIPER INSTITUTIONAL FUNDS INC.)
PIPER JAFFRAY TOWER
222 SOUTH NINTH STREET
MINNEAPOLIS, MINNESOTA 55402-3804
THIS PROXY IS BEING SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF PIPER
INSTITUTIONAL FUNDS INC.
The undersigned hereby appoints William H. Ellis, Susan S. Miley and Robert
H. Nelson, and each of them, with power to act without the other and with the
right of substitution in each, as proxies of the undersigned and hereby
authorizes each of them to represent and to vote, as designated below, all the
shares of Institutional Government Adjustable Portfolio (the "Fund"), a series
of Piper Institutional Funds Inc. (the "Company"), held of record by the
undersigned on July 22, 1996, at the Special Meeting of shareholders of the Fund
to be held on September 12, 1996, or any adjournments or postponements thereof,
with all powers the undersigned would possess if present in person. All
previous proxies given with respect to the Special Meeting hereby are revoked.
THE PROXIES ARE INSTRUCTED TO VOTE AS FOLLOWS:
PROPOSAL TO APPROVE AN AGREEMENT AND PLAN OF REORGANIZATION (the
"Plan"), by and between the Company, on behalf of the Fund, and Piper
Funds Inc. -- II, on behalf of Adjustable Rate Mortgage Securities Fund
("Adjustable Rate Fund"), pursuant to which substantially all of the
assets of the Fund will be acquired by Adjustable Rate Fund and
shareholders of the Fund will become shareholders of Adjustable Rate
Fund receiving shares of Adjustable Rate Fund with a value equal to the
value of their holdings in the Fund. A vote in favor of the Plan will
be considered a vote in favor of an amendment to the articles of
incorporation of the Company required to effect the reorganization as
contemplated by the Plan.
/ / FOR / / AGAINST / / ABSTAIN
In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the special meeting or any adjournments or
postponements thereof.
THIS PROXY WILL BE VOTED AS INSTRUCTED ON THE ABOVE PROPOSAL. IT IS
UNDERSTOOD THAT, IF NO CHOICE IS SPECIFIED, THIS PROXY WILL BE VOTED "FOR" THE
ABOVE PROPOSAL. UPON ALL OTHER MATTERS THE PROXIES SHALL VOTE AS THEY DEEM IN
THE BEST INTERESTS OF THE FUND. RECEIPT OF NOTICE OF MEETING AND PROXY
STATEMENT IS ACKNOWLEDGED BY YOUR EXECUTION OF THIS PROXY. SIGN, DATE, AND
RETURN IN THE ADDRESSED ENVELOPE-NO POSTAGE REQUIRED. PLEASE MAIL PROMPTLY TO
SAVE FURTHER SOLICITATION EXPENSE.
Dated:_________________________, 1996
_____________________________________
_____________________________________
IMPORTANT: Please sign this proxy
exactly as your name appears hereon.
When shares are held by joint tenants,
both should sign. When signing as
attorney, executor, administrator,
trustee or guardian, please give full
title as such. If a corporation, please
sign in full corporate name by president
or other authorized officer. If a
partnership, please sign in partnership
name by partner or other authorized
person.
