-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F+Hc6mrutgC/Mqcn02urAXF+dXIx8GWcA0eLT57lG+Y88fHsQL+ik7TC3DEyjDie MjgjJt7VBNbwCQvPTmJr/A== 0000912057-96-005901.txt : 19960807 0000912057-96-005901.hdr.sgml : 19960807 ACCESSION NUMBER: 0000912057-96-005901 CONFORMED SUBMISSION TYPE: N14AE24/A PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19960402 DATE AS OF CHANGE: 19960402 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PIPER FUNDS INC CENTRAL INDEX KEY: 0000806177 STANDARD INDUSTRIAL CLASSIFICATION: 0000 STATE OF INCORPORATION: MN FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: N14AE24/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-02159 FILM NUMBER: 96543759 BUSINESS ADDRESS: STREET 1: 222 S 9TH ST - STE 1300 STREET 2: PIPER JEFFRAY TOWER CITY: MINNEAPOLIS STATE: MN ZIP: 55402 BUSINESS PHONE: 6123426288 MAIL ADDRESS: STREET 1: 222 S 9TH ST - STE 1300 CITY: MINNEAPOLIS STATE: MN ZIP: 55402 FORMER COMPANY: FORMER CONFORMED NAME: PIPER JAFFRAY INVESTMENT TRUST INC DATE OF NAME CHANGE: 19940520 FORMER COMPANY: FORMER CONFORMED NAME: PIPER JAFFRAY FUNDS INC DATE OF NAME CHANGE: 19870127 N14AE24 1 N14AE24 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 2, 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 GLOBAL FUNDS INC. (Exact name of Registrant as specified in Charter) PIPER JAFFRAY TOWER 222 SOUTH NINTH STREET MINNEAPOLIS, MINNESOTA 55402-3804 (Address of Principal Executive Offices) 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 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, New York 10036
------------------------ It is proposed that this filing will become effective on the thirtieth day after the date of filing pursuant to Rule 488. ------------------------ The Exhibit Index is located on page . ------------------------ No filing fee is due because the Registrant has previously registered 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. The Registrant filed the Rule 24f-2 Notice for its fiscal year ended February 28, 1995, with the Securities and Exchange Commission on April 24, 1995. The Registrant intends to file the Rule 24f-2 Notice for its fiscal year ended February 29, 1996 on or about April 4, 1996. ------------------------ PURSUANT TO RULE 429, THIS REGISTRATION STATEMENT RELATES TO SHARES PREVIOUSLY REGISTERED BY THE REGISTRANT ON FORM N-1A (REGISTRATION NO. 33-33534). - - - - - - -------------------------------------------------------------------------------- - - - - - - -------------------------------------------------------------------------------- FORM N-14 PIPER GLOBAL FUNDS, INC. 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 Page (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) Registrant's Prospectus (b) * (c) * (d) * (e) Available Information (f) Available Information 6(a) Prospectus of the Hercules Funds Inc. (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 Table of Contents 12(a) Additional Information about Pacific-European Fund (b) * 13(a) Additional Information about Hercules Pacific Basin Value Fund (b) * (c) * 14 Registrant's Statement of Additional Information dated April 28, 1995; Hercules Funds Inc.'s Statement of Additional Information dated August 29, 1995 PART C OF FORM N-14 ITEM NO. OTHER INFORMATION HEADING - - - - - - ----------------------- --------------------------------------------------------------------------------------------- 15 Indemnification 16 Exhibits 17 Undertakings
- - - - - - ------------------------ * Not Applicable or Negative Answer HERCULES FUNDS INC. HERCULES EUROPEAN VALUE FUND PIPER JAFFRAY TOWER 222 SOUTH NINTH STREET MINNEAPOLIS, MINNESOTA 55402-3804 May 20, 1996 Dear Shareholder: A Special Meeting of Shareholders of Hercules European Value Fund (the "Fund"), a series of Hercules Funds Inc. (the "Company"), will be held at the offices of Hercules Funds Inc. on June 18, 1996 at a.m./p.m. central time in the office of the Company, 222 South Ninth Street, 3rd Floor, Minneapolis, MN. The purpose of the meeting is to ask shareholders of the Fund to consider and approve an Agreement and Plan of Reorganization pursuant to which the assets of the Fund would be combined with those of Pacific-European Growth Fund ("Pacific-European Fund"), a series of Piper Global Funds Inc., and Fund shareholders would become shareholders of Pacific-European Fund. Pacific- European Fund is a mutual fund with an objective of long-term capital appreciation. It invests primarily in common stock of companies in the Pacific Basin or in Europe. Pacific-European Fund is managed by Piper Capital Management Incorporated ("Piper Capital"). Edinburgh Fund Managers plc, an experienced international investment manager, serves as the sub-adviser to Pacific-European Fund. The combination of assets of the Fund with Pacific-European Fund is one element of an overall recommendation that Hercules Funds Inc. be eliminated as a separate family of funds and that instead, each Hercules fund be combined with the assets of appropriate mutual funds in the Piper family of mutual funds (or, in the case of Hercules World Bond Fund and Hercules Money Market Fund, that the fund be liquidated). As set forth in the enclosed Proxy Statement/Prospectus, efforts to develop an effective distribution system for the Hercules funds have not proven to be successful and it is believed unlikely that the Hercules funds will, in the foreseeable future, grow to a size to be economically viable. Pursuant to the reorganization, you would receive shares of Pacific-European Fund with a value equal to the value of your Fund shares at the time of the reorganization. We urge you to read all of the enclosed proxy materials carefully, but direct your attention to the following important points: - The Board of Directors of the Company has unanimously approved the reorganization and recommends that you vote FOR the reorganization. - Shareholders in the Fund will not incur any commissions, sales loads or other similar charges in connection with this reorganization. In addition, Piper Capital has agreed to pay for all direct expenses of the reorganization (including the proxy solicitation). - The expense ratio for Pacific-European Fund is lower than that of the Fund. Waivers and reimbursements currently keep the Fund's expense ratio artificially low. Piper Capital and the Fund's distributor do not presently intend to continue these limitations beyond the Fund's fiscal year ending June 30, 1996. - The Fund's shareholders would retain the capabilities and resources of Piper Capital and its affiliates in the areas of operations, management, distribution, shareholder servicing and marketing. - Edinburgh Fund Managers plc, an experienced international investment manager, is the sub-adviser to Pacific-European Fund. - The reorganization would enable the Fund's shareholders to enjoy an expanded range of mutual fund investment options. The Piper Funds complex of which Pacific-European Fund is a part, includes 15 other mutual fund portfolios that will be available for exchange by Fund shareholders who receive Pacific-European Fund shares in the reorganization. - The reorganization will not result in any federal taxable income to the Fund or its shareholders. The enclosed shareholder QUESTION AND ANSWER SHEET and the enclosed proxy material give you more detailed information about the proposals and the reasons why the Board of Directors recommends voting in favor of them. Please read these documents carefully. Also enclosed are the formal Notice of Special Meeting and a Proxy Card for you to mark, sign, date and return to us. PLEASE RETURN YOUR PROXY CARD IMMEDIATELY TO ASSURE THAT YOUR VOTE WILL BE COUNTED WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON. YOUR PROMPT RESPONSE WILL ELIMINATE ADDITIONAL MAILING. If you are also a shareholder in any other series of Hercules Funds Inc. (except Hercules Money Market Fund) you also will receive proxy material, including a Proxy Card, for that series. The Board of Directors recommends that you vote in favor of the proposals contained in the Proxy Statement/ Prospectus. PLEASE REMEMBER TO RETURN A COMPLETED PROXY CARD FOR EACH SERIES IN WHICH YOU ARE INVESTED. A POSTAGE-PAID ENVELOPE IS ENCLOSED WITH EACH PROXY FOR YOUR CONVENIENCE. As the meeting date approaches, if you haven't already voted, you may receive a telephone call reminding you to vote. If you have further questions about your proxy, please contact your investment professional. Sincerely, WILLIAM H. ELLIS PRESIDENT QUESTION AND ANSWER SHEET ON FEBRUARY 6, 1996, PIPER CAPITAL MANAGEMENT INCORPORATED RECOMMENDED TO THE BOARD OF DIRECTORS OF HERCULES FUNDS INC. THAT IT ELIMINATE HERCULES AS A SEPARATE FUND FAMILY BECAUSE THE FUNDS ARE TOO SMALL TO BE ECONOMICALLY VIABLE. THE BOARD UNANIMOUSLY AGREED THAT IT WOULD BE IN THE BEST INTEREST OF SHAREHOLDERS TO REORGANIZE THE HERCULES EQUITY FUNDS INTO APPROPRIATE PIPER FUNDS AND TO LIQUIDATE THE WORLD BOND FUND. THESE PROPOSALS ARE SUBJECT TO SHAREHOLDER APPROVAL. WHAT WILL HAPPEN TO THE VARIOUS HERCULES FUNDS? Piper Capital is proposing the following changes: - Hercules North American Growth and Income Fund will be reorganized into Growth and Income Fund, a series of Piper Funds Inc. - Hercules European Value Fund and Hercules Pacific Basin Value Fund will be reorganized into Pacific-European Growth Fund, a series of Piper Global Funds Inc. - Hercules Latin American Value Fund will be reorganized into the Emerging Markets Growth Fund, a newly-created series of Piper Global Funds Inc. - Hercules World Bond Fund will be liquidated and net assets distributed to shareholders. WHAT ABOUT HERCULES MONEY MARKET FUND? We expect that shareholders will redeem out of Hercules Money Market Fund as a result of Piper Capital's decision to discontinue the fund's 1% expense limitation effective July 1, 1996. WHY WERE THESE CHANGES RECOMMENDED? The Hercules funds have not been able to attract sufficient assets to make them economically viable to operate and prospects for future growth appear remote. If the changes are approved, we believe shareholders will benefit from: - A potential increase in operating efficiencies and therefore a reduction in expense ratios - The potential for greater investment diversification and more flexibility in portfolio management because the existing corresponding Piper funds have a larger asset base - The advantages of ownership within a larger fund family, including flexibility to transfer between funds in the Piper funds complex at net asset value WILL SHAREHOLDERS PAY A SALES LOAD WHEN THEY MOVE INTO THE PIPER FUNDS? No. Even though Hercules shareholders paid no front-end sales charges, the maximum 4% front-end load on Piper fund shares acquired in the reorganizations will be waived if the proposal is approved. WILL THE HERCULES CONTINGENT DEFERRED SALES CHARGE (CDSC) BE WAIVED? Yes. Shareholders subject to a CDSC (those who purchased shares after June 19, 1995) will not pay a CDSC if they exchange into the respective Piper fund through the reorganization. WILL SHAREHOLDERS BE ABLE TO EXCHANGE OR TRANSFER TO OTHER PIPER OPEN-END FUNDS AT NET ASSET VALUE? Yes. After Hercules fund shares are reorganized into the applicable Piper fund, shareholders will then be able to exchange or transfer into other Piper funds at net asset value. HOW MANY OTHER PIPER OPEN-END FUNDS ARE AVAILABLE? The back side of the enclosed brochure lists the 15 other funds available in Piper's family of open-end funds. WHAT PERCENTAGE OF SHAREHOLDERS MUST VOTE "YES" FOR THE PROPOSAL TO PASS? For each fund, shareholders representing a majority of the outstanding shares must vote yes in order for the proposed reorganization or liquidation of that fund to occur. IF APPROVED, HOW WILL THE REORGANIZATIONS BE ACCOMPLISHED? The reorganizations would be accomplished by combining substantially all of the assets of each fund with the corresponding Piper fund and distributing shares of the Piper fund with a value equal to the value of each Hercules shareholder's fund holdings. WHO WILL PAY FOR THE REORGANIZATION? Piper Capital has agreed to pay all direct costs associated with the proposed reorganizations and liquidation including the costs of proxy solicitation. No commission, sales loads or other charges will be incurred by shareholders. Also, we anticipate the proposed reorganizations would be completed on a tax-free basis. HOW DOES THE HERCULES EUROPEAN VALUE FUND COMPARE WITH THE PACIFIC-EUROPEAN GROWTH FUND? Here are a few comparisons of fund characteristics. Please review the Proxy
Statement/Prospectus for a complete comparison: HERCULES EUROPEAN VALUE PACIFIC-EUROPEAN GROWTH Investment objective Long-term capital Long-term capital appreciation and, to a appreciation. Current lesser extent, current income is incidental. income Investment policies Primarily through Primarily investments in investments in Europe the Pacific Basin and Europe Country allocation as of 100% Europe 67% Pacific Basin, 28% 2/29/96 Europe, 5% Latin America Net assets as of 2/29/96 $13.8 million $163.3 million Fund registration Non-diversified Diversified Adviser/Sub-adviser Piper Capital/Pictet Piper Capital/Edinburgh International Management Fund Managers
HERCULES FUNDS INC. HERCULES EUROPEAN VALUE FUND PIPER JAFFRAY TOWER 222 SOUTH NINTH STREET MINNEAPOLIS, MINNESOTA 55402-3804 ------------------------ NOTICE OF SPECIAL MEETING OF SHAREHOLDERS TO BE HELD JUNE 18, 1996 --------------------- TO THE SHAREHOLDERS OF HERCULES EUROPEAN VALUE FUND, A SERIES OF HERCULES FUNDS INC. Notice is hereby given that a Special Meeting (the "Meeting") of shareholders of Hercules European Value Fund (the "Fund"), one of six portfolios of Hercules Funds Inc. (the "Company"), will be held in the office of the Company, 222 South Ninth Street, 3rd Floor, Minneapolis, MN 55402, on , 1996 at a.m./p.m. central time. Piper Capital will validate parking at the Energy Center Ramp located at the corner of South Ninth Street and Third Avenue South. Please bring your parking ticket to the Meeting for validation. 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 Global Funds Inc. ("Piper Global"), on behalf of Pacific-European Growth Fund ("Pacific-European Fund"), pursuant to which substantially all of the assets of the Fund will be combined with those of Pacific-European Fund and shareholders of the Fund will become shareholders of Pacific-European Fund receiving shares of Pacific-European 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 April 25, 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 May 20, 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. PACIFIC-EUROPEAN GROWTH FUND A SERIES OF PIPER GLOBAL FUNDS INC. PIPER JAFFRAY TOWER 222 SOUTH NINTH STREET MINNEAPOLIS, MINNESOTA 55402-3804 (800) 866-7778 (TOLL FREE) ACQUISITION OF THE ASSETS OF HERCULES EUROPEAN VALUE FUND A SERIES OF HERCULES FUNDS INC. BY AND IN EXCHANGE FOR SHARES OF PACIFIC-EUROPEAN GROWTH FUND A SERIES OF PIPER GLOBAL FUNDS INC. This Proxy Statement/Prospectus is being furnished to shareholders of Hercules European Value Fund (the "Fund"), a series of Hercules 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 Pacific-European Growth Fund ("Pacific-European Fund"), a series of Piper Global Funds Inc. ("Piper Global"), in exchange for shares of Pacific-European Fund. As a result of this transaction, shareholders of the Fund will become shareholders of Pacific-European Fund and will receive shares of Pacific-European 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. Pacific-European Fund is a diversified series of Piper Global, an open-end management investment company the shares of which can be offered in more than one series. The investment objective of Pacific-European Fund is long-term capital appreciation. Current income is incidental to this objective. Pacific-European Fund seeks to achieve its investment objective by investing primarily in Common Stock (as herein defined) of companies in the Pacific Basin or in Europe (including Eastern Europe). Up to 25% of Pacific-European Fund's total assets may be invested in other areas of the world to the extent significant opportunities for long-term capital appreciation outside of the Pacific Basin and Europe become available. Pacific-European Fund does not invest in Common Stock of U.S. companies. This Proxy Statement/Prospectus sets forth concisely information about Pacific-European Fund that shareholders of the Fund should know before voting on the Plan. This Proxy Statement also constitutes a Prospectus of Pacific-European Fund filed with the Securities and Exchange Commission (the "Commission") as part of its Registration Statement on Form N-14. A copy of the Prospectus for Pacific-European Fund dated April 28, 1995, is attached to this Proxy Statement/Prospectus and is incorporated herein by reference. Also enclosed and incorporated by reference is Piper Global's Annual Report for the fiscal year ended February 29, 1996. A Statement of Additional Information relating to the reorganization described in this Proxy Statement/Prospectus (the "Additional Statement") dated , 1996, has been filed with the Commission and is also incorporated herein by reference. Also incorporated herein by reference are the Company's Prospectus dated August 29, 1995, the Company's Annual Report for its fiscal year ended June 30, 1995 and the Company's Semi-Annual Report for the six months ended December 31, 1995. Such documents are available without charge, as noted under "Available Information" below. 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 ON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. TABLE OF CONTENTS PROXY STATEMENT/PROSPECTUS
PAGE ---- INTRODUCTION............................................................... 1 General................................................................ 1 Record Date; Share Information......................................... 1 Proxies................................................................ 2 Expenses of Solicitation............................................... 2 Vote Required.......................................................... 3 SYNOPSIS................................................................... 3 The Reorganization..................................................... 3 Fee Table.............................................................. 4 Tax Consequences of the Reorganization................................. 5 Dissenting Shareholders' Rights of Appraisal........................... 5 Comparison of the Fund and Pacific-European Fund....................... 5 PRINCIPAL RISK FACTORS..................................................... 8 THE REORGANIZATION......................................................... 9 Background............................................................. 9 The Board's Consideration.............................................. 10 The Plan............................................................... 11 Tax Aspects of the Reorganization...................................... 13 Dissenters' Rights..................................................... 14 Description of Shares.................................................. 14 Capitalization Table (unaudited)....................................... 14 COMPARISON OF INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS............. 15 Investment Objectives and Policies..................................... 15 Investment Restrictions................................................ 16 Interest of Certain Persons............................................ 17 ADDITIONAL INFORMATION ABOUT THE FUND AND PACIFIC-EUROPEAN FUND............ 17 General................................................................ 17 Financial Information.................................................. 17 Management............................................................. 17 Description of Securities and Shareholder Inquiries.................... 17 Dividends, Distributions and Taxes..................................... 17 Purchases and Redemptions.............................................. 17 Pending Legal Proceedings.............................................. 17 MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE................................ 18 FINANCIAL STATEMENTS AND EXPERTS........................................... 18 LEGAL MATTERS.............................................................. 18 AVAILABLE INFORMATION...................................................... 18 OTHER BUSINESS............................................................. 19 EXHIBIT A -- Agreement and Plan of Reorganization, dated as of , 1996 by and between the Company, on behalf of the Fund, and Piper Global, on behalf of Pacific-European Fund.......................... A-1 EXHIBIT B -- PROSPECTUS OF PACIFIC-EUROPEAN FUND, dated April 28, 1995
HERCULES FUNDS INC. HERCULES EUROPEAN VALUE FUND PIPER JAFFRAY TOWER 222 SOUTH NINTH STREET MINNEAPOLIS, MINNESOTA 55402-3804 (800) 584-1317 (TOLL FREE) ------------------------ PROXY STATEMENT/PROSPECTUS --------------------- SPECIAL MEETING OF SHAREHOLDERS TO BE HELD , 1996 INTRODUCTION GENERAL This Proxy Statement/Prospectus is being furnished to shareholders of Hercules European Value Fund (the "Fund"), a non-diversified series of Hercules 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 Company to be held at the office of the Company, 222 South Ninth Street, 3rd Floor, Minneapolis, Minnesota 55402-3804 on June 18, 1996 at a.m./p.m. central time and any adjournments thereof (the "Meeting"). It is expected that this Proxy Statement/Prospectus will be mailed on or about May 20, 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 Global Funds Inc. ("Piper Global"), on behalf of Pacific-European Growth Fund ("Pacific-European Fund"), pursuant to which substantially all of the assets of the Fund will be combined with those of Pacific-European Fund in exchange for shares of Pacific-European Fund. As a result of this transaction, shareholders of the Fund will become shareholders of Pacific-European Fund and will receive shares in Pacific-European 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 Pacific-European Fund pursuant to the Reorganization ("Pacific-European Fund Shares") will be issued at net asset value without a sales charge. Further information relating to Pacific-European Fund is set forth in the current Prospectus of Pacific-European Fund attached to 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. The information concerning the Fund contained herein has been supplied by the Company and the information concerning Pacific-European Fund contained herein has been supplied by Piper Global. RECORD DATE; SHARE INFORMATION The Board has fixed the close of business on April 25, 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 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 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. [To the knowledge of the Board, as of the Record Date, no person owned of record or beneficially 5% or more of the outstanding shares of the Fund. 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 Global's Board of Directors, as of the Record Date no person owned of record or beneficially 5% or more of the outstanding shares of Pacific-European Fund. As of the Record Date, the directors and officers of Piper Global, as a group, owned less than 1% of the outstanding shares of Pacific-European 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. 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: (i) delivering written notice of revocation to the Secretary of the Company at 222 South Ninth Street, Minneapolis, Minnesota 55402-3804; (ii) attending the Meeting and voting in person; or (iii) 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 the quorum for the Meeting cannot be obtained, 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 Global. 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. In addition, arrangements have been made with Shareholder Communications Corporation, an independent shareholder communication firm, to assist in the solicitation of proxies. 2 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. 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 PACIFIC-EUROPEAN FUND WHICH IS ATTACHED TO 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 Pacific-European Fund in exchange for Pacific-European Fund Shares. The aggregate net asset value of Pacific-European Fund Shares issued in the exchange will equal the aggregate value of the net assets of the Fund received by Pacific-European Fund. On or after the closing date scheduled for the Reorganization (the "Closing Date"), the Fund will distribute Pacific-European 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. If all other series of the Company effect similar reorganizations or otherwise liquidate, the Company will take all necessary steps to effect its dissolution as a Minnesota corporation and its deregistration under the Investment Company Act of 1940, as amended (the "1940 Act"). As a result of the Reorganization, each Fund shareholder will receive that number of full and fractional Pacific-European Fund Shares equal in value to such shareholder's shares of the Fund. A similar reorganization is being proposed to shareholders of Hercules Pacific Basin Value Fund. If shareholders of that fund approve a similar reorganization, substantially all of the assets of that fund, subject to stated liabilities, will also be transferred to Pacific-European 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, AS THAT TERM IS DEFINED IN THE 1940 ACT ("INDEPENDENT DIRECTORS"), HAS UNANIMOUSLY CONCLUDED THAT THE REORGANIZATION IS IN THE BEST INTERESTS OF THE FUND AND ITS SHAREHOLDERS AND RECOMMENDS APPROVAL OF THE PLAN. 3 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 Pacific-European Fund. The following table sets forth the expenses and fees that shareholders of the Fund and Pacific-European Fund incurred during the twelve months ended February 29, 1996. The Pro Forma Combined fees reflect what the fee schedule would have been at February 29, 1996, if the Reorganization and the proposed reorganization of Hercules Pacific Basin Value Fund into Pacific-European Fund (discussed above) had occurred 12 months prior to that date. If the proposed reorganization of Hercules Pacific Basin Value Fund into Pacific-European Fund does not occur, the expenses set forth in the Pro Forma Combined column would not be materially different from those presented below. SHAREHOLDER TRANSACTION EXPENSES
PACIFIC- EUROPEAN PRO FORMA FUND FUND COMBINED --------- ------------------- ------------- Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) (1).......................... 0% 4.00% 4.00% Maximum Deferred Sales Charge (2)................................. 2.00% 0% 0% Exchange Fee (3).................................................. $ 0 $ 0 $ 0
ANNUAL FUND OPERATING EXPENSES AS A PERCENTAGE OF AVERAGE NET ASSETS
PACIFIC- EUROPEAN PRO FORMA FUND FUND COMBINED --------- ------------------- ------------- Management Fees (4)............................................... 1.00% 0.75% 0.72% 12b-1 Fees (after voluntary fee limitation) (5)(6)................ 0.50% 0.32% 0.32% Other Expenses (after voluntary expense reimbursement) (6)........ 0.50% 0.48% 0.48% Total Fund Operating Expenses (after voluntary fee limitation and expense reimbursement) (6)... 2.00% 1.55% 1.52%
- - - - - - ------------------------ (1) No sales charge will be imposed on Shares acquired in the Reorganization. On unrelated purchases, the front end sales charge of 4.00% applies to purchases less than $100,000 and scales down to 0% on purchases of $500,000 or more. (2) The maximum 2.00% contingent deferred sales charge on shares of the Fund applies to redemptions during the first 365 days after purchase; the charge declines to 1.00% during the next 365 days after purchase, reaching zero thereafter. No CDSC is imposed on shares purchased prior to June 19, 1995. In connection with purchases of Pacific-European Fund of $500,000 or more, on which no front-end sales charge is imposed, a 1.00% CDSC will be imposed on redemptions occurring within 24 months of purchase. See "Comparison of the Fund and Pacific-European Fund -- Purchases, Redemptions and Exchanges." (3) There is a $50 fee for each exchange in excess of 12 exchanges per year for the Fund. There is a $5 fee for each exchange in excess of 4 exchanges per year for Pacific-European Fund. (4) With respect to Pacific-European Fund and the Pro Forma Combined fund, the Management Fees may be more or less than those set forth in the table to the extent that Pacific-European Fund and the Pro Forma Combined fund outperforms or underperforms the EAFE Index (as defined herein). For the fiscal year ended February 29, 1996, the performance fee adjustment resulted in a reduction of Management Fees of 0.21% of average daily net assets. Absent such reduction, Management Fees for Pacific-European Fund and the Pro Forma Combined fund would be 0.96% and 0.93% of average daily net assets, respectively. See "Comparison of the Fund and Pacific-European Fund -- Investment Management and Distribution Plan Fees." (5) 12b-1 fees for the Fund and Pacific-European Fund are currently limited voluntarily by the Fund's distributor, Piper Jaffray Inc. (the "Distributor"). Absent such fee limitation, the Rule 12b-1 fees may not exceed 0.70% and 0.50% per annum of the average daily net assets for the Fund and Pacific-European Fund, respectively. A portion of the 12b-1 fee equal to 0.25% of average daily net assets is characterized as a service fee within the meaning of the National Association of Securities Dealers, Inc. ("NASD") guidelines. 4 (6) Piper Capital has voluntarily limited total expenses of the Fund on a per annum basis to 2.00% of average daily net assets. As a result, certain Other Expenses are currently borne by Piper Capital. Absent such limitations, for the 12 months ended February 29, 1996, Other Expenses would have been 1.96% of the average daily net assets for the Fund. Without such limitations and the 12b-1 fee limitations discussed above, Total Fund Operating Expenses for the 12 months ended February 29, 1996, as a percentage of average daily net assets, would have been 3.66%, 1.73% and 1.70% for the Fund, Pacific-European Fund and the Pro Forma Combined column, respectively. Pacific-European Fund's limitations may be revised or terminated at any time subsequent to the end of its fiscal year. Piper Capital and the Fund's distributor do not presently intend to continue any limitations for the Fund beyond the Fund's fiscal year ending June 30, 1996. EXAMPLE To attempt to show the effect of these expenses on an investment over time, the example shown below has been created. The expenses set forth in the example below may increase if the fee limitations and expense reimbursements discussed above are removed. As noted above, Pacific-European Fund charges a maximum 4.00% front-end sales charge on new purchases. The expenses shown below have been calculated as if no such sales charge was imposed because Fund shareholders who receive Pacific-European Fund Shares in the Reorganization will not pay the front-end sales charge with respect to those shares. Assuming that an investor makes a $1,000 investment in either the Fund or Pacific-European Fund or on a Pro Forma Combined basis, that the annual return is 5.00% and that the Total Fund Operating Expenses for each fund are the ones shown in the chart above, if the investment was redeemed at the end of each period shown below, the investor would incur the following expenses by the end of each period shown:
1 YEAR 3 YEARS 5 YEARS 10 YEARS ----------- ----------- ----------- ----------- The Fund........................................................... $ 40 $ 63 $ 108 $ 233 Pacific-European Fund*............................................. $ 16 $ 49 $ 84 $ 185 Pro Forma Combined**............................................... $ 15 $ 48 $ 83 $ 181
If such investment was not redeemed, the investor would incur the following expenses:
1 YEAR 3 YEARS 5 YEARS 10 YEARS ----------- ----------- ----------- ----------- The Fund........................................................... $ 20 $ 63 $ 108 $ 233 Pacific-European Fund*............................................. $ 16 $ 49 $ 84 $ 185 Pro Forma Combined**............................................... $ 15 $ 48 $ 83 $ 181
- - - - - - ------------------------ *Expenses for shares of Pacific-European Fund purchased subject to the maximum front end sales charge are: $55, $87, $121 and $217 for the one-, three-, five- and ten-year periods shown, respectively. **Expenses for shares of Pacific-European Fund on a Pro Forma Combined basis purchased subject to the front-end sales charge are: $55, $86, $120 and $214 for the one-, three-, five- and ten-year periods shown, respectively. 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. Long-term shareholders of either fund may pay more in sales charges and distribution fees than the economic equivalent of the maximum front-end sales charges permitted by the NASD. TAX CONSEQUENCES OF THE REORGANIZATION As a condition to the Reorganization, the Fund will receive an opinion of the law firm Gordon Altman Butowsky Weitzen Shalov & Wein to the effect that the Reorganization will constitute a tax-free reorganization for Federal income tax purposes, and that no gain or loss will be recognized by the Fund or the shareholders of the Fund for Federal income tax purposes as a result of the Reorganization. For further information about the tax consequences of the Reorganization, see "The Reorganization -- Tax Aspects of the Reorganization" below. 5 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 PACIFIC-EUROPEAN FUND INVESTMENT OBJECTIVES AND POLICIES. The Fund and Pacific-European Fund have similar investment objectives. The Fund's objectives are long-term capital appreciation and, to a lesser extent, current income. The investment objective of Pacific-European Fund is long-term capital appreciation. Current income is incidental to this objective. The investment objective of the Fund is fundamental and may not be changed without shareholder approval. The investment objective of Pacific-European Fund is non-fundamental and, accordingly, it may be changed without shareholder approval. The Fund seeks to achieve its investment objective by investing, under normal circumstances, at least 65% of its total assets in securities issued by issuers in Europe (including up to 10% in Eastern Europe). Pacific-European Fund seeks to achieve its investment objective by investing, under normal circumstances, at least 65% of its total assets in Common Stock (as defined herein) of companies in the Pacific Basin or in Europe (including Eastern Europe). Up to 25% of Pacific-European Fund's total assets may be invested in other areas of the world to the extent significant opportunities for long-term capital appreciation outside of the Pacific Basin and Europe become available. Accordingly, the principal difference between the two funds is that Pacific-European Fund invests primarily in countries that comprise the Pacific Basin and Europe and may invest up to 25% of its assets in other areas of the world, whereas the Fund invests primarily in Europe. In addition, although emphasis is placed on investments in equity securities, the Fund may invest without limitation in investment grade debt securities of governmental and private issuers (including bonds, notes, debentures, Brady Bonds, mortgage-backed securities and asset-backed securities), whereas Pacific-European Fund invests in debt instruments solely for temporary defensive purposes. The Fund and Pacific-European Fund may invest in American Depository Receipts ("ADRs"), European Depository Receipts ("EDRs") and in other investment companies (up to the limits prescribed by the 1940 Act). The Fund may also invest up to 10% of its total assets in foreign index linked instruments and in loan participations and assignments; Pacific-European Fund does not invest in these types of securities. The Fund may purchase and sell put and call options, futures contracts and options on futures contracts with respect to financial instruments, stock and interest rate indexes and foreign currencies. Futures and options may be used to facilitate allocation of the Fund's investment among asset classes, to generate income or to hedge against declines in securities prices or increases in prices of securities proposed to be purchased. Pacific-European Fund may, for hedging purposes only, buy or sell put and call options on the securities in which it may invest and enter into futures contracts and options on futures contracts based on financial indices including any index of securities in which the Fund may invest. Both funds may buy or sell options, futures or options on futures that are traded on U.S. or foreign exchanges or over-the-counter. In addition, both funds may enter into currency exchange transactions (including forward foreign currency exchange contracts and futures and options contracts on foreign currencies), as a hedge against fluctuations in foreign exchange rates. Both the Fund and Pacific-European Fund may purchase securities on a when-issued or delayed delivery basis and may purchase or sell securities on a forward commitment basis. Both funds may invest in warrants up to 5% of its net assets. Both funds may enter into repurchase agreements subject to certain procedures designed to minimize risks associated with such agreements. Although both 6 funds may enter into reverse repurchase agreements, neither fund has, nor does Pacific-European Fund have any current intention of entering into such agreements in the future. The Fund may invest in zero coupon bonds, deferred interest bonds and bonds on which the interest is payable in kind ("PIK Bonds"); Pacific-European Fund does not invest in these instruments. In addition, the Fund is a non-diversified investment company, within the meaning of the 1940 Act, whereas Pacific-European Fund is a diversified investment company. For a more detailed comparison of the investment objectives and policies of the Fund and Pacific-European Fund, see "Comparison of Investment Objectives, Policies and Restrictions," below. INVESTMENT MANAGEMENT AND DISTRIBUTION PLAN FEES. The Fund and Pacific-European Fund have the same Board of Directors. In addition, the Fund and Pacific-European 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 1.00% of its average net asset value. Pacific-European Fund pays a management fee at an annual rate of 1.00% of the portion of daily net assets up to $100 million, 0.875% of such assets between $100 million and $200 million and 0.75% of the portion of daily net assets exceeding $200 million (the "Basic Fee"), and is subject to adjustment as described below. The adjustment is based upon the investment performance of Pacific-European Fund in relation to the investment record of the Morgan Stanley Capital International European, Australian and Far East Index (the "EAFE-SM- Index"). The EAFE Index is a market capitalization weighted index containing (as of February 29, 1996) 1,109 companies representing approximately 60% of the market capitalization of each of the following 20 countries or territories: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, The Netherlands, New Zealand, Norway, Singapore, Malaysia, Spain, Sweden, Switzerland and the United Kingdom. The Basic Fee for each month may be increased or decreased by up to 0.25% (on an annualized basis) of Pacific-European Fund's average daily net assets depending upon the extent by which Pacific-European Fund's performance varies from the EAFE Index over the applicable performance period. For a more detailed discussion of the performance component of the advisory fee for Pacific-European Fund, see "Management -- Investment Adviser" in Pacific-European Fund's current Prospectus. With respect to the Fund, Piper Capital has retained the services of Pictet International Limited ("Pictet") as sub-adviser to manage the portfolio. As compensation for its services Piper Capital pays Pictet monthly compensation, calculated in the same manner as the investment advisory fee, of 0.50% of net assets of the Fund. With respect to Pacific-European Fund, Piper Capital has retained the services of Edinburgh Fund Managers plc ("EFM") as sub-adviser to manage the portfolio. As compensation for its services, Piper Capital pays EFM monthly compensation, calculated in the same manner as the investment advisory fee, of 65% of the Basic Fee plus or minus 90% of the performance fee adjustment described above. EFM has entered into an expense reimbursement agreement with Piper Capital under which it pays Piper Capital a monthly fee equal to 10% of the Basic Fee. This 10% fee is a reimbursement to Piper Capital for certain expenses it bears in connection with the administration of Pacific-European Fund. Both the Fund and Pacific-European Fund have adopted distribution plans (each, a "12b-1 Plan") pursuant to Rule 12b-1 under the 1940 Act pursuant to which the Distributor is entitled to reimbursement each month for its actual expenses incurred in connection with servicing of the funds' shareholder accounts and in connection with distribution-related services provided with respect to each 12b-1 Plan. Payments under the 12b-1 Plan may not exceed 0.70% of average daily net assets in the case of the Fund and 0.50% in the case of Pacific-European Fund. The Distributor has voluntarily limited reimbursements under each 12b-1 Plan to 0.50% in the case of the Fund and 0.32% in the case of Pacific-European Fund. In the case of Pacific-European Fund, this limitation may be revised or terminated at any time after its fiscal year end. In the case of the Fund, Piper Capital and the Distributor do not presently intend to continue these limitations beyond the Fund's current fiscal year. 7 OTHER SIGNIFICANT FEES. Both the Fund and Pacific-European 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. PURCHASES, REDEMPTIONS AND EXCHANGES. PURCHASES. The Fund and Pacific-European Fund each continuously issue their shares to investors at a price equal to net asset value at the time of such issuance. Investors in Pacific-European Fund, however, also pay a front-end sales charge of 4.00% on purchases of less than $100,000 scaled down to 0% on purchases of $500,000 and above. Shareholders of the Fund who acquire Pacific- European 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 Pacific-European Fund. Shares of the Fund and Pacific-European Fund are distributed by the Distributor and other broker-dealers who have entered into selected broker-dealer agreements with the Distributor. REDEMPTIONS. Shareholders of the Fund and Pacific-European Fund may redeem their shares for cash at any time at the net asset value per share next determined; however, such redemption proceeds will be reduced by the amount of any applicable contingent deferred sales charge ("CDSC"). In most circumstances, redemptions of Fund shares made within two years of purchase are subject to a CDSC, scaled down from 2.00% to 1.00% of the amount redeemed. No CDSC will be applied to shares of the Fund at the time of the Reorganization or to Pacific-European Fund Shares acquired in the Reorganization on redemption of such Shares. With respect to Pacific-European Fund, 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 charge is equal to 1.00% of the lesser of the net asset value of the shares at the time of purchase or at the time of redemption. Pacific-European Fund offers a reinstatement privilege whereby a shareholder whose shares have been redeemed may, within thirty days after the date of redemption invest any portion or all of the proceeds thereof in another fund managed by Piper Capital (other than portfolios of the Company) without payment of an additional sales charge, or if such redemption was subject to a CDSC, pro rata credit will be given for such CDSC. The Fund and Pacific-European Fund may redeem involuntarily, at net asset value, accounts valued at less than $200. EXCHANGES. Each of the Fund and Pacific-European Fund makes available to its shareholders exchange privileges allowing exchange of shares for shares of certain other funds. Shares of the Fund may be exchanged for shares of any of the five other series of the Company. Pacific-European Fund Shares may be exchanged for shares of any of the 15 other funds open to new investors that are advised by Piper Capital. Both the Fund and Pacific-European Fund provide telephone exchange privileges to their shareholders. For a more detailed discussion of purchasing, redeeming and exchanging Pacific-European Fund shares, see "Shareholder Guide to Investing -- How to Purchase Shares," "-- How to Redeem Shares" and "-- Shareholder Services" in Pacific-European Fund's current Prospectus. DIVIDENDS. Dividends from both the Fund's and Pacific-European Fund's anticipated net investment income are declared and paid annually and net short-term capital gains and long-term capital gains distributions, if any, are paid at least annually. Dividends and capital gains distributions of both the Fund and Pacific-European Fund are automatically reinvested in additional shares at net asset value unless the shareholder elects to receive cash. PRINCIPAL RISK FACTORS The Fund and Pacific-European Fund each pursue their respective investment objectives through investment in foreign securities. Accordingly, they are both subject to the same general risks associated with international investing. These risks include: risks relating to adverse currency fluctuations, potential political and economic instability of certain countries, limited liquidity and greater volatility 8 of prices as compared to U.S. securities, investment and repatriation restrictions, and foreign taxation. Their risks differ to the extent that Pacific-European Fund invests in both the Pacific Basin and Europe and may invest up to 25% of its assets anywhere in the world, whereas the Fund invests primarily in Europe. Many of the countries and markets in which Pacific-European Fund is authorized to invest are less developed than those of Europe. Accordingly, the Pacific-European Fund may invest a greater percentage of its assets in less developed and emerging market countries than the Fund. Investments in such less developed and emerging markets generally involve a greater degree of risk than do investments in more developed markets. Another difference between the two funds is that although the Fund emphasizes investment in equity securities, it may also pursue its objective through investment in investment grade debt securities and may invest without limitation in such securities. By contrast, Pacific-European Fund may invest in debt securities solely for defensive purposes. Accordingly, the Fund may be subject to the risks associated with investments in debt securities (E.G., credit risk, interest rate risk) to a greater extent than Pacific-European Fund. While both Funds may participate in the futures and options markets for hedging purposes, and the risks of such participation are similar, the Fund may also enter into such transactions for speculative purposes to generate income. In addition, as discussed above, the Fund may invest in zero coupon bonds, deferred interest bonds and PIK Bonds and Pacific-European Fund does not engage in such transactions. Accordingly, Pacific-European Fund is not subject to the risks associated with these transactions. In addition, as discussed above, the Fund is a non-diversified investment company under the 1940 Act, whereas Pacific-European Fund is a diversified investment company. As a result, the Fund may invest a higher percentage of its assets in a more limited number of issuers than Pacific-European Fund. The foregoing discussion is a summary of the principal risk factors. For a more complete discussion of the risks of each fund, see "Special Risk Considerations" in the Fund's Prospectus and "Risk Factors" in Pacific-European Fund's Prospectus. THE REORGANIZATION BACKGROUND The Company was initially managed through a joint venture ("Hercules") between Piper Jaffray Companies, Inc. ("Piper Jaffray") and Midland Walwyn Capital Corporation ("Midland") pursuant to which the parties agreed to jointly promote, distribute and manage a family of international funds in the United States and Canada. The Company's shares were first offered to the public in the U.S. on November 9, 1993. The Company's shares, including shares of the Fund, were originally offered for sale with no front-end or back-end sales charge. In lieu of a sales charge paid by investors, Hercules and each sub-adviser retained by Hercules to manage the portfolio of each series of the Company, advanced to broker-dealers a sales commission (except with respect to the Money Market Fund) in the aggregate of 2.00% of the net asset value of shares purchased. If a shareholder redeemed in less than two years, all or a portion of the advanced commission was charged back to the broker-dealer. If a shareholder exchanged among the series within the same two year period, the sub-advisers paid, or were paid, as the case may be, a portion of the commission advance that had not yet been recovered. While initially the Company, including the Fund, experienced positive growth, a trend of net redemptions commenced in November of 1994 which has yet to be reversed. In April 1995, Piper Jaffray and Midland announced their mutual agreement to terminate the joint venture arrangement and to dissolve Hercules. After requisite shareholder approval was obtained in July 1995, Piper Capital assumed the role of manager and investment adviser for the Company. 9 After becoming manager to the Company, Piper Capital focused on the structure, pricing and marketing of the various Hercules funds in the United States in an attempt to promote asset growth in the funds and reverse the trend of net redemptions. In particular, it invested considerable time and financial resources to develop a distribution network with broker-dealers in addition to Piper Jaffray because Piper Capital believed that the development of an external distribution system was critical to the successful distribution of the Hercules funds. As part of this effort, a change in the pricing structure was implemented in June 1995 incorporating a CDSC. Implementation of the CDSC was intended to eliminate the need to recoup from the broker-dealer through whom the shares were sold the commissions advanced to it by Piper Capital and the applicable sub-adviser in the event of a redemption within two years of purchase. In lieu thereof, shareholders would be required to pay a declining CDSC if shares were redeemed within two years of purchase. It was believed that this pricing structure would prove attractive to broker-dealers as well as to future investors. The implementation of the CDSC did not, however, have the desired effect on growth. Rather, the trend of net redemptions continued. Latin American Value Fund and Money Market Fund are the only Hercules funds which have had even one month since October 1994 where shareholder purchases exceeded redemptions. Moreover, sales through broker-dealers other than Piper Jaffray remained minimal. The continuing inability to achieve asset growth in the Hercules funds prompted a further review by Piper Capital of the future prospects of the funds. Ultimately, Piper Capital concluded that it is unlikely that the Hercules funds will, in the foreseeable future grow to a sufficient size to be economically viable. Accordingly, Piper Capital recommended to the Board of Directors of the Company that the Hercules funds be eliminated as a free standing family of funds and that instead each Hercules fund be combined with an appropriate fund within the Piper family of funds (or, in the case of World Bond Fund and Money Market Fund, that the fund be liquidated). THE BOARD'S CONSIDERATION At a meeting of the Board of Directors held on February 6, 1996, Piper Capital reviewed for the Board the basis for its recommendation. It detailed the efforts that have been made since inception of the Hercules Funds to promote and market the funds, the continuing inability to reverse the trend of net redemptions that has continued since November 1994 despite these efforts, and the basis for its pessimistic view respecting the Company's future prospects. At its meeting on February 6, 1996, the Board, including all of the Independent Directors, unanimously approved the Reorganization and on March 29, 1996 approved the Plan and determined to recommend that shareholders of the Fund 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 Company'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 since the commencement of operations, Piper Capital (or Hercules) has voluntarily limited total expenses of the Fund and the Distributor has voluntarily limited its 12b-1 fees payable by the Fund but they do not presently intend to continue these limitations beyond the Fund's fiscal year ending June 30, 1996. The Board noted that absent such assumption of expenses and waiver of fees, the expense ratio of the Fund for the most current fiscal year would have been considerably higher and total return lower. The Board carefully considered the compatibility of the investment objectives, policies, restrictions and portfolios of the Fund and Pacific-European Fund. In particular, the Board focused on the differences in the investment policies of the Fund and Pacific-European Fund. The most significant difference between the two, as discussed more fully below in "Comparison of Investment Objectives, Policies and Restrictions -- Investment Objectives and Policies," is that the Fund invests primarily in Europe (including up to 10% in Eastern Europe) whereas Pacific-European Fund invests primarily in 10 the Pacific Basin as well as Europe (including Eastern Europe). In considering the suitability of Pacific-European Fund for shareholders of the Fund given Pacific-European Fund's broader geographic focus, the Board evaluated information provided by Piper Capital that indicated that a significant percentage of shareholders of the Fund were also shareholders of the Hercules Pacific Basin Fund and therefore were investors who sought exposure to the Pacific Basin and Europe. The Board also considered the fact that the sub-adviser for the Fund is Pictet whereas EFM is the sub-adviser for Pacific-European Fund. Accordingly, the Reorganization would, from the standpoint of Fund shareholders, result in a change of sub-advisers. The Board evaluated the nature, scope and quality of the investment advisory services provided by EFM relative to those provided by Pictet and concluded that the change would be in the best interests of shareholders of the Fund. In addition, the Board considered the comparative expenses currently incurred in the operation of the Fund and Pacific-European Fund, the terms and conditions of the proposed Reorganization, the comparative performance of the funds, PCM's undertaking to pay all direct costs (E.G., proxy solicitation) of the Reorganization, and the indirect costs (E.G., brokerage) likely to be incurred by the Fund in the Reorganization. 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. 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. The Fund's expense ratio for its fiscal year ended June 30, 1995 was 2.00%, giving effect to waivers and expense reimbursements which Piper Capital and the Distributor intend to discontinue after the Fund's fiscal year ending June 30, 1996. Absent such waivers and reimbursements, expenses would have been 3.21%. By contrast, the expense ratio for Pacific-European Fund for its fiscal year ended February 28, 1995 was 1.76%, giving effect to the Distributor's voluntary limitation. Absent such limitation expenses would have been 1.98%. The Distributor has voluntarily agreed to limit the 12b-1 fee to an annual rate of 0.32% of Pacific-European Fund's average daily net assets for its current fiscal year. (Advisory fees for Pacific-European Fund could, in the future, be more or less than that incurred during its last fiscal year because the fee is subject to a performance based adjustment upward or downward of 0.25%.) In addition, Pacific-European Fund's advisory fee scales down as asset levels increase and, because Pacific-European Fund is much larger than the Fund, there is the opportunity to benefit from economies of scale, greater investment diversification and facilitation of portfolio management. In fact, subsequent to the Reorganization (and the proposed reorganization of Hercules Pacific Basin Value Fund into Pacific-European Fund, as discussed above) advisory fees for Pacific-European Fund may be reduced, as a percentage of net assets, due to increased net assets of the combined funds. 2. Shareholders of the Fund will be able to acquire shares of Pacific-European Fund, which are otherwise subject to a maximum 4.00% front-end sales charge, at net asset value and pursue a similar investment objective in a larger and more economically viable fund without having to sell their shares. Moreover, shareholders will be able to redeem the shares so acquired at net asset value without any CDSC being imposed. 3. The Fund's shareholders would retain the capabilities and resources of Piper Capital and its affiliates in the areas of operations, management, distribution, shareholder servicing and marketing. 4. The Reorganization would enable the Fund's shareholders to enjoy an expanded range of mutual fund investment options. The Piper Funds complex, of which Pacific-European Fund is a part, includes 15 other mutual fund portfolios that will be available for exchange by Fund shareholders who receive Pacific-European Fund Shares in the Reorganization. 5. 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. 11 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 the Fund shareholders will not be diluted as a result thereof. The Board of Directors of Pacific-European Fund, including all of the Independent Directors, has also determined that the Reorganization is in the best interests of Pacific-European Fund and that the interests of existing shareholders of Pacific-European Fund will not be diluted as a result thereof. The transaction will enable Pacific-European 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 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 Pacific-European 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 (i) the Fund will transfer all of its assets, including appropriate portfolio securities, cash, cash equivalents, securities, commodities, futures and dividend and interest receivables to Pacific-European Fund on the Closing Date in exchange for the assumption by Pacific-European 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 Pacific-European Fund Shares; (ii) such Pacific-European Fund Shares will be distributed to the shareholders of the Fund on the Closing Date or as soon as practicable thereafter; and (iii) the Company shall be dissolved as a Minnesota corporation and deregistered as an investment company under the 1940 Act, promptly following the making of all distributions and the reorganization or liquidation of each other series of the Company. In most cases, reorganization or liquidation of the other series is contingent on obtaining the approval of shareholders of the series. 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 Pacific-European 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 Pacific-European Fund Shares to be delivered to the Fund will be determined by dividing the value of the Fund assets acquired by Pacific-European Fund (net of stated liabilities assumed by Pacific-European Fund) by the net asset value of a Pacific-European Fund Share; these values will be calculated as of the close of business of the New York Stock Exchange on the fifth business day following the receipt of the requisite approval by the shareholders of the Fund of the Plan or at such other time as the Fund and Pacific-European Fund may agree (the "Valuation Date"). The net asset value of a Pacific-European Fund Share shall be the net asset value per share computed on the Valuation Date, using the valuation procedures set forth in Pacific-European 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 Pacific-European Fund would be $100,000. If the net asset value per share of Pacific-European Fund were $10 per share at the close of business on the Valuation Date, the number of shares to be issued would be 10,000 ($100,000 DIVIDED BY $10). These 10,000 shares of Pacific-European 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 12 amounts or shares expected to be involved in the Reorganization. Pacific-European Fund will cause its transfer agent to credit and confirm an appropriate number of Pacific-European Fund Shares to each Fund shareholder. Neither the Fund nor Pacific-European Fund issues stock certificates. The Closing Date will be the next business day following the Valuation Date, or at such other time as the Fund and Pacific-European 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 Pacific-European 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 shares of Pacific- European Fund 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. 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 Pacific-European 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 September 15, 1996, any condition set forth in the Plan has not been fulfilled or waived by the party entitled to its benefits. The effect of the Reorganization is that shareholders of the Fund who vote their shares in favor of the Plan are electing to sell their shares of the Fund (at net asset value on the Valuation Date) and reinvest the proceeds in Pacific-European Fund at net asset value and without recognition of taxable gain or loss for Federal income tax purposes. However, if the Fund recognizes net gain from the sale of securities prior to the Closing Date, such gain, to the extent not offset by capital loss carry-forwards, will be distributed to shareholders prior to the Closing Date and will be taxable to shareholders as capital gain. See "Tax Aspects of the Reorganization" below. Shareholders of the Fund will continue to be able to redeem their shares at net asset value (subject to any applicable CDSC) 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 Pacific-European 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 all periods since inception of the Fund through and including the Valuation Date (computed without regard to any dividends paid deduction), and all of the Fund's net capital gain, if any, realized in such periods (after reduction for any capital loss carry-forward). The Reorganization is intended to qualify for Federal income tax purposes as a tax-free reorganization under Section 368(a)(1) of the Internal Revenue Code of 1986, as amended (the "Code"). The Company and Piper Global have represented that, to their best knowledge, there is no plan or intention by Fund shareholders to redeem, sell, exchange or otherwise dispose of a number of Pacific-European Fund Shares received in the transaction that would reduce the Fund shareholders' ownership of Pacific-European Fund Shares to a number of shares having a value, as of the Closing Date, of less than 50% of the value of all of the formerly outstanding Fund shares as of the same date. The Company and Piper Global have each further represented that, as of the Closing Date, the Fund and Pacific-European Fund will qualify as regulated investment companies. In addition, Piper Global has further represented that Pacific-European Fund will qualify as a regulated investment company for its current fiscal year. 13 As a condition to the Reorganization, the Fund and Pacific-European Fund will receive an opinion of Gordon Altman Butowsky Weitzen Shalov & Wein that, based on certain assumptions, facts, the terms of the Plan and additional representations set forth in the Plan or provided by the Company and Piper Global: 1. The transfer of substantially all of the Fund's assets in exchange for Pacific-European Fund Shares and the assumption by Pacific-European Fund of certain stated liabilities of the Fund followed by the distribution by the Fund of Pacific-European Fund Shares to the Fund Shareholders in exchange for their Fund shares will constitute a "reorganization" within the meaning of Section 368(a)(1) of the Code, and the Fund and Pacific-European Fund will each be a "party to a reorganization" within the meaning of Section 368(b) of the Code; 2. No gain or loss will be recognized by Pacific-European Fund upon the receipt of the assets of the Fund solely in exchange for Pacific-European Fund Shares and the assumption by Pacific-European Fund of the stated liabilities of the Fund; 3. No gain or loss will be recognized by the Fund upon the transfer of the assets of the Fund to Pacific-European Fund in exchange for Pacific-European Fund Shares and the assumption by Pacific-European Fund of the stated liabilities or upon the distribution of Pacific-European Fund Shares to the Fund's shareholders in exchange for their Fund shares; 4. No gain or loss will be recognized by the Fund shareholders upon the exchange of the shares of the Fund for Pacific-European Fund Shares; 5. The aggregate tax basis for Pacific-European Fund Shares received by each of the Fund's shareholders pursuant to the reorganization will be the same as the aggregate tax basis of the shares in the Fund held by each such shareholder of the Fund immediately prior to the Reorganization; 6. The holding period of Pacific-European Fund Shares to be received by each shareholder of the Fund will include the period during which the shares in the Fund surrendered in exchange therefor were held (provided such shares in the Fund were held as capital assets on the date of the Reorganization); 7. The tax basis of the assets of the Fund acquired by Pacific-European Fund will be the same as the tax basis of such assets to the Fund immediately prior to the Reorganization; and 8. The holding period of the assets of the Fund in the hands of Pacific-European Fund will include the period during which those assets were held by the Fund. The Reorganization will be treated as a "change in ownership" under Section 382 of the Code. It is not anticipated that any resulting limitations on the use of any capital loss carryovers of the Fund will be material. In addition, the economic benefit of any capital loss carryovers of the Fund would be available to shareholders of the combined entity with a resulting benefit to Pacific-European Fund shareholders. It is not anticipated that any such benefit will be material. SHAREHOLDERS OF THE FUND SHOULD CONSULT THEIR TAX ADVISERS REGARDING THE EFFECT, IF ANY, OF THE PROPOSED TRANSACTION IN LIGHT OF THEIR INDIVIDUAL CIRCUMSTANCES. BECAUSE THE FOREGOING DISCUSSION ONLY RELATES TO THE FEDERAL INCOME TAX CONSEQUENCES OF THE PROPOSED TRANSACTION, SHAREHOLDERS OF THE FUND SHOULD ALSO CONSULT THEIR TAX ADVISORS AS TO STATE AND LOCAL TAX CONSEQUENCES, IF ANY, OF THE PROPOSED TRANSACTION. 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 that such shareholders comply with the requirements of the MBCA Sections. NOTWITHSTANDING THE PROVISIONS OF THE MBCA SECTIONS, THE DIVISION OF INVESTMENT MANAGEMENT OF THE COMMISSION HAS TAKEN THE POSITION THAT ADHERENCE TO STATE APPRAISAL PROCEDURES BY A REGISTERED INVESTMENT COMPANY ISSUING REDEEMABLE SECURITIES WOULD CONSTITUTE A VIOLATION OF RULE 22C-1 UNDER THE 1940 ACT. THIS RULE PROVIDES THAT NO 14 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. Accordingly, in the event that any shareholder elects to exercise dissenters' rights under Minnesota law, the Company intends to submit this question to a court of competent jurisdiction. In such event, a dissenting shareholder would not receive any payment until disposition of any such court proceeding. It should be emphasized that Fund shareholders may sell their shares at net asset value (subject to any applicable CDSC) at any time prior to the Closing Date. DESCRIPTION OF SHARES Shares of Pacific-European Fund to be issued pursuant to the Plan will, when issued, be fully paid and non-assessable by Pacific-European Fund and transferable without restrictions and will have no preemptive or conversion rights. CAPITALIZATION TABLE (UNAUDITED) The following table sets forth the capitalization of Pacific-European Fund and the Fund as of February 29, 1996 and on a pro forma combined basis as if the Reorganization (and the proposed reorganization of Hercules Pacific Basin Value Fund into Pacific-European Fund, as discussed above) had occurred on that date:
SHARES NET ASSETS OUTSTANDING NET ASSET VALUE (000S OMITTED) (000S OMITTED) PER SHARE -------------- -------------- --------------- The Fund............................................... $ 13,871 1,270 $ 10.92 Pacific-European Fund.................................. $ 163,312 11,783 $ 13.86 Pro Forma Combined..................................... $ 203,612 14,691 $ 13.86
COMPARISON OF INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS INVESTMENT OBJECTIVES AND POLICIES The Fund and Pacific-European Fund have a similar investment objective. The Fund's objectives are long-term capital appreciation and, to a lesser extent, current income. The investment objective of Pacific-European Fund is long-term capital appreciation. Current income is incidental to this objective. The investment objective of the Fund is fundamental and may not be changed without shareholder approval. The investment objective of Pacific-European Fund is non-fundamental and, accordingly, it may be changed without shareholder approval. If there is a change in investment objective of Pacific-European Fund, shareholders would need to consider whether Pacific-European Fund remains an appropriate investment in light of their then current financial position and needs. The Fund seeks to achieve its investment objective by investing, under normal circumstances, at least 65% of its total assets in securities issued by issuers in Europe (including up to 10% in Eastern Europe). Emphasis is placed on investment in equity securities; however, the Fund may invest without limit in investment grade debt securities of governmental and private issuers (including notes, debentures, Brady Bonds, mortgage-backed securities and asset-backed securities). Pacific-European Fund seeks to achieve its investment objective by investing, under normal circumstances, at least 65% of its total assets in Common Stock of companies in the Pacific Basin or in Europe (including Eastern Europe). "Common Stock" means common stock and foreign equity securities which are substantially similar to common stock in the U.S. and does not include preferred stock or convertible debt securities). Up to 25% of Pacific-European Fund's total assets may be invested in other areas of the world to the extent significant opportunities for long-term capital appreciation outside of the Pacific Basin and Europe become available. Pacific-European Fund invests in debt securities solely for temporary defensive purposes. As discussed above, the principal difference between the two funds is that Pacific-European Fund invests in countries that comprise the Pacific 15 Basin (namely, Malaysia, Pakistan, Sri Lanka, the Philippines, Singapore, South Korea, Thailand, India, Indonesia, Hong Kong, Japan, Taiwan, Australia and New Zealand) and Europe (including Eastern Europe), whereas the Fund invests primarily in Europe. As of February 29, 1996, approximately 67% of Pacific-European Fund's investments were in companies in the Pacific Basin (including Japan) and approximately 28% were in companies in Europe. While Pacific-European Fund has no specific policy or restriction on the allocation of its funds between Europe and the Pacific Basin, Piper Capital and EFM believe that the opportunities for long-term capital appreciation in the Pacific Basin are generally superior to those presently available in the economically more mature areas of the world. The relative emphasis of Pacific-European Fund's investments between the Pacific Basin and Europe may change over time. Both the Fund and Pacific-European Fund may invest part or all of their respective assets in U.S. dollar- or foreign currency-denominated cash or domestic or foreign high-quality money market instruments to maintain a temporary "defensive" posture, when, in the opinion of the investment adviser, it is advisable to do so because of market conditions. The Fund and Pacific-European Fund may invest in American Depository Receipts ("ADRs"), European Depository Receipts ("EDRs") and in other investment companies (up to the limits prescribed by the 1940 Act). The Fund may also invest up to 10% of its total assets in foreign index linked instruments and in loan participations and assignments; Pacific-European Fund does not invest in these types of securities. The Fund may purchase and sell put and call options, futures contracts and options on futures contracts with respect to financial instruments, stock and interest rate indexes and foreign currencies. Futures and options may be used to facilitate allocation of the Fund's investment among asset classes, to generate income or to hedge against declines in securities prices or increases in prices of securities proposed to be purchased. Pacific-European Fund may, for hedging purposes only, buy or sell put and call options on the securities in which it may invest and enter into futures contracts and options on futures contracts based on financial indices including any index of securities in which the Fund may invest. Both funds may buy or sell options, futures or options on futures that are traded on U.S. or foreign exchanges or over-the-counter. In addition, both funds may enter into currency exchange transactions (including forward foreign currency exchange contracts and futures and options contracts on foreign currencies), as a hedge against fluctuations in foreign exchange rates. Both the Fund and Pacific-European Fund may purchase securities on a when-issued or delayed delivery basis and may purchase or sell securities on a forward commitment basis. Both funds may invest in warrants up to 5% of its net assets. Included within this amount, but not to exceed 2% of the value of its net assets, may be warrants that are not listed on the New York or American Stock Exchange. Warrants are, in effect, options to purchase equity securities at a specific price, during a specific period, and have no voting or other rights with respect to the corporation issuing them and pay no dividends. Both funds may enter into repurchase agreements subject to certain procedures designed to minimize risks associated with such agreements. Although both funds may enter into reverse repurchase agreements, neither Fund has, nor does Pacific-European Fund have any current intention of entering into such agreements in the future. The Fund may invest in zero coupon bonds, deferred interest bonds and PIK Bonds; Pacific-European Fund does not invest in these types of instruments. In addition, the Fund is a non-diversified investment company within the meaning of the 1940 Act, whereas Pacific-European Fund is a diversified investment company. A non-diversified investment company may invest a greater portion of its assets in the securities of a single issuer than a diversified investment company. To the extent that a relatively high percentage of a non-diversified fund's assets may be invested in the securities of a limited number of issuers, such fund may be more susceptible to any single economic, political or regulatory occurrence than the portfolio securities of a diversified investment company. 16 The investment policies of both the Fund and Pacific-European Fund are non-fundamental and may be changed by their respective Boards of Directors unless otherwise noted herein. 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 Objective and Policies" in each fund's respective Prospectus and "Investment Objectives and Policies" in the Fund's Statement of Additional Information and "Investment Objective, Policies and Restrictions" in Pacific-European Fund's Statement of Additional Information. INVESTMENT RESTRICTIONS The investment restrictions adopted by the Fund and Pacific-European Fund as fundamental policies appear under the caption "Investment Restrictions" in the Prospectus and Statement of Additional Information of the Fund and "Special Investment Methods -- Investment Restrictions" in Pacific-European Fund's Prospectus and "Investment Objective, Policies and Restrictions" in Pacific- European Fund's Statement of Additional Information. A fundamental investment restriction cannot be changed without the vote of a majority of the outstanding voting securities of a fund, as defined in the 1940 Act. The material differences are as follows: As a diversified investment company, Pacific- European Fund may not, as a matter of fundamental policy, 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 (other than obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities). The Fund is subject to a similar non-fundamental limitation only with respect to 50% of its assets. While both funds are prohibited from making short sales, the Fund is subject to such limitation on a non-fundamental basis. As a fundamental restriction, both the Fund and Pacific-European Fund may not purchase real estate or interests therein other than securities backed by mortgages and similar investments; however, the Fund may purchase readily marketable interests in real estate investment trusts or readily marketable securities of companies that invest in real estate. In addition, the Fund has a fundamental restriction prohibiting the purchase of real estate limited partnership interests whereas Pacific-European Fund is subject to the same limitation on a non-fundamental basis. INTEREST OF CERTAIN PERSONS The following persons affiliated with the Fund and Pacific-European Fund receive payments from the Fund and Pacific-European Fund for services rendered pursuant to contractual arrangements with both funds: (i) Piper Capital, as the investment adviser and manager to each fund, and (ii) the Distributor, as the distributor of shares of each fund. In addition, with respect to Pacific-European Fund only, the Distributor provides certain transfer agent and dividend disbursing agent services for shareholder accounts held at the Distributor. ADDITIONAL INFORMATION ABOUT THE FUND AND PACIFIC-EUROPEAN FUND GENERAL For a discussion of the organization and operation of the Fund, see "Management," "Investment Objectives and Policies," "Investment Restrictions" and "General Information" in its prospectus. For a discussion of the organization and operation of Pacific-European Fund, see "Introduction," "Management," "Investment Objective and Policies" and "General Information" in its prospectus. FINANCIAL INFORMATION For certain financial information about Pacific-European Fund and the Fund, see "Financial Highlights" and "Performance Comparisons" in their respective prospectuses. MANAGEMENT For information about Pacific-European Fund's and the Fund's Board of Directors, investment manager and distributor, see "Management" and "Distribution of Fund Shares" in their respective prospectuses. 17 DESCRIPTION OF SECURITIES AND SHAREHOLDER INQUIRIES For a description of the nature and most significant attributes of shares of the Fund and Pacific-European 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 the Fund's policies with respect to dividends, distributions and taxes, see "Dividends, Distributions and Tax Status" in its prospectus. For a discussion of Pacific-European Fund's policies with respect to dividends, distributions, and taxes, see "Dividends and Distributions" and "Tax Status" in its prospectus. PURCHASES AND REDEMPTIONS For a discussion of how the Fund's shares may be purchased and redeemed, see "Purchase of Shares" and "Redemption of Shares" in its prospectus. For a discussion of how Pacific-European Fund's shares may be purchased and redeemed, see "Shareholder Guide to Investing" in its prospectus. PENDING LEGAL PROCEEDINGS For a discussion of pending legal proceedings, see "Pending Litigation" in the Fund's prospectus and "General Information -- Pending Legal Proceedings" in Pacific-European Fund's prospectus. MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE For management's discussion of Pacific-European Fund's performance as of its fiscal year ended February 29, 1996, see Piper Global's Annual Report for such fiscal year accompanying this Proxy Statement/Prospectus and incorporated herein by reference. For management's discussion of the Fund's performance, see the Company's Annual Report for its fiscal year ended June 30, 1995, which is incorporated herein by reference. The Company's Annual Report is available without charge, as noted under "Available Information" below. FINANCIAL STATEMENTS AND EXPERTS The annual financial statements of Pacific-European Fund and the Fund incorporated by reference in the Additional Statement 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 Pacific-European Fund will be passed upon by Dorsey & Whitney LLP, Minneapolis, Minnesota. AVAILABLE INFORMATION ADDITIONAL INFORMATION ABOUT THE FUND AND PACIFIC-EUROPEAN FUND IS AVAILABLE, AS APPLICABLE, IN THE FOLLOWING DOCUMENTS WHICH ARE INCORPORATED HEREIN BY REFERENCE: (I) PACIFIC-EUROPEAN FUND'S PROSPECTUS DATED APRIL 28, 1995, ATTACHED TO THIS PROXY STATEMENT/PROSPECTUS, WHICH PROSPECTUS FORMS A PART OF POST-EFFECTIVE AMENDMENT NO. 4 TO PIPER GLOBAL'S REGISTRATION STATEMENT ON FORM N-1A (FILE NOS. 33-33534; 811-06046); (II) PACIFIC-EUROPEAN FUND'S STATEMENT OF ADDITIONAL INFORMATION DATED APRIL 28, 1995; (III) PIPER GLOBAL'S ANNUAL REPORT FOR ITS FISCAL YEAR ENDED FEBRUARY 29, 1996 ACCOMPANYING THIS PROXY STATEMENT/PROSPECTUS; (IV) THE COMPANY'S PROSPECTUS DATED AUGUST 29, 1995, WHICH PROSPECTUS FORMS A PART OF POST-EFFECTIVE AMENDMENT NO. 6 TO THE COMPANY'S REGISTRATION STATEMENT ON FORM N-1A (FILE NOS. 33-67016; 811-7936); (V) THE COMPANY'S STATEMENT OF ADDITIONAL INFORMATION DATED AUGUST 29, 1995; (VI) THE COMPANY'S ANNUAL REPORT FOR THE FISCAL YEAR ENDED JUNE 30, 1995; AND (VII) THE COMPANY'S SEMI- 18 ANNUAL REPORT FOR THE SIX MONTHS ENDED DECEMBER 31, 1995. THE FOREGOING DOCUMENTS MAY BE OBTAINED WITHOUT CHARGE UPON REQUEST FROM SHAREHOLDER SERVICES, PIPER JAFFRAY TOWER, 222 SOUTH NINTH STREET, 55402-3804, (800) 866-7778. The Company and Piper Global are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and in accordance therewith, file reports and other information with the Commission. Proxy material, reports and other information about the Fund and Pacific-European 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 May 20, 1996 19 EXHIBIT A AGREEMENT AND PLAN OF REORGANIZATION HERCULES EUROPEAN VALUE FUND AND PACIFIC-EUROPEAN GROWTH FUND THIS AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") is made as of this day of , 1996, by and between Hercules Funds Inc. ("Hercules Company"), on behalf of its series Hercules European Value Fund ("Hercules Fund"), and Piper Global Funds Inc. ("Piper Company"), on behalf of its series Pacific-European Growth Fund ("Piper Fund"). Hercules Company and Piper Company are Minnesota corporations. As used in this Agreement, the terms "Piper Fund" and "Hercules Fund" shall be construed to mean, respectively, 'Piper Company on behalf of Piper Fund' and 'Hercules Company on behalf of Hercules 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) of the Internal Revenue Code of 1986, as amended (the "Code"). The reorganization ("Reorganization") will consist of the transfer to Piper Fund of substantially all of the assets of Hercules Fund in exchange for the assumption by Piper Fund of all stated liabilities of Hercules Fund and the issuance by Piper Fund of shares of common stock, par value $0.01 per share ("Piper Fund Shares"), to be distributed, after the Closing Date hereinafter determined, to the shareholders of Hercules Fund in liquidation of Hercules Fund as provided herein, all upon the terms and conditions hereinafter set forth in this Agreement. The distribution of Piper Fund Shares to Hercules Fund shareholders and the retirement and cancellation of Hercules Fund shares will be effected pursuant to an amendment to the Articles of Incorporation of Hercules Company in the form attached hereto as Exhibit 1 (the "Amendment"), to be adopted by Hercules Company 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. THE REORGANIZATION AND LIQUIDATION OF HERCULES 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, Hercules Fund agrees to assign, deliver and otherwise transfer the Hercules Fund Assets (as defined in paragraph 1.2(a)) to Piper Fund and Piper Fund agrees in exchange therefor to assume all stated liabilities of Hercules Fund on the Closing Date (as defined in paragraph 3.1) as set forth in paragraph 1.3 and to deliver to Hercules Fund Shareholders (as defined in paragraph 1.5) the number of Piper Fund Shares, including fractional Piper Fund Shares, determined in accordance with paragraph 2.2. Such transactions shall take place at the closing provided for in paragraph 3.1 ("Closing"). 1.2.(a) The "Hercules Fund Assets" shall consist of all property including, without limitation, all cash, cash equivalents, securities, commodities, futures, and dividend and interest receivables owned by Hercules Fund, and any deferred or prepaid expenses shown as an asset on Hercules Fund's books, on the Valuation Date (as defined in paragraph 2.1). (b) Hercules 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 Hercules Fund shareholders, acquire without the prior approval of Piper Fund, any additional securities or other instruments other than securities or instruments of the type in which Piper Fund is permitted to invest and in amounts agreed to by Piper Fund. In the event that Hercules Fund holds any assets that Piper Fund is not permitted to hold, Hercules Fund will dispose of such assets on or prior to the Valuation Date. In addition, if it is determined that the portfolios of Hercules Fund and Piper Fund, when aggregated, would contain investments exceeding certain percentage limitations imposed upon Piper Fund with respect to such investments (including, A-1 among others, percentage limitations necessary to satisfy the diversification requirements of the Code), Hercules Fund if requested by Piper 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. Hercules Fund will endeavor to discharge all of its liabilities and obligations on or prior to the Valuation Date. Piper 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 Hercules Fund prepared by the Treasurer of Hercules 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 Hercules Fund to comply with Section 852(a)(1) of the Code and to avoid having any investment company taxable income or net capital gain (as defined in Sections 852(b)(2) and 1222(11) of the Code, respectively) in the taxable year ending with its dissolution, Hercules Fund will on or before the Valuation Date (a) declare a dividend in an amount large enough so that it will have declared dividends of all 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) and (b) distribute such dividend. 1.5. On the Closing Date or as soon as practicable thereafter, pursuant to paragraph 1.1 hereof and the Amendment, Hercules Fund will distribute Piper Fund Shares received by Hercules Fund pro rata to its shareholders of record determined as of the close of business on the Valuation Date ("Hercules Fund Shareholders"). Thereafter, no additional shares representing interests in the Hercules Fund shall be issued. Such distribution will be accomplished by an instruction, signed by Hercules Fund's Secretary, to transfer Piper Fund Shares then credited to Hercules Fund's account on the books of Piper Fund to open accounts on the books of Piper Fund in the names of the Hercules Fund Shareholders and representing the respective pro rata number of Piper Fund Shares due each such Hercules Fund Shareholder. All issued and outstanding shares of Hercules Fund simultaneously will be canceled on Hercules Fund's books. No Hercules Fund Shareholder will be charged any contingent deferred sales charge described in Hercules Fund's current or then-current prospectus as a result of the conversion of Hercules Fund holdings into Piper Fund Shares described in this paragraph. 1.6. Ownership of Piper Fund Shares will be shown on the books of Piper Fund's transfer agent. Piper Fund Shares will be issued in the manner described in Piper Fund's then current Prospectus and Statement of Additional Information, except no front-end sales charges will be incurred by Hercules Fund Shareholders in connection with Piper Fund Shares received in the Reorganization. 1.7. Any transfer taxes payable upon issuance of Piper Fund Shares in a name other than the registered holder of Hercules Fund Shares on Hercules 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 Piper Fund Shares are to be issued and transferred. 1.8. Any reporting responsibility of Hercules Fund is and shall remain the responsibility of Hercules Fund up to and including the date on which Hercules Fund is dissolved and deregistered pursuant to paragraph 1.9. 1.9. Hercules Company shall be dissolved as a Minnesota corporation and deregistered as an investment company under the Investment Company Act of 1940, as amended ("1940 Act"), promptly following the making of all distributions pursuant to paragraph 1.5 and the reorganization or liquidation of each of its series, such that no shares of Hercules Company remain issued and outstanding. 1.10. All books and records maintained on behalf of Hercules Fund will be delivered to Piper Fund and, after the Closing, will be maintained by Piper Fund or its designee in compliance with applicable record retention requirements under the 1940 Act. A-2 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 Hercules Fund or such other date after such shareholder approval as may be mutually agreed upon. The value of the Hercules Fund Assets shall be the value of such assets computed as of 4:00 p.m., Eastern time, on the Valuation Date, using the valuation procedures set forth in Piper Fund's then current Prospectus and Statement of Additional Information. 2.2. The net asset value of a Piper Fund Share shall be the net asset value per share computed on the Valuation Date, using the valuation procedures set forth in Piper Fund's then current Prospectus and Statement of Additional Information. 2.3. The number of Piper Fund Shares (including fractional shares, if any) to be issued hereunder shall be determined by dividing the value of the Hercules Fund Assets, net of the liabilities of Hercules Fund assumed by Piper Fund pursuant to paragraph 1.1, determined in accordance with paragraph 2.1, by the net asset value of a Piper 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 Piper Fund. Piper 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 Hercules Fund (together with any cash or other assets) shall be delivered by Hercules Fund to Investors Fiduciary Trust Company (the "Custodian"), as custodian for Piper Fund, for the account of Piper 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 Piper Growth and Income Fund, a series of Piper Funds, Inc." 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 so that, in the judgment of both Piper Fund and Hercules Fund, accurate appraisal of the value of the net assets of Piper Fund or the Hercules 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. A-3 4. COVENANTS OF PIPER FUND AND HERCULES FUND 4.1. Except as otherwise expressly provided herein with respect to Hercules Fund, Piper Fund and Hercules 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 of business will include customary dividends and other distributions. 4.2. Piper Company will prepare and file with the Securities and Exchange Commission ("Commission") a registration statement on Form N-14 under the Securities Act of 1933, as amended ("1933 Act"), relating to Piper Fund Shares ("Registration Statement"). Hercules Company will provide Piper Company with the Proxy Materials as described in paragraph 4.3 below, for inclusion in the Registration Statement. Hercules Company will further provide Piper Company with such other information and documents relating to Hercules Fund as are reasonably necessary for the preparation of the Registration Statement. 4.3. Hercules 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 Hercules Fund from holding all of its assets as Piper Fund Shares until such shares are distributed to Hercules Fund shareholders. Hercules Company will prepare the notice of meeting, form of proxy and proxy statement (collectively, "Proxy Materials") to be used in connection with such meeting. Piper Company will furnish Hercules Company with a currently effective prospectus relating to Piper Fund Shares for inclusion in the Proxy Materials and with such other information relating to Piper Fund as is reasonably necessary for the preparation of the Proxy Materials. 4.4. Subject to the provisions of this Agreement, Piper Fund and Hercules 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. 4.5. As soon after the Closing Date as is reasonably practicable, Hercules Company (a) shall prepare and file all federal and other tax returns and reports of Hercules 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. Piper 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 Company represents and warrants to Hercules Company as follows: (a) Piper Fund is a series of Piper Company. Piper Company 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 Company is a duly registered, open-end, 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 Piper 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 Piper Fund are registered in all jurisdictions in which they are required to be registered under state securities laws and other laws, and Piper Company is not subject to any stop order and is fully qualified to sell Piper Fund shares in each state in which such shares have been registered; A-4 (d) The current Prospectus and Statement of Additional Information of Piper 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; (e) Piper 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 Company's Articles of Incorporation or By-Laws or of any agreement, indenture, instrument, contract, lease or other undertaking to which Piper Fund is a party or by which it is bound; (f) Other than as disclosed in Piper Fund's currently effective prospectus, 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 Piper Company or Piper 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 Piper 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) Piper Fund's Statement of Assets and Liabilities, Statement of Operations, Statement of Changes in Net Assets and Financial Highlights as of Piper Fund's most recent fiscal year-end, and for the year then ended, certified by KPMG Peat Marwick LLP (copies of which have been furnished to Hercules Fund), fairly present, in all materials respects, Piper Fund's financial condition as of such date in accordance with generally accepted accounting principles, and its results of operations, changes in its net assets and financial highlights for such period, and as of such date there were no known liabilities of Piper 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 Piper Fund's financial condition, assets, liabilities or business, other than changes occurring in the ordinary course of business, or any incurrence by Piper 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's net asset value per share nor a decrease in Piper Fund's size due to redemptions by Piper Fund shareholders shall constitute a material adverse change; (i) All issued and outstanding Piper 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. Piper 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 to 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 Company, and this Agreement constitutes a valid and binding obligation of Piper 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'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; A-5 (k) Piper Fund Shares to be issued and delivered to Hercules Fund, for the account of the Hercules 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 Piper 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 Piper 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'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, Piper 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's knowledge, are reasonably likely to occur which will adversely affect, the ability of Piper Fund to continue to meet the requirements of Subchapter M of the Code; (n) Since Piper Fund's most recent fiscal year-end, there has been no change by Piper Fund in accounting methods, principles, or practices, including those required by generally accepted accounting principles; (o) The information furnished or to be furnished by Piper 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; and (p) The Proxy Materials to be included in the Registration Statement (only insofar as they relate to Piper 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. Hercules Company represents and warrants to Piper Company as follows: (a) Hercules Fund is a series of Hercules Company. Hercules Company is a corporation validly existing and in good standing under the laws of Minnesota. (b) Hercules Company is a duly registered, open-end, 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 Hercules 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 Hercules Fund are registered in all jurisdictions in which they are required to be registered under state securities laws and other laws, and Hercules Company is not subject to any stop order and is fully qualified to sell Hercules Fund shares in each state in which such shares have been registered; (d) The current Prospectus and Statement of Additional Information of Hercules 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; A-6 (e) Hercules Fund is not in, and the execution, delivery and performance of this Agreement will not result in a, material violation of any provision of Hercules Company's Articles of Incorporation or By-Laws or of any agreement, indenture, instrument, contract, lease or other undertaking to which Hercules Fund is a party or by which it is bound; (f) Other than as disclosed in Hercules Fund's currently effective prospectus, 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 Hercules 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 Hercules 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) Hercules Fund's Statement of Assets and Liabilities, Statement of Operations, Statement of Changes in Net Assets and Financial Highlights of Hercules Fund as of June 30, 1995 and for the year then ended, certified by KPMG Peat Marwick LLP (copies of which have been or will be furnished to Piper Fund) fairly present, in all material respects, Hercules 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 Hercules 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 Hercules Fund's financial condition, assets, liabilities or business, other than changes occurring in the ordinary course of business, or any incurrence by Hercules 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 Piper Fund prior to the date of this Agreement and prior to the Closing Date. All liabilities of Hercules Fund (contingent and otherwise) are reflected in the Valuation Date Statement. For the purpose of this subparagraph (h), neither a decline in Hercules Fund's net asset value per share nor a decrease in Hercules Fund's size due to redemptions by Hercules Fund shareholders shall constitute a material adverse change; (i) Hercules 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; (j) All issued and outstanding shares of Hercules 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. Hercules 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 to any of its shares. All such shares will, at the time of Closing, be held by the persons and in the amounts recorded by Hercules 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 Hercules Company, and subject to the approval of Hercules Fund's shareholders, this Agreement constitutes a valid and binding obligation of Hercules 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 Hercules 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; A-7 (l) All material federal and other tax returns and reports of Hercules 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 Hercules 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, Hercules 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 Hercules Fund's knowledge, are reasonably likely to occur which will adversely affect the ability of Hercules Fund to continue to meet the requirements of Subchapter M of the Code; (n) At the Closing Date, Hercules Fund will have good and valid title to the Hercules Fund Assets, subject to no liens (other than the obligation, if any, to pay the purchase price of portfolio securities purchased by Hercules Fund which have not settled prior to the Closing Date), security interests or other encumbrances, and full right, power and authority to assign, deliver and otherwise transfer such assets hereunder, and upon delivery and payment for such assets, Piper 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 Hercules 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 Securities Exchange Act of 1934, as amended ("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 Hercules Fund nor Hercules Company shall be construed to have made the foregoing representation with respect to portions of the Proxy Materials furnished by Piper Fund. Any other information furnished by Hercules 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 applicable federal securities and other laws and regulations thereunder; (p) Hercules 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; and (q) Hercules Fund is not acquiring Piper 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 HERCULES FUND The obligations of Hercules Fund to consummate the transactions provided for herein shall be subject, at its election, to the performance by Piper 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 Piper 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 be Closing Date. 6.2. Piper Fund shall have delivered to Hercules Fund a certificate of its President and Treasurer, in a form reasonably satisfactory to Hercules Fund and dated as of the Closing Date, to the effect that the representations and warranties of Piper Company made in this Agreement are true and correct at and as of the a Closing Date, except as they may be affected by the transactions contemplated by this Agreement, and as to such other matters as Hercules Company shall reasonably request. A-8 6.3. Hercules Company shall have received a favorable opinion from Dorsey & Whitney LLP, counsel to Piper Fund, dated as of the Closing Date, to the effect that: (a) Piper Company is a validly existing Minnesota corporation and has the corporate power to own all of the properties and assets of Piper Fund and, to the knowledge of such counsel, to carry on its business as presently conducted; (b) Piper Company is a duly registered, open-end, management investment company, and, to the knowledge of such counsel, its registration with the Commission as an investment company under the 1940 Act is in full force and effect; (c) this Agreement has been duly authorized, executed and delivered by Piper Fund and, assuming that the Registration Statement complies with the 1933 Act, the 1934 Act and the 1940 Act and regulations thereunder and assuming due authorization, execution and delivery of this Agreement by Hercules Fund, is a valid and binding obligation of Piper Fund enforceable against Piper Fund 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; (d) Piper Fund Shares to be issued to Hercules Fund Shareholders as provided by this Agreement are duly authorized and, assuming receipt of the consideration to be paid therefor, upon such delivery will be validly issued and outstanding and fully paid and nonassessable, and, to the knowledge of such counsel, no shareholder of Piper Fund has any preemptive rights to subscription or purchase in respect thereof; (e) the execution and delivery of this Agreement did not, and the consummation of the transactions contemplated hereby will not, violate Piper Company's Articles of Incorporation or By-Laws; and (f) to the knowledge of such counsel, no consent, approval, authorization or order of any court or governmental authority of the United States or any state is required for the consummation by Piper Fund of the transactions contemplated herein, 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. 6.4. 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's 12b-1 plan of distribution, from those described in the Prospectus and Statement of Additional Information of Piper Fund in effect on the date of this Agreement. 7. CONDITIONS PRECEDENT TO OBLIGATIONS OF PIPER FUND The obligations of Piper Fund to complete the transactions provided for herein shall be subject, at its election, to the performance by Hercules 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 Hercules Company 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. Hercules Fund shall have delivered to Piper Fund at the Closing a certificate of its President and its Treasurer, in form and substance satisfactory to Piper Fund and dated as of the Closing Date, to the effect that the representations and warranties of Hercules 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 Piper Fund shall reasonably request. 7.3. Hercules Fund shall have delivered to Piper Fund a statement, certified by the Treasurer of Hercules Company, of the Hercules Fund Assets and its liabilities, together with a list of Hercules 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. Piper Fund shall have received at the Closing a favorable opinion from Gordon Altman Butowsky Weitzen Shalov & Wein, counsel to Hercules Fund, dated as of the Closing Date to the effect that: (a) Hercules Company is a validly existing Minnesota corporation and has the corporate power to own all of the properties and assets of Hercules Fund and, to the knowledge of such counsel, to carry A-9 on its business as presently conducted (Minnesota counsel may be relied upon in delivering such opinion); (b) Hercules Company is a duly registered, open-end management investment company under the 1940 Act, and, to the knowledge of such counsel, its registration with the Commission as an investment company under the 1940 Act is in full force and effect; (c) this Agreement has been duly authorized, executed and delivered by Hercules Fund and, assuming that the Registration Statement complies with the 1933 Act, the 1934 Act and the 1940 Act and the regulations thereunder and assuming due authorization, execution and delivery of this Agreement by Piper Fund, is a valid and binding obligation of Hercules Fund enforceable against Hercules Fund 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; (d) the execution and delivery of this Agreement did not, and the consummation of the transactions contemplated hereby will not, violate Hercules Company's Articles of Incorporation or By-Laws; and (e) to the knowledge of such counsel, no consent, approval, authorization or order of any court or governmental authority of the United States or any state is required for the consummation by Hercules Fund of the transactions contemplated herein, 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. 7.5. On the Closing Date, the Hercules Fund Assets shall include no assets that Piper Fund, by reason of Piper Company's Articles of Incorporation limitations or otherwise, may not properly acquire. 8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF PIPER FUND AND HERCULES FUND The obligations of Hercules Fund and Piper 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 Hercules Fund in accordance with the provisions of Hercules Company's Articles of Incorporation, and certified copies of the resolutions evidencing such approval shall have been delivered to Piper 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 Piper Fund or Hercules 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 Piper Fund or Hercules 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, Hercules 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 Hercules 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 all taxable years ending on or before the Closing Date. A-10 8.6. The parties shall have received a favorable opinion of the law firm of Gordon Altman Butowsky Weitzen Shalov & Wein (based on such representations as such law firm shall reasonably request), addressed to Piper Company and Hercules Company, which opinion may be relied upon by the shareholders of Hercules Fund, substantially to the effect that, for federal income tax purposes: (a) The transfer of substantially all of Hercules Fund's assets in exchange for Piper Fund Shares and the assumption by Piper Fund of certain stated liabilities of Hercules Fund followed by the distribution by Hercules Fund of Piper Fund Shares to the Hercules Fund Shareholders in exchange for their Hercules Fund shares will constitute a "reorganization" within the meaning of Section 368(a)(1) of the Code, and Hercules Fund and Piper Fund will each be a "party to a reorganization" within the meaning of Section 368(b) of the Code; (b) No gain or loss will be recognized by Piper Fund upon the receipt of the assets of Hercules Fund solely in exchange for Piper Fund Shares and the assumption by Piper Fund of the stated liabilities of Hercules Fund; (c) No gain or loss will be recognized by Hercules Fund upon the transfer of the assets of Hercules Fund to Piper Fund in exchange for Piper Fund Shares and the assumption by Piper Fund of the stated liabilities of Hercules Fund or upon the distribution of Piper Fund Shares to the Hercules Fund Shareholders as provided for in this Agreement; (d) No gain or loss will be recognized by the Hercules Fund Shareholders upon the exchange of the Hercules Fund shares for Piper Fund Shares; (e) The aggregate tax basis for Piper Fund Shares received by each Hercules Fund Shareholder pursuant to the Reorganization will be the same as the aggregate tax basis of the Hercules Fund shares held by each such Hercules Fund Shareholder immediately prior to the Reorganization; (f) The holding period of Piper Fund Shares to be received by each Hercules Fund Shareholder will include the period during which the Hercules Fund shares surrendered in exchange therefor were held (provided such Hercules Fund Shares were held as capital assets on the date of the Reorganization); (g) The tax basis of the assets of Hercules Fund acquired by Piper Fund will be the same as the tax basis of such assets to Hercules Fund immediately prior to the Reorganization; and (h) The holding period of the assets of Hercules Fund in the hands of Piper Fund will include the period during which those assets were held by Hercules Fund. Notwithstanding anything herein to the contrary, neither Piper Fund nor Hercules 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) In the event the transactions contemplated herein are not consummated by reason of Hercules Fund's being either unwilling or unable to go forward (other than by reason of the nonfulfillment or failure of any condition to Hercules Fund's obligations specified in this Agreement), PCM's obligations, on behalf of Hercules Fund, shall be limited to reimbursement of Piper Fund for all reasonable out-of-pocket fees and expenses incurred by Piper Fund in connection with those transactions. A-11 (c) In the event the transactions contemplated herein are not consummated by reason of Piper Fund's being either unwilling or unable to go forward (other than by reason of the nonfulfillment or failure of any condition to Piper Fund's obligations specified in the Agreement), Piper Fund's only obligation hereunder shall be to reimburse Hercules Fund for all reasonable out-of-pocket fees and expenses incurred by Hercules 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, except that the representations, warranties and covenants of Hercules Fund hereunder shall not survive the dissolution and complete liquidation of Hercules Fund in accordance with Section 1.9. 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 Hercules Company and Piper Company; (b) by either Piper Company or Hercules Company 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 September 15, 1996; or (c) by either Piper Fund or Hercules 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 Hercules 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 Piper Fund or Hercules Fund or the directors or officers of Piper Fund or Hercules 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 Piper Fund or Hercules Fund or the directors or officers of Piper Fund or Hercules 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 fees. 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 Hercules Fund's shareholders called by Hercules Fund pursuant to paragraph 4.3, no such amendment may have the effect of changing the provisions for determining the number of Piper Fund Shares to be issued to the Hercules Fund Shareholders under this Agreement to the detriment of such Hercules Fund Shareholders without their further approval. A-12 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 Company hereunder are solely those of Piper Fund. It is expressly agreed that no shareholder, nominee, director, officer, agent, or employee of Piper Fund shall be personally liable hereunder. The execution and delivery of this Agreement have been authorized by the directors of Piper Company and signed by authorized officers of Piper Company 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 Hercules Company hereunder are solely those of Hercules Company. It is expressly agreed that no shareholder, nominee, director, officer, agent, or employee of Hercules Fund shall be personally liable hereunder. The execution and delivery of this Agreement have been authorized by the directors of Hercules Company and signed by authorized officers of Hercules Company 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. HERCULES FUNDS INC., on behalf of Hercules European Value Fund By: __________________________________ Name: Title: PIPER GLOBAL FUNDS INC., on behalf of Pacific-European Growth Fund By: __________________________________ Name: Title: A-13 EXHIBIT 1 TO AGREEMENT AND PLAN OF REORGANIZATION ARTICLES OF AMENDMENT TO ARTICLES OF INCORPORATION OF HERCULES FUNDS INC. The undersigned officer of Hercules Funds Inc. ("Hercules Company"), a corporation subject to the provisions of Chapter 302A of the Minnesota Statutes, hereby certifies that Hercules Company's (a) Board of Directors, by written action dated March 29, 1996, and (b) shareholders, at a meeting held June 18, 1996, adopted the resolutions hereinafter set forth; and such officer further certifies that the amendments to Hercules Company's Articles of Incorporation set forth in such resolutions were adopted pursuant to Chapter 302A. WHEREAS, Hercules Company 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 several series, each of which represents a separate and distinct portfolio of assets; and WHEREAS, it is desirable and in the best interest of the holders of the Hercules European Value Fund ("Hercules Fund"), a series of Hercules Company, that the assets belonging to such series, subject to its stated liabilities, be sold to Pacific-European Growth Fund ("Piper Fund"), a series of Piper Global Funds Inc. ("Piper Company"), a Minnesota corporation and an open-end management investment company registered under the Investment Company Act of 1940, in exchange for shares of Piper Fund; and WHEREAS, Hercules Company wishes to provide for the PRO RATA distribution of such shares of Piper Fund received by it to holders of shares of Hercules Fund and the simultaneous cancellation and retirement of the outstanding shares of Hercules Fund; and WHEREAS, Hercules Company and Piper Company 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 Hercules Fund to the foregoing transactions, and in particular to bind such shareholders to the cancellation and retirement of the outstanding shares of Hercules Fund, it is necessary to adopt an amendment to Hercules Company's Articles of Incorporation. NOW, THEREFORE, BE IT RESOLVED, that Hercules Company's Articles of Incorporation be, and the same hereby are, amended to add the following Article 5B immediately following Article 5 thereof: 5B. (a) For purposes of this Article 5B, the following terms shall have the following meanings: "HERCULES COMPANY" means this corporation. "PIPER COMPANY" means Piper Global Funds Inc., a Minnesota corporation. "ACQUIRED FUND" means Hercules Company's Hercules European Value Fund. "ACQUIRING FUND" means Piper Company's Pacific-European Growth 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 9:00 a.m. on the next business day following the Valuation Date or such other date and time set forth in the pertinent plan of reorganization or liquidation, as the case may be, for the consummation of the reorganization or liquidation. (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 Hercules Company'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"). (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 Hercules Company'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 the Series A Common Shares of Hercules Company. IN WITNESS WHEREOF, the undersigned officer of Hercules Company has executed these Articles of Amendment on behalf of Hercules Company on , 1996. HERCULES FUNDS INC. By ___________________________________ Its __________________________________ 2 EXHIBIT B PACIFIC-EUROPEAN GROWTH FUND A SERIES OF PIPER GLOBAL FUNDS INC. Supplement dated January 25, 1996 to Prospectus dated April 28, 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). PJPEX-05A PROSPECTUS DATED APRIL 28, 1995 PACIFIC-EUROPEAN GROWTH FUND A SERIES OF PIPER GLOBAL FUNDS INC. PIPER JAFFRAY TOWER 222 SOUTH NINTH STREET, MINNEAPOLIS, MINNESOTA 55402-3804 (800) 866-7778 (TOLL FREE) Pacific-European Growth Fund (the "Fund") is a diversified series of Piper Global Funds Inc. ("Piper Global"), 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 Piper Global currently outstanding. The investment objective of the Fund is long-term capital appreciation. Current income is incidental to this objective. The Fund seeks to achieve its investment objective through investments primarily in Common Stock (as herein defined) of companies in the Pacific Basin or in Europe (including Eastern Europe). Up to 25% of the Fund's total assets may be invested in other areas of the world to the extent significant opportunities for long-term capital appreciation outside of the Pacific Basin and Europe become available. The Fund does not invest in Common Stock of U.S. companies. No assurance can be given that the Fund's investment objective will be achieved. Investment in the Fund involves certain risks and requires consideration of factors not typically associated with investment in securities of U.S. issuers. See "Risk Factors." This Prospectus concisely describes the information about the Fund 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 Fund dated April 28, 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 Pacific-European Growth Fund (the "Fund") is a diversified series of Piper Global Funds Inc. ("Piper Global"), an open-end management investment company, or mutual fund, the shares of which can be offered in more than one series. Each series in effect represents a separate fund with its own investment objectives and policies. The Fund is the only series of Piper Global currently outstanding. Piper Global was organized under the laws of the State of Minnesota in 1990 as a closed-end investment company and converted to an open-end investment company on August 31, 1992. The investment objective of the Fund is long-term capital appreciation. Current income is incidental to this objective. 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 basic management fee calculated and paid monthly at an annual rate of 1.00% on net assets up to $100 million, with the fee scaled downward as assets increase in size (the "Basic Fee"). The Basic Fee (as a percentage of net assets) is higher than that paid by most other mutual funds. The Basic Fee may be increased or decreased by up to a maximum, on an annual basis, of .25% of the Fund's average daily net assets depending upon the extent to which the Fund outperforms or underperforms the Morgan Stanley Capital International European, Australian and Far East Index (the "EAFE-SM- Index"). See "Management--Investment Adviser." THE SUB-ADVISER Edinburgh Fund Managers plc acts as the Fund's sub-adviser (the "Sub-Adviser") under an agreement with the Adviser. The Sub-Adviser is a public limited company that was incorporated in 1969. It is a majority-owned subsidiary of The British Investment Trust PLC, a Scottish closed-end investment company founded in 1889, for which the Sub-Adviser serves as investment manager and adviser. For its services, the Sub-Adviser is paid a fee by the Adviser equal to 65% of the Basic Fee plus or minus 90% of the performance fee adjustment. See "Management--Sub-Adviser." THE DISTRIBUTOR Piper Jaffray Inc. ("Piper Jaffray" or the "Distributor"), a wholly owned subsidiary of Piper Jaffray Companies Inc. and an affiliate of the Adviser, serves as Distributor of the Fund's shares. 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 4% of the offering price (4.17% 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. FUND SHARES ARE BEING OFFERED TO THE PUBLIC WITHOUT AN INITIAL OR DEFERRED SALES CHARGE THROUGH JUNE 30, 1995. In connection with purchases of $500,000 or more, there is no initial sales charge; however, a 1% 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--Public Offering Price." MINIMUM INITIAL AND SUBSEQUENT INVESTMENTS The minimum initial investment for the Fund is $250. There is no minimum for subsequent investments. 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. 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." 2 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." CERTAIN RISK FACTORS TO CONSIDER An investment in the Fund is subject to certain risks, as set forth in detail under "Investment Objective and Policies," "Special Investment Methods" and "Risk Factors." As with other mutual funds, there can be no assurance that the Fund will achieve its objective. Because the Fund invests in foreign securities, an investment in the Fund requires consideration of certain risk factors that are not typically associated with investing in securities of U.S. companies. These factors include risks relating to adverse currency fluctuations, potential political and economic instability of certain countries, limited liquidity and volatile prices of certain securities of non-U.S. companies, and foreign taxation. In addition, the Fund may engage in the following investment practices which involve certain special risks: entering into currency exchange transactions, forward foreign currency exchange transactions and foreign currency futures and options, entering into options transactions on securities in which the Fund may invest, the use of repurchase agreements, the lending of portfolio securities, entering into futures contracts and options on futures contracts, the purchase of securities on a "when-issued" basis and the purchase or sale of securities on a "forward commitment" basis. These techniques involve certain special risks and may increase the volatility of 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. SHAREHOLDER INQUIRIES Any questions or communications regarding a shareholder account should be directed to your Piper Jaffray investment executive or, in the case of shares held through another broker-dealer, to IFTC at (800) 874-6205. General inquiries regarding the Fund should be directed to the Fund at the telephone number set forth on the cover page of this Prospectus. 3 FUND EXPENSES SHAREHOLDER TRANSACTION EXPENSES Maximum Sales Load Imposed on Purchases (as a percentage of offering price).................................................. 4.00% Exchange Fee*..................................................... $0 ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets) Management Fee.................................................... 1.03% Rule 12b-1 Fees (after voluntary limitation)...................... .32% Other Expenses.................................................... .45% ----- Total Fund Operating Expenses (after voluntary limitation).... 1.80%
- - - - - - --------- *There is a $5.00 fee for each exchange in excess of four exchanges per year. See "How to Purchase Shares--Exchange Privilege." 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: 1 year............. $ 58 3 years............ $ 94 5 years............ $134 10 years............ $243
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 LESSER THAN THOSE SHOWN. The information set forth in the table is based on actual expenses incurred by the Fund during the fiscal year ended February 28, 1995, except that the Rule 12b-1 fees and total fund operating expenses have been restated to reflect a change in the Distributor's voluntary Rule 12b-1 fee limit for fiscal 1996. The Fund has adopted a Rule 12b-1 Plan under which the Fund is required to reimburse the Distributor for shareholder servicing costs and distribution costs in an amount not to exceed, on an annualized basis, .50% of the average daily net assets of the Fund. Of such amount, the Distributor may be paid shareholder servicing fees of up to .25% of the average daily net assets of the Fund to cover shareholder servicing costs, and distribution fees of a like amount to cover distribution costs. The Distributor has voluntarily agreed to limit the fee to an annual rate of .32% of the Fund's average daily net assets. This voluntary limitation 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 expenses ratio and increasing yield to investors when such amounts are assumed or the inverse when such amounts are reimbursed. During the fiscal year ended February 28, 1995, the Distributor voluntarily limited Rule 12b-1 fees to .28% of average daily net assets, resulting in total operating expenses equal to 1.76% of average daily net assets. Absent any Rule 12b-1 fee limitation, total Fund operating expenses for the fiscal year ended February 28, 1995, would have been 1.98% of average daily net assets. The management fees for fiscal 1996 may be more or less than those set forth in the table to the extent that the Fund outperforms or underperforms the EAFE Index. See "Management-- Investment Adviser." As a result of the Fund's reimbursement of its distribution costs, which payments are considered asset-based sales charges, long-term shareholders of the Fund may pay more than the economic equivalent of the maximum 6.25% front end sales charge permitted under the rules of the National Association of Securities Dealers, Inc. 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 information presented in this section relates to fiscal periods ended both before and after the conversion of Piper Global from a closed-end investment company to an open-end investment company on August 31, 1992. The following financial highlights have been audited by KPMG Peat Marwick LLP, independent auditors, whose report thereon appears in the Statement of Additional Information. This 4 information should be read in conjunction with the financial statements and the related notes thereto appearing in the Statement of Additional Information. The table sets forth for the Fund per-share data for a share of capital stock outstanding throughout each fiscal period and selected information for such periods.
YEAR ENDED FEBRUARY 28, PERIOD FROM ----------------------------------------- 4/27/90* 1995 1994 1993 1992 TO 2/28/91 ------- ------- ------ ------ ----------- Net asset value, beginning of period.............. $ 15.44 $ 10.81 $10.53 $10.18 $10.97 ------- ------- ------ ------ ----------- Operations: Investment income (loss)--net................... (0.03) (0.03) -- 0.06 0.20 Net realized and unrealized gains (losses) on investments................................... (1.63) 4.72 0.28 0.37 (0.79) ------- ------- ------ ------ ----------- Total from operations......................... (1.66) 4.69 0.28 0.43 (0.59) ------- ------- ------ ------ ----------- Distributions from net investment income.......... -- -- -- (0.06) (0.20) Return of capital distributions................... -- -- -- (0.02) -- Distributions from net realized gains............. (1.05) (0.06) -- -- -- ------- ------- ------ ------ ----------- Total distributions........................... (1.05) (0.06) -- (0.08) (0.20) ------- ------- ------ ------ ----------- Net asset value, end of period.................... $ 12.73 $ 15.44 $10.81 $10.53 $10.18 ------- ------- ------ ------ ----------- ------- ------- ------ ------ ----------- Total return +.................................... (11.09)% 43.45% 2.66% 4.44% (5.03)% Net assets, end of period (000s omitted).......... 154,393 165,655 59,791 35,680 34,492 Ratio of expenses to average daily net assets ++............................................... 1.76% 1.81% 2.25% 1.92% 1.77%** Ratio of net investment income (loss) to average daily net assets ++.............................. (0.19)% (0.29)% 0.03% 0.60% 2.36%** Portfolio turnover rate (excluding short-term securities)...................................... 57% 52% 59% 69% 10%
* 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 and does not reflect a sales charge. ++ During 1995 and 1994, the Fund's Rule 12b-1 fee was voluntarily limited by the Distributor to .28% and .30%, respectively, of average daily net assets. Had the maximum fee of .50% been in effect, the ratios of expenses and net investment income (loss) would have been 1.98%/(.41%) and 2.01%/(.49%), respectively. During 1993, various fees and expenses were voluntarily limited or absorbed by the Adviser and the Distributor. Had the Fund paid all 1993 expenses, the ratios of expenses and net investment income (loss) to average daily net assets would have been 2.59% and (.31)%. Included in 1993 gross expenses were expenses of approximately .32% of average daily net assets that related to converting to an open-end investment company. Further performance information pertaining to the Fund is contained in the annual report to shareholders which may be obtained without charge by calling or writing the Fund at the address and telephone number listed on the cover. INVESTMENT OBJECTIVE AND POLICIES GENERAL The Fund's investment objective is long-term capital appreciation. Current income is incidental to this objective. The Fund seeks to achieve its investment objective through investments primarily (under normal circumstances, at least 65% of its total assets) in Common Stock of companies in the Pacific Basin or in Europe (including Eastern Europe). "Common Stock" means common stock and foreign equity securities which are substantially similar to common stock in the U.S. and does not include preferred stock or convertible debt securities (such foreign equity securities may have voting and distribution rights which differ from those of common stock in the U.S.). The Pacific Basin is generally defined as those countries bordering the Pacific Ocean. The Fund may invest in the following countries within the region: Malaysia, Pakistan, Sri Lanka, the Philippines, Singapore, South Korea, Thailand, India, Indonesia, Hong Kong, Japan, Taiwan, Australia and New Zealand. In addition, to the extent that suitable investment 5 opportunities become available, the Fund may invest in any other country within the region, including, but not limited to, China. For purposes of this Prospectus, unless otherwise indicated, Europe consists of Austria, Belgium, Denmark, Germany, Finland, France, Greece, the Republic of Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, Turkey and the United Kingdom (together, "Western Europe"), plus Albania, Bulgaria, the Czech and Slovak Republics, Hungary, Poland, Romania, the successor states to the former Yugoslavia, and the Commonwealth of Independent States (formerly, the Union of Soviet Socialist Republics) (together, "Eastern Europe"). As the securities markets of additional continental European countries develop, such countries may be considered part of the Fund's definition of Europe and appropriate countries for investment by the Fund. For a discussion of the economies of the Pacific Basin and Europe, see "Investment Objective, Policies and Restrictions--Investment Background" in the Statement of Additional Information. As of March 31, 1995, approximately 64% of the Fund's investments were in companies in the Pacific Basin (including Japan) and approximately 26% were in companies in Europe. While the Fund has no specific policy or restriction on the allocation of its funds between Europe and the Pacific Basin, the Adviser and the Sub-Adviser (collectively, "Management") believe that the opportunities for long-term capital appreciation in the Pacific Basin are generally superior to those presently available in the economically more mature areas of the world. The relative emphasis of the Fund's investments between the Pacific Basin and Europe may change over time to the extent Management identifies greater investment opportunities in Europe as a result of more attractive values, recent developments in Eastern Europe, the removal of most intra-European trade barriers as a result of the adoption of the Single European Act in 1992 or other factors. In normal market conditions, the Fund's investments will be allocated among at least three different countries in the Pacific Basin and/or Europe. For additional information regarding the allocation of Fund investments, see "Investment Objective, Policies and Restrictions--Investment Background--Allocation of Investments Between the Pacific Basin and Europe" in the Statement of Additional Information. A company is considered to be in the Pacific Basin or in Europe, as the case may be, if (a) it is organized under the laws of a country within the Pacific Basin or in Europe (including the United Kingdom); (b) at least 50% of its assets are located in the Pacific Basin or in Europe; (c) it derives at least 50% of its total revenues from goods produced, sales made, services performed or investment in companies in the Pacific Basin or in Europe; or (d) its securities are traded principally on stock exchanges in a Pacific Basin or European country. The Fund's definition of companies in the Pacific Basin or in Europe may include companies that reflect economic and market forces applicable to other regions as well as the Pacific Basin or Europe. Nevertheless, Management believes that investment in such companies is appropriate in light of the Fund's investment objective because Management selects among such companies those which, in its view, have sufficiently strong exposure to economic and market forces in the Pacific Basin or in Europe, as the case may be, such that the value of the securities of such companies will tend to reflect Pacific Basin or European developments to a greater extent than developments in other regions. With respect to the investment by the Fund in companies that receive 50% or more of their revenues from investments in companies located in the Pacific Basin or Europe (e.g., investment companies and trusts), the Fund believes that securities of such companies will similarly reflect the development of the region in which it invests and, in addition, the purchase of such securities is currently one of the few mechanisms through which the Fund may invest in securities of South Korean, Taiwanese and Indian companies. Up to 25% of the Fund's total assets may be invested in other areas of the world to the extent significant opportunities for long-term capital appreciation outside of the Pacific Basin and Europe become available. The Fund currently invests a portion of its assets in certain countries in Latin America, including Mexico, Brazil, Argentina, Chile, Peru, Venezuela, Colombia and Ecuador. The Fund may invest in other Latin American countries as opportunities develop. As of March 31, 1995, approximately 2% of the Fund's investments were in companies in Latin America. The Fund does not invest in Common Stock of U.S. companies. No assurance can be given that the Fund's investment objective will be achieved. The investment objective of the Fund is not fundamental and may be changed without shareholder approval. If there is a change in investment objective, shareholders should consider whether the Fund remains an appropriate investment in light of their then current financial position and needs. 6 TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST The Fund invests primarily in Common Stock. In addition, up to 10% of the Fund's assets may be invested in rights, options or warrants to purchase Common Stock. In addition to investing directly in Common Stock, the Fund may invest in American Depository Receipts ("ADRs") and European Depository Receipts ("EDRs"). Generally, ADRs in registered form are U.S. dollar denominated securities designed for use in the U.S. securities markets, which represent and may be converted into the underlying foreign security. EDRs are typically issued in bearer form and are designed for use in the European securities markets. The Fund also may purchase shares of investment companies or trusts which invest principally in securities in which the Fund is authorized to invest. The purchase of investment company stock currently is one of the few mechanisms through which the Fund may invest in securities of Indian and Taiwanese companies. For a discussion of the risks of investing in investment companies, see "Risk Factors-- Investment and Repatriation Restrictions." For temporary defensive purposes, the Fund may invest without limitation in U.S. dollar denominated or foreign currency denominated cash or in high quality debt securities with remaining maturities of one year or less. Such securities may include commercial paper, certificates of deposit, bankers' acceptances and securities issued by the U.S. or a foreign government, their agencies or instrumentalities. All securities in which the Fund invests for defensive purposes (other than securities issued or guaranteed by the U.S. or a foreign government, their agencies or instrumentalities) must be rated AA or better by Standard & Poor's Corporation or be of comparable quality as determined by the Adviser. For an explanation of ratings, see Appendix A to the Statement of Additional Information. SPECIAL INVESTMENT METHODS The following discussion describes some of the investment management practices that the Fund may employ from time to time to facilitate portfolio management and mitigate risk. FOREIGN CURRENCY TRANSACTIONS The Fund engages in currency exchange transactions in connection with the purchase and sale of its investments. Currency exchange transactions are necessary to enable the Fund to purchase securities denominated in a foreign currency and to convert interest and dividend payments or sales proceeds paid in a foreign currency into U.S. dollars or into another currency. In addition, the Fund may engage in forward foreign currency exchange transactions and foreign currency futures and options transactions to protect against uncertainty with respect to future currency exchange rates. Forward currency exchange and futures and options transactions are used only for hedging and not for speculation. The Fund conducts its currency exchange transactions either on a spot (cash) basis at the rate prevailing in the currency exchange market or through entering into forward or futures contracts to purchase or sell foreign currencies. The Fund may engage in "transaction hedging" to protect against a change in the foreign currency 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 (or other foreign currency equivalent to the extent needed for purposes of purchasing securities) of a dividend or interest payment in a foreign currency. For that purpose, the Fund may purchase or sell a foreign currency on a spot (or cash) basis at the prevailing spot rate in connection with the settlement of transactions in portfolio securities denominated in that foreign currency. If conditions warrant, the Fund may also enter into contracts to purchase or sell foreign currencies at a future date ("forward contracts") and purchase or sell foreign currency futures contracts as a hedge against changes in foreign currency exchange rates between the trade and settlement dates on particular transactions and not for speculation. A foreign currency forward contract is a negotiated agreement to exchange currency at a future time at a rate or rates that may be higher or lower than the spot rate. Foreign currency futures contracts are standardized exchange-traded contracts and have margin requirements. For transaction hedging purposes, the Fund may also purchase exchange-listed and over-the-counter call and put options on foreign currency futures contracts and on foreign currencies. A put option on a 7 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. The Fund may engage in "position hedging" to protect against a decline in the value relative to the U.S. dollar of the currencies in which its portfolio securities are denominated or quoted (or an increase in the value of currency for securities which the Fund intends to buy, when it holds cash reserves and short-term investments). For position hedging purposes, the Fund may purchase or sell foreign currency futures contracts and foreign currency forward contracts, and may purchase put or call options on foreign currency futures contracts and in foreign currencies on exchanges or over-the-counter markets. In connection with position hedging, the Fund may also purchase or sell foreign currency on a spot basis. Transaction and position hedging do not eliminate fluctuations in the underlying prices of the securities which the Fund 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. In addition, hedging transactions involve costs and may result in losses. The Fund may write covered call options on foreign currencies to offset some of the costs of hedging those currencies. The Fund will 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. The Fund's ability to engage in hedging and related option transactions may be limited by tax considerations. See "Taxation--Consequences of Certain Fund Investments" in the Statement of Additional Information. For additional information regarding foreign currency transactions, see "Investment Objective, Policies and Restrictions--Foreign Currency Transactions" in the Statement of Additional Information. HEDGING The Fund may engage in various futures and put and call transactions (collectively, "Hedging Transactions"). Hedging Transactions may be used to attempt to protect against possible declines in the market value of the Fund's portfolio, to protect the Fund's unrealized gains in the value of its portfolio securities, to facilitate the sale of such securities for investment purposes or to establish a position in the securities markets as a temporary substitute for purchasing particular securities. Any or all of these techniques may be used at any time. There is no overall limitation on the percentage of the Fund's portfolio securities which may be subject to a hedge position. There is no particular strategy that requires use of one technique rather than another. Use of any Hedging Transaction is a function of market conditions. The Hedging Transactions that the Fund may use are described below. Additional Hedging Transactions may be used by the Fund in the future as they are developed to the extent deemed appropriate by the Board of Directors of the Fund. OPTIONS ON SECURITIES. In seeking to reduce fluctuations in net asset value, the Fund may write (i.e., sell), covered put and call options and purchase put and call options on the securities in which it may invest. Such options are traded on U.S. and foreign securities exchanges and in the over-the-counter markets. A put option gives the buyer of such option, upon payment of a premium, the right to deliver a specified amount of a security to the writer of the option on or before a fixed date at a predetermined price. A call option gives the purchaser of the option, upon payment of a premium, the right to call upon the writer to deliver a specified amount of a security on or before a fixed date, at a predetermined price. A call option written by the Fund is "covered" if the Fund owns the underlying security covered by the call or has an absolute and immediate right to acquire that security without additional cash consideration (or for additional cash consideration held in a segregated account by its custodian) upon conversion or exchange of other securities held in its portfolio. A call option is also covered if the Fund holds a call on the same security and in the same principal amount as the call written where the exercise price of the call held (a) is equal to or 8 less than the exercise price of the call written or (b) is greater than the exercise price of the call written if the difference is maintained by the Fund in cash and high grade liquid debt securities in a segregated account with its custodian. A put option written by the Fund is "covered" if the Fund maintains cash and high grade liquid debt securities with a value equal to the exercise price in a segregated account with its custodian, or else holds a put on the same security and in the same principal amount as the put written where the exercise price of the put held is equal to or greater than the exercise price of the put written. The Fund will not write puts if, as a result, more than 50% of the Fund's assets would be required to be segregated. The premium paid by the purchaser of an option will reflect, among other things, the relationship of the exercise price to the market price and volatility of the underlying security, the remaining term of the option, supply and demand and interest rates. In purchasing a call option, the Fund would be in a position to realize a gain if, during the option period, the price of the security increased above the call option price by an amount in excess of the cost of the option. Otherwise, it would realize a loss. In purchasing a put option, the Fund would be in a position to realize a gain if, during the option period, the price of the security declined below the put option price by an amount in excess of the cost of the option. Otherwise, it would realize a loss. If a put or call option purchased by the Fund were permitted to expire without being sold or exercised, its premium would be lost by the Fund. If a put option written by the Fund were exercised, the Fund would be obligated to purchase the underlying security at the exercise price. If a call option written by the Fund were exercised, the Fund would be obligated to sell the underlying security at the exercise price. The risk involved in writing a put option is that there could be a decrease in the market value of the underlying security caused by rising interest rates or other factors. If this occurred, the option could be exercised and the underlying security would then be sold to the Fund at a higher price than its current value. The risk involved in writing a call option is that there could be an increase in the market value of the underlying security caused by declining interest rates or other factors. If this occurred, the option could be exercised and the underlying security would then be sold by the Fund at a lower price than its current market value. These risks could be reduced by entering into a closing transaction as described in Appendix B to the Statement of Additional Information. The Fund retains the premium received from writing a put or call option whether or not the option is exercised. See Appendix B to the Statement of Additional Information for a further discussion of the use, risks and costs of option trading. The exchanges have established position limits governing the maximum number of options which may be written by an investor or group of investors acting in concert. Similarly, the Commodities Futures Trading Commission and the Chicago Board of Trade have established futures position limits for an investor or group of investors acting in concert. (A discussion of the Fund's ability to invest in futures contracts and options thereon is set forth below.) The position limits may restrict the Fund's ability to purchase or write options on a particular security or to enter into futures contracts. It is possible that the Fund and other clients of the Adviser, including closed-end and other open-end investment companies managed by the Adviser, may be considered to be a group of investors acting in concert. Thus, the number of options or futures transactions which the Fund may enter into may be affected by options or futures transactions of other investment advisory clients of the Adviser. Over-the-counter options are purchased or written by the Fund in privately negotiated transactions. Such options are illiquid and it may not be possible for the Fund 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. FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Fund may enter into contracts for the purchase or sale for future delivery of securities or contracts based on financial indices including any index of securities in which the Fund may invest ("futures contracts") and may purchase and write put and call options to buy or sell futures contracts ("options on 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 9 struck. No physical delivery of the securities underlying the index is made. Options on futures contracts to be written or purchased by the Fund will be traded on exchanges or over-the-counter. These investment techniques are used only to hedge against declines in the value of the Fund's portfolio securities or increases in the prices of securities which the Fund intends to purchase at a later date. The successful use of such instruments relies upon the Adviser's experience with respect to such instruments. Should prices move in an unexpected manner, the Fund may not achieve the anticipated benefits of futures contracts or options on futures contracts or may realize losses and would thus be in a worse position than if such strategies had not been used. In addition, the correlation between movements in the price of futures contracts or options on futures contracts and movements in the prices of the securities hedged or used for cover will not be perfect. See Appendix B to the Statement of Additional Information for further discussion of the use, risks and costs of futures contracts and options on futures contracts. Futures contracts and options on futures contracts are used only as a hedge and not for speculation. In addition, the Fund does not enter into any futures contracts or options on futures contracts if immediately thereafter the amount of initial margin deposits on all the futures contracts of the Fund and premiums paid on options on futures contracts would exceed 5% of the market value of the total assets of the Fund. This restriction will not be changed by the Fund's Board of Directors without considering the policies and concerns of the various applicable federal and state regulatory agencies. The Fund limits its activities in options and futures contracts to the extent necessary to prevent disqualification of the Fund as a regulated investment company under the Internal Revenue Code. For a discussion of the tax treatment of futures contracts and options on futures contracts, see "Taxation-- Consequences of Certain Fund Investments" in the Statement of Additional Information. WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES The Fund may purchase securities on a "when-issued" basis and may purchase or sell securities on a "forward commitment" basis. The Fund may make such purchases in order to lock-in the purchase price of a security which Management believes will appreciate in value. There is always the risk, however, that the security will decrease in value prior to its delivery. 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, which can be a month or more after the date of the transaction. At the time the Fund makes the commitment to purchase securities on a when-issued or forward commitment basis, it will record the transaction and thereafter reflect the value of such securities in determining its net asset value. At the time the Fund enters into a transaction on a when-issued or forward commitment basis, a segregated account consisting of cash or high grade liquid debt securities equal to the value of the when-issued or forward commitment securities will be established and maintained with the custodian and will be marked to the market daily. On the delivery date, the Fund will meet its obligations from securities that are then maturing or sale of the securities held in the segregated asset account and/or from then available cash flow. If the Fund disposes of the right to acquire a when-issued security prior to its acquisition or disposes of its right to deliver or receive against a forward commitment, it can incur a gain or loss due to market fluctuation. There is always a risk that the securities may not be delivered and that the Fund may incur a loss or will have lost the opportunity to invest the amount set aside for such transaction in the segregated asset account. The purchase of securities on a when-issued or forward commitment basis can result in increased volatility of the Fund's net asset value to the extent the Fund makes such purchases while remaining substantially fully invested. Settlements in the ordinary course, which may take substantially more than three business days for non-U.S. securities, are not treated by the Fund as when-issued or forward commitment transactions and, accordingly, are not subject to the foregoing limitations even though some of the risks described above may be present in such transactions. REPURCHASE AGREEMENTS The Fund may enter, without limitation, into repurchase agreements pertaining to the securities in which it may invest with securities dealers or member banks of the Federal Reserve System. A repurchase agreement arises when a buyer such as the Fund purchases a security and simultaneously agrees to resell it to the vendor at an agreed-upon future date, normally one day or a few days later. The resale price is greater than the purchase price, reflecting an agreed upon interest rate which is effective for the period of time the 10 buyer's money is invested in the security and which is related to the current market rate rather than the coupon rate on the purchased security. Such agreements permit the Fund to keep all of its assets at work while retaining "overnight" flexibility in pursuit of investments of a longer-term nature. The Fund requires continual maintenance by its custodian for its account in the Federal Reserve/Treasury Book Entry System of collateral in an amount equal to, or in excess of, the resale price. In the event a vendor defaults on its repurchase obligation, the Fund might suffer a loss to the extent that the proceeds from the sale of the collateral are less than the repurchase price. In the event of a vendor's bankruptcy, the Fund might be delayed in, or prevented from, selling the collateral for the Fund's benefit. The Fund's Board of Directors has established procedures, which are periodically reviewed by the Board, pursuant to which the Adviser will monitor the creditworthiness of the dealers and banks with which the Fund enters into repurchase agreement transactions. LENDING OF SECURITIES In order to facilitate achievement of its investment objective, the Fund may from time to time lend securities from its portfolio to brokers, dealers and financial institutions and receive collateral in the form of cash or U.S. government securities. Securities lending may be used to generate income to cushion the Fund against declines in stock prices without requiring the Fund to sell portfolio securities which it believes will appreciate in value. 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 enter into loan arrangements only with brokers, dealers or financial institutions which the Adviser has determined are creditworthy under guidelines established by the Fund's Board of Directors. In addition, collateral for such loans must be maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities (including interest on the loaned securities). The interest accruing on the loaned securities will be paid to the Fund and the Fund will have the right, on demand, to call back the loaned securities. The Fund may pay fees to arrange the loans. The Fund does not lend portfolio securities in excess of 30% of the value of its total assets (including such loans), nor does the Fund lend its portfolio securities to any officer, director, employee or affiliate of the Fund or the Adviser or Sub-Adviser. ILLIQUID SECURITIES As a fundamental investment restriction that may not be changed without the approval of a majority of the Fund's shares, the Fund will not invest more than 15% of its net assets in illiquid securities. A security is considered illiquid if it cannot be sold in the ordinary course of business within seven days at approximately the price at which it is valued. 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 and other selling expenses 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 or Sub-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 Securities and Exchange Commission adopted Rule 144A under the 1933 Act, which provides a safe harbor exemption from the registration requirements of the 1933 Act for resales of restricted securities to "qualified institutional buyers," as defined in the rule. The result of this rule has been the development of a more liquid and efficient institutional resale market for restricted securities. Thus, restricted securities are no longer necessarily illiquid. The Fund may therefore invest in Rule 144A securities and treat them as liquid when they have been determined to be liquid by the Board of Directors of the Company or by the Adviser or Sub-Adviser subject to the oversight of and pursuant to procedures adopted by the Board of Directors. See "Investment Objective, Policies and Restrictions-- 11 Illiquid Securities" in the Statement of Additional Information. Similar determinations may be made with respect to commercial paper issued in reliance on the so-called "private placement" exemption from registration under Section 4(2) of the 1933 Act. BORROWING The Fund may borrow money only from banks for temporary or emergency purposes in an amount up to 10% of the value of the Fund's total assets, provided that reverse repurchase agreements entered into by the Fund are not subject to such limitation. Reverse repurchase agreements are subject, however, to the asset coverage requirements of the Investment Company Act of 1940 (the "1940 Act") and to certain segregated account requirements. The Fund has not entered into reverse repurchase agreements in the past and has no current intention of entering into such agreements in the future. See "Investment Objective, Policies and Restrictions--Reverse Repurchase Agreements" in the Statement of Additional Information. Interest paid by the Fund on borrowed funds will decrease the net earnings of the Fund. The Fund will not purchase portfolio securities while outstanding borrowings (other than reverse repurchase agreements) exceed 5% of the value of the Fund's total assets. The Fund may mortgage, pledge or hypothecate its assets only to secure such temporary or emergency borrowing. The policies set forth in this paragraph are fundamental and may not be changed without the approval of a majority of the Fund's shares. PORTFOLIO TURNOVER The Fund intends to acquire and hold securities for long-term capital appreciation and normally does not intend to trade in securities for short-term gains; however, securities may be purchased and sold at such times as Management deems to be in the best interests of the Fund and its shareholders. The method of calculating portfolio turnover rate is set forth in the Statement of Additional Information under "Investment Objective, Policies and Restrictions--Portfolio Turnover." Portfolio turnover rates for the Fund are set forth in "Financial Highlights." INVESTMENT RESTRICTIONS The Fund has adopted certain fundamental and nonfundamental investment restrictions in addition to those set forth above. Fundamental investment restrictions which may not be changed without shareholder approval include the following: (1) With respect to 75% of its total assets, the Fund will not invest more than 5% of the value of its total assets in any one issuer, or own more than 10% of the outstanding voting securities of any one issuer. (These restrictions do not apply to securities issued or guaranteed by the U.S. government or any agency or instrumentality thereof. For purposes of these restrictions, the government of any country (other than the U.S.), including its governmental subdivisions, is each considered a single issuer.) (2) The Fund will not invest 25% or more of the value of its total assets in the same industry. (This restriction does not apply to securities issued or guaranteed by the U.S. government or its agencies or instrumentalities.) In addition, as nonfundamental investment restrictions which may be changed at any time without shareholder approval, the Fund will not invest more than 5% of its net assets in warrants or more than 5% of its total assets in the securities of issuers which, with their predecessors, have a record of less than three years' continuous operation. A list of the Fund's fundamental and nonfundamental investment restrictions is set forth in the Statement of Additional Information. RISK FACTORS Investment in foreign securities requires consideration of factors not typically associated with investment in securities of U.S. issuers. Those include the following: CURRENCY FLUCTUATIONS. The value of the Fund's portfolio securities computed in U.S. dollars will vary with increases and decreases in the exchange rate between the currencies in which the Fund has invested and the U.S. dollar. A decline in the value of any particular currency against the U.S. dollar will cause a decline in the U.S. dollar value of the Fund's holdings of securities denominated in such currency and, therefore, will cause an overall decline in the Fund's net asset value and net investment income and capital gains, if any, to be distributed in U.S. dollars to shareholders by the Fund. 12 The rate of exchange between the U.S. dollar and other currencies is determined by several factors, including the supply and demand for particular currencies, central bank efforts to support particular currencies, the movement of interest rates, the price of oil, the pace of activity in the industrial countries, including the United States, and other economic and financial conditions affecting the world economy. POLITICAL AND ECONOMIC RISKS. Investing in securities of non-U.S. companies may entail additional risks. Nationalization, expropriation or confiscatory taxation, currency blockage, political changes, government regulation, social instability or diplomatic developments could affect adversely the economy of a country or the Fund's investment in such country. The Fund may also be adversely affected by exchange control regulations. Certain additional risks are involved in investing in the securities of Eastern European issuers. Although the Fund has the ability to invest in such securities, because of current political instability and military conflict in Eastern Europe, the Fund does not currently hold any such securities and does not intend to purchase any such securities until a more favorable political climate exists. Upon the accession to power of Communist regimes approximately 50 years ago, the governments of a number of Eastern European countries expropriated a large amount of property. The claims of many property owners against those governments were never finally settled. There can be no assurance that any Fund investments in Eastern Europe would not also be expropriated, nationalized or otherwise confiscated. In the event of such expropriation, nationalization or other confiscation, the Fund could lose its entire investment in the country involved. In addition, any change in the leadership or policies of Eastern European countries, or any change in the leadership or policies of the Commonwealth of Independent States (formerly, the Union of Soviet Socialist Republics) that exercises a significant influence over those countries, may halt the expansion of or reverse the liberalization of foreign investment policies now occurring and adversely affect existing investment opportunities. Most Eastern European countries have had a centrally planned, socialist economy since shortly after World War II. The governments of a number of Eastern European countries currently are implementing reforms directed at political and economic liberalization, including efforts to decentralize the economic decision making process and move towards a market economy. There can be no assurance that these reforms will continue or, if continued, will achieve their goals. In addition, favorable economic developments in Eastern Europe may not continue or may be reversed by unanticipated political events that could adversely affect the Fund if it were invested in the securities of Eastern European issuers. Investing in the securities of Eastern European issuers involves certain considerations not usually associated with investing in securities of issuers in more developed capital markets such as the United States, Japan or Western Europe, including (a) political and economic considerations, such as greater risks of expropriation, confiscatory taxation and nationalization and less social, political and economic stability; (b) the small current size of the markets for such securities and the currently low or nonexistent volume of trading, resulting in lack of liquidity and in price volatility; (c) certain national policies which may restrict the Fund's investment opportunities, including, without limitation, restrictions on investing in issuers or industries deemed sensitive to relevant national interests; and (d) the absence of developed legal structures governing private or foreign investments and private property. CORPORATE DISCLOSURE STANDARDS AND GOVERNMENTAL REGULATION. Non-U.S. companies are not generally subject to uniform accounting, auditing and financial reporting standards or to other regulatory requirements comparable to those applicable to U.S. companies. Thus, there may be less available information concerning non-U.S. issuers of securities held by the Fund than is available concerning U.S. companies. Applicable accounting and financial reporting standards in Eastern Europe may be substantially different from U.S. accounting standards and, in certain Eastern European countries, no reporting standards currently exist. Consequently, substantially less information on Eastern European companies is available to investors and the information that is available may not be conceptually comparable to, or prepared on the same basis as that available in more developed capital markets, which may make it difficult to assess the financial status of particular companies. However, in order to become attractive to Western 13 international investors such as the Fund, some Eastern European companies may submit to reviews of their financial condition conducted in accordance with accounting standards employed in Western European countries. Management believes that such information, together with the application of other analytical techniques, can provide an adequate basis on which to assess the financial viability of such companies. MARKET CHARACTERISTICS. Securities of many non-U.S. companies may be less liquid and their prices more volatile than securities of comparable U.S. companies. In addition, securities of companies traded in many countries outside the U.S., particularly those of emerging countries in the Pacific Basin, may be subject to further risks due to the inexperience of local brokers and financial institutions in less developed markets, the possibility of permanent or temporary termination of trading, and greater spreads between bid and asked prices for securities. Non-U.S. stock exchanges and brokers are subject to less governmental supervision and regulation than in the U.S. and non-U.S. stock exchange transactions are usually subject to fixed commissions, which are generally higher than negotiated commissions on U.S. transactions. In addition, there may in certain instances be delays in the settlement of non-U.S. stock exchange transactions. INVESTMENT AND REPATRIATION RESTRICTIONS. Several of the countries in the Pacific Basin and certain European countries restrict, to varying degrees, foreign investments in their securities markets. Government and private restrictions take a variety of forms, including (a) limitations on the amount of funds that may be introduced into or repatriated from the country (including limitations on repatriation of investment income and capital gains); (b) prohibitions or substantial restrictions on foreign investment in certain industries or market sectors, such as defense, energy and transportation; (c) restrictions (whether contained in the charter of an individual company or mandated by the government) on the percentage of securities of a single issuer which may be owned by a foreign investor; (d) limitations on the types of securities which a foreign investor may purchase; and (e) restrictions on a foreign investor's right to invest in companies whose securities are not publicly traded. In some circumstances, these restrictions may limit or preclude investment in certain countries or may increase the cost of investing in securities of particular companies. The governments of certain Eastern European countries may require that a governmental or quasi-governmental authority act as custodian of the Fund's assets invested in such countries. These authorities may not be qualified to act as foreign custodians under the 1940 Act and, as a result, the Fund will not be able to invest in these countries in the absence of exemptive relief from the Securities and Exchange Commission. In addition, the risk of loss through government confiscation may be increased in such countries. The Fund may make direct investments in Taiwan if it adheres to certain government restrictions or may invest in Taiwanese stocks quoted elsewhere. However, the Fund currently intends to invest in Taiwan through the purchase of shares of investment funds organized under the laws of Taiwan and through Euromarket Instruments. The Fund currently may not make direct investments in India. However, the laws regarding investments in India by foreigners have recently changed and the Fund will most likely apply to the authorities in India for permission to invest directly in that country. The return on the Fund's investments in investment companies will be reduced by the operating expenses, including investment advisory and administrative fees, of such companies. The Fund's investment in an investment company may require the payment of a premium above the net asset value of the investment company's shares, and the market price of the investment company thereafter may decline without any change in the value of the investment company's assets. The Fund, however, will not invest in any investment company or trust unless it is believed that the potential benefits of such investment are sufficient to warrant the payment of any such premium. Under the 1940 Act, the Fund may not invest more than 10% of its assets in investment companies or more than 5% of its total assets in the securities of any one investment company, nor may it own more than 3% of the outstanding voting securities of any such company. FOREIGN TAXES. The Fund's interest and dividend income from foreign issuers may be subject to non-U.S. withholding taxes. The Fund also may be subject to taxes on trading profits in some countries. In addition, many of the countries in the Pacific Basin have a transfer or stamp duties tax on certain securities transactions. The imposition of these taxes will increase the cost to the Fund of investing in any country imposing such taxes. For U.S. tax purposes, U.S. shareholders may be entitled to a credit or deduction to the extent of any foreign income taxes paid by the Fund. See "Tax Status." 14 MANAGEMENT BOARD OF DIRECTORS The Board of Directors of Piper Global has the primary responsibility for overseeing the overall management of Piper Global and electing its officers. INVESTMENT ADVISER Piper Capital Management Incorporated (the "Adviser") has been retained under an Investment Advisory and Management Agreement (the "Advisory Agreement") with Piper Global 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 Fund, the Adviser 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 March 31, 1995, the Adviser rendered investment advice regarding approximately $10.2 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 supervises, directs and monitors the day to day operations of the Fund in accordance with the Fund's investment objective, policies and restrictions, as well as the implementation of investment programs formulated by the Sub-Adviser. The Adviser is responsible for investing the portion of the Fund's portfolio maintained in cash and short-term high quality debt securities. The Adviser reviews investment and allocation determinations of the Sub-Adviser. In addition, the Sub-Adviser must obtain the Adviser's approval prior to (a) any investment of the assets of the Fund in any country outside of the Pacific Basin or Europe, and (b) any investment by the Sub-Adviser which would result in reallocation of in excess of 5% of the Fund's total assets. The Adviser determines the broker-dealers which are eligible to execute transactions on behalf of the Fund. The Adviser furnishes at its own expense all necessary administrative services, office space, equipment and clerical personnel for providing the foregoing services. In addition, the Adviser pays the salaries and fees of all officers and directors of the Fund who are affiliated with the Adviser. The Adviser is liable to the Fund for losses resulting from willful misconduct, bad faith or gross negligence in the performance of its duties or from its reckless disregard of its duties under the Advisory Agreement. Under the Advisory Agreement, the Fund pays the Adviser a monthly management fee. The fee is paid at an annual rate of 1.00% on average daily net assets up to $100 million, .875% on net assets over $100 million and up to $200 million, and .75% on net assets over $200 million (the "Basic Fee"), and is subject to adjustment as described below. The adjustment is based upon the investment performance of the Fund in relation to the investment record of the Morgan Stanley Capital International EAFE-SM- Index (the "EAFE Index"). The Basic Fee is higher than fees paid by most other investment companies. Adjustments to the Basic Fee are made by comparison of the Fund's investment performance for the applicable period with the investment record of the EAFE Index. The Basic Fee for each month may be increased or decreased by up to .25% (on an annualized basis) of the Fund's average daily net assets depending upon the extent (as set forth below) by which the Fund's performance varies from the EAFE Index over the applicable performance period. For purposes of calculation of the performance adjustment, average daily net assets are equal to the Fund's average daily net assets during the month for which the calculation is being made. 15 The following table illustrates the full range of permitted increases or decreases to the Basic Fee on an annualized basis:
ADJUSTMENT TO BASIC FEE PERFORMANCE OF FUND RELATIVE TO EAFE INDEX (ANNUALIZED) - - - - - - -------------------------------------------------------------------------------- ------------- +5 Percentage Points or more................................................... +.25 +4............................................................................. +.20 +3............................................................................. +.15 +2............................................................................. +.10 +1............................................................................. +.05 0............................................................................. 0 - - - - - - -1.............................................................................. -.05 - - - - - - -2.............................................................................. -.10 - - - - - - -3.............................................................................. -.15 - - - - - - -4.............................................................................. -.20 - - - - - - -5 Percentage Points or more.................................................... -.25
The Basic Fee, plus or minus the performance adjustments calculated as described herein, is paid monthly. The applicable performance period is a rolling 12-month period consisting of the most recent calendar month plus the immediately preceding 11 months. In calculating the investment performance of the Fund as compared with the investment record of the EAFE Index, dividends and other distributions of the Fund and dividends and other distributions made with respect to component securities of the EAFE Index during the performance period are treated as having been reinvested. The investment performance of the Fund is calculated based upon the total return of the Fund for the applicable period, which consists of the total net asset value of the Fund at the end of the applicable period, including reinvestment of dividends and distributions, less the net asset value of the Fund at the commencement of the applicable period divided by the net asset value of the Fund at the commencement of the applicable period. Fractions of a percentage point are rounded to the nearest whole point (to the higher whole point if exactly one-half). The EAFE Index is a market capitalization weighted index containing (as of March 31, 1995) 1,113 companies representing approximately 60% of the market capitalization of each of the following 20 countries: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, The Netherlands, New Zealand, Norway, Singapore, Malaysia, Spain, Sweden, Switzerland and the United Kingdom. The EAFE Index is an unmanaged index of common stocks, whereas the Fund, under normal circumstances, may invest up to 35% of its assets in securities other than common stock. Additionally, the largest percentages of the EAFE Index are currently represented by the Japanese and United Kingdom markets, which currently represent approximately 44% and 16%, respectively, of the EAFE Index. Consequently, the extent to which the EAFE Index increases or decreases in any one year will be affected significantly by the performance of these markets. The Fund currently has approximately 33% and 9%, respectively, of its total assets invested in Japan and the United Kingdom. Because the Fund's weighting in these two markets is not as significant as that of the EAFE Index, the performance of the other markets in which the Fund invests, as compared to that of the Japanese and United Kingdom markets, will affect to a significant degree whether the Fund outperforms or underperforms the EAFE Index. SUB-ADVISER Edinburgh Fund Managers plc, Donaldson House, 97 Haymarket Terrace, Edinburgh, Scotland EH12, 5HD, is the Sub-Adviser for the Fund under an agreement with the Adviser (the "Sub-Advisory Agreement"). The Sub-Adviser is responsible for the investment and reinvestment of the Fund's assets in non-U.S. securities and the placement of brokerage transactions in connection therewith. For its services, the Sub-Adviser is paid a fee by the Adviser equal to 65% of the Basic Fee plus or minus 90% of the performance fee adjustment described above. Such fee is paid over the same time periods and calculated in the same manner as the investment advisory fee described above under "--Investment Adviser." 16 The Sub-Adviser is a public limited company that was incorporated in 1969. It is a majority-owned subsidiary of The British Investment Trust PLC, a Scottish closed-end investment company founded in 1889, for which the Sub-Adviser serves as investment manager and adviser. The Sub-Adviser, an investment adviser registered under the Advisers Act, currently furnishes investment management services, directly or through subsidiaries, to ten closed-end investment companies, twenty-six open-end investment companies (which includes four open-end investment companies serving United Kingdom tax-exempt institutional clients), twenty-one pension plans, four charitable organizations and four other individual/corporate clients. As of March 31, 1995, the Sub-Adviser managed approximately $5.7 billion of assets. Approximately 20% of such assets were invested in the Pacific Basin and 62% of such assets were invested in Europe. PORTFOLIO MANAGEMENT The day-to-day management of the Fund is primarily the responsibility of the Sub-Adviser. The following individuals employed by the Sub-Adviser co-manage the Fund: Iain A. Watt, Michael W. Balfour, Jamie Sandison, Christian Albuisson, David Currie and Gavin Grant. Mr. Balfour, who is a director of the Fund, has been director of overseas investments for the Sub-Adviser since 1992, and was previously the assistant director and head of the Pacific Department of the Sub-Adviser from 1988 to 1992. Mr. Watt, who is a director of the Fund, has been the managing director of the Sub-Adviser since 1991, prior to which he had been a director of the Sub-Adviser since 1986. Mr. Sandison has been a portfolio manager in the Pacific Department since January 1994 and was previously an investment manager with Ivory and Sime plc from 1990 to 1994. Mr. Albuisson has been a portfolio manager in the European Department of the Sub-Adviser since February 1990 and was previously an investment manager with British Linen Fund Managers from June 1988 to February 1990. Mr. Currie was appointed assistant director of the Sub-Adviser in 1993 and head of the Japanese Department in 1992, prior to which he had been a portfolio manager in that department since 1991 and a fund manager in the UK Department from October 1988 to January 1991. Mr. Grant was appointed assistant director of the Sub-Adviser in 1995 and head of the Latin American Department in 1994, prior to which he had been a portfolio manager in that department since 1991. Messrs. Watt, Balfour, Albuisson and Currie have been co-managers of the Fund since its inception. Messrs. Sandison and Grant have been co-managers of the Fund since 1994 and 1992, respectively. TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND CUSTODIAN First Trust National Association, 180 East Fifth Street, St. Paul, Minnesota 55101, serves as Custodian for the Fund's portfolio securities and cash. Investors Fiduciary Trust Company ("IFTC"), 127 West Tenth Street, Kansas City, Missouri 64105, serves as Transfer Agent and Dividend Disbursing Agent for the Fund. Rules adopted under the 1940 Act permit the Fund to maintain its securities and cash in the custody of certain eligible banks and securities depositories. The Fund's portfolio of Pacific Basin and European issuers is held by its sub-custodians who are approved by the directors in accordance with such rules. Such determination is made pursuant to such rules following a consideration of a number of factors including, but not limited to, the reliability and financial stability of the institution; the ability of the institution to perform custodial services for the Fund; the reputation of the institution in its national market; the political and economic stability of the country in which the institution is located; and the risks of potential nationalization or expropriation of Fund assets. Piper Global has entered into a Shareholder Account Servicing Agreement with the Distributor. Under this agreement, the Distributor provides certain transfer agent and dividend disbursing agent services for shareholder accounts held at the Distributor. 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 and Sub-Adviser select 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 Fund 17 shares may also be considered a factor if the Adviser or Sub-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 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. Piper Global has adopted a Distribution Plan (the "Plan") as required by Rule 12b-1 under the 1940 Act. Under the Plan, the Distributor is entitled to reimbursement each month for its actual expenses incurred in connection with servicing of the Fund's shareholder accounts and in connection with distribution related services provided with respect to the Fund, in an amount not to exceed, on an annualized basis, .50% of the average daily net assets of the Fund. The Distributor is reimbursed under the Plan for its expenses incurred in connection with the sale of Fund shares ("Distribution Expenses") and for its costs in connection with the ongoing servicing and/or maintenance of shareholder accounts ("Shareholder Servicing Costs"). Of the .50% of average daily net assets reimbursable under the Plan, .25% may be reimbursed to cover Shareholder Servicing Costs and .25% may be reimbursed to cover Distribution Expenses. The Distributor has voluntarily agreed to limit reimbursements under the Plan to .32% of the Fund's average daily net assets. This limitation may be revised or terminated at any time after fiscal 1996 year end. The Adviser and the Distributor, out of their own assets, may pay for certain expenses incurred in connection with the distribution of shares of the Fund. In particular, the Adviser may make payments out of its own assets to Piper Jaffray investment executives and other broker dealers in connection with their sales of shares of the Fund. See "How to Purchase Shares--Purchase Price." Further information regarding the Plan is contained in the Statement of Additional Information. The Distributor's Shareholder Servicing Costs include 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 .30% 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 .30% of the average daily net assets of the Fund attributable to shares sold by the investment executive. Of such payments, an amount equal to .25% of average daily net assets of the Fund is considered a Shareholder Servicing Cost under the Plan and the remainder is considered ongoing sales compensation reimbursable as a Distribution Expense under the Plan. 18 - - - - - - -------------------------------------------------------------------------------- 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 AS A PERCENTAGE OF OF AMOUNT OF TRANSACTION AT OFFERING PRICE OFFERING PRICE NET ASSET VALUE - - - - - - --------------------------------------------------------- ----------------- ----------------- Less than $100,000....................................... 4.00% 4.17% $100,000 but less than $250,000.......................... 3.25% 3.36% $250,000 but less than $500,000.......................... 2.50% 2.56% $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. These broker-dealers may, by virtue of such reallowance, be deemed to be "underwriters" under the 1933 Act. FUND SHARES ARE BEING OFFERED TO THE PUBLIC WITHOUT AN INITIAL OR DEFERRED SALES CHARGE THROUGH JUNE 30, 1995. The Distributor will pay its investment executives and other broker-dealers selling Fund shares a fee equal to 2.00% of the net asset value of any shares sold during this period. These payments will be an expense of the Distributor; they will not be reimbursed by the Fund under its Rule 12b-1 Plan. 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, provide promotional incentives to investment executives of the Distributor and to broker-dealers who have sales agreements with the Distributor in connection with sales of shares of the Fund and other mutual funds for which the Adviser acts as investment adviser. In some instances, these incentives may be made available only to certain investment executives or broker-dealers who have sold or may sell significant amounts of such shares. The incentives may include payment for travel expenses, including lodging at luxury resorts, incurred in connection with sales seminars. PURCHASES OF $500,000 OR MORE If you make a purchase of $500,000 or more (including purchases made under a Letter of Intent), a 1% contingent deferred sales charge will be assessed in the event you redeem shares within 24 months following 19 - - - - - - -------------------------------------------------------------------------------- SHAREHOLDER GUIDE TO INVESTING 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 currently pays its investment executives and other broker-dealers fees in connection with these purchases as follows:
FEE AS A PERCENTAGE OF OFFERING AMOUNT OF TRANSACTION PRICE - - - - - - ----------------------------------------------------------------------------- --------------- First $1,000,000............................................................. 1.00% Next $2,000,000.............................................................. 0.75% Next $2,000,000.............................................................. 0.50% Next $5,000,000.............................................................. 0.25% Above $10,000,000............................................................ 0.15%
Piper Jaffray investment executives and other broker-dealers generally will not receive a fee in connection with purchases on which the contingent deferred sales charge is waived. However, the Distributor, in its discretion, may pay a fee out of its own assets to its investment executives and other broker-dealers in connection with purchases by employee benefit plans on which no sales charge is imposed. Please see the Special Purchase Plans section of "Reducing Your Sales Charge." MINIMUM INVESTMENTS A minimum initial investment of $250 is required.There is no minimum for subsequent investments. The Distributor, in its discretion, may waive the minimum. REDUCING YOUR SALES CHARGE You may qualify for a reduced sales charge through one or more of several plans. You must notify your Piper Jaffray investment executive or broker-dealer at the time of purchase to take advantage of these plans. AGGREGATION Front-end or initial sales charges may be reduced or eliminated by aggregating your purchase with purchases of certain related personal accounts. In addition, purchases made by members of certain organized groups will be aggregated for purposes of determining sales charges. Sales charges are calculated by adding the dollar amount of your current purchase to the higher of the cost or current value of shares of any Piper fund sold with a sales charge that are currently held by you and your related accounts or by other members of your group. QUALIFIED GROUPS. You may group purchases in the following personal accounts together: - Your individual account. - Your spouse's account. - Your children's accounts (if they are under the age of 21). - Your employee benefit plan accounts if they are exclusively for your benefit. This includes accounts such as IRAs, individual 403(b) plans or single-participant Keogh-type plans. - A single trust estate or single fiduciary account if you are the trustee or fiduciary. Additionally, purchases made by members of any organized group meeting the requirements listed below may be aggregated for purposes of determining sales charges: - The group has been in existence for more than six months; - It is not organized for the purpose of buying redeemable securities of a registered investment company; and 20 - - - - - - -------------------------------------------------------------------------------- SHAREHOLDER GUIDE TO INVESTING - Purchases must be made through a central administration, or through a single dealer, or by other means that result in economy of sales effort or expense. An organized group does not include a group of individuals whose sole organizational connection is participation as credit card holders of a company, policyholders of an insurance company, customers of either a bank or broker-dealer or clients of an investment adviser. RIGHT OF ACCUMULATION Sales charges for purchases of Fund shares into Piper Jaffray accounts will be automatically calculated taking into account the dollar amount of any new purchases along with the higher of current value or cost of shares previously purchased in the Piper funds that were sold with a sales charge. For other broker-dealer accounts, you should notify your investment executive at the time of purchase of additional Piper fund shares you may own. LETTER OF INTENT Your sales charge may be reduced by signing a non-binding Letter of Intent. This Letter of Intent will state your intention to invest $100,000 or more in any of the Piper funds sold with a sales charge over a 13-month period, beginning not earlier than 90 days prior to the date you sign the Letter. You will pay the lower sales charge applicable to the total amount you plan to invest over the 13-month period. Part of your shares will be held in escrow to cover additional sales charges that may be due if you do not invest the planned amount. Please see "Purchase of Shares" in the Statement of Additional Information for more details. You can contact your Piper Jaffray investment executive or other broker-dealer for an application. SPECIAL PURCHASE PLANS For more information on any of the following special purchase plans, contact your Piper Jaffray investment executive or other broker-dealer. PURCHASE BY PIPER JAFFRAY COMPANIES INC., ITS SUBSIDIARIES AND THE SUB-ADVISER Piper Jaffray Companies Inc., its subsidiaries and the Sub-Adviser 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 also may buy Fund shares without paying a sales charge: - Clients of the Adviser buying 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. 21 - - - - - - -------------------------------------------------------------------------------- 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. 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") (a "401(k) Plan"). In the event a 401(k) Plan of an employer has purchased shares in the Fund or in any other mutual fund managed by the Adviser (other than a money market 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. 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 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 Fund's transfer agent, IFTC. This request should contain: the dollar amount or number of shares to be redeemed, your Fund account number and either a social security or tax identification number (as applicable). You should sign your request in exactly the same way the account is registered. If there is more than one owner of the shares, all owners must sign. A signature guarantee is required for redemptions over $25,000. Please contact IFTC or refer to "Redemption of Shares" in the Statement of Additional Information for more details. CONTINGENT DEFERRED SALES CHARGE If you invest $500,000 or more and, as a result, pay no front-end sales charge, you may incur a contingent deferred sales charge if you redeem within 24 months. This charge will be equal to 1% 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. 22 - - - - - - -------------------------------------------------------------------------------- SHAREHOLDER GUIDE TO INVESTING SPECIAL PURCHASE PLANS. If you purchased your shares through one of the plans described above under "Special Purchase Plans," the contingent deferred sales charge will be waived. In addition, the contingent deferred sales charge will be waived in the event of: - The death or disability (as defined in Section 72(m)(7) of the Code) of the shareholder. (This waiver will be applied to shares held at the time of death or the initial determination of disability of either an individual shareholder or one who owns the shares as a joint tenant with the right of survivorship or as a tenant in common.) - A lump sum distribution from an employee benefit plan qualified under Section 401(a) of the Code, an individual retirement account under Section 408(a) of the Code or a simplified employee pension plan under Section 408(k) of the Code. - Systematic withdrawals from any such plan or account if the shareholder is at least 59 1/2 years old. - A tax-free return of the excess contribution to an individual retirement account under Section 408(a) of the Code. - Involuntary redemptions effected pursuant to the right to liquidate shareholder accounts having an aggregate net asset value of less than $200. EXCHANGES. If you exchange your shares, no contingent deferred sales charge will be imposed. However, the charge will apply if you subsequently redeem the new shares within 24 months of the original purchase. REINSTATEMENT PRIVILEGE. If you elect to use the Reinstatement Privilege (please see "Shareholder Services" below), any contingent deferred sales charge you paid will be credited to your account (proportional to the amount reinvested). Please see "Redemption of Shares" in the Statement of Additional Information for more details. PAYMENT OF REDEMPTION PROCEEDS After your shares have been redeemed, the cash proceeds will normally be sent to you or your broker-dealer within five business days (three business days after June 3, 1995). 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 check has 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 if 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 23 - - - - - - -------------------------------------------------------------------------------- SHAREHOLDER GUIDE TO INVESTING more automatically transferred each month from any of the money market fund series of Piper Funds. You should contact your Piper Jaffray investment executive or IFTC to obtain authorization forms or for additional information. REINSTATEMENT PRIVILEGE If you have redeemed shares of the Fund, you may be eligible to reinvest in shares of any fund managed by the Adviser without payment of an additional sales charge. The reinvestment request must be made within 30 days of the redemption. This privilege is subject to the eligibility of share purchases in your state as well as the minimum investment requirements and any other applicable terms in the prospectus of the fund being acquired. EXCHANGE PRIVILEGE If your investment goals change, you may prefer a fund with a different objective. If you are considering an exchange into another mutual fund managed by the Adviser, you should carefully read the appropriate prospectus for additional information about that fund. A prospectus may be obtained through your Piper Jaffray investment executive, your broker-dealer or the Distributor. To exchange your shares, please contact your Piper Jaffray investment executive, your broker-dealer or IFTC. You may exchange your shares for shares of any other mutual fund managed by the Adviser that is open to new investors. All exchanges are subject to the eligibility of share purchases in your state as well as the minimum investment requirements and any other applicable terms in the prospectus of the fund being acquired. Exchanges are made on the basis of 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 Fund reserves the right to change or discontinue the exchange privilege, or any aspect of the privilege, upon 60 days' written notice. TELEPHONE TRANSACTION PRIVILEGES PIPER JAFFRAY INC. ACCOUNTS. If you hold your shares in a Piper Jaffray account, you may telephone your investment executive to execute any transaction or to apply for many shareholder services. In some cases, you may be required to complete a written application. OTHER BROKER-DEALER ACCOUNTS. If you hold your shares in an account with your broker-dealer or at IFTC, you may authorize telephone privileges by completing the Account Application and Services Form. Please contact your broker-dealer or IFTC (800-874-6025) for an application or for more details. The Fund will employ reasonable procedures to confirm that a 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. If the Fund follows such procedures, it will not be liable for following instructions communicated by telephone that it reasonably believes to be genuine. If the Fund does not employ such procedures, it may be liable for any losses due to unauthorized or fraudulent telephone instructions. 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. 24 - - - - - - -------------------------------------------------------------------------------- SHAREHOLDER GUIDE TO INVESTING SYSTEMATIC WITHDRAWAL PLAN If your account has a value of $5,000 or more, you may establish a Systematic Withdrawal Plan. This plan will allow you to receive regular periodic payments by redeeming as many shares from your account as necessary. As with other redemptions, a redemption to make a withdrawal is a sale for federal income tax purposes. Payments made under a Systematic Withdrawal Plan cannot be considered as actual yield or income since part of the payments may be a return of capital. A request to establish a Systematic Withdrawal Plan must be submitted in writing to your Piper Jaffray investment executive or other broker-dealer. There are no service charges for maintenance; the minimum amount that you may withdraw each period is $100. You will be required to have any income dividends and any capital gains distributions reinvested. You may choose to have withdrawals made monthly, quarterly or semi-annually. Please contact your Piper Jaffray investment executive, other broker-dealer or IFTC for more information. You should be aware that additional investments in an account that has an active Systematic Withdrawal Plan may be inadvisable due to sales charges and tax liabilities. As a result, you will not be allowed to make additional investments of less than $5,000 or three times the annual withdrawals while you have the plan in effect. Please refer to "Redemption of Shares" in the Statement of Additional Information for additional details. ACCOUNT PROTECTION If you purchased your shares of the Fund through a Piper Jaffray investment executive, you may choose from several account options. Your investments in the Fund held in a Piper Jaffray account (except for non-"PAT" accounts) would be protected up to $25 million. Investments held in non-"PAT" Piper Jaffray accounts are protected up to $2.5 million. In each case, the Securities Investor Protection Corporation ("SPIC") 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. The Fund is required to supply annual and semi-annual reports that list securities held by the Fund and include the current financial statements of the Fund. HOUSEHOLDING. If you have multiple accounts with Piper Jaffray, you may receive some of the above information in combined mailings. This will not only help to reduce Fund expenses, it will help the environment by saving paper. Please contact your Piper Jaffray investment executive for more information. DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income and distributions of net realized capital gains, if any, will be payable to Fund shareholders on an annual basis. BUYING A DIVIDEND. On the record date for a distribution, the Fund's share price is reduced by the amount of the distribution. If you buy shares just before the record date ("buying a dividend"), you will pay the full price for the shares and then receive a portion of the price back as a taxable distribution. DISTRIBUTION 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 25 - - - - - - -------------------------------------------------------------------------------- SHAREHOLDER GUIDE TO INVESTING 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. 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. In valuing the Fund's assets, all securities for which market quotations are readily available are valued under normal circumstances at the last sales price prior to the time of determination, or if no sale is reported at that time, the mean between the closing asked price and the closing bid price or, if no bid and asked prices are available, at the most recent available sales price. With respect to a security which is listed or traded on more than one exchange, the Fund normally looks to the exchange on which trading is more extensive. In instances where market quotations are not readily available and in certain other circumstances, fair value is determined according to methods selected in good faith by the Board of Directors. Short-term investments having a maturity of 60 days or less are valued at cost with any premium amortized or discount credited over the period remaining until maturity. Options will be valued at market value or fair value, as determined in good faith by or under the direction of the Board of Directors, if no market exists. Futures contracts will be valued at the settlement price established each day by the board of trade or exchange on which they are traded. Securities and assets for which market quotations are not readily available are valued at fair value as determined in good faith by or under the direction of the Board of Directors. Any assets or liabilities initially expressed in terms of foreign currencies are translated into U.S. dollars by the pricing service retained by the Fund or, to the extent that an exchange rate is not available through such pricing service, at the mean of current bid and asked prices of such currencies against the U.S. dollar last quoted by a major bank that is a regular participant in the foreign exchange market. The Fund has been advised that the pricing service translates foreign currencies into U.S. dollars on the basis of the official exchange rate or by taking into account the quotes provided by a number of major banks that are regular participants in the foreign exchange market. Trading in securities on European and Pacific Basin securities exchanges and in over-the-counter markets is normally completed well before the close of business on each business day of the Fund. In addition, European or Pacific Basin securities trading generally or in a particular country or countries may not take place on all business days in New York. Furthermore, trading takes place in various foreign markets on days which are not business days of the Fund and on which the Fund's net asset value is not calculated. Therefore, the net asset value of the Fund might be significantly affected on days when the investor has no access to the Fund. The Fund calculates net asset value per share as of the close of the regular trading session on the Exchange. Such calculation does not take place contemporaneously with the determination of the prices of the majority of the portfolio securities used in such calculation. If events materially affecting the value of such securities occur between the time when their price is determined and the time when the Fund's net asset value is calculated, such securities will be valued at fair value as determined in good faith by or under the direction of the Board of Directors. TAX STATUS The Fund qualified as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended, during its last taxable year and intends to qualify as a regulated investment company during the 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. 26 - - - - - - -------------------------------------------------------------------------------- SHAREHOLDER GUIDE TO INVESTING Distributions by the Fund are generally taxable to the shareholders, whether received in cash or additional shares of the Fund (or shares of another mutual fund managed by the Adviser). Distributions of net capital gains (designated as "capital gain dividends") are taxable to shareholders as long-term capital gains, regardless of the length of time the shareholder has held shares of the Fund. 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 Fund's investments may be subject to taxes in foreign countries which would reduce the total return on such investments. In addition, if the Fund is deemed to be a resident of the United Kingdom for United Kingdom tax purposes or if the Fund is treated as being engaged in a trading activity through an agent in the United Kingdom, there is a risk that the United Kingdom will attempt to tax all or a portion of the Fund's gains or income. In light of the structure of the Fund and the terms and conditions of the Advisory and Sub-Advisory Agreements, the Adviser believes that any such risk is minimal. If the Fund has more than 50% of its assets invested in the stock or securities of foreign corporations at the end of the Fund's taxable year, the Fund may make an election to allow shareholders either to claim U.S. foreign tax credits with respect to such foreign taxes paid or to deduct such amounts as an itemized deduction on their tax return. In the event such an election is made, shareholders would have to increase their taxable income by the amount of such taxes and the Fund would not be able to deduct such taxes in computing its taxable income. 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 the Fund's "average annual total return" and "cumulative total return." All such 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. Average annual 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. In addition to advertising total return, comparative performance information may be used from time to time in advertising the Fund's shares including data from Lipper Analytical Services, Inc. and other entities or organizations which track the performance of investment companies. Performance of the Fund may be compared to the EAFE Index and to the performance of International Funds as reported by Lipper. For additional information regarding the calculation of average annual total return and cumulative total return, see "Calculation of Performance Data" in the Statement of Additional Information. GENERAL INFORMATION Piper Global is authorized to issue a total of 100 billion shares of common stock, with a par value of $.01 per share. These shares can be issued in more than one class or series. Each designated series of stock 27 - - - - - - -------------------------------------------------------------------------------- SHAREHOLDER GUIDE TO INVESTING will represent a separate portfolio of investments, each with a different investment objective. The Board of Directors has authorized two billion shares to be issued 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 Piper Global. 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 Piper Global created in the future. All classes of shares in the 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 the Fund, 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 the Fund. This ability to create multiple classes of shares within the Fund will allow Piper Global 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. 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 has one vote (with proportionate voting for fractional shares). 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. 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 Piper Global issues shares in additional series, the assets received by Piper Global 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 in respect to such series and with a share of the general expenses of Piper Global. Any general expenses of Piper Global 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. The Bylaws of Piper Global provide that shareholder meetings need be held only with such frequency as required under Minnesota law. Minnesota corporation law requires only that the Board of Directors convene shareholders 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 Piper Global may demand a regular meeting of shareholders by written notice given to the chief executive officer or chief financial officer of Piper Global. 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 Piper Global. 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 Piper Global may be removed by action of the record holders of two-thirds or more of the outstanding shares of 28 - - - - - - -------------------------------------------------------------------------------- SHAREHOLDER GUIDE TO INVESTING Piper Global. 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 Piper Global's outstanding shares. PENDING LEGAL PROCEEDINGS Complaints have been filed in U.S. District Court against the Adviser and the Distributor relating to several other investment companies for which the Adviser acts as investment adviser or subadviser. These lawsuits do not involve the Fund and the Adviser and Distributor do not believe that the lawsuits will have a material adverse effect upon their ability to perform under their agreements with the Fund. An agreement in principle has been reached to settle one such lawsuit. The Adviser and Distributor intend to defend the other lawsuits vigorously. See "Pending Legal Proceedings" in the Statement of Additional Information. NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION 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 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. 29 PACIFIC-EUROPEAN GROWTH FUND A Series of Piper Global Funds Inc. INVESTMENT ADVISER Piper Capital Management Incorporated SUB-ADVISER Edinburgh Fund Managers plc DISTRIBUTOR Piper Jaffray Inc. CUSTODIAN First Trust National Association TRANSFER AGENT Investors Fiduciary Trust Company LEGAL COUNSEL Dorsey & Whitney P.L.L.P. Table of Contents
PAGE Introduction......................... 2 Fund Expenses........................ 4 Financial Highlights................. 4 Investment Objective and Policies.... 5 Special Investment Methods........... 7 Risk Factors......................... 12 Management........................... 15 Distribution of Fund Shares.......... 18 SHAREHOLDER GUIDE TO INVESTING How to Purchase Shares........... 19 Reducing Your Sales Charge....... 20 Special Purchase Plans........... 21 How to Redeem Shares............. 22 Shareholder Services............. 23 Dividends and Distributions...... 25 Valuation of Shares.................. 26 Tax Status........................... 26 Performance Comparisons.............. 27 General Information.................. 27
PGPEX-05 PACIFIC EUROPEAN GROWTH FUND [LOGO] PROSPECTUS APRIL 28, 1995 PACIFIC EUROPEAN GROWTH FUND [Graphic] 1996 ANNUAL REPORT TABLE OF CONTENTS Letter to Shareholders . . . . . . . . . . . . . . . . . . . . . . . 2 Investments in Securities . . . . . . . . . . . . . . . . . . . . . . 7 Financial Statements and Notes . . . . . . . . . . . . . . . . . . . 10 Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . 18 Federal Tax Information . . . . . . . . . . . . . . . . . . . . . . . 19 PACIFIC-EUROPEAN GROWTH FUND Pacific-European Growth Fund is an open-end mutual fund seeking investment opportunities primarily in the Pacific Basin and Europe. The fund's investment objective is long-term capital appreciation; any current income realized is incidental. To reach its objective, the fund invests primarily in common stocks of companies in the Pacific Basin (for example, Japan, Hong Kong, Malaysia, Singapore, South Korea and Thailand) or Europe (including Eastern Europe). Up to 25% of the fund's total assets may also be invested in other areas of the world. The fund does not invest in common stock of U.S. companies. As with other mutual funds, there is no assurance that this fund will achieve its objective. The fund's Nasdaq symbol is PGPEX. MANAGEMENT EXPERIENCE Piper Capital Management Incorporated has retained an experienced international money manager, Edinburgh Fund Managers plc, to act as subadviser to the fund. Edinburgh Fund Managers Group plc is a holding company with three wholly owned operating subsidiaries. The main operating subsidiary is Edinburgh Fund Managers plc, which provides investment services to institutional clients and investment management services to closed- and open-end funds and discretionary funds, including pension plans and charities. Edinburgh Fund Managers Group plc is a publicly listed company established in 1969 and a majority-owned subsidiary of the British Investment Trust plc, a Scottish closed-end investment company which was founded in 1889. Pacific-European Growth Fund is co-managed by the following people: Lloyd Beat, account manager; Iain Watt, group chief executive and fund director; Mike Balfour, chief investment director and fund director; Jeremy Whitley, Pacific Basin portfolio manager; Christian Albuisson, European portfolio manager; Miranda Tulloch, Japanese portfolio manager; Robin Watson, Latin America portfolio manager; Ralph Woodford, United Kingdom large-company portfolio manager; and Barry Hutcheon, United Kingdom small-company portfolio manager. THIS REPORT IS INTENDED FOR SHAREHOLDERS OF PACIFIC-EUROPEAN GROWTH FUND, BUT MAY ALSO BE USED AS SALES LITERATURE IF PRECEDED OR ACCOMPANIED BY A PROSPECTUS. THE PROSPECTUS GIVES DETAILS ABOUT THE CHARGES, INVESTMENT RESULTS, RISKS AND OPERATING POLICIES OF THE FUND. SHAREHOLDER SERVICES LOW MINIMUM INVESTMENTS You can open a Piper mutual fund account 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 to 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. AS A SHAREHOLDER IN PIPER GLOBAL FUNDS, YOU HAVE ACCESS TO A FULL RANGE OF SERVICES AND BENEFITS. CHECK YOUR PROSPECTUS FOR DETAILS ABOUT SERVICES AND ANY LIMITATIONS THAT MIGHT APPLY TO YOUR FUND. 1 PACIFIC-EUROPEAN GROWTH FUND March 15, 1996 Dear Shareholders: FOR THE YEAR ENDED FEBRUARY 29, 1996, PACIFIC-EUROPEAN GROWTH FUND PROVIDED A TOTAL RETURN OF 16.70%, WHICH INCLUDES REINVESTED DISTRIBUTIONS BUT NOT THE FUND'S SALES CHARGE.* This performance is in line with the European, Australian, Far East (EAFE) Index** return of 17.21%. The fund's strategy has been to overweight the Pacific, underweight Europe and remain relatively neutral in Japan and Latin America relative to the EAFE Index. The markets of Europe were strong in the first half of the fiscal year while Japan and the Far East rallied in the second half after noticeable weakness at the beginning of the year. The performance of the Pacific European Growth Fund was noticeably stronger in the second half. IN JAPAN, A SIGNIFICANT LOOSENING OF MONETARY POLICY ALONG WITH CONCERTED ACTION TO ADDRESS BAD DEBTS IN THE FINANCIAL SECTOR PROMPTED A SHARP RALLY IN THE MARKET. The Japanese market rose a little over 15% for the year in local currency terms, however, this represents a rally of nearly 30% from the low point in June. In dollar terms, the rise was a more muted 9.1% for the year. Approximately 40% of the fund's exposure was hedged into the dollar to partially protect against a decline in the yen. This policy added significantly to the fund's return. AS THE JAPANESE AUTHORITIES CONTINUE TO INJECT LIQUIDITY INTO THE ECONOMY THE OUTLOOK CONTINUES TO IMPROVE. We believe stronger economic growth and a sharp rebound in corporate earnings may allow the Japanese market to move significantly higher over the next twelve months or so. The market remains attractively valued, in our opinion; Prices are reasonable given the potential for growth. THE OUTLOOK FOR MANY MARKETS IN THE PACIFIC RIM IS MUCH IMPROVED. Since the beginning of November, the region has rallied by 15% as measured by the MSCI Pacific Ex-Japan Index, thus reversing summer weakness and adding to earlier gains to produce a return of nearly 22% [Picture] [Picture] IAIN WATT (ABOVE) IS GROUP CHIEF EXECUTIVE OF EDINBURGH FUND MANAGERS PLC AND A CO-MANAGER OF PACIFIC-EUROPEAN GROWTH FUND. MIKE BALFOUR (BELOW) IS CHIEF INVESTMENT DIRECTOR AT EDINBURGH FUND MANAGERS PLC AND A CO-MANAGER OF PACIFIC-EUROPEAN GROWTH FUND. *PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. THE RETURN AND PRINCIPAL VALUE OF YOUR INVESTMENT WILL FLUCTUATE SO THAT FUND SHARES, WHEN SOLD, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. **THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EAFE INDEX IS AN UNMANAGED INDEX OF SECURITIES LISTED ON THE STOCK EXCHANGES OF EUROPE, AUSTRALIA, AND THE FAR EAST. 2 PACIFIC-EUROPEAN GROWTH FUND for the year as a whole. Inflation has largely been dealt with, reductions in U.S. interest rates have aided government policies, and U.S. investors have returned to Pacific markets. This suggests a strong upcoming 12 months for these markets. Earnings growth in many of the Far Eastern markets remains noticeably stronger than in the West and, in the long run, we believe this will continue to feed stronger stock market returns. CONTINENTAL EUROPEAN MARKETS HAVE RECENTLY BEEN MORE FRAGILE AS SIGNS OF ECONOMIC SLOWDOWN BECOME MORE EVIDENT. Interest rates have not continued to fall as expected due to the uncertainty surrounding the timetable and criteria for Monetary Union. In addition, European unemployment has risen sharply and both political and fiscal strains have become evident. To move ahead in the longer term, Continental Europe needs to see both political and corporate restructuring. THE UNITED KINGDOM APPEARS A LITTLE BETTER PLACED THAN ITS OTHER EUROPEAN PARTNERS. Interest rates have fallen and are likely to fall further while both the employment and fiscal situations are stronger. Still, the market has been unsettled by the fact that the Socialists look likely to win a convincing general election victory within the next year for the first time since 1979. As in the United States, some concerns are now being expressed that the current economic slowdown may continue. THE LATIN AMERICAN MARKETS HAVE SHOWN SOME STRENGTH RECENTLY, WHICH HAS CONTRIBUTED TO THE FUND'S RETURN. The MSCI Latin America Free Index returned nearly 19% for the year. While the long shadow of the Mexican devaluation debacle is taking time to fade, there are signs that investor interest is returning to markets which are supported by the prospect of economic revival over the next year. As the re-emergence of growth becomes evident, perhaps later in 1996, we expect several of these markets to post attractive returns. PORTFOLIO COMPOSITION FEBRUARY 29, 1996 Pacific-European Growth Fund by Region Japan 34% Other Pacific Basin 28% [graphic] Latin America 5% Other Assets 3% Europe 25% Short-Term 5% INVESTMENT CATEGORIES REFLECT PERCENTAGE OF TOTAL ASSETS. SEE MAP ON PAGE 5 FOR PORTFOLIO COMPOSITION BY COUNTRY. EAFE Index by Region Japan 39% Europe 50% [graphic] Pacific/Other 11% INVESTMENT CATEGORIES REFLECT PERCENTAGE OF TOTAL ASSETS. 3 PACIFIC-EUROPEAN GROWTH FUND THE FUND'S PRIMARY STRATEGY WILL BE TO MAINTAIN A HEAVY WEIGHTING IN JAPAN AND THE FAR EASTERN MARKETS FOR THE FORESEEABLE FUTURE. These markets are expected to be noticeably stronger than either Europe or the U.S. over the next year. We will also pay careful attention to European bond yields, as a rally in the European bond markets would allow stock markets to make some headway at least in the short term. Thank you for your investment in Pacific-European Growth Fund. We remain committed to providing you with top-quality investment management and service and look forward to helping you achieve your long-term financial goals. Sincerely, /s/ Iain Watt Iain Watt Manager, Edinburgh Fund Managers /s/ Mike Balfour Mike Balfour Manager, Edinburgh Fund Managers /s/ William H. Ellis William H. Ellis President, Piper Capital Management VALUE OF $10,000 INVESTED FEBRUARY 29, 1996 [graphic] $10,000 INVESTED IN APRIL 1990 AND HELD THROUGH FEBRUARY 29, 1996, WOULD HAVE GROWTH TO $_______. THE FUND'S PERFORMANCE REFLECTS THE MAXIMUM SALES CHARGE OF 4%, AS IF IT WAS APPLIED SINCE THE FUND'S INCEPTION, 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 2/29/96, INCLUDING 4% SALES CHARGE One Year . . . . . . . . . . . . . . 23.66% Five Year . . . . . . . . . . . . . . . . .% Since Inception (4/27/90) . . . . . . 9.59% DURING THESE PERIODS, THE FUND'S ADVISER WAIVED OR PAID CERTAIN FUND EXPENSES AND/OR THE FUND'S DISTRIBUTOR VOLUNTARILY LIMITED 12b-1 FEES FOR THE FUND. OTHERWISE, THE AVERAGE ANNUAL TOTAL RETURNS WOULD HAVE BEEN ____% ONE YEAR, ____% FIVE YEAR AND _____% SINCE INCEPTION. ALL RETURNS INCLUDE REINVESTED DISTRIBUTIONS. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. 4 PACIFIC-EUROPEAN GROWTH FUND PORTFOLIO COMPOSITION BY COUNTRY FEBRUARY 29, 1996 (AS A PERCENTAGE OF TOTAL ASSETS) EUROPE [graphic (map)] PACIFIC BASIN [graphic (map)] LATIN AMERICA [graphic (map)] 5 PACIFIC-EUROPEAN GROWTH FUND TEN LARGEST HOLDINGS FEBRUARY 29, 1996 (PERCENTAGE OF NET ASSETS) TOSHIBA JAPAN, 1.7% Toshiba, the #3 electronics firm in Japan, is the world leader in making large-scale memory chips (DRAMs) and is also a top supplier of color flat-panel displays for portable computers. Although it has suffered in recent years because of the Japanese recession and global competition, it is benefiting from cost cutting measures and new product development. MATSUSHITA ELECTRIC WORKS JAPAN, 1.6% The #2 powerhouse electronics maker from Japan, Matsushita has built its business on providing low-cost, high-quality home electronics and appliances. Matsushita is targeting multimedia as their premier area for growth. HUTCHISON WHAMPOA HONG KONG, 1.6% Hutchinson Whampoa, one of the oldest property companies in Hong Kong, has recently benefited from its prime locations for high-rise rental properties. Besides rental properties, the company is diversified in retailing, telecommunications, energy, container terminals and finance. MORI SEIKI JAPAN, 1.5% Mori Seiki - a major machine tool manufacturer with a strong global sales network - is experiencing strong order growth as companies increase their manufacturing related capital expenditures. NOMURA JAPAN, 1.5% Japan's largest brokerage firm, Nomura is also a leading bond underwriter and a major player in equity issues. The company's earnings are positioned to improve significantly as the Japanese stock market recovers and trading volumes increase. The company is also looking to expand into China and other Asian countries. DAINIPPON INK AND CHEMICALS JAPAN, 1.5% Dainippon Ink and Chemicals is one of Japan's main chemical companies. In recent years, the company has diversified into synthetic resins and chemical products, with approximately 50% of its sales in the graphic arts market. Also, over 50% of its sales are exports. UNITED OVERSEAS BANK SINGAPORE, 1.4% United Overseas Bank is part of a Singapore banking group with a market capitalization totaling $10 billion. Besides United Overseas Bank, this group also includes Chung Khiaw Bank, Lee Wah Bank, Far Eastern Bank and Industrial and Commercial Bank. SONY CORPORATION JAPAN, 1.4% Sony, the global leader in consumer electronics manufacturing, has recently been merging its electronics manufacturing with the U.S. entertainment industry including Columbia and Tri-Star pictures and Columbia and Epic records. The company will benefit from strong product sales worldwide while continuing its restructuring program. ISETAN JAPAN, 1.4% Isetan is a Tokyo based department store that targets the younger generation. The company has one of the lowest exposures to corporate sales, the area hardest hit by the recession. There are signs that consumption is improving, especially in the clothing area where the company has a high exposure relative to most competitors. DAO HENG BANK GROUP UNLIMITED HONG KONG, 1.4% Dao Heng Bank Group is one of Hong Kong's major commercial banking groups, with a market capitalization of $2.8 billion. 6 - - - - - - -------------------------------------------------------------------------------- FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES FEBRUARY 29, 1996 ASSETS: Investments in securities at market value* (note 2) (including a repurchase agreement of $7,701,000) ..... $ 159,543,727 Cash in bank on demand deposit ........................... 253,608 Foreign cash in bank on demand deposit ................... 518,197 Receivable for investment securities sold ................ 141,493 Receivable for fund shares sold .......................... 159,838 Net unrealized appreciation of forward foreign currency contracts held (notes 2, 4) ............................ 5,078,658 Dividends and accrued interest receivable ................ 308,060 ----------------- Total assets ......................................... 166,003,581 ----------------- LIABILITIES: Payable for investment securities purchased .............. 1,515,647 Payable for fund shares redeemed ......................... 100,535 Accrued investment management fee ........................ 118,372 Accrued distribution and shareholder account servicing fees ................................................... 126,340 Payable for foreign capital gains taxes .................. 828,991 Other accrued expenses ................................... 1,992 ----------------- Total liabilities .................................... 2,691,877 ----------------- Net assets applicable to outstanding capital stock ....... $ 163,311,704 ----------------- ----------------- REPRESENTED BY: Capital stock - authorized 2 billion shares of $0.01 par value; outstanding, 11,782,881 shares ................ $ 117,829 Additional paid-in capital ............................... 141,786,457 Accumulated net realized gain on investments and foreign currency transactions .................................. 2,856,345 Unrealized appreciation of investments and on translation of other assets and liabilities denominated in foreign currencies ............................................. 18,551,073 ----------------- Total - representing net assets applicable to outstanding capital stock ........................ $ 163,311,704 ----------------- ----------------- Net asset value per share of outstanding capital stock ... $ 13.86 ----------------- ----------------- * Investments in securities at identified cost ........... $ 146,080,551 ----------------- -----------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 7 - - - - - - -------------------------------------------------------------------------------- FINANCIAL STATEMENTS STATEMENT OF OPERATIONS FOR THE YEAR ENDED FEBRUARY 29, 1996 INCOME: Dividends (net of foreign withholding taxes of $336,776) ............................................ $ 2,869,826 Interest ................................................. 251,483 ---------------- Total investment income .............................. 3,121,309 ---------------- EXPENSES (NOTE 5): Investment management fee ................................ 1,216,305 Distribution fees ........................................ 812,754 Custodian, accounting and transfer agent fees ............ 473,367 Shareholder account servicing fees ....................... 135,878 Reports to shareholders .................................. 66,645 Directors' fees .......................................... 15,434 Audit and legal fees ..................................... 55,634 Other expenses ........................................... 55,842 ---------------- Total expenses ....................................... 2,831,859 Less expenses waived by the distributor .................. (298,512) ---------------- Net expenses before expenses paid indirectly ........... 2,533,347 Less expenses paid indirectly ............................ (5,362) ---------------- Total net expenses ................................... 2,527,985 ---------------- Net investment income ................................ 593,324 ---------------- NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS AND FOREIGN CURRENCY: Net realized gain (loss) on: Investments (net of foreign withholding taxes of $321,197) (note 3) ................................... 11,219,771 Foreign currency transactions .......................... (405,039) ---------------- Net realized gain ................................ 10,814,732 ---------------- Net change in unrealized appreciation or depreciation of: Investments ............................................ 8,557,882 Translation of other assets and liabilities denominated in foreign currencies ................................ 4,933,600 ---------------- Net change in unrealized appreciation or depreciation ......................................... 13,491,482 ---------------- Net gain on investments ................................ 24,306,214 ---------------- Net increase in net assets resulting from operations ....................................... $ 24,899,538 ---------------- ----------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 8 - - - - - - -------------------------------------------------------------------------------- FINANCIAL STATEMENTS STATEMENTS OF CHANGES IN NET ASSETS
Year Ended Year Ended 2/29/96 2/28/95 ----------------- ----------------- OPERATIONS: Net investment income (loss) ........................... $ 593,324 (323,920) Net realized gain on investments and foreign currency transactions ........................................... 10,814,732 13,540,140 Net change in unrealized appreciation or depreciation of investments and on translation of other assets and liabilities denominated in foreign currencies .......... 13,491,482 (32,565,743) ----------------- ----------------- Net increase (decrease) in net assets resulting from operations ........................................... 24,899,538 (19,349,523) ----------------- ----------------- DISTRIBUTIONS TO SHAREHOLDERS: From net investment income ............................... (593,324) -- From net realized gains .................................. (10,077,791) (11,890,084) ----------------- ----------------- Total distributions .................................... (10,671,115) (11,890,084) ----------------- ----------------- CAPITAL SHARE TRANSACTIONS: Proceeds from sale of 2,173,410 and 3,448,028 shares, respectively ........................................... 29,496,476 50,722,931 Proceeds from issuance of 795,210 and 774,367 shares for reinvestment of distributions, respectively ............ 10,633,411 10,384,329 Payments for 3,316,664 and 2,819,369 shares redeemed, respectively ........................................... (45,439,458) (41,129,910) ----------------- ----------------- Increase (decrease) in net assets from capital share transactions ......................................... (5,309,571) 19,977,350 ----------------- ----------------- Total increase (decrease) in net assets .............. 8,918,852 (11,262,257) Net assets at beginning of year ............................ 154,392,852 165,655,109 ----------------- ----------------- Net assets at end of year ................................ $ 163,311,704 154,392,852 ----------------- ----------------- ----------------- -----------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 9 - - - - - - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (1) ORGANIZATION The Pacific-European Growth Fund (the fund) is a diversified series of Piper Global Funds Inc. (Piper Global) which is registered under the Investment Company Act of 1940 (as amended) as an open-end management investment company. The fund is the only series of Piper Global currently outstanding. The fund pursues its investment objective of long-term capital appreciation by investing primarily in equity securities of companies in the Pacific Basin and Europe. Piper Global's articles of incorporation permit the board of directors to create additional series in the future. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies of the fund are as follows: INVESTMENTS IN SECURITIES Securities traded on U.S. or foreign securities exchanges or included in a national market system are valued at the last quoted sales price; securities for which there were no sales reported are valued at the mean between the bid and ask prices; exchange listed options are valued at the last sales price and futures contracts are valued at the last settlement price; bonds and other securities for which market quotations are not readily available are valued at fair value according to methods selected in good faith by the board of directors. Securities with maturities of 60 days or less when acquired or subsequently within 60 days of maturity 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 an identified cost basis. Dividend income is recognized on the ex-dividend date or upon receipt of ex-dividend notification in the case of certain foreign securities. Interest income, including level-yield amortization of premium and discount, is accrued daily. OPTION TRANSACTIONS For hedging purposes, the fund 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 the fund gives up the opportunity of 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 pay 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 written call option, the purchase cost for 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 from changes in the market, the fund 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 10 - - - - - - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS 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. FEDERAL TAXES The fund's policy is to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its taxable income to shareholders. Therefore, no income tax provision is required. In addition, on a calendar-year basis, the fund will distribute substantially all of its 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) 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, the "mark-to-market" of certain Passive Foreign Investment Companies (PFICs) for tax purposes, and losses deferred due to "wash sale" 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 were recorded by the fund. DISTRIBUTIONS TO SHAREHOLDERS Distributions to shareholders from net investment income and realized capital gains, if any, will be made on an annual basis. Shareholders may elect to have distributions paid in cash or reinvested in additional shares at net asset value. REPURCHASE AGREEMENTS The fund, along with other affiliated registered investment companies, may transfer uninvested cash balances to a joint 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. Procedures for all agreements ensure that the daily market value of the collateral is in excess of the repurchase amount in the event of a default. FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS Securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the closing rate of exchange. Foreign currency amounts related to the purchase or sale of securities and income and expenses are translated at the exchange rate on the transaction date. The fund does not separately identify that portion of realized and unrealized gain (loss) on investments arising from changes in the exchange rates from the portion arising from changes in the market value of investments. The fund also may enter into forward foreign currency exchange contracts for hedging purposes. The net U.S. dollar value of foreign currency underlying all contractual commitments held by the fund and the resulting unrealized appreciation or depreciation are determined using foreign currency exchange rates from independent pricing sources. The fund is subject to the credit risk that the other party will not complete the obligations of the contract. 11 - - - - - - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS 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) INVESTMENT SECURITY TRANSACTIONS Cost of purchases and proceeds from sales of securities, other than temporary investments in short-term securities, for the year ended February 29, 1996, were $102,583,039 and $115,679,442, respectively. (4) FORWARD FOREIGN CURRENCY CONTRACTS On February 29, 1996, the fund had open foreign currency exchange contracts which obligate the fund to deliver and receive currencies at specified future dates. The unrealized appreciation (depreciation) on these contracts is included in the accompanying financial statements. The terms of the open contracts are as follows:
Settlement Currency to U.S. $ Value Currency to U.S. $ Value Appreciation Date be Delivered as of 2/29/96 be Received as of 2/29/96 (Depreciation) - - - - - - -------- ------------------- --------------- -------------- --------------- ------------- 3/01/96 1,006,174USD 1,006,174 630,593IEP 992,553 (13,621) 3/04/96 14,888,536JPY 141,492 142,310USD 142,310 818 5/22/96 1,085,825,000JPY 10,433,970 13,000,000USD 13,000,000 2,566,030 5/22/96 1,090,050,000JPY 10,474,569 13,000,000USD 13,000,000 2,525,431 --------------- --------------- ------------- $ 22,056,205 $ 27,134,863 $5,078,658 --------------- --------------- ------------- --------------- --------------- -------------
IEP = IRISH PUNT JPY = JAPANESE YEN USD = U.S. DOLLAR (5) FEES AND EXPENSES The fund has entered into the following agreement with Piper Capital Management Incorporated (the adviser): The investment advisory agreement provides the adviser with a monthly investment management fee calculated at the annualized rate of 1% of the fund's average daily net assets up to $100 million, 0.875% on net assets of $100 million to $200 million and 0.75% on net assets in excess of $200 million. Starting in April 1991, the basic fee has been subject to a performance adjustment for the applicable performance period, based on the performance of the fund relative to the Morgan Stanley Capital International EAFE Index. Such performance period has consisted of a rolling 12-month period. For each percentage point the fund outperforms or underperforms the EAFE Index during the applicable performance period, the monthly fee is increased or decreased by 0.05% (on an annualized basis) up to a maximum of 1/12 of 0.25% of the fund's average daily net assets during the month for which the calculation is made. During the year ended February 29, 1996, the performance adjustment decreased the management fee by $337,288. Edinburgh Fund Managers plc has been retained by the adviser as subadviser and is paid a fee equal to 65% of the basic investment management fee plus or minus 90% of the performance adjustment. Edinburgh Fund Managers plc has entered into an expense reimbursement agreement with the adviser under which it pays the adviser a monthly fee equal to 10% of the basic investment management fee. This 10% fee is a reimbursement to the adviser for certain expenses it bears in connection with the administration of the fund. The fund pays Piper Jaffray Inc. (the distributor) a fee in connection with the servicing of each shareholder account and in connection with distribution related services provided to the fund. The fee is limited to a maximum of 0.50% per 12 - - - - - - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS annum of the average daily net assets of the fund. The 0.50% reimbursement fee includes 0.25% payable as a servicing fee and 0.25% payable as a distribution fee. For the year ended February 29, 1996, Piper Jaffray Inc. voluntarily agreed to limit the reimbursement fee to an annual rate of 0.32% of average daily net assets. 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 the investment management fee and the distribution reimbursement fee, 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 and other miscellaneous expenses. Sales charges received by Piper Jaffray Inc. for distributing the fund's shares were $400,766 for the year ended February 29, 1996. Expenses paid indirectly represent a reduction of custodian fees for earnings on cash balances maintained with the custodian by the fund. (6) PROPOSED MERGER The board of directors of Hercules Funds Inc., an affiliated open-end management investment company, approved a plan to reorganize the Hercules European Value Fund and Hercules Pacific Basin Value Fund (the Hercules Funds) subject to shareholder approval. In effect, the reorganization would merge the Hercules Funds into Pacific-European Growth Fund. It is anticipated that the merger, if approved, would occur in or around June 1996. However, it is possible that shareholders of one or both of the Hercules Funds will not approve this merger. All costs associated with the merger will be borne by the adviser. 13 - - - - - - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (7) FINANCIAL HIGHLIGHTS Per-share data for a share of capital stock outstanding throughout each period and selected information for each period are as follows:
Year Ended -------------------------------------------------------------- 2/28/93 2/29/96 2/28/95 2/28/94 (c) 2/29/92 ----------- ---------- ---------- ---------- ---------- PER-SHARE DATA Net asset value, beginning of period ........... $ 12.73 15.44 10.81 10.53 10.18 ----------- ---------- ---------- ---------- ---------- Operations Net investment income (loss).................... 0.05 (0.03) (0.03) -- 0.06 Net realized and unrealized gains (losses)...... 2.03 (1.63) 4.72 0.28 0.37 ----------- ---------- ---------- ---------- ---------- Total from operations......................... 2.08 (1.66) 4.69 0.28 0.43 ----------- ---------- ---------- ---------- ---------- Distributions to shareholders: From net investment income...................... (0.05) -- -- -- (0.06) From net realized gains......................... (0.90) (1.05) (0.06) -- -- Return of capital............................... -- -- -- -- (0.02) ----------- ---------- ---------- ---------- ---------- Total distributions........................... (0.95) (1.05) (0.06) -- (0.08) ----------- ---------- ---------- ---------- ---------- Net asset value, end of period ................. $ 13.86 12.73 15.44 10.81 10.53 ----------- ---------- ---------- ---------- ---------- ----------- ---------- ---------- ---------- ---------- SELECTED INFORMATION Total return (a).................................. 16.70% (11.09%) 43.45% 2.66% 4.44% Net assets at end of period (in millions) ...... $ 163 154 166 60 36 Ratio of expenses to average daily net assets (b)............................................. 1.55% 1.76% 1.81% 2.25% 1.92% Ratio of net investment income (loss) to average daily net assets (b)............................ 0.36% (0.19%) (0.29%) 0.03% 0.60% Portfolio turnover rate (excluding short-term securities)..................................... 65% 57% 52% 59% 69%
(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 PERIODS REFLECTED ABOVE, THE ADVISER AND DISTRIBUTOR VOLUNTARILY WAIVED FEES AND EXPENSES. HAD THE FUND PAID ALL EXPENSES AND THE MAXIMUM DISTRIBUTION FEE BEEN IN EFFECT, THE RATIOS OF EXPENSES AND NET INVESTMENT INCOME TO AVERAGE DAILY NET ASSETS WOULD HAVE BEEN AS FOLLOWS: 1.73%/0.18%, 1.98%/(0.41%), 2.01%/(0.49%) AND 2.59%/(0.31%) IN FISCAL YEARS 1996, 1995, 1994 AND 1993, 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) THE FUND CONVERTED FROM A CLOSED-END INVESTMENT COMPANY TO AN OPEN-END INVESTMENT COMPANY ON AUGUST 31, 1992. INFORMATION FOR PERIODS PRIOR TO CONVERSION ARE BASED ON THE FUND'S OPERATIONS AS A CLOSED-END FUND. FISCAL 1993 EXPENSES INCLUDE 0.32% RELATED TO THE CONVERSION. 14 - - - - - - -------------------------------------------------------------------------------- INVESTMENTS IN SECURITIES PACIFIC-EUROPEAN GROWTH FUND FEBRUARY 29, 1996
Number Market Name of Issuer of Shares Value (a) - - - - - - --------------------------------------------------------- ---------- ------------ (PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS) COMMON STOCKS (93.0%): EUROPE (25.8%): FRANCE (3.9%): Alcatel Alsthom - telecommunications ................. 17,249 $ 1,526,907 Elf Aquitaine - oil company .......................... 22,694 1,562,733 Eridania Berghim Say - sugar company ................. 6,880 1,179,643 Pinault Printemps - retail stores .................... 8,880 2,100,995 ------------ 6,370,278 ------------ GERMANY (3.1%): Deutsche Bank - bank ................................. 35,200 1,771,950 Mannesmann - industrial machinery manufacturing ...... 2,370 844,819 Siemens - electronic capital goods ................... 2,740 1,565,900 Veba - electricity and chemicals ..................... 18,600 875,191 ------------ 5,057,860 ------------ IRELAND (0.6%): Irish Life PLC - life insurance ...................... 250,000 999,490 ------------ ITALY (1.4%): Italgas - utilities .................................. 319,800(b) 991,421 Stet-societa Finanz Telefon - telecommunications and cellular ............................................ 421,050 1,286,392 ------------ 2,277,813 ------------ NETHERLANDS (2.3%): Fortis Amev NV - bank ................................ 18,000 1,198,545 Klondike Post Netherland NV - telecommunications and cellular ............................................ 17,000 681,443 Verenigde Nederlandse Uitgeversbedrijven Verenigd Bezit - publishing .................................. 110,000 1,794,421 ------------ 3,674,409 ------------ SPAIN (1.6%): Iberdrola - utilities ................................ 138,000 1,358,454 Repsol SA - oil and gas .............................. 36,000 1,312,946 ------------ 2,671,400 ------------ SWEDEN (1.0%): Nordbanken AB - regional banks ....................... 97,000(b) 1,699,025 ------------ SWITZERLAND (2.3%): Brown Boveri - general engineering ................... 1,050 1,255,768 Nestle - food and beverages .......................... 820 896,011 Roche Holdings - pharmaceuticals ..................... 205 1,591,238 ------------ 3,743,017 ------------ UNITED KINGDOM (9.6%): Abbott Mead Vickers PLC - communications ............. 57,000 460,469 Antofagasta Holdings - diversified industrial products ............................................ 60,000 344,250 Bluebird Toys PLC - toy manufacturer ................. 119,600 585,562 British Petroleum - oil and gas ...................... 124,000 1,023,539 British Telecom - telecommunications ................. 194,000 1,102,686
Number Market Name of Issuer of Shares Value (a) - - - - - - --------------------------------------------------------- ---------- ------------ BTR - conglomerate ................................... 193,700 $ 955,764 Cable & Wireless PLC- telecommunications ............. 120,000 816,102 Compass Group - contract catering .................... 115,600 861,347 Dixons Group PLC- department stores .................. 160,000 1,130,976 Jupiter Split Trust PLC - investment fund ............ 963,716(b) 1,216,451 Marks & Spencer - retail-general ..................... 141,400 906,473 Sheffield Insulation Group - building materials ...... 80,000 271,728 Siebe - industrial products and equipment ............ 102,900 1,272,091 SmithKline Beecham Class A - consumer health products ............................................ 131,000 1,394,993 Sun Alliance Group - property and casualty insurance ........................................... 210,000 1,240,218 Thorn Emi - hotel and leisure ........................ 52,000 1,288,872 Watmoughs - printing and publishing .................. 73,000 480,267 Yorkshire Chemicals - chemicals ...................... 82,500 325,660 ------------ 15,677,448 ------------ Total Europe Common Stocks ......................... 42,170,740 ------------ LATIN AMERICA (4.5%): ARGENTINA (0.5%): Inversiones Y Representaciones (IRSA) GDS - real estate .............................................. 28,806(b) 788,564 ------------ BRAZIL (2.1%): Cia Acos Especia Itab ADR - steel manufacturer ....... 95,000 1,128,600 Refrigeracao Prana ADR - consumer durable goods ...... 122,000 1,653,832 Telecomunicacoes Brasileiras ADR - telecommunications and cellular ........................................ 12,500 656,250 ------------ 3,438,682 ------------ CHILE (0.4%): Five Arrow Chile Fund - mutual fund .................. 200,000 537,500 Five Arrow Chile Fund Warrants - mutual fund ......... 80,000(b) 46,000 ------------ 583,500 ------------ COLOMBIA (0.2%): Carulla 144A ADS - retail stores ..................... 30,780(c) 284,715 ------------ MEXICO (1.3%): Cementos De Mexico A - cement manufacturer ........... 155,000 527,204 Telefonos De Mexico ADR - telecommunications and cellular ............................................ 52,700 1,607,350 ------------ 2,134,554 ------------ Total Latin America Common Stocks .................. 7,230,015 ------------ PACIFIC BASIN (62.7%): HONG KONG (9.6%): China Light and Power Company - electric utilities ... 300,000 1,404,643
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES. 15 - - - - - - -------------------------------------------------------------------------------- INVESTMENTS IN SECURITIES PACIFIC-EUROPEAN GROWTH FUND (CONTINUED)
Number Market Name of Issuer of Shares Value (a) - - - - - - --------------------------------------------------------- ---------- ------------ Dao Heng Bank Group - bank ........................... 559,574 $ 2,294,315 Esprit Asia Holdings Ltd. - retail ................... 2,500,000 961,974 Hutchison Whampoa - diversified holding company ...... 400,000 2,535,084 Ka Wah Bank - commercial bank ........................ 3,000,000 1,096,165 Sun Hung Kai Properties - property ................... 230,000 2,052,642 Swire Pacific Limited - diversified holding company ............................................. 250,000 2,182,630 Wharf Holdings - real estate services ................ 500,000 1,936,882 Yizheng Chemicals - chemicals and plastics ........... 4,490,000 1,248,592 ------------ 15,712,927 ------------ INDIA (0.4%): Hindalco Industries ADR - aluminum manufacturer ...... 20,000(b) 717,400 ------------ INDONESIA (2.6%): PT Andayani Megah - tire and rubber .................. 850,000 733,866 PT Bank International Indonesia - bank . 500,000 2,099,072 PT Hanjaya Mandala Sampoerna - tobacco ............... 75,000 818,314 PT Indocement - construction materials . 160,000 637,167 ------------ 4,288,419 ------------ JAPAN (34.5%): Amada Metrecs - electronic capital goods ............. 108,000 1,631,932 Circle K Japan Company - retail stores ............... 22,000(b) 932,478 Daifuku - machine tool manufacturer .................. 78,000 1,156,379 Dainippon Ink and Chemical - chemicals and plastics ............................................ 530,000 2,407,603 Daiwa Securities - finance ........................... 150,000 2,109,765 DDI Corp - telecommunications ........................ 255 1,868,425 Denki Kagaku - chemicals and plastics ................ 300,000(b) 1,200,285 H.I.S. Company - leisure and entertainment ........... 22,000(b) 1,045,379 Honda Motor - motor vehicles ......................... 89,000 1,886,149 Ichiyoshi Securities - securities broker ............. 125,000 801,853 Isetan - retail stores ............................... 184,000 2,308,197 Kobe Steel - iron, steel and aluminum ................ 745,000(b) 2,159,420 Kumagai Gumi - building materials .................... 400,000 1,634,593 Maeda Road Construction - transportation ............. 90,000 1,565,217 Marubeni Corporation - wholesale distributor ......... 420,000 2,271,133 Matsushita Electric Works - electricals .............. 237,000 2,545,118 Mitsubishi Materials - metal mining company .......... 430,000 2,227,132 Mitsui Fudosan - real estate ......................... 190,000 2,220,955 Mori Seiki - machine tool manufacturer . 121,000 2,518,318 Nihon Cement Company - cement manufacturer ........... 344,000 2,288,430 Nippon Telephone and Telegraph - telecommunications .................................. 291 2,210,121 Nippon Yusen - shipping .............................. 392,000 2,235,210 Nissha Printing - print, media publishing 75,000 1,104,775 Nomura - stock broker ................................ 118,000 2,422,238 Sony Corporation - electronics ....................... 40,000 2,341,649
Number Market Name of Issuer of Shares Value (a) - - - - - - --------------------------------------------------------- ---------- ------------ Sumitomo Bank - commercial bank ...................... 76,000 $ 1,444,524 Sumitomo Trust & Banking - bank ...................... 128,000 1,593,538 Tokyo Steel Manufacturing - steel manufacturer ....... 84,000 1,540,699 Topy Industries - tires and auto parts ............... 279,000 1,206,415 Toshiba - electronics ................................ 350,000 2,704,205 Tsudakoma - machine tool manufacturer 101,000 662,294 ------------ 56,244,429 ------------ MALAYSIA (1.7%): Kim Hin Industries - ceramic tile manufacturer ....... 150,000 300,177 Telekom Malaysia - telecommunications 160,000 1,374,926 YTL Corporation - construction ....................... 240,000 1,130,077 ------------ 2,805,180 ------------ PHILIPPINES (1.2%): Philippine Long Distance Telephone - telecommunications and cellular ..................... 15,990 944,544 Philippine National Bank - bank ...................... 75,000(b) 1,060,983 ------------ 2,005,527 ------------ SINGAPORE (4.8%): City Developments - real estate ...................... 250,000 2,036,119 Development Bank of Singapore - financial services ... 150,000 2,135,269 Genting Berhad - hotels and leisure .................. 150,000 1,341,966 United Overseas Bank - bank .......................... 219,200 2,344,136 ------------ 7,857,490 ------------ SOUTH KOREA (2.4%): Pohang Iron and Steel - steel manufacturer ........... 18,000 1,383,517 Shinhan Bank - commercial bank ....................... 44,977 1,110,415 Shinsegae Department Stores - retail stores .......... 14,770 1,007,024 Yukong - oil company ................................. 15,000(b) 465,785 ------------ 3,966,741 ------------ THAILAND (5.5%): Bank of Ayudhya - commercial bank .................... 260,000 1,746,265 Electricity General Public Company - electric utility ............................................. 300,000 1,127,026 General Finance and Securities Company - financial services ............................................ 300,000 1,285,204 Land and Houses - residential properties 75,200 1,490,251 Siam Cement - cement manufacturer .................... 21,400 1,106,724 Srithai Superware - consumer durable goods ........... 100,000 670,302 TelecomAsia Corporation - telecommunications ......... 500,000(b) 1,418,087 ------------ 8,843,859 ------------ Total Pacific Basin Common Stocks .................. 102,441,972 ------------ Total Common Stock (cost: $138,379,551) .............................. 151,842,727 ------------
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES. 16 - - - - - - -------------------------------------------------------------------------------- INVESTMENTS IN SECURITIES PACIFIC-EUROPEAN GROWTH FUND (CONTINUED)
Principal Market Name of Issuer Amount Value (a) - - - - - - --------------------------------------------------------- ---------- ------------ SHORT-TERM SECURITIES (4.7%): Repurchase agreement with Morgan Stanley in a joint trading account, collateralized by U.S. government agency securities, acquired on 2/29/96, accrued interest at repurchase date of $1,112, 5.20%, 3/1/96 (cost: $7,701,000) ................................ $ 7,701,000 7,701,000 ------------ Total Investments in Securities (97.7%) (cost: $146,080,551) (d) .......................... 159,543,727 ------------ Other assets in excess of liabilities (2.3%) ....... 3,767,977 ------------ Net assets (100.0%) ............................... $ 163,311,704 ------------ ------------
NOTES TO INVESTMENTS IN SECURITIES: (A) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO THE FINANCIAL STATEMENTS. (B) PRESENTLY NON-INCOME PRODUCING. (C) REPRESENTS SECURITY SOLD UNDER RULE 144A AND IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS SECURITY HAS BEEN DETERMINED TO BE LIQUID UNDER GUIDELINES ESTABLISHED BY THE BOARD OF DIRECTORS. (D) AT FEBRUARY 29, 1996, THE COST OF INVESTMENTS FOR FEDERAL INCOME TAX PURPOSES WAS $146,363,187. THE AGGREGATE GROSS UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED ON THIS COST WERE AS FOLLOWS: GROSS UNREALIZED APPRECIATION .... $ 21,596,119 GROSS UNREALIZED DEPRECIATION ...... (8,415,579) ------------ NET UNREALIZED APPRECIATION .... $ 13,180,540 ------------ ------------
17 - - - - - - -------------------------------------------------------------------------------- INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS AND SHAREHOLDERS PIPER GLOBAL FUNDS INC.: We have audited the accompanying statement of assets and liabilities, including the schedule of investments in securities, of Pacific-European Growth Fund (a series of Piper Global Funds Inc.) as of February 29, 1996, and the related statement 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 for each of the years in the five-year period then ended. 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 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 Pacific-European Growth Fund as of February 29, 1996, and the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended and the financial highlights for each of the years in the five-year period then ended, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Minneapolis, Minnesota March 14, 1996 18 - - - - - - -------------------------------------------------------------------------------- FEDERAL INCOME TAX INFORMATION Fiscal Year Ended February 29, 1996 Information for federal income tax purposes is presented below to aid shareholders in reporting taxable distributions made by the fund during the fiscal year ended February 29, 1996. In early February 1996, you should have received Form 1099-DIV which reported these distributions. Shareholders should consult a tax advisor on how to report these distributions at the state and local levels.
Payable Date Per Share - - - - - - ------------------------------------------------------------------------- ----------- December 5, 1995 ...................................................... $ 0.8794* December 22, 1995........................................................ 0.0680 ----------- Total distributions ............................................... $ 0.9474 ----------- -----------
* THIS DISTRIBUTION INCLUDES $0.0684 OF NET SHORT-TERM CAPITAL GAINS AND $0.8110 OF NET LONG-TERM CAPITAL GAINS. 19 - - - - - - -------------------------------------------------------------------------------- DIRECTORS AND OFFICERS DIRECTORS 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 Iain Watt, MANAGING DIRECTOR, EDINBURGH FUND MANAGERS PLC Michael Balfour, DIRECTOR, EDINBURGH FUND MANAGERS PLC OFFICERS William H. Ellis, CHAIRMAN OF THE BOARD Paul A. Dow, PRESIDENT Robert H. Nelson, SENIOR VICE PRESIDENT AND TREASURER Nancy S. Olsen, SENIOR VICE PRESIDENT Susan Sharp Miley, SECRETARY INVESTMENT ADVISER Piper Capital Management Incorporated 222 SOUTH NINTH STREET, MINNEAPOLIS, MN 55402-3804 INVESTMENT SUBADVISER Edinburgh Fund Managers plc DONALDSON HOUSE, 97 HAYMARKET TERRACE, EDINBURGH, SCOTLAND EH12 5HD INDEPENDENT AUDITORS KPMG Peat Marwick LLP 4200 NORWEST CENTER, MINNEAPOLIS, MN 55402 CUSTODIAN First Trust 180 EAST FIFTH STREET, ST. PAUL, MN 55101 TRANSFER AGENT Investors Fiduciary Trust Company 127 WEST 10TH STREET, KANSAS CITY, MO 64105-1716 LEGAL COUNSEL Dorsey & Whitney LLP 220 SOUTH SIXTH STREET, MINNEAPOLIS, MN 55402
20 [PIPER CAPITAL MANAGEMENT LOGO] Bulk Rate U.S. Postage PIPER CAPITAL MANAGEMENT INCORPORATED PAID 222 SOUTH NINTH STREET Permit No. 3008 MINNEAPOLIS, MN 55402-3804 Mpls., MN 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. 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: Corporate Communications Piper Capital Management 222 South Ninth Street Minneapolis, MN 55402-3804 Dated: February 7, 1996 Supplement to Prospectus Dated August 29, 1995 HERCULES FUNDS INC. On February 6, 1996, the Board of Directors of Hercules Funds Inc. (the "Company") considered a recommendation of Piper Capital Management Incorporated (the "Manager"), to eliminate the Company as a separate family of funds because the Company has been unable to attract sufficient assets for its continued operation to be economically viable. The Board of Directors, including all of its members who are not "interested persons" of the Company (as defined in the Investment Company Act of 1940), unanimously agreed that it would be in the best interests of shareholders of each of the four series of the Company named below (each, a "Fund" and collectively, the "Funds") to effect the following mergers (the "Proposed Mergers"): (i) Hercules North American Growth and Income Fund to be merged into Growth and Income Fund, a series of Piper Funds Inc.; (ii) Hercules European Value Fund to be merged into Pacific-European Growth Fund ("PEF"), a series of Piper Global Funds Inc. ("Piper Global"); (iii) Hercules Pacific Basin Value Fund to be merged into PEF; and (iv) Hercules Latin American Value Fund to be merged into a newly created series of Piper Global. If approved by shareholders of each Fund, the Proposed Mergers would be effected by combining substantially all of the assets of each Fund with the corresponding fund set forth above (each an "Acquiring Fund"), and distributing to shareholders of the Fund shares of the corresponding Acquiring Fund with a value equal to the value of their holdings in the Fund. Each Acquiring Fund is managed by the Manager. Edinburgh Fund Managers plc acts as subadviser for PEF and would serve in the same capacity for the newly created series of Piper Global. The Manager has agreed to pay all direct expenses associated with the Proposed Mergers (such as costs of proxy solicitation). No commission, sales loads or other charges will be incurred by shareholders in connection with the Proposed Mergers. Also, the Proposed Mergers should not result in any taxable income to the Company or its shareholders for federal income tax purposes. In addition, the Board of Directors unanimously agreed that it is in the best interests of shareholders of Hercules World Bond Fund to liquidate the assets of the World Bond Fund (the "Proposed Liquidation"). The Manager has agreed to pay all direct expenses associated with the Proposed Liquidation (such as costs of proxy solicitation). The Company will call a Special Meeting of Shareholders at a date to be announced for the purpose of voting on the Proposed Mergers and the Proposed Liquidation. The Proposed Mergers and the Proposed Liquidation are each subject to the approval of shareholders of the relevant Fund and are also subject to other conditions. Additional information concerning the Proposed Mergers and Proposed Liquidation will be included in the proxy material respecting each of the proposed transactions to be provided to shareholders as of a record date not yet determined. Additionally, with respect to Hercules Money Market Fund, because the costs associated with operating the Money Market Fund have made it economically unfeasible for the Manager to continue absorbing certain fund expenses, the Manager intends to cease this practice effective as of July 1, 1996 thereby eliminating the Money Market Fund's 1% expense limitation currently in place. HERCULES EUROPEAN VALUE FUND A SERIES OF HERCULES FUNDS INC. SUPPLEMENT DATED DECEMBER 20, 1995 TO PROSPECTUS DATED AUGUST 29, 1995 Christian Simond is no longer responsible for the day-to-day management of European Value Fund. Nils Francke, formerly Mr. Simond's assistant, has assumed such responsibilities. Biographical information about Mr. Francke is included in this Prospectus. John Gerth will assist Mr. Francke in the day-to-day management of European Value Fund. Mr. Gerth joined Pictet in 1991. Prior to that time he was a Vice President and Senior Securities Officer and Head of International Equities for Citibank. PROSPECTUS DATED AUGUST 29, 1995 HERCULES FUNDS INC. 222 SOUTH NINTH STREET, MINNEAPOLIS, MINNESOTA 55402-3804 (612) 342-1100 (LOCAL CALLS) (800) 584-1317 (TOLL FREE) Hercules Funds Inc. (the "Company") is comprised of eight funds (the "Fund(s)"). A prominent international advisory organization has been retained on behalf of each Fund to act as its sub-adviser (the "Sub-Adviser(s)"). This prospectus relates to six of the Funds; the remaining two Funds are not being offered for sale as of the date hereof. The six Funds, their investment objectives and Sub-Advisers are as follows: HERCULES NORTH AMERICAN GROWTH AND INCOME FUND ("North American Fund") has investment objectives of both long-term capital appreciation and current income. North American Fund seeks to achieve its objectives primarily through investments in securities of issuers in Mexico, Canada and the U.S. ACCI WORLDWIDE, S.A. DE C.V. ("Acci") and AGF INVESTMENT ADVISORS, INC. ("AGF") serve as Sub-Advisers to North American Fund regarding investments in securities of Mexican and Canadian issuers, respectively. PIPER CAPITAL MANAGEMENT INCORPORATED, the Company's investment manager, also manages the U.S. portion of North American Fund. HERCULES EUROPEAN VALUE FUND ("European Value Fund") has investment objectives of long-term capital appreciation and to a lesser extent, current income. European Value Fund seeks to achieve its objectives primarily through investments in securities of issuers located in Europe. PICTET INTERNATIONAL MANAGEMENT LIMITED ("Pictet") serves as Sub-Adviser to European Value Fund. HERCULES PACIFIC BASIN VALUE FUND ("Pacific Value Fund") has investment objectives of long-term capital appreciation and to a lesser extent, current income. Pacific Value Fund seeks to achieve its objectives primarily through investments in securities of issuers located in the Pacific Basin, which is defined as those countries bordering on the Pacific Ocean. EDINBURGH FUND MANAGERS PLC ("EFM") serves as Sub-Adviser to Pacific Value Fund. HERCULES LATIN AMERICAN VALUE FUND ("Latin American Value Fund") has investment objectives of long-term capital appreciation and to a lesser extent, current income. Latin American Value Fund seeks to achieve its objectives primarily through investments in securities of issuers located in Latin America. BANKERS TRUST COMPANY serves as Sub-Adviser to Latin American Value Fund. HERCULES WORLD BOND FUND ("Bond Fund") has an investment objective of a high level of total investment return. Bond Fund seeks to achieve its objective through investments principally in debt securities of issuers located anywhere in the world. SALOMON BROTHERS ASSET MANAGEMENT LIMITED serves as Sub-Adviser to Bond Fund. HERCULES MONEY MARKET FUND ("Money Market Fund") has an investment objective of maximizing current income consistent with the preservation of capital and maintenance of liquidity. Money Market Fund invests exclusively in a variety of high quality money market instruments, such as high grade domestic commercial paper, repurchase agreements, obligations of domestic banks (e.g., time deposits, certificates of deposit and bankers' acceptances), U.S. Government securities and short-term corporate obligations. Money Market Fund seeks to maintain a stable net asset value of $1.00 per share. SALOMON BROTHERS ASSET MANAGEMENT INC serves as Sub-Adviser to Money Market Fund. INVESTMENT IN EACH OF THE FUNDS (OTHER THAN MONEY MARKET FUND) INVOLVES CERTAIN RISKS NOT TYPICALLY ASSOCIATED WITH A FUND WHICH INVESTS PRIMARILY IN SECURITIES OF U.S. ISSUERS. SEE "SPECIAL RISK CONSIDERATIONS." This Prospectus describes concisely 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 Company dated August 29, 1995 is available free of charge. Write to the Company at 222 South Ninth Street, 20th Floor, Minneapolis, Minnesota 55402-3804 or telephone (612) 342-1100 (local calls) or (800) 584-1317 (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. INVESTMENT IN MONEY MARKET FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. THERE IS NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE. 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 The Company is an open-end management investment company, commonly called a mutual fund. The Company, which was organized as a corporation under the laws of the State of Minnesota in 1993, has one class of capital stock that is currently issued in eight separate series. This Prospectus relates to shares of six of those series: Hercules North American Growth and Income Fund ("North American Fund") Hercules European Value Fund ("European Value Fund"), Hercules Pacific Basin Value Fund ("Pacific Value Fund"), Hercules Latin American Value Fund ("Latin American Value Fund"), Hercules World Bond Fund ("Bond Fund") and Hercules Money Market Fund ("Money Market Fund") (sometimes referred to herein as a "Fund" or, collectively, as the "Funds"). Shares of the remaining two series, Hercules Emerging Markets Debt Fund and Hercules Global Short-Term Fund, are not being offered for sale as of the date hereof. This prospectus relates to the continuous offering of shares by each of the six Funds set forth above. MANAGEMENT On July 18, 1995, shareholders of the Company approved an investment advisory and management agreement between Piper Capital Management Incorporated (the "Manager"), a corporation organized under the laws of the state of Delaware and the Company. Each Fund pays the Manager a fee for managing its investment portfolio. Management fees for each of the Funds, except for Money Market Fund, are paid monthly at an annual rate of 1.0% of average daily net assets of the applicable Fund. These fees are higher than fees paid by most other investment companies. The management fees for Money Market Fund are paid monthly at an annual rate of .50% of average daily net assets. See "Management--Investment Manager." As previously described, with respect to each Fund, the Manager has entered into a sub-advisory agreement pursuant to which the Sub-Advisers, subject to the supervision of the Manager, are responsible for certain investment functions including researching and developing an overall investment plan and making and implementing investment decisions regarding assets of the respective Fund. With respect to North American Fund, the Manager has retained the responsibility to manage the U.S. portion of the portfolio. For its services, each Sub-Adviser is paid by the Manager a fee, payable over the same time periods and calculated in the same manner as the management fee of the applicable Fund, of .50% of average daily net assets of such Fund (in the case of North American Fund, each of the two Sub-Advisers is paid .166 of 1%), except that with respect to Money Market Fund, the Sub-Adviser is paid by the Manager a fee of .25% of average daily net assets of the applicable Fund. See "Management--Sub-Advisers." THE DISTRIBUTOR Piper Jaffray Inc. ("Piper Jaffray" or the "Distributor"), a wholly owned subsidiary of Piper Jaffray Companies Inc. and an affiliate of the Manager, serves as Distributor of the Company's shares. For its services as Distributor, which include distributing shares of the Funds and for sales-related expenses, the Distributor is entitled to reimbursement from each Fund (other than Money Market Fund) each month for its actual expenses incurred in the distribution and promotion of each Fund's shares pursuant to a Rule 12b-1 Distribution Plan adopted by each of the Funds. Reimbursement to the Distributor is computed separately for each of the applicable Funds and may not exceed .70% per annum of the average daily net assets with respect to North American Fund, European Value Fund, Pacific Value Fund and Latin American Value Fund and .50% per annum with respect to Bond Fund. The Rule 12b-1 fees may be limited voluntarily by the Distributor. Currently, reimbursement to the Distributor is limited on a per annum basis to .50% with respect to average daily net assets of North 2 American Fund, European Value Fund, Pacific Value Fund and Latin American Value Fund and .30% with respect to average daily net assets of Bond Fund. These limitations may be revised or terminated at any time after the Company's current fiscal year. See "Distribution of Fund Shares." OFFERING PRICES Shares of the Funds are offered to the public at the next determined net asset value after receipt of an order by either the Distributor or the Funds' transfer agent, Investors Fiduciary Trust Company ("IFTC"). Shares redeemed within two years of purchase are subject to a contingent deferred sales charge under most circumstances. See "Purchase of Shares--Public Offering Price" and "Redemption of Shares--Contingent Deferred Sales Charge." MINIMUM INITIAL AND SUBSEQUENT INVESTMENTS The minimum initial investment for each Fund is $250. Subsequent investments must be $100 or more. These minimums may be lowered by the Distributor in certain instances. See "Purchase of Shares--Minimum Investments." EXCHANGES Shares of a Fund may be exchanged for shares of any other Fund offered in an investor's state at net asset value. An investor may make twelve exchanges per year without payment of a service charge. Thereafter, there is a $50 service charge for each exchange. See "Purchase of Shares--Exchange Privilege." REDEMPTIONS Shares of any Fund may be redeemed at any time at their net asset value next determined after receipt of a redemption request by the Distributor or by IFTC. The Company reserves the right, upon 30 days' written notice, to redeem an account in any Fund if the net asset value of the shares in that account falls below $200 as the result of a redemption or transfer request. Although no commission or sales load is imposed on the purchase of shares, a contingent deferred sales charge of up to 2% of net asset value is imposed on redemptions of shares of each Fund (other than Money Market Fund) within two years of purchase (the "holding period"). However, there is no charge imposed on redemption of shares purchased through reinvestment of dividends or distributions. See "Redemption of Shares." TAXES Each of the Funds is treated as a separate corporation for federal tax purposes and each of the Funds expects to qualify as a regulated investment company during the current taxable year. CERTAIN SPECIAL RISK CONSIDERATIONS An investment in any of the Funds is subject to certain risks, as set forth in detail under "Special Risk Considerations." As with other mutual funds, there can be no assurance that any Fund will achieve its objective. Each Fund (other than Money Market Fund) invests in foreign securities. Accordingly, an investment in each Fund (other than Money Market Fund) requires consideration of certain risk factors that are not typically associated with investing in securities of U.S. companies. To the extent a Fund's investments are denominated in currencies other than the U.S. dollar, such Fund is subject to a risk of a decline in the value of such currency against the U.S. dollar. Additional risk factors include potential political and economic instability of certain countries, limited liquidity, volatile prices of certain securities of non-U.S. companies and foreign taxation. See "Special Risk Considerations--Foreign Securities." 3 The value of debt securities in which each of the Funds may invest typically varies inversely with changes in the level of interest rates. Each Fund may borrow for investment purposes principally through the use of reverse repurchase agreements and to a lesser extent through borrowing from banks. This speculative technique is referred to as "leveraging." Leveraging generally exaggerates the effect on net asset value of any increase or decrease in the market value of the Funds' portfolio securities. Money borrowed for leveraging will be subject to interest costs which may or may not be recovered by income from or appreciation of the securities purchased. Some or all of the Funds, to the extent set forth under "Investment Objectives and Policies," "Special Investment Methods" and "Other Eligible Investments" may engage in the following investment practices: forward foreign currency exchange transactions and foreign currency futures and options, the use of repurchase agreements, entering into options and futures transactions with respect to financial instruments and stock and interest rate indexes, entering into interest rate swaps, caps and floors, the purchase of securities on a "when-issued" basis, the purchase or sale of securities on a "forward commitment" basis, the purchase of zero coupon and payment in kind bonds, the purchase of Brady Bonds, the use of short sales, the purchase of illiquid securities, investments in foreign index linked instruments and the purchase of mortgage-related securities. The use of certain of these financial techniques to generate income is considered speculative and may involve the creation of leverage. In addition, the use of certain of these practices may increase the volatility of a Fund's net asset value. Certain of the investment techniques set forth above are commonly referred to as "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. All of these transactions involve certain special risks, as set forth under "Special Risk Considerations" and "Other Eligible Investments--Brady Bonds." The Company has registered as a "non-diversified" investment company so that each Fund will be able to invest more than 5% of the value of its assets in the obligations of a single issuer, subject to the diversification requirements of Subchapter M of the Internal Revenue Code of 1986, as amended, applicable to the Funds. To the extent the Funds invest a relatively high percentage of their assets in obligations of a limited number of issuers, the Funds may be more susceptible than diversified funds to any single economic, political or regulatory occurrence or to changes in an issuer's financial condition or in the market's assessment of issuers. See "Special Risk Considerations--Non-Diversified Status." Latin American Value Fund and Bond Fund may invest in lower-quality debt securities rated below Baa3 by Moody's Investors Service, Inc. ("Moody's") or BBB- by Standard & Poor's Ratings Group ("S&P") (commonly known as "high yield" or "junk" bonds) or, if unrated, of comparable quality as determined by their respective Sub-Advisers. Latin American Value Fund and Bond Fund will each invest less than 35% of its net assets in such high yield securities. Investment in high yield securities typically involves risks not associated with higher-rated securities, including, among others, overall greater risk of not receiving timely and ultimate payment of interest and principal, potentially greater sensitivity to general economic conditions and changes in interest rates, greater market price volatility and less liquid secondary market trading. See "Special Risk Considerations--Risks of Lower-Rated Debt Securities." Each of the Funds (other than Money Market Fund) may invest in loans, assignments of loans and participations in loans. Such investments are subject to special risks, including the lack of a liquid 4 secondary market for such securities and, in the case of loan participations, assumption of the credit risk of both the underlying borrower and the seller of the participation. See "Other Eligible Investments--Loan Participations and Assignments." SHAREHOLDER INQUIRIES Any questions or communications regarding a shareholder account should be directed to your broker-dealer or to IFTC at (800) 245-7087. General inquiries regarding the Funds should be directed to the Funds at the telephone number set forth on the cover page of this Prospectus. 5 FEES AND EXPENSES
LATIN NORTH EUROPEAN PACIFIC AMERICAN MONEY AMERICAN VALUE VALUE VALUE BOND MARKET FUND FUND FUND FUND FUND FUND -------- -------- ------- -------- ------ ------ SHAREHOLDER TRANSACTION EXPENSES Maximum Sales Load Imposed on Purchases (as a percentage of offering price)............................................ 0% 0% 0% 0% 0% 0% Maximum Contingent Deferred Sales Charge(1)................. 2.00% 2.00% 2.00% 2.00% 2.00% None Exchange Fee(2)............................................. $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 ANNUAL FUND OPERATING EXPENSES (after fee limitation and reimbursement; as a percentage of average net assets) Management Fees............................................. 1.00% 1.00% 1.00% 1.00% 1.00% .50% 12b-1 Fees (after fee limitation)(3),(4).................... .50% .50% .50% .50% .30% 0%(5) Other Expenses (after expense reimbursement)(4)............. Administrative Services, Transfer Agency and Custodian.... .50% .50% .50% .50% .50% .50% Total Fund Operating Expenses (after fee limitation and reimbursement)(4).......................................... 2.00% 2.00% 2.00% 2.00% 1.80% 1.00% EXAMPLE You would pay the following expenses on a $1,000 investment, assuming (1) 5% annual return and (2) redemption at the end of each time period(4) 1 year.................................................... $ 40 $ 40 $ 40 $ 40 $ 38 $ 10 3 years................................................... $ 63 $ 63 $ 63 $ 63 $ 57 $ 32 5 years................................................... 108 108 108 108 97 55 10 years.................................................. 233 233 233 233 212 122 -------- -------- ------- -------- ------ ------ -------- -------- ------- -------- ------ ------ You would pay the following expenses on the same investment, assuming no redemption 1 year.................................................... $ 20 $ 20 $ 20 $ 20 $ 18 $ 10 3 years................................................... $ 63 $ 63 $ 63 $ 63 $ 57 $ 32 5 years................................................... 108 108 108 108 97 55 10 years.................................................. 233 233 233 233 212 122
- - - - - - --------- (1)The maximum 2% contingent deferred sales charge on shares of each Fund (other than Money Market Fund) applies to redemptions during the first 365 days after purchase; the charge declines to 1% during the next 365 days after purchase, reaching zero thereafter. (2)There is a $50 fee for each exchange in excess of 12 exchanges per year. See "Purchase of Shares-- Exchange Privilege." (3)A portion of the Rule 12b-1 fee equal to .25% of the average daily net assets with respect to all of the Funds (other than Money Market Fund) is characterized as a service fee within the meaning of the guidelines of the National Association of Securities Dealers, Inc. ("NASD"). (4)12b-1 fees for each Fund (other than Money Market Fund) are currently limited voluntarily by the Distributor. In addition, certain "Other Expenses" are borne by the Manager. The amounts set forth in the Example may increase if such fee limitations and expense reimbursement are removed. For each Fund's current fiscal year the Manager has voluntarily limited total expenses on a per annum basis to 2% with respect to average daily net assets of North American Fund, European Value Fund, Pacific Value Fund and Latin American Value Fund, 1.8% with respect to average daily net assets of Bond Fund and 1.00% with respect to average daily net assets of Money Market Fund. After each Fund's current fiscal year, these limitations may be revised or terminated at any time. (5)The Company's 12b-1 Distribution Plan authorizes payments by Money Market Fund in an amount not to exceed .10% per annum of its daily net assets; however, the Board of Directors of the Company determined to discontinue such payments by the Fund effective as of June 19, 1995. 6 The purpose of the above Fees and Expenses table is to assist the investor in understanding the various costs and expenses that each Fund expects to incur and that investors in the Funds should expect to bear directly or indirectly. The percentages set forth for each Fund which are included within the category "Other Expenses" are estimates. The Rule 12b-1 fees set forth in the table (for each of the Funds other than Money Market Fund) are pursuant to voluntary fee limitations by the Distributor which may be revised or terminated at any time after the conclusion of each Fund's current fiscal year. Absent such fee limitation, Rule 12b-1 fees may not exceed .70% per annum of the average daily net assets with respect to North American Fund, Pacific Value Fund, European Value Fund and Latin American Value Fund and .50% with respect to Bond Fund. In addition to the Rule 12b-1 fee limitation, certain "Other Expenses" were voluntarily waived or absorbed by the Manager. Absent such waivers and reimbursements for the fiscal year ended June 30, 1995, "Other Expenses" would have been 1.69% of average daily net assets for North American Fund, 1.51% of average daily net assets for European Value Fund, .83% of average daily net assets for Pacific Value Fund, 1.77% of average daily net assets for Latin American Value Fund, 1.03% of average daily net assets for Bond Fund and 24.84% of average daily net assets for Money Market Fund. Had the Funds paid all expenses, Total Fund Operating Expenses for the fiscal year ended June 30, 1995 would have been 3.39% of average daily net assets for North American Fund, 3.21% of average daily net assets for European Value Fund, 2.53% of average daily net assets for Pacific Value Fund, 3.47% of average daily net assets for Latin American Value Fund, 2.53% of average daily net assets for Bond Fund and 25.44% of average daily net assets for Money Market Fund. THE TABLE AND EXAMPLES SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OR PREDICTION OF FUTURE EXPENSES OR PERFORMANCE WHICH MAY BE MORE OR LESS THAN THOSE SET FORTH. For additional information, including a more complete explanation of management and Rule 12b-1 fees, see "Management-- Investment Manager," "Management--Expenses" and "Distribution of Fund Shares." Long-term shareholders of the Funds (other than Money Market Fund) may pay more in Rule 12b-1 distribution fees than the economic equivalent of the maximum front-end sales charge permitted by the NASD. 7 FINANCIAL HIGHLIGHTS The following financial highlights show certain per share data and selected information for a share of capital stock outstanding during the indicated periods for the Funds. The information has been audited by KPMG Peat Marwick LLP, independent auditors, whose report thereon appears in the Statement of Additional Information. This information should be read in conjunction with the financial statements and the related notes thereto appearing in the Statement of Additional Information.
NORTH AMERICAN FUND EUROPEAN VALUE FUND ------------------------- ------------------------- FISCAL YEAR PERIOD FROM FISCAL YEAR PERIOD FROM ENDED 11/9/93* TO ENDED 11/9/93* TO 6/30/95 6/30/94 6/30/95 6/30/94 ----------- ----------- ----------- ----------- PER SHARE DATA Net asset value, beginning of period........................ $ 9.46 10.00 9.86 10.00 - - - - - - ------------------------------------------------------------------------------------------------------------------- Operations: Investment income--net**.................................. 0.17 0.04 0.12 0.02 Net realized and unrealized gains (losses)................ 0.33 (0.58) 1.21 (0.16) - - - - - - ------------------------------------------------------------------------------------------------------------------- Total from operations....................................... 0.50 (0.54) 1.33 (0.14) - - - - - - ------------------------------------------------------------------------------------------------------------------- Distributions from: Investment income--net.................................... (0.04) -- (0.03) -- Net realized gains........................................ -- -- (0.06) -- - - - - - - ------------------------------------------------------------------------------------------------------------------- Total distributions......................................... (0.04) -- (0.09) -- - - - - - - ------------------------------------------------------------------------------------------------------------------- Net asset value, end of period.............................. $ 9.92 9.46 11.10 9.86 - - - - - - ------------------------------------------------------------------------------------------------------------------- - - - - - - ------------------------------------------------------------------------------------------------------------------- SELECTED INFORMATION Total return***............................................. 5.36% (5.40%) 13.52% (1.40%) Net assets, end of period (000s omitted).................... $13,217 16,856 17,520 16,574 Ratio of expenses to average daily net assets++............. 2.00% 2.00%+ 2.00% 2.00%+ Ratio of net investment income to average daily net assets++............................................... 1.84% 0.87%+ 1.10% 0.47%+ Portfolio turnover rate (excluding short-term securities)... 52% 23% 131% 60%
- - - - - - ------------ * Commencement of operations. ** Based on the weighted average number of shares outstanding during the period. ***Total return is based on the change in net asset value during the period, assumes reinvestment of all distributions and does not reflect the contingent deferred sales charge applicable to shares purchased after 6/19/95. + Adjusted to an annual basis. ++ Various portfolio fees and expenses were voluntarily waived or absorbed by the manager and Distributor. Had the funds paid all expenses, the annualized ratios of expenses and net investment income to average daily net assets would have been as follows:
NORTH AMERICAN FUND EUROPEAN VALUE FUND ------------------------- ------------------------- FISCAL YEAR PERIOD FROM FISCAL YEAR PERIOD FROM ENDED 11/9/93* TO ENDED 11/9/93* TO 6/30/95 6/30/94 6/30/95 6/30/94 ----------- ----------- ----------- ----------- 3.39%/0.45% 3.41%/(0.54%) 3.21%/(0.11%) 3.25%/(0.78%)
8 FINANCIAL HIGHLIGHTS (CONTINUED)
PACIFIC VALUE FUND LATIN AMERICAN VALUE FUND ------------------------- ------------------------- FISCAL YEAR PERIOD FROM FISCAL YEAR PERIOD FROM ENDED 11/9/93* TO ENDED 11/9/93* TO 6/30/95 6/30/94 6/30/95 6/30/94 ----------- ----------- ----------- ----------- PER SHARE DATA Net asset value, beginning of period........................ $ 10.68 10.00 9.14 10.00 - - - - - - ------------------------------------------------------------------------------------------------------------------- Operations: Investment income (loss)--net**........................... (0.10) (0.04) -- 0.01 Net realized and unrealized gains (losses)................ (1.45) 0.72 (1.94) (0.87) - - - - - - ------------------------------------------------------------------------------------------------------------------- Total from operations....................................... (1.55) 0.68 (1.94) (0.86) - - - - - - ------------------------------------------------------------------------------------------------------------------- Distributions from: Net realized gains........................................ (0.11) -- -- -- - - - - - - ------------------------------------------------------------------------------------------------------------------- Total distributions......................................... (0.11) -- -- -- - - - - - - ------------------------------------------------------------------------------------------------------------------- Net asset value, end of period.............................. $ 9.02 10.68 7.20 9.14 - - - - - - ------------------------------------------------------------------------------------------------------------------- - - - - - - ------------------------------------------------------------------------------------------------------------------- SELECTED INFORMATION Total return***............................................. (14.63%) 6.80% (21.23%) (8.60%) Net assets, end of period (000s omitted).................... $31,527 40,828 22,624 27,750 Ratio of expenses to average daily net assets++............. 2.00% 2.00%+ 2.00%+ 2.00%+ Ratio of net investment income (loss) to average daily net assets++............................................... (1.06%) (0.96%)+ (0.03%)+ 0.14%+ Portfolio turnover rate (excluding short-term securities)... 68% 39% 161% 78%
- - - - - - ------------ * Commencement of operations. ** Based on the weighted average number of shares outstanding during the period. ***Total return is based on the change in net asset value during the period, assumes reinvestment of all distributions and does not reflect the contingent deferred sales charge applicable to shares purchased after 6/19/95. + Adjusted to an annual basis. ++ Various portfolio fees and expenses were voluntarily waived or absorbed by the manager and Distributor. Had the funds paid all expenses, the annualized ratios of expenses and net investment income to average daily net assets would have been as follows:
PACIFIC VALUE FUND LATIN AMERICAN VALUE FUND ------------------------- ------------------------- FISCAL YEAR PERIOD FROM FISCAL YEAR PERIOD FROM ENDED 11/9/93* TO ENDED 11/9/93* TO 6/30/95 6/30/94 6/30/95 6/30/94 ----------- ----------- ----------- ----------- 2.53%/(1.59%) 2.36%/(1.32%) 3.47%/(1.50%) 3.10%/(0.96%)
9 FINANCIAL HIGHLIGHTS (CONTINUED)
MONEY MARKET BOND FUND FUND ------------------------- ------------ FISCAL YEAR PERIOD FROM PERIOD FROM ENDED 11/9/93* TO 12/13/94* TO 6/30/95 6/30/94 6/30/95 ----------- ----------- ------------ PER SHARE DATA Net asset value, beginning of period........................ $ 9.35 10.00 1.00 - - - - - - ------------------------------------------------------------------------------------------------------ Operations: Investment income net**................................... 0.45 0.12 0.02 Net realized and unrealized gains (losses)................ 0.22 (0.71) -- - - - - - - ------------------------------------------------------------------------------------------------------ Total from operations....................................... 0.67 (0.59) 0.02 - - - - - - ------------------------------------------------------------------------------------------------------ Distributions: From investment income--net............................... (0.09) (0.06) (0.02) Tax return of capital..................................... (0.11) -- -- - - - - - - ------------------------------------------------------------------------------------------------------ Total distributions......................................... (0.20) (0.06) (0.02) - - - - - - ------------------------------------------------------------------------------------------------------ Net asset value, end of period.............................. $ 9.82 9.35 1.00 - - - - - - ------------------------------------------------------------------------------------------------------ - - - - - - ------------------------------------------------------------------------------------------------------ SELECTED INFORMATION Total return***............................................. 7.24% (5.96%) 2.62% Net assets, end of period (000s omitted).................... $13,776 32,360 1,230 Ratio of expenses to average daily net assets++............. 1.80% 1.80%+ 1.00%+ Ratio of net investment income to average daily net assets++................................................... 4.76% 2.63%+ 4.53%+ Portfolio turnover rate (excluding short-term securities)... 501% 291% N/A
- - - - - - ------------ *Commencement of operations. **Based on the weighted average number of shares outstanding during the period. ***Total return is based on the change in net asset value during the period, assumes reinvestment of all distributions and does not reflect the contingent deferred sales charge applicable to shares purchased after 6/19/95. + Adjusted to an annual basis. ++ Various portfolio fees and expenses were voluntarily waived or absorbed by the manager and Distributor. Had the funds paid all expenses, the annualized ratios of expenses and net investment income to average daily net assets would have been as follows:
MONEY MARKET BOND FUND FUND ------------------------- ------------ FISCAL YEAR PERIOD FROM PERIOD FROM ENDED 11/9/93* TO 12/13/94* TO 6/30/95 6/30/94 6/30/95 ----------- ----------- ------------ 2.53%/4.03% 2.03%/2.40% 25.44%/(19.91%)
10 INVESTMENT OBJECTIVES AND POLICIES The investment objectives listed below are fundamental and 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. NORTH AMERICAN FUND North American Fund's objectives are to achieve long-term capital appreciation and current income. The Fund seeks to achieve its investment objectives by investing under normal circumstances at least 65% of its total assets in U.S., Canadian and Mexican securities (as described below). North American Fund defines U.S., Canadian or Mexican securities as securities issued by: (a) companies organized in the U.S., Canada or Mexico or for which the principal trading market is located in such countries, (b) companies that derive at least 50% of their gross revenues from either goods produced, sales made, services performed or investments made in such countries, (c) companies which have at least 50% of their total assets located in the U.S., Canada or Mexico or (d) or guaranteed by the governments of such countries or their agencies, political subdivisions or instrumentalities or the central bank of such country (sovereign debt). The Fund will not invest 25% or more of its total assets in government obligations issued by Canada or Mexico. See "Special Risk Considerations-- Foreign Securities--Risks of Sovereign Debt Obligations." In selecting particular investments, each Sub-Adviser and the Manager seek to identify companies believed by it to have long term prospects for growth of earnings and dividends in relationship to the prevailing market price. Emphasis is expected to be placed on investment in companies which the Sub-Advisers and the Manager believe are well positioned to benefit from the cross border commerce among the countries in North America which is currently taking place and is expected to increase as a result of government initiatives to promote free cross border trade. Assets will be allocated among the U.S., Canada and Mexico in accordance with the Manager's view as to where the best opportunities exist. The Manager may rely in whole or in part in making such allocations on the results of a proprietary allocation model made available to the Fund without separate charge by a financial institution to be selected by the Manager. Although initially the Fund expects to invest virtually all of its assets in North American issuers, the Fund is authorized to invest up to 35% of its total assets in securities of issuers located outside of the U.S., Canada and Mexico. In evaluating investments outside of North America, the Manager and Sub-Adviser will seek investments in issuers which they believe are well positioned to benefit from cross-border trade with the U.S., Canada and Mexico or from other developments in North America. Equity securities in which the Fund may invest include common stocks and preferred stocks (either convertible or non-convertible), warrants and stock rights. The Fund does not expect to invest more than 5% of its net assets in warrants and stock rights. Also, North American Fund may invest to a limited extent in investment companies or trusts which invest in securities of the U.S., Canada and Mexico. See "Other Eligible Investments--Investments in Other Investment Companies." Debt securities in which the Fund may invest include bonds, notes and debentures of any maturity, mortgage-backed securities and asset-backed securities. Such securities may be issued by governmental or private issuers. Debt securities must be rated at least BBB by S&P or Baa by Moody's, or, if unrated, of at least comparable quality as determined by the Sub-Advisers to the North American Fund. The foregoing rating limitation applies at the time of acquisition of a security. Any 11 subsequent change in rating by a rating service will not require the Fund to dispose of the security. However, if the subsequent change in a rating of any security causes the Fund to have in the aggregate more than 5% of its net assets invested in securities rated below investment grade, the Fund will sell, as soon as it is practicable, sufficient securities to reduce the total to below 5%. See "Other Eligible Investments--Mortgage-Backed Securities" and "--Asset-Backed Securities." Generally, the Fund expects to invest no more than 60% or less than 20% of its total assets in any one of the U.S., Canada or Mexico. For temporary defensive purposes, the Fund may invest all or a portion of its assets in U.S. dollar-or foreign currency-denominated cash or domestic or foreign high quality money market instruments including commercial paper, certificates of deposit, bankers' acceptances and securities issued by the U.S. or a foreign government, their agencies or instrumentalities. EUROPEAN VALUE FUND European Value Fund's investment objectives are long-term capital appreciation and, to a lesser extent, current income. European Value Fund seeks to achieve its investment objectives primarily through investments (under normal circumstances, at least 65% of its total assets) in securities issued by issuers in Europe. The Fund defines Europe as Austria, Belgium, Denmark, Germany, Finland, France, Greece, the Republic of Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, Turkey and the United Kingdom. As the securities markets of additional continental European countries develop, such countries may be considered part of the Fund's definition of Europe and appropriate countries for investment by the Fund. Emphasis is expected to be placed on investments in equity securities. The Fund may, however, also seek capital appreciation through investment in debt securities, such as may occur through favorable changes in relative foreign exchange rates, in relative interest rate levels or in creditworthiness of issuers. Under normal market conditions, European Value Fund's investments will be allocated among at least three different countries in Europe. European Value Fund defines securities of European issuers as follows: (a) securities of companies organized under the laws of a country within Europe (including the United Kingdom) or for which the principal trading market is in Europe; (b) securities of companies that derive at least 50% of their gross revenues from goods produced, sales made, services performed or investments in companies in Europe; (c) securities of companies which have at least 50% of their total assets located in Europe; or (d) securities issued or guaranteed by the government of a country in Europe, its agencies, political subdivisions or instrumentalities or the central bank of such country (sovereign debt). The Fund will not invest 25% or more of its total assets in obligations issued by the government of any one European country. See "Special Risk Considerations--Foreign Securities--Risks of Sovereign Debt Obligations." The Fund is authorized to invest up to 10% of its net assets in securities issued by issuers in Eastern Europe. In view of rapid political developments in Eastern Europe, it is not possible to categorically state the issuing markets; however, the Fund currently defines Eastern Europe as the Czech Republic, Slovakia, Hungary, Poland, Lithuania, Latvia, Estonia, Russian Federation, Romania and Slovenia. The Fund may in the future invest in other markets in Eastern Europe as these markets develop. 12 Assets will be allocated among countries and currencies in accordance with the Sub-Adviser's proprietary asset allocation system. The system involves the continuing analysis of a fixed set of statistical indicators which (i) describe the progress of the credit cycle in each country, (ii) gauge the outlook for bond prices within the context of the historical and current relationship between money supply growth, inflation and real interest rates, and (iii) measure the likely relative return of stocks versus bonds on the basis of the current, implicit equity risk premium vis-a-vis historic norms. In selecting particular investments, the Sub-Adviser seeks to identify companies believed by it to be undervalued in the marketplace in relation to various factors such as the company's assets, earnings, growth potential and cash flows. Equity securities in which European Value Fund may invest include common stocks and preferred stocks (either convertible or non-convertible), warrants and stock rights. The Fund does not expect to invest more than 5% of its net assets in warrants and stock rights. European Value Fund also may purchase shares of investment companies or trusts which invest principally in securities in which the European Value Fund is authorized to invest. See "Other Eligible Investments--Investments in Other Investment Companies." Debt securities that European Value Fund may acquire include bonds, notes and debentures of any maturity, mortgage-backed securities and asset-backed securities. Such securities may be issued by governmental or private issuers. Debt securities that European Value Fund may acquire must be rated at least BBB by S&P or Baa by Moody's, or, if unrated, of comparable quality as determined by the Sub-Adviser. The foregoing rating limitation applies at the time of acquisition of a security. Any subsequent change in rating by a rating service will not require the Fund to dispose of any security. However, if the subsequent change in a rating of any security causes the Fund to have in the aggregate more than 5% of its net assets invested in securities rated below investment grade, the Fund will sell, as soon as it is practicable, sufficient securities to reduce the total to below 5%. See "Other Eligible Investments--Mortgage-Backed Securities" and "--Asset-Backed Securities." For temporary defensive purposes, European Value Fund may invest all or a portion of its assets in U.S. dollar- or foreign currency-denominated cash or domestic or foreign high-quality money market instruments including commercial paper, certificates of deposit, bankers' acceptances and securities issued by the U.S. or a foreign government, their agencies or instrumentalities. PACIFIC VALUE FUND Pacific Value Fund's investment objectives are long-term capital appreciation and, to a lesser extent, current income. Pacific Value Fund seeks to achieve its investment objectives through investments primarily (under normal circumstances, at least 65% of its total assets) in the securities of issuers located in the Pacific Basin. The Pacific Basin is defined as those countries bordering the Pacific Ocean. The Pacific Value Fund may invest in the following countries within the region: Malaysia, Pakistan, Sri Lanka, the Philippines, Singapore, South Korea, Thailand, India, Indonesia, Hong Kong, Japan, Taiwan, Australia and New Zealand. In addition, to the extent that suitable investment opportunities become available, Pacific Value Fund may invest in the following other countries: China, Vietnam, Laos, Cambodia, Myanmar, Bangladesh and North Korea. Emphasis is expected to be placed on investment in equity securities. The Fund may, however, also seek capital appreciation through investment in debt securities, such as may occur through favorable changes in relative foreign exchange rates, in relative interest rate levels or in creditworthiness of issuers. 13 Under normal market conditions, Pacific Value Fund's investments will be allocated among at least three different countries in the Pacific Basin. Pacific Value Fund defines securities of Pacific Basin issuers as follows: (a) securities of companies organized under the laws of a country within the Pacific Basin or for which the principal trading market for its securities is located in a country in the Pacific Basin, (b) securities of companies which derive at least 50% of their gross revenues from goods produced, sales made, services performed or investments in companies in the Pacific Basin, (c) securities of companies which have at least 50% of their total assets located in the Pacific Basin, or (d) securities issued or guaranteed by the government of a country in the Pacific Basin, its agencies, political subdivisions or instrumentalities, or the central bank of such country (sovereign debt). The Fund will not invest 25% or more of its total assets in obligations issued by the governments of any one country in the Pacific Basin. See "Special Risk Considerations--Foreign Securities--Risks of Sovereign Debt Obligations." In selecting investments, the Sub-Adviser seeks to identify countries and industries which, due to economic and political factors, have potential for significant growth and to identify those companies within such countries and industries which are best positioned to benefit therefrom. The equity securities in which Pacific Value Fund may invest consist of common stock, preferred stock (convertible and non-convertible), warrants and stock rights. The Fund does not expect to invest more than 5% of its net assets in warrants and stock rights. Pacific Value Fund may also to a limited extent purchase shares of investment companies or trusts which invest principally in securities in which Pacific Value Fund is authorized to invest. See "Other Eligible Investments--Investments in Other Investment Companies." Debt securities that Pacific Value Fund may acquire include bonds, notes and debentures of any maturity, mortgage-backed securities and asset-backed securities. Such securities may be issued by governmental or private issuers. Debt securities that the Fund may acquire must be rated at least BBB by S&P or Baa by Moody's, or, if unrated, of comparable quality as determined by the Sub- Adviser. For temporary defensive purposes, Pacific Value Fund may invest without limitation in U.S. dollar- or foreign currency-denominated cash or domestic or foreign high-quality money market instruments. LATIN AMERICAN VALUE FUND The investment objectives of Latin American Value Fund are long-term capital appreciation and to a lesser extent, current income. Latin American Value Fund seeks to achieve its objectives primarily by investing under normal circumstances at least 65% of its total assets in securities of Latin American issuers. In pursuit of its investment objectives, the Fund may invest in both equity and debt securities. Capital appreciation from debt securities may result from favorable changes in relative foreign exchange rates, in relative interest rate levels or in creditworthiness of issuers. Under normal market conditions, Latin American Value Fund's investments will be allocated among at least three different countries in Latin America. The Fund defines Latin America as Mexico, Central America and South America. Latin American Value Fund defines securities of Latin American issuers as follows: (a) securities of companies organized in a country in Latin America or for which the principal trading market is located in Latin America, (b) securities of companies that derive at least 50% of their gross revenues from either goods produced, sales made, services performed or investments in companies in 14 Latin America, (c) securities of companies which have at least 50% of their total assets located in Latin America, or (d) securities issued or guaranteed by the government of a country in Latin America, its agencies, political subdivisions or instrumentalities, or the central bank of such country (sovereign debt). The Fund will not invest 25% or more of its total assets in obligations issued by the governments of any one country in Latin America. See "Special Risk Considerations--Foreign Securities-- Risks of Sovereign Debt Obligations." Latin American Value Fund's assets will be allocated among the countries in Latin America in accordance with the Manager's and Sub-Adviser's judgment as to where the best investment opportunities exist. Criteria for determining the appropriate distribution of investments among various countries and regions include the prospects for relative growth among the countries, expected levels of inflation, government policies influencing business conditions, the outlook for currency relationships and the range of alternative opportunities available to international investors. Criteria for selection of individual securities include the issuer's competitive position, prospects for growth, managerial strength, earnings quality, underlying asset value, relative market value and overall marketability. The Fund may invest in securities of companies having various levels of net worth, including smaller companies whose securities generally are more volatile than securities offered by larger companies with higher levels of net worth. Latin American equity securities in which the Fund invests consist of common stock and preferred stock (either convertible or non-convertible), warrants and stock rights. The Fund does not expect to invest more than 5% of its net assets in warrants and stock rights. Latin American Value Fund may invest to a limited extent in investment companies or trusts which invest principally in securities in which Latin American Value Fund invests. See, "Other Eligible Investments--Investments in Other Investment Companies." Debt securities that Latin American Value Fund may acquire include bonds, notes and debentures of any maturity, mortgage-backed securities and asset-backed securities. Such debt securities may be issued by governmental or private issuers. The Fund may invest in any debt security regardless of rating (including securities in default status), provided, however, that the Fund may not invest more than 35% of its net assets in securities rated lower than investment grade or, if unrated, of comparable quality as determined by the Sub-Adviser. If a subsequent change in a rating of any security causes the Fund to have more than 35% of its net assets in securities rated lower than investment grade, the Fund will sell, as soon as it is practicable, sufficient securities to reduce the total to 35% or below. See "Other Eligible Investments--Mortgage-Backed Securities," "--Asset-Backed Securities," "Special Risk Considerations--Risks of Lower-Rated Debt Securities" and "Appendix." For temporary defensive purposes, the Fund may invest all or a portion of its assets in U.S. dollar-or foreign currency-denominated cash or foreign or domestic high-quality money market instruments including commercial paper, certificates of deposit, bankers' acceptances and securities issued by the U.S. or a foreign government, their agencies or instrumentalities. BOND FUND The investment objective of Bond Fund is to provide a high level of total investment return. Bond Fund will attempt to achieve its investment objective by investing principally in debt securities of issuers located anywhere in the world. Total investment return is the combination of income and capital appreciation. The Sub-Adviser emphasizes income in selecting securities for Bond Fund, but also considers the potential for changes in value resulting from changes in currency relationships, interest rates, individual issuers' credit standings and other factors. 15 Bond Fund will invest, under normal circumstances, at least 65% of its total assets in debt securities (i.e., bonds and notes) with an initial maturity of more than one year. Bond Fund will invest primarily in debt securities rated at least Baa by Moody's or BBB by S&P or, if unrated, of comparable quality as determined by the Sub-Adviser, but may invest in lower quality debt securities, provided that such investments do not meet or exceed 35% of the Fund's net assets. If a subsequent change in a rating of any security causes the Fund to have more than 35% of its net assets in securities rated lower than investment grade, the Fund will sell, as soon as it is practicable, sufficient securities to reduce the total to 35% or below. See "Special Risk Considerations--Risks of Lower-Rated Debt Securities" and "Appendix." Some of the debt securities purchased by Bond Fund may be convertible into common stock or be traded together with warrants for the purchase of common stock. Bond Fund can invest in securities of any type of issuer including governmental, supranational and private issuers. Up to 35% of the Fund's total assets may be invested in mortgage-backed and asset-backed securities. Bond Fund may invest in securities issued anywhere in the world, including the U.S. Under normal market conditions, Bond Fund will be invested in at least three different countries, one of which may be the U.S. Subject to the requirement that Bond Fund may not invest 25% or more of its total assets in obligations issued by the government of any one country, other than the U.S., there is no limit on the amount the Fund may invest in any one country, or in securities denominated in the currency of any one country, to take advantage of what the Sub-Adviser believes to be favorable yields, currency exchange conditions or total investment return potential. The Sub-Adviser will actively manage the allocation of Bond Fund's investments among countries, geographic regions, currency denominations and issuers in an attempt to achieve a high total investment return. In doing so, the Sub-Adviser will consider such factors as the outlook for currency relationships, current and anticipated interest rates, levels of inflation within various countries, prospects for relative economic growth, government policies influencing currency exchange rates and business conditions and the credit quality of individual issuers. Although Bond Fund is not limited to any region, country or currency, the Sub-Adviser currently expects to invest Bond Fund's assets primarily within Australia, Canada, Europe, Eastern Europe, Japan, Latin America, New Zealand and the United States, and in securities denominated in the currencies of these countries or regions or denominated in multinational currency units such as the European Currency Unit ("ECU"). Securities of issuers within a given country may be denominated in the currency of another country. See "Special Risk Considerations--Foreign Securities--Additional Risks Applicable to Investment in Eastern Europe." Under current market conditions, the Sub-Adviser expects that the dollar-weighted average maturity of Bond Fund's investments will not exceed 15 years. Generally, Bond Fund's average maturity will be shorter when interest rates worldwide or in a particular country are expected to rise, and longer when interest rates are expected to fall. The Fund may use various techniques to shorten or lengthen the dollar-weighted average maturity of its portfolio including transactions in futures and options on futures, interest rate swaps and short sales. Bond Fund may purchase and sell forward foreign exchange contracts for hedging purposes and for purposes of seeking to enhance portfolio returns and managing portfolio risk more efficiently. See "Special Investment Methods--Foreign Currency Transactions." The Sub-Adviser believes that active currency management can enhance portfolio returns through opportunities arising from interest rate differentials between currencies and/or changes in value between currencies. Moreover, the Sub-Adviser believes active currency management can be employed as an overall portfolio risk management tool. For example, in its view, foreign currency management can provide overall portfolio risk 16 diversification when combined with a portfolio of foreign securities and the market risks of investing in specific foreign markets can at times be reduced by currency strategies which may not involve the currency in which the foreign security is denominated. Use of foreign currency futures, options and forward contracts will be subject to applicable limitations and requirements of the Securities and Exchange Commission (the "SEC") and the Commodity Futures Trading Commission (the "CFTC"). See "Special Risk Considerations--Risks of Transactions in Futures Contracts and Options." For temporary defensive purposes, the Fund may invest all or a portion of its assets in U.S. dollar-or foreign currency-denominated cash or foreign or domestic high-quality money market instruments. MONEY MARKET FUND Money Market Fund has an investment objective of maximizing current income consistent with preservation of capital and maintenance of liquidity. Money Market Fund will attempt to achieve its investment objective by investing in a combination of money market securities described below and it may invest in repurchase agreements and enter into reverse repurchase agreements (in an amount not to exceed 5% of its total assets) with respect to such securities. See "Special Investment Methods--Repurchase Agreements" and "--Reverse Repurchase Agreements." The Fund may invest in U.S. Government Securities. U.S. Government Securities are obligations issued or guaranteed as to principal and interest by the U.S. Government or one of 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 Corporation, the Financing Corporation and the Student Loan Marketing Association. Certain U.S. Government Securities, such as Government National Mortgage Association mortgage-backed securities, are backed by the full faith and credit of the U.S. Treasury, while others, such as those of the Federal Home Loan Banks, are backed by the right of the issuer to borrow from the U.S. Treasury. In addition, other obligations, 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. Finally, obligations of other agencies or instrumentalities, such as those of the Federal Home Loan Mortgage Corporation and the Student Loan Marketing Association, are backed solely by the credit of the agency or instrumentality issuing the obligations. The Fund may also invest in other Eligible Securities. In addition to U.S. Government Securities, Eligible Securities include securities rated in one of the two highest short-term rating categories by at least two nationally recognized statistical rating organizations ("NRSROs"). NRSROs currently include Standard & Poor's Ratings Group, Moody's Investors Service, Inc., Duff and Phelps, Inc., Fitch Investors Service, Inc., Thomson Bankwatch and, with respect to debt issued by banks, bank holding companies, broker-dealers, broker-dealers' parent companies, and bank-sponsored debt, IBCA Limited and its affiliate, IBCA, Inc. See "Appendix" attached hereto for an explanation of the ratings issued by these organizations. Eligible Securities also include (a) securities that at the time of issuance were long-term securities but that have remaining maturities of 397 calendar days or less, provided the issuer has comparable outstanding short-term debt rated in one of the two highest rating categories, and (b) unrated securities of comparable quality, as determined by the Manager and the Sub-Adviser pursuant to written guidelines and procedures adopted by the Company's Board of Directors. 17 The types of Eligible Securities in which the Fund may invest include bonds, notes and commercial paper (including variable amount master demand notes) of domestic issuers, certificates of deposits, bank notes, time deposits and bankers' acceptances issued by domestic banks. Commercial paper is a short term debt obligation of a domestic issuer. Variable amount master demand notes are demand obligations that permit the investment of fluctuating amounts at varying market rates of interest pursuant to arrangements between the issuer and a commercial bank acting as agent for the payees of such notes, whereby both parties have the right to vary the amount of the outstanding indebtedness on the notes. Certificates of deposit are certificates evidencing the obligation of a bank to repay funds deposited with it for a specified period of time. Time deposits are non-negotiable deposits maintained in a banking institution for a specified period of time at a stated interest rate. Time deposits are not transferable and are therefore illiquid prior to their maturity. The Fund will not invest more than 10% of its net assets in time deposits of over 7 days and other illiquid securities. See "Special Investment Methods--Illiquid Securities." Bankers' acceptances are credit instruments evidencing the obligation of a bank to pay a draft drawn on it by a customer. These instruments reflect the obligation both of the bank and of the drawer to pay the face amount of the instrument upon maturity. Money Market Fund may purchase from banks and securities dealers participation interests in securities in which the Fund may invest. A participation interest gives the Fund an undivided interest in the security in the proportion that the Fund's participation interest bears to the total principal amount of the security. These instruments may have fixed, floating or variable rates of interest, with remaining maturities of one year or less. If the participation interest is unrated, or has been given a rating below that which is permissible for purchase by the Fund, the participation interest will be backed by an irrevocable letter of credit or guarantee of a bank, or the payment obligation otherwise will be collateralized by U.S. Government Securities, or, in the case of unrated participation interests, the Sub-Adviser must have determined that the instrument is of comparable quality to those instruments in which the Fund may invest. For certain participation interests, the Fund will have the right to demand payment, on not more than seven days' notice, for all or any part of the Fund's participation interest in the security, plus accrued interest. As to these instruments, the Fund intends to exercise its right to demand payment only upon a default under the terms of the security, as needed to provide liquidity to meet redemptions, or to maintain or improve the quality of its investment portfolio. Participation interests that do not have this demand feature are considered illiquid securities and subject to the 10% limitation discussed below. See "Special Investment Methods--Illiquid Securities." RULE 2A-7. The Fund is subject to the investment restrictions of Rule 2a-7 under the Investment Company Act of 1940, as amended (the "1940 Act") in addition to its other policies and restrictions discussed below. Rule 2a-7 requires that the Fund invests exclusively in securities that mature within 397 days and 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 U.S. dollar-denominated investments that: (1) present "minimal credit risks," and (2) are at the time of acquisition "Eligible Securities." It is the responsibility of the Manager and the Sub-Adviser to determine that the Fund's investments present only "minimal credit risks" and are Eligible Securities; such determination will be made pursuant to written guidelines and procedures adopted by the Company's Board of Directors. Under Rule 2a-7, 95% of the assets of the Fund must be invested in Eligible Securities that are deemed First Tier Securities, which include, among others, securities rated by at least two NRSROs in the highest category for short-term debt obligations. In addition, the Fund may not (1) invest (with 18 certain limited exemptions) more than 5% of its total assets in securities of a single issuer, other than U.S. Government Securities, (2) invest more than 5% of its total assets in Second Tier Securities (I.E., Eligible Securities that are not First Tier Securities) and (3) invest more than the greater of 1% of the Fund's total assets or $1,000,000 in Second Tier Securities of a single issuer. OTHER ELIGIBLE INVESTMENTS DEPOSITORY RECEIPTS AND DEPOSITORY SHARES Each Fund (other than Money Market Fund) may invest in American Depository Receipts ("ADRs") or other similar securities, such as American Depository Shares, convertible into securities of foreign issuers. These securities may not necessarily be denominated in the same currency as the securities into which they may be converted. ADRs are receipts typically issued by a U.S. bank or trust company evidencing ownership of the underlying securities. Generally, ADRs, in registered form, are designed for use in U.S. securities markets. As a result of the absence of established securities markets and publicly owned corporations in certain foreign countries as well as restrictions on direct investment by foreign entities, the Funds may be able to invest in such countries solely or primarily through ADRs or similar securities and government approved investment vehicles. No more than 5% of each Fund's assets (other than Latin American Value Fund) will be invested in ADRs sponsored by persons other than the underlying issuers. Latin American Value Fund may invest up to 20% of its assets in these unsponsored ADRs. Issuers of the stock of such unsponsored ADRs are not obligated to disclose material information in the United States and, therefore, there may not be a correlation between such information and the market value of such ADRs. The Funds may also invest in European Depository Receipts ("EDRs") which are typically issued in bearer form and are designed for use in the European securities markets. INVESTMENT IN OTHER INVESTMENT COMPANIES Under the 1940 Act, each of the Funds generally may invest up to 10% of its total assets in the aggregate in shares of other investment companies and up to 5% of its total assets in any one investment company, as long as that investment does not represent more than 3% of the voting stock of the acquired investment company at the time such shares are purchased. Investment in other investment companies or investment vehicles may be the sole or most practical means by which the Funds can invest in certain countries. Such investments may involve the payment of substantial premiums above the value of such issuers' portfolio securities, and are subject to limitations under the 1940 Act and market availability. There can be no assurance that investment companies or other investment vehicles for investing in certain countries will be available for investment. In addition, special tax considerations may apply. The Funds do not intend to invest in such investment companies or vehicles unless, in the judgment of the Manager and Sub-Adviser, the potential benefits of such investment justify the payment of any applicable premium or sales charge. As a shareholder in an investment company, each of the Funds would bear its ratable share of the applicable investment company's expenses, including its advisory and administrative fees. At the same time, the Funds would continue to pay their own management and advisory fees and other expenses. See "Special Risk Considerations--Foreign Securities--Investment and Repatriation Restrictions." SUPRANATIONAL ORGANIZATIONS Each of the Funds (other than Money Market Fund) may invest in debt securities issued or guaranteed by supranational organizations. Such organizations are entities designated or supported by a government or government entity to promote economic development and include, among others, 19 the Asian Development Bank, the European Coal and Steel Community, the European Economic Community and the World Bank. These organizations do not have taxing authority and are dependent upon their members for payments of interest and principal. Each supranational entity's lending activities are limited to a percentage of its total capital (including "callable capital" contributed by members at the entity's call), reserves and net income. Securities issued by supranational organizations may be denominated in U.S. dollars or in foreign currencies. FOREIGN INDEX LINKED INSTRUMENTS Each of the Funds (other than Money Market Fund) may, subject to compliance with its respective quality limitations applicable to its investment in debt securities, invest up to 10% of its total assets in instruments issued by the U.S. or a foreign government or by private issuers that return principal and/or pay interest to investors in amounts which derive a portion of their return based on the level of a particular foreign index ("Foreign Index Linked Instruments"). 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 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 Instruments. 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. or foreign governmental agency or instrumentality or by a private issuer. MORTGAGE-BACKED SECURITIES Each of the Funds may invest in securities which represent interests in pools of mortgages ("Mortgage-Backed Securities"). These securities provide investors with payments consisting of both interest and principal as the mortgages in the underlying mortgage pools are repaid. Such securities may be issued or guaranteed by governmental issuers or by private issuers. Unscheduled or early payments on the underlying mortgages may shorten these securities' effective maturities and lower their total returns. Because prepayments of principal generally occur when interest rates are declining, it is likely that a Fund will have to reinvest the proceeds of prepayments at lower interest rates than those at which the assets were previously invested. The value of Mortgage-Backed Securities may change due to changes in the market's perception of issuers. In addition, the mortgage securities market in general may be adversely affected by regulatory or tax changes. ADJUSTABLE RATE MORTGAGE SECURITIES. Each of the Funds may also invest in adjustable rate mortgage securities ("ARMS") which are issued by agencies or instrumentalities of the U.S. Government. ARMS are pass-through mortgage securities collateralized by mortgages with interest rates that are adjusted from time to time. The adjustments usually are determined in accordance with a predetermined interest rate index and may be subject to certain limits. While 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), 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 20 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. CMOS. Each of the Funds may invest in collateralized mortgage obligations ("CMOs"). CMOs are securities collateralized by mortgages or Mortgage-Backed Securities. CMOs are issued in classes and series that have different maturities and often are retired in sequence although certain classes of CMOs may have priority over others with respect to the receipt of prepayments on the mortgages. Therefore, depending on the type of CMOs in which a Fund invests, the investment may be subject to a greater or lesser risk of prepayment than other types of mortgage-related securities. CMOs are issued by government or non-government entities such as banks, mortgage lenders, or other financial institutions. In a CMO, a series of bonds or certificates is issued in multiple classes. Each class of CMOs, often referred to as a "tranche," is issued at a specific 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 underlying mortgages may be allocated among the several classes of a series of a CMO in many ways. One or more tranches of a CMO may have coupon rates which reset periodically at a specified increment over an index such as the London Interbank Offered Rate ("LIBOR"). These floating rate CMOs are typically issued with lifetime caps on the coupon rate thereon. Inverse or reverse floating CMOs ("inverse floaters") constitute a tranche of a CMO with a coupon rate that moves in the reverse direction to an applicable index such as LIBOR. Accordingly, the coupon rate thereon will increase as interest rates decrease. Like most other fixed-income securities, the value of inverse floaters will decrease as interest rates increase. Inverse floaters, however, exhibit greater price volatility than the majority of Mortgage-Backed Securities. 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. As a result, the yield to maturity of an inverse floater is sensitive not only to changes in interest rates but also to changes in prepayment rates on the related underlying mortgage assets. STRIPPED MORTGAGE-BACKED SECURITIES. Each of the Funds (other than Money Market Fund) may also invest in Stripped Mortgage-Backed Securities ("SMBS"). SMBS are derivative multi-class mortgage securities which may entitle the holders thereof to receive distributions consisting solely or primarily of all or a portion of the interest (the "IO class") or the principal (the "PO class") on the underlying pool of mortgage loans or Mortgage-Backed 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 pool of mortgage loans or Mortgage-Backed Securities. For example, a rapid or slow rate of principal payments may 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 may incur substantial losses. Conversely, if the underlying mortgage assets experience slower than anticipated prepayments of principal, the return on a PO class will be adversely affected more severely than would be the case with a traditional Mortgage-Backed Security. Under the Internal Revenue Code of 1986, as amended, SMBS generate taxable income from the current accrual of original issue discount, without a corresponding distribution of cash to the Funds. In addition, the Staff of the Division of Investment Management of the SEC considers privately issued SMBS to be illiquid securities. 21 ASSET-BACKED SECURITIES Each of the Funds may invest in asset-backed securities. Such securities represent interests in pools of consumer loans (generally unrelated to mortgage loans). Interest and principal payments ultimately depend on payment of the underlying loans by individuals, although the securities may be supported by letters of credit or other credit enhancements. The value of asset-backed securities may also depend on the creditworthiness of the servicing agent for the loan pool, the originator of the loans, or the financial institution providing the credit enhancement. BRADY BONDS Each of the Funds (other than Money Market Fund) may invest in Brady Bonds and other sovereign debt securities of countries that have restructured or are in the process of restructuring sovereign debt pursuant to the Brady Plan. Brady Bonds are debt securities issued under the framework of the Brady Plan, an initiative announced by former U.S. Treasury Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to restructure their outstanding external indebtedness. The Brady Plan contemplates, among other things, the adoption by debtor nations of certain economic reforms and the exchange of commercial bank debt for newly issued bonds. In restructuring its external debt under the Brady Plan framework, a debtor nation negotiates with its existing bank lenders as well as the World Bank and/or the International Monetary Fund (the "IMF"). The World Bank and/or the IMF support the restructuring by providing funds pursuant to loan agreements or other arrangements which enable the debtor nation to collateralize the new Brady Bonds or to replenish reserves used to reduce outstanding bank debt. Under these loan agreements or other arrangements with the World Bank or the IMF, debtor nations have been required to agree to the implementation of certain domestic monetary and fiscal reforms. The Brady Plan only sets forth general guiding principles for economic reform and debt reduction, emphasizing that solutions must be negotiated on a case-by-case basis between debtor nations and their creditors. Brady Bonds have been issued only recently, and accordingly do not have a long payment history. Agreements implemented under the Brady Plan to date are designed to achieve debt and debt-service reduction through specific options negotiated by a debtor nation with its creditors. As a result, the financial packages offered by each country differ. The types of options have included the exchange of outstanding commercial bank debt for bonds issued at 100% of face value of such debt, bonds issued at a discount of face value of such debt, and bonds bearing an interest rate which increases over time and the advancement of the new money for bonds. The principal of certain Brady Bonds has been collateralized by U.S. Treasury zero coupon bonds with a maturity equal to the final maturity of such Brady Bonds. Collateral purchases are financed by the IMF, the World Bank and the debtor nations' reserves. Interest payments may also be collateralized in part in various ways. FOREIGN LOAN PARTICIPATIONS AND ASSIGNMENTS Each of the Funds (other than Money Market Fund) may invest in fixed and floating rate loans ("Loans") arranged through private negotiations between a foreign sovereign entity and one or more financial institutions ("Lenders"). The Funds (other than Money Market Fund) may invest in such Loans in the form of participations ("Participations") in Loans and assignments ("Assignments") of all or a portion of Loans from third parties. Participations typically will result in the Funds having a contractual relationship only with the Lender, not with the borrower. The Funds will have the right to receive payments of principal, interest and any fee to which they are entitled only from the Lender selling the Participation and only upon receipt by the Lender of the payments from the borrower. In 22 connection with purchasing Participations, the Funds generally will have no right to enforce compliance by the borrower with the terms of the loan agreement relating to the Loan, nor any rights or set-off against the borrower, and the Funds may not benefit directly from any collateral supporting the Loan in which they have purchased the Participations. As a result, the Funds will assume the credit risk of both the borrower and the Lender that is selling the Participation. In the event of the insolvency of the Lender selling a Participation, a Fund may be treated as a general creditor of the Lender and may not benefit from any set-off between the Lender and the borrower. A Fund will acquire a Participation only if the Lender interpositioned between the Fund and the borrower is determined by the Sub-Adviser to be creditworthy. When the Funds purchase Assignments from Lenders, the Funds will acquire direct rights against the borrower on the Loan, except that under certain circumstances such rights may be more limited than those held by the assigning Lender. The Funds may have difficulty disposing of Assignments and Participations. Because the market for such instruments is not highly liquid, the Funds anticipate that such instruments could be sold only to a limited number of institutional investors. The lack of a highly liquid secondary market will have an adverse impact on the value of such instruments and on the Funds' ability to dispose of particular Assignments or Participations in response to a specific economic event, such as deterioration in the creditworthiness of the borrower. Based upon the current position of the Staff of the SEC, the Funds will treat investments in Assignments and Participations as illiquid for purposes of the limitations on investments in illiquid securities. The Funds may revise this policy based on any future change in the SEC's position. See "Special Investment Methods--Illiquid Securities." SPECIAL INVESTMENT METHODS For risks associated with the following investment methods, see "Special Risk Considerations." FOREIGN CURRENCY TRANSACTIONS Each of the Funds (other than Money Market Fund) may engage in currency exchange transactions in connection with the purchase and sale of their investments. Currency exchange transactions are necessary to enable the Funds to purchase securities denominated in a foreign currency and to convert interest and dividend payments or sales proceeds paid in a foreign currency into U.S. dollars or into another currency. The Funds may engage in "transaction hedging" to protect against a change in foreign currency exchange rate between the date on which the Funds contract to purchase or sell the security and the settlement date, or to "lock in" the U.S. dollar equivalent (or other foreign currency equivalent to the extent needed for purposes of purchasing securities) of a dividend or interest payment in a foreign currency. For that purpose, the Funds may enter into forward foreign currency exchange contracts ("Forward Contracts"). A 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. For transaction hedging purposes, the Funds may also purchase exchange-listed and over-the-counter call and put options on foreign currency futures contracts and on foreign currencies. A put option on a futures contract gives the Funds the right to assume a short position in the futures contract until expiration of the option. A put option on currency gives the Funds 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 Funds the right to assume a long position in the futures contract until the expiration of the option. A call option on currency gives the Funds the right to purchase a currency at the exercise price until the expiration of the option. 23 The Funds may enter into Forward Contracts or foreign currency options or futures to protect against a decline in the value relative to the U.S. dollar of the currencies in which their portfolio securities are denominated or quoted (or an increase in the value of currency for securities which the Funds intend to buy when they hold cash reserves and short-term investments) ("position hedging"). For position hedging purposes, the Funds may enter into a forward contract to sell, for a fixed amount of U.S. dollars or other currency, an amount of foreign currency approximating the value of some or all of the portfolio securities to be hedged. In some cases, the Funds may enter into a forward contract to sell a currency other than the currency in which the Securities to be hedged are denominated ("cross-hedging"). The Funds will use cross-hedging, when it is determined that the foreign currency in which the portfolio securities are denominated have insufficient liquidity or are trading at a discount as compared with some other foreign currency with which it tends to move in tandem. Transaction and position hedging do not eliminate fluctuations in the underlying prices of the securities which the Funds own or intend 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. In addition, currency transactions involve transaction costs. The Funds may write covered call options on foreign currencies to offset some of the costs of currency transactions. The Funds' ability to engage in currency and related option transactions may be limited by tax considerations. See "Taxation-- Consequences of Certain Investments" in the Statement of Additional Information. As noted above Bond Fund may enter into currency transactions other than those described above with a view towards enhancing portfolio returns and managing portfolio currency risk more efficiently. Such transactions may cause the Fund to have a larger exposure to the movement of particular currencies than would be the case if such techniques were not utilized. Therefore, if the Sub-Adviser is incorrect in its assessment of currency rate movements, the Fund may be adversely affected by such transactions. See "Special Risk Considerations--Risks of Transactions in Futures Contracts and Options." REPURCHASE AGREEMENTS Each Fund may enter into repurchase agreements with respect to debt securities it holds. 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 domestic 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 applicable 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. The Company's Board of Directors has established procedures, which are periodically reviewed by the Board, pursuant to which the Manager and the Sub-Advisers will monitor the creditworthiness of the dealers and banks with which the Funds enter into repurchase agreement transactions. 24 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 transaction 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 may or may not be recovered by income from or appreciation of the securities purchased. No more than 25% of the total assets of each of the Funds (other than Money Market Fund) will be subject to reverse repurchase agreements; no more than 5% of the total assets of Money Market Fund will be subject to reverse repurchase agreements. BORROWING Each of the Funds may borrow money from banks for temporary or emergency purposes in an amount up to 10% of the value of the Fund's total assets. With respect to each Fund, reverse repurchase agreements are not included in this limitation. See "Special Investment Methods-- Reverse Repurchase Agreements" in the preceding paragraph. Interest paid by a Fund on borrowed funds would decrease the net earnings of that Fund. None of the Funds will purchase portfolio securities while outstanding borrowings (other than reverse repurchase agreements) exceed 5% of the value of the Fund's total assets. Each of the Funds may mortgage, pledge or hypothecate its assets in an amount not exceeding 10% of the value of its total assets to secure 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. OPTIONS AND FUTURES TRANSACTIONS Each Fund (other than Money Market Fund) may buy and sell put and call options and futures contracts and options on futures contracts with respect to financial instruments, stock and interest rate indexes and foreign currencies. Any options sold (i.e., written) by a Fund must be "covered." Futures and options will be used to facilitate allocation of a Fund's investment among asset classes, for speculative purposes to generate income or to hedge against declines in securities prices or increases in prices of securities proposed to be purchased. Different uses of futures and options have different risk and return characteristics. Generally, selling futures contracts, purchasing put options and writing call options are strategies designed to protect against falling securities prices and can limit potential gains if prices rise. Purchasing futures contracts, purchasing call options and writing put options are strategies whose returns tend to rise and fall together with securities prices and can cause losses if prices fall. If securities prices remain unchanged over time, option writing strategies tend to be profitable, while option buying strategies tend to decline in value. Options purchased and written by the Funds may be exchange traded or may be options entered into by the Funds in negotiated transactions with investment dealers and other financial institutions ("OTC Options") (such as commercial banks or savings and loan associations) deemed creditworthy 25 by the Manager. OTC Options are illiquid and it may not be possible for the Funds to dispose of options they have purchased or terminate their obligations under an option they have written at a time when the Manager and Sub-Adviser believe it would be advantageous to do so. Futures contracts and options on futures contracts will be entered into on domestic and foreign exchanges and boards of trade, subject to applicable regulations of the CFTC. These transactions may be entered into for bona fide hedging and other permissible risk management purposes. In connection with transactions in futures contracts and writing related options, each Fund will be required to deposit as "initial margin" a specified amount of cash or short-term U.S. Government securities. The initial margin required for a futures contract is set by the exchange on which the contract is traded. Thereafter, subsequent payments (referred to as "variation margin") are made to and from the broker to reflect changes in the value of the futures contract. No Fund will purchase or sell futures contracts or related options if, as a result, the sum of the initial margin deposit on that Fund's existing futures and related options positions and premiums paid for options on futures contracts entered into for other than bona fide hedging purposes would exceed 5% of the Fund's assets. With respect to futures and options on futures contracts, segregated accounts will be maintained consisting of cash or high grade liquid U.S. or foreign debt securities with a value (marked to market daily) equal to the dollar amount of the Fund's purchase or sale obligation under such contracts. SWAP TRANSACTIONS Each of the Funds (other than Money Market Fund) may enter into interest rate swaps and purchase or sell interest rate caps and floors. Such transactions will be entered into primarily to preserve a return or spread on a particular investment or portion of its portfolio or as a duration management technique. Interest rate swaps involve the exchange by a 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 that a specified index exceeds a predetermined interest rate cap, 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 that 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. A Fund 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 debt 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 than a net basis, the Fund will 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 the Fund sells (i.e., writes) caps and floors, that Fund's sub-custodian 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 Funds will not enter into any interest rate swap, 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 S&P. The Manager and the applicable Sub-Advisers will monitor the creditworthiness of contra- 26 parties on an ongoing basis. If there is a default by the other party to such a transaction, the applicable 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 Manager and Sub-Advisers have 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 the Funds. Interest rate swap 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 a Fund may not exceed 5% of the Fund's total assets. The Funds may sell (i.e., write) caps and floors without limitation, subject to the segregated account requirement. WHEN-ISSUED SECURITIES Each of the Funds, 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, which is generally expressed in yield terms, is fixed at the time the commitment is made, but delivery and payment for the securities take place at a later date. Normally, the settlement date occurs within two months after the transaction, but delayed settlements beyond two months may be negotiated. During the period between a commitment and settlement, no payment is made for the securities purchased by the purchaser and, thus, no interest accrues to the purchaser from the transaction. If a Fund chooses to dispose of the right to acquire a when-issued security prior to its acquisition or dispose of its right to deliver or receive against a forward commitment, it can incur a gain or loss. The use of when-issued transactions and forward commitments enables the Funds to hedge against anticipated changes in interest rates and prices. The Funds may also enter into such transactions to generate incremental income. In some instances, the third-party seller of when-issued or forward commitment securities may determine prior to the settlement date that it will be unable to meet its existing transaction commitments without borrowing securities. If advantageous from a yield perspective, a Fund may, in that event, agree to resell its purchase commitment to the third-party seller at the current market price on the date of sale and concurrently enter into another purchase commitment for such securities at a later date. As an inducement for a Fund to "roll over" its purchase commitment, such Fund may receive a negotiated fee. The purchase of securities on a when-issued or forward commitment basis exposes the Funds 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. These risks could result in an increase in the volatility of a Fund's net asset value. A segregated account consisting of cash or high-grade liquid U.S. or foreign debt securities, equal to the value of the when-issued or forward commitment securities will be established and maintained with the custodian and will be marked to market daily. The purchase of securities with a settlement date occurring on the Public Securities Association approved settlement date is considered a normal delivery and not a "when-issued" or "forward commitment" purchase. 27 ZERO COUPON, DEFERRED INTEREST AND PAYMENT IN KIND BONDS The Funds (other than Money Market Fund) may invest in zero coupon bonds, deferred interest bonds and bonds on which the interest is payable in kind ("PIK Bonds"). Zero coupon and deferred interest bonds are debt obligations which are issued at a significant discount from face value. The discount approximates the total amount of interest the bonds will accrue and compound over the period until maturity or the first interest accrual date at a rate of interest reflecting the market rate of the security at the time of issuance. While zero coupon bonds do not require the periodic payment of interest, deferred interest bonds provide for a period of delay before the regular payment of interest begins. Although this period of delay is different for each deferred interest bond, a typical period is approximately one-third of the bond's term to maturity. PIK Bonds are debt obligations which provide that the issuer thereof may, at its option, pay interest on such bonds in cash or in the form of additional debt obligations. Such investments benefit the issuer by mitigating its need for cash to meet debt service, but also require a higher rate of return to attract investors who are willing to defer receipt of such cash. The Funds will accrue income on such investments for tax and accounting purposes, in accordance with applicable law, which income is distributable to shareholders. Because no cash is received at the time such income is accrued, the Funds may be required to liquidate portfolio securities to satisfy their distribution obligations. Zero coupon securities, PIK Bonds and debt securities acquired at a discount tend to be subject to greater price fluctuations in response to changes in interest rates than are ordinary interest-paying debt securities with similar maturities. The value of zero coupon securities and debt securities acquired at a discount appreciates more during periods of declining interest rates and depreciates more during periods of rising interest rates. Under current federal income tax law, the Funds are required to accrue as income each year the value of securities received in respect of pay-in-kind bonds and a portion of the original issue discount with respect to zero coupon securities and other securities issued at a discount to the stated redemption price. In addition, the Funds will elect similar treatment for any market discount with respect to debt securities acquired at a discount. Accordingly, the Funds may have to dispose of portfolio securities under disadvantageous circumstances in order to generate current cash to satisfy certain distribution requirements. SHORT SALES Bond Fund may make short sales, which are transactions in which the Fund sells a security it does not own in anticipation of a decline in the market value of that security. To complete such a transaction, the Fund must borrow the security to make delivery to the buyer. The Fund then is obligated to replace the security borrowed by purchasing it at the market price at the time of replacement. The price at such time may be more or less than the price at which the security was sold by the Fund. Until the security is replaced, the Fund is required to pay to the lender any dividends or interest which accrue during the period of the loan. To borrow the security, the Fund also may be required to pay a premium, which would increase the cost of the securities sold. The proceeds of the short sale will be retained by the broker, to the extent necessary to meet margin requirements, until the short position is closed out. The Fund will incur a loss as a result of the short sale if the price of the security increases between the date of the short sale and the date on which the Fund replaces the borrowed security. The Fund will realize a gain if the security declines in price between those dates. The amount of any gain will be decreased, and the amount of any loss increased, by the amount of any premium, dividends or interest the Fund may be required to pay in connection with the short sale. 28 No securities will be sold short if, after effect is given to any such short sale, the total market value of all securities sold short would exceed 5% of the value of the Fund's total assets. In addition, the value of the securities of any one issuer in which the Fund is short will not exceed the lesser of 2% of the value of the Fund's net assets or 2% of the securities of any class of any issuer. During the period of time the short position is open, the Fund will establish a segregated account maintained by the Fund's custodian in an amount of cash, U.S. Government Securities or other high-grade liquid debt obligations equal to the difference between the market value of the securities sold short at the time they were sold short and any cash or U.S. Government Securities required to be deposited as collateral with the broker in connection with the short sale (not including the proceeds from the short sale), marked to market daily. In addition to the short sales discussed above, Bond Fund may also make short sales "against the box" of securities they own or have the right to obtain at no added cost which are identical to those sold short. Not more than 50% of the Fund's total assets (determined at the time of the short sale) may be held as collateral for such sales. Such sales will be made for the purpose of hedging against an anticipated decline in the underlying securities. ILLIQUID SECURITIES Each of the Funds (other than Money Market Fund) may invest up to 15% of its net assets in illiquid securities; Money Market Fund may invest up to 10% of its net assets in illiquid securities. Each Fund will treat repurchase agreements and time deposits with a term of more than seven days, securities that are subject to repatriation restrictions for more than seven days, any securities issued in connection with debt conversion programs that are restricted as to remittance of invested capital or profits, purchased OTC Options, the cover for any options a Fund has written and foreign index linked instruments, as illiquid securities for purposes of this limitation. The sale of illiquid securities often requires more time and results in higher brokerage charges or dealer discounts and other selling expenses than does the sale of securities eligible for trading on national securities exchanges or in the over-the-counter markets. A Fund may be restricted in its ability to sell such securities at a time when the Manager and Sub-Adviser deem 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 or restricted 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, as amended (the "1933 Act"). Such securities generally have been considered illiquid because they may be resold only subject to statutory restrictions and delays or if registered under the 1933 Act. In 1990, however, the Securities and Exchange Commission adopted Rule 144A under the 1933 Act, which provides a safe harbor exemption from the registration requirements of the 1933 Act for resales of restricted securities to "qualified institutional buyers," as defined in the rule. The result of this rule has been the development of a more liquid and efficient institutional resale market for restricted securities. Thus, restricted securities are no longer necessarily illiquid. The Funds are not subject to any limitation on their ability to invest in securities simply because such securities are restricted. The Funds may therefore invest in Rule 144A securities and treat them as liquid when they have been determined to be liquid by the Board of Directors of the Company or by the Manager, 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 Rule 144A 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 29 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). Investing in Rule 144A 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. PORTFOLIO TURNOVER Bond Fund may actively use trading to benefit from yield disparities among different issues of securities or otherwise to achieve its investment objective and policies and therefore Bond Fund is expected to have a high portfolio turnover rate (generally defined as being 100% or more). To the extent that active trading will increase a Fund's rate of turnover, certain transaction expenses will increase and the incidence of short-term gain may be taxable as ordinary income. For the fiscal year ended June 30, 1995, the portfolio turnover rates for Bond Fund, European Value Fund and Latin American Value Fund were 501%, 131% and 161%, respectively. The calculation of portfolio turnover does not include securities maturing in less than 12 months. Accordingly, the portfolio turnover rate for Money Market Fund will generally be insignificant. While it is not the policy of any of the other Funds to trade actively for short-term profits, each Fund will dispose of securities without regard to the time they have been held when such action appears advisable to the Manager and Sub-Adviser. In the case of each Fund, frequent changes may result in higher brokerage and other costs for the Fund. The method of calculating portfolio turnover rate is set forth in the Statement of Additional Information under "Investment Objectives, Policies and Restrictions--Portfolio Transactions and Allocation of Brokerage." INVESTMENT RESTRICTIONS Each of the Funds has adopted certain investment restrictions, which are set forth in detail in the Statement of Additional Information. The following restriction is fundamental to each Fund and may not be changed without shareholder approval: The Funds will not invest 25% or more of the value of its total assets in the same industry or in the obligations of any one government other than the U.S. All restrictions not defined as fundamental may be changed without shareholder approval. If a percentage restriction 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. However, with respect to the investment restriction on borrowing, each Fund is prohibited from purchasing portfolio securities while outstanding borrowing exceeds 5% of the value of that Fund's total assets. SPECIAL RISK CONSIDERATIONS FOREIGN SECURITIES Investment in foreign securities involves risks not typically associated with investment in securities of U.S. issuers. Those include the following: CURRENCY FLUCTUATIONS. The value of a Fund's portfolio securities computed in U.S. dollars will vary with increases and decreases in the exchange rate between the currencies in which the Fund has invested and the U.S. dollar. A decline in the value of any particular currency against the U.S. dollar 30 will cause a decline in the U.S. dollar value of the Fund's holdings of securities denominated in such currency and, therefore, will cause an overall decline in the Fund's net asset value and net investment income and capital gains, if any, to be distributed in U.S. dollars to shareholders by the Fund. The rate of exchange between the U.S. dollar and other currencies is determined by several factors, including the supply and demand for particular currencies, central bank efforts to support particular currencies, the movement of interest rates, the price of oil, the pace of activity in the industrial countries, including the U.S., and other economic and financial conditions affecting the world economy. POLITICAL AND ECONOMIC RISKS. Nationalization, expropriation or confiscatory taxation, currency blockage, political changes, government regulation, social instability or diplomatic developments could affect adversely the economy of a country or a Fund's investment in such country. A Fund may also be adversely affected by exchange control regulations. The foregoing risks are of particular concern in the case of issuers in emerging market countries because such countries generally have less social, political and economic stability than the U.S., Canada, Japan or Western Europe. CORPORATE DISCLOSURE STANDARDS AND GOVERNMENTAL REGULATION. Non-U.S. companies are not generally subject to uniform accounting, auditing and financial reporting standards or to other regulatory requirements comparable to those applicable to U.S. companies and in certain countries no reporting standards currently exist. Thus, there may be less information available concerning non-U.S. issuers of securities held by a Fund than is available concerning U.S. companies. MARKET CHARACTERISTICS. Securities of many non-U.S. companies may be less liquid and their prices more volatile than securities of comparable U.S. companies. In addition, securities of companies traded in many countries outside the U.S., particularly those of emerging market countries, may be subject to further risks due to the inexperience of local brokers and financial institutions in less developed markets, the possibility of permanent or temporary termination of trading, and greater spreads between bid and asked prices for securities. Non-U.S. stock exchanges and brokers are subject to less governmental supervision and regulation than in the U.S., and non-U.S. stock exchange transactions are usually subject to fixed commissions, which are generally higher than negotiated commissions on U.S. transactions. In addition, there may in certain instances be delays in the settlement of non-U.S. stock exchange transactions. The limited size of some non-U.S. securities markets and limited trading volume in issuers compared to volume of trading in U.S. securities could cause prices to be erratic for reasons apart from factors that affect the quality of the securities. For example, limited market size may cause prices to be unduly influenced by traders who control large positions. Adverse publicity and investors' perceptions, whether or not based on fundamental analysis, may decrease the value and liquidity of portfolio securities, especially in these markets. INVESTMENT AND REPATRIATION RESTRICTIONS. Several countries restrict, to varying degrees, foreign investments in their securities markets. Government and private restrictions take a variety of forms, including (a) limitations on the amount of funds that may be introduced into or repatriated from the country (including limitations on repatriation of investment income and capital gains); (b) prohibitions or substantial restrictions on foreign investment in certain industries or market sectors, such as defense, energy and transportation; (c) restrictions (whether contained in the charter of an individual company or mandated by the government) on the percentage of securities of a single issuer which may be owned by a foreign investor; (d) limitations on the types of securities which a foreign investor may purchase; and (e) restrictions on a foreign investor's right to invest in companies 31 whose securities are not publicly traded. In some circumstances, these restrictions may limit or preclude investment in certain countries or may increase the cost of investing in securities of particular companies. FOREIGN TAXES. The Funds' interest and dividend income from foreign issuers may be subject to non-U.S. withholding taxes. The Funds also may be subject to taxes on trading profits or on transfers of securities in some countries. The imposition of these taxes will increase the cost to the Funds of investing in any country imposing such taxes. For U.S. tax purposes, U.S. shareholders may be entitled to a credit or deduction to the extent of any foreign income taxes paid by the Funds. See "Dividends, Distributions and Tax Status--Taxes." RISKS OF SOVEREIGN DEBT OBLIGATIONS. Each of the Funds (other than Money Market Fund) may purchase sovereign debt instruments issued or guaranteed by foreign governments or their agencies. Sovereign debt may be in the form of conventional securities or other types of debt instruments such as loans or loan participations. Sovereign debt of Latin American nations or other developing or emerging market countries may involve a high degree of risk, and may be in default or present the risk of default. The governmental entity that controls the repayment of sovereign debt may not be able or willing to repay the principal and/or interest when due in accordance with the terms of such debt. A governmental entity's willingness or ability to repay principal and interest due in a timely manner may be affected by, among other factors, its cash flow situation, the extent of its foreign reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the governmental entity's policy towards the IMF, and the political constraints to which a governmental entity may be subject. Holders of sovereign debt, including the Funds, may be requested to participate in the rescheduling of such debt and to extend further loans to governmental entities. If a governmental entity defaults on its sovereign debt, the Funds may have limited recourse against the issuer and/or guarantor. Remedies must, in some cases, be pursued in the courts of the defaulting party itself, and the ability of the holder of sovereign debt securities to obtain recourse may be subject to the political climate in the relevant country. ADDITIONAL RISKS APPLICABLE TO INVESTMENT IN EASTERN EUROPE. Investments in companies domiciled in Eastern European countries may be subject to potentially greater risks than those of other foreign issuers. These risks include: (a) potentially less social, political and economic stability; (b) the small current size of the markets for such securities and the low volume of trading, which result in less liquidity and in greater price volatility; (c) certain national policies which may restrict a Fund's investment opportunities, including restrictions on investment in issuers or industries deemed sensitive to national interests; (d) foreign taxation; (e) the absence of developed legal structures governing private or foreign investment or allowing for judicial redress for injury to private property; (f) the absence, until recently in certain Eastern European countries, of a capital market structure or market-oriented economy; and (g) the possibility that recent favorable economic developments in Eastern Europe may be slowed or reversed by unanticipated political or social events in such countries, or in the Commonwealth of Independent States (formerly the Union of Soviet Socialist Republics). The Communist governments of a number of Eastern European countries expropriated large amounts of private property in the past, in many cases without adequate compensation, and there may be no assurance that such expropriation will not occur in the future. In the event of such expropriation, a Fund could lose a substantial portion of any investments it has made in the affected 32 countries. Further, no accounting standards exist in Eastern European countries. Finally, even though certain Eastern European currencies may be convertible into U.S. dollars, the conversion rates may be artificial to the actual market values and may be adverse to shareholders of the Fund. ADDITIONAL RISKS APPLICABLE TO INVESTMENT IN LATIN AMERICAN COUNTRIES, INCLUDING MEXICO. Many of the currencies of Latin American and certain other emerging market countries have experienced steady devaluations relative to the U.S. dollar, and major devaluations have historically occurred in certain countries. Devaluations in the currencies in which the Funds' portfolio securities are denominated may have a detrimental impact on the Funds. Some Latin American countries also may have managed currencies which are not free-floating against the U.S. dollar. In addition, there is a risk that certain Latin American and other emerging market countries may restrict the free conversion of their currencies into other currencies. Further, certain currencies issued by Latin American countries may not be internationally traded. Most Latin American countries have experienced substantial, and in some periods extremely high, rates of inflation for many years. Inflation and rapid fluctuations in inflation rates have had and may continue to have very negative effects on the economies and securities markets of certain Latin American countries. Many Latin American governments have exercised and continue to exercise a significant influence over many aspects of the private sector. Government actions concerning the economy could have a significant effect on market conditions and prices and/or yields of securities in which the Funds invest. For more information on investment in Latin American and other emerging market countries, see "Investment Objective and Policies--Special Risk Considerations--Additional Risks Applicable to Investment in Countries in Latin America" in the Statement of Additional Information. RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND OPTIONS Participation in the options or futures markets and in interest rate and currency transactions involves investment risks and transaction costs to which the Funds would not be subject absent the use of these strategies. If the Manager's and Sub-Adviser's prediction of movements in the direction of the securities, currency or interest rate markets are inaccurate, the adverse consequences to a Fund (E.G., a reduction in a Fund's net asset value or a reduction in the amount of income available for distribution) may leave that Fund in a worse position than if such strategies were not used. Risks inherent in the use of options, interest rate transactions, futures contracts and options on futures contracts include (a) dependence on the Manager's and Sub-Advisers' ability to predict correctly movements in the direction of interest rates and security prices; (b) imperfect correlation between the price of options and futures contracts and options thereon and movements in the prices of the securities being hedged; (c) the fact that skills needed to use these strategies are different from those needed to select portfolio securities; (d) the possible absence of a liquid secondary market for any particular instrument at any time; and (e) the possible need to defer closing out certain hedged positions to avoid adverse tax consequences. RISKS OF FIXED-INCOME SECURITIES All fixed-income securities are subject to two types of risks: credit risk and interest rate risk. Credit risk relates to the ability of the issuer to meet interest or principal payments, or both, as they come due. Interest rate risk refers to the fluctuations in the net asset value of any portfolio of fixed- income securities resulting from the inverse relationship between price and yield of fixed-income 33 securities; that is, when the general level of interest rates rises, the prices of outstanding fixed-income securities decline, and when interest rates fall, prices rise. Fixed rate securities with longer term to maturity are generally subject to greater volatility than shorter term instruments. Each of the Funds may invest in bonds which are rated Baa by Moody's or BBB by S&P. Such bonds are considered medium grade securities, and while normally adequately secured, may be subject to adverse economic conditions which could affect their ability to pay interest and repay principal and therefore have speculative characteristics. RISKS OF FOREIGN INDEX LINKED INSTRUMENTS Foreign Index Linked Instruments may offer higher yields than comparable securities linked to purely domestic indexes 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 indexes. In addition, the value of Foreign Index Linked Instruments will be affected by fluctuations in foreign exchange rates or in foreign interest rates. If the Manager and Sub-Adviser are incorrect in their prediction as to the movements in the direction of particular foreign currencies or foreign interest rates, the return realized by a Fund on Foreign Index Linked Instruments may be lower than if the Fund had invested in a similarly rated domestic security. Foreign currency gains and losses with respect to Foreign Index Linked Instruments may affect the amount and timing of income recognized by the Funds. RISKS OF LOWER-RATED DEBT SECURITIES Latin American Value Fund and Bond Fund may invest in debt securities rated below Baa3 by Moody's or BBB- by S&P (commonly known as "high yield" or "junk" bonds). Such securities are subject to higher risks and greater market fluctuations than are lower-yielding, higher-rated securities. Under rating agency guidelines, medium- and lower-rated securities and comparable unrated securities will likely have some quality and protective characteristics that are outweighed by large uncertainties or major risk exposures to adverse conditions. Certain of the debt securities in which the Fund may invest may have, or may be considered comparable to securities having, the lowest ratings for non-subordinated debt instruments assigned by Moody's or S&P. Under rating agency guidelines, these securities are considered to have extremely poor prospects of ever attaining any real investment standing, to have a current identifiable vulnerability to default, to be unlikely to have the capacity to pay interest and repay principal when due in the event of adverse business, financial or economic conditions, and/or to be in default or not current in the payment of interest or principal. Such securities are considered speculative with respect to the issuer's capacity to pay interest and repay principal in accordance with the terms of the obligations. Unrated securities deemed comparable to these lower- and lowest-rated securities will have similar characteristics. Accordingly, it is possible that these types of factors could, in certain instances, reduce the value of securities held by the Fund with a commensurate effect on the value of their respective shares. The price of high yield securities has been found to be less sensitive to changes in prevailing interest rates than higher-rated investments, but are likely to be more sensitive to adverse economic changes or individual corporate developments. During an economic downturn or substantial period of rising interest rates, highly leveraged issuers (which issuers of these securities often are) may experience financial stress which would adversely affect their ability to service their principal and interest payment obligations, to meet their projected business goals or to obtain additional financing. If the issuers of a fixed-income security owned by a Fund were to default, the Fund might incur additional expenses to seek recovery. The risk of loss due to default by issuers of high yield securities is 34 significantly greater than that associated with higher-rated securities because such securities generally are unsecured and frequently are subordinated to the prior payment of senior indebtedness. In addition, periods of economic uncertainty and change can be expected to result in an increased volatility of market prices of high yield securities and a corresponding volatility in the net asset value of a share of a Fund. The secondary market for high yield securities is less liquid than the markets for higher quality securities and, as such, may have an adverse effect on the market prices of certain securities. In addition, the trading volume for high yield, high risk debt securities is generally lower than that for higher-rated securities and the secondary markets could contract under adverse market or economic conditions independent of any specific adverse changes in the condition of a particular issuer. These factors may also adversely affect the ability of the Company's Board of Directors to arrive at a fair value for certain high yield securities at certain times and could make it difficult for a Fund to sell certain securities. Furthermore, adverse publicity and investor perceptions about lower-rated securities, whether or not based on fundamental analysis, may tend to decrease the market value and liquidity of such lower-rated securities. Less liquid secondary markets may also affect each Fund's ability to sell securities at their fair value. In addition, each of the Funds may invest up to 15% of its net assets, measured at the time of investment, in illiquid securities, which may be more difficult to value and to sell at fair value. If the secondary markets for high yield, high risk debt securities contract due to adverse economic conditions or for other reasons, certain previously liquid securities in a Fund's portfolio may become illiquid and the proportion of the Fund's assets invested in illiquid securities may increase. Many fixed income securities, including certain U.S. corporate fixed income securities in which a Fund may invest, contain call or buy-back features which permit the issuer of the security to call or repurchase it. Such securities may present risks based on payment expectations. If an issuer exercises such a "call option" and redeems the security, a Fund may have to replace the called security with a lower yielding security, resulting in a decreased rate of return for such Fund. DIVERSIFICATION STATUS Each of the Funds (other than Money Market Fund) is "non-diversified" and, accordingly, will be able to invest more than 5% of the value of its assets in the obligations of a single issuer, subject to the diversification requirements of subchapter M of the Internal Revenue Code of 1986, as amended, applicable to the Funds. To the extent the Funds invest a relatively high percentage of their assets in obligations of a limited number of issuers, the Funds may be more susceptible than more widely diversified funds to any single economic, political or regulatory occurrence or to changes in an issuer's financial condition or in the market's assessment of the issuers. Pursuant to the requirements of Rule 2a-7 of the 1940 Act, Money Market Fund is "diversified" and, accordingly, may not (except under certain circumstances) invest more than 5% of the value of its assets in the obligations of a single issuer (other than U.S. Government Securities). MANAGEMENT BOARD OF DIRECTORS As in all corporations, the Company's Board of Directors has the primary responsibility for overseeing the overall management of the Company and electing its officers. 35 INVESTMENT MANAGER Piper Capital Management Incorporated (the "Manager") has been retained under an Investment Advisory and Management Agreement (the "Advisory Agreement") with the Company to act as investment adviser for each Fund subject to the authority of the Board of Directors. The Manager 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 June 30, 1995, the Manager rendered investment advice regarding approximately $10 billion of assets. The Manager 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 Manager is 222 South Ninth Street, 20th Floor, Minneapolis, Minnesota 55402-3804. Under the Advisory Agreement, the Manager is to provide administrative services, manage the business affairs and supervise the investment of the Company's assets. SUB-ADVISERS Under Sub-Advisory Agreements between the Manager and the following Sub-Advisers, each Sub-Adviser provides the respective Fund with investment advice and portfolio management relating to the Fund's investment in securities issued by issuers in the particular geographical region in which the applicable Fund is authorized to invest, subject to the overall supervision of the Manager: NORTH AMERICAN FUND--The Manager is responsible for investments in U.S. securities. The individual who is primarily responsible for the day-to-day management of the U.S. portion of North American Fund is Paul Dow. Mr. Dow has been a Senior Vice President of the Manager since February 1989 and Chief Investment Officer of the Manager since December 1989. Prior to joining the Manager, Mr. Dow was a Vice President of Centerre Trust Company of St. Louis, Missouri, serving as a senior equity and balanced portfolio manager since 1983. In addition to Mr. Dow, John K. Schonberg is responsible for the day-to-day management of the U.S. portion of North American Fund. Mr. Schonberg has been a vice president, equity portfolio manager and quantitative analyst for the Manager since 1989. He also manages several institutional separately managed stock portfolio accounts. Acci Worldwide, S.A. de C.V. ("Acci") (regarding investments in Mexican securities), Paseo de la Reforma 398-4 Piso, 06600 Mexico, D.F. Acci, an investment adviser registered under the Advisers Act, was organized in June 1990 as a controlled subsidiary of Acciones y Valores de Mexico, S.A. de C.V. ("AVM") for the purpose of providing investment advice to non-Mexican investment funds investing in Mexican securities. AVM, founded in 1971, has been involved in equity underwriting and trading, portfolio investment and management of equity mutual funds in Mexico and participates in the fixed-income markets. AVM is a subsidiary of Grupo Financiero Banamex--Accival ("Banacci") which owns over 99% of the voting stock of AVM and of Banamex, Mexico's largest bank. As of June 30, 1995, Banacci managed assets of approximately $964 million. The individual at Acci who is responsible for the day-to-day management of North American Fund is Maru Eugenia Pichardo. Ms. Pichardo has been associated with AVM for fourteen years and is currently a managing director of AVM. AGF Investment Advisors, Inc. ("AGF") (regarding investments in Canadian securities), 31st Floor, Toronto-Dominion Bank Tower, Toronto, Ontario, Canada M5K 1E9. AGF, an investment 36 adviser registered under the Advisers Act, is a wholly owned subsidiary of AGF Management Limited ("AGF Ltd."), an Ontario corporation incorporated in 1960, located at Toronto-Dominion Bank Tower, Suite 3100, Toronto, Ontario, Canada M5K 1E9. As of June 30, 1995, AGF Ltd. and its subsidiaries had approximately $3.2 Billion under management. The individual at AGF who is responsible for the day-to-day management of North American Fund is Robert Farquharson. Mr. Farquharson has been associated with AGF for over thirty years, and is currently a Vice Chairman of AGF Ltd. and oversees strategy for the AGF equity funds. EUROPEAN VALUE FUND--Pictet International Management Ltd. ("Pictet"), Cutlers Garden, 5 Devonshire Square, London EC2M 4LD, England. Pictet, founded in 1980 and based in London, is an investment adviser registered under the Advisers Act and is regulated by the Investment Management Regulatory Organisation Limited in the United Kingdom. Pictet is a wholly owned subsidiary of Pictet (London) Limited ("Pictet London") which is a holding company wholly owned by Pictet (Canada) and Company Ltd. ("Pictet Canada"). Pictet Canada is a partnership, whose principal activities are investment accounting, custody and securities brokerage. The Pictet group of companies provides a wide range of services to individual and institutional clients including portfolio management, administrative and custodian services, financial and economic research, brokerage services and advice and counselling on legal, tax and accountancy matters. As of June 30, 1995, the Pictet group managed assets in excess of $45 billion. The individual at Pictet who is responsible for the day-to-day management of European Value Fund is Christian Simond. Mr. Simond joined Pictet in 1986 and is currently a Senior Investment Manager with Pictet (London) Limited. In addition, Nils Francke assists Mr. Simond in the day-to-day management of European Value Fund. Mr. Francke joined Pictet in 1994 as an Investment Manager with the Pictet European equities team. Prior to 1994, Mr. Francke served for three years as an Executive Officer with Schroder Munchmeyer Hengst in Germany, advising institutions on European capital and equities markets. PACIFIC VALUE FUND--Edinburgh Fund Managers plc ("EFM"), Donaldson House, 97 Haymarket Terrace, Edinburgh, EH12 5HD, Scotland. EFM is a public limited company that was incorporated in 1969. EFM is a majority-owned subsidiary of The British Investment Trust plc, a Scottish closed-end investment company founded in 1889, for which EFM serves as investment manager. EFM, an investment adviser registered under the Advisers Act, currently furnishes investment management services, directly or through subsidiaries, to several closed-end and open-end investment companies, pension plans, charitable organizations and other individual/corporate clients. EFM is also a partner with U.S.-based Wilmington Trust Company in a partnership known as Edinburgh-Wilmington International Capital Management, which is a registered investment adviser providing international equity management to U.S. investors. As of June 30, 1995, EFM managed assets of approximately $5.7 billion. The individual at EFM who is responsible for the day-to-day management of Pacific Value Fund is Helen Fallow. Ms. Fallow joined EFM in 1990, and she currently serves as Manager of its Pacific Rim Department. Prior to joining EFM, Ms. Fallow was Vice President of Equity Sales with Crosby Securities Ltd. In addition to Ms. Fallow, David Currie is responsible for the day-to-day management of the Japanese portion of the Pacific Value Fund. Mr. Currie has been a portfolio manager for EFM since 1988. Since 1991 he has been employed in its Japanese Department; prior to that time he was employed in its United Kingdom Department. 37 LATIN AMERICAN VALUE FUND--Bankers Trust Company ("Bankers Trust"), a New York banking corporation with executive offices at 130 Liberty Street, New York, New York 10006, is a wholly owned subsidiary of Bankers Trust New York Corporation. Bankers Trust conducts a variety of general banking and trust activities and is a major wholesale supplier of financial services to the international and domestic institutional market. As of December 31, 1994, Bankers Trust New York Corporation was the seventh largest bank holding company in the United States with total assets of approximately $72 billion. Bankers Trust is a worldwide merchant bank dedicated to servicing the needs of corporations, governments, financial institutions and private clients through a global network of 83 offices in 36 countries. As of March 31, 1995, Bankers Trust and its subsidiaries had assets under management of over $164.7 billion worldwide and is one of the largest investment managers in the United States. Bankers Trust's officers have had extensive experience in managing investment portfolios having objectives similar to those of Latin American Value Fund. The individual at Bankers Trust who is responsible for the day-to-day management of the Fund is Maria-Elena Carrion. Since mid-1993, Ms. Carrion has been a Vice President of Bankers Trust and is the head of its Latin American Investment Team. Prior to joining Bankers Trust, Ms. Carrion was associated with Latin American Securities, a London-based specialty fund management company. From 1986 through July 1991 Ms. Carrion was a Vice President at U.S. Trust. In addition to Ms. Carrion, Emily Alejos is responsible for the day-to-day management of Latin American Value Fund. Ms. Alejos joined Bankers Trust in 1993 as a portfolio manager for the Latin American Investment Team. Prior to that time she was an investment analyst for GT Capital Management where she specialized in Latin American equitites. BOND FUND--Salomon Brothers Asset Management Limited ("SBAM Limited"), Victoria Plaza, 111 Buckingham Palace Road, London SW1W OSB England. SBAM Limited is based in London and specializes in the management of global multicurrency fixed income securities and currency transactions. SBAM Limited is an indirect, wholly owned subsidiary of Salomon Inc, the parent of Salomon Brothers Inc ("SBI"). SBI is one of the largest international investment houses in the world, with offices and affiliates in 19 countries and assets at June 30, 1995 of approximately $164 billion. SBAM Limited is registered as an investment adviser under the Advisers Act and is regulated by the Investment Management Regulatory Organisation Limited in the United Kingdom. In connection with SBAM Limited's service as Sub-Adviser to Bond Fund, SBAM Limited's affiliate, Salomon Brothers Asset Management Inc ("SBAM Inc") will provide certain advisory services to SBAM Limited for the benefit of Bond Fund. SBAM Inc will be compensated by SBAM Limited at no additional expense to Bond Fund. Like SBAM Limited, SBAM Inc is registered as an investment adviser under the Advisers Act and is an indirect, wholly owned subsidiary of Salomon Inc. The business address of SBAM Inc is Seven World Trade Center, New York, New York 10048. SBAM Limited provides a broad range of fixed income investment advisory services for institutional clients located around the world, and provides investment advisory services for one U.S. registered investment company (including portfolios thereof). As of June 30, 1995, SBAM Limited, SBAM Inc and their advisory affiliates had in excess of $12 billion of assets under management of which approximately $2.7 billion is in global fixed income portfolios. David J. Griffiths and David Scott are responsible for the day-to-day management of Bond Fund. David J. Griffiths assumed such responsibilities since March 1995. Mr. Griffiths joined SBAM Limited in 1991 as a portfolio manager. Prior to that time he was associated with Salomon's International 38 Bond Market Research Group where he monitored European economic and interest rate developments. Mr. Scott joined SBAM Limited in March 1994 as a portfolio manager. Before joining SBAM Limited, he was a portfolio manager for J.P. Morgan Investment Management in London. Prior to that, Mr. Scott was a portfolio manager for Mercury Asset Management in London. MONEY MARKET FUND. SBAM Inc, Seven World Trade Center, New York, New York 10048, has a professional staff with extensive experience in the securities and investment industry in both portfolio and securities analysis. This staff has been innovative in developing and managing funds for U.S. and non-U.S. investors. SBAM Inc provides a broad range of fixed income and equity investment advisory services for its individual and institutional clients located around the world, and provides investment advisory services for 21 registered investment companies (including portfolios thereof). SBAM Inc is an indirect wholly owned subsidiary of Salomon Inc, the parent of SBI. SBI is one of the largest international investment houses in the world with offices and affiliates in 19 countries with assets at June 30, 1995 of approximately $164 billion. Mary Beth Whyte will be responsible for the day-to-day management of Money Market Fund's portfolio. Ms. Whyte, who joined SBAM Inc in 1994, is a Vice President and Portfolio Manager responsible for directing SBAM Inc's investment policy for all municipal portfolios and money market activities. Prior to joining SBAM Inc, Ms. Whyte was a Senior Vice President and head of the Municipal Bond Area at Fiduciary Trust Company International from 1987-1994. Prior to that, she was associated with U.S. Trust Company from 1986-1987 and Bernstein-Macaulay Inc. from 1985-1986. RATE OF COMPENSATION. Under the Advisory Agreement, the Manager receives a monthly fee computed separately for each Fund. Fees for North American Fund, European Value Fund, Pacific Value Fund, Latin American Value Fund and Bond Fund are paid monthly at an annual rate of 1.0% of average daily net assets of the applicable Fund. These fees are higher than fees paid by most other investment companies. The fees for Money Market Fund are paid monthly at an annual rate of .50% of average daily net assets. As compensation for their services provided pursuant to the respective Sub-Advisory Agreements, the Manager pays each Sub-Adviser monthly compensation payable over the same time periods and calculated in the same manner as the investment advisory fee of the applicable Fund of .50% of net assets of such Fund, except that with respect to Money Market Fund, the Sub-Adviser is paid by the Manager a fee of .25% of daily net assets of the applicable Fund. In the case of North American Fund, the fee is split equally among each of the Sub-Advisers without regard to the amount of assets under their respective management at any one time. CUSTODIAN Investors Fiduciary Trust Company ("IFTC"), 127 West 10th Street, 14th Floor, Kansas City, Missouri 64105, (816) 474-8786, serves as custodian for each Fund's portfolio securities and cash. Rules adopted under the 1940 Act permit the Funds to maintain their securities and cash in the custody of certain eligible banks and securities depositories. IFTC has entered into a Sub-Custodian Agreement with Bankers Trust Company with respect to the Company's foreign portfolio securities and related cash. Rule 17f-5 adopted under the Act permits the Company to maintain such securities and cash in the custody of certain eligible foreign banks and foreign securities depositories. The 39 Funds' foreign securities are held by such entities who are approved by the Board of Directors in accordance with such rules. Determinations are made pursuant to such rules following consideration of a number of factors including, but not limited to, the reliability and financial stability of the institutions; the ability of the institutions to perform custodial services for the Funds; the reputation of the institutions in national markets; the countries in which the institutions are located; and the risks of potential nationalization or expropriation of assets of the Funds. ACCOUNTING AGENT, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT IFTC has been retained to provide certain accounting and bookkeeping services to the Funds. In addition, IFTC serves as Transfer Agent and Dividend Disbursing Agent for the Company. 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 Manager, distribution expenses pursuant to a Rule 12b-1 plan, fees and expenses of officers and directors who are not affiliated with the Manager, taxes, interest, legal fees, transfer agent, dividend disbursing agent, accounting agent and custodian fees, auditing 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 expense of reports to shareholders, shareholders' meetings and proxy solicitations, and other expenses which are not expressly assumed by the Manager 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 among the Funds based upon the relative net assets of the Funds at the time such expenses were accrued. For each Fund's current fiscal year the Manager has voluntarily limited total expenses (including the Manager's compensation and amounts paid pursuant to the Rule 12b-1 plan discussed below but excluding interest, taxes, brokerage fees and commissions and extraordinary expenses) on a per annum basis to 2% with respect to average daily net assets of North American Fund, European Value Fund, Pacific Value Fund and Latin American Value Fund, 1.8% with respect to average daily net assets of Bond Fund and 1.00% with respect to average daily net assets of Money Market Fund. After each Fund's current fiscal year, these limitations may be revised or terminated at any time. BROKERAGE COMMISSIONS The Manager and Sub-Advisers may consider a number of factors in determining which brokers or futures commission merchants to use for the respective Fund's portfolio transactions (including transactions in futures contracts and options on futures contracts). These factors, which are more fully discussed in the Statement of Additional Information, include, but are not limited to, research services, the reasonableness of commissions and quality of services and execution. A broker's sales of a Fund's shares may also be considered a factor if the Manager and/or Sub-Adviser is satisfied that such 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 or the Sub-Advisers (or the Manager with respect to the U.S. portion of North American Fund) or their affiliates on a securities exchange if the commissions, fees or other remuneration received by such persons are reasonable and fair compared to the commissions, fees or other remuneration paid to other brokers or other 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 40 exchange during a comparable period of time. In effecting portfolio transactions through the Distributor or the Sub-Advisers (or the Manager with respect to the U.S. portion of North American Fund) or their affiliates, the Funds intend to comply with Section 17(e) of the 1940 Act. DISTRIBUTION OF FUND SHARES Piper Jaffray Inc. ("Piper Jaffray" or the "Distributor") acts as the principal distributor of the Funds' shares. From the date of this prospectus, shares of each Fund are being offered to the public on a continuous basis. The address of the Distributor is that of the Company. The Company has adopted a Distribution Plan pursuant to Rule 12b-1 under the 1940 Act (the "Plan"), pursuant to which the Distributor is entitled to reimbursement each month for its actual expenses incurred in connection with servicing of the Funds' shareholder accounts and in connection with distribution-related services provided with respect to each Fund in an amount not to exceed .70% per annum of the average daily net assets with respect to North American Fund, Pacific Value Fund, European Value Fund and Latin American Value Fund, and .50% with respect to Bond Fund. The Plan also authorizes payments by Money Market Fund in an amount not to exceed .10% per annum of its average daily net assets. However, the Board of Directors of the Company has determined to discontinue payments under the Plan with respect to Money Market Fund effective as of June 19, 1995. For each of the applicable Funds payments under the Plan are currently limited voluntarily by the Distributor to amounts not in excess of an annual rate of .50% with respect to North American Fund, Pacific Value Fund, European Value Fund and Latin American Value Fund and .30% with respect to Bond Fund. These limitations may be revised or terminated at any time after the conclusion of each Fund's current fiscal year. The Distributor is reimbursed under the Plan for Distribution Expenses and Shareholder Servicing Costs. Distribution Expenses include, but are not limited to, initial and ongoing sales compensation (in addition to sales loads) paid to investment executives of the Distributor and to other broker-dealers; expenses incurred in the printing of prospectuses, statements of additional information and reports used for sales purposes; expenses of preparation and distribution of sales literature; expenses of advertising of any type; an allocation of the Distributor's overhead; payments to and expenses of persons who provide support services in connection with the distribution of Fund shares; and other distribution-related expenses. Shareholder Servicing Costs include all expenses of the Distributor incurred in connection with providing administrative or accounting services including payments made to persons, including employees of the Distributor, who respond to inquiries of shareholders of the Funds regarding their ownership of shares or their accounts with the Funds or who provide other administrative or accounting services not otherwise required to be provided by the Funds' Adviser, Sub-Advisers or transfer agent. The Manager, the Sub-Advisers and the Distributor may, out of their own assets, pay for certain expenses incurred in connection with the distribution of shares of the Fund. In particular, the Distributor may make payments out of its own assets to its investment executives and other broker-dealers in connection with their sales of shares of the Fund. See "Purchase of Shares--Public Offering Price." The Distributor's Shareholder Servicing Costs include payments to its investment executives and to other broker-dealers who have entered into sales agreements with the Distributor as follows: If shares of a Fund (other than Money Market Fund) are sold by a representative of a broker-dealer other than the Distributor, that portion of .25% of the average daily net assets of the Fund which is attributable to shares sold by such representative is paid to such broker-dealer. If shares of a Fund 41 (other than Money Market Fund) are sold by an investment executive of the Distributor, compensation will be paid to the investment executive in the manner set forth in a written agreement, in an amount not to exceed that portion of .25% of the average daily net assets of the Fund which is attributable to shares sold by such investment executive. In addition, the Distributor pays an amount equal to .25% of the average daily net assets of North American Fund, European Value Fund, Pacific Value Fund and Latin American Value Fund (.05% with respect to Bond Fund) as ongoing sales compensation to investment executives of the Distributor and to broker-dealers which have entered into sales agreements with the Distributor. Such payments are considered Distribution Expenses of the Distributor and are reimbursable under the Plan. Further information regarding the Plan is contained in the Statement of Additional Information. PURCHASE OF SHARES GENERAL The Funds' shares may be purchased at the public offering price from the Distributor and from certain other broker-dealers who have sales agreements with the Distributor. The net asset value per share for the Money Market Fund is normally expected to be $1.00. See "Valuation of Shares." The address of the Distributor is that of the Funds. Shareholders will receive written confirmation of their purchases. Stock certificates will not be issued in order to facilitate redemptions and transfers between the Funds. The Distributor reserves the right to reject any purchase order. Shareholders should be aware that, because the Company does not issue stock certificates, Fund shares must be kept in an account with the Distributor or with IFTC in the case of Fund shares purchased through another broker-dealer that has a sales agreement with the Distributor. Purchases of shares of Money Market Fund may be made by wire transfer for next day settlement. A prospective shareholder must have an account with the Company prior to wiring money for a purchase. For information concerning this method of purchase contact your broker or call IFTC at (800) 245-7087. PUBLIC OFFERING PRICE Shares of the Funds are offered to the public at the net asset value per share next determined after an order is received by either the Distributor or IFTC. While no sales charge is imposed at the time shares are purchased, a contingent deferred sales charge ("CDSC") may be imposed at the time of redemption. See "Redemption of Shares--Contingent Deferred Sales Charge." The Manager and the Sub-Adviser of the applicable Fund (other than Money Market Fund) will advance to broker-dealers through which a sale of shares is made, on each sale, a sales commission in the aggregate of 2% of the net asset value of the shares purchased. The Distributor or the Manager, at its expense, may also 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 Company and other investment companies for which the Manager acts as investment adviser. In some instances, such 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, incurred in connection with educational seminars. MINIMUM INVESTMENTS A minimum initial investment of $250 is required. The minimum subsequent investment is $100. The Distributor may waive any such minimums in the case of purchases by certain payroll deduction 42 or other employee benefit plan investments. In addition, these minimums are not applicable to purchases made under certain automatic investment programs offered by the Distributor and other participating brokerage firms. SPECIAL PURCHASE PLANS For information on any of the following special purchase plans, contact your broker-dealer. TAX SHELTERED RETIREMENT PLANS. Contact your broker-dealer for prototype plans for Individual Retirement Accounts ("IRAs"), Simplified Employee Pension Accounts ("SEP IRAs") and Keogh, Pension and Profit Sharing Accounts and will act as custodian for such Accounts. AUTOMATIC MONTHLY INVESTMENT PROGRAM. Any shareholder may arrange to make additional purchases of shares of the Company by having $100 or more per month automatically transferred from his or her bank, savings and loan, or other financial institution. Shareholders should contact their investment executive or IFTC to obtain authorization forms or for additional information. EXCHANGE PRIVILEGE Shares of one Fund may be exchanged for shares of another Fund, provided that the shares to be acquired in the exchange are eligible for sale in the shareholder's state of residence. Exchanges are made on the basis of the net asset values of the Funds involved. All exchanges are subject to the minimum investment requirements and any other applicable terms set forth in the prospectus relating to the Fund being acquired. An exchange will be treated for federal income tax purposes as a redemption of shares (followed by a purchase of new shares) on which the shareholder may realize a capital gain or loss (see "Taxes", below). No CDSC is imposed at the time of any exchange, although any applicable CDSC will be imposed upon ultimate redemption. During the period of time the shareholder remains in Money Market Fund the holding period (for the purpose of determining the rate of the CDSC) is frozen. If those shares are subsequently reexchanged for shares of another Fund, the holding period previously frozen when the first exchange was made resumes on the next day. Thus, the CDSC is based upon the time (calculated as described above) the shareholder was invested in any Fund other than Money Market Fund. A shareholder may make an exchange by contacting his or her investment executive. Other shareholders must contact IFTC. Shareholders who have authorized telephone exchanges in their Account Application and Services Form will be able to effect exchanges from a Fund into an identically registered account in one of the other available Funds by calling IFTC at (800) 245-7087. The Funds will employ reasonable procedures to confirm that instructions communicated by telephone are genuine. The procedures include requiring various forms of personal identification such as name, mailing address, social security or other tax identification number and account number. Telephone instructions will also be recorded. If such procedures are not employed, the applicable Fund may be liable for any losses due to unauthorized or fraudulent transactions. Otherwise, exchanges must be made by mail by following the procedures applicable to redemption of the Funds' shares (see "Redemption of Shares--Normal Redemption," below) except that, with respect to an exchange transaction between accounts registered in identical names, no signature guarantee is required unless the amount being exchanged exceeds $25,000. An investor may make twelve exchanges per year without payment of a service charge. Thereafter, there is a $50 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. 43 REDEMPTION OF SHARES NORMAL REDEMPTION Shares of each Fund, in any amount, may be redeemed at any time at their current net asset value next determined after a request is received by the Distributor or IFTC; however, such redemption proceeds may be reduced by the amount of any applicable contingent deferred sales charge (see below). A written redemption request (discussed below) will not be considered received unless it is in proper form. To redeem shares of the Funds, an investor may make an oral redemption request through his or her investment executive. Shareholders may also redeem shares by written request to IFTC at the address set forth above. See "Management--Custodian." To be considered in proper form, written requests for redemption should indicate the dollar amount or number of shares to be redeemed, should refer to the shareholder's Fund account number, and should give either a social security or tax identification number (as applicable). 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 $25,000 or more or redemption proceeds are to be paid to someone other than the shareholder at such 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 or 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. CONTINGENT DEFERRED SALES CHARGE Shares that are held for more than two years after purchase will not be subject to any charge upon redemption, except as described below. Shares of such Funds redeemed sooner than two years after purchase may, however, be subject to a charge upon redemption. This charge is called a contingent deferred sales charge (or CDSC), which will be a percentage of the dollar amount of shares redeemed and will be assessed on an amount equal to the lesser of the current market value or the cost of the shares being redeemed. The size of this percentage will depend upon how long the shares have been held, as set forth in the table below:
CONTINGENT DEFERRED SALES CHARGE AS A PERCENTAGE OF AMOUNT NUMBER OF DAYS SINCE PURCHASE REDEEMED - - - - - - ----------------------------------------------------------------------- ----------------------- first 365 days......................................................... 2.0% next 365 days.......................................................... 1.0% thereafter............................................................. None
For purposes of calculating the time periods set forth in the preceding table, any day in which shares of Money Market Fund are held is excluded. No CDSC will be imposed on shares purchased prior to June 19, 1995. 44 A CDSC will not be imposed when a Shareholder redeems: (a) shares representing amounts attributable to increases in the value of an account above the net cost of the investment due to increases in the net asset value per share; (b) shares held for more than two years; (c) shares acquired through reinvestment of income dividends or capital gain distributions; and (d) shares acquired by exchange where the exchanged shares would not be assessed a CDSC upon redemption. Moreover, in determining whether a CDSC is applicable, the calculation will be made in a manner that results in the lowest possible rate. It will be assumed that amounts described in (a), (b), (c) and (d) above are redeemed in that order. In addition, as stated above, no CDSC will be assessed on shares of Money Market Fund if they were not acquired in an exchange for shares of another Fund. The CDSC, if otherwise applicable, will be waived in the case of purchases made by (a) employee benefit plans containing an actively maintained qualified cash or deferred arrangement under Section 401(k) of the Internal Revenue Code (the "Code"); (b) custodial accounts qualified under Section 403(b)(7) of the Code; (c) 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; (d) the following persons associated with the Manager and the Distributor: (i) officers, directors and partners; (ii) employees and retirees; (iii) spouses, or children under the age of 21, of any such persons; or (iv) any trust, pension, profit-sharing or other benefit plan for any of the foregoing persons; and (e) sales representatives of broker-dealers who have entered into sales agreements with the Distributor, and spouses and children under the age of 21 of such sales representatives. In addition, the CDSC will be waived in the event of (a) the death or disability of the Shareholder; (b) 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; (c) systematic withdrawals from any plans set forth in (b), above, if the Shareholder is at least 59 1/2 years old; (d) a tax-free return of the excess contribution to an individual retirement account under Section 408(a) of the Code; or (e) involuntary redemptions effected pursuant to the right of the Company to liquidate Shareholder accounts having an aggregate net asset value of less than $200 or such other amount as set forth in the then current prospectus. In determining whether a Shareholder is "disabled" for purposes of waiving the CDSC, the definition of the term contained in Section 72(m)(7) of the Code will be utilized. The Company will apply the waiver for death or disability 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. All waivers will be granted only following receipt by the Distributor of confirmation of the Shareholder's entitlement. REDEMPTIONS BY TELEPHONE Redemption requests may be made by telephone by calling IFTC at (800) 245-7087. Telephone redemption requests over $25,000 are not allowed. Redemption requests over this amount must be made in the Normal Redemption manner as described above. Telephone redemptions will not be allowed if the shareholder has changed his or her address of record in the preceding thirty days. Each Fund will employ reasonable procedures to confirm that instructions received by telephone are genuine. These procedures include requiring various forms of personal identification such as name, mailing address, social security or other tax identification number and shareholder account number. Telephone instructions will also be recorded. If such procedures are not employed, each Fund may be liable for any losses due to unauthorized or fraudulent transactions. 45 EXPEDITED REDEMPTIONS Expedited redemptions may be requested by telephone by contacting IFTC at (800) 245-7087. The proceeds of the expedited redemption will be wired to a bank account designated by the shareholder. The shareholder must make the election to use expedited redemptions and provide the appropriate bank information to his or her broker-dealer or directly to IFTC at the time the shareholder's Fund account is opened. The minimum amount for expedited redemptions is $25,000. Expedited redemptions will not be allowed if the shareholder has changed his or her bank instructions within the preceding thirty days. Each Fund will employ reasonable procedures to confirm that instructions communicated by telephone are genuine. These procedures are described in the Redemptions by Telephone section above. SYSTEMATIC WITHDRAWAL PLAN If your account has a value of $5,000, you may establish a Systematic Withdrawal Plan for any of the Funds and receive regular periodic payments. A request to establish a Systematic Withdrawal Plan must be submitted in writing to an investor's broker-dealer. There are no service charges for maintenance; the minimum amount that you may withdraw 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 is 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. Any applicable CDSC will be imposed on shares redeemed under the Systematic Withdrawal Plan. Therefore, any shareholder participating in the Systematic Withdrawal Plan will have sufficient shares redeemed from his or her account so that the proceeds (net of any applicable CDSC) to the shareholder will be the designated monthly or quarterly amount. You will ordinarily not be allowed to make additional investments of less than $5,000 or three times the annual withdrawals under the Systematic Withdrawal Plan during the time you have the plan in effect. You will receive a confirmation of each transaction showing the sources of the payment and the share and cash balance remaining in your plan. The plan may be terminated on written notice by the shareholder or the appropriate 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. You may change the amount and schedule of withdrawal payments or suspend such payments by giving written notice to your broker-dealer at least ten business days prior to the end of the month preceding a scheduled payment. PAYMENT OF REDEMPTION PROCEEDS Normally, the Funds will make payment for all shares redeemed within three business days, but in no event will payment be made more than seven days after receipt by the Distributor or IFTC of a redemption request in proper order. However, payment may be postponed or the right of redemption (by each of the methods described above) suspended for more than seven days under unusual circumstances, such as when trading is not taking place on the New York Stock Exchange (the "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, which may be up to 15 days from the purchase date. 46 INVOLUNTARY REDEMPTION The Company reserves the right to redeem a shareholder's account at any time the net asset value of the account falls below $200 as the result of a redemption or transfer request. Shareholders will be notified in writing prior to any such redemption and will be allowed 30 days to make additional investments before the redemption is processed. VALUATION OF SHARES Each Fund determines its net asset value on each day the Exchange is open for business, provided that the net asset value need not be determined for a Fund on days on which changes in the value of the Fund's portfolio securities will not materially affect the current net asset value of the Fund's shares and days when no Fund shares are tendered for redemption and no order for Fund shares is received. The calculation is made as of the primary closing time of the Exchange (currently 4:00 p.m. New York time) after the Funds have declared any applicable dividends. The net asset value per share for each of the Funds 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 Funds, 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. Securities traded on a national securities exchange or on the NASDAQ National Market System are valued at the last reported sale price that day. Securities traded on a national securities exchange or on the NASDAQ National Market System for which there were no sales on that day and securities traded on other over-the-counter markets for which market quotations are readily available are valued at the mean between the bid and asked prices as obtained from one or more dealers that make markets in the securities. To the extent dealer quotes are used in pricing securities, quotes are always sought from more than one dealer. However, from time to time, it may not as a practical matter be possible to obtain bid and asked quotations from more than one dealer. Under such circumstances, one dealer quote will be used as a basis for valuing the security unless the Manager, subject to the supervision of the Board of Directors, believes based on market prices of comparable securities, developments in the marketplace or otherwise, that the quote is not reflective of the market value of the security in which case such security will be valued at fair value. If a Fund should have an open short position as to a security, the valuation of the contract will be at the average of the bid and asked prices. Portfolio securities underlying actively traded options will be valued at their market price as determined above. The current market value of any exchange-traded option held or written by a Fund is its last sales price on the exchange prior to the time when assets are valued. Lacking any sales that day, the options will be valued at the mean between the current closing bid and asked prices. Financial futures are valued at the settlement price established each day by the board of trade or exchange on which they are traded. The value of certain fixed-income securities will be provided by an independent pricing service which determines these valuations at a time earlier than the close of the Exchange. Pricing services consider such factors as security prices, yields, maturities, call features, ratings and developments relating to specific securities in arriving at securities valuations. Occasionally events affecting the value of such securities may occur between the time valuations are determined and the close of the Exchange. If events materially affecting the value of such securities occur during such period, or if the Company's 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 47 decided upon in good faith by the Company's Board of Directors. In addition, any securities or other assets of a Fund for which market prices are not readily available will be valued at their fair value in accordance with such procedures. Any assets or liabilities initially expressed in terms of foreign currencies are translated into U.S. dollars by the pricing service retained by the Funds or, to the extent that an exchange rate is not available through such pricing service, at the mean of current bid and asked prices of such currencies against the U.S. dollar last quoted by a major bank that is a regular participant in the foreign exchange market. The Funds have been advised that the pricing service translates foreign currencies into U.S. dollars on the basis of the official exchange rate or by taking into account the quotes provided by a number of major banks that are regular participants in the foreign exchange market. Trading in securities on Latin American, European and Pacific Basin securities exchanges and in over-the-counter markets is normally completed well before the close of business on each business day of the Funds. In addition, securities trading in a particular country in which a Fund invests may not take place on all business days in New York. Furthermore, trading takes place in various foreign markets on days which are not business days of the Funds and on which the Funds' net asset value is not calculated. Therefore, the net asset value of a Fund might be significantly affected on days when the investor has no access to the Fund. The Funds calculate net asset value per share as of the close of the regular trading session on the Exchange. Such calculation does not generally take place contemporaneously with the determination of the prices of the majority of the portfolio securities used in such calculation. If events materially affecting the value of such securities occur between the time when their price is determined and the time when the Funds' net asset value is calculated, such securities will be valued at fair value as determined in good faith by or under the direction of the Board of Directors. The Board of Directors expects that the net asset value per share for Money Market Fund will ordinarily be $1.00. Total assets for the Fund is determined by valuing the portfolio securities at amortized cost in accordance with Rule 2a-7 under the 1940 Act. 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 the Fund sold its portfolio. Under the direction of the Board of Directors, certain 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. Market valuations are obtained from yield data relating to classes of money market instruments published by reputable sources at the bid prices for the instruments. 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. DIVIDENDS, DISTRIBUTIONS AND TAX STATUS DIVIDENDS AND DISTRIBUTIONS Net investment income and net realized long-term and short-term capital gains will be determined separately for each Fund. Bond Fund intends to declare and pay dividends from investment income quarterly. Bond Fund may at times pay out more or less than the entire amount of net investment income in any particular period in order to permit such Fund to maintain a stable level of 48 distributions. Any such amount retained by Bond Fund would be available to stabilize future distributions. As a result, the distributions paid by Bond Fund for any particular period may be more or less than the amount of net investment income earned by such Fund during such period. Distributions may also include amounts attributable to net short-term capital gains if necessary to maintain a stable level of distributions. This may result in a portion of the distributions constituting a return of capital to the extent Bond Fund subsequently realize capital losses. Dividends from net investment income earned by the remaining Funds (other than Money Market Fund) will be declared and paid annually. Distributions of any net realized long-term and short-term gains (except as noted above with respect to Bond Fund) earned by a Fund will be made annually. Money Market Fund intends to declare dividends on a daily basis which will be reinvested in additional Fund shares on a monthly basis. Each daily dividend is payable to Fund shareholders of record at the time of its declaration. On the record date for a distribution, a Fund's share price is reduced by the amount of the distribution. If an investor buys shares just before the record date ("buying a dividend"), the investor will pay the full price for the shares and then receive a portion of the price back as a taxable distribution. All net investment income dividends and net realized capital gains distributions with respect to the shares of any Fund will be payable in additional shares of such Fund at net asset value unless the shareholder notifies his or her broker-dealer of an election to receive cash. Shareholders may elect either to receive income dividends in cash and capital gains in additional shares of the Fund at net asset value, or to receive both income dividends and capital gains in cash. The taxable status of income dividends and/or net capital gains distributions is not affected by whether they are reinvested or paid in cash. TAXES Each of the Funds 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 of the Funds expects to qualify as a regulated investment company during the current taxable year. If qualified as a regulated investment company, 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 the shareholders, whether received in cash or additional shares of the Funds. 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. In general, individuals are taxed on long-term capital gains at a maximum rate of 28% and on ordinary income at a maximum rate of 39.6%. Corporations are taxed at a maximum rate of 35%. A shareholder will recognize a capital gain or loss upon the sale or exchange of shares in a Fund (including upon a sale or exchange of Fund shares pursuant to the Exchange Privilege) 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. A Fund may be subject to foreign income taxes including withholding taxes. If a Fund has more than 50% of its assets invested in the stock or securities of foreign corporations at the end of the 49 Fund's taxable year, the Fund may make an election to allow shareholders either to claim U.S. foreign tax credits with respect to foreign taxes paid by the Fund or to deduct such amounts as an itemized deduction on their tax return. In the event such an election is made, shareholders would have to increase their taxable income by the amount of such taxes and the Fund would not be able to deduct such taxes in computing its taxable income. For federal income tax purposes, North American Fund, Pacific Basin Value Fund, Latin American Value Fund and Bond Fund had capital loss carryovers at June 30, 1995 of $838,953; $1,546,411; $10,643,620; and $338,380, respectively. If these capital loss carryovers are not offset by subsequent capital gains, they will expire in the years 2002 through 2004. It is unlikely the board of directors of the Company will authorize a distribution of any net realized capital gains until the available capital loss carryovers have been offset or expire. 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. Distributions may also be subject to state and local taxes. Before investing in any of the Funds, you should check the consequences of your local and state tax laws. The tax discussion set forth in this Prospectus and in the Statement of Additional Information does not purport to address all of the federal income tax consequences applicable to an investment in the Funds, or to all categories of investors, some of which may be subject to special rules. Investors should consult their tax advisors as to the applicability of the foregoing to their situation. PERFORMANCE COMPARISONS Advertisements and other sales literature for a Fund may refer to a Fund's "average annual total return" and "cumulative total return." In addition, North American Fund, Bond Fund and Money Market Fund may provide yield calculations in advertisements and other sales literature. All such yield and total return quotations are not intended to predict or represent future performance. The return on and principal value of an investment in any of the Funds will fluctuate, so that an investor's shares, when redeemed, may be worth more or less than their original cost. Yield calculations other than for Money Market Fund 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. The "yield" of Money Market Fund refers to the income generated by an investment in the Fund over a seven-day period (which period will be 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 a Fund from the redeemable value of such 50 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, including data from Lipper Analytical Services, Inc., the S&P 500, NASDAQ Composite, Wilshire 5000, Russell 2000 and Value Line Composite indexes and other industry publications. Performance of the Funds may also be compared to the performance of comparable Funds, as reported by Lipper Analytical Services. For additional information regarding the calculation of yield, average annual total return and cumulative total return, see "Calculation of Performance Data" in the Statement of Additional Information. The Company's annual report will contain performance information that will be made available to shareholders upon request and without charge. LEGAL EXPERTS The validity of the shares offered hereby will be passed upon for the Company by Gordon Altman Butowsky Weitzen Shalov & Wein, New York, New York. With regard to matters of Minnesota law, Gordon Altman Butowsky Weitzen Shalov & Wein may rely upon the opinion of Dorsey & Whitney, Minneapolis, Minnesota. PENDING LITIGATION Complaints have been filed in U.S. District Court against the Manager and the Distributor relating to other investment companies managed by the Manager. These lawsuits do not involve the Company. The Manager and the Distributor have entered into a settlement agreement which represents a consolidation of a number of complaints. The settlement is subject to court approval. The Manager and Distributor do not believe that the lawsuits will have a material adverse effect upon their ability to perform under their agreements with the Manager or the Company and they intend to defend the lawsuits vigorously. See "Pending Legal Proceedings" in the Statement of Additional Information. 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. 260 billion of these shares have been authorized by the Board of Directors to be issued in 8 separate series: 10 billion shares designated as North American Fund shares, 10 billion shares as European Value Fund shares, 10 billion shares as Pacific Value Fund shares, 10 billion shares as Latin American Value Fund shares, 10 billion shares as Bond Fund shares, 100 billion shares as Money Market Fund shares and 110 billion shares allocated among the other two series of the Company that are not currently being offered for sale. 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. 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. 51 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. 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. On an issue affecting only a particular series, the shares of the affected Fund vote as a separate series. An example of such an issue would be a fundamental investment restriction pertaining to only one series. In voting on the Investment Management and Advisory Agreement and the Sub-Advisory Agreement, approval of the Agreements by the shareholders of a particular series would make the Agreements 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. 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 various other matters such as amendments to investment advisory contracts or to fundamental investment policies and restrictions. 52 APPENDIX RATINGS OF INVESTMENTS MOODY'S INVESTORS SERVICE INC. ("MOODY'S") BOND RATINGS Aaa....... 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. Aa........ 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 risks appear somewhat larger than in Aaa securities. A......... Bonds which are rated A possess many favorable investment 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. Baa....... 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. Bonds rated Aaa, Aa, A and Baa are considered investment grade bonds. Ba........ Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate, and therefore not well safeguarded during both good and bad times in the future. Uncertainty of position characterizes bonds in this class. B......... Bonds which are rated B generally lack characteristics of desirable investments. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Caa....... Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca........ Bonds which are rated Ca present obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings.
A-1 C......... Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing.
CONDITIONAL RATING: Municipal bonds for which the security depends upon the completion of some act or the fulfillment of some condition are rated conditionally. These are bonds secured by (a) earnings of projects under construction, (b) earnings of projects unseasoned in operation experience, (c) rentals which begin when facilities are completed, or (d) payments to which some other limiting condition attaches. Parenthetical rating denotes probable credit stature upon completion of construction or elimination of basis of condition. RATING REFINEMENTS: Moody's may apply numerical modifiers, 1, 2 and 3 in each generic rating classification from Aa through B in its corporate and municipal bond rating system. The modifier 1 indicates that the security ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and a modifier 3 indicates that the issue ranks in the lower end of its generic rating category. COMMERCIAL PAPER RATINGS Moody's Commercial Paper ratings are opinions of the ability to repay punctually promissory obligations not having an original maturity in excess of nine months. Moody's employs the following three designations, all judged to be investment grade, to indicate the relative repayment capacity of rated issuers: Prime-1, Prime-2, Prime-3. Issuers rated Prime-1 have a superior capacity for repayment of short-term promissory obligations. Issuers rated Prime-2 have a strong capacity for repayment of short-term promissory obligations; and Issuers rated Prime-3 have an acceptable capacity for repayment of short-term promissory obligations. Issuers rated Not Prime do not fall within any of the Prime rating categories. STANDARD & POOR'S RATINGS GROUP ("STANDARD & POOR'S") BOND RATINGS A Standard & Poor's bond rating is a current assessment of the creditworthiness of an obligor with respect to a specific obligation. This assessment may take into consideration obligors such as guarantors, insurers, or lessees. The ratings are based on current information furnished by the issuer or obtained by Standard & Poor's from other sources it considers reliable. The ratings are based, in varying degrees, on the following considerations: (1) likelihood of default-capacity and willingness of the obligor as to the timely payment of interest and repayment of principal in accordance with the terms of the obligation; (2) nature of and provisions of the obligation; and (3) protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights. Standard & Poor's does not perform an audit in connection with any rating and may, on occasion, rely on unaudited financial information. The ratings may be changed, suspended or withdrawn as a result of changes in, or unavailability of, such information, or for other reasons. A-2 AAA....... Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is extremely strong. AA........ Debt rated AA has a very strong capacity to pay interest and repay principal and differs from the highest-rated issues only in small degree. A......... 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. BBB....... 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 for debt in higher-rated categories. Bonds rated AAA, AA, A and BBB are considered investment grade bonds. BB........ Debt rated BB has less near-term vulnerability to default than other speculative grade debt. However, it faces major ongoing uncertainties or exposure to adverse business, financial or economic conditions which could lead to inadequate capacity to meet timely interest and principal payment. B......... Debt rated B has a greater vulnerability to default but presently has the capacity to meet interest payments and principal repayments. Adverse business, financial or economic conditions would likely impair capacity or willingness to pay interest and repay principal. CCC....... Debt rated CCC has a current identifiable vulnerability to default, and is dependent upon favorable business, financial and economic conditions to meet timely payments of interest and repayments of principal. In the event of adverse business, financial or economic conditions, it is not likely to have the capacity to pay interest and repay principal. CC........ The rating CC is typically applied to debt subordinated to senior debt which is assigned an actual or implied CCC rating. C......... The rating C is typically applied to debt subordinated to senior debt which is assigned an actual or implied CCC - debt rating. The C rating may be used to cover a situation where a bankruptcy petition has been filed, but debt service payments are continued. C1........ The rating C1 is reserved for income bonds on which no interest is being paid. D......... Debt rated D is in payment default. The D rating category is used when interest payments or principal payments are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payment will be made during such grace period. The D rating also will be used upon the filing of a bankruptcy petition if debt service payments are jeopardized. NR........ Indicates that no rating has been requested, that there is insufficient information on which to base a rating or that Standard & Poor's does not rate a particular type of obligation as a matter of policy.
A-3 Bonds rated BB, B, CCC, CC and C are regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal. BB indicates the least degree of speculation and C the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. Plus (+) or minus (-): The ratings from AA to CCC may be modified by the addition of a plus or minus sign to show relative standing within the major ratings categories. In the case of municipal bonds, the foregoing ratings are sometimes followed by a "p" which indicates that the rating is provisional. A provisional rating assumes the successful completion of the project being financed by the bonds being rated and indicates that payment of debt service requirements is largely or entirely dependent upon the successful and timely completion of the project. This rating, however, while addressing credit quality subsequent to completion of the project, makes no comment on the likelihood or risk of default upon failure of such completion.
COMMERCIAL PAPER RATINGS Standard and Poor's commercial paper rating is a current assessment of the likelihood of timely payment of debt having an original maturity of no more than 365 days. The commercial paper rating is not a recommendation to purchase or sell a security. The ratings are based upon current information furnished by the issuer or obtained by Standard & Poor's from other sources it considers reliable. The ratings may be changed, suspended, or withdrawn as a result of changes in or unavailability of such information. Ratings are graded into group categories, ranging from "A" for the highest quality obligations to "D" for the lowest. Ratings are applicable to both taxable and tax-exempt commercial paper. The categories are as follows: Issues assigned A ratings are regarded as having the greatest capacity for timely payment. Issues in this category are further refined with the designation 1, 2 and 3 to indicate the relative degree of safety. A-1....... indicates that the degree of safety regarding timely payment is very strong. A-2....... indicates capacity for timely payment on issues with this designation is strong. However, the relative degree of safety is not as overwhelming as for issues designated "A-1." A-3....... indicates a satisfactory capacity for timely payment. Obligations carrying this designation are, however, somewhat more vulnerable to the adverse effects of changes in circumstances than obligations carrying the higher designations.
A-4 FITCH INVESTORS SERVICE, INC. ("FITCH") BOND RATINGS AAA....... Bonds rated AAA are considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events. AA........ Bonds rated AA are considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA categories are not significantly vulnerable to foreseeable future developments, short-term debt of these issuers is generally rated F-1+.
COMMERCIAL PAPER RATINGS The rating F-1+ is the highest commercial paper rating assigned by Fitch. Paper rated F-1+ is regarded as having the strongest degree of assurance for timely payment. The rating F-1 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. DUFF & PHELPS, INC. ("DUFF") BOND RATINGS AAA....... Bonds rated AAA are considered to be of the highest credit quality. The risk factors are negligible, being only slightly more than U.S. Treasury debt. AA........ Bonds rated AA are considered by Duff to be of high credit quality with strong protection factors. Risk is modest and may vary slightly from time to time because of economic conditions.
COMMERCIAL PAPER RATINGS 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. IBCA LIMITED AND IBCA INC. ("IBCA") BOND RATINGS AAA....... Obligations rated AAA by IBCA have the lowest expectation of investment risk. Capacity for timely repayment of principal and interest is substantial, such that adverse changes in business, economic or financial conditions are unlikely to increase investment risk significantly.
A-5 AA........ Obligations rated AA by IBCA have a very low expectation of investment risk. Capacity for timely repayment of principal and interest is substantial. Adverse changes in business, economic or financial condition may increase investment risk, albeit not very significantly.
IBCA also assigns a rating to certain international and U.S. banks. An IBCA bank rating represents IBCA's current assessment of the strength of the bank and whether such bank would receive support should it experience difficulties. In its assessment of a bank, IBCA uses a dual rating system comprised of Legal Ratings and Individual Ratings. In addition, IBCA assigns banks Long- and Short- Term Ratings as used in the corporate ratings discussed above. Legal Ratings, which range in gradation from 1 through 5, address the question of whether the bank would receive support provided by central banks or shareholders if it experienced difficulties, and such ratings are considered by IBCA to be a prime factor in its assessment of credit risk. Individual Ratings, which range in gradations from A through E, represent IBCA's assessment of a bank's economic merits and address the question of how the bank would be viewed if it were entirely independent and could not rely upon support from state authorities or its owners. COMMERCIAL PAPER RATINGS The designation A1 by IBCA indicates that the obligation is supported by a very strong capacity for timely repayment. Those obligations rated A1+ are supported by the highest capacity for timely repayment. Obligations rated A2 are supported by a strong capacity for timely repayment, although such capacity may be susceptible to adverse changes in business, economic or financial conditions. THOMSON BANKWATCH, INC. ("BANKWATCH") BOND RATINGS BankWatch assigns a rating to each issuer it rates, in gradations of A through E. BankWatch examines all segments of the organization, including, where applicable, the holding company, member banks or associations, and other subsidiaries. In those instances where financial disclosure is incomplete or untimely, a qualified rating (QR) is assigned to the institution. BankWatch also assigns, in the case of foreign banks, a country rating which represents an assessment of the overall political and economic stability of the country in which the bank is domiciled. COMMERCIAL PAPER RATINGS The rating TBW-1 is the highest short-term obligation rating assigned by BankWatch. Obligations rated TBW-1 are regarded as having the strongest capacity for timely repayment. Obligations rated TBW-2 are supported by a strong capacity for timely repayment, although the degree of safety is not as high as for issues rated TBW-1. A-6 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. ---------------- TABLE OF CONTENTS
PAGE Introduction....................... 2 Fees and Expenses.................. 6 Financial Highlights............... 8 Investment Objectives and Policies.......................... 11 Other Eligible Investments......... 19 Special Investment Methods......... 23 Investment Restrictions............ 31 Special Risk Considerations........ 30 Management......................... 35 Distribution of Fund Shares........ 41 Purchase of Shares................. 42 Redemption of Shares............... 44 Valuation of Shares................ 47 Dividends, Distributions and Tax Status............................ 48 Performance Comparisons............ 50 Legal Experts...................... 51 Pending Litigation................. 51 General Information................ 51 Ratings of Investments................Appendix
[LOGO] HERCULES FUNDS INC. August 29, 1995 HERC-05X [LOGO] HERCULES 1995 - - - - - - ------------------- ANNUAL INTERNATIONAL FUNDS REPORT [WORLD GRAPHIC BACKGROUND] A WORLD OF INVESTMENT CHOICES TABLE OF CONTENTS NORTH AMERICAN GROWTH AND INCOME FUND - - - - - - -------------------------------------------------------------------------------- Seeks to provide long-term capital growth and current income primarily through investments in securities of issuers in Mexico, Canada and the United States. Letter to Shareholders . . . . . . . . . . .4 Financial Statements and Notes . . . . . . 16 Investments in Securities. . . . . . . . . 31 Federal Tax Information. . . . . . . . . . 41 Shareholder Update . . . . . . . . . . . . 43 EUROPEAN VALUE FUND - - - - - - -------------------------------------------------------------------------------- Seeks to provide long-term capital growth and, to a lesser extent current income, primarily through investments in securities of issuers located in Europe. Letter to Shareholders . . . . . . . . . . .6 Financial Statements and Notes . . . . . . 16 Investments in Securities. . . . . . . . . 33 Federal Tax Information. . . . . . . . . . 41 Shareholder Update . . . . . . . . . . . . 43 PACIFIC BASIN VALUE FUND - - - - - - -------------------------------------------------------------------------------- Seeks to provide long-term capital growth and, to a lesser extent current income, primarily through investments in regions bordering the Pacific Ocean. Letter to Shareholders . . . . . . . . . . .8 Financial Statements and Notes . . . . . . 16 Investments in Securities. . . . . . . . . 35 Federal Tax Information. . . . . . . . . . 41 Shareholder Update . . . . . . . . . . . . 43 LATIN AMERICAN VALUE FUND - - - - - - -------------------------------------------------------------------------------- Seeks to provide long-term capital growth and, to a lesser extent current income, primarily through investments in securities of issuers in Mexico, Central America and South America. Letter to Shareholders . . . . . . . . . . 10 Financial Statements and Notes . . . . . . 16 Investments in Securities. . . . . . . . . 37 Federal Tax Information. . . . . . . . . . 41 Shareholder Update . . . . . . . . . . . . 43 WORLD BOND FUND - - - - - - -------------------------------------------------------------------------------- Seeks to provide a high level of total investment return through investments in debt securities of issuers located anywhere in the world. Letter to Shareholders . . . . . . . . . . 12 Financial Statements and Notes . . . . . . 17 Investments in Securities. . . . . . . . . 38 Federal Tax Information. . . . . . . . . . 42 Shareholder Update . . . . . . . . . . . . 43 GLOBAL SHORT-TERM FUND - - - - - - -------------------------------------------------------------------------------- Seeks to provide a high level of total return through investments in securities (primarily short-term securities) of issuers located around the world. Letter to Shareholders . . . . . . . . . . 14 Financial Statements and Notes . . . . . . 17 Investments in Securities. . . . . . . . . 39 Federal Tax Information. . . . . . . . . . 42 Shareholder Update . . . . . . . . . . . . 43 MONEY MARKET FUND - - - - - - -------------------------------------------------------------------------------- Seeks to maximize current income consistent with the preservation of capital and maintenance of liquidity by investing exclusively in high-quality U.S. money market instruments. Letter to Shareholders . . . . . . . . . . 15 Financial Statements and Notes . . . . . . 17 Investments in Securities. . . . . . . . . 39 Federal Tax Information. . . . . . . . . . 42 Shareholder Update . . . . . . . . . . . . 43 1 [WILLIAM H. ELLIS PHOTO] WILLIAM H. ELLIS PRESIDENT HERCULES FAMILY OF FUNDS HERCULES INTERNATIONAL FUNDS LETTER TO SHAREHOLDERS August 15, 1995 Dear Shareholders: It has been a dynamic year in international markets. From natural disasters like the earthquake in Kobe, Japan, to currency issues in Mexico, Japan and the U.S., the past 12 months have produced both ups and downs in investment markets. It is particularly in this environment that I believe the Hercules funds' multi-manager approach makes sense. Utilizing the investment expertise of eight independent subadvisers, each selected for their experience in a specific world region, adds yet another element of diversification to international investing. The Hercules funds have undergone some important changes during the past fiscal year which I'd like to review with you. Although you received information about these developments earlier this summer, I'll bring you up-to-date on their progress. At a special shareholder meeting on July 18, 1995, shareholders approved a change in the Company's investment manager from Hercules International Management L.L.C. to Piper Capital Management Incorporated, a subsidiary of Piper Jaffray Companies Inc. (For specific voting results, turn to page 43.) This change emanated from a mutual agreement between Piper Jaffray Companies and Midland Walwyn in Toronto to dissolve their partnership in Hercules International. With the partnership now dissolved, there are two separate Hercules families of funds: one in the United States, managed by Piper Capital Management, and one in Canada, managed by Atlas Capital Management, a subsidiary of Midland Walwyn. The separation will enable each company to concentrate exclusively on their respective markets and to focus on those elements most attractive to their domestic investors. We also changed the pricing structure of the Hercules funds this year, as we became concerned that shareholders unfamiliar with fluctuations in international markets may react too quickly and evaluate performance based on a time frame that is too short. As you know, that's a formula for buying high 2 and selling low. As a result, in June, we implemented a pricing structure designed to encourage the long-term perspective that's so important when investing globally: - - - - - - - You continue to pay no front-end load, so 100% of your money goes to work immediately. - - - - - - - There is no fee for exchanging between funds in the Hercules family up to 12 times per year. - - - - - - - The new pricing structure does not apply to money invested in the Hercules funds before June 19, 1995. You may redeem those shares at any time and will not be assessed a sales charge. - - - - - - - For money invested after June 19, 1995, you may pay a deferred sales charge if you redeem shares within the first 24 months. There will be a 2% fee for redemptions within the first 12 months of investment and a 1% fee for redemptions in the second 12 months. - - - - - - - Time spent in the Money Market Fund does not count toward eliminating the deferred sales charge. This pricing structure is attractive compared to other global and international mutual funds on the market. The deferred sales charge is lower and has a shorter phase-out than many other funds with deferred sales charges. According to Lipper Analytical Services, an independent rating service, only 11% of the 123 global equity funds it tracks offer sales charges lower than 4.5%. And, you pay no sales charge on the Hercules funds if you hold your investment for two years (with the exception of time invested in the Hercules Money Market Fund).* This is an exciting time for the Hercules funds. These changes enable us to focus exclusively on the needs of our U.S. shareholders, and provide those investors with an appropriate long-term investment horizon an excellent opportunity to invest around the world. If you have any questions about these changes or about the Hercules funds, I encourage you to contact your investment professional or call Hercules toll-free at 800 584-1317. Thank you for your investment in the Hercules family of funds. Sincerely, /s/ William H.Ellis William H. Ellis President * FUNDS ARE SUBJECT TO 12B-1 FEES. 3 [PHOTO] MARU EUGENIA PICHARDO PORTFOLIO MANAGER, MEXICO ACCI WORLDWIDE, S.A. DE C.V. [PHOTO] STEPHEN UZIELLI PORTFOLIO MANAGER, CANADA AGF INVESTMENT ADVISORS, INC. [PHOTO] JOHN SCHONBERG PORTFOLIO MANAGER, UNITED STATES PIPER CAPITAL MANAGEMENT INCORPORATED HERCULES INTERNATIONAL FUNDS NORTH AMERICAN GROWTH AND INCOME FUND August 15, 1995 Dear Shareholders: FOR THE 12 MONTHS ENDED JUNE 30, 1995, NORTH AMERICAN GROWTH AND INCOME FUND PROVIDED A 5.4% TOTAL RETURN. During the same period, the S&P 500 Index returned 26%; the Mexico Stock Exchange Index declined -46.9%, and the Toronto Stock Exchange 300 Index returned 15.2% (all in U.S. dollar terms). Net asset value (NAV) stood at $9.92 per share on June 30, 1995, up from $9.46 per share on June 30, 1994. IMPORTANT ADVANCEMENTS WERE MADE IN MEXICO DURING 1994, HOWEVER EVENTS DID NOT TURN OUT AS FORECASTED. Favorable developments such as inflation reduction, real GDP growth, and an orderly election were negatively affected by the uprising in Chiapas and crimes with political overtones. High interest rates abroad reversed capital inflows to emerging markets and to Mexico, and at the end of 1994 the country faced a massive flight of foreign currency which resulted in a strong devaluation of the peso versus the U.S. dollar. In the first quarter of 1995, a new economic program was introduced to restore confidence and promote the economy's capacity for growth. The anchor of the program was the implementation of tight fiscal and monetary policies. A U.S. financial package supported the program and helped resolve Mexico's liquidity crisis. DURING THE SECOND QUARTER OF 1995, STABILIZATION SEEMED TO RETURN TO MEXICAN MARKETS. Indicators such as the exchange rate, inflation, and the Consumer Price Index improved and stabilized, pointing toward economic firmness and the possible end of the financial crisis sometime in August. The government has made substantial advances with issues involving financial institutions and highways, principally helping to create a climate of greater stability, and the feared social upheaval has failed to materialize. THE FUND'S MEXICAN PORTFOLIO HOLDS A 63% POSITION IN STOCKS AND 37% IN FIXED INCOME INVESTMENTS and is balanced between cyclical and non-cyclical, domestic and multinational companies. Our strategy continues to focus on undervalued stocks and also includes stocks with a one- to two-year horizon which should benefit from a second phase of privatization. Over the past year, the fund has increased its holdings of industrial conglomerates, mining, paper and forest, and chemical sectors, and has reduced its emphasis in construction, food, beverage, tobacco and communications industries. 4 THE FUND'S U.S. PORTFOLIO SERVED TO OFFSET SOME OF THE VOLATILITY EXPERIENCED IN THE MEXICAN MARKET. First quarter 1995 was one of the S&P 500's best quarters for the past three years, and the U.S. portion of the fund outperformed the index for the quarter. The U.S. economy showed signs of weakening during the second quarter, prompting the Federal Reserve to reduce the federal funds rate from 6% to 5.75% in July. The markets gave a rousing welcome, with all major stock indexes reaching record-breaking highs. The technology sector performed especially well and now appears to be somewhat overpriced. WE ARE NOT ANTICIPATING A MAJOR U.S. STOCK MARKET DECLINE SOON, AS EARNINGS ARE STILL STRONG. Yet, it's unlikely the market will continue rising without some type of correction. When the market does pull back, we anticipate investors will move away from the technology sector and toward others that have not done as well. We currently favor the retail trade and energy sectors, which appear undervalued and due for a rebound. CANADA IS ENTERING THE LATTER STAGES OF THE ECONOMIC CYCLE, WHICH TENDS TO BE DOMINATED BY INDUSTRIAL AND RESOURCE-BASED STOCKS. These sectors also happen to be strengths underpinning the Canadian market. In fact, stock growth thus far in 1995 has been led by resources. Strong energy prices have created appreciation in the oil and gas sector, and paper and forestry stocks also have grown impressively. The stabilization of the Canadian dollar and an improvement in fiscal policy have made stocks more attractive to foreign investors. As recessionary fears subside, we believe there is room for further capital appreciation in Canadian markets. STEVE UZIELLI, PORTFOLIO MANAGER FOR THE CANADIAN PORTION OF THE FUND, LEFT AGF IN JUNE. Until his replacement is named, Robert Farquharson has assumed responsibility for portfolio management. Mr. Farquharson has over 30 years of investment experience, having joined AGF in 1963. He holds a B. Comm. degree from the University of Toronto and is a Chartered Financial Analyst (CFA). Thank you for your investment in the North American Growth and Income Fund. Sincerely, /s/ M. Pichardo /s/ S. Uzielli /s/ John Schonberg Maru Eugenia Pichardo Stephen Uzielli John Schonberg Portfolio Manager Portfolio Manager Portfolio Manager COUNTRY ALLOCATION JUNE 30, 1995 U.S. 57% Mexico 22% [PIE CHART] Canada 20% Cash 1% - - - - - - -------------------------------------------------------------------------------- VALUE OF $10,000 INVESTED [GRAPH] THE HERCULES FUNDS RECENTLY INTRODUCED A CONTINGENT DEFERRED SALES CHARGE (CDSC) APPLICABLE TO SHARES PURCHASED AFTER JUNE 19, 1995. HAD THIS STRUCTURE BEEN IN EFFECT SINCE THE FUND'S INCEPTION, A $10,000 INVESTMENT MADE ON NOVEMBER 9, 1993 AND REDEEMED ON JUNE 30, 1995, INCLUDING REINVESTED DISTRIBUTIONS, WOULD HAVE BEEN WORTH $9,868. HOWEVER, BECAUSE THE CDSC DOES NOT APPLY TO SHARES PURCHASED BEFORE JUNE 19, 1995, YOUR ACTUAL PROCEEDS WOULD HAVE BEEN $9,967. IN COMPARING A FUND TO INDEXES, KEEP IN MIND THAT INDEXES ARE UNMANAGED, THEIR RETURNS DO NOT REFLECT MANAGEMENT FEES, AND THEY ARE NOT OPEN TO INVESTMENT. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. - - - - - - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTALRETURN (THROUGH 6/30/95 ASSUMING CDSC FEES WERE APPLICABLE) One-Year . . . . . . . . . . . . . . . .3.36% Since Inception (11/93 ) . . . . . . . -0.81% DURING SOME PERIODS, THE FUND'S MANAGER AND DISTRIBUTOR WAIVED OR ABSORBED FUND EXPENSES WHICH MAY OR MAY NOT BE WAIVED IN THE FUTURE. OTHERWISE, THE AVERAGE ANNUAL TOTAL RETURNS WOULD HAVE BEEN 1.97% AND -2.34%, RESPECTIVELY. 5 [PHOTO] CHRISTIAN SIMOND PORTFOLIO MANAGER PICTET INTERNATIONAL MANAGEMENT LTD. [PHOTO] NILS FRANCKE PORTFOLIO MANAGER PICTET INTERNATIONAL MANAGEMENT LTD. HERCULES INTERNATIONAL FUNDS EUROPEAN VALUE FUND August 15, 1995 Dear Shareholders: EUROPEAN VALUE FUND ENJOYED STRONG PERFORMANCE OVER THE PAST YEAR, RETURNING 13.5% THROUGH THE END OF JUNE 1995. This compares to the benchmark Morgan Stanley Capital International (MSCI) Europe Index's return of 18.8% and the Lipper European Region Funds Average of 13.4%. The fund's net asset value was $11.10 per share on June 30, 1995, up from $9.86 per share on June 30, 1994. OVER THE PAST YEAR, EUROPEAN STOCK PERFORMANCE WAS LARGELY DRIVEN BY U.S. CAPITAL MARKETS AND CURRENCY FLUCTUATIONS. In the latter half of 1994, many European stock markets suffered from rising short-term interest rates in the United States, a decline in the U.S dollar, and signs of a stronger-than- expected European recovery. Subsequently, investors sold European bonds in line with U.S. bonds, and European stocks weakened because they already carried a substantial recovery premium for corporate earnings and became unattractive compared to rising bond yields. ACCORDINGLY, WE REPOSITIONED THE FUND TO BENEFIT FROM THE BETTER BOND ENVIRONMENT AND TO PROTECT IT AGAINST NEGATIVE CURRENCY EXPOSURE. We moved more into smaller, "non-core" European countries, especially in Scandinavia, which generally performed better than core countries like Germany and Switzerland, whose currencies strengthened more dramatically. We also added a 10% exposure to European bonds. THE RELATIVE ATTRACTIVENESS OF STOCKS WAS FURTHER REDUCED IN THE FIRST QUARTER OF 1995 when the U.S. dollar depreciated another 10% versus core European currencies, and European analysts again had to cut back their growth and earnings expectations. Performance improved when translated into a weaker U.S. dollar, however, and on average, European markets advanced by a satisfactory 6% in the second quarter. As the fund remained unhedged until this spring, it benefitted fully from the appreciation of most European currencies against the dollar. 6 OVERALL, OUR OUTLOOK FOR EUROPEAN STOCKS IMPROVED IN THE SPRING OF THIS YEAR AND IS NOW VERY POSITIVE. Europe currently lags the United States in the economic cycle, and we see leaner companies emerging out of the recession. As companies improve their profitability through further restructuring and European interest rates continue to fall, we expect stocks to outperform bonds. The U.S. dollar has bounced several times from its current levels and now looks relatively undervalued in our opinion. We have therefore initiated a 20% currency hedge against the European Currency Unit (ECU), the basket of European currencies, in anticipation of a strengthening U.S. dollar. We also recently sold our 10% bond holdings and are now 100% in stocks. IN TERMS OF STOCK SELECTION, WE INCREASED THE FUND'S WEIGHTING IN INTEREST-RATE- SENSITIVE AND QUALITY GROWTH STOCKS, ESPECIALLY IN THE TELECOMMUNICATIONS SECTOR. We particularly like the Finnish company Nokia, which is #2 in the market for worldwide cellular phones after Motorola. We also have investments in Ericsson, Siemens and Philips, three major worldwide players in the technology sector. We thank you for your investment in the European Value Fund. Sincerely, /s/ Christian Simond /s/ Nils Francke Christian Simond Nils Francke Portfolio Manager Portfolio Manager COUNTRY ALLOCATION JUNE 30, 1995 United Kingdom 35% Belgium 3% Denmark 2% Switzerland 11% Sweden 4% Spain 3% [PIE CHART] Austria 2% France 11% Germany 12% Italy 3% Netherlands 8% Other 6% - - - - - - -------------------------------------------------------------------------------- VALUE OF $10,000 INVESTED [GRAPH] THE HERCULES FUNDS RECENTLY INTRODUCED A CONTINGENT DEFERRED SALES CHARGE (CDSC) APPLICABLE TO SHARES PURCHASED AFTER JUNE 19, 1995. HAD THIS STRUCTURE BEEN IN EFFECT SINCE THE FUND'S INCEPTION, A $10,000 INVESTMENT MADE ON NOVEMBER 9, 1993 AND REDEEMED ON JUNE 30, 1995, INCLUDING REINVESTED DISTRIBUTIONS, WOULD HAVE BEEN WORTH $11,093. HOWEVER, BECAUSE THE CDSC DOES NOT APPLY TO SHARES PURCHASED BEFORE JUNE 19, 1995, YOUR ACTUAL PROCEEDS WOULD HAVE BEEN $11,193. IN COMPARING A FUND TO INDEXES, KEEP IN MIND THAT INDEXES ARE UNMANAGED, THEIR RETURNS DO NOT REFLECT MANAGEMENT FEES, AND THEY ARE NOT OPEN TO INVESTMENT. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. - - - - - - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURN (THROUGH 6/30/95 ASSUMING CDSC FEES WERE APPLICABLE) One-Year . . . . . . . . . . . . . . . 11.52% Since Inception (11/93 ) . . . . . . . .6.54% DURING SOME PERIODS, THE FUND'S MANAGER AND DISTRIBUTOR WAIVED OR ABSORBED FUND EXPENSES WHICH MAY OR MAY NOT BE WAIVED IN THE FUTURE. OTHERWISE, THE AVERAGE ANNUAL TOTAL RETURNS WOULD HAVE BEEN 10.31% AND 5.02%, RESPECTIVELY. 7 [PHOTO] LLOYD BEAT INVESTMENT MANAGER EDINBURGH FUND MANAGERS PLC [PHOTO] DAVID CURRIE PORTFOLIO MANAGER, JAPAN EDINBURGH FUND MANAGERS PLC [PHOTO] JAMIE SANDISON PORTFOLIO MANAGER, PACIFIC RIM EDINBURGH FUND MANAGERS PLC HERCULES INTERNATIONAL FUNDS PACIFIC BASIN VALUE FUND August 15, 1995 Dear Shareholders: OVER THE PAST YEAR ENDED JUNE 30, 1995, PACIFIC BASIN VALUE FUND DECLINED - - - - - - -14.25%. This compares to a decline for Japan of -14.2% and a return for the MSCI Pacific Ex-Japan Index of 7.9%. The fund's benchmark index, the MSCI Pacific Index, declined -10.8% over the period. At June 30, 1995, the fund's net asset value was $9.02 per share, down from $10.68 on June 30, 1994. Pacific Basin Value Fund maintains a 58% weighting in Japan, which is the primary reason for our relative underperformance. THE JAPANESE MARKET HAS HAD A DIFFICULT TIME, ESPECIALLY OVER THE FIRST SIX MONTHS OF 1995. Despite encouraging signs of an improvement in the economy, Japanese investors have remained very negative. Authorities have continued to run a relatively tight monetary policy despite the low level of nominal interest rates. This has shown through in terms of the very strong yen. Concerns that the economy will dip back into recession, along with voter dissatisfaction with the management of the economy, have created a situation where investor sentiment is very poor. Recently, we hedged approximately 40% of the fund's yen exposure to protect against adverse currency movements. HOWEVER, WE BELIEVE THIS IS THE DARKNESS BEFORE THE DAWN! THERE HAS BEEN VISIBLE IMPROVEMENT IN THE JAPANESE ECONOMY AND IN RESTRUCTURING BY JAPANESE COMPANIES. What we believe is required now is clear signs that the Japanese authorities can rise to the present situation and revive the economy. Essentially, this requires "printing" money to solve the deflationary situation. We believe there are signs that the authorities are moving in the right direction, and when this becomes apparent to the market, share prices should be strong. ELSEWHERE IN THE PACIFIC BASIN THE SCENE IS NOW MUCH BETTER THAN IT WAS AT THE END OF 1994. U.S. interest rates seem to have reached their peak, and so have interest rates in most Pacific Rim markets. Hong Kong and Singapore have been on a rising trend since February 1995, and although some of the smaller markets had a poor quarter on the back of the Mexican devaluation, they rallied strongly in the second quarter of 1995. 8 INVESTORS ARE RETURNING TO THE PACIFIC RIM MARKETS because, in our opinion, they see: - - - - - - - Long-term economic growth that is well above the sustainable rates of the developed world - - - - - - - A structure and dynamics in the region that should ensure growth for years to come - - - - - - - Attractive valuations (many markets are at a discount compared to Wall Street) WE BELIEVE PACIFIC RIM MARKETS WILL PERFORM WELL, ALTHOUGH THEY MAY STOP FOR BREATH IF THE U.S. ECONOMY ACCELERATES LATER IN THE YEAR AND THERE ARE CONCERNS ABOUT INTEREST RATES. We believe Japan offers the best opportunities for strong price appreciation over the medium term and, consequently, the fund will maintain a sizeable weighting in Japan for the time being. IN JUNE, JAMIE SANDISON, PORTFOLIO MANAGER FOR THE PACIFIC RIM REGION, ASSUMED NEW RESPONSIBILITIES AS HEAD OF EDINBURGH'S CONTINENTAL EUROPEAN TEAM. Until a replacement is named, his position covering Pacific equities for the fund will be taken on by Helen Fallow, head of the Pacific Department. Ms. Fallow joined Edinburgh in 1990 and is a specialist in Asian markets -- Hong Kong and China, particularly. Prior to joining the company, she was Head of Emerging Markets Research at Crosby Securities Limited, based in Hong Kong. Ms. Fallow earned an MA with honors from the University of Dundee. We thank you for your continued support of the Pacific Basin Value Fund and would be happy to hear your comments or answer any questions you may have. Sincerely, /s/ Lloyd C. Beat /s/ David W. Currie /s/ Jamie R. Sandison Lloyd Beat David Currie Jamie Sandison Investment Manager Portfolio Manager Portfolio Manager COUNTRY ALLOCATION JUNE 30, 1995 Japan 58% South Korea 3% Singapore 4% Malaysia 5% India 3% Taiwan 2% [PIE CHART] Thailand 8% Australia 3% Hong Kong 9% Indonesia 2% Cash/Other 3% - - - - - - -------------------------------------------------------------------------------- VALUE OF $10,000 INVESTED [GRAPH] THE HERCULES FUNDS RECENTLY INTRODUCED A CONTINGENT DEFERRED SALES CHARGE (CDSC) APPLICABLE TO SHARES PURCHASED AFTER JUNE 19, 1995. HAD THIS STRUCTURE BEEN IN EFFECT SINCE THE FUND'S INCEPTION, A $10,000 INVESTMENT MADE ON NOVEMBER 9, 1993 AND REDEEMED ON JUNE 30, 1995, INCLUDING REINVESTED DISTRIBUTIONS, WOULD HAVE BEEN WORTH $9,028. HOWEVER, BECAUSE THE CDSC DOES NOT APPLY TO SHARES PURCHASED BEFORE JUNE 19, 1995, YOUR ACTUAL PROCEEDS WOULD HAVE BEEN $9,118. IN COMPARING A FUND TO INDEXES, KEEP IN MIND THAT INDEXES ARE UNMANAGED, THEIR RETURNS DO NOT REFLECT MANAGEMENT FEES, AND THEY ARE NOT OPEN TO INVESTMENT. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. - - - - - - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURN (THROUGH 6/30/95 ASSUMING CDSC FEES WERE APPLICABLE) One-Year . . . . . . . . . . . . . . .-16.31% Since Inception (11/93 ) . . . . . . . -6.05% DURING SOME PERIODS, THE FUND'S MANAGER AND DISTRIBUTOR WAIVED OR ABSORBED FUND EXPENSES WHICH MAY OR MAY NOT BE WAIVED IN THE FUTURE. OTHERWISE, THE AVERAGE ANNUAL TOTAL RETURNS WOULD HAVE BEEN -16.82% AND -6.56%, RESPECTIVELY. 9 [PHOTO] MARIA-ELENA CARRION PORTFOLIO MANAGER BANKERS TRUST COMPANY [PHOTO] EMILY ALEJOS PORTFOLIO MANAGER BANKERS TRUST COMPANY HERCULES INTERNATIONAL FUNDS LATIN AMERICAN VALUE FUND August 15, 1995 Dear Shareholders: LATIN AMERICAN VALUE FUND STAGED A STRONG COMEBACK IN THE SECOND QUARTER OF 1995, returning 15% after a first quarter decline of -30.1%. For the year ended June 30, the fund declined -21.2%, compared to declines of -17.6% for the benchmark IFC Latin America Investable Index and -19.7% for the Lipper Latin American Funds Average. The fund's net asset value declined from $9.14 on June 30, 1994 to $7.20 on June 30, 1995. THE LAST 12 MONTHS HAVE BEEN CHARACTERIZED BY EXTREMELY HIGH VOLATILITY IN LATIN AMERICAN MARKETS. After a strong third quarter in 1994, the following six months saw a pronounced downward trend in all markets, exacerbated by the December Mexican devaluation. In the second quarter of 1995, Latin American markets staged a strong rally, with major markets advancing between 18% and 30% as dedicated fund managers reacted to the deeply oversold condition. Despite strong gains during the quarter, however, the only Latin American market to post positive performance year-to-date in 1995 was Chile, which advanced an impressive 23% in U.S. dollar terms. Other major markets were still down significantly year-to-date: Argentina -12%, Brazil -24%, and Mexico -25% in U.S. dollar terms. WE BELIEVE THE WORST IS BEHIND US FOR LATIN AMERICAN MARKETS. Our outlook for the next 12 months is positive given the attractive valuations produced by the recent market declines and an improved global environment. Specifically, as the U.S. economy decelerates and interest rates continue to decline, capital should once again flow into all emerging markets. OUR STRATEGY OVER THE NEXT QUARTER IS TO CONTINUE EMPHASIZING HIGH-GROWTH MARKETS WHILE DOWNPLAYING CONTRACTING OR DECELERATING-GROWTH MARKETS. We therefore continue to emphasize Brazil and the Andean Pact (Colombia, Peru and Venezuela) and to de-emphasize Argentina and Mexico. Within Brazil, our portfolio continues to be structured around three major themes: - - - - - - - Efficiency improvement stories, such as the recently-privatized steel industry - - - - - - - Sectors with strong export potential, such as the pulp and iron ore industries - - - - - - - Sectors with strong privatization potential, such as the telecommunications and electricity industries 10 Within Mexico, we have restructured the portfolio to emphasize companies with significant earnings in U.S. dollars and low credit risk. Overall, we are maintaining a fully invested position in the portfolio. LOOKING OUT 12 MONTHS, WE EXPECT THE LATIN AMERICAN REGION TO GENERATE ATTRACTIVE RETURNS GIVEN HIGH EARNINGS GROWTH PROSPECTS IN SELECTIVE MARKETS AND LOW OVERALL VALUATIONS. Returns should be in line with expected average earnings growth of 15% for the region over the next 12 months and price-to-earnings expansion in the Brazilian market. Overall, all the Latin American markets should benefit from the recent improvement in global liquidity resulting from interest rate cuts in the United States and Japan. Thank you for your patience as we ride out the recent market volatility and stay focused on the long-term prospects for the region. Sincerely, /s/ Maria-Elena Carrion /s/ Emily Alejos Maria-Elena Carrion Emily Alejos Portfolio Manager Portfolio Manager COUNTRY ALLOCATION JUNE 30, 1995 Columbia 9% Chile 7% Cash Equiv. 8% Argentina 2% [PIE CHART] Mexico 16% Venezuela 5% Peru 8% Brazil 45% - - - - - - -------------------------------------------------------------------------------- VALUE OF $10,000 INVESTED THE HERCULES FUNDS RECENTLY INTRODUCED A CONTINGENT DEFERRED SALES CHARGE (CDSC) APPLICABLE TO SHARES PURCHASED AFTER JUNE 19, 1995. HAD THIS STRUCTURE BEEN IN EFFECT SINCE THE FUND'S INCEPTION, A $10,000 INVESTMENT MADE ON NOVEMBER 9, 1993 AND REDEEMED ON JUNE 30, 1995, INCLUDING REINVESTED DISTRIBUTIONS, WOULD HAVE BEEN WORTH $7,128. HOWEVER, BECAUSE THE CDSC DOES NOT APPLY TO SHARES PURCHASED BEFORE JUNE 19, 1995, YOUR ACTUAL PROCEEDS WOULD HAVE BEEN $7,200. IN COMPARING A FUND TO INDEXES, KEEP IN MIND THAT INDEXES ARE UNMANAGED, THEIR RETURNS DO NOT REFLECT MANAGEMENT FEES, AND THEY ARE NOT OPEN TO INVESTMENT. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. - - - - - - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURN (THROUGH 6/30/95 ASSUMING CDSC FEES WERE APPLICABLE) One-Year . . . . . . . . . . . . . . .-22.80% Since Inception (11/93). . . . . . . -18.67% DURING SOME PERIODS, THE FUND'S MANAGER AND DISTRIBUTOR WAIVED OR ABSORBED FUND EXPENSES WHICH MAY OR MAY NOT BE WAIVED IN THE FUTURE. OTHERWISE, THE AVERAGE ANNUAL TOTAL RETURNS WOULD HAVE BEEN -24.25% AND -20.22%, RESPECTIVELY. 11 [DAVID SCOTT PHOTO] DAVID SCOTT PORTFOLIO MANAGER SALOMON BROTHERS ASSET MANAGEMENT LTD. [DAVID GRIFFITHS PHOTO] DAVID GRIFFITHS PORTFOLIO MANAGER SALOMON BROTHERS ASSET MANAGEMENT LTD. HERCULES INTERNATIONAL FUNDS WORLD BOND FUND August 15, 1995 Dear Shareholders: PERFORMANCE OF THE WORLD BOND FUND HAS IMPROVED SIGNIFICANTLY IN 1995, AS GLOBAL BOND YIELDS GENERALLY DECLINED FOLLOWING A SHARPER-THAN-EXPECTED SLOWDOWN IN WORLDWIDE ECONOMIC ACTIVITY. The fund returned 7.2% for the year ended June 30, 1995, compared to a total return of 11.6% for the benchmark Salomon Brothers World Government Bond Index and 8.7% for the Lipper General World Income Funds Average. The fund's net asset value increased from $9.35 on June 30, 1994, to $9.82 on June 30, 1995, and the fund paid dividends of 20.15 cents per share during the fiscal year.* U.S. TREASURY YIELDS FELL 1.5% TO 2% THIS YEAR FOLLOWING EVIDENCE THAT THE PACE OF ACTIVITY IN THE U.S. ECONOMY HAD DECLINED SHARPLY FROM THE HECTIC RATE OF 1994. A large part of the slowdown seems related to an unwanted buildup in corporate inventories, however, the slowdown has led to surprisingly sharp declines in employment. This in turn prompted speculation that the Fed would begin to lower interest rates -- which it in fact did in early July. We have several observations regarding this move: - - - - - - - The Fed is probably biased in favor of further rate reductions; they would be unlikely to sanction a move which would have to be reversed in a few months. - - - - - - - The scale of any future reductions may be limited by evidence, already emerging, that the economy is responding to the large decline in bond yields and strong stock markets seen this year. Mortgage applications are up strongly and auto production schedules are increasing. - - - - - - - The current pricing of the Treasury market already reflects the expectation of another 0.50% to 0.75% reduction in rates. Thus, further improvements in the Treasury market will depend on evidence of renewed economic weakening. JAPANESE BOND YIELDS ALSO DECLINED SIGNIFICANTLY DURING THE YEAR AS THE EXTREME OVERVALUATION OF THE YEN RAISED THE RISK OF A SERIOUS ECONOMIC DEPRESSION. A near-bankrupt banking sector and a collapsing stock market attest to the problems currently facing Japan. The Bank of Japan has steered money rates below 1% and long bond yields have collapsed from 4.5% at the beginning of the year to just 2.5% recently. Yields at these levels appear to reflect an extended period of deflation. Such a situation does not appear to us to be * THE 12-CENT DIVIDEND DECLARED FOR SHAREHOLDERS OF RECORD ON JUNE 29, 1995 WAS CLASSIFIED AS A RETURN OF CAPITAL FOR TAX PURPOSES. BECAUSE IT WAS PAID FROM SOURCES OTHER THAN THE FUND'S NET INVESTMENT INCOME, IT IS NOT TAXABLE AS INCOME. PLEASE CONSULT A TAX ADVISER ON HOW TO REPORT THESE DISTRIBUTIONS ON YOUR TAX FORMS. 12 tolerable for Japanese politicians, and any collapse in the banking sector should be a concern for politicians around the world. We expect a bail-out of the banking sector accompanied by further stimulus and deregulation packages, with coordinated intervention to weaken the yen. This is likely to undermine bond market sentiment in Japan over the coming months. GROWTH IN EUROPE HAS ALSO UNDERSHOT EXPECTATIONS THIS YEAR, ALTHOUGH TO A LESSER EXTENT THAN IN THE U.S. Growth in domestic demand remains sedated by large-scale fiscal consolidation, and hopes of a recovery led by exports have been disappointed by two factors: The strength of the Deutsche mark has damaged Germany's global competitiveness, and there has been a slowdown in demand for exports outside the European Community. Worries over the sustainability of a relatively recent German economic recovery led the Bundesbank to reduce interest rates in March, and further rate cuts may be forthcoming if the economy remains lackluster. THE FUND HAS EMPHASIZED EUROPEAN BOND MARKETS RELATIVE TO THOSE IN BOTH THE U.S. AND JAPAN, where current yield levels do not appear to be attractive. We feel that the higher yields available in European markets offer the greatest opportunity for further capital appreciation and income gains for the fund. FOREIGN EXCHANGE EXPOSURE REMAINS FULLY HEDGED BACK INTO THE U.S. DOLLAR. This policy of hedging the currency reduces the volatility of investments, in our opinion, and protects shareholders from foreign currency losses should the U.S. dollar strengthen. We believe the outlook for the U.S. dollar -- which fell precipitously during the first quarter of 1995 -- is now more constructive, and we expect a significant rally in the dollar over the rest of this year. Thank you for your investment in the World Bond Fund. Sincerely, /s/ David J. Scott /s/ David Griffiths David Scott David Griffiths Portfolio Manager Portfolio Manager COUNTRY ALLOCATION* JUNE 30, 1995 Germany 32% Australia 4% Cash 7% U.S. 17% Denmark 12% [PIE CHART] Japan 11% Spain 9% Austria 3% U.K. 5% * INCLUDES EXPOSURE TO FUTURES CONTRACTS - - - - - - -------------------------------------------------------------------------------- VALUE OF $10,000 INVESTED [GRAPH] THE HERCULES FUNDS RECENTLY INTRODUCED A CONTINGENT DEFERRED SALES CHARGE (CDSC) APPLICABLE TO SHARES PURCHASED AFTER JUNE 19, 1995. HAD THIS STRUCTURE BEEN IN EFFECT SINCE THE FUND'S INCEPTION, A $10,000 INVESTMENT MADE ON NOVEMBER 9, 1993 AND REDEEMED ON JUNE 30, 1995, INCLUDING REINVESTED DISTRIBUTIONS, WOULD HAVE BEEN WORTH $9,985. HOWEVER, BECAUSE THE CDSC DOES NOT APPLY TO SHARES PURCHASED BEFORE JUNE 19, 1995, YOUR ACTUAL PROCEEDS WOULD HAVE BEEN $10,085. IN COMPARING A FUND TO INDEXES, KEEP IN MIND THAT INDEXES ARE UNMANAGED, THEIR RETURNS DO NOT REFLECT MANAGEMENT FEES, AND THEY ARE NOT OPEN TO INVESTMENT. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. - - - - - - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURN (THROUGH 6/30/95 ASSUMING CDSC FEES WERE APPLICABLE) One-Year . . . . . . . . . . . . . . . .5.24% Since Inception (11/93). . . . . . . . -0.09% DURING SOME PERIODS, THE FUND'S MANAGER AND DISTRIBUTOR WAIVED OR ABSORBED FUND EXPENSES WHICH MAY OR MAY NOT BE WAIVED IN THE FUTURE. OTHERWISE, THE AVERAGE ANNUAL TOTAL RETURNS WOULD HAVE BEEN 4.51% AND -4.90%, RESPECTIVELY. 13 DAVID SCOTT (PICTURED ON PAGE 12) PORTFOLIO MANAGER SALOMON BROTHERS ASSET MANAGEMENT LTD. DAVID GRIFFITHS (PICTURED ON PAGE 12) PORTFOLIO MANAGER SALOMON BROTHERS ASSET MANAGEMENT LTD. - - - - - - -------------------------------------------------------------------------------- VALUE OF $10,000 INVESTED [GRAPH] IF YOU HAD INVESTED $10,000 IN THE FUND ON NOVEMBER 9, 1993, AND HELD IT THROUGH JUNE 30, 1995, REINVESTING ALL DISTRIBUTIONS, YOUR INVESTMENT WOULD BE WORTH $10,155. IN COMPARING A FUND TO INDEXES, KEEP IN MIND THAT INDEXES ARE UNMANAGED, THEIR RETURNS DO NOT REFLECT MANAGEMENT FEES, AND THEY ARE NOT OPEN TO INVESTMENT. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. - - - - - - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURN (THROUGH 6/30/95) One-Year . . . . . . . . . . . . . . . .1.89% Since Inception (11/93). . . . . . . . .0.95% DURING SOME PERIODS, THE FUND'S MANAGER AND DISTRIBUTOR WAIVED OR ABSORBED FUND EXPENSES WHICH MAY OR MAY NOT BE WAIVED IN THE FUTURE. OTHERWISE, THE AVERAGE ANNUAL TOTAL RETURNS WOULD HAVE BEEN -15.79% AND -11.90%, RESPECTIVELY. HERCULES INTERNATIONAL FUNDS GLOBAL SHORT-TERM FUND August 15, 1995 Dear Shareholders: GLOBAL SHORT-TERM FUND PROVIDED A RETURN OF 1.89% FOR THE 12 MONTHS ENDED JUNE 30, 1995. Its net asset value increased to $10 per share on June 30, 1995, up from $9.91 on June 30, 1994. The Salomon Brothers Three-Month U.S. Treasury Bill Index, by comparison, increased 5.38% over the period and the benchmark Salomon World Government Bond Index returned 11.57%. The fund paid dividends of 9.51 cents for the year ended June 30, 1995. SINCE THE HERCULES MONEY MARKET FUND WAS INTRODUCED IN JANUARY, INVESTORS HAVE SHOWN LESS INTEREST IN THE GLOBAL SHORT-TERM FUND. At June 30, 1995, the fund's net assets were just $212,000 and its only investment was a U.S. Treasury bill. AS A RESULT, THE FUND'S INVESTMENT ADVISER HAS DISCONTINUED NEW SALES AND EXCHANGES INTO THE GLOBAL SHORT-TERM FUND, and we do not anticipate significant dividend distributions from the fund in the future. We encourage shareholders to talk with their investment professional about exchanging into the Money Market Fund, or any of the other Hercules funds, at no charge. /s/ David J. Scott /s/ David Griffiths David Scott David Griffiths Portfolio Manager Portfolio Manager 14 [MARYBETH WHYTE PHOTO] MARYBETH WHYTE PORTFOLIO MANAGER SALOMON BROTHERS ASSET MANAGEMENT INC HERCULES INTERNATIONAL FUNDS MONEY MARKET FUND August 15, 1995 Dear Shareholders: AS OF JUNE 30, 1995, THE SEVEN-DAY EFFECTIVE (COMPOUND) YIELD OF THE MONEY MARKET FUND WAS 4.69%, and its 30-day effective yield was 4.63%. The fund's average maturity was 76 days. BOTH LONG-TERM AND SHORT-TERM U.S. INTEREST RATES FELL DURING THE FIRST QUARTER OF 1995 despite a 0.50% increase in the federal funds rate in February. Market participants believed the Federal Reserve had raised interest rates for the last time, and thus short-term yields fell as investors no longer felt the need to be compensated for future rate increases. SECOND QUARTER ACTIVITY SAW FAVORABLE RESULTS FOR MONEY MARKET SECURITIES as weakness on the employment front ignited a rally in the short-term market. While other economic data was decidedly mixed during the quarter, most market pundits continued to believe the Fed would not raise rates again, and were proven correct in July when the federal funds rate was lowered from 6% to 5.75%. THE PORTFOLIO REMAINS INVESTED COMPLETELY IN U.S. TREASURY BILLS, and its average maturity was extended from 20 days to 76 days in anticipation of declining short-term interest rates. The Federal Reserve's move to lower interest rates, along with renewed signs of life from consumers, have increased the chances of a "soft landing" for the current economic expansion. Barring an unexpected shock, neither boom nor recession is on the horizon. The potential for large budget cuts later this year could hamper economic growth in the short run, however the effects of a credible budget plan on the financial markets and the possibility of further rate cuts by the Fed should outweigh any negative impact. We believe the federal funds rate may decline another 0.25% by year-end. Thank you for your investment in the Money Market Fund. /s/ Marybeth Whyte Marybeth Whyte Portfolio Manager 15 ------------------------------------------------------------------------ FINANCIAL STATEMENTS STATEMENTS OF ASSETS AND LIABILITIES JUNE 30, 1995
North American Pacific Latin Growth and European Basin American Income Value Value Value Fund Fund Fund Fund - - - - - - ---------------------------------------------------------------------------------------------------------------- ASSETS: Investments in securities, at market value* (note 2) $13,170,154 17,558,689 31,272,381 22,259,248 Cash in bank on demand deposit 132,829 -- 905,633 36,930 Foreign cash in bank on demand deposit 1,000 81,339 62,891 8,873 Receivable for investment securities sold 84,407 819,145 9,254 177,117 Receivable for fund shares sold 2,621 -- 241,559 78,140 Organization costs (note 2) 64,091 64,091 64,091 64,091 Dividends and accrued interest receivable 20,913 137,323 36,800 98,286 - - - - - - ---------------------------------------------------------------------------------------------------------------- Total assets 13,476,015 18,660,587 32,592,609 22,722,685 - - - - - - ---------------------------------------------------------------------------------------------------------------- LIABILITIES: Bank overdraft -- 726,758 -- -- Payable for investment securities purchased -- 98,868 737,371 -- Payable for fund shares redeemed 238,101 101,144 107,405 63,453 Unrealized depreciation of forward foreign currency contracts held (notes 2 and 4) -- 185,581 147,351 -- Accrued distribution fee 5,489 7,113 13,050 8,925 Accrued investment management fee 11,253 14,862 27,282 18,645 Accrued expenses and other liabilities 3,752 6,005 32,928 7,630 - - - - - - ---------------------------------------------------------------------------------------------------------------- Total liabilities 258,595 1,140,331 1,065,387 98,653 - - - - - - ---------------------------------------------------------------------------------------------------------------- Net assets applicable to outstanding capital stock $13,217,420 17,520,256 31,527,222 22,624,032 - - - - - - ---------------------------------------------------------------------------------------------------------------- - - - - - - ---------------------------------------------------------------------------------------------------------------- REPRESENTED BY: Capital stock - 10 billion shares of $.01 par value authorized for each fund; outstanding, 1,332,763; 1,578,787; 3,495,770; 3,140,348 shares, respectively $ 13,328 15,788 34,958 31,403 Additional paid-in capital 13,943,781 15,930,770 36,465,491 35,243,185 Undistributed net investment income (accumulated net investment loss) (note 2) (393,668) 223,075 (211,925) (153,624) Accumulated net realized gain (loss) on investments and foreign currency transactions (850,994) 604,008 (1,552,376) (11,147,882) Unrealized appreciation (depreciation) of investments and on translation of other assets and liabilities in foreign currencies (notes 4 and 7) 504,973 746,615 (3,208,926) (1,349,050) - - - - - - ---------------------------------------------------------------------------------------------------------------- Total - representing net assets applicable to outstanding capital stock $13,217,420 17,520,256 31,527,222 22,624,032 - - - - - - ---------------------------------------------------------------------------------------------------------------- - - - - - - ---------------------------------------------------------------------------------------------------------------- Net asset value per share of outstanding capital stock $ 9.92 11.10 9.02 7.20 - - - - - - ---------------------------------------------------------------------------------------------------------------- - - - - - - ---------------------------------------------------------------------------------------------------------------- *INVESTMENTS IN SECURITIES, AT IDENTIFIED COST $12,665,204 16,632,313 34,333,691 23,607,434 - - - - - - ---------------------------------------------------------------------------------------------------------------- - - - - - - ----------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 16 ------------------------------------------------------------------------ FINANCIAL STATEMENTS STATEMENTS OF ASSETS AND LIABILITIES JUNE 30, 1995
World Global Money Bond Short-Term Market Fund Fund Fund - - - - - - ----------------------------------------------------------------------------------------------- ASSETS: Investments in securities, at market value* (note 2) $ 12,655,163 99,299 1,301,196 Cash in bank on demand deposit 1,030,953 48,823 196 Organization costs (note 2) 64,091 64,091 38,851 Dividends and accrued interest receivable 416,925 -- -- - - - - - - ----------------------------------------------------------------------------------------------- Total assets 14,167,132 212,213 1,340,243 - - - - - - ----------------------------------------------------------------------------------------------- LIABILITIES: Payable for fund shares redeemed 263,253 -- 109,588 Net unrealized depreciation of forward foreign currency contracts held (notes 2 and 4) 71,507 -- -- Dividends payable to shareholders (note 2) 14,101 -- 23 Accrued distribution fee 3,819 -- 58 Accrued investment management fee 12,460 101 541 Accrued expenses and other liabilities 25,541 6 94 - - - - - - ----------------------------------------------------------------------------------------------- Total liabilities 390,681 107 110,304 - - - - - - ----------------------------------------------------------------------------------------------- Net assets applicable to outstanding capital stock $ 13,776,451 212,106 1,229,939 - - - - - - ----------------------------------------------------------------------------------------------- - - - - - - ----------------------------------------------------------------------------------------------- REPRESENTED BY: Capital stock - 10 billion (100 billion for Global Short-Term Fund and Money Market Fund each) shares of $.01 par value authorized for each fund; outstanding, 1,402,574; 21,201; 1,229,939 shares, respectively (note 1) $ 14,026 212 12,299 Additional paid-in capital 14,366,681 213,143 1,217,640 Undistributed net investment income (accumulated net investment loss) (note 2) (632,506) 3,740 -- Accumulated net realized (loss) on investments and foreign currency transactions (362,726) (4,989) -- Unrealized appreciation of investments and on translation of other assets and liabilities in foreign currencies (notes 4 and 7) 390,976 -- -- - - - - - - ----------------------------------------------------------------------------------------------- Total - representing net assets applicable to outstanding capital stock $ 13,776,451 212,106 1,229,939 - - - - - - ----------------------------------------------------------------------------------------------- - - - - - - ----------------------------------------------------------------------------------------------- Net asset value per share of outstanding capital stock $ 9.82 10.00 1.00 - - - - - - ----------------------------------------------------------------------------------------------- - - - - - - ----------------------------------------------------------------------------------------------- *INVESTMENTS IN SECURITIES, AT IDENTIFIED COST $ 12,176,942 99,299 1,301,196 - - - - - - ----------------------------------------------------------------------------------------------- - - - - - - -----------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 17 ------------------------------------------------------------------------ FINANCIAL STATEMENTS STATEMENTS OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 1995
North American Pacific Latin Growth and European Basin American Income Value Value Value Fund Fund Fund Fund - - - - - - ------------------------------------------------------------------------------------------------------------ INCOME: Dividends (net of foreign withholding taxes of $7,348; $69,136; $49,616; $17,639, respectively) $ 281,754 468,490 362,205 377,995 Interest (net of foreign withholding taxes of $14,422; $2,149; $0; $0, respectively) 333,841 101,024 2,368 173,973 - - - - - - ------------------------------------------------------------------------------------------------------------ Total investment income 615,595 569,514 364,573 551,968 - - - - - - ------------------------------------------------------------------------------------------------------------ EXPENSES (NOTE 6): Investment management fee 160,455 183,817 385,858 280,401 Distribution fee 112,319 128,672 270,101 196,280 Custodian, accounting and transfer agent fees 164,237 172,683 179,117 359,665 Audit and legal fees 43,614 43,463 52,517 52,238 Amortization of organization costs 17,845 17,845 17,845 17,845 Directors' fees 5,909 5,909 5,909 5,909 Reports to shareholders 7,657 7,693 14,571 14,588 Registration fees 16,308 15,891 25,867 23,441 Other expenses 15,546 14,701 26,004 22,094 - - - - - - ------------------------------------------------------------------------------------------------------------ Total expenses 543,890 590,674 977,789 972,461 Less expenses waived or absorbed by manager (190,889) (186,196) (128,856) (355,579) Less expenses waived or absorbed by distributor (32,091) (36,763) (77,172) (56,080) - - - - - - ------------------------------------------------------------------------------------------------------------ Net expenses 320,910 367,715 771,761 560,802 - - - - - - ------------------------------------------------------------------------------------------------------------ Investment income (loss) - net 294,685 201,799 (407,188) (8,834) - - - - - - ------------------------------------------------------------------------------------------------------------ REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS AND FOREIGN CURRENCY: Net realized gain (loss) on investments (note 3) (1,333,951) 825,508 (1,237,693) (8,891,338) Net realized gain (loss) on foreign currency transactions (58,915) 2,976 (225,442) (133,054) - - - - - - ------------------------------------------------------------------------------------------------------------ Net realized gain (loss) on investments and foreign currency transactions (1,392,866) 828,484 (1,463,135) (9,024,392) - - - - - - ------------------------------------------------------------------------------------------------------------ Net change in unrealized appreciation or depreciation of investments and on translation of other assets and liabilities in foreign currencies 1,612,010 1,175,631 (4,415,354) 2,849,640 - - - - - - ------------------------------------------------------------------------------------------------------------ Net gain (loss) on investments and foreign currency 219,144 2,004,115 (5,878,489) (6,174,752) - - - - - - ------------------------------------------------------------------------------------------------------------ Net increase (decrease) in net assets resulting from operations $ 513,829 2,205,914 (6,285,677) (6,183,586) - - - - - - ------------------------------------------------------------------------------------------------------------ - - - - - - ------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 18 ------------------------------------------------------------------------ FINANCIAL STATEMENTS STATEMENTS OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 1995
World Global Money Bond Short-Term Market Fund Fund Fund* - - - - - - ------------------------------------------------------------------------------------------- INCOME: Interest (net of foreign withholding taxes of $11,100; $0; $0, respectively) $ 1,664,619 43,821 20,832 - - - - - - ------------------------------------------------------------------------------------------- EXPENSES (NOTE 6): Investment management fee 253,709 5,312 1,882 Distribution fee 126,855 3,187 376 Custodian, accounting and transfer agent fees 108,238 91,782 64,570 Audit and legal fees 74,993 42,426 18,685 Amortization of organization costs 17,845 17,845 2,782 Directors' fees 5,909 5,909 3,159 Reports to shareholders 6,070 627 47 Registration fees 24,141 10,254 1,057 Other expenses 23,099 13,569 3,170 - - - - - - ------------------------------------------------------------------------------------------- Total expenses 640,859 190,911 95,728 Less expenses waived or absorbed by manager (133,203) (177,099) (91,965) Less expenses waived or absorbed by distributor (50,742) (531) -- - - - - - - ------------------------------------------------------------------------------------------- Net expenses 456,914 13,281 3,763 - - - - - - ------------------------------------------------------------------------------------------- Investment income - net 1,207,705 30,540 17,069 - - - - - - ------------------------------------------------------------------------------------------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS AND FOREIGN CURRENCY: Net realized gain on investments (note 3) 1,626,510 15,432 -- Net realized loss on foreign currency transactions (2,594,888) (50,156) -- Net realized loss on futures contracts (249,444) -- -- - - - - - - ------------------------------------------------------------------------------------------- Net realized loss on investments and foreign currency transactions (1,217,822) (34,724) -- - - - - - - ------------------------------------------------------------------------------------------- Net change in unrealized appreciation or depreciation of investments and on translation of other assets and liabilities in foreign currencies 1,524,955 19,538 -- - - - - - - ------------------------------------------------------------------------------------------- Net gain (loss) on investments and foreign currency 307,133 (15,186) -- - - - - - - ------------------------------------------------------------------------------------------- Net increase in net assets resulting from operations $ 1,514,838 15,354 17,069 - - - - - - ------------------------------------------------------------------------------------------- - - - - - - -------------------------------------------------------------------------------------------
*FOR THE PERIOD FROM DECEMBER 13, 1994, COMMENCEMENT OF OPERATIONS, TO JUNE 30, 1995. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 19 ------------------------------------------------------------------------- FINANCIAL STATEMENTS STATEMENTS OF CHANGES IN NET ASSETS
North American Growth and Income Fund European Value Fund ------------------------------- ------------------------------- Period from Period from For the Year 11/9/93* to For the Year 11/9/93* to Ended 6/30/95 6/30/94 Ended 6/30/95 6/30/94 - - - - - - ----------------------------------------------------------------------------------------------------------------------- OPERATIONS: Investment income - net $ 294,685 67,387 201,799 33,204 Net realized gain (loss) on investments and foreign currency transactions (1,392,866) (164,207) 828,484 (106,879) Net change in unrealized appreciation or depreciation of investments and on translation of other assets and liabilities in foreign currencies 1,612,010 (1,107,037) 1,175,631 (429,016) - - - - - - ----------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 513,829 (1,203,857) 2,205,914 (502,691) - - - - - - ----------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Investment income - net (74,603) -- (41,687) -- Net realized gains -- -- (112,779) -- - - - - - - ----------------------------------------------------------------------------------------------------------------------- Total distributions (74,603) -- (154,466) -- - - - - - - ----------------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS (NOTE 5): Proceeds from shares sold 2,581,949 18,792,081 4,213,199 17,517,578 Reinvestment of distributions 72,165 -- 148,816 -- Payments for shares redeemed (6,731,426) (749,385) (5,467,416) (457,345) - - - - - - ----------------------------------------------------------------------------------------------------------------------- Increase (decrease) in net assets from capital share transactions (4,077,312) 18,042,696 (1,105,401) 17,060,233 - - - - - - ----------------------------------------------------------------------------------------------------------------------- Total increase (decrease) in net assets (3,638,086) 16,838,839 946,047 16,557,542 - - - - - - ----------------------------------------------------------------------------------------------------------------------- Net assets at beginning of period (note 1) 16,855,506 16,667 16,574,209 16,667 - - - - - - ----------------------------------------------------------------------------------------------------------------------- Net assets at end of period $ 13,217,420 16,855,506 17,520,256 16,574,209 - - - - - - ----------------------------------------------------------------------------------------------------------------------- - - - - - - ----------------------------------------------------------------------------------------------------------------------- Undistributed net investment income (accumulated net investment loss) $ (393,668) (62,566) 223,075 (6,026) - - - - - - ----------------------------------------------------------------------------------------------------------------------- - - - - - - -----------------------------------------------------------------------------------------------------------------------
* COMMENCEMENT OF OPERATIONS. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 20 ------------------------------------------------------------------------ FINANCIAL STATEMENTS STATEMENTS OF CHANGES IN NET ASSETS
Pacific Basin Value Fund Latin American Value Fund ------------------------------ ------------------------------ Period from Period from For the Year 11/9/93* to For the Year 11/9/93* to Ended 6/30/95 6/30/94 Ended 6/30/95 6/30/94 - - - - - - --------------------------------------------------------------------------------------------------------------------- OPERATIONS: Investment income (loss) - net $ (407,188) (167,901) (8,834) 18,072 Net realized gain (loss) on investments and foreign currency transactions (1,463,135) 677,669 (9,024,392) (2,388,607) Net change in unrealized appreciation or depreciation of investments and on translation of other assets and liabilities in foreign currencies (4,415,354) 1,206,428 2,849,640 (4,198,690) - - - - - - --------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations (6,285,677) 1,716,196 (6,183,586) (6,569,225) - - - - - - --------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Investment income - net -- -- -- -- Net realized gains (428,688) -- -- -- - - - - - - --------------------------------------------------------------------------------------------------------------------- Total distributions (428,688) -- -- -- - - - - - - --------------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS (NOTE 5): Proceeds from shares sold 8,508,368 40,734,038 11,516,745 37,811,581 Reinvestment of distributions 418,184 -- -- -- Payments for shares redeemed (11,512,632) (1,639,234) (10,459,488) (3,508,662) - - - - - - --------------------------------------------------------------------------------------------------------------------- Increase in net assets from capital share transactions (2,586,080) 39,094,804 1,057,257 34,302,919 - - - - - - --------------------------------------------------------------------------------------------------------------------- Total increase (decrease) in net assets (9,300,445) 40,811,000 (5,126,329) 27,733,694 - - - - - - --------------------------------------------------------------------------------------------------------------------- Net assets at beginning of period (note 1) 40,827,667 16,667 27,750,361 16,667 - - - - - - --------------------------------------------------------------------------------------------------------------------- Net assets at end of period $ 31,527,222 40,827,667 22,624,032 27,750,361 - - - - - - --------------------------------------------------------------------------------------------------------------------- - - - - - - --------------------------------------------------------------------------------------------------------------------- Undistributed net investment income (accumulated net investment loss) $ (211,925) -- (153,624) -- - - - - - - --------------------------------------------------------------------------------------------------------------------- - - - - - - ---------------------------------------------------------------------------------------------------------------------
* COMMENCEMENT OF OPERATIONS. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 21 ------------------------------------------------------------------------ FINANCIAL STATEMENTS STATEMENTS OF CHANGES IN NET ASSETS
Money Market World Bond Fund Global Short-Term Fund Fund ----------------------------- ----------------------------- ------------- For the Year Period From For the Year Period From Period from Ended 11/9/93* to Ended 11/9/93* to 12/13/94* 6/30/95 6/30/94 6/30/95 6/30/94 to 6/30/95 - - - - - - -------------------------------------------------------------------------------------------------------------------------- OPERATIONS: Investment income - net $ 1,207,705 425,848 30,540 18,250 17,069 Net realized loss on investments and foreign currency transactions (1,217,822) (1,475,275) (34,724) (5,260) -- Net change in unrealized appreciation or depreciation of investments and on translation of other assets and liabilities in foreign currencies 1,524,955 (1,133,979) 19,538 (19,538) -- - - - - - - -------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 1,514,838 (2,183,406) 15,354 (6,548) 17,069 - - - - - - -------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS: From investment income - net (249,747) (194,474) (12,663) (12,833) (17,069) Tax return of capital (152,655) -- -- -- -- - - - - - - -------------------------------------------------------------------------------------------------------------------------- Total distributions (402,402) (194,474) (12,663) (12,833) (17,069) - - - - - - -------------------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS (NOTE 5): Proceeds from shares sold 1,176,394 39,113,811 655,611 3,715,535 2,793,880 Reinvestment of distributions 444,626 89,327 12,864 9,642 14,739 Payments for shares redeemed (21,316,988) (4,478,942) (2,501,571) (1,679,952) (1,579,180) - - - - - - -------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in net assets from capital share transactions (19,695,968) 34,724,196 (1,833,096) 2,045,225 1,229,439 - - - - - - -------------------------------------------------------------------------------------------------------------------------- Total increase (decrease) in net assets (18,583,532) 32,343,316 (1,830,405) 2,025,844 1,229,439 - - - - - - -------------------------------------------------------------------------------------------------------------------------- Net assets at beginning of period (note 1) 32,359,983 16,667 2,042,511 16,667 500 - - - - - - -------------------------------------------------------------------------------------------------------------------------- Net assets at end of period $ 13,776,451 32,359,983 212,106 2,042,511 1,229,939 - - - - - - -------------------------------------------------------------------------------------------------------------------------- - - - - - - -------------------------------------------------------------------------------------------------------------------------- Undistributed net investment income (accumulated net investment loss) $ (632,506) (414,774) 3,740 12,904 -- - - - - - - -------------------------------------------------------------------------------------------------------------------------- - - - - - - --------------------------------------------------------------------------------------------------------------------------
* COMMENCEMENT OF OPERATIONS. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 22 --------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS 1 ORGANIZATION Hercules Funds Inc. (the company) was incorporated on July 29, 1993, and is registered under the Investment Company Act of 1940 (as amended) as a non-diversified, open-end management investment company, the shares of which are comprised of a series of seven funds: North American Growth and Income Fund, European Value Fund, Pacific Basin Value Fund, Latin American Value Fund, World Bond Fund, Global Short-Term Fund and Money Market Fund (the funds). The company's articles of incorporation permit the board of directors to create additional funds in the future. On November 9, 1993 (commencement of operations) the registration statement for the company's shares became effective under the Securities Act of 1933. The only transaction of the funds (except Money Market Fund), prior to commencement of operations was the initial sale on October 12, 1993, of 1,667 shares of each fund at $10 per share to Hercules International Management LLC. On December 13, 1994, the Money Market Fund commenced operations. The only transaction of the fund prior to commencement of operations was the sale of 500 shares at $1 per share to Hercules International Management LLC. On April 17, 1995, the company discontinued sale of shares and exchanges into the Global Short-Term Fund. 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Significant accounting policies of the funds are as follows: INVESTMENTS IN SECURITIES Securities traded on U.S. or foreign securities exchanges or included in a national market system are valued at the last quoted sales price; securities for which there were no sales reported are valued at the mean between the bid and ask prices; exchange listed options are valued at the last sales price and futures contracts are valued at the last settlement price; bonds and other securities for which market quotations are not readily available are valued at fair value according to methods selected in good faith by the board of directors. Securities with maturities of 60 days or less when acquired or subsequently within 60 days of maturity 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 an identified cost basis. Dividend income is recognized on the ex-dividend date or upon receipt of ex-dividend notification in the case of certain foreign securities. Interest income, including level yield amortization of premium and discount, is accrued daily. Pursuant to Rule 2a-7 of the Investment Company Act of 1940 (as amended), securities in the Money Market Fund are valued at amortized cost, which approximates market value, in order to maintain a constant net asset value of $1 per share. OPTION TRANSACTIONS In order to produce incremental earnings, protect gains, and facilitate buying and selling of securities for investment purposes, the funds (except Money Market Fund) may buy and sell put and call options and write covered call and cash-secured put options on securities, stock and interest rate indexes and foreign currencies. The risk in writing a call option is that the fund gives up the opportunity of profit if the market price of the security, index or currency increases. The risk in writing a put option is that the fund may incur a loss if the market price of the security, index or currency 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 sale of a written call option, the purchase cost of 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 from changes in the market, the funds (except Money Market Fund) may buy and sell financial futures contracts and related options. Risks of entering into futures contracts and related options include the possibility that 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 initial margin, either cash or securities in an amount 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 funds recognize a realized gain or loss when the contract is closed or expires. 23 --------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS FEDERAL TAXES Each fund within the company is treated as a separate entity for federal income tax purposes. Each fund's policy is to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its taxable income to shareholders. Therefore, no income or excise tax provision is required. Net investment income and net realized gains (losses) 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, "mark-to-market" of certain passive foreign investment companies (PFICs), foreign currency and futures positions 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 were recorded by the funds. On the statements of assets and liabilities, as a result of permanent book-to-tax differences, accumulated net realized gain (loss) and undistributed net investment income (accumulated net investment loss) have been increased (decreased), resulting in net reclassification adjustments to additional paid-in-capital as follows:
NORTH AMERICAN GROWTH PACIFIC LATIN GLOBAL AND EUROPEAN BASIN AMERICAN WORLD SHORT- INCOME VALUE VALUE VALUE BOND TERM FUND FUND FUND FUND FUND FUND - - - - - - ------------------------------------------------------------------------------------------- Accumulated net realized gain (loss) $ 568,880 (51,294) (177,567) 235,489 1,679,977 35,236 Undistributed net investment income (accumulated net investment loss) $ (551,184) 68,989 195,263 (144,790) (1,175,690) (27,041) Additional paid-in-capital reduction (increase) $ (17,696) (17,695) (17,696) (90,699) (504,287) (8,195)
On the statement of assets and liabilities, accumulated net investment losses result from certain foreign currency losses which will be recognized for tax purposes as ordinary losses in the subsequent fiscal year. DISTRIBUTIONS TO SHAREHOLDERS Dividends to shareholders from net investment income for World Bond Fund are declared and paid quarterly. For Money Market Fund, distributions to shareholders from net investment income are declared daily and paid monthly. For North American Growth and Income, European Value, Pacific Basin Value and Latin American Value Funds, dividends from net investment income are declared and paid annually. For Global Short-Term Fund, dividends to shareholders from net investment income were declared and paid monthly through March 1995 and are now paid as necessary to avoid federal income and excise taxes. Distributions from net realized gains, if any, will be made on an annual basis for all funds. Shareholders may elect to have distributions paid in cash or reinvested at net asset value. ORGANIZATION COSTS Organization costs were incurred in connection with the start up and initial registration of the funds. These costs are being amortized over 60 months on a straight-line basis. If any or all of the shares representing initial capital of the funds are redeemed prior to the end of the amortization period, the proceeds will be reduced by the unamortized organization cost balance in the proportion as the number of shares redeemed bears to the number of initial shares outstanding immediately preceding the redemption. FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS Securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the daily closing rate of exchange. Foreign currency amounts related to the purchase or sale of securities and income and expense are translated at the exchange rate on the transaction date. The funds do not separately identify that portion of realized and unrealized gain (loss) arising from changes in the exchange rates from the portion arising from changes in the market value of investments. The funds (except Money Market Fund) also may enter into forward foreign currency exchange contracts for transaction or position hedging purposes, and in the case of World Bond and Global Short-Term Funds, for the 24 --------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS purpose of enhancing portfolio returns. The net U.S. dollar value of foreign currency underlying all contractual commitments held by the funds and the resulting unrealized appreciation or depreciation, are determined using foreign currency exchange rates from independent pricing sources. The funds are subject to the credit risk that the counterparty will not complete the obligations of the contract. 3 INVESTMENT SECURITY TRANSACTIONS Cost of purchases and proceeds from sales of securities, other than temporary investments in short-term securities (for all funds except Money Market Fund) for the year ended June 30, 1995, (period from December 13, 1994 to June 30, 1995 for the Money Market Fund) were as follows:
NORTH AMERICAN GROWTH PACIFIC LATIN GLOBAL AND EUROPEAN BASIN AMERICAN WORLD SHORT- MONEY INCOME VALUE VALUE VALUE BOND TERM MARKET FUND FUND FUND FUND FUND FUND FUND - - - - - - ---------------------------------------------------------------------------------------------------------------- Purchases $ 7,678,158 22,693,640 25,116,675 42,528,018 105,244,181 1,391,262 6,663,689 Sales proceeds $ 10,783,837 22,318,954 25,482,751 41,984,644 122,990,708 1,760,101 5,383,326
For the year ended June 30, 1995, brokerage commissions paid to affiliated broker-dealers amounted to $24,276, $4,191, $4,849 and $10,523 for the North American Growth and Income Fund, European Value Fund, Pacific Basin Value Fund and Latin American Value Fund, respectively. 4 FORWARD FOREIGN CURRENCY CONTRACTS On June 30, 1995, the European Value Fund, Pacific Basin Value Fund and World Bond Fund had open foreign currency exchange contracts which obligate the funds to deliver or receive foreign currencies at specified future dates. The unrealized appreciation (depreciation) on these contracts is included in the accompanying financial statements. The terms of the open contracts are as follows:
U.S. $ VALUE U.S. $ VALUE SETTLEMENT CURRENCY TO BE AS OF CURRENCY TO AS OF APPRECIATION FUND DATE DELIVERED 6/30/95 BE RECEIVED 6/30/95 (DEPRECIATION) - - - - - - ------------------------------------------------------------------------------------------------------------------------------ EUROPEAN 03-Jul-95 106,043 ATS $ 10,887 10,837 USD $ 10,837 $ (50) VALUE FUND 03-Jul-95 57,340 CHF 49,867 49,679 USD 49,679 (188) 03-Jul-95 11,352 DEM 8,211 8,184 USD 8,184 (27) 03-Jul-95 193,530 GBP 308,584 307,345 USD 307,345 (1,239) 05-Jul-95 376,471 DEM 272,312 271,742 USD 271,742 (570) 05-Jul-95 124,972 FIM 29,268 29,278 USD 29,278 10 22-Aug-95 2,841,133 ECU 3,783,517 3,600,000 USD 3,600,000 (183,517) - - - - - - ------------------------------------------------------------------------------------------------------------------------------ $ 4,462,646 $ 4,277,065 $(185,581) - - - - - - ------------------------------------------------------------------------------------------------------------------------------ - - - - - - ------------------------------------------------------------------------------------------------------------------------------ PACIFIC BASIN VALUE FUND 22-May-96 376,200,000 JPY $ 4,647,351 4,500,000 USD $ 4,500,000 $(147,351) - - - - - - ------------------------------------------------------------------------------------------------------------------------------ - - - - - - ------------------------------------------------------------------------------------------------------------------------------ WORLD BOND 21-Jul-95 1,203,135 USD $ 1,203,135 1,663,936 DEM $ 1,203,570 $ 435 FUND 21-Jul-95 645,450 DEM 467,668 474,596 USD 474,596 6,928 21-Jul-95 2,500,000 DEM 1,811,400 1,815,541 USD 1,815,541 4,141 21-Jul-95 271,890 DEM 197,001 189,470 USD 189,470 (7,531) 21-Jul-95 2,740,790 DEM 1,985,866 1,954,914 USD 1,954,914 (30,952) 21-Jul-95 9,182,575 DKK 1,701,212 1,666,529 USD 1,666,529 (34,683) 21-Jul-95 150,046,521 ESP 1,242,657 1,188,393 USD 1,188,393 (54,264) 21-Jul-95 164,812 USD 164,812 104,048 GBP 165,904 1,092 21-Jul-95 855,400 USD 855,400 535,965 GBP 853,820 (1,580) 21-Jul-95 530,367 GBP 844,902 856,542 USD 856,542 11,640 21-Jul-95 800,093 GBP 1,274,590 1,268,947 USD 1,268,947 (5,643) 31-Aug-95 757,023 AUD 536,065 542,785 USD 542,785 6,720 31-Aug-95 120,000,000 JPY 1,429,442 1,461,632 USD 1,461,632 32,190 - - - - - - ------------------------------------------------------------------------------------------------------------------------------ $ 13,714,150 $ 13,642,643 $ (71,507) - - - - - - ------------------------------------------------------------------------------------------------------------------------------ - - - - - - ------------------------------------------------------------------------------------------------------------------------------
ATS - Austrian Schilling GBP - British Pound ECU - European Currency CHF - Swiss Franc DKK - Danish Krone JPY - Japanese Yen DEM - German Deutschemark FIM - Finnish Mark ESP - Spanish Peseta AUD - Australian Dollar
25 --------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS 5 CAPITAL SHARE TRANSACTIONS Transactions in shares of each fund for the year ended June 30, 1995 (period from December 13, 1994 to June 30, 1995 for the Money Market Fund) were as follows:
NORTH AMERICAN GROWTH PACIFIC LATIN GLOBAL AND EUROPEAN BASIN AMERICAN WORLD SHORT- MONEY INCOME VALUE VALUE VALUE BOND TERM MARKET FUND FUND FUND FUND FUND FUND FUND - - - - - - --------------------------------------------------------------------------------------------------------------------------- Sold 268,278 399,899 832,267 1,321,613 124,891 66,680 2,793,880 Distribution Reinvestment 8,127 14,618 42,071 -- 46,856 1,306 14,739 Redeemed (725,259) (515,858) (1,201,579) (1,216,683) (2,231,574) (252,893) (1,579,180) - - - - - - --------------------------------------------------------------------------------------------------------------------------- Increase (Decrease) (448,854) (101,341) (327,241) 104,930 (2,059,827) (184,907) 1,229,439 - - - - - - --------------------------------------------------------------------------------------------------------------------------- - - - - - - ---------------------------------------------------------------------------------------------------------------------------
Transactions in shares of each fund for the period from November 9, 1993 (commencement of operations), to June 30, 1994, were as follows:
- - - - - - --------------------------------------------------------------------------------------------------------------------------- Sold 1,856,326 1,723,375 3,979,994 3,370,590 3,917,436 372,155 -- Distribution Reinvestment -- -- -- -- 9,238 968 -- Redeemed (76,376) (44,914) (158,650) (336,839) (465,940) (168,682) -- - - - - - - --------------------------------------------------------------------------------------------------------------------------- Increase (Decrease)...... 1,779,950 1,678,461 3,821,344 3,033,751 3,460,734 204,441 -- - - - - - - --------------------------------------------------------------------------------------------------------------------------- - - - - - - ---------------------------------------------------------------------------------------------------------------------------
6 FEES AND EXPENSES The company was managed by Hercules International Management LLC (the manager), a limited liability company organized under the laws of Delaware on July 26, 1993. On July 18, 1995, shareholders approved a change in the funds investment manager to Piper Capital Management Incorporated, a subsidiary of Piper Jaffray Companies Inc. The fees paid by the fund's to Piper Capital Management Incorporated will be at the same rates as those previously paid to Hercules International Management LLC as described below. Each fund paid the manager a fee for managing its investment portfolio. Management fees for each fund (except for Global Short-Term Fund and Money Market Fund) were paid monthly at an annual rate of 1.00% of average daily net assets. The fee for the Global Short-Term Fund and Money Market Fund were paid monthly at an annual rate of .50% of average daily net assets. The manager entered into sub-advisory agreements pursuant to which the subadvisers, subject to the supervision of the manager, are responsible for certain investment functions, including researching and developing an overall investment plan and making and implementing investment decisions regarding assets of the respective fund. For its services, the subadvisers are paid by the manager over the same time periods and calculated in the same manner as the investment advisory fee of the applicable fund, 0.50% of average daily net assets of each fund except Global Short-Term and Money Market Funds, which are paid a fee of 0.25% of average daily net assets.
FUND SUBADVISER(S) - - - - - - ----------------------------------------------- ------------------------------------------ NORTH AMERICAN GROWTH AND INCOME FUND Piper Capital Management Incorporated* Acci Worldwide, S.A. de C.V.* AGF Investment Advisors, Inc.* EUROPEAN VALUE FUND Pictet International Management Limited PACIFIC BASIN VALUE FUND Edinburgh Fund Managers plc LATIN AMERICAN VALUE FUND Bankers Trust Company WORLD BOND FUND Salomon Brothers Asset Management Limited GLOBAL SHORT-TERM FUND Salomon Brothers Asset Management Limited MONEY MARKET FUND Salomon Brothers Asset Management Inc
*TOTAL FEE PAID TO SUBADVISERS SHARED EQUALLY. 26 --------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS Piper Jaffray Inc. (the distributor), a wholly-owned subsidiary of Piper Jaffray Companies Inc. and an affiliate of the manager, serves as the distributor of the funds' shares. For its services as distributor, which include distributing shares of the funds and for sales-related expenses, the distributor is entitled to reimbursement each month for its actual expenses incurred in the distribution and promotion of each fund's shares pursuant to a Rule 12b-1 Distribution Plan adopted by each of the funds. Reimbursement to the distributor is computed separately for each fund and may not exceed 0.70% per annum of the average daily net assets of North American Growth and Income, European Value, Pacific Basin Value and Latin American Value Funds, 0.50% with respect to average daily net assets of World Bond Fund, 0.30% with respect to average daily net assets of Global Short-Term Fund, and 0.10% with respect to average daily net assets of Money Market Fund. For the year ended June 30, 1995 (period from November 14, 1994 to June 30, 1995 for Money Market Fund), Piper Jaffray Inc. voluntarily agreed to limit the reimbursement fee to an annual rate of 0.50% for North American Growth and Income, European Value, Pacific Basin Value, and Latin American Value Funds, 0.30% for World Bond Fund, 0.25% for Global Short-Term Fund. Effective June 19, 1995, the company's board of directors discontinued payments under the Rule 12b-1 Distribution Plan for the Money Market Fund. In addition to the fees above, the funds are responsible for paying most other operating expenses, including directors' fees, custodian fees, registration fees, printing of shareholder reports, legal and audit services, organization costs, taxes, interest and other miscellaneous expenses. For the period, the manager and distributor have voluntarily limited total expenses on a per annum basis to 2.00% of average daily net assets of North American Growth and Income, European Value, Pacific Basin Value and Latin American Value Funds, 1.80% of average daily net assets of World Bond Fund, 1.25% of average daily net assets of Global Short-Term Fund, and 1.00% of average daily net assets of Money Market Fund. 7 FUTURES CONTRACTS The funds pledge securities or cash when making initial margin deposits on futures contracts. On June 30, 1995, the World Bond Fund had the following open futures contracts:
COLLATERAL PLEDGED TO COVER MARKET LONG (L) INITIAL VALUE OF NET COUNTRY OF OR TYPE OF CONTRACT NUMBER OF MARGIN OPEN UNREALIZED DENOMINATION SHORT (S) AND MATURITY CONTRACTS DEPOSITS CONTRACTS (LOSS) - - - - - - ---------------------------------------------------------------------------------------------------------------- LIFFE German WORLD BOND Bund Futures FUND Germany L September (1995) 7 $ 15,212 $1,174,937 $ (20,778) - - - - - - ---------------------------------------------------------------------------------------------------------------- - - - - - - ----------------------------------------------------------------------------------------------------------------
8 CAPITAL LOSS CARRYOVERS For federal income tax purposes, North American Growth and Income Fund, Pacific Basin Value Fund, Latin American Value Fund, World Bond Fund and Global Short-Term Fund had capital loss carryovers at June 30, 1995 of $838,953; $1,546,411; $10,643,620; $338,380; and $4,989, respectively, which, if not offset by subsequent capital gains will expire in 2002 through 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 expire. 27 --------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS 9 FINANCIAL HIGHLIGHTS Per-share data for a share of capital stock outstanding throughout each period and selected information for each period are as follows:
NORTH AMERICAN GROWTH AND EUROPEAN INCOME FUND VALUE FUND ---------------------------------------------------- YEAR PERIOD FROM YEAR PERIOD FROM ENDED 11/9/93* TO ENDED 11/9/93* TO 6/30/95 6/30/94 6/30/95 6/30/94 - - - - - - --------------------------------------------------------------------------------------------------------- PER SHARE DATA Net asset value, beginning of period.............. $ 9.46 10.00 9.86 10.00 - - - - - - --------------------------------------------------------------------------------------------------------- Operations: Investment income - net**....................... 0.17 0.04 0.12 0.02 Net realized and unrealized gains (losses)...... 0.33 (0.58) 1.21 (0.16) - - - - - - --------------------------------------------------------------------------------------------------------- Total from operations............................. 0.50 (0.54) 1.33 (0.14) - - - - - - --------------------------------------------------------------------------------------------------------- Distributions from: Investment income - net......................... (0.04) -- (0.03) -- Net realized gains.............................. -- -- (0.06) -- - - - - - - --------------------------------------------------------------------------------------------------------- Total distributions............................... (0.04) -- (0.09) -- - - - - - - --------------------------------------------------------------------------------------------------------- Net asset value, end of period.................... $ 9.92 9.46 11.10 9.86 - - - - - - --------------------------------------------------------------------------------------------------------- - - - - - - --------------------------------------------------------------------------------------------------------- SELECTED INFORMATION Total return***................................... 5.36% (5.40%) 13.52% (1.40%) Net assets, end of period (000s omitted).......... $13,217 16,856 17,520 16,574 Ratio of expenses to average daily net assets++... 2.00% 2.00%+ 2.00% 2.00%+ Ratio of net investment income to average daily net assets++.................................... 1.84% 0.87%+ 1.10% 0.47%+ Portfolio turnover rate (excluding short-term securities)..................................... 52% 23% 131% 60%
* COMMENCEMENT OF OPERATIONS. ** BASED ON THE WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING DURING THE PERIOD. *** TOTAL RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE DURING THE PERIOD, ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND DOES NOT REFLECT THE CONTINGENT DEFERRED SALES CHARGE APPLICABLE TO SHARES PURCHASED AFTER 6/19/95. + ADJUSTED TO AN ANNUAL BASIS. ++ VARIOUS PORTFOLIO FEES AND EXPENSES WERE VOLUNTARILY WAIVED OR ABSORBED BY THE MANAGER AND DISTRIBUTOR. HAD THE FUNDS PAID ALL EXPENSES THE ANNUALIZED RATIOS OF EXPENSES AND NET INVESTMENT INCOME TO AVERAGE DAILY NET ASSETS WOULD HAVE BEEN AS FOLLOWS:
NORTH AMERICAN GROWTH AND EUROPEAN INCOME FUND VALUE FUND - - - - - - ----------------------------------------------------------------- YEAR PERIOD FROM YEAR PERIOD FROM ENDED 11/9/93* TO ENDED 11/9/93* TO 6/30/95 6/30/94 6/30/95 6/30/94 - - - - - - ----------------------------------------------------------------- 3.39%/0.45% 3.41%/(0.54%) 3.21%/(0.11%) 3.25%/(0.78%)
28 --------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS 9 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:
LATIN PACIFIC BASIN AMERICAN VALUE FUND VALUE FUND ---------------------------------------------------- YEAR PERIOD FROM YEAR PERIOD FROM ENDED 11/9/93* TO ENDED 11/9/93* TO 6/30/95 6/30/94 6/30/95 6/30/94 - - - - - - ------------------------------------------------------------------------------------- PER SHARE DATA Net asset value, beginning of period...................... $ 10.68 10.00 9.14 10.00 - - - - - - ------------------------------------------------------------------------------------- Operations: Investment income (loss) - net**...................... (0.10) (0.04) -- 0.01 Net realized and unrealized gains (losses)............. (1.45) 0.72 (1.94) (0.87) - - - - - - ------------------------------------------------------------------------------------- Total from operations......... (1.55) 0.68 (1.94) (0.86) - - - - - - ------------------------------------------------------------------------------------- Distributions from: Net realized gains.......... (0.11) -- -- -- - - - - - - ------------------------------------------------------------------------------------- Total distributions........... (0.11) -- -- -- - - - - - - ------------------------------------------------------------------------------------- Net asset value, end of period...................... $ 9.02 10.68 7.20 9.14 - - - - - - ------------------------------------------------------------------------------------- - - - - - - ------------------------------------------------------------------------------------- SELECTED INFORMATION Total return***............... (14.63%) 6.80% (21.23%) (8.60%) Net assets, end of period (000s omitted).............. $31,527 40,828 22,624 27,750 Ratio of expenses to average daily net assets++................ 2.00% 2.00%+ 2.00% 2.00%+ Ratio of net investment income (loss) to average daily net assets++.................... (1.06%) (0.96%)+ (0.03)% .14%+ Portfolio turnover rate (excluding short-term securities)................. 68% 39% 161% 78%
* COMMENCEMENT OF OPERATIONS. ** BASED ON THE WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING DURING THE PERIOD. *** TOTAL RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE DURING THE PERIOD, ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND DOES NOT REFLECT THE CONTINGENT DEFERRED SALES CHARGE APPLICABLE TO SHARES PURCHASED AFTER 6/19/95. + ADJUSTED TO AN ANNUAL BASIS. ++ VARIOUS PORTFOLIO FEES AND EXPENSES WERE VOLUNTARILY WAIVED OR ABSORBED BY THE MANAGER AND DISTRIBUTOR. HAD THE FUNDS PAID ALL EXPENSES THE ANNUALIZED RATIOS OF EXPENSES AND NET INVESTMENT INCOME TO AVERAGE DAILY NET ASSETS WOULD HAVE BEEN AS FOLLOWS:
LATIN PACIFIC BASIN AMERICAN VALUE FUND VALUE FUND - - - - - - ------------------------------------------------------------------ YEAR PERIOD FROM YEAR PERIOD FROM ENDED 11/9/93* TO ENDED 11/9/93* TO 6/30/95 6/30/94 6/30/95 6/30/94 - - - - - - ------------------------------------------------------------------ 2.53%/(1.59%) 2.36%/(1.32%) 3.47%/(1.50%) 3.10%/(0.96%)
29 --------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS 9 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:
GLOBAL MONEY WORLD BOND SHORT-TERM MARKET FUND FUND FUND ---------------------------------------------------------------------- YEAR PERIOD FROM YEAR PERIOD FROM PERIOD FROM ENDED 11/9/93* TO ENDED 11/9/93* TO 12/13/94* TO 6/30/95 6/30/94 6/30/95 6/30/94 6/30/95 - - - - - - --------------------------------------------------------------------------------------------------------------------------- PER SHARE DATA Net asset value, beginning of period.............. $ 9.35 10.00 9.91 10.00 1.00 - - - - - - --------------------------------------------------------------------------------------------------------------------------- Operations: Investment income - net**....................... 0.45 0.12 0.29 0.08 0.02 Net realized and unrealized gains (losses)...... 0.22 (0.71) (0.10) (0.11) -- - - - - - - --------------------------------------------------------------------------------------------------------------------------- Total from operations............................. 0.67 (0.59) 0.19 (0.03) 0.02 - - - - - - --------------------------------------------------------------------------------------------------------------------------- Distributions: From investment income - net.................... (0.09) (0.06) (0.10) (0.06) (0.02) Tax return of capital........................... (0.11) -- -- -- -- - - - - - - --------------------------------------------------------------------------------------------------------------------------- Total distributions............................... (0.20) (0.06) (0.10) (0.06) (0.02) - - - - - - --------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period.................... $ 9.82 9.35 10.00 9.91 1.00 - - - - - - --------------------------------------------------------------------------------------------------------------------------- - - - - - - --------------------------------------------------------------------------------------------------------------------------- SELECTED INFORMATION Total return***................................... 7.24% (5.96%) 1.89% (0.33%) 2.62% Net assets, end of period (000s omitted).......... $13,776 32,360 212 2,043 1,230 Ratio of expenses to average daily net assets++... 1.80% 1.80%+ 1.25% 1.25%+ 1.00%+ Ratio of net investment income to average daily net assets++................................ 4.76% 2.63%+ 2.87% 1.70%+ 4.53%+ Portfolio turnover rate (excluding short-term securities)..................................... 501% 291% 407% 362% N/A
* COMMENCEMENT OF OPERATIONS. ** BASED ON THE WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING DURING THE PERIOD. *** TOTAL RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE DURING THE PERIOD, ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND DOES NOT REFLECT THE CONTINGENT DEFERRED SALES CHARGE APPLICABLE TO SHARES PURCHASED AFTER 6/19/95. + ADJUSTED TO AN ANNUAL BASIS. ++ VARIOUS PORTFOLIO FEES AND EXPENSES WERE VOLUNTARILY WAIVED OR ABSORBED BY THE MANAGER AND DISTRIBUTOR. HAD THE FUNDS PAID ALL EXPENSES THE ANNUALIZED RATIOS OF EXPENSES AND NET INVESTMENT INCOME TO AVERAGE DAILY NET ASSETS WOULD HAVE BEEN AS FOLLOWS:
GLOBAL MONEY WORLD BOND SHORT-TERM MARKET FUND FUND FUND - - - - - - ----------------------------------------------------------------------------- YEAR PERIOD FROM YEAR PERIOD FROM PERIOD FROM ENDED 11/9/93* TO ENDED 11/9/93* TO 12/13/94* TO 6/30/95 6/30/94 6/30/95 6/30/94 6/30/95 - - - - - - ----------------------------------------------------------------------------- 2.53%/4.03% 2.03%/2.40% 17.97%/(13.85%) 6.25%/(3.30%) 25.44%/(19.91%)
30 ------------------------------------------------------------------------ INVESTMENTS IN SECURITIES HERCULES NORTH AMERICAN GROWTH AND INCOME FUND JUNE 30, 1995
Number of Market Name of Issuer Shares Value (a) - - - - - - ------------------------------------------ ------------ ------------ (PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS) COMMON STOCKS (91.6%) CANADA (20.3%) Abitibi Price (installment receipt) - forest products and paper............ 2,700 $ 43,763 Agrium Incorporated - chemicals - agricultural......................... 1,800 60,973 Alcan Aluminium - metals - diversified.......................... 3,100 93,717 Avenor (installment receipt) - forest products and paper................... 2,400 51,138 Bank of Montreal - bank............... 5,900 123,566 Bank of Nova Scotia - bank............ 6,700 144,591 Barrick Gold Corporation - mining..... 3,300 83,537 BCE - telecommunications.............. 2,500(b) 83,318 Bombardier Class B - diversified industrials and conglomerates........ 3,300 80,231 Canadian Occidental Petroleum - oil and gas.............................. 1,800 55,891 Canadian Pacific - diversified holding company.............................. 3,200 55,072 Delrina - computer software........... 4,600(b) 62,830 Euro-Nevada Mining - mining........... 2,000 61,191 Finning Limited - industrial equipment distributors......................... 1,800 27,536 Imasco - tobacco products/retailing... 4,000 71,025 Laidlaw Incorporated - environmental services............................. 5,900 56,410 Linamar - automobile parts............ 2,900 40,931 Loblaw - retailing - grocery.......... 1,400 28,301 Loewen Group - funeral services....... 900 32,125 Magna International Class A - automobile parts..................... 800 35,476 Methanex (installment receipt) - chemicals............................ 3,000(b) 18,303 Noranda - metals - diversified........ 3,700 72,774 Nova - chemicals...................... 7,700 65,207 Pinnacle Resources - oil and gas...... 4,300(b) 45,811 Placer Dome - mining.................. 2,400 62,721 Plaintree Systems - computer - networking products.................. 3,500(b) 37,607 Revenue Properties - real estate...... 13,100 29,583 Rio Algom - mining.................... 3,000 57,913 Rogers Cantel Mobile Communications - telecommunications................... 2,300(b) 55,290 Rogers Communications Class B - cable television........................... 5,900(b) 69,304 Royal Bank of Canada - bank........... 7,300 163,522 Seagram - brewers and distillers/ entertainment........................ 3,800 130,796 Sherritt - chemicals.................. 5,400(b) 56,547 Speedy Muffler King - automobile parts................................ 4,500(b) 37,698 Stelco Class A - metal products....... 11,600(b) 57,039 Suncor - oil and gas.................. 5,900 61,783 Talisman Energy - oil and gas......... 3,400(b) 63,158 Teck Class B - mining................. 2,600 51,375 TELUS Corporation - telecommunications................... 4,400 53,287 Thomson - publishing - newspapers..... 2,900 39,610 TransCanada Pipelines - oil and gas... 4,100 54,881 TVX Gold - mining..................... 5,500(b) 39,565 Wascana Energy - oil and gas.......... 7,700(b) 66,609 ------------ 2,682,005 ------------ Number of Market Name of Issuer Shares Value (a) - - - - - - ------------------------------------------ ------------ ------------ MEXICO (14.0%) ALFA Class A - diversified industrial and conglomerates.................... 12,000 $ 145,612 Apasco - building construction and cement............................... 12,000(b) 47,770 Cemex CPO - building construction and cement............................... 12,000 40,480 Cifra Class C - retailing............. 85,000 111,974 Controladora Comercial Mexicana Class B - retailing........................ 20,000(b) 15,028 Corporacion GEO Series B - homebuilders......................... 20,000(b) 58,769 Cydsa Series A - chemicals............ 20,000(b) 66,827 Desc Sociedad de Fomento Industrial Class B - diversified industrials.... 17,000(b) 56,803 Desc Sociedad de Fomento Industrial Class C - diversified industrials.... 14,000(b) 45,212 Empresas ICA Sociedad Controladora - engineering and construction......... 2,000 20,655 Empresas La Moderna Series A - tobacco products............................. 4,000(b) 15,092 Fomento Economico Mexicano (Femsa) Class B Ord - brewers/food and beverage............................. 10,000 23,501 Grupo Industrial Minera Mexico Class B - mining............................. 26,000(b) 124,700 Grupo Industrial Durango Class A - forest products and paper............ 12,000(b) 49,784 Grupo Carso Class A1 - diversified holding company...................... 14,000(b) 76,435 Grupo Elektra CPO - retailing......... 14,000 44,540 Grupo Embotelladoras de Mexico (Gemex) CPO - food and beverage.............. 8,000(b) 41,567 Grupo Gigante Series B - retailing.... 30,000(b) 6,427 Grupo Industrial Maseca (Maseca) Class B - food processing.................. 16,000 10,692 Grupo Modelo Class C - brewers/distillers................... 10,500 140,168 Grupo Sidek Class B - diversified industrial and conglomerates......... 22,000(b) 19,274 Grupo Simec Class B - steel........... 80,000(b) 39,265 Grupo Situr Class B - lodging, leisure and entertainment.................... 10,139(b) 4,766 Corporacion Industrial Sanluis CPO - diversified industrials and conglomerate......................... 12,000 264,748 Industrias Penoles - mining........... 33,000 98,974 Kimberly Clark de Mexico Class A - forest products and paper............ 8,000 91,446 Sistema Argos - Series B - food and beverage............................. 50,000(b) 27,977 Tablex Class 2 - food and beverage.... 33,293(b) 39,919 Telefonos de Mexico (Telmex) Class L - telecommunications................... 50,000 73,701 Transportacion Martima Mexicana A - transportation - marine.............. 2,000(b) 11,031 Vitro - diversified industrial........ 12,000 34,149 ------------ 1,847,286 ------------ UNITED STATES (57.3%) A T & T Corporation - telecommunications................... 3,700 196,562 Abbott Laboratories - pharmaceuticals...................... 2,200 89,100 Air Products and Chemicals - chemicals............................ 2,000 111,500 Airtouch Communications - telecommunications................... 3,500(b) 99,750
31 ---------------------------------------------------------------- INVESTMENTS IN SECURITIES HERCULES NORTH AMERICAN GROWTH AND INCOME FUND JUNE 30, 1995 (CONTINUED)
Number of Market Name of Issuer Shares Value (a) - - - - - - ------------------------------------------ ------------ ------------ American Home Products - pharmaceuticals...................... 100 $ 7,738 Anheuser-Busch - brewers and distillers........................... 2,000 113,750 Baker Hughes - oil and gas - equipment............................ 3,700 75,850 BankAmerica - bank - money center..... 2,900 152,612 BellSouth - telecommunications........ 3,000 190,500 Boeing - aerospace/defense............ 3,000 187,875 Bristol-Myers Squibb - pharmaceuticals...................... 2,400 163,500 Burlington Northern - transportation - rail................................. 2,900 183,788 Burlington Resources - oil and gas.... 2,900 106,938 cisco Systems - computer software and services............................. 3,500(b) 176,969 Coca-Cola Company - food and beverage............................. 3,500 223,125 DSC Communications - telecommunications equipment......... 2,500(b) 116,250 Du Pont (E.I.) De Nemours - chemicals............................ 1,800 123,750 Emerson Electric - electrical equipment............................ 2,300 164,450 Englehard - chemicals................. 3,500 150,063 Enron - oil and gas................... 5,800 203,725 Exxon - oil and gas................... 3,500 247,187 Federal National Mortgage Association - financial services................. 2,200 207,625 Fluor - engineering and construction......................... 2,800 145,600 Ford Motor Company - auto and trucks............................... 5,300 157,675 GTE - telecommunications.............. 4,900 167,213 Gannett - publishing - newspaper...... 2,700 146,475 Gap - retailing....................... 3,000 104,625 General Electric - diversified industrial........................... 4,600 259,325 General Instrument - electrical equipment............................ 3,400(b) 130,475 General Motors - auto and trucks...... 3,500 164,063 General Motors Class E - computer software and services................ 2,200 95,700 Home Depot - retailing................ 3,000 121,875 Intel - electronics - semiconductors....................... 2,600 164,612 International Paper - forest products and paper............................ 1,600 137,200 Marsh and McLennan - insurance........ 2,000 162,250 McDonald's - restaurant/food service.............................. 3,400 133,025 Medtronic - medical - biotechnology... 2,100 161,962 Merck and Company - pharmaceuticals... 3,900 191,100 Minnesota Mining and Manufacturing (3M) - diversified industrial and conglomerates........................ 3,800 217,550 Morton International - chemicals...... 5,200 152,100 Norwest Corporation - bank............ 6,600 189,750 Philip Morris - food products and tobacco.............................. 1,700 126,437 Procter & Gamble - household products............................. 3,400 244,375 Royal Dutch Petroleum ADR - oil and gas.................................. 1,300 158,437 Schlumberger - oil and gas - equipment and services......................... 1,700 105,613 Service Corporation International - funeral services..................... 3,800 120,175 Tandy Corporation - retailing......... 3,800 197,125 The Limited - retailing............... 4,000 88,000 Number of Shares or Principal Market Name of Issuer Amount Value (a) - - - - - - ------------------------------------------ ------------ ------------ United Healthcare - insurance/HMO..... 2,000 $ 82,750 Wisconsin Energy - utilities.......... 5,800 162,400 ------------ 7,580,494 ------------ Total Common Stocks (cost: $11,609,521).................. 12,109,785 ------------ RIGHTS AND WARRANTS (0.0%) UNITED STATES Viacom variable common rights - broadcast, radio and television...... 3,000 4,500 ------------ Total Rights and Warrants (cost: $4,003)....................... 4,500 ------------ BONDS (0.5%) MEXICO (NEW PESO) Grupo F Bancomer 95-2, 51.00%, due 4/28/02.............................. 400,000(c) 65,548 ------------ Total Bonds (cost: $64,864)...................... 65,548 ------------ SHORT-TERM SECURITIES (7.5%) MEXICO Bancomer (New Peso), 42.50%, due 7/03/95.............................. 4,732,966(c) 756,669 Bancomer (New Peso), 43.75%, due 7/05/95.............................. 968,094(c) 154,771 Mexican Tesobono (U.S. dollar), 10.72%, due 8/17/95.................. 80,000(c) 78,881 ------------ Total Short-Term Securities (cost: $986,816)..................... 990,321 ------------ Total Investments in Securities (cost: $12,665,204)(d)............... $ 13,170,154 ------------ ------------
NOTES TO INVESTMENTS IN SECURITIES: (A) SECURITIES ARE VALUED BY PROCEDURES DESCRIBED IN NOTE 2 TO THE FINANCIAL STATEMENTS. (B) CURRENTLY NON-INCOME PRODUCING. (C) VALUE STATED IN U.S. DOLLARS; PRINCIPAL AMOUNT STATED IN THE CURRENCY INDICATED. (D) AT JUNE 30, 1995, THE COST OF SECURITIES FOR FEDERAL INCOME TAX PURPOSES WAS $12,677,245. THE AGGREGATE GROSS UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED ON THIS COST WERE AS FOLLOWS: GROSS UNREALIZED APPRECIATION........ $ 1,518,637 GROSS UNREALIZED DEPRECIATION........ (1,025,728) ----------- NET UNREALIZED APPRECIATION.......... $ 492,909 ----------- -----------
32 ------------------------------------------------------------------------ INVESTMENTS IN SECURITIES HERCULES EUROPEAN VALUE FUND JUNE 30, 1995
Number of Market Name of Issuer Shares Value (a) - - - - - - ------------------------------------------ ------------ ------------ (PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS) COMMON STOCKS (95.0%) AUSTRIA (2.0%) Boehler - Uddeholm - metal products............................. 400(b) $ 27,680 Burgenland Holding - diversified holding company...................... 900 30,862 BWT - environmental control........... 150 18,172 EA-Generali - insurance............... 250 73,665 Flughafen Wien - transportation - airport.............................. 800 42,546 Mayr-Melnhof Karton - forest products and paper............................ 600 34,682 OMV - oil and gas..................... 400 46,119 VA Technologie - engineering and construction......................... 225 28,160 Wienerberger Baustoffindustrie - building construction and materials............................ 150 57,598 ------------ 359,484 ------------ BELGIUM (2.6%) Compagnie Maritime Belge (CMB) - transportation - marine.............. 1,160 89,198 Electrabel - utilities................ 500 105,753 Petrofina - oil and gas............... 220 66,506 Societe Generale de Belgique - diversified holding company.......... 1,300 94,701 Solvay - chemicals.................... 170 94,227 ------------ 450,385 ------------ DENMARK (1.6%) Den Danske Bank - bank - money center............................... 700 43,973 East Asiatic Company - diversified holding company...................... 1,580(b) 45,674 Jacob Holm and Sonner Class B - textiles............................. 1,097 189,053 ------------ 278,700 ------------ FINLAND (2.1%) Amer Group Class A - diversified holding company...................... 1,720 31,298 Aspoyhtyma - electronics.............. 2,460 74,895 Finnair - transportation - air........ 10,200 67,602 Nokia - telecommunications - equipment............................ 1,440 85,658 Pohjola Insurance Company - insurance............................ 5,700 89,438 Rauma - forest products and paper..... 1,200(b) 21,667 ------------ 370,558 ------------ FRANCE (11.1%) Accor - hotels and leisure............ 1,050 140,029 Alcatel Alsthom - telecommunications equipment............................ 1,560 140,671 Casino Guichard-Perrachon - retailing............................ 4,300 125,609 Credit Local de France - banking and financial services................... 1,530 142,135 Elf Aquitaine - oil and gas........... 3,400 251,631 Groupe Poliet - construction and construction materials............... 1,375 125,039 Lagardere Groupe - diversified holding company.............................. 5,875 121,890 Lyonnaise des Eaux-Dumez - environmental control................ 1,310 124,077 Nord Est - diversified holding company.............................. 4,900 124,624 Pernod Ricard - brewers and distillers........................... 2,000 131,709 Schneider - electronics............... 1,700 134,659 Societe Eurafrance - financial services............................. 380 125,673 Societe Nationale D'Exploitation Industrielle des Tabacs et Allumettes (SEITA) - tobacco products........... 4,500 135,445 Number of Market Name of Issuer Shares Value (a) - - - - - - ------------------------------------------ ------------ ------------ Union Financiere de France Banque - financial services................... 1,405 $ 121,531 ------------ 1,944,722 ------------ GERMANY (9.8%) Allianz Holding - insurance........... 90 161,382 Allianz Holding (new) - insurance..... 6 10,759 BASF - chemicals...................... 475 101,427 Bayer - chemicals..................... 300 74,582 Bayerische Motoren Werke (BMW) - auto and trucks........................... 185 101,566 Bayerische Vereinsbank - bank......... 200 60,614 BayWa-Bayerische Warenvermit - retailing............................ 240 55,031 CKAG Colonia Konzern - insurance...... 100(b) 88,824 Commerzbank - bank - money center..... 475 113,897 Deutsche Babcock - engineering and construction......................... 650 71,464 Hoechst - chemicals................... 350 75,570 Karstadt - retailing.................. 215 94,242 Kiekert - automobile parts............ 1,600(b) 68,282 Linde - engineering................... 200 118,481 M.A.N. - autos and trucks............. 200 51,429 Munich RE - insurance................. 50 109,584 Preussag - diversified holding company.............................. 200 59,892 RWE - oil and gas..................... 350 121,647 Schwarz Pharma - pharmaceuticals...... 1,100(b) 46,069 Siemens - diversified manufacturing... 200 99,139 Tarkett - construction and construction material................ 1,000(b) 25,967 ------------ 1,709,848 ------------ ITALY (2.6%) Istituto Nazionale delle Assicurazioni - insurance.......................... 47,000(b) 62,571 Italgas - utilities................... 42,000 109,208 Parmalat Finanziaria - food and beverage............................. 60,000 53,374 Pininfarina - automobile and automobile parts..................... 4,600 42,679 Societa Partecipazioni Finanziare (SOPAF) - financial services......... 69,200 87,214 Telecom Italia-Di Risp - telecommunications................... 44,700 94,623 ------------ 449,669 ------------ NETHERLANDS (7.6%) Fugro - environmental control......... 11,410 213,712 Koninlijke Gist-Brocades - pharmaceuticals...................... 8,960 232,637 Internationale Nederlanden Groep (ING) - insurance.......................... 3,800 210,334 Philips Electronics - electronics..... 5,100 216,082 Polynorm - metal products............. 1,250 136,117 Royal Dutch Petroleum - oil and gas... 1,390 169,856 VNU-Verenigde Nederlandse Uitgevbedri Verigd Bezit - printing and publishing........................... 1,290 154,553 ------------ 1,333,291 ------------ NORWAY (2.1%) Kvaerner - engineering and construction......................... 1,850 84,098 Kverneland Gruppen - agribusiness..... 6,270 95,177 Norsk Hydro - chemicals............... 2,100 88,132 Orkla Borregaard - diversified manufacturing........................ 1,110 49,738 UNI Storebrand - insurance............ 11,000 49,468 ------------ 366,613 ------------
33 ---------------------------------------------------------------- INVESTMENTS IN SECURITIES HERCULES EUROPEAN VALUE FUND JUNE 30, 1995 (CONTINUED)
Number of Market Name of Issuer Shares Value (a) - - - - - - ------------------------------------------ ------------ ------------ PORTUGAL (0.7%) Jornalgeste S.G.P.S. - printing and publishing........................... 4,878(b) $ 82,107 Tertir-Terminais de Portugal - transportation....................... 7,800(b) 46,111 ------------ 128,218 ------------ SPAIN (2.9%) Compania Sevillana de Electricidad - utilities............................ 20,500(b) 126,401 Cortefiel - retailing................. 1,650 50,186 Inmobiliaria Urbis - engineering and construction......................... 23,500(b) 118,643 Repsol - oil and gas.................. 3,300 104,060 Vallehermoso - real estate............ 6,100 104,759 ------------ 504,049 ------------ SWEDEN (3.8%) Electrolux Class B - furniture/home appliance............................ 2,370 107,918 Ericsson - Class B - telecommunications equipment......... 9,140 182,318 Hoganas Class B - industrial machinery and manufacturing.................... 5,920 115,645 Pharmacia Class A - pharmaceuticals... 6,500 142,623 Skandia Forsakrings - insurance....... 6,300(b) 122,201 ------------ 670,705 ------------ SWITZERLAND (10.7%) BBC Brown Boveri - engineering........ 135 139,949 Bobst - forest products and paper..... 75 114,145 Ciba-Geigy Registered - pharmaceuticals...................... 295 216,533 CS Holding - financial services....... 2,305 211,486 Forbo Holding - household products/ wares................................ 450 219,942 Fust Dipl. Ing - furniture/home appliances........................... 340 99,056 Reiseburo Kuoni - miscellaneous services............................. 65 104,578 Sandoz - pharmaceuticals.............. 335 231,326 Saurer Gruppe - diversified industrial and conglomerates.................... 280 102,031 Swiss Bank Corporation Class B - financial services................... 630 223,542 Winterthur Schweizerische Registered - insurance............................ 345 207,627 ------------ 1,870,215 ------------ UNITED KINGDOM (35.4%) Aegis Group - advertising............. 660,000(b) 297,295 Barclays - bank - money center........ 9,000 96,938 B.A.T. Industries - tobacco........... 30,000 230,086 Blue Circle Industries - construction and construction materials........... 26,100 116,942 British Petroleum - oil and gas....... 35,000 251,413 Cable and Wireless - telecommunications................... 17,750 121,700 Cadbury Schweppes - food and beverage............................. 21,414 156,724 Cantab Pharmaceuticals - biopharmaceuticals................... 4,000(b) 8,802 Celltech Group - biopharmaceuticals... 38,000(b) 194,497 Daily Mail and General Trust - printing and publishing.............. 10,000 169,017 Enterprise Oil - oil and gas.......... 25,000 158,055 General Electric Company plc - electronics.......................... 34,500 168,881 Glaxo Wellcome - pharmaceuticals...... 22,000 270,634 Grand Metropolitan - food and beverage............................. 25,000 153,670 Great Universal Stores - retailing.... 31,000 290,645 Guardian Royal Exchange - insurance... 20,000 66,012 Number of Market Name of Issuer Shares Value (a) - - - - - - ------------------------------------------ ------------ ------------ Guinness - brewers and distillers..... 19,000 $ 143,298 HSBC Holdings - bank - money center............................... 9,000 116,454 International Business Communications (Holdings) - printing and publishing........................... 40,000 179,860 Marks & Spencer - retailing........... 20,000 128,995 Northumbrian Water Group - utilities............................ 6,000 89,356 Peninsular and Oriental Steam Navigation - transportation - marine............................... 25,000 230,804 RAP Group - wholesale distributors.... 25,000 59,794 Reuters Holdings - communications..... 30,000 250,655 Rolls-Royce - aerospace/defense....... 35,000 97,384 Royal Doulton - household products/ wares................................ 15,000 62,425 Royal Insurance Holdings - insurance............................ 28,500 140,420 Scotia Holdings - pharmaceuticals..... 10,000(b) 69,680 Scottish Power - utilities............ 14,000 72,327 SeaPerfect - fishery.................. 90,497(b) 173,157 Seeboard - utilities.................. 23,000 142,660 Shell Transport and Trading - oil and gas.................................. 26,500 317,329 Smith New Court - financial services............................. 30,000 210,952 TSB Group - financial services........ 40,000 154,348 Unilever - food/consumer goods........ 3,750 76,088 United News and Media - publishing - newspapers........................... 8,000 66,331 Vendome Luxury Group Units - jewelry/ watch/gemstones...................... 17,000 129,569 Vosper Thornycroft Holdings - shipbuilding......................... 8,000 106,513 S. G. Warburg Group - financial services............................. 11,000 127,863 Wolseley - construction and construction materials............... 10,100 55,882 Yorkshire Electricity - utilities..... 9,000 99,592 Zeneca Group - pharmaceuticals........ 8,700 147,322 ------------ 6,200,369 ------------ Total Common Stocks (cost: $15,850,100).................. 16,636,826 ------------ PREFERRED STOCKS (4.4%) AUSTRIA (0.1%) Baumax - retailing.................... 400(b) 19,096 ------------ GERMANY (2.4%) Fielmann - retailing.................. 1,600(b) 72,911 Fresenius - pharmaceuticals........... 200 134,539 Friedrich Grohe - furniture/home appliance............................ 325 109,431 Heidelberger Zement - construction and construction materials............... 125 74,593 Krones AG Hermann Kronseder Maschinenfabrik - industrial machinery............................ 75 35,805 ------------ 427,279 ------------ ITALY (0.3%) Autostrade Concessioni E Construzione - engineering and construction....... 50,000 55,950 ------------ NETHERLANDS (0.9%) Ballast Nedam - engineering and construction......................... 3,200 153,148 ------------ SWITZERLAND (0.7%) Merck Preferred - pharmaceuticals..... 150 116,102 ------------ Total Preferred Stocks (cost: $654,672)...................... 771,575 ------------
34 ------------------------------------------------------------------------ INVESTMENTS IN SECURITIES HERCULES EUROPEAN VALUE FUND JUNE 30, 1995 (CONTINUED)
Number of Shares or Principal Market Name of Issuer Amount Value (a) - - - - - - ------------------------------------------ ------------ ------------ RIGHTS AND WARRANTS (0.1%) SWITZERLAND (0.0%) Winterthur Schweizerische Rights - insurance............................ 345 $ 2,670 ------------ UNITED KINGDOM (0.1%) Gartmore Micro Index Trust Warrants - small cap index...................... 10,000 6,059 Herald Investment Trust Warrants - multi-media fund..................... 10,000 5,740 ------------ 11,799 ------------ Total Rights and Warrants (cost: $6,017)....................... 14,469 ------------ CORPORATE BONDS (0.7%) DENMARK (0.7%) Det Danske Traelastkompagni (Danish krone), convertible, 5.25% due 1/01/02.............................. 685,000(c) 135,819 ------------ Total Corporate Bonds (cost: $121,524)..................... 135,819 ------------ Total Investments in Securities (cost: $16,632,313) (d).............. $ 17,558,689 ------------ ------------
NOTES TO INVESTMENTS IN SECURITIES: (A) SECURITIES ARE VALUED BY PROCEDURES DESCRIBED IN NOTE 2 TO THE FINANCIAL STATEMENTS. (B) CURRENTLY NON-INCOME PRODUCING. (C) VALUE STATED IN U.S. DOLLARS; PRINCIPAL AMOUNT STATED IN THE CURRENCY INDICATED. (D) AT JUNE 30, 1995, THE COST OF SECURITIES FOR FEDERAL INCOME TAX PURPOSES WAS $16,655,127. THE AGGREGATE GROSS UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED ON THIS COST WERE AS FOLLOWS: GROSS UNREALIZED APPRECIATION............ $ 1,350,803 GROSS UNREALIZED DEPRECIATION............ (447,241) ----------- NET UNREALIZED APPRECIATION............ $ 903,562 ----------- -----------
HERCULES PACIFIC BASIN VALUE FUND JUNE 30, 1995
Number of Market Name of Issuer Shares Value (a) - - - - - - ------------------------------------------ ------------ ------------ (PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS) COMMON STOCKS (98.0%) AUSTRALIA (2.8%) National Australia Bank - banking and financial services................... 51,000 $ 402,853 Wesfarmers - diversified holding company.............................. 75,000 475,224 ------------ 878,077 ------------ HONG KONG (8.7%) Dao Heng Bank Group - banking and financial services................... 175,000 533,750 Esprit Asia Holdings - retailing...... 1,220,000 469,067 Giordano International - retailing.... 740,000 549,905 Hutchison Whampoa - diversified holding company...................... 100,000 483,348 Sun Hung Kai Properties - real estate............................... 50,000 369,941 Yizheng Chemical Fibre Company - textiles............................. 950,000 331,494 ------------ 2,737,505 ------------ INDIA (2.5%) Hindalco Industries - metals - diversified.......................... 25,000(b) 728,250 Videocon International GDR - electronics.......................... 23,000 86,825 ------------ 815,075 ------------ INDONESIA (2.0%) Gadjah Tunggal - tires and rubber..... 241,000 346,295 Supreme Cable Manufacturing - industrial machinery and manufacturing........................ 89,000 280,748 ------------ 627,043 ------------ JAPAN (58.0%) Dainippon Ink and Chemical - chemicals............................ 190,000 814,238 DDI Corporation - telecommunications................... 154 1,236,291 Denki Kagaku Kogyo K.K. - chemicals... 300,000(b) 998,760 Geomatec Company - electronics........ 20,000 1,251,402 Ichiyoshi Securities - financial services............................. 150,000 752,612 Kobe Steel - metal products........... 425,000(b) 1,013,518 Kumagai Gumi Company - engineering and construction......................... 185,000 775,338 Maeda Road Construction - engineering and construction..................... 40,000 774,453 Mitsubishi Heavy Industries - industrial machinery /manufacturing....................... 150,000 1,020,012 Mitsui Fudosan - real estate.......... 155,000 1,776,814 Mori Seiki - industrial machinery and manufacturing........................ 70,000 1,247,860 Nichiei Company - financial services............................. 19,000 1,173,130 Nissha Printing - printing and publishing........................... 37,000 506,699 Sanwa Bank - bank..................... 36,000 680,007 Sony Music Entertainment - diversified services............................. 18,900 801,027 Sumitomo Bank - bank.................. 70,000 1,214,804 Sumitomo Trust and Banking - bank..... 73,000 887,669
35 ------------------------------------------------------------------------ INVESTMENTS IN SECURITIES HERCULES PACIFIC BASIN VALUE FUND JUNE 30, 1995 (CONTINUED)
Number of Market Name of Issuer Shares Value (a) - - - - - - ------------------------------------------ ------------ ------------ Tokyo Steel Manufacturing - metal products............................. 42,000 $ 718,965 Topre - automobile parts.............. 89,000 651,437 ------------ 18,295,036 ------------ MALAYSIA (5.0%) Genting - hotels, leisure and entertainment........................ 45,000 444,831 Telekom Malaysia - telecommunications................... 84,000 637,408 YTL Corporation - engineering and construction......................... 100,000 488,106 ------------ 1,570,345 ------------ PAKISTAN (1.1%) Pakistan Telecommunications - telecommunications................... 3,480(b) 353,220 ------------ PHILIPPINES (2.0%) Benpres Holdings GDR - communications....................... 39,798 328,334 Philippine Long Distance Telephone - telecommunications................... 4,110 293,686 ------------ 622,020 ------------ SINGAPORE (4.2%) City Developments - real estate....... 80,400 492,069 Clipsal Industries - electrical equipment............................ 36,000 83,160 Fraser and Neave - beverage/brewers... 25,000 288,117 Osprey Maritime - transportation - marine............................... 93,000(b) 183,210 Overseas-Chinese Banking Corporation - bank................................. 25,000 277,380 ------------ 1,323,936 ------------ SOUTH KOREA (2.9%) Korea 1990 Trust - closed-end country fund................................. 125 593,751 Korea International Trust IDR - closed-end country fund.............. 3 157,500 Samsung Electronics - electronics..... 123 8,856 Samsung Electronics GDS - electronics.......................... 2,969 158,099 ------------ 918,206 ------------ THAILAND (7.9%) Christiani and Nielsen - engineering and construction..................... 165,000 397,712 Number of Shares or Principal Market Name of Issuer Amount Value (a) - - - - - - ------------------------------------------ ------------ ------------ Electricity Generating (Egcomp) - utilities............................ 165,000(b) $ 497,975 Finance One Company - financial services............................. 60,000 442,374 Siam Cement Company - construction and construction materials............... 5,000 301,239 Sino Thai Engineering and Construction - engineering and construction....... 41,500 490,905 Thai Farmers Bank - bank.............. 40,000 354,713 ------------ 2,484,918 ------------ TAIWAN (0.9%) ROC Taiwan Fund - closed-end country fund................................. 25,000(b) 275,000 ------------ Total Common Stocks (cost: $33,933,691).................. 30,900,381 ------------ BONDS (1.2%) TAIWAN Teco Electric and Machinery, convertible, (U.S. dollar), 2.75% due 4/15/04.............................. 400,000(c) 372,000 ------------ Total Bonds (cost: $400,000)..................... 372,000 ------------ Total Investments in Securities (cost: $34,333,691)(d)............... $ 31,272,381 ------------ ------------
NOTES TO INVESTMENTS IN SECURITIES: (A) SECURITIES ARE VALUED BY PROCEDURES DESCRIBED IN NOTE 2 TO THE FINANCIAL STATEMENTS. (B) CURRENTLY NON-INCOME PRODUCING. (C) VALUE STATED IN U.S. DOLLARS; PRINCIPAL AMOUNT STATED IN THE CURRENCY INDICATED. (D) AT JUNE 30, 1995, THE COST OF SECURITIES FOR FEDERAL INCOME TAX PURPOSES WAS $35,031,040. THE AGGREGATE GROSS UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED ON THIS COST WERE AS FOLLOWS: GROSS UNREALIZED APPRECIATION........... $ 1,214,213 GROSS UNREALIZED DEPRECIATION........... (4,972,872) ----------- NET UNREALIZED DEPRECIATION............. $(3,758,659) ----------- -----------
36 ------------------------------------------------------------------------ INVESTMENTS IN SECURITIES HERCULES LATIN AMERICAN VALUE FUND JUNE 30, 1995
Number of Market Name of Issuer Shares Value (a) - - - - - - -------------------------------------------------- --------------- ----------- (PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS) COMMON STOCKS (57.2%) ARGENTINA (2.3%) Yacimientos Petrolifernas Fiscales Sociedad Anonima (YPF) ADR - oil and gas.............. 28,498 $ 537,900 ----------- BRAZIL (11.7%) Centrais Eletricas Brasileiras (Electrobras) - utilities.................................... 4,664,139 1,266,741 Energetica de Sao Paulo - utilities........... 10,150,000(b) 330,798 Paulista de Forca e Luz (CPFL) - utilities.... 5,050,000 252,911 Siderurgica Nacional ADR - metal products..... 16,098 366,230 Telecomunicacoes Brasileiras (Telebras) - telecommunications........................... 14,515,000 422,599 ----------- 2,639,279 ----------- CHILE (6.5%) Banco Osorno y La Union ADR - banking and financial services........................... 7,277 100,968 Chile Fund - closed-end country fund.......... 12,257 658,814 Compania Chilena de Generacion Electrica (Chilgener) ADR - utilities.................. 17,650 558,181 Compania de Distribucion Electrica de la V Region (Chilquinta) ADR - utilities.......... 9,000 162,367 ----------- 1,480,330 ----------- COLOMBIA (8.4%) Carulla y Compania ADR - retailing............ 24,975 449,550 Cementos Paz del Rio 144A ADR - building construction and materials................... 13,475(b,d) 227,391 Cementos Diamante 144A ADR - construction and construction materials....................... 16,492(d) 478,268 Corporacion Financiera del Valle (Corfivalle) ADR - diversified industrials and conglomerates................................ 10,351 174,673 La Gran Cadena de Almacenes Colombianos (Cadenalco) ADR - retailing.................. 26,923(c) 568,748 ----------- 1,898,630 ----------- MEXICO (15.8%) Cemex Class B ADR - construction and construction materials....................... 17,664 132,480 Grupo Carso Class A1 - diversified holding company...................................... 225,403(b) 1,230,617 Panamerican Beverages ADR Class A - food and beverage..................................... 36,340 1,090,200 Telefonos de Mexico Class L ADR (Telmex) - telecommunications........................... 27,882 826,004 Telefonos de Mexico Class L (Telmex) - telecommunications........................... 200,000 294,804 ----------- 3,574,105 ----------- PERU (8.0%) Cerveceria Backus y Johnson Brewery Class T - brewers and distillers....................... 146,083 345,502 Number of Market Name of Issuer Shares Value (a) - - - - - - -------------------------------------------------- --------------- ----------- Banco de Credito del Peru - bank.............. 288,558 $ 506,015 Cementos Norte Pacasmayo Class T - building construction and materials................... 66,485 191,921 Cerveceria San Juan Class C - brewers and distillers................................... 20,033 31,590 Enrique Ferreyros - industrial machinery and manufacturing................................ 114,216 160,231 Minsur Class T - mining....................... 1 13 Telefonica del Peru Class B - telecommunications........................... 331,136 565,790 ----------- 1,801,062 ----------- VENEZUELA (4.5%) Ceramica Carabobo ADR Class B - building construction and materials................... 155,520(c) 155,520 Corimon ADR - diversified industrials and conglomerates................................ 23,182(b) 150,683 Mavesa 144A ADR - food and beverage........... 44,224(d) 153,674 Siderurgica Venezolana Sivensa ADR - metal products..................................... 213,000(c) 330,150 Sudamtex de Venezuela ADR - textiles.......... 47,960 227,810 ----------- 1,017,837 ----------- Total Common Stocks (cost: $13,571,661).......................... 12,949,143 ----------- PREFERRED STOCKS (33.2%) BRAZIL Aracruz Celulose ADR - forest products and paper........................................ 54,597 641,516 Banco Bradesco - banking and financial services..................................... 75,876,230 642,949 Banco Itau - bank............................. 501,216 152,461 Centrais Eletricas Brasileiras (Electrobras) Class B - utilities.......................... 600 165 Cervejaria Brahma - brewers and distillers.... 2,152,883 706,301 Companhia Energetica de Sao Paulo (CESP) ADR - utilities.................................... 24,000(b) 273,120 Companhia Energetica de Sao Paulo (CESP) - utilities.................................... 2,000,130(b) 79,093 Siderurgica Paulista (Cosipa) Class PNB - metal products............................... 373,574(b) 592,524 Lojas Renner - retailing...................... 7,768,600 131,657 Mesbla - retailing............................ 1,300,000(b) 91,798 Refrigeracao Parana (Refripar) - furniture/home appliance..................... 220,180,000 428,161 Tecidos Norte de Minas (Coteminas) - textiles..................................... 699,844 220,483 Telecomunicacoes Brasileiras (Telebras) ADR - telecommunications........................... 24,991 843,446 Telecomunicacoes Brasileiras (Telebras) - telecommunications........................... 5,947,800 203,214 Telecomunicacoes de Sao Paulo (Telesp) - telecommunications........................... 4,947,340 615,394 Usinas Siderurgicas de Minas Gerais (Usiminas) 144A ADR - metal products.................... 13,000(d) 146,250 Usinas Siderurgicas de Minas Gerais (Usiminas) - metal products............................. 634,000,000 709,419 Vale do Rio Doce ADR - mining................. 17,758 681,849
37 - - - - - - -------------------------------------------------------------------------------- INVESTMENTS IN SECURITIES HERCULES LATIN AMERICAN VALUE FUND JUNE 30, 1995 (CONTINUED)
Number of Shares or Principal Market Name of Issuer Amount Value (a) - - - - - - ---------------------------------------- ---------------- ------------ Vale do Rio Doce Preferred - mining............................. 2,224,110 $ 341,892 ------------ Total Preferred Stocks (cost: $8,233,265)................. 7,501,692 ------------ OPTIONS (0.0%) BRAZIL Paulista de Forca e Luz, 1 call option on 3,800,000 shares, strike price of 70, Expires October 31, 1995............................... 3,800,000 5,905 ------------ Total Options (cost: $0)......................... 5,905 ------------ SHORT-TERM SECURITY (8.0%) UNITED STATES CIBC Time Deposit, (U.S. dollar), 6.00%, due 7/03/95................. 1,802,508 1,802,508 ------------ Total Short-Term Security (cost: $1,802,508)........................ 1,802,508 ------------ Total Investments in Securities (cost: $23,607,434)(e)............. $ 22,259,248 ------------ ------------
NOTES TO INVESTMENTS IN SECURITIES: (A) SECURITIES ARE VALUED BY PROCEDURES DESCRIBED IN NOTE 2 TO THE FINANCIAL STATEMENTS. (B) CURRENTLY NON-INCOME PRODUCING. (C) SECURITY DEEMED TO BE ILLIQUID BY THE MANAGER. INVESTMENTS IN ILLIQUID SECURITIES REPRESENT 4.66% OF NET ASSETS AT JUNE 30, 1995. (D) REPRESENTS SECURITY SOLD UNDER RULE 144A AND IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS SECURITY HAS BEEN DETERMINED TO BE LIQUID UNDER GUIDELINES ESTABLISHED BY THE BOARD OF DIRECTORS. (E) AT JUNE 30, 1995, THE COST OF SECURITIES FOR FEDERAL INCOME TAX PURPOSES WAS $24,111,695. THE AGGREGATE GROSS UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED ON THIS COST WERE AS FOLLOWS: GROSS UNREALIZED APPRECIATION........... $ 1,787,183 GROSS UNREALIZED DEPRECIATION........... (3,639,630) ----------- NET UNREALIZED DEPRECIATION........... $(1,852,447) ----------- -----------
HERCULES WORLD BOND FUND JUNE 30, 1995
Principal Market Name of Issuer Amount (b) Value (a) - - - - - - ------------------------------------ --------------- --------------- (PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS) BONDS (91.9%) AUSTRALIA (4.0%) Australian Government (Australian dollar), 9.50%, due 8/15/03........................ 760,000 $ 552,283 --------------- AUSTRIA (2.9%) Austrian Republic (British pound), 9.00%, due 7/22/04..... 250,000 400,867 --------------- DENMARK (12.3%) Danish Government (Danish krone), 6.00%, due 12/10/99.... 9,750,000 1,689,291 --------------- GERMANY (23.5%) Deutscheland Republic (German deutschemark), 7.375%, due 1/03/05........................ 2,300,000 1,701,917 European Investment Bank (German deutschemark), 6.50%, due 4/21/04........................ 800,000 557,830 Inter-American Development Bank (German deutschemark), 7.00%, due 6/08/05.................... 800,000 574,293 International Bank of Reconstruction and Development (German deutschemark), 5.875%, due 11/10/03................... 600,000 400,665 --------------- 3,234,705 --------------- JAPAN (10.5%) Japanese Government (Japanese yen), 4.60%, due 3/21/05....... 83,000,000 1,115,877 Japanese Government (Japanese yen), 4.60%, due 9/20/04....... 24,000,000 323,315 --------------- 1,439,192 --------------- SPAIN (8.5%) Spanish Government (Spanish peseta), 7.40%, due 7/30/99.... 164,000,000 1,177,488 --------------- UNITED KINGDOM (4.8%) U.K. Government (British pound), 9.00%, due 7/12/11............. 400,000 665,504 --------------- UNITED STATES (25.4%) U.S. Treasury Bond (U.S. dollar), 7.75%, due 1/31/00.... 3,270,000(c) 3,495,833 --------------- Total Investments in Securities (cost: $12,176,942) (d)........ $ 12,655,163 --------------- ---------------
NOTES TO INVESTMENTS IN SECURITIES: (A) SECURITIES ARE VALUED BY PROCEDURES DESCRIBED IN NOTE 2 TO THE FINANCIAL STATEMENTS. (B) VALUE STATED IN U.S. DOLLARS; PRINCIPAL AMOUNT STATED IN THE CURRENCY INDICATED. (C) PARTIALLY PLEDGED AS INITIAL MARGIN DEPOSIT ON OPEN FUTURES POSITIONS (SEE NOTE 7 TO THE FINANCIAL STATEMENTS). (D) AT JUNE 30, 1995, THE COST OF SECURITIES FOR FEDERAL INCOME TAX PURPOSES WAS $12,199,066. THE AGGREGATE GROSS UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED ON THIS COST WERE AS FOLLOWS: GROSS UNREALIZED APPRECIATION.............. $ 518,079 GROSS UNREALIZED DEPRECIATION.............. (61,982) --------- NET UNREALIZED APPRECIATION.............. $ 456,097 --------- ---------
38 - - - - - - -------------------------------------------------------------------------------- INVESTMENTS IN SECURITIES HERCULES GLOBAL SHORT-TERM FUND JUNE 30, 1995
Principal Market Name of Issuer Amount Value (a) - - - - - - ------------------------------------ --------------- --------------- (PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS) SHORT-TERM SECURITY (46.8%) UNITED STATES U.S. Treasury Bill, 5.37%, due 8/17/95.................... 100,000 $ 99,299 --------------- Total Investments in Securities (cost: $99,299) (b)............ $ 99,299 --------------- ---------------
NOTES TO INVESTMENTS IN SECURITIES: (A) SECURITIES ARE VALUED BY PROCEDURES DESCRIBED IN NOTE 2 TO THE FINANCIAL STATEMENTS. (B) ALSO REPRESENTS COST FOR FEDERAL INCOME TAX PURPOSES. HERCULES MONEY MARKET FUND JUNE 30, 1995
Principal Market Name of Issuer Amount Value (a) - - - - - - ------------------------------------ --------------- --------------- (PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS) U.S. TREASURY BILLS (105.8%) 5.65%, due 7/13/95.............. 165,000 $ 164,689 5.57%, due 9/07/95.............. 50,000 49,474 5.35%, due 9/21/95.............. 180,000 177,807 5.37%, due 9/21/95.............. 427,000 421,777 5.38%, due 9/21/95.............. 4,000 3,951 5.40%, due 9/21/95.............. 100,000 98,770 5.45%, due 9/28/95.............. 106,000 104,572 5.47%, due 9/28/95.............. 284,000 280,156 --------------- Total Investments in Securities (cost: $1,301,196) (b)........... $ 1,301,196 --------------- ---------------
NOTES TO INVESTMENTS IN SECURITIES: (A) SECURITIES ARE VALUED BY PROCEDURES DESCRIBED IN NOTE 2 TO THE FINANCIAL STATEMENTS. (B) ALSO REPRESENTS COST FOR FEDERAL INCOME TAX PURPOSES. 39 ------------------------------------------------------------------------ INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS AND SHAREHOLDERS HERCULES FUNDS INC.: We have audited the accompanying statements of assets and liabilities, including the schedules of investments in securities, of the North American Growth and Income Fund, European Value Fund, Pacific Basin Value Fund, Latin American Value Fund, World Bond Fund, Global Short-Term Fund and Money Market Fund (separate funds within Hercules Funds Inc.) as of June 30, 1995, and the related statements of operations for the year then ended (period from December 13, 1994 to June 30, 1995 for Money Market Fund), and statements of changes in net assets and the financial highlights for the year ended June 30, 1995 and the period from November 9, 1993 to June 30, 1994 (period from December 13, 1994 to June 30, 1995 for Money Market Fund). 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 North American Growth and Income Fund, European Value Fund, Pacific Basin Value Fund, Latin American Value Fund, World Bond Fund, Global Short-Term Fund and Money Market Fund as of June 30, 1995, and the results of their operations, 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 August 18, 1995 40 ------------------------------------------------------------------------ FEDERAL TAX INFORMATION Information for federal tax purposes is presented below to aid shareholders in reporting taxable distributions made by the funds during the fiscal year ended June 30, 1995. By early February 1996, each shareholder will receive a Form 1099-DIV reporting these and ony other distributions the funds may make this calander year. Shareholders should consult a tax advisor on how to report these distributions at the state and local levels. NORTH AMERICAN GROWTH AND INCOME FUND
S.T. Capital Income Gain Total Payable Date Per Share Per Share Per Share - - - - - - -------------------------------------------------------------------- January 5, 1995.................. $ 0.04180* -- $ 0.04180
EUROPEAN VALUE FUND
S.T. Capital Income Gain Total Payable Date Per Share Per Share Per Share - - - - - - -------------------------------------------------------------------- January 5, 1995.................. $ 0.02308 $ 0.06244 $ 0.08552
PACIFIC BASIN VALUE FUND
S.T. Capital Income Gain Total Payable Date Per Share Per Share Per Share - - - - - - -------------------------------------------------------------------- January 5, 1995.................. -- $ 0.10800 $ 0.10800
LATIN AMERICAN VALUE FUND For the year ended June 30, 1995 .................. No declared dividends
* 100% qualifying for corporate dividend received deduction. 41 ------------------------------------------------------------------------ FEDERAL TAX INFORMATION WORLD BOND FUND
Tax Return Income of Capital Total Payable Date Per Share Per Share Per Share - - - - - - --------------------------------------------------------------------- October 5, 1994................... $ 0.03500 -- $ 0.03500 January 5, 1995................... 0.02350 -- 0.02350 April 5, 1995..................... 0.02303 -- 0.02303 July 6, 1995...................... 0.01017 0.10983 0.12000 --------- $ 0.20153 --------- ---------
GLOBAL SHORT-TERM FUND
Income Payable Date Per Share - - - - - - ------------------------------------------------------------------ August 3, 1994......................................... $ 0.01000 September 6, 1994...................................... 0.01250 October 5, 1994........................................ 0.01500 November 3, 1994....................................... 0.01500 December 5, 1994....................................... 0.01500 January 5, 1995........................................ 0.01000 February 3, 1995....................................... 0.00750 March 3, 1995.......................................... 0.01011 --------- $ 0.09511 --------- ---------
MONEY MARKET FUND
Income Payable Date Per Share - - - - - - ------------------------------------------------------------------ January 3, 1995........................................ $ 0.00203 January 31, 1995....................................... 0.00326 February 28, 1995...................................... 0.00326 March 31, 1995......................................... 0.00398 April 28, 1995......................................... 0.00381 May 31, 1995........................................... 0.00396 June 30, 1995.......................................... 0.00373 --------- $ 0.02403 --------- ---------
42 ------------------------------------------------------------------------ SHAREHOLDER UPDATE Voting results for the special meeting of the Hercules Funds Inc. held on 7/18/95 were as follows: APPROVAL OF NEW INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT BETWEEN HERCULES FUNDS INC. AND PIPER CAPITAL MANAGEMENT INCORPORATED:
For Against Abstain NORTH AMERICAN GROWTH AND INCOME FUND 717,988 16,140 67,569 EUROPEAN VALUE FUND 787,420 13,548 86,801 PACIFIC BASIN VALUE FUND 1,770,384 33,513 151,888 LATIN AMERICAN VALUE FUND 1,525,100 29,112 145,288 WORLD BOND FUND 902,088 22,049 75,873 GLOBAL SHORT-TERM FUND 16,793 -- -- MONEY MARKET FUND 1,104,107 18,161 2,267
APPROVAL OF NEW SUB-INVESTMENT ADVISORY AGREEMENTS BETWEEN PIPER CAPITAL MANAGEMENT AND EACH SUBADVISER:
For Against Abstain NORTH AMERICAN GROWTH AND INCOME FUND Acci Worldwide 710,372 19,685 71,640 AGF Investment Advisors 712,323 18,531 70,843 EUROPEAN VALUE FUND Pictet International Mgmt. 778,330 17,201 92,237 PACIFIC BASIN VALUE FUND Edinburgh Fund Managers 1,740,009 44,149 171,627 LATIN AMERICAN VALUE FUND Bankers Trust 1,494,786 41,681 163,032 WORLD BOND FUND SBAM Ltd. 877,292 29,335 93,384 GLOBAL SHORT-TERM FUND SBAM Ltd. 16,691 101 -- MONEY MARKET FUND SBAM Inc. 1,104,107 18,161 2,267
43 DIRECTORS AND OFFICERS DIRECTORS David T. Bennett, Chairman, Highland Homes, Inc., USL Products, Inc., and Kiefer Built, Inc., of Counsel, Gray, Plant, Mooty, Mooty & Bennett, P.A. Jaye F. Dyer, President, Dyer Management Company Karol D. Emmerich, President, the Paraclete Group Luella G. Goldberg, Director, TCF Financial, ReliaStar Financial Corp., Hormel Foods Corp. George A. Latimer, Director, Special Actions Office, Office of the Secretary, Department of Housing and Urban Development BOARD OF The board of directors of an investment company is charged DIRECTORS with extensive responsibilities under federal and state RESPONSIBILITIES laws. Under common law and state statutes, all board members are subject to general fiduciary duties including acting in good faith and in the best interest of the company and its shareholders. In addition, the Investment Company Act of 1940 (as amended) charges independent directors with management supervision and financial oversight. Some of the directors' key responsibilities include: - To act in good faith and in a manner that is in the best interest of the funds and their shareholders. Directors have an obligation not to use their position for personal gain and to prevent conflicts from arising between personal interests and the interests of the company. - To approve the advisory contract between the investment company and its subadviser(s) annually, ensuring that it is fair to the fund and to shareholders. - To review and approve other agreements such as custody agreements, foreign custody arrangements and service agreements with affiliates. - To approve the fund's distribution plan annually. - To monitor fund investments, ensuring that decisions made are in accordance with the fund's investment policies and restrictions. - To monitor portfolio transactions, ensuring that fund management executes transactions appropriately, that transactions with affiliated broker dealers are appropriate and in compliance, and that purchases or sales between affiliated funds follow regulatory restrictions. OFFICERS William H. Ellis, President Charles N. Hayssen, Treasurer Robert H. Nelson, Vice President David E. Rosedahl, Secretary INVESTMENT Piper Capital Management Incorporated ADVISER 222 South Ninth Street, Minneapolis, MN 55402-3804 DISTRIBUTOR Piper Jaffray Inc. 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 Gordon Altman Butowsky Weitzen Shalov & Wein 114 West 47th Street, New York, NY 10036 INDEPENDENT KPMG Peat Marwick LLP AUDITORS 4200 Norwest Center, 90 South Seventh Street, Minneapolis, MN 55402 44 This report is intended for shareholders of the Hercules family of funds, but is may also be used a sales literature if preceded or accompanied by a prospectus. The prospectus gives details about the charges, investment results, risks and operating policies of the funds. [HERCULES LOGO] 222 South Ninth Street, Minneapolis, MN 55402-3804 Piper Jaffray Inc., fund distributor and NASD member. Printed on recycled paper containing 50% recycled fiber with 10% post-consumer waste. [LOGO] HERCULES 1995 INTERNATIONAL FUNDS SEMIANNUAL REPORT A WORLD OF INVESTMENT CHOICES TABLE OF CONTENTS NORTH AMERICAN GROWTH AND INCOME FUND Seeks to provide long-term capital Letter to Shareholders . . . . . . 2 growth and current income primarily Financial Statements and Notes . . 13 through investments in securities of Investments in Securities . . . . 32 issuers in Mexico, Canada and the United States. EUROPEAN VALUE FUND Seeks to provide long-term capital Letter to Shareholders . . . . . . 4 growth and, to a lesser extent Financial Statements and Notes . . 13 current income, primarily through Investments in Securities . . . . 34 investments in securities of issuers located in Europe. PACIFIC BASIN VALUE FUND Seeks to provide long-term capital Letter to Shareholders . . . . . . 6 growth and, to a lesser extent Financial Statements and Notes . . 13 current income, primarily through Investments in Securities . . . . 36 investments in regions bordering the Pacific Ocean. LATIN AMERICAN VALUE FUND Seeks to provide long-term capital Letter to Shareholders . . . . . . 8 growth and, to a lesser extent Financial Statements and Notes . . 13 current income, primarily through Investments in Securities . . . . 38 investments in securities of issuers in Mexico, Central America and South America. WORLD BOND FUND Seeks to provide a high level of Letter to Shareholders . . . . . . 10 total investment return through Financial Statements and Notes . . 14 investments in debt securities of Investments in Securities . . . . 39 issuers located anywhere in the world. MONEY MARKET FUND Seeks to maximize current income Letter to Shareholders . . . . . . 12 consistent with the preservation of Financial Statements and Notes . . 14 capital and maintenance of liquidity Investments in Securities . . . . 40 by investing exclusively in high-quality U.S. money market instruments. THIS REPORT IS INTENDED FOR SHAREHOLDERS OF THE HERCULES FAMILY OF FUNDS, 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, RISKS AND OPERATING POLICIES OF THE FUNDS. HERCULES INTERNATIONAL FUNDS LETTER TO SHAREHOLDERS February 15, 1996 Dear Shareholders: Since we became the investment manager of the Hercules [PHOTO] funds in July 1995, Piper Capital has focused on the pricing and marketing of the Hercules funds in the WILLIAM H. ELLIS United States in an attempt to promote asset growth and PRESIDENT potentially reduce overall expense ratios. HERCULES FUNDS INC. To date, our efforts to attract sufficient assets have not been successful. Net assets have declined further over the six month period covered by this report, with the exception of Money Market Fund, which remained flat. As a result, we believe it is time to make some major changes. On February 6, 1996, we recommended to the Board of Directors of Hercules Funds Inc. that it eliminate Hercules as a separate fund family because we believe the funds are too small to be economically viable. The board unanimously agreed that it would be in the best interests of shareholders to merge the four stock funds into appropriate Piper fund alternatives and to liquidate World Bond Fund. The proposed mergers and proposed liquidation are subject to the approval of shareholders of the respective funds. In addition, because the costs associated with operating Money Market Fund have become increasingly prohibitive due to its small asset base, Piper Capital has decided to stop waiving and absorbing fund expenses effective July 1, 1996. Currently, we waive or absorb expenses that are in excess of 1% of the fund's average daily net assets. We are preparing proxy materials which will provide you with more complete information about the proposal, including the basis for the board's recommendation. We expect to mail these materials to you in late April. Please read them thoroughly and contact your Investment Executive if you have further questions. Until we receive a majority vote, the Hercules funds will continue to operate and be managed as they have been in the past. We thank you for your investment in the Hercules funds and look forward to helping you reach your investment goals through international markets. Sincerely, /S/ WILLIAM H. ELLIS William H. Ellis President 1 HERCULES INTERNATIONAL FUNDS NORTH AMERICAN GROWTH AND INCOME FUND [PHOTO] February 15, 1996 Dear Shareholders: MARU EUGENIA PICHARDO PORTFOLIO MANAGER, FOR THE SIX MONTHS ENDED DECEMBER 31, 1995, NORTH MEXICO ACCI WORLDWIDE, AMERICAN GROWTH AND INCOME FUND PROVIDED A 10.15% S.A. DE C.V. TOTAL RETURN, assuming distributions were reinvested and not including any sales charges. During the same [PHOTO] period, the S&P 500 Index returned 14.44%, the Mexican Bolsa Index returned 2.99%, and the Toronto ROBERT FARQUHARSON Stock Exchange 300 Index returned 5.80% (all in U.S. PORTFOLIO MANAGER, dollar terms). The fund's primary strategy during CANADA AGF INVESTMENT the period was to place heavier emphasis on the U.S. ADVISORS, INC. market than on Canadian and Mexican markets. [PHOTO] THE FUND BENEFITED FROM ITS EMPHASIS ON THE U.S. MARKET, where the best performing sectors were JOHN SCHONBERG health care and financial services. The U.S. portion PORTFOLIO MANAGER, of the fund was positioned to take advantage of a UNITED STATES slow growth, low inflationary economic environment. PIPER CAPITAL Our most meaningful overweighting, compared to the MANAGEMENT INCORPORATED S&P 500 Index, was in the capital goods and services sector. During the third quarter, we increased our weighting in the energy sector as we believed that these stocks -- especially oil services -- were particularly attractive. Many energy companies have recently restructured, which should improve profits going forward. AFTER AN INCREDIBLE PERFORMANCE IN 1995, THE U.S. STOCK MARKET HAS LIKELY REAPED MOST OF THE BENEFITS FROM LOWER INTEREST RATES. We are maintaining a conservative outlook given our belief that, at current levels, the market is fairly valued. Relative to the Canadian and Mexican markets, however, we believe the U.S. market remains the most attractive, so we are maintaining a heavy weighting in U.S. stocks. Our largest emphasis continues to be in the capital goods and services sector with investments in companies such as Allied Signal, Boeing, GE, 3M, and WMX Technologies. ALTHOUGH 1995 WAS CHARACTERIZED BY GREAT VOLATILITY IN MEXICAN FINANCIAL MARKETS, THERE ARE SIGNS THAT THE ECONOMIC SLOWDOWN HAS BOTTOMED. Recent economic indicators such as the level of retail sales, inventories and domestic sales of gasoline seem to indicate that the recovery is taking off, albeit gradually. The Mexican stock market finished the third quarter of 1995 up 6.38% even after reports that Gross Domestic Product had contracted more than 10% during the second quarter. The financial markets were very 2 volatile for the fourth quarter mainly explained by speculative movements against the peso. However, at the end of December, the market reached a 13-month high fueled by signs of stabilization of the peso and lower interest rates. We anticipate investors will react positively to the potential for economic growth, more attractive valuations and a drop in domestic and non-domestic interest rates in 1996. THE MEXICAN PORTION OF THE FUND REMAINS DEFENSIVE, with a balanced portfolio that includes export-oriented companies which benefited from the decline in the peso and domestic-oriented companies with strong cash flows and low debt. At the end of 1995, the Mexican portion of the portfolio was 88% invested in stocks and 12% in high-quality, short-term debt instruments, capitalizing on the current high interest rates. Our investment strategy for 1996 includes a gradual switch from cyclical stocks, which tend to rise and fall with the economy and are currently showing price increases, to stocks expected to benefit from the privatization process in the coming months -- for example, industrial groups, construction and telecommunications companies. THE CANADIAN MARKET UNDERPERFORMED THE U.S. MARKET IN 1995, HOWEVER, THE FUNDAMENTALS OF THE CANADIAN ECONOMY REMAIN STRONG. Inflation remains subdued, world economies are continuing to expand, and the undervalued Canadian dollar should attract capital flows into the market due to the competitiveness of Canadian companies. As investors begin to focus on the strong potential inherent in the market, the Canadian portion of the fund should be rewarded by a narrowing performance gap relative to the United States and the return of the international investor. Thank you for your investment in the North American Growth and Income Fund. Sincerely, /S/ MARU EUGENIA PICHARDO /S/ ROBERT FARQUHARSON /S/ JOHN SCHONBERG Maru Eugenia Pichardo Robert Farquharson John Schonberg Portfolio Manager Portfolio Manager Portfolio Manager * THE S&P 500 INDEX IS AN UNMANAGED INDEX OF LARGE COMPANY U.S. STOCKS. THE MEXICAN BOLSA INDEX IS AN UNMANAGED INDEX OF 38 COMPANY STOCKS AND IS WEIGHTED BY MARKET VALUE AND INDUSTRY. THE TORONTO STOCK EXCHANGE IS AN UNMANAGED INDEX THAT INCLUDES THE STOCKS OF 300 CANADIAN INCORPORATED COMPANIES. THE BLENDED INDEX REPRESENTS AN UNMANAGED MIX OF 52% S&P 500, 22% TSE AND 26% MBI. [GRAPHIC REPRESENTATION OF PIE CHART] COUNTRY ALLOCATION AS OF DECEMBER 31, 1995 United States 58% Canada 18% Mexico 23% Cash & Equivalents 1% VALUE OF $10,000 INVESTED [GRAPH] SHARES PURCHASED AFTER JUNE 19, 1995, ARE SUBJECT TO A CONTINGENT DEFERRED SALES CHARGE (CDSC). HAD THIS STRUCTURE BEEN IN EFFECT SINCE THE FUND'S INCEPTION, A $10,000 INVESTMENT MADE ON NOVEMBER 9, 1993, AND REDEEMED ON DECEMBER 31, 1995, INCLUDING REINVESTED DISTRIBUTIONS, WOULD HAVE GROWN TO $10,779. IF SHARES WERE PURCHASED BEFORE JUNE 19, 1995 AND HELD THROUGH DECEMBER 31, 1995, WITH DISTRIBUTIONS INVESTED, THE INVESTMENT WOULD HAVE GROWN TO $10,979. IN COMPARING A FUND TO INDEXES, KEEP IN MIND THAT INDEXES ARE UNMANAGED, THEIR RETURNS DO NOT REFLECT SALES OR MANAGEMENT FEES, AND THEY ARE NOT OPEN TO INVESTMENT. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. AVERAGE ANNUAL TOTAL RETURNS THROUGH DECEMBER 31, 1995 WITH WITHOUT CDSC CDSC One Year. . . . . . . . . . . . . . . 21.06%. . . . . . . 23.06% Since Inception (11/93 ). . . . . . . 3.56%. . . . . . . 4.45% DURING SOME PERIODS, THE FUND'S MANAGER AND DISTRIBUTOR WAIVED OR ABSORBED FUND EXPENSES WHICH MAY OR MAY NOT BE WAIVED IN THE FUTURE. OTHERWISE, THE AVERAGE ANNUAL TOTAL RETURNS WITH CDSC AND REINVESTED DISTRIBUTIONS WOULD HAVE BEEN 20.03% AND 2.36%, RESPECTIVELY. 3 [PHOTO] HERCULES INTERNATIONAL FUNDS NILS FRANCKE EUROPEAN PORTFOLIO MANAGER VALUE FUND PICTET INTERNATIONAL MANAGEMENT LTD. February 15, 1996 Dear Shareholders: IN NOVEMBER, MR. FRANCKE ASSUMED FOR THE SIX MONTHS ENDED DECEMBER 31, 1995, EUROPEAN RESPONSIBILITY AS VALUE FUND RETURNED 5.82%, assuming distributions LEAD MANAGER FOR were reinvested and not including any sales charges. THE EUROPEAN VALUE This compares to the benchmark Morgan Stanley Capital FUND. PREVIOUSLY, International (MSCI) Europe Index's return of 7.98% HE CO-MANAGED THE and the Lipper European Region Funds Average of 4.34% FUND WITH CHRISTIAN over the same period. Our strategy during the period SIMOND, WHO favored smaller European markets, interest-rate-sensitive CONTINUES TO MANAGE stocks, and growth-oriented stocks with good earnings OTHER EUROPEAN- visibility. REGION PORTFOLIOS FOR PICTET OVERALL, EUROPEAN STOCK MARKETS ENDED THE THIRD QUARTER OF 1995 WITH POSITIVE PERFORMANCE, WITH THE INTERNATIONAL. EXCEPTION OF THE FRENCH AND ITALIAN MARKETS. France, in particular, struggled with uncertainties over the country's political elections, restrictive spending programs and the resulting labor strikes. Not surprisingly, the French stock market retreated to five-year lows during the last quarter of 1995. DISCUSSIONS ABOUT THE PENDING EUROPEAN MONETARY UNION INTENSIFIED, resulting in renewed strength of the German mark and Swiss franc during the third quarter. While this had a negative effect on "cyclical" stocks, which tend to rise and fall along with the economy, there was also a positive side. Several European governments responded to the discussions by committing to additional spending cuts to reduce their budget deficits. This new course of action meant that previous expectations for European economic growth were too high, and that central banks would need to cut interest rates further. AS WE ANTICIPATED, EVIDENCE OF A EUROPEAN ECONOMIC SLOWDOWN BECAME APPARENT DURING THE FOURTH QUARTER OF 1995. Of particular importance was the emerging weakness of the German economy, whose industrial output in October 1995 declined 3.4% compared to October 1994. Finally, on December 14, 1995, the Bundesbank cut its discount rate to 3%. Though this cut was expected, the actual move persuaded investors that European monetary policy is moving into a synchronized phase and that central banks across the continent will support lower interest rates with coordinated action. 4 EUROPEAN VALUE FUND'S COUNTRY ALLOCATION CONTINUES TO FAVOR SMALLER COUNTRIES, as they currently are not as affected by currency fluctuations as are core countries like Germany. In the United Kingdom, we have remained invested in mid-cap stocks with substantial overweighting in the medical and pharmaceutical sectors. Holdings include Zeneca, Glaxo Wellcome, and Celltech. IN TERMS OF STOCK SELECTION, WE KEPT OUR EMPHASIS ON INTEREST-RATE-SENSITIVE STOCKS AND GROWTH-ORIENTED STOCKS WITH GOOD EARNINGS VISIBILITY, due to a lot of recent downward earnings revisions. Two stocks with positive recent earnings reports are Fresenius, a German pharmaceutical company, and Bic, the French company known for disposable pens and razors. Fresenius, which we have owned since the fund's inception, announced a possible joint venture with W.R. Grace's National Medical Care dialysis unit. At Bic, the son of the firm's founder recently returned to France from the United States to become the company's group chairman. WE REMAIN POSITIVE FOR EUROPEAN STOCKS IN 1996, WHICH CONTINUE TO BE SUPPORTED BY LOWER INTEREST RATES, AND ALSO ON THE OUTLOOK FOR THE DOLLAR. As a result, we increased our dollar hedge with European countries from 20% in the second quarter to 40% by September 30. We believe this is a good medium-term strategy because the dollar currently appears undervalued in terms of purchasing power parity. If we are right, and the dollar strengthens over the next few months, we may move more into cyclical, export-oriented stocks which would benefit in such an environment. We appreciate your investment in the European Value Fund. Sincerely, /S/ NILS FRANCKE Nils Francke Portfolio Manager * THE MSCI EUROPE 14 INDEX IS AN UNMANAGED INDEX OF SECURITIES LISTED ON THE STOCK EXCHANGES OF AUSTRIA, BELGIUM, DENMARK, FINLAND, FRANCE, GERMANY, IRELAND, ITALY, THE NETHERLANDS, NORWAY, SPAIN, SWEDEN, SWITZERLAND, AND THE UNITED KINGDOM. [GRAPHIC REPRESENTATION OF PIE CHART] COUNTRY ALLOCATION AS OF DECEMBER 31, 1995 United Kingdom 35% Switzerland 11% Sweden 4% Netherlands 7% France 11% Czech Republic 3% Germany 13% Italy 4% Other 12% VALUE OF $10,000 INVESTED [GRAPH] SHARES PURCHASED AFTER JUNE 19, 1995, ARE SUBJECT TO A CONTINGENT DEFERRED SALES CHARGE (CDSC). HAD THIS STRUCTURE BEEN IN EFFECT SINCE THE FUND'S INCEPTION, A $10,000 INVESTMENT MADE ON NOVEMBER 9, 1993, AND REDEEMED ON DECEMBER 31, 1995, INCLUDING REINVESTED DISTRIBUTIONS, WOULD HAVE GROWN TO $11,645. IF SHARES WERE PURCHASED BEFORE JUNE 19, 1995 AND HELD THROUGH DECEMBER 31, 1995, WITH DISTRIBUTIONS INVESTED, THE INVESTMENT WOULD HAVE GROWN TO $11,845. IN COMPARING A FUND TO INDEXES, KEEP IN MIND THAT INDEXES ARE UNMANAGED, THEIR RETURNS DO NOT REFLECT SALES OR MANAGEMENT FEES, AND THEY ARE NOT OPEN TO INVESTMENT. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. AVERAGE ANNUAL TOTAL RETURNS THROUGH DECEMBER 31, 1995 WITH WITHOUT CDSC CDSC One Year. . . . . . . . . . . . . . . 13.39%. . . . . . . 15.39% Since Inception (11/93 ). . . . . . . 7.37%. . . . . . . 8.22% DURING SOME PERIODS, THE FUND'S MANAGER AND DISTRIBUTOR WAIVED OR ABSORBED FUND EXPENSES WHICH MAY OR MAY NOT BE WAIVED IN THE FUTURE. OTHERWISE, THE AVERAGE ANNUAL TOTAL RETURNS WITH CDSC AND REINVESTED DISTRIBUTIONS WOULD HAVE BEEN 12.40% AND 6.15%, RESPECTIVELY. 5 [PHOTO] HERCULES INTERNATIONAL FUNDS LLOYD BEAT PACIFIC BASIN INVESTMENT MANAGER VALUE FUND EDINBURGH FUND MANAGERS PLC February 15, 1996 Dear Shareholders: [PHOTO] OVER THE SIX MONTHS ENDED DECEMBER 31, 1995, PACIFIC BASIN VALUE FUND RETURNED 11.21%, assuming DAVID CURRIE distributions were reinvested and not including any PORTFOLIO MANAGER, sales charges. This compares favorably to returns of JAPAN 9.92% for the MSCI Japan Index and 5.67% for the MSCI EDINBURGH FUND Pacific Ex-Japan Index during the same period. The MANAGERS PLC fund's benchmark, the MSCIPacific Index, returned 9.12% over the period. Over the past six months, our [PHOTO] strategy has been to overweight Japan compared to the MSCI Pacific Index, focus on smaller companies, and HELEN FALLOW hedge approximately 40% of the yen into U.S. dollars. PORTFOLIO MANAGER, PACIFIC RIM THE JAPANESE STOCK MARKET, WHILE EXPERIENCING EDINBURGH FUND CONSIDERABLE VOLATILITY, WITNESSED A STRONG RECOVERY MANAGERS PLC DURING THE THIRD QUARTER WHICH CONTINUED INTO THE FOURTH QUARTER. The market rose over 20% in local currency terms from June 30 to September 30, and rose another 10% by the end of December. The catalyst for the turnaround was a sharp decline in the value of the yen, which followed continuing loosening of economic policy by the Japanese authorities and a relaxation of certain overseas investment restrictions -- both of which culminated in reduced interest rates. The weaker yen and lower interest rates contributed to an improvement in investor sentiment and allowed the Japanese stock market to focus on expectations for a further recovery in earnings. During the fourth quarter, an improved outlook for Japan's banking sector, growing confidence that the current economic expansion will continue, and encouraging earnings reports drove markets higher. WE WILL MAINTAIN OUR HEAVY WEIGHTING IN JAPAN GOING FORWARD, as we believe the market remains a good value and expansionary monetary and fiscal policies should lead to a brightening economic picture for the country. Though Prime Minister Murayama resigned the first week of January 1996, we believe politics will have little effect on the market as the current monetary policy should remain in place regardless of the successor. 6 ELSEWHERE IN THE PACIFIC BASIN, SOME LARGER MARKETS PERFORMED WELL WHILE SMALLER MARKETS CONTINUED TO SUFFER. Returns across the region were generally mixed during the third quarter, though the strength of the U.S. dollar resulted in particularly strong performance in Hong Kong. Many of the smaller countries battled with inflationary fears and rapid growth. During the fourth quarter, the Hong Kong market rose 3.8% and Singapore boasted a rally of 9.6%. Thailand and Indonesia both were rewarded for their proactive approach to dealing with economic overheating. MANY PACIFIC BASIN ECONOMIES APPEAR TO BE DEALING EFFECTIVELY WITH THEIR INFLATION PROBLEMS, AND THEIR LONG-TERM FUNDAMENTAL OUTLOOKS REMAIN EXCELLENT. Achieving a slower, more sustainable rate of economic growth, combined with a strong U.S. dollar and lower interest rates worldwide, should improve investor interest in the Pacific Basin as a whole and will likely result in a recovery in some of the region's smaller markets. We thank you for your continued support of the Pacific Basin Value Fund and would be happy to hear your comments or answer any questions you may have. Sincerely, /S/ LLOYD BEAT /S/ DAVID CURRIE /S/ HELEN FALLOW Lloyd Beat David Currie Helen Fallow Investment Manager Portfolio Manager Portfolio Manager * THE MSCI PACIFIC INDEX IS AN UNMANAGED INDEX OF SECURITIES LISTED ON THE STOCK EXCHANGES OF AUSTRALIA, HONG KONG, JAPAN, MALAYSIA, NEW ZEALAND AND SINGAPORE. THE BLENDED INDEX IS AN UNMANAGED MIX OF THE MSCI JAPAN (50%) AND MSCI PACIFIC EX-JAPAN (50%) INDEXES. [GRAPHIC REPRESENTATION OF PIE CHART] COUNTRY ALLOCATION AS OF DECEMBER 31, 1995 Japan 60% South Korea 3% Singapore 4% Malaysia 5% Taiwan 2% Thailand 5% Australia 2% Hong Kong 15% Indonesia 2% Other 2% VALUE OF $10,000 INVESTED [GRAPH] SHARES PURCHASED AFTER JUNE 19, 1995, ARE SUBJECT TO A CONTINGENT DEFERRED SALES CHARGE (CDSC). HAD THIS STRUCTURE BEEN IN EFFECT SINCE THE FUND'S INCEPTION, A $10,000 INVESTMENT MADE ON NOVEMBER 9, 1993, AND REDEEMED ON DECEMBER 31, 1995, INCLUDING REINVESTED DISTRIBUTIONS, WOULD BE WORTH $9,940. IF SHARES WERE PURCHASED BEFORE JUNE 19, 1995 AND HELD THROUGH DECEMBER 31, 1995, WITH DISTRIBUTIONS INVESTED, THE INVESTMENT WOULD BE WORTH $10,140. IN COMPARING A FUND TO INDEXES, KEEP IN MIND THAT INDEXES ARE UNMANAGED, THEIR RETURNS DO NOT REFLECT SALES OR MANAGEMENT FEES, AND THEY ARE NOT OPEN TO INVESTMENT. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. AVERAGE ANNUAL TOTAL RETURNS THROUGH DECEMBER 31, 1995 WITH WITHOUT CDSC CDSC One Year. . . . . . . . . . . . . . . -1.08%. . . . . . . 0.92% Since Inception (11/93 ). . . . . . . -0.28%. . . . . . . 0.65% DURING SOME PERIODS, THE FUND'S MANAGER AND DISTRIBUTOR WAIVED OR ABSORBED FUND EXPENSES WHICH MAY OR MAY NOT BE WAIVED IN THE FUTURE. OTHERWISE, THE AVERAGE ANNUAL TOTAL RETURNS WITH CDSC AND REINVESTED DISTRIBUTIONS WOULD HAVE BEEN -1.59% AND -0.81%, RESPECTIVELY. 7 HERCULES INTERNATIONAL FUNDS LATIN AMERICAN [PHOTO] VALUE FUND MARIA-ELENA CARRION February 15, 1996 Dear Shareholders: PORTFOLIO MANAGER BANKERS TRUST COMPANY THE LATIN AMERICAN VALUE FUND WAS DOWN 1.67% OVER THE SIX-MONTH PERIOD FROM JUNE 30, 1995, TO DECEMBER 31, [PHOTO] 1995, assuming dividends were reinvested and not including any sales charges. This compares to returns EMILY ALEJOS of 0.13% for the Lipper Latin American Average and PORTFOLIO MANAGER 0.64% for the IFC Latin American Investable Index BANKERS TRUST COMPANY during the same period. THESE RELATIVELY MODEST PERFORMANCE NUMBERS DISGUISE THE EXTREME VOLATILITY SEEN IN THE MARKETS DURING THIS TIME PERIOD. The major markets of Argentina, Brazil and Mexico experienced a summer rally that lasted from June until September, at which point investors sold off considerably. After a sharp decline, the markets began an extended rally again in mid-November with prices rising in response to attractive valuations and improving fundamental strengths. These markets saw swings of 34%, 35% and 30% respectively from trough to peak during the six-month period. Currency volatility was also a principal theme as a result of political uncertainties and changing country risk. THE VOLATILITY IN THE MEXICAN PESO OCCURRED AS A RESULT OF THE LACK OF POLICY DIRECTION FROM MEXICO CITY AND CONCERNS ABOUT THE ECONOMIC OUTLOOK. Inflation ticked up, suggesting the need for continued high interest rates and causing decreased estimates for economic growth. Interest rates also remained high in an effort to defend the currency. With the banking system vulnerable and the consumer already overextended, a strategy of tight monetary policy was quite risky, threatening the stability of the private sector. BRAZILIAN MARKET VOLATILITY OCCURRED AS INVESTORS ADJUSTED TO SHARP SWINGS IN ECONOMIC GROWTH AND A SIGNIFICANT INCREASE IN CORPORATE BANKRUPTCIES. The worsening economic outlook, coupled with the lack of progress in political reform, caused a sharp selloff in the market. THE WEAKNESS IN THE COLOMBIAN PESO OCCURRED AS POLITICAL UNCERTAINTY STARTED TO IMPACT THE ECONOMY due to higher interest rates and delayed government spending. The threat of the forced resignation of President Samper has resulted in the Colombian stock market being one of the worst performing Latin American markets for the year. 8 IN ARGENTINA, WE SAW CONTINUED TENSION BETWEEN FINANCE MINISTER CAVALLO AND PRESIDENT MENEM resulting in political paralysis, a general loss of confidence and stalled economic activity. The market managed to end the year with a bang, however, in reaction to convincing evidence that the worst of the political and economic crisis was over. OUR STRATEGY OVER THE SIX-MONTH PERIOD WAS TO UNDERWEIGHT MEXICO AND ARGENTINA RELATIVE TO THE IFC INDEX AND TO HOLD A DEFENSIVE PORTFOLIO, as we believed the short-term risk for the markets was quite high given their valuations and significant political and economic risk across the region. Looking out to the next year or two, however, we expect to see a dramatically improved environment for Latin American stocks given the attractiveness of their relative valuations in global portfolios, the favorable international interest rate environment and the return to economic growth for the major markets. TWO YEARS OF A BEAR MARKET IN LATIN AMERICA HAVE CREATED STRONG OPPORTUNITIES FOR LONG-TERM INVESTORS as we believe that expectations remain quite low and the economic outlook for 1996 is significantly better for the region as a whole. We appreciate your long-term investment perspective for investing in Latin American markets. Sincerely, /S/ MARIA-ELENA CARRION /S/ EMILY ALEJOS Maria-Elena Carrion Emily Alejos Portfolio Manager Portfolio Manager * THE IFC LATIN AMERICA INVESTABLE INDEX IS AN UNMANAGED INDEX OF SECURITIES FROM ARGENTINA, BRAZIL, CHILE, COLOMBIA, MEXICO, PERU AND VENEZUELA. THE INDEX IS LIMITED TO THOSE SECURITIES IN WHICH FOREIGNERS MAY INVEST. [GRAPHIC REPRESENTATION OF PIE CHART] COUNTRY ALLOCATION AS OF DECEMBER 31, 1995 Brazil 29% Argentina 11% Colombia 7% Venezuela 6% Peru 6% Chile 15% Mexico 22% Cash/Equivalents 4% VALUE OF $10,000 INVESTED [GRAPH] SHARES PURCHASED AFTER JUNE 19, 1995, ARE SUBJECT TO A CONTINGENT DEFERRED SALES CHARGE (CDSC). HAD THIS STRUCTURE BEEN IN EFFECT SINCE THE FUND'S INCEPTION, A $10,000 INVESTMENT MADE ON NOVEMBER 9, 1993, AND REDEEMED ON DECEMBER 31, 1995, INCLUDING REINVESTED DISTRIBUTIONS, WOULD BE WORTH $6,880. IF SHARES WERE PURCHASED BEFORE JUNE 19, 1995 AND HELD THROUGH DECEMBER 31, 1995, WITH DISTRIBUTIONS INVESTED, THE INVESTMENT WOULD BE WORTH $7,080. IN COMPARING A FUND TO INDEXES, KEEP IN MIND THAT INDEXES ARE UNMANAGED, THEIR RETURNS DO NOT REFLECT SALES OR MANAGEMENT FEES, AND THEY ARE NOT OPEN TO INVESTMENT. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. AVERAGE ANNUAL TOTAL RETURNS THROUGH DECEMBER 31, 1995 WITH WITHOUT CDSC CDSC One Year. . . . . . . . . . . . . . . -23.77%. . . . . . .-21.77% Since Inception (11/93 ). . . . . . . -16.02%. . . . . . .-14.89% DURING SOME PERIODS, THE FUND'S MANAGER AND DISTRIBUTOR WAIVED OR ABSORBED FUND EXPENSES WHICH MAY OR MAY NOT BE WAIVED IN THE FUTURE. OTHERWISE, THE AVERAGE ANNUAL TOTAL RETURNS WITH CDSC AND REINVESTED DISTRIBUTIONS WOULD HAVE BEEN -24.65% AND -17.34%, RESPECTIVELY. 9 HERCULES INTERNATIONAL FUNDS WORLD BOND FUND [PHOTO] February 15, 1996 Dear Shareholders: DAVID SCOTT PORTFOLIO MANAGER WORLD BOND FUND RETURNED 9.36% FOR THE SIX MONTHS SALOMON BROTHERS ENDED DECEMBER 31, 1995, compared to total returns of ASSET MANAGEMENT LTD. 7.25% for the benchmark Salomon Brothers World Government Bond Index and 6.72% for the Lipper General World Income Funds Average during the same period. The fund's net asset value increased from $9.82 on June 30, 1995, to $10.45 on December 31, 1995, and the fund paid distributions of 28 cents per [PHOTO] share during the six-month period.* DAVID GRIFFITHS THE FUND BENEFITED PRIMARILY FROM ITS VERY LOW PORTFOLIO MANAGER EXPOSURE TO THE JAPANESE BOND MARKET DURING THE PAST SALOMON BROTHERS SIX MONTHS. The third quarter of 1995 was dominated ASSET MANAGEMENT LTD. by Japan's attempts to reflate its economy. Initially, substantial central bank intervention weakened the yen and improved growth expectations. In response, Japanese government bond yields rose and the Nikkei stock index rallied. A number of bank and credit union failures in August, however, underscored the fact that a weaker yen alone may not solve Japan's problems. The fiscal package introduced in September failed to focus on consumer demand and banking problems, and combined with a cut in the discount rate, caused bond yields to decline. During the fourth quarter, these factors conspired to keep Japanese bond yields broadly unchanged in contrast to other major bond markets which posted gains. THE GERMAN BOND MARKET PERFORMED RELATIVELY WELL, THOUGH CONCERNS OVER THE POTENTIAL DILUTION OF THE DEUTSCHE MARK AS EUROPE MOVES TO A SINGLE CURRENCY SEEM TO HAVE PREVENTED SOME OF THE ANTICIPATED GAINS. Shorter-term bonds made progress during the third quarter. With little economic data to rely on, the market focused on weak business confidence surveys and a decline in inflation. This, combined with Deutsche mark strength early in the quarter, caused the Bundesbank to lower its discount rate to 3.5%. In December the discount rate was lowered again to 3%, its lowest level since 1988. Weak consumer demand, falling industrial production and very low inflation provided a positive background for the German bond market. * THIS DIVIDEND WAS CLASSIFIED AS A RETURN OF CAPITAL FOR TAX PURPOSES. BECAUSE IT WAS PAID FROM SOURCES OTHER THAN THE FUND'S NET INVESTMENT INCOME, IT IS NOT TAXABLE AS INCOME. PLEASE CONSULT A TAX ADVISER ON HOW TO REPORT THESE DISTRIBUTIONS ON YOUR TAX FORMS. 10 IN THE UNITED STATES, SIGNS OF A SLOWDOWN IN GROWTH TOWARD THE END OF THE YEAR HAS PROVIDED A POSITIVE BACKDROP FOR THE BOND MARKET. After the Federal Reserve lowered the federal funds rate to 5.75% in July, subsequent reports of stronger-than-expected economic data pushed yields higher. But with inflation pressures abating and expectations (at the time) of a budget resolution, yields dropped to end the third quarter little changed. During the fourth quarter, inflation expectations lessened as leading inflation indicators produced benign readings. This led to another reduction in the federal funds rate in December. The prospect of fiscal restraint has also supported market sentiment, despite the slow progress toward a compromise between Congress and the Clinton Administration. WORLD BOND FUND REMAINS CONCENTRATED IN THE UNITED STATES AND CORE EUROPEAN MARKETS -- PRIMARILY GERMANY -- WHERE ECONOMIC CONDITIONS APPEAR WEAKEST. The fund also continues to be fully hedged back to the U.S. dollar, as we believe it limits the volatility of fund returns and protects U.S. investors from foreign currency losses should the dollar strengthen. We appreciate your investment in the World Bond Fund. Sincerely, /S/ DAVID SCOTT /S/ DAVID GRIFFITHS David Scott David Griffiths Portfolio Manager Portfolio Manager * THE SALOMON WORLD GOVERNMENT BOND INDEX IS AN UNMANAGED INDEX DESIGNED TO TRACK THE MAJOR GOVERNMENT DEBT FROM AUSTRIA, AUSTRALIA, BELGIUM, CANADA, DENMARK, FRANCE, GERMANY, ITALY, JAPAN, NETHERLANDS, SPAIN, SWEDEN, UNITED KINGDOM, AND THE UNITED STATES. [GRAPHIC REPRESENTATION OF PIE CHART] COUNTRY ALLOCATION AS OF DECEMBER 31, 1995 Germany 27% Italy 7% Cash 6% Canada 2% Belgium 2% Spain 17% Austria 12% United States 23% United Kingdom 4% VALUE OF $10,000 INVESTED [GRAPH] SHARES PURCHASED AFTER JUNE 19, 1995, ARE SUBJECT TO A CONTINGENT DEFERRED SALES CHARGE (CDSC). HAD THIS STRUCTURE BEEN IN EFFECT SINCE THE FUND'S INCEPTION, A $10,000 INVESTMENT MADE ON NOVEMBER 9, 1993, AND REDEEMED ON DECEMBER 31, 1995, INCLUDING REINVESTED DISTRIBUTIONS, WOULD BE WORTH $10,829. IF SHARES WERE PURCHASED BEFORE JUNE 19, 1995, AND HELD THROUGH DECEMBER 31, 1995, WITH DISTRIBUTIONS INVESTED, THE INVESTMENT WOULD BE WORTH $11,029. IN COMPARING A FUND TO INDEXES, KEEP IN MIND THAT INDEXES ARE UNMANAGED, THEIR RETURNS DO NOT REFLECT SALES OR MANAGEMENT FEES, AND THEY ARE NOT OPEN TO INVESTMENT. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. AVERAGE ANNUAL TOTAL RETURNS THROUGH DECEMBER 31, 1995 WITH WITHOUT CDSC CDSC One Year. . . . . . . . . . . . . . . 15.04%. . . . . . . 17.04% Since Inception (11/93 ). . . . . . . 3.79%. . . . . . . 4.68% DURING SOME PERIODS, THE FUND'S MANAGER AND DISTRIBUTOR WAIVED OR ABSORBED FUND EXPENSES WHICH MAY OR MAY NOT BE WAIVED IN THE FUTURE. OTHERWISE, THE AVERAGE ANNUAL TOTAL RETURNS WITH CDSC AND REINVESTED DISTRIBUTIONS WOULD HAVE BEEN 14.37% AND 3.22%, RESPECTIVELY. 11 HERCULES INTERNATIONAL FUNDS MONEY MARKET FUND [PHOTO] MARYBETH WHYTE PORTFOLIO MANAGER February 15, 1996 SALOMON BROTHERS ASSET MANAGEMENT INC Dear Shareholders: YIELDS AS OF DECEMBER 31, 1995, THE SEVEN-DAY EFFECTIVE (COMPOUND) YIELD OF THE MONEY MARKET FUND WAS BASED ON THE SEVEN AND 30 4.63% and its 30-day effective yield was 4.72%. DAYS ENDED DECEMBER 31, The fund's average weighted maturity was 17 days. 1995. THE THIRD QUARTER PRODUCED MIXED RESULTS FOR SEVEN-DAY CURRENT . . 4.53% MONEY MARKET SECURITIES. Soft economic data in SEVEN-DAY EFFECTIVE . 4.63% the second quarter had bolstered investors' 30-DAY CURRENT . . . 4.62% expectations for a swift series of interest rate 30-DAY EFFECTIVE . . 4.72% cuts by the Federal Reserve. While there was one rate cut in July, the economic data began to DURING ALL PERIODS, strengthen almost immediately thereafter, PIPER CAPITAL WAIVED resulting in no more policy changes for the rest OR PAID FUND EXPENSES of the quarter. We restructured the Money Market AND/OR PIPER JAFFRAY, Fund in two ways during the quarter. First, we THE FUND'S replaced the portfolio's Treasury bills with DISTRIBUTOR, government agency discount notes to capture a VOLUNTARILY LIMITED yield advantage. Second, we reduced the 12B-1 FEES FOR THE portfolio's average weighted maturity in light of FUND. HAD THESE FEES our reduced expectations for further interest AND EXPENSES NOT BEEN rate cuts. WAIVED, THE FUND'S CURRENT AND EFFECTIVE MONEY MARKET SECURITIES FINISHED THE FOURTH YIELDS WOULD HAVE QUARTER ON A STRONG NOTE AFTER GETTING OFF TO A BEEN 0%. PAST SLOW START. Investors were initially concerned PERFORMANCE DOES NOT that a rebound in the economy would prevent the GUARANTEE FUTURE Federal Reserve from reducing rates. However, RESULTS. EFFECTIVE continued signs of economic weakness caused YIELDS REFLECT THE investors to bid up money market securities in REINVESTMENT OF anticipation of lower interest rates. By DISTRIBUTIONS. December, even without a budget deal in place, the Fed lowered the federal funds rate to 5.5%. Investors finished 1995 confident that the Fed would lower interest rates another 0.25%, which it did in January. We further reduced the average weighted maturity of the fund from 30 days to 17 days by December 31, given the interest rate reduction and a yield advantage in shorter-term securities. The fund remains fully invested in government agency discount notes. We appreciate the opportunity to help you meet your investment goals. Sincerely, /S/ MARYBETH WHYTE Marybeth Whyte Portfolio Manager 12 ------------------------------------------------------------------------ FINANCIAL STATEMENTS STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 1995 (UNAUDITED)
North American Pacific Latin Growth and European Basin American Income Value Value Value Fund Fund Fund Fund - - - - - - ------------------------------------------------------------------------------------------------------------------ ASSETS: Investments in securities, at market value* (note 2) $9,581,198 14,173,663 26,530,108 17,414,100 Cash in bank on demand deposit 70,444 277,093 -- 2,924 Foreign cash in bank on demand deposit 9,845 3,595 72,316 7,516 Receivable for investment securities sold -- 190,270 316,127 -- Receivable for fund shares sold 1,550 600 31,870 6,100 Net unrealized appreciation of forward foreign currency contracts held (notes 2 and 4) -- 121,546 1,560,757 -- Organization costs (note 2) 55,096 55,096 55,096 55,096 Dividends and accrued interest receivable 17,940 73,160 27,315 79,081 - - - - - - ------------------------------------------------------------------------------------------------------------------ Total assets 9,736,073 14,895,023 28,593,589 17,564,817 - - - - - - ------------------------------------------------------------------------------------------------------------------ LIABILITIES: Bank overdraft -- -- 912,491 -- Payable for investment securities purchased 12,768 -- -- 173,233 Payable for fund shares redeemed 49,773 49,010 72,583 224,056 Accrued distribution fee 4,097 6,031 11,459 7,064 Accrued investment management fee 8,283 12,632 23,581 14,819 Accrued expenses and other liabilities 2,626 4,800 41,624 5,894 - - - - - - ------------------------------------------------------------------------------------------------------------------ Total liabilities 77,547 72,473 1,061,738 425,066 - - - - - - ------------------------------------------------------------------------------------------------------------------ Net assets applicable to outstanding capital stock $9,658,526 14,822,550 27,531,851 17,139,751 - - - - - - ------------------------------------------------------------------------------------------------------------------ - - - - - - ------------------------------------------------------------------------------------------------------------------ REPRESENTED BY: Capital stock - 10 billion shares of $.01 par value authorized for each fund; outstanding, 898,125; 1,412,567; 2,778,625 and 2,420,697 shares, respectively $ 8,981 14,126 27,786 24,207 Additional paid-in capital 9,407,433 13,925,867 29,616,917 30,139,150 Accumulated net investment loss (note 2) (447,850) (32,030) (389,891) (130,896) Accumulated net realized loss on investments and foreign currency transactions (514,436) (192,247) (2,991,332) (11,328,016) Unrealized appreciation (depreciation) of investments and on translation of other assets and liabilities in foreign currencies (notes 4 and 7) 1,204,398 1,106,834 1,268,371 (1,564,694) - - - - - - ------------------------------------------------------------------------------------------------------------------ Total - representing net assets applicable to outstanding capital stock $9,658,526 14,822,550 27,531,851 17,139,751 - - - - - - ------------------------------------------------------------------------------------------------------------------ - - - - - - ------------------------------------------------------------------------------------------------------------------ Net asset value per share of outstanding capital stock $ 10.75 10.49 9.91 7.08 - - - - - - ------------------------------------------------------------------------------------------------------------------ - - - - - - ------------------------------------------------------------------------------------------------------------------ *INVESTMENTS IN SECURITIES, AT IDENTIFIED COST $8,376,882 13,188,999 26,819,362 18,977,646 - - - - - - ------------------------------------------------------------------------------------------------------------------ - - - - - - ------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 13 ------------------------------------------------------------------------ FINANCIAL STATEMENTS STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 1995 (UNAUDITED)
World Money Bond Market Fund Fund - - - - - - ---------------------------------------------------------------------------------- ASSETS: - - - - - - ---------------------------------------------------------------------------------- Investments in securities, at market value* (note 2) $7,181,742 1,506,171 Cash in bank on demand deposit 375,614 43,789 Foreign cash in bank on demand deposit 54,594 -- Organization costs (note 2) 55,096 34,656 Unrealized gain on futures contracts (note 7) 16,443 -- Net unrealized appreciation of forward foreign currency contracts held (notes 2 and 4) 10,934 -- Dividends and accrued interest receivable 208,490 -- - - - - - - ---------------------------------------------------------------------------------- Total assets 7,902,913 1,584,616 - - - - - - ---------------------------------------------------------------------------------- LIABILITIES: Payable for fund shares redeemed 15,019 -- Dividends payable to shareholders (note 2) -- 6,080 Accrued distribution fee 2,266 -- Accrued investment management fee 6,842 652 Accrued expenses and other liabilities 1,943 -- - - - - - - ---------------------------------------------------------------------------------- Total liabilities 26,070 6,732 - - - - - - ---------------------------------------------------------------------------------- Net assets applicable to outstanding capital stock $7,876,843 1,577,884 - - - - - - ---------------------------------------------------------------------------------- - - - - - - ---------------------------------------------------------------------------------- REPRESENTED BY: Capital stock - 10 billion and 100 billion shares, respectively, of $.01 par value authorized; outstanding, 754,060 and 1,577,884 shares, respec- tively (note 1) $ 7,541 15,779 Additional paid-in capital 7,867,653 1,562,105 Accumulated net investment loss (note 2) (621,732) -- Accumulated net realized gain on investments and foreign currency transactions 336,158 -- Unrealized appreciation of investments and on translation of other assets and liabilities in foreign currencies (notes 4 and 7) 287,223 -- - - - - - - ---------------------------------------------------------------------------------- Total - representing net assets applicable to outstanding capital stock $7,876,843 1,577,884 - - - - - - ---------------------------------------------------------------------------------- - - - - - - ---------------------------------------------------------------------------------- Net asset value per share of outstanding capital stock $ 10.45 1.00 - - - - - - ---------------------------------------------------------------------------------- - - - - - - ---------------------------------------------------------------------------------- *INVESTMENTS IN SECURITIES, AT IDENTIFIED COST $6,922,273 1,506,171 - - - - - - ---------------------------------------------------------------------------------- - - - - - - ----------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 14 ------------------------------------------------------------------------ FINANCIAL STATEMENTS STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 (UNAUDITED)
North American Pacific Latin Growth and European Basin American Income Value Value Value Fund Fund Fund Fund - - - - - - ------------------------------------------------------------------------------------------------------------- INCOME: Dividends (net of foreign withholding taxes of $2,797; $19,591; $10,986; $8,624, respectively) $ 93,185 130,050 123,968 126,788 Interest (net of foreign withholding taxes of $5,174; $0; $0; $0, respectively) 123,854 3,120 4,511 105,188 - - - - - - ------------------------------------------------------------------------------------------------------------- Total investment income 217,039 133,170 128,479 231,976 - - - - - - ------------------------------------------------------------------------------------------------------------- EXPENSES (NOTE 6): Investment management fee 56,834 82,058 153,223 104,624 Distribution fee 28,417 41,029 76,611 52,312 Custodian, accounting and transfer agent fees 87,404 102,651 115,043 110,977 Audit and legal fees 17,005 20,443 31,637 24,522 Amortization of organization costs 8,996 8,996 8,996 8,996 Directors' fees 1,879 1,879 1,879 1,879 Reports to shareholders 6,497 6,808 9,724 10,268 Registration fees 14,737 14,698 15,887 15,500 Other expenses 7,596 8,486 12,218 11,848 - - - - - - ------------------------------------------------------------------------------------------------------------- Total expenses 229,365 287,048 425,218 340,926 Less expenses waived or absorbed by manager (101,980) (105,316) (81,251) (110,754) Less expenses waived or absorbed by distributor (11,367) (16,411) (30,645) (20,924) Less expenses paid indirectly (2,350) (1,206) (6,877) -- - - - - - - ------------------------------------------------------------------------------------------------------------- Net expenses 113,668 164,115 306,445 209,248 - - - - - - ------------------------------------------------------------------------------------------------------------- Investment income (loss) - net 103,371 (30,945) (177,966) 22,728 - - - - - - ------------------------------------------------------------------------------------------------------------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS AND FOREIGN CURRENCY: Net realized gain (loss) on investments (note 3) 342,129 864,084 (1,072,982) (121,399) Net realized loss on foreign currency transactions (5,571) (229,188) (29,864) (58,735) - - - - - - ------------------------------------------------------------------------------------------------------------- Net realized gain (loss) on investments and foreign currency transactions 336,558 634,896 (1,102,846) (180,134) - - - - - - ------------------------------------------------------------------------------------------------------------- Net change in unrealized appreciation or depreciation of investments and on translation of other assets and liabilities in foreign currencies 699,425 360,219 4,477,297 (215,644) - - - - - - ------------------------------------------------------------------------------------------------------------- Net gain (loss) on investments and foreign currency 1,035,983 995,115 3,374,451 (395,778) - - - - - - ------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations $1,139,354 964,170 3,196,485 (373,050) - - - - - - ------------------------------------------------------------------------------------------------------------- - - - - - - -------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 15 ------------------------------------------------------------------------ FINANCIAL STATEMENTS STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 1995* (UNAUDITED)
World Global Money Bond Short-Term Market Fund Fund Fund - - - - - - ---------------------------------------------------------------------------------------------- INCOME: Interest (net of foreign withholding taxes of $3,694; $0; $0, respectively) $ 338,443 380 47,429 - - - - - - ---------------------------------------------------------------------------------------------- Total investment income 338,443 380 47,429 - - - - - - ---------------------------------------------------------------------------------------------- EXPENSES (NOTE 6): Investment management fee 50,280 131 4,223 Distribution fee 15,084 65 -- Custodian, accounting and transfer agent fees 76,789 30,307 52,352 Audit and legal fees 19,027 1,034 7,425 Amortization of organization costs 8,996 2,982 4,195 Directors' fees 1,879 1,879 1,879 Reports to shareholders 4,878 3,306 3,672 Registration fees 15,778 11,019 10,040 Other expenses 11,552 1,580 6,204 - - - - - - ---------------------------------------------------------------------------------------------- Total expenses 204,263 52,303 89,990 Less expenses waived or absorbed by manager (94,033) (51,424) (81,337) Less expenses waived or absorbed by distributor (10,056) (13) -- Less expense paid indirectly (9,669) (540) (206) - - - - - - ---------------------------------------------------------------------------------------------- Net expenses 90,505 326 8,447 - - - - - - ---------------------------------------------------------------------------------------------- Investment income - net 247,938 54 38,982 - - - - - - ---------------------------------------------------------------------------------------------- REALIZED AND UNREALIZED GAINS ON INVESTMENTS AND FOREIGN CURRENCY: Net realized gain on investments (note 3) 256,488 -- -- Net realized gain on foreign currency transactions 388,455 -- -- Net realized gain on futures contracts 53,941 -- -- - - - - - - ---------------------------------------------------------------------------------------------- Net realized gain on investments and foreign currency transactions 698,884 -- -- - - - - - - ---------------------------------------------------------------------------------------------- Net change in unrealized appreciation or depreciation of investments and on translation of other assets and liabilities in foreign currencies (103,753) -- -- - - - - - - ---------------------------------------------------------------------------------------------- Net gain on investments and foreign currency 595,131 -- -- - - - - - - ---------------------------------------------------------------------------------------------- Net increase in net assets resulting from operations $ 843,069 54 38,982 - - - - - - ---------------------------------------------------------------------------------------------- - - - - - - ----------------------------------------------------------------------------------------------
*GLOBAL SHORT-TERM FUND WAS LIQUIDATED ON OCTOBER 20, 1995. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 16 ------------------------------------------------------------------------ FINANCIAL STATEMENTS STATEMENTS OF CHANGES IN NET ASSETS
North American Growth and Income Fund European Value Fund --------------------------- --------------------------- Six Months Six Months Ended Year Ended Year 12/31/95 Ended 12/31/95 Ended (Unaudited) 6/30/95 (Unaudited) 6/30/95 - - - - - - ------------------------------------------------------------------------------------------------------------------ OPERATIONS: Investment income (loss) - net $ 103,371 294,685 (30,945) 201,799 Net realized gain (loss) on investments and foreign currency transactions 336,558 (1,392,866) 634,896 828,484 Net change in unrealized appreciation or depreciation of investments and on translation of assets and liabilities in foreign currencies 699,425 1,612,010 360,219 1,175,631 - - - - - - ------------------------------------------------------------------------------------------------------------------ Net increase in net assets resulting from operations 1,139,354 513,829 964,170 2,205,914 - - - - - - ------------------------------------------------------------------------------------------------------------------ DISTRIBUTIONS TO SHAREHOLDERS: From investment income - net -- (74,603) (192,130) (41,687) In excess of investment income - net (157,553) -- (32,030) -- From net realized gains -- -- (1,431,151) (112,779) - - - - - - ------------------------------------------------------------------------------------------------------------------ Total distributions (157,553) (74,603) (1,655,311) (154,466) - - - - - - ------------------------------------------------------------------------------------------------------------------ CAPITAL SHARE TRANSACTIONS (NOTE 5): Proceeds from shares sold 482,341 2,581,949 1,832,232 4,213,199 Reinvestment of distributions 153,043 72,165 1,607,628 148,816 Payments for shares redeemed (5,176,079) (6,731,426) (5,446,425) (5,467,416) - - - - - - ------------------------------------------------------------------------------------------------------------------ Decrease in net assets from capital share transactions (4,540,695) (4,077,312) (2,006,565) (1,105,401) - - - - - - ------------------------------------------------------------------------------------------------------------------ Total increase (decrease) in net assets (3,558,894) (3,638,086) (2,697,706) 946,047 - - - - - - ------------------------------------------------------------------------------------------------------------------ Net assets at beginning of period 13,217,420 16,855,506 17,520,256 16,574,209 - - - - - - ------------------------------------------------------------------------------------------------------------------ Net assets at end of period $ 9,658,526 13,217,420 14,822,550 17,520,256 - - - - - - ------------------------------------------------------------------------------------------------------------------ - - - - - - ------------------------------------------------------------------------------------------------------------------ Undistributed net investment income (accumulated net investment loss) $ (447,850) (393,668) (32,030) 223,075 - - - - - - ------------------------------------------------------------------------------------------------------------------ - - - - - - ------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 17 ------------------------------------------------------------------------ FINANCIAL STATEMENTS STATEMENTS OF CHANGES IN NET ASSETS
Pacific Basin Value Fund Latin American Value Fund ---------------------------- ---------------------------- Six Months Six Months Ended Ended 12/31/95 Year 12/31/95 Year (Unaudited) Ended 6/30/95 (Unaudited) Ended 6/30/95 - - - - - - -------------------------------------------------------------------------------------------------------------------- OPERATIONS: Investment income (loss) - net $ (177,966) (407,188) 22,728 (8,834) Net realized loss on investments and foreign currency transactions (1,102,846) (1,463,135) (180,134) (9,024,392) Net change in unrealized appreciation or depreciation of investments and on translation of assets and liabilities in foreign currencies 4,477,297 (4,415,354) (215,644) 2,849,640 - - - - - - -------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 3,196,485 (6,285,677) (373,050) (6,183,586) - - - - - - -------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS: From net realized gains -- (428,688) -- -- In excess of net realized gains (336,110) -- -- -- - - - - - - -------------------------------------------------------------------------------------------------------------------- Total distributions (336,110) (428,688) -- -- - - - - - - -------------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS (NOTE 5): Proceeds from shares sold 3,140,643 8,508,368 2,496,793 11,516,745 Reinvestment of distributions 332,042 418,184 565 -- Payments for shares redeemed (10,328,431) (11,512,632) (7,608,589) (10,459,488) - - - - - - -------------------------------------------------------------------------------------------------------------------- Increase (decrease) in net assets from capital share transactions (6,855,746) (2,586,080) (5,111,231) 1,057,257 - - - - - - -------------------------------------------------------------------------------------------------------------------- Total decrease in net assets (3,995,371) (9,300,445) (5,484,281) (5,126,329) - - - - - - -------------------------------------------------------------------------------------------------------------------- Net assets at beginning of period 31,527,222 40,827,667 22,624,032 27,750,361 - - - - - - -------------------------------------------------------------------------------------------------------------------- Net assets at end of period $27,531,851 31,527,222 17,139,751 22,624,032 - - - - - - -------------------------------------------------------------------------------------------------------------------- - - - - - - -------------------------------------------------------------------------------------------------------------------- Accumulated net investment loss $ (389,891) (211,925) (130,896) (153,624) - - - - - - -------------------------------------------------------------------------------------------------------------------- - - - - - - --------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 18 ------------------------------------------------------------------------ FINANCIAL STATEMENTS STATEMENTS OF CHANGES IN NET ASSETS
World Bond Fund Global Short-Term Fund Money Market Fund ---------------------------- ------------------------- --------------------------- Six Months Period Six Months Ended Year Ended Year Ended Period from 12/31/95 Ended 10/20/95* Ended 12/31/95 12/13/94** (Unaudited) 6/30/95 (Unaudited) 6/30/95 (Unaudited) to 6/30/95 - - - - - - -------------------------------------------------------------------------------------------------------------------------------- OPERATIONS: Investment income - net $ 247,938 1,207,705 54 30,540 38,982 17,069 Net realized gain (loss) on investments and foreign currency transactions 698,884 (1,217,822) -- (34,724) -- -- Net change in unrealized appreciation or depreciation of investments and on translation of other assets and liabilities in foreign currencies (103,753) 1,524,955 -- 19,538 -- -- - - - - - - -------------------------------------------------------------------------------------------------------------------------------- Net increase in net assets resulting from operations 843,069 1,514,838 54 15,354 38,982 17,069 - - - - - - -------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS: From investment income - net -- (249,747) (3,794) (12,663) (38,982) (17,069) In excess of investment income - net -- -- (2,722) -- -- -- Tax return of capital (237,164) (152,655) -- -- -- -- - - - - - - -------------------------------------------------------------------------------------------------------------------------------- Total distributions (237,164) (402,402) (6,516) (12,663) (38,982) (17,069) - - - - - - -------------------------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS (NOTE 5): Proceeds from shares sold 647,179 1,176,394 -- 655,611 2,955,293 2,793,880 Reinvestment of distributions 215,588 444,626 6,516 12,864 25,138 14,739 Payments for shares redeemed (7,368,280) (21,316,988) (212,160) (2,501,571) (2,632,486) (1,579,180) - - - - - - -------------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in net assets from capital share transactions (6,505,513) (19,695,968) (205,644) (1,833,096) 347,945 1,229,439 - - - - - - -------------------------------------------------------------------------------------------------------------------------------- Total increase (decrease) in net assets (5,899,608) (18,583,532) (212,106) (1,830,405) 347,945 1,229,439 - - - - - - -------------------------------------------------------------------------------------------------------------------------------- Net assets at beginning of period (note 1) 13,776,451 32,359,983 212,106 2,042,511 1,229,939 500 - - - - - - -------------------------------------------------------------------------------------------------------------------------------- Net assets at end of period $ 7,876,843 13,776,451 -- 212,106 1,577,884 1,229,939 - - - - - - -------------------------------------------------------------------------------------------------------------------------------- - - - - - - -------------------------------------------------------------------------------------------------------------------------------- Undistributed net investment income (accumulated net investment loss) $ (621,732) (632,506) -- 3,740 -- -- - - - - - - -------------------------------------------------------------------------------------------------------------------------------- - - - - - - --------------------------------------------------------------------------------------------------------------------------------
* GLOBAL SHORT-TERM FUND WAS LIQUIDATED ON OCTOBER 20, 1995. ** COMMENCEMENT OF OPERATIONS. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 19 --------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS 1 ORGANIZATION Hercules Funds Inc. (the company) was incorporated on July 29, 1993, and is registered under the Investment Company Act of 1940 (as amended) as a non-diversified, open-end management investment company, the shares of which are comprised of a series of six funds: North American Growth and Income Fund, European Value Fund, Pacific Basin Value Fund, Latin American Value Fund, World Bond Fund and Money Market Fund (the funds). The company's articles of incorporation permit the board of directors to create additional funds in the future. On November 9, 1993 (commencement of operations) the registration statement for the company's shares became effective under the Securities Act of 1933. The only transaction of the funds (except Money Market Fund), prior to commencement of operations was the initial sale on October 12, 1993, of 1,667 shares of each fund at $10 per share to Hercules International Management LLC. On December 13, 1994, the Money Market Fund commenced operations. The only transaction of the fund prior to commencement of operations was the sale of 500 shares at $1 per share to, Hercules International Management LLC. On July 18, 1995, shareholders approved a change in the funds' investment manager to Piper Capital Management Incorporated, a subsidiary of Piper Jaffray Companies Inc. Global Short-Term Fund ceased operations and liquidated all its net assets on October 20, 1995. 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Significant accounting policies of the funds are as follows: INVESTMENTS IN SECURITIES Securities traded on U.S. or foreign securities exchanges or included in a national market system are valued at the last quoted sales price; securities for which there were no sales reported are valued at the mean between the bid and ask prices; exchange listed options are valued at the last sales price and futures contracts are valued at the last settlement price; bonds and other securities for which market quotations are not readily available are valued at fair value according to methods selected in good faith by the board of directors. Securities with maturities of 60 days or less when acquired or subsequently within 60 days of maturity are valued at amortized cost, which approximates market value. Pursuant to Rule 2a-7 of the Investment Company Act of 1940 (as amended), securities in the Money Market Fund are valued at amortized cost, which approximates market value, in order to maintain a constant net asset value of $1 per share. Securities transactions are accounted for on the date the securities are purchased or sold. Realized gains and losses are calculated on an identified cost basis. Dividend income is recognized on the ex-dividend date or upon receipt of ex-dividend notification in the case of certain foreign securities. Interest income, including level yield amortization of premium and discount, is accrued daily. OPTION TRANSACTIONS In order to produce incremental earnings, protect gains, and facilitate buying and selling of securities for investment purposes, the funds (except Money Market Fund) may buy and sell put and call options and write covered call and cash-secured put options on securities, stock and interest rate indexes and foreign currencies. The risk in writing a call option is that the fund gives up the opportunity of profit if the market price of the security, index or currency increases. The risk in writing a put option is that the fund may incur a loss if the market price of the security, index or currency 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 sale of a written call option, the purchase cost of 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 from changes in the market, the funds (except Money Market Fund) may buy and sell financial futures contracts and related options. Risks of entering into futures contracts and related options include the possibility that 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 initial margin, either cash or securities in an amount 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 funds recognize a realized gain or loss when the contract is closed or expires. 20 --------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS FEDERAL TAXES Each fund within the company is treated as a separate entity for federal income tax purposes. Each fund's policy is to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its taxable income to shareholders. Therefore, no income or excise tax provision is required. Net investment income and net realized gains (losses) 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, "mark-to-market" of certain passive foreign investment companies (PFICs), foreign currency and futures positions 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 were recorded by the funds. DISTRIBUTIONS TO SHAREHOLDERS Dividends to shareholders from net investment income for World Bond Fund are declared and paid quarterly. For Money Market Fund, distributions to shareholders from net investment income are declared daily and paid monthly. For North American Growth and Income, European Value, Pacific Basin Value and Latin American Value Funds, dividends from net investment income are declared and paid annually. Distributions from net realized gains, if any, will be made on an annual basis for all funds. Shareholders may elect to have distributions paid in cash or reinvested at net asset value. ORGANIZATION COSTS Organization costs were incurred in connection with the start up and initial registration of the funds. These costs are being amortized over 60 months on a straight-line basis. If any or all of the shares representing initial capital of the funds are redeemed prior to the end of the amortization period, the proceeds will be reduced by the unamortized organization cost balance in the proportion as the number of shares redeemed bears to the number of initial shares outstanding immediately preceding the redemption. FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS Securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the daily closing rate of exchange. Foreign currency amounts related to the purchase or sale of securities and income and expense are translated at the exchange rate on the transaction date. The funds do not separately identify that portion of realized and unrealized gain (loss) arising from changes in the exchange rates from the portion arising from changes in the market value of investments. The funds (except Money Market Fund) also may enter into forward foreign currency exchange contracts for transaction or position hedging purposes, and in the case of World Bond Fund for the purpose of enhancing portfolio returns. The net U.S. dollar value of foreign currency underlying all contractual commitments held by the funds and the resulting unrealized appreciation or depreciation, are determined using foreign currency exchange rates from independent pricing sources. The funds are subject to the credit risk that the counterparty will not complete the obligations of the contract. 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 and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income, expenses, gains and losses during the reporting period. Actual results could differ from those estimates. 21 --------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS 3 INVESTMENT SECURITY TRANSACTIONS (UNAUDITED) Cost of purchases and proceeds from sales of securities, other than temporary investments in short-term securities (for all funds except Money Market Fund) for the six months ended December 31, 1995, (period from July 1, 1995 to October 20, 1995 for Global Short-Term Fund) were as follows:
NORTH AMERICAN GROWTH PACIFIC LATIN GLOBAL AND EUROPEAN BASIN AMERICAN WORLD SHORT- MONEY INCOME VALUE VALUE VALUE BOND TERM MARKET FUND FUND FUND FUND FUND FUND FUND - - - - - - ---------------------------------------------------------------------------------------------------------------- Purchases $ 1,750,211 8,766,242 7,178,454 11,733,661 14,311,977 -- 8,979,583 Sales proceeds $ 5,724,065 13,077,101 13,629,199 15,031,432 21,031,999 -- 8,821,971
For the period from July 1, 1995 to December 31, 1995, brokerage commissions paid to affiliated broker-dealers amounted to $6,730, $4,860, $10,486 and $1,458 for the North American Growth and Income Fund, European Value Fund, Pacific Basin Value Fund and Latin American Value Fund, respectively. 4 FORWARD FOREIGN CURRENCY CONTRACTS (UNAUDITED) On December 31, 1995, the European Value Fund, Pacific Basin Value Fund and World Bond Fund had open foreign currency exchange contracts which obligate the funds to deliver or receive foreign currencies at specified future dates. The unrealized appreciation (depreciation) on these contracts is included in the accompanying financial statements. The terms of the open contracts are as follows:
U.S. $ U.S. $ SETTLEMENT CURRENCY TO BE VALUE AS OF CURRENCY TO BE VALUE AS OF APPRECIATION FUND DATE DELIVERED 12/31/95 RECEIVED 12/31/95 (DEPRECIATION) - - - - - - ---------------------------------------------------------------------------------------------------------- EUROPEAN 15-Feb-96 3,510,500DEM $2,448,014 2,500,000USD $2,500,000 $ 51,986 VALUE FUND 22-Feb-96 2,841,133ECU 3,625,334 3,694,894USD 3,694,894 69,560 - - - - - - ---------------------------------------------------------------------------------------------------------- $6,073,348 $6,194,894 $ 121,546 - - - - - - ---------------------------------------------------------------------------------------------------------- - - - - - - ---------------------------------------------------------------------------------------------------------- PACIFIC BASIN 5-Jan-96 32,719,124JPY $ 316,127 317,507USD $ 317,507 $ 1,380 VALUE FUND 22-May-96 376,200,000JPY 3,710,547 4,500,000USD 4,500,000 789,453 22-May-96 378,180,000JPY 3,730,076 4,500,000USD 4,500,000 769,924 - - - - - - ---------------------------------------------------------------------------------------------------------- $7,756,750 $9,317,507 $1,560,757 - - - - - - ---------------------------------------------------------------------------------------------------------- - - - - - - ---------------------------------------------------------------------------------------------------------- WORLD BOND 22-Jan-96 4,449,318BEF $ 150,991 151,337USD $ 151,337 $ 346 FUND 22-Jan-96 1,222,089DEM 851,276 862,673USD 862,673 11,397 22-Jan-96 449,613USD 449,613 647,443DEM 450,993 1,380 4-Mar-96 885,595USD 885,595 1,274,371DEM 889,551 3,956 4-Mar-96 150,046,521ESP 1,225,570 1,215,345USD 1,215,345 (10,225) 4-Mar-96 768,624GBP 1,189,430 1,177,147USD 1,177,147 (12,283) 4-Mar-96 770,635USD 770,636 503,026GBP 778,422 7,786 3-Apr-96 182,563CAD 133,800 134,494USD 134,494 694 3-Apr-96 836,600DEM 583,973 584,545USD 584,545 572 3-Apr-96 4,276,407DEM 2,985,067 2,992,378USD 2,992,378 7,311 - - - - - - ---------------------------------------------------------------------------------------------------------- $9,225,951 $9,236,885 $ 10,934 - - - - - - ---------------------------------------------------------------------------------------------------------- - - - - - - ----------------------------------------------------------------------------------------------------------
BEF - Belgian Franc ESP - Spanish Peseta CAD - Canadian Dollar GBP - British Pound DEM - Deutschemark JPY - Japanese Yen ECU - European Currency Unit USD - United States Dollar 22 --------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS 5 CAPITAL SHARE TRANSACTIONS Transactions in shares of each fund for the six months ended December 31, 1995 (period from July 1, 1995 to October 20, 1995 for Global Short-Term Fund) (unaudited) were as follows:
NORTH AMERICAN GROWTH PACIFIC LATIN GLOBAL AND EUROPEAN BASIN AMERICAN WORLD SHORT- MONEY INCOME VALUE VALUE VALUE BOND TERM MARKET FUND FUND FUND FUND FUND FUND FUND - - - - - - --------------------------------------------------------------------------------------------------------------- Sold 45,918 161,499 324,986 351,638 63,201 -- 2,955,293 Distribution Reinvestment 14,343 153,763 34,624 80 21,167 1,061 25,138 Redeemed (494,897) (481,482) (1,076,754) (1,071,368) (732,881) (22,262) (2,632,486) - - - - - - --------------------------------------------------------------------------------------------------------------- Increase (Decrease) (434,636) (166,220) (717,144) (719,650) (648,513) (21,201) 347,945 - - - - - - --------------------------------------------------------------------------------------------------------------- - - - - - - ---------------------------------------------------------------------------------------------------------------
Transactions in shares of each fund for the year ended June 30, 1995 (period from December 13, 1994 to June 30, 1995 for the Money Market Fund) were as follows: - - - - - - --------------------------------------------------------------------------------------------------------------- Sold 268,278 399,899 832,267 1,321,613 124,891 66,680 2,793,880 Distribution Reinvestment 8,127 14,618 42,071 0 46,856 1,306 14,739 Redeemed (725,259) (515,858) (1,201,579) (1,216,683) (2,231,574) (252,893) (1,579,180) - - - - - - --------------------------------------------------------------------------------------------------------------- Increase (Decrease) (448,854) (101,341) (327,241) 104,930 (2,059,827) (184,907) 1,229,439 - - - - - - --------------------------------------------------------------------------------------------------------------- - - - - - - ---------------------------------------------------------------------------------------------------------------
6 FEES AND EXPENSES The company was managed by Hercules International Management LLC (the manager), a limited liability company organized under the laws of Delaware on July 26, 1993. On July 18, 1995, shareholders approved a change in the funds investment manager to Piper Capital Management Incorporated, a subsidiary of Piper Jaffray Companies Inc. The fees paid by the funds to Piper Capital Management Incorporated will be at the same rates as those previously paid to Hercules International Management LLC as described below. Each fund paid the manager a fee for managing its investment portfolio. Management fees for each fund (except for Global Short-Term Fund and Money Market Fund) were paid monthly at an annual rate of 1.00% of average daily net assets. The fee for the Global Short-Term Fund and Money Market Fund were paid monthly at an annual rate of .50% of average daily net assets. The manager entered into sub-advisory agreements pursuant to which the subadvisers, subject to the supervision of the manager, are responsible for certain investment functions, including researching and developing an overall investment plan and making and implementing investment decisions regarding assets of the respective fund. For its services, the subadvisers are paid by the manager over the same time periods and calculated in the same manner as the investment advisory fee of the applicable fund, 0.50% of average daily net assets of each fund except Global Short-Term and Money Market Funds, which are paid a fee of 0.25% of average daily net assets.
FUND SUBADVISER(S) - - - - - - ----------------------------------------------- ------------------------------------------ NORTH AMERICAN GROWTH AND INCOME FUND Piper Capital Management Incorporated* Acci Worldwide, S.A. de C.V.* AGF Investment Advisors, Inc.* EUROPEAN VALUE FUND Pictet International Management Limited PACIFIC BASIN VALUE FUND Edinburgh Fund Managers plc LATIN AMERICAN VALUE FUND Bankers Trust Company WORLD BOND FUND Salomon Brothers Asset Management Limited GLOBAL SHORT-TERM FUND Salomon Brothers Asset Management Limited MONEY MARKET FUND Salomon Brothers Asset Management Inc
*TOTAL FEE PAID TO SUBADVISERS SHARED EQUALLY. 23 --------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS Piper Jaffray Inc. (the distributor), a wholly-owned subsidiary of Piper Jaffray Companies Inc. and an affiliate of the manager, serves as the distributor of the funds' shares. For its services as distributor, which include distributing shares of the funds and for sales-related expenses, the distributor is entitled to reimbursement each month for its actual expenses incurred in the distribution and promotion of each fund's shares pursuant to a Rule 12b-1 Distribution Plan adopted by each of the funds. Reimbursement to the distributor is computed separately for each fund and may not exceed 0.70% per annum of the average daily net assets of North American Growth and Income, European Value, Pacific Basin Value and Latin American Value Funds, 0.50% with respect to average daily net assets of World Bond Fund and 0.30% with respect to average daily net assets of Global Short-Term Fund. For the year ended June 30, 1996, Piper Jaffray Inc. voluntarily agreed to limit the reimbursement fee to an annual rate of 0.50% for North American Growth and Income, European Value, Pacific Basin Value, and Latin American Value Funds, 0.30% for World Bond Fund and 0.25% for Global Short-Term Fund. Effective June 19, 1995, the company's board of directors discontinued payments under the Rule 12b-1 Distribution Plan for the Money Market Fund. In addition to the fees above, the funds are responsible for paying most other operating expenses, including directors' fees, custodian fees, registration fees, printing of shareholder reports, legal and audit services, organization costs, taxes, interest and other miscellaneous expenses. For the period, the manager and distributor have voluntarily limited total expenses on a per annum basis to 2.00% of average daily net assets of North American Growth and Income, European Value, Pacific Basin Value and Latin American Value Funds, 1.80% of average daily net assets of World Bond Fund, 1.25% of average daily net assets of Global Short-Term Fund, and 1.00% of average daily net assets of Money Market Fund. 7 FUTURES CONTRACTS (UNAUDITED) The funds pledge securities or cash when making initial margin deposits on futures contracts. On December 31, 1995, the World Bond Fund had the following open futures contracts:
COLLATERAL PLEDGED TO COVER MARKET LONG (L) NUMBER INITIAL VALUE OF NET COUNTRY OF OR TYPE OF CONTRACT OF MARGIN OPEN UNREALIZED DENOMINATION SHORT (S) AND MATURITY CONTRACTS DEPOSITS CONTRACTS GAIN LIFFE German WORLD BOND Bund Futures FUND Germany L September 1995 2 $11,331 $345,771 $ 2,869 LIFFE BTP futures Italy L March 1996 3 6,261 408,060 13,574 $17,592 $753,831 $16,443
8 CAPITAL LOSS CARRYOVERS For federal income tax purposes, North American Growth and Income Fund, Pacific Basin Value Fund, Latin American Value Fund and World Bond Fund had capital loss carryovers at June 30, 1995 of $838,953; $1,546,411; $10,643,620 and $338,380, respectively, which, if not offset by subsequent capital gains will expire in 2002 through 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 expire. 24 --------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS 9 FINANCIAL HIGHLIGHTS Per-share data for a share of capital stock outstanding throughout each period and selected information for each period are as follows:
NORTH AMERICAN GROWTH AND INCOME FUND --------------------------------------------- SIX MONTHS ENDED YEAR PERIOD FROM 12/31/95 ENDED 11/9/93* TO (UNAUDITED) 6/30/95 6/30/94 - - - - - - ------------------------------------------------------------------------------------------------- PER SHARE DATA Net asset value, beginning of period.............. $ 9.92 9.46 10.00 - - - - - - ------------------------------------------------------------------------------------------------- Operations: Investment income - net**....................... 0.09 0.17 0.04 Net realized and unrealized gains (losses)...... 0.92 0.33 (0.58) - - - - - - ------------------------------------------------------------------------------------------------- Total from operations............................. 1.01 0.50 (0.54) - - - - - - ------------------------------------------------------------------------------------------------- Distributions: From investment income - net.................... -- (0.04) -- In excess of investment income - net............ (0.18) -- -- - - - - - - ------------------------------------------------------------------------------------------------- Total distributions............................... (0.18) (0.04) -- - - - - - - ------------------------------------------------------------------------------------------------- Net asset value, end of period.................... $10.75 9.92 9.46 - - - - - - ------------------------------------------------------------------------------------------------- - - - - - - ------------------------------------------------------------------------------------------------- SELECTED INFORMATION Total return***................................... 10.15% 5.36% (5.40%) Net assets, end of period (000s omitted).......... $9,659 13,217 16,856 Ratio of expenses to average daily net assets++... 2.04%+ TRIANGLE 2.00% 2.00%+ Ratio of net investment income to average daily net assets++.................................... 1.82%+ 1.84% 0.87%+ Portfolio turnover rate (excluding short-term securities)..................................... 18% 52% 23%
* COMMENCEMENT OF OPERATIONS ** BASED ON THE WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING DURING THE PERIOD. *** TOTAL RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE DURING THE PERIOD AND ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS. + ADJUSTED TO AN ANNUAL BASIS. ++ VARIOUS PORTFOLIO FEES AND EXPENSES WERE VOLUNTARILY WAIVED OR ABSORBED BY THE MANAGER AND DISTRIBUTOR. HAD THE FUNDS PAID ALL EXPENSES THE ANNUALIZED RATIOS OF EXPENSES AND NET INVESTMENT INCOME (LOSS) TO AVERAGE DAILY NET ASSETS WOULD HAVE BEEN AS FOLLOWS:
SIX MONTHS ENDED YEAR PERIOD FROM 12/31/95 ENDED 11/9/93* TO (UNAUDITED) 6/30/95 6/30/94 ------------------------------------------- 4.04%/(0.18%) 3.39%/0.45% 3.41%/(0.54%)
TRIANGLE FOR THE SIX MONTHS ENDED 12/31/95, THE RATIO OF EXPENSES TO AVERAGE DAILY NET ASSET INCLUDES EXPENSES PAID INDIRECTLY BY THE FUND. PRIOR PERIOD EXPENSE RATIOS HAVE NOT BEEN ADJUSTED. 25 --------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS 9 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:
EUROPEAN VALUE FUND --------------------------------------------- SIX MONTHS ENDED YEAR PERIOD FROM 12/31/95 ENDED 11/9/93* TO (UNAUDITED) 6/30/95 6/30/94 - - - - - - ------------------------------------------------------------------------------------------------- PER SHARE DATA Net asset value, beginning of period.............. $ 11.10 9.86 10.00 - - - - - - ------------------------------------------------------------------------------------------------- Operations: Investment income (loss) - net**................ (0.02) 0.12 0.02 Net realized and unrealized gains (losses)...... 0.66 1.21 (0.16) - - - - - - ------------------------------------------------------------------------------------------------- Total from operations............................. 0.64 1.33 (0.14) - - - - - - ------------------------------------------------------------------------------------------------- Distributions: From investment income - net.................... (0.15) (0.03) -- In excess of investment income-net.............. (0.02) -- -- From net realized gains......................... (1.08) (0.06) -- - - - - - - ------------------------------------------------------------------------------------------------- Total distributions............................... (1.25) (0.09) -- - - - - - - ------------------------------------------------------------------------------------------------- Net asset value, end of period.................... $ 10.49 11.10 9.86 - - - - - - ------------------------------------------------------------------------------------------------- - - - - - - ------------------------------------------------------------------------------------------------- SELECTED INFORMATION Total return***................................... 5.82% 13.52% (1.40%) Net assets, end of period (000s omitted).......... $14,823 17,520 16,574 Ratio of expenses to average daily net assets++... 2.02%+ TRIANGLE 2.00% 2.00%+ Ratio of net investment income (loss) to average daily net assets++.............................. 0.38%+ 1.10% 0.47%+ Portfolio turnover rate (excluding short-term securities)..................................... 58% 131% 60%
* COMMENCEMENT OF OPERATIONS ** BASED ON THE WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING DURING THE PERIOD. *** TOTAL RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE DURING THE PERIOD AND ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS. + ADJUSTED TO AN ANNUAL BASIS. ++ VARIOUS PORTFOLIO FEES AND EXPENSES WERE VOLUNTARILY WAIVED OR ABSORBED BY THE MANAGER AND DISTRIBUTOR. HAD THE FUNDS PAID ALL EXPENSES THE ANNUALIZED RATIOS OF EXPENSES AND NET INVESTMENT (LOSS) TO AVERAGE DAILY NET ASSETS WOULD HAVE BEEN AS FOLLOWS:
SIX MONTHS ENDED YEAR PERIOD FROM 12/31/95 ENDED 11/9/93* TO (UNAUDITED) 6/30/95 6/30/94 --------------------------------------------- 3.51%/(1.87%) 3.21%/(0.11%) 3.25%/(0.78%)
TRIANGLE FOR THE SIX MONTHS ENDED 12/31/95, THE RATIO OF EXPENSES TO AVERAGE DAILY NET ASSETS INCLUDES EXPENSES PAID INDIRECTLY BY THE FUND. PRIOR PERIOD EXPENSE RATIOS HAVE NOT BEEN ADJUSTED. 26 --------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS 9 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:
PACIFIC BASIN VALUE FUND --------------------------------------------- SIX MONTHS ENDED YEAR PERIOD FROM 12/31/95 ENDED 11/9/93* TO (UNAUDITED) 6/30/95 6/30/94 - - - - - - ------------------------------------------------------------------------------------------------- PER SHARE DATA Net asset value, beginning of period.............. $ 9.02 10.68 10.00 - - - - - - ------------------------------------------------------------------------------------------------- Operations: Investment income (loss) - net**................ (0.06) (0.10) (0.04) Net realized and unrealized gains (losses)...... 1.07 (1.45) 0.72 - - - - - - ------------------------------------------------------------------------------------------------- Total from operations............................. 1.01 (1.55) 0.68 - - - - - - ------------------------------------------------------------------------------------------------- Distributions: From net realized gains......................... -- (0.11) -- In excess of net realized gains................. (0.12) -- -- - - - - - - ------------------------------------------------------------------------------------------------- Total distributions............................... (0.12) (0.11) -- - - - - - - ------------------------------------------------------------------------------------------------- Net asset value, end of period.................... $ 9.91 9.02 10.68 - - - - - - ------------------------------------------------------------------------------------------------- - - - - - - ------------------------------------------------------------------------------------------------- SELECTED INFORMATION Total return***................................... 11.21% (14.63%) 6.80% Net assets, end of period (000s omitted).......... $27,532 31,527 40,828 Ratio of expenses to average daily net assets++... 2.05%+ TRIANGLE 2.00% 2.00%+ Ratio of net investment loss to average daily net assets++........................................ (1.16)%+ (1.06)% (0.96%)+ Portfolio turnover rate (excluding short-term securities)..................................... 24% 68% 39%
* COMMENCEMENT OF OPERATIONS ** BASED ON THE WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING DURING THE PERIOD. *** TOTAL RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE DURING THE PERIOD AND ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS. + ADJUSTED TO AN ANNUAL BASIS. ++ VARIOUS PORTFOLIO FEES AND EXPENSES WERE VOLUNTARILY WAIVED OR ABSORBED BY THE MANAGER AND DISTRIBUTOR. HAD THE FUNDS PAID ALL EXPENSES THE ANNUALIZED RATIOS OF EXPENSES AND NET INVESTMENT (LOSS) TO AVERAGE DAILY NET ASSETS WOULD HAVE BEEN AS FOLLOWS:
SIX MONTHS ENDED YEAR PERIOD FROM 12/31/95 ENDED 11/9/93* TO (UNAUDITED) 6/30/95 6/30/94 --------------------------------------------- 2.78%/(1.89%) 2.53%/(1.59%) 2.36%/(1.32%)
TRIANGLE FOR THE SIX MONTHS ENDED 12/31/95, THE RATIO OF EXPENSES TO AVERAGE DAILY NET ASSETS INCLUDES EXPENSES PAID INDIRECTLY BY THE FUND. PRIOR PERIOD EXPENSE RATIOS HAVE NOT BEEN ADJUSTED. 27 --------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS 9 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:
LATIN AMERICAN VALUE FUND --------------------------------------------- SIX MONTHS ENDED YEAR PERIOD FROM 12/31/95 ENDED 11/9/93* TO (UNAUDITED) 6/30/95 6/30/94 - - - - - - ------------------------------------------------------------------------------------------------- PER SHARE DATA Net asset value, beginning of period.............. $ 7.20 9.14 10.00 - - - - - - ------------------------------------------------------------------------------------------------- Operations: Investment income (loss) - net**................ 0.01 -- 0.01 Net realized and unrealized gains (losses)...... (0.13) (1.94) (0.87) - - - - - - ------------------------------------------------------------------------------------------------- Total from operations............................. (0.12) (1.94) (0.86) - - - - - - ------------------------------------------------------------------------------------------------- Net asset value, end of period.................... $ 7.08 7.20 9.14 - - - - - - ------------------------------------------------------------------------------------------------- - - - - - - ------------------------------------------------------------------------------------------------- SELECTED INFORMATION Total return***................................... (1.67%) (21.23%) (8.60%) Net assets, end of period (000s omitted).......... $17,140 22,624 27,750 Ratio of expenses to average daily net assets++... 2.00%+ TRIANGLE 2.00% 2.00%+ Ratio of net investment income (loss) to average daily net assets++.............................. 0.22%+ (0.03)% 0.14%+ Portfolio turnover rate (excluding short-term securities)..................................... 60% 161% 78%
* COMMENCEMENT OF OPERATIONS ** BASED ON THE WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING DURING THE PERIOD. *** TOTAL RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE DURING THE PERIOD AND ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS. + ADJUSTED TO AN ANNUAL BASIS. ++ VARIOUS PORTFOLIO FEES AND EXPENSES WERE VOLUNTARILY WAIVED OR ABSORBED BY THE MANAGER AND DISTRIBUTOR. HAD THE FUNDS PAID ALL EXPENSES THE ANNUALIZED RATIOS OF EXPENSES AND NET INVESTMENT (LOSS) TO AVERAGE DAILY NET ASSETS WOULD HAVE BEEN AS FOLLOWS:
SIX MONTHS ENDED YEAR PERIOD FROM 12/31/95 ENDED 11/9/93* TO (UNAUDITED) 6/30/95 6/30/94 --------------------------------------------- 3.27%/(1.05%) 3.47%/(1.50%) 3.10%/(0.96%)
TRIANGLE FOR THE SIX MONTHS ENDED 12/31/95, THE RATIO OF EXPENSES TO AVERAGE DAILY NET ASSETS INCLUDES EXPENSES PAID INDIRECTLY BY THE FUND. PRIOR PERIOD EXPENSE RATIOS HAVE NOT BEEN ADJUSTED. 28 --------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS 9 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:
WORLD BOND FUND --------------------------------------------- SIX MONTHS ENDED YEAR PERIOD FROM 12/31/95 ENDED 11/9/93* TO (UNAUDITED) 6/30/95 6/30/94 - - - - - - ------------------------------------------------------------------------------------------------- PER SHARE DATA Net asset value, beginning of period.............. $ 9.82 9.35 10.00 - - - - - - ------------------------------------------------------------------------------------------------- Operations: Investment income (loss) - net**................ 0.25 0.45 0.12 Net realized and unrealized gains (losses)...... 0.66 0.22 (0.71) - - - - - - ------------------------------------------------------------------------------------------------- Total from operations............................. 0.91 0.67 (0.59) - - - - - - ------------------------------------------------------------------------------------------------- Distributions: From investment income - net.................... -- (0.09) (0.06) Tax return of capital........................... (0.28) (0.11) -- - - - - - - ------------------------------------------------------------------------------------------------- Total distributions............................... (0.28) (0.20) (0.06) - - - - - - ------------------------------------------------------------------------------------------------- Net asset value, end of period.................... $10.45 9.82 9.35 - - - - - - ------------------------------------------------------------------------------------------------- - - - - - - ------------------------------------------------------------------------------------------------- SELECTED INFORMATION Total return***................................... 9.36% 7.24% (5.96%) Net assets, end of period (000s omitted).......... $7,877 13,776 32,360 Ratio of expenses to average daily net assets++... 1.99%+ TRIANGLE 1.80% 1.80%+ Ratio of net investment income to average daily net assets++.................................... 4.93%+ 4.76% 2.63%+ Portfolio turnover rate (excluding short-term securities)..................................... 168% 501% 291%
* COMMENCEMENT OF OPERATIONS ** BASED ON THE WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING DURING THE PERIOD. *** TOTAL RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE DURING THE PERIOD AND ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS. + ADJUSTED TO AN ANNUAL BASIS. ++ VARIOUS PORTFOLIO FEES AND EXPENSES WERE VOLUNTARILY WAIVED OR ABSORBED BY THE MANAGER AND DISTRIBUTOR. HAD THE FUNDS PAID ALL EXPENSES THE ANNUALIZED RATIOS OF EXPENSES AND NET INVESTMENT INCOME TO AVERAGE DAILY NET ASSETS WOULD HAVE BEEN AS FOLLOWS:
SIX MONTHS ENDED YEAR PERIOD FROM 12/31/95 ENDED 11/9/93* TO (UNAUDITED) 6/30/95 6/30/94 --------------------------------------- 4.06%/2.86% 2.53%/4.03% 2.03%/2.40%
TRIANGLE FOR THE SIX MONTHS ENDED 12/31/95, THE RATIO OF EXPENSES TO AVERAGE DAILY NET ASSETS INCLUDES EXPENSES PAID INDIRECTLY BY THE FUND. PRIOR PERIOD EXPENSE RATIOS HAVE NOT BEEN ADJUSTED. 29 --------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS 9 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:
GLOBAL SHORT-TERM FUND --------------------------------------------- PERIOD ENDED YEAR PERIOD FROM 10/20/95# ENDED 11/9/93* TO (UNAUDITED) 6/30/95 6/30/94 - - - - - - ------------------------------------------------------------------------------------------------- PER SHARE DATA Net asset value, beginning of period.............. $ 10.00 9.91 10.00 - - - - - - ------------------------------------------------------------------------------------------------- Operations: Investment income - net**....................... 0.00 0.29 0.08 Net realized and unrealized losses.............. (0.01) (0.10) (0.11) - - - - - - ------------------------------------------------------------------------------------------------- Total from operations............................. (0.01) 0.19 (0.03) - - - - - - ------------------------------------------------------------------------------------------------- Distributions: From investment income - net.................... (2.24) (0.10) (0.06) In excess of investment income - net............ (1.61) -- -- Payments upon liquidation of the fund........... (6.14) -- -- - - - - - - ------------------------------------------------------------------------------------------------- Total distributions............................... (9.99) (0.10) (0.06) - - - - - - ------------------------------------------------------------------------------------------------- Net asset value, end of period.................... $ -- 10.00 9.91 - - - - - - ------------------------------------------------------------------------------------------------- - - - - - - ------------------------------------------------------------------------------------------------- SELECTED INFORMATION Total return***................................... (0.10%) 1.89% (0.33%) Net assets, end of period (000s omitted).......... $ -- 212 2,043 Ratio of expenses to average daily net assets++... 3.29%+ TRIANGLE 1.25% 1.25%+ Ratio of net investment income to average daily net assets++.................................... 0.20%+ 2.87% 1.70%+ Portfolio turnover rate (excluding short-term securities)..................................... -- 407% 362%
# GLOBAL SHORT-TERM FUND WAS LIQUIDATED ON OCTOBER 20, 1995. * COMMENCEMENT OF OPERATIONS ** BASED ON THE WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING DURING THE PERIOD. *** TOTAL RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE DURING THE PERIOD AND ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS. + ADJUSTED TO AN ANNUAL BASIS. ++ VARIOUS PORTFOLIO FEES AND EXPENSES WERE VOLUNTARILY WAIVED OR ABSORBED BY THE MANAGER AND DISTRIBUTOR. HAD THE FUNDS PAID ALL EXPENSES THE ANNUALIZED RATIOS OF EXPENSES AND NET INVESTMENT (LOSS) TO AVERAGE DAILY NET ASSETS WOULD HAVE BEEN AS FOLLOWS:
PERIOD ENDED YEAR PERIOD FROM 10/20/95# ENDED 11/9/93* TO (UNAUDITED) 6/30/95 6/30/94 --------------------------------------------------- 198.54%/(195.05%) 17.97%/(13.85%) 6.25%/(3.30%)
TRIANGLE FOR THE SIX MONTHS ENDED 12/31/95, THE RATIO OF EXPENSES TO AVERAGE DAILY NET ASSETS INCLUDES EXPENSES PAID INDIRECTLY BY THE FUND. PRIOR PERIOD EXPENSE RATIOS HAVE NOT BEEN ADJUSTED. 30 --------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS 9 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:
MONEY MARKET FUND --------------------------------- SIX MONTHS PERIOD FROM ENDED 12/13/94* 12/31/95 TO (UNAUDITED) 6/30/95 - - - - - - ------------------------------------------------------------------------------------- PER SHARE DATA Net asset value, beginning of period.............. $ 1.00 1.00 - - - - - - ------------------------------------------------------------------------------------- Operations: Investment income - net**....................... 0.02 0.02 - - - - - - ------------------------------------------------------------------------------------- Distributions: From investment income - net.................... (0.02) (0.02) - - - - - - ------------------------------------------------------------------------------------- Net asset value, end of period.................... $ 1.00 1.00 - - - - - - ------------------------------------------------------------------------------------- - - - - - - ------------------------------------------------------------------------------------- SELECTED INFORMATION Total return***................................... 2.33% 2.62% Net assets, end of period (000s omitted).......... $1,578 1,230 Ratio of expenses to average daily net assets++... 1.02%+ TRIANGLE 1.00%+ Ratio of net investment income to average daily net assets++.................................... 4.62%+ 4.53%+ Portfolio turnover rate (excluding short-term securities)..................................... N/A N/A
* COMMENCEMENT OF OPERATIONS ** BASED ON THE WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING DURING THE PERIOD. *** TOTAL RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE DURING THE PERIOD AND ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS. + ADJUSTED TO AN ANNUAL BASIS. ++ VARIOUS PORTFOLIO FEES AND EXPENSES WERE VOLUNTARILY WAIVED OR ABSORBED BY THE MANAGER AND DISTRIBUTOR. HAD THE FUNDS PAID ALL EXPENSES THE ANNUALIZED RATIOS OF EXPENSES AND NET INVESTMENT (LOSS) TO AVERAGE DAILY NET ASSETS WOULD HAVE BEEN AS FOLLOWS:
SIX MONTHS ENDED PERIOD FROM 12/31/95 12/13/94* TO (UNAUDITED) 6/30/95 -------------------------------- 10.66%/(5.02%) 25.44%/(19.91%)
TRIANGLE FOR THE SIX MONTHS ENDED 12/31/95, THE RATIO OF EXPENSES TO AVERAGE DAILY NET ASSETS INCLUDES EXPENSES PAID INDIRECTLY BY THE FUND. PRIOR PERIOD EXPENSE RATIOS HAVE NOT BEEN ADJUSTED. 31 ------------------------------------------------------------------------ INVESTMENTS IN SECURITIES HERCULES NORTH AMERICAN GROWTH AND INCOME FUND DECEMBER 31, 1995 (UNAUDITED)
Number of Market Name of Issuer Shares Value (a) - - - - - - ------------------------------------------ ------------ ----------- (PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS) COMMON STOCKS (95.6 %): CANADA (17.9%) Agrium Incorporated - chemicals....... 2,400 $ 36,051 Anderson Exploration - oil and gas.... 6,000(b) 61,550 Avenor (installment receipt) - forest products............................. 1,900 32,543 Bank of Montreal - banking and financial services................... 5,100 115,845 Bank of Nova Scotia - banking and financial services................... 4,600 100,275 Barrick Gold - mining................. 3,000 79,135 BCE - telecommunications.............. 1,700 58,857 BCE Mobile Communications - telecommunications................... 1,000(b) 33,797 Bombardier Class B - diversified industrials and conglomerates........ 6,300 83,092 Cameco - metal products............... 900 33,468 Canadian Occidential Petroleum - oil and gas.............................. 3,200 104,928 Canadian Pacific - diversified holding company.............................. 3,400 61,971 Delrina - computer software........... 1,647(b) 37,713 Diamond Field Resources - mining...... 4,100 77,358 Euro-Nevada Mining - mining........... 2,200 80,198 Falconbridge (installment receipt) - mining............................... 3,300 28,714 Imasco - tobacco products............. 3,400 66,019 Linamar - automobile parts............ 3,600 60,670 Lowen Group - funeral services........ 900 22,669 Noranda - metal products.............. 3,000 61,825 Petro-Canada (installment receipt) - oil and gas.......................... 13,300 76,745 Royal Bank of Canada - banking and financial services................... 4,100 93,506 Royal Plastics Group - construction and construction materials........... 4,200(b) 60,780 Seagram - brewers and distillers...... 1,500 51,658 Sherritt - chemicals.................. 4,100 52,949 Sherritt International - mining....... 3,485(b) 15,960 Summit Resources - oil and gas........ 6,700 38,047 Thompson - printing and publishing.... 4,200 58,472 Wascana Energy - oil and gas.......... 800(b) 7,547 Western Star Truck Holdings - automobile........................... 1,800 36,930 ----------- 1,729,272 ----------- MEXICO (19.4%) ALFA Class A - diversified industrial and conglomerates.................... 8,000 102,375 Apasco - construction and construction materials............................ 10,000 40,947 Bimbo ACP - food and beverage......... 11,000 44,971 Cementos de Mexico CPO (Cemex) - construction and construction materials............................ 22,000 73,095 Cifra Class C - retail................ 25,000(b) 25,308 Controladora Comercial Mexicana Class B - retail........................... 20,000(b) 12,875 Corporation GEO Series B - real estate............................... 32,200 94,448 Cydsa Series A - diversified holding company.............................. 20,000 47,242 Desc Sociedad de Fomento Industrial Class B - diversified industrials and conglomerates........................ 19,000(b) 70,156 Number of Market Name of Issuer Shares Value (a) - - - - - - ------------------------------------------ ------------ ----------- Desc Sociedad de Fomento Industrial Class C - diversified industrials and conglomerates........................ 14,000(b) $ 49,968 Embotelladores del Valle de Anahuac - food and beverage.................... 30,000(b) 27,255 Empresas ICA Sociedad Controladora - construction and construction materials............................ 4,000 41,791 Empresas La Moderna Series A - tobacco products............................. 14,000(b) 53,965 Fomento Economico Mexicano (Femsa) Class B - food and beverage.......... 10,000 23,102 Gruma Class B - food and beverage..... 12,000 33,796 Grupo Industrial Durango Class A - forest products...................... 11,000(b) 35,263 Grupo Carso Class A1 - diversified holding company...................... 6,000(b) 32,005 Grupo Elektra CPO - retail............ 14,000 60,688 Grupo Embotelladoras de Mexico (Gemex) CPO - food and beverage.............. 24,000 40,182 Grupo Financiero Bancomer Class B - banking and financial services....... 36,000 10,139 Grupo Financiero Banorte Class B - financial services................... 13,000 11,912 Grupo Industrial Maseca (Maseca) Class B - food and beverage................ 32,000 19,520 Grupo Industrial Minera Mexico Class B - mining............................. 10,000(b) 42,440 Grupo Modelo Class C (Gmodelo) - brewers and distillers............... 16,000 74,549 Grupo Simec Class B - metal products............................. 40,000(b) 13,238 Indl Sanluis CPO - diversified industrials and conglomerate......... 35,000 179,429 Industrias Penoles - mining........... 33,000 136,197 Kimberly Clark de Mexico Class A - forest products...................... 2,000 30,240 Nadro Class L - consumer goods........ 15,000 50,616 Sigma Alimentos - tobacco products.... 8,000 50,876 Sistema Argos - Series B - food and beverage............................. 75,000 38,254 Tablex Class 2 - food and beverage.... 33,293(b) 49,691 Telefonos de Mexico Class L (Telmex) - telecommunications................... 45,000 71,836 Transportacion Maritima Mexicana Class A - transportation................... 10,000(b) 75,925 Tubos de Acero de Mexico - metal products............................. 12,000(b) 87,528 Vitro - diversified industrials and conglomerates........................ 12,000 18,378 ----------- 1,870,200 ----------- UNITED STATES (58.3%) A T & T Corporation - telecommunications................... 2,300 148,925 Air Products and Chemicals - chemicals............................ 2,000 105,500 Airtouch Communications - telecommunications................... 3,500(b) 98,875 American Home Products - pharmaceuticals...................... 100 9,700 Baker Hughes - oil and gas............ 3,700 90,188 BankAmerica - banking and financial services............................. 2,900 187,775 BellSouth - telecommunications........ 4,100 178,350 Boeing - aerospace.................... 2,000 156,750 Bristol-Myers Squibb - pharmaceuticals...................... 600 51,525 Burlington Northern - transportation....................... 1,400 109,200 Burlington Resources - oil and gas.... 2,100 82,425
32 ---------------------------------------------------------------- INVESTMENTS IN SECURITIES HERCULES NORTH AMERICAN GROWTH AND INCOME FUND DECEMBER 31, 1995 (UNAUDITED) (CONTINUED)
Number of Market Name of Issuer Shares Value (a) - - - - - - ------------------------------------------ ------------ ----------- Coca-Cola Company - food and beverage............................. 1,800 $ 133,650 DSC Communications - telecommunica- tions................................ 1,600(b) 59,000 Du Pont (E.I.) De Nemours - chemicals............................ 1,800 125,775 Emerson Electric - electronics........ 1,300 106,275 Enron - oil and gas................... 2,800 106,750 Exxon - oil and gas................... 2,200 176,275 Federal National Mortgage Association - financial services................. 1,500 186,188 Fluor - engineering................... 1,800 118,800 Ford Motor Company - automobile....... 3,500 101,500 GAP - retail.......................... 1,300 54,600 General Electric - electronics........ 2,900 208,800 General Instrument - communications... 2,700(b) 63,113 General Motors - automobile........... 1,400 74,025 General Motors Class E - computer software............................. 2,200 114,400 GTE - telecommunications.............. 2,700 118,800 H & R Block - financial services...... 3,000 121,500 Home Depot - retail................... 3,000 143,625 Intel - computer hardware............. 2,000 113,500 International Paper - forest products............................. 3,200 121,200 Marsh and McLennan - insurance........ 1,400 124,250 McDonald's - food and beverage........ 2,600 117,325 Medtronic - health care............... 2,000 111,750 Merck and Company - pharmaceuticals... 2,900 190,672 Minnesota Mining and Manufacturing (3M) - diversified industrial and conglomerates........................ 2,300 152,375 Morton International - chemicals...... 4,200 150,675 Norwest Corporation - banking and fi- nancial services..................... 4,600 151,800 Philip Morris - food and beverage..... 1,000 90,500 Procter & Gamble - consumer goods..... 2,400 199,200 Royal Dutch Petroleum ADR - oil and gas.................................. 900 127,013 Schlumberger - oil and gas............ 1,700 117,725 Service Corporation International - funeral services..................... 2,800 123,200 Tandy - retail........................ 2,000 83,000 Texaco - oil and gas.................. 800 62,800 The Limited - retail.................. 3,100 53,863 United Healthcare - health care....... 2,000 131,000 Viacom Class B - communications....... 68(b) 3,222 Wisconsin Energy - utilities.......... 3,500 107,188
Number of Shares or Principal Market Name of Issuer Amount Value (a) - - - - - - ------------------------------------------ ------------ ----------- WMX Technonogies - environmental con- trol................................. 2,200 $ 65,725 ----------- 5,630,272 ----------- Total Common Stocks (cost: $8,001,551)................... 9,229,744 ----------- BONDS (.8%): MEXICO (.8%) Grupo Financiero Bancomer 95-2 (New Peso), 57.46%, due 4/28/02........... 598,800(c) 77,910 ----------- Total Bonds (cost: $98,554)...................... 77,910 ----------- SHORT-TERM SECURITIES (2.8%): MEXICO (2.8%) Bancomer (New Peso), 47.50%, due 1/3/96............................... 2,107,659(c) 273,544 ----------- Total Short-Term Securities (cost: $276,777)..................... 273,544 ----------- Total Investments in Securities (cost: $8,376,882)(d)................ $9,581,198 ----------- -----------
NOTES TO INVESTMENTS IN SECURITIES: (a) SECURITIES ARE VALUED BY PROCEDURES DESCRIBED IN NOTE 2 TO THE FINANCIAL STATEMENTS. (b) PRESENTLY NON-INCOME PRODUCING. (c) VALUE STATED IN U.S. DOLLARS, PRINCIPAL AMOUNT STATED IN THE CURRENCY INDICATED. (d) ALSO APPROXIMATES COST FOR FEDERAL INCOME TAX PURPOSES. THE AGGREGATE GROSS UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED ON THIS COST WERE AS FOLLOWS: GROSS UNREALIZED APPRECIATION........ $ 1,818,728 GROSS UNREALIZED DEPRECIATION........ (614,412) ----------- NET UNREALIZED APPRECIATION.......... $ 1,204,316 ----------- -----------
33 ------------------------------------------------------------------------ INVESTMENTS IN SECURITIES HERCULES EUROPEAN VALUE FUND DECEMBER 31, 1995 (UNAUDITED)
Number of Market Name of Issuer Shares Value (a) - - - - - - ------------------------------------------ ------------- ------------ (PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS) COMMON STOCKS (92.2%): AUSTRIA (2.2%) Austria Mikro Systeme International - electronics.......................... 180 $ 29,117 Boehler Uddeholm - metal products..... 375(b) 28,568 Burgenland Holding - utilities........ 650 26,688 BWT - environmental control........... 150 15,360 EA-Generali - insurance............... 200 59,758 EVN Energie-Versorgung Niederoesterreich - utilities........ 100 13,703 Flughafen Wien - air transportation... 475 31,956 Mayr-Melnhof Karton - forest products............................. 450 22,483 VA Technologie - engineering.......... 225 28,494 Voest-Alpine Stahl - metal products... 500(b) 14,296 Vogel & Noot Waermetechnik - engineering.......................... 350(b) 7,791 Wienerberger Baustoffindustrie - construction and construction materials............................ 96 18,996 Wolford - textiles.................... 175 27,529 ------------ 324,739 ------------ BELGIUM (1.5%) Electrabel - utilities................ 310 73,492 Fortis - insurance.................... 680 82,447 Kredietbank - banking and financial services............................. 220 59,979 ------------ 215,918 ------------ CZECH REPUBLIC (2.4%) Elektrarny Opatovice - utilities...... 800(b) 95,852 Komercni Banka - banking and financial services............................. 1,700 91,484 Severoceske Doly - mining............. 4,900(b) 78,831 SPT Telekom - telecommunications...... 900(b) 85,052 ------------ 351,219 ------------ DENMARK (1.8%) Den Danske Bank - banking and financial services................... 700 48,202 Jacob Holm and Sonner Class B - textiles............................. 497(b) 67,017 Novo Nordisk - pharmaceuticals........ 270 36,893 Scandinavian Mobility International - health care.......................... 2,100(b) 50,216 Tele Danmark Class B - telecommunications................... 1,200 65,372 ------------ 267,700 ------------ FINLAND (1.9 %) Aspoyhtyma - electronics.............. 2,460 92,020 Cultor - food and beverage............ 1,100 45,438 Nokia - telecommunications............ 2,740 108,153 Tietotehdas Class B - computer software............................. 1,400 45,301 ------------ 290,912 ------------ FRANCE (10.6%) Accor - hotels, leisure and entertainment........................ 600 77,530 Alcatel Alsthom - telecommunications................... 685 58,944 Assurances Generales de France - banking and financial services....... 1,200 40,110 AXA - insurance....................... 1,200 80,709 BIC - consumer goods.................. 500 50,749 Casino Guichard-Perrachon - retail.... 2,100 60,819 Compagnie Financiere de Paribas - financial services................... 1,025 56,091 Credit Commercial de France - banking and financial services............... 1,550 78,945 Credit Local de France - banking and financial services................... 750 59,921 Number of Market Name of Issuer Shares Value (a) - - - - - - ------------------------------------------ ------------- ------------ Elf Aquitaine - oil and gas........... 1,300 $ 95,596 Groupe Danone - food and beverage..... 150 24,702 Groupe Poliet - construction and construction materials............... 875 70,942 Lafarge - construction and construction materials............... 1,125 72,340 Lyonnaise des Eaux-Dumez - environmental control................ 1,110 106,668 Nord Est - diversified holding company.............................. 3,750 86,671 Pernod Richard - brewers and distillers........................... 950 53,885 Primagaz Cie - oil and gas............ 450 35,677 PSA Peugeot Citroen - automobile and automobile parts..................... 575 75,706 Schneider - electronics............... 2,100 71,648 Societe Eurafrance - financial services............................. 230 77,112 Societe Generale - banking and financial services................... 600 73,983 Union Financiere de France Banque - financial services................... 1,175 97,707 Usinor Sacilor - metal products....... 4,900(b) 64,015 ------------ 1,570,470 ------------ GERMANY (10.0%) Adidas - consumer goods............... 1,750(b) 92,221 Allianz Holding - insurance........... 96 188,191 Altana - pharmaceuticals.............. 175 101,723 Bayer - chemicals..................... 375 99,408 Bayerische Vereinsbank - banking and financial services................... 3,000 89,802 Deutsche Bank - banking and financial services............................. 2,100 99,554 Hoechst - chemicals................... 400 108,597 Kiekert - automobile parts............ 1,600(b) 95,231 Merck KGaA - pharmaceuticals.......... 2,300(b) 93,265 Preussag - diversified holding company.............................. 200 56,248 SGL Carbon - chemicals................ 1,350(b) 105,256 Siemens - electronics................. 250 137,139 Tarkett - construction and construction material................ 2,700(b) 58,267 VEBA - utilities...................... 2,600 111,131 Volkswagen - automobile............... 150 50,226 ------------ 1,486,259 ------------ ITALY (3.2%) Istituto Mobiliare Italiano - banking and financial services............... 11,000 69,270 Istituto Nazional delle Assicurazioni - insurance.......................... 47,000 62,302 Italgas - utilities................... 20,100 61,135 Olivetti Group - computer software.... 53,200 42,647 Pininfarina - automobile.............. 4,600 39,975 SME Meridonale - food and beverage.... 31,702 64,781 Societa Partecipazioni Finanziare (SOPAF) - financial services......... 69,200 77,567 Unicem - construction and construction materials............................ 10,000 53,841 ------------ 471,518 ------------ NETHERLANDS (7.0%) Assurantieconcern Stad Rotterdam - insurance............................ 4,900 145,659 Furgo - environmental control......... 11,410 122,757 Gist-Brocades - pharmaceuticals....... 5,660 168,251 Internationale Nederlanden Grope (ING) - financial services & insurance..... 1,900 126,667 Philips Electronics - electronics..... 3,500 126,244 Polynorm - diversified industrials and conglomerates........................ 1,250 106,499
34 ---------------------------------------------------------------- INVESTMENTS IN SECURITIES HERCULES EUROPEAN VALUE FUND DECEMBER 31, 1995 (UNAUDITED) (CONTINUED)
Number of Market Name of Issuer Shares Value (a) - - - - - - ------------------------------------------ ------------- ------------ Royal Dutch Petroleum - oil and gas... 1,690 $ 235,633 ------------ 1,031,710 ------------ NORWAY (1.4%) Kvaerner - engineering & construction......................... 1,850 65,364 Orkla Borregaard - diversified industrials and conglomerate......... 1,710 84,962 UNI Storebrand - insurance............ 11,000(b) 60,727 ------------ 211,053 ------------ PORTUGAL (.6%) Jornalgeste SGPS - printing and publishing........................... 4,878(b) 56,948 Tertir-Terminais de Portugal - transportation....................... 7,800(b) 32,782 ------------ 89,730 ------------ SPAIN (2.0%) Amper - telecommunications............ 2,800(b) 33,014 Banco Santander - banking and financial services................... 1,200(b) 60,047 Empresa Nacional Hidroelectrica del Ribagorzana - utilities.............. 2,830 60,341 Inmobiliaria Urbis - real estate...... 5,977(b) 28,189 Telefonica De Espana - telecommunications................... 4,100 56,596 Zardoya-Otis - industrial machinery and and manufacturing................ 500 54,435 ------------ 292,622 ------------ SWEDEN (3.8%) Althin Medical - health care.......... 4,200 85,408 Ericsson Class B - telecommunications................... 2,934 57,454 Hoganas Class B - metal products manufacturing........................ 3,760 109,876 Skandia Forsakrings - insurance....... 3,350 90,578 Sparbanken Sverige - banking and financial services................... 4,700 59,823 Svenska Handelsbanken Class B - banking and financial services....... 3,470 69,518 Volvo - automobile.................... 4,460 91,367 ------------ 564,024 ------------ SWITZERLAND (10.3%) BBC Brown Boveri - diversified holding company.............................. 85 98,700 Ciba-Geigy Registered - pharmaceuticals...................... 225 197,899 CS Holding - financial services....... 1,650 169,075 Fust Dipl. Ing Bearer - consumer goods................................ 240 60,312 Kuoni Reisen Holdings - miscellaneous services............................. 45 72,140 Oerlikon-Buehrle Holding - diversified holding company...................... 1,025(b) 83,492 Roche Holdings - pharmaceuticals...... 35 276,755 Sandoz - health care.................. 275 251,646 Swiss Bank Corporation Class B - financial services................... 300 122,444 Winterthur Schweizerische Registered - insurance............................ 275 194,454 ------------ 1,526,917 ------------ UNITED KINGDOM (33.5%) Aegis Group - advertising............. 510,000(b) 298,770 Blue Circle Industries - construction and construction materials........... 26,100 138,724 British Petroleum - oil and gas....... 35,000 292,757 Number of Market Name of Issuer Shares Value (a) - - - - - - ------------------------------------------ ------------- ------------ British Telecommunications - telecommunications................... 46,000 $ 252,703 Cable and Wireless - telecommunications................... 15,750 112,432 Celltech Group - pharmaceuticals...... 13,900(b) 126,836 Daily Mail and General Trust - printing and publishing.............. 10,000 179,239 Forte - hotels, leisure and entertainment........................ 25,000 128,222 General Electric Company plc - electronics.......................... 26,450 145,715 Glaxo Wellcome - pharmaceuticals...... 14,000 198,792 Grand Metropolitan - food and beverage............................. 22,500 162,013 Great Universal Stores - retail....... 18,600 197,721 Guardian Royal Exchange - insurance... 20,000 85,662 Guiness - brewing and distillers...... 17,100 125,784 HSBC Holdings - financial services.... 9,000 140,504 International Business Communications (Holdings) - printing and publishing........................... 40,000 177,532 Legal & General Group - insurance..... 19,500 202,749 Marks & Spencer - retail.............. 20,000 139,667 Mercury Asset Management Group - investment company................... 9,400 126,910 Rank Organisation - communications.... 15,000 108,474 Rolls-Royce - aerospace............... 15,000 43,995 Royal Insurance Holdings - insurance............................ 24,200 143,459 SeaPerfect - food and beverage........ 90,497(b) 112,350 Shell Transport and Trading - oil and gas.................................. 33,500 442,929 Standard Chartered - banking and financial services................... 40,000 340,166 Tarmac - construction and construction materials............................ 31,000 49,551 United Newspapers PLC - printing and publishing........................... 8,000 68,902 Vendome Luxury Group Units - consumer goods................................ 17,000 154,331 Vosper Thornycroft Holdings PLC - diversified manufacturing............ 8,000 101,181 Zeneca Group - pharmaceuticals........ 8,700 168,224 ------------ 4,966,294 ------------ Total Common Stocks (cost: $12,758,132).................. 13,661,085 ------------ PREFERRED STOCKS (2.8%): GERMANY (2.4%) Asko Deutsche Kaufhaus - retail....... 75 33,676 Fresenius AG - health care............ 1,750 166,655 Koegel Fahrzeugwerke AG - automobile........................... 325 65,611 Systeme, Anwendungen, Produkte in der Datenverarbeitung (SAP) - computer hardware and software................ 625 94,762 ------------ 360,704 ------------ ITALY (.4%) Autostrade Concessioni E Construzione- engineering.......................... 50,000 54,786 ------------ Total Preferred Stocks (cost: $343,950)..................... 415,490 ------------ WARRANTS (.2%): NETHERLANDS (.1%) International Nederlanden Grope Warrants - financial services........ 6,600(b) 22,779 ------------ UNITED KINGDOM (.1%) Gartmore Micro Index Trust Warrants - financial services................... 10,000(b) 4,345
35 ------------------------------------------------------------------------ INVESTMENTS IN SECURITIES HERCULES EUROPEAN VALUE FUND DECEMBER 31, 1995 (UNAUDITED) (CONTINUED)
Number of Shares or Principal Market Name of Issuer Amount Value (a) - - - - - - ------------------------------------------ ------------ ------------ Herald Investment Trust Warrants - financial services................... 10,000(b) $ 8,535 ------------ 12,880 ------------ Total Warrants (cost: $26,474)...................... 35,659 ------------ CORPORATE BONDS (.4%): DENMARK (.4%) Det Danske Traelastkompagni (Danish krone), convertible, 5.25%, due 1/1/02............................... 335,000(c) 61,429 ------------ Total Corporate Bonds (cost: $60,443)...................... 61,429 ------------ Total Investments in Securities (cost: $13,188,999)(d)............... $ 14,173,663 ------------ ------------
NOTES TO INVESTMENTS IN SECURITIES: (a) SECURITIES ARE VALUED BY PROCEDURES DESCRIBED IN NOTE 2 TO THE FINANCIAL STATEMENTS. (b) PRESENTLY NON-INCOME PRODUCING. (c) VALUE STATED IN U.S. DOLLARS, PRINCIPAL AMOUNT STATED IN THE CURRENCY INDICATED. (d) ALSO APPROXIMATES COST FOR FEDERAL INCOME TAX PURPOSES. THE AGGREGATE GROSS UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED ON THIS COST WERE AS FOLLOWS: GROSS UNREALIZED APPRECIATION........... $ 1,671,007 GROSS UNREALIZED DEPRECIATION........... (686,343) ----------- NET UNREALIZED APPRECIATION............. $ 984,664 ----------- -----------
HERCULES PACIFIC BASIN FUND DECEMBER 31, 1995 (UNAUDITED)
Number of Market Value Name of Issuer Shares (a) - - - - - - ------------------------------------------ ------------ ------------ (PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS) COMMON STOCKS (95.2%): AUSTRALIA (1.7%) National Australia Bank - banking and financial services................... 36,000 $ 323,542 Wesfarmers - chemicals................ 25,000 153,007 ------------ 476,549 ------------ HONG KONG (14.2%) China Light & Power - utilities....... 55,000 253,217 Dao Heng Bank Group - banking and financial services................... 175,000 629,163 Esprit Asia Holdings - retail......... 1,220,000 418,105 Giordano International - retail....... 500,000 426,770 Hutchison Whampoa - diversified holding company...................... 100,000 609,117 New World Infrastructure - diversified industrials and conglomerate......... 160,000(b) 306,240 Sung Hung Kai Properties - real estate............................... 50,000 408,988 Wharf Holdings - real estate.......... 175,000 582,768 Yizherg Chemical Fibre Company - textiles............................. 1,200,000 270,029 ------------ 3,904,397 ------------ INDIA (1.2%) Hindalco Industries - metal products............................. 10,000(b) 340,000 ------------ INDONESIA (1.6%) Gadjah Tunggal - industrial manufacturing........................ 482,000 268,773 Supreme Cable Manufacturing - industrial manufacturing............. 133,500 179,538 ------------ 448,311 ------------ JAPAN (57.5%) Daimaru - retail...................... 100,000 772,947 Dainippon Ink and Chemical - chemicals............................ 125,000 580,918 DDI Corporation - telecommunications................... 55 425,121 Denki Kagaku Kogyo K.K. - chemicals... 115,000(b) 416,667 Dowa Mining - mining.................. 182,000 875,710 Ichiyoshi Securities - financial services............................. 150,000 1,014,493 Kobe Steel - metal products........... 220,000(b) 678,068 Kumagai Gumi Company - engineering.... 185,000 741,787 Maeda Road Construction - construction and construction materials........... 30,000 553,623 Mitsubishi Heavy Industries - industrial machinery and manufacturing........................ 88,000 699,749 Mitsui Fudosan - real estate.......... 70,000 858,937 Mori Seiki - industrial machinery and manufacturing........................ 27,000 607,826 Murata Manufacturing - electronics.... 20,000 734,300 Nippon Telegraph and Telephone - telecommunications................... 45 363,043 Nissha Printing - printing and publishing........................... 37,000 546,957 Okuma - industrial machinery and manufacturing........................ 80,000(b) 745,894 Sony Music Entertainment - consumer goods................................ 15,900 829,565 Sumitomo Bank - financial services.... 30,000 634,783 Sumitomo Trust and Banking - financial services............................. 73,000 1,029,758 TOA - engineering..................... 84,000 616,812 Tokyo Steel Manufacturing - metal products............................. 33,000 605,797
36 ------------------------------------------------------------------------ INVESTMENTS IN SECURITIES HERCULES PACIFIC BASIN VALUE FUND DECEMBER 31, 1995 (UNAUDITED) (CONTINUED)
Number of Market Name of Issuer Shares Value (a) - - - - - - ------------------------------------------ ------------ ------------ Topre - automobile parts.............. 92,000 $ 728,889 Yaskawa Electric - electronics........ 165,000(b) 776,377 ------------ 15,838,021 ------------ MALAYSIA (4.6%) Genting - hotels, leisure and entertainment........................ 45,000 375,738 Telekom Malaysia - telecommunications................... 54,000 421,111 YTL - construction and construction materials............................ 75,000 472,627 ------------ 1,269,476 ------------ PAKISTAN (.5%) Pakistan Telecommunications - telecommunications................... 1,500(b) 130,500 ------------ PHILIPPINES (1.1%) C & P Homes - real estate............. 425,000(b) 311,904 ------------ SINGAPORE (4.4%) City Developments - real estate....... 80,400 585,533 Fraser and Neave - food and beverage............................. 25,000 318,179 Overseas-Chinese Banking Corporation - banking and financial services....... 25,000 312,876 ------------ 1,216,588 ------------ SOUTH KOREA (2.8%) Korea 1990 Trust - closed-end fund.... 75(b) 375,000 Korea International Trust IDR - closed-end fund...................... 3 157,500 Samsung Electronics - 1/2 Voting Shares - electronics................. 39(b) 2,101 Samsung Electronics GDS - 1/2 Voting Shares - electronics................. 121(b) 11,616 Samsung Electronics GDS - 1/2 Non- Voting Shares - electronics.......... 2,968 190,694 Samsung Electronics GDS - electronics.......................... 202(b) 19,392 ------------ 756,303 ------------ TAIWAN (1.0%) ROC Taiwan Fund - closed-end fund..... 25,000 262,500 ------------ THAILAND (4.6%) Electricity Generating (Egcomp) - utilities............................ 140,000 465,895
Number of Shares or Principal Market Name of Issuer Amount Value (a) - - - - - - ------------------------------------------ ------------ ------------ Finance One Compnay - financial services............................. 30,000 $ 198,500 Siam Cement Company - construction and construction materials............... 5,000 264,831 Sino Thai Engineering and Construction - construction and construction materials............................ 20,000 146,884 Thai Farmers Bank - banking and finan- cial services........................ 20,000 185,949 ------------ 1,262,059 ------------ Total Common Stocks (cost: $26,419,362).................. 26,216,608 ------------ CORPORATE BONDS (1.1%): TAIWAN (1.1%) Teco Electric and Machinery, convertible, (U.S. dollar), 2.75%, due 4/15/04.......................... 400,000(c) 313,500 ------------ Total Corporate Bonds (cost: $400,000)..................... 313,500 ------------ Total Investments in Securities (cost: $26,819,362)(d)............... $ 26,530,108 ------------ ------------
NOTES TO INVESTMENTS IN SECURITIES: (a) SECURITIES ARE VALUED BY PROCEDURES DESCRIBED IN NOTE 2 TO THE FINANCIAL STATEMENTS. (b) PRESENTLY NON-INCOME PRODUCING. (c) VALUE STATED IN U.S. DOLLARS, PRINCIPAL AMOUNT STATED IN THE CURRENCY INDICATED. (d) ALSO APPROXIMATES COST FOR FEDERAL INCOME TAX PURPOSES. THE AGGREGATE GROSS UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED ON THIS COST WERE AS FOLLOWS: GROSS UNREALIZED APPRECIATION........... $ 2,129,717 GROSS UNREALIZED DEPRECIATION........... (2,418,971) ----------- NET UNREALIZED DEPRECIATION............. $ (289,254) ----------- -----------
37 ------------------------------------------------------------------------ INVESTMENTS IN SECURITIES HERCULES LATIN AMERICAN VALUE FUND DECEMBER 31, 1995 (UNAUDITED)
Number of Market Name of Issuer Shares Value (a) - - - - - - ------------------------------------------ --------------- ------------ (PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS) COMMON STOCKS (74.3%): ARGENTINA (11.8%) Banco del Sud Class B - banking and financial services................... 19,500(b) $ 144,278 Banco Frances del Rio de la Plata ADR - banking and financial services..... 16,578 445,534 Interamericana de Automo (Ciadea) - automobile........................... 57,693(b) 295,921 Inversiones y Representaciones (IRSA)- real estate.......................... 12,600 321,300 Juan Minetti - construction and construction materials............... 53,205 178,210 Migor 144A ADR - automobile........... 65,116(b)(d) 154,651 Telefonica de Argentina - ADR - utilities............................ 17,817 485,513 ------------ 2,025,407 ------------ BRAZIL (7.5%) Centrais Eletricas Brasileiras (Electrobras) - utilities............ 1,305,458 353,244 Lojas Americanas - retail............. 17,054,667 371,993 Siderurgica Nacional - metal products............................. 2,500,000 51,443 Siderurgica Nacional ADR - metal products............................. 17,917 367,299 Telecomunicacoes Brasileiras (Telebras) - telecommunications...... 3,415,000 132,110 ------------ 1,276,089 ------------ CHILE (15.2%) Banco Osorno y La Union ADR - banking and financial services............... 10,987 152,445 Chile Fund - closed-end fund.......... 22,841 593,866 Chilgener ADR - utilities............. 24,928 623,200 Compania de Telefone Chile ADR - broadcast, radio and TV.............. 10,291 852,867 Empresa Nacional Elec - ADR - utilities............................ 16,933 385,226 ------------ 2,607,604 ------------ COLUMBIA (5.2%) Carulla 144A ADR - retail............. 29,970(d) 202,298 Cemetos Diamante 144A ADR - construction and construction materials............................ 20,492(d) 373,979 La Gran Cadena de Almacenes Colombianos (Cadenalco) 144A ADR - retail............................... 26,923(d) 316,345 ------------ 892,622 ------------ MEXICO (22.6%) Cemex - construction and construction materials............................ 108,300 388,643 Empresas ICA Sociedad Controladora - engineering.......................... 17,200 176,300 Gruma Class B - food and beverage..... 139,932(b) 394,098 Grupo Carso Class A1 - diversified holding company...................... 69,779(b) 372,215 Grupo Elektra GDR - retail............ 24,300 212,625 Grupo Financiero Bancomer Class B - banking and financial services....... 1,275,300(b) 359,170 Grupo Financiero Banorte Class B - financial services................... 381,600(b) 349,656 Grupo Modelo Class C (Gmodelo) - food and beverage......................... 96,475 449,507 Grupo Televisa GDR - communications... 18,500 416,250 Panamerican Beverages ADR Class A - food and beverage.................... 13,840 442,880
Number of Market Name of Issuer Shares Value (a) - - - - - - ------------------------------------------ --------------- ------------ Telefonos de Mexico Class L (Telmex) - telecommunications................... 200,000 $ 319,273 ------------ 3,880,617 ------------ PERU (5.7%) Cementos Norte Pacasmayo Class T - construction and construction materials............................ 76,421 138,977 Credicorp Limited - banking and financial services................... 16,166(b) 275,630 Fabril Pacifico - insurance........... 180,000(b)(c) 201,082 Minsur Class T - mining............... 3 21 Telefonica del Peru Class B - telecommunications................... 169,400 363,079 ------------ 978,789 ------------ VENEZUELA (6.3%) Ceramica Carabobo ADR Class B - construction and construction materials............................ 155,520 171,072 Corimon ADR - diversified industrials and conglomerates.................... 23,182(b) 86,933 Mavesa 144A ADR - food and beverage... 44,224(d) 171,368 Siderurgica Venezolana Sivensa ADR - metal products....................... 228,000 428,640 Sudamtex de Venezuela ADR - textiles............................. 47,960 221,815 ------------ 1,079,828 ------------ Total Common Stocks (cost: $13,126,309).................. 12,740,956 ------------ PREFERRED STOCKS (23.8%): BRAZIL (22.0%) Banco Bradesco - banking and financial services............................. 41,795,427 365,514 Banco Itau - banking and financial services............................. 1,501,216 418,570 Brasmotor - consumer goods............ 1,988,763 394,908 Centrais Eletricas Brasileiras (Electrobras) Class B - utilities.... 600 162 Cervejaria Brahma - brewer and distiller............................ 730,430 300,611 Cosipa Class PNB - metal products..... 218,885(b) 290,510 Iochpe Maxion - automobile and automobile parts..................... 1,564,791 170,655 Lojas Americanas - retail............. 5,439,181(b) 127,592 Lojas Renner - retail................. 7,768,600 207,813 Mesbla - retail....................... 1,300,000(b) 16,050 Refrigeracao Parana (Refripar) - consumer goods....................... 235,182,000 469,420 Tecidos Norte de Minas (Coteminas) - textiles............................. 699,844 234,013 Telecomunicacoes Brasileiras (Telebras) - telecommunications...... 3,547,800 170,829 Usinas Siderurgica de Minas Gerais (Usiminas) 144A ADR - metal products............................. 13,000(d) 105,625 Usinas Siderurgica de Minas Gerais (Usiminas) - metal products.......... 423,731,474 344,409 Vale do Rio Doce - mining............. 918,600 151,218 ------------ 3,767,899 ------------ COLUMBIA (1.8%) Banco Indl Colombiano ADR - banking and financial services............... 19,000 311,125 ------------ Total Preferred Stocks (cost: $5,257,694)................... 4,079,024 ------------
38 ------------------------------------------------------------------------ INVESTMENTS IN SECURITIES HERCULES LATIN AMERICAN VALUE FUND DECEMBER 31, 1995 (UNAUDITED) (CONTINUED)
Number of Shares or Principal Market Name of Issuer Amount Value (a) - - - - - - ------------------------------------------ --------------- ------------ RIGHTS (.0%): BRAZIL (.0%) Banco Bradesco Rights................. 977,261(b) $ 0 ------------ Total Rights (cost: $0)........................... 0 ------------ SHORT-TERM SECURITIES (3.5%): UNITED STATES (3.5%) U.S. Treasury Bill, 5.3%, due 3/14/96.............................. $ 600,000 594,120 ------------ Total Short-Term Securities (cost: $593,643)..................... 594,120 ------------ Total Investments in Securities (cost: $18,977,646)(e)............... $ 17,414,100 ------------ ------------
NOTES TO INVESTMENTS IN SECURITIES: (a) SECURITIES ARE VALUED BY PROCEDURES DESCRIBED IN NOTE 2 TO THE FINANCIAL STATEMENTS. (b) PRESENTLY NON-INCOME PRODUCING. (c) SECURITY DEEMED TO BE ILLIQUID BY THE MANAGER. INVESTMENTS IN ILLIQUID SECURITIES REPRESENT 1.17% OF NET ASSETS AT DECEMBER 31, 1995. (d) REPRESENTS SECURITY SOLD UNDER RULE 144A AND IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS SECURITY HAS BEEN DETERMINED TO BE LIQUID UNDER GUIDELINES ESTABLISHED BY THE BOARD OF DIRECTORS. (e) ALSO APPROXIMATES COST FOR FEDERAL INCOME TAX PURPOSES. THE AGGREGATE GROSS UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED ON THIS COST WERE AS FOLLOWS: GROSS UNREALIZED APPRECIATION......... $ 1,247,924 GROSS UNREALIZED DEPRECIATION......... (2,811,470) ----------- NET UNREALIZED DEPRECIATION........... $(1,563,546) ----------- -----------
HERCULES WORLD BOND FUND DECEMBER 31, 1995 (UNAUDITED)
Principal Market Value Name of Issuer Amount (b) (a) - - - - - - ------------------------------------ --------------- --------------- (PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS) BONDS (76.0%) AUSTRIA (12.0%) Otereich KontrollBank (Austrian schilling), 7.00%, due 8/8/05......................... 1,300,000 $ 949,321 --------------- CANADA (1.8%) Canadian Government Bond (Canadian dollars), 8.75%, due 12/01/05....................... 170,000 139,531 --------------- BELGIUM (1.8%) Kingdom of Belgium Bond (Belgian franc), 6.50%, due 3/31/05..... 4,300,000 143,707 --------------- GERMANY (21.9%) Deutschland Republic (German deutschemark), 7.375%, due 1/3/05......................... 1,350,000 1,026,996 International Bank of Reconstruction and Development (German deutschemark), 5.875%, due 11/10/03................... 600,000 419,478 Ontario Province (German deutschemark), 6.25%, due 1/13/04........................ 400,000 278,037 --------------- 1,724,511 --------------- SPAIN (16.2%) Spanish Government (Spanish peseta), 7.40%, due 7/30/99.... 164,000,000 1,273,542 --------------- UNITED KINGDOM (4.4%) U.K. Government (British pound), 9.00%, due 7/12/11............. 200,000(c) 346,741 --------------- UNITED STATES (17.9%) KFW International Finance (German deutschemark), 7.75%, due 10/6/04.................... 550,000 414,462 U.S. Treasury Note (U.S. dollar), 7.50%, due 2/15/05.... 875,000(c) 993,398 --------------- 1,407,860 --------------- Total Bonds (cost: $5,725,745)............. 5,985,213 ---------------
39 ------------------------------------------------------------------------ INVESTMENTS IN SECURITIES HERCULES WORLD BOND FUND DECEMBER 31, 1995 (UNAUDITED) (CONTINUED)
Principal Market Value Name of Issuer Amount (b) (a) - - - - - - ------------------------------------ --------------- --------------- SHORT-TERM SECURITIES (15.2%): UNITED STATES (15.2%) U.S. Treasury Bill, 5.30%, due 1/25/96........................ 1,200,000 $ 1,196,529 --------------- Total Short-Term Securities (cost: $1,196,528)............. 1,196,529 --------------- Total Investments in Securities (cost: $6,922,273)(d).......... $ 7,181,742 --------------- ---------------
NOTES TO INVESTMENTS IN SECURITIES: (a) SECURITIES ARE VALUED BY PROCEDURES DESCRIBED IN NOTE 2 TO THE FINANCIAL STATEMENTS. (b) VALUE STATED IN U.S. DOLLARS, PRINCIPAL AMOUNT STATED IN THE CURRENCY INDICATED. (c) PLEDGED AS INITIAL MARGIN DEPOSIT ON OPEN FUTURES POSITIONS (SEE NOTE 7 TO THE FINANCIAL STATEMENTS). (d) ALSO APPROXIMATES COST FOR FEDERAL INCOME TAX PURPOSES. THE AGGREGATE GROSS UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED ON THIS COST WERE AS FOLLOWS: GROSS UNREALIZED APPRECIATION........... $ 262,384 GROSS UNREALIZED DEPRECIATION........... (2,915) ----------- NET UNREALIZED APPRECIATION............. $ 259,469 ----------- -----------
HERCULES MONEY MARKET FUND DECEMBER 31, 1995 (UNAUDITED)
Principal Name of Issuer Amount Value (a) - - - - - - ------------------------------------ --------------- --------------- (PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS) DISCOUNT NOTES (95.5%): Federal Farm Credit Bank, 6.84%, due 1/18/96...................... $ 140,000 $ 139,627 Federal Farm Credit Bank, 6.71%, due 2/5/96....................... 200,000 198,915 Federal Home Loan Bank, 6.02%, due 1/9/96........................... 135,000 134,831 Federal Home Loan Mortgage Corporation, 6.20%, due 1/5/96... 375,000 374,763 Federal Home Loan Mortgage Corporation, 6.20%, due 1/22/96.......................... 260,000 259,145 Federal National Mortgage Association, 6.85%, due 1/19/96.......................... 400,000 398,890 --------------- Total Investments in Securities (cost: $1,506,171)(b)........... $ 1,506,171 --------------- ---------------
NOTES TO INVESTMENTS IN SECURITIES: (a) SECURITIES ARE VALUED BY PROCEDURES DESCRIBED IN NOTE 2 TO THE FINANCIAL STATEMENTS. (b) ALSO EQUALS COST FOR FEDERAL INCOME TAX PURPOSES. 40 DIRECTORS AND OFFICERS DIRECTORS David T. Bennett, Chairman, Highland Homes, Inc., USL Products, Inc., and 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 A. Latimer, Chief Executive Officer, National Equity Funds BOARD OF DIRECTORS RESPONSIBILITIES The board of directors of an investment company is charged with extensive responsibilities under federal and state laws. Under common law and state statutes, all board members are subject to general fiduciary duties including acting in good faith and in the best interest of the company and its shareholders. In addition, the Investment Company Act of 1940 (as amended) charges independent directors with management supervision and financial oversight. Some of the directors' key responsibilities include: - - - - - - - To act in good faith and in a manner that is in the best interest of the funds and their shareholders. Directors have an obligation not to use their position for personal gain and to prevent conflicts from arising between personal interests and the interests of the company. - - - - - - - To approve the advisory contracts between the investment company and the funds' manager, and between the funds' manager and subadvisers, ensuring that they are fair to the funds and to shareholders. - - - - - - - To review and approve other agreements such as custody agreements, foreign custody arrangements and service agreements with affiliates. - - - - - - - To approve the funds' distribution plan annually. - - - - - - - To monitor fund investments, ensuring that decisions made are in accordance with the funds' investment policies and restrictions. - - - - - - - To monitor portfolio transactions, ensuring that fund management executes transactions appropriately, that transactions with affiliated broker dealers are appropriate and in compliance, and that purchases or sales between affiliated funds follow regulatory restrictions. OFFICERS William H. Ellis, President Robert H. Nelson, Vice President and Treasurer Susan Sharp Miley, Secretary INVESTMENT ADVISER Piper Capital Management Incorporated 222 South Ninth Street, Minneapolis, MN 55402-3804 DISTRIBUTOR Piper Jaffray Inc. 222 South Ninth Street, Minneapolis, MN 55402-3804 CUSTODIAN AND TRANSFER AGENT Investors Fiduciary Trust Company 127 West 10th Street, Kansas City, MO 64105-1716 LEGAL COUNSEL Gordon Altman Butowsky Weitzen Shalov & Wein 114 West 47th Street, New York, NY 10036 INDEPENDENT AUDITORS KPMG Peat Marwick LLP 4200 Norwest Center, 90 South Seventh Street, Minneapolis, MN 55402 41 [LOGO]HERCULES 222 SOUTH NINTH STREET, MINNEAPOLIS, MN 55402-3804 INTERNATIONAL FUNDS PIPER JAFFRAY INC., FUND DISTRIBUTOR AND NASD MEMBER. Bulk Rate U.S. Postage PAID Permit No. 3008 Mpls., MN Recycle THIS DOCUMENT IS PRINTED ON PAPER MADE FROM Logo 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 annual and semiannual 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: Corporate Communications Piper Capital Management 222 South Ninth Street Minneapolis, MN 55402-3804 073-96 HERC 02 2/96 PIPER GLOBAL FUNDS INC. PACIFIC-EUROPEAN GROWTH FUND PART B STATEMENT OF ADDITIONAL INFORMATION This Statement of Additional Information relates to the shares of common stock of Pacific-European Growth Fund ("Pacific-European Fund"), a series of Piper Global Funds Inc. ("Piper Global"), to be issued by Piper Global, pursuant to an Agreement and Plan of Reorganization, dated as of ____________, 1996, between Piper Global on behalf of Pacific-European Fund and Hercules Funds Inc. (the "Company") on behalf of Hercules European Value Fund (the "Fund") in connection with the acquisition by Pacific-European Fund of substantially all of the assets, subject to stated liabilities, of the Fund. This Statement of Additional information does not constitute a prospectus. This Statement of Additional Information does not include all information that a shareholder should consider before voting on the proposal contained in the Proxy Statement/Prospectus, and, therefore, should be read in conjunction with the related Proxy Statement/Prospectus, dated _______________, 1996. A copy of the Proxy Statement/Prospectus may be obtained without charge by mailing a written request to Piper Global at 222 South Ninth Street, Minneapolis, Minnesota 55402-3804. Please retain this document for future reference. The date of this Statement of Additional Information is ______________, 1996 TABLE OF CONTENTS Page ---- INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . 3 ADDITIONAL INFORMATION ABOUT PIPER GLOBAL. . . . . . . . 3 FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . 5 -2- INTRODUCTION This Statement of Additional Information is intended to supplement the information provided in the Proxy Statement/Prospectus dated _____________, 1996 (the "Proxy Statement/Prospectus"). The Proxy Statement/Prospectus has been sent to the Fund's shareholders in connection with the solicitation of proxies by the Board of Directors of the Company to be voted at the Special Meeting of Shareholders of the Fund to be held on ______, 1996. This Statement of Additional information incorporates by reference the Statement of Additional Information of Pacific-European Fund dated April 28, 1995. ADDITIONAL INFORMATION ABOUT PIPER GLOBAL INVESTMENT OBJECTIVES AND POLICIES For additional information about Pacific-European Fund's investment objectives and policies, see "Investment Objectives, Policies and Restrictions" in Pacific-European Fund's Statement of Additional Information. MANAGEMENT For additional information about the Board of Directors, officers and management personnel of Piper Global, see "Directors and Executive Officers" and "Investment Advisory and Other Services" in Pacific-European Fund's Statement of Additional Information. INVESTMENT ADVISORY AND OTHER SERVICES For additional information about Piper Capital Management Incorporated and Edinburgh Fund Managers plc., Pacific-European Fund's investment adviser and subadviser, respectively, advisory fees paid and advisory services performed, see "Investment Advisory and Other Services" in Pacific-European Fund's Statement of Additional Information. For additional information about Pacific-European Fund's distributor and other service providers, see also "Investment Advisory and Other Services." For additional information about Pacific-European Fund's independent auditors, see "Financial Statements" in Pacific-European Fund's Statement of Additional Information. -3- PORTFOLIO TRANSACTIONS AND BROKERAGE For additional information about brokerage practices, including allocation policies, see "Portfolio Transactions and Allocation of Brokerage" in Pacific-European Fund's Statement of Additional Information. DESCRIPTION OF PACIFIC-EUROPEAN FUND SHARES For additional information about the voting rights and other characteristics of the shares of Pacific-European Fund, see "Capital Stock and Ownership of Shares" in Pacific-European Fund's Statement of Additional Information. PURCHASE, REDEMPTION AND PRICING OF SHARES For additional information about the purchase and redemption of Pacific-European Fund's shares and the determination of its net asset value, see "Purchase of Shares," "Redemption of Shares" and "Net Asset Value and Public Offering Price" in Pacific-European Fund's Statement of Additional Information. TAXATION For additional information about Pacific-European Fund's policies regarding tax matters affecting Pacific-European Fund and its shareholders, see "Taxation" in Pacific-European Fund's Statement of Additional Information. DISTRIBUTION OF SHARES For additional information about Pacific-European Fund's distributor and the distribution agreement between Pacific-European Fund and its distributor, see "Investment Advisory and Other Services" in Pacific-European Fund's Statement of Additional Information. -4- PERFORMANCE DATA For additional information about Pacific-European Fund's performance data, see "Calculation of Performance Data" in Pacific-European Fund's Statement of Additional Information. FINANCIAL STATEMENTS Pacific-European Fund's most recent audited financial statements are set forth in its Annual Report dated February 29, 1996, a copy of which is included with and incorporated by reference in the Proxy Statement/Prospectus. The Company's most recent audited financial statements are set forth in its Annual Report dated June 30, 1995, which is incorporated by reference in the Proxy Statement/Prospectus. In addition, the Company's updated unaudited financial statements are set forth in its Semi-Annual Report for the six month period ended December 31, 1995, which is incorporated by reference in the Proxy Statement/Prospectus. -5- UNAUDITED COMBINING FINANCIAL STATEMENTS AQUISITION OF THE ASSETS OF HERCULES EUROPEAN VALUE FUND AND HERCULES PACIFIC BASIN VALUE FUND SERIES OF HERCULES FUNDS INC. BY AND IN EXCHANGE FOR PACIFIC-EUROPEAN GROWTH FUND A SERIES OF PIPER GLOBAL FUNDS INC. FEBRUARY 29, 1996 The accompanying unaudited pro forma combining statements of assets and liabilities, including the schedule of investments in securities, and the statements of operations reflect the accounts of the Hercules European Value Fund (European Fund), a series of Hercules Funds Inc., the Hercules Pacific Basin Value Fund (Pacific Fund), a series of Hercules Funds Inc. (Hercules Funds) and Pacific-European Growth Fund (Piper Fund), a series of Piper Global Funds Inc. (collectively, the Funds) and combining statements as of and for the twelve-month period ended February 29, 1996. These statements have been derived from the annual report of Piper Fund dated February 29, 1996 and the underlying accounting records of Hercules Funds used in calculating net asset values for the twelve-month period ended February 29, 1996. The pro forma combining statement of operations has been prepared based upon the fee and expense structure of Piper Fund. The statements do not reflect the effects of proposed differing investment objectives and policies of the Funds. The pro forma combining statements have been prepared assuming that both of the Hercules Funds are merged into Piper Fund under the proposed Plan and Agreement of Reorganization pursuant to which the assets and liabilities of Hercules Funds would be exchanged for shares of Piper Fund. It is possible that shareholders of one or both of the Hercules Funds will not approve the Reorganization. PIPER GLOBAL FUNDS INC. - PACIFIC-EUROPEAN GROWTH FUND PRO FORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) FEBRUARY 29, 1996
Hercules Hercules European Pacific Basin Pacific-European Pro-Forma Value Value Growth Adjustments Pro Forma Fund Fund Fund (note 3) Combined - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- ASSETS: Investments in securities, at market value* (including repurchase agreement of $0, $0, $7,701,000 and $7,701,000, respectively) $13,703,179 24,800,168 159,543,727 198,047,074 Cash in bank on demand deposit 87,709 4,484 253,608 104,324 (a) 450,125 Foreign cash in bank on demand deposit 1,679 17,473 518,197 537,349 Receivable for investment securities sold 724,654 454,735 141,493 1,320,882 Receivable for fund shares sold 1,500 28,022 159,838 189,360 Unrealized appreciation of forward foreign currency contracts held - 1,751,988 5,078,658 6,830,646 Organization costs 52,162 52,162 - (104,324)(a) - Dividends and accrued interest receivable 57,717 5,620 308,060 371,397 - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- Total assets 14,628,600 27,114,652 166,003,581 207,746,833 - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- LIABILITIES: Payable for investment securities purchased 582,880 199,828 1,515,647 2,298,355 Payable for fund shares redeemed 119,021 370,855 100,535 590,411 Unrealized depreciation of forward foreign currency contracts held 22,445 - - 22,445 Accrued distribution and shareholder account servicing fee 17,864 34,259 126,340 178,463 Accrued investment management fee 11,279 21,904 118,372 151,555 Payable for foreign capital gains taxes 828,991 828,991 Accrued expenses and other liabilities 4,222 58,892 1,992 65,106 - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities 757,711 685,738 2,691,877 4,135,326 - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- Net assets applicable to outstanding capital stock $13,870,889 26,428,914 163,311,704 203,611,507 - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- REPRESENTED BY: Capital stock and additional paid-in capital (note 2); outstanding, 1,270,453; 2,627,386; 11,782,881 and 14,690,515 shares, respectively $12,348,382 27,590,157 141,904,286 181,842,825 Accumulated net realized gain (loss) on investments and foreign currency transactions 415,779 (2,846,493) 2,856,345 425,631 Unrealized appreciation of investments and on translation of other assets and liabilities in foreign currencies 1,106,728 1,685,250 18,551,073 21,343,051 - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- Total - representing net assets applicable to outstanding capital stock $13,870,889 26,428,914 163,311,704 203,611,507 - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- Net asset value per share of outstanding capital stock $ 10.92 10.06 13.86 13.86 - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- *Investments in securities, at identified cost $12,600,971 24,865,413 146,080,551 183,546,935 - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- - - - - - - ----------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Pro Forma Combining Financial Statements. PIPER GLOBAL FUNDS INC. - PACIFIC-EUROPEAN GROWTH FUND PRO FORMA COMBINING STATEMENT OF OPERATIONS (UNAUDITED) FOR THE TWELVE-MONTH PERIOD ENDED FEBRUARY 29, 1996
Hercules Hercules European Pacific Basin Pacific-European Pro Forma Value Value Growth Adjustments Pro Forma Fund Fund Fund (note 3) Combined - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- INCOME: Dividends $ 445,707 293,248 2,869,826 3,608,781 Interest 35,457 8,869 251,483 295,809 - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- Total investment income 481,164 302,117 3,121,309 3,904,590 - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- EXPENSES: Investment management fee 166,308 314,028 1,216,305 (173,452)(b) 1,523,189 Distribution fee 116,416 219,819 812,754 (92,482)(c) 1,056,507 Custodian, accounting and transfer agent fees 208,787 214,339 468,005 (285,443)(d) 605,688 Shareholder account servicing fees - - 135,878 135,878 Reports to shareholders 12,975 21,129 66,645 (14,496)(d) 86,253 Amortization of organization costs 17,894 17,894 - (35,788)(d) - Directors' fees 6,182 6,182 15,434 (12,364)(d) 15,434 Audit and legal fees 46,388 57,745 55,634 (104,133)(d) 55,634 Other expenses 33,560 48,623 55,842 (16,529)(d) 121,496 - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- Total expenses 608,510 899,759 2,826,497 (734,687) 3,600,079 Less expenses waived or absorbed by manager (242,261) (207,423) - 449,684 (e) Less expenses waived or absorbed by distributor (33,262) (62,806) (298,512) 8,245 (e) (386,335) - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- Net expenses 332,987 629,530 2,527,985 (276,758) 3,213,744 - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- Investment income- net 148,177 (327,413) 593,324 276,758 690,846 - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS AND FOREIGN CURRENCY: Net realized gain (loss) on investments 1,262,954 (919,804) 11,219,772 11,562,922 Net realized loss on foreign currency transactions (436,928) (38,412) (405,039) (880,379) - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- Net realized gain (loss) on investments and foreign currency transactions 826,026 (958,216) 10,814,733 10,682,543 - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- Net change in unrealized appreciation of investments and on translation of other assets and liabilities in foreign currencies 5,495,385 7,644,412 13,491,482 26,631,279 - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- Net gain on investments and foreign currency 6,321,411 6,686,196 24,306,215 37,313,822 - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- Net increase in net assets resulting from operations $6,469,588 6,358,783 24,899,539 276,758 38,004,668 - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- - - - - - - ----------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Pro Forma Combining Financial Statements. PIPER GLOBAL FUNDS INC. PACIFIC-EUROPEAN GROWTH FUND NOTES TO PRO FORMA COMBINING FINANCIAL STATEMENTS (UNAUDITED) (1) BASIS OF COMBINATION The accompanying unaudited pro forma combining statements of assets and liabilities, including the schedule of investments in securities, and the statements of operations reflect the accounts of the Hercules European Value Fund (European Fund), a series of Hercules Funds Inc., the Hercules Pacific Basin Value Fund (Pacific Fund), a series of Hercules Funds Inc. (Hercules Funds) and Pacific-European Growth Fund (Piper Fund), a series of Piper Global Funds Inc. (collectively, the Funds) and combining statements as of and for the twelve-month period ended February 29, 1996. These statements have been derived from the annual report of Piper Fund dated February 29, 1996 and the underlying accounting records of Hercules Funds used in calculating net asset values for the twelve-month period ended February 29, 1996. The pro forma combining statement of operations has been prepared based upon the fee and expense structure of Piper Fund. The historical cost of the investments in securities would be carried forward to Piper Fund as the reorganization will be accounted for as a tax-free exchange. The pro forma combining statements have been prepared assuming that both Hercules Funds are merged into Piper Fund under the proposed Plan and Agreement of Reorganization pursuant to which the assets and liabilities of Hercules Funds would be exchanged for shares of Piper Fund. It is possible that shareholders of one or both of the Hercules Funds will not approve the Reorganization. The accompanying Pro Forma Combining Schedule of Total Return and Expense Ratios presents historical combining pro forma total return and expense ratio information under all possible scenarios. The pro forma combining financial statements and accompanying schedule of investments in securities should be read in conjunction with the historical financial statements of the Funds and the notes thereto incorporated by reference in the Statement of Additional Information. (2) CAPITAL SHARES The pro forma combining statement of assets and liabilities assumes the issuance of 1,000,786 and 1,906,848 shares of Piper Fund to shareholders of European Fund and Pacific Fund, respectively, as if the reorganization had taken place on February 29, 1996 and is based on the net asset value of Piper Fund on that date. (3) PRO FORMA ADJUSTMENTS (A) ORGANIZATION COSTS - Deferred organizational costs have been adjusted to reflect reimbursement of unamortized Hercules Funds organization costs by Piper Capital Management Inc. (the manager). (B) INVESTMENT MANAGEMENT FEE - The investment management fee has been adjusted to reflect the fee structure of Piper Fund. The investment management agreement of Piper Global Funds Inc. provides for a management fee at a per annum rate of 1.00% on the first $100 million of average daily net assets, 0.875% on the next $100 million of average daily net assets and 0.75% of average daily net assets in excess of $200 million, paid to the manager. The basic fee structure is subject to a performance adjustment based upon the performance of the fund relative to the Morgan Stanley Capital International EAFE Index. For each percentage point the Piper Fund outperforms or underperforms the EAFE Index, during the applicable rolling 12-month performance period, the monthly fee is increased or decreased by 0.05% (on an annualized basis) up to a maximum of 1/12 of 0.25% of the fund's average daily net assets during the month for which the calculation is made. During the year ended February 29, 1996, the performance adjustment decreased the management fee by $337,288 or 0.21% of Piper Fund's average daily net assets. Hercules Funds pay a per annum rate of 1.00% of average daily net assets to the manager, with no performance adjustment. (C) DISTRIBUTION FEE - The distribution fee has been adjusted to reflect the 12b-1 fee structure of Piper Fund. Pursuant to distribution plans adopted in accordance with Rule 12b-1 of the Investment Company Act of 1940, reimbursement to Piper Jaffray Inc. (the distributor), may not exceed 0.50% and 0.70% per annum of the average daily net assets of Piper Fund and Hercules Funds, respectively. During the twelve-month period ended February 29, 1996, the distributor voluntarily agreed to limit the fees to an annual rate of 0.32% and 0.50% for Piper Fund and Hercules Funds, respectively. (D) OTHER FEES AND EXPENSES - The pro forma adjustments to custodian, accounting and transfer agent fees, reports to shareholders, amortization of organizational costs, Directors fees, audit and legal fees and other expenses reflects the reimbursement of the Hercules Fund's organizational costs and savings due to a decreases in certain expenses duplicated between the Funds. (E) NET EXPENSES - The expenses waived or absorbed by the manager and the distributor have been adjusted to reflect the voluntary expense limitation by the distributor for Piper Fund and no voluntary expense limitation by the manager of Piper Fund. During the twelve-month period ended February 29, 1996, the manager and distributor voluntarily agreed to limit total expenses on a per annum basis to 2.00% of average daily net assets for Hercules Funds. (4) INVESTMENT OBJECTIVES AND POLICIES These statements do not reflect the effects of proposed differing investment objectives and policies of the Funds. PIPER GLOBAL FUNDS INC. - PACIFIC-EUROPEAN GROWTH FUND PRO FORMA COMBINING SCHEDULE OF TOTAL RETURNS AND EXPENSE RATIOS (UNAUDITED) As discussed in footnote 1 to the Pro Forma Combining Financial Statements, it is possible that shareholders of one or both of the Hercules Funds will not approve the Reorganization, in which case the combined fund will be comprised only of the Piper Fund and the Hercules Fund which approves the Reorganization. Presented below is combining pro forma total return and expense ratio information for the twelve month period ended February 29, 1996 and the two most recent preceding periods under all possible combination scenarios.
Twelve month period Ended --------------------------------------------------------- February 29, 1996 February 28, 1995 February 28, 1994 ----------------- ----------------- ----------------- Scenario 1 - European Fund, Pacific Fund and Piper Fund Total Return (a) 17.05% (11.12%) 42.53% Gross Expense Ratio (b) 1.70% 1.94% 2.00% Net Expense Ratio (b) 1.52% 1.72% 1.79% Scenario 2 - European Fund and Piper Fund Total Return (a) 16.93% (9.93%) 43.10% Gross Expense Ratio (b) 1.72% 1.97% 2.02% Net Expense Ratio (b) 1.54% 1.75% 1.82% Scenario 3 - Pacific Fund and Piper Fund Total Return (a) 16.86% (12.16%) 42.89% Gross Expense Ratio (b) 1.71% 1.95% 2.00% Net Expense Ratio (b) 1.53% 1.73% 1.80%
(a) Total return is based on the change in net asset value during the period, assumes reinvestment of distributions at actual reinvestment prices and does not reflect a sales charge. The combining pro forma total returns were computed assuming the applicable Funds had been combined since their respective inceptions. (b) Distribution fees and expenses were voluntarily limited by the distributor of Piper Fund. Gross expense ratio represents the ratio of expenses before voluntary waivers to average daily net assets. Net expense ratio represents the ratio of expenses after voluntary waivers to average daily net assets. The combined pro forma expense ratios were computed assuming the applicable Funds had been combined since their respective inceptions and reflects the revised investment management and distribution fee structures and savings due to duplicated expenses between the Funds as described in note 3 to the Pro Forma Combining Financial Statements. PIPER GLOBAL FUNDS INC. - PACIFIC-EUROPEAN GROWTH FUND PRO FORMA COMBINING SCHEDULE OF INVESTMENTS (UNAUDITED) FEBRUARY 29, 1996
Pro Forma Hercules Hercules Combined European Value Pacific Basin Pacific-European Pro Forma Number of Fund Value Fund Growth Fund Combined Name of Issuer Shares Market Value Market Value Market Value Market Value - - - - - - -------------------------------------------------- ---------- --------------- -------------- ----------------- ------------ (PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS) Common Stocks (93.2%) Argentina (.4%) Inversiones Y Representaciones (IRSA) ADR - real estate company 28,806(b) 788,564 788,564 ------------ ------------ -------------- ----------- - - 788,564 788,564 ------------ ------------ -------------- ----------- Austria (.2%) Austria Mikro Systeme International - electronics 180 26,242 26,242 Boehler Uddeholm - metal products 375(b) 28,820 28,820 Burgenland Holding - diversified holding company 650 29,307 29,307 EA-Generali - insurance 200 69,109 69,109 EVN Energie-Versorgung Niederoesterreich - utilities 120 15,884 15,884 Flughafen Wien - air transportation 475 32,423 32,423 Mayr-Melnhof Karton - forest products 450 22,462 22,462 VA Technologie - automobile 225 28,392 28,392 Voest-Alpine Stahl - metal products 500(b) 16,848 16,848 Wienerberger Baustoffindustrie - construction and construction materials 96 21,642 21,642 Wolford - textiles 175 31,595 31,595 ------------ ------------ -------------- ----------- 322,724 - - 322,724 ------------ ------------ -------------- ----------- Belgium (.2%) Electrabel - utilities 510 116,790 116,790 Quick Restaurents - food and beverage 1,300 138,755 138,755 Solvay - chemicals 200 117,805 117,805 ------------ ------------ -------------- ----------- 373,350 - - 373,350 ------------ ------------ -------------- ----------- Brazil (1.7%) Cia Acos Especia Itab ADR - steel manufacturer 95,000 1,128,600 1,128,600 Refrigeracao Prana ADR - consumer durable goods 122,000 1,653,832 1,653,832 Telecomunicacoes Brasileiras ADR - telecommunications and cellular 12,500 656,250 656,250 ------------ ------------ -------------- ----------- - - 3,438,682 3,438,682 ------------ ------------ -------------- ----------- Chile (.3%) Five Arrows Chile Fund - closed-end fund 200,000 - - 537,500 537,500 ------------ ------------ -------------- ----------- Columbia (.1%) Carulla 144A ADS - retail stores 30,780 - - 284,715 284,715 ------------ ------------ -------------- -----------
PIPER GLOBAL FUNDS INC. - PACIFIC-EUROPEAN GROWTH FUND PRO FORMA COMBINING SCHEDULE OF INVESTMENTS (UNAUDITED) FEBRUARY 29, 1996
Pro Forma Hercules Hercules Combined European Value Pacific Basin Pacific-European Pro Forma Number of Fund Value Fund Growth Fund Combined Name of Issuer Shares Market Value Market Value Market Value Market Value - - - - - - -------------------------------------------------- ---------- --------------- -------------- ----------------- ------------ (PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS) Czech Republic (.1%) Elektrarny Opatovice - utilities 800(b) 111,514 111,514 Komercni Banka - banking and financial services 1,700 116,306 116,306 ------------ ------------ -------------- ----------- 227,820 - - 227,820 ------------ ------------ -------------- ----------- Denmark (.1%) Bang & Olufsen Holding - electronics 2,400 72,570 72,570 Danisco - food and beverage 1,060 51,991 51,991 Jacob Holm and Sonner Class B - textiles 497 55,045 55,045 Novo Nordisk - pharmaceuticals 270 36,786 36,786 ------------ ------------ -------------- ----------- 216,392 - - 216,392 ------------ ------------ -------------- ----------- Finland (.2%) Aspoyhtyma - electronics 460 14,650 14,650 Cultor - food and beverage 1,100 47,353 47,353 Enso-Gutzeit Oy - forest products 4,600 32,128 32,128 Nokia - telecommunications 2,740 94,784 94,784 Talentum - printing and publishing 4,700(b) 43,356 43,356 Tietotehdas Class B - computer software 2,100 86,020 86,020 ------------ ------------ -------------- ----------- 318,291 - - 318,291 ------------ ------------ -------------- ----------- France (4.1%) Accor - hotels, leisure and entertainment 600 84,344 84,344 Alcatel Alsthom - telecommunications 17,249 1,526,907 1,526,907 Assurances Generales de France - banking and financial services 2,000 56,625 56,625 AXA - insurance 1,371 88,410 88,410 BIC - consumer goods 950 105,895 105,895 Casino Guichard-Perrachon - retail 2,650 91,818 91,818 Credit Commercial de France - banking and financial services 1,550 73,622 73,622 Elf Aquitaine - oil company 24,094 96,405 1,562,733 1,659,138 Eridania Berghim Say - sugar company 6,880 1,179,643 1,179,643 Essilor International - pharmaceuticals 450 107,093 107,093 Groupe Danone - food and beverage 400 63,832 63,832 Lafarge - construction and construction material 1,125 77,224 77,224 L'Air Liquide - chemicals 750 132,456 132,456 Legrand - electronics 300 53,695 53,695 Lyonnaise des Eaux-Dumez - environmental control 1,110 102,610 102,610 Michelin Class B - automobile 2,600 116,236 116,236 Moet-Hennessy Louis Vuitton - brewers and distillers 650 147,740 147,740 Pernod Richard - brewers and distillers 950 59,568 59,568 Pinaul Printemps - retail stores 8,880 2,100,995 2,100,995
PIPER GLOBAL FUNDS INC. - PACIFIC-EUROPEAN GROWTH FUND PRO FORMA COMBINING SCHEDULE OF INVESTMENTS (UNAUDITED) FEBRUARY 29, 1996
Pro Forma Hercules Hercules Combined European Value Pacific Basin Pacific-European Pro Forma Number of Fund Value Fund Growth Fund Combined Name of Issuer Shares Market Value Market Value Market Value Market Value - - - - - - -------------------------------------------------- ---------- --------------- -------------- ----------------- ------------ (PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS) Primagaz Cie - oil and gas 1,150 111,909 111,909 PSA Peugeot Citroen - automobile and automobile parts 675 100,767 100,767 Schneider - electronics 2,100 92,303 92,303 Societe Eurafrance - financial services 12 4,397 4,397 Societe Generale - banking and financial services 600 68,307 68,307 Total Class B - oil and gas 1,500 98,807 98,807 Union Financiere de France Banque - financial services 1,175 117,948 117,948 ------------ ------------ -------------- ----------- 2,052,011 - 6,370,278 8,422,289 ------------ ------------ -------------- ----------- Germany (3.3%) Adidas - consumer goods 1,750(b) 112,643 112,643 Allianz Holding - insurance 65 125,339 125,339 Altana - pharmaceuticals 275 182,985 182,985 BASF - chemicals 650 162,765 162,765 Bayer - retail 550 168,271 168,271 Deutsche Bank - bank 35,200 1,771,950 1,771,950 Hoechst - chemicals 500 157,523 157,523 Kiekert - automobile parts 1,300(b) 66,200 66,200 Mannesmann AG - industrial machinery/ manufacturing 2,670 106,939 844,819 951,758 Merck KGaA - pharmaceuticals 2,300(b) 97,837 97,837 SGL Carbon - chemicals 1,200(b) 106,898 106,898 Siemens - electronic capital goods 2,990 142,874 1,565,900 1,708,774 VEBA - electricity and chemical company 21,200 122,338 875,191 997,529 Volkswagen - automobile 325 123,574 123,574 ------------ ------------ -------------- ----------- 1,676,186 - 5,057,860 6,734,046 ------------ ------------ -------------- ----------- Hong Kong (9.5%) China Light & Power - electric utilities 370,000 327,750 1,404,643 1,732,393 Dao Heng Bank Group - banking and financial services 699,574 574,015 2,294,315 2,868,330 Esprit Asia Holdings - retail 3,720,000 469,443 961,974 1,431,417 Giordano International - retail 500,000 533,532 533,532 Hutchison Whampoa - diversified holding company 475,000 475,328 2,535,084 3,010,412 Ka Wah Bank - commercial bank 3,000,000 1,096,165 1,096,165 Sun Hung Kai Properties - real estate 280,000 446,226 2,052,642 2,498,868 Swire Pacific - holding company 250,000 2,182,630 2,182,630 Wharf Holdings - real estate 635,000 522,958 1,936,882 2,459,840 Yizheng Chemical - chemicals and plastics 5,690,000 333,700 1,248,592 1,582,292 ------------ ------------ -------------- ----------- - 3,682,952 15,712,927 19,395,879 ------------ ------------ -------------- -----------
PIPER GLOBAL FUNDS INC. - PACIFIC-EUROPEAN GROWTH FUND PRO FORMA COMBINING SCHEDULE OF INVESTMENTS (UNAUDITED) FEBRUARY 29, 1996
Pro Forma Hercules Hercules Combined European Value Pacific Basin Pacific-European Pro Forma Number of Fund Value Fund Growth Fund Combined Name of Issuer Shares Market Value Market Value Market Value Market Value - - - - - - -------------------------------------------------- ---------- --------------- -------------- ----------------- ------------ (PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS) Ireland (.5%) Irish Life - life insurance 250,000 - - 999,490 999,490 ------------ ------------ -------------- ----------- India (.4%) Hindalco Industries ADR - aluminium manufacturer 25,000(b) - 179,350 717,400 896,750 ------------ ------------ -------------- ----------- Indonesia (2.4%) Bukaka Teknik Utama - industrial machinery and manufacturing 200,000(b) 362,616 362,616 Hanjaya Mandala Sampoerna - tobacco 93,000 196,395 818,314 1,014,709 PT Andayani Megah - tire and rubber 850,000 733,866 733,866 PT Bank International Indonesia - banking 500,000 2,099,072 2,099,072 Pt Indocement - construction materials 160,000 637,167 637,167 Supreme Cable Manufacturing - industrial machinery and manufacturing 133,500 162,805 162,805 ------------ ------------ -------------- ----------- - 721,816 4,288,419 5,010,235 ------------ ------------ -------------- ----------- Italy (1.5%) Edison - utilities 24,700 124,134 124,134 Ente Nazionale Idrocaburi - oil and gas 23,100(b) 87,626 87,626 Istituto Mobiliare Italiano - banking and financial services 22,700 159,541 159,541 Italgas - utilities 356,900 115,015 991,421 1,106,436 Mondadori (Arnoldo) Editore - printing and publishing 10,000 86,842 86,842 Olivetti Group - computer software 82,300(b) 48,809 48,809 Societa Partecipazioni Finanziare (SOPAF) - financial services 69,200 79,949 79,949 Stet-societa Finanz Telefon - telecommunications and cellular 421,050 1,286,392 1,286,392 Unicem - construction and construction materials 12,700(b) 81,841 81,841 ------------ ------------ -------------- ----------- 783,757 - 2,277,813 3,061,570 ------------ ------------ -------------- ----------- Japan (35.0%) Amada Metrecs - electronic capital goods 108,000 1,631,932 1,631,932 Circle K Japan Company - retail stores 22,000(b) 932,478 932,478 DDI - telecommunications 337 600,827 1,868,425 2,469,252 Daifuku - machine tool manufacturer 78,000 1,156,379 1,156,379 Daimaru - retail 100,000 687,099 687,099 Dainippon Ink & Chemical - chemical and plastics 655,000 567,831 2,407,603 2,975,434 Daiwa Securities - finance 150,000 2,109,765 2,109,765 Dowa Mining - mining 172,000 866,334 866,334 Denki Kagaku - chemical and plastics 415,000(b) 460,109 1,200,285 1,660,394 H.I.S. Company - leisure and entertainment 22,000(b) 1,045,379 1,045,379 Honda Motor - motor vehicles 89,000 1,886,149 1,886,149 Ichiyoshi Securities - securities broker 275,000 962,224 801,853 1,764,077 Isetan - retail stores 184,000 2,308,197 2,308,197 Kobe Steel - iron/steel and aluminum 965,000(b) 637,681 2,159,420 2,797,101
PIPER GLOBAL FUNDS INC. - PACIFIC-EUROPEAN GROWTH FUND PRO FORMA COMBINING SCHEDULE OF INVESTMENTS (UNAUDITED) FEBRUARY 29, 1996
Pro Forma Hercules Hercules Combined European Value Pacific Basin Pacific-European Pro Forma Number of Fund Value Fund Growth Fund Combined Name of Issuer Shares Market Value Market Value Market Value Market Value - - - - - - -------------------------------------------------- ---------- --------------- -------------- ----------------- ------------ (PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS) Kumagai Gumi - engineering and construction 585,000 755,999 1,634,593 2,390,592 Maeda Road Construction - transportation 120,000 521,739 1,565,217 2,086,956 Marubeni Corporation - distributer -wholesale 420,000 2,271,133 2,271,133 Matsushita Electric Works - electricals 237,000 2,545,118 2,545,118 Mitsubishi Heavy Industries - industrial machinery and manufacturing 78,000 630,820 630,820 Mitsubishi Materials - metal mining company 430,000 2,227,132 2,227,132 Mitsui Fudosan - real estate 250,000 701,354 2,220,955 2,922,309 Mori Seiki - machine tool manufacturer 159,000 790,877 2,518,318 3,309,195 Murata Manufacturing - electronics 20,000 657,638 657,638 Nihon Cement Company, LTD - cement manufacturing 344,000 2,288,430 2,288,430 Nippon Telegraph and Telephone - telecommunications 336 342,124 2,210,121 2,552,245 Nissha Printing - print media/publishing 112,000 545,023 1,104,775 1,649,798 Nomura - stock broker 118,000 2,422,238 2,422,238 Nippon Yusen - shipping 392,000 2,235,210 2,235,210 Okuma - industrial machinery and manufacturing 40,000(b) 402,946 402,946 Sony Music Entertainment - consumer goods 15,900 788,767 788,767 Sony Corporation - electronics 40,000 2,341,649 2,341,649 Sumitomo Bank - commercial bank 106,000 570,207 1,444,524 2,014,731 Sumitomo Trust & Banking - bank 188,000 746,971 1,593,538 2,340,509 TOA - engineering 84,000 581,953 581,953 Topre - automobile parts 92,000 699,454 699,454 Tokyo Steel Manufacturing - steel manufacturer 117,000 605,274 1,540,699 2,145,973 Topy Industries - tires and auto parts 279,000 1,206,415 1,206,415 Toshiba - electronics 350,000 2,704,205 2,704,205 Tsudakoma - machine tool manufacturer 101,000 662,294 662,294 Yaskawa Electric - electronics 165,000(b) 843,621 843,621 ------------ ------------ -------------- ----------- - 14,966,872 56,244,429 71,211,301 ------------ ------------ -------------- ----------- Malaysia (1.8%) Genting - hotels, leisure and entertainment 33,000 295,232 295,232 Kim Hin Industries - ceramic tile manufacturer 150,000 300,177 300,177 Telekom Malaysian - telecommunications 200,000 343,732 1,374,926 1,718,658 YTL Corporation - construction 300,000 282,519 1,130,077 1,412,596 ------------ ------------ -------------- ----------- - 921,483 2,805,180 3,726,663 ------------ ------------ -------------- ----------- Mexico (1.1%) Cementos De Mexico Class A (Cemex) - building construction and materials 155,000 527,204 527,204 Telefonos De Mexico Class L ADR - telecommunications and cellular 52,700 1,607,350 1,607,350 ------------ ------------ -------------- ----------- - - 2,134,554 2,134,554 ------------ ------------ -------------- -----------
PIPER GLOBAL FUNDS INC. - PACIFIC-EUROPEAN GROWTH FUND PRO FORMA COMBINING SCHEDULE OF INVESTMENTS (UNAUDITED) FEBRUARY 29, 1996
Pro Forma Hercules Hercules Combined European Value Pacific Basin Pacific-European Pro Forma Number of Fund Value Fund Growth Fund Combined Name of Issuer Shares Market Value Market Value Market Value Market Value - - - - - - -------------------------------------------------- ---------- --------------- -------------- ----------------- ------------ (PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS) Netherlands (2.2%) ASM Lithography Holding - diversified industrials and conglomerate 1,500(b) 72,408 72,408 Amev NV - bank 18,000 1,198,545 1,198,545 Furgo - McClelland - engineering 11,410 124,548 124,548 Gist-Brocades - pharmaceuticals 5,660 171,276 171,276 Klondike Post Netherland NV - telecommunications and cellular 17,000 681,443 681,443 Philips Electronics - electronics 3,500 145,391 145,391 Polynorm - diversified industrial and conglomerate 1,250 118,253 118,253 Royal Dutch Petroleum - oil and gas 590 81,505 81,505 Vnu - Ver Ned Uitgev Ver Bezit - publishing company 110,000 1,794,421 1,794,421 ------------ ------------ -------------- ----------- 713,381 - 3,674,409 4,387,790 ------------ ------------ -------------- ----------- Norway (.1%) Kvaerner - engineering and construction 1,850 59,161 59,161 Orkla Borregaard - diversified industrials and conglomerate 1,710 77,357 77,357 UNI Storebrand - insurance 11,000(b) 59,371 59,371 ------------ ------------ -------------- ----------- 195,889 - - 195,889 ------------ ------------ -------------- ----------- Philippines (1.1%) C & P Homes - real estate 425,000(b) 329,048 329,048 Philippine Long Distance Telephone - telecommunications & cellular 15,990 944,544 944,544 Philippine National Bank - commercial bank 75,000(b) 1,060,983 1,060,983 ------------ ------------ -------------- ----------- - 329,048 2,005,527 2,334,575 ------------ ------------ -------------- ----------- Portugal (.1%) Jornalgeste SGPS - printing and publishing 4,878(b) 48,818 48,818 Tertir-Terminais de Portugal - transportation 7,800(b) 28,010 28,010 ------------ ------------ -------------- ----------- 76,828 - - 76,828 ------------ ------------ -------------- ----------- Singapore (4.5%) City Development - real estate 330,400 654,816 2,036,119 2,690,935 Development Bank Of Singapore - financial services 150,000 2,135,269 2,135,269 Genting Berhad - hotels and leisure 150,000 1,341,966 1,341,966 Overseas-Chinese Banking Corporation - banking and financial services 25,000 347,025 347,025 United Overseas Bank - bank 249,200 320,822 2,344,136 2,664,958 ------------ ------------ -------------- ----------- - 1,322,663 7,857,490 9,180,153 ------------ ------------ -------------- -----------
PIPER GLOBAL FUNDS INC. - PACIFIC-EUROPEAN GROWTH FUND PRO FORMA COMBINING SCHEDULE OF INVESTMENTS (UNAUDITED) FEBRUARY 29, 1996
Pro Forma Hercules Hercules Combined European Value Pacific Basin Pacific-European Pro Forma Number of Fund Value Fund Growth Fund Combined Name of Issuer Shares Market Value Market Value Market Value Market Value - - - - - - -------------------------------------------------- ---------- --------------- -------------- ----------------- ------------ (PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS) South Korea (2.3%) Korea 1990 Trust - closed-end fund 75(b) 393,750 393,750 Korea International Turst IDR - closed-end fund 3 157,500 157,500 Pohang Iron And Steel - steel manufacturer 18,000 1,383,517 1,383,517 Samsung Electronics 1/2 Non-Voting Shares - electronics 2,968(b) 161,014 161,014 Samsung Electronics 1/2 Voting Shares - electronics 462(b) 42,491 42,491 Shinhan Bank - commercial bank 44,977 1,110,415 1,110,415 Shinsegae Department Store - retail stores 292(b) 19,898 19,898 Shinsegae Department Store - retail stores 14,478 987,126 987,126 Yukong - oil company 15,000(b) 465,785 465,785 ------------ ------------ -------------- ----------- - 754,755 3,966,741 4,721,496 ------------ ------------ -------------- ----------- Spain (1.6%) Amper - telecommunications 2,800(b) 36,261 36,261 Cubiertas y Mzov - engineering 1,800 116,190 116,190 Empresa Nacional Hidroelectrica del Ribagorzana - utilities 2,830 63,937 63,937 Iberdrola - utilities 150,000 118,126 1,358,454 1,476,580 Inmobiliaria Urbis - real estate 5,977(b) 25,078 25,078 Repsol Sa - oil & gas 37,800 65,647 1,312,946 1,378,593 Telefonica De Espana - telecommunications 4,100 67,322 67,322 Zardoya-Otis - industrial machinery and manufacturing 500 53,617 53,617 ------------ ------------ -------------- ----------- 546,178 - 2,671,400 3,217,578 ------------ ------------ -------------- ----------- Sweden (1.2%) Althin Medical - health care 4,200 80,705 80,705 AssiDoman - forest products 3,100 69,420 69,420 Astra Class A - pharmaceuticals 1,900 87,061 87,061 Atlas Copco Class B - industrial machinery and manufacturing 3,900 67,447 67,447 Ericsson - Class B - telecommunications 2,934 63,534 63,534 Frontec Class B - computer hardware and software 2,000(b) 73,019 73,019 Getinge Industrier Class B - health care 1,300 68,407 68,407 Hoganas Class B - metal products and manufacturing 1,960 54,176 54,176 Nordbanken AB - regional bank 97,000(b) 1,699,025 1,699,025 Skandia Forsakrings - insurance 4,250 99,256 99,256 ------------ ------------ -------------- ----------- 663,025 - 1,699,025 2,362,050 ------------ ------------ -------------- ----------- Switzerland (2.3%) Brown Boveri - general engineering 1,135 101,657 1,255,768 1,357,425 Ciba-Geigy Registered - pharmaceuticals 75 66,898 66,898 CS Holding - financial services 500 47,576 47,576 Kuoni Reisen Holdings - miscellaneous services 45 82,452 82,452
PIPER GLOBAL FUNDS INC. - PACIFIC-EUROPEAN GROWTH FUND PRO FORMA COMBINING SCHEDULE OF INVESTMENTS (UNAUDITED) FEBRUARY 29, 1996
Pro Forma Hercules Hercules Combined European Value Pacific Basin Pacific-European Pro Forma Number of Fund Value Fund Growth Fund Combined Name of Issuer Shares Market Value Market Value Market Value Market Value - - - - - - -------------------------------------------------- ---------- --------------- -------------- ----------------- ------------ (PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS) Nestle-Registered - food and beverage/ processing 820 896,011 896,011 Oerlikon-Buehrle Holding - diversified holding company 1,025(b) 97,745 97,745 Roche Holdings - pharmaceuticals 235 232,864 1,591,238 1,824,102 Sandoz - health care 275 257,891 257,891 Saurer - diversified industrials and conglomerate 100(b) 42,059 42,059 Winterthur Schweizerische Registered - insurance 125 81,203 81,203 ------------ ------------ -------------- ----------- 1,010,345 - 3,743,017 4,753,362 ------------ ------------ -------------- ----------- Thailand (5.3%) Bank of Ayudhya Public Company - commercial bank 320,000 405,418 1,746,265 2,151,683 Electricity General Public Company - electric utility 370,000 271,345 1,127,026 1,398,371 Finance One Compnay - financial services 50,000 360,595 360,595 General Finance and Securities Company - financial services 350,000(b) 207,878 1,285,204 1,493,082 General Finance and Securities Company - foreign - financial serevices 50,000 215,811 215,811 Land And Houses - residential property 75,200 1,490,251 1,490,251 Siam Cement - construction and construction materials 26,400 253,891 1,106,724 1,360,615 Srithai Superware - consumer durable goods 100,000 670,302 670,302 Telecomasia Corporation - utilities 500,000(b) 1,418,087 1,418,087 Thai Farmers Bank - banking and financial services 20,000 206,291 206,291 ------------ ------------ -------------- ----------- - 1,921,229 8,843,859 10,765,088 ------------ ------------ -------------- ----------- United Kingdom (9.6%) Abbott Mead Vickers Plc - communications 57,000 460,469 460,469 Aegis Group - advertising 510,000(b) 386,249 386,249 Antofagasta Holdings - diversified industrial 60,000 344,250 344,250 Bluebird Toys PLC - toy manufacturer 119,600 585,562 585,562 British Aerospace - air transportation 10,000 133,110 133,110 British Petroleum - oil and gas 147,000 189,850 1,023,539 1,213,389 British Telecom - telecommunications 240,000 261,462 1,102,686 1,364,148 BTR - conglomerate 193,700 955,764 955,764 Cable & Wireless - telecommunications & cellular 135,750 107,113 816,102 923,215 Compass Group - contract catering 115,600 861,347 861,347 Dixons Group - department stores 160,000 1,130,976 1,130,976 Glaxo Wellcome - pharmaceuticals 14,000 193,530 193,530 Grand Metropolitan - food and beverage 22,500 149,405 149,405 Great Universal Stores - retail 18,600 188,392 188,392 Guiness - brewing and distillers 10,600 74,441 74,441 International Business Communications (Holdings) - printing and publishing 40,000 184,212 184,212 Jupiter Split Trust - investment fund 963,716(b) 1,216,451 1,216,451 Legal & General Group - insurance 19,500 213,022 213,022 Marks & Spencer - retail 161,400 128,214 906,473 1,034,687
PIPER GLOBAL FUNDS INC. - PACIFIC-EUROPEAN GROWTH FUND PRO FORMA COMBINING SCHEDULE OF INVESTMENTS (UNAUDITED) FEBRUARY 29, 1996
Pro Forma Hercules Hercules Combined European Value Pacific Basin Pacific-European Pro Forma Number of Fund Value Fund Growth Fund Combined Name of Issuer Shares Market Value Market Value Market Value Market Value - - - - - - -------------------------------------------------- ---------- --------------- -------------- ----------------- ------------ (PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS) Rolls-Royce - aerospace 15,000 47,507 47,507 Royal Insurance Holdings - insurance 14,200 82,450 82,450 SeaPerfect - food and beverage 90,497(b) 98,307 98,307 Sheffield Insulation Group - building materials 80,000 271,728 271,728 Shell Transprt and Trading - oil and gas 33,500 432,592 432,592 Siebe - industrial products and equipment 102,900 1,272,091 1,272,091 Smithkline Beecham-CL A - consumer health products 131,000 1,394,993 1,394,993 Standard Chartered - banking and financial services 32,000 310,406 310,406 Sun Alliance Group - property and casualty insurance 210,000 1,240,218 1,240,218 Tarmac - construction and construction materials 31,000 56,442 56,442 Thorn Emi - hotels & leisure 52,000 1,288,872 1,288,872 Vendome Luxury Group Units - consumer goods 17,000 141,494 141,494 Vosper Thornycroft Holdings PLC - diversified manufacturing 8,000 101,837 101,837 Watmoughs - printing and publishing 73,000 480,266 480,266 Yorkshire Chemicals - chemicals 82,500 325,661 325,661 Zeneca Group - pharmaceuticals 23,700 455,801 455,801 ------------ ------------ -------------- ----------- 3,935,836 - 15,677,448 19,613,284 ------------ ------------ -------------- ----------- Total Common Stocks 13,112,013 24,800,168 151,796,727 189,708,908 (cost: $175,430,618) ------------ ------------ -------------- ----------- Preferred Stocks (.2%) Germany (.2%) Fresenius AG - health care 1,750 256,660 256,660 Koegel Fahrzeugwerke AG - automobile 325(b) 63,552 63,552 Systeme, Anwendungen, Produkte in der Datenverarbeitung (SAP) - computer hardware 725 113,564 113,564 ------------ ------------ -------------- ----------- Total Preferred Stocks 433,776 - - 433,776 (cost: $259,496) ------------ ------------ -------------- -----------
PIPER GLOBAL FUNDS INC. - PACIFIC-EUROPEAN GROWTH FUND PRO FORMA COMBINING SCHEDULE OF INVESTMENTS (UNAUDITED) FEBRUARY 29, 1996
Pro Forma Hercules Hercules Combined European Value Pacific Basin Pacific-European Pro Forma Principal Fund Value Fund Growth Fund Combined Name of Issuer Amount Market Value Market Value Market Value Market Value - - - - - - -------------------------------------------------- ---------- --------------- -------------- ----------------- ------------ (PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS) Corporate Bonds (-%) Denmark (-%) Det Danske Traelastkompagni (Danish krone), convertible - corporate bonds 335,000 55,948 - - 55,948 ------------ ------------ -------------- ----------- Total Corporate Bonds 55,948 - - 55,948 (cost: $60,292) ------------ ------------ -------------- ----------- Rights/Warrants (.07%) International Nederlanden Grope Warrants - financial services 24,630(b) 87,825 87,825 Five Arrow Chile Warrants - mutual fund 80,000(b) 46,000 46,000 Gartmore Micro Index Trust Warrants - financial services 10,000(b) 3,366 3,366 Herald Investment Trust Warrants - financial services 10,000(b) 10,251 10,251 ------------ ------------ -------------- ----------- Total Rights/Warrants 101,442 - 46,000 147,442 (cost: $95,529) ------------ ------------ -------------- ----------- Short-Term Securities (3.8%) Repurchase agreement with Goldman Sachs, 5.20%, 3/1/96 $7,701,000 7,701,000 7,701,000 ------------ ------------ -------------- ----------- Total Short Term Securities - - 7,701,000 7,701,000 (cost: $7,701,000) ------------ ------------ -------------- ----------- Total Investments in Securities $13,703,179 24,800,168 159,543,727 198,047,074 (cost: $183,546,935) ------------ ------------ -------------- ----------- ------------ ------------ -------------- -----------
Notes to Investments in Securities: (a) See historical financial statements and footnotes thereto of each fund regarding valuation of securities (b) Presently non-income producing. PART B PACIFIC-EUROPEAN GROWTH FUND A Series of Piper Global Funds Inc. STATEMENT OF ADDITIONAL INFORMATION April 28, 1995 Table of Contents Page ---- Investment Objective, Policies and Restrictions..... 2 Directors and Executive Officers.................... 10 Investment Advisory and Other Services.............. 15 Portfolio Transactions and Allocation of Brokerage.. 21 Capital Stock and Ownership of Shares............... 23 Net Asset Value and Public Offering Price........... 23 Calculation of Performance Data..................... 24 Purchase of Shares.................................. 25 Redemption of Shares................................ 25 Taxation............................................ 27 General Information................................. 31 Financial Statements................................ 31 Pending Litigation.................................. 31 Appendix A - Corporate Bond, Preferred Stock and Commercial Paper Ratings.......................... A-1 Appendix B - General Characteristics and Risks of Options and Futures............................... B-1 This Statement of Additional Information is not a prospectus. This Statement of Additional Information relates to the prospectus dated April 28, 1995, and should be read in conjunction therewith. A copy of the prospectus may be obtained from the Fund at Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota 55402-3804. 1 INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS ----------------------------------------------- The investment objective and policies of the Fund are set forth in the prospectus. Certain additional investment information is set forth below. INVESTMENT BACKGROUND THE PACIFIC BASIN. Management believes that there are significant investment opportunities available in the Pacific Basin. Its reasons for this view include the following: (a) HISTORIC ECONOMIC GROWTH. Many countries in the Pacific Basin have, over approximately the last 25 years, experienced an economic growth rate superior to that of the U.S. Management believes that, based on its evaluation of the factors which in its view have contributed to the high level of growth experienced by countries in the Pacific Basin, the rapid growth rate of countries in the region should continue. (b) ATTRACTIVE RELATIVE VALUATIONS. Management believes that the potential future values of companies within the region have not been reflected in stock market prices to as great an extent as in other areas of the world. Accordingly, Management believes that a significant number of undervalued companies are located in the region. (c) EXPANSION OF EQUITY MARKETS. Management believes that the stock markets of countries in the Pacific Basin are maturing, that the strong economic growth of the region will continue and that foreign investment will increase substantially. (d) CONSUMER DEMAND. Approximately 50% of the world's population lives within the Pacific Basin, including China and India. Management believes that, to the extent that economic growth within the region continues and per capita income rises, consumer demand within the region should expand, which in turn would provide further impetus to economic development. EUROPE. The European economy as represented by the Gross Domestic Product of Europe, including the United Kingdom, is greater than that of the U.S. and almost twice the size of Japan. Management is of the view that the economic growth of countries within Europe has not to date been fully reflected in stock prices. Thus, the stock market capitalization of the European countries is generally smaller relative to the size of their respective economies than are the stock markets of the U.S. and Japan. Management believes that recent developments in Europe will contribute to a significant increase in domestic and foreign investment in the European stock markets, resulting in European stock market capitalizations more reflective of the size of the respective European economies and in turn a corresponding increase in stock market prices generally. 2 In Management's view, the action of the European Union, consisting of twelve Western European countries, in adopting the Single European Act, is of particular importance. In Management's view, the dismantling of controls and barriers and harmonization of laws and regulations will result in the achievement of a higher economic growth rate and lower inflation in the region as a whole than would otherwise have been the case. Management believes that the progressive development of a single European market could be beneficial for economic growth, investment and the control of inflation. In addition, recent political developments in Eastern Europe are expected to result in an opening up of these markets. Management anticipates that the development of market oriented economies by Eastern European countries will contribute to economic growth in Western Europe and extend the consumer market place of the whole region. Eastern European Developments. Although the changes taking place in Eastern Europe are a continuing process and direct access to most of these potential markets by foreign investors is limited, Management may in the future seek to invest in the business opportunities that may emerge from the changing political, economic and legal environment in Eastern Europe, particularly in Hungary, Poland and the Czech and Slovak Republics. However, Management believes that at the present time there are very few appropriate investments available for the Fund in Eastern Europe and Management does not intend to make any such investments in the near future. While Management expects that additional investments will become available in the future, there can be no assurance that this will be the case. Certain Eastern European countries are currently implementing reforms directed at political and economic liberalization, including efforts to move toward more market-oriented economies and to foster multi-party political systems. For example, Hungary and Poland have adopted reforms to stimulate their economies and encourage foreign investment. Specifically, laws have been or are being enacted to allow private individuals to own and operate businesses and to protect the property rights of investors. Such laws seek to assure foreign investors of the right to own interests in and, under certain circumstances, control local companies and to repatriate capital and profits, and in certain cases grant favorable tax treatment to companies with foreign participation. As a result of these and other measures, Management expects that foreign direct investment in Eastern Europe may increase. In addition, the World Bank, the International Monetary Fund and various national governments and private banks are providing financing to companies based in, and governments of, certain Eastern European countries. The European Union has entered into trade and cooperation agreements with most Eastern European countries and has provided technical and financial assistance to such countries. Further, the United States has granted many Eastern European nations "most favored nation" status with respect to trade matters. ALLOCATION OF INVESTMENTS BETWEEN THE PACIFIC BASIN AND EUROPE. As noted above under "Investment Background -- The Pacific Basin," the Pacific Basin includes several countries that have experienced high economic growth rates in 3 recent years. Also, Management believes that there are more attractive values in the region as compared to other areas of the world. Consequently, Management believes that the opportunities for long-term capital appreciation in the Pacific Basin are generally superior to those presently available in the economically more mature areas of the world. Accordingly, while the Fund has no specific policy or restriction on the allocation of its funds between Europe and the Pacific Basin, as of March 31, 1995, approximately 64% of the Fund's investments were in companies in the Pacific Basin and approximately 26% were in companies in Europe. The relative emphasis of the Fund's investments as between the Pacific Basin and Europe may change over time to the extent Management identifies greater investment opportunities in Europe as a result of more attractive values, recent developments in Eastern Europe, the removal of most intra-European trade barriers or otherwise. ALLOCATION AMONG COUNTRIES. Investment is made in those countries where Management believes that economic and political factors, including currency movements, are likely to produce above average investment returns. There is no limitation on the percentage of the Fund's assets that may be invested at any one time in securities of companies in one or more of the countries in the Pacific Basin or in Europe, except insofar as the Fund is limited in its ability to invest in other investment companies; provided, however, that in normal market conditions the Fund's investments will be allocated among at least three different countries in the Pacific Basin and/or Europe. To the extent the Fund invests a significant portion of its assets in any one country, it will be more susceptible to factors adversely affecting issuers in such country than would a comparable fund having a lesser percentage of its assets so invested. SELECTION OF INVESTMENTS. Emphasis is placed on identifying securities of companies believed to be undervalued in the marketplace in relation to such factors as the company's assets, earnings and growth potential or which are believed best positioned within a particular industry to take advantage of specific economic and political factors likely to result in growth for such industry. The Fund does not, however, concentrate its investments in companies of a particular asset size or in a particular industry, but instead selects its investments based on the characteristics of the particular markets and economies of the countries in which it invests. FOREIGN CURRENCY TRANSACTIONS As discussed in the prospectus, the Fund engages in currency exchange transactions in connection with the purchase and sale of its investments. A forward foreign currency exchange contract involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract as agreed by the parties, at a price set at the time of the contract. In the case of a cancelable forward contract, the holder has the unilateral right to cancel the contract at maturity by paying a specified fee. The contracts are traded in the interbank market conducted directly between currency traders (usually large commercial banks) and their customers. A forward contract generally has no deposit requirement, and no commissions are charged at any stage for trades. A 4 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 ("CFTC"), such as the New York Mercantile Exchange. The Fund would enter into foreign currency futures contracts solely for hedging or other appropriate risk management purposes as defined in CFTC regulations. Forward foreign currency exchange contracts differ from foreign currency futures contracts in certain respects. For example, the maturity date of a forward contract may be any fixed number of days from the date of the contract agreed upon by the parties, rather than a predetermined date in any given month. Forward contracts may be in any amounts agreed upon by the parties rather than predetermined amounts. Also, forward foreign exchange contracts are traded directly between currency traders so that no intermediary is required. A forward contract generally requires no margin or other deposit. At the maturity of a forward or futures contract, the Fund 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 usually 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. Positions in foreign currency futures contracts may be closed out only on an exchange or board of trade which provides a secondary market in such contracts. Although the Fund purchases or sells 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, the Fund 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 the Fund to dispose of an option it has purchased or terminate its obligations under an option it has written at a time when the Adviser believes it would be advantageous to do so. Options on foreign currencies are affected by all of those factors which influence foreign exchange rates and investments generally. The value of a foreign currency option is dependent upon the value of the foreign currency and the U.S. dollar, and may have no relationship to the 5 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 provided 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 that the U.S. options markets are closed while the markets for the underlying currencies remain open, significant price and rate movements may take place in the underlying markets that cannot be reflected in the options markets. Although foreign exchange dealers do not charge a fee for currency conversion, they do realize a profit based upon the difference between prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign currency to the Fund at one rate, while offering a lesser rate of exchange should the Fund desire to resell that currency to the dealer. REVERSE REPURCHASE AGREEMENTS The Fund has the right to enter into reverse repurchase agreement transactions. However, the Fund does not currently enter into or intend to enter into such transactions during the coming year. The Fund may enter into reverse repurchase agreements with the same parties with whom it may enter into repurchase agreements. See "Special Investment Methods - Repurchase Agreements" in the prospectus. Under a reverse repurchase agreement, the Fund sells securities and agrees to repurchase them at a mutually agreed date and price. 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, it will establish and maintain a segregated account with an approved custodian containing high grade liquid debt securities having a value not less than the repurchase price (including accrued interest). Reverse repurchase agreements involve the risk that the market value of the securities retained in lieu of sale by the Fund may decline below the price of the securities the Fund has sold but is obligated to repurchase. 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 will be used as a means of borrowing for investment 6 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 may or may not be recovered by income from or appreciation of the securities purchased. The Fund's Board of Directors has established procedures, which are periodically reviewed by the Board, pursuant to which the Adviser will monitor the creditworthiness of the dealers and banks with which the Fund enters into reverse repurchase agreement transactions. The Securities and Exchange Commission views reverse repurchase agreement transactions as collateralized borrowings by the Fund. Therefore, pursuant to the Investment Company Act of 1940 (the "1940 Act"), the Fund must maintain continuous asset coverage (that is, total assets including borrowings, less liabilities exclusive of borrowings) of at least 300% of the amount borrowed. ILLIQUID SECURITIES As a fundamental investment restriction that may not be changed without shareholder approval, the Fund will invest no more than 15% of its net assets in illiquid securities. A security is considered illiquid if it cannot be sold in the ordinary course of business within seven days at approximately the price at which it is valued. 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 and other selling expenses 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 Securities and Exchange Commission adopted Rule 144A under the 1933 Act, which provides a safe harbor exemption from the registration requirements of the 1933 Act for resales of restricted securities to "qualified institutional buyers," as defined in the rule. The result of this rule has been the development of a more liquid and efficient institutional resale market for restricted securities. Thus, restricted securities are no longer necessarily illiquid. The Fund may therefore invest in Rule 144A securities and treat them as liquid when they have been determined to be liquid by the Board of Directors of the Company or by the Adviser subject to the oversight of and pursuant to procedures adopted by the Board of Directors (as discussed below). Similar determinations may 7 be made with respect to securities issued in reliance on the so-called "private placement" exemption from registration under Section 4(2) of the 1933 Act. Under the procedures adopted by the Board of Directors, 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. 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 The Fund's investment objective and the following investment restrictions are fundamental and cannot be changed without the approval of the holders of a majority of the Fund's outstanding voting securities (defined in the 1940 Act as the lesser of (a) more than 50% of the outstanding shares or (b) 67% or more of the shares represented at a meeting where more than 50% of the outstanding shares are represented). All other investment policies or practices are considered by the Fund not to be fundamental and, accordingly, may be changed without shareholder approval. If a percentage restriction on investment or use of assets set forth below is adhered to at the time a transaction is effected, later changes in percentage resulting from changing market values will not be considered a deviation from policy. The Fund may 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 United States government or any agency or instrumentality thereof. For purposes of these restrictions, the government of any country (other than the U.S.), including its governmental subdivisions, is each considered a single issuer. (2) Invest 25% or more of the value of its total assets in the securities of issuers in the same industry, provided that this limitation does not apply to 8 securities issued or guaranteed by the United States government or its agencies or instrumentalities. (3) Borrow money (provided that the Fund may enter into reverse repurchase agreements) except from banks for temporary or emergency purposes. The amount of such borrowing may not exceed 10% of the value of the Fund's total assets. The Fund will not purchase portfolio securities while outstanding borrowing exceeds 5% of the value of the Fund's total assets. The Fund will not borrow money for leverage purposes (provided that the Fund may enter into reverse repurchase agreements for such purposes). (4) Pledge, hypothecate, mortgage or otherwise encumber its assets, except to secure issuances or borrowings permitted by restriction 3 above (collateral arrangements with respect to reverse repurchase agreements or to margin for future contracts and options are not deemed to be pledges or other encumbrances for purposes of this restriction). (5) Make loans of money or property to any person, except through loans of portfolio securities, the purchase of debt obligations in which the Fund may invest consistently with the Fund's investment objective and policies or the acquisition of securities subject to repurchase agreements. (6) Underwrite the securities of other issuers, except to the extent that in connection with the disposition of portfolio securities or the sale of its own shares the Fund may be deemed to be an underwriter. (7) Invest for the purpose of exercising control over management of any company. (8) Purchase real estate or interests therein other than securities backed by mortgages and similar instruments. (9) Purchase or sell commodities or commodity contracts except for hedging purposes. (10) Make any short sales of securities. (11) Issue any senior securities (as defined in the 1940 Act), other than as set forth in restriction number 3 above 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. (12) Invest more than 15% of the value of its net assets in illiquid securities. In addition, the following are non-fundamental investment restrictions of the Fund which may be changed without shareholder approval: 9 (a) The Fund will not purchase or sell interests in oil, gas or mineral leases or interests in oil, gas or other mineral exploration or development programs. (b) The Fund will not invest more than 5% of the value of its total assets in the securities of any issuers which, with their predecessors, have a record of less than three years' continuous operation. (Securities of such issuers will not be deemed to fall within this limitation if they are guaranteed by an entity in continuous operation for more than three years. The value of all securities issued or guaranteed by such guarantor and owned by the Fund shall not exceed 10% of the value of the total assets of the Fund.) (c) The Fund will not 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 contracts. (d) The Fund will not purchase or retain the securities of any issuer if, to the Fund's knowledge, those officers or directors of Piper Global 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. (e) The Fund will not invest in real estate limited partnerships. (f) The Fund will treat repurchase agreements with remaining maturities in excess of seven days as illiquid securities. (g) The Fund will not 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 the Fund's net assets, may be warrants which are not listed on the New York Stock Exchange or the American Stock Exchange. DIRECTORS AND EXECUTIVE OFFICERS -------------------------------- The directors and officers of Piper Global and their principal occupations during the past five years are set forth below. Each of Piper Global's directors and officers, other than Mr. Watt and Mr. Balfour, also serves as a director or officer of various closed-end and open-end investment companies managed by the Adviser. 10 Principal Occupations Position With During The Past Five Years Name And Address Piper Global And Other Affiliations - - - - - - ---------------- ------------- -------------------------- William H. Ellis* Chairman of President of Piper Jaffray Companies Piper Jaffray Tower the Board of Inc. and Piper Jaffray Inc. since 222 South Ninth Street Directors September 1982 and Chief Operating Minneapolis, MN 55402 Officer of the same two companies since August 1983; Director and Chairman of the Board of the Adviser since October 1985 and President of the Adviser since December 1994. Jaye F. Dyer Director President of Dyer Management 4670 Norwest Center Company, a private management 90 South Seventh Street company, since January 1, 1991; Minneapolis, MN 55402 prior thereto, Mr. Dyer was President and Chief Executive Officer of Dyco Petroleum Corporation, a Minneapolis based oil and natural gas development subsidiary of Arkla, Inc., from 1971, when he founded the company, until March 1, 1989, and Chairman of the Board until December 31, 1990. Mr. Dyer serves on the board of directors of Northwestern National Life Insurance Company, The ReliaStar Financial Corp. (the holding company of Northwestern National Life Insurance Company) and various privately held and nonprofit corporations. Karol D. Emmerich Director President of The Paraclete Group, 7302 Claredon Drive a consultant to nonprofit and other Edina, MN 55439 organizations, since May 1993; prior thereto, Ms. Emmerich was Vice President and Treasurer of Dayton Hudson Corporation from 1980 to May 1993 and Chief Accounting Officer from 1989 to May 1993. Ms. Emmerich also serves on the board of directors of a number of privately held and nonprofit corporations. Luella G. Goldberg Director 7019 Tupa Drive Edina, MN 55435 Ms. Goldberg serves on the board of directors of Northwestern National Life Insurance Company (since 1976), The ReliaStar Financial Corp. (since 1989), TCF Bank Savings fsb (since 1986), TCF Financial Corporation, the holding company of TCF Bank Savings fsb (since 1988) and Hormel Foods Corp. (since 1993). Ms. Goldberg also serves as a Trustee of Wellesley College and as a director of a number of other organizations, including the Minnesota Orchestral Association and the University of Minnesota Foundation. Ms. Goldberg was Chairman of the Board of Trustees of Wellesley College from 1985 to 1993 and acting President from July 1, 1993 to October 1, 1993. 11 Principal Occupations Position With During The Past Five Years Name And Address Piper Global And Other Affiliations - - - - - - ---------------- ------------- -------------------------- John T. Golle Director Chairman and Chief Executive 1600 West 82nd Street Officer of Education Alternatives, Minneapolis, MN 55431 Inc., a company in the business of providing private management for public schools since 1986; formerly a partner and director of Golle & Holmes Companies, a holding company located in Minneapolis, Minnesota engaged through its subsidiaries in various aspects of the training and development services industry. Mr. Golle also serves on the board of directors of the Children's Broadcasting Corporation. George Latimer Director Director, Special Actions Office, 754 Linwood Office of the Secretary, Department St. Paul, MN 55105 of Housing and Urban Development since 1993, prior thereto, Mr. Latimer had been Dean of Hamline Law School, Saint Paul, Minnesota, since 1990. Mr. Latimer serves on the board of directors of Digital Biometrics, Inc. and Payless Cashways, Inc. Iain A. Watt* Director Managing Director of the Sub-- Edinburgh Fund Managers plc Adviser since 1991, prior to which Donaldson House he had been Director since 1986. 97 Haymarket Terrace Mr. Watt is also a director of Edinburgh, EH12 5HD Edinburgh Dragon Trust plc, Edinburgh New Tiger Trust plc, Edinburgh Unit Trust Managers Limited, Edinburgh Oil Management Limited and Private Fund Managers Limited. Michael W. Balfour* Director Director of Overseas Investments Edinburgh Fund Managers plc of the Sub-Adviser since 1992, prior Donaldson House to which he was the assistant 97 Haymarket Terrace director and head of the Pacific Edinburgh, EH12 5HD Department of the Sub-Adviser from 1988 to 1992. Mr. Balfour is also a director of the Sub-Adviser, Credit Capital Asset Management Company Limited, Edinburgh Inca Trust plc and Edinburgh Java Trust plc. Paul A. Dow President Chief Investment Officer of the Piper Jaffray Tower Adviser since December 1989 and 222 South Ninth Street Senior Vice President of the Adviser Minneapolis, MN 55402 since February 1989. Robert H. Nelson Vice President Senior Vice President of the Adviser Piper Jaffray Tower since November 1993, prior to which 222 South Ninth Street he had been a Vice President of the Minneapolis, MN 55402 Adviser since November 1991 and an Assistant Vice President since 1989. 12 Principal Occupations Position With During The Past Five Years Name And Address Piper Global And Other Affiliations - - - - - - ---------------- ------------- -------------------------- Nancy S. Olsen Vice President Senior Vice President of the Piper Jaffray Tower Adviser since November 1991; 222 South Ninth Street prior to which Ms. Olsen had Minneapolis, MN 55402 been a Vice President of the Adviser since May 1987. Charles N. Hayssen Treasurer Managing Director of Piper Piper Jaffray Tower Jaffray Inc. since 1986 and of 222 South Ninth Street Piper Jaffray Companies Inc. Minneapolis, MN 55402 since 1987; Chief Financial Officer of Piper Jaffray Inc. since 1988; Director and Chief Financial Officer of the Adviser since 1989 and Chief Operating Officer of the Adviser since December 1994. David E. Rosedahl Secretary Managing Director, Secretary Piper Jaffray Tower and General Counsel for Piper 222 South Ninth Street Jaffray Inc.; Managing Minneapolis, MN 55402 Director and General Counsel for Piper Jaffray Companies Inc.; Secretary and a Director of the Adviser. __________________ * Directors who are "interested persons" of the Fund, as defined in the 1940 Act, of Piper Capital and the Fund. Two of the Fund's directors, Mr. Balfour and Mr. Watt, reside outside of the United States and substantially all of the assets of such persons are located outside of the United States. Neither Mr. Balfour nor Mr. Watt has appointed an agent for service of process in the United States. It may not be possible, therefore, for investors to effect service of process within the United States upon such persons or to enforce against them, in the United States courts or foreign courts, judgments obtained in the United States courts predicated upon the civil liability provisions of the federal securities laws of the United States. In addition, it is not certain that a foreign court would enforce, in original actions, liabilities against such persons predicated solely upon United States securities laws. Ms. Goldberg, Ms. Emmerich and Mr. Dyer are members of the Fund's Audit Committee. Ms. Goldberg acts as the chairperson of such committee. The Audit Committee oversees the Fund's financial reporting process, reviews audit results and recommends annually to the Fund a firm of independent certified public accountants. The Board of Directors also has a Committee of the Independent Directors, consisting of Messrs. Dyer, Golle and Latimer, Ms. Emmerich and Ms. Goldberg, and a Derivatives Committee consisting of Ms. Emmerich, who serves as chairperson of such committee, Ms. Goldberg and Mr. Dyer. The functions of the Committee of the Independent Directors are: (a) recommendation to the full Board of approval of any management, advisory, sub-advisory and/or administration agreements; (b) recommendation to the full Board of approval of any underwriting and/or 13 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 Fund who are officers or employees of the Adviser or Sub-Adviser or any of their affiliates receive no remuneration from the Fund. Each of the other directors receives from the Fund an annual retainer of $1,000, plus a fee of $250 for each regular quarterly Board of Directors meeting attended. In addition, members of the Audit Committee not affiliated with the Adviser or Sub-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 between the Fund and all other publicly-held 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 Piper Global during the fiscal year ended February 28, 1995, as well as the total compensation received by each director from Piper Global and all other registered investment companies managed by the Adviser or an affiliate 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. No other individuals received compensation from Piper Global during the fiscal year ended February 28, 1995.
Pension or Retirement Estimated Total Aggregate Benefits Annual Benefits Compensation Compensation Accrued as Part Upon from Fund Director from Piper Global of Fund Expenses Retirement Complex* - - - - - - -------- ----------------- ---------------- --------------- ------------ Jaye F. Dyer $2,053 None None $61,500 Karol D. Emmerich $2,053 None None $61,500 Luella G. Goldberg $2,105 None None $63,500 John T. Golle $2,000 None None $59,500 George Latimer $2,000 None None $59,500
- - - - - - --------------- * Consists of 26 registered investment companies managed by the Adviser or an affiliate of the Adviser, including Piper Global. Each director included in the table serves on the board of each such registered investment company. 14 INVESTMENT ADVISORY AND OTHER SERVICES -------------------------------------- GENERAL 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. The Sub-Adviser for the Fund is Edinburgh Fund Managers plc (the "Sub-Adviser"). Each of the Adviser and Sub- Adviser 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. The address of the Sub-Adviser is Donaldson House, 97 Haymarket Terrace, Edinburgh, Scotland, EH12 5HD. CONTROL OF THE ADVISER, THE SUB-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. The Sub- Adviser is a public limited company incorporated in 1969. It is a majority-owned subsidiary of The British Investment Trust plc, a Scottish closed-end investment company, for which the Sub-Adviser serves as investment manager and adviser. 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 of Piper Global (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 Piper Global) and the shareholders of the Fund. 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 Piper Global or by vote of a majority of the Fund'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 Piper Global. 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 Fund, provided that in either event such continuance is also approved by a vote of a majority of the directors who are not parties to such agreement, or interested persons of such parties, cast in person at a meeting called for the purpose of voting on such approval. 15 Pursuant to the Investment Advisory and Management Agreement, the Fund pays the Adviser monthly advisory fees as set forth in the prospectus. Adjustments to the Basic Fee are made by comparison of the Fund's investment performance for the applicable period with the investment record of the EAFE Index. The Basic Fee for each month may be increased or decreased by up to .25% (on an annualized basis) of the Fund's average daily net assets depending upon the extent by which the Fund's performance varies from the EAFE Index over the applicable performance period. For each percentage point by which the investment performance of the Fund exceeds that of the EAFE Index for the applicable performance period, the Basic Fee is increased by .05% (on an annualized basis) of the Fund's average daily net assets, and for each percentage point amount by which the Fund underperforms the EAFE Index, the Basic Fee is decreased by .05% (on an annualized basis) of the Fund's average daily net assets. The maximum monthly increase for performance is 1/12 of .25% of the Fund's average daily net assets and will be payable if the investment performance of the Fund exceeds that of the EAFE Index by five or more percentage points for the performance period, and the maximum decrease for performance is 1/12 of .25% of the Fund's average daily net assets, which will occur if the Fund underperforms the EAFE Index by five or more percentage points for the performance period. For purposes of calculation of the performance adjustment, average daily net assets are equal to the Fund's average daily net assets during the month for which the calculation is being made. The advisory fees paid by the Fund for the fiscal years ended February 28, 1993, 1994 and 1995 were $505,350, $1,068,330 and $1,731,719, respectively. The Adviser and Sub-Adviser intend, although not required under the Investment Advisory and Management Agreement and Sub-Investment Advisory Agreement (discussed below), 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 exceed 2.25%. This arrangement may be modified or discontinued at any time after fiscal year end, at the Adviser's discretion. Even in the event of discontinuance of this arrangement the Fund will still be subject to the laws of certain states, which require that if a mutual fund's expenses (including advisory fees but excluding interest, taxes, brokerage commissions and extraordinary expenses) exceed certain percentages of average net assets, the fund must be reimbursed for such excess expenses. The Investment Advisory and Management Agreement provides that the Adviser must make any expense reimbursements to the Fund required under state law. The laws of California provide that aggregate annual expenses of a mutual fund shall not normally exceed 2-1/2% of the first $30 million of the average net assets, 2% of the next $70 million of the average net assets and 1-1/2% of the remaining average net assets. Such expenses include the Adviser's compensation, but exclude interest, taxes, brokerage fees and commissions, extraordinary expenses and amounts paid under the Fund's Rule 12b-1 Plan. The Adviser does not believe that the laws of any other state in which the Fund's shares may be offered for sale contain expense reimbursement requirements. 16 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. SUB-ADVISORY AGREEMENT Under the Sub-Investment Advisory Agreement, the Sub-Adviser is responsible for the investment and reinvestment of the Fund's assets in non-U.S. securities and the placement of brokerage transactions in connection therewith. For its services, the Sub-Adviser is paid by the Adviser a fee, payable over the same time periods and calculated in the same manner as the Adviser's fee, equal to 65% of the Adviser's Basic Fee plus or minus 90% of the performance fee adjustment. The fee received by the Sub-Adviser will be reduced by a portion of the excess, if any, of certain of the Fund's annual expenses over the expense limitations set by California law, as described above, and any other applicable state expense limitations. The Sub-Adviser's fee shall be reduced by an amount which bears the same ratio to the fee reductions absorbed by the Adviser under the Investment Advisory and Management Agreement as the sub-advisory fees which the Sub-Adviser would otherwise be entitled to receive bear to the advisory fees which the Adviser would be entitled to receive had the Fund not exceeded state expense limitations. The fees paid by the Adviser to the Sub-Adviser (such amounts are payable out of the advisory fees received by the Adviser for the same periods and are not in addition to such amounts) for the fiscal years ended February 28, 1993, 1994 and 1995 were $364,557, $691,438 and $1,149,751, respectively. The Sub-Investment Advisory Agreement will terminate automatically in the event of its assignment. In addition, the Sub-Investment Advisory Agreement is terminable at any time, without penalty, by the Board of Directors on 60 days' written notice to the Adviser and the Sub-Adviser or by a vote of the holders of a majority of the outstanding shares of the Fund. Unless sooner terminated, the Sub-Investment Advisory Agreement shall continue in effect until two years from the date of its execution and thereafter from year to year provided it is specifically approved at least annually by either the Board of Directors or by a vote of a majority (as defined in the 1940 Act) of the outstanding voting securities of the Fund, provided that, in either event, such continuance is also approved by a vote of a majority of the Directors who are not parties to such Sub-Investment Advisory Agreement, or interested persons of such parties, cast in person at a meeting called for the purpose of voting on such approval. 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 to the Adviser, fees and expenses of officers and directors who are not affiliated with 17 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 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, distribution expenses pursuant to the Rule 12b-1 plan, and other expenses which are not expressly assumed by the Adviser under the Investment Advisory and Management Agreement. DISTRIBUTION PLAN Rule 12b-1(b) under the 1940 Act provides that any payments made by the Fund in connection with financing the distribution of its shares may only be made pursuant to a written plan describing all aspects of the proposed financing of distribution, and also requires that all agreements with any person relating to the implementation of the plan must be in writing. The Fund has entered into an Underwriting and Distribution Agreement with the Distributor pursuant to a Distribution Plan adopted in accordance with such Rule. The Fund's Distribution Plan became effective upon the Fund's conversion to an open-end investment company on August 31, 1992. Rule 12b-1(b)(1) requires that such plan be approved by a majority of a 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 of Piper Global and of the Directors who are not interested persons of Piper Global and who have no direct or indirect interest in the operation of the plan or in the agreements related to the plan, cast in person at a meeting called for the purpose of voting on such plan or agreement. Rule 12b-1(b)(3) requires that the plan or agreement provide, in substance: (a) that it shall continue in effect for a period of more than one year from the date of its execution or adoption only so long as such continuance is specifically approved at least annually in the manner described in paragraph (b)(2) of Rule 12b-1; (b) that any person authorized to direct the disposition of 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 of Piper Global who are not interested persons of Piper Global 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. 18 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 Piper Global's disinterested directors are committed to the discretion of such disinterested directors. Rule 12b-1(e) provides that the Fund may implement or continue a plan pursuant to Rule 12b- 1(b) only if the directors who vote to approve such implementation or continuation conclude, in the exercise of reasonable business judgment and in light of their fiduciary duties under state law, and under Sections 36(a) and (b) of the 1940 Act, that there is a reasonable likelihood that the plan will benefit the Fund and its shareholders. The Board of Directors has concluded that there is a reasonable likelihood that the Distribution Plan will benefit the Fund and its shareholders. Pursuant to the provisions of the Distribution Plan, the Fund pays a monthly fee to the Distributor equal, on an annual basis, to up to .50% of the Fund's average daily net assets in order to reimburse the Distributor for its actual expenses incurred to cover shareholder servicing costs and distribution expenses. In the event expenses for any one year exceed the maximum reimbursable under the Plan, such expenses may not be carried forward to the following year. Shareholder Servicing Costs include all expenses of the Distributor incurred in connection with providing administrative or accounting services to shareholders, 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 of the Fund regarding their ownership of shares or their accounts with the Fund, or who provide other administrative or accounting services not otherwise required to be provided by the Fund's Adviser or transfer agent. Distribution Expenses under the Plan include, but are not limited to, initial and ongoing sales compensation (in addition to sales charges) paid to investment executives of the Distributor and to other broker-dealers; expenses incurred in the printing of prospectuses, statements of additional information and reports used for sales purposes; expenses of preparation and distribution of sales literature; expenses of advertising of any type; an allocation of the Distributor's overhead; and payments to and expenses of persons who provide support services in connection with the distribution of Fund shares. Distribution fees paid by the Fund for the fiscal year ended February 28, 1995 were $476,639. During this period, the Distributor voluntarily agreed to limit the reimbursement fee to an annual rate of .28% of average daily net assets. Of the distribution fees paid for the fiscal year ended February 28, 1995, the Distributor used $200,188 for compensation to underwriters (fees to investment executives) and $276,451 for printing and mailing of prospectuses to other than current shareholders. 19 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 being reimbursed for its shareholder servicing and distribution expenses pursuant to the Distribution Plan discussed above, the Distributor receives the sales load on sales of Fund shares as set forth in the prospectus. The Distributor waived such payment for purchases of Fund shares during fiscal 1993. The total underwriting commissions paid by the Fund during the fiscal years ended February 28, 1994 and 1995 were $556,904 and $459,632, respectively, and the Distributor retained underwriting commissions of $323,004 and $266,587, respectively. TRANSFER AGENT AND DIVIDEND DISBURSING AGENT Investors Fiduciary Trust Company ("IFTC"), the transfer agent for Piper Global, maintains certain omnibus shareholder accounts for the Fund. Each such omnibus account represents the accounts of a number of individual shareholders of the Fund. Piper Global 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 $6.00 per active shareholder account for the Fund and $1.60 per inactive account for the Fund (defined as an account that has a balance of shares in the Fund but that does not require a client statement for the current month). 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 20 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 February 28, 1995. Fees accrued from December 1, 1994 to February 28, 1995 were $23,704. PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE -------------------------------------------------- Transactions on stock exchanges involve the payment of brokerage commissions. In transactions on stock exchanges in the United States, commissions are negotiated whereas on many foreign stock exchanges, commissions are fixed, often at levels higher than those available in the United States. In the case of securities traded on the over-the-counter markets, there is generally no stated commission but the price usually includes a commission paid by the issuer to the underwriters. Commissions are paid with respect to the purchase of certain other securities in which the Fund may invest, and with respect to options on securities, futures contracts and options on futures contracts purchased by the Fund. Subject to the general supervision of the Directors of the Fund, the Adviser and the Sub-Adviser are responsible for the investment decisions and the placing of the orders for portfolio transactions for the Fund. The Fund has no obligation to enter into transactions in portfolio securities with any dealer, issuer, underwriter or other entity. The Fund does not purchase securities from, or sell securities to, the Adviser, the Sub- Adviser or their respective affiliates acting as principal. In placing orders, it is the policy of the Fund to obtain the best price and execution for its transactions. Where best price and execution may be obtained from more than one broker-dealer, the Adviser or the Sub-Adviser may, in their discretion, purchase and sell securities through broker-dealers who provide research, statistical and other information to the Adviser or the Sub-Adviser, as the case may be. The Fund will not purchase at a higher price or sell at a lower price in connection with transactions effected with a dealer, acting as principal, who furnishes research services to the Adviser or Sub-Adviser than would be the case if no weight were given by the Adviser or Sub-Adviser, as the case may be, to the dealer's furnishing of such services. The supplemental information received from a broker-dealer is in addition to the services required to be performed by the Adviser under the Advisory Agreement, and by the Sub-Adviser under the Sub-Advisory Agreement, and the expenses of the Adviser and/or the Sub-Adviser will not necessarily be reduced as a result of the receipt of such information. Consistent with the Rules of Fair Practice of the National Association of Securities Dealers, Inc., and subject to seeking the best price and execution, the Fund may consider sales of Shares of the Fund as a factor in the selection of broker-dealers to enter into portfolio transactions with the Fund. 21 The investment information provided to the Adviser or the Sub-Adviser, as the case may be, is of the types described in Section 28(e)(3) of the Securities Exchange Act of 1934 and is designed to augment the Adviser's or the Sub- Adviser's own internal research and investment strategy capabilities. Research and statistical services furnished by brokers through which the Fund effects securities transactions are used by the Adviser or the Sub-Adviser in carrying out its investment management responsibilities with respect to all its client accounts, but not all such services may be used by the Adviser or the Sub- Adviser in connection with the Fund. Certain other clients of the Adviser and/or the Sub-Adviser may have investment objectives and policies similar to those of the Fund. The Adviser and/or the Sub-Adviser may, from time to time, make recommendations that result in the purchase or sale of a particular security by its other clients simultaneously with the Fund. ("Security" is defined for these purposes to include options, futures contracts and options on futures contracts.) If transactions on behalf of more than one client during the same period increase the demand for securities being purchased or the supply of securities being sold, there may be an adverse affect on price or quantity. In addition, it is possible that the number of options or futures transactions that the Fund may enter into may be affected by options or futures transactions entered into by other investment advisory clients of the Adviser. It is the policy of the Adviser and the Sub-Adviser to allocate advisory recommendations and the placing of orders in a manner that is deemed equitable by the Adviser or the Sub-Adviser to the accounts involved, including the Fund. When two or more of the clients of the Adviser or Sub-Adviser (including the Fund) are purchasing or selling the same security on a given day from the same broker-dealer, such transactions may be averaged as to price. Transactions in securities, options on securities, futures contracts and options on futures contracts may be effected through Piper Jaffray Inc. if the commissions, fees or other remuneration received by Piper Jaffray Inc. are reasonable and fair compared to the commissions, fees or other remuneration paid to other brokers or other futures commission merchants in connection with comparable transactions involving similar securities or similar futures contracts or options thereon being purchased or sold on an exchange or contract market during a comparable period of time. In effecting portfolio transactions through Piper Jaffray Inc., the Fund intends to comply with Section 17(e)(1) of the 1940 Act. The Fund paid brokerage commissions for the fiscal years ended February 28, 1993, 1994 and 1995 of $274,000, $735,400 and $683,910, respectively. No commissions were paid to affiliates of the Fund, the Adviser or the Sub-Adviser, or to affiliates of such affiliates during such periods. From time to time the Fund may acquire the securities of its regular brokers or dealers or affiliates of such brokers or dealers. During the fiscal year ended February 28, 1995, no such securities were acquired by the Fund. 22 OPTION TRADING LIMITS 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 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 and the Sub-Adviser. An exchange may order the liquidation of positions found to be in excess of these limits, and it may impose certain other sanctions. CAPITAL STOCK AND OWNERSHIP OF SHARES ------------------------------------- The 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. As of March 31, 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 Fund 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 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. The portfolio securities in which the Fund invests fluctuate in value, and hence the net asset value per share of the Fund also fluctuates. On February 28, 1995, the net asset value per share for the Fund was calculated as follows: Net Assets ($154,392,852) = Net Asset Value Per Share ($12.73) ------------------------- Shares Outstanding (12,130,925) ----------- 23 A sales charge of 4% 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. CALCULATION OF PERFORMANCE DATA ------------------------------- Advertisements and other sales literature for the Fund may refer to "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: P(1+T)/n/ = ERV Where: P = a hypothetical initial payment of $1,000; T = average annual total return; n = number of years; and ERV = ending redeemable value at the end of the period of a hypothetical $1,000 payment made at the beginning of such period. This calculation deducts the maximum sales charge from the initial hypothetical $1,000 investment, assumes all dividends and capital gains distributions are reinvested at net asset value on the appropriate reinvestment dates as described in the prospectus, and includes all recurring fees, such as investment advisory and management fees, charged to all shareholder accounts. The average annual total returns on an investment in the Fund for various periods ending February 28, 1995 were: One Year: (14.64)% Since Inception (4/27/90): 4.66% The Adviser has waived or paid certain expenses of the Fund, thereby increasing total return. 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 return since inception for the period ended February 28, 1995, would have been 4.49%. 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: 24 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 Fund's cumulative total return from inception (April 27, 1990) through February 28, 1995 was 24.67%. Absent any voluntary expense payments or waivers, the cumulative total return would have been 23.79%. PURCHASE OF SHARES ------------------ An investor may qualify for a reduced sales charge immediately by signing a nonbinding Letter of Intent stating the investor's intention to invest within a 13-month period, beginning not earlier than 90 days prior to the date of execution of the Letter, a specified amount which, if made at one time, would qualify for a reduced sales charge. Reinvested dividends will be treated as purchases of additional shares. Any redemptions made during the term of the Letter of Intent will be subtracted from the amount of purchases in determining whether the Letter of Intent has been completed. During the term of a Letter of Intent, IFTC will hold shares representing 5% of the amount that the investor intends to invest during the 13-month period in escrow for payment of a higher sales charge if the full amount indicated in the Letter of Intent is not purchased. Dividends on the escrowed shares will be paid to the shareholder. The escrowed shares will be released when the full amount indicated has been purchased. If the full indicated amount is not purchased within the 13-month period, the investor will be required to pay, either in cash or by liquidating escrowed shares, an amount equal to the difference in the dollar amount of sales charge actually paid and the amount of sales charge the investor would have paid on his or her aggregate purchases if the total of such purchases had been made at a single time. REDEMPTION OF SHARES -------------------- General Redemption of shares, or payment, may be suspended at times (a) when the New York Stock Exchange is closed for other than customary weekend or holiday closings, (b) when trading on said Exchange is restricted, (c) when an emergency exists, as a result of which disposal by the Fund of securities owned by it is not 25 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 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 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 the Fund within 30 days without payment of an additional sales charge. The Distributor will refund to any shareholder a pro rata amount of any contingent deferred sales charge paid by such shareholder in connection with a redemption of Fund shares if and to the extent that the redemption proceeds are reinvested within 30 days of such redemption in any mutual fund managed by the Adviser. Such refund will be based upon the ratio of the net asset value of shares purchased in the reinvestment to the net asset value of shares redeemed. Reinvestments will be allowed at net asset value without the payment of a front-end sales charge, irrespective of the amounts of the reinvestment, but shall be subject to the same pro rata contingent deferred sales charge that was applicable to the earlier investment; however, the period during which the contingent deferred sales charge shall apply on the newly issued shares shall be the period applicable to the redeemed shares extended by the number of days between the redemption and the reinvestment dates (inclusive). 26 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 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 the Fund concurrent with purchases of additional shares of the Fund would be disadvantageous because of the sales commission involved in the additional purchases. Additional investments of less than $5,000 or three times the annual withdrawals under the Systematic Withdrawal Plan will ordinarily not be allowed during the time the plan is in effect. A confirmation of each transaction showing the sources of the payment and the share and cash balance remaining in the account will be sent. The plan may be terminated on written notice by the shareholder or the Fund, and it will terminate automatically if all shares are liquidated or withdrawn from the account or upon the death or incapacity of the shareholder. The amount and schedule of withdrawal payments may be changed or suspended by giving written notice to your Piper Jaffray investment executive or other broker-dealer at least seven business days prior to the end of the month preceding a scheduled payment. TAXATION -------- GENERAL The Fund has qualified and intends to qualify in the future as a regulated investment company for federal income tax purposes. In order to so qualify, the Fund must meet certain requirements imposed by the Code as to the sources of the Fund's income and the diversification of the Fund's assets. The Fund must, among other things, (a) derive in each taxable year at least 90% of its gross income from dividends, interest, payments with respect to loans of securities, gains from the sale or other disposition of securities or other income derived with respect to its business of investing in such securities (including, but not limited to, gains from options, futures or forward contracts); (b) generally derive in each taxable year less than 30% of its gross income from gains from the sale or other disposition of securities, options, futures or forward contracts held for less than three months; and 27 (c) diversify its holdings so that, at the end of each fiscal quarter, (i) at least 50% of the value of the Fund's assets is represented by (A) cash, United States government securities or securities of other regulated investment companies, and (B) other securities that, with respect to any one issuer, do not represent more than 5% of the value of the Fund's assets or more than 10% of the voting securities of such issuer, and (ii) not more than 25% of the value of the Fund's assets is invested in the securities of any issuer (other than United States government securities or the securities of other regulated investment companies) or two or more issuers controlled by the Fund and determined to be engaged in the same trade or business. If the Fund qualifies as a regulated investment company and satisfies a minimum distribution requirement, the Fund will not be subject to federal income tax on income and gains to the extent that it distributes such income and gains to its shareholders. The minimum distribution requirement is satisfied if the Fund distributes at least 90% of its net investment income (including tax-exempt interest and net short-term capital gains) for the taxable year. Although the Fund intends to satisfy the above minimum distribution requirement, it may elect to retain its remaining net investment income. The Fund would be subject to corporate tax (at rates up to 35%) on any undistributed income. The Fund will be subject to a nondeductible 4% excise tax to the extent that it does not distribute by the end of each calendar year (or is not subjected to regular corporate tax in such year on) an amount equal to the sum of (a) 98% of the Fund's ordinary income for such calendar year; (b) 98% of the excess of capital gains over capital losses for the one-year period ending on October 31 of each year; and (c) the undistributed income and gains from the preceding years (if any). As discussed above, the Fund intends to continue to distribute sufficient income to qualify as a regulated investment company. However, the Fund may retain all or a portion of its net investment income in excess of such amount, which net investment income may be subject to the corporate income or the excise tax. In addition, the Fund may in the future decide to retain all or a portion of its net capital gain, as described under "Federal Tax Treatment of Shareholders - Distributions to Shareholders," below. FEDERAL TAX TREATMENT OF SHAREHOLDERS DISTRIBUTIONS TO SHAREHOLDERS. Distributions to shareholders attributable to the Fund's net investment income (including interest income and net short- term capital gains) are taxable as ordinary income whether paid in cash or reinvested in additional shares of the Fund. It is not anticipated that any of the Fund's distributions will qualify for the dividends received deduction for corporate shareholders. Distributions of any net capital gain (i.e., the excess of net long-term capital gain over net short-term capital loss, if any) that are designated as capital gain dividends are taxable as long-term capital gains, whether paid in cash or additional shares of the Fund, regardless of how long the shares have been held. 28 The Fund may elect to retain all or a portion of its net capital gain and be taxed at the corporate tax rate for such capital gains, which is currently 35%. In such event, the Fund would most likely make an election that would require each shareholder of record on the last day of the Fund's taxable year to include in income for tax purposes his proportionate share of the Fund's undistributed net capital gain. If such an election is made, each shareholder would be entitled to credit his proportionate share of the tax paid by the Fund against his federal income tax liabilities and to claim refunds to the extent that the credit exceeds such liabilities. In addition, the shareholder would be entitled to increase the basis of his shares for federal tax purposes by an amount equal to 65% of his proportionate share of the undistributed net capital gain. Dividends and distributions by the Fund are generally taxable to the shareholders at the time the dividend or distribution is made (even if reinvested in additional shares of the Fund). However, any dividend declared by the Fund in October, November or December of any calendar year which is payable to shareholders of record on a specified date in such a month will be treated as received by the shareholders on December 31 of such year if the dividend is paid during January of the following year. The realization by the Fund of original issue or market discount will increase the investment income of the Fund and the amount required to be distributed. FOREIGN TAX CREDIT ELECTION. The Fund may be subject to taxes on its income imposed by foreign countries. If at the end of the Fund's fiscal year more than 50% of its total assets consist of securities of foreign corporations, the Fund will be eligible to file an election with the Internal Revenue Service pursuant to which shareholders of the Fund will be required to include their respective pro rata portions of such foreign taxes as gross income, treat such amounts as foreign taxes paid by them, and deduct such amounts in computing their taxable incomes or, alternatively, use them as foreign tax credits against their federal income taxes. SALE OF SHARES. In general, if a share of common stock is sold or exchanged, the seller will recognize gain or loss equal to the difference between the amount realized in the sale or exchange and the seller's adjusted basis in the share of common stock. Any gain or loss realized upon a sale or exchange of shares of common stock will be treated as long-term capital gain or loss if the shares have been held for more than one year, and otherwise as short-term capital gain or loss. Further, if such shares are held for six months or less, loss realized by a shareholder will be treated as long-term capital loss to the extent of the total of any capital gain dividend received by the shareholder. In addition, any loss realized on a sale or exchange of shares of common stock will be disallowed to the extent the shares disposed of are replaced within a period of 61 days beginning 30 days before and ending 30 days after disposition of the shares. In such case, the basis of the shares acquired will be adjusted to reflect the disallowed loss. 29 Backup Withholding. The Fund may be required to withhold federal income tax at the rate of 31% of all taxable distributions payable to shareholders who fail to provide the Fund with their correct taxpayer identification number or to make required certifications, or who have been notified by the Internal Revenue Service that they are subject to backup withholding. Corporate shareholders and certain other shareholders specified in the Code are generally exempt from such backup withholding. Backup withholding is not an additional tax. Any amounts withheld may be credited against the shareholder's federal income tax liability. OTHER TAXES. Distributions may also be subject to state, local and foreign taxes depending on each shareholder's particular situation. FOREIGN SHAREHOLDERS. The foregoing discussion relates solely to United States federal income tax law as applicable to "U.S. persons," i.e., U.S. citizens and residents and U.S. domestic corporations, partnerships, trusts and estates. Shareholders who are not U.S. persons should consult their tax advisers regarding the U.S. and non-U.S. tax consequences of ownership of shares of the Fund, including the fact that such a shareholder may be subject to U.S. withholding tax at a rate of 30% (or at a lower rate under an applicable U.S. income tax treaty) on amounts constituting ordinary income from U.S. sources, including ordinary dividends paid by the Fund. CONSEQUENCES OF CERTAIN FUND INVESTMENTS The Fund engages in various hedging transactions. Under various provisions of the Code, the result of such transactions may be to change the character of recognized gains and losses, accelerate the recognition of certain gains and losses, and defer the recognition of certain losses. The extent to which the Fund may be able to use such hedging techniques may be limited by the requirement that generally less than 30% of the Fund's gross income consist of gains from the sale or disposition of certain assets held for less than three months. Under Section 988 of the Code, all or a portion of gains and losses from certain transactions is treated as ordinary income or loss. These rules generally apply to transactions in certain securities denominated in foreign currencies, forward contracts in foreign currencies, futures contracts in foreign currencies that are not "regulated futures contracts," certain unlisted options and foreign currency swaps. The rules under Section 988 may also affect the timing of income recognized by the Fund. The Fund may be subject to U.S. taxes resulting from holdings in a passive foreign investment company ("PFIC"). A foreign corporation is a PFIC when 75% or more of its gross income for the taxable year is passive income or 50% or more of the average value of its assets consists of assets that produce or could produce passive income. The Fund has no current intention to invest in PFICs. 30 GENERAL INFORMATION ------------------- Minnesota has enacted legislation which authorizes corporations to eliminate or limit the personal liability of a director to the corporation or its shareholders for monetary damages for breach of the fiduciary duty of "care" (the duty to act with the care an ordinarily prudent person in a like position would exercise under similar circumstances). Minnesota law does not, however, permit a corporation to eliminate or limit the liability of a director (a) for any breach of the director's duty of "loyalty" to the corporation or its shareholders (the duty to act in good faith and in a manner reasonably believed to be in the best interest of the corporation), (b) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (c) for authorizing a dividend, stock repurchase or redemption or other distribution in violation of Minnesota law or for violation of certain provisions of Minnesota securities laws, or (d) for any transaction from which the director derived an improper personal benefit. Minnesota law does not permit elimination or limitation of a director's liability under the 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 the Fund as of February 28, 1995, are incorporated by reference into this Statement of Additional Information in reliance upon the report of KPMG Peat Marwick LLP, 4200 Norwest Center, Minneapolis, Minnesota 55402, independent auditors, given upon the authority of said firm as experts in accounting and auditing. PENDING LITIGATION ------------------ Complaints have been filed in federal court relating to another open-end investment company managed by the Adviser and to six closed-end investment companies managed by the Adviser and to two open-end funds for which the Adviser acts as sub-adviser. A 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. Plaintiffs in the complaint, which purports to be a class action and represents the consolidation of a number of previously filed complaints, are Richard J. Rodney, Jr., Doug Shonka, Carl Patrick Monahan, Jerry Hoehnen, Rosemary Boris, Thomas W. Newcome, Delvin D. Junker, Printing Mailing Trade District, affiliated with the Newspaper Drivers' Division of the International Brotherhood of the Teamsters, The History Theatre, Inc., Paul Gold, and Bernard Friedman. Piper Jaffray 31 Companies and attorneys representing the plaintiffs in the complaint recently reached a $70 million agreement in principle to settle the lawsuit. The agreement requires court approval and the acceptance of the settlement by a large percentage of Institutional Government Income Portfolio shareholders. Three additional complaints, which are based on claims similar to those asserted in the first complaint, have been filed relating to Institutional Government Income Portfolio. The first of such complaints was filed in the same court against the same parties on October 21, 1994, by Eltrax Systems, Inc. A second additional complaint was filed against 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 Institutional Government Income Portfolio, the Adviser, the Distributor, Piper Jaffray Companies Inc., William H. Ellis and Edward J. Kohler. A complaint was filed by Herman D. Gordon on October 20, 1994, in the United States District Court, District of Minnesota, against American Adjustable Rate Term Trust Inc. - 1998, American Adjustable Rate Term Trust Inc. - 1999, the Adviser, the Distributor, Piper Jaffray Companies Inc., Benjamin Rinkey, Jeffrey Griffin, Charles N. Hayssen and Edward J. Kohler. The complaint, which purports to be a class action, alleges that the defendants violated the federal securities laws by making materially misleading statements in prospectuses and other disclosure documents. A complaint was filed by Carson H. Bradley on February 3, 1995 in the Sixth Judicial District of the State of Idaho against American Government Income Fund Inc., American Government Income Portfolio Inc., the Adviser, the Distributor and Worth Bruntjen. The complaint alleges negligent misrepresentation, breach of fiduciary duty and breach of contract. A complaint was filed 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, Piper Jaffray Companies Inc., the Adviser, the Distributor, Benjamin Rinkey, Jeffrey Griffin, Charles N. Hayssen, Edward J. Kohler and William H. Ellis. The complaint, which is a putative class action, was filed by Frank Donio, I.R.A., Jane Mazzagatte, I.R.A., Myra Smith, John M. Gobble, I.R.A. and Morgan Properties, Inc. The complaint alleges certain violations of federal and state securities laws, including the dissemination or approval of misleading prospectuses, reports and releases. 32 Complaints have also been filed relating to two open-end funds for which the Adviser has acted as sub-adviser, Managers Intermediate Mortgage Fund and Managers Short Government Fund. A complaint was filed on September 26, 1994 in the United States District Court, District of Connecticut, by Florence R. Hosea, Bobby W. Hosea, Getrud B. Dale and Peter M. Dale, Andrew Poffel and Diane Poffel as tenants by the Entireties, Myrone Sarone, Donna M. DiPalo, Bernard B. Geltner and Gail Geltner and Paul Delman. The complaint was filed against The Managers Funds, the Managers Funds, L.P., Robert P. Watson, the Adviser, the Distributor, an individual associated with the Adviser, Evaluation Associates, Inc. and Managers Intermediate Mortgage Fund. The complaint, which is a putative class action, alleges certain violations of federal securities laws, including the making of false and misleading statements in the prospectus, and alleges negligent misrepresentation, breach of fiduciary duty and common law fraud. A similar complaint filed as a putative class action in the same court on November 4, 1994 was consolidated with the first complaint on December 13, 1994. The complaint was filed by Karen E. Kopelman against The Managers Fund, The Managers Funds, L.P., Robert P. Watson, the Adviser, the Distributor, Worth Bruntjen, Evaluation Associates, Inc. and Managers Intermediated Mortgage Fund. A complaint was filed on November 18, 1994 in the United States District Court, District of Minnesota. The complaint was filed by Robert Fleck as a putative class action against The Managers Funds, The Managers Funds, L.P., the Adviser, the Distributor, Worth Bruntjen, Evaluation Associates, Inc., Robert P. Watson, John E. Rosati, William M. Graulty, Madeline H. McWhinney, Steven J. Pasggioli, Thomas R. Schneeweis and Managers Short Government Fund, F/K/A/ Managers Short Government Income Fund. The complaint alleges certain violations of federal securities laws, including the making of false and misleading statements in the prospectus, and negligent misrepresentation. 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 Funds and they intend to defend the remaining lawsuits vigorously. 33 APPENDIX A CORPORATE BOND, PREFERRED STOCK AND COMMERCIAL PAPER RATINGS COMMERCIAL PAPER RATINGS - - - - - - ------------------------ STANDARD & POOR'S CORPORATION. Commercial paper ratings are graded into four categories, ranging from "A" for the highest quality obligations to "D" for the lowest. Issues assigned the A rating are regarded as having the greatest capacity for timely payment. Issues in this category are further refined with designation 1, 2 and 3 to indicate the relative degree of safety. The "A-1" designation indicates that the degree of safety regarding timely payment is very strong. Those issues determined to possess overwhelming safety characteristics will be denoted with a plus sign designation. MOODY'S INVESTORS SERVICE, INC. Moody's commercial paper ratings are opinions of the ability of the issuers to repay punctually promissory obligations not having an original maturity in excess of nine months. Moody's makes no representation that such obligations are exempt from registration under the Securities Act of 1933, nor does it represent that any specific note is a valid obligation of a rated issuer or issued in conformity with any applicable law. Moody's employs the following three designations, all judged to be investment grade, to indicate the relative repayment capacity of rated issuers: Prime-1 Superior capacity for repayment of short-term promissory obligations Prime-2 Strong capacity for repayment of short-term promissory obligations Prime-3 Acceptable capacity for repayment of short-term promissory obligations CORPORATE BOND RATINGS - - - - - - ---------------------- STANDARD & POOR'S CORPORATION. Standard & Poor's ratings for corporate bonds have the following definitions: Debt rated "AAA" has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is extremely strong. Debt rated "AA" has a very strong capacity to pay interest and repay principal and differs from the higher rated issues only in a small degree. Debt rated "A" has a strong capacity to pay interest and repay principal, although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories. A-1 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. PREFERRED STOCK RATING - - - - - - ---------------------- STANDARD & POOR'S CORPORATION. Standard & Poor's ratings for preferred stock have the following definitions: An issue rated "AAA" has the highest rating that may be assigned by Standard & Poor's to a preferred stock issue and indicates an extremely strong capacity to pay the preferred stock obligations. A-2 A preferred stock issue rated "AA" also qualifies as a high-quality fixed income security. The capacity to pay preferred stock obligations is very strong, although not as overwhelming as for issues rated "AAA." An issue rated "A" is backed by a sound capacity to pay the preferred stock obligations, although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions. An issue rated "BBB" is regarded as backed by an adequate capacity to pay the preferred stock obligations. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to make payments for a preferred stock in this category than for issues in the "A" category. MOODY'S INVESTORS SERVICE, INC. Moody's ratings for preferred stock include the following: An issue which is rated "aaa" is considered to be a top-quality preferred stock. This rating indicates good asset protection and the least risk of dividend impairment within the universe of preferred stocks. An issue which is rated "aa" is considered a high grade preferred stock. This rating indicates that there is reasonable assurance that earnings and asset protection will remain relatively well maintained in the foreseeable future. An issue which is rate "a" is considered to be an upper medium grade preferred stock. While risks are judged to be somewhat greater than in the "aaa" and "aa" classifications, earnings and asset protection are, nevertheless, expected to be maintained at adequate levels. An issue which is rated "baa" is considered to be medium grade, neither highly protected nor poorly secured. Earnings and asset protection appear adequate at present but may be questionable over any great length of time. A-3 APPENDIX B GENERAL CHARACTERISTICS AND RISKS OF OPTIONS AND FUTURES OPTIONS ON SECURITIES The Fund may write covered put and call options and purchase put and call options on the securities in which it may invest that are traded on U.S. and foreign securities exchanges and in over-the-counter markets. The writer of an option may have no control over when the underlying securities must be sold, in the case of a call option, or purchased, in the case of a put option; the writer may be assigned an exercise notice at any time prior to the termination of the obligation. Whether or not an option expires unexercised, the writer retains the amount of the premium. This amount, of course, may, in the case of a covered call option, be offset by a decline in the market value of the underlying security during the option period. If a call option is exercised, the writer experiences a profit or loss from the sale of the underlying security. If a put option is exercised, the writer must fulfill the obligation to purchase the underlying security at the exercise price which will usually exceed the then market value of the underlying security. The writer of an option that wishes to terminate its obligation may effect a "closing purchase transaction." This is accomplished by buying an option of the same series as the option previously written. The effect of the purchase is that the writer's position will be canceled by the clearing corporation. However, a writer may not effect a closing purchase transaction after being notified of the exercise of an option. Likewise, an investor who is the holder of an option may liquidate its position by effecting a "closing sale transaction." This is accomplished by selling an option of the same series as the option previously purchased. There is no guarantee that either a closing purchase or a closing sale transaction can be effected. Effecting a closing transaction in the case of a written call option will permit the Fund to write another call option on the underlying security with either a different exercise price or expiration date or both, or in the case of a written put option will permit the Fund to write another put option to the extent that the exercise price thereof is secured by deposited cash or short- term securities. Also, effecting a closing transaction will permit the cash or proceeds from the concurrent sale of any securities subject to the option to be used for other Fund investments. If the Fund desires to sell a particular security from its portfolio on which it has written a call option, it will effect a closing transaction prior to or concurrent with the sale of the security. The Fund will realize a profit from a closing transaction if the price of the transaction is less than the premium received from writing the option or is more than the premium paid to purchase the option; the Fund will realize a loss from a closing transaction if the price of the transaction is more than the premium received from writing the option or is less than the premium paid to purchase the option. B-1 Because increases in the market price of a call option will generally reflect increases in the market price of the underlying security, any loss resulting from the repurchase of a call option is likely to be offset in whole or in part by appreciation of the underlying security owned by the Fund. An option position may be closed out only where there exists a secondary market for an option of the same series. If a secondary market does not exist, it might not be possible to effect closing transactions in particular options with the result that the Fund would have to exercise the options in order to realize any profit. If the Fund is unable to effect a closing purchase transaction in a secondary market, it will not be able to sell the underlying security until the option expires or it delivers the underlying security upon exercise. Reasons for the absence of a liquid secondary market include the following: (i) there may be insufficient trading interest in certain options, (ii) restrictions may be imposed by a national securities exchange ("Exchange") on opening transactions or closing transactions or both, (iii) trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of options or underlying securities, (iv) unusual or unforeseen circumstances may interrupt normal operations on an Exchange, (v) the facilities of an Exchange or the Options Clearing Corporation may not at all times be adequate to handle current trading volume, or (vi) one or more Exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of options (or a particular class or series of options), in which event the secondary market on that Exchange (or in that class or series of options) would cease to exist, although outstanding options on that Exchange that had been issued by the Options Clearing Corporation as a result of trades on that Exchange would continue to be exercisable in accordance with their terms. The Fund may purchase put options to hedge against a decline in the value of its portfolio. By using put options in this way, the Fund will reduce any profit it might otherwise have realized in the underlying security by the amount of the premium paid for the put option and by transaction costs. The Fund may purchase call options to hedge against an increase in the price of securities that the Fund anticipates purchasing in the future. The premium paid for the call option plus any transaction costs will reduce the benefit, if any, realized by the Fund upon exercise of the option, and, unless the price of the underlying security rises sufficiently, the option may expire worthless to the Fund. FUTURES CONTRACTS The Fund may, for hedging purposes, enter into contracts for the purchase or sale for future delivery of securities or foreign currencies, or contracts based on securities or financial indices including any index of the types of securities in which the Fund may invest. U.S. futures contracts have been designed by exchanges which have been designated "contracts markets" 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. Futures contracts trade on a number of exchange markets, and, through their clearing B-2 corporations, the exchanges guarantee performance of the contracts as between the clearing members of the exchange. At the same time a futures contract is purchased or sold, the Fund must allocate cash or securities as a deposit payment ("initial deposit"). It is expected that the initial deposit would be approximately 1-1/2% to 5% of a contract's face value. Daily thereafter, the futures contract is valued and the payment of "variation margin" may be required, since each day the Fund would provide or receive cash that reflects any decline or increase in the contract's value. At the time of delivery of securities pursuant to such a contract, adjustments are made to recognize differences in value arising from the delivery of securities with a different interest rate from that specified in the contract. In some (but not many) cases, securities called for by a futures contract may not have been issued when the contract was written. Although futures contracts by their terms call for the actual delivery or acquisition of securities, in most cases the contractual obligation is fulfilled before the date of the contract without having to make or take delivery of the securities. The offsetting of a contractual obligation is accomplished by buying (or selling, as the case may be) on a commodities exchange an identical futures contract calling for delivery in the same month. Such a transaction, which is effected through a member of an exchange, cancels the obligation to make or take delivery of the securities. Since all transactions in the futures market are made, offset or fulfilled through a clearing house associated with the exchange on which the contracts are traded, the Fund will incur brokerage fees when it purchases or sells futures contracts. The ordinary spreads between prices in the cash and futures markets, due to differences in the nature of those markets, are subject to distortions. First, all participants in the futures market are subject to initial deposit and variation margin requirements. Rather than meeting additional variation margin requirements, investors may close futures contracts through offsetting transactions which could distort the normal relationship between the cash and futures markets. Second, the liquidity of the futures market depends on participants entering into offsetting transactions rather than making or taking delivery. To the extent participants decide to make or take delivery, liquidity in the futures market could be reduced, thus producing distortion. Third, from the point of view of speculators, the margin deposit requirements in the futures market are less onerous than margin requirements in the securities market. Therefore, increased participation by speculators in the futures market may cause temporary price distortions. Due to the possibility of distortion, a correct forecast of general interest rate trends by Management may still not result in a successful transaction. In addition, futures contracts entail risks. Although Management will only enter into futures contracts if it believes that use of such contracts will benefit the Fund, if Management's investment judgment about the general direction of securities prices is incorrect, the Fund's overall performance would be poorer than if B-3 it had not entered into any such contract. For example, if the Fund has hedged against the possibility of a decrease in securities prices which would adversely affect the price of securities held in its portfolio and securities prices increase instead, the Fund will lose part or all of the benefit of the increased value of its securities 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 from its portfolio to meet daily variation margin requirements. Such sales of securities may be, but will not necessarily be, at increased prices which reflect the rising market. The Fund may have to sell securities at a time when it may be disadvantageous to do so. OPTIONS ON FUTURES CONTRACTS The Fund may purchase and write options on futures contracts for hedging purposes. The purchase of a call option on a futures contract is similar in some respects to the purchase of a call option on an individual security. Depending on the pricing of the option compared to either the price of the futures contract upon which it is based or the price of the underlying debt securities, it may or may not be less risky than ownership of the futures contract or underlying debt securities. As with the purchase of futures contracts, when the Fund is not fully invested it may purchase a call option on a futures contract to hedge against an anticipated increase in securities prices. The writing of a call option on a futures contract constitutes a partial hedge against declining prices of the security which is deliverable upon exercise of the futures contract. If the futures price at expiration of the option is below the exercise price, the Fund will retain the full amount of the option premium which provides a partial hedge against any decline that may have occurred in the Fund's portfolio holdings. The writing of a put option on a futures contract constitutes a partial hedge against increasing prices of the security which is deliverable upon exercise of the futures contract. If the futures price at expiration of the option is higher than the exercise price, the Fund will retain the full amount of the option premium which provides a partial hedge against any increase in the price of securities which the Fund intends to purchase. If a put or call option the Fund has written is exercised, the Fund will incur a loss which will be reduced by the amount of the premium it receives. Depending on the degree of correlation between changes in the value of its portfolio securities and changes in the value of its futures positions, the Fund's losses from existing options may to some extent be reduced or increased by changes in the value of portfolio securities. The purchase of a put option on a futures contract is similar in some respects to the purchase of protective put options on portfolio securities. For example, the Fund may purchase a put option on a futures contract to hedge the Fund's portfolio against the risk of a decline in securities prices. The amount of risk the Fund assumes when it purchases an option on a futures contract is the premium paid for the option plus related transaction costs. In addition to the correlation risks discussed above, the purchase of an option also B-4 entails the risk that changes in the value of the underlying futures contract will not be fully reflected in the value of the option purchased. The Fund's ability to engage in the options and futures strategies described above will depend on the availability of liquid markets in such instruments. Markets in options and futures with respect to many types of securities in which the Fund invests are relatively new and still developing. It is impossible to predict the amount of trading interest that may exist in various types of options or futures. Therefore no assurance can be given that the Fund will be able to utilize these instruments effectively for the purposes set forth above. Furthermore, the Fund's ability to engage in options and futures transactions may be limited by tax considerations. See "Taxation- Consequences of Certain Fund Investments." ADDITIONAL RISKS OF OPTIONS ON SECURITIES AND OPTIONS ON FUTURES CONTRACTS Options on securities may be traded over-the-counter. In an over-the- counter trading environment, much of the protection afforded to exchange participants will not be available. For example, there are no daily price fluctuation limits, and adverse market movements could therefore continue to an unlimited extent over a period of time. Although the purchaser of an option cannot lose more than the amount of the premium plus related transaction costs, this entire amount could be lost. Moreover, the option writer could lose amounts substantially in excess of its initial investment, due to the margin requirements associated with such positions. In addition, options on securities, futures contracts and options on futures contracts may be traded on foreign exchanges. Such transactions are subject to the risk of governmental actions affecting trading in or the prices of foreign currencies or securities. The value of such positions also could be adversely affected by (a) other complex foreign political and economic factors; (b) lesser availability than in the United States of data on which to make trading decisions; (c) delays in the Fund's ability to act upon economic events occurring in foreign markets during nonbusiness hours in the United States; (d) the imposition of different exercise and settlement terms and procedures and margin requirements than in the United States; and (e) lesser trading volume. FUTURE DEVELOPMENTS The Fund may, following written notice thereof to its shareholders, take advantage of opportunities in the area of options and futures contracts and options on futures contracts which are not currently contemplated for use by the Fund or which are not currently available but which may be developed, to the extent such opportunities are both consistent with the Fund's investment objective and legally permissible for the Fund. Such opportunities, if they arise, may involve risks which exceed those involved in the options and futures activities described above. B-5 STATEMENT OF ADDITIONAL INFORMATION August 29, 1995 TABLE OF CONTENTS PAGE INVESTMENT OBJECTIVES AND POLICIES. . . . . . . . . . . . . . . . . . . 1 INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . . 26 DIRECTORS AND EXECUTIVE OFFICERS. . . . . . . . . . . . . . . . . . . . 30 INVESTMENT ADVISORY AND OTHER SERVICES. . . . . . . . . . . . . . . . . 34 PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE. . . . . . . . . . . 45 CAPITAL STOCK AND OWNERSHIP OF SHARES . . . . . . . . . . . . . . . . . 49 NET ASSET VALUE AND PUBLIC OFFERING PRICE . . . . . . . . . . . . . . . 50 CALCULATION OF PERFORMANCE DATA . . . . . . . . . . . . . . . . . . . . 51 REDEMPTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 TAXATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 PENDING LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . 60 AUDITORS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 Financial Statements at June 30, 1995 (Audited). . . . . . . . . . . . . . . F-1 Investments in Securities at June 30, 1995 . . . . . . . . . . . . . . . . .F-16 Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . .F-25 This Statement of Additional Information is not a prospectus. This Statement of Additional Information relates to the Prospectus dated August 29, 1995, and should be read in conjunction therewith. A copy of the Prospectus may be obtained from Hercules Funds Inc. at Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota 55402-3804. INVESTMENT OBJECTIVES AND POLICIES Hercules Funds (the "Company") is comprised of eight funds: Hercules North American Growth and Income Fund ("North American Fund"), Hercules European Value Fund ("European Value Fund"), Hercules Pacific Basin Value Fund ("Pacific Value Fund"), Hercules Latin American Value Fund ("Latin American Value Fund"), Hercules World Bond Fund ("Bond Fund"), Hercules Global Short-Term Fund ("Short- Term Fund"), Hercules Emerging Markets Debt Fund ("Emerging Markets Fund") and Hercules Money Market Fund ("Money Market Fund") (each sometimes referred to herein as a "Fund" or, collectively, as the "Funds"). This Statement of Additional Information relates to each of the above Funds other than Short-Term Fund and Emerging Markets Fund, which are not currently being offered for sale. As described in the Prospectus, the Company's investment manager, Piper Capital Management Incorporated (the "Manager") has retained an advisory organization on behalf of each Fund to act as its sub-adviser (the "Sub-Adviser(s)"). See "Investment Advisory and Other Services" below. Piper Jaffray Inc. is the distributor of shares of each of the Funds. POTENTIAL BENEFITS OF INTERNATIONAL INVESTING OPPORTUNITIES FOR INCREASED RETURN Currently, more than 60% of the world's stock market capitalization is located overseas. Europe alone is the world's third largest source of equity capital. Many foreign countries are experiencing growth rates higher than the United States. For example, the Pacific Basin is one of the world's fastest growing economic regions. And many foreign equity and bond markets have outperformed the U.S. market over the past few years. VARIOUS INVESTMENT OPPORTUNITIES Foreign stock and bond markets do not always move in step with one another or with U.S. markets. Therefore, a portfolio invested in a number of markets worldwide is not subject to the movements of any single market. INVESTMENT OBJECTIVES The investment objectives of each Fund are set forth in the Prospectus. Certain additional information is set forth below. There can be no assurance that any Fund will achieve its investment objectives. -1- HIGH-QUALITY MONEY MARKET INSTRUMENTS As discussed in the Prospectus, each of the Funds (other than Money Market Fund) may invest without limitation for temporary defensive purposes in high- quality money market instruments. Such investments include obligations issued or guaranteed by the U.S. and foreign governments, their agencies, and instrumentalities. These include direct obligations of the U.S. Treasury, such as Treasury bills and notes; obligations supported by the right of the issuer to borrow from the U.S. Treasury, such as those of the Federal Home Loan Banks; instruments supported solely by the credit of the issuer, such as those of the Federal Intermediate Credit Banks; and similar U.S.-dollar denominated instruments of foreign governments, their agencies authorities and instrumentalities; obligations of U.S. and non-U.S. banks, including certificates of deposit, bankers' acceptances and similar instruments, when such banks have total assets at the time of purchase equal to at least $1 billion; interest-bearing deposits in U.S. commercial and savings banks having total assets of $1 billion or less, in principal amounts at each such bank not greater than are insured by an agency of the U.S. Government, provided that the aggregate amount of such deposits (including interest earned) does not exceed 5% of the Fund's assets; commercial paper and other short-term debt obligations of U.S. and foreign companies, rated at least A-1 by Standard & Poor's Ratings Group ("S&P"), Prime-1 by Moody's Investors Service Inc. ("Moody's"), or, if not rated, judged by the applicable Sub-Adviser to be of equivalent quality, provided that any outstanding intermediate- or long-term debt of the issuer is rated at least AA by S&P or Aa by Moody's and repurchase agreements secured by any of the foregoing. These instruments may include corporate bonds and notes (corporate obligations that mature, or that may be redeemed, in one year or less). These corporate obligations include variable rate master notes, which are redeemable upon notice and permit investment of fluctuating amounts at varying rates of interest pursuant to direct arrangements with the issuer of the instrument. INVESTMENT POLICIES OPTIONS AND FUTURES TRANSACTIONS OPTIONS. Each of the Funds (other than Money Market Fund) may buy and sell put and call options and futures contracts and options on futures contracts with respect to financial instruments, stock and interest rate indexes and foreign currencies. Futures and options will be used to facilitate allocation of a Fund's investment among asset -2- classes, to generate income or to hedge against declines in securities prices or increases in prices of securities proposed to be purchased. Different uses of futures and options have different risk and return characteristics. Generally, selling futures contracts, purchasing put options and writing call options are strategies designed to protect against falling securities prices and can limit potential gains if prices rise. Purchasing futures contracts, purchasing call options and writing put options are strategies whose returns tend to rise and fall together with securities prices and can cause losses if prices fall. If securities prices remain unchanged over time option writing strategies tend to be profitable, while option buying strategies tend to decline in value. WRITING COVERED OPTIONS - Each of the Funds (other than Money Market Fund) may write (I.E.., sell) covered put and call options with respect to the securities in which they may invest. By writing a call option, a Fund becomes obligated during the term of the option to deliver the securities underlying the option upon payment of the exercise price if the option is exercised. By writing a put option, a Fund becomes obligated during the term of the option to purchase the securities underlying the option at the exercise price if the option is exercised. With respect to put options written by any Fund, there will have been a predetermination that acquisition of the underlying security is in accordance with the investment objective of such Fund. The Funds write only "covered" options. This means that so long as a Fund is obligated as the writer of a call option, it will own the underlying securities subject to the option (or comparable securities satisfying the cover requirements of securities exchanges). A 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. Through the writing of call or put options, a Fund may obtain a greater current return than would be realized on the underlying securities alone. The Funds receive premiums from writing call or put options, which they retain whether or not the options are exercised. By writing a call option, a Fund might lose the potential for gain on the underlying security while the option is open, and by writing a put option a Fund might become obligated to purchase the underlying security for more than its current market price upon exercise. -3- PURCHASING OPTIONS - Each of the Funds (other than Money Market Fund) may purchase put options in order to protect portfolio holdings in an underlying security against a decline in the market value of such holdings. Such protection is provided during the life of the put because a Fund may sell the underlying security at the put exercise price, regardless of a decline in the underlying security's market price. Any loss to a Fund is limited to the premium paid for, and transaction costs paid in connection with, the put plus the initial excess, if any, of the market price of the underlying security over the exercise price. However, if the market price of such security increases, the profit a 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. A 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 Funds will only purchase put options on securities where, in the opinion of the Funds' Sub-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 Funds purchase put options on underlying securities they own. Each of the Funds (other than Money Market Fund) may also purchase call options. During the life of the call option, the Fund may buy the underlying security at the call exercise price regardless of any increase in the underlying security's market price. In order for a call option to be profitable, the market price of the underlying security must rise sufficiently above the exercise price to cover the premium and transaction costs. By using call options in this manner, a Fund will reduce any profit it might have realized had it bought the underlying security at the time it purchased the call option by the premium paid for the call option and by transaction costs. The securities exchanges have established limitations governing the maximum number of options which may be written by an investor or group of investors acting in concert. These position limits may restrict a Fund's ability to purchase or sell options on a particular security. It is possible that with respect to a Fund, the Fund and other clients of the Manager or of the Sub- Adviser may be considered to be a group of investors acting in concert. Thus, the number of options -4- which a Fund may write may be affected by options written by other investment advisory clients of the Manager or of the Sub-Advisers. SECURITIES INDEX OPTION TRADING - Each of the Funds (other than Money Market Fund) may purchase and write put and call options on securities indexes. Options on securities indexes are similar to options on securities except that, rather than the right to take or make delivery of a security at a specified price, an option on an index gives the holder the right to receive, upon exercise of the option, an amount of cash if the closing level of the index upon which the option is based is greater than, in the case of a call, or less than, in the case of a put, the exercise price of the option. The writer of the option is obligated to make delivery of this amount. The effectiveness of purchasing or writing index options as a hedging technique depends upon the extent to which price movements in a Fund's portfolio correlate with price movements of the index selected. Because the value of an index option depends upon movements in the level of the index rather than the price of a particular security, whether a Fund will realize a gain or loss from the purchase or writing of options on an index depends upon movements in the level of prices in the stock or bond markets generally or, in the case of certain indexes, in an industry or market segment, rather than movements in the price of a particular security. Accordingly, successful use by a Fund of options on security indexes will be subject to the Manager's and/or Sub- Adviser's ability to predict correctly movements in the direction of the stock market or interest rates market generally or of a particular industry. This requires different skills and techniques than predicting changes in the price of individual securities. In the event the Manager and/or Sub-Adviser are unsuccessful in predicting the movements of an index, a Fund could be in a worse position than had no hedge been attempted. Because exercises of index options are settled in cash, a Fund cannot determine the amount of its settlement obligations in advance and, with respect to call writing, cannot provide in advance for its potential settlement obligations by acquiring and holding the underlying securities. When a Fund writes an option on an index, the Fund will segregate or put into escrow with its custodian or pledge to a broker as collateral for the option, cash, high- grade liquid debt securities or "qualified securities" with a market value determined on a daily basis of not less than 100% of the current market value of the option. -5- Options purchased and written by a Fund may be exchange traded or may be options entered into by the Fund in negotiated transactions with investment dealers and other financial institutions ("OTC Options") (such as commercial banks or savings and loan associations) deemed creditworthy by the Sub-Adviser. OTC Options are illiquid and it may not be possible for the Fund to dispose of options it has purchased or to terminate its obligations under an option it has written at a time when the Sub-Adviser believes it would be advantageous to do so. FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. Each of the Funds (other than Money Market Fund) may enter into futures contracts and purchase and write options on these contracts, including but not limited to interest rate, securities index and foreign currency futures contracts and put and call options on these futures contracts. These contracts will be entered into on domestic and foreign exchanges and boards of trade, subject to applicable regulations of the Commodity Futures Trading Commission. These transactions may be entered into for bona fide hedging and other permissible risk management purposes. In connection with transactions in futures contracts and writing related options, each Fund will be required to deposit as "initial margin" a specified amount of cash or short-term U.S. Government securities. The initial margin required for a futures contract is set by the exchange on which the contract is traded. It is expected that the initial margin would be approximately 1-1/2% to 5% of a contract's face value. Thereafter, subsequent payments (referred to as "variation margin") are made to and from the broker to reflect changes in the value of the futures contract. No Fund will purchase or sell futures contracts or related options if, as a result, the sum of the initial margin deposit on that Fund's existing futures and related options positions and premiums paid for options on futures contracts entered into for other than bona fide hedging purposes would exceed 5% of the Fund's assets. Although futures contracts by their terms call for the actual delivery or acquisition of securities, in most cases the contractual obligation is fulfilled before the date of the contract without having to make or take delivery of the securities. The offsetting of a contractual obligation is accomplished by buying (or selling, as the case may be) on a commodities exchange an identical futures contract calling for delivery in the same month. Such a transaction, which is effected through a member of an exchange, cancels the obligation to make or take delivery of the securities. Since -6- all transactions in the futures market are made, offset or fulfilled through a clearing house associated with the exchange on which the contracts are traded, the Fund will incur brokerage fees when it purchases or sells futures contracts. FOREIGN CURRENCY TRANSACTIONS. As discussed in the Prospectus, each of the Funds (other than Money Market Fund) may engage in currency exchange transactions in connection with the purchase and sale of their investments. A forward foreign currency exchange contract involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract as agreed by the parties, at a price set at the time of the contract. In the case of a cancelable forward contract, the holder has the unilateral right to cancel the contract at maturity by paying a specified fee. The contracts are traded in the interbank market conducted directly between currency traders (usually large commercial banks) and their customers. A forward contract generally has no deposit requirement, and no commissions are charged at any stage for trades. Forward foreign currency exchange contracts differ from foreign currency futures contracts in certain respects. For example, the maturity date of a forward contract may be any fixed number of days from the date of the contract agreed upon by the parties, rather than a predetermined date in any given month. Forward contracts may be in any amounts agreed upon by the parties rather than predetermined amounts. Also, forward foreign exchange contracts are traded directly between currency traders so that no intermediary is required. A forward contract generally requires no margin or other deposit. At the maturity of a forward or futures contract, the Funds 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 usually 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. Options on foreign currencies operate similarly to options on securities (discussed above), and are traded primarily in the over-the-counter market, although options on foreign currencies have recently been listed on several -7- exchanges. Options traded in the over-the-counter market are illiquid and it may not be possible for a Fund to dispose of an option it has purchased or terminate its obligations under an option it has written at a time when its Sub- Adviser believes it would be advantageous to do so. Options on foreign currencies are affected by all of those factors which influence foreign exchange rates and investments generally. The value of a foreign currency option is dependent upon the value of the foreign currency and the U.S. dollar, and may have no relationship to the investment merits of a foreign debt security. Because foreign currency transactions occurring in the interbank market involve substantially larger amounts than those that may be involved in the use of foreign currency options, investors may be disadvantaged by having to deal in an odd-lot market (generally consisting of transactions of less than $1 million) for the underlying foreign currencies at prices that are less favorable than for round lots. There is no systematic reporting of last sale information for foreign currencies and there is no regulatory requirement that quotations available through dealers or other market sources be provided 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 that the U.S. options markets are closed while the markets for the underlying currencies remain open, significant price and rate movements may take place in the underlying markets that cannot be reflected in the options markets. Although foreign exchange dealers do not charge a fee for currency conversion, they do realize a profit based upon the difference between prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign currency to a Fund at one rate, while offering a lesser rate of exchange should the Fund desire to resell that currency to the dealer. INTEREST RATE SWAPS, CAPS AND FLOORS. Each of the Funds (other than Money Market Fund) may enter into interest rate swaps, caps and floors on either an asset-based or liability-based basis, depending upon whether they are hedging their assets or their liabilities, and will usually enter into interest rate swaps on a net basis, I.E., the two payment streams are netted out, with the Funds receiving or paying, as the case may be, only the net amount of the two payments. The net amount of the excess, if any, of a Fund's obligations over its entitlement with respect to each interest rate swap will -8- 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 a Fund enters into an interest rate swap where the contract does not otherwise specify, the contract will be deemed to have been entered into on a gross basis and 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 a 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. REVERSE REPURCHASE AGREEMENTS Each Fund may enter into reverse repurchase agreement transactions to the extent set forth in the Prospectus. Each Fund may enter into reverse repurchase agreements with the same parties with whom it may enter into repurchase agreements. See "Special Investment Methods-Repurchase Agreements" in the Prospectus. Under a reverse repurchase agreement, a Fund sells securities and agrees to repurchase them at a mutually agreed date and price. 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 a Fund enters into a reverse repurchase agreement, it will establish and maintain a segregated account with an approved custodian containing high-grade liquid debt securities having a value not less than the repurchase price (including accrued interest). Reverse repurchase agreements involve the risk that the market value of the securities retained in lieu of sale by the Fund may decline below the price of the securities the Fund has sold but is obligated to repurchase. 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 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 may or may not be recovered by income from or appreciation of the securities purchased. The -9- Company's Board of Directors has established procedures, which are periodically reviewed by the Board, pursuant to which the Manager and Sub-Advisers will monitor the creditworthiness of the dealers and banks with which the Fund enters into reverse repurchase agreement transactions. MORTGAGE-BACKED SECURITIES As discussed in the Prospectus the Funds may invest in mortgage backed securities. The mortgage-related securities in which the Funds may invest include Mortgage-Backed Securities and Stripped Mortgage-Backed Securities. Mortgage-Backed Securities are securities that, directly or indirectly, represent participations in, or are secured by and payable from, loans secured by real property, including government guaranteed pass-through securities such as Government National Mortgage Association ("Ginnie Mae" or "GNMA"), Federal National Mortgage Association ("Fannie Mae" or "FNMA") and Federal Home Loan Mortgage Corporation ("Freddie Mac" or "FHLMC") Certificates, private pass- through securities, commercial mortgage-backed securities, and certain collateralized mortgage obligations and multi-class pass-through securities. Mortgage-Backed Securities may have fixed or adjustable interest rates. There are currently three basic types of Mortgage-Backed Securities: (a) those issued or guaranteed by the United States Government or one of its agencies or instrumentalities, such as Ginnie Mae, Fannie Mae and Freddie Mac; (b) those issued by non-governmental issuers that represent interests in, or are collateralized by, Mortgage-Backed Securities issued or guaranteed by the United States Government or one of its agencies or instrumentalities; and (c) those issued by non-governmental issuers that represent an interest in, or are collateralized by, whole mortgage loans or Mortgage-Backed Securities without a government guarantee but usually with over-collateralization or some other form of private credit enhancement. Non-governmental issuers referred to in (b) and (c) above include 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. The investment characteristics of Mortgage-Backed Securities differ from those of traditional debt securities. The major differences include the fact that interest payments and principal repayments on Mortgage-Backed Securities are made more frequently (usually monthly), and principal may be prepaid at any time because the underlying mortgage loans or other assets generally may be prepaid at any time. These differences can result in significantly greater price and -10- yield volatility than is the case with traditional debt securities. As a result, if a 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 a 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. The government guaranteed mortgage pass-through securities in which the Fund may invest will include certificates issued or guaranteed by Ginnie Mae, Fannie Mae and Freddie Mac, which represent interests in underlying residential mortgage loans. These mortgage pass-through securities provide for the pass- through to investors of their pro-rata share of monthly 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 servicer of the underlying mortgage loans. Each of GNMA, FNMA and FHLMC guarantee timely distributions of interest to certificate holders. GNMA and FNMA guarantee timely distributions of scheduled principal. FHLMC generally guarantees only ultimate collection of principal of the underlying mortgage loans. Private mortgage pass-through securities ("Private Pass-Throughs") are structured similarly to Ginnie Mae, Fannie Mae and Freddie Mac mortgage pass- through securities 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. Since Private Pass-Throughs typically are not guaranteed by an entity having the credit status of Ginnie Mae, Fannie Mae or Freddie Mac, such securities generally are structured with one or more types of credit enhancement. Collateralized mortgage obligations ("CMOs") 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 CMO or make scheduled distributions on the multi-class pass-through security. CMOs and multi-class pass-through securities (collectively CMOs unless the context -11- indicates otherwise) may be issued by agencies or instrumentalities of the United States Government or by private organizations. Subordinated Mortgage-Backed Securities. Credit enhancement in the form of subordination provides for the issuance of a senior class of certificates that are generally rated at least AA by S&P and one or more classes of subordinated certificates that bear ratings lower than the senior certificates or are non- rated. Holders of either the senior or the subordinated certificates will ordinarily be entitled to a pro-rata share of distributions of principal and interest. However, in the event that delinquencies and defaults on the underlying loans cause a shortfall in the distributions to the senior certificates, distributions otherwise payable to the subordinated certificates will be distributed to the senior certificates to the extent required. The characteristics of the mortgage loans and other credit enhancement features will determine the size of the subordinated interest required to obtain the desired rating on the senior securities. To the extent that actual delinquency and loss experience is greater than that anticipated, the return on the subordinated certificates will be adversely affected and, in extreme cases, a portion of the principal could be lost; to the extent that such experience is more favorable than anticipated, the return on the subordinated certificates will be increased. The Trust may invest in subordinated certificates, which securities, at the time of investment, are rated BBB or higher by S&P, or, if unrated, determined by a Sub-Adviser to be of comparable quality. Stripped Mortgage-Backed Securities ("SMBS") are derivative multi-class mortgage securities. SMBS may be issued by agencies or instrumentalities of the United States Government or by private originators of, or investors in, mortgage loans, including savings and loan associations, mortgage bankers, commercial banks, investment banks and special purpose subsidiaries of the foregoing. There are generally two classes of SMBS, one of which (the "IO class") entitles the holders thereof to receive distributions consisting solely or primarily of all or a portion of the interest on the underlying pool of mortgage loans or Mortgage-Backed Securities ("Mortgage Assets") and the other of which (the "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. The cash flows and yields -12- on IO and PO classes are extremely sensitive to the rate of principal payments (including prepayments) on the related underlying Mortgage Assets. REPURCHASE AGREEMENTS The Funds 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 applicable Fund will promptly receive additional collateral (equal to the repurchase price plus accrued interest). U.S. GOVERNMENT SECURITIES The U.S. Government securities in which the Funds may invest include securities issued or guaranteed as to payment of principal and interest by the U.S. Government or its agencies or instrumentalities. The Funds may invest in direct obligations of the U.S. Treasury, such as U.S. Treasury bills, notes and bonds, and in 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 ("FNMA"), the Government National Mortgage Association ("GNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC") and the Financing Corporation. The maturities of U.S. Government securities usually range from three months to 30 years. Some U.S. Government securities are backed by full faith and credit of the U.S. Government (E.G., GNMA securities), while others may be backed solely by the credit of the issuing agency (E.G., FNMA and FHLMC securities). VARIABLE AND FLOATING RATE OBLIGATIONS Certain of the obligations in which Money Market Fund may invest may be variable or floating rate obligations in which the interest rate is adjusted either at predesignated periodic intervals (variable rate) or when there is a change in the index rate of interest on which the interest rate payable on the obligation is based (floating rate). Variable or floating rate obligations may include a demand feature which is a put that entitles the holder to receive the principal amount of the underlying security or securities and which may be exercised either at any time on no more than 30 days' notice -13- or at specified intervals not exceeding 397 calendar days on more than 30 days' notice. Variable or floating rate instruments with a demand feature enable Money Market Fund to purchase instruments with a stated maturity in excess of 397 calendar days. The Fund will determine the maturity of variable or floating rate instruments in accordance with the Securities and Exchange Commission ("SEC") rules which allow the Fund to consider certain of such instruments as having maturities that are less than the maturity date on the face of the instrument and which can reasonably be expected to have a market value that approximates its par value. LOWER-RATED DEBT SECURITIES Latin American Value Fund and Bond Fund may each invest in lower-rated debt securities, I.E., securities rated lower than BBB by S&P or Baa by Moody's or, if unrated, of comparable quality as determined by the Sub-Adviser. The market for lower-rated debt securities may be thinner and less active than that for high rated debt securities, which can adversely affect the prices at which the former are sold. If market quotations are not available, lower-rated debt securities will be valued in accordance with procedures established by the Board of Directors, including the use of outside pricing services. Judgment plays a greater role in valuing high yield corporate debt securities than is the case for securities for which more external sources for quotations and last sale information are available. Adverse publicity and changing investor perception may affect the ability of outside pricing services to value lower rated debt securities and the Funds' ability to dispose of these securities. Since the risk of default is high for lower-rated debt securities, research and credit analysis are an especially important part of managing securities of this type. The Sub-Advisers will attempt to identify those issuers of high yielding debt securities whose financial condition is adequate to meet future obligations, has improved or is expected to improve in the future. The Sub- Advisers' analysis will focus on relative values based on such factors as interest and dividend coverage, asset coverage, earnings prospects and the experience and managerial strength of the issuer. For the risks associated with lower-rated or unrated sovereign debt obligations, see "Special Risk Considerations--Risks of Sovereign Debt Obligations" herein and in the Prospectus. ILLIQUID SECURITIES Historically, illiquid securities have included securities subject to contractual or legal restrictions on -14- resale because they have not been registered under the Securities Act of 1933, as amended (the "1933 Act"), securities which are otherwise not readily marketable and repurchase agreements having a maturity of longer than seven days. Securities which have not been registered under the 1933 Act are referred to as private placements or restricted securities and are purchased directly from the issuer or in the secondary market. Mutual funds do not typically hold a significant amount of these restricted or other illiquid securities because of the potential for delays on resale and uncertainty in valuation. Limitations on resale may have an adverse effect on the marketability of portfolio securities and a Fund might be unable to dispose of restricted or other illiquid securities promptly or at a reasonable price and might thereby experience difficulty satisfying redemptions within seven days. A Fund might also have to register such restricted securities in order to dispose of them resulting in additional expense and delay. Adverse market conditions could impede such a public offering of securities. In recent years, however, a large institutional market has developed for certain securities that are not registered under the 1933 Act, including repurchase agreements, commercial paper, foreign securities, municipal securities and corporate bonds and notes. Institutional investors depend on an efficient institutional market in which the unregistered security can be readily resold or on an issuer's ability to honor a demand for repayment. The fact that there are contractual or legal restrictions on resale of such investments to the general public or to certain institutions may not be indicative of their liquidity. The SEC has adopted Rule 144A, which allows a broader institutional trading market for securities otherwise subject to restriction on their resale to the general public. Rule 144A establishes a "safe harbor" from the registration requirements of the 1933 Act of resales of certain securities to qualified institutional buyers. The Manager and the Sub-Advisers anticipate that the market for certain restricted securities such as institutional commercial paper will expand further as a result of this regulation and the development of automated systems for the trading, clearance and settlement of unregistered securities of domestic and foreign issuers, such as the PORTAL System sponsored by the National Association of Securities Dealers, Inc. The Manager and the applicable Sub-Adviser will monitor the liquidity of Rule 144A Securities in each Fund's portfolio under the supervision of the Company's Board of Directors. In reaching liquidity decisions, the Manager and applicable Sub- -15- Adviser will consider, among other things, the following factors: (1) the frequency of trades and quotes for the security; (2) the number of dealers and other potential purchasers wishing to purchase or sell the security; (3) dealer undertakings to make a market in the security and (4) the nature of the security and of the marketplace trades (E.G., the time needed to dispose of the security, the method of soliciting offer and the mechanics of the transfer). SPECIAL RISK CONSIDERATIONS RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND OPTIONS. HEDGING RISKS IN FUTURES CONTRACTS TRANSACTIONS - There are several risks associated with using stock index or interest rate futures contracts as hedging devices. One risk arises because the prices of futures contracts may not correlate perfectly with movements in the underlying index or financial instrument 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 index or 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 stock indexes or 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. With respect to index futures contracts, the risk of imperfect correlation increases as the composition of a Fund's portfolio diverges from the financial instruments included in the applicable index. Successful use of futures contracts by a Fund is subject to the ability of the Manager and/or Sub-Adviser to predict correctly movements in the direction of interest rates or the stock market. If a Fund has hedged against the possibility of a decline in the value of the stocks held in its portfolio or an increase in interest rates adversely affecting the value of -16- fixed-income securities held in its portfolio and stock prices increase or 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 rising market or 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 - A 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. A 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 Funds 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 -17- 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 - The use of options on financial instruments and indexes and interest rate and stock index futures contracts also involves additional risk. Compared to the purchase or sale of futures contracts, the purchase of call or put options 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 generates a premium which may partially offset a decline in the value of a Fund's portfolio assets. By writing a call option, the Fund becomes obligated to sell an underlying instrument or a futures contract, which may have a value higher than the exercise price. Conversely, the writing of a put option generates a premium, but the Fund becomes obligated to purchase the underlying instrument or futures contract, which may have a value lower than the exercise price. Thus, the loss incurred by a Fund in writing options 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 Sub- Adviser deems it desirable to do so. Although a Fund will enter into an option position only if the Sub-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. A Fund's purchase or sale of put or call options will be based upon predictions as to anticipated interest rates or market trends by the Sub- Adviser, which could prove to be inaccurate. Even if the expectations of the Sub-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. The writer of an option may have no control over when the underlying securities must be sold, in the case of a call option, or purchased, in the case of a put option; the writer may be assigned an exercise notice at any time prior to the termination of the obligation. Whether or not an option expires unexercised, the writer retains the amount of the premium. This amount, of course, may, in the case of a -18- covered call option, be offset by a decline in the market value of the underlying security during the option period. If a call option is exercised, the writer experiences a profit or loss from the sale of the underlying security. If a put option is exercised, the writer must fulfill the obligation to purchase the underlying security at the exercise price which will usually exceed the then market value of the underlying security. The writer of an option that wishes to terminate its obligation may effect a "closing purchase transaction." This is accomplished by buying an option of the same series as the option previously written. The effect of the purchase is that the writer's position will be canceled by the clearing corporation. However, a writer may not effect a closing purchase transaction after being notified of the exercise of an option. Likewise, an investor who is the holder of an option may liquidate its position by effecting a "closing sale transaction." This is accomplished by selling an option of the same series as the option previously purchased. There is no guarantee that either a closing purchase or a closing sale transaction can be effected. Effecting a closing transaction in the case of a written call option will permit the Fund to write another call option on the underlying security with either a different exercise price or expiration date or both, or in the case of a written put option will permit the Fund to write another put option to the extent that the exercise price thereof is secured by deposited cash or short- term securities. Also, effecting a closing transaction will permit the cash or proceeds from the concurrent sale of any securities subject to the option to be used for other Fund investments. If the Fund desires to sell a particular security from its portfolio on which it has written a call option, it will effect a closing transaction prior to or concurrent with the sale of the security. A Fund will realize a profit from a closing transaction if the price of the transaction is less than the premium received from writing the option or is more than the premium paid to purchase the option; the Fund will realize a loss from a closing transaction if the price of the transaction is more than the premium received from writing the option or is less than the premium paid to purchase the option. Because increases in the market price of a call option will generally reflect increases in the market price of the underlying security, any loss resulting from the repurchase of a call option is likely to be offset in whole or in part by appreciation of the underlying security owned by the Fund. -19- An option position may be closed out only where there exists a secondary market for an option of the same series. If a secondary market does not exist, it might not be possible to effect closing transactions in particular options with the result that the Fund would have to exercise the options in order to realize any profit. If the Fund is unable to effect a closing purchase transaction in a secondary market, it will not be able to sell the underlying security until the option expires or it delivers the underlying security upon exercise. Reasons for the absence of a liquid secondary market include the following: (i) there may be insufficient trading interest in certain options, (ii) restrictions may be imposed by a national securities exchange ("Exchange") on opening transactions or closing transactions or both, (iii) trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of options or underlying securities, (iv) unusual or unforeseen circumstances may interrupt normal operations on an Exchange, (v) the facilities of an Exchange or the Options Clearing Corporation may not at all times be adequate to handle current trading volume, or (vi) one or more Exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of options (or a particular class or series of options), in which event the secondary market on that Exchange (or in that class or series of options) would cease to exist, although outstanding options on that Exchange that had been issued by the Options Clearing Corporation as a result of trades on that Exchange would continue to be exercisable in accordance with their terms. The Funds may purchase put options to hedge against a decline in the value of their portfolios. By using put options in this way, the Funds will reduce any profit they might otherwise have realized in the underlying security by the amount of the premium paid for the put option and by transaction costs. The Funds may purchase call options to hedge against an increase in the price of securities that the Funds anticipate purchasing in the future. The premium paid for the call option plus any transaction costs will reduce the benefit, if any, realized by a Fund upon exercise of the option, and, unless the price of the underlying security rises sufficiently, the option may expire worthless to the Fund. As discussed above, options may be traded over-the-counter ("OTC options"). In an over-the counter trading environment, many of the protections afforded to exchange participants will not be available. For example, there are no daily price fluctuation limits, and adverse market movements -20- could therefore continue to an unlimited extent over a period of time. The Funds may purchase and write OTC options deemed creditworthy by the Manager. OTC options are illiquid and it may not be possible for the Funds to dispose of options they have purchased or terminate their obligations under an option they have written at a time when the Manager and Sub-Adviser believe it would be advantageous to do so. Accordingly, OTC options are subject to the Funds' limitation that a maximum of 15% of its net assets be invested in illiquid securities. In the event of the bankruptcy of the writer of an OTC option, the Funds could experience a loss of all or part of the value of the option. FOREIGN TRANSACTIONS - Transactions in options and futures contracts may be conducted outside of the U.S. Such transactions are subject to the risk of governmental actions affecting trading in or the prices of foreign currencies or securities. The value of such positions also could be adversely affected by (a) other complex foreign political and economic factors; (b) lesser availability than in the United States of data on which to make trading decisions; (c) delays in a Fund's ability to act upon economic events occurring in foreign markets during nonbusiness hours in the United States; (d) the imposition of different exercise and settlement terms and procedures and margin requirements than in the United States; and (e) lesser trading volume. In addition, such transactions may not involve a clearing mechanism and related guarantee. FUTURE DEVELOPMENTS - A Fund may, following written notice thereof to its shareholders, take advantage of opportunities in the area of options and futures contracts and options on futures contracts which are not currently contemplated for use by the Fund or which are not currently available but which may be developed, to the extent such opportunities are both consistent with the Fund's investment object and legally permissible for the Fund. Such opportunities, if they arise, may involve risks which exceed those involved in the options and futures activities described above. RISKS OF SOVEREIGN DEBT OBLIGATIONS Each of the Funds (other than Money Market Fund) may invest in debt obligations of governments within the region or regions in which they are authorized to invest ("sovereign debt"). Investment in sovereign debt can involve a high degree of risk. The governmental entity that controls the repayment of sovereign debt may be dependent on expected disbursements from foreign governments, multilateral agencies -21- and others abroad to reduce principal and interest arrearages on their debt. The commitment on the part of these governments, agencies and others to make such disbursements may be conditioned on a governmental entity's implementation of economic reforms and/or economic performance and the timely service of such debtor's obligations. Failure to implement such reforms, achieve such levels of economic performance or repay principal or interest when due may result in the cancellation of such third parties' commitments to lend funds to the governmental entity, which may further impair such debtor's ability or willingness to service its debts in a timely manner. Investments in the sovereign debt of emerging market countries involve special risks. Certain government obligors in which the Funds may invest have in the past experienced substantial difficulties in servicing their external debt obligations and the restructuring of certain indebtedness. Restructuring arrangements have included, among other things, reducing and rescheduling interest and principal payments by negotiating new or amended credit agreements or converting outstanding principal and unpaid interest to Brady Bonds and obtaining new credit to finance interest payments. The risks of default are particularly great in the case of certain emerging market countries which have historically experienced, and may continue to experience, high rates of inflation, high interest rates, exchange rate fluctuations, large amounts of external debt, balance of payments and trade difficulties and extreme poverty and unemployment. Government obligors in developing and emerging market countries are among the world's largest debtors to commercial banks, other governments, international financial organizations and other financial institutions. Certain government obligors in which the Funds may invest have in the past experienced substantial difficulties in servicing their external debt obligations, which led to defaults on certain obligations and the restructuring of certain indebtedness. BRADY BONDS - Brady Bonds are debt securities issued under the framework of the Brady Plan, an initiative announced by former U.S. Treasury Secretary Nicholas F. Brady as a mechanism for debtor nations to restructure their outstanding external indebtedness. Brady Plan debt restructuring has been implemented to date in Argentina, Brazil, Bulgaria, Costa Rica, Jordan, Mexico, Nigeria, Philippines, Uruguay and Venezuela (collectively, the "Brady Countries"). As of August 1994 the Brady Countries have issued Brady Bonds aggregating approximately $83 billion, based on current estimates. It is expected that other countries will undertake a Brady Plan in -22- the future, including Dominican Republic, Ecuador, Panama, Peru and Poland. Interest payments on these Brady Bonds generally are collateralized on a one- year or longer rolling-forward basis by cash or securities in an amount that, in the case of fixed rate bonds, is equal to at least one year of interest payments or, in the case of floating rate bonds, initially is equal to at least one year of interest payments or, in the case of floating rate bonds, initially is equal to at least one year's interest payments based on the applicable interest rate at that time and is adjusted at regular intervals thereafter. Certain Brady Bonds are entitled to "value recovery payments" in certain circumstances, which in effect constitute supplemental interest payments but generally are not collateralized. Most Mexican Brady Bonds issued to date have principal repayments at final maturity fully collateralized by U.S. Treasury zero coupon bonds (or comparable collateral in other currencies) and interest coupon payments collateralized on an 18-month rolling-forward basis by funds held in escrow by an agent for the bondholders. A significant portion of the Venezuelan Brady Bonds and the Argentine Brady Bonds issued to date have principal repayments at final maturity collateralized by U.S. Treasury zero coupon bonds or comparable collateral in other currencies) and/or interest coupon payments collateralized on a 14-month (for Venezuela) or 12-month (for Argentina) rolling-forward basis by securities held by the Federal Reserve Bank of New York as collateral agent. ADDITIONAL RISKS APPLICABLE TO INVESTMENT IN CANADA The economy of Canada is strongly influenced by the activities of companies and industries involved in the production and processing of natural resources. The companies may include those involved in the energy industry, industrial materials (chemicals, base metals, timber and paper) and agricultural materials (grain cereals). The securities of companies in the energy industry are subject to changes in value and dividend yield which depend, to a large extent, on the price and supply of energy fuels. Rapid price and supply fluctuations may be caused by events relating to international politics, energy conservation and the success of exploration projects. Economic prospects are changing due to recent government attempts to reduce restrictions against foreign investment. Many factors affect and could have an adverse impact on the financial condition of Canada, including, social, environmental and economic conditions; factors which are not within -23- the control of Canada. The Manager and Sub-Adviser are unable to predict what effect, if any, such factors would have on instruments held in North American Fund's portfolio. ADDITIONAL RISKS APPLICABLE TO INVESTMENT IN COUNTRIES IN LATIN AMERICA, INCLUDING MEXICO Investing in securities of issuers located in Latin American countries may entail risks relating to the potential political and economic instability of those countries and the risks of expropriation, nationalization, confiscation or the imposition or restrictions on foreign investment and on repatriation of capital invested. In the event of expropriation, nationalization or other confiscation by any country, a Fund could lose its entire investment in any such country. The securities markets of Latin American countries are substantially smaller, less developed, less liquid and more volatile than the major securities markets in the U.S. Disclosure and regulatory standards are in many respects less stringent than U.S. standards. Furthermore, there is a lower level of monitoring and regulation of the markets and the activities of investors in such markets. The limited size of many Latin American securities markets and limited trading volume in the securities of Latin American issuers compared to volume of trading in the securities of U.S. issuers could cause prices to be erratic for reasons apart from factors that affect the soundness and competitiveness of the issuers. For example, limited market size may cause prices to be unduly influenced by traders who control large positions. Adverse publicity and investors' perceptions, whether or not based on in-depth fundamental analysis, may decrease the value and liquidity of portfolio securities. Some Latin American countries also may have managed currencies, which are not free floating against the U.S. dollar. In addition, there is risk that certain Latin American countries may restrict the free conversion of their currencies into other currencies. Further, certain Latin American currencies may not be internationally traded. Certain of these currencies have experienced a steep devaluation relative to the U.S. dollar. Any devaluations in the currencies in which the Funds' securities are denominated may have a detrimental impact on the Funds' net asset value. The economies of individual Latin American countries may differ favorably or unfavorably from the U.S. economy in such respects as the rate of growth of gross domestic product, the -24- rate of inflation, capital reinvestment, resource self-sufficiency and balance of payments positions. Certain Latin American countries have experienced high levels of inflation which can have a debilitating effect on an economy. Furthermore, certain Latin American countries may impose withholding taxes on dividends payable to the Funds at a higher rate than those imposed by other foreign countries. This may reduce the Funds' investment income available for distribution to shareholders. Although a number of Latin American countries are currently experiencing lower rates of inflation and higher rates of real growth in gross domestic product than they have in the past, other such countries continue to experience significant problems, including high inflation rates and high interest rates. Capital flight has proven a persistent problem and external debt has been forcibly rescheduled. Political turmoil, high inflation, capital repatriation restrictions and nationalization have further exacerbated conditions. Governments of many Latin American countries have exercised and continue to exercise substantial influence over many aspects of the private sector through the ownership or control of many companies, including some of the largest in those countries. As a result, government actions in the future could have a significant effect on economic conditions which may adversely affect prices of certain portfolio securities. Political, economic or social instability or other similar developments, such as military coups, have occurred in the past and could also adversely affect the Funds' investments in these countries. Changes in political leadership, the implementation of market oriented economic policies, such as privatization, trade reform and fiscal and monetary reform are among the recent steps taken to renew economic growth. External debt is being restructured and flight capital (domestic capital that has left home country) has begun to return. Inflation control efforts have also been implemented. Free Trade Zones are being discussed in various areas in Latin America, the most notable being a free zone between Mexico and the U.S. Latin American equity markets can be extremely volatile and in the past have shown little correlation with the U.S. market. Currencies are typically weak, but most are now relatively free floating, and it is not unusual for the currencies to undergo wide fluctuations in value over short periods of time due to changes in the market. -25- Latin America is a region rich in natural resources such as oil, copper, tin, silver, iron ore, forestry, fishing, livestock and agriculture. The region has a large population (roughly 300 million) representing a large domestic market. Economic growth was strong in the 1960's and 1970's, but slowed dramatically (and in some instances was negative) in the 1980's as a result of poor economic policies, higher international interest rates, and the denial of access to new foreign capital. INVESTMENT RESTRICTIONS Each of the Funds has adopted certain investment restrictions, which are set forth below. All other investment policies or practices are considered by each Fund not to be fundamental and, accordingly, may be changed without shareholder approval. If a percentage restriction on investment or use of assets set forth below is adhered to at the time a transaction is effected, later changes in percentage resulting from changing market values will not be considered a deviation from policy. However, with respect to the investment restriction on borrowing from banks (excluding reverse repurchase agreements), each Fund is prohibited from purchasing portfolio securities while outstanding borrowing exceeds 5% of the value of that Fund's total assets. The following restrictions are fundamental and may not be changed with respect to a Fund without the approval of the holders of a majority of the Fund's outstanding voting securities (defined in the 1940 Act as the lesser of (a) more than 50% of the outstanding shares or (b) 67% or more of the shares represented at a meeting where more than 50% of the outstanding shares are represented). Each Fund may not: (1) Invest 25% or more of the value of its total assets in the same industry or groups of industries or in the obligations of any one government other than the U.S. (The various types of utility companies, such as gas, electric, telephone, telegraph, satellite and microwave communication companies, are considered as separate industries.) Notwithstanding the foregoing, Money Market Fund may invest more than 25% of the value of its total assets in debt obligations issued by U.S. banks. (2) Borrow money (provided that a Fund may enter into reverse repurchase agreements) except from banks for temporary or emergency purposes. The amount of such borrowing may not exceed 10% of the value of the Fund's total assets. The Fund will not purchase portfolio -26- securities while outstanding borrowing exceeds 5% of the value of the Fund's total assets. The Fund will not borrow money for leverage purposes (provided that each Fund (other than Money Market Fund) may enter into reverse repurchase agreements for such purposes in an amount not to exceed 25% of its total assets; Money Market Fund may enter into reverse repurchase agreements for such purposes in an amount not to exceed 5% of its total assets). (3) Pledge, hypothecate, mortgage or otherwise encumber its assets, except to secure issuances or borrowings permitted by restriction 2 above (collateral arrangements with respect to reverse repurchase agreements or margin for futures contracts and options are not deemed to be pledges or other encumbrances for purposes of this restriction). (4) Make loans of money or property to any person, except through 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. (5) Underwrite the securities of other issuers, except to the extent that in connection with the disposition of portfolio securities or the sale of its own shares, the Fund may be deemed to be an underwriter. (6) Invest for the purpose of exercising control over management of any company. (7) Purchase real estate (including limited partnership interests, but excluding readily marketable interests in real estate investment trusts or readily marketable securities of companies which invest in real estate) or interests therein or real estate mortgage loans other than securities backed by mortgages and similar instruments. (8) Issue any senior securities (as defined in the 1940 Act), other than as set forth in restriction number (2) above 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. (9) Invest more than 15% of the value of its net assets in illiquid securities or, in the case of Money Market -27- Fund, invest more than 10% of the value of its net assets in illiquid securities. (10) Purchase commodities, except that (with the exception of Money Market Fund) the Fund may engage in futures and options on futures as described in "Investment Policies." Money Market Fund may not invest in any foreign securities. The following are non-fundamental investment restrictions of each Fund (unless otherwise indicated) which may be changed without shareholder approval: (a) The Funds will not purchase or sell interests in oil, gas, mineral leases or other mineral exploration or development programs. (b) Each Fund will not 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.) (c) Each Fund will not purchase any securities on margin except to obtain such short-term credits as may be necessary for the clearance of transactions and except that each Fund may make margin deposits in connection with options and futures contracts. (d) Each Fund will not purchase or retain the securities of any issuer if, to such 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. (e) The Funds (other than Bond Fund) may not engage in the short sales of securities. (f) Money Market Fund is not permitted to write, purchase or sell puts, calls or combinations thereof, provided that the Fund may purchase securities with demand or put features. (g) Money Market Fund may not loan portfolio securities. -28- (h) Money Market Fund will not purchase the securities of other investment companies except as part of a merger, consolidation, or acquisition of assets, nor invest in warrants. (i) The Funds will limit to 5% of net assets investments in warrants valued at the lower of cost or market, with no more than 2% of net assets invested in unlisted warrants. For purposes of this restriction, warrants acquired by any Fund in units or attached to other securities are deemed to be without value. -29- 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. Each of the Fund's directors also serves as a director of American Opportunity Income Fund Inc. ("OIF"), American Government Income Fund Inc. ("AGF"), American Government Term Trust Inc. ("AGT"), American Government Income Portfolio Inc. ("AAF"), American Municipal Term Trust Inc. ("AXT"), American Municipal Term Trust Inc. - II ("BXT"), Minnesota Municipal Term Trust Inc. ("MNA"), American Strategic Income Portfolio Inc. ("ASP"), Minnesota Municipal Term Trust Inc. - II ("MNB"), American Strategic Income Portfolio Inc.- II ("BSP"), American Municipal Term Trust Inc. - III ("CXT"), American Strategic Income Portfolio Inc. - III ("CSP"), American Municipal Income Portfolio Inc. ("XAA"), Minnesota Municipal Income Portfolio Inc. ("MXA"), American Select Portfolio Inc. ("SLA"), Americas Income Trust Inc. ("XUS") and Highlander Income Fund Inc. ("HLA"), closed-end investment companies managed by the Manager and of Piper Funds Inc., Piper Institutional Funds Inc., Piper Global Funds Inc. and Piper Funds Inc. - II, open-end investment companies managed by the Manager. Messrs. Hayssen and Rosedahl are officers of the above closed- and open-end investment companies. Mr. Bennett is not a director of Piper Global Funds Inc. -30- NAME AND ADDRESS POSITION WITH THE FUND Charles N. Hayssen Treasurer Piper Jaffray Tower 222 South Ninth Street Minneapolis, MN 55402-3804 William H. Ellis President Piper Jaffray Tower 222 South Ninth Street Minneapolis, MN 55402-3804 David T. Bennett Director Gray, Plant, Mooty, Mooty & Bennett 3400 City Center 33 South 6th Street Minneapolis, MN 55402 Jaye F. Dyer Director 4670 Norwest Center 90 South Seventh Street Minneapolis, MN 55402 Luella G. Goldberg Director 7019 Tupa Drive Edina, MN 55435 George Latimer Director 1536 Hewitt Avenue Saint Paul, MN 55105 Karol D. Emmerich Director 7302 Clareton Drive Edina, MN 55439 Robert H. Nelson Vice President Piper Jaffray Tower 222 South Ninth Street Minneapolis, MN 55402-3804 David E. Rosedahl Secretary Piper Jaffray Tower 222 South Ninth Street Minneapolis, MN 55402-3804 Charles N. Hayssen has been a Managing Director of Piper Jaffray Inc. since November 1986 and of Piper Jaffray Companies Inc. since November 1987, Chief Financial Officer of Piper Jaffray Inc. from April 1988 until July 1995, Director -31- and Chief Financial Officer of the Manager since January 1989 and Chief Operating Officer of that company since December 1994. William H. Ellis has been President of Piper Jaffray Companies Inc. and Piper Jaffray Inc. since September 1982 and has been Chief Operating Officer of the same two companies since August 1983. Mr. Ellis has been President and Chief Executive Officer of the Manager since November 1994 and Director and Chairman of the Board of the Manager since October 1985. Mr. Bennett has been of counsel to the law firm of Gray, Plant, Mooty, Mooty & Bennett, P.A., located in Minneapolis, Minnesota since January 1967. Mr. Bennett also serves on the board of directors of a number of privately held and nonprofit corporations. Jaye F. Dyer has been President of Dyer Management Company, a private investment management company, since 1991; prior thereto, Mr. Dyer was President and Chief Executive Officer of Dyco Petroleum Corporation, an oil and natural gas development subsidiary of Arkla Inc. located in Minneapolis, Minnesota from 1971, when he founded the company, until March 1, 1989 and Chairman of the Board until December 31, 1990. Mr. Dyer serves on the boards of directors of Northwestern National Life Insurance Company and various privately held and nonprofit corporations. Luella G. Goldberg has served as a director of Northwestern National Life Insurance Company since 1976, a director of The NWNL Companies, Inc. (the holding company of Northwestern National Life Insurance Company) since January 1989, a director of TCF Banking and Savings, F.A. since 1986 and a director of TCF Financial Corporation (the holding company of TCF Banking and Savings, F.A.) since December 1988 and a director of Hormel Foods Corp. since September 1993. Ms. Goldberg serves as Chairman of the Board of Trustees of Wellesley College and also serves on the board of directors of a number of other organizations, including the Minnesota Orchestral Association, the University of Minnesota Foundation and Abbott-Northwestern Hospital in Minneapolis. George Latimer has been Special Consultant to the Department of Housing and Urban Development since 1993, prior to which he had been Dean of Hamline Law School from 1990 to 1993; prior thereto, Mr. Latimer was Mayor of the City of Saint Paul from 1976 to 1989. Mr. Latimer serves on the board of directors of Digital Biometrics, Inc. -32- Karol D. Emmerich has been President of Paraclete Group, a consultant to nonprofit and other organizations since 1993, prior to which she had been a Vice President and Treasurer of Dayton Hudson Corporation, from 1980 to May 1993 and Chief Accounting Officer from 1989 to May 1993. Ms. Emmerich also serves on the board of directors of Metropolitan Financial Corporation. Robert H. Nelson joined the Manager in 1988. He has served as Senior Vice President of the Manger since November 1993, prior to which he had served as Vice President for the same company. David E. Rosedahl has been Secretary of the Manager since October 1983, a Director of Piper Capital Management Inc. since October 1985, a Managing Director and Assistant Secretary of Piper Jaffray Inc. since November 1986 and of Piper Jaffray Companies Inc. since November 1987 and General Counsel for Piper Jaffray Inc. and Piper Jaffray Companies Inc. since 1977. The directors of the Company who are officers or employees of the Manager or any of its affiliates receive no remuneration from the Company. Each of the other directors receives from the Company a quarterly retainer of $1,000.00. In addition, each director who is not affiliated with the Manager shall receive a fee for each in-person meeting attended, such per-meeting fee to be based upon the net asset value of the Company as follows: NET ASSET VALUE PER-MEETING FEE Under $200 million $ 250 Under $500 million $ 500 Under $1 billion $ 750 Under $5 billion $1000 $5 billion and over $1500 In addition, members of the Audit Committee not affiliated with the Manager receive $1,000 for each Audit Committee meeting attended ($2,000 with respect to the chairperson of the Committee), with such fee being paid by the Company. 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 (during such fiscal year) from all other open-end and closed-end investment companies managed by -33- the Manager. Directors who are officers or employees of the Manager or any of its affiliates did not receive any such compensation and are not included in the table. No other individuals received compensation from the Company during the fiscal year ended June 30, 1995.
- - - - - - ------------------------------------------------------------------------------------------------- - - - - - - ------------------------------------------------------------------------------------------------- Pension or Retirement Estimated Aggregate Benefits Annual Total Compensation Accrued as Part Benefits Compensation from the of Company Upon From Fund Director Company Expenses Retirement Complex* - - - - - - ------------------------------------------------------------------------------------------------- David Bennett $1,750.00 None None $63,000 - - - - - - ------------------------------------------------------------------------------------------------- Jaye F. Dyer $7,250.00 None None $72,500 - - - - - - ------------------------------------------------------------------------------------------------- Karol D. Emmerich $7,250.00 None None $72,500 - - - - - - ------------------------------------------------------------------------------------------------- Luella G. Goldberg $9,250.00 None None $76,500 - - - - - - ------------------------------------------------------------------------------------------------- George Latimer $5,250.00 None None $53,750 - - - - - - ------------------------------------------------------------------------------------------------- - - - - - - -------------------------------------------------------------------------------------------------
*Consists of 22 open-end and closed-end investment companies managed by the Manager or an affiliate of the Manager, including the Company. Each director included in the table, other than Mr. Bennett, serves on the board of each such open-end and closed-end investment company. Mr. Bennett serves on the board of 21 of such open-end and closed-end investment companies. INVESTMENT ADVISORY AND OTHER SERVICES GENERAL The investment adviser for the Funds is Piper Capital Management Incorporated (the "Manager"). 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 Company. The address of the Manager and the Distributor is Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota 55402-3804. CONTROL OF THE MANAGER AND THE DISTRIBUTOR The Manager and the Distributor are 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. -34- INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT The Manager 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 by the shareholders of each Fund at a special meeting of the Company held on July 18, 1995. The prior manager was Hercules International Management L.L.C. (the "Prior Manager"). 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 Manager, and by the Manager 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 Manager. 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. If a majority of the outstanding voting securities of any of the Funds approves the agreement, the agreement shall continue in effect with respect to such approving Fund whether or not the shareholders of any other Fund approve the agreement. Pursuant to the Investment Advisory and Management Agreement, the Funds pay the Manager monthly advisory fees equal, on an annual basis, to 1.0% of each Fund's (except for Money Market Fund) average daily net assets. These fees are higher than fees paid by most other investment companies. The fees for Money Market Fund are paid monthly at an annual rate of .50% of average daily net assets of the Fund. For the fiscal year ended June 30, 1994 the advisory fees accrued or paid by the Funds were as follows: North American Fund -- $77,277; European Value Fund -- $70,390; Pacific Value Fund -- $174,540; Latin American Value Fund -- $133,200; and Bond Fund -- $161,843. No advisory fees were accrued or paid by Money Market Fund during this period because that Fund did not -35- commence operations until December 13, 1994. For the fiscal year ended June 30, 1995 the advisory fees accrued or paid by the Funds were as follows: North American Fund -- $160,455; European Value Fund -- $183,817; Pacific Value Fund - - - - - - -- $385,858; Latin American Value Fund -- $280,401; Bond Fund -- $253,709; and Money Market Fund -- $1,882. As discussed in the Prospectus, for each Fund's current fiscal year the Manager and the Distributor have voluntarily limited total expenses on a per annum basis to 2% with respect to average daily net assets of North American Fund, European Value Fund, Pacific Value Fund and Latin American Value Fund, 1.8% with respect to average daily net assets of Bond Fund and 1.00% with respect to average daily net assets of Money Market Fund. After each Fund's current fiscal year, these limitations may be revised or terminated at any time. The Investment Advisory and Management Agreement and the Sub-Investment Advisory Agreements between the Manager and each Sub-Adviser provide that the Manager and Sub-Advisers 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 Manager's compensation and the Sub-Adviser's compensation but exclude interest, taxes, brokerage fees and commissions, extraordinary expenses and amounts paid under the Company's Rule 12b-1 plan. The Manager does not believe that the laws of any other state in which the Funds' shares may be offered for sale contain expense reimbursement requirements. The Funds did not exceed such limitation during the fiscal year ended June 30, 1995. Under the Investment Advisory and Management Agreement, the Manager 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 Board of Directors of the Company. The Manager is obligated to pay the salaries and fees of any affiliates of the Manager serving as officers or directors of the Funds. The same security may be suitable for more than one of the Funds and/or for other series of the Company or other funds or private accounts managed by the Manager, the Sub-Advisers or their 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 -36- account. The simultaneous purchase or sale of the same securities by more than one of the Funds or other funds or accounts 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. SUB-ADVISERS Under Sub-Investment Advisory Agreements between the Manager and the following Sub-Advisers, each Sub-Adviser provides the respective Fund with investment advice and portfolio management relating to the Fund's investment in securities issued by issuers in the particular region or regions in which the applicable Fund is authorized to invest, subject to the overall supervision of the Manager: NORTH AMERICAN FUND - The Manager is responsible for investments in U.S. securities. Acci Worldwide, S.A. de C.V. ("Acci") (regarding investment in Mexican securities) Paseo de la Reforma 398-4 Piso 06600 Mexico, D.F. Acci, an investment adviser registered under the Advisers Act was organized in June, 1990 as a controlled subsidiary of Acciones y Valores de Mexico, S.A. de C.V. ("AVM") for the purpose of providing investment advice to non-Mexican investment funds investing in Mexican securities. AVM, founded in 1971, has been involved in equity underwriting and trading, portfolio investment and management of equity mutual funds in Mexico and participates in the fixed-income markets. The address of AVM is that of Acci. AVM is a subsidiary of Grupo Financiero Banamex - - - - - - - Accival ("Accival"), a holding company that owns over 99% of the voting stock of AVM and of Banamex, one of Mexico's largest bank. The address of Accival is Paseo de la Reforma 420, 06600 Mexico, D.F. AGF Investment Advisors, Inc. ("AGF") (regarding investment in Canadian securities) 31st Floor, Toronto-Dominion Bank Tower, Toronto, Ontario Canada M5K 1E9. AGF, an investment adviser registered under the Advisers Act, is a wholly owned subsidiary of A.G.F. Management Limited ("A.G.F. Ltd."), an Ontario corporation incorporated in 1960, Toronto-Dominion Bank Tower, Suite 3100, Toronto, Ontario, Canada M5K 1E9. EUROPEAN VALUE FUND - Pictet International Management Ltd. ("Pictet"), Cutlers Gardens, 5 Devonshire Square, London, England EC2M 4LD. Pictet, founded in 1980 and based in London, is an adviser registered under the Advisers Act and is a wholly owned subsidiary of Pictet (London) Limited, a -37- holding company wholly owned by Pictet (Canada) and Company Limited ("Pictet Canada"). Pictet Canada is a partnership, whose principal activities are investment accounting, custody and securities brokerage. The general partners of Pictet Canada are Pictet Advisory Services Overseas and FINGEST Company, each of whose interest in Pictet Canada amounts to .1%. The Pictet group of companies provides a wide range of services to individual and institutional clients including portfolio management, administrative and custodian services, financial and economic research, brokerage services and advice and counselling on legal, tax and accountancy matters. PACIFIC VALUE FUND - Edinburgh Fund Managers plc ("EFM"), Donaldson House, 97 Haymarket Terrace, Edinburgh EH12 5HD, Scotland. EFM is a public limited company that was incorporated in 1969. EFM is a majority-owned (approximately 53%) subsidiary of The British Investment Trust plc ("BIT"), a Scottish closed- end investment company founded in 1889, for which EFM serves as investment manager. The address of BIT is that of EFM. EFM, an investment adviser registered under the Advisers Act, currently furnishes investment management services, directly or through subsidiaries, to several closed-end and open-end investment companies, pension plans, charitable organizations and other individual/corporate clients. EFM is also a partner with U.S. based Wilmington Trust Company in a partnership known as Edinburgh-Wilmington International Capital Management, which is a registered investment adviser providing international equity management to U.S. investors. LATIN AMERICAN VALUE FUND - Bankers Trust Company ("Bankers Trust"), a New York banking corporation with executive offices at 130 Liberty Street, New York, New York 10017, is a wholly owned subsidiary of Bankers Trust New York Corporation. Bankers Trust conducts a variety of general banking and trust activities and is a major wholesale supplier of financial services to the international and domestic institutional market. As of December 31, 1994 Bankers Trust New York Corporation was the seventh largest bank holding company in the United States. Bankers Trust is a worldwide merchant bank dedicated to servicing the needs of corporations, governments, financial institutions and private clients through a global network of 83 offices in 36 countries. BOND FUND - Salomon Brothers Asset Management Limited ("SBAM Limited"), Victoria Plaza, 111 Buckingham Palace Road, London SW1W OSB England. SBAM Limited is based in London and specializes in the management of global multicurrency fixed income securities and currency transactions. SBAM Limited is an indirect, wholly owned subsidiary of Salomon Inc, the -38- parent of Salomon Brothers Inc ("SBI"). SBI is one of the largest international investment houses in the world, with offices and affiliates in 19 countries and assets at June 30, 1995 of approximately $164 Billion. SBAM Limited is registered as an investment adviser under the Advisers Act and is a member of the Investment Management Regulatory Organization Limited in the United Kingdom. In connection with SBAM Limited's services as Sub-Adviser to Bond Fund, SBAM Limited's affiliate, Salomon Brothers Asset Management Inc ("SBAM Inc"), will provide certain advisory services to SBAM Limited for the benefit of Bond Fund. SBAM Inc will be compensated by SBAM Limited at no additional expense to Bond Fund. Like SBAM Limited, SBAM Inc is registered as an investment adviser under the Advisers Act and is an indirect, wholly owned subsidiary of Salomon Inc. SBAM Inc acts as Sub-Adviser to Money Market Fund. The business address of SBAM Inc is Seven World Trade Center, New York, New York 10048. SBAM Limited and SBAM Inc together provide a broad range of fixed income and equity investment advisory services for their individual and institutional clients located around the world, and provide investment advisory services for twenty-one registered investment companies (including portfolios thereof). MONEY MARKET FUND - SBAM Inc, Seven World Trade Center, New York, New York 10048, has a professional staff with extensive experience in securities and the investment industry in both portfolio and securities analysis. This staff has been innovative in developing and managing funds for U.S. and non-U.S. investors. In addition, SBAM Inc has access to the quantitative analytical and research capabilities of SBI and its affiliates, which have a staff of over 250 research professionals including a substantial group dedicated to emerging markets sovereign and corporate credit research. SBAM Inc provides a broad range of fixed income and equity investment advisory services for its individual and institutional clients located around the world, and provides investment advisory services for 21 registered investment companies (including portfolios thereof). SBAM Inc is an indirect wholly-owned subsidiary of Salomon Inc, the parent of SBI. SBI is one of the largest international investment houses in the world with offices and affiliates in 19 countries with assets at June 30, 1995 of approximately $164 Billion. RATE OF COMPENSATION. As compensation for their services provided pursuant to the respective Sub-Advisory Agreements, the Manager pays each Sub-Adviser monthly compensation payable -39- over the same time periods and calculated in the same manner as the investment advisory fee of the applicable Fund of .50% of net assets of such Fund, except that with respect to Money Market Fund, the applicable Sub-Adviser is paid by the Manager a fee of .25% of daily net assets of such Funds. In the case of North American Fund, the fee is split equally among each of the two Sub-Advisers and the Manager without regard to the amount of assets under their respective management at any one time. For the fiscal year ended June 30, 1994 the sub- advisory fees accrued or paid pursuant to the Sub-Investment Advisory Agreements were as follows: North American Fund -- $38,638 (split equally among each of the Sub-Advisers); European Value Fund -- $35,195; Pacific Value Fund -- $87,270; Latin American Value Fund -- $66,600; and Bond Fund -- $80,921. No sub-advisory fees were accrued or paid by Money Market Fund during this period because that Fund did not commence operations until December 13, 1994. For the fiscal year ended June 30, 1995 the sub-advisory fees accrued or paid pursuant to the Sub-Investment Advisory Agreements were as follows: North American Fund - - - - - - -- $80,228 (split equally among each of the Sub-Advisers); European Value Fund - - - - - - - - $91,909; Pacific Value Fund -- $192,929; Latin American Value Fund -- $140,201; Bond Fund -- $126,855; and Money Market Fund -- $941. DISTRIBUTION PLAN Rule 12b-1(b) under the Investment Company Act of 1940 provides that any payments made by the Funds in connection with financing the distribution of their shares may only be made pursuant to a written plan describing all aspects of the proposed financing of distribution, and also requires that all agreements with any person relating to the implementation of the plan must be in writing. Because some of the payments described below to be made by the Funds are distribution expenses within the meaning of Rule 12b-1, the Company has entered into an Underwriting and Distribution Agreement with the Distributor pursuant to a Distribution Plan adopted in accordance with such Rule. In addition, Rule 12b-1(b)(1) requires that such plan be approved by a majority of each 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 in the operation of the plan or in the agreements related to the plan, cast in person at a meeting called for the -40- purpose of voting on such plan or agreement. Rule 12b-1(b)(3) requires that the plan or agreement provide, in substance: (a) that it shall continue in effect for a period of more than one year from the date of its execution or adoption only so long as such continuance is specifically approved at least annually in the manner described in paragraph (b)(2) of Rule 12b-1; (b) that any person authorized to direct the disposition of moneys paid or payable by the Company pursuant to the plan or any related agreement shall provide to the Company's Board of Directors, and the directors shall review, at least quarterly, a written report of the amounts so expended and the purposes for which such expenditures were made; and (c) in the case of a plan, that it may be terminated at any time by a vote of a majority of the members of the Board of Directors of the Company who are not interested persons of the Company 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 a Fund. The Distribution Plan has been approved by the Board of Directors (including a majority of the directors who are not interested persons of the Company) and the initial shareholder of each 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 Company may rely upon Rule 12b-1(b) only if the selection and nomination of the Company's disinterested directors are committed to the discretion of such disinterested directors. Rule 12b-1(e) provides that the Company may implement or continue a plan pursuant to Rule 12b- 1(b) only if the directors who vote to approve such implementation or continuation conclude, in the exercise of reasonable business judgment and in light of their fiduciary duties under state law, and under Sections 36(a) and (b) of the Investment Company Act of 1940, that there is a reasonable likelihood that the plan will benefit the Company -41- and its shareholders. The Board of Directors has concluded that there is a reasonable likelihood that the Distribution Plan will benefit the Company and its shareholders. Pursuant to the provisions of the Distribution Plan, each of the Funds pays a fee to the Distributor on a monthly basis at the annual rate of up to .70% of average daily net assets of the North American Fund, European Value Fund, Pacific Value Fund and Latin American Value Fund; and .50% of Bond Fund's average daily net assets, in order to reimburse the Distributor for its actual expenses incurred in the distribution and promotion of such Fund's shares. The Distribution Plan also authorizes payments by Money Market Fund in an amount not to exceed .10% per annum of average daily net assets. However, the Board of Directors of the Company has determined to discontinue payments under the Plan with respect to Money Market Fund effective as of June 19, 1995. Currently, reimbursement to the Distributor is limited for each Fund other than Money Market Fund on a per annum basis to .50% per annum with respect to average daily net assets of North American Fund, European Value Fund, Pacific Value Fund and Latin American Value Fund and .30% with respect to average daily net assets of Bond Fund. Those limitations may be revised or terminated at any time. For the fiscal year ended June 30, 1994 the distribution fees accrued or paid by the Funds were as follows: North American Fund -- $38,638; European Value Fund -- $35,195; Pacific Basin Value Fund -- $87,270; Latin American Value Fund -- $66,600; and Bond Fund -- $48,553. No distribution fees were accrued or paid by Money Market Fund during this period because that Fund did not commence operations until December 13, 1994. For the fiscal year ended June 30, 1995 the distribution fees accrued or paid by the Funds were as follows: North American Fund -- $112,319; European Value Fund -- $128,672; Pacific Basin Value Fund -- $270,101; Latin American Value Fund -- $196,280; Bond Fund -- $126,855; and Money Market Fund -- $376, not including amounts waived or absorbed by the Distributor. The amounts actually paid by each Fund, taking into effect the amounts waived or absorbed by the Distributor, were as follows: North American Fund -- $80,228; European Value Fund -- $91,909; Pacific Basin Value Fund -- $192,929; Latin American Value Fund -- $140,200; Bond Fund -- $76,113; and Money Market Fund -- $376. Distribution fees for the fiscal year ended June 30, 1995, were used by the Distributor as follows: -42-
North American European Pacific Value Latin American Bond Fund Money Fund Value Fund Fund Value Fund Market Fund - - - - - - ------------------------------------------------------------------------------------------------------------------------------------ Advertising 0 0 0 0 0 0 - - - - - - ------------------------------------------------------------------------------------------------------------------------------------ Printing and Mailing of 0 0 0 0 0 0 Prospectuses to Other than Current Shareholders - - - - - - ----------------------------------------------------------------------------------------------------------------------------------- Compensation to $112,319 $128,672 $270,101 $196,280 $126,855 $76 Underwriters(trail fees to investment executives) - - - - - - ----------------------------------------------------------------------------------------------------------------------------------- Compensation to Dealers 0 0 0 0 0 0 - - - - - - ------------------------------------------------------------------------------------------------------------------------------------ Compensation to Sales 0 0 0 0 0 0 Personnel ----------------------------------------------------------------------------------------------------------------------------------- Interest, Carrying or 0 0 0 0 0 0 Other Financial Charge - - - - - - ------------------------------------------------------------------------------------------------------------------------------------ Other (Specify) 0 0 0 0 0 0 - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
The Distributor is reimbursed under the Plan for Distribution Expenses and Shareholder Servicing Costs. Distribution Expenses include, but are not limited to, initial and ongoing sales compensation (in addition to sales loads) paid to investment executives of the Distributor and to other broker-dealers; expenses incurred in the printing of prospectuses, statements of additional information and reports used for sales purposes; expenses of preparation and distribution of sales literature; expenses of advertising of any type; an allocation of the Distributor's overhead; payments to and expenses of persons who provide support services in connection with the distribution of Fund shares; and other distribution-related expenses. Shareholder Servicing Costs include all expenses of the Distributor incurred in connection with providing administrative or accounting services including payments made to persons, including employees of the Distributor, who respond to inquiries of shareholders of the Funds regarding their ownership of shares or their accounts with the Funds or who provide other administrative or accounting services not otherwise required to be provided by the Funds' Adviser, Sub-Advisers or transfer agent. The Manager, the Sub- Advisers and the Distributor may, out of their own assets, pay for certain expenses incurred in connection with the distribution of shares of the Fund. In particular, the Distributor may make payments out of its own assets to its investment executives and other broker dealers in connection with their sales of -43- shares of the Fund. See "Purchase of Shares - Public Offering Price." The Distributor's Shareholder Servicing Costs include payments to its investment executives and to other broker-dealers which have entered into sales agreements with the Distributor as follows: If shares of a Fund are sold by a representative of a broker-dealer other than the Distributor, that portion of .25% of the average daily net assets of the Fund which is attributable to shares sold by such representative is paid to such broker-dealer. If shares of a Fund are sold by an investment executive of the Distributor, compensation will be paid to the investment executive in the manner set forth in a written agreement, in an amount not to exceed that portion of .25% of the average daily net assets of the Fund which is attributable to shares sold by such investment executive. In addition, the Distributor pays an amount equal to .25% of the average daily net assets of the North American Fund, the European Value Fund, the Pacific Value Fund and the Latin American Value Fund (.05% with respect to the Bond Fund) as ongoing sales compensation to investment executives of the Distributor and to broker-dealers which have entered into sales agreements with the Distributor. Such payments are considered Distribution Expenses of the Distributor and are reimbursable under the Plan. UNDERWRITING AND DISTRIBUTION AGREEMENT Pursuant to the 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. -44- PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE Transactions on stock exchanges involve the payment of brokerage commissions. In transactions on stock exchanges in the United States, commissions are negotiated whereas on many foreign stock exchanges, commissions are fixed, often at levels higher than those available in the United States. In the case of securities traded on the over-the-counter markets, there is generally no stated commission but the price usually includes a commission paid by the issuer to the underwriters (I.E., these are net prices which include a markup). Commissions are paid with respect to the purchase of certain other securities in which the Funds may invest, and with respect to options on securities, futures contracts and options on futures contracts purchased by the Funds. Subject to the general supervision of the Directors of the Company, the Manager and the respective Sub-Advisers are responsible for the investment decisions and the placing of the orders for portfolio transactions for the Funds. During the fiscal year ended June 30, 1994, the brokerage commissions paid by the Funds (other than Money Market Fund) were as follows: North American Fund -- $62,242; European Value Fund -- $66,725; Pacific Value Fund -- $296,670; Latin American Value Fund -- $160,209; and Bond Fund -- $2,470. During the fiscal year ended June 30, 1995, the brokerage commissions paid by the Funds (other than Money Market Fund) were as follows: North American Fund -- $54,181; European Value Fund -- $99,038; Pacific Value Fund -- $222,407; Latin American Value Fund -- $217,281; and Bond Fund -- $1,796. During the fiscal year ended June 30, 1994, information with respect to brokerage commissions paid by the Funds to affiliated brokers was as follows: -45-
- - - - - - ---------------------------------------------------------------------------------------------------------------- Name of Fund Name of Brokerage Total Amount of Affiliated Commission Transactions Broker Paid Where Commissions Paid to Affiliate -------------------------------------------------------------------- Dollar % Dollar % Amount Amount - - - - - - ---------------------------------------------------------------------------------------------------------------- North Acciones y $25,765 31 $4,929,047 24 American Valores Fund - - - - - - ---------------------------------------------------------------------------------------------------------------- North Piper 85 0 45,000 0 American Jaffray Fund Inc. - - - - - - ---------------------------------------------------------------------------------------------------------------- European Pictet & 5,281 8 1,708,530 6 Value Fund Cie - - - - - - ---------------------------------------------------------------------------------------------------------------- Latin Salomon 4,208 3 1,661,720 3 American Brothers Inc Value Fund - - - - - - ----------------------------------------------------------------------------------------------------------------- - - - - - - -----------------------------------------------------------------------------------------------------------------
During the fiscal year ended June 30, 1995, information with respect to brokerage commissions paid by the Funds to affiliated brokers is as follows:
- - - - - - ------------------------------------------------------------------------------------------------------------- Name of Name of Brokerage Total Amount of Fund Affiliated Commission Transactions Broker Paid Where Commissions Paid to Affiliate -------------------------------------------------------- Dollar % Dollar % Amount Amount - - - - - - ------------------------------------------------------------------------------------------------------------ North Acciones y $24,276 44.81 $4,858,121 28.33 American Valores Fund - - - - - - ------------------------------------------------------------------------------------------------------------- European Pictet & Cie $ 4,191 4.23 $1,353,868 4.04 Value Fund - - - - - - ------------------------------------------------------------------------------------------------------------- Latin Salomon $10,523 4.84 $3,105,766 6.28 American Brothers Inc. Value Fund - - - - - - ------------------------------------------------------------------------------------------------------------- Pacific Salomon $ 4,849 2.18 $1,285,191 2.61 Basin Fund Brothers Inc - - - - - - -------------------------------------------------------------------------------------------------------------- - - - - - - ---------------------------------------------------------------------------------------------------------------
Brokerage commissions in Mexico generally are higher than in the U.S. and Canada and, therefore, brokerage commissions -46- paid to Acciones y Valores represent a higher percentage of total commissions than such transactions represent in terms of dollars. From time to time the Funds may acquire the securities of their regular brokers or dealers or parent companies of such brokers or dealers. As of June 30, 1995, European Value Fund owned $210,952 of securities issued by Smith New Court and $127,863 of securities issued by S.G. Warburg Group. The Funds have no obligation to enter into transactions in portfolio securities with any dealer, issuer, underwriter or other entity. The Funds do not purchase securities from, or sell securities to, the Manager, the Sub- Advisers or their respective affiliates acting as principal. In placing orders, it is the policy of the Funds to obtain the best price and execution for its transactions. Where best price and execution may be obtained from more than one broker-dealer, the Manager and/or the Sub-Advisers may, in their discretion, purchase and sell securities through broker/dealers who provide research, statistical and other information to the Manager or the Sub-Advisers, as the case may be. 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 Manager and/or a Sub-Adviser than would be the case if no weight were given by the Manager and/or Sub- Adviser, as the case may be, to the dealer's furnishing of such services. The supplemental information received from a broker-dealer is in addition to the services required to be performed by the Manager under the Investment Advisory Agreement, and by the Sub-Investment Advisers under the Sub-Advisory Agreements, and the expenses of the Manager and/or the Sub-Advisers will not necessarily be reduced as a result of the receipt of such information. Consistent with the Rules of Fair Practice of the National Association of Securities Dealers, Inc., and subject to seeking the best price and execution, the Funds may consider sales of shares of the Funds as a factor in the selection of broker-dealers to enter into portfolio transactions with the Funds. The investment information provided to the Manager and/or the Sub-Advisers, as the case may be, is of the types described in Section 28(e)(3) of the Securities Exchange Act of 1934 and is designed to augment the Manager's and/or a Sub-Adviser's own internal research and investment strategy capabilities. Research and statistical services furnished by -47- brokers through which the Funds effect securities transactions are used by the Manager and/or a Sub-Adviser in carrying out its investment management responsibilities with respect to all its client accounts, but not all such services may be used by the Manager and/or a Sub-Adviser in connection with the Funds. Certain other clients of the Manager and/or a Sub-Adviser may have investment objectives and policies similar to those of the Company. The Manager and/or a Sub-Adviser may, from time to time, make recommendations that result in the purchase or sale of a particular security by its other clients simultaneously with a Fund. ("Security" is defined for these purposes to include options, futures contracts and options on futures contracts.) If transactions on behalf of more than one client during the same period increase the demand for securities being purchased or the supply of securities being sold, there may be an adverse effect on price or quantity. In addition, it is possible that the number of options or futures transactions that a Fund may enter into may be affected by options or futures transactions entered into by other investment advisory clients of the Manager and/or Sub-Advisor. It is the policy of the Manager and/or the Sub-Advisers to allocate advisory recommendations and the placing of orders in a manner that is deemed equitable by the Manager or the Sub-Adviser to the accounts involved, including the Funds. When two or more of the clients of the Manager and/or a Sub-Adviser (including the Funds) are purchasing or selling the same security on a given day from the same broker-dealer, such transactions may be averaged as to price. Transactions in securities, options on securities, futures contracts and options on futures contracts may be effected through Piper Jaffray Inc. or affiliates of the Sub-Advisers if the commissions, fees or other remuneration received by Piper Jaffray Inc. and such other entities are reasonable and fair compared to the commissions, fees or other remuneration paid to other brokers or other futures commission merchants in connection with comparable transactions involving similar securities or similar futures contracts or options thereon being purchased or sold on an exchange or contract market during a comparable period of time. In effecting portfolio transactions through Piper Jaffray Inc., the Company intends to comply with Section 17(e)(1) of the 1940 Act. -48- CAPITAL STOCK AND OWNERSHIP OF SHARES As of July 31, 1995, Piper Jaffray Inc., the Company's distributor, owned 54.39% of Money Market Fund and therefore controls Money Market Fund. The effect of this control is that Piper Jaffray Inc. currently holds a sufficient number of shares to constitute a quorum and approve or disapprove any proposal presented to shareholders of Money Market Fund. Piper Jaffray Inc., a corporation organized under the laws of the state of Delaware, is a wholly owned subsidiary of Piper Jaffray Companies Inc. Its address is that of the Company. As of June 31, 1995, no other person owned 5% or more of the outstanding shares of any of the Funds. As of July 31, 1995, the directors and officers of the Company as a group owned less than 1% of the outstanding shares of the Company as of such date. -49- NET ASSET VALUE AND PUBLIC OFFERING PRICE The method for determining the public offering price of a Fund's shares is summarized in the Prospectus section entitled "Valuation of Shares." The net asset value of a 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. -50- CALCULATION OF PERFORMANCE DATA As discussed in the Prospectus, from time to time certain of the Funds may quote its "yield" and/or its "total return" in advertisements and sales literature. Other than for Money Market Fund, yield is calculated for any 30- day period as follows: the amount of interest and/or dividend income for each security in the Fund's portfolio is determined in accordance with regulatory requirements; the total for the entire portfolio constitutes the Fund's gross income for the period. Expenses accrued during the period are subtracted to arrive at "net investment income." The resulting amount is divided by the product of the maximum offering price per share on the last day of the period multiplied by the average number of Fund shares outstanding during the period that were entitled to dividends. This amount is added to 1 and raised to the sixth power. 1 is then subtracted from the result and the difference is multiplied by 2 to arrive at the annualized yield. YIELD FOR 30-DAY PERIOD ENDED JUNE 30, 1995 Bond Fund . . . . . . . . . . . . . . . . . . . . . . 5.09% Various portfolio fees and expenses were voluntarily waived or absorbed by the Prior Manager. Had the Funds paid all expenses, the yield for Bond Fund would have been 4.50%. For Money Market Fund, yield is 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 -51- 7, and subtracting 1 from the result, according to the following formula: 365/7 EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1) ] - 1 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. Money Market Fund's yield and effective yield, based on the seven days ended June 30, 1995, are set forth below: Yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.41% Effective Yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.51% 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 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. -52- The average annual total returns on an investment in the Funds for various periods ending June 30, 1995 were:
Since inception One Year (11/9/93) ("Since ("1995 PERIOD") Inception Period") ---------------- --------------------- North American Fund 3.36% -0.81% European Value Fund 11.52% 6.54% Pacific Value Fund -16.31% -6.05% Latin American Value Fund -22.80% -18.67% Bond Fund 5.24% 0.09%
Various portfolio fees and expenses were voluntarily waived or absorbed by the Prior Manager. Had the Funds paid all expenses, the average annual total return for the 1995 Period for each of North American Fund, European Value Fund and Pacific Value Fund, Latin American Value Fund and Bond Fund would have been 1.97%, 10.31%, -16.82%, -24.25% and 4.51%. Had the Funds paid all expenses, the average annual total return during the Since Inception Period for each of North American Fund, European Value Fund, Pacific Value Fund, Latin American Value Fund and Bond Fund would have been -2.34%, 5.02%, -6.56, -20.22 and -0.49%, respectively. Cumulative 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 deducts the maximum sales charge from the initial hypothetical $1,000 investment, assumes all dividends and capital gain distributions are reinvested at net asset value on the appropriate reinvestment dates as described in the Prospectus and -53- includes all recurring fees, such as investment advisory and management fees, charged to all shareholder accounts. Cumulative Total Return For the Since Inception Period North American Fund. . . . . . . . . . . . . . . . . . . . . . . .-1.33% European Value Fund. . . . . . . . . . . . . . . . . . . . . . . +10.93% Pacific Value Fund . . . . . . . . . . . . . . . . . . . . . . . .-9.72% Latin American Value Fund. . . . . . . . . . . . . . . . . . . . -28.72% Bond Fund. . . . . . . . . . . . . . . . . . . . . . . . . . . . .-0.13% Various portfolio fees and expenses were voluntarily waived or absorbed by the Prior Manager. Had the Funds paid all expenses, the cumulative total return for the Since Inception Period for each of North American Fund, European Value Fund, Pacific Value Fund, Latin American Value Fund and Bond Fund would have been -3.83%, +8.32%, -10.55%, -30.95% and -0.83%, respectively. As discussed in the Prospectus, the Company recently introduced a contingent deferred sales charge ("CDSC"), applicable to shares of each Fund (other than Money Market Fund) purchased after June 19, 1995. The performance information set forth above for such Funds assumes the effect of the CDSC as if it were applicable to all shares purchased throughout the periods shown. REDEMPTION Redemption of shares, or payment, may be suspended at times (a) when the New York Stock Exchange is closed for other than customary weekend or holiday closings, (b) when trading on said Exchange is restricted, (c) when an emergency exists, as a result of which disposal by the Fund of securities owned by it is not reasonably practicable, or it is not reasonably practicable for the Fund fairly to determine the value of its net assets, or (d) during any other period when the Securities and Exchange Commission, by order, so permits, provided that applicable rules and regulations of the Securities and Exchange Commission shall govern as to whether the conditions prescribed in (b) or (c) exist. -54- TAXATION General Each of the Funds intends to qualify as a regulated investment company for federal income tax purposes. In order for a Fund to so qualify, the Fund must meet certain requirements imposed by the Code as to the sources of the Fund's income and the diversification of the Fund's assets. The Fund must, among other things, (a) derive in each taxable year at least 90% of its gross income from dividends, interest, payments with respect to loans of securities, gains from the sale or other disposition of securities or other income derived with respect to its business of investing in such securities (including, but not limited to, gains from options, futures or forward contracts); (b) generally derive in each taxable year less than 30% of its gross income from gains from the sale or other disposition of securities, options, futures or forward contracts held for less than three months; and (c) diversify its holdings so that, at the end of each fiscal quarter, (i) at least 50% of the value of the Fund's assets is represented by (A) cash, United States government securities or securities of other regulated investment companies, and (B) other securities that, with respect to any one issuer, do not represent more than 5% of the value of the Fund's assets or more than 10% of the voting securities of such issuer, and (ii) not more than 25% of the value of the Company's assets is invested in the securities of any issuer (other than United States government securities or the securities of other regulated investment companies) or two or more issuers controlled by the Fund and determined to be engaged in the same trade or business. If a Fund qualifies as a regulated investment company and satisfies a minimum distribution requirement, the Fund will not be subject to federal income tax on income and gains to the extent that it distributes such income and gains to its shareholders. The minimum distribution requirement is satisfied if the Fund distributes at least 90% of its net investment income (including tax exempt interest and net short-term capital gains) for the taxable year. Although the Fund intends to satisfy the above minimum distribution requirement, it may elect to retain its remaining net investment income. The Fund would be subject to corporate tax (currently at a 35% rate) on any undistributed income. The Fund will be subject to a nondeductible 4% excise tax to the extent that the Fund does not distribute by the end of each calendar year (or is not subjected to regular corporate tax in such year on) an amount equal to the sum of (a) 98% of the Fund's ordinary income for such calendar year; (b)98% of the excess of capital gains over capital losses for the one year period generally -55- ending on October 31 of each year; and (c) the undistributed income and gains from the preceding years (if any). As discussed above, each of the Funds intends to continue to distribute sufficient income to qualify as a regulated investment company. However, a Fund may retain all or a portion of its net investment income in excess of such amount, which net investment income may be subject to the corporate income or the excise tax. In addition, a Fund may in the future decide to retain all or a portion of its net capital gain, as described under "Federal Tax Treatment of Shareholders," below. FEDERAL TAX TREATMENT OF SHAREHOLDERS DISTRIBUTIONS TO SHAREHOLDERS. Distributions to shareholders attributable to a Fund's net investment income (including interest income and net short-term capital gains) are taxable as ordinary income whether paid in cash or reinvested in additional shares of the Fund. In general, distributions will qualify for the dividends received deduction for corporate shareholders only to the extent that such distributions are attributable to dividends which are received from U.S. corporations and which satisfy certain other requirements. Distributions of any net capital gain (I.E., the excess of net long-term capital gain over net short-term capital loss, if any) that are designated as capital gain dividends are taxable as long-term capital gains, whether paid in cash or additional shares of a Fund, regardless of how long the shares have been held. For individuals, long-term capital gains are generally subject to a maximum tax rate of 28% while ordinary income is generally subject to a maximum rate of 39.6%. For corporations, long-term capital gains are currently subject to the same rates of tax as ordinary income (maximum rate of 35%). A Fund may elect to retain all or a portion of its net capital gain and be taxed at the corporate tax rate for such capital gains, which is currently 35%. In such event, the Fund would most likely make an election that would require each shareholder of record on the last day of the Fund's taxable year to include in income for tax purposes his proportionate share of the Fund's undistributed net capital gain. If such an election is made, each shareholder would be entitled to credit his proportionate share of the tax paid by the Fund against his federal income tax liabilities and to claim refunds to the extent that the credit exceeds such liabilities. In addition, the shareholder would be entitled to increase the -56- basis of his shares for federal tax purposes by an amount equal to 65% of his proportionate share of the undistributed net capital gain. Dividends and distributions by a Fund are generally taxable to the shareholders at the time the dividend or distribution is made (even if reinvested in additional shares of the Fund). However, any dividend declared by a Fund in October, November or December of any calendar year which is payable to shareholders of record on a specified date in such a month will be treated as received by the shareholders as of December 31 of such year if the dividend is paid during January of the following year. The accrual by a Fund of original issue or market discount will increase the investment income of the Fund and the amount required to be distributed. SALE OF SHARES. In general, if a share of common stock is sold or exchanged, the seller will recognize gain or loss equal to the difference between the amount received in the sale or exchange and the seller's adjusted basis in the share of common stock. Any gain or loss realized upon a sale or exchange of shares of common stock will be treated as long-term capital gain or loss if the shares have been held for more than one year, and otherwise as short-term capital gain or loss. Further, if such shares are held for six months or less, loss realized by a shareholder will be treated as long-term capital loss to the extent of the total of any capital gain dividend received by the shareholder. In addition, any loss realized on a sale or exchange of shares of common stock will be disallowed to the extent the shares disposed of are replaced within a period of 61 days beginning 30 days before and ending 30 days after disposition of the shares. In such case, the basis of the shares acquired will be adjusted to reflect the disallowed loss. BACKUP WITHHOLDING. A Fund may be required to withhold federal income tax at the rate of 31% of all taxable distributions payable to shareholders who fail to provide the Fund with their correct taxpayer identification number or to make required certifications, or who have been notified by the Internal Revenue Service that they are subject to backup withholding. Corporate shareholders and certain other shareholders specified in the Code are generally exempt from such backup withholding. Backup withholding is not an additional tax. Any amounts withheld may be credited against the shareholder's federal income tax liability. OTHER TAXES. Distributions may also be subject to state, local and foreign taxes depending on each shareholder's particular situation. -57- FOREIGN SHAREHOLDERS. The foregoing discussion relates solely to United States federal income tax law as applicable to "U.S. persons" (I.E., U.S. citizens and residents and U.S. domestic corporations, partnerships, trusts and estates). Shareholders who are not U.S. persons should consult their tax advisers regarding the U.S. and non-U.S. tax consequences of ownership of shares of the Company, including the fact that such a shareholder may be subject to U.S. withholding tax at a rate of 30% (or at a lower rate under an applicable U.S. income tax treaty) on amounts constituting ordinary income from U.S. sources, including ordinary dividends paid by the Company. CONSEQUENCES OF CERTAIN INVESTMENTS The Funds may engage in various hedging transactions. Under various provisions of the Code, the result of such transactions may be to change the character of recognized gains and losses, accelerate the recognition of certain gains and losses, and defer the recognition of certain losses. The extent to which the Funds may be able to use such hedging techniques may be limited by the requirement that generally less than 30% of a Fund's gross income consist of gains from the sale or disposition of certain assets held for less than three months. Under Section 988 of the Code, all or a portion of gains and losses from certain transactions is treated as ordinary income or loss. These rules generally apply to transactions in certain securities denominated in foreign currencies, forward contracts in foreign currencies, futures contracts in foreign currencies that are not "regulated futures contracts," certain unlisted options and foreign currency swaps. The rules under Section 988 may also affect the timing of income recognized by a Fund. A Fund may be subject to U.S. taxes resulting from holdings in a passive foreign investment company ("PFIC"). A foreign corporation is a PFIC when 75% or more of its gross income for the taxable year is passive income or 50% or more of the average value of its assets consists of assets that produce or could produce passive income. Because of the expansive definition of a PFIC, it is possible that a Fund may invest a portion of its assets in PFICs. It is not anticipated, however, that the portion of the Fund's assets (if any) invested in PFICs will be material. PASS-THROUGH OF FOREIGN TAX CREDITS Foreign taxes paid by a Fund will not be eligible to be passed through to shareholders unless such taxes are imposed on the Fund. Certain taxes deducted from gross dividends paid to the Fund -58- may, for U.S. federal income tax purposes, be treated as imposed on the issuing corporation rather than the Fund. Any such taxes would not be included in the Fund's income, would not be eligible to be "passed through" by the Fund to its shareholders, and would not be eligible to be claimed as a foreign tax credit or deduction by the Fund's shareholders. Generally, a credit for foreign taxes may not exceed a United States shareholder's U.S. tax attributable to its foreign source taxable income. Generally, the source of the Fund's income flows through to its shareholders. Thus, dividends and interest received by the Fund will give rise to foreign source income to the shareholders. However, certain items of the Fund's income, including income and gains from securities transactions (including foreign securities), as well as certain foreign currency gains, will be treated as U.S. source income to shareholders. Accordingly, a United States shareholder will be unable to claim a foreign tax credit with respect to these items of income and gain unless such holder has other foreign source income. This limitation on foreign tax credits is applied separately to specific categories of foreign source income, among which is "passive income", which includes foreign source dividends, interest and capital gains. As a result of these rules, certain United States shareholders may be unable to claim a credit for the full amount of their proportionate share of the foreign taxes paid by the Fund. -59- PENDING LEGAL PROCEEDINGS Complaints have been filed in federal court relating to one open-end and six closed-end investment companies managed by the Manager and to two open-end funds for which the Manager acts as sub-adviser. A 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 Manager, 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. Plaintiffs in the complaint, which purports to be a class action and represents the consolidation of a number of previously filed complaints, are Richard J. Rodney, Jr., Doug Shonka, Carl Patrick Monahan, Jerry Hoehnen, Rosemary Boris, Thomas W. Newcome, Delvin D. Junker, Printing Mailing Trade District (affiliated with the Newspaper Drivers' Division of the International Brotherhood of the Teamsters), The History Theatre, Inc., Paul Gold, and Bernard Friedman. Piper Jaffray Companies and attorneys representing the plaintiffs in the complaint recently reached a $70 million agreement in principle to settle the lawsuit. The agreement requires court approval and the acceptance of the settlement by a large percentage of Institutional Government Income Portfolio shareholders. Four additional complaints, which are based on claims similar to those asserted in the first complaint, have been filed relating to Institutional Government Income Portfolio. The first of such complaints was filed in the same court against the same parties on October 21, 1994, by Eltrax Systems, Inc. A second additional complaint was filed against the Company, the Manager, 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 Institutional Government Income Portfolio, the Manager, the Distributor, Piper Jaffray Companies Inc., William H. Ellis and Edward J. Kohler. The fourth complaint was brought on April 11, 1995 and in the future may be filed in the Minnesota State district Court, Hennepin -60- County. The Plaintiff, Frank R. Berman, Trustee of Frank R. Berman Professional CP Pension Plan Trust, sued individually and not on behalf of any putative class. Defendants are the Distributor, Piper Funds Inc., Morton Silverman and Worth Bruntjen. In addition to the above complaints, a number of actions have been commenced in arbitration by individual investors in the Institutional Government Income Portfolio. The complaints discussed in this paragraph generally have been consolidated with the IN RE: PIPER FUNDS INC. action for pretrial purposes, and the arbitrations have been stayed pending the decision by class members to either participate in the settlement or opt out of the IN RE: PIPER FUNDS INC. action. A complaint was filed by Herman D. Gordon on October 20, 1994, in the United States District Court, District of Minnesota, against American Adjustable Rate Term Trust Inc. -- 1998, American Adjustable Rate Term Trust Inc. -- 1999, the Manager, the Distributor, Piper Jaffray Companies Inc., Benjamin Rinkey, Jeffrey Griffin, Charles N. Hayssen and Edward J. Kohler ("Gordon"). The complaint, which purports to be a class action, alleges that the defendants violated the federal securities laws by making materially misleading statements in prospectuses and other disclosure documents. A complaint was filed by Frank Donio, I.R.A. and other plaintiffs on April 14, 1995, in 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 Manager, the Distributor, Piper Jaffray Companies Inc. and certain associated individuals ("Donio"). The complaint, which purports to be a class action, alleges that the defendants violated certain federal and state securities laws by making materially misleading statements in prospectuses and other disclosure documents and by breaching their fiduciary duties. A complaint, consolidating Gordon and Donio, was filed on May 23, 1995, in the United States District Court, District of Minnesota. 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 Manager, the Distributor and Worth Bruntjen. The complaint alleges negligent misrepresentation, breach of fiduciary duty and breach of contract. A complaint was filed by Gary E. Nelson on June 28, 1995, in the United States District Court, Western District of Washington, -61- against American Strategic Income Portfolio - II, the Manager, the Distributor, Piper Jaffray Companies Inc., and certain associated individuals. The complaint, which purports to be a class action, alleges that the defendants violated certain federal and state securities laws by making materially misleading statements in prospectuses and other disclosure documents and by breaching their fiduciary duties. Complaints have also been filed relating to two open-end funds for which the Manager has acted as sub-adviser, Managers Intermediate Mortgage Fund and Managers Short Government Fund. A complaint was filed on September 26, 1994 in 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 Manager, the Distributor, an individual associated with the Manager, Evaluation Associates, Inc. and Managers Intermediate Mortgage Fund. The complaint, which is a putative class action, alleges certain violations of federal securities laws, including the making of false and misleading statements in the prospectus, and alleges negligent misrepresentation, breach of fiduciary duty and common law fraud. A similar complaint filed as a putative class action in the same court on November 4, 1994 was consolidated with the first complaint on December 13, 1994. The complaint was filed by Karen E. Kopelman against The Managers Fund, The Managers Funds, L.P., Robert P. Watson, the Manager, the Distributor, Worth Bruntjen, Evaluation Associates, Inc. and Managers Intermediate Mortgage Fund. A complaint was filed on November 18, 1994 in the United States District Court, District of Minnesota. The complaint was filed by Robert Fleck as a putative class action against The Managers Funds, The Managers Funds, L.P., the Manager, the Distributor, Worth Bruntjen, Evaluation Associates, Inc., Robert P. Watson, John E. Rosati, William M. Graulty, Madeline M. 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. In addition, there are several New York Stock Exchange and National Association of Securities Dealers arbitrations pending against the Manager relating to both investment companies and private accounts managed by the Manager. -62- The Manager and the Distributor do not believe that the settlement reached in connection with the first lawsuit described above, any other of the above lawsuits or the arbitrations will have a material adverse effect upon their ability to perform under their agreements with the Funds, and they intend to defend such actions vigorously. -63- AUDITORS KPMG Peat Marwick LLP, 4200 Norwest Center, Minneapolis, Minnesota 55402, acts as the independent auditors for the Company and in such capacity examines the Company's annual financial statements. The annual financial statements of the Company for the fiscal year ended June 30, 1995 included in this Statement of Additional Information have been included herein in reliance upon the report of KPMG Peat Marwick LLP, independent auditors, located elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The annual financial statements of the Company for the fiscal year ended June 30, 1995 contain information with respect to the Short-Term Fund. Because this Fund is not currently being offered for sale to new investors, additional information relating to this Fund is not included in this Statement of Additional Information. -64- ------------------------------------------------------------------------ FINANCIAL STATEMENTS STATEMENTS OF ASSETS AND LIABILITIES JUNE 30, 1995
North American Pacific Latin Growth and European Basin American Income Value Value Value Fund Fund Fund Fund - - - - - - ---------------------------------------------------------------------------------------------------------------- ASSETS: Investments in securities, at market value* (note 2) $13,170,154 17,558,689 31,272,381 22,259,248 Cash in bank on demand deposit 132,829 -- 905,633 36,930 Foreign cash in bank on demand deposit 1,000 81,339 62,891 8,873 Receivable for investment securities sold 84,407 819,145 9,254 177,117 Receivable for fund shares sold 2,621 -- 241,559 78,140 Organization costs (note 2) 64,091 64,091 64,091 64,091 Dividends and accrued interest receivable 20,913 137,323 36,800 98,286 - - - - - - ---------------------------------------------------------------------------------------------------------------- Total assets 13,476,015 18,660,587 32,592,609 22,722,685 - - - - - - ---------------------------------------------------------------------------------------------------------------- LIABILITIES: Bank overdraft -- 726,758 -- -- Payable for investment securities purchased -- 98,868 737,371 -- Payable for fund shares redeemed 238,101 101,144 107,405 63,453 Unrealized depreciation of forward foreign currency contracts held (notes 2 and 4) -- 185,581 147,351 -- Accrued distribution fee 5,489 7,113 13,050 8,925 Accrued investment management fee 11,253 14,862 27,282 18,645 Accrued expenses and other liabilities 3,752 6,005 32,928 7,630 - - - - - - ---------------------------------------------------------------------------------------------------------------- Total liabilities 258,595 1,140,331 1,065,387 98,653 - - - - - - ---------------------------------------------------------------------------------------------------------------- Net assets applicable to outstanding capital stock $13,217,420 17,520,256 31,527,222 22,624,032 - - - - - - ---------------------------------------------------------------------------------------------------------------- - - - - - - ---------------------------------------------------------------------------------------------------------------- REPRESENTED BY: Capital stock - 10 billion shares of $.01 par value authorized for each fund; outstanding, 1,332,763; 1,578,787; 3,495,770; 3,140,348 shares, respectively $ 13,328 15,788 34,958 31,403 Additional paid-in capital 13,943,781 15,930,770 36,465,491 35,243,185 Undistributed net investment income (accumulated net investment loss) (note 2) (393,668) 223,075 (211,925) (153,624) Accumulated net realized gain (loss) on investments and foreign currency transactions (850,994) 604,008 (1,552,376) (11,147,882) Unrealized appreciation (depreciation) of investments and on translation of other assets and liabilities in foreign currencies (notes 4 and 7) 504,973 746,615 (3,208,926) (1,349,050) - - - - - - ---------------------------------------------------------------------------------------------------------------- Total - representing net assets applicable to outstanding capital stock $13,217,420 17,520,256 31,527,222 22,624,032 - - - - - - ---------------------------------------------------------------------------------------------------------------- - - - - - - ---------------------------------------------------------------------------------------------------------------- Net asset value per share of outstanding capital stock $ 9.92 11.10 9.02 7.20 - - - - - - ---------------------------------------------------------------------------------------------------------------- - - - - - - ---------------------------------------------------------------------------------------------------------------- *INVESTMENTS IN SECURITIES, AT IDENTIFIED COST $12,665,204 16,632,313 34,333,691 23,607,434 - - - - - - ---------------------------------------------------------------------------------------------------------------- - - - - - - ----------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. F-1 ------------------------------------------------------------------------ FINANCIAL STATEMENTS STATEMENTS OF ASSETS AND LIABILITIES JUNE 30, 1995
World Global Money Bond Short-Term Market Fund Fund Fund - - - - - - ----------------------------------------------------------------------------------------------- ASSETS: Investments in securities, at market value* (note 2) $ 12,655,163 99,299 1,301,196 Cash in bank on demand deposit 1,030,953 48,823 196 Organization costs (note 2) 64,091 64,091 38,851 Dividends and accrued interest receivable 416,925 -- -- - - - - - - ----------------------------------------------------------------------------------------------- Total assets 14,167,132 212,213 1,340,243 - - - - - - ----------------------------------------------------------------------------------------------- LIABILITIES: Payable for fund shares redeemed 263,253 -- 109,588 Net unrealized depreciation of forward foreign currency contracts held (notes 2 and 4) 71,507 -- -- Dividends payable to shareholders (note 2) 14,101 -- 23 Accrued distribution fee 3,819 -- 58 Accrued investment management fee 12,460 101 541 Accrued expenses and other liabilities 25,541 6 94 - - - - - - ----------------------------------------------------------------------------------------------- Total liabilities 390,681 107 110,304 - - - - - - ----------------------------------------------------------------------------------------------- Net assets applicable to outstanding capital stock $ 13,776,451 212,106 1,229,939 - - - - - - ----------------------------------------------------------------------------------------------- - - - - - - ----------------------------------------------------------------------------------------------- REPRESENTED BY: Capital stock - 10 billion (100 billion for Global Short-Term Fund and Money Market Fund each) shares of $.01 par value authorized for each fund; outstanding, 1,402,574; 21,201; 1,229,939 shares, respectively (note 1) $ 14,026 212 12,299 Additional paid-in capital 14,366,681 213,143 1,217,640 Undistributed net investment income (accumulated net investment loss) (note 2) (632,506) 3,740 -- Accumulated net realized (loss) on investments and foreign currency transactions (362,726) (4,989) -- Unrealized appreciation of investments and on translation of other assets and liabilities in foreign currencies (notes 4 and 7) 390,976 -- -- - - - - - - ----------------------------------------------------------------------------------------------- Total - representing net assets applicable to outstanding capital stock $ 13,776,451 212,106 1,229,939 - - - - - - ----------------------------------------------------------------------------------------------- - - - - - - ----------------------------------------------------------------------------------------------- Net asset value per share of outstanding capital stock $ 9.82 10.00 1.00 - - - - - - ----------------------------------------------------------------------------------------------- - - - - - - ----------------------------------------------------------------------------------------------- *INVESTMENTS IN SECURITIES, AT IDENTIFIED COST $ 12,176,942 99,299 1,301,196 - - - - - - ----------------------------------------------------------------------------------------------- - - - - - - -----------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. F-2 ------------------------------------------------------------------------ FINANCIAL STATEMENTS STATEMENTS OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 1995
North American Pacific Latin Growth and European Basin American Income Value Value Value Fund Fund Fund Fund - - - - - - ------------------------------------------------------------------------------------------------------------ INCOME: Dividends (net of foreign withholding taxes of $7,348; $69,136; $49,616; $17,639, respectively) $ 281,754 468,490 362,205 377,995 Interest (net of foreign withholding taxes of $14,422; $2,149; $0; $0, respectively) 333,841 101,024 2,368 173,973 - - - - - - ------------------------------------------------------------------------------------------------------------ Total investment income 615,595 569,514 364,573 551,968 - - - - - - ------------------------------------------------------------------------------------------------------------ EXPENSES (NOTE 6): Investment management fee 160,455 183,817 385,858 280,401 Distribution fee 112,319 128,672 270,101 196,280 Custodian, accounting and transfer agent fees 164,237 172,683 179,117 359,665 Audit and legal fees 43,614 43,463 52,517 52,238 Amortization of organization costs 17,845 17,845 17,845 17,845 Directors' fees 5,909 5,909 5,909 5,909 Reports to shareholders 7,657 7,693 14,571 14,588 Registration fees 16,308 15,891 25,867 23,441 Other expenses 15,546 14,701 26,004 22,094 - - - - - - ------------------------------------------------------------------------------------------------------------ Total expenses 543,890 590,674 977,789 972,461 Less expenses waived or absorbed by manager (190,889) (186,196) (128,856) (355,579) Less expenses waived or absorbed by distributor (32,091) (36,763) (77,172) (56,080) - - - - - - ------------------------------------------------------------------------------------------------------------ Net expenses 320,910 367,715 771,761 560,802 - - - - - - ------------------------------------------------------------------------------------------------------------ Investment income (loss) - net 294,685 201,799 (407,188) (8,834) - - - - - - ------------------------------------------------------------------------------------------------------------ REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS AND FOREIGN CURRENCY: Net realized gain (loss) on investments (note 3) (1,333,951) 825,508 (1,237,693) (8,891,338) Net realized gain (loss) on foreign currency transactions (58,915) 2,976 (225,442) (133,054) - - - - - - ------------------------------------------------------------------------------------------------------------ Net realized gain (loss) on investments and foreign currency transactions (1,392,866) 828,484 (1,463,135) (9,024,392) - - - - - - ------------------------------------------------------------------------------------------------------------ Net change in unrealized appreciation or depreciation of investments and on translation of other assets and liabilities in foreign currencies 1,612,010 1,175,631 (4,415,354) 2,849,640 - - - - - - ------------------------------------------------------------------------------------------------------------ Net gain (loss) on investments and foreign currency 219,144 2,004,115 (5,878,489) (6,174,752) - - - - - - ------------------------------------------------------------------------------------------------------------ Net increase (decrease) in net assets resulting from operations $ 513,829 2,205,914 (6,285,677) (6,183,586) - - - - - - ------------------------------------------------------------------------------------------------------------ - - - - - - ------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. F-3 ------------------------------------------------------------------------ FINANCIAL STATEMENTS STATEMENTS OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 1995
World Global Money Bond Short-Term Market Fund Fund Fund* - - - - - - ------------------------------------------------------------------------------------------- INCOME: Interest (net of foreign withholding taxes of $11,100; $0; $0, respectively) $ 1,664,619 43,821 20,832 - - - - - - ------------------------------------------------------------------------------------------- EXPENSES (NOTE 6): Investment management fee 253,709 5,312 1,882 Distribution fee 126,855 3,187 376 Custodian, accounting and transfer agent fees 108,238 91,782 64,570 Audit and legal fees 74,993 42,426 18,685 Amortization of organization costs 17,845 17,845 2,782 Directors' fees 5,909 5,909 3,159 Reports to shareholders 6,070 627 47 Registration fees 24,141 10,254 1,057 Other expenses 23,099 13,569 3,170 - - - - - - ------------------------------------------------------------------------------------------- Total expenses 640,859 190,911 95,728 Less expenses waived or absorbed by manager (133,203) (177,099) (91,965) Less expenses waived or absorbed by distributor (50,742) (531) -- - - - - - - ------------------------------------------------------------------------------------------- Net expenses 456,914 13,281 3,763 - - - - - - ------------------------------------------------------------------------------------------- Investment income - net 1,207,705 30,540 17,069 - - - - - - ------------------------------------------------------------------------------------------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS AND FOREIGN CURRENCY: Net realized gain on investments (note 3) 1,626,510 15,432 -- Net realized loss on foreign currency transactions (2,594,888) (50,156) -- Net realized loss on futures contracts (249,444) -- -- - - - - - - ------------------------------------------------------------------------------------------- Net realized loss on investments and foreign currency transactions (1,217,822) (34,724) -- - - - - - - ------------------------------------------------------------------------------------------- Net change in unrealized appreciation or depreciation of investments and on translation of other assets and liabilities in foreign currencies 1,524,955 19,538 -- - - - - - - ------------------------------------------------------------------------------------------- Net gain (loss) on investments and foreign currency 307,133 (15,186) -- - - - - - - ------------------------------------------------------------------------------------------- Net increase in net assets resulting from operations $ 1,514,838 15,354 17,069 - - - - - - ------------------------------------------------------------------------------------------- - - - - - - -------------------------------------------------------------------------------------------
*FOR THE PERIOD FROM DECEMBER 13, 1994, COMMENCEMENT OF OPERATIONS, TO JUNE 30, 1995. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. F-4 ------------------------------------------------------------------------- FINANCIAL STATEMENTS STATEMENTS OF CHANGES IN NET ASSETS
North American Growth and Income Fund European Value Fund ------------------------------- ------------------------------- Period from Period from For the Year 11/9/93* to For the Year 11/9/93* to Ended 6/30/95 6/30/94 Ended 6/30/95 6/30/94 - - - - - - ----------------------------------------------------------------------------------------------------------------------- OPERATIONS: Investment income - net $ 294,685 67,387 201,799 33,204 Net realized gain (loss) on investments and foreign currency transactions (1,392,866) (164,207) 828,484 (106,879) Net change in unrealized appreciation or depreciation of investments and on translation of other assets and liabilities in foreign currencies 1,612,010 (1,107,037) 1,175,631 (429,016) - - - - - - ----------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 513,829 (1,203,857) 2,205,914 (502,691) - - - - - - ----------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Investment income - net (74,603) -- (41,687) -- Net realized gains -- -- (112,779) -- - - - - - - ----------------------------------------------------------------------------------------------------------------------- Total distributions (74,603) -- (154,466) -- - - - - - - ----------------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS (NOTE 5): Proceeds from shares sold 2,581,949 18,792,081 4,213,199 17,517,578 Reinvestment of distributions 72,165 -- 148,816 -- Payments for shares redeemed (6,731,426) (749,385) (5,467,416) (457,345) - - - - - - ----------------------------------------------------------------------------------------------------------------------- Increase (decrease) in net assets from capital share transactions (4,077,312) 18,042,696 (1,105,401) 17,060,233 - - - - - - ----------------------------------------------------------------------------------------------------------------------- Total increase (decrease) in net assets (3,638,086) 16,838,839 946,047 16,557,542 - - - - - - ----------------------------------------------------------------------------------------------------------------------- Net assets at beginning of period (note 1) 16,855,506 16,667 16,574,209 16,667 - - - - - - ----------------------------------------------------------------------------------------------------------------------- Net assets at end of period $ 13,217,420 16,855,506 17,520,256 16,574,209 - - - - - - ----------------------------------------------------------------------------------------------------------------------- - - - - - - ----------------------------------------------------------------------------------------------------------------------- Undistributed net investment income (accumulated net investment loss) $ (393,668) (62,566) 223,075 (6,026) - - - - - - ----------------------------------------------------------------------------------------------------------------------- - - - - - - -----------------------------------------------------------------------------------------------------------------------
* COMMENCEMENT OF OPERATIONS. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. F-5 ------------------------------------------------------------------------ FINANCIAL STATEMENTS STATEMENTS OF CHANGES IN NET ASSETS
Pacific Basin Value Fund Latin American Value Fund ------------------------------ ------------------------------ Period from Period from For the Year 11/9/93* to For the Year 11/9/93* to Ended 6/30/95 6/30/94 Ended 6/30/95 6/30/94 - - - - - - --------------------------------------------------------------------------------------------------------------------- OPERATIONS: Investment income (loss) - net $ (407,188) (167,901) (8,834) 18,072 Net realized gain (loss) on investments and foreign currency transactions (1,463,135) 677,669 (9,024,392) (2,388,607) Net change in unrealized appreciation or depreciation of investments and on translation of other assets and liabilities in foreign currencies (4,415,354) 1,206,428 2,849,640 (4,198,690) - - - - - - --------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations (6,285,677) 1,716,196 (6,183,586) (6,569,225) - - - - - - --------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Investment income - net -- -- -- -- Net realized gains (428,688) -- -- -- - - - - - - --------------------------------------------------------------------------------------------------------------------- Total distributions (428,688) -- -- -- - - - - - - --------------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS (NOTE 5): Proceeds from shares sold 8,508,368 40,734,038 11,516,745 37,811,581 Reinvestment of distributions 418,184 -- -- -- Payments for shares redeemed (11,512,632) (1,639,234) (10,459,488) (3,508,662) - - - - - - --------------------------------------------------------------------------------------------------------------------- Increase in net assets from capital share transactions (2,586,080) 39,094,804 1,057,257 34,302,919 - - - - - - --------------------------------------------------------------------------------------------------------------------- Total increase (decrease) in net assets (9,300,445) 40,811,000 (5,126,329) 27,733,694 - - - - - - --------------------------------------------------------------------------------------------------------------------- Net assets at beginning of period (note 1) 40,827,667 16,667 27,750,361 16,667 - - - - - - --------------------------------------------------------------------------------------------------------------------- Net assets at end of period $ 31,527,222 40,827,667 22,624,032 27,750,361 - - - - - - --------------------------------------------------------------------------------------------------------------------- - - - - - - --------------------------------------------------------------------------------------------------------------------- Undistributed net investment income (accumulated net investment loss) $ (211,925) -- (153,624) -- - - - - - - --------------------------------------------------------------------------------------------------------------------- - - - - - - ---------------------------------------------------------------------------------------------------------------------
* COMMENCEMENT OF OPERATIONS. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. F-6 ------------------------------------------------------------------------ FINANCIAL STATEMENTS STATEMENTS OF CHANGES IN NET ASSETS
Money Market World Bond Fund Global Short-Term Fund Fund ----------------------------- ----------------------------- ------------- For the Year Period From For the Year Period From Period from Ended 11/9/93* to Ended 11/9/93* to 12/13/94* 6/30/95 6/30/94 6/30/95 6/30/94 to 6/30/95 - - - - - - -------------------------------------------------------------------------------------------------------------------------- OPERATIONS: Investment income - net $ 1,207,705 425,848 30,540 18,250 17,069 Net realized loss on investments and foreign currency transactions (1,217,822) (1,475,275) (34,724) (5,260) -- Net change in unrealized appreciation or depreciation of investments and on translation of other assets and liabilities in foreign currencies 1,524,955 (1,133,979) 19,538 (19,538) -- - - - - - - -------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 1,514,838 (2,183,406) 15,354 (6,548) 17,069 - - - - - - -------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS: From investment income - net (249,747) (194,474) (12,663) (12,833) (17,069) Tax return of capital (152,655) -- -- -- -- - - - - - - -------------------------------------------------------------------------------------------------------------------------- Total distributions (402,402) (194,474) (12,663) (12,833) (17,069) - - - - - - -------------------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS (NOTE 5): Proceeds from shares sold 1,176,394 39,113,811 655,611 3,715,535 2,793,880 Reinvestment of distributions 444,626 89,327 12,864 9,642 14,739 Payments for shares redeemed (21,316,988) (4,478,942) (2,501,571) (1,679,952) (1,579,180) - - - - - - -------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in net assets from capital share transactions (19,695,968) 34,724,196 (1,833,096) 2,045,225 1,229,439 - - - - - - -------------------------------------------------------------------------------------------------------------------------- Total increase (decrease) in net assets (18,583,532) 32,343,316 (1,830,405) 2,025,844 1,229,439 - - - - - - -------------------------------------------------------------------------------------------------------------------------- Net assets at beginning of period (note 1) 32,359,983 16,667 2,042,511 16,667 500 - - - - - - -------------------------------------------------------------------------------------------------------------------------- Net assets at end of period $ 13,776,451 32,359,983 212,106 2,042,511 1,229,939 - - - - - - -------------------------------------------------------------------------------------------------------------------------- - - - - - - -------------------------------------------------------------------------------------------------------------------------- Undistributed net investment income (accumulated net investment loss) $ (632,506) (414,774) 3,740 12,904 -- - - - - - - -------------------------------------------------------------------------------------------------------------------------- - - - - - - --------------------------------------------------------------------------------------------------------------------------
* COMMENCEMENT OF OPERATIONS. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. F-7 --------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS 1 ORGANIZATION Hercules Funds Inc. (the company) was incorporated on July 29, 1993, and is registered under the Investment Company Act of 1940 (as amended) as a non-diversified, open-end management investment company, the shares of which are comprised of a series of seven funds: North American Growth and Income Fund, European Value Fund, Pacific Basin Value Fund, Latin American Value Fund, World Bond Fund, Global Short-Term Fund and Money Market Fund (the funds). The company's articles of incorporation permit the board of directors to create additional funds in the future. On November 9, 1993 (commencement of operations) the registration statement for the company's shares became effective under the Securities Act of 1933. The only transaction of the funds (except Money Market Fund), prior to commencement of operations was the initial sale on October 12, 1993, of 1,667 shares of each fund at $10 per share to Hercules International Management LLC. On December 13, 1994, the Money Market Fund commenced operations. The only transaction of the fund prior to commencement of operations was the sale of 500 shares at $1 per share to Hercules International Management LLC. On April 17, 1995, the company discontinued sale of shares and exchanges into the Global Short-Term Fund. 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Significant accounting policies of the funds are as follows: INVESTMENTS IN SECURITIES Securities traded on U.S. or foreign securities exchanges or included in a national market system are valued at the last quoted sales price; securities for which there were no sales reported are valued at the mean between the bid and ask prices; exchange listed options are valued at the last sales price and futures contracts are valued at the last settlement price; bonds and other securities for which market quotations are not readily available are valued at fair value according to methods selected in good faith by the board of directors. Securities with maturities of 60 days or less when acquired or subsequently within 60 days of maturity 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 an identified cost basis. Dividend income is recognized on the ex-dividend date or upon receipt of ex-dividend notification in the case of certain foreign securities. Interest income, including level yield amortization of premium and discount, is accrued daily. Pursuant to Rule 2a-7 of the Investment Company Act of 1940 (as amended), securities in the Money Market Fund are valued at amortized cost, which approximates market value, in order to maintain a constant net asset value of $1 per share. OPTION TRANSACTIONS In order to produce incremental earnings, protect gains, and facilitate buying and selling of securities for investment purposes, the funds (except Money Market Fund) may buy and sell put and call options and write covered call and cash-secured put options on securities, stock and interest rate indexes and foreign currencies. The risk in writing a call option is that the fund gives up the opportunity of profit if the market price of the security, index or currency increases. The risk in writing a put option is that the fund may incur a loss if the market price of the security, index or currency 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 sale of a written call option, the purchase cost of 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 from changes in the market, the funds (except Money Market Fund) may buy and sell financial futures contracts and related options. Risks of entering into futures contracts and related options include the possibility that 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 initial margin, either cash or securities in an amount 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 funds recognize a realized gain or loss when the contract is closed or expires. F-8 --------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS FEDERAL TAXES Each fund within the company is treated as a separate entity for federal income tax purposes. Each fund's policy is to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its taxable income to shareholders. Therefore, no income or excise tax provision is required. Net investment income and net realized gains (losses) 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, "mark-to-market" of certain passive foreign investment companies (PFICs), foreign currency and futures positions 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 were recorded by the funds. On the statements of assets and liabilities, as a result of permanent book-to-tax differences, accumulated net realized gain (loss) and undistributed net investment income (accumulated net investment loss) have been increased (decreased), resulting in net reclassification adjustments to additional paid-in-capital as follows:
NORTH AMERICAN GROWTH PACIFIC LATIN GLOBAL AND EUROPEAN BASIN AMERICAN WORLD SHORT- INCOME VALUE VALUE VALUE BOND TERM FUND FUND FUND FUND FUND FUND - - - - - - ------------------------------------------------------------------------------------------- Accumulated net realized gain (loss) $ 568,880 (51,294) (177,567) 235,489 1,679,977 35,236 Undistributed net investment income (accumulated net investment loss) $ (551,184) 68,989 195,263 (144,790) (1,175,690) (27,041) Additional paid-in-capital reduction (increase) $ (17,696) (17,695) (17,696) (90,699) (504,287) (8,195)
On the statement of assets and liabilities, accumulated net investment losses result from certain foreign currency losses which will be recognized for tax purposes as ordinary losses in the subsequent fiscal year. DISTRIBUTIONS TO SHAREHOLDERS Dividends to shareholders from net investment income for World Bond Fund are declared and paid quarterly. For Money Market Fund, distributions to shareholders from net investment income are declared daily and paid monthly. For North American Growth and Income, European Value, Pacific Basin Value and Latin American Value Funds, dividends from net investment income are declared and paid annually. For Global Short-Term Fund, dividends to shareholders from net investment income were declared and paid monthly through March 1995 and are now paid as necessary to avoid federal income and excise taxes. Distributions from net realized gains, if any, will be made on an annual basis for all funds. Shareholders may elect to have distributions paid in cash or reinvested at net asset value. ORGANIZATION COSTS Organization costs were incurred in connection with the start up and initial registration of the funds. These costs are being amortized over 60 months on a straight-line basis. If any or all of the shares representing initial capital of the funds are redeemed prior to the end of the amortization period, the proceeds will be reduced by the unamortized organization cost balance in the proportion as the number of shares redeemed bears to the number of initial shares outstanding immediately preceding the redemption. FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS Securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the daily closing rate of exchange. Foreign currency amounts related to the purchase or sale of securities and income and expense are translated at the exchange rate on the transaction date. The funds do not separately identify that portion of realized and unrealized gain (loss) arising from changes in the exchange rates from the portion arising from changes in the market value of investments. The funds (except Money Market Fund) also may enter into forward foreign currency exchange contracts for transaction or position hedging purposes, and in the case of World Bond and Global Short-Term Funds, for the F-9 --------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS purpose of enhancing portfolio returns. The net U.S. dollar value of foreign currency underlying all contractual commitments held by the funds and the resulting unrealized appreciation or depreciation, are determined using foreign currency exchange rates from independent pricing sources. The funds are subject to the credit risk that the counterparty will not complete the obligations of the contract. 3 INVESTMENT SECURITY TRANSACTIONS Cost of purchases and proceeds from sales of securities, other than temporary investments in short-term securities (for all funds except Money Market Fund) for the year ended June 30, 1995, (period from December 13, 1994 to June 30, 1995 for the Money Market Fund) were as follows:
NORTH AMERICAN GROWTH PACIFIC LATIN GLOBAL AND EUROPEAN BASIN AMERICAN WORLD SHORT- MONEY INCOME VALUE VALUE VALUE BOND TERM MARKET FUND FUND FUND FUND FUND FUND FUND - - - - - - ---------------------------------------------------------------------------------------------------------------- Purchases $ 7,678,158 22,693,640 25,116,675 42,528,018 105,244,181 1,391,262 6,663,689 Sales proceeds $ 10,783,837 22,318,954 25,482,751 41,984,644 122,990,708 1,760,101 5,383,326
For the year ended June 30, 1995, brokerage commissions paid to affiliated broker-dealers amounted to $24,276, $4,191, $4,849 and $10,523 for the North American Growth and Income Fund, European Value Fund, Pacific Basin Value Fund and Latin American Value Fund, respectively. 4 FORWARD FOREIGN CURRENCY CONTRACTS On June 30, 1995, the European Value Fund, Pacific Basin Value Fund and World Bond Fund had open foreign currency exchange contracts which obligate the funds to deliver or receive foreign currencies at specified future dates. The unrealized appreciation (depreciation) on these contracts is included in the accompanying financial statements. The terms of the open contracts are as follows:
U.S. $ VALUE U.S. $ VALUE SETTLEMENT CURRENCY TO BE AS OF CURRENCY TO BE AS OF APPRECIATION FUND DATE DELIVERED 6/30/95 RECEIVED 6/30/95 (DEPRECIATION) - - - - - - ------------------------------------------------------------------------------------------------------------------- EUROPEAN 03-Jul-95 106,043ATS $ 10,887 10,837USD $ 10,837 $ (50) VALUE FUND 03-Jul-95 57,340CHF 49,867 49,679USD 49,679 (188) 03-Jul-95 11,352DEM 8,211 8,184USD 8,184 (27) 03-Jul-95 193,530GBP 308,584 307,345USD 307,345 (1,239) 05-Jul-95 376,471DEM 272,312 271,742USD 271,742 (570) 05-Jul-95 124,972FIM 29,268 29,278USD 29,278 10 22-Aug-95 2,841,133ECU 3,783,517 3,600,000USD 3,600,000 (183,517) - - - - - - ------------------------------------------------------------------------------------------------------------------- $ 4,462,646 $ 4,277,065 $ (185,581 ) - - - - - - ------------------------------------------------------------------------------------------------------------------- - - - - - - ------------------------------------------------------------------------------------------------------------------- PACIFIC BASIN VALUE FUND 22-May-96 376,200,000 JPY $ 4,647,351 4,500,000 USD $ 4,500,000 $ (147,351 ) - - - - - - ------------------------------------------------------------------------------------------------------------------- - - - - - - ------------------------------------------------------------------------------------------------------------------- WORLD BOND 21-Jul-95 1,203,135 USD $ 1,203,135 1,663,936 DEM $ 1,203,570 $ 435 FUND 21-Jul-95 645,450 DEM 467,668 474,596 USD 474,596 6,928 21-Jul-95 2,500,000 DEM 1,811,400 1,815,541 USD 1,815,541 4,141 21-Jul-95 271,890 DEM 197,001 189,470 USD 189,470 (7,531 ) 21-Jul-95 2,740,790 DEM 1,985,866 1,954,914 USD 1,954,914 (30,952 ) 21-Jul-95 9,182,575 DKK 1,701,212 1,666,529 USD 1,666,529 (34,683 ) 21-Jul-95 150,046,521 ESP 1,242,657 1,188,393 USD 1,188,393 (54,264 ) 21-Jul-95 164,812 USD 164,812 104,048 GBP 165,904 1,092 21-Jul-95 855,400 USD 855,400 535,965 GBP 853,820 (1,580 ) 21-Jul-95 530,367 GBP 844,902 856,542 USD 856,542 11,640 21-Jul-95 800,093 GBP 1,274,590 1,268,947 USD 1,268,947 (5,643 ) 31-Aug-95 757,023 AUD 536,065 542,785 USD 542,785 6,720 31-Aug-95 120,000,000 JPY 1,429,442 1,461,632 USD 1,461,632 32,190 - - - - - - ------------------------------------------------------------------------------------------------------------------- $ 13,714,150 $ 13,642,643 $ (71,507 ) - - - - - - ------------------------------------------------------------------------------------------------------------------- - - - - - - -------------------------------------------------------------------------------------------------------------------
ATS - Austrian Schilling GBP - British Pound ECU - European Currency CHF - Swiss Franc DKK - Danish Krone JPY - Japanese Yen DEM - German Deutschemark FIM - Finnish Mark ESP - Spanish Peseta AUD - Australian Dollar
F-10 --------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS 5 CAPITAL SHARE TRANSACTIONS Transactions in shares of each fund for the year ended June 30, 1995 (period from December 13, 1994 to June 30, 1995 for the Money Market Fund) were as follows:
NORTH AMERICAN GROWTH PACIFIC LATIN GLOBAL AND EUROPEAN BASIN AMERICAN WORLD SHORT- MONEY INCOME VALUE VALUE VALUE BOND TERM MARKET FUND FUND FUND FUND FUND FUND FUND - - - - - - --------------------------------------------------------------------------------------------------------------------------- Sold 268,278 399,899 832,267 1,321,613 124,891 66,680 2,793,880 Distribution Reinvestment 8,127 14,618 42,071 -- 46,856 1,306 14,739 Redeemed (725,259) (515,858) (1,201,579) (1,216,683) (2,231,574) (252,893) (1,579,180) - - - - - - --------------------------------------------------------------------------------------------------------------------------- Increase (Decrease) (448,854) (101,341) (327,241) 104,930 (2,059,827) (184,907) 1,229,439 - - - - - - --------------------------------------------------------------------------------------------------------------------------- - - - - - - ---------------------------------------------------------------------------------------------------------------------------
Transactions in shares of each fund for the period from November 9, 1993 (commencement of operations), to June 30, 1994, were as follows:
- - - - - - --------------------------------------------------------------------------------------------------------------------------- Sold 1,856,326 1,723,375 3,979,994 3,370,590 3,917,436 372,155 -- Distribution Reinvestment -- -- -- -- 9,238 968 -- Redeemed (76,376) (44,914) (158,650) (336,839) (465,940) (168,682) -- - - - - - - --------------------------------------------------------------------------------------------------------------------------- Increase (Decrease)...... 1,779,950 1,678,461 3,821,344 3,033,751 3,460,734 204,441 -- - - - - - - --------------------------------------------------------------------------------------------------------------------------- - - - - - - ---------------------------------------------------------------------------------------------------------------------------
6 FEES AND EXPENSES The company was managed by Hercules International Management LLC (the manager), a limited liability company organized under the laws of Delaware on July 26, 1993. On July 18, 1995, shareholders approved a change in the funds investment manager to Piper Capital Management Incorporated, a subsidiary of Piper Jaffray Companies Inc. The fees paid by the fund's to Piper Capital Management Incorporated will be at the same rates as those previously paid to Hercules International Management LLC as described below. Each fund paid the manager a fee for managing its investment portfolio. Management fees for each fund (except for Global Short-Term Fund and Money Market Fund) were paid monthly at an annual rate of 1.00% of average daily net assets. The fee for the Global Short-Term Fund and Money Market Fund were paid monthly at an annual rate of .50% of average daily net assets. The manager entered into sub-advisory agreements pursuant to which the subadvisers, subject to the supervision of the manager, are responsible for certain investment functions, including researching and developing an overall investment plan and making and implementing investment decisions regarding assets of the respective fund. For its services, the subadvisers are paid by the manager over the same time periods and calculated in the same manner as the investment advisory fee of the applicable fund, 0.50% of average daily net assets of each fund except Global Short-Term and Money Market Funds, which are paid a fee of 0.25% of average daily net assets.
FUND SUBADVISER(S) - - - - - - ----------------------------------------------- ------------------------------------------ NORTH AMERICAN GROWTH AND INCOME FUND Piper Capital Management Incorporated* Acci Worldwide, S.A. de C.V.* AGF Investment Advisors, Inc.* EUROPEAN VALUE FUND Pictet International Management Limited PACIFIC BASIN VALUE FUND Edinburgh Fund Managers plc LATIN AMERICAN VALUE FUND Bankers Trust Company WORLD BOND FUND Salomon Brothers Asset Management Limited GLOBAL SHORT-TERM FUND Salomon Brothers Asset Management Limited MONEY MARKET FUND Salomon Brothers Asset Management Inc
*TOTAL FEE PAID TO SUBADVISERS SHARED EQUALLY. F-11 --------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS Piper Jaffray Inc. (the distributor), a wholly-owned subsidiary of Piper Jaffray Companies Inc. and an affiliate of the manager, serves as the distributor of the funds' shares. For its services as distributor, which include distributing shares of the funds and for sales-related expenses, the distributor is entitled to reimbursement each month for its actual expenses incurred in the distribution and promotion of each fund's shares pursuant to a Rule 12b-1 Distribution Plan adopted by each of the funds. Reimbursement to the distributor is computed separately for each fund and may not exceed 0.70% per annum of the average daily net assets of North American Growth and Income, European Value, Pacific Basin Value and Latin American Value Funds, 0.50% with respect to average daily net assets of World Bond Fund, 0.30% with respect to average daily net assets of Global Short-Term Fund, and 0.10% with respect to average daily net assets of Money Market Fund. For the year ended June 30, 1995 (period from November 14, 1994 to June 30, 1995 for Money Market Fund), Piper Jaffray Inc. voluntarily agreed to limit the reimbursement fee to an annual rate of 0.50% for North American Growth and Income, European Value, Pacific Basin Value, and Latin American Value Funds, 0.30% for World Bond Fund, 0.25% for Global Short-Term Fund. Effective June 19, 1995, the company's board of directors discontinued payments under the Rule 12b-1 Distribution Plan for the Money Market Fund. In addition to the fees above, the funds are responsible for paying most other operating expenses, including directors' fees, custodian fees, registration fees, printing of shareholder reports, legal and audit services, organization costs, taxes, interest and other miscellaneous expenses. For the period, the manager and distributor have voluntarily limited total expenses on a per annum basis to 2.00% of average daily net assets of North American Growth and Income, European Value, Pacific Basin Value and Latin American Value Funds, 1.80% of average daily net assets of World Bond Fund, 1.25% of average daily net assets of Global Short-Term Fund, and 1.00% of average daily net assets of Money Market Fund. 7 FUTURES CONTRACTS The funds pledge securities or cash when making initial margin deposits on futures contracts. On June 30, 1995, the World Bond Fund had the following open futures contracts:
COLLATERAL PLEDGED TO COVER MARKET LONG (L) INITIAL VALUE OF NET COUNTRY OF OR TYPE OF CONTRACT NUMBER OF MARGIN OPEN UNREALIZED DENOMINATION SHORT (S) AND MATURITY CONTRACTS DEPOSITS CONTRACTS (LOSS) - - - - - - ---------------------------------------------------------------------------------------------------------------- LIFFE German WORLD BOND Bund Futures FUND Germany L September (1995) 7 $ 15,212 $1,174,937 $ (20,778) - - - - - - ---------------------------------------------------------------------------------------------------------------- - - - - - - ----------------------------------------------------------------------------------------------------------------
8 CAPITAL LOSS CARRYOVERS For federal income tax purposes, North American Growth and Income Fund, Pacific Basin Value Fund, Latin American Value Fund, World Bond Fund and Global Short-Term Fund had capital loss carryovers at June 30, 1995 of $838,953; $1,546,411; $10,643,620; $338,380; and $4,989, respectively, which, if not offset by subsequent capital gains will expire in 2002 through 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 expire. F-12 --------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS 9 FINANCIAL HIGHLIGHTS Per-share data for a share of capital stock outstanding throughout each period and selected information for each period are as follows:
NORTH AMERICAN GROWTH AND EUROPEAN INCOME FUND VALUE FUND ---------------------------------------------------- YEAR PERIOD FROM YEAR PERIOD FROM ENDED 11/9/93* TO ENDED 11/9/93* TO 6/30/95 6/30/94 6/30/95 6/30/94 - - - - - - --------------------------------------------------------------------------------------------------------- PER SHARE DATA Net asset value, beginning of period.............. $ 9.46 10.00 9.86 10.00 - - - - - - --------------------------------------------------------------------------------------------------------- Operations: Investment income - net**....................... 0.17 0.04 0.12 0.02 Net realized and unrealized gains (losses)...... 0.33 (0.58) 1.21 (0.16) - - - - - - --------------------------------------------------------------------------------------------------------- Total from operations............................. 0.50 (0.54) 1.33 (0.14) - - - - - - --------------------------------------------------------------------------------------------------------- Distributions from: Investment income - net......................... (0.04) -- (0.03) -- Net realized gains.............................. -- -- (0.06) -- - - - - - - --------------------------------------------------------------------------------------------------------- Total distributions............................... (0.04) -- (0.09) -- - - - - - - --------------------------------------------------------------------------------------------------------- Net asset value, end of period.................... $ 9.92 9.46 11.10 9.86 - - - - - - --------------------------------------------------------------------------------------------------------- - - - - - - --------------------------------------------------------------------------------------------------------- SELECTED INFORMATION Total return***................................... 5.36% (5.40%) 13.52% (1.40%) Net assets, end of period (000s omitted).......... $13,217 16,856 17,520 16,574 Ratio of expenses to average daily net assets++... 2.00% 2.00%+ 2.00% 2.00%+ Ratio of net investment income to average daily net assets++.................................... 1.84% 0.87%+ 1.10% 0.47%+ Portfolio turnover rate (excluding short-term securities)..................................... 52% 23% 131% 60%
* COMMENCEMENT OF OPERATIONS. ** BASED ON THE WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING DURING THE PERIOD. *** TOTAL RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE DURING THE PERIOD, ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND DOES NOT REFLECT THE CONTINGENT DEFERRED SALES CHARGE APPLICABLE TO SHARES PURCHASED AFTER 6/19/95. + ADJUSTED TO AN ANNUAL BASIS. ++ VARIOUS PORTFOLIO FEES AND EXPENSES WERE VOLUNTARILY WAIVED OR ABSORBED BY THE MANAGER AND DISTRIBUTOR. HAD THE FUNDS PAID ALL EXPENSES THE ANNUALIZED RATIOS OF EXPENSES AND NET INVESTMENT INCOME TO AVERAGE DAILY NET ASSETS WOULD HAVE BEEN AS FOLLOWS:
NORTH AMERICAN GROWTH AND EUROPEAN INCOME FUND VALUE FUND - - - - - - ----------------------------------------------------------------- YEAR PERIOD FROM YEAR PERIOD FROM ENDED 11/9/93* TO ENDED 11/9/93* TO 6/30/95 6/30/94 6/30/95 6/30/94 - - - - - - ----------------------------------------------------------------- 3.39%/0.45% 3.41%/(0.54%) 3.21%/(0.11%) 3.25%/(0.78%)
F-13 --------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS 9 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:
LATIN PACIFIC BASIN AMERICAN VALUE FUND VALUE FUND ---------------------------------------------------- YEAR PERIOD FROM YEAR PERIOD FROM ENDED 11/9/93* TO ENDED 11/9/93* TO 6/30/95 6/30/94 6/30/95 6/30/94 - - - - - - ------------------------------------------------------------------------------------- PER SHARE DATA Net asset value, beginning of period...................... $ 10.68 10.00 9.14 10.00 - - - - - - ------------------------------------------------------------------------------------- Operations: Investment income (loss) - net**...................... (0.10) (0.04) -- 0.01 Net realized and unrealized gains (losses)............. (1.45) 0.72 (1.94) (0.87) - - - - - - ------------------------------------------------------------------------------------- Total from operations......... (1.55) 0.68 (1.94) (0.86) - - - - - - ------------------------------------------------------------------------------------- Distributions from: Net realized gains.......... (0.11) -- -- -- - - - - - - ------------------------------------------------------------------------------------- Total distributions........... (0.11) -- -- -- - - - - - - ------------------------------------------------------------------------------------- Net asset value, end of period...................... $ 9.02 10.68 7.20 9.14 - - - - - - ------------------------------------------------------------------------------------- - - - - - - ------------------------------------------------------------------------------------- SELECTED INFORMATION Total return***............... (14.63%) 6.80% (21.23%) (8.60%) Net assets, end of period (000s omitted).............. $31,527 40,828 22,624 27,750 Ratio of expenses to average daily net assets++................ 2.00% 2.00%+ 2.00% 2.00%+ Ratio of net investment income (loss) to average daily net assets++.................... (1.06%) (0.96%)+ (0.03)% .14%+ Portfolio turnover rate (excluding short-term securities)................. 68% 39% 161% 78%
* COMMENCEMENT OF OPERATIONS. ** BASED ON THE WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING DURING THE PERIOD. *** TOTAL RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE DURING THE PERIOD, ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND DOES NOT REFLECT THE CONTINGENT DEFERRED SALES CHARGE APPLICABLE TO SHARES PURCHASED AFTER 6/19/95. + ADJUSTED TO AN ANNUAL BASIS. ++ VARIOUS PORTFOLIO FEES AND EXPENSES WERE VOLUNTARILY WAIVED OR ABSORBED BY THE MANAGER AND DISTRIBUTOR. HAD THE FUNDS PAID ALL EXPENSES THE ANNUALIZED RATIOS OF EXPENSES AND NET INVESTMENT INCOME TO AVERAGE DAILY NET ASSETS WOULD HAVE BEEN AS FOLLOWS:
LATIN PACIFIC BASIN AMERICAN VALUE FUND VALUE FUND - - - - - - ------------------------------------------------------------------ YEAR PERIOD FROM YEAR PERIOD FROM ENDED 11/9/93* TO ENDED 11/9/93* TO 6/30/95 6/30/94 6/30/95 6/30/94 - - - - - - ------------------------------------------------------------------ 2.53%/(1.59%) 2.36%/(1.32%) 3.47%/(1.50%) 3.10%/(0.96%)
F-14 --------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS 9 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:
GLOBAL MONEY WORLD BOND SHORT-TERM MARKET FUND FUND FUND ---------------------------------------------------------------------- YEAR PERIOD FROM YEAR PERIOD FROM PERIOD FROM ENDED 11/9/93* TO ENDED 11/9/93* TO 12/13/94* TO 6/30/95 6/30/94 6/30/95 6/30/94 6/30/95 - - - - - - --------------------------------------------------------------------------------------------------------------------------- PER SHARE DATA Net asset value, beginning of period.............. $ 9.35 10.00 9.91 10.00 1.00 - - - - - - --------------------------------------------------------------------------------------------------------------------------- Operations: Investment income - net**....................... 0.45 0.12 0.29 0.08 0.02 Net realized and unrealized gains (losses)...... 0.22 (0.71) (0.10) (0.11) -- - - - - - - --------------------------------------------------------------------------------------------------------------------------- Total from operations............................. 0.67 (0.59) 0.19 (0.03) 0.02 - - - - - - --------------------------------------------------------------------------------------------------------------------------- Distributions: From investment income - net.................... (0.09) (0.06) (0.10) (0.06) (0.02) Tax return of capital........................... (0.11) -- -- -- -- - - - - - - --------------------------------------------------------------------------------------------------------------------------- Total distributions............................... (0.20) (0.06) (0.10) (0.06) (0.02) - - - - - - --------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period.................... $ 9.82 9.35 10.00 9.91 1.00 - - - - - - --------------------------------------------------------------------------------------------------------------------------- - - - - - - --------------------------------------------------------------------------------------------------------------------------- SELECTED INFORMATION Total return***................................... 7.24% (5.96%) 1.89% (0.33%) 2.62% Net assets, end of period (000s omitted).......... $13,776 32,360 212 2,043 1,230 Ratio of expenses to average daily net assets++... 1.80% 1.80%+ 1.25% 1.25%+ 1.00%+ Ratio of net investment income to average daily net assets++................................ 4.76% 2.63%+ 2.87% 1.70%+ 4.53%+ Portfolio turnover rate (excluding short-term securities)..................................... 501% 291% 407% 362% N/A
* COMMENCEMENT OF OPERATIONS. ** BASED ON THE WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING DURING THE PERIOD. *** TOTAL RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE DURING THE PERIOD, ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND DOES NOT REFLECT THE CONTINGENT DEFERRED SALES CHARGE APPLICABLE TO SHARES PURCHASED AFTER 6/19/95. + ADJUSTED TO AN ANNUAL BASIS. ++ VARIOUS PORTFOLIO FEES AND EXPENSES WERE VOLUNTARILY WAIVED OR ABSORBED BY THE MANAGER AND DISTRIBUTOR. HAD THE FUNDS PAID ALL EXPENSES THE ANNUALIZED RATIOS OF EXPENSES AND NET INVESTMENT INCOME TO AVERAGE DAILY NET ASSETS WOULD HAVE BEEN AS FOLLOWS:
GLOBAL MONEY WORLD BOND SHORT-TERM MARKET FUND FUND FUND - - - - - - ----------------------------------------------------------------------------- YEAR PERIOD FROM YEAR PERIOD FROM PERIOD FROM ENDED 11/9/93* TO ENDED 11/9/93* TO 12/13/94* TO 6/30/95 6/30/94 6/30/95 6/30/94 6/30/95 - - - - - - ----------------------------------------------------------------------------- 2.53%/4.03% 2.03%/2.40% 17.97%/(13.85%) 6.25%/(3.30%) 25.44%/(19.91%)
F-15 ------------------------------------------------------------------------ INVESTMENTS IN SECURITIES HERCULES NORTH AMERICAN GROWTH AND INCOME FUND JUNE 30, 1995
Number of Market Name of Issuer Shares Value (a) - - - - - - ------------------------------------------ ------------ ------------ (PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS) COMMON STOCKS (91.6%) CANADA (20.3%) Abitibi Price (installment receipt) - forest products and paper............ 2,700 $ 43,763 Agrium Incorporated - chemicals - agricultural......................... 1,800 60,973 Alcan Aluminium - metals - diversified.......................... 3,100 93,717 Avenor (installment receipt) - forest products and paper................... 2,400 51,138 Bank of Montreal - bank............... 5,900 123,566 Bank of Nova Scotia - bank............ 6,700 144,591 Barrick Gold Corporation - mining..... 3,300 83,537 BCE - telecommunications.............. 2,500(b) 83,318 Bombardier Class B - diversified industrials and conglomerates........ 3,300 80,231 Canadian Occidental Petroleum - oil and gas.............................. 1,800 55,891 Canadian Pacific - diversified holding company.............................. 3,200 55,072 Delrina - computer software........... 4,600(b) 62,830 Euro-Nevada Mining - mining........... 2,000 61,191 Finning Limited - industrial equipment distributors......................... 1,800 27,536 Imasco - tobacco products/retailing... 4,000 71,025 Laidlaw Incorporated - environmental services............................. 5,900 56,410 Linamar - automobile parts............ 2,900 40,931 Loblaw - retailing - grocery.......... 1,400 28,301 Loewen Group - funeral services....... 900 32,125 Magna International Class A - automobile parts..................... 800 35,476 Methanex (installment receipt) - chemicals............................ 3,000(b) 18,303 Noranda - metals - diversified........ 3,700 72,774 Nova - chemicals...................... 7,700 65,207 Pinnacle Resources - oil and gas...... 4,300(b) 45,811 Placer Dome - mining.................. 2,400 62,721 Plaintree Systems - computer - networking products.................. 3,500(b) 37,607 Revenue Properties - real estate...... 13,100 29,583 Rio Algom - mining.................... 3,000 57,913 Rogers Cantel Mobile Communications - telecommunications................... 2,300(b) 55,290 Rogers Communications Class B - cable television........................... 5,900(b) 69,304 Royal Bank of Canada - bank........... 7,300 163,522 Seagram - brewers and distillers/ entertainment........................ 3,800 130,796 Sherritt - chemicals.................. 5,400(b) 56,547 Speedy Muffler King - automobile parts................................ 4,500(b) 37,698 Stelco Class A - metal products....... 11,600(b) 57,039 Suncor - oil and gas.................. 5,900 61,783 Talisman Energy - oil and gas......... 3,400(b) 63,158 Teck Class B - mining................. 2,600 51,375 TELUS Corporation - telecommunications................... 4,400 53,287 Thomson - publishing - newspapers..... 2,900 39,610 TransCanada Pipelines - oil and gas... 4,100 54,881 TVX Gold - mining..................... 5,500(b) 39,565 Wascana Energy - oil and gas.......... 7,700(b) 66,609 ------------ 2,682,005 ------------ Number of Market Name of Issuer Shares Value (a) - - - - - - ------------------------------------------ ------------ ------------ MEXICO (14.0%) ALFA Class A - diversified industrial and conglomerates.................... 12,000 $ 145,612 Apasco - building construction and cement............................... 12,000(b) 47,770 Cemex CPO - building construction and cement............................... 12,000 40,480 Cifra Class C - retailing............. 85,000 111,974 Controladora Comercial Mexicana Class B - retailing........................ 20,000(b) 15,028 Corporacion GEO Series B - homebuilders......................... 20,000(b) 58,769 Cydsa Series A - chemicals............ 20,000(b) 66,827 Desc Sociedad de Fomento Industrial Class B - diversified industrials.... 17,000(b) 56,803 Desc Sociedad de Fomento Industrial Class C - diversified industrials.... 14,000(b) 45,212 Empresas ICA Sociedad Controladora - engineering and construction......... 2,000 20,655 Empresas La Moderna Series A - tobacco products............................. 4,000(b) 15,092 Fomento Economico Mexicano (Femsa) Class B Ord - brewers/food and beverage............................. 10,000 23,501 Grupo Industrial Minera Mexico Class B - mining............................. 26,000(b) 124,700 Grupo Industrial Durango Class A - forest products and paper............ 12,000(b) 49,784 Grupo Carso Class A1 - diversified holding company...................... 14,000(b) 76,435 Grupo Elektra CPO - retailing......... 14,000 44,540 Grupo Embotelladoras de Mexico (Gemex) CPO - food and beverage.............. 8,000(b) 41,567 Grupo Gigante Series B - retailing.... 30,000(b) 6,427 Grupo Industrial Maseca (Maseca) Class B - food processing.................. 16,000 10,692 Grupo Modelo Class C - brewers/distillers................... 10,500 140,168 Grupo Sidek Class B - diversified industrial and conglomerates......... 22,000(b) 19,274 Grupo Simec Class B - steel........... 80,000(b) 39,265 Grupo Situr Class B - lodging, leisure and entertainment.................... 10,139(b) 4,766 Corporacion Industrial Sanluis CPO - diversified industrials and conglomerate......................... 12,000 264,748 Industrias Penoles - mining........... 33,000 98,974 Kimberly Clark de Mexico Class A - forest products and paper............ 8,000 91,446 Sistema Argos - Series B - food and beverage............................. 50,000(b) 27,977 Tablex Class 2 - food and beverage.... 33,293(b) 39,919 Telefonos de Mexico (Telmex) Class L - telecommunications................... 50,000 73,701 Transportacion Martima Mexicana A - transportation - marine.............. 2,000(b) 11,031 Vitro - diversified industrial........ 12,000 34,149 ------------ 1,847,286 ------------ UNITED STATES (57.3%) A T & T Corporation - telecommunications................... 3,700 196,562 Abbott Laboratories - pharmaceuticals...................... 2,200 89,100 Air Products and Chemicals - chemicals............................ 2,000 111,500 Airtouch Communications - telecommunications................... 3,500(b) 99,750
F-16 ---------------------------------------------------------------- INVESTMENTS IN SECURITIES HERCULES NORTH AMERICAN GROWTH AND INCOME FUND JUNE 30, 1995 (CONTINUED)
Number of Market Name of Issuer Shares Value (a) - - - - - - ------------------------------------------ ------------ ------------ American Home Products - pharmaceuticals...................... 100 $ 7,738 Anheuser-Busch - brewers and distillers........................... 2,000 113,750 Baker Hughes - oil and gas - equipment............................ 3,700 75,850 BankAmerica - bank - money center..... 2,900 152,612 BellSouth - telecommunications........ 3,000 190,500 Boeing - aerospace/defense............ 3,000 187,875 Bristol-Myers Squibb - pharmaceuticals...................... 2,400 163,500 Burlington Northern - transportation - rail................................. 2,900 183,788 Burlington Resources - oil and gas.... 2,900 106,938 cisco Systems - computer software and services............................. 3,500(b) 176,969 Coca-Cola Company - food and beverage............................. 3,500 223,125 DSC Communications - telecommunications equipment......... 2,500(b) 116,250 Du Pont (E.I.) De Nemours - chemicals............................ 1,800 123,750 Emerson Electric - electrical equipment............................ 2,300 164,450 Englehard - chemicals................. 3,500 150,063 Enron - oil and gas................... 5,800 203,725 Exxon - oil and gas................... 3,500 247,187 Federal National Mortgage Association - financial services................. 2,200 207,625 Fluor - engineering and construction......................... 2,800 145,600 Ford Motor Company - auto and trucks............................... 5,300 157,675 GTE - telecommunications.............. 4,900 167,213 Gannett - publishing - newspaper...... 2,700 146,475 Gap - retailing....................... 3,000 104,625 General Electric - diversified industrial........................... 4,600 259,325 General Instrument - electrical equipment............................ 3,400(b) 130,475 General Motors - auto and trucks...... 3,500 164,063 General Motors Class E - computer software and services................ 2,200 95,700 Home Depot - retailing................ 3,000 121,875 Intel - electronics - semiconductors....................... 2,600 164,612 International Paper - forest products and paper............................ 1,600 137,200 Marsh and McLennan - insurance........ 2,000 162,250 McDonald's - restaurant/food service.............................. 3,400 133,025 Medtronic - medical - biotechnology... 2,100 161,962 Merck and Company - pharmaceuticals... 3,900 191,100 Minnesota Mining and Manufacturing (3M) - diversified industrial and conglomerates........................ 3,800 217,550 Morton International - chemicals...... 5,200 152,100 Norwest Corporation - bank............ 6,600 189,750 Philip Morris - food products and tobacco.............................. 1,700 126,437 Procter & Gamble - household products............................. 3,400 244,375 Royal Dutch Petroleum ADR - oil and gas.................................. 1,300 158,437 Schlumberger - oil and gas - equipment and services......................... 1,700 105,613 Service Corporation International - funeral services..................... 3,800 120,175 Tandy Corporation - retailing......... 3,800 197,125 The Limited - retailing............... 4,000 88,000 Number of Shares or Principal Market Name of Issuer Amount Value (a) - - - - - - ------------------------------------------ ------------ ------------ United Healthcare - insurance/HMO..... 2,000 $ 82,750 Wisconsin Energy - utilities.......... 5,800 162,400 ------------ 7,580,494 ------------ Total Common Stocks (cost: $11,609,521).................. 12,109,785 ------------ RIGHTS AND WARRANTS (0.0%) UNITED STATES Viacom variable common rights - broadcast, radio and television...... 3,000 4,500 ------------ Total Rights and Warrants (cost: $4,003)....................... 4,500 ------------ BONDS (0.5%) MEXICO (NEW PESO) Grupo F Bancomer 95-2, 51.00%, due 4/28/02.............................. 400,000(c) 65,548 ------------ Total Bonds (cost: $64,864)...................... 65,548 ------------ SHORT-TERM SECURITIES (7.5%) MEXICO Bancomer (New Peso), 42.50%, due 7/03/95.............................. 4,732,966(c) 756,669 Bancomer (New Peso), 43.75%, due 7/05/95.............................. 968,094(c) 154,771 Mexican Tesobono (U.S. dollar), 10.72%, due 8/17/95.................. 80,000(c) 78,881 ------------ Total Short-Term Securities (cost: $986,816)..................... 990,321 ------------ Total Investments in Securities (cost: $12,665,204)(d)............... $ 13,170,154 ------------ ------------
NOTES TO INVESTMENTS IN SECURITIES: (A) SECURITIES ARE VALUED BY PROCEDURES DESCRIBED IN NOTE 2 TO THE FINANCIAL STATEMENTS. (B) CURRENTLY NON-INCOME PRODUCING. (C) VALUE STATED IN U.S. DOLLARS; PRINCIPAL AMOUNT STATED IN THE CURRENCY INDICATED. (D) AT JUNE 30, 1995, THE COST OF SECURITIES FOR FEDERAL INCOME TAX PURPOSES WAS $12,677,245. THE AGGREGATE GROSS UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED ON THIS COST WERE AS FOLLOWS: GROSS UNREALIZED APPRECIATION........ $ 1,518,637 GROSS UNREALIZED DEPRECIATION........ (1,025,728) ----------- NET UNREALIZED APPRECIATION.......... $ 492,909 ----------- -----------
F-17 ------------------------------------------------------------------------ INVESTMENTS IN SECURITIES HERCULES EUROPEAN VALUE FUND JUNE 30, 1995
Number of Market Name of Issuer Shares Value (a) - - - - - - ------------------------------------------ ------------ ------------ (PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS) COMMON STOCKS (95.0%) AUSTRIA (2.0%) Boehler - Uddeholm - metal products............................. 400(b) $ 27,680 Burgenland Holding - diversified holding company...................... 900 30,862 BWT - environmental control........... 150 18,172 EA-Generali - insurance............... 250 73,665 Flughafen Wien - transportation - airport.............................. 800 42,546 Mayr-Melnhof Karton - forest products and paper............................ 600 34,682 OMV - oil and gas..................... 400 46,119 VA Technologie - engineering and construction......................... 225 28,160 Wienerberger Baustoffindustrie - building construction and materials............................ 150 57,598 ------------ 359,484 ------------ BELGIUM (2.6%) Compagnie Maritime Belge (CMB) - transportation - marine.............. 1,160 89,198 Electrabel - utilities................ 500 105,753 Petrofina - oil and gas............... 220 66,506 Societe Generale de Belgique - diversified holding company.......... 1,300 94,701 Solvay - chemicals.................... 170 94,227 ------------ 450,385 ------------ DENMARK (1.6%) Den Danske Bank - bank - money center............................... 700 43,973 East Asiatic Company - diversified holding company...................... 1,580(b) 45,674 Jacob Holm and Sonner Class B - textiles............................. 1,097 189,053 ------------ 278,700 ------------ FINLAND (2.1%) Amer Group Class A - diversified holding company...................... 1,720 31,298 Aspoyhtyma - electronics.............. 2,460 74,895 Finnair - transportation - air........ 10,200 67,602 Nokia - telecommunications - equipment............................ 1,440 85,658 Pohjola Insurance Company - insurance............................ 5,700 89,438 Rauma - forest products and paper..... 1,200(b) 21,667 ------------ 370,558 ------------ FRANCE (11.1%) Accor - hotels and leisure............ 1,050 140,029 Alcatel Alsthom - telecommunications equipment............................ 1,560 140,671 Casino Guichard-Perrachon - retailing............................ 4,300 125,609 Credit Local de France - banking and financial services................... 1,530 142,135 Elf Aquitaine - oil and gas........... 3,400 251,631 Groupe Poliet - construction and construction materials............... 1,375 125,039 Lagardere Groupe - diversified holding company.............................. 5,875 121,890 Lyonnaise des Eaux-Dumez - environmental control................ 1,310 124,077 Nord Est - diversified holding company.............................. 4,900 124,624 Pernod Ricard - brewers and distillers........................... 2,000 131,709 Schneider - electronics............... 1,700 134,659 Societe Eurafrance - financial services............................. 380 125,673 Societe Nationale D'Exploitation Industrielle des Tabacs et Allumettes (SEITA) - tobacco products........... 4,500 135,445 Number of Market Name of Issuer Shares Value (a) - - - - - - ------------------------------------------ ------------ ------------ Union Financiere de France Banque - financial services................... 1,405 $ 121,531 ------------ 1,944,722 ------------ GERMANY (9.8%) Allianz Holding - insurance........... 90 161,382 Allianz Holding (new) - insurance..... 6 10,759 BASF - chemicals...................... 475 101,427 Bayer - chemicals..................... 300 74,582 Bayerische Motoren Werke (BMW) - auto and trucks........................... 185 101,566 Bayerische Vereinsbank - bank......... 200 60,614 BayWa-Bayerische Warenvermit - retailing............................ 240 55,031 CKAG Colonia Konzern - insurance...... 100(b) 88,824 Commerzbank - bank - money center..... 475 113,897 Deutsche Babcock - engineering and construction......................... 650 71,464 Hoechst - chemicals................... 350 75,570 Karstadt - retailing.................. 215 94,242 Kiekert - automobile parts............ 1,600(b) 68,282 Linde - engineering................... 200 118,481 M.A.N. - autos and trucks............. 200 51,429 Munich RE - insurance................. 50 109,584 Preussag - diversified holding company.............................. 200 59,892 RWE - oil and gas..................... 350 121,647 Schwarz Pharma - pharmaceuticals...... 1,100(b) 46,069 Siemens - diversified manufacturing... 200 99,139 Tarkett - construction and construction material................ 1,000(b) 25,967 ------------ 1,709,848 ------------ ITALY (2.6%) Istituto Nazionale delle Assicurazioni - insurance.......................... 47,000(b) 62,571 Italgas - utilities................... 42,000 109,208 Parmalat Finanziaria - food and beverage............................. 60,000 53,374 Pininfarina - automobile and automobile parts..................... 4,600 42,679 Societa Partecipazioni Finanziare (SOPAF) - financial services......... 69,200 87,214 Telecom Italia-Di Risp - telecommunications................... 44,700 94,623 ------------ 449,669 ------------ NETHERLANDS (7.6%) Fugro - environmental control......... 11,410 213,712 Koninlijke Gist-Brocades - pharmaceuticals...................... 8,960 232,637 Internationale Nederlanden Groep (ING) - insurance.......................... 3,800 210,334 Philips Electronics - electronics..... 5,100 216,082 Polynorm - metal products............. 1,250 136,117 Royal Dutch Petroleum - oil and gas... 1,390 169,856 VNU-Verenigde Nederlandse Uitgevbedri Verigd Bezit - printing and publishing........................... 1,290 154,553 ------------ 1,333,291 ------------ NORWAY (2.1%) Kvaerner - engineering and construction......................... 1,850 84,098 Kverneland Gruppen - agribusiness..... 6,270 95,177 Norsk Hydro - chemicals............... 2,100 88,132 Orkla Borregaard - diversified manufacturing........................ 1,110 49,738 UNI Storebrand - insurance............ 11,000 49,468 ------------ 366,613 ------------
F-18 ---------------------------------------------------------------- INVESTMENTS IN SECURITIES HERCULES EUROPEAN VALUE FUND JUNE 30, 1995 (CONTINUED)
Number of Market Name of Issuer Shares Value (a) - - - - - - ------------------------------------------ ------------ ------------ PORTUGAL (0.7%) Jornalgeste S.G.P.S. - printing and publishing........................... 4,878(b) $ 82,107 Tertir-Terminais de Portugal - transportation....................... 7,800(b) 46,111 ------------ 128,218 ------------ SPAIN (2.9%) Compania Sevillana de Electricidad - utilities............................ 20,500(b) 126,401 Cortefiel - retailing................. 1,650 50,186 Inmobiliaria Urbis - engineering and construction......................... 23,500(b) 118,643 Repsol - oil and gas.................. 3,300 104,060 Vallehermoso - real estate............ 6,100 104,759 ------------ 504,049 ------------ SWEDEN (3.8%) Electrolux Class B - furniture/home appliance............................ 2,370 107,918 Ericsson - Class B - telecommunications equipment......... 9,140 182,318 Hoganas Class B - industrial machinery and manufacturing.................... 5,920 115,645 Pharmacia Class A - pharmaceuticals... 6,500 142,623 Skandia Forsakrings - insurance....... 6,300(b) 122,201 ------------ 670,705 ------------ SWITZERLAND (10.7%) BBC Brown Boveri - engineering........ 135 139,949 Bobst - forest products and paper..... 75 114,145 Ciba-Geigy Registered - pharmaceuticals...................... 295 216,533 CS Holding - financial services....... 2,305 211,486 Forbo Holding - household products/ wares................................ 450 219,942 Fust Dipl. Ing - furniture/home appliances........................... 340 99,056 Reiseburo Kuoni - miscellaneous services............................. 65 104,578 Sandoz - pharmaceuticals.............. 335 231,326 Saurer Gruppe - diversified industrial and conglomerates.................... 280 102,031 Swiss Bank Corporation Class B - financial services................... 630 223,542 Winterthur Schweizerische Registered - insurance............................ 345 207,627 ------------ 1,870,215 ------------ UNITED KINGDOM (35.4%) Aegis Group - advertising............. 660,000(b) 297,295 Barclays - bank - money center........ 9,000 96,938 B.A.T. Industries - tobacco........... 30,000 230,086 Blue Circle Industries - construction and construction materials........... 26,100 116,942 British Petroleum - oil and gas....... 35,000 251,413 Cable and Wireless - telecommunications................... 17,750 121,700 Cadbury Schweppes - food and beverage............................. 21,414 156,724 Cantab Pharmaceuticals - biopharmaceuticals................... 4,000(b) 8,802 Celltech Group - biopharmaceuticals... 38,000(b) 194,497 Daily Mail and General Trust - printing and publishing.............. 10,000 169,017 Enterprise Oil - oil and gas.......... 25,000 158,055 General Electric Company plc - electronics.......................... 34,500 168,881 Glaxo Wellcome - pharmaceuticals...... 22,000 270,634 Grand Metropolitan - food and beverage............................. 25,000 153,670 Great Universal Stores - retailing.... 31,000 290,645 Guardian Royal Exchange - insurance... 20,000 66,012 Number of Market Name of Issuer Shares Value (a) - - - - - - ------------------------------------------ ------------ ------------ Guinness - brewers and distillers..... 19,000 $ 143,298 HSBC Holdings - bank - money center............................... 9,000 116,454 International Business Communications (Holdings) - printing and publishing........................... 40,000 179,860 Marks & Spencer - retailing........... 20,000 128,995 Northumbrian Water Group - utilities............................ 6,000 89,356 Peninsular and Oriental Steam Navigation - transportation - marine............................... 25,000 230,804 RAP Group - wholesale distributors.... 25,000 59,794 Reuters Holdings - communications..... 30,000 250,655 Rolls-Royce - aerospace/defense....... 35,000 97,384 Royal Doulton - household products/ wares................................ 15,000 62,425 Royal Insurance Holdings - insurance............................ 28,500 140,420 Scotia Holdings - pharmaceuticals..... 10,000(b) 69,680 Scottish Power - utilities............ 14,000 72,327 SeaPerfect - fishery.................. 90,497(b) 173,157 Seeboard - utilities.................. 23,000 142,660 Shell Transport and Trading - oil and gas.................................. 26,500 317,329 Smith New Court - financial services............................. 30,000 210,952 TSB Group - financial services........ 40,000 154,348 Unilever - food/consumer goods........ 3,750 76,088 United News and Media - publishing - newspapers........................... 8,000 66,331 Vendome Luxury Group Units - jewelry/ watch/gemstones...................... 17,000 129,569 Vosper Thornycroft Holdings - shipbuilding......................... 8,000 106,513 S. G. Warburg Group - financial services............................. 11,000 127,863 Wolseley - construction and construction materials............... 10,100 55,882 Yorkshire Electricity - utilities..... 9,000 99,592 Zeneca Group - pharmaceuticals........ 8,700 147,322 ------------ 6,200,369 ------------ Total Common Stocks (cost: $15,850,100).................. 16,636,826 ------------ PREFERRED STOCKS (4.4%) AUSTRIA (0.1%) Baumax - retailing.................... 400(b) 19,096 ------------ GERMANY (2.4%) Fielmann - retailing.................. 1,600(b) 72,911 Fresenius - pharmaceuticals........... 200 134,539 Friedrich Grohe - furniture/home appliance............................ 325 109,431 Heidelberger Zement - construction and construction materials............... 125 74,593 Krones AG Hermann Kronseder Maschinenfabrik - industrial machinery............................ 75 35,805 ------------ 427,279 ------------ ITALY (0.3%) Autostrade Concessioni E Construzione - engineering and construction....... 50,000 55,950 ------------ NETHERLANDS (0.9%) Ballast Nedam - engineering and construction......................... 3,200 153,148 ------------ SWITZERLAND (0.7%) Merck Preferred - pharmaceuticals..... 150 116,102 ------------ Total Preferred Stocks (cost: $654,672)...................... 771,575 ------------
F-19 ------------------------------------------------------------------------ INVESTMENTS IN SECURITIES HERCULES EUROPEAN VALUE FUND JUNE 30, 1995 (CONTINUED)
Number of Shares or Principal Market Name of Issuer Amount Value (a) - - - - - - ------------------------------------------ ------------ ------------ RIGHTS AND WARRANTS (0.1%) SWITZERLAND (0.0%) Winterthur Schweizerische Rights - insurance............................ 345 $ 2,670 ------------ UNITED KINGDOM (0.1%) Gartmore Micro Index Trust Warrants - small cap index...................... 10,000 6,059 Herald Investment Trust Warrants - multi-media fund..................... 10,000 5,740 ------------ 11,799 ------------ Total Rights and Warrants (cost: $6,017)....................... 14,469 ------------ CORPORATE BONDS (0.7%) DENMARK (0.7%) Det Danske Traelastkompagni (Danish krone), convertible, 5.25% due 1/01/02.............................. 685,000(c) 135,819 ------------ Total Corporate Bonds (cost: $121,524)..................... 135,819 ------------ Total Investments in Securities (cost: $16,632,313) (d).............. $ 17,558,689 ------------ ------------
NOTES TO INVESTMENTS IN SECURITIES: (A) SECURITIES ARE VALUED BY PROCEDURES DESCRIBED IN NOTE 2 TO THE FINANCIAL STATEMENTS. (B) CURRENTLY NON-INCOME PRODUCING. (C) VALUE STATED IN U.S. DOLLARS; PRINCIPAL AMOUNT STATED IN THE CURRENCY INDICATED. (D) AT JUNE 30, 1995, THE COST OF SECURITIES FOR FEDERAL INCOME TAX PURPOSES WAS $16,655,127. THE AGGREGATE GROSS UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED ON THIS COST WERE AS FOLLOWS: GROSS UNREALIZED APPRECIATION............ $ 1,350,803 GROSS UNREALIZED DEPRECIATION............ (447,241) ----------- NET UNREALIZED APPRECIATION............ $ 903,562 ----------- -----------
HERCULES PACIFIC BASIN VALUE FUND JUNE 30, 1995
Number of Market Name of Issuer Shares Value (a) - - - - - - ------------------------------------------ ------------ ------------ (PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS) COMMON STOCKS (98.0%) AUSTRALIA (2.8%) National Australia Bank - banking and financial services................... 51,000 $ 402,853 Wesfarmers - diversified holding company.............................. 75,000 475,224 ------------ 878,077 ------------ HONG KONG (8.7%) Dao Heng Bank Group - banking and financial services................... 175,000 533,750 Esprit Asia Holdings - retailing...... 1,220,000 469,067 Giordano International - retailing.... 740,000 549,905 Hutchison Whampoa - diversified holding company...................... 100,000 483,348 Sun Hung Kai Properties - real estate............................... 50,000 369,941 Yizheng Chemical Fibre Company - textiles............................. 950,000 331,494 ------------ 2,737,505 ------------ INDIA (2.5%) Hindalco Industries - metals - diversified.......................... 25,000(b) 728,250 Videocon International GDR - electronics.......................... 23,000 86,825 ------------ 815,075 ------------ INDONESIA (2.0%) Gadjah Tunggal - tires and rubber..... 241,000 346,295 Supreme Cable Manufacturing - industrial machinery and manufacturing........................ 89,000 280,748 ------------ 627,043 ------------ JAPAN (58.0%) Dainippon Ink and Chemical - chemicals............................ 190,000 814,238 DDI Corporation - telecommunications................... 154 1,236,291 Denki Kagaku Kogyo K.K. - chemicals... 300,000(b) 998,760 Geomatec Company - electronics........ 20,000 1,251,402 Ichiyoshi Securities - financial services............................. 150,000 752,612 Kobe Steel - metal products........... 425,000(b) 1,013,518 Kumagai Gumi Company - engineering and construction......................... 185,000 775,338 Maeda Road Construction - engineering and construction..................... 40,000 774,453 Mitsubishi Heavy Industries - industrial machinery /manufacturing....................... 150,000 1,020,012 Mitsui Fudosan - real estate.......... 155,000 1,776,814 Mori Seiki - industrial machinery and manufacturing........................ 70,000 1,247,860 Nichiei Company - financial services............................. 19,000 1,173,130 Nissha Printing - printing and publishing........................... 37,000 506,699 Sanwa Bank - bank..................... 36,000 680,007 Sony Music Entertainment - diversified services............................. 18,900 801,027 Sumitomo Bank - bank.................. 70,000 1,214,804 Sumitomo Trust and Banking - bank..... 73,000 887,669
F-20 ------------------------------------------------------------------------ INVESTMENTS IN SECURITIES HERCULES PACIFIC BASIN VALUE FUND JUNE 30, 1995 (CONTINUED)
Number of Market Name of Issuer Shares Value (a) - - - - - - ------------------------------------------ ------------ ------------ Tokyo Steel Manufacturing - metal products............................. 42,000 $ 718,965 Topre - automobile parts.............. 89,000 651,437 ------------ 18,295,036 ------------ MALAYSIA (5.0%) Genting - hotels, leisure and entertainment........................ 45,000 444,831 Telekom Malaysia - telecommunications................... 84,000 637,408 YTL Corporation - engineering and construction......................... 100,000 488,106 ------------ 1,570,345 ------------ PAKISTAN (1.1%) Pakistan Telecommunications - telecommunications................... 3,480(b) 353,220 ------------ PHILIPPINES (2.0%) Benpres Holdings GDR - communications....................... 39,798 328,334 Philippine Long Distance Telephone - telecommunications................... 4,110 293,686 ------------ 622,020 ------------ SINGAPORE (4.2%) City Developments - real estate....... 80,400 492,069 Clipsal Industries - electrical equipment............................ 36,000 83,160 Fraser and Neave - beverage/brewers... 25,000 288,117 Osprey Maritime - transportation - marine............................... 93,000(b) 183,210 Overseas-Chinese Banking Corporation - bank................................. 25,000 277,380 ------------ 1,323,936 ------------ SOUTH KOREA (2.9%) Korea 1990 Trust - closed-end country fund................................. 125 593,751 Korea International Trust IDR - closed-end country fund.............. 3 157,500 Samsung Electronics - electronics..... 123 8,856 Samsung Electronics GDS - electronics.......................... 2,969 158,099 ------------ 918,206 ------------ THAILAND (7.9%) Christiani and Nielsen - engineering and construction..................... 165,000 397,712 Number of Shares or Principal Market Name of Issuer Amount Value (a) - - - - - - ------------------------------------------ ------------ ------------ Electricity Generating (Egcomp) - utilities............................ 165,000(b) $ 497,975 Finance One Company - financial services............................. 60,000 442,374 Siam Cement Company - construction and construction materials............... 5,000 301,239 Sino Thai Engineering and Construction - engineering and construction....... 41,500 490,905 Thai Farmers Bank - bank.............. 40,000 354,713 ------------ 2,484,918 ------------ TAIWAN (0.9%) ROC Taiwan Fund - closed-end country fund................................. 25,000(b) 275,000 ------------ Total Common Stocks (cost: $33,933,691).................. 30,900,381 ------------ BONDS (1.2%) TAIWAN Teco Electric and Machinery, convertible, (U.S. dollar), 2.75% due 4/15/04.............................. 400,000(c) 372,000 ------------ Total Bonds (cost: $400,000)..................... 372,000 ------------ Total Investments in Securities (cost: $34,333,691)(d)............... $ 31,272,381 ------------ ------------
NOTES TO INVESTMENTS IN SECURITIES: (A) SECURITIES ARE VALUED BY PROCEDURES DESCRIBED IN NOTE 2 TO THE FINANCIAL STATEMENTS. (B) CURRENTLY NON-INCOME PRODUCING. (C) VALUE STATED IN U.S. DOLLARS; PRINCIPAL AMOUNT STATED IN THE CURRENCY INDICATED. (D) AT JUNE 30, 1995, THE COST OF SECURITIES FOR FEDERAL INCOME TAX PURPOSES WAS $35,031,040. THE AGGREGATE GROSS UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED ON THIS COST WERE AS FOLLOWS: GROSS UNREALIZED APPRECIATION........... $ 1,214,213 GROSS UNREALIZED DEPRECIATION........... (4,972,872) ----------- NET UNREALIZED DEPRECIATION............. $(3,758,659) ----------- -----------
F-21 ------------------------------------------------------------------------ INVESTMENTS IN SECURITIES HERCULES LATIN AMERICAN VALUE FUND JUNE 30, 1995
Market Name of Issuer Number of Shares Value (a) - - - - - - ---------------------------------------- ---------------- ------------ (PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS) COMMON STOCKS (57.2%) ARGENTINA (2.3%) Yacimientos Petrolifernas Fiscales Sociedad Anonima (YPF) ADR - oil and gas............................ 28,498 $ 537,900 ------------ BRAZIL (11.7%) Centrais Eletricas Brasileiras (Electrobras) - utilities.......... 4,664,139 1,266,741 Energetica de Sao Paulo - utilities.......................... 10,150,000(b) 330,798 Paulista de Forca e Luz (CPFL) - utilities.......................... 5,050,000 252,911 Siderurgica Nacional ADR - metal products........................... 16,098 366,230 Telecomunicacoes Brasileiras (Telebras) - telecommunications.... 14,515,000 422,599 ------------ 2,639,279 ------------ CHILE (6.5%) Banco Osorno y La Union ADR - banking and financial services..... 7,277 100,968 Chile Fund - closed-end country fund............................... 12,257 658,814 Compania Chilena de Generacion Electrica (Chilgener) ADR - utilities.......................... 17,650 558,181 Compania de Distribucion Electrica de la V Region (Chilquinta) ADR - utilities.......................... 9,000 162,367 ------------ 1,480,330 ------------ COLOMBIA (8.4%) Carulla y Compania ADR - retailing.......................... 24,975 449,550 Cementos Paz del Rio 144A ADR - building construction and materials.......................... 13,475(b,d) 227,391 Cementos Diamante 144A ADR - construction and construction materials.......................... 16,492(d) 478,268 Corporacion Financiera del Valle (Corfivalle) ADR - diversified industrials and conglomerates...... 10,351 174,673 La Gran Cadena de Almacenes Colombianos (Cadenalco) ADR - retailing.......................... 26,923(c) 568,748 ------------ 1,898,630 ------------ MEXICO (15.8%) Cemex Class B ADR - construction and construction materials............. 17,664 132,480 Grupo Carso Class A1 - diversified holding company.................... 225,403(b) 1,230,617 Panamerican Beverages ADR Class A - food and beverage.................. 36,340 1,090,200 Telefonos de Mexico Class L ADR (Telmex) - telecommunications...... 27,882 826,004 Telefonos de Mexico Class L (Telmex) - telecommunications............... 200,000 294,804 ------------ 3,574,105 ------------ PERU (8.0%) Cerveceria Backus y Johnson Brewery Class T - brewers and distillers... 146,083 345,502 Market Name of Issuer Number of Shares Value (a) - - - - - - ---------------------------------------- ---------------- ------------ Banco de Credito del Peru - bank.... 288,558 $ 506,015 Cementos Norte Pacasmayo Class T - building construction and materials.......................... 66,485 191,921 Cerveceria San Juan Class C - brewers and distillers............. 20,033 31,590 Enrique Ferreyros - industrial machinery and manufacturing........ 114,216 160,231 Minsur Class T - mining............. 1 13 Telefonica del Peru Class B - telecommunications................. 331,136 565,790 ------------ 1,801,062 ------------ VENEZUELA (4.5%) Ceramica Carabobo ADR Class B - building construction and materials.......................... 155,520(c) 155,520 Corimon ADR - diversified industrials and conglomerates...... 23,182(b) 150,683 Mavesa 144A ADR - food and beverage........................... 44,224(d) 153,674 Siderurgica Venezolana Sivensa ADR - metal products..................... 213,000(c) 330,150 Sudamtex de Venezuela ADR - textiles........................... 47,960 227,810 ------------ 1,017,837 ------------ Total Common Stocks (cost: $13,571,661)................ 12,949,143 ------------ PREFERRED STOCKS (33.2%) BRAZIL Aracruz Celulose ADR - forest products and paper................. 54,597 641,516 Banco Bradesco - banking and financial services................. 75,876,230 642,949 Banco Itau - bank................... 501,216 152,461 Centrais Eletricas Brasileiras (Electrobras) Class B - utilities.......................... 600 165 Cervejaria Brahma - brewers and distillers......................... 2,152,883 706,301 Companhia Energetica de Sao Paulo (CESP) ADR - utilities............. 24,000(b) 273,120 Companhia Energetica de Sao Paulo (CESP) - utilities................. 2,000,130(b) 79,093 Siderurgica Paulista (Cosipa) Class PNB - metal products............... 373,574(b) 592,524 Lojas Renner - retailing............ 7,768,600 131,657 Mesbla - retailing.................. 1,300,000(b) 91,798 Refrigeracao Parana (Refripar) - furniture/home appliance........... 220,180,000 428,161 Tecidos Norte de Minas (Coteminas) - textiles........................... 699,844 220,483 Telecomunicacoes Brasileiras (Telebras) ADR - telecommunications................. 24,991 843,446 Telecomunicacoes Brasileiras (Telebras) - telecommunications.... 5,947,800 203,214 Telecomunicacoes de Sao Paulo (Telesp) - telecommunications...... 4,947,340 615,394 Usinas Siderurgicas de Minas Gerais (Usiminas) 144A ADR - metal products........................... 13,000(d) 146,250 Usinas Siderurgicas de Minas Gerais (Usiminas) - metal products........ 634,000,000 709,419 Vale do Rio Doce ADR - mining....... 17,758 681,849
F-22 - - - - - - -------------------------------------------------------------------------------- INVESTMENTS IN SECURITIES HERCULES LATIN AMERICAN VALUE FUND JUNE 30, 1995 (CONTINUED)
Number of Shares or Principal Market Name of Issuer Amount Value (a) - - - - - - ---------------------------------------- ---------------- ------------ Vale do Rio Doce Preferred - mining............................. 2,224,110 $ 341,892 ------------ Total Preferred Stocks (cost: $8,233,265)................. 7,501,692 ------------ OPTIONS (0.0%) BRAZIL Paulista de Forca e Luz, 1 call option on 3,800,000 shares, strike price of 70, Expires October 31, 1995............................... 3,800,000 5,905 ------------ Total Options (cost: $0)......................... 5,905 ------------ SHORT-TERM SECURITY (8.0%) UNITED STATES CIBC Time Deposit, (U.S. dollar), 6.00%, due 7/03/95................. 1,802,508 1,802,508 ------------ Total Short-Term Security (cost: $1,802,508)........................ 1,802,508 ------------ Total Investments in Securities (cost: $23,607,434)(e)............. $ 22,259,248 ------------ ------------
NOTES TO INVESTMENTS IN SECURITIES: (A) SECURITIES ARE VALUED BY PROCEDURES DESCRIBED IN NOTE 2 TO THE FINANCIAL STATEMENTS. (B) CURRENTLY NON-INCOME PRODUCING. (C) SECURITY DEEMED TO BE ILLIQUID BY THE MANAGER. INVESTMENTS IN ILLIQUID SECURITIES REPRESENT 4.66% OF NET ASSETS AT JUNE 30, 1995. (D) REPRESENTS SECURITY SOLD UNDER RULE 144A AND IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS SECURITY HAS BEEN DETERMINED TO BE LIQUID UNDER GUIDELINES ESTABLISHED BY THE BOARD OF DIRECTORS. (E) AT JUNE 30, 1995, THE COST OF SECURITIES FOR FEDERAL INCOME TAX PURPOSES WAS $24,111,695. THE AGGREGATE GROSS UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED ON THIS COST WERE AS FOLLOWS: GROSS UNREALIZED APPRECIATION........... $ 1,787,183 GROSS UNREALIZED DEPRECIATION........... (3,639,630) ----------- NET UNREALIZED DEPRECIATION........... $(1,852,447) ----------- -----------
HERCULES WORLD BOND FUND JUNE 30, 1995
Principal Market Name of Issuer Amount (b) Value (a) - - - - - - ------------------------------------ --------------- --------------- (PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS) BONDS (91.9%) AUSTRALIA (4.0%) Australian Government (Australian dollar), 9.50%, due 8/15/03........................ 760,000 $ 552,283 --------------- AUSTRIA (2.9%) Austrian Republic (British pound), 9.00%, due 7/22/04..... 250,000 400,867 --------------- DENMARK (12.3%) Danish Government (Danish krone), 6.00%, due 12/10/99.... 9,750,000 1,689,291 --------------- GERMANY (23.5%) Deutscheland Republic (German deutschemark), 7.375%, due 1/03/05........................ 2,300,000 1,701,917 European Investment Bank (German deutschemark), 6.50%, due 4/21/04........................ 800,000 557,830 Inter-American Development Bank (German deutschemark), 7.00%, due 6/08/05.................... 800,000 574,293 International Bank of Reconstruction and Development (German deutschemark), 5.875%, due 11/10/03................... 600,000 400,665 --------------- 3,234,705 --------------- JAPAN (10.5%) Japanese Government (Japanese yen), 4.60%, due 3/21/05....... 83,000,000 1,115,877 Japanese Government (Japanese yen), 4.60%, due 9/20/04....... 24,000,000 323,315 --------------- 1,439,192 --------------- SPAIN (8.5%) Spanish Government (Spanish peseta), 7.40%, due 7/30/99.... 164,000,000 1,177,488 --------------- UNITED KINGDOM (4.8%) U.K. Government (British pound), 9.00%, due 7/12/11............. 400,000 665,504 --------------- UNITED STATES (25.4%) U.S. Treasury Bond (U.S. dollar), 7.75%, due 1/31/00.... 3,270,000(c) 3,495,833 --------------- Total Investments in Securities (cost: $12,176,942) (d)........ $ 12,655,163 --------------- ---------------
NOTES TO INVESTMENTS IN SECURITIES: (A) SECURITIES ARE VALUED BY PROCEDURES DESCRIBED IN NOTE 2 TO THE FINANCIAL STATEMENTS. (B) VALUE STATED IN U.S. DOLLARS; PRINCIPAL AMOUNT STATED IN THE CURRENCY INDICATED. (C) PARTIALLY PLEDGED AS INITIAL MARGIN DEPOSIT ON OPEN FUTURES POSITIONS (SEE NOTE 7 TO THE FINANCIAL STATEMENTS). (D) AT JUNE 30, 1995, THE COST OF SECURITIES FOR FEDERAL INCOME TAX PURPOSES WAS $12,199,066. THE AGGREGATE GROSS UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED ON THIS COST WERE AS FOLLOWS: GROSS UNREALIZED APPRECIATION.............. $ 518,079 GROSS UNREALIZED DEPRECIATION.............. (61,982) --------- NET UNREALIZED APPRECIATION.............. $ 456,097 --------- ---------
F-23 - - - - - - -------------------------------------------------------------------------------- INVESTMENTS IN SECURITIES HERCULES GLOBAL SHORT-TERM FUND JUNE 30, 1995
Principal Market Name of Issuer Amount Value (a) - - - - - - ------------------------------------ --------------- --------------- (PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS) SHORT-TERM SECURITY (46.8%) UNITED STATES U.S. Treasury Bill, 5.37%, due 8/17/95.................... 100,000 $ 99,299 --------------- Total Investments in Securities (cost: $99,299) (b)............ $ 99,299 --------------- ---------------
NOTES TO INVESTMENTS IN SECURITIES: (A) SECURITIES ARE VALUED BY PROCEDURES DESCRIBED IN NOTE 2 TO THE FINANCIAL STATEMENTS. (B) ALSO REPRESENTS COST FOR FEDERAL INCOME TAX PURPOSES. HERCULES MONEY MARKET FUND JUNE 30, 1995
Principal Market Name of Issuer Amount Value (a) - - - - - - ------------------------------------ --------------- --------------- (PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS) U.S. TREASURY BILLS (105.8%) 5.65%, due 7/13/95.............. 165,000 $ 164,689 5.57%, due 9/07/95.............. 50,000 49,474 5.35%, due 9/21/95.............. 180,000 177,807 5.37%, due 9/21/95.............. 427,000 421,777 5.38%, due 9/21/95.............. 4,000 3,951 5.40%, due 9/21/95.............. 100,000 98,770 5.45%, due 9/28/95.............. 106,000 104,572 5.47%, due 9/28/95.............. 284,000 280,156 --------------- Total Investments in Securities (cost: $1,301,196) (b)........... $ 1,301,196 --------------- ---------------
NOTES TO INVESTMENTS IN SECURITIES: (A) SECURITIES ARE VALUED BY PROCEDURES DESCRIBED IN NOTE 2 TO THE FINANCIAL STATEMENTS. (B) ALSO REPRESENTS COST FOR FEDERAL INCOME TAX PURPOSES. F-24 ------------------------------------------------------------------------ INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS AND SHAREHOLDERS HERCULES FUNDS INC.: We have audited the accompanying statements of assets and liabilities, including the schedules of investments in securities, of the North American Growth and Income Fund, European Value Fund, Pacific Basin Value Fund, Latin American Value Fund, World Bond Fund, Global Short-Term Fund and Money Market Fund (separate funds within Hercules Funds Inc.) as of June 30, 1995, and the related statements of operations for the year then ended (period from December 13, 1994 to June 30, 1995 for Money Market Fund), and statements of changes in net assets and the financial highlights for the year ended June 30, 1995 and the period from November 9, 1993 to June 30, 1994 (period from December 13, 1994 to June 30, 1995 for Money Market Fund). 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 North American Growth and Income Fund, European Value Fund, Pacific Basin Value Fund, Latin American Value Fund, World Bond Fund, Global Short-Term Fund and Money Market Fund as of June 30, 1995, and the results of their operations, 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 August 18, 1995 F-25 PIPER GLOBAL FUNDS INC. PACIFIC-EUROPEAN GROWTH FUND PART C OTHER INFORMATION ITEM 15. INDEMNIFICATION The response to this item is incorporated by reference to (a) Item 27 of Post-Effective Amendment No. 4 to Registrant's Registration Statement on Form N- 1A, which was filed electronically pursuant to Regulation S-T on April 28, 1995, as an amendment to its Registration Statement on Form N-1A (File Nos. 33- 33534; 811-06046), filed on November 17, 1986, and (b) Exhibits 1.a, 1.b and 2 hereto. ITEM 16. EXHIBITS 1.a Articles of Incorporation (1) 1.b Articles of Amendment to Articles of Incorporation (3) 2. Amended and Restated Bylaws (3) 3. Not applicable 4. Copy of Agreement and Plan of Reorganization (filed herewith as Exhibit A to the Proxy Statement/Prospectus) 5. Not applicable 6.a Investment Advisory and Management Agreement (3) 6.b Sub-Investment Advisory Agreement (3) 7. Underwriting and Distribution Agreement (3) 8. Not applicable 9. Form of Custody and Investment Accounting Agreement 10. Amended and Restated Plan of Distribution (3) 11. Opinion and Consent of Dorsey & Whitney 12. Opinion and Consent of Gordon Altman Butowsky Weitzen Shalov & Wein regarding tax matters 13. Not applicable 14. Consent of KPMG Peat Marwick LLP 15. Not applicable 16. Not applicable 17.a Registrant's Rule 24f-2 Notice pursuant to Rule 24f-2 under the Investment Company Act of 1940, for its fiscal year ended February 28, 1995 as filed on April 18, 1995 17.b Powers of Attorney 17.c Form of Proxy 17.d Additional Solicitation Material - - - - - - --------------- (1) Incorporated by reference to the Registrant's Registration Statement on Form N-2, filed February 16, 1990, File No. 33-33534 (2) Incorporated by reference to Amendment No. 2 to the Registrant's Registration Statement on Form N-2, filed April 19, 1990, File No. 33- 33534. (3) Incorporated by reference to Post-Effective Amendment No. 2 to the Registrant's Registration Statement on Form N-1A filed June 28, 1993. ITEM 17. 1. The undersigned Registrant agrees that prior to any public reoffering of the securities registered through the use of the prospectus which is a part of this registration statement on Form N-14 by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c) of the Securities Act of 1933, 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 this registration statement on Form N-14 and will not be used until the amendment is effective, and that, in determining any liability under the Securities Act of 1933, 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. 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 and State of Minnesota, on the 29th day of March, 1996. PIPER GLOBAL FUNDS INC. By: /s/ Paul A. Dow ------------------- Paul A. Dow President As required by the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/ Paul A. Dow President (principal March 29, 1996 - - - - - - ----------------------- executive officer) Paul A. Dow /s/ Robert H. Nelson Treasurer (principal March 29, 1996 - - - - - - ----------------------- financial and accounting Robert H. Nelson officer) /s/ Michael W. Balfour Director March 29, 1996 - - - - - - ----------------------- Michael W. Balfour /s/ David T. Bennett Director March 29, 1996 - - - - - - ----------------------- David T. Bennett /s/ Jaye F. Dyer Director March 29, 1996 - - - - - - ----------------------- Jaye F. Dyer /s/ William H. Ellis Director March 29, 1996 - - - - - - ----------------------- William H. Ellis /s/ Karol E. Emmerich Director March 29, 1996 - - - - - - ----------------------- Karol E. Emmerich /s/ Luella G. Goldberg Director March 29, 1996 - - - - - - ----------------------- Luella G. Goldberg /s/ George T. Latimer Director March 29, 1996 - - - - - - ----------------------- George T. Latimer /s/ Iain A. Watt Director March 29, 1996 - - - - - - ----------------------- Iain A. Watt EXHIBIT INDEX EXHIBIT PAGE NUMBER EXHIBIT NUMBER - - - - - - ------- ------- ------ 9. Form of Custody and Investment Accounting Agreement 11. Opinion and consent of Dorsey & Whitney 12. Opinion and consent of Gordon Altman Butowsky Weitzen Shalov & Wein regarding tax matters 14. Consent of KPMG Peat Marwick LLP 17. a Registrant's Rule 24f-2 Notice pursuant to Rule 24f-2 under the Investment Company Act of 1940, for its fiscal year ended February 28, 1995, as filed on April 18, 1995 b Powers of Attorney c Form of Proxy d Additional Solicitation Material I-1 EX-99.9 2 EXHIBIT 99.9 CUSTODY AGREEMEN CUSTODY AND INVESTMENT ACCOUNTING AGREEMENT THIS AGREEMENT made and effective as the 1st day of January, 1996, by and between INVESTORS FIDUCIARY TRUST COMPANY, a trust company chartered under the laws of the state of Missouri, having its trust office located at l27 West 10th Street, Kansas City, Missouri 64105 ("Custodian"), and each registered investment company which is listed on Schedule I hereto or which hereafter agrees with Custodian in writing to be bound by the terms, conditions and provisions hereof, each having its principal office and place of business at Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota 55402-3804 (each a "Fund" and collectively the "Funds"). WITNESSETH: WHEREAS, except as otherwise indicated on Exhibit A hereto, each Fund desires to appoint Investors Fiduciary Trust Company as custodian of the securities and monies of its investment portfolio and as its agent to perform certain investment accounting and recordkeeping functions; and WHEREAS, Investors Fiduciary Trust Company is willing to accept such appointment; NOW, THEREFORE, for and in consideration of the mutual promises contained herein, the parties hereto, intending to be legally bound, mutually covenant and agree as follows: 1. APPOINTMENT OF CUSTODIAN. Except as otherwise set forth on Exhibit A, each Fund hereby constitutes and appoints Custodian as: A. Custodian of the securities and monies at any time owned by the Fund; and B. Agent to perform certain accounting and recordkeeping functions relating to portfolio transactions required of a duly registered investment company under Rule 31a of the Investment Company Act of 1940 (the "1940 Act") and to calculate the net asset value of the Fund. 2. REPRESENTATIONS AND WARRANTIES. A. Each Fund hereby represents, warrants and acknowledges to Custodian: 1. That it is a corporation duly organized and existing and in good standing under the laws of Minnesota, and that it is registered under the 1940 Act; and 2. That it has the requisite power and authority under applicable law, its articles of incorporation and its bylaws to enter into this Agreement; that it has taken all requisite action necessary to appoint Custodian as custodian and investment accounting and recordkeeping agent for the Fund; that this Agreement has been duly executed and delivered by the Fund; and that this Agreement constitutes a legal, valid and binding obligation of the Fund, enforceable in accordance with its terms, subject, as to enforcement, to applicable bankruptcy, reorganization, insolvency or other similar laws relating to or affecting creditors' rights generally and to equitable principles of public policy that may restrict the availability of remedies. B. Custodian hereby represents, warrants and acknowledges to each Fund: 1. That it is a trust company duly organized and existing and in good standing under the laws of the State of Missouri; provided, that it is understood that Custodian intends to merge with a newly chartered national association which shall be the surviving entity of such merger and the successor to Custodian hereunder without further act of the parties; and 2. That it has the requisite power and authority under applicable law, its charter and its bylaws to enter into and perform this Agreement; that this Agreement has been duly executed and delivered by Custodian; and that this Agreement constitutes a legal, valid and binding obligation of Custodian, enforceable in accordance with its terms, subject, as to enforcement, to applicable bankruptcy, reorganization, insolvency or other similar laws relating to or affecting creditors' rights generally and to equitable principles and principles of public policy that may restrict the availability of remedies. 2 3. DUTIES AND RESPONSIBILITIES OF CUSTODIAN. A. DELIVERY OF ASSETS Except as permitted by the 1940 Act, each Fund will deliver or cause to be delivered to Custodian on the effective date of this Agreement, or as soon thereafter as practicable, and from time to time thereafter, all portfolio securities acquired by it and monies then owned by it or from time to time coming into its possession during the time this Agreement shall continue in effect. Custodian shall have no responsibility or liability whatsoever for or on account of securities or monies not so delivered. B. DELIVERY OF ACCOUNTS AND RECORDS Each Fund shall turn over or cause to be turned over to Custodian all of the Fund's relevant accounts and records previously maintained. Custodian shall be entitled to rely conclusively on the completeness and correctness of the accounts and records turned over to it, and the applicable Fund shall indemnify and hold Custodian harmless of and from any and all expenses, damages and losses whatsoever arising out of or in connection with any error, omission, inaccuracy or other deficiency of such accounts and records or in the failure of such Fund to provide, or to provide in a timely manner, any accounts, records or information needed by the Custodian to perform its functions hereunder. C. DELIVERY OF ASSETS TO THIRD PARTIES Custodian will receive delivery of and keep safely the assets of each Fund delivered to it from time to time segregated in a separate account, and as to each Fund which is comprised of more than one portfolio of investment securities (each a "Portfolio") Custodian shall keep the assets of each Portfolio segregated in a separate account. Custodian will not deliver, assign, pledge or hypothecate any such assets to any person except as permitted by the provisions of this Agreement or any agreement executed by it according to the terms of Section 3.S. of this Agreement. Upon delivery of any such assets to a subcustodian pursuant to 3 Section 3.S. of this Agreement, Custodian will create and maintain records identifying those assets which have been delivered to the subcustodian as belonging to the applicable Fund, by Portfolio if applicable. The Custodian is responsible for the safekeeping of the securities and monies of each Fund only until they have been transmitted to and received by other persons as permitted under the terms of this Agreement, except for securities and monies transmitted to subcustodians appointed under Section 3.S. of this Agreement, for which Custodian remains responsible to the extent provided in Section 3.S. hereof. Custodian may participate directly or indirectly through a subcustodian in the Depository Trust Company (DTC), Treasury/Federal Reserve Book Entry System (Fed System), Participant Trust Company (PTC) or other depository approved by the applicable Fund (as such entities are defined at 17 CFR Section 270.17f-4(b)) (each a "Depository" and collectively, the "Depositories"). D. REGISTRATION OF SECURITIES The Custodian shall at all times hold registered securities of the Funds in the name of the Custodian, the applicable Fund, or a nominee of either of them, unless specifically directed by instructions to hold such registered securities in so-called "street name," provided that, in any event, all such securities and other assets shall be held in an account of the Custodian containing only assets of each individual Fund, or only assets held by the Custodian as a fiduciary or custodian for customers, and provided further, that the records of the Custodian at all times shall indicate the Fund or other customer for which such securities and other assets are held in such account and the respective interests therein. If, however, any Fund directs the Custodian to maintain securities in "street name", notwithstanding anything contained herein to the contrary, the Custodian shall be obligated only to utilize its best efforts to timely collect income due the Fund on such securities and to notify the Fund of relevant corporate actions including, without limitation, pendency of calls, maturities, tender or exchange offers. All securities, and the ownership thereof by the Funds, which are held by Custodian hereunder, however, 4 shall at all times be identifiable on the records of the Custodian. Each Fund agrees to hold Custodian and its nominee harmless for any liability as a shareholder of record of securities held in custody for such Fund. E. EXCHANGE OF SECURITIES Upon receipt of instructions as defined herein in Section 4, Custodian will exchange, or cause to be exchanged, portfolio securities held by it for the account of a Fund for other securities or cash issued or paid in connection with any reorganization, recapitalization, merger, consolidation, split-up of shares, change of par value, conversion or otherwise, and will deposit any such securities in accordance with the terms of any reorganization or protective plan. Without instructions, Custodian is authorized to exchange securities held by it in temporary form for securities in definitive form, to effect an exchange of shares when the par value of the stock is changed, and, upon receiving payment therefor, to surrender bonds or other securities held by it at maturity or when advised of earlier call for redemption, except that Custodian shall receive instructions prior to surrendering any convertible security. F. PURCHASES OF INVESTMENTS - OTHER THAN OPTIONS AND FUTURES Each Fund will, on each business day on which a purchase of securities (other than options and futures) shall be made by it, deliver to Custodian instructions which shall specify with respect to each such purchase: 1. If applicable, the name of the Portfolio making such purchase; 2. The name of the issuer and description of the security; 3. The number of shares and the principal amount purchased, and accrued interest, if any; 4. The trade date; 5. The settlement date; 6. The purchase price per unit and the brokerage commission, taxes and other expenses payable in connection with the purchase; 7. The total amount payable upon such purchase; 5 8. The name of the person from whom or the broker or dealer through whom the purchase was made; and 9. Whether the security is to be received in certificated form or via a specified Depository. In accordance with such instructions, Custodian will pay for, out of monies held for the account of such Fund, but only insofar as such monies are available for such purpose, and receive the portfolio securities so purchased by or for the account of the Fund, except that Custodian may in its sole discretion advance funds to the Fund which may result in an overdraft because the monies held by the Custodian on behalf of the Fund are insufficient to pay the total amount payable upon such purchase. Except as otherwise instructed by the applicable Fund, such payment shall be made by the Custodian only upon receipt of securities: (a) by the Custodian; (b) by a clearing corporation of a national exchange of which the Custodian is a member; or (c) by a Depository. Notwithstanding the foregoing, (i) in the case of a repurchase agreement, the Custodian may release funds to a Depository prior to the receipt of advice from the Depository that the securities underlying such repurchase agreement have been transferred by book- entry into the account maintained with such Depository by the Custodian, on behalf of its customers, provided that the Custodian's instructions to the Depository require that the Depository make payment of such funds only upon transfer by book-entry of the securities underlying the repurchase agreement in such account; (ii) in the case of time deposits, call account deposits, currency deposits and other deposits, foreign exchange transactions, futures contracts or options, the Custodian may make payment therefor before receipt of an advice or confirmation evidencing said deposit or entry into such transaction; and (iii) in the case of the purchase of securities, the settlement of which occurs outside of the United States of America, the Custodian may make, or cause a subcustodian appointed pursuant to Section 3.S.2. of this Agreement to make, payment therefor in accordance with generally accepted local custom and market practice. 6 G. SALES AND DELIVERIES OF INVESTMENTS - OTHER THAN OPTIONS AND FUTURES Each Fund will, on each business day on which a sale of investment securities (other than options and futures) of the Fund has been made, deliver to Custodian instructions specifying with respect to each such sale: 1. If applicable, the name of the Portfolio making such sale; 2. The name of the issuer and description of the securities; 3. The number of shares and principal amount sold, and accrued interest, if any; 4. The date on which the securities sold were purchased or other information identifying the securities sold and to be delivered; 5. The trade date; 6. The settlement date; 7. The sale price per unit and the brokerage commission, taxes or other expenses payable in connection with such sale; 8. The total amount to be received by Fund upon such sale; and 9. The name and address of the broker or dealer through whom or person to whom the sale was made. In accordance with such instructions, Custodian will deliver or cause to be delivered the securities thus designated as sold for the account of the Fund to the broker or other person specified in the instructions relating to such sale. Except as otherwise instructed by the applicable Fund, such delivery shall be made upon receipt of payment therefor: (a) in such form as is satisfactory to the Custodian; (b) credit to the account of the Custodian with a clearing corporation of a national securities exchange of which the Custodian is a member; or (c) credit to the account of the Custodian, on behalf of its customers, with a Depository. Notwithstanding the foregoing: (i) in the case of securities held in physical form, such securities shall be delivered in accordance with "street delivery custom" to a broker or its clearing agent; or (ii) in the case of the sale of securities, the settlement of which occurs outside of the United States of America, the Custodian 7 may make, or cause a subcustodian appointed pursuant to Section 3.S.2. of this Agreement to make, payment therefor in accordance with generally accepted local custom and market practice. H. PURCHASES OR SALES OF OPTIONS AND FUTURES Each Fund will, on each business day on which a purchase or sale of the following options and/or futures shall be made by it, deliver to Custodian instructions which shall specify with respect to each such purchase or sale: 1. If applicable, the name of the Portfolio making such purchase or sale; 2. Security Options a. The underlying security; b. The price at which purchased or sold; c. The expiration date; d. The number of contracts; e. The exercise price; f. Whether the transaction is an opening, exercising, expiring or closing transaction; g. Whether the transaction involves a put or call; h. Whether the option is written or purchased; i. Market on which option traded; and j. Name and address of the broker or dealer through whom the sale or purchase was made. 3. Options on Indices a. The index; b. The price at which purchased or sold; c. The exercise price; d. The premium; e. The multiple; f. The expiration date; 8 g. Whether the transaction is an opening, exercising, expiring or closing transaction; h. Whether the transaction involves a put or call; i. Whether the option is written or purchased; and j. The name and address of the broker or dealer through whom the sale or purchase was made, or other applicable settlement instructions. 4. Security Index Futures Contracts a. The last trading date specified in the contract and, when available, the closing level, thereof; b. The index level on the date the contract is entered into; c. The multiple; d. Any margin requirements; e. The need for a segregated margin account (in addition to instructions, and if not already in the possession of Custodian, the Fund shall deliver a substantially complete and executed custodial safekeeping account and procedural agreement which shall be incorporated by reference into this Custody Agreement); and f. The name and address of the futures commission merchant through whom the sale or purchase was made, or other applicable settlement instructions. 5. Options on Index Future Contracts a. The underlying index future contract; b. The premium; c. The expiration date; d. The number of options; e. The exercise price; f. Whether the transaction involves an opening, exercising, expiring or closing transaction; 9 g. Whether the transaction involves a put or call; h. Whether the option is written or purchased; and i. The market on which the option is traded. I. SECURITIES PLEDGED OR LOANED If specifically allowed for in the prospectus of the applicable Fund, and subject to such additional terms and conditions as Custodian may require: 1. Upon receipt of instructions, Custodian will release or cause to be released securities held in custody to the pledgee designated in such instructions by way of pledge or hypothecation to secure any loan incurred by the Fund; provided, however, that the securities shall be released only upon payment to Custodian of the monies borrowed, except that in cases where additional collateral is required to secure a borrowing already made, further securities may be released or caused to be released for that purpose upon receipt of instructions. Upon receipt of instructions, Custodian will pay, but only from funds available for such purpose, any such loan upon redelivery to it of the securities pledged or hypothecated therefor and upon surrender of the note or notes evidencing such loan. 2. Upon receipt of instructions, Custodian will release securities held in custody to the borrower designated in such instructions; provided, however, that the securities will be released only upon deposit with Custodian of full cash collateral as specified in such instructions, and that Fund will retain the right to any dividends, interest or distribution on such loaned securities. Upon receipt of instructions and the loaned securities, Custodian will release the cash collateral to the borrower. J. ROUTINE MATTERS Custodian will, in general, attend to all routine and mechanical matters in connection with the sale, exchange, substitution, purchase, transfer, or other dealings with securities or other property of the Funds except as may be otherwise provided in this Agreement or directed from time to time by any Fund in writing. 10 K. DEPOSIT ACCOUNTS Custodian will open and maintain one or more special purpose deposit accounts for each Fund in the name of Custodian ("Accounts"), subject only to draft or order by Custodian upon receipt of instructions. All monies received by Custodian from or for the account of the Funds shall be deposited in said Accounts. Barring events not in the control of the Custodian such as strikes, lockouts or labor disputes, riots, war or equipment or transmission failure or damage, fire, flood, earthquake or other natural disaster, action or inaction of governmental authority or other causes beyond its control, at 9:00 a.m., Kansas City time, on the second business day after deposit of any check into an Account, Custodian agrees to make Fed Funds available to the applicable Fund in the amount of the check. Deposits made by Federal Reserve wire will be available to the Funds immediately and ACH wires will be available to the Funds on the next business day. Income earned on the portfolio securities will be credited to the Funds based on the schedule attached as Exhibit A. The Custodian will be entitled to reverse any credited amounts where credits have been made and monies are not finally collected. If monies are collected after such reversal, the Custodian will credit the applicable Fund in that amount. Custodian may open and maintain Accounts in its own banking department, in State Street Bank and Trust Company, or in such other banks or trust companies as may be designated by it or by a Fund in writing, all such Accounts, however, to be in the name of Custodian and subject only to its draft or order. Funds received and held for the account of different Portfolios shall be maintained in separate Accounts established for each Portfolio. L. INCOME AND OTHER PAYMENTS TO THE FUNDS Custodian will: 1. Collect, claim and receive and deposit for the account of the Funds all income and other payments which become due and payable on or after the effective date of this Agreement with respect to the securities deposited under this Agreement, and credit the account of the applicable Fund in 11 accordance with the schedule attached hereto as Exhibit A. If, for any reason, any Fund is credited with income that is not subsequently collected, Custodian may reverse that credited amount. 2. Execute ownership and other certificates and affidavits for all federal, state and local tax purposes in connection with the collection of bond and note coupons; and 3. Take such other action as may be necessary or proper in connection with: a. the collection, receipt and deposit of such income and other payments, including but not limited to the presentation for payment of: 1. all coupons and other income items requiring presentation; and 2. all other securities which may mature or be called, redeemed, retired or otherwise become payable and regarding which the Custodian has actual knowledge, or should reasonably be expected to have knowledge; and b. the endorsement for collection, in the name of the applicable Fund, of all checks, drafts or other negotiable instruments. Custodian, however, will not be required to institute suit or take other extraordinary action to enforce collection except upon receipt of instructions and upon being indemnified to its satisfaction against the costs and expenses of such suit or other actions. Custodian will receive, claim and collect all stock dividends, rights and other similar items and will deal with the same pursuant to instructions. Unless prior instructions have been received to the contrary, Custodian will, without further instructions, sell any rights held for the account of a Fund on the last trade date prior to the date of expiration of such rights. M. PAYMENT OF DIVIDENDS AND OTHER DISTRIBUTIONS On the declaration of any dividend or other distribution on the shares of capital stock of a Fund ("Fund Shares") by the Board of Directors of a Fund, such Fund 12 shall deliver to Custodian instructions with respect thereto. On the date specified in such instructions for the payment of such dividend or other distribution, Custodian will pay out of the monies held for the account of such Fund, insofar as the same shall be available for such purposes, and credit to the account of the Dividend Disbursing Agent for such Fund, such amount as may be specified in such instructions. N. SHARES OF A FUND PURCHASED BY THE FUND Whenever any Fund Shares are repurchased or redeemed by a Fund, the Fund or its agent shall advise Custodian of the aggregate dollar amount to be paid for such shares and shall confirm such advice in writing. Upon receipt of such advice, Custodian shall charge such aggregate dollar amount to the account of the Fund and either deposit the same in the account maintained for the purpose of paying for the repurchase or redemption of Fund Shares or deliver the same in accordance with such advice. Custodian shall not have any duty or responsibility to determine that Fund Shares have been removed from the proper shareholder account or accounts or that the proper number of Fund Shares have been cancelled and removed from the shareholder records. O. SHARES OF A FUND PURCHASED FROM THE FUND Whenever Fund Shares are purchased from a Fund, the Fund will deposit or cause to be deposited with Custodian the amount received for such shares. Custodian shall not have any duty or responsibility to determine that Fund Shares purchased from any Fund have been added to the proper shareholder account or accounts or that the proper number of such shares have been added to the shareholder records. P. PROXIES AND NOTICES Custodian will promptly deliver or mail or have delivered or mailed to the applicable Fund all proxies properly signed, all notices of meetings, all proxy statements and other notices, requests or announcements affecting or relating to securities held by Custodian for such Fund and will, upon receipt of instructions, execute and deliver or cause its nominee to execute and deliver or mail or have 13 delivered or mailed such proxies or other authorizations as may be required. Except as provided by this Agreement or pursuant to instructions hereafter received by Custodian, neither it nor its nominee will exercise any power inherent in any such securities, including any power to vote the same, or execute any proxy, power of attorney, or other similar instrument voting any of such securities, or give any consent, approval or waiver with respect thereto, or take any other similar action. Q. DISBURSEMENTS Custodian will pay or cause to be paid, insofar as funds are available for the purpose, bills, statements and other obligations of each Fund (including but not limited to obligations in connection with the conversion, exchange or surrender of securities owned by the Fund, interest charges, dividend disbursements, taxes, management fees, custodian fees, legal fees, auditors' fees, transfer agents' fees, brokerage commissions, compensation to personnel, and other operating expenses of the Fund) pursuant to instructions of the Fund setting forth the name of the person to whom payment is to be made, the amount of the payment, and the purpose of the payment. R. DAILY STATEMENT OF ACCOUNTS Custodian will, within a reasonable time, render to each Fund a detailed statement of the amounts received or paid and of securities received or delivered for the account of the Fund during each business day. Custodian will, from time to time, upon request by any Fund, render a detailed statement of the securities and monies held for such Fund under this Agreement, and Custodian will maintain such books and records as are necessary to enable it to do so. Custodian will permit such persons as are authorized by any Fund, including such Fund's independent public accountants, reasonable access to such records or will provide reasonable confirmation of the contents of such records, and if demanded, Custodian will permit federal and state regulatory agencies to examine the securities, books and records. Upon the written instructions of any Fund or as demanded by federal or 14 state regulatory agencies, Custodian will instruct any subcustodian to permit such persons as are authorized by such Fund, including such Fund's independent public accountants, reasonable access to such records or to provide reasonable confirmation of the contents of such records, and to permit such agencies to examine the books, records and securities held by such subcustodian which relate to such Fund. S. APPOINTMENT OF SUBCUSTODIANS 1. Notwithstanding any other provisions of this Agreement, all or any of the monies or securities of the Funds may be held in Custodian's own custody or in the custody of one or more other banks or trust companies acting as subcustodians as may be selected by Custodian. Any such subcustodian selected by the Custodian must have the qualifications required for a custodian under the 1940 Act, as amended. Custodian shall be responsible to the applicable Fund for any loss, damage or expense suffered or incurred by the Fund resulting from the actions or omissions of any subcustodians selected and appointed by Custodian (except subcustodians appointed at the request of the Fund and as provided in Subsection 2 below) to the same extent Custodian would be responsible to the Fund under Section 5. of this Agreement if it committed the act or omission itself. Upon request of any Fund, Custodian shall be willing to contract with other subcustodians reasonably acceptable to the Custodian for purposes of (i) effecting third-party repurchase transactions with banks, brokers, dealers, or other entities through the use of a common custodian or subcustodian, or (ii) providing depository and clearing agency services with respect to certain variable rate demand note securities, or (iii) for other reasonable purposes specified by the Fund; provided, however, that the Custodian shall be responsible to the Fund for any loss, damage or expense suffered or incurred by the Fund resulting from the actions or omissions of any such subcustodian only to the same extent such subcustodian is responsible to the Custodian. The Fund 15 shall be entitled to review the Custodian's contracts with any such subcustodians appointed at its request. Custodian shall be responsible to the applicable Fund for any loss, damage or expense suffered or incurred by the Fund resulting from the actions or omissions of any Depository only to the same extent such Depository is responsible to Custodian. 2. Notwithstanding any other provisions of this Agreement, each Fund's foreign securities (as defined in Rule 17f-5(c)(1) under the 1940 Act) and the Fund's cash or cash equivalents, in amounts deemed by the Fund to be reasonably necessary to effect the Fund's foreign securities transactions, may be held in the custody of one or more banks or trust companies acting as subcustodians, and thereafter, pursuant to a written contract or contracts as approved by the Fund's Board of Directors, may be transferred to accounts maintained by any such subcustodian with eligible foreign custodians, as defined in Rule 17f-5(c)(2). Custodian shall be responsible to the Fund for any loss, damage or expense suffered or incurred by the Fund resulting from the actions or omissions of any foreign subcustodian only to the same extent the foreign subcustodian is liable to the domestic subcustodian with which the Custodian contracts for foreign subcustody purposes. T. ACCOUNTS AND RECORDS Custodian will prepare and maintain, with the direction and as interpreted by each Fund, the Fund's accountants and/or other advisors, in complete, accurate and current form all accounts and records (i) required to be maintained by the Fund with respect to portfolio transactions under Rule 31a of the 1940 Act, including but not limited to the records needed to comply with Rule 31a-1(b)(1) of the 1940 Act, (ii) required to be maintained as a basis for calculation of the Fund's net asset value, and (iii) as otherwise agreed upon between the parties. Custodian will preserve said records in the manner and for the periods prescribed in the 1940 Act or for such longer period as is agreed upon by the parties. Custodian relies upon 16 each Fund to furnish, in writing or its electronic or digital equivalent, accurate and timely information needed by Custodian to complete such Fund's records and perform daily calculation of the Fund's net asset value. Custodian shall incur no liability and each Fund shall indemnify and hold harmless Custodian from and against any liability arising from any failure of such Fund to furnish such information in a timely and accurate manner, even if the Fund subsequently provides accurate but untimely information. It shall be the responsibility of each Fund to furnish Custodian with the declaration, record and payment dates and amounts of any dividends or income and any other special actions required concerning each of its securities when such information is not readily available from generally accepted securities industry services or publications. U. ACCOUNTS AND RECORDS PROPERTY OF THE FUNDS Custodian acknowledges that all of the accounts and records maintained by Custodian pursuant to this Agreement are the property of each respective Fund, and will be made available to the applicable Fund for inspection or reproduction within a reasonable period of time, upon demand. Custodian will assist each Fund's independent auditors, or upon approval of the Fund, or upon demand, any regulatory body, in any requested review of the Fund's accounts and records but shall be reimbursed by the Fund for all expenses and employee time invested in any such review outside of routine and normal periodic reviews. Upon receipt from the applicable Fund of the necessary information or instructions, Custodian will supply information from the books and records it maintains for the Fund that the Fund needs for tax returns, questionnaires, periodic reports to shareholders and such other reports and information requests as the Fund and Custodian shall agree upon from time to time. V. ADOPTION OF PROCEDURES Custodian and each Fund may from time to time adopt procedures as they agree upon, and Custodian may conclusively assume that no procedure approved or directed by any Fund or its accountants or other advisors conflicts with or violates 17 any requirements of its prospectus, articles of incorporation, bylaws, any applicable law, rule or regulation, or any order, decree or agreement by which the Fund may be bound. Each Fund will be responsible to notify Custodian of any changes in statutes, regulations, rules, requirements or policies which might necessitate changes in Custodian's responsibilities or procedures as to such Fund. W. CALCULATION OF NET ASSET VALUE Custodian will calculate each Fund's net asset value, in accordance with such Fund's prospectus. Custodian will price the securities and foreign currency holdings of the Funds for which market quotations are available by the use of outside services designated by each Fund which are normally used and contracted with for this purpose; all other securities and foreign currency holdings will be priced in accordance with the applicable Fund's instructions. Custodian will have no responsibility for the accuracy of the prices quoted by these outside services or for the information supplied by any Fund or for acting upon such instructions. X. ADVANCES In the event Custodian or any subcustodian shall, in its sole discretion, advance cash or securities for any purpose (including but not limited to securities settlements, purchase or sale of foreign exchange or foreign exchange contracts and assumed settlement) for the benefit of any Fund, the advance shall be payable by the Fund on demand. Any such cash advance shall be subject to an overdraft charge at the rate set forth in the then-current fee schedule from the date advanced until the date repaid. As security for each such advance, each Fund hereby grants Custodian and such subcustodian a lien on and security interest in all property at any time held for the account of the Fund, including without limitation all assets acquired with the amount advanced. Should the Fund fail to promptly repay the advance, the Custodian and such subcustodian shall be entitled to utilize available cash and to dispose of such Fund's assets pursuant to applicable law to the extent necessary to obtain reimbursement of the amount advanced and any related overdraft charges. 18 Y. EXERCISE OF RIGHTS; TENDER OFFERS Upon receipt of instructions, the Custodian shall: (a) deliver warrants, puts, calls, rights or similar securities to the issuer or trustee thereof, or to the agent of such issuer or trustee, for the purpose of exercise or sale, provided that the new securities, cash or other assets, if any, are to be delivered to the Custodian; and (b) deposit securities upon invitations for tenders thereof, provided that the consideration for such securities is to be paid or delivered to the Custodian or the tendered securities are to be returned to the Custodian. 4. INSTRUCTIONS. A. The term "instructions", as used herein, means written (including telecopied or telexed) or oral instructions which Custodian reasonably believes were given by a designated representative of the applicable Fund. Each Fund shall deliver to Custodian, prior to delivery of any assets to Custodian and thereafter from time to time as changes therein are necessary, written instructions naming one or more designated representatives to give instructions in the name and on behalf of each Fund, which instructions may be received and accepted by Custodian as conclusive evidence of the authority of any designated representative to act for the Fund and may be considered to be in full force and effect (and Custodian will be fully protected in acting in reliance thereon) until receipt by Custodian of notice to the contrary. Unless such written instructions delegating authority to any person to give instructions specifically limit such authority to specific matters or require that the approval of anyone else will first have been obtained, Custodian will be under no obligation to inquire into the right of such person, acting alone, to give any instructions whatsoever which Custodian may receive from such person. If any Fund fails to provide Custodian any such instructions naming designated representatives, any instructions received by Custodian from a person reasonably believed to be an appropriate representative of such Fund shall constitute valid and proper instructions hereunder. 19 B. No later than the next business day immediately following each oral instruction, the applicable Fund will send Custodian written confirmation of such oral instruction. At Custodian's sole discretion, Custodian may record on tape, or otherwise, any oral instruction whether given in person or via telephone, each such recording identifying the parties, the date and the time of the beginning and ending of such oral instruction. C. If Custodian shall provide any Fund direct access to any computerized recordkeeping and reporting system used hereunder or if Custodian and any Fund shall agree to utilize any electronic system of communication, the Fund shall be fully responsible for any and all consequences of the use or misuse of the terminal device, passwords, access instructions and other means of access to such system(s) which are utilized by, assigned to or otherwise made available to the Fund. Each such Fund agrees to implement and enforce appropriate security policies and procedures to prevent unauthorized or improper access to or use of such system(s). Custodian shall be fully protected in acting hereunder upon any instructions, communications, data or other information received by Custodian by such means as fully and to the same effect as if delivered to Custodian by written instrument signed by the requisite authorized representative(s) of the Fund. Each Fund shall indemnify and hold Custodian harmless from and against any and all losses, damages, costs, charges, counsel fees, payments, expenses and liability which may be suffered or incurred by Custodian as a result of the use or misuse, whether authorized or unauthorized, of any such system(s) by the Fund or by any person who acquires access to such system(s) through the terminal device, passwords, access instructions or other means of access to such system(s) which are utilized by, assigned to or otherwise made available to the Fund, except to the extent attributable to any negligence or willful misconduct by Custodian. 5. LIMITATION OF LIABILITY OF CUSTODIAN. A. Custodian shall at all times use reasonable care and due diligence and act in good faith in performing its duties under this Agreement. Custodian shall indemnify and 20 hold each Fund harmless from and against any and all losses, damages, costs, charges, counsel fees, payments, expenses and liability which may be asserted against the Fund, incurred by the Fund or for which the Fund may be held to be liable, arising out of or attributable to: 1. All actions taken by Custodian pursuant to this Agreement which relate to such Fund, or any instructions provided to Custodian by or on behalf of such Fund hereunder, provided that Custodian has failed to act in good faith and with due diligence and reasonable care; and 2. Custodian's refusal or failure to comply with the terms of this Agreement (including without limitation Custodian's failure to pay or reimburse the Fund under this indemnification provision) or the failure of any representation or warranty of Custodian hereunder to be and remain true and correct in all respects at all times. Custodian shall not be responsible for, and each Fund shall indemnify and hold Custodian harmless from and against, any and all losses, damages, costs, charges, counsel fees, payments, expenses and liability which may be asserted against Custodian, incurred by Custodian or for which Custodian may be held to be liable, arising out of or attributable to: 1. All actions taken by Custodian pursuant to this Agreement which relate to such Fund, or any instructions provided to Custodian by or on behalf of such Fund hereunder, provided that Custodian has acted in good faith and with due diligence and reasonable care; and 2. Such Fund's refusal or failure to comply with the terms of this Agreement (including without limitation the Fund's failure to pay or reimburse Custodian under this indemnification provision), the Fund's negligence or willful misconduct, or the failure of any representation or warranty of the Fund hereunder to be and remain true and correct in all respects at all times. 21 B. Custodian may request and obtain at the expense of the applicable Fund the advice and opinion of counsel for the Fund or of its own counsel with respect to questions or matters of law, and it shall be without liability to the Fund for any action taken or omitted by it in good faith, in conformity with such advice or opinion. If Custodian reasonably believes that it could not prudently act according to the instructions of a Fund or the Fund's accountants or counsel, it may in its discretion, with notice to the Fund, not act according to such instructions. C. Custodian may rely upon the advice and statements of any Fund, such Fund's accountants and officers or other authorized individuals, and other persons believed by it in good faith to be expert in matters upon which they are consulted, and Custodian shall not be liable for any actions taken, in good faith, upon such advice and statements. D. If any Fund requests Custodian in any capacity to take any action which involves the payment of money by Custodian, or which might make it or its nominee liable for payment of monies or in any other way, Custodian shall be indemnified and held harmless by the Fund against any liability on account of such action; provided, however, that nothing herein shall obligate Custodian to take any such action except in its sole discretion. E. Custodian shall be protected in acting as custodian hereunder upon any instructions, advice, notice, request, consent, certificate or other instrument or paper appearing to it to be genuine and to have been properly executed. Custodian shall be entitled to receive upon request as conclusive proof of any fact or matter required to be ascertained from a Fund hereunder a certificate signed by an officer or designated representative of the Fund. Each Fund shall also provide Custodian instructions with respect to any matter concerning this Agreement requested by Custodian. F. Custodian shall be under no duty or obligation to inquire into, and shall not be liable for: 22 1. The validity of the issue of any securities purchased by or for any Fund, the legality of the purchase of any securities or foreign currency positions or evidence of ownership required by any Fund to be received by Custodian, or the propriety of the decision to purchase or amount paid therefor; 2. The legality of the sale of any securities or foreign currency positions by or for any Fund, or the propriety of the amount for which the same are sold; 3. The legality of the issue or sale of any Fund Shares, or the sufficiency of the amount to be received therefor; 4. The legality of the repurchase or redemption of any Fund Shares, or the propriety of the amount to be paid therefor; or 5. The legality of the declaration of any dividend by any Fund, or the legality of the issue of any Fund Shares in payment of any stock dividend. G. Custodian shall not be liable for, or considered to be Custodian of, any money represented by any check, draft, wire transfer, clearinghouse funds, uncollected funds, or instrument for the payment of money to be received by it on behalf of any Fund until Custodian actually receives such money; provided, however, that it shall advise the affected Fund promptly if it fails to receive any such money in the ordinary course of business and shall cooperate with the Fund toward the end that such money shall be received. H. Except as provided in Section 3.S., Custodian shall not be responsible for loss occasioned by the acts, neglects, defaults or insolvency of any broker, bank, trust company, or any other person with whom Custodian may deal. I. Custodian shall not be responsible or liable for the failure or delay in performance of its obligations under this Agreement, or those of any entity for which it is responsible hereunder, arising out of or caused, directly or indirectly, by circumstances beyond the affected entity's reasonable control, including, without limitation: any interruption, loss or malfunction of any utility, transportation, 23 computer (hardware or software) or communication service; inability to obtain labor, material, equipment or transportation, or a delay in mails; governmental or exchange action, statute, ordinance, rulings, regulations or direction; war, strike, riot, emergency, civil disturbance, terrorism, vandalism, explosions, labor disputes, freezes, floods, fires, tornados, acts of God or public enemy, revolutions, or insurrection. J. EXCEPT FOR VIOLATIONS OF SECTION 9, IN NO EVENT AND UNDER NO CIRCUMSTANCES SHALL EITHER PARTY TO THIS AGREEMENT BE LIABLE TO ANYONE, INCLUDING, WITHOUT LIMITATION TO THE OTHER PARTY, FOR CONSEQUENTIAL, SPECIAL OR PUNITIVE DAMAGES FOR ANY ACT OR FAILURE TO ACT UNDER ANY PROVISION OF THIS AGREEMENT EVEN IF ADVISED OF THIS POSSIBILITY THEREOF. 6. COMPENSATION. In consideration for its services hereunder as Custodian and investment accounting and recordkeeping agent, each Fund will pay to Custodian such compensation as shall be set forth in a separate fee schedule to be agreed to by each Fund and Custodian from time to time. Custodian shall also be entitled to receive, and each Fund agrees to pay to Custodian, on demand, reimbursement for Custodian's cash disbursements and reasonable out-of-pocket costs and expenses, including attorney's fees, incurred by Custodian in connection with the performance of services hereunder for such Fund. Custodian may charge such compensation against monies held by it for the account of such Fund. Custodian will also be entitled to charge against any monies held by it for the account of the applicable Fund the amount of any loss, damage, liability, advance, overdraft or expense for which it shall be entitled to reimbursement from such Fund, including but not limited to fees and expenses due to Custodian for other services provided to the Fund by Custodian. Custodian will be entitled to reimbursement by the Funds for the losses, damages, liabilities, advances, overdrafts and expenses of subcustodians only to the extent that (i) Custodian would have been entitled to reimbursement hereunder if it 24 had incurred the same itself directly, and (ii) Custodian is obligated to reimburse the subcustodian therefor. 7. TERMINATION. Each Fund and IFTC may terminate this agreement by notice in writing, delivered or mailed, postage prepaid, to the other party and received not less than ninety (90) days prior to the date upon which such termination will take effect. Upon termination of this Agreement, each Fund will pay Custodian its fees and compensation due hereunder and its reimbursable disbursements, costs and expenses paid or incurred to such date and the Fund shall designate a successor custodian by notice in writing to Custodian by the termination date. In the event no written order designating a successor custodian has been delivered to Custodian on or before the date when such termination becomes effective, then Custodian may, at its option, deliver the securities, funds and properties of the Fund to a bank or trust company at the selection of Custodian, and meeting the qualifications for custodian set forth in the 1940 Act and having not less that Two Million Dollars ($2,000,000) aggregate capital, surplus and undivided profits, as shown by its last published report, or apply to a court of competent jurisdiction for the appointment of a successor custodian or other proper relief, or take any other lawful action under the circumstances; provided, however, that the Fund shall reimburse Custodian for its costs and expenses, including reasonable attorney's fees, incurred in connection therewith. Custodian will, upon termination of this Agreement and payment of all sums due to Custodian from the Fund hereunder or otherwise, deliver to the successor custodian so specified or appointed, or as specified by the court, at Custodian's office, all securities then held by Custodian hereunder, duly endorsed and in form for transfer, and all funds and other properties of the Fund deposited with or held by Custodian hereunder, and Custodian will co-operate in effecting changes in book-entries at all Depositories. Upon delivery to a successor custodian or as specified by the court, Custodian will have no further obligations or liabilities under this Agreement. Thereafter such successor will be the successor custodian under this Agreement and will be entitled to reasonable compensation for its services. In the event that securities, funds and other properties remain in the possession of the Custodian after the date of termination hereof owing to 25 failure of the Fund to appoint a successor custodian, the Custodian shall be entitled to compensation as provided in the then-current fee schedule hereunder for its services during such period as the Custodian retains possession of such securities, funds and other properties, and the provisions of this Agreement relating to the duties and obligations of the Custodian shall remain in full force and effect. 8. NOTICES. Notices, requests, instructions and other writings addressed to the Funds, or any of them, at Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota 55402-3804, or at such other address as the Funds may have designated to Custodian in writing, will be deemed to have been properly given to the Funds hereunder; and notices, requests, instructions and other writings addressed to Custodian at its offices at 127 West 10th Street, Kansas City, Missouri 64105, Attention: Custody Department, or to such other address as it may have designated to the Funds in writing, will be deemed to have been properly given to Custodian hereunder. 9. CONFIDENTIALITY. A. Each Fund shall preserve the confidentiality of the computerized investment portfolio recordkeeping and accounting system used by Custodian (the "Portfolio Accounting System") and the tapes, books, reference manuals, instructions, records, programs, documentation and information of, and other materials relevant to, the Portfolio Accounting System and the business of Custodian ("Confidential Information"). Each Fund agrees that it shall not voluntarily disclose any such Confidential Information to any other person other than its own employees who reasonably have a need to know such information pursuant to this Agreement. Each Fund shall return all such Confidential Information to Custodian upon termination or expiration of this Agreement. B. The Funds have been informed that the Portfolio Accounting System is licensed for use by Custodian from DST Systems, Inc. ("Licensor"), and each Fund acknowledges that Custodian and Licensor have proprietary rights in and to the Portfolio Accounting System and all other Custodian or Licensor programs, code, techniques, know-how, data bases, supporting documentation, data formats, and 26 procedures, including without limitation any changes or modifications made at the request or expense or both of any Fund (collectively, the "Protected Information"). Each Fund acknowledges that the Protected Information constitutes confidential material and trade secrets of Custodian and Licensor. Each Fund agrees to preserve the confidentiality of the Protected Information, and each Fund hereby acknowledges that any unauthorized use, misuse, disclosure or taking of Protected Information, residing or existing internal or external to a computer, computer system, or computer network, or the knowing and unauthorized accessing or causing to be accessed of any computer, computer system, or computer network, may be subject to civil liabilities and criminal penalties under applicable law. Each Fund shall so inform employees and agents who have access to the Protected Information or to any computer equipment capable of accessing the same. Licensor is intended to be and shall be a third party beneficiary of each Fund's obligations and undertakings contained in this paragraph. C. Custodian agrees that, except as otherwise required by law, Custodian will keep confidential all records of and information in its possession relating to the Funds and will not disclose the same to any person except at the request or with the consent of each affected Fund. 10. MULTIPLE FUNDS AND PORTFOLIOS. A. Each Fund and Portfolio shall be regarded for all purposes hereunder as a separate party apart from each other. Unless the context otherwise requires, with respect to every transaction covered by this Agreement, every reference herein to a Fund shall be deemed to relate solely to the particular Fund and, if applicable, the particular Portfolio to which such transaction relates. Under no circumstances shall the rights, obligations or remedies with respect to a particular Fund or Portfolio constitute a right, obligation or remedy applicable to any other. The use of this single document to memorialize the separate agreement of each Fund is understood to be for clerical convenience only and shall not constitute any basis for joining the Funds or any Portfolios for any reason. 27 B. Additional Funds may be added to this Agreement by the execution of a written agreement by each such additional Fund and Custodian, agreeing to be bound by the terms, conditions, and provisions hereof. Rates and charges for each additional Fund shall be as agreed upon by Custodian and such Fund in writing. C. Additional Portfolios of any Fund may be added to this Agreement, provided that Custodian consents to such addition. Rates or charges for each additional Portfolio shall be as agreed upon by Custodian and the applicable Fund in writing. 11. MISCELLANEOUS. A. This Agreement shall be construed according to, and the rights and liabilities of the parties hereto shall be governed by, the laws of the State of Missouri, without reference to the choice of laws principles thereof. B. All terms and provisions of this Agreement shall be binding upon, inure to the benefit of and be enforceable by the parties hereto and their respective successors and permitted assigns. C. The representations and warranties, the indemnifications extended hereunder, and the provisions of Section 9. hereof are intended to and shall continue after and survive the expiration, termination or cancellation of this Agreement. D. No provisions of the Agreement may be amended or modified in any manner except by a written agreement properly authorized and executed by each party hereto. E. The failure of any party to insist upon the performance of any terms or conditions of this Agreement or to enforce any rights resulting from any breach of any of the terms or conditions of this Agreement, including the payment of damages, shall not be construed as a continuing or permanent waiver of any such terms, conditions, rights or privileges, but the same shall continue and remain in full force and effect as if no such forbearance or waiver had occurred. No waiver, release or discharge of any party's rights hereunder shall be effective unless contained in a written instrument signed by the party sought to be charged. 28 F. The captions in the Agreement are included for convenience of reference only, and in no way define or limit any of the provisions hereof or otherwise affect their construction or effect. G. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. H. If any provision of this Agreement shall be determined to be invalid or unenforceable, the remaining provisions of this Agreement shall not be affected thereby, and every provision of this Agreement shall remain in full force and effect and shall remain enforceable to the fullest extent permitted by applicable law. I. This Agreement may not be assigned by any party hereto without the prior written consent of the other party; provided, however, that the foregoing shall not apply to the planned merger of Custodian with State Street Bank and Trust Company of Missouri, N.A., which shall continue the business of Custodian under the name Investors Fiduciary Trust Company, n.a., and which shall succeed to Custodian's rights, duties and obligations hereunder without further act of the parties. J. Neither the execution nor performance of this Agreement shall be deemed to create a partnership or joint venture by and between Custodian and any Fund. K. All prior contracts between Custodian and each Fund for custody and investment accounting services are hereby cancelled and superseded effective as of the date hereof, except that all rights, duties and liabilities which may have arisen under such contracts prior to the effectiveness hereof shall continue and survive. Otherwise, this Agreement does not in any way affect any other agreements entered into among any parties hereto and any actions taken or omitted by any party hereunder shall not affect any rights or obligations of any other party hereunder. 29 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective duly authorized officers. INVESTORS FIDUCIARY TRUST COMPANY By: /s/ Allen N. Strain ----------------------------------------------- Title: EVP ------------------------------------------- EACH FUND LISTED ON SCHEDULE I HERETO By:/s/ Robert H. Nelson ----------------------------------------------- Title: SVP ------------------------------------------- 30 EXHIBIT A INVESTORS FIDUCIARY TRUST COMPANY AVAILABILITY SCHEDULE BY TRANSACTION TYPE
- - - - - - ------------------------------------------------------------------------------------------------------------------- - - - - - - ------------------------------------------------------------------------------------------------------------------- TRANSACTION DTC PHYSICAL FED - - - - - - ------------------------------------------------------------------------------------------------------------------- TYPE CREDIT DATE FUNDS TYPE CREDIT DATE FUNDS TYPE CREDIT DATE FUNDS TYPE - - - - - - ---- ----------- ---------- ----------- ---------- ----------- ---------- - - - - - - ------------------------------------------------------------------------------------------------------------------- - - - - - - ------------------------------------------------------------------------------------------------------------------- Calls Puts As Received C or F* As Received C or F* - - - - - - ------------------------------------------------------------------------------------------------------------------- Maturities As Received C or F* Mat. Date C or F* Mat. Date F - - - - - - ------------------------------------------------------------------------------------------------------------------- Tender Reorgs. As Received C As Received C N/A - - - - - - ------------------------------------------------------------------------------------------------------------------- Dividends Paydate C Paydate C N/A - - - - - - ------------------------------------------------------------------------------------------------------------------- Floating Rate Int. Paydate C Paydate C N/A - - - - - - ------------------------------------------------------------------------------------------------------------------- Floating Rate Int. N/A As Rate Received C N/A (No Rate) - - - - - - ------------------------------------------------------------------------------------------------------------------- Mtg. Backed P&I Paydate C Paydate + 1 C Paydate F Bus. Day - - - - - - ------------------------------------------------------------------------------------------------------------------- Fixed Rate Int. Paydate C Paydate C Paydate F - - - - - - ------------------------------------------------------------------------------------------------------------------- Euroclear N/A C Paydate C - - - - - - ------------------------------------------------------------------------------------------------------------------- - - - - - - -------------------------------------------------------------------------------------------------------------------
LEGEND C = Clearinghouse Funds F = Fed Funds N/A = Not Applicable * Availability based on how received. 31 SCHEDULE I INITIAL LIST OF FUNDS Piper Institutional Funds Inc. Institutional Government Adjustable Portfolio Institutional Money Market Fund Piper Funds Inc. - II Adjustable Rate Mortgage Securities Fund Piper Global Funds Inc. Pacific-European Growth Fund* Piper Funds Inc. National Tax Exempt Fund Emerging Growth Fund Growth & Income Fund U.S. Government Money Market Fund Tax-Exempt Money Market Fund Institutional Government Income Portfolio Value Fund Equity Strategy Fund Balanced Fund Government Income Fund Money Market Fund Minnesota Tax-Exempt Fund Short-Intermediate Bond Fund American Government Income Fund Inc. American Government Income Portfolio Inc. American Opportunity Income Fund Inc. American Government Term Trust Inc. American Municipal Term Trust Inc. American Municipal Term Trust Inc. II American Municipal Term Trust Inc. III Minnesota Municipal Term Trust Inc. Minnesota Municipal Term Trust Inc. II American Strategic Income Portfolio* American Strategic Income Portfolio II* American Strategic Income Portfolio III* American Municipal Income Portfolio Minnesota Municipal Income Portfolio Inc. American Select Portfolio* The Americas Income Trust* Highlander Income Fund Inc. *Investment accounting services only; no custody services 32 EX-99.11 3 EXHIBIT 99.11 LEGALITY OPINION EXHIBIT 11 DORSEY & WHITNEY LLP Pillsbury Center South 220 South Sixth Street Minneapolis, Minnesota 55402-1498 April 1, 1996 Piper Global Funds Inc. 222 South Ninth Street Minneapolis, Minnesota 55402-3804 Re: Pacific-European Growth Fund, a Series of Piper Global Funds Inc. Shares to be Issued Pursuant to Agreement and Plan of Reorganization Ladies and Gentlemen: We have acted as counsel to Piper Global Funds Inc., a Minnesota corporation ("Piper Global"), in connection with its authorization and proposed issuance of its Series A common shares, par value $.01 per share (the "Shares"). The Shares are to be issued pursuant to an Agreement and Plan of Reorganization (the "Agreement"), by and between Piper Global, on behalf of its Pacific-European Growth Fund series, and Hercules Funds Inc., a Minnesota corporation, on behalf of its Hercules European Value Fund series, 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 Piper Global's Registration Statement on Form N-14 filed with the Securities and Exchange Commission (the "Registration Statement"). In rendering the opinions hereinafter expressed, we have reviewed the corporate proceedings taken by Piper Global in connection with the authorization and issuance of the Shares, and we have reviewed such questions of law and examined copies of such corporate records of Piper Global, certificates of public officials and of responsible officers of Piper Global, and other documents as we have deemed necessary as a basis for such opinions. As to the various matters of fact material to such opinions, 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 Piper Global. 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 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: 1. Piper Global is validly existing as a corporation in good standing under the laws of the State of Minnesota. 2. The Shares, when issued and delivered by Piper Global pursuant to, and upon satisfaction of the conditions contained in, the Agreement, will be duly authorized, validly issued, fully paid and non-assessable. In rendering the foregoing opinions (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 Piper Global's final Prospectus/Proxy Statement relating to the Shares included in the Registration Statement. Very truly yours, KLP /s/ Dorsey & Whitney LLP EX-99.12 4 EXHIBIT 99.12 TAX OPINION April 1, 1996 Piper Global Funds Inc. Pacific-European Growth Fund Piper Jaffray Tower 222 South Ninth Street Minneapolis, Minnesota 55402-3804 Hercules Funds Inc. Hercules European Value Fund Piper Jaffray Tower 222 South Ninth Street Minneapolis, Minnesota 55402-3804 Gentlemen: You have requested our opinion as to the Federal income tax consequences of the transaction (the "Reorganization") described below pursuant to which (i) Pacific-European Growth Fund ("Pacific-European"), a series of Piper Global Funds Inc., will acquire all of the assets of Hercules European Value Fund ("European Value"), a series of Hercules Funds Inc., in exchange for shares of Pacific-European (the "Pacific-European Shares"), and the assumption by Pacific-European of certain liabilities of European Value (the "Liabilities"), (ii) European Value will be liquidated, and (iii) the Pacific- European Shares will be distributed to the holders ("European Value Shareholders") of shares in European Value ("European Value Shares") pursuant to such liquidation. We have examined and are familiar with such documents, records and other instruments as we have deemed appropriate for purposes of this opinion letter, including the Registration Statement being filed with the Securities and Exchange Commission under the Securities Act of 1933 on Form N-14, relating to the Pacific-European Shares (the "Registration Statement") which includes, as a part thereof, the proxy statement of European Value (the "European Value Proxy") which will be used to solicit proxies of European Value Shareholders in connection with the Special Meeting of European Value Shareholders and the proposed Agreement and April 1, 1996 Page 2 Plan of Reorganization by and between European Value and Pacific-European (the "Plan"). In rendering this opinion, we have assumed that such documents as yet unexecuted will, when executed, conform to the proposed forms of such documents that we have examined. We have further assumed that the Reorganization will be carried out pursuant to the terms of the Plan, that factual statements and information contained in the Registration Statement, the European Value Proxy and other documents, records, and instruments supplied to us are correct and that there will be no material change with respect to such facts or information prior to the time of the Reorganization. In rendering our opinion we have also relied on the representations and facts discussed below which have been provided to us by Piper Capital Management Incorporated ("Piper Capital"), Pacific- European and European Value, and we have assumed that such representations and facts will remain correct at the time of the Reorganization. FACTS Pacific-European is an open-end diversified management investment company engaged in the continuous offering of its shares to the public. Since its inception, Pacific-European has conducted its affairs so as to qualify, and has elected to be taxed, as a regulated investment company under Section 851 of the Internal Revenue Code of 1986, as amended (the "Code"). European Value is an open-end non-diversified management investment company engaged in the continuous offering of its shares to the public. Since its inception, European Value has conducted its affairs so as to qualify, and has elected to be taxed, as a regulated investment company under Section 851 of the Code. The Board of Directors of Pacific-European and of European Value have each determined, for valid business April 1, 1996 Page 3 reasons, that it is advisable to combine the assets of European Value and Pacific-European into one fund. In view of the above, the Board of Directors of European Value adopted the Plan, subject to, among other things, approval by European Value Shareholders. Pursuant to the Plan, European Value will transfer all of its assets to Pacific-European in exchange for the Pacific-European Shares (including fractional Pacific-European Shares) and the assumption by Pacific-European of the Liabilities. Immediately thereafter, European Value will distribute the Pacific-European Shares to European Value Shareholders in exchange for and in cancellation of their European Value Shares and in complete liquidation of European Value. Each of the following representations, among other representations, has been made to us in connection with the Reorganization by Piper Capital, European Value and Pacific-European. (1) To the best of the knowledge of the management of Piper Capital, European Value, Pacific-European, and their affiliates (collectively, "Management"), there is no plan or intention on the part of European Value Shareholders, to redeem, sell, exchange or otherwise dispose of a number of Pacific-European Shares that would reduce European Value Shareholders' ownership of Pacific-European Shares to a number of Pacific-European Shares having a value, as of the date of the Reorganization, of less than 50 percent of the value of all of the formerly outstanding European Value Shares as of such date; (2) Pacific-European has no plan or intention to reacquire any of the Pacific-European Shares to be issued pursuant to the Reorganization except to the extent necessary to comply with its legal obligation to redeem its own shares; April 1, 1996 Page 4 (3) The Liabilities to be assumed by or transferred to Pacific- European were incurred by European Value in the ordinary course of business and are associated with the assets being transferred to Pacific-European; (4) The amount of the Liabilities will not exceed the aggregate adjusted basis of European Value for its assets transferred to Pacific-European; (5) Pacific-European has no plan or intention to sell or otherwise dispose of more than fifty percent of the assets of European Value acquired in the Reorganization, except for dispositions made in the ordinary course of business; (6) There is no indebtedness between European Value and Pacific- European that was issued, acquired or will be settled at a discount; (7) European Value has been a regulated investment company within the meaning of Section 851 of the Code since the date of its organization through the end of its last complete taxable year and will qualify as a regulated investment company for its taxable year ending on the date of the Reorganization; (8) Pacific-European has been a regulated investment company within the meaning of Section 851 of the Code since the date of its organization through the date hereof and will qualify as a regulated investment company for its taxable year ending February 28, 1997; and (9) European Value will have no accumulated earnings and profits as of the close of its taxable year ending on the date of the Reorganization. April 1, 1996 Page 5 OPINION Based on the Code, Treasury Regulations issued thereunder, Internal Revenue Service Rulings and the relevant case law, as of the date hereof, and on the facts, representations and assumptions set forth above, and the documents, records and other instruments we have reviewed, it is our opinion that the Federal income tax consequences of the Reorganization to Pacific-European, European Value, and the European Value Shareholders will be as follows: (1) The transfer of substantially all of European Value's assets in exchange for Pacific-European Shares and the assumption by Pacific-European of the Liabilities, followed by the distribution by European Value of the Pacific- European Shares to the European Value Shareholders in exchange for their European Value Shares, will constitute a "reorganization" within the meaning of Section 368(a)(1) of the Code, and European Value and Pacific-European will each be a "party to a reorganization" within the meaning of Section 368(b) of the Code; (2) No gain or loss will be recognized by Pacific-European upon the receipt of the assets of European Value solely in exchange for Pacific-European Shares and the assumption of the Liabilities by Pacific-European; (3) No gain or loss will be recognized by European Value upon the transfer of the assets of European Value to Pacific-European, in exchange for the Pacific-European Shares and the assumption of the Liabilities by Pacific- European, or upon the distribution of the Pacific-European Shares to European Value Shareholders in exchange for their European Value Shares as provided in the Plan; (4) No gain or loss will be recognized by European Value Shareholders upon the exchange of their European Value Shares for the Pacific-European Shares; April 1, 1996 Page 6 (5) The aggregate tax basis for the Pacific-European Shares received by each European Value Shareholder pursuant to the Reorganization will be the same as the aggregate tax basis of the European Value Shares held by each such European Value Shareholder immediately prior to the Reorganization; (6) The holding period of the Pacific-European Shares to be received by each European Value Shareholder will include the period during which the European Value Shares surrendered in exchange therefor were held (provided such European Value Shares were held as capital assets on the date of the Reorganization); (7) The tax basis of the assets of European Value acquired by Pacific-European will be the same as the tax basis of such assets to European Value immediately prior to the Reorganization; and (8) The holding period of the assets of European Value in the hands of Pacific-European will include the period during which those assets were held by European Value. We are not expressing an opinion as to any aspect of the Reorganization other than those opinions expressly stated above. As noted above, this opinion is based upon our analysis of the Code, Treasury Regulations issued thereunder, Internal Revenue Service Rulings and case law which we deem relevant as of the date hereof. No assurances can be given that there will not be a change in the existing law or that the Internal Revenue Service will not alter its present views, either prospectively or retroactively, or adopt new views with regard to any of the matters upon which we are rendering this opinion, nor can any assurances be given that the Internal Revenue Service will not audit or question the treatment accorded to the Reorganization on the April 1, 1996 Page 7 Federal income tax returns of Pacific-European, European Value, or the European Value Shareholders. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the use of our name and any reference to our firm in the Registration Statement and the European Value Proxy constituting a part thereof. Very truly yours, /s/ Gordon Altman Butowsky Weitzen Shalov & Wein EX-99.14 5 EXHIBIT 99.14 ACCOUNTANT'S CONSENT [LETTERHEAD-KPMG PEAT MARWICK LLP] INDEPENDENT AUDITORS' CONSENT The Board of Directors Piper Global Funds Inc. and Hercules Funds Inc.: We consent to the incorporation by reference in the registration statement on Form N-14 (the "Registration Statement") of Pacific-European Growth Fund (a series of Piper Global Funds Inc.) of (a) our report, dated March 14, 1996, relating to the February 29, 1996 financial statements and financial highlights of Pacific-European Growth Fund, and (b) our report, dated August 18, 1995, relating to the June 30, 1995 financial statements and financial highlights of Hercules Funds Inc. We also consent to the reference to our Firm under the headings (a) "Financial Statements and Experts" in the Registration Statement, (b) "Financial Highlights" in the prospectus of Pacific-European Growth Fund dated April 28, 1995, which is incorporated by reference in the Registration Statement, (c) "Financial Statements" in the statement of additional information of Pacific-European Growth Fund dated, April 28, 1995, which is incorporated by reference in the Registration Statement, (d) "Financial Highlights" in the prospectus of Hercules Funds Inc. dated August 29, 1995, which is incorporated by reference in the Registration Statement, and (e) "Auditors" in the statement of additional information of Hercules Funds Inc. dated August 29, 1995, which is incorporated by reference in the Registration Statement. KPMG Peat Marwick LLP Minneapolis, Minnesota April 2, 1996 EX-99.17(A) 6 EXHIBIT 99.17(A) 24F-2 NOTICE OF ACQUIRING FUND SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Rule 24f-2 Notice for Piper Global Funds Inc. 1. This notice is filed for the fiscal period ended February 28, 1995, for Piper Global Funds Inc. 2. No securities of the same class or series have been registered under the Securities Act of 1933 other than pursuant to Rule 24f-2 of the Investment Company Act of 1940 (the "1940 Act") which remained unsold at the beginning of such period. 3. No securities have been registered during such period other than pursuant to Rule 24f-2 of the 1940 Act. 4. 4,222,396 shares were sold during such period, at an aggregate price of $61,107,260.* 5. All 4,222,396 shares sold during such period were sold in reliance upon registration pursuant to Rule 24f-2 of the 1940 Act. * Includes 774,367 shares sold by reinvestment of dividends, at an aggregate purchase price of $10,384,329. 2,819,369 shares were redeemed during such period at an aggregate price of $41,129,910. The aggregate sales price of shares sold during the period, $61,107,260, reduced by the aggregate price at which shares were redeemed during such period, ($41,129,910), equals $19,977,350. This amount multiplied by one twenty-ninth of one percent equals $6,888.79, the registration fee which is enclosed with this notice. April 18, 1995 PIPER GLOBAL FUNDS INC. /s/ Robert H. Nelson Robert H. Nelson Vice President EX-99.17(B) 7 EXHIBIT 99.17(B) POWER OF ATTORNEY POWER OF ATTORNEY The undersigned members of the Board of Directors of Piper Global Funds Inc. (the "Fund") hereby each appoint Stuart M. Strauss as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments (including post-effective amendments) to the Registration Statement on Form N-14 of the Fund, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitutes, may lawfully do or cause to be done by virtue hereof. Signature Title Date --------- ----- ---- /s/ David T. Bennett Director March 29, 1996 - - - - - - ----------------------------- David T. Bennett /s/ Karol D. Emmerich Director March 29, 1996 - - - - - - ----------------------------- Karol D. Emmerich /s/ Luella G. Goldberg Director March 29, 1996 - - - - - - ----------------------------- Luella G. Goldberg /s/ George Latimer Director March 29, 1996 - - - - - - ----------------------------- George Latimer /s/ Jaye F. Dyer Director March 29, 1996 - - - - - - ----------------------------- Jaye F. Dyer POWER OF ATTORNEY The undersigned members of the Board of Directors of Piper Global Funds Inc. (the "Fund") hereby each appoint William H. Ellis as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments (including post-effective amendments) to the Registration Statement on Form N-14 of the Fund, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitutes, may lawfully do or cause to be done by virtue hereof. Signature Title Date --------- ----- ---- /s/ Michael W. Balfour Director March 29, 1996 - - - - - - ----------------------------- Michael W. Balfour /s/ Iain A. Watt Director March 29, 1996 - - - - - - ----------------------------- Iain A. Watt EX-99.17(C) 8 EXHIBIT 99.17(C) PROXY CARD HERCULES FUNDS INC. HERCULES EUROPEAN VALUE FUND PROXY FOR SPECIAL MEETING OF SHAREHOLDERS TO BE HELD , 1996 The undersigned shareholder of Hercules European Value Fund ("European Value Fund"), a series of Hercules Funds Inc. (the "Company"), does hereby appoint WILLIAM H. ELLIS, ROBERT H. NELSON and SUSAN SHARP MILEY and each of them, as attorneys-in-fact and proxies of the undersigned, each with the full power of substitution, to attend the Special Meeting of Shareholders of European Value Fund to be held on , 1996, at Piper Jaffray Tower, 222 South Ninth Street, Third Floor, Minneapolis, Minnesota at a.m./p.m., Minnesota time, and at all adjournments thereof and to vote the shares held in the name of the undersigned on the record date for said meeting for the Proposal specified on the reverse side hereof. Said attorneys-in-fact shall vote in accordance with their best judgment as to any other matter. THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL LISTED ON THE REVERSE SIDE HEREOF. THE SHARES REPRESENTED HEREBY WILL BE VOTED AS INDICATED ON THE REVERSE SIDE OR FOR IF NO CHOICE IS INDICATED. Please mark your proxy, date and sign it on the reverse side and return it promptly in the accompanying envelope, which requires no postage if mailed in the United States. PLEASE MARK BOXES / / OR /X/ IN BLUE OR BLACK INK. The Proposal: Approval of the Agreement and Plan of Reorganization, dated as of , 1996 (the "Plan"), by and between the Company, on behalf of European Value Fund, and Piper Global Funds Inc., on behalf of Pacific-European Growth Fund ("Pacific-European Fund"), pursuant to which substantially all of the assets of European Value Fund will be combined with those of Pacific-European Fund and shareholders of European Value Fund will become shareholders of Pacific-European Fund receiving shares of Pacific-European Fund with a value equal to the value of their holdings in European Value 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 / / Dated: __ ________________________, 1996 (Month) (Day) ________________________________________ Signature(s) ________________________________________ Signature(s) Please read both sides of this ballot. NOTE: PLEASE SIGN EXACTLY AS YOUR NAME(S) APPEAR HEREON. When signing as custodian, attorney, executor, administrator, trustee, etc., please give your full title as such. All joint owners should sign this proxy. If the account is registered in the name of a corporation, partnership or other entity, a duly authorized individual must sign on its behalf and give his or her title. EX-99.17(D) 9 EXHIBIT 99.17(D) ADDITIONAL SOLICITATION MATERIAL - - - - - - -------------------------------------------------------------------------------- PIPER FAMILY OF FUNDS - - - - - - -------------------------------------------------------------------------------- [Piper International Funds Logo] PACIFIC-EUROPEAN GROWTH FUND [Pacific-European Growth Fund Wrapper Cover Photo -- beach and sunset] AN INTERNATIONAL FUND - - - - - - -------------------------------------------------------------------------------- FOUR REASONS TO EXPAND YOUR INVESTMENT HORIZONS - - - - - - -------------------------------------------------------------------------------- TODAY, GROWING NUMBERS OF AMERICAN INVESTORS LOOK OVERSEAS TO BROADEN THEIR INVESTMENT HORIZONS - AND FOR GOOD REASON. INTERNATIONAL INVESTING OFFERS IMPORTANT BENEFITS TO U.S. INVESTORS. CONSIDER THESE FOUR COMPELLING REASONS: 1 TODAY NEARLY TWO-THIRDS OF THE WORLD'S INVESTMENT OPPORTUNITIES ARE LOCATED OUTSIDE THE UNITED STATES. The U.S. market isn't shrinking - it's just that foreign markets are growing, altering the United States' role in global finance and trade. WORLD STOCK MARKET CAPITALIZATION [PIE CHARTS] 1970 NON-UNITED STATES 34% UNITED STATES 66% 1995 PACIFIC BASIN 30% CANADA 2% UNITED STATES 42% EUROPE 26% SOURCE: MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI). BASED ON THE WORLD'S 22 DEVELOPED MARKETS AS REPRESENTED BY THE MSCI WORLD INDEX. 2 MANY OF THE PRODUCTS AND SERVICES YOU USE EVERY DAY ARE PRODUCED OR PROVIDED BY COMPANIES THAT ARE INTERNATIONALLY OWNED AND OPERATED. Investing internationally allows you to invest in these global companies and their products. 3 INTERNATIONAL INVESTING CAN ENHANCE RETURNS. The economies of many countries are dramatically expanding - particularly in the Pacific Basin (the area from Japan to Australia) and other developing areas of the world. And while past performance does not guarantee future results, over the past 10 years, many world stock markets have significantly outperformed the U.S. market. In exchange for their greater long-term growth potential, however, foreign markets may experience greater volatility on a yearly basis. Other risks of international investing include adverse currency fluctuations, potential political and economic instability of certain countries, limited liquidity, volatile prices of certain non-U.S. securities and foreign taxation. See your prospectus for more information about these risks. WORLD STOCK MARKETS AVERAGE ANNUAL RETURNS FOR THE 10 YEARS ENDED DECEMBER 29, 1995 [BAR CHART] 23.83% HONG KONG 20.67 BELGIUM 20.21 SINGAPORE 19.43 SWEDEN 19.33 NETHERLANDS 17.91 SPAIN 15.30 FRANCE 15.02 UNITED KINGDOM 14.90 S&P 500 INDEX 13.72 MSCI WORLD INDEX 12.82 JAPAN SOURCE: MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI). THE MSCI WORLD INDEX IS AN UNMANAGED INDEX OF 1,579 COMPANIES LISTED ON THE STOCK EXCHANGES OF THE U.S., CANADA, MEXICO, AUSTRALIA AND THE FAR EAST. THE S&P 500 INDEX IS AN UNMANAGED INDEX OF 500 LARGE-CAP STOCKS GENERALLY CONSIDERED TO BE REPRESENTATIVE OF THE U.S. STOCK MARKET. 4 INTERNATIONAL DIVERSIFICATION CAN REDUCE RISK. By not putting "all your eggs in one basket," you are taking steps to reduce risk. Because stock markets around the world often move in different directions than the U.S. market, adding an international component to your portfolio can reduce your portfolio's overall market risk. - - - - - - -------------------------------------------------------------------------------- PACIFIC-EUROPEAN GROWTH FUND - - - - - - -------------------------------------------------------------------------------- Pacific-European Growth Fund is an open-end mutual fund with an investment objective of long-term capital appreciation. It offers investors convenient access to the attractive long-term growth opportunities provided by companies located predominantly in the markets of the Pacific Basin and Europe (including Eastern Europe). The fund has the added flexibility to invest up to 25% of its total assets in other parts of the world. However, it does not invest in common stocks of U.S. companies. No assurance can be made that the fund's objective will be achieved. Dividends, if any, will be paid annually. PACIFIC-EUROPEAN GROWTH FUND PROVIDES INVESTORS WITH A WORLD OF ATTRACTIVE BENEFITS: - - - - - - - LOW-COST INTERNATIONAL INVESTING Investors can initially purchase shares for as little as $250 with no minimum for subsequent investments. Automatic monthly investment plan participants can purchase shares for as little as $100 per month. - - - - - - - EXCHANGE PRIVILEGES Shareholders can revise their investment plan without incurring a sales charge by exchanging their shares for shares of other Piper funds with the same fee structure. - - - - - - - CONVENIENT SERVICES Shareholders enjoy a range of convenient services such as automatic monthly investing, reinvestment and withdrawal plans, and comprehensive record keeping and reporting. - - - - - - - RETIREMENT PLANS AND IRA INVESTING Investors can build their retirement assets faster by investing them tax-deferred. LIFETIME RESULTS OF A $10,000 INVESTMENT [GRAPH] DATE PGPEX EAFE 4/90 9635 10000 9793 11049 7885 8714 12/90 8347 9641 9269 10366 9072 9808 8902 10658 12/91 9286 10845 9205 9567 9766 9778 9187 9935 12/92 9205 9560 10055 10715 10742 11802 11610 12593 12/93 13840 12710 13168 13163 13640 13844 14149 13867 12/94 13427 13735 13172 14001 13035 14114 13633 14714 12/95 14234 15321 2/96 14549 15443 ALL RETURNS INCLUDE REINVESTED DISTRIBUTIONS. If you had invested $10,000 in the fund in April 1990 and held it through February 29, 1996, reinvesting all distributions, your investment would have grown to $14,549. Pacific-European Growth Fund results reflect the fund's maximum 4% sales charge, as if it was applied since the fund's inception. This fund operated as a closed-end fund until August 31, 1992. In comparing the fund to the EAFE Index, keep in mind that the fund's performance reflects the sales charge, while no such charges are reflected in the index. AVERAGE ANNUAL TOTAL RETURNS (THROUGH 2/29/96, INCLUDING 4% SALES CHARGE) One Year................................12.03% Five Year................................8.90% Since Inception (4/27/90)................6.62% DURING THESE PERIODS, THE FUND'S ADVISER WAIVED OR PAID CERTAIN FUND EXPENSES AND/OR THE FUND'S DISTRIBUTOR VOLUNTARILY LIMITED 12b-1 FEES FOR THE FUND. OTHERWISE, THE AVERAGE ANNUAL TOTAL RETURNS WOULD HAVE BEEN 11.79% FOR ONE YEAR, 8.71% FOR FIVE YEARS AND 6.46% SINCE INCEPTION. ALL RETURNS INCLUDE REINVESTED DISTRIBUTIONS AND THE 4% SALES CHARGE. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. THE RETURN AND PRINCIPAL VALUE OF YOUR INVESTMENT WILL FLUCTUATE SO THAT SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THIS MAY BE USED AS SALES LITERATURE WHEN PRECEDED OR ACCOMPANIED BY A CURRENT PACIFIC-EUROPEAN GROWTH FUND PROSPECTUS. THE PROSPECTUS GIVES DETAILS ABOUT CHARGES, THE INVESTMENT OBJECTIVE, RISKS, AND INVESTMENT POLICIES OF THE FUND. PLEASE READ IT CAREFULLY BEFORE INVESTING. - - - - - - -------------------------------------------------------------------------------- PLANNING FOR RETIREMENT - - - - - - -------------------------------------------------------------------------------- [Photo: Mark] MARK, A SUCCESSFUL 40-YEAR-OLD ATTORNEY, HAS ONE PRIMARY GOAL: TO ENJOY A SECOND "CAREER" SAILING THE WORLD AFTER HIS RETIREMENT. BECAUSE MARK NEEDS HIS INVESTMENTS TO PROVIDE MAXIMUM GROWTH POTENTIAL IN ORDER TO HELP ACHIEVE THIS GOAL, HE USES EVERY OPPORTUNITY TO INVEST FOR HIS FUTURE. THAT'S WHY HE INVESTS A PORTION OF HIS 401(K) CONTRIBUTIONS IN PACIFIC-EUROPEAN GROWTH FUND. PACIFIC- EUROPEAN GROWTH FUND OFFERS LONG-TERM GROWTH POTENTIAL WHILE ALSO PROVIDING GLOBAL DIVERSIFICATION THAT IS SO IMPORTANT TO EQUITY INVESTING TODAY. AND BECAUSE MARK INVESTS IN THE FUND THROUGH HIS EMPLOYER'S QUALIFIED RETIREMENT PLAN, HIS INVESTMENT EARNINGS COMPOUND TAX-DEFERRED UNTIL WITHDRAWN AT RETIREMENT. MARK UNDERSTANDS THAT OVER TIME, THE POWER OF TAX-DEFERRAL CAN BE SUBSTANTIAL, HELPING HIM ACHIEVE HIS LONG-TERM GOAL. THE HYPOTHETICAL ILLUSTRATION BELOW ASSUMES YOU SET ASIDE $5,000 PER YEAR IN A TAX-DEFERRED ACCOUNT, SUCH AS YOUR EMPLOYER'S 401(K) PLAN, WITH AN AVERAGE 9% ANNUAL RETURN ON YOUR INVESTMENTS. FURTHER ASSUME THAT YOU ARE IN THE 31% FEDERAL TAX BRACKET. EVEN AFTER TAXES, YOU WILL COME OUT AHEAD OVER THE LONG RUN BY POSTPONING YOUR TAX BURDEN UNTIL YOU RETIRE. THIS ILLUSTRATION SHOULD NOT BE CONSIDERED REPRESENTATIVE OF AN INVESTMENT IN PACIFIC-EUROPEAN GROWTH FUND OR ANY PARTICULAR INVESTMENT. INVESTMENT PERFORMANCE MAY DIFFER SUBSTANTIALLY. TAX-DEFERRED VS. TAXABLE INVESTING [GRAPH] TAX DEFE- YEARS RRED TAXABLE 0 1278 882 2585 1784 3921 2706 5288 3648 6685 4612 8113 5598 9574 6606 11067 7637 12595 8690 14156 9768 15753 10869 17385 11996 19055 13148 20761 14325 22507 15530 24291 16761 26116 18020 27982 19307 29889 20624 5 31840 21970 33835 23346 35874 24753 37959 26192 40091 27663 42272 29167 44501 30706 46790 32278 49111 33887 51494 35531 53931 37212 56422 38931 58970 40689 61575 42487 64239 44325 66962 46204 69747 48125 72594 50090 75506 52099 78483 54153 10 81527 56253 84639 58401 87822 60597 91076 62842 94403 65138 97805 67486 101284 69886 104841 72340 108478 74850 112197 77416 116000 80040 119888 82723 123863 85466 127928 88271 132085 91139 136335 94071 140681 97070 145124 100136 149667 103271 154313 106476 15 159063 109754 163920 113105 168887 116532 173965 120036 179157 123618 184466 127282 189895 131027 195446 134857 201121 138774 206925 142778 212858 146872 218926 151059 225130 155340 231473 159717 237960 164192 244592 168768 251373 173448 258307 178232 265397 183124 272647 188126 280060 193241 20 287639 198471 295389 203818 303313 209286 311416 214877 319701 220594 328173 226439 336835 232416 345691 238527 354748 244776 364008 251165 373476 257698 383157 264378 393056 271209 403178 278193 413528 285334 424110 292636 434931 300102 445995 307737 457308 315543 25 468876 323524 480704 331685 492797 340030 505164 348563 517808 357287 530737 366208 543956 375330 557473 384657 571295 394193 585427 403945 599877 413915 614653 424110 629760 434535 645208 445194 661003 456092 677154 467236 693668 478631 710554 490282 727820 502195 745474 514377 30 763525 526832 - - - - - - -------------------------------------------------------------------------------- INTERNATIONAL EXPERTISE - - - - - - -------------------------------------------------------------------------------- EDINBURGH FUND MANAGERS PLC (EDINBURGH) Edinburgh, the fund's subadviser, brings substantial international investing expertise to the daily management of the fund. A TRADITION OF EQUITY MANAGEMENT Located in Edinburgh, Scotland, Europe's third largest money management center, the firm's international presence gives it easy access to foreign markets. By focusing completely on international equity management, the firm has developed a tradition of capitalizing on emerging international opportunities. Edinburgh began investing in the United States in the early 1900s, Japan in the 1960s, the Pacific Basin in the 1970s, and Latin America in the 1990s. PROVEN PROFESSIONAL MANAGEMENT Edinburgh has more than 90 years of money management experience and a staff of approximately 50 investment managers. With more than $11 billion under management, Edinburgh provides investment management services to more than 70 other international funds. The fund's management team continuously monitors interest rates, currency fluctuations, economic conditions and other factors inherent in international investing. PIPER CAPITAL MANAGEMENT INCORPORATED As investment adviser to Pacific-European Growth Fund, Piper Capital oversees the fund's operations. Piper Capital is a wholly-owned subsidiary of Piper Jaffray Companies Inc., an investment firm founded in 1895. - - - - - - -------------------------------------------------------------------------------- PIPER FAMILY OF FUNDS - - - - - - -------------------------------------------------------------------------------- We invite you to contact your Piper Jaffray Investment Executive for more complete information and a prospectus for any of the Piper funds or call 1 800 866-7778. - - - - - - -------------------------------------------------------------------------------- GROWTH FUNDS - - - - - - -------------------------------------------------------------------------------- PIPER EMERGING GROWTH FUND PIPER EQUITY STRATEGY FUND PIPER GROWTH FUND - - - - - - -------------------------------------------------------------------------------- TOTAL RETURN FUNDS - - - - - - -------------------------------------------------------------------------------- PIPER GROWTH AND INCOME FUND PIPER BALANCED FUND - - - - - - -------------------------------------------------------------------------------- INCOME FUNDS - - - - - - -------------------------------------------------------------------------------- PIPER GOVERNMENT INCOME FUND PIPER SHORT-INTERMEDIATE BOND FUND ADJUSTABLE RATE MORTGAGE SECURITIES FUND - - - - - - -------------------------------------------------------------------------------- TAX-EXEMPT FUNDS - - - - - - -------------------------------------------------------------------------------- PIPER NATIONAL TAX-EXEMPT FUND PIPER MINNESOTA TAX-EXEMPT FUND - - - - - - -------------------------------------------------------------------------------- INTERNATIONAL FUNDS - - - - - - -------------------------------------------------------------------------------- PACIFIC-EUROPEAN GROWTH FUND - - - - - - -------------------------------------------------------------------------------- INSTITUTIONAL FUNDS - - - - - - -------------------------------------------------------------------------------- INSTITUTIONAL GOVERNMENT INCOME PORTFOLIO* INSTITUTIONAL GOVERNMENT ADJUSTABLE PORTFOLIO INSTITUTIONAL MONEY MARKET FUND - - - - - - -------------------------------------------------------------------------------- CASH MANAGEMENT FUNDS - - - - - - -------------------------------------------------------------------------------- PIPER MONEY MARKET FUND PIPER TAX-EXEMPT MONEY MARKET FUND PIPER U.S. GOVERNMENT MONEY MARKET FUND *FUND NOT AVAILABLE TO NEW INVESTORS. 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. PIPER CAPITAL MANAGEMENT PIPER CAPITAL MANAGEMENT INCORPORATED 222 SOUTH NINTH STREET, MPLS, MN 55402-3804 1 800 866-7778 PIPER JAFFRAY INC., FUND DISTRIBUTOR AND NASD MEMBER. 0125-96 PGPEX.36 4/96 -----END PRIVACY-ENHANCED MESSAGE-----