-----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, V6y+w8ZYPK1kjqIorSBo8dZvkTEF1TRfNZ0nx28NS/wpsyHO9Xt3umQ9zV3S8V2/ 3WZBMVaRKRQ9AsuKI6rnAA== 0000912057-96-010263.txt : 19960520 0000912057-96-010263.hdr.sgml : 19960520 ACCESSION NUMBER: 0000912057-96-010263 CONFORMED SUBMISSION TYPE: 497 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19960517 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PIPER FUNDS INC CENTRAL INDEX KEY: 0000806177 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: MN FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 497 SEC ACT: 1933 Act SEC FILE NUMBER: 333-02171 FILM NUMBER: 96569293 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 497 1 497 - - [LOGO] HERCULES FUNDS INC. HERCULES NORTH AMERICAN GROWTH AND INCOME FUND 222 SOUTH NINTH STREET MINNEAPOLIS, MINNESOTA 55402-3804 May 17, 1996 Dear Shareholder: A special meeting of shareholders of Hercules North American Growth and Income Fund (the "Fund") will be held at the offices of Hercules Funds Inc. on June 18, 1996 at 10 a.m. central time at 222 South Ninth Street, 3rd floor, Minneapolis, Minnesota. This meeting has been called to seek shareholder approval to combine the assets of the Fund with assets of Growth and Income Fund, a series of Piper Funds Inc. If approved, Fund shareholders would become shareholders of Growth and Income Fund and would receive shares with a value equal to the value of their Fund shares. This reorganization is part of a larger proposal to eliminate Hercules as a separate family of funds, as we believe the funds are unlikely to grow to a size which is economically viable. If you are a shareholder in more than one Hercules fund, you will receive separate mailings of proxy materials for each fund. PLEASE RETURN A COMPLETED PROXY CARD FOR EACH FUND IN WHICH YOU ARE INVESTED. We urge you to read all of the enclosed 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 will not incur any commissions, sales loads or other charges in connection with the reorganization and Piper Capital, the investment manager for both funds, has agreed to pay for all direct expenses including the proxy solicitation. - The expense ratio for Growth and Income Fund is lower than the Fund's expense ratio. While 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 waiving expenses for the Fund after June 30, 1996. - The reorganization would enable Fund shareholders to enjoy an expanded range of mutual fund investment options, including 16 other open-end Piper Funds. Shareholders who receive Growth and Income Fund shares in the reorganization would have exchange privileges within the Piper family of funds. - The reorganization will not result in any federal taxable income to the Fund or its shareholders. PLEASE MARK, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD AS SOON AS POSSIBLE, AS YOUR PROMPT RESPONSE WILL ELIMINATE THE NEED FOR ADDITIONAL MAILINGS. A postage-paid envelope is enclosed with each proxy mailing for your convenience. As the meeting date approaches, if you haven't voted you may receive a telephone call reminding you to vote. The enclosed QUESTION AND ANSWER sheet provides more detailed information about the proposal. Also enclosed are the formal Notice of Special Meeting and Proxy Statement/Prospectus documents. If you have additional questions, please contact your investment professional or call Piper Capital at 1 800 866-7778 and press 2. Sincerely, [SIG] William H. Ellis President SHAREHOLDER Q&A MAY 17, 1996 - -------------------------------------------------------------------------------- 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 CHARGE 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 16 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 NORTH AMERICAN GROWTH AND INCOME FUND COMPARE WITH THE PIPER GROWTH AND INCOME FUND? Here are a few comparisons of fund characteristics. Please review the Proxy Statement/Prospectus for a complete comparison:
HERCULES NORTH AMERICAN PIPER GROWTH AND INCOME GROWTH AND INCOME Investment objective Long-term capital Current income and long-term appreciation and current growth of capital and income income Investment policies 65% minimum in U.S., 95% minimum in U.S. Canadian, & Mexican securities securities Country allocation as of 58% U.S., 18% Canada, 24% 100% U.S. 2/29/96 Mexico Net assets as of 2/29/96 $8.7 million $83.3 million Adviser/Subadvisers Piper Capital/AGF Advisers, Piper Capital Acci Worldwide, Piper Capital
HERCULES FUNDS INC. HERCULES NORTH AMERICAN GROWTH AND INCOME 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 NORTH AMERICAN GROWTH AND INCOME FUND, A SERIES OF HERCULES FUNDS INC. Notice is hereby given that a Special Meeting (the "Meeting") of shareholders of Hercules North American Growth and Income 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 June 18, 1996 at 10:00 a.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 April 15, 1996 (the "Plan"), by and between the Company, on behalf of the Fund, and Piper Funds Inc. ("Piper"), on behalf of Growth and Income Fund ("Growth and Income Fund"), pursuant to which substantially all of the assets of the Fund will be acquired by Growth and Income Fund and shareholders of the Fund will become shareholders of Growth and Income Fund receiving shares of Growth and Income 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 17, 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. GROWTH AND INCOME FUND A SERIES OF PIPER FUNDS INC. PIPER JAFFRAY TOWER 222 SOUTH NINTH STREET MINNEAPOLIS, MINNESOTA 55402-3804 (800) 866-7778 (TOLL FREE) ------------------------ ACQUISITION OF THE ASSETS OF HERCULES NORTH AMERICAN GROWTH AND INCOME FUND A SERIES OF HERCULES FUNDS INC. BY AND IN EXCHANGE FOR SHARES OF GROWTH AND INCOME FUND A SERIES OF PIPER FUNDS INC. ------------------------ This Proxy Statement/Prospectus is being furnished to shareholders of Hercules North American Growth and Income Fund (the "Fund"), a series of Hercules Funds Inc. (the "Company"), in connection with an Agreement and Plan of Reorganization dated as of April 15, 1996 (the "Plan") pursuant to which substantially all of the assets of the Fund will be combined with those of Growth and Income Fund ("Growth and Income Fund"), a series of Piper Funds Inc. ("Piper"), in exchange for shares of Growth and Income Fund. As a result of this transaction, shareholders of the Fund will become shareholders of Growth and Income Fund and will receive shares of Growth and Income 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. Growth and Income Fund is a diversified series of Piper, an open-end diversified management investment company the shares of which can be offered in more than one series. The investment objectives of Growth and Income Fund are current income and long-term growth of capital and income. Growth and Income Fund seeks to achieve its investment objectives by investing primarily in common stock of U.S. companies and securities convertible into such common stock and also in U.S. Government securities and U.S. investment grade corporate debt securities. This Proxy Statement/Prospectus sets forth concisely information about Growth and Income Fund that shareholders of the Fund should know before voting on the Plan. This Proxy Statement also constitutes a Prospectus of Growth and Income 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 Growth and Income Fund dated November 27, 1995, is attached to this Proxy Statement/Prospectus and is incorporated herein by reference. Also enclosed and incorporated by reference is the Annual Report for Piper -- Total Return Funds for Growth and Income Fund's fiscal year ended September 30, 1995. A Statement of Additional Information relating to the reorganization described in this Proxy Statement/Prospectus (the "Additional Statement") dated May 2, 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................................................................................................ 3 Tax Consequences of the Reorganization................................................................... 5 Dissenting Shareholders' Rights of Appraisal............................................................. 5 Comparison of the Fund and Growth and Income Fund........................................................ 5 PRINCIPAL RISK FACTORS..................................................................................... 8 THE REORGANIZATION......................................................................................... 8 Background............................................................................................... 8 The Board's Consideration................................................................................ 9 The Plan................................................................................................. 11 Tax Aspects of the Reorganization........................................................................ 12 Dissenters' Rights....................................................................................... 14 Description of Shares.................................................................................... 14 Capitalization Table (unaudited)......................................................................... 14 COMPARISON OF INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS............................................. 14 Investment Objectives and Policies....................................................................... 14 Investment Restrictions.................................................................................. 16 Interest of Certain Persons.............................................................................. 17 ADDITIONAL INFORMATION ABOUT THE FUND AND GROWTH AND INCOME 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................................................................ 17 FINANCIAL STATEMENTS AND EXPERTS........................................................................... 18 LEGAL MATTERS.............................................................................................. 18 AVAILABLE INFORMATION...................................................................................... 18 OTHER BUSINESS............................................................................................. 18 EXHIBIT A -- Agreement and Plan of Reorganization, dated as of April 15, 1996 by and between the Company, on behalf of the Fund, and Piper, on behalf of Growth and Income Fund......................... A-1 PROSPECTUS OF GROWTH AND INCOME FUND, dated November 27, 1995
i ------------------------ PROXY STATEMENT/PROSPECTUS HERCULES NORTH AMERICAN GROWTH AND INCOME FUND SPECIAL MEETING OF SHAREHOLDERS TO BE HELD JUNE 18, 1996 ------------------------ INTRODUCTION GENERAL This Proxy Statement/Prospectus is being furnished to shareholders of Hercules North American Growth and Income 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 10:00 a.m. central time and any adjournments thereof (the "Meeting"). It is expected that this Proxy Statement/Prospectus will be mailed on or about May 17, 1996. At the Meeting, Fund shareholders will consider and vote upon an Agreement and Plan of Reorganization, dated as of April 15, 1996 (the "Plan"), by and between the Company, on behalf of the Fund, and Piper Funds Inc. ("Piper"), on behalf of Growth and Income Fund ("Growth and Income Fund"), pursuant to which substantially all of the assets of the Fund will be combined with those of Growth and Income Fund in exchange for shares of Growth and Income Fund. As a result of this transaction, shareholders of the Fund will become shareholders of Growth and Income Fund and will receive shares in Growth and Income 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 Growth and Income Fund pursuant to the Reorganization ("Growth and Income Fund Shares") will be issued at net asset value without a sales charge. Further information relating to Growth and Income Fund is set forth in the current Prospectus of Growth and Income 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 Growth and Income Fund contained herein has been supplied by Piper. 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 686,836 shares of the Fund issued and outstanding. The holders of record on the Record Date of shares of the Fund are entitled to one vote per share held and a fractional vote with respect to fractional shares held on each matter submitted to a vote at the Meeting. The holders of 10% of the shares outstanding and entitled to vote will constitute a quorum at the Meeting. 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. 1 To the knowledge of Piper's Board of Directors, as of the Record Date no person owned of record or beneficially 5% or more of the outstanding shares of Growth and Income Fund. As of the Record Date, the directors and officers of Piper, as a group, owned less than 1% of the outstanding shares of Growth and Income 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 sufficient votes to approve the Plan are not obtained by the Meeting date, or, subject to approval of the Board, for other reasons, an adjournment or adjournments of the Meeting may be sought. Any adjournment would require a vote in favor of the adjournment by the holders of a majority of the shares present at the Meeting (or any adjournment thereof) in person or by proxy. The persons named as proxies will vote all shares represented by proxies which they are required to vote in favor of the Plan, in favor of an adjournment, and will vote all shares which they are required to vote against the Plan, against an adjournment. Approval of the Plan will be deemed approval of the amendment to the articles of incorporation of the Company attached to the Plan. EXPENSES OF SOLICITATION All expenses of this solicitation, including the cost of preparing and mailing this Proxy Statement/ Prospectus, will be borne by Piper Capital Management Incorporated ("Piper Capital"), investment manager to the Company and Piper. 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 GROWTH AND INCOME 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 Growth and Income Fund in exchange for Growth and Income Fund Shares. The aggregate net asset value of Growth and Income Fund Shares issued in the exchange will equal the aggregate value of the net assets of the Fund received by Growth and Income Fund. On or after the closing date scheduled for the Reorganization (the "Closing Date"), the Fund will distribute Growth and Income 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 Growth and Income Fund Shares equal in value to such shareholder's shares of the Fund. The Board has determined that the interests of existing Fund shareholders will not be diluted as a result of the Reorganization. FOR THE REASONS SET FORTH BELOW UNDER "THE REORGANIZATION -- THE BOARD'S CONSIDERATION," THE BOARD, INCLUDING ALL OF THE DIRECTORS WHO ARE NOT "INTERESTED PERSONS" OF THE COMPANY, 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. 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 Growth and Income Fund. The following table sets forth the expenses and fees that shareholders of the Fund and Growth and Income Fund incurred during the twelve months ended September 30, 1995. The Pro Forma Combined fees reflect what the fee schedule would have been at September 30, 1995, if the Reorganization had occurred 12 months prior to that date. SHAREHOLDER TRANSACTION EXPENSES
GROWTH AND PRO FORMA FUND INCOME 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
3 ANNUAL FUND OPERATING EXPENSES AS A PERCENTAGE OF AVERAGE NET ASSETS
GROWTH AND PRO FORMA FUND INCOME FUND COMBINED ----------- ------------- ------------ Management Fees (4)............................................... 1.00% 0.75% 0.75% 12b-1 Fees (after voluntary fee limitation) (5)................... 0.50% 0.32% 0.32% Other Expenses (after voluntary expense reimbursement) (6)........ 0.50% 0.25% 0.25% ----- ----- ----- Total Fund Operating Expenses (after voluntary fee limitation and expense reimbursement) (6)....................................... 2.00% 1.32% 1.32%
- ------------------------ (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 contingent deferred sales charge ("CDSC") on shares of the Fund is 2.00% on redemptions during the first 365 days after purchase; the charge declines to 1.00% during the next 365 days after purchase, reaching zero thereafter. In connection with purchases of Growth and Income 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 Growth and Income 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 Growth and Income Fund. (4) Growth and Income Fund pays monthly management fees at an annual rate of 0.75% on assets up to $100 million. These fees are scaled downward as net assets increase in size to as low as 0.50% on net assets of over $500 million. (5) 12b-1 fees for the Fund and Growth and Income Fund are currently limited voluntarily by the distributor of the funds, Piper Jaffray Inc. (the "Distributor"). Absent such fee limitation, the 12b-1 fees may not exceed 0.70% and 0.50% per annum of the average daily net assets for the Fund and Growth and Income 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. (6) Piper Capital has voluntarily limited Total Fund Operating Expenses on a per annum basis to 2.00% and 1.32% of average daily net assets for the Fund and Growth and Income Fund, respectively. As a result, certain Other Expenses are currently borne by Piper Capital. Absent such waivers and reimbursements for the 12 months ended September 30, 1995, Other Expenses would have been 1.99%, 0.35% and 0.35%, each as a percentage of average daily net assets for the Fund, Growth and Income Fund and the Pro Forma Combined column, respectively. Without such limitations and the 12b-1 fee limitations discussed above, Total Fund Operating Expenses for the 12 months ended September 30, 1995, as a percentage of average daily net assets, would have been 3.69%, 1.60% and 1.60% for the Fund, Growth and Income Fund and Pro Forma Combined column, respectively. After each fund's current fiscal year, these limitations may be revised or terminated at any time. Piper Capital and the 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, Growth and Income 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 Growth and Income Fund Shares in the Reorganization will not pay the front-end sales charge with 4 respect to those shares. Assuming that an investor makes a $1,000 investment in either the Fund or Growth and Income Fund or on a Pro Forma Combined basis, that the annual return is 5.00% and that the Total Fund Operating Expenses 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 Growth and Income Fund*................. $13 $42 $ 72 $159 Pro Forma Combined**.................... $13 $42 $ 72 $159
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 Growth and Income Fund*................. $13 $42 $ 72 $159 Pro Forma Combined**.................... $13 $42 $ 72 $159
- ------------------------ *Expenses for shares of Growth and Income Fund purchased subject to the maximum front end sales charge are: $53, $80, $109, and $193 for the one-, three-, five-, and ten-year periods shown, respectively. **Expenses for shares of Growth and Income Fund on a Pro Forma Combined basis, purchased subject to the maximum front-end sales charge, are: $53, $80, $109, and $193 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. 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 GROWTH AND INCOME FUND INVESTMENT OBJECTIVES AND POLICIES. The Fund and Growth and Income Fund have similar investment objectives. The Fund's objectives are long-term capital appreciation and current income. The investment objectives of Growth and Income Fund are current income and long-term growth of capital and income. The investment objectives of the Fund and Growth and Income Fund are fundamental and may not be changed without shareholder approval. 5 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. Growth and Income Fund seeks to achieve its investment objectives by investing in a broadly diversified portfolio of securities, with an emphasis on securities of large, established companies that have a history of dividend payments and that the investment adviser believes are undervalued. The principal difference between the two funds is that Growth and Income Fund invests at least 95% of its assets in U.S. equity and debt securities, whereas the Fund invests in U.S. securities and Canadian and Mexican securities. For both funds, companies are selected on the basis of Piper Capital's assessment (and the sub-adviser's, in the case of the Fund's non-U.S. investments) of their prospects for long-term growth in dividends and earnings in relationship to the prevailing market price. With respect to the Growth and Income Fund, Piper Capital also considers other factors, including the sensitivity of a company's particular industry to fluctuations in major economic variables, such as interest rates and industrial production. With respect to the Fund, emphasis is placed on investments in companies which Piper Capital (and the sub-advisers, in the case of non-U.S. investments) believes 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. The Fund may invest without limitation in equity and investment grade debt securities. Growth and Income Fund may also invest without limitation in equity and investment grade debt securities but under normal circumstances invests primarily in common stock and securities convertible into common stock. 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. Growth and Income Fund may, for hedging purposes only, buy put and call options on the securities in which it may invest, buy exchange-traded stock index options and enter into interest rate and stock index futures contracts, and options thereon. In addition, Growth and Income Fund may sell covered options and stock index options for hedging purposes or to generate income. The Fund may buy or sell options, futures and options on futures that are traded on U.S. or foreign exchanges or over-the-counter; however, Growth and Income Fund may purchase and sell only exchange-traded options, futures and options on futures. In addition, the Fund may, but Growth and Income Fund may not, 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. To date, the Fund has not engaged in options on futures contracts, options on stock and interest rate indexes or currency exchange transactions other than forward contracts. Both the Fund and Growth and Income Fund may purchase securities on a when-issued or delayed delivery basis and purchase or sell securities on a forward commitment basis. Growth and Income Fund may, while the Fund may not, purchase securities on a "when, as and if issued" basis. Both funds may enter into repurchase agreements subject to certain procedures designed to minimize risks associated with such agreements. The Fund may also (i) invest in warrants up to 5% of its net assets; (ii) invest in American Depository Receipts ("ADRs") and similar instruments; and (iii) invest in other investment companies (up to the limits prescribed by the 1940 Act); Growth and Income Fund does not invest in these types of instruments and, accordingly, only the Fund is exposed to risks associated with them. Growth and Income Fund may lend portfolio securities up to one-third of the value of its total assets; the Fund does not enter into these types of transactions and, accordingly, only Growth and Income Fund is exposed to risks associated with securities lending. In addition, the Fund is a non-diversified investment company, within the meaning of the 1940 Act, whereas Growth and Income Fund is a diversified investment company. 6 For a more detailed comparison of the investment objectives and policies of the Fund and Growth and Income Fund, see "Comparison of Investment Objectives, Policies and Restrictions," below. INVESTMENT MANAGEMENT AND DISTRIBUTION PLAN FEES. The Fund and Growth and Income Fund have the same Board of Directors. In addition, the Fund and Growth and Income 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 daily net asset value and Growth and Income Fund pays at the annual rate of 0.75% of the portion of average daily net assets up to $100 million, 0.65% of such assets between $100 million and $300 million, 0.55% of such assets between $300 million and $500 million, and 0.50% of the portion of daily net assets exceeding $500 million. With respect to the Fund, Piper Capital has retained the services of Acci Worldwide, S.A. de C.V. ("Acci") and AGF Investment Advisers, Inc. ("AGF") as sub-advisers for investments in Mexican and Canadian issuers, respectively. Piper Capital manages the Fund's investments in U.S. securities. As compensation for their portfolio management services, Piper Capital, Acci and AGF together receive monthly compensation, calculated in the same manner as the investment advisory fee, of 0.50% of net assets of the Fund. This fee is paid by Piper Capital and is split equally among Piper Capital, Acci and AGF without regard to the amount of assets under their respective management at any one time. Both the Fund and Growth and Income 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 compensated for its 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 Growth and Income 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 Growth and Income Fund. In the case of Growth and Income 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. Payments made under the 12b-1 Plans for the Fund and Growth and Income Fund are not tied exclusively to expenses actually incurred by the Distributor and may exceed such expenses. OTHER SIGNIFICANT FEES. Both the Fund and Growth and Income 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 Growth and Income Fund each continuously issue their shares to investors at a price equal to net asset value at the time of such issuance. Investors in Growth and Income 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 Growth and Income 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 Growth and Income Fund. Shares of the Fund and Growth and Income Fund are distributed by the Distributor and other broker-dealers who have entered into selected broker-dealer agreements with the Distributor. Purchase orders for shares of the Fund will not be accepted after the date on which the Plan is approved by Fund shareholders. REDEMPTIONS. Shareholders of the Fund and Growth and Income 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 Growth and Income Fund Shares acquired in the Reorganization on redemption of such shares. With respect to Growth and Income Fund, shareholders 7 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. Growth and Income 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, a pro rata credit will be given for such CDSC. The Fund and Growth and Income Fund may redeem involuntarily, at net asset value, accounts valued at less than $200. EXCHANGES. Each of the Fund and Growth and Income 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. Growth and Income 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 Growth and Income Fund provide telephone exchange privileges to their shareholders. For a more detailed discussion of purchasing, redeeming and exchanging Growth and Income Fund shares, see "Shareholder Guide to Investing -- How to Purchase Shares", "-- How to Redeem Shares" and "-- Shareholder Services" in Growth and Income Fund's current Prospectus. DIVIDENDS. Dividends from anticipated net investment income are declared and paid quarterly by Growth and Income Fund and annually by the Fund. Net short-term capital gains and long-term capital gains distributions are paid at least once annually by both funds. Dividends and capital gains distributions of both the Fund and Growth and Income Fund are automatically reinvested in additional shares at net asset value unless the shareholder elects to receive cash. PRINCIPAL RISK FACTORS The Fund and Growth and Income Fund are subject to the same risks to the extent each invests in equity and debt securities, namely, market risk with respect to equity investments and credit risk and interest rate risk with respect to investments in debt securities. However, because the Fund pursues its investment objectives in part through investment in foreign securities, and Growth and Income Fund does not, the Fund is also exposed to the risks of international investing. These risks include: risks relating to adverse currency fluctuations, potential political and economic instability of countries in which the Fund invests, limited liquidity and greater volatility of prices as compared to U.S. securities, investment and repatriation restrictions, and foreign taxation. The Fund, unlike Growth and Income Fund, invests in options traded over-the-counter (OTC). OTC options trading has no daily price fluctuation limits and OTC options are considered illiquid. Furthermore, only the Fund engages in currency forward contracts. These transactions are affected by all of the factors which influence foreign exchange rates and foreign investments generally, as well as limited reporting of last sale quotations, limitations, charges or taxes associated with making or accepting delivery of foreign currencies, and the absence of an established secondary market. In addition, as discussed above, the Fund is a non-diversified investment company under the 1940 Act, whereas Growth and Income 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 Growth and Income 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 "Investment Objectives and Policies - -- Growth and Income Fund -- Investment Risks" in Growth and Income Fund's Prospectus. 8 THE REORGANIZATION BACKGROUND The Company was managed initially 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. Shares of the Company 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. 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 9 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 and that 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 Growth and Income Fund. In particular the Board focused on the differences in the investment policies of the Fund and Growth and Income 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 securities of the U.S., Canada and Mexico, whereas Growth and Income Fund invests only in U.S. securities. In considering the suitability of Growth and Income Fund for shareholders of the Fund given Growth and Income Fund's focus solely on U.S. investments, the Board noted the substantial percentage of the Fund's assets invested in the U.S. (approximately 57% of the Portfolio as of January 31, 1996), and the fact that the sub-adviser responsible for the U.S. investments of the Fund, Piper Capital, is also the investment adviser of Growth and Income Fund. The Board also took into account Piper Capital's view that a combination of the Fund with another fund which more closely resembles the Fund may not be practicable because there are so few North American funds and the small size of the Fund makes it less attractive as a merger candidate. In addition, the Board considered the comparative expenses currently incurred in the operation of the Fund and Growth and Income Fund, the terms and conditions of the proposed Reorganization, the comparative performance of the funds, Piper Capital's undertaking to pay all the 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 3.39%. By contrast, the expense ratio for Growth and Income Fund for its fiscal year ended September 30, 1995 was 1.32% (or 1.60% absent fee limitations and expense reimbursements). The Distributor has voluntarily agreed to limit the 12b-1 fee to an annual rate of 0.32% of Growth and Income Fund's average daily net assets for its current fiscal year and Piper Capital has voluntarily agreed to reimburse Growth and Income Fund for the amount by which total fund operating expenses exceed 1.32% for its current fiscal year. In addition, Growth and Income Fund's advisory fee scales down as asset levels increase, and, because Growth and Income 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. 10 2. Shareholders of the Fund will be able to acquire shares of Growth and Income 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 and will not pay any CDSC on Fund shares converted in the Reorganization. 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 Growth and Income Fund is a part, includes fifteen mutual fund portfolios that will be available for exchange by Fund shareholders who receive Growth and Income 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. Based on the foregoing, the Board determined that the Reorganization is in the best interests of the shareholders of the Fund and that the interests of Fund shareholders will not be diluted as a result thereof. The Board of Directors of Growth and Income Fund, including all of the Independent Directors, has also determined that the Reorganization is in the best interests of Growth and Income Fund and that the interests of existing shareholders of Growth and Income Fund will not be diluted as a result thereof. The transaction will enable Growth and Income Fund to acquire investment securities which are consistent with its objectives without the brokerage costs attendant to the purchase of such securities in the market. Also, the addition of the Fund's assets should result in some cost savings to the extent that fixed expenses of Growth and Income Fund can be spread over a larger asset base. A larger asset base could also lead to reduced management fees as a result of "breakpoints" in the management fees payable by Growth and Income 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 Growth and Income Fund on the Closing Date in exchange for the assumption by Growth and Income 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 Growth and Income Fund Shares; (ii) such Growth and Income 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 11 would involve the Fund holding all of its assets as shares of Growth and Income 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 Growth and Income Fund Shares to be delivered to the Fund will be determined by dividing the value of the Fund assets acquired by Growth and Income Fund (net of stated liabilities assumed by Growth and Income Fund) by the net asset value of a Growth and Income Fund Share; these values will be calculated as of the close of business of the New York Stock Exchange on a business day not later than the fifth business day following the receipt of the requisite approval of the Plan by the shareholders of the Fund or at such other time as the Fund and Growth and Income Fund may agree (the "Valuation Date"). The net asset value of a Growth and Income Fund Share shall be the net asset value per share computed on the Valuation Date, using the valuation procedures set forth in Growth and Income 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 Growth and Income Fund would be $100,000. If the net asset value per share of Growth and Income 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 Growth and Income Fund would be distributed to the former shareholders of the Fund. This example is given for illustration purposes only and does not bear any relationship to the dollar amounts or shares expected to be involved in the Reorganization. Growth and Income Fund will cause its transfer agent to credit and confirm an appropriate number of Growth and Income Fund Shares to each Fund shareholder. Neither the Fund nor Growth and Income 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 Growth and Income 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 Growth and Income 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 Growth and Income 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 Growth and Income 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 Growth and Income Fund at net asset value and without recognition of taxable gain or loss for Federal income tax purposes. Prior to the Valuation Date, the Fund will declare and pay a dividend to distribute all of its accumulated investment company taxable income and net capital gain, if any. The proceeds of such distribution may be taxable to Fund shareholders. See "Tax Aspects of the Reorganization" below. All contracts entered into by or on behalf of the Fund will terminate upon consummation of the Reorganization. Shareholders of the Fund will continue to be able to redeem their shares at net asset value (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 Growth and Income Fund. 12 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 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 Growth and Income Fund Shares received in the transaction that would reduce the Fund shareholders' ownership of Growth and Income 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 the Fund shares as of the same date. The Company and Piper have each further represented that, as of the Closing Date, the Fund and Growth and Income Fund will qualify as regulated investment companies. In addition, Piper has further represented that Growth and Income Fund will qualify as a regulated investment company for its current fiscal year. As a condition to the Reorganization, the Fund and Growth and Income 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: 1. The transfer of substantially all of the Fund's assets in exchange for Growth and Income Fund Shares and the assumption by Growth and Income Fund of certain stated liabilities of the Fund followed by the distribution by the Fund of Growth and Income 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 Growth and Income 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 Growth and Income Fund upon the receipt of the assets of the Fund solely in exchange for Growth and Income Fund Shares and the assumption by Growth and Income 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 Growth and Income Fund in exchange for Growth and Income Fund Shares and the assumption by Growth and Income Fund of the stated liabilities or upon the distribution of Growth and Income 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 Growth and Income Fund Shares; 5. The aggregate tax basis for Growth and Income 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 Growth and Income 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 Growth and Income Fund will be the same as the tax basis of such assets to the Fund immediately prior to the Reorganization; and 13 8. The holding period of the assets of the Fund in the hands of Growth and Income 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 Growth and Income 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 ADVISERS 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 OPEN-END INVESTMENT COMPANY MAY REDEEM ITS SHARES OTHER THAN AT NET ASSET VALUE NEXT COMPUTED AFTER RECEIPT OF A TENDER OF SUCH SECURITY FOR REDEMPTION. IT IS THE VIEW OF THE DIVISION OF INVESTMENT MANAGEMENT THAT RULE 22C-1 PREEMPTS APPRAISAL PROVISIONS IN STATE STATUTES. In the interests of ensuring equal valuation of all interests in the Fund, the Company will determine dissenters' rights in accordance with the Division's interpretation. It should be emphasized that Fund shareholders may sell their shares at net asset value (subject to any applicable CDSC) at any time prior to the Closing Date. DESCRIPTION OF SHARES Shares of Growth and Income Fund to be issued pursuant to the Plan will, when issued, be fully paid and non-assessable by Growth and Income Fund and transferable without restrictions and will have no preemptive or conversion rights. CAPITALIZATION TABLE (UNAUDITED) The following table sets forth the capitalization of Growth and Income Fund and the Fund as of September 30, 1995 and on a pro forma combined basis as if the Reorganization had occurred on that date:
SHARES NET ASSETS OUTSTANDING NET ASSET (000S (000S VALUE PER OMITTED) OMITTED) SHARE ------------ ----------- --------- Fund.................................... $ 11,599 1,089 $10.65 Growth and Income Fund.................. $ 73,431 5,678 $12.93 Pro Forma Combined...................... $ 85,030 6,575 $12.93
COMPARISON OF INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS INVESTMENT OBJECTIVES AND POLICIES The Fund and Growth and Income Fund have similar investment objectives. The Fund's objectives are long-term capital appreciation and current income. The investment objectives of Growth and Income Fund are current income and long-term growth of capital and income. The investment objectives of the Fund and Growth and Income Fund are fundamental and may not be changed without shareholder approval. 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, which are defined in its current 14 prospectus 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 does not invest 25% or more of its total assets in government obligations issued by Canada or Mexico. Growth and Income Fund seeks to achieve its investment objectives by investing in a broadly diversified portfolio of securities, with an emphasis on securities of large, established companies that have a history of dividend payments and that the investment adviser believes are undervalued. The principal difference between the two funds is that Growth and Income Fund invests at least 95% of its assets in U.S. equity and debt securities, whereas the Fund invests in U.S. securities and Canadian and Mexican securities. For both funds, companies are selected on the basis of Piper Capital's (and the sub-adviser's, in the case of the Fund's non-U.S. investments) assessment of their prospects for long-term growth in dividends and earnings in relationship to the prevailing market price (I.E., investments that the adviser believes to be undervalued). With respect to Growth and Income Fund, Piper Capital also considers other factors, including the sensitivity of a company's particular industry to fluctuations in major economic variables, such as interest rates and industrial production. With respect to the Fund, emphasis is placed on investments in companies which Piper Capital (and the sub-advisers, in the case of non-U.S. investments) believes 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. In addition, the Fund is authorized to invest up to 35% of its total assets in securities of issuers located outside North America that are believed by Piper Capital (and the sub-advisers) to be well positioned to benefit from cross-border trade with the U.S., Canada and Mexico. The Fund may invest without limitation in equity and investment grade debt securities. Growth and Income Fund may also invest without limitation in equity and investment grade debt securities but under normal circumstances invests primarily in common stock and securities convertible into common stock. The Fund may invest part or all of its 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. For temporary defensive purposes, Growth and Income Fund may retain cash or invest all or part of its assets in short-term money market securities including U.S. Government obligations, time deposits, bank CDs, bankers' acceptances, high-grade commercial paper, and other money market instruments. 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. Growth and Income Fund may, for hedging purposes only, buy put and call options on the securities in which it may invest, buy exchange-traded stock index options and enter into interest rate and stock index futures contracts, and options thereon. In addition, Growth and Income Fund may sell covered options and stock index options for hedging purposes or to generate income. The Fund may buy or sell options, futures and options on futures that are traded on U.S. or foreign exchanges or over-the-counter; however, Growth and Income Fund may purchase and sell only exchange-traded options, futures and options on futures. In addition, the Fund may, but Growth and Income Fund may not, enter into currency exchange transactions (including forward foreign currency exchange contracts and futures and options contracts on foreign currencies) as a 15 hedge against fluctuations in foreign exchange rates. To date, the Fund has not engaged in options on futures contracts, options on stock and interest rate indexes or currency exchange transactions other than forward contracts. Both the Fund and Growth and Income Fund may purchase securities on a when-issued or delayed delivery basis, may purchase or sell securities on a forward commitment basis. Growth and Income Fund may, while the Fund may not, purchase securities on a "when, as and if issued" basis. While Growth and Income Fund may not currently invest in warrants at all. Both funds may enter into repurchase agreements subject to certain procedures designed to minimize risks associated with such agreements. The Fund may also (i) invest up to 5% of its net assets in warrants; (ii) invest in American Depository Receipts ("ADRs") and similar instruments; and (iii) invest in other investment companies (up to the limits prescribed by the 1940 Act); Growth and Income Fund does not invest in these types of instruments. Growth and Income Fund may lend portfolio securities up to one-third of the value of its total assets; the Fund does not enter into these types of transactions. In addition, the Fund is a non-diversified investment company within the meaning of the 1940 Act, whereas Growth and Income 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. The investment policies of both the Fund and Growth and Income 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 Objectives and Policies" in each fund's respective Prospectus and "Investment Objectives and Policies" in the Fund's Statement of Additional Information and "Investment Objectives, Policies and Restrictions" in Growth and Income Fund's Statement of Additional Information. INVESTMENT RESTRICTIONS Complete descriptions of the fundamental and non-fundamental investment restrictions adopted by the Fund and Growth and Income Fund appear under the caption "Investment Restrictions" in the Prospectus and Statement of Additional Information of the Fund and "Special Investment Methods -- Investment Restrictions" in Growth and Income Fund's Prospectus and "Investment Objectives, Policies and Restrictions" in Growth and Income Fund's Statement of Additional Information. A fundamental investment restriction cannot be changed without the vote of a majority of the fund's outstanding voting securities, as defined in the 1940 Act. The material differences between the investment restrictions of the two funds are as follows: First, as a diversified investment company, Growth and Income 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. Second, neither fund may invest for purposes of exercising control, however, for Growth and Income Fund this is a non-fundamental restriction. Third, only Growth and Income Fund is subject to a non-fundamental restriction against investments in other investment companies (except as part of a merger, consolidation or acquisition of assets). Fourth, as mentioned above, the Fund may purchase warrants with up to 5% of its net assets, whereas Growth and Income Fund is subject to a non-fundamental restriction against investing in any warrants. Fifth, according to each fund's fundamental restrictions, the Fund may, but Growth and Income Fund may not, enter into reverse repurchase agreements for leverage purposes. Sixth, also as a matter of fundamental restriction, the Fund may, 16 but Growth and Income Fund may not, invest in readily marketable interests in real estate investment trusts. Seventh, neither fund may invest more than 15% of the value of its net assets in illiquid securities, however, with respect to Growth and Income Fund this is a non-fundamental restriction. Finally, Growth and Income Fund may, but the Fund, pursuant to its fundamental restrictions, may not, make loans of money or property except through the purchase of debt obligations. Any non-public loans made by Growth and Income Fund generally would be subject to its limitation on investments in illiquid securities. INTERESTS OF CERTAIN PERSONS The following persons affiliated with the Fund and Growth and Income Fund receive payments from the Fund and Growth and Income 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 Growth and Income Fund only, Piper Trust Company, an affiliate of Piper Capital and the Distributor, and the Distributor provide certain transfer agent and dividend disbursing agent services for certain shareholder accounts. ADDITIONAL INFORMATION ABOUT THE FUND AND GROWTH AND INCOME 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 Growth and Income Fund, see "Introduction", "Management", "Investment Objectives and Policies" and "General Information" in its prospectus. FINANCIAL INFORMATION For certain financial information about Growth and Income Fund and the Fund, see "Financial Highlights" and "Performance Comparisons" in their respective prospectuses. MANAGEMENT For information about Growth and Income Fund's and the Fund's Board of Directors, investment manager and distributor, see "Management" and "Distribution of Fund Shares" in their respective prospectuses. DESCRIPTION OF SECURITIES AND SHAREHOLDER INQUIRIES For a description of the nature and most significant attributes of shares of the Fund and Growth and Income 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 Growth and Income 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 Growth and Income 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 Growth and Income Fund's prospectus. 17 MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE For management's discussion of Growth and Income Fund's performance as of its fiscal year ended September 30, 1995, see Piper'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 Growth and Income 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 Growth and Income Fund will be passed upon by Dorsey & Whitney LLP, Minneapolis, Minnesota. AVAILABLE INFORMATION ADDITIONAL INFORMATION ABOUT THE FUND AND GROWTH AND INCOME FUND IS AVAILABLE, AS APPLICABLE, IN THE FOLLOWING DOCUMENTS WHICH ARE INCORPORATED HEREIN BY REFERENCE: (I) GROWTH AND INCOME FUND'S PROSPECTUS DATED NOVEMBER 27, 1995, ATTACHED TO THIS PROXY STATEMENT/PROSPECTUS, WHICH PROSPECTUS FORMS A PART OF POST-EFFECTIVE AMENDMENT NO. 27 TO PIPER'S REGISTRATION STATEMENT ON FORM N-1A (FILE NOS. 33-10261; 811-4905); (II) GROWTH AND INCOME FUND'S STATEMENT OF ADDITIONAL INFORMATION DATED NOVEMBER 27, 1995; (III) THE ANNUAL REPORT FOR PIPER -- TOTAL RETURN FUNDS FOR GROWTH AND INCOME FUND'S FISCAL YEAR ENDED SEPTEMBER 30, 1995 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-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 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 Growth and Income 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 18 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 17, 1996 19 EXHIBIT A AGREEMENT AND PLAN OF REORGANIZATION HERCULES NORTH AMERICAN GROWTH AND INCOME FUND AND PIPER GROWTH AND INCOME FUND THIS AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") is made as of this 15th day of April, 1996, by and between Hercules Funds Inc. ("Hercules Company"), on behalf of its series Hercules North American Growth and Income Fund ("Hercules Fund"), and Piper Funds Inc. ("Piper Company"), on behalf of its series Growth and Income 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 on its business as presently conducted (Minnesota counsel may be relied upon in delivering such A-9 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 Company on behalf 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 North American Growth and Income Fund By: _______/s/ William H. Ellis_______ Name: William H. Ellis Title: President PIPER FUNDS INC., on behalf of Growth and Income Fund By: _______/s/ Robert H. Nelson_______ Name: Robert H. Nelson Title: Senior Vice President 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 North American Growth and Income Fund ("Hercules Fund"), a series of Hercules Company, that the assets belonging to such series, subject to its stated liabilities, be sold to Growth and Income Fund ("Piper Fund"), a series of Piper 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 5A immediately following Article 5 thereof: 5A. (a) For purposes of this Article 5A, the following terms shall have the following meanings: "HERCULES COMPANY" means the Corporation. "PIPER COMPANY" means Piper Funds Inc., a Minnesota corporation. "ACQUIRED FUND" means Hercules Company's Hercules North American Growth and Income Fund, the Series A Shares of the Corporation. "ACQUIRING FUND" means Piper Company's Growth and Income 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 Hercules Company, without designation as to series. 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 GROWTH FUND EMERGING GROWTH FUND GROWTH AND INCOME FUND EQUITY STRATEGY FUND BALANCED FUND A SERIES OF PIPER FUNDS INC. Supplement dated January 24, 1996 to Prospectus dated April 27, 1995 The section of the prospectus on page 31 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 Funds 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). PROSPECTUS DATED NOVEMBER 27, 1995 PIPER FUNDS INC. PIPER JAFFRAY TOWER 222 SOUTH NINTH STREET, MINNEAPOLIS, MINNESOTA 55402-3804 (800) 866-7778 (TOLL FREE) Growth Fund, Emerging Growth Fund, Growth and Income Fund, Equity Strategy Fund and Balanced Fund (the "Funds") are series of Piper Funds Inc. (the "Company"), an open-end mutual fund whose shares are currently offered in thirteen series. Each Fund has its own investment objectives and policies designed to meet different investment goals. GROWTH FUND (formerly Value Fund) has a primary investment objective of long-term capital appreciation with secondary objectives of current income and conservation of principal. The Fund invests primarily in a diversified portfolio of common stocks or securities convertible into or carrying rights to buy common stocks. EMERGING GROWTH FUND has an investment objective of long-term capital appreciation. The Fund invests primarily in common stocks and securities convertible into common stocks of emerging growth companies, with an emphasis on companies headquartered or maintaining offices or manufacturing facilities in states in which the Distributor maintains offices. GROWTH AND INCOME FUND has investment objectives of both current income and long-term growth of capital and income. The Fund invests in a broadly diversified portfolio of securities, with an emphasis on securities of large, established companies that have a history of dividend payments and that the Adviser believes are undervalued. EQUITY STRATEGY FUND has an investment objective of a high total investment return consistent with prudent investment risk. The Fund invests primarily in common stocks and securities convertible into or carrying rights to buy common stocks of companies representing a number of different sectors of the economy. In pursuing its objective, the Fund expects to have a high portfolio turnover rate. BALANCED FUND has investment objectives of both current income and long-term capital appreciation consistent with conservation of principal. The Fund invests primarily in common stocks and fixed-income securities with emphasis on income-producing securities that appear to have some potential for capital appreciation. INVESTMENTS IN CERTAIN FUNDS MAY INVOLVE ADDITIONAL RISKS. EQUITY STRATEGY FUND MAY ENGAGE IN SHORT-TERM TRADING IN ATTEMPTING TO ACHIEVE ITS INVESTMENT OBJECTIVE, WHICH WILL INCREASE TRANSACTION COSTS. IN ADDITION, EQUITY STRATEGY FUND MAY SELL SECURITIES SHORT. EACH FUND MAY INVEST IN ILLIQUID SECURITIES WHICH WILL INVOLVE GREATER RISK THAN INVESTMENTS IN OTHER SECURITIES AND MAY INCREASE FUND EXPENSES. SEE "SPECIAL INVESTMENT METHODS" FOR A DISCUSSION OF THE RISKS OF EACH OF THESE TECHNIQUES. This Prospectus concisely describes the information about the Funds that you ought to know before investing. Please read it carefully before investing and retain it for future reference. A Statement of Additional Information about the Funds dated November 27, 1995, is available free of charge. Write to the Funds 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 Growth Fund (formerly Value Fund), Emerging Growth Fund, Growth and Income Fund, Equity Strategy Fund and Balanced Fund (sometimes referred to herein as a "Fund" or, collectively, as the "Funds") are series of Piper Funds Inc. (the "Company"). The Company is an open-end management investment company organized under the laws of the State of Minnesota in 1986, the shares of which are currently offered in thirteen series. Each Fund has a different investment objective and is designed to meet different investment needs and each Fund is classified as a diversified fund. THE INVESTMENT ADVISER The Company is managed by Piper Capital Management Incorporated (the "Adviser"), a wholly owned subsidiary of Piper Jaffray Companies Inc. Each Fund pays the Adviser a fee for managing its investment portfolio. Fees for each Fund are paid at an annual rate of .75% on net assets up to $100 million and are scaled downward as assets increase in size. These fees are higher than fees paid by most other investment companies. See "Management--Investment Adviser." THE DISTRIBUTOR Piper Jaffray Inc. ("Piper Jaffray"), a wholly owned subsidiary of Piper Jaffray Companies Inc. and an affiliate of the Adviser, serves as Distributor of the Funds' shares. OFFERING PRICE Shares of the Funds 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. 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 each 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 (except Hercules Funds Inc.) 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." REDEMPTION PRICE Shares of any 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 Sales Charge." Each Fund reserves the right, upon 30 days' written notice, to redeem an account in any Fund 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 any of the Funds is subject to certain risks, as set forth in detail under "Investment Objectives and Policies" and "Special Investment Methods." As with other mutual funds, there can be no assurance that any Fund will achieve its objective. Each of the Funds is subject to market risk (the risk that a security will be worth less when it is sold than when it was bought due to any number of factors, including reduced demand or loss of investor confidence in the market) and/or interest-rate risk (the risk that rising interest rates will make bonds issued at lower interest rates worth less). As a result, the value of each Fund's 2 shares will vary. Some or all of the Funds, to the extent set forth under "Investment Objectives and Policies" and "Special Investment Methods," may engage in the following investment practices: the use of repurchase agreements, the lending of portfolio securities, borrowing from banks, entering into options transactions on securities in which the Funds may invest and on stock indexes, the use of stock index futures contracts and interest rate futures contracts, entering into options on futures contracts, the use of short sales, and the purchase or sale of securities on a "when-issued" or forward commitment basis, including the use of mortgage dollar rolls. These techniques may increase the volatility of a Fund's net asset value. Equity Strategy Fund may engage in short-term trading in attempting to achieve its investment objective, which will increase transaction costs. Balanced Fund and Growth and Income Fund may purchase mortgage-related securities, including derivative mortgage securities. In addition to interest rate risk, mortgage-related securities are subject to prepayment risk. Recent market experience has shown that certain derivative mortgage securities may be extremely sensitive to changes in interest rates and in prepayment rates on the underlying mortgage assets and, as a result, the prices of such securities may be highly volatile. All of these transactions involve certain special risks, as set forth under "Investment Objectives and Policies" and "Special Investment Methods." SHAREHOLDER INQUIRIES Any questions or communications regarding a shareholder account should be directed to your Piper Jaffray Investment Executive or, in the case of shares held through another broker-dealer, to IFTC at (800) 874-6205. General inquiries regarding the Funds should be directed to the Funds at the telephone number set forth on the cover page of this Prospectus. FUND EXPENSES
EMERGING GROWTH AND EQUITY GROWTH GROWTH INCOME STRATEGY BALANCED FUND FUND FUND FUND FUND ------ -------- ---------- -------- -------- SHAREHOLDER TRANSACTION EXPENSES Maximum Sales Load Imposed on Purchases (as a percentage of offering price)........... 4.00% 4.00% 4.00% 4.00% 4.00% Exchange Fee * $ 0 0 0 0 0 ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets) Management Fees................................. .71% .70% .75% .75% .75% Rule 12b-1 Fees (after voluntary limitation) **............................................ .32% .32% .32% .32% .32% Other Expenses (after voluntary expense reim- bursement) **................................. .24% .22% .25% .33% .25% ------ --- --- --- --- Total Fund Operating Expenses (after voluntary limitations and expense reimbursements)....... 1.27% 1.24% 1.32% 1.40% 1.32%
- --------- * There is a $5.00 fee for each exchange in excess of four exchanges per year. See "How to Purchase Shares--Exchange Privilege." ** See the discussion below for an explanation of voluntary Rule 12b-1 fee limitations and expense reimbursements. 3 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:
EMERGING GROWTH AND EQUITY GROWTH GROWTH INCOME STRATEGY BALANCED FUND FUND FUND FUND FUND ------ -------- ---------- -------- -------- 1 Year ........................................ $ 52 52 53 53 53 3 Years ....................................... $ 79 78 80 80 80 5 Years ....................................... $ 107 106 109 109 109 10 Years ....................................... $ 187 185 193 193 193
The purpose of the above Fund Expenses table is to assist you in understanding the various costs and expenses that investors in the Funds will bear directly or indirectly. THE EXAMPLE CONTAINED IN THE TABLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The information set forth in the table is based on actual expenses (including expenses paid through expense offset arrangements) incurred by the Funds during the fiscal year ended September 30, 1995. The expenses for all Funds reflect a voluntary limitation by the Distributor of the fee payable to it under each Fund's Rule 12b-1 Plan to .32% of each Fund's average daily net assets. In addition, the Adviser reimbursed Growth and Income Fund, Equity Strategy Fund and Balanced Fund for the amount by which total Fund operating expenses (excluding expenses paid through expense offset arrangements) for fiscal 1995 exceeded 1.32% of average daily net assets. Absent any Rule 12b-1 fee limitations or expense reimbursements, Total Fund Operating Expenses for the fiscal year ended September 30, 1995, as a percentage of average daily net assets, would have been 1.45% for Growth Fund, 1.42% for Emerging Growth Fund, 1.60% for Growth and Income Fund, 1.63% for Equity Strategy Fund and 1.65% for Balanced Fund. The voluntary Rule 12b-1 fee limitations for each Fund and the expense reimbursements for Growth and Income Fund, Equity Strategy Fund and Balanced Fund reflected in the Fund Expenses table may be discontinued at any time after the fiscal 1996 year end. The Adviser may or may not assume additional expenses of the Funds from time to time, in its discretion, while retaining the ability to be reimbursed by the Funds for expenses assumed during a fiscal year prior to the end of such year. The foregoing policy will have the effect of lowering a Fund's overall expense ratio and increasing yield to investors when such amounts are assumed or the inverse when such amounts are reimbursed. As a result of each Fund's annual payment of its Rule 12b-1 fee, a portion of which is considered an asset-based sales charge, long-term shareholders of a 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." 4 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 each Fund. This information has been audited by KPMG Peat Marwick LLP, independent auditors, and should be read in conjunction with the financial statements of each Fund contained in its annual report. An annual report of each Fund is available without charge by contacting the Funds at 800-866-7778 (toll free). In addition to financial statements, the annual reports contain further information about the performance of the Funds. GROWTH FUND
PERIOD PERIOD FROM FROM FISCAL YEAR ENDED SEPTEMBER 30, 11/1/88 YEAR 3/16/87* ----------------------------------------- TO ENDED TO 1995 1994 1993 1992 1991 1990 9/30/89 10/31/88 10/31/87 ------ ----- ----- ----- ----- ----- ------- -------- -------- Net asset value, beginning of period.............. $18.90 19.30 17.06 16.86 11.69 12.46 9.60 8.61 10.00 ------ ----- ----- ----- ----- ----- ------- -------- -------- Operations: Net investment income........................... 0.08 0.08 0.12 0.17 0.19 0.20 0.17 0.19 0.10 Net realized and unrealized gains (losses) on investments................................... 3.60 (0.37) 2.24 0.76 5.18 (0.78) 2.86 0.98 (1.40) ------ ----- ----- ----- ----- ----- ------- -------- -------- Total from operations....................... 3.68 (0.29) 2.36 0.93 5.37 (0.58) 3.03 1.17 (1.30) ------ ----- ----- ----- ----- ----- ------- -------- -------- Distributions from net investment income.......... (0.08) (0.11) (0.12) (0.16) (0.20) (0.19) (0.17) (0.18) (0.09) Distributions from net realized gains............. (2.10) -- -- (0.57) -- -- -- -- -- ------ ----- ----- ----- ----- ----- ------- -------- -------- Total distributions......................... (2.18) (0.11) (0.12) (0.73) (0.20) (0.19) (0.17) (0.18) (0.09) ------ ----- ----- ----- ----- ----- ------- -------- -------- Net asset value, end of period.................... $20.40 18.90 19.30 17.06 16.86 11.69 12.46 9.60 8.61 ------ ----- ----- ----- ----- ----- ------- -------- -------- ------ ----- ----- ----- ----- ----- ------- -------- -------- Total return (%)+................................. 20.60 (1.51) 13.85 5.76 46.23 (4.81) 31.90 13.79 (13.16) Net assets end of period (in millions)............ $ 172 195 252 200 107 47 37 19 18 Ratio of expenses to average daily net assets (%)++........................................... 1.27 1.23 1.26 1.29 1.32 1.31 1.30** 1.30 1.00** Ratio of net investment income to average daily net assets (%)++................................ 0.40 0.43 0.66 1.04 1.25 1.57 1.75** 2.06 1.84** Portfolio turnover rate (excluding short-term securities) (%)................................. 80 11 45 36 36 37 48 52 32
- ---------- *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 the periods reflected above, the Advisor and Distributor voluntarily waived fees and expenses. Had the Fund paid all expenses and had the maximum Rule 12b-1 fee been in effect, the ratios of expenses and net investment income to average daily net assets would have been: 1.45%/022% in fiscal 1995, 1.42%/0.24% in fiscal 1994, 1.44%/0.48% in fiscal 1993, 1.47%/0.86% in fiscal 1992, 1.55%/1.02% in fiscal 1991, 1.64%/1.24% in fiscal 1990, 1.89%/1.16% in fiscal 1989, 1.96%/1.40% in fiscal 1988 and 2.29%/0.55% in fiscal 1987. Beginning in fiscal 1995, the expense ratio reflects the effect of gross expenses paid indirectly by the Fund. Prior period expense ratios have not been adjusted. 5 EMERGING GROWTH FUND
FISCAL YEAR ENDED SEPTEMBER 30, ------------------------------------------ 1995 1994 1993 1992 1991 1990* ------ ----- ----- ----- ----- ------ Net asset value, beginning of period.............. $19.26 19.73 14.41 13.86 8.59 10.00 ------ ----- ----- ----- ----- ------ Operations: Net investment income (loss).................... (0.11) (0.07) (0.05) (0.01) 0.02 0.02 Net realized and unrealized gains (losses) on investments................................... 6.80 (0.40) 5.37 0.64 5.28 (1.42) ------ ----- ----- ----- ----- ------ Total from operations....................... 6.69 (0.47) 5.32 0.63 5.30 (1.40) ------ ----- ----- ----- ----- ------ Distributions from net investment income.......... -- -- -- -- (0.03) (0.01) Distributions from net realized gains............. -- -- -- (0.08) -- -- ------ ----- ----- ----- ----- ------ Total distributions......................... -- -- -- (0.08) (0.03) (0.01) ------ ----- ----- ----- ----- ------ Net asset value, end of period.................... $25.95 19.26 19.73 14.41 13.86 8.59 ------ ----- ----- ----- ----- ------ ------ ----- ----- ----- ----- ------ Total return (%)+................................. 34.68 (2.38) 36.92 4.55 61.80 (14.01) Net asset, end of period (in millions)............ $ 253 224 191 110 56 21 Ratio of expenses to average daily net assets (%)++........................................... 1.24 1.24 1.29 1.30 1.30 1.30** Ratio of net investment income to average daily net assets (%)++................................ (0.51) (0.38) (0.34) (0.14) 0.11 0.71** Portfolio turnover rate (excluding short-term securities) (%)................................. 33 31 30 21 27 6
- ---------- *Period from 4/23/90 (commencement of operations) to 9/30/90. **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 the periods reflected above, the Adviser and the Distributor voluntarily waived fees and expenses. Had the Fund paid all expenses and had the maximum Rule 12b-1 fee been in effect, the ratios of expenses and net investment income to average daily net assets would have been: 1.42%/(0.69%) in fiscal 1995, 1.44%/(0.58%) in fiscal 1994, 1.49%/(0.54%) in fiscal 1993, 1.56%/(0.40%) in fiscal 1992, 1.70%/(0.29%) in fiscal 1991 and 1.95%/0.06% in fiscal 1990. Beginning in fiscal 1995, the expense ratio reflects the effect of gross expenses paid indirectly by the Fund. Prior period expense ratios have not been adjusted. 6 GROWTH AND INCOME FUND
FISCAL YEAR ENDED SEPTEMBER 30, ------------------------------------------ 1995 1994 1993 1992* --------- --------- --------- --------- Net asset value, beginning of period.................................. $ 10.27 10.30 10.01 10.00 --------- --------- --------- --------- Operations: Net investment income............................................... 0.19 0.24 0.24 0.03 Net realized and unrealized gains (losses) on investments........... 2.70 0.02 0.29 (0.02) --------- --------- --------- --------- Total from operations........................................... 2.89 0.26 0.53 0.01 --------- --------- --------- --------- Distributions from net investment income.............................. (0.19) (0.24) (0.24) -- Distributions from net realized gains................................. (0.04) (0.05) -- -- --------- --------- --------- --------- Total distributions............................................. (0.23) (0.29) (0.24) -- --------- --------- --------- --------- Net asset value, end of period........................................ $ 12.93 10.27 10.30 10.01 --------- --------- --------- --------- --------- --------- --------- --------- Total return (%)+..................................................... 28.81 2.53 5.41 0.10 Net assets, end of period (in millions)............................... $ 73 73 96 52 Ratio of expenses to average daily net assets (%)++................... 1.32 1.29 1.32 1.28** Ratio of net investment income to average daily net assets (%)++...... 1.93 2.26 2.51 3.00** Portfolio turnover rate (excluding short-term securities) (%)......... 14 20 26 1
- ---------- *Period from 7/21/92 (commencement of operations) to 9/30/92. **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 the periods reflected above, the Adviser and the Distributor voluntarily waived fees and expenses. Had the Fund paid all expenses and had the maximum Rule 12b-1 fee been in effect, the ratios of expenses and net investment income to average daily net assets would have been: 1.60%/1.65% in fiscal 1995, 1.62%/1.93% in fiscal 1994, 1.58%/2.25% in fiscal 1993 and 2.06%/2.22% in fiscal 1992. Beginning in fiscal 1995, the expense ratio reflects the effect of gross expenses paid indirectly by the Fund. Prior period expense ratios have not been adjusted. 7 EQUITY STRATEGY FUND
PERIOD FROM FISCAL YEAR ENDED SEPTEMBER 30, PERIOD FROM YEAR 3/16/87* ----------------------------------------- 11/1/88 TO ENDED TO 1995 1994 1993 1992 1991 1990 9/30/89 10/31/88 10/31/87 ------ ----- ----- ----- ----- ----- ----------- -------- -------- Net asset value, beginning of period.............. $17.17 16.84 13.57 12.82 9.17 10.05 8.07 7.90 10.00 ------ ----- ----- ----- ----- ----- ----------- -------- -------- Operations: Net investment income+++........................ 0.11 0.07 0.03 0.08 0.07 0.10 0.38 0.09 0.08 Net realized and unrealized gains (losses) on investments................................... 2.27 0.29 3.30 0.71 3.65 (0.74) 1.85 0.19 (2.11) ------ ----- ----- ----- ----- ----- ----------- -------- -------- Total from operations....................... 2.38 0.36 3.33 0.79 3.72 (0.64) 2.23 0.28 (2.03) ------ ----- ----- ----- ----- ----- ----------- -------- -------- Distributions from net investment income.......... (0.09) (0.03) (0.06) (0.04) (0.07) (0.24) (0.25) (0.11) 0.07 ------ ----- ----- ----- ----- ----- ----------- -------- -------- Net asset value, end of period.................... $19.46 17.17 16.84 13.57 12.82 9.17 10.05 8.07 7.90 ------ ----- ----- ----- ----- ----- ----------- -------- -------- ------ ----- ----- ----- ----- ----- ----------- -------- -------- Total return (%)+................................. 13.88 2.12 24.56 6.18 40.71 (6.61) 27.86 3.47 (20.48) Net assets end of period (in millions)............ $ 48 78 84 9 9 8 13 19 28 Ratio of expenses to average daily net assets (%)++........................................... 1.40 1.32 1.28 1.47 1.32 1.49 1.30** 1.52 1.02** Ratio of net investment income to average daily net assets (%)++................................ 0.43 0.37 0.50 0.56 0.61 1.03 3.95** 1.13 1.51** Portfolio turnover rate (excluding short-term securities) (%)................................. 182 177 154 420 507 514 375 202 200
- ---------- *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 the periods reflected above, the Adviser and Distributor voluntarily waived fees and expenses. Had the Fund paid all expenses and had the maximum Rule 12b-1 fee been in effect, the ratios of expenses and net investment income to average daily net assets would have been: 1.63%/0.20% in fiscal 1995, 1.54%/0.15% in fiscal 1994, 1.86%/(0.08%) in fiscal 1993, 2.49%/(0.46%) in fiscal 1992, 2.39%/(0.46%) in fiscal 1991, 2.55%/(0.03%) in fiscal 1990, 2.23%/3.02% in fiscal 1989, 2.20%/0.45% in fiscal 1988 and 2.24%/0.29% in fiscal 1987. Beginning in fiscal 1995, the expense ratio reflects the effect of gross expenses paid indirectly by the Fund. Prior period expense ratios have not been adjusted. +++For the years ended September 30, 1992, and October 31, 1988, gross expenses included $0.02 per share of income tax expense. 8 BALANCED FUND
PERIOD FROM FISCAL YEAR ENDED SEPTEMBER 30, PERIOD FROM YEAR 3/16/87* ----------------------------------------- 11/1/88 TO ENDED TO 1995 1994 1993 1992 1991 1990 9/30/89 10/31/88 10/31/87 ------ ----- ----- ----- ----- ----- ----------- -------- -------- Net asset value, beginning of period.............. $11.81 12.23 11.88 10.77 8.87 10.00 9.19 8.97 10.00 ------ ----- ----- ----- ----- ----- ----------- -------- -------- Operations: Net investment income........................... 0.47 0.38 0.34 0.38 0.43 0.42 0.44 0.51 0.28 Net realized and unrealized gains (losses) on investments................................... 1.93 (0.26) 0.65 1.17 1.89 (1.14) 0.83 0.22 (1.09) ------ ----- ----- ----- ----- ----- ----------- -------- -------- Total from operations....................... 2.40 0.12 0.99 1.55 2.32 (0.72) 1.27 0.73 (0.81) ------ ----- ----- ----- ----- ----- ----------- -------- -------- Distributions from net investment income.......... (0.35) (0.37) (0.34) (0.39) (0.42) (0.41) (0.46) (0.51) (0.22) Distributions from net realized gains............. (0.12) (0.17) (0.30) (0.05) -- -- -- -- -- ------ ----- ----- ----- ----- ----- ----------- -------- -------- Total distributions......................... (0.47) (0.54) (0.64) (0.44) (0.42) (0.41) (0.46) (0.51) (0.22) ------ ----- ----- ----- ----- ----- ----------- -------- -------- Net asset value, end of period.................... $13.74 11.81 12.23 11.88 10.77 8.87 10.00 9.19 8.97 ------ ----- ----- ----- ----- ----- ----------- -------- -------- ------ ----- ----- ----- ----- ----- ----------- -------- -------- Total return (%)+................................. 21.78 1.00 8.51 14.75 26.61 (7.42) 14.20 8.53 (8.24) Net assets end of period (in millions)............ $ 44 46 57 28 15 14 16 13 13 Ratio of expenses to average daily net assets (%)++........................................... 1.32 1.32 1.32 1.32 1.32 1.31 1.30** 1.30 .99** Ratio of net investment income to average daily net assets (%)++................................ 3.54 3.03 3.13 3.57 4.15 4.32 5.15** 5.58 5.46** Portfolio turnover rate (excluding short-term securities) (%)................................. 39 62 41 58 44 105 95 73 95
- ---------- *Commencement of operations. **Adjusted to an annual basis. +Total return is based on the change in net asset value during the periods, assumes reinvestment of all distributions and does not reflect a sales charge. ++During the periods reflected above, the Adviser and the Distributor voluntarily waived fees and expenses. Had the Fund paid all expenses and had the maximum Rule 12b-1 fee been in effect, the ratios of expenses and net investment income to average daily net assets would have been: 1.65%/3.21% in fiscal 1995, 1.60%/2.75% in fiscal 1994, 1.62%/2.83% in fiscal 1993, 1.77%/3.12% in fiscal 1992, 1.98%/3.49% in fiscal 1991, 1.96%/3.67% in fiscal 1990, 2.29%/4.16% in fiscal 1989, 2.09%/4.79% in fiscal 1988 and 1.96%/4.09% in fiscal 1987. Beginning in fiscal 1995, the expense ratio reflects the effect of gross expenses paid indirectly by the Fund. Prior period expense ratios have not been adjusted. 9 INVESTMENT OBJECTIVES AND POLICIES The investment objectives listed below cannot be changed without shareholder approval. The investment policies and techniques employed in pursuit of the Funds' objectives may be changed without shareholder approval, unless otherwise noted. Because of the risks associated with common stock and bond investments, the Funds are intended to be long-term investment vehicles and are not designed to provide investors with a means of speculating on short-term market movements. Investors should be willing to accept the risk of the potential for sudden, sometimes substantial declines in market value. No assurance can be given that the Funds will achieve their objectives or that shareholders will be protected from the risk of loss that is inherent in equity and bond market investing. GROWTH FUND INVESTMENT OBJECTIVES. Growth Fund's primary investment objective is long-term capital appreciation with secondary objectives of current income and conservation of principal. INVESTMENT POLICIES AND TECHNIQUES. Growth Fund (formerly known as Value Fund) will maintain a carefully selected portfolio of securities broadly diversified among industries and companies. The Fund will invest at least 60% of its total assets in securities of large companies with market capitalizations of over $500 million offering, in the opinion of the Adviser, long-term earnings growth, a cyclical earnings rebound or above-average dividend yield when compared to the S&P 500. Emphasis will be placed on common stocks of companies which the Adviser believes are well managed with strong business fundamentals and which are trading at a discount to the present value of their projected future earnings. Growth Fund may also invest up to 40% of its total assets in securities of medium ($100-$500 million market capitalization) and smaller sized (under $100 million market capitalization) companies, some of which may be considered speculative in nature, which the Adviser believes could generate high levels of future revenue and earnings growth and where, in the Adviser's opinion, the investment opportunity is not fully reflected in the price of the securities. Growth Fund will invest under normal market conditions not less than 90% of its total assets in common stocks or securities convertible into or that carry the right to buy common stocks and in repurchase agreements. See "Special Investment Methods--Repurchase Agreements." Under unusual circumstances, as a defensive measure, Growth Fund may retain cash or invest part or all of its assets in short-term money market securities deemed by the Adviser to be consistent with a temporary defensive posture. In addition, normally up to 5% of the Fund's total assets will be held in short-term money market securities and cash to pay redemption requests and Fund expenses. Investments in short-term money market securities may include obligations of the U.S. Government and its agencies and instrumentalities, time deposits, bank certificates of deposit, bankers' acceptances, high-grade commercial paper and other money market instruments. See "Investment Objectives, Policies and Restrictions" in the Statement of Additional Information. Growth Fund may write covered put and call options on the securities in which it may invest, purchase put and call options with respect to such securities, and enter into closing purchase and sale transactions with respect thereto. Growth Fund may also purchase and write put and call options on stock indexes listed on national securities exchanges. See "Special Investment Methods--Options Transactions." In addition, solely for the purpose of hedging against changes in the value of its portfolio securities due to anticipated changes in the market, Growth Fund may enter into stock index futures contracts, purchase and write put or call options on such contracts, and close such contracts and options. See "Special Investment Methods--Futures Contracts and Options on Futures Contracts" and "--Risks of Transactions in Futures Contracts and Options on Futures Contracts." INVESTMENT RISKS. As a mutual fund investing primarily in common stocks, Growth Fund is subject to market risk, i.e., the possibility that stock prices in general will decline over short or even extended periods. The stock market tends to be cyclical, with periods when stock prices generally rise and periods when stock prices generally decline. The investment techniques used by the Fund also pose certain risks. See "Special Investment Methods." 10 EMERGING GROWTH FUND INVESTMENT OBJECTIVE. Emerging Growth Fund's investment objective is long-term capital appreciation. Dividend and interest income from portfolio securities, if any, is incidental to the Fund's objective. INVESTMENT POLICIES AND TECHNIQUES. Emerging Growth Fund seeks to achieve its objective by investing, under normal circumstances, at least 90% of its assets in common stocks and securities convertible into common stocks of companies which the Adviser believes to have superior appreciation potential. Emerging Growth Fund invests primarily (i.e., at least 65% of its assets under normal market conditions) in common stocks and securities convertible into common stocks of small and medium sized companies that are early in their life cycles but that have the potential to become major enterprises (emerging growth companies). These companies generally will have annual gross revenues at the time of purchase ranging from $10 million to $1 billion, and their shares will frequently be traded in the over-the-counter market. Companies with revenues in this range typically will have market capitalizations ranging from $250 million to $4 billion. The Fund may also invest, however, in more established companies whose rates of earnings growth are expected to accelerate because of special factors such as a rejuvenated management, new products, changes in consumer demand or basic changes in the economic environment, and in companies which appear to be undervalued in relation to their long-term earning power or asset values. Emerging Growth Fund also intends to invest at least 65% of its assets in common stocks and securities convertible into common stocks of companies headquartered or maintaining offices or manufacturing facilities in states in which the Distributor maintains offices. This will allow the Fund to draw on the Distributor's local expertise and research capabilities. The Distributor currently maintains offices in Arizona, California, Colorado, Idaho, Illinois, Iowa, Kansas, Minnesota, Missouri, Montana, Nebraska, New Jersey, New York, North Dakota, Oregon, South Dakota, Utah, Washington, Wisconsin and Wyoming; however, these states may change from time to time. The Fund's emphasis on emerging growth companies stems from the Adviser's belief that there are four broad phases of corporate growth, with the fastest growth normally occurring in the second of these phases. The first phase of corporate growth occurs during the infancy of a company. Investing in a company during this phase of its growth involves high risk, with many companies failing to survive. During the second phase of a company's growth, sometimes referred to as the emerging growth phase, there is often a period of swift development during which growth occurs at a rate generally not equaled by more mature companies. There next occurs a third phase of established growth in which growth is generally less dramatic because of competitive forces, regulations and internal bureaucracy. This is followed by a fourth phase of maturity, when the growth pattern of a company begins to roughly reflect the increase in gross national product. The Adviser intends to focus on companies positioned in the second phase of growth. Of course, the actual growth of a company is not necessarily consistent with this pattern and cannot be foreseen. Consequently, it may be difficult to determine the phase in which a company is currently situated. 11 The following illustration represents the Adviser's conception of the four growth phases of a successful business. This graph is presented for illustrative purposes only, and does not represent the actual growth of a typical company. In addition, there is no necessary correlation between the business growth of a company and the market value of its stock. This illustration should not be considered a representation of the performance of the common stocks in which the Fund invests. [CHART] Under unusual circumstances, as a defensive measure, Emerging Growth Fund may retain cash or invest part or all of its assets in short-term money market securities deemed by the Adviser to be consistent with a temporary defensive posture. In addition, even when Emerging Growth Fund is "fully invested," normally up to 5% of the Fund's total assets will be held in short-term money market securities and cash to pay redemption requests and Fund expenses. Investments in short-term money market securities may include obligations of the U.S. Government and its agencies and instrumentalities, time deposits, bank certificates of deposit, bankers' acceptances, high-grade commercial paper and other money market instruments. See "Investment Objectives, Policies and Restrictions" in the Statement of Additional Information. Emerging Growth Fund may also enter into repurchase agreements. See "Special Investment Methods--Repurchase Agreements." Emerging Growth Fund may write covered put and call options on the securities in which it may invest, purchase put and call options with respect to such securities, and enter into closing purchase and sale transactions with respect thereto. Emerging Growth Fund may also purchase and write put and call options on stock indexes listed on national securities exchanges. See "Special Investment Methods--Options Transactions." In addition, solely for the purpose of hedging against changes in the value of its portfolio securities due to anticipated changes in the market, Emerging Growth Fund may enter into stock index futures contracts, purchase and write put or call options on such contracts, and close such contracts and options. See "Special Investment Methods--Futures Contracts and Options on Futures Contracts" and "--Risks of Transactions in Futures Contracts and Options on Futures Contracts." INVESTMENT RISKS. As a mutual fund investing primarily in common stocks, Emerging Growth Fund is subject to market risk, i.e., the possibility that stock prices in general will decline over short or even extended periods. The stock market tends to be cyclical, with periods when stock prices generally rise and periods when stock prices generally decline. In addition, companies in which the Fund invests also may involve certain special risks. Emerging growth companies may have limited product lines, markets or financial resources, and they may be dependent on a limited management group. The securities of emerging growth companies may have limited market stability and may be subject to more abrupt or erratic market movements than securities of larger, more established companies or the market averages in general. Thus, shares of Emerging Growth Fund will probably be subject to greater fluctuation in value than shares of a more conservative equity fund and an investment in the Fund should not be considered a total investment plan. In addition, Emerging Growth Fund may be less diversified by industry and company than other funds with a similar investment objective and no geographic limitation. The investment techniques used by the Fund also pose certain risks. See "Special Investment Methods." 12 GROWTH AND INCOME FUND INVESTMENT OBJECTIVES. Growth and Income Fund's investment objectives are to provide current income and long-term growth of capital and income. INVESTMENT POLICIES AND TECHNIQUES. Growth and Income Fund will pursue its investment objectives by investing in a broadly diversified portfolio of securities, with an emphasis on securities of large, established companies that have a history of dividend payments and that the Adviser believes are undervalued. Companies will be selected on the basis of the Adviser's assessment of their prospects for long-term growth in dividends and earnings. Additional factors which the Adviser will consider include the stability of a company's earnings as well as the sensitivity of that company's particular industry to fluctuations in major economic variables, such as interest rates and industrial production. Under normal market conditions, Growth and Income Fund will invest principally in common stocks and securities convertible into common stocks. However, the Fund may also invest in debt securities, including U.S. Government securities (securities issued or guaranteed as to payment of principal and interest by the U.S. Government or its agencies or instrumentalities) and nonconvertible preferred stocks. Investments in long-term debt securities, including debt securities convertible into common stock, will be limited to U.S. Government securities and those securities rated at the time of purchase within the four highest investment grades assigned by Moody's Investors Service, Inc. ("Moody's") (Aaa, Aa, A or Baa) or Standard & Poor's Ratings Services ("Standard & Poor's") (AAA, AA, A, or BBB), or to unrated securities judged by the Adviser at the time of purchase to be of comparable quality. Debt securities rated Baa and BBB have speculative characteristics; changes in economic conditions or other circumstances are more likely to lead to a weakened capacity to make principal and interest payments than is the case with higher grade bonds. In the event a security held in Growth and Income Fund's portfolio is downgraded to a rating below Baa or BBB, the Fund will sell such security as promptly as practicable. For an explanation of Moody's and Standard & Poor's ratings, see Appendix A to the Statement of Additional Information. U.S. Government securities in which the Fund may invest 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. Obligations of U.S. Government agencies or instrumentalities are backed in a variety of ways by the U.S. Government or its agencies or instrumentalities. Some of these obligations, such as Government National Mortgage Association mortgage-backed securities, are backed by the full faith and credit of the U.S. Treasury. Others, such as obligations of the Federal Home Loan Banks, are backed by the right of the issuer to borrow from the Treasury. Still others, such as those issued by the Federal National Mortgage Association, are backed by the discretionary authority of the U.S. Government to purchase certain obligations of the agency or instrumentality. Finally, obligations of other agencies or instrumentalities are backed only by the credit of the agency or instrumentality issuing the obligations. See "Investment Objectives and Policies--U.S. Government Securities" in the Statement of Additional Information. Under unusual circumstances, as a defensive measure, Growth and Income Fund may retain cash or invest part or all of its assets in short-term money market securities deemed by the Adviser to be consistent with a temporary defensive posture. In addition, normally a small portion of the Fund's total assets will be held in short-term money market securities and cash to pay redemption requests and Fund expenses. Investments in short-term money market securities may include obligations of the U.S. Government and its agencies and instrumentalities, time deposits, bank certificates of deposit, bankers' acceptances, high-grade commercial paper and other money market instruments. See "Investment Objectives, Policies and Restrictions" in the Statement of Additional Information. Growth and Income Fund may also enter into repurchase agreements. See "Special Investment Methods--Repurchase Agreements." Growth and Income Fund may write covered put and call options on the securities in which it may invest, purchase put and call options with respect to such securities, and enter into closing purchase and sale transactions with respect thereto. Growth and Income Fund may also purchase and write put and call options on stock indexes listed on national securities exchanges. See "Special Investment Methods--Options Transactions." In addition, solely for the purpose of hedging against changes in the value of its portfolio securities due to anticipated changes in the market, Growth and Income Fund may enter into stock index futures contracts and interest rate futures contracts, purchase and write put or call options on such contracts, 13 and close such contracts and options. See "Special Investment Methods--Futures Contracts and Options on Futures Contracts" and "--Risks of Transactions in Futures Contracts and Options on Futures Contracts." Growth and Income Fund may purchase or sell securities on a "when-issued" or "forward commitment" basis and may enter into mortgage "dollar rolls." The use of these techniques could result in increased volatility of the Fund's net asset value. See "Special Investment Methods--When-Issued Securities." INVESTMENT RISKS. As a mutual fund investing primarily in common stocks, Growth and Income Fund is subject to market risk, i.e., the possibility that stock prices in general will decline over short or even extended periods. The stock market tends to be cyclical, with periods when stock prices generally rise and periods when stock prices generally decline. Because Growth and Income Fund also may invest in debt securities, the Fund may be subject to interest rate risk as well. Bond prices generally vary inversely with changes in the level of interest rates so that when interest rates rise, the prices of bonds fall; conversely, when interest rates fall, bond prices rise. Investments in debt securities may also subject the Fund to credit risk. Credit risk, also know as default risk, is the possibility that a bond issuer will fail to make timely payments of interest or principal. As discussed above, the Fund's investments in long-term debt securities are limited to U.S. Government securities and securities which, at the time of purchase, are rated investment grade or are judged by the Adviser to be of comparable quality. The investment techniques used by the Fund also pose certain risks. See "Special Investment Methods." EQUITY STRATEGY FUND INVESTMENT OBJECTIVE. Equity Strategy Fund's investment objective is to provide a high total investment return consistent with prudent investment risk. INVESTMENT POLICIES AND TECHNIQUES. Equity Strategy Fund invests primarily (at least 65% of its assets under normal market conditions) in common stocks and in securities that are convertible into or that carry rights to buy common stocks of companies representing a number of different sectors of the economy. The Fund seeks to achieve its objective by varying the weighting of its portfolio among the different sectors. The sectors in which the Fund currently invests are: Basic Energy, Basic Materials, Industrial Manufacturing, Utilities, Commercial and Industrial Services, Financial, Consumer Staples, Consumer Cyclical, Health Care, Technology and Transportation. For a description of the scope of each of these industry sectors, see Appendix D to the Statement of Additional Information. In selecting investments for Equity Strategy Fund, the Adviser intends to follow the investment strategies used by Piper Jaffray in developing the MicroGroup Project. The MicroGroup Project divides over 5,300 individual issuers into over 350 MicroGroups, which are groups of stocks that have similar trading patterns and whose earnings or revenues are derived from similar lines of business. Stocks of companies that are broadly diversified may be included in more than one MicroGroup and possibly in more than one sector. The MicroGroups are then split into the eleven broader economic sectors listed above. For example, the Transportation Sector consists of Airline, Air Freight, Trucking, Freight Forwarder, Railroad and Marine Transportation MicroGroups. Divisions into sectors and MicroGroups are based upon the concept that stocks of issuers engaged in similar operations will respond to market forces in a similar manner. The number of sectors into which the MicroGroup Project divides the economy may change from time to time, and Equity Strategy Fund may invest in any of these sectors. Equity Strategy Fund may invest up to 25% of its total assets in common stocks or securities convertible into common stocks that are deemed by the Adviser to have investment merit but that are not included in any of the MicroGroups. Most typically, a stock will not be included in a MicroGroup for one of the following reasons: (a) the stock is being issued in connection with an initial public offering and has not yet been placed in a MicroGroup; (b) the issuer's line of business precludes an ideal fit into a MicroGroup (e.g., the issuer is too specialized or too diversified); or (c) the stock is that of a foreign issuer. (No more than 5% of the total assets of Equity Strategy Fund will be invested in the securities of foreign issuers.) In response to changes or anticipated changes in the general economy and within one or more particular industry sectors, the Adviser may increase, decrease or eliminate entirely a particular sector's representation in the Fund's portfolio, which may result in a higher portfolio turnover rate than experienced by other equity funds. Sector and MicroGroup selections are based upon both fundamental factors (e.g., economic and 14 interest rate sensitivity) and technical factors (e.g., whether the sector or MicroGroup appears to be under accumulation or distribution) and upon relative strength considerations (whether the sector or MicroGroup is outperforming or underperforming the market). Component companies of selected MicroGroups are in turn evaluated based upon fundamental earnings developments, financial condition and technical considerations. As a result of adhering to these principles, it is anticipated that Equity Strategy Fund will invest in both large- and small-capitalization issues, some of which may be considered speculative in nature. From time to time, for temporary defensive purposes, Equity Strategy Fund may retain cash or invest part or all of its assets in short-term money market securities deemed by the Adviser to be consistent with a temporary defensive posture. In addition, even when Equity Strategy Fund is "fully invested," normally up to 5% of the Fund's total assets will be held in short-term money market securities and cash, to pay redemption requests and Fund expenses. Investments in short-term money market securities may include obligations of the U.S. Government and its agencies and instrumentalities, time deposits, bank certificates of deposit, bankers' acceptances, high-grade commercial paper and other money market instruments. See "Investment Objectives, Policies and Restrictions" in the Statement of Additional Information. Equity Strategy Fund may also enter into repurchase agreements. See "Special Investment Methods--Repurchase Agreements." Equity Strategy Fund may write covered put and call options on the securities in which it may invest, purchase put and call options with respect to such securities, and enter into closing purchase and sale transactions with respect thereto. Equity Strategy Fund may also purchase and write put and call options on stock indexes listed on national securities exchanges. See "Special Investment Methods--Options Transactions." In addition, solely for the purpose of hedging against changes in the value of its portfolio securities due to anticipated changes in the market, Equity Strategy Fund may enter into stock index futures contracts, purchase and write put or call options on such contracts, and close such contracts and options. See "Special Investment Methods--Futures Contracts and Options on Futures Contracts" and "--Risks of Transactions in Futures Contracts and Options on Futures Contracts." Equity Strategy Fund may also make short sales of securities. See "Special Investment Methods--Short Sales." INVESTMENT RISKS. As a mutual fund investing primarily in common stocks, Equity Strategy Fund is subject to market risk, i.e., the possibility that stock prices in general will decline over short or even extended periods. The stock market tends to be cyclical, with periods when stock prices generally rise and periods when stock prices generally decline. The investment results of the Fund will also depend upon the Adviser's ability to anticipate correctly the relative performance of various industry sectors. The Fund's investment results would suffer, for example, if none or only a small portion of the Fund's assets were allocated to a particular sector during a significant market advance in that sector, or if a major portion of its assets were allocated to a particular sector during a market decline in that sector. The Adviser's strategy may result in the Fund investing in both large and small capitalization issues, some of which may be considered speculative in nature. The investment techniques used by the Fund also pose certain risks. See "Special Investment Methods." BALANCED FUND INVESTMENT OBJECTIVES. Balanced Fund has investment objectives of both current income and long-term capital appreciation consistent with conservation of principal. INVESTMENT POLICIES AND TECHNIQUES. It is intended that the assets of Balanced Fund will be invested on the basis of combined considerations of risk, income, capital appreciation and protection of capital value. The Fund may invest in any type or class of securities, including money market securities, fixed-income securities, such as bonds, debentures, preferred stocks and U.S. Government securities (securities issued or guaranteed as to payment of principal and interest by the U.S. Government or its agencies or instrumentalities), senior securities convertible into common stocks and common stocks. The Fund may invest up to 25% of its total assets in foreign securities. See "Special Investment Methods--Foreign Securities." Balanced Fund may also enter into repurchase agreements. See "Special Investment Methods--Repurchase Agreements." The mix of securities in the Fund's portfolio will be determined on the basis of existing and anticipated market conditions. Consequently, the relative percentages of each type of security in the portfolio may be expected to fluctuate. At least 35% of the Fund's total assets, however, must be invested in fixed-income 15 securities. To pay redemption requests and Fund expenses, normally up to 5% of the Fund's total assets will be held in short-term money market securities and cash. Investments in long-term debt securities will be limited to U.S. Government securities and to those securities rated at the time of purchase within the four highest investment grades assigned by Moody's (Aaa, Aa, A or Baa) or Standard & Poor's (AAA, AA, A or BBB) or unrated securities judged by the Adviser at the time of purchase to be of comparable quality. Debt securities rated Baa and BBB have speculative characteristics; changes in economic conditions or other circumstances are more likely to lead to a weakened capacity to make principal and interest payments than is the case with higher grade bonds. In the event a security held in Balanced Fund's portfolio is downgraded to a rating below Baa or BBB, the Fund will sell such security as promptly as practicable. For an explanation of Moody's and Standard & Poor's ratings, see Appendix A to the Statement of Additional Information. Not more than 20% of the long-term debt securities held at any one time by Balanced Fund will be unrated. U.S. Government securities in which the Fund may invest 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. Obligations of U.S. Government agencies or instrumentalities are backed in a variety of ways by the U.S. Government or its agencies or instrumentalities. Some of these obligations, such as Government National Mortgage Association mortgage-backed securities, are backed by the full faith and credit of the U.S. Treasury. Others, such as obligations of the Federal Home Loan Banks, are backed by the right of the issuer to borrow from the Treasury. Still others, such as those issued by the Federal National Mortgage Association, are backed by the discretionary authority of the U.S. Government to purchase certain obligations of the agency or instrumentality. Finally, obligations of other agencies or instrumentalities are backed only by the credit of the agency or instrumentality issuing the obligations. The Fund may invest in mortgage-related U.S. Government securities, including derivative mortgage securities. Recent market experience has shown that certain derivative mortgage securities may be extremely sensitive to changes in interest rates and in prepayment rates on the underlying mortgage assets and, as a result, may be highly volatile. However, Balanced Fund will not invest more than 5% of its net assets, in the aggregate, in the following types of derivative mortgage securities: inverse floaters, interest only, principal only, inverse interest only and Z tranches of collateralized mortgage obligations, and stripped mortgage-backed securities. See "Investment Objectives and Policies--U.S. Government Securities" in the Statement of Additional Information. Investments in short-term money market securities may include obligations of the U.S. Government and its agencies and instrumentalities, time deposits, bank certificates of deposit, bankers' acceptances, high-grade commercial paper and other money market instruments. See "Investment Objectives, Policies and Restrictions" in the Statement of Additional Information. Balanced Fund may write covered put and call options on the securities in which it may invest, purchase put and call options with respect to such securities, and enter into closing purchase and sale transactions with respect thereto. Balanced Fund may also purchase and write put and call options on stock indexes listed on national securities exchanges. See "Special Investment Methods--Options Transactions." In addition, solely for the purpose of hedging against changes in the value of its portfolio securities due to anticipated changes in the market and in interest rates, Balanced Fund may enter into stock index futures contracts and interest rate futures contracts, purchase and write put or call options on such contracts, and close such contracts and options. See "Special Investment Methods--Futures Contracts and Options on Futures Contracts" and "--Risks of Transactions in Futures Contracts and Options on Futures Contracts." Balanced Fund may purchase or securities on a "when-issued" or "forward commitment" basis and may enter into mortgage "dollar rolls." The use of these techniques could result in increased volatility of the Fund's net asset value. See "Special Investment Methods--When-Issued Securities." EFFECTIVE DURATION. In managing the fixed income portion of Balanced Fund's portfolio, the Adviser will attempt to maintain an average effective duration of 3 to 6 1/2 years. Effective duration estimates the interest rate risk (price volatility) of a security, I.E., how much the value of the security is expected to change with a given change in interest rates. The longer a security's effective duration, the more sensitive its price is to changes in interest rates. For example, if interest rates were to increase by 1%, the market value of a bond with an effective duration of five years would decrease by about 5%, with all other factors being constant. 16 It is important to understand that, while a valuable measure, effective duration is based on certain assumptions and has several limitations. It is most useful as a measure of interest rate risk when interest rate changes are small, rapid and occur equally across all the different points of the yield curve. In addition, effective duration is difficult to calculate precisely for bonds with prepayment options, such as mortgage-backed securities, because the calculation requires assumptions about prepayment rates. For example, when interest rates go down, homeowners may prepay their mortgages at a higher rate than assumed in the initial effective duration calculation, thereby shortening the effective duration of the Fund's mortgage-backed securities. Conversely, if rates increase, prepayments may decrease to a greater extent than assumed, extending the effective duration of such securities. For these reasons, the effective durations of funds which invest a significant portion of their assets in mortgage-backed securities can be greatly affected by changes in interest rates. INVESTMENT RISKS. The Fund may invest in any type or class of securities, including money market securities, fixed-income securities and common stocks. As a result, investors in the Fund will be exposed to the market risks of both common stocks and bonds. Stock market risk is the possibility that stock prices in general will decline over short or even extended periods. The stock market tends to be cyclical, with periods when stock prices generally rise and periods when stock prices generally decline. Bond market risk is the potential for fluctuations in the market value of bonds. Bond prices vary inversely with changes in the level of interest rates. When interest rates rise, the prices of bonds fall; conversely, when interest rates fall, bond prices rise. To the extent the Fund invests in mortgage-related securities, the Fund will also be subject to prepayment risk. Prepayment risk results because, as interest rates fall, homeowners are more likely to refinance their home mortgages. When home mortgages are refinanced, the principal on mortgage-related securities held by the Fund is "prepaid" earlier than expected. The Fund must then reinvest the unanticipated principal payments, just at a time when interest rates on new mortgage investments are falling. Prepayment risk has two important effects on the Fund: - When interest rates fall and additional mortgage prepayments must be reinvested at lower interest rates, the income of the Fund will be reduced. - When interest rates fall, prices on mortgage-backed securities may not rise as much as comparable Treasury bonds because bond market investors may anticipate an increase in mortgage prepayments and a likely decline in income. Balanced Fund's investments in mortgage-related securities also subject the Fund to extension risk. Extension risk is the possibility that rising interest rates may cause prepayments to occur at a slower than expected rate. This particular risk may effectively change a security which was considered short- or intermediate-duration at the time of purchase into a long-duration security. Long-duration securities generally fluctuate more widely in response to changes in interest rates than short- or intermediate-duration securities. Investments in debt securities may also subject the Fund to credit risk. Credit risk, also known as default risk, is the possibility that a bond issuer will fail to make timely payments of interest or principal. As discussed above, the Fund's investments in long-term debt securities are limited to U.S. Government securities and securities which, at the time of purchase, are rated investment grade or are judged by the Adviser to be of comparable quality. The investment techniques used by the Fund and the Fund's ability to invest up to 25% of its total assets in foreign securities also pose certain risks. See "Special Investment Methods." Investors should also be aware that the investment results of the Fund depend upon the Adviser's ability to anticipate correctly the relative performance and risks of stocks, bonds and money market instruments. The Fund's investment results would suffer, for example, if only a small portion of the Fund's assets were invested in stocks during a significant market advance, or if a major portion of its assets were invested in stocks during a market decline. Similarly, the Fund's performance could deteriorate if the Fund were substantially invested in bonds at a time when interest rates moved adversely. 17 SPECIAL INVESTMENT METHODS REPURCHASE AGREEMENTS Each Fund may enter into repurchase agreements with respect to securities issued or guaranteed as to payment of principal and interest by the U.S. Government or its agencies or instrumentalities. A repurchase agreement involves the purchase by a Fund of securities with the condition that after a stated period of time the original seller (a member bank of the Federal Reserve System or a recognized securities dealer) will buy back the same securities ("collateral") at a predetermined price or yield. Repurchase agreements involve certain risks not associated with direct investments in securities. In the event the original seller defaults on its obligation to repurchase, as a result of its bankruptcy or otherwise, the Fund will seek to sell the collateral, which action could involve costs or delays. In such case, the Fund's ability to dispose of the collateral to recover such investment may be restricted or delayed. While collateral will at all times be maintained in an amount equal to the repurchase price under the agreement (including accrued interest due thereunder), to the extent proceeds from the sale of collateral were less than the repurchase price, a Fund would suffer a loss. Repurchase agreements maturing in more than seven days are considered illiquid and subject to each Fund's restriction on investing in illiquid securities. LENDING OF PORTFOLIO SECURITIES In order to generate additional income, each Fund may lend portfolio securities up to one-third of the value of its total assets to broker-dealers, banks or other financial borrowers of securities. As with other extensions of credit, there are risks of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. However, the Funds will only enter into loan arrangements with broker-dealers, banks or other institutions which the Adviser has determined are creditworthy under guidelines established by the Company's Board of Directors and will receive collateral in the form of cash, U.S. Government securities or other high-grade debt obligations equal to at least 100% of the value of the securities loaned. The value of the collateral and of the securities loaned will be marked to market on a daily basis. During the time portfolio securities are on loan, the borrower pays the Fund an amount equivalent to any dividends or interest paid on the securities and the Fund may invest the cash collateral and earn additional income or may receive an agreed upon amount of interest income from the borrower. However, the amounts received by the Fund may be reduced by finders' fees paid to broker-dealers and related expenses. BORROWING Each Fund 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. 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 Fund 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 without the approval of a majority of a Fund's shares. OPTIONS TRANSACTIONS WRITING COVERED OPTIONS. Each 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 principal reason for writing call or put options is to obtain, through the receipt of premiums, a greater current return than would be realized on the underlying securities alone. The 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, 18 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. For Growth Fund, Emerging Growth Fund, Growth and Income Fund and Balanced Fund, the aggregate value of the securities or other collateral underlying the calls and obligations underlying the puts written by a Fund, determined as of the date the options are sold, will not exceed 25% of the net assets of such Fund. For Equity Strategy Fund, the aggregate value of the securities or other collateral underlying the puts written by the Fund, determined as of the date the options are sold, will not exceed 50% of the Fund's net assets. Equity Strategy Fund may write covered call options without limit. PURCHASING OPTIONS. Each Fund may purchase put options, solely for hedging purposes, in order to protect portfolio holdings in an underlying security against a substantial decline in the market value of such holdings ("protective puts"). Such protection is provided during the life of the put because 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. Each Fund may also purchase call options solely for the purpose of hedging against an increase in prices of securities that the Fund ultimately wants to buy. Such protection is provided during the life of the call option because the Fund may buy the underlying security at the call exercise price regardless of any increase in the underlying security's market price. In order for a call option to be profitable, the market price of the underlying security must rise sufficiently above the exercise price to cover the premium and transaction costs. By using call options in this manner, 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 Funds may purchase and write only exchange-traded put and call options. STOCK INDEX OPTION TRADING. The Funds may purchase and write put and call options on stock indexes listed on national securities exchanges. Stock index options will be purchased for the purpose of hedging against changes in the value of a Fund's portfolio securities due to anticipated changes in the market. Stock index options will be written for hedging purposes and to realize income from the premiums received on the sale of such options. Options on stock indexes are similar to options on stock except that, rather than the right to take or make delivery of stock at a specified price, an option on a stock index gives the holder the right to receive, upon exercise of the option, an amount of cash if the closing level of the stock 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 value of a stock index fluctuates with changes in the market values of the stocks included in the index. The index may include stocks representative of the entire market, such as the S&P 500, or may include only stocks in a particular industry or market segment, such as the AMEX Oil and Gas Index. The effectiveness of purchasing or writing stock 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 stock index selected. For further information concerning the characteristics and risks of options transactions, see "Investment Objectives, Policies and Restrictions--Options" in the Statement of Additional Information. FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS Each Fund may purchase and sell interest rate futures contracts. Balanced Fund and Growth and Income Fund also may purchase and sell interest rate futures contracts. The futures contracts in which the Funds may invest have been developed by and are traded on national commodity exchanges. Stock index futures contracts may be based upon broad-based stock indexes such as the S&P 500 or upon narrow-based stock indexes. A buyer entering into a stock index futures contract will, on a specified future date, pay or receive a final cash payment equal to the difference between the actual value of the stock index on the last day of the contract and the value of the stock index established by the contract. An interest rate futures contract is an agreement to purchase or sell an agreed amount of debt securities at a set price for delivery on a future date. 19 The purpose of the acquisition or sale of a futures contract by a Fund is to hedge against fluctuations in the value of its portfolio without actually buying or selling securities. For example, if a Fund owns long-term U.S. Government securities and interest rates are expected to increase, the Fund might sell futures contracts. If interest rates did increase, the value of the U.S. Government securities in the Fund's portfolio would decline, but the value of the Fund's futures contracts would increase at approximately the same rate, thereby keeping the net asset value of the Fund from declining as much as it otherwise would have. If, on the other hand, the Fund held cash reserves and short-term investments pending anticipated investment in long-term obligations and interest rates were expected to decline, the Fund might purchase futures contracts for U.S. Government securities. Since the behavior of such contracts would generally be similar to that of long-term securities, the Fund could take advantage of the anticipated rise in the value of long-term securities without actually buying them until the market had stabilized. At that time, the Fund could accept delivery under the futures contracts or the futures contracts could be liquidated and the Fund's reserves could then be used to buy long-term securities in the cash market. The Funds will engage in such transactions only for hedging purposes, on either an asset-based or a liability-based basis, in each case in accordance with the rules and regulations of the Commodity Futures Trading Commission. See Appendix B and Appendix C to the Statement of Additional Information. Each Fund may purchase and sell put and call options on futures contracts and enter into closing transactions with respect to such options to terminate existing positions. The Funds may use such options on futures contracts in connection with their hedging strategies in lieu of purchasing and writing options directly on the underlying securities or purchasing and selling the underlying futures contracts. There are risks in using futures contracts and options on futures contracts as hedging devices. The primary risks associated with the use of futures contracts and options thereon are (a) the prices of futures contracts and options may not correlate perfectly with the market value of the securities subject to the hedge and (b) the possible lack of a liquid secondary market for a futures contract and the resulting inability to close a futures position prior to its maturity date. With respect to stock index futures contracts, the risk of imperfect correlation increases as the composition of a Fund's portfolio diverges from the securities included in the applicable stock index. The Adviser will attempt to reduce this risk, to the extent possible, by entering into futures contracts on indexes whose movements it believes will have a significant correlation with movements in the value of the Fund's portfolio securities sought to be hedged. The risk that a Fund will be unable to close out a futures position will be minimized by entering into such transactions on a national exchange with an active and liquid secondary market. Additional information with respect to interest rate and stock index futures contracts, together with information regarding options on such contracts, is set forth in Appendix B and Appendix C, respectively, to the Statement of Additional Information. WHEN-ISSUED SECURITIES Balanced Fund and Growth and Income Fund may purchase securities on a "when-issued" basis and may purchase or sell securities on a "forward commitment" basis. When such transactions are negotiated, the price is fixed at the time the commitment is made, but delivery and payment for the securities take place at a later date. The Funds will not accrue income with respect to when-issued or forward commitment securities prior to their stated delivery date. Pending delivery of the securities, each Fund maintains in a segregated account cash or liquid high-grade debt obligations in an amount sufficient to meet its purchase commitments. 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. A Fund's purchase of securities on a when-issued or forward commitment basis while remaining substantially fully invested increases the amount of the Fund's assets that are subject to market risk to an amount that is greater than the Fund's net asset value, which could result in increased volatility of the price of the Fund's shares. For additional information concerning when-issued and forward commitment transactions, see "Investment Objectives, Policies and Restrictions" in the Statement of Additional Information. 20 MORTGAGE DOLLAR ROLLS In connection with their ability to purchase securities on a when-issued or forward commitment basis, Balanced Fund and Growth and Income Fund may enter into mortgage "dollar rolls" in which a Fund sells securities for delivery in the current month and simultaneously contracts with the same counterparty to repurchase similar (same type, coupon and maturity) but not identical securities on a specified future date. The Fund gives up the right to receive principal and interest paid on the securities sold. However, the Fund would benefit to the extent of any difference between the price received for the securities sold and the lower forward price for the future purchase plus any fee income received. Unless such benefits exceed the income, capital appreciation and gain or loss due to mortgage prepayments that would have been realized on the securities sold as part of the mortgage dollar roll, the use of this technique will diminish the investment performance of the Fund compared with what such performance would have been without the use of mortgage dollar rolls. Each Fund will hold and maintain in a segregated account until the settlement date cash or liquid high-grade debt securities in an amount equal to the forward purchase price. The benefits derived from the use of mortgage dollar rolls may depend upon the Adviser's ability to predict correctly mortgage prepayments and interest rates. There is no assurance that mortgage dollar rolls can be successfully employed. In addition, the use of mortgage dollar rolls by a Fund while remaining substantially fully invested increases the amount of the Fund's assets that are subject to market risk to an amount that is greater than the Fund's net asset value, which could result in increased volatility of the price of the Fund's shares. For financial reporting and tax purposes, the Funds treat mortgage dollar rolls as two separate transactions: one involving the purchase of a security and a separate transaction involving a sale. The Funds do not currently intend to enter into mortgage dollar rolls that are accounted for as a financing. No more than one-third of a Fund's total assets may be committed to the purchase of securities on a when-issued or forward commitment basis, including mortgage dollar roll purchases. SHORT SALES Equity Strategy 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, Equity Strategy 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, Equity Strategy 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. Equity Strategy 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. Equity Strategy 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 Equity Strategy Fund may be required to pay in connection with the short sale. 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 Equity Strategy 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. Equity Strategy Fund will make short sales (other than short sales "against the box," as discussed below) only of securities listed on a national securities exchange. In addition to the short sales discussed above, Equity Strategy Fund may also make short sales "against the box" of securities or maintain a short position, provided that at all times when a short position is open the Fund owns an equal amount of such securities or securities convertible into or exchangeable, without payment of any further consideration, for securities of the same issue as, and equal in amount to, the securities sold short. Not more than 50% of the Fund's total assets (determined at the time of the short sale) 21 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 As a nonfundamental investment restriction that may be changed at any time without shareholder approval, no Fund will 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. A Fund may be restricted in its ability to sell such securities at a time when the Adviser deems it advisable to do so. In addition, in order to meet redemption requests, a Fund may have to sell other assets, rather than such illiquid securities, at a time which is not advantageous. "Restricted securities" are securities which were originally sold in private placements and which have not been registered under the Securities Act of 1933 (the "1933 Act"). Such securities generally have been considered illiquid, since they may be resold only subject to statutory restrictions and delays or if registered under the 1933 Act. In 1990, however, the 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 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. See "Investment Objectives, Policies and Restrictions--Illiquid Securities" in the Statement of Additional Information. Similar determinations may be made with respect to commercial paper issued in reliance on the so-called "private placement" exemption from registration under Section 4(2) of the 1933 Act and with respect to IO, PO and inverse floating classes of mortgage-backed securities issued by the U.S. Government or its agencies and instrumentalities. FOREIGN SECURITIES As nonfundamental investment objectives which may be changed at any time without shareholder approval, Balanced Fund may invest up to 25% of its total assets in foreign securities and each of the other Funds may invest up to 5% of its total assets in such securities. The value of foreign securities investments may be affected by changes in currency rates or exchange control regulations, changes in governmental administration or economic or monetary policy (in this country or abroad) or changed circumstances in dealings between nations. Costs may be incurred in connection with conversions between various currencies. Moreover, there may be less publicly available information about foreign issuers than about domestic issuers, and foreign issuers may not be subject to accounting, auditing and financial reporting standards and requirements comparable to those of domestic issuers. Securities of some foreign issuers are less liquid and more volatile than securities of comparable domestic issuers and foreign brokerage commissions are generally higher than in the United States. Foreign securities markets may also be less liquid, more volatile and less subject to government supervision than in the United States. Investments in foreign countries could be affected by other factors not present in the United States, including expropriation, confiscatory taxation and potential difficulties in enforcing contractual obligations and could be subject to extended settlement periods. In addition, as a result of their investments in foreign securities, the Funds may receive interest or dividend payments, or the proceeds of the sale or redemption of such securities, in the foreign currencies in which such securities are denominated. Under certain circumstances, such as where the Adviser believes that the applicable exchange rate is unfavorable at the time the currencies are received or the Adviser anticipates, for any other reason, that the exchange rate will improve, the Funds may hold such currencies for an indefinite period of time. While the holding of currencies will permit the Funds to take advantage of favorable movements in the applicable exchange rate, such strategy also exposes the Funds to risk of loss if 22 exchange rates move in a direction adverse to a Fund's position. Such losses could reduce any profits or increase any losses sustained by the Funds from the sale or redemption of securities, and could reduce the dollar value of interest or dividend payments received. PORTFOLIO TURNOVER Equity Strategy Fund may engage in short-term trading in attempting to achieve its investment objective. It may be expected that a substantial portion of Equity Strategy Fund's portfolio will at times consist of securities believed to have potential primarily for short-term gains. The Fund may also take short-term gains on securities originally purchased for their long-term potential should the price objective be achieved earlier than anticipated, or sell securities where the Adviser believes that growth is no longer feasible or that the risk of market decline is too great. Since Equity Strategy Fund engages in short-term trading, it pays greater brokerage commission costs or mark-up charges. High portfolio turnover also may increase short-term capital gains, which are taxable as ordinary income when distributed to shareholders. While it is not the policy of any of the remaining 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 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 Turnover." Portfolio turnover rates for the Funds are set forth in "Financial Highlights." INVESTMENT RESTRICTIONS Each Fund has adopted certain fundamental and nonfundamental investment restrictions in addition to those set forth above. As a fundamental investment restriction which may not be changed without shareholder approval, no Fund will invest 25% or more of its total assets in any one industry. (This restriction does not apply to securities of the U.S. Government or its agencies and instrumentalities and repurchase agreements relating thereto. As to utility companies, gas, electric, telephone, telegraph, satellite and microwave communications companies are considered as separate industries.) In addition, as a nonfundamental investment restriction which may be changed at any time without shareholder approval, no Fund will invest more than 5% of its total assets in the securities of issuers which, with their predecessors, have a record of less than three years' continuous operation. A list of each Fund's fundamental and nonfundamental investment restrictions is set forth in the Statement of Additional Information. Except for each Fund's policy regarding borrowing, if a percentage restriction set forth under "Investment Objectives and Policies" or under "Special Investment Methods" 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. MANAGEMENT BOARD OF DIRECTORS The Company's Board of Directors has the primary responsibility for overseeing the overall management of the Company and electing its officers. INVESTMENT ADVISER Piper Capital Management Incorporated (the "Adviser") has been retained under an Investment Advisory and Management Agreement with the Company to act as the Funds' investment adviser subject to the authority of the Board of Directors. In addition to acting as the investment adviser for the other series of the Company, the Adviser also serves as investment adviser to a number of other open-end and closed-end investment companies and to various other concerns, including pension and profit-sharing funds, corporate funds and individuals. As of November 1, 1995, the Adviser rendered investment advice regarding approximately $9 billion of assets. The Adviser is a wholly owned subsidiary of Piper Jaffray Companies Inc., a publicly held corporation which is engaged through its subsidiaries in various aspects of the financial services industry. The address of the Adviser is Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota 55402-3804. 23 The Adviser furnishes each Fund with investment advice and supervises the management and investment programs of the Funds. The Adviser furnishes at its own expense all necessary administrative services, office space, equipment and clerical personnel for servicing the investments of the Funds. The Adviser also provides investment advisory facilities and executive and supervisory personnel for managing the investments and effecting the portfolio transactions of the Funds. In addition, the Adviser pays the salaries and fees of all officers and directors of the Company who are affiliated with the Adviser. Under the Investment Advisory and Management Agreement, each Fund pays the Adviser monthly fees at an annual rate of .75% on average daily net assets up to $100 million. These fees are higher than fees paid by most other investment companies. The fees are scaled downward as net assets increase in size to as low as .50% on net assets of over $500 million. PORTFOLIO MANAGEMENT Beginning December 9, 1994, Steven V. Markusen assumed primary responsibility for the day-to-day management of the Growth Fund's portfolio. Mr. Markusen has been a Senior Vice President of the Adviser since December 1993. Prior to that, he served as a Senior Vice President of Investment Advisers, Inc., in Minneapolis, Minnesota, where he was responsible for managing institutional equity and balanced portfolios and the IAI Growth Fund. In addition, he was responsible for a group which managed $2.5 billion in large capitalization growth equity assets. Before joining Investment Advisers, Inc. in 1989, Mr. Markusen was a Vice President with INVESCO Funds, where he managed three equity funds for five years. He is a Chartered Financial Analyst ("CFA") and has 12 years of financial experience. Sandra K. Shrewsbury has been primarily responsible for the day-to-day management of the Emerging Growth Fund's portfolio since 1993. Ms. Shrewsbury has been a Vice President of the Distributor since 1990, prior to which she had been an Assistant Vice President of the Distributor. She is a CFA and has 13 years of financial experience. Paul A. Dow has been primarily responsible for the day-to-day management of the Growth and Income Fund's portfolio since the Fund's inception in 1992. Mr. Dow has shared that primary responsibility with Michael S. Wallace since October 1995. Mr. Dow has been a Senior Vice President of the Adviser since February 1989 and Chief Investment Officer of the Adviser since December 1989. He is a CFA and has 22 years of financial experience. Mr. Wallace has been a portfolio manager for the Adviser since December 1994, prior to which he had been an analyst for the Adviser since June 1993. Prior to joining the Adviser, Mr. Wallace was a Financial Analyst for Allstate Insurance Company from 1987 to 1991. He has an MBA in Finance and Accounting from Cornell University and six years of financial experience. Edward P. Nicoski has been primarily responsible for the day-to-day management of the Equity Strategy Fund's portfolio since the Fund's inception in 1987. Mr. Nicoski has been a Vice President of the Adviser since October 1985 and a Managing Director of the Distributor since November 1986. He is a CFA with 26 years of financial experience. Bruce D. Salvog and David M. Steele have been primarily responsible for the day-to-day management of the fixed income portion of Balanced Fund's portfolio since 1992. Mr. Salvog has been a Senior Vice President of the Adviser since 1992. He has an AB from Harvard University and 26 years of financial experience. Mr. Steele has been a Senior Vice President of the Adviser since 1992. He has an MBA from the University of Southern California and 16 years of financial experience. Paul A. Dow has been primarily responsible for the day-to-day management of the equity portion of Balanced Fund's portfolio since 1989. He has shared that primary responsibility with John K. Schonberg since October 1995. Mr. Dow is also portfolio manager for Growth and Income Fund and his experience is discussed above. Mr. Schonberg has been a portfolio manager for the Adviser since 1989, prior to which he had been a research analyst for the Distributor since 1987. Mr. Schonberg has eight years of financial experience. TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND CUSTODIAN Investors Fiduciary Trust Company ("IFTC"), 127 West Tenth Street, Kansas City, Missouri 64105, (800) 874-6205, serves as Custodian for the Funds' portfolio securities and cash and as Transfer Agent and Dividend Disbursing Agent for the Funds. 24 The Company has entered into Shareholder Account Servicing Agreements with the Distributor and Piper Trust Company, an affiliate of the Distributor and the Adviser. Under these agreements, the Distributor and Piper Trust Company provide transfer agent and dividend disbursing agent services for certain shareholder accounts. For more information, see "Investment Advisory and Other Services--Transfer Agent and Dividend Disbursing Agent" in the Statement of Additional Information. PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS The Adviser selects brokers and futures commission merchants to use for the Funds' portfolio transactions. In making its selection, the Adviser may consider a number of factors, which are more fully discussed in the Statement of Additional Information, including, but not limited to, research services, the reasonableness of commissions and quality of services and execution. A broker's sales of shares of any series of the Company may also be considered a factor if the Adviser is satisfied that a Fund would receive from that broker the most favorable price and execution then available for a transaction. Portfolio transactions for the Funds may be effected through the Distributor on a securities exchange in compliance with Section 17(e) of the Investment Company Act of 1940, as amended (the "1940 Act"). For more information, see "Portfolio Transactions and Allocation of Brokerage" in the Statement of Additional Information. DISTRIBUTION OF FUND SHARES Piper Jaffray acts as the principal distributor of the Funds' shares. The Company has adopted a Distribution Plan (the "Plan") as required by Rule 12b-1 under the 1940 Act. Under the Plan, the Distributor is paid a total fee in connection with the servicing of each Fund's shareholder accounts and in connection with distribution related services provided with respect to each Fund. This fee is calculated and paid monthly at an annual rate equal to .50% of the average daily net assets of each Fund. A portion of the total fee equal to .25% of each Fund's average daily net assets is categorized as a distribution fee intended to compensate the Distributor for its expenses incurred in connection with the sale of Fund shares. The remaining portion of the fee, equal to .25% of each Fund's average daily net assets, is categorized as a servicing fee intended to compensate the Distributor for ongoing servicing and/or maintenance of shareholder accounts. The Distributor has voluntarily agreed to limit the total fee payable under the Plan to .32% of each Fund's average daily net assets. This limitation may be revised or terminated at any time after fiscal 1996 year end. Payments made under the Plan are not tied exclusively to expenses actually incurred by the Distributor and may exceed such expenses. 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 Funds. 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 Funds. See "How to Purchase Shares--Purchase Price." Further information regarding the Plan is contained in the Statement of Additional Information. The Distributor uses all or a portion of its Rule 12b-1 fee to make payments to Investment Executives of the Distributor and broker-dealers which have entered into sales agreements with the Distributor. If shares of a 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 a 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. 25 - -------------------------------------------------------------------------------- SHAREHOLDER GUIDE TO INVESTING - -------------------------------------------------------------------------------- HOW TO PURCHASE SHARES GENERAL The Funds' shares may be purchased at the public offering price from the Distributor and from other broker-dealers who have sales agreements with the Distributor. The address of the Distributor is that of the Funds. The Distributor reserves the right to reject any purchase order. You should be aware that, because the Funds do not issue stock certificates, Fund shares must be kept in an account with the Distributor or with IFTC. All investments must be arranged through your Piper Jaffray Investment Executive or other broker-dealer. PURCHASE PRICE You may purchase shares of the Funds at the net asset value per share next calculated after receipt of your order by your Piper Jaffray Investment Executive or other broker-dealer, plus a front-end sales charge as follows:
SALES CHARGE SALES CHARGE AS A PERCENTAGE OF AS A PERCENTAGE OF AMOUNT OF TRANSACTION AT OFFERING PRICE OFFERING PRICE NET ASSET VALUE - --------------------------------------------------------- ------------------- ------------------- Less than $100,000....................................... 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. 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 Funds, other series of the Company 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 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 AMOUNT OF TRANSACTION OF OFFERING 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%
26 - -------------------------------------------------------------------------------- SHAREHOLDER GUIDE TO INVESTING - -------------------------------------------------------------------------------- Piper Jaffray Investment Executives and other broker-dealers generally will not receive a fee in connection with purchases on which the contingent deferred sales charge is waived. However, the Distributor, in its discretion, may pay a fee out of its own assets to its Investment Executives and other broker-dealers in connection with purchases by employee benefit plans on which no sales charge is imposed. Please see the Special Purchase Plans section of "Reducing Your Sales Charge." MINIMUM INVESTMENTS A minimum initial investment of $250 is required. There is no minimum for subsequent investments. The Distributor, in its discretion, may waive the minimum. REDUCING YOUR SALES CHARGE You may qualify for a reduced sales charge through one or more of several plans. You must notify your Piper Jaffray Investment Executive or broker-dealer at the time of purchase to take advantage of these plans. AGGREGATION Front-end or initial sales charges may be reduced or eliminated by aggregating your purchase with purchases of certain related personal accounts. In addition, purchases made by members of certain organized groups will be aggregated for purposes of determining sales charges. Sales charges are calculated by adding the dollar amount of your current purchase to the higher of the cost or current value of shares of any Piper fund sold with a sales charge that are currently held by you and your related accounts or by other members of your group. QUALIFIED GROUPS. You may group purchases in the following personal accounts together: - Your individual account. - Your spouse's account. - Your children's accounts (if they are under the age of 21). - Your employee benefit plan accounts if they are exclusively for your benefit. This includes accounts such as IRAs, individual 403(b) plans or single-participant Keogh-type plans. - A single trust estate or single fiduciary account if you are the trustee or fiduciary. Additionally, purchases made by members of any organized group meeting the requirements listed below may be aggregated for purposes of determining sales charges: - The group has been in existence for more than six months. - It is not organized for the purpose of buying redeemable securities of a registered investment company. - Purchases must be made through a central administration, or through a single dealer, or by other means that result in economy of sales effort or expense. An organized group does not include a group of individuals whose sole organizational connection is participation as credit card holders of a company, policyholders of an insurance company, customers of either a bank or broker-dealer or clients of an investment adviser. RIGHT OF ACCUMULATION Sales charges for purchases of Fund shares into Piper Jaffray accounts will be automatically calculated taking into account the dollar amount of any new purchases along with the higher of current value or cost of shares previously purchased in any other mutual fund managed by the Adviser (except Hercules Funds Inc.) that was sold with a sales charge. For other broker-dealer accounts, you should notify your Investment Executive at the time of purchase of additional Piper fund shares you may own. 27 - -------------------------------------------------------------------------------- SHAREHOLDER GUIDE TO INVESTING - -------------------------------------------------------------------------------- LETTER OF INTENT Your sales charge may be reduced by signing a non-binding Letter of Intent. This Letter of Intent will state your intention to invest $100,000 or more in any of the mutual funds managed by the Adviser that are sold with a sales charge (except Hercules Funds Inc.) over a 13-month period, beginning not earlier than 90 days prior to the date you sign the Letter. You will pay the lower sales charge applicable to the total amount you plan to invest over the 13-month period. Part of your shares will be held in escrow to cover additional sales charges that may be due if you do not invest the planned amount. Please see "Purchase of Shares" in the Statement of Additional Information for more details. You can contact your Piper Jaffray Investment Executive or other broker-dealer for an application. SPECIAL PURCHASE PLANS For more information on any of the following special purchase plans, contact your Piper Jaffray Investment Executive or other broker-dealer. PURCHASES BY PIPER JAFFRAY COMPANIES INC., ITS SUBSIDIARIES AND ASSOCIATED PERSONS Piper Jaffray Companies Inc. and its subsidiaries may buy shares of the Funds 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 Funds 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 Funds in their advisory accounts. - Discretionary accounts at Piper Trust Company and participants in investment companies exempt from registration under the 1940 Act that are managed by the Adviser. - Trust companies and bank trust departments using funds over which they exercise exclusive discretionary investment authority and which are held in a fiduciary, agency, advisory, custodial or similar capacity. - Investors purchasing shares through a Piper Jaffray Investment Executive if the purchase of such shares is funded by the proceeds from the sale of shares of any non-money market open-end mutual fund. This privilege is available for 30 days after the sale. PURCHASES BY EMPLOYEE BENEFIT PLANS AND TAX-SHELTERED ANNUITIES - Shares of the Funds 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 Funds or any other series of the Company (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 Funds 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 Funds without incurring a sales charge. 28 - -------------------------------------------------------------------------------- SHAREHOLDER GUIDE TO INVESTING - -------------------------------------------------------------------------------- HOW TO REDEEM SHARES NORMAL REDEMPTION You may redeem all or a portion of your shares on any day that a Fund values its shares. (Please refer to "Valuation of Shares" below for more information.) Your shares will be redeemed at the net asset value next calculated after the receipt of your instructions in good form by your Piper Jaffray Investment Executive or other broker-dealer as explained below. PIPER JAFFRAY INC. ACCOUNTS. To redeem your shares, please contact your Piper Jaffray Investment Executive with an oral request to redeem your shares. OTHER BROKER-DEALER ACCOUNTS. To redeem your shares, you may either contact your broker-dealer with an oral request or send a written request directly to the Funds' transfer agent, IFTC. This request should contain: the dollar amount or number of shares to be redeemed, your Fund account number and either a social security or tax identification number (as applicable). You should sign your request in exactly the same way the account is registered. If there is more than one owner of the shares, all owners must sign. A signature guarantee is required for redemptions over $25,000. Please contact IFTC or refer to "Redemption of Shares" in the Statement of Additional Information for more details. 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. 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. 29 - -------------------------------------------------------------------------------- SHAREHOLDER GUIDE TO INVESTING - -------------------------------------------------------------------------------- - 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 three business days. In no event will payment be made more than seven days after receipt of your order in good form. However, payment may be postponed or the right of redemption suspended for more than seven days under unusual circumstances, such as when trading is not taking place on the New York Stock Exchange. Payment of redemption proceeds may also be delayed if the shares to be redeemed were purchased by a check drawn on a bank which is not a member of the Federal Reserve System, until such checks have cleared the banking system (normally up to 15 days from the purchase date). INVOLUNTARY REDEMPTION Each Fund reserves the right to redeem your account at any time the net asset value of the account falls below $200 as the result of a redemption or exchange request. You will be notified in writing prior to any such redemption and will be allowed 30 days to make additional investments before the redemption is processed. SHAREHOLDER SERVICES AUTOMATIC MONTHLY INVESTMENT PROGRAM You may arrange to make additional automated purchases of shares of the Funds or certain other mutual funds managed by the Adviser. You can automatically transfer $100 or more per month from your bank, savings and loan or other financial institution to purchase additional shares. In addition, if you hold your shares in a Piper Jaffray account you may arrange to make such additional purchases by having $25 or more automatically transferred each month from any of the money market fund series of the Company. 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 a Fund, you may be eligible to reinvest in shares of any fund managed by the Adviser without payment of an additional sales charge (except Hercules Funds Inc.). The reinvestment request must be made within 30 days of the redemption. This privilege is subject to the eligibility of share purchases in your state as well as the minimum investment requirements and any other applicable terms in the prospectus of the fund being acquired. 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. 30 - -------------------------------------------------------------------------------- SHAREHOLDER GUIDE TO INVESTING - -------------------------------------------------------------------------------- You may exchange your shares for shares of any other mutual fund managed by the Adviser (except Hercules Funds Inc.) that is open to new investors. All exchanges are subject to the eligibility of share purchases in your state as well as the minimum investment requirements and any other applicable terms in the prospectus of the fund being acquired. Exchanges are made on the basis of the net asset values of the funds involved, except that investors exchanging into a fund which has a higher sales charge must pay the difference. You may make four exchanges per year without payment of a service charge. Thereafter, you will pay a $5 service charge for each exchange. The Company reserves the right to change or discontinue the exchange privilege, or any aspect of the privilege, upon 60 days' written notice. TELEPHONE TRANSACTION PRIVILEGES PIPER JAFFRAY INC. ACCOUNTS. If you hold your shares in a Piper Jaffray account, you may telephone your Investment Executive to execute any transaction or to apply for many shareholder services. In some cases, you may be required to complete a written application. OTHER BROKER-DEALER ACCOUNTS. If you hold your shares in an account with your broker-dealer or at IFTC, you may authorize telephone privileges by completing the Account Application and Services Form. Please contact your broker-dealer or IFTC (800-874-6205) for an application or for more details. The Funds will employ reasonable procedures to confirm that a telephonic request is genuine, including requiring that payment be made only to the address of record or the bank account designated on the Account Application and Services Form and requiring certain means of telephonic identification. A Fund employing such procedures will not be liable for following instructions communicated by telephone that it reasonably believes to be genuine. If a Fund does not employ such procedures, it may be liable for any losses due to unauthorized or fraudulent telephone transactions. It may be difficult to reach the Funds by telephone during periods when market or economic conditions lead to an unusually large volume of telephone requests. If you cannot reach the Funds by telephone, you should contact your broker-dealer or issue written instructions to IFTC at the address set forth herein. See "Management--Transfer Agent, Dividend Disbursing Agent and Custodian." The Funds reserve the right to suspend or terminate their telephone services at any time without notice. DIRECTED DIVIDENDS You may direct income dividends and capital gains distributions to be invested in any other mutual fund managed by the Adviser (other than a money market fund or Hercules Funds Inc.) that is offered in your state. This investment will be made at net asset value. It will not be subject to a minimum investment amount except that you must hold shares in such fund (including the shares being acquired with the dividend or distribution) with a value at least equal to such fund's minimum initial investment amount. SYSTEMATIC WITHDRAWAL PLAN If your account has a value of $5,000 or more, you may establish a Systematic Withdrawal Plan for any of the Funds. This plan will allow you to receive regular periodic payments by redeeming as many shares from your account as necessary. As with other redemptions, a redemption to make a 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. 31 - -------------------------------------------------------------------------------- SHAREHOLDER GUIDE TO INVESTING - -------------------------------------------------------------------------------- A request to establish a Systematic Withdrawal Plan must be submitted in writing to your Piper Jaffray Investment Executive or other broker-dealer. There are no service charges for maintenance; the minimum amount that you may withdraw each period is $100. You will be required to have any income dividends and any capital gains distributions reinvested. You may choose to have withdrawals made monthly, quarterly or semiannually. Please contact your Piper Jaffray Investment Executive, other broker-dealer or IFTC for more information. You should be aware that additional investments in an account that has an active Systematic Withdrawal Plan may be inadvisable due to sales charges and tax liabilities. Please refer to "Redemption of Shares" in the Statement of Additional Information for additional details. ACCOUNT PROTECTION If you purchased your shares of any of the Funds through a Piper Jaffray Investment Executive, you may choose from several account options. Your investments in any of the Funds 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 and each Fund is required to supply annual and semiannual reports that list securities held by the Fund and include the current financial statements of the Fund. HOUSEHOLDING. If you have multiple accounts with Piper Jaffray, you may receive some of the above information in combined mailings. This will not only help to reduce Fund expenses, it will help the environment by saving paper. Please contact your Piper Jaffray Investment Executive for more information. DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income, if any, will be paid quarterly by Growth Fund, Growth and Income Fund and Balanced Fund and annually by Emerging Growth Fund and Equity Strategy Fund. Net realized capital gains, if any, will be distributed at least once annually by each Fund. BUYING A DIVIDEND. On the ex-dividend date for a distribution, a Fund's share price is reduced by the amount of the distribution. If you buy shares just before the ex-dividend 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 a Fund generally will be payable in additional shares of that Fund at net asset value ("Reinvestment Option"). If you wish to receive your distributions in cash, you must notify your Piper Jaffray Investment Executive or other broker-dealer. You may elect either to receive income dividends in cash and capital gains distributions in additional shares of the Fund at net asset value ("Split Option"), or to receive both income dividends and capital gains distributions in cash ("Cash Option"). You may also direct income dividends and capital gains distributions to be invested in another mutual fund managed by the Adviser. See "Shareholder Services--Directed Dividends" above. The taxable status of income dividends and/or net capital gains distributions is not affected by whether they are reinvested or paid in cash. 32 VALUATION OF SHARES The Funds compute their net asset value on each day the New York Stock Exchange (the "Exchange") is open for business. The calculation is made as of the regular close of the Exchange (currently 4:00 p.m. New York time) after the Funds have declared any applicable dividends. The net asset value 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. 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 decided upon in good faith by the 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. TAX STATUS Each Fund is treated as a separate corporation for federal income tax purposes under the Internal Revenue Code of 1986, as amended (the "Code"). Therefore, each Fund is treated separately in determining whether it qualifies as a regulated investment company under the Code and for purposes of determining the net ordinary income (or loss), net realized capital gains (or losses) and distributions necessary to relieve such Fund of any federal income tax liability. Each Fund qualified as a regulated investment company during its last taxable year and intends to so qualify during the current taxable year. If so qualified, a Fund will not be liable for federal income taxes to the extent it distributes its taxable income to shareholders. Distributions by a Fund are generally taxable to the shareholders, whether received in cash or additional shares of the Fund (or shares of another mutual fund managed by the Adviser). Under the Code, corporate shareholders generally may deduct 70% of distributions from a Fund attributable to dividends paid by domestic corporations. 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. A shareholder will recognize a capital gain or loss upon the sale or exchange of shares in a 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. 33 The foregoing relates to federal income taxation as in effect as of the date of this Prospectus. For a more detailed discussion of the federal income tax consequences of investing in shares of the Funds, see "Taxation" in the Statement of Additional Information. Before investing in any of the Funds, you should check the consequences of your local and state tax laws. PERFORMANCE COMPARISONS Advertisements and other sales literature for Growth Fund, Emerging Growth Fund, Growth and Income Fund, Equity Strategy Fund and Balanced Fund may refer to a Fund's "average annual total return" and "cumulative total return." In addition, Growth and Income Fund and Balanced Fund may provide yield calculations in advertisements and other sales literature. When a Fund advertises its yield, it will also advertise its total return as required by the rules of the Securities and Exchange Commission. All such yield and total return quotations are based upon historical earnings and are not intended to indicate future performance. The return on and principal value of an investment in 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 will be based upon a 30-day period stated in the advertisement and will be calculated by dividing the net investment income per share (as defined under Securities and Exchange Commission rules and regulations) earned during the advertised period by the offering price per share (including the maximum sales charge) on the last day of the period. The result will then be "annualized" using a formula that provides for semi-annual compounding of income. Average annual total return is the average annual compounded rate of return on a hypothetical $1,000 investment made at the beginning of the advertised period. Cumulative total return is calculated by subtracting a hypothetical $1,000 payment to a Fund from the redeemable value of such payment at the end of the advertised period, dividing such difference by $1,000 and multiplying the quotient by 100. In calculating average annual and cumulative total return, the maximum sales charge is deducted from the hypothetical investment and all dividends and distributions are assumed to be reinvested. Such total return quotations may be accompanied by quotations which do not reflect the reduction in value of the initial investment due to the sales charge, and which thus will be higher. Comparative performance information also may be used from time to time in advertising the Funds' shares. For example, advertisements may compare the Funds' performance to that of various unmanaged market indices, or may include performance data from Lipper Analytical Services, Inc., Morningstar, Inc. or other entities or organizations which track the performance of investment companies. For additional information regarding comparative performance information and the calculation of yield, average annual total return and cumulative total return, see "Performance Comparisons" in the Statement of Additional Information. GENERAL INFORMATION The Company, which was organized under the laws of State of Minnesota in 1986, is authorized to issue a total of 10 trillion shares of common stock, with a par value of $.01 per share. Four hundred billion of these shares have been authorized by the Board of Directors to be issued in thirteen separate series, as follows: Growth Fund, Emerging Growth Fund, Growth and Income Fund, Equity Strategy Fund, Balanced Fund, Government Income Fund, Short-Intermediate Bond Fund, Institutional Government Income Portfolio, National Tax-Exempt Fund and Minnesota Tax-Exempt Fund, each of which has ten billion authorized shares, and Money Market Fund, Tax-Exempt Money Market Fund and U.S. Government Money Market Fund, each of which has one hundred billion authorized shares. The Board of Directors is empowered under the Company's Articles of Incorporation to issue additional series of the Company's common stock without shareholder approval. In addition, the Board of Directors may, without shareholder approval, create and issue one or more additional classes of shares within each Fund, as well as within any series of the Company created in the future. See "Capital Stock and Ownership of Shares" in the Statement of Additional Information. 34 All shares, when issued, will be fully paid and nonassessable and will be redeemable. All shares have equal voting rights. They can be issued as full or fractional shares. A fractional share has pro-rata the same kind of rights and privileges as a full share. The shares possess no preemptive or conversion rights. Each share of a series has one vote (with proportionate voting for fractional shares) irrespective of the relative net asset value of the series' shares. On some issues, such as the election of directors, all shares of the Company vote together as one series. On an issue affecting only a particular series, the shares of the affected series vote separately. Cumulative voting is not authorized. This means that the holders of more than 50% of the shares voting for the election of directors can elect 100% of the directors if they choose to do so, and, in such event, the holders of the remaining shares will be unable to elect any directors. The Bylaws of the Company provide that shareholder meetings be held only with such frequency as required under Minnesota law. Minnesota corporation law requires only that the Board of Directors convene shareholder meetings when it deems appropriate. In addition, Minnesota law provides that if a regular meeting of shareholders has not been held during the immediately preceding 15 months, a shareholder or shareholders holding 3% or more of the voting shares of the Company may demand a regular meeting of shareholders by written notice given to the chief executive officer or chief financial officer of the Company. Within 30 days after receipt of the demand, the Board of Directors shall cause a regular meeting of shareholders to be called, which meeting shall be held no later than 90 days after receipt of the demand, all at the expense of the Company. In addition, the 1940 Act requires a shareholder vote for all amendments to fundamental investment policies and restrictions and for all amendments to investment advisory contracts and Rule 12b-1 distribution plans. The 1940 Act also provides that Directors of the Company may be removed by action of the record holders of two-thirds or more of the outstanding shares of the Company. The Directors are required to call a meeting of shareholders for the purpose of voting upon the question of removal of any Director when so requested in writing by the record holders of at least 10% of the Company's outstanding shares. PENDING LEGAL PROCEEDINGS Complaints have been brought against the Adviser and the Distributor relating to another series of the Company and to other investment companies for which the Adviser acts or has acted as investment adviser or subadviser. These lawsuits do not involve the Funds. A number of complaints have been brought in federal and state court against the Institutional Government Income Portfolio ("PJIGX") series of the Company, the Adviser, the Distributor, and certain individuals affiliated or formerly affiliated with the Adviser and the Distributor. In addition, complaints have been filed in federal court relating to a number of closed-end investment companies managed by the Adviser and two open-end investment companies for which the Adviser has acted as sub-adviser. The complaints, which ask for rescission of plaintiff shareholders' purchases or compensatory damages, plus interest, costs and expenses, generally allege, among other things, certain violations of federal and/or state securities laws, including the making of materially misleading statements in prospectuses concerning investment policies and risks. See "Pending Litigation" in the Statement of Additional Information. A settlement agreement has been reached with respect to one of the complaints involving PJIGX. An Amended Consolidated Class Action Complaint, which represents a consolidation of claims previously brought by 11 persons or entities, was filed on October 5, 1994 in the United States District Court, District of Minnesota. The named plaintiffs in this putative class action (the "PJIGX action") purport to represent a class of individuals and groups who purchased shares of PJIGX during the period from July 1, 1991 through May 9, 1994. The named plaintiffs and defendants have entered into a settlement agreement which has received preliminary approval from the Court. The terms of the settlement are set forth in a Settlement Agreement dated July 20, 1995 (as modified by an Addendum filed on July 28, 1995). The Settlement Agreement contained a provision which would have permitted the defendants to cancel the Agreement if shareholders who had incurred a cumulative "loss" (as defined under the Agreement) of more than 10% of the loss sustained by the entire class had opted out. The October 2, 1995 deadline for requesting exclusion from the class has passed, and the loss sustained by persons requesting exclusion is less than 10%. If granted final approval by the Court, the settlement agreement would provide up to approximately $70 million to class members in payments scheduled over approximately three years. Such payments would be made by 35 Piper Jaffray Companies and the Adviser and would not be an obligation of the Company. Six additional complaints have been brought and a number of actions have been commenced in arbitration relating to PJIGX. The complaints generally have been consolidated with the PJIGX action for pretrial purposes and the arbitrations and litigations have been stayed pending entry of an order by the Court permitting those class members who have requested exclusion to proceed with their actions. The Adviser and the Distributor to not believe that the PJIGX settlement or any outstanding complaint or action in arbitration will have a material adverse effect on their ability to perform under their agreements with the Company or a material adverse effect on the Funds, and they intend to defend such lawsuits and actions vigorously. NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS (AND/OR IN THE STATEMENT OF ADDITIONAL INFORMATION REFERRED TO ON THE COVER PAGE OF THIS PROSPECTUS,), AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS OR PIPER JAFFRAY INC. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. 36 - PIPER FUNDS INC. INVESTMENT ADVISER Piper Capital Management Incorporated DISTRIBUTOR Piper Jaffray Inc. CUSTODIAN AND TRANSFER AGENT Investors Fiduciary Trust Company INDEPENDENT AUDITORS KPMG Peat Marwick LLP LEGAL COUNSEL Dorsey & Whitney P.L.L.P. Table of Contents
PAGE Introduction......................... 2 Fund Expenses........................ 3 Financial Highlights................. 5 Investment Objectives and Policies... 10 Special Investment Methods........... 18 Management........................... 23 Distribution of Fund Shares.......... 25 SHAREHOLDER GUIDE TO INVESTING How to Purchase Shares............. 26 Reducing Your Sales Charge......... 27 Special Purchase Plans............. 28 How to Redeem Shares............... 29 Shareholder Services............... 30 Dividends and Distributions........ 32 Valuation of Shares.................. 33 Tax Status........................... 33 Performance Comparisons.............. 34 General Information.................. 34
XGF/XTR-05 HERCULES FUNDS INC. HERCULES NORTH AMERICAN GROWTH AND INCOME FUND PROXY FOR SPECIAL MEETING OF SHAREHOLDERS TO BE HELD JUNE 18, 1996 The undersigned shareholder of Hercules North American Growth and Income Fund ("North American 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 North American Fund to be held on June 18, 1996, at Piper Jaffray Tower, 222 South Ninth Street, Third Floor, Minneapolis, Minnesota at 10:00 a.m. Central 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 April 15, 1996 (the "Plan"), by and between the Company, on behalf of North American Fund, and Piper Funds Inc., on behalf of Growth and Income Fund ("Growth Fund"), pursuant to which substantially all of the assets of North American Fund will be acquired by Growth Fund and shareholders of North American Fund will become shareholders of Growth Fund receiving shares of Growth Fund with a value equal to the value of their holdings in North American 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. -----END PRIVACY-ENHANCED MESSAGE-----