-----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, OY9hgJ3/H3sftMqCPlXDjZJZtB+frtYMbVjnjYRyAT7ZKuM5JtFsVmcRwM2eGp5t QZ5ddLUiK7eU93KDBfQZrw== 0001047469-97-006245.txt : 19971127 0001047469-97-006245.hdr.sgml : 19971127 ACCESSION NUMBER: 0001047469-97-006245 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971126 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: N-30D SEC ACT: SEC FILE NUMBER: 811-04905 FILM NUMBER: 97729474 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 N-30D 1 N-30D Growth and Income Funds - 1997 Annual Report [LOGO] GROWTH AND INCOME FUNDS 1997 Annual Report GROWTH AND INCOME FUND BALANCED FUND INSIDE: ACTION OR REACTION -- Which Guides Your Approach to Investing? [PICTURE] [LOGO] CONTENTS President's Letter . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . 25 Federal Tax Information . . . . . . . . . . . . . . . . . . . . . . . . . 26 Shareholder Services . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Glossary***. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 GROWTH AND INCOME FUND Portfolio Managers' Letter . . . . . . . . . . . . . . . . . . . . . . . . .4 Financial Statements and Notes . . . . . . . . . . . . . . . . . . . . . . 10 Investments in Securities. . . . . . . . . . . . . . . . . . . . . . . . . 22 BALANCED FUND Portfolio Managers' Letter . . . . . . . . . . . . . . . . . . . . . . . . .7 Financial Statements and Notes . . . . . . . . . . . . . . . . . . . . . . 10 Investments in Securities. . . . . . . . . . . . . . . . . . . . . . . . . 23 This report is intended for shareholders of Growth and Income Fund and Balanced Fund, but may also be used as sales literature if preceded or accompanied by a prospectus. The prospectus gives details about the charges, investment results, risks and operating policies of the funds. *** This report includes a glossary to help you understand financial terms used in the portfolio managers' letters. When you see this symbol, it indicates a word that is defined in the glossary. ACTION - -------------------------------------------------------------------------------- WHICH GUIDES YOUR APPROACH TO INVESTING? The market soars 150 points. The market plummets 150 points. One financial commentator urges investors to sell stocks and buy bonds. Another promotes a "can't miss" investment opportunity. One thing is for sure -- in today's financial markets, it's easy to get the impression that investment experts possess a secret formula for success. Yet many successful investors realize there are no short-term secrets to investing. While others heed market soothsayers and prophets, savvy investors work with investment professionals who help them remain calm in the face of volatility. Guided by long-term investment plans rather than by emotions, these investors stay the course while others react to the latest trend. More important, successful investors employ several time-tested investment strategies to help reach their goals, including diversification and systematic investing.* - -------------------------------------------------------------------------------- WALL STREET'S WILD RIDE - -------------------------------------------------------------------------------- Dow Jones Industrial Average [EDGAR REPRESENTATION OF GRAPH] Dow Jones Industrial Average 8/1 8194 8/4 8198 8/5 8188 8/6 8259 High 8/6/97 8,259 8/7 8188 8/8 8031 8/11 8062 8/12 7961 8/13 7928 8/14 7942 8/15 7695 8/18 7803 8/19 7918 8/20 8021 8/21 7894 8/22 7888 8/25 7860 8/26 7782 8/27 7787 8/28 7694 8/29 7622 9/2 7880 9/3 7895 9/4 7867 9/5 7822 9/8 7835 9/9 7852 9/10 7719 9/11 7661 9/12 7743 9/15 7721 9/16 7896 9/17 7886 9/18 7923 9/19 7917 9/22 7997 9/23 7970 9/24 7907 9/25 7848 9/26 7922 9/29 7991 9/30 7945 10/1 8016 10/2 8028 10/3 8039 10/6 8100 10/7 8178 10/8 8095 10/9 8061 10/10 8045 10/13 8072 10/14 8096 10/15 8058 10/16 7939 10/17 7847 10/20 7921 10/21 8060 10/22 8035 10/23 7848 10/24 7715 10/27 7161 Low 10/27/97 7,161 10/28 7498 10/29 7507 10/30 7382 10/31 7442 Source: Bloomberg. The Dow Jones industrial average is a price-weighted average of the 30 largest blue-chip stocks on the New York Stock Exchange. DO YOUR EXPECTATIONS REFLECT MARKET REALITIES? Investors' expectations have risen with the market -- and are in sharp contrast to market realities. In the words of Federal Reserve Chairman Alan Greenspan, there is an "irrational exuberance" based on unprecedented growth in recent years. During the past few years, returns -- especially from stocks -- have been much higher than at any other time in history. The chart below shows long-term returns of various securities compared to the highly inflated results of the past year. - -------------------------------------------------------------------------------- SHORT-TERM RETURNS VS. LONG-TERM RETURNS THROUGH SEPTEMBER 30, 1997 - -------------------------------------------------------------------------------- The past year has provided investors with unusually high returns THE PAST YEAR PAST 71 YEARS total return average annualized total return, 1926-1997 Large-Company Stocks 40.49% 10.98% Long-Term Corporate Bonds 12.67% 5.67% Source: Ibbotson Associates. Past performance does not guarantee future results. Stocks generally exhibit more volatility than bonds. *** - This symbol represents a graduation cap, used throughout this report to indicate terms defined in the glossary. OR REACTION: - -------------------------------------------------------------------------------- What actions do successful investors take to weather the market's normal ups and downs? First, they realize that markets move in cycles. In addition, they diversify their holdings among a mix of funds that mirror their investment objectives and risk tolerance and continue to purchase fund shares systematically. By investing regularly* -- consistently buying shares through market fluctuations -- educated investors steadily increase the number of shares they own, while evening out their average cost per share over time. THE MISGUIDED REACTIVE INVESTOR The reactive investor believes that a shortcut to success is to chase today's best-performing funds. After all, what could go wrong when you invest in these winners? Plenty. The lure of a quick profit could fade to the reality of poor returns for reactive investors who buy in at the peak of a fund's rally. They often buy when prospects look bright and sell when prices drop -- behavior that can devastate an investor's returns even while the market makes solid gains. In contrast, educated investors don't succumb to emotions that could undermine rational decisions. They're aware that few, if any, mutual funds can significantly outperform their peers year after year. They also realize that long-term investing helps reduce volatility. A buy-and-hold philosophy protects investors against wild swings triggered by short-term market fluctuations -- and helps them sleep better at night, too. IT'S A FACT: INVESTORS PROFIT FROM THEIR ACTIONS, NOT THEIR REACTIONS If you want to be successful in the financial marketplace, don't be swayed by emotions or speculation. Keep in mind that markets change daily, yet your goals may not change for years. Work with your Piper Jaffray Investment Executive to develop an investment plan or to fine-tune your investment strategies as your objectives change. A professional can help you ignore short-term volatility and focus on long-term results. Your actions -- not your reactions -- ultimately represent the difference between getting by ... and getting ahead. *Keep in mind, investing regularly does not assure a profit and does not protect against loss in declining markets. TAKE THE GUESSWORK OUT OF INVESTING WITH THESE TRIED-AND-TRUE INVESTMENT STRATEGIES - -------------------------------------------------------------------------------- X GET AN INVESTMENT PLAN An investment plan maps out your goals and identifies effective ways to pursue them. X INVEST SYSTEMATICALLY* Systematic investing is an effective way to build wealth over time and helps you avoid hitting only market peaks and valleys. X DIVERSIFY Diversification helps reduce volatility within your portfolio and may also give you better long-term results. X REASSESS YOUR RISK TOLERANCE Life's events may affect the amount of risk that's comfortable. A "BUY-AND-HOLD" PHILOSOPHY HELPS REDUCE YOUR RISK - -------------------------------------------------------------------------------- Your chance of losing money decreases the longer you hold stocks [EDGAR REPRESENTATION OF GRAPH] HOLDING STOCKS FOR ONE YEAR 29% HOLDING STOCKS FOR FIVE YEARS 11% HOLDING STOCKS FOR 10 YEARS 3% Source: Based on rolling annual returns of the S&P 500 Index through 1996. The S&P 500 is an unmanaged index of large-capitalization stocks. Past performance does not guarantee future results. PRESIDENT'S LETTER - -------------------------------------------------------------------------------- [PHOTO] PAUL A. DOW, CFA - -------------------------------------------------------------------------------- President Piper Funds Paul Dow, Chief Investment Officer, was named CEO of Piper Capital Management effective October 1, 1997. He has therefore stepped down as one of the lead portfolio managers for Growth and Income Fund and Balanced Fund. November 17, 1997 - -------------------------------------------------------------------------------- DEAR SHAREHOLDERS: An athlete is sometimes said to be "in the zone." That's the time when the difficult seems easy, the fast seems slow; essentially, the time when everything comes together and performance soars. For the past few years, the investment environment has been in the zone. The economy has maintained a steady growth rate without increasing inflationary pressures. In fact, economic prognosticators have consistently underestimated growth and overestimated inflation -- traditionally considered an impossible feat. This robust economic environment, supplemented by company earnings that have grown at even faster rates than the economy due to widening profit margins, has provided extraordinary returns for equity investors. As you can see in the chart below, the Dow Jones Industrial Average appreciation in recent years has been far above the normal experience of the past 100 years. In fact, the past 15- and 20-year periods are in the top one percentile of all periods. The most significant event for the stock market during the funds' fiscal year was the shift in performance leadership from large stocks to small- and mid-cap stocks. In the first six months of the fiscal year, small- and mid-cap stock returns (as measured by S&P's SmallCap 600 and MidCap 400 indexes) were -0.18% and 4.48%, compared to 11.23% for the S&P 500 Index. In the second half of the fiscal year, small- and mid-cap stocks surged ahead with returns of 37.22% and 33.13%, compared to 26.25% for large-company stocks.** With this outstanding performance, small- and midsize company stocks' fiscal year returns through September 30 closed the gap with large-company stock returns, as shown below. It appears the prolonged period of only the largest stocks providing the highest returns has ended, and investors are focusing more on companies selling at attractive relative values. - -------------------------------------------------------------------------------- THE DOW JONES INDUSTRIAL AVERAGE CAPITAL APPRECIATION* - -------------------------------------------------------------------------------- Median Annualized Annualized Appreciation for Appreciation Rolling Periods as of 8/29/97 Since 1896 3 years 24.9% 5.8% 10 years 11.1% 3.9% 15 years 15.3% 4.1% 20 years 11.5% 3.5% * The Dow Jones Industrial Average is a price-weighted average of the 30 largest blue-chip stocks on the New York Stock Exchange. Performance does not include reinvested dividends. Past performance does not guarantee future results. Sources: Dow Jones & Company; Crandall, Pierce & Company TOTAL RETURNS (INCLUDING REINVESTED DISTRIBUTIONS)** - -------------------------------------------------------------------------------- For the fiscal year ended September 30, 1997 [EDGAR REPRESENTATION OF GRAPH] S&P SmallCap 600 Index 36.98% S&P MidCap 400 Index 39.09% S&P 500 Index 40.45% The S&P 600, 400 and 500 indexes are unmanaged indexes of small-, mid- and large-capitalization stocks, respectively. Performance includes no expenses or transaction charges. - -------------------------------------------------------------------------------- 2 1997 Annual Report - Growth and Income Funds - -------------------------------------------------------------------------------- Fixed income investors have also fared well, from a historical perspective, yet not without setbacks. Fixed income returns have been helped by steadily declining inflation expectations. Non-government issues have further benefited from investors' increasing degree of comfort with credit risk. As a result, the amount of additional yield required by investors to take on credit risk has declined to levels not seen since the late 1960s. This is a normal occurrence during a period of economic growth, but is not sustainable permanently. At this time of high valuations and buoyant investor confidence, it is particularly important to be watchful of significant changes that may alter the markets. A negative event in the marketplace would likely bring on a period of lower performance. During the past few months, several events developed that could alter the generally positive condition of the investment environment. The aftermath of the UPS strike could have an effect on corporate profit margins, as the strength of labor improves while the labor pool is shrinking. The recently publicized Boeing and Union Pacific production and transportation backlogs could indicate an economy that is reaching some stress points. Most significantly, the turmoil in Asia recently has spread to U.S. markets, causing a high level of volatility. The decline in Asian currencies and the high level of excess manufacturing capacity could bring increasing competitive pressures on U.S. companies, threatening their strong earnings growth. So far, none of these events appear significant enough to change our overall view of continued slow inflation and a growing economy. However, the Asian situation is the biggest challenge to "the zone" yet. When markets change, it is important to clearly understand, and be disciplined in, your investment strategy. At Piper Funds, we believe that maintaining sound, disciplined investment strategies is essential to achieving consistent, competitive performance in an ever-changing environment. We also believe in providing a higher level of quality service to shareholders. That means going the extra step to make sure you understand your investments. Take a look at the fund prospectus that accompanies this shareholder report. We've revised it to make it simpler and easier to read. We hope the information in your new prospectus, and in this shareholder report, is useful to you, and we look forward to continuing to provide you with exceptional service. Thank you for your continued confidence in the Piper Funds family. Sincerely, /s/ Paul A. Dow Paul A. Dow President, Piper Funds ** Past performance does not guarantee future results. Small- and mid-capitalization stocks are more volatile than stocks of larger companies. They often involve higher risks because they lack the management expertise, operating history, financial resources, product diversification and competitive strengths of larger companies. - -------------------------------------------------------------------------------- 3 1997 Annual Report - Growth and Income Funds GROWTH AND INCOME FUND - -------------------------------------------------------------------------------- [PHOTO] STEVE MARKUSEN, CFA shares responsibility for the management of Growth and Income Fund. He has 13 years of financial experience. - -------------------------------------------------------------------------------- November 17, 1997 - -------------------------------------------------------------------------------- DEAR SHAREHOLDERS: FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997, GROWTH AND INCOME FUND CLASS A RETURNED 31.87%,* WITH ALL DISTRIBUTIONS REINVESTED, BUT NOT INCLUDING THE SALES CHARGE. These results were below the 35.76% return for the Lipper Growth and Income Funds Average.+ Although the fund's investments in the energy, retail and financial sectors*** performed well, the fund lagged the Lipper average during the second half of the fiscal year. This was primarily due to the fund's underexposure to financial stocks, which performed well during the second half of the fiscal year, and its higher average market capitalization*** versus the average growth and income fund. WHILE THE FUND'S RECENT PERFORMANCE IS BELOW OUR GOALS, WE ARE COMMITTED TO GENERATING CONSISTENT, COMPETITIVE PERFORMANCE OVER A LONGER TERM. Our investment process involves identifying large, attractively valued companies that we believe offer above-average earnings and dividend growth potential or are undervalued in the marketplace. During the past three years, the fund returned an average annualized 26.61% to class A shareholders (with distributions reinvested and not including sales charges), compared to a 25.46% average annualized return for the Lipper average. - -------------------------------------------------------------------------------- PERFORMANCE THROUGH SEPTEMBER 30, 1997* - -------------------------------------------------------------------------------- Growth of $10,000 Invested Since Inception [EDGAR REPRESENTATION OF GRAPH] Growth and Income Fund S&P 500 Index** Lipper Growth and Income Class A, reflects the fund's Funds Average+ maximum 4% sales charge 7/92 9,600 10,000 10,000 7/92 9,715 10,000 10,000 8/92 9,504 9,795 9,802 9/92 9,610 9,910 9,917 10/92 9,446 9,945 9,978 11/92 9,677 10,283 10,352 12/92 9,751 10,409 10,523 1/93 9,692 10,496 10,650 2/93 9,789 10,639 10,741 3/93 9,934 10,864 11,028 4/93 9,788 10,601 10,830 5/93 9,983 10,885 11,084 6/93 9,886 10,917 11,141 7/93 9,886 10,873 11,144 8/93 10,218 11,285 11,551 9/93 10,130 11,199 11,551 10/93 10,326 11,431 11,720 11/93 10,287 11,322 11,558 12/93 10,347 11,459 11,824 1/94 10,685 11,848 12,204 2/94 10,377 11,527 11,961 3/94 9,987 11,024 11,472 4/94 10,047 11,165 11,593 5/94 10,267 11,349 11,699 6/94 10,005 11,070 11,437 7/94 10,296 11,434 11,754 8/94 10,598 11,903 12,204 9/94 10,386 11,612 11,930 10/94 10,487 11,873 12,052 11/94 10,214 11,440 11,606 12/94 10,463 11,610 11,725 1/95 10,647 11,911 11,902 2/95 11,076 12,375 12,346 3/95 11,436 12,740 12,656 4/95 11,806 13,116 12,964 5/95 12,289 13,640 13,390 6/95 12,444 13,957 13,683 7/95 12,733 14,419 14,151 8/95 12,815 14,456 14,257 9/95 13,379 15,066 14,703 10/95 13,410 15,012 14,515 11/95 14,093 15,671 15,139 12/95 14,410 15,973 15,378 1/96 14,769 16,516 15,803 2/96 14,790 16,670 16,025 3/96 15,180 16,830 16,220 4/96 15,392 17,078 16,492 5/96 15,731 17,519 16,797 6/96 15,784 17,585 16,754 7/96 15,084 16,808 16,048 8/96 15,338 17,163 16,501 9/96 15,996 18,129 17,256 10/96 16,442 18,629 17,607 11/96 17,533 20,037 18,766 12/96 17,294 19,640 18,567 1/97 18,037 20,867 19,398 2/97 18,082 21,031 19,512 3/97 17,384 20,167 18,821 4/97 17,968 21,371 19,531 5/97 18,942 22,672 20,725 6/97 19,563 23,687 21,536 7/97 21,192 25,570 23,134 8/97 20,148 24,138 22,342 9/97 21,094 25,461 23,479 ** An unmanaged index of large-capitalization stocks that includes no expenses or transaction charges. + The average total return, not including sales charges, of similar funds as characterized by Lipper Analytical Services. - -------------------------------------------------------------------------------- Class A Average Annualized Total Returns Includes the fund's maximum 4% front-end sales charge One Year 26.59% - -------------------------------------------------------------------------------- Five Year 16.07% - -------------------------------------------------------------------------------- Since Inception (7/27/92) 15.50% - -------------------------------------------------------------------------------- Class B and Y Cumulative Total Returns Class B share returns include the fund's maximum 4% contingent deferred sales charge. Sales charges do not apply to Class Y shares. Class B Since Inception (2/18/97) 9.93% - -------------------------------------------------------------------------------- Class Y Since Inception (2/18/97) 14.51% - -------------------------------------------------------------------------------- * PLEASE REMEMBER, YOU COULD LOSE MONEY WITH THIS INVESTMENT. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. The investment return and principal value of your investment will fluctuate so that fund shares, when sold, may be worth more or less than their original cost. Neither safety of principal nor stability of income is guaranteed. During most periods, the fund's advisor waived or paid certain expenses and/or the fund's distributor voluntarily waived certain 12b-1 fees. Without waivers, returns would have been lower. All fund and benchmark returns include reinvested distributions. *** - This symbol represents a graduation cap, used throughout this report to indicate terms defined in the glossary. - -------------------------------------------------------------------------------- 4 1997 Annual Report - Growth and Income Funds GROWTH AND INCOME FUND (CONTINUED) - -------------------------------------------------------------------------------- [PHOTO] BRENT MELLUM, CFA shares responsibility for the management of Growth and Income Fund. He has three years of financial experience. - -------------------------------------------------------------------------------- DURING 1997, THE FUND BENEFITED FROM GOOD STOCK SELECTIONS AS SEVERAL LARGE-COMPANY HOLDINGS GENERATED STRONG RETURNS. Ford Motor (3.3% of the fund's total assets as of September 30, 1997) was a strong performer due to a dramatic earnings increase related to cost cutting in its North American automotive and international operations as well as investor's focus on the value of Ford's non-automotive assets. AirTouch Communications (2.4%), a wireless communications provider, was also a strong contributor as it continued to grow its subscribers and improve profitability. The Limited (2.0%), an apparel retailer, produced a strong return due to its growing specialty concepts and low valuation*** of its core women's apparel division. ALTHOUGH THE FUND WAS UNDERWEIGHTED*** IN TECHNOLOGY AND FINANCIAL STOCKS, THE FUND'S ADDITIONS TO THESE SECTORS DURING 1997 ADDED TO THE FUND'S PERFORMANCE. As we wrote in the semiannual report to shareholders, we began looking for attractively priced stocks in the technology area following sharp price declines as investors became concerned about near-term earnings growth. We purchased Compaq Computer (1.9%), Hewlett Packard (2.2%) and International Business Machines (2.6%). These companies were attractively valued and offered long-term earnings and dividend growth potential. Compaq Computer, in particular, generated excellent appreciation as earnings increased due to strong PC unit growth and higher profit margins. We also added to financial stocks because they offered above-average, long-term dividend growth potential and were selling at relatively low valuations. Stocks that we purchased in this area included Associates First Capital (1.3%), U.S. Bancorp (2.0%) and General Re Corp. (1.4%). - -------------------------------------------------------------------------------- PORTFOLIO COMPOSITION BY SECTOR - -------------------------------------------------------------------------------- As a percentage of total assets on September 30, 1997 - -------------------------------------------------------------------------------- [EDGAR REPRESENTATION OF GRAPH] Growth and Income Fund S&P 500 Index** Basic Materials 8% 6% Capital Goods & Services 9% 10% Commercial Services 0% 1% Consumer Durables 5% 3% Consumer Non-Durables 8% 11% Consumer Services 1% 4% Energy 13% 9% Financial Services 14% 16% Health Care 8% 11% Retail Trade 6% 5% Short-Term 3% 0% Technology 13% 14% Transportation 2% 1% Utilities 9% 9% Other Assets 1% 0% ** An unmanaged index of large-capitalization stocks that includes no expenses or transaction charges. - -------------------------------------------------------------------------------- TOP 10 EQUITY HOLDINGS - -------------------------------------------------------------------------------- As a percentage of total assets on September 30, 1997 1 Ford Motor 3.3% - -------------------------------------------------------------------------------- 2 General Electric 2.8% - -------------------------------------------------------------------------------- 3 Exxon 2.7% - -------------------------------------------------------------------------------- 4 International Business Machines 2.6% - -------------------------------------------------------------------------------- 5 Intel 2.5% - -------------------------------------------------------------------------------- 6 BankAmerica 2.5% - -------------------------------------------------------------------------------- 7 AirTouch Communications 2.4% - -------------------------------------------------------------------------------- 8 Baker Hughes 2.4% - -------------------------------------------------------------------------------- 9 Schlumberger Limited 2.3% - -------------------------------------------------------------------------------- 10 Abbott Laboratories 2.3% - -------------------------------------------------------------------------------- *** - This symbol represents a graduation cap, used throughout this report to indicate terms defined in the glossary. - -------------------------------------------------------------------------------- 5 1997 Annual Report - Growth and Income Funds GROWTH AND INCOME FUND (CONTINUED) - -------------------------------------------------------------------------------- WE BELIEVE THE FUND WILL CONTINUE TO BENEFIT FROM ITS OVERWEIGHTING*** IN THE ENERGY SECTOR. We expect this sector to experience strong demand growth and limited supply expansion during the next several years. These positive supply/demand fundamentals should allow many of these companies to operate at high utilization rates which would expand profit margins and generate above-average earnings growth. Major energy companies, including Exxon (2.7%) and Texaco (2.1%), are attractively valued given this outlook and provide income to the fund due to above-average dividend yields. ***We also have a good representation in the oil service sector by owning Schlumberger (2.3%) and Baker Hughes (2.4%). Both companies should benefit from increased exploration and production activity to meet rising energy demand. LOOKING FORWARD, WE BELIEVE THE ECONOMY WILL EXPAND MODERATELY AND INFLATION WILL REMAIN AT RELATIVELY LOW LEVELS. This is an ideal environment for stocks; however, we are cautious about the near-term outlook for the market. Our caution is due to high returns during the last several years along with high valuations in certain sectors of the market and the increase in volatility in recent months. We believe the fund is positioned appropriately in this environment. Our investment process continues to focus on identifying companies with above-average earnings and dividend growth potential that sell at attractive valuations or companies that are undervalued in the marketplace. We feel this process will deliver consistent, competitive performance and fulfill the fund's investment objective of current income and growth of capital and income. Thank you for your investment in Growth and Income Fund. We appreciate the opportunity to manage your assets and help you pursue your long-term investment goals. Sincerely, /s/ Steve Markusen /s/ Brent Mellum Steve Markusen Brent Mellum Portfolio Manager Portfolio Manager *** - This symbol represents a graduation cap, used throughout this report to indicate terms defined in the glossary. - -------------------------------------------------------------------------------- 6 1997 Annual Report - Growth and Income Funds BALANCED FUND - -------------------------------------------------------------------------------- [PHOTO] DAVID STEELE shares responsibility for the management of the fixed income portion of Balanced Fund. He has 18 years of financial experience. - -------------------------------------------------------------------------------- November 17, 1997 - -------------------------------------------------------------------------------- DEAR SHAREHOLDERS: FOR THE ONE-YEAR PERIOD ENDED SEPTEMBER 30, 1997, BALANCED FUND CLASS A REGISTERED A 20.24%* TOTAL RETURN WITH ALL DISTRIBUTIONS REINVESTED, BUT NOT INCLUDING THE SALES CHARGE. The fund underperformed the Lipper Balanced Funds Average,++ which gained 24.03%, due to our decision to maintain a 50%/50% blend of stocks and bonds during the period. We believe other balanced funds in the group had as much as 60% in stocks. Our more conservative investment approach was based on our assessment that bonds were attractively valued,*** relative to stocks. This allocation helped protect the fund against risk when stocks came under pressure in March and August due to fears of higher inflation. We continue to believe this allocation strategy will benefit the fund in the prevailing volatile stock market environment. WHILE OUR CONSERVATIVE ALLOCATION STRATEGY DETRACTED FROM THIS YEAR'S PERFORMANCE, SEVERAL LARGE-COMPANY HOLDINGS GENERATED STRONG RESULTS. General Electric (1.2% of the fund's total assets at September 30, 1997) registered strong returns due to rising earnings as the company benefited from global economic strength and expanded profit margins. AirTouch Communications (1.5%), a wireless communications provider, continued to increase its subscribers and improve profitability, leading to - -------------------------------------------------------------------------------- PERFORMANCE THROUGH SEPTEMBER 30, 1997* - -------------------------------------------------------------------------------- Growth of $10,000 Invested Since Inception [EDGAR REPRESENTATION OF GRAPH]
Balanced Fund Lehman Brothers S&P 500 Index+ Lipper Balanced Class A, reflects the Government Funds Average++ fund's maximum Corporate Index** 4% sales charge 3/87 9,600 10,000 10,000 10,000 3/87 9,581 10,000 10,000 10,000 4/87 9,331 9,911 9,734 9,833 5/87 9,274 9,997 9,691 9,834 6/87 9,490 10,502 9,811 10,107 7/87 9,654 11,034 9,790 10,357 8/87 9,819 11,446 9,735 10,577 9/87 9,604 11,195 9,526 10,388 10/87 8,809 8,784 9,883 9,051 11/87 8,534 8,060 9,945 8,744 12/87 8,809 8,673 10,081 9,157 1/88 9,120 9,038 10,427 9,485 2/88 9,320 9,459 10,547 9,813 3/88 9,052 9,167 10,443 9,651 4/88 9,042 9,268 10,382 9,697 5/88 8,992 9,349 10,313 9,675 6/88 9,319 9,778 10,546 10,033 7/88 9,299 9,740 10,485 9,970 8/88 9,206 9,410 10,513 9,830 9/88 9,456 9,811 10,743 10,105 10/88 9,560 10,084 10,933 10,289 11/88 9,415 9,940 10,810 10,168 12/88 9,469 10,114 10,846 10,281 1/89 9,797 10,854 10,991 10,704 2/89 9,691 10,584 10,907 10,580 3/89 9,765 10,831 10,965 10,730 4/89 10,064 11,393 11,197 11,085 5/89 10,385 11,854 11,473 11,426 6/89 10,448 11,787 11,847 11,486 7/89 10,945 12,851 12,093 12,072 8/89 10,999 13,102 11,906 12,183 9/89 10,918 13,049 11,958 12,163 10/89 10,787 12,746 12,261 12,005 11/89 10,863 13,006 12,371 12,148 12/89 11,072 13,318 12,390 12,266 1/90 10,549 12,424 12,220 11,726 2/90 10,572 12,584 12,247 11,825 3/90 10,577 12,918 12,248 11,965 4/90 10,387 12,595 12,135 11,753 5/90 11,091 13,823 12,487 12,436 6/90 11,157 13,730 12,689 12,478 7/90 11,067 13,686 12,847 12,458 8/90 10,323 12,449 12,661 11,764 9/90 10,096 11,843 12,766 11,425 10/90 10,050 11,793 12,935 11,393 11/90 10,529 12,555 13,217 11,928 12/90 10,768 12,905 13,417 12,221 1/91 11,185 13,467 13,567 12,658 2/91 11,741 14,430 13,684 13,254 3/91 11,956 14,779 13,778 13,506 4/91 12,049 14,814 13,937 13,581 5/91 12,493 15,453 14,002 14,015 6/91 12,101 14,745 13,987 13,586 7/91 12,466 15,433 14,163 14,035 8/91 12,807 15,798 14,489 14,376 9/91 12,796 15,534 14,792 14,373 10/91 12,951 15,743 14,923 14,561 11/91 12,570 15,109 15,073 14,228 12/91 13,718 16,837 15,581 15,300 1/92 13,573 16,523 15,350 15,183 2/92 13,815 16,737 15,431 15,360 3/92 13,621 16,411 15,346 15,147 4/92 13,986 16,893 15,439 15,334 5/92 14,180 16,976 15,738 15,529 6/92 14,132 16,723 15,969 15,417 7/92 14,549 17,406 16,378 15,884 8/92 14,463 17,050 16,524 15,747 9/92 14,684 17,250 16,749 15,934 10/92 14,585 17,310 16,492 15,913 11/92 15,018 17,899 16,478 16,274 12/92 15,180 18,119 16,761 16,505 1/93 15,410 18,271 17,126 16,718 2/93 15,576 18,520 17,483 16,915 3/93 15,780 18,910 17,542 17,247 4/93 15,535 18,453 17,677 17,153 5/93 15,780 18,947 17,668 17,403 6/93 15,793 19,002 18,069 17,586 7/93 15,689 18,926 18,185 17,637 8/93 16,116 19,644 18,603 18,166 9/93 15,934 19,493 18,668 18,205 10/93 16,156 19,897 18,745 18,419 11/93 16,182 19,707 18,533 18,152 12/93 16,269 19,945 18,615 18,457 1/94 16,695 20,623 18,894 18,956 2/94 16,295 20,064 18,482 18,558 3/94 15,759 19,189 18,029 17,880 4/94 15,786 19,435 17,880 17,925 5/94 15,974 19,754 17,847 18,048 6/94 15,757 19,270 17,806 17,765 7/94 16,148 19,903 18,162 18,166 8/94 16,446 20,719 18,170 18,598 9/94 16,093 20,212 17,895 18,250 10/94 16,243 20,666 17,876 18,308 11/94 15,984 19,913 17,843 17,870 12/94 16,229 20,209 17,961 18,029 1/95 16,521 20,733 18,306 18,265 2/95 17,106 21,541 18,731 18,810 3/95 17,458 22,176 18,856 19,152 4/95 17,851 22,830 19,118 19,513 5/95 18,525 23,742 19,919 20,158 6/95 18,794 24,294 20,079 20,490 7/95 19,007 25,099 20,000 20,909 8/95 19,135 25,162 20,256 21,081 9/95 19,598 26,224 20,463 21,598 10/95 19,655 26,130 20,764 21,523 11/95 20,355 27,277 21,107 22,237 12/95 20,698 27,803 21,417 22,621 1/96 20,968 28,749 21,550 23,043 2/96 20,818 29,016 21,093 23,075 3/96 21,013 29,295 20,916 23,187 4/96 21,104 29,727 20,771 23,331 5/96 21,270 30,494 20,736 23,583 6/96 21,407 30,610 21,014 23,652 7/96 20,829 29,257 21,062 23,057 8/96 21,011 29,875 21,012 23,449 9/96 21,589 31,556 21,386 24,311 10/96 22,042 32,426 21,884 24,850 11/96 23,016 34,877 22,286 26,034 12/96 22,624 34,186 22,039 25,734 1/97 23,214 36,322 22,066 26,522 2/97 23,247 36,607 22,112 26,635 3/97 22,570 35,103 21,849 25,895 4/97 23,114 37,199 22,168 26,600 5/97 23,839 39,463 22,374 27,715 6/97 24,470 41,231 22,642 28,583 7/97 26,013 44,509 23,335 30,210 8/97 25,183 42,017 23,074 29,323 9/97 25,960 44,319 23,436 30,510
** An unmanaged index of U.S. government and Treasury securities and investment-grade corporate debt securities that includes no expenses or transaction charges. + An unmanaged index of large-capitalization stocks that includes no expenses or transaction charges. ++ The average total return, not including sales charges, of similar funds as characterized by Lipper Analytical Services. - -------------------------------------------------------------------------------- Class A Average Annualized Total Returns Includes the fund's maximum 4% front-end sales charge One Year 15.43% - -------------------------------------------------------------------------------- Five Year 11.15% - -------------------------------------------------------------------------------- Ten Year 10.00% - -------------------------------------------------------------------------------- Since Inception (3/16/87) 9.46% - -------------------------------------------------------------------------------- Class B Cumulative Total Returns Includes the fund's maximum 4% contingent deferred sales charge Since Inception (2/18/97) 5.08% - -------------------------------------------------------------------------------- * PLEASE REMEMBER, YOU COULD LOSE MONEY WITH THIS INVESTMENT. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. The investment return and principal value of your investment will fluctuate so that fund shares, when sold, may be worth more or less than their original cost. Neither safety of principal nor stability of income is guaranteed. During most periods, the fund's advisor waived or paid certain expenses and/or the fund's distributor voluntarily waived certain 12b-1 fees. Without waivers, returns would have been lower. All fund and benchmark returns include reinvested distributions. - -------------------------------------------------------------------------------- 7 1997 Annual Report - Growth and Income Funds BALANCED FUND (CONTINUED) - -------------------------------------------------------------------------------- [PHOTO] STEVE MARKUSEN, CFA is primarily responsible for the management of the equity portion of Balanced Fund. He has 13 years of financial experience. - -------------------------------------------------------------------------------- excellent appreciation. Carnival (0.9%), the world's largest operator of pleasure cruises, registered strong gains due to increased capacity and profit margins that pushed earnings higher. OUR DECISION TO OVERWEIGHT*** ENERGY STOCKS CONTRIBUTED FAVORABLY TO THE FUND'S PERFORMANCE. Energy stocks fared well primarily because of increased demand and limited supply expansion that pushed earnings higher. The fund enjoyed solid investment results from some of its top holdings in this sector,*** most notably Exxon (1.1%), the world's leading oil company, Transocean Offshore (1.0%), a deep water exploration company, and Schlumberger (2.2%), the world's leading oil services company. We believe the positive supply/demand scenario will continue during the next 12 months. This should allow energy companies to increase earnings, leading to enhanced stock performance. THE FUND ALSO BENEFITED FROM ITS INCREASED EXPOSURE TO HOLDINGS IN THE FINANCIAL AND TECHNOLOGY SECTORS DURING 1997. Purchases in the financial sector included American International Group (0.8%) and U.S. Bancorp (0.8%). Both companies continued to increase earnings as valuations*** remained attractive. U.S. Bancorp, after its merger with First Bank Systems, has a bright outlook due to cost reductions and revenue enhancements that we expect as a result of the merger. Technology stocks experienced a substantial price correction*** during the first part of 1997 that allowed us to buy at attractive prices. Stocks the fund purchased included International Business Machines (1.1%), Compaq Computer (0.9%) and Oracle (0.6%). These companies should benefit from rising technology use. THE PERFORMANCE OF THE BOND PORTION OF THE FUND BENEFITED FROM OUR STRATEGIC DECISIONS THROUGHOUT THE FISCAL YEAR. Early in the period, we realized strong performance due to our overweighted position in mortgage-backed securities, which outperformed the bond market. Our decision to overweight the fund in corporate bonds later in the fiscal year also helped performance, as these securities recorded above-average investment results during the last three months of the period. Also contributing to the - -------------------------------------------------------------------------------- PORTFOLIO COMPOSITION - -------------------------------------------------------------------------------- As a percentage of total assets on September 30, 1997 STOCKS 51% BONDS 48% Basic Materials 4% U.S. Treasury Securities 14% Capital Goods & Services 5% Corporate Bonds 14% Consumer Durables 2% U.S. Agency Fixed Rate Mortgage-Backed Securities 6% Consumer Non-Durables 4% U.S. Agency Adjustable Rate Mortgage-Backed Securities 1% Consumer Services 1% Private Fixed Rate CMOs 3% Energy 7% U.S. Agency CMOs 2% Financial Services 8% Asset-Backed Securities 2% Health Care 5% U.S. Agency Fixed Debentures 6% Retail Trade 3% OTHER ASSETS 1% Technology 7% Transportation 1% Utilities 4% TOP 10 EQUITY HOLDINGS - -------------------------------------------------------------------------------- As a percentage of total assets on September 30, 1997 1 Schlumberger Limited 2.2% - -------------------------------------------------------------------------------- 2 Norwest 2.1% - -------------------------------------------------------------------------------- 3 FNMA (Fannie Mae) 2.0% - -------------------------------------------------------------------------------- 4 Merck & Co. 1.8% - -------------------------------------------------------------------------------- 5 AirTouch Communications 1.5% - -------------------------------------------------------------------------------- 6 Sears, Roebuck and Co. 1.4% - -------------------------------------------------------------------------------- 7 AlliedSignal 1.4% - -------------------------------------------------------------------------------- 8 Burlington Northern Santa Fe 1.4% - -------------------------------------------------------------------------------- 9 Baker Hughes 1.3% - -------------------------------------------------------------------------------- 10 Procter & Gamble 1.3% - -------------------------------------------------------------------------------- *** - This symbol represents a graduation cap, used throughout this report to indicate terms defined in the glossary. - -------------------------------------------------------------------------------- 8 1997 Annual Report - Growth and Income Funds BALANCED FUND (CONTINUED) - -------------------------------------------------------------------------------- [PHOTO] BRUCE SALVOG shares responsibility for the management of the fixed income portion of Balanced Fund. He has 27 years of financial experience. - -------------------------------------------------------------------------------- fund's performance was our decision to maintain a neutral-to-defensive effective duration*** compared to our benchmark when interest rates rose in March. On March 25, the Federal Reserve raised short-term interest rates for the first time in two years in a pre-emptive strike against inflation. By late April, long Treasury yields had risen above 7%, so we adopted a more aggressive duration posture. That decision proved beneficial as rates declined during ensuing months. OUR OUTLOOK FOR THE STOCK AND BOND MARKETS IS CAUTIOUSLY OPTIMISTIC. The economic and corporate environment for equities couldn't be better, considering inflation is under control and corporate profits, on balance, have been good. But stock market valuations are at historically high levels, which could become a problem for stock prices should inflation exceed analysts' expectations and corporate profits begin to weaken. As for bonds, the continuing threat of another rate hike by the Federal Reserve may cause yields to rise in the near-term. But we believe bonds, in general, are fairly valued and should continue to perform well in the coming months. Given this forecast, we expect to maintain our 50%/50% asset allocation,*** focusing primarily on high-quality stocks that meet our strict investment criteria and bonds that are attractively priced compared to other fixed income securities. Since we believe inflation will remain under control, we intend to increase the fund's duration compared to its benchmark if interest rates move significantly higher in the near term. Thank you for your investment in Balanced Fund. We remain committed to providing you with quality service and look forward to helping you achieve your financial goals. Sincerely, /s/ David Steele /s/ Steve Markusen /s/ Bruce Salvog David Steele Steve Markusen Bruce Salvog Portfolio Manager Portfolio Manager Portfolio Manager *** - This symbol represents a graduation cap, used throughout this report to indicate terms defined in the glossary. - -------------------------------------------------------------------------------- 9 1997 Annual Report - Growth and Income Funds Financial Statements - -------------------------------------------------------------------------------- STATEMENTS OF ASSETS AND LIABILITIES September 30, 1997 ................................................................................
GROWTH AND INCOME BALANCED FUND FUND ------------- ------------ ASSETS: Investments in securities at market value* (note 2) (including repurchase agreements of $5,019,000 and $142,000, respectively) .................................. $144,173,744 $48,663,406 Cash in bank on demand deposit ............................. 30,030 257,954 Receivable for investment securities sold .................. 619,704 -- Receivable for fund shares sold ............................ 338,944 33,485 Dividends and accrued interest receivable .................. 161,846 329,998 ------------- ------------ Total assets ............................................. 145,324,268 49,284,843 ------------- ------------ LIABILITIES: Payable for investment securities purchased ................ 2,934,179 -- Payable for fund shares redeemed ........................... 371,848 332,272 Accrued investment management fee .......................... 83,312 30,158 Accrued distribution and service fees ...................... 35,898 13,692 Other accrued expenses ..................................... 5,053 -- ------------- ------------ Total liabilities ........................................ 3,430,290 376,122 ------------- ------------ Net assets applicable to outstanding capital stock ....... $141,893,978 $48,908,721 ------------- ------------ ------------- ------------ COMPOSITION OF NET ASSETS: Capital stock and additional paid-in capital ............... $ 83,026,903 $34,276,471 Undistributed net investment income ........................ 3,184 16,482 Accumulated net realized gain on investments ............... 12,178,065 3,100,699 Unrealized appreciation of investments ..................... 46,685,826 11,515,069 ------------- ------------ Total - representing net assets applicable to outstanding capital stock .......................................... $141,893,978 $48,908,721 ------------- ------------ ------------- ------------ * Investments in securities at identified cost ........... $ 97,487,918 $37,148,337 ------------- ------------ ------------- ------------ NET ASSET VALUE AND OFFERING PRICE: CLASS A (NOTE 1): Net assets ............................................... $127,063,830 $48,871,577 Shares outstanding (authorized four billion shares of $0.01 par value): ...................................... 6,917,087 3,145,651 Net asset value .......................................... $ 18.37 $ 15.54 Maximum offering price per share (net asset value plus 4% of offering price) ..................................... $ 19.14 $ 16.19 CLASS B: Net assets ............................................... $ 904,550 $ 37,144 Shares outstanding (authorized two billion shares of $0.01 par value): ............................................ 49,355 2,395 Net asset value and offering price per share ............. $ 18.33 $ 15.51 CLASS Y: Net assets ............................................... $ 13,925,598 -- Shares outstanding (authorized one billion shares of $0.01 par value): ............................................ 758,360 -- Net asset value and offering price per share ............. $ 18.36 --
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. - -------------------------------------------------------------------------------- 10 1997 Annual Report - Growth and Income Funds Financial Statements (continued) - -------------------------------------------------------------------------------- STATEMENTS OF OPERATIONS For the Year Ended September 30, 1997 ................................................................................
GROWTH AND INCOME BALANCED FUND FUND ------------ ------------- INCOME: Dividends (net of foreign withholding taxes of $4,736 and $740, respectively) ...................................... $ 2,368,529 $ 414,742 Interest ................................................... 383,536 1,631,148 ------------ ------------- Total income ............................................. 2,752,065 2,045,890 ------------ ------------- EXPENSES (NOTE 5): Investment management fee .................................. 901,743 362,819 Distribution and service fees: CLASS A .................................................. 582,629 241,820 CLASS B .................................................. 2,863 154 CLASS Y .................................................. -- -- Custodian and accounting fees .............................. 108,170 62,395 Transfer agent and dividend disbursing agent fees .......... 87,377 51,452 Registration fees .......................................... 52,697 36,653 Reports to shareholders .................................... 35,892 28,238 Amortization of organization costs ......................... 13,225 -- Directors' fees ............................................ 7,968 7,968 Audit and legal fees ....................................... 37,989 37,989 Other expenses ............................................. 13,348 9,126 ------------ ------------- Total expenses ........................................... 1,843,901 838,614 Less Class A expenses waived by the distributor ........ (186,386) (77,389) Less expenses waived by the adviser .................... (34,832) (110,881) ------------ ------------- Net expenses before expenses paid indirectly ............. 1,622,683 650,344 Less expenses paid indirectly .......................... (33) (187) ------------ ------------- Total net expenses ....................................... 1,622,650 650,157 ------------ ------------- Net investment income .................................... 1,129,415 1,395,733 ------------ ------------- NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS: Net realized gain on investments (note 3) .................. 13,015,004 3,266,517 Net realized loss on closed or expired option contracts written (note 2) ......................................... (181,637) -- ------------ ------------- Net realized gain on investments ......................... 12,833,367 3,266,517 Net change in unrealized appreciation or depreciation of investments .............................................. 19,936,662 4,157,249 ------------ ------------- Net gain on investments .................................. 32,770,029 7,423,766 ------------ ------------- Net increase in net assets resulting from operations ... $33,899,444 $ 8,819,499 ------------ ------------- ------------ -------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. - -------------------------------------------------------------------------------- 11 1997 Annual Report - Growth and Income Funds Financial Statements (continued) - -------------------------------------------------------------------------------- STATEMENTS OF CHANGES IN NET ASSETS ................................................................................
GROWTH AND INCOME FUND BALANCED FUND ---------------------------- --------------------------- Year Ended Year Ended Year Ended Year Ended 9/30/97 9/30/96 9/30/97 9/30/96 ------------- ------------ ------------ ------------ OPERATIONS: Net investment income ...................................... $ 1,129,415 $ 1,078,923 $ 1,395,733 $ 1,440,045 Net realized gain on investments ........................... 12,833,367 6,012,377 3,266,517 2,867,497 Net change in unrealized appreciation or depreciation of investments .............................................. 19,936,662 7,464,585 4,157,249 28,858 ------------- ------------ ------------ ------------ Net increase in net assets resulting from operations ..... 33,899,444 14,555,885 8,819,499 4,336,400 ------------- ------------ ------------ ------------ DISTRIBUTIONS TO SHAREHOLDERS: CLASS A: From net investment income ............................... (1,123,538) (1,181,927) (1,402,111) (1,452,108) From net realized gains .................................. (6,538,320) (996,506) (2,554,492) (1,746,546) CLASS B: From net investment income ............................... (1,110) -- (433) -- From net realized gains .................................. -- -- -- -- CLASS Y: From net investment income ............................... (70,694) -- -- -- From net realized gains .................................. -- -- -- -- ------------- ------------ ------------ ------------ Total distributions ...................................... (7,733,662) (2,178,433) (3,957,036) (3,198,654) ------------- ------------ ------------ ------------ CAPITAL SHARE TRANSACTIONS (NOTE 4): CLASS A .................................................... 4,970,887 11,428,192 (1,431,461) 313,697 CLASS B .................................................... 827,747 -- 34,648 -- CLASS Y .................................................... 12,692,933 -- -- -- ------------- ------------ ------------ ------------ Increase (decrease) in net assets from capital share transactions ........................................... 18,491,567 11,428,192 (1,396,813) 313,697 ------------- ------------ ------------ ------------ Total increase in net assets ............................. 44,657,349 23,805,644 3,465,650 1,451,443 Net assets at beginning of year ............................ 97,236,629 73,430,985 45,443,071 43,991,628 ------------- ------------ ------------ ------------ Net assets at end of year .................................. $141,893,978 $ 97,236,629 $ 48,908,721 $ 45,443,071 ------------- ------------ ------------ ------------ ------------- ------------ ------------ ------------ Undistributed net investment income ........................ $ 3,184 $ 61,629 $ 16,482 $ 24,113 ------------- ------------ ------------ ------------ ------------- ------------ ------------ ------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. - -------------------------------------------------------------------------------- 12 1997 Annual Report - Growth and Income Funds Notes to Financial Statements - -------------------------------------------------------------------------------- (1) ORGANIZATION ................................ Piper Funds Inc. (the company) is registered under the Investment Company Act of 1940 (as amended) as a single, open-end management investment company. The company currently has 12 series, including Growth and Income Fund and Balanced Fund (the funds). Each fund is classified as a diversified series. The company's articles of incorporation permit the board of directors to create additional series in the future. The funds commenced offering Class B shares and Growth and Income Fund commenced offering Class Y shares on February 18, 1997. All shares existing prior to that date were classified as Class A shares. Key features of each class are: CLASS A: - Subject to a front-end sales charge - Lower distribution and service fees than Class B CLASS B: - No front-end sales charge - Subject to a contingent deferred sales charge upon redemption - Higher distribution and service fees than Class A - Automatic conversion to Class A shares at the beginning of the sixth calendar year after issuance CLASS Y: - Requires a minimum initial investment of $1 million - No front-end or contingent deferred sales charges - No distribution and service fees The classes of shares have the same rights and are identical in all respects except that each class bears different distribution expenses, has exclusive voting rights with respect to matters affecting that class and has different exchange privileges. Growth and Income Fund invests primarily in stocks of large, established companies that appear undervalued and potentially offer long-term dividend and earnings growth. The fund may also invest in debt securities including U.S. government securities and nonconvertible preferred stock. Balanced Fund invests in both common stocks and fixed income securities that appear to have some potential for capital appreciation. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ................................ INVESTMENTS IN SECURITIES Portfolio securities for which market quotations are readily available are valued at current market value. If market quotations or valuations are not available, or if such quotations or valuations are believed to be inaccurate, unreliable or not reflective of market value, portfolio securities are valued - -------------------------------------------------------------------------------- 13 1997 Annual Report - Growth and Income Funds Notes to Financial Statements (continued) - -------------------------------------------------------------------------------- according to procedures adopted by the funds' board of directors in good faith at 'fair value', that is, a price that the fund might reasonably expect to receive for the security or other asset upon its current sale. The current market value of certain fixed income securities is provided by an independent pricing service. Fixed income securities for which prices are not available from an independent pricing service but where an active market exists are valued using market quotations obtained from one or more dealers that make markets in the securities or from a widely-used quotation system. Short-term securities with maturities of 60 days or less are valued at amortized cost, which approximates market value. Exchange-traded options are valued at the last sales price on the exchange prior to the time when assets are valued. If no sales were reported that day, the options will be valued at the mean between the current closing bid and asked prices. Over-the-counter options are valued using market quotations obtained from broker-dealers. Financial futures are valued at the last settlement price established each day by the board of trade or exchange on which they are traded. Pricing services value domestic and foreign equity securities (and occasionally fixed-income securities) traded on a securities exchange or Nasdaq at the last reported sale price, up to the time of valuation. If there are no reported sales of a security on the valuation date, it is valued at the mean between the published bid and asked prices reported by the exchange or Nasdaq. If there are no sales and no published bid and asked quotations for a security on the valuation date or the security is not traded on an exchange or Nasdaq, the pricing service may obtain market quotations directly from broker-dealers. Securities transactions are accounted for on the date securities are purchased or sold. Realized gains and losses are calculated on the identified-cost basis. Dividend income is recognized on the ex-dividend date and interest income, including amortization of bond discount and premium, is recorded on an accrual basis. OPTIONS TRANSACTIONS For hedging purposes, the funds may buy and sell put and call options, write covered call options on portfolio securities and write cash-secured puts. The risk in writing a call option is that the funds give up the opportunity of profit if the market price of the security increases. The risk in writing a put option is that the funds may incur a loss if the market price of the security decreases and the option is exercised. The risk in buying an option is that the funds pay a premium whether or not the option is exercised. The funds also have the additional risk of not being able to enter into a closing transaction if a liquid secondary market does not exist. Option contracts are valued daily and unrealized appreciation or depreciation is recorded. The funds will realize a gain or loss upon expiration or closing of the option transaction. When an option is exercised, the proceeds on the sale of a written call option, the purchase cost of a written put option, or the cost of a security for purchased put and call options is adjusted by the amount of premium received or paid. - -------------------------------------------------------------------------------- 14 1997 Annual Report - Growth and Income Funds Notes to Financial Statements (continued) - -------------------------------------------------------------------------------- The number of contracts and premium amounts associated with call option contracts written during the year ended September 30, 1997, for Growth and Income Fund were as follows:
CALL OPTIONS ---------------------- NUMBER OF PREMIUM CONTRACTS AMOUNT --------- ---------- Balance at September 30, 1996 .......... 230 $ 55,993 Opened ............................... -- -- Closed ............................... (230) (55,993) --------- ---------- Balance at September 30, 1997 .......... -- $ -- --------- ---------- --------- ----------
FUTURES TRANSACTIONS For hedging purposes, the funds may buy and sell financial futures contracts and related options. Risks of entering into futures contracts and related options include the possibility that there may be an illiquid market and that a change in the value of the contract or option may not correlate with changes in the value of the underlying securities. Upon entering into a futures contract, the funds are required to deposit either cash or securities in an amount (initial margin) equal to a certain percentage of the contract value. Subsequent payments (variation margin) are made or received by the funds each day. The variation margin payments are equal to the daily changes in the contract value and are recorded as unrealized gains and losses. The funds recognize a realized gain or loss when the contract is closed or expires. SECURITIES PURCHASED ON A WHEN-ISSUED BASIS Delivery and payment for securities that have been purchased by the funds on a when-issued or forward-commitment basis can take place a month or more after the transaction date. During this period, such securities do not earn interest, are subject to market fluctuation and may increase or decrease in value prior to their delivery. The funds segregate, with their custodian, assets with a market value equal to the amount of their purchase commitments. The purchase of securities on a when-issued or forward-commitment basis may increase the volatility of the funds' net asset value if the funds make such purchases while remaining substantially fully invested. As of September 30, 1997, the funds had no outstanding when-issued or forward-commitments. FEDERAL TAXES Each fund is treated separately for federal income tax purposes. Each fund intends to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and not be subject to federal income tax. Therefore, no income tax provision is required. The funds also intend to distribute their taxable net investment income and realized gains, if any, to avoid the payment of any federal excise taxes. Net investment income and net realized gains (losses) may differ for financial statement and tax purposes primarily because of losses deferred due to "wash sale" and "straddle" transactions and the non-deductibility of amortization of organization costs. - -------------------------------------------------------------------------------- 15 1997 Annual Report - Growth and Income Funds Notes to Financial Statements (continued) - -------------------------------------------------------------------------------- The character of distributions made during the year from net investment income or net realized gains may differ from its ultimate characterization for federal income tax purposes. In addition, due to the timing of dividend distributions, the fiscal year in which amounts are distributed may differ from the year that the income or realized gains (losses) were recorded by the funds. On the statements of assets and liabilities, as a result of permanent book-to-tax differences, reclassification adjustments have been made as follows:
GROWTH AND INCOME BALANCED FUND FUND ----------- --------- Undistributed Net Investment Income .... $ 7,482 $(820) Accumulated Net Realized Gains ......... $ -- $ 820 Additional Paid-In Capital ............. $(7,482) $ --
DISTRIBUTIONS TO SHAREHOLDERS Distributions to shareholders from net investment income are declared separately for each class and paid quarterly. Net realized gains distributions, if any, will be made at least annually. Distributions are payable in cash or reinvested in additional shares of the same class. REPURCHASE AGREEMENTS For repurchase agreements entered into with certain broker-dealers, the funds, along with other affiliated registered investment companies, may transfer uninvested cash balances to a joint trading account, the daily aggregate of which is invested in repurchase agreements secured by U.S. government or agency obligations. Securities pledged as collateral for all individual and joint repurchase agreements are held by the funds' custodian bank until maturity of the repurchase agreement. Provisions for all agreements ensure that the daily market value of the collateral is in excess of the repurchase amount, including accrued interest, to protect the funds in the event of a default. ORGANIZATION COSTS Organization costs were incurred in connection with the start up and initial registration of the funds. These costs are amortized over 60 months on a straight-line basis. If any or all of the shares representing initial capital of the fund are redeemed by any holder thereof prior to the end of the amortization period, the proceeds will be reduced by the unamortized organization cost balance in the same proportion as the number of shares redeemed bears to the number of initial shares outstanding preceding the redemption. ALLOCATION OF INCOME, EXPENSES AND GAINS(LOSSES) Income, expenses (other than class-specific expenses) and realized and unrealized gains and losses are allocated daily to each class of shares based upon the relative proportion of net assets represented by such class. Class-specific expenses, which include distribution and service fees, are charged directly to such class. - -------------------------------------------------------------------------------- 16 1997 Annual Report - Growth and Income Funds Notes to Financial Statements (continued) - -------------------------------------------------------------------------------- USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts in the financial statements. Actual results could differ from these estimates. (3) INVESTMENT SECURITY TRANSACTIONS ................................ Cost of purchases and proceeds from sales of securities, other than temporary investments in short-term securities, for the year ended September 30, 1997, were as follows:
GROWTH AND INCOME BALANCED FUND FUND ----------- ----------- Purchases .............................. $66,324,139 $19,789,668 Proceeds from sales .................... $53,278,300 $23,480,600
(4) CAPITAL SHARE TRANSACTIONS ................................ Capital share transactions for the funds were as follows:
YEAR ENDED YEAR ENDED SEPTEMBER 30, 1997(A) SEPTEMBER 30, 1996 ------------------------ ------------------------ SHARES AMOUNT SHARES AMOUNT ---------- ------------ ---------- ------------ GROWTH AND INCOME FUND: CLASS A Sales of fund shares ................. 2,164,442 $ 33,710,309 1,318,710 $ 18,689,037 Issued for reinvested distributions ...................... 483,550 7,152,088 156,296 2,178,416 Issued in connection with the merger of Hercules ........................ North American Growth and Income Fund (Note 6) ........................... -- -- 494,086 7,333,808 Redemptions of fund shares ........... (1,460,532) (23,640,495) (1,183,011) (16,773,069) Redemptions in exchange for Class Y shares ............................. (734,641) (12,251,015) -- -- ---------- ------------ ---------- ------------ 452,819 $ 4,970,887 786,081 $ 11,428,192 ---------- ------------ ---------- ------------ CLASS B Sales of fund shares ................. 51,933 $ 869,013 Issued for reinvested distributions ...................... 66 1,105 Redemptions of fund shares ........... (2,644) (42,371) ---------- ------------ 49,355 $ 827,747 ---------- ------------ CLASS Y Sales of fund shares ................. 149,097 $ 2,539,485 Sales in exchange from Class A shares ............................. 734,994 12,251,015 Issued for reinvested distributions ...................... 4,142 70,694 Redemptions of fund shares ........... (129,873) (2,168,261) ---------- ------------ 758,360 $ 12,692,933 ---------- ------------
YEAR ENDED YEAR ENDED SEPTEMBER 30, 1997(A) SEPTEMBER 30, 1996 ------------------------ ---------------------- SHARES AMOUNT SHARES AMOUNT ---------- ------------ -------- ------------ BALANCED FUND: CLASS A Sales of fund shares ................. 819,933 $ 11,658,196 671,093 $ 9,367,148 Issued for reinvested distributions ...................... 269,167 3,740,957 231,008 3,199,026 Redemptions of fund shares ........... (1,170,542) (16,830,614) (877,520) (12,252,477) ---------- ------------ -------- ------------ (81,442) $ (1,431,461) 24,581 $ 313,697 ---------- ------------ -------- ------------ CLASS B Sales of fund shares ................. 2,366 $ 34,215 Issued for reinvested distributions ...................... 29 433 ---------- ------------ 2,395 $ 34,648 ---------- ------------
(a) REPRESENTS PERIOD FROM FEBRUARY 18 (COMMENCEMENT OF OFFERING OF SHARES) TO SEPTEMBER 30, 1997, FOR CLASS B AND CLASS Y. - -------------------------------------------------------------------------------- 17 1997 Annual Report - Growth and Income Funds Notes to Financial Statements (continued) - -------------------------------------------------------------------------------- Sales charges received by Piper Jaffray Inc. (Piper Jaffray), the funds' distributor, for distributing the funds' shares for the year ended September 30, 1997, were as follows:
GROWTH AND INCOME FUND BALANCED FUND ---------------------------- --------------------- CLASS A CLASS B CLASS Y CLASS A CLASS B ------- -------- -------- ---------- -------- Front-end sales charges ................ $80,683 $-- $-- $ 10,581 $-- Contingent deferred sales charges ...... 10,720 -- -- 1,879 -- ------- --- --- ---------- --- $91,403 $-- $-- $ 12,460 $-- ------- --- --- ---------- --- ------- --- --- ---------- ---
(5) EXPENSES ................................ INVESTMENT MANAGEMENT FEE The company has entered into an investment management agreement with Piper Capital Management Incorporated (Piper Capital) under which Piper Capital manages each fund's assets and furnishes related office facilities, equipment, research and personnel. The agreement requires each fund to pay Piper Capital a monthly fee based on average daily net assets. The fee for each fund is equal to an annual rate of 0.75% of the first $100 million in net assets, 0.65% of the next $200 million and decreasing percentages thereafter to 0.50% of net assets in excess of $500 million. For the year ended September 30, 1997, the effective investment management fee paid by the funds was 0.73% and 0.75% on an annual basis for Growth and Income Fund and Balanced Fund, respectively. DISTRIBUTION AND SERVICE FEES Each fund also pays Piper Jaffray fees accrued daily and paid quarterly for providing shareholder services and distribution-related services. The fees for each class, which are being voluntarily limited for Class A for the year ended September 30, 1997, are stated below as a percent of average daily net assets attributable to such shares.
GROWTH AND INCOME FUND BALANCED FUND --------------------------- ----------------- CLASS A CLASS B CLASS Y CLASS A CLASS B ------- ------- ------- ------- ------- Distribution fee ....................... 0.25% 0.75% -- 0.25% 0.75% Service fee ............................ 0.25% 0.25% -- 0.25% 0.25% -- ------- ------- ------- ------- Total distribution and service fees .... 0.50% 1.00% -- 0.50% 1.00% -- -- ------- ------- ------- ------- ------- ------- ------- ------- Total distribution and service fees after voluntary limitation ........... 0.34% 1.00% -- 0.34% 1.00% -- -- ------- ------- ------- ------- ------- ------- ------- -------
SHAREHOLDER ACCOUNT SERVICING FEES The company has also entered into shareholder account servicing agreements under which Piper Jaffray and Piper Trust Company (Piper Trust) perform various transfer and dividend disbursing agent services for accounts held at the respective company. The fees, which are paid monthly to Piper Jaffray and Piper Trust for providing these services, are equal to an annual rate of $6.00 per active shareholder account and $1.60 per closed account. For the year ended September 30, 1997, Piper Jaffray and Piper Trust received the following amounts in connection with the shareholder account servicing agreements:
GROWTH AND INCOME FUND BALANCED FUND ------------ -------------- Piper Jaffray .......................... $58,500 $16,141 Piper Trust ............................ 2,843 11,429 ------------ -------------- $61,343 $27,570 ------------ -------------- ------------ --------------
- -------------------------------------------------------------------------------- 18 1997 Annual Report - Growth and Income Funds Notes to Financial Statements (continued) - -------------------------------------------------------------------------------- OTHER FEES AND EXPENSES In addition to the investment management, distribution and shareholder account servicing fees, each fund is responsible for paying most other operating expenses including: outside directors' fees and expenses; custodian fees; registration fees; printing and shareholder reports; transfer agent fees and expenses; legal, auditing and accounting services; insurance; interest; taxes and other miscellaneous expenses. For the year ended September 30, 1997, Piper Capital voluntarily limited total fees and expenses for Growth and Income Fund to annual rates of 1.34%, 2.0% and 1.0% of average daily net assets attributable to such shares for Class A, Class B and Class Y, respectively, and for Balanced Fund to annual rates of 1.34% and 2.0% of average daily net assets attributable to such shares for Class A and Class B, respectively. Expenses paid indirectly represent a reduction of custodian fees for earnings on miscellaneous cash balances maintained by the funds. (6) MERGER ................................ On June 21, 1996, the net assets of Hercules North American Growth and Income Fund were acquired in a tax-free merger. Growth and Income Fund issued 494,086 shares in exchange for net assets of $7,333,808 of Hercules North American Growth and Income Fund. Included in the net assets acquired was $1,114,581 in unrealized appreciation. The aggregate net assets of the combined fund following the transaction totaled $96,447,398. - -------------------------------------------------------------------------------- 19 1997 Annual Report - Growth and Income Funds Notes to Financial Statements (continued) - -------------------------------------------------------------------------------- (7) FINANCIAL HIGHLIGHTS ................................ Per-share data for a share of capital stock outstanding throughout each period and selected information for each period are as follows: GROWTH AND INCOME FUND
CLASS A ---------------------------------------- Year Ended September 30, ---------------------------------------- 1997 1996 1995 1994 1993 ------- ------- ------ ------ ------ PER-SHARE DATA Net asset value, beginning of period ... $ 15.04 $ 12.93 $10.27 $10.30 $10.01 ------- ------- ------ ------ ------ Operations: Net investment income ................ 0.15 0.18 0.19 0.24 0.24 Net realized and unrealized gains on investments ........................ 4.35 2.31 2.70 0.02 0.29 ------- ------- ------ ------ ------ Total from operations .............. 4.50 2.49 2.89 0.26 0.53 ------- ------- ------ ------ ------ Distributions to shareholders: From net investment income ........... (0.16) (0.20) (0.19) (0.24) (0.24) From net realized gains .............. (1.01) (0.18) (0.04) (0.05) -- ------- ------- ------ ------ ------ Total distributions to shareholders ..................... (1.17) (0.38) (0.23) (0.29) (0.24) ------- ------- ------ ------ ------ Net asset value, end of period ......... $ 18.37 $ 15.04 $12.93 $10.27 $10.30 ------- ------- ------ ------ ------ ------- ------- ------ ------ ------ SELECTED INFORMATION Total return (a) ....................... 31.87% 19.56% 28.81% 2.53% 5.41% Net assets at end of period (in millions) ............................ $ 127 $ 97 $ 73 $ 73 $ 96 Ratio of expenses to average daily net assets ............................... 1.34% 1.32% 1.32% 1.29% 1.32% Ratio of net investment income to average daily net assets ............. 0.90% 1.26% 1.93% 2.26% 2.51% Average commission rate paid on portfolio transactions (b) ........... $0.0600 $0.0600 n/a n/a n/a Portfolio turnover rate (excluding short-term securities) ............... 46% 22% 14% 20% 26% Ratios before waivers by the adviser and distributor: Ratio of expenses to average daily net assets before waivers .............. 1.52% 1.56% 1.60% 1.62% 1.58% Ratio of net investment income to average daily net assets before waivers ............................ 0.72% 1.02% 1.65% 1.93% 2.25%
CLASS B CLASS Y ------------------------- ------------------------- Period Ended Period Ended September 30, 1997(c) September 30, 1997(c) ------------------------- ------------------------- PER-SHARE DATA Net asset value, beginning of period ... $ 16.14 $ 16.14 ---------- ---------- Operations: Net investment income ................ 0.03 0.12 Net realized and unrealized gains on investments ........................ 2.21 2.21 ---------- ---------- Total from operations .............. 2.24 2.33 ---------- ---------- Distributions to shareholders: From net investment income ........... (0.05) (0.11) ---------- ---------- Net asset value, end of period ......... $ 18.33 $ 18.36 ---------- ---------- ---------- ---------- SELECTED INFORMATION Total return (a) ....................... 13.93% 14.51% Net assets at end of period (in thousands and millions for Class B and Class Y, respectively) ............... $ 905 $ 14 Ratio of expenses to average daily net assets ............................... 1.98%(d) 0.99%(d) Ratio of net investment income to average daily net assets ............. 0.04%(d) 1.12%(d) Average commission rate paid on portfolio transactions (b) ........... $0.0600 $0.0600 Portfolio turnover rate (excluding short-term securities) ............... 46% 46% Ratios before waivers by the adviser: Ratio of expenses to average daily net assets before waivers .............. 1.98%(d) 1.00%(d) Ratio of net investment income to average daily net assets before waivers ............................ 0.04%(d) 1.11%(d)
(a) TOTAL RETURN ASSUMES REINVESTMENT OF DISTRIBUTIONS AND DOES NOT REFLECT A SALES CHARGE. (b) DISCLOSED IN ACCORDANCE WITH GUIDELINES ADOPTED IN 1996. (c) COMMENCEMENT OF OFFERING OF CLASS B AND CLASS Y SHARES WAS FEBRUARY 18, 1997. (d) ANNUALIZED. - -------------------------------------------------------------------------------- 20 1997 Annual Report - Growth and Income Funds Notes to Financial Statements (continued) - -------------------------------------------------------------------------------- (7) FINANCIAL HIGHLIGHTS ................................ Per-share data for a share of capital stock outstanding throughout each period and selected information for each period are as follows: BALANCED FUND
CLASS A ---------------------------------------- Year Ended September 30, ---------------------------------------- 1997 1996 1995 1994 1993 ------- ------- ------ ------ ------ PER-SHARE DATA Net asset value, beginning of period ... $ 14.08 $ 13.74 $11.81 $12.23 $11.88 ------- ------- ------ ------ ------ Operations: Net investment income ................ 0.42 0.44 0.47 0.38 0.34 Net realized and unrealized gains (losses) on investments ............ 2.26 0.89 1.93 (0.26) 0.65 ------- ------- ------ ------ ------ Total from operations .............. 2.68 1.33 2.40 0.12 0.99 ------- ------- ------ ------ ------ Distributions to shareholders: From net investment income ........... (0.42) (0.44) (0.35) (0.37) (0.34) From net realized gains .............. (0.80) (0.55) (0.12) (0.17) (0.30) ------- ------- ------ ------ ------ Total distributions to shareholders ..................... (1.22) (0.99) (0.47) (0.54) (0.64) ------- ------- ------ ------ ------ Net asset value, end of period ......... $ 15.54 $ 14.08 $13.74 $11.81 $12.23 ------- ------- ------ ------ ------ ------- ------- ------ ------ ------ SELECTED INFORMATION Total return (a) ....................... 20.24% 10.16% 21.78% 1.00% 8.51% Net assets at end of period (in millions) ............................ $ 49 $ 45 $ 44 $ 46 $ 57 Ratio of expenses to average daily net assets ............................... 1.34% 1.32% 1.32% 1.32% 1.32% Ratio of net investment income to average daily net assets ............. 2.89% 3.16% 3.54% 3.03% 3.13% Average commission rate paid on portfolio transactions (b) ........... $0.0600 $0.0600 n/a n/a n/a Portfolio turnover rate (excluding short-term securities) ............... 42% 27% 39% 62% 41% Ratios before waivers by the adviser and distributor: Ratio of expenses to average daily net assets before waivers .............. 1.73% 1.69% 1.65% 1.60% 1.62% Ratio of net investment income to average daily net assets before waivers ............................ 2.50% 2.79% 3.21% 2.75% 2.83%
CLASS B ------------------------- Period Ended September 30, 1997(c) ------------------------- PER-SHARE DATA Net asset value, beginning of period ... $ 14.46 ---------- Operations: Net investment income ................ 0.20 Net realized and unrealized gains on investments ........................ 1.10 ---------- Total from operations .............. 1.30 ---------- Distributions to shareholders: From net investment income ........... (0.25) ---------- Net asset value, end of period ......... $ 15.51 ---------- ---------- SELECTED INFORMATION Total return (a) ....................... 9.08% Net assets at end of period (in thousands) ........................... $ 37 Ratio of expenses to average daily net assets ............................... 1.99%(d) Ratio of net investment income to average daily net assets ............. 2.11%(d) Average commission rate paid on portfolio transactions (b) ........... $0.0600 Portfolio turnover rate (excluding short-term securities) ............... 42% Ratios before waivers by the adviser: Ratio of expenses to average daily net assets before waivers .............. 2.11%(d) Ratio of net investment income to average daily net assets before waivers ............................ 1.99%(d)
(a) TOTAL RETURN ASSUMES REINVESTMENT OF DISTRIBUTIONS AND DOES NOT REFLECT A SALES CHARGE. (b) DISCLOSED IN ACCORDANCE WITH GUIDELINES ADOPTED IN 1996. (c) COMMENCEMENT OF OFFERING OF CLASS B SHARES WAS FEBRUARY 18, 1997. (d) ANNUALIZED. - -------------------------------------------------------------------------------- 21 1997 Annual Report - Growth and Income Funds Investments in Securities - --------------------------------------------------------------------------------
GROWTH AND INCOME FUND September 30, 1997 ....................................................................................... Number of Market Description of Security Shares Value (a) - --------------------------------------------------------- ----------- ------------ (PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS) COMMON STOCK (98.1%): BASIC MATERIALS (8.0%): Air Products & Chemicals ............................ 21,200 $ 1,758,275 Aluminum Company of America ......................... 20,000 1,640,000 duPont (E.I.) de Nemours & Co. ...................... 24,800 1,526,750 Morton International ................................ 42,400 1,505,200 Phelps Dodge ........................................ 25,000 1,940,625 USX - U.S. Steel Group .............................. 85,000 2,953,750 ------------ 11,324,600 ------------ CAPITAL GOODS AND SERVICES (9.2%): AlliedSignal Inc. ................................... 60,000 2,550,000 Boeing Co. .......................................... 43,000 2,340,812 General Electric .................................... 60,000 4,083,750 Minnesota Mining & Manufacturing Co. ................ 30,000 2,775,000 Thomas & Betts ...................................... 25,000 1,365,625 ------------ 13,115,187 ------------ CONSUMER DURABLES (4.7%): Chrysler Corp. ...................................... 50,000 1,840,625 Ford Motor .......................................... 106,900 4,837,225 ------------ 6,677,850 ------------ CONSUMER NON-DURABLES (8.3%): Colgate-Palmolive ................................... 38,000 2,648,125 General Mills ....................................... 33,000 2,274,937 Philip Morris Co. ................................... 50,000 2,078,125 Procter & Gamble .................................... 30,000 2,071,875 Reebok International ................................ 55,000(b) 2,677,812 ------------ 11,750,874 ------------ CONSUMER SERVICES (1.3%): Carnival Corp. - Class A ............................ 40,000 1,850,000 ------------ ENERGY (13.0%): Anadarko Petroleum .................................. 30,000 2,154,375 Baker Hughes Inc. ................................... 78,700 3,443,125 Exxon Corp. ......................................... 60,400 3,869,375 Mobil Corp. ......................................... 16,000 1,184,000 Schlumberger Ltd. ................................... 39,200 3,300,150 Texaco Inc. ......................................... 50,400 3,096,450 Transocean Offshore Inc. ............................ 30,000 1,438,125 ------------ 18,485,600 ------------ FINANCIAL SERVICES (14.7%): American Express .................................... 27,000 2,210,625 Associates First Capital 'A' ........................ 30,000 1,867,500 BankAmerica Corp. ................................... 50,000 3,665,625 Chubb Corp. ......................................... 40,000 2,842,500 Federal National Mortgage Association ............... 60,000 2,820,000 General Re Corp. .................................... 10,000 1,985,000 Norwest Corp. ....................................... 42,900 2,627,625 U.S. Bancorp ........................................ 30,000 2,895,000 ------------ 20,913,875 ------------ HEALTH CARE (8.1%): Abbott Laboratories ................................. 51,400 3,286,387 Johnson & Johnson ................................... 45,000 2,593,125 Medtronic, Inc. ..................................... 27,400 1,287,800
Number of Shares or Principal Market Description of Security Amount Value (a) - --------------------------------------------------------- ----------- ------------ Merck & Co., Inc. ................................... 30,800 $ 3,078,075 St. Jude Medical .................................... 35,000(b) 1,227,188 ------------ 11,472,575 ------------ RETAIL TRADE (6.1%): Dayton Hudson ....................................... 26,700 1,600,331 Home Depot .......................................... 24,900 1,297,913 Limited Inc. ........................................ 120,000 2,932,500 Sears, Roebuck ...................................... 50,000 2,846,875 ------------ 8,677,619 ------------ TECHNOLOGY (13.0%): Cisco Systems, Inc. ................................. 20,000(b) 1,461,250 Compaq Computer ..................................... 37,500(b) 2,803,125 EMC Corp. ........................................... 25,000(b) 1,459,375 Hewlett-Packard Co. ................................. 45,000 3,130,313 Intel Corp. ......................................... 40,000 3,692,500 International Business Machines Corp. ............... 35,000 3,707,813 Sensormatic Electronics ............................. 150,000 2,118,750 ------------ 18,373,126 ------------ TRANSPORTATION (2.0%): Burlington Northern Santa Fe ........................ 28,700 2,773,138 ------------ UTILITIES (9.7%): AirTouch Communications ............................. 100,000(b) 3,543,750 BellSouth Corp. ..................................... 47,000 2,173,750 Enron ............................................... 57,800 2,225,300 FPL Group ........................................... 60,000 3,075,000 GTE Corp. ........................................... 60,000 2,722,500 ------------ 13,740,300 ------------ Total Common Stock (cost: $92,468,918) ............................ 139,154,744 ------------ SHORT-TERM SECURITIES (3.5%): Repurchase agreement with Goldman Sachs, acquired on 9/30/97, interest of $857, 6.15%, 10/1/97 (cost: $5,019,000) ................................ $ 5,019,000(c) 5,019,000 ------------ Total Investments in Securities (d) (cost: $97,487,918) ............................ 144,173,744 ------------ ------------
NOTES TO INVESTMENTS IN SECURITIES (a) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO THE FINANCIAL STATEMENTS. (b) CURRENTLY NON-INCOME PRODUCING. (c) REPURCHASE AGREEMENT IN A JOINT TRADING ACCOUNT WHICH IS COLLATERALIZED BY U.S. GOVERNMENT AGENCY SECURITIES. ACCRUED INTEREST SHOWN REPRESENTS INTEREST DUE AT MATURITY OF THE REPURCHASE AGREEMENT. (d) ON SEPTEMBER 30, 1997, THE COST OF INVESTMENTS IN SECURITIES FOR FEDERAL INCOME TAX PURPOSES WAS $97,487,918. THE AGGREGATE GROSS UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED ON THIS COST WERE AS FOLLOWS: GROSS UNREALIZED APPRECIATION ...... $ 47,066,524 GROSS UNREALIZED DEPRECIATION ...... (380,698) ------------ NET UNREALIZED APPRECIATION ...... $ 46,685,824 ------------ ------------
- -------------------------------------------------------------------------------- 22 1997 Annual Report - Growth and Income Funds Investments in Securities - --------------------------------------------------------------------------------
BALANCED FUND September 30, 1997 ....................................................................................... Number of Market Description of Security Shares Value (a) - --------------------------------------------------------- ----------- ------------ (PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS) COMMON STOCK (51.9%): BASIC MATERIALS (4.4%): Air Products & Chemicals .......................... 5,000 $ 414,687 Aluminum Company of America ....................... 6,000 492,000 duPont (E.I.) de Nemours & Co. .................... 4,000 246,250 Morton International .............................. 10,000 355,000 Phelps Dodge ...................................... 4,000 310,500 USX - U.S. Steel Group ............................ 10,000 347,500 ------------ 2,165,937 ------------ CAPITAL GOODS AND SERVICES (5.0%): AlliedSignal Inc. ................................. 16,000 680,000 Boeing Co. ........................................ 8,600 468,162 General Electric .................................. 9,000 612,562 Minnesota Mining & Manufacturing Co. 4,500 416,250 Thomas & Betts .................................... 5,000 273,125 ------------ 2,450,099 ------------ CONSUMER DURABLES (1.9%): Ford Motor ........................................ 11,400 515,850 General Motors .................................... 6,400 428,400 ------------ 944,250 ------------ CONSUMER NON-DURABLES (3.9%): Coca-Cola Co. ..................................... 4,100 249,844 Colgate-Palmolive ................................. 3,000 209,062 Philip Morris Co. ................................. 7,200 299,250 Procter & Gamble .................................. 9,400 649,187 Reebok International .............................. 10,000 486,875 ------------ 1,894,218 ------------ CONSUMER SERVICES (0.9%): Carnival Corp. - Class A .......................... 10,000 462,500 ------------ ENERGY (7.3%): Anadarko Petroleum ................................ 4,000 287,250 Baker Hughes Inc. ................................. 15,000 656,250 Exxon Corp. ....................................... 8,400 538,125 Schlumberger Ltd. ................................. 12,600 1,060,762 Texaco Inc. ....................................... 9,000 552,937 Transocean Offshore Inc. .......................... 10,000 479,375 ------------ 3,574,699 ------------ FINANCIAL SERVICES (7.7%): American International Group ...................... 3,750 386,953 Associates First Capital 'A' ...................... 6,300 392,175 BankAmerica Corp. ................................. 8,448 619,344 Federal National Mortgage Association 20,800 977,600 Norwest Corp. ..................................... 16,700 1,022,875 U.S. Bancorp ...................................... 4,000 386,000 ------------ 3,784,947 ------------ HEALTH CARE (4.9%): Johnson & Johnson ................................. 8,600 495,575 Medtronic, Inc. ................................... 13,600 639,200 Merck & Co., Inc. ................................. 9,000 899,438
Number of Shares or Principal Market Description of Security Amount Value (a) - --------------------------------------------------------- ----------- ------------ St. Jude Medical .................................. 10,000(b) $ 350,625 ------------ 2,384,838 ------------ RETAIL TRADE (3.5%): Gap Inc. .......................................... 11,800 590,738 Home Depot ........................................ 8,400 437,850 Sears, Roebuck .................................... 12,000 683,250 ------------ 1,711,838 ------------ TECHNOLOGY (7.2%): Cabletron Systems ................................. 7,500(b) 240,000 Cisco Systems, Inc. ............................... 3,600(b) 263,025 Compaq Computer ................................... 5,750(b) 429,813 EMC Corp. ......................................... 4,000(b) 233,500 Hewlett-Packard Co. ............................... 7,000 486,938 Intel Corp. ....................................... 5,600 516,950 International Business Machines Corp. . 5,000 529,688 Lucent Technologies ............................... 2,916 237,290 Oracle Corp. ...................................... 7,500(b) 273,281 Sensormatic Electronics ........................... 21,000 296,625 ------------ 3,507,110 ------------ TRANSPORTATION (1.4%): Burlington Northern Santa Fe ...................... 6,900 666,713 ------------ UTILITIES (3.8%): AirTouch Communications ........................... 21,500(b) 761,906 BellSouth Corp. ................................... 8,000 370,000 Enron ............................................. 9,100 350,350 GTE Corp. ......................................... 8,000 363,000 ------------ 1,845,256 ------------ Total Common Stock (cost: $14,739,131) .......................... 25,392,405 ------------ CORPORATE BONDS (14.3%): CONSUMER DURABLES (0.9%): Ford Holdings, 9.25%, 3/1/00 ...................... $ 400,000 427,376 ------------ CONSUMER SERVICES (2.2%): MCI Communications, 7.13%, 6/15/27 500,000 528,100 Time Warner Inc., 8.88%, 10/1/12 .................. 500,000 569,460 ------------ 1,097,560 ------------ FINANCIAL SERVICES (7.8%): American Express Credit Corporation, 7.38%, 2/1/99 .......................................... 400,000 407,768 Aon Corp., 6.88%, 10/1/99 ......................... 450,000 455,971 BankAmerica Corp., 8.38%, 3/15/02 ................. 480,000 515,789 General Motors Acceptance Corp., 8.50%, 1/1/03 .... 500,000 545,215 Heller Financial, 9.13%, 8/1/99 ................... 300,000 315,420 Lehman Brothers, floating rate, 7.36%, 12/15/03 ... 650,000(d) 670,963 Morgan Stanley Group Inc., 8.10%, 6/24/02 ......... 500,000 533,145 NationsBank Corp., 5.38%, 4/15/00 ................. 400,000 392,752 ------------ 3,837,023 ------------
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES. - -------------------------------------------------------------------------------- 23 1997 Annual Report - Growth and Income Funds Investments in Securities (continued) - -------------------------------------------------------------------------------- BALANCED FUND (CONTINUED)
Principal Market Description of Security Amount Value (a) - --------------------------------------------------------- ----------- ------------ TRANSPORTATION (1.3%): Boeing Co., 8.75%, 9/15/31 ........................ $ 500,000 $ 616,860 ------------ UTILITIES (2.1%): Korea Electric Power ADS, 6.38%, 12/1/03 .......... 500,000 480,685 Pennsylvania Power and Light, 7.70%, 10/1/09 ...... 500,000 542,405 ------------ 1,023,090 ------------ Total Corporate Bonds (cost: $6,691,750) ........................... 7,001,909 ------------ U.S. GOVERNMENT AND AGENCY SECURITIES (28.8%): GOVERNMENT TRUST CERTIFICATES (0.7%): 9.25%, Government Trust Certificate, 11/15/01 ..... 293,241 312,824 ------------ U.S. AGENCY DEBENTURES (5.2%): 5.94%, FHLMC, 9/21/99 ............................. 1,000,000 1,001,480 7.40%, FNMA, 7/1/04 ............................... 500,000 530,395 6.63%, FNMA, 3/21/06 .............................. 1,000,000 1,017,000 ------------ 2,548,875 ------------ U.S. AGENCY MORTGAGE-BACKED SECURITIES (8.6%): ADJUSTABLE RATE (2.1%): 6.99%, FHLMC, Series 1435, Class FA, LIBOR, 12/15/22 ........................................ 586,622(d) 595,562 7.44%, FNMA, 4/1/18 ............................... 429,578(d) 445,678 ------------ 1,041,240 ------------ FIXED RATE (6.5%): 6.50%, FHLMC, 9/1/25 .............................. 380,040 372,555 6.50%, FHLMC, 1/1/01 .............................. 471,211 478,425 8.00%, FHLMC, 11/1/24 ............................. 810,023 839,087 6.50%, FHLMC, Series 1056, Class KB, 3/15/01 ...... 366,436 368,041 6.00%, FNMA, 4/1/09 ............................... 736,214 724,479 6.00%, FNMA, 3/1/03 ............................... 352,472 349,388 10.00%, FNMA, Series 1989-15, Class D, 9/25/18 .... 31,339 31,943 ------------ 3,163,918 ------------ U.S. GOVERNMENT SECURITIES (14.3%): 8.50%, U. S. Treasury Bond, 2/15/20 ............... 1,000,000 1,236,850 7.63%, U. S. Treasury Bond, 11/15/22 1,500,000 1,710,660 5.88%, U. S. Treasury Note, 2/15/04 ............... 1,000,000 989,550 6.25%, U. S. Treasury Note, 10/31/01 1,000,000 1,009,700 7.25%, U.S. Treasury Note, 8/15/04 ................ 1,000,000 1,063,580 5.88%, U.S. Treasury Note, 6/30/00 ................ 500,000 500,365 6.35%, U.S. Treasury Strip, 2/15/15 ............... 1,500,000(c) 488,265 ------------ 6,998,970 ------------ Total U.S. Government and Agency Securities (cost: $13,528,387) .......................... 14,065,827 ------------
Principal Market Description of Security Amount Value (a) - --------------------------------------------------------- ----------- ------------ PRIVATE MORTGAGE-BACKED SECURITIES (2.6%): FIXED RATE (2.6%): 6.40%, Capstead Securities Corporation, Series 1993-D, Class D2, 7/25/23 ....................... $ 233,300 $ 230,456 8.50%, Residential Funding Mortgage Securities, Series 1993-S26, Class A17, 6/25/09 ............. 900,000 936,261 9.30%, Security Pacific National Bank, Series 1989-A, Class 7, 8/25/19 ........................ 124,585 124,741 ------------ 1,291,458 ------------ Total Private Mortgage-Backed Securities (cost: $1,281,011) ........................... 1,291,458 ------------ ASSET-BACKED SECURITIES (1.6%): Citibank Credit Card Master Trust I, Series 1997-7, Class A, 6.35%, 8/15/02 ......................... 500,000 502,700 General Motors Acceptance Corp., Series 1994-A, Grantor Trust, 6.30%, 6/15/99 ................... 127,280 127,875 Premier Auto Trust, Series 1993-6, Class A2, 4.65%, 11/2/99 ......................................... 139,909 139,232 ------------ Total Asset-Backed Securities (cost: $766,058) ............................. 769,807 ------------ SHORT-TERM SECURITIES (0.3%): Repurchase agreement with Goldman Sachs, acquired on 9/30/97, interest of $24, 6.15%, 10/1/97 (cost: $142,000) ................................ 142,000(e) 142,000 ------------ Total Investments in Securities (f) (cost: $37,148,337) .......................... $ 48,663,406 ------------ ------------
NOTES TO INVESTMENTS IN SECURITIES: (a) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO THE FINANCIAL STATEMENTS. (b) CURRENTLY NON-INCOME PRODUCING. (c) FOR ZERO-COUPON INVESTMENTS, THE INTEREST RATE SHOWN IS THE EFFECTIVE YIELD ON THE DATE OF PURCHASE. (d) PORTFOLIO ABBREVIATIONS AND DEFINITIONS: LIBOR - LONDON INTERBANK OFFERED RATE ADJUSTABLE OR FLOATING RATE - REPRESENTS SECURITIES THAT PAY INTEREST AT RATES THAT INCREASE (DECREASE) WITH AN INCREASE (DECREASE) IN THE SPECIFIED INDEX. INTEREST RATES DISCLOSED ARE IN EFFECT ON SEPTEMBER 30, 1997. (e) REPURCHASE AGREEMENT IN A JOINT TRADING ACCOUNT WHICH IS COLLATERALIZED BY U.S. GOVERNMENT AGENCY SECURITIES. ACCRUED INTEREST SHOWN REPRESENTS INTEREST DUE AT MATURITY OF THE REPURCHASE AGREEMENT. (f) ON SEPTEMBER 30, 1997, THE COST OF INVESTMENTS IN SECURITIES, FOR FEDERAL INCOME TAX PURPOSES WAS $37,151,515. THE AGGREGATE GROSS UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED ON THIS COST WERE AS FOLLOWS: GROSS UNREALIZED APPRECIATION ...... $ 11,720,369 GROSS UNREALIZED DEPRECIATION ...... (208,478) ------------ NET UNREALIZED APPRECIATION ...... $ 11,511,891 ------------ ------------
- -------------------------------------------------------------------------------- 24 1997 Annual Report - Growth and Income Funds Independent Auditors' Report - -------------------------------------------------------------------------------- THE BOARD OF DIRECTORS AND SHAREHOLDERS PIPER FUNDS INC.: We have audited the accompanying statements of assets and liabilities, including the schedules of investments in securities, of Growth and Income Fund and Balanced Fund (funds within Piper Funds Inc.) as of September 30, 1997, and the related statements of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period ended September 30, 1997, and the financial highlights for each of the years in the five-year period ended September 30, 1997. These financial statements and the financial highlights are the responsibility of the funds' management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Investment securities held in custody are confirmed to us by the custodian. As to securities purchased and sold but not received or delivered, we request confirmations from brokers and, where replies are not received, we carry out other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and the financial highlights referred to above present fairly, in all material respects, the financial position of Growth and Income Fund and Balanced Fund as of September 30, 1997, and the results of their operations, the changes in their net assets and the financial highlights for the periods stated in the first paragraph above, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Minneapolis, Minnesota November 7, 1997 - -------------------------------------------------------------------------------- 25 1997 Annual Report - Growth and Income Funds Federal Income Tax Information - -------------------------------------------------------------------------------- The following per-share information describes the federal tax treatment of distributions made during the fiscal year. Distributions for the calendar year will be reported to you on Form 1099-DIV. Please consult a tax adviser on how to report these distributions at the state and local levels. INCOME DISTRIBUTIONS (TAXABLE AS ORDINARY DIVIDENDS, 100% AND 29.42% QUALIFYING FOR DEDUCTION BY CORPORATIONS, RESPECTIVELY)
GROWTH AND INCOME FUND BALANCED FUND ------------------------- ---------------- PAYABLE DATE CLASS A CLASS B CLASS Y CLASS A CLASS B - ---------------------------------------- ------- ------- ------- ------- ------- 23-Dec-96 .............................. $0.0800 $ -- $ -- $0.1300 $ -- 24-Mar-97 .............................. 0.0301 0.0284 0.0346 0.0886 0.0848 16-Jun-97 .............................. 0.0328 0.0237 0.0452 0.0932 0.0815 29-Sep-97 .............................. 0.0142 -- 0.0321 0.1080 0.0819 ------- ------- ------- ------- ------- Total .................................. $0.1571 $0.0521 $0.1119 $0.4198 $0.2482 ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
SHORT-TERM GAINS (TAXABLE AS ORDINARY DIVIDENDS)
GROWTH AND INCOME FUND BALANCED FUND ------------------------- ---------------- PAYABLE DATE CLASS A CLASS B CLASS Y CLASS A CLASS B - ---------------------------------------- ------- ------- ------- ------- ------- 22-Oct-96 .............................. $0.2433 $ -- $ -- $ -- $ -- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LONG-TERM GAINS (TAXABLE AS CAPITAL GAINS DISTRIBUTIONS)
GROWTH AND INCOME FUND BALANCED FUND ------------------------- ---------------- PAYABLE DATE CLASS A CLASS B CLASS Y CLASS A CLASS B - ---------------------------------------- ------- ------- ------- ------- ------- 22-Oct-96 .............................. $0.7660 $ -- $ -- $0.7950 $ -- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
- -------------------------------------------------------------------------------- 26 1997 Annual Report - Growth and Income Funds SHAREHOLDER SERVICES - -------------------------------------------------------------------------------- As a shareholder in Piper Funds, you have access to a full range of services and benefits. Check your prospectus for details about services and any limitations that might apply to your fund. - -------------------------------------------------------------------------------- LOW MINIMUM INVESTMENTS You may become a shareholder in Piper Funds class A shares or class B shares with an initial investment of $250 or more. Class Y shares have a minimum initial investment of $1 million. Add to your existing investment with any amount, at any time. AUTOMATIC MONTHLY INVESTMENT PROGRAMS To purchase shares as part of a savings discipline, you may automatically transfer $100 or more each month to any Piper fund from your bank, savings and loan or other financial institution. Or, transfer $25 or more per month from any of the Piper money market funds.* RECEIVING DIVIDENDS AND OTHER DISTRIBUTIONS Dividend and capital gains distributions may be reinvested in additional shares of the fund you own, invested in shares of a different Piper fund offered in your state, or distributed in cash. Any reinvestments must be in the same class of shares. REDUCING THE CLASS A FRONT-END SALES CHARGE You may reduce, or even eliminate, the class A front-end sales charge if: your initial investment exceeds a specified amount, your investment combined with the value of your existing Piper Funds investments (or a related account's investments) exceeds a specified amount or if your investments combined during a 13-month period exceed a specified amount. See your prospectus for details. EXCHANGING SHARES If your investment goals or your financial needs change, you may move from one Piper fund to the same class of another Piper fund, if the shares of that fund are legally available in your state. There is no fee to exchange shares. Exchanges are generally made based on the net asset value per share of each fund at the time of the exchange. However, if your new fund has a higher sales charge, you must pay the difference. TAKING SYSTEMATIC WITHDRAWALS If your account has a value of $5,000 or more, you may make automatic withdrawals from your account. You may withdraw $100 or more monthly, quarterly, or semiannually by authorizing the sale of the appropriate number of shares on a periodic basis. REINVESTING AFTER A SALE If you sell class A shares, you may reinvest in class A shares of that fund or another Piper fund within 30 days without a sales charge. If you sell class B shares (or other shares subject to a CDSC) and elect to reinvest within 30 days, that charge will be credited to your account and the reinvested shares will continue to be subject to the CDSC. CONFIRMATION OF TRANSACTIONS You receive a confirmation statement following every transaction, except in the money market funds. All transactions are reflected on your account statement. ACCOUNT STATEMENTS Whenever you add to or withdraw from your account, you will receive a monthly statement from Piper Jaffray. Accounts with no activity receive a quarterly statement instead. Periodic dividend and capital gains distributions, if any, also appear on your statement. * An investment in a Piper money market fund is neither insured nor guaranteed by the U.S. government, and there can be no assurance that the fund will be able to maintain a stable net asset value of $1 per share. - -------------------------------------------------------------------------------- 27 1997 Annual Report - Growth and Income Funds GLOSSARY OF TERMS*** ASSET ALLOCATION Asset allocation is the process of dividing investment funds among categories of assets, such as cash equivalents, stocks, bonds, and such tangible assets as real estate, precious metals and collectables. The term also applies to subcategories such as government, municipal and corporate bonds, and industry groupings of common stocks. Asset allocation affects both risk and return and is a central concept in personal financial planning and investment management. CORRECTION Reverse movement, usually downward, in the price of a stock. DIVIDEND YIELD The annual percentage rate of return paid on a stock in the form of dividends. EFFECTIVE DURATION Effective duration estimates how much the value of a security is expected to change with a given change in interest rates. Longer effective durations indicate more sensitivity to changes in interest rates. For example, if interest rates were to increase by 1%, the market value of a bond with an effective duration of five years would decrease by about 5%, with all other factors being constant. It is important to remember that effective duration is based on certain assumptions and has several limitations. It is most effective as a measure when interest rate changes are small, rapid and occur equally across all points of the yield curve. In addition, effective duration is difficult to calculate precisely for bonds with prepayment options, such as mortgage-backed securities. If a fund has an AGGRESSIVE EFFECTIVE DURATION, it means its managers have set a longer duration posture in comparison to the fund's benchmark. A fund with a long effective duration is more sensitive to changing interest rates. If a fund has a DEFENSIVE EFFECTIVE DURATION, it means its managers have set a shorter duration posture in comparison to the fund's benchmark, to make the fund less sensitive to changing interest rates. If a fund has a NEUTRAL EFFECTIVE DURATION, the duration is approximately the same as its benchmark. MARKET CAPITALIZATION The value of a company determined by multiplying the number of outstanding shares by the current market price of a share. OVERWEIGHT OR OVERWEIGHTING In portfolio management, overweighting means a fund's portfolio contains a higher percentage of a certain sector than its benchmark. SECTOR Refers to a particular group of stocks, usually in one industry. UNDERWEIGHT OR UNDERWEIGHTING In portfolio management, underweighting means a fund's portfolio contains a lower percentage of a certain sector than its benchmark. VALUED OR VALUATION The determined or estimated value of a particular stock. *** - This symbol represents a graduation cap, used throughout this report to indicate terms defined in the glossary. - -------------------------------------------------------------------------------- 28 1997 Annual Report - Growth and Income Funds DIRECTORS - -------------------------------------------------------------------------------- DAVID T. BENNETT, Chairman, Highland Homes, Inc., USL Products, Inc., Kiefer Built, Inc., of Counsel, Gray, Plant, Mooty, Mooty & Bennett, P.A. JAYE F. DYER, President, Dyer Management Company WILLIAM H. ELLIS, Retired President, Piper Jaffray Companies Inc., Piper Capital Management Incorporated KAROL D. EMMERICH, President, The Paraclete Group LUELLA G. GOLDBERG, Director, TCF Financial, ReliaStar Financial Corp., Hormel Foods Corp. DAVID A. HUGHEY, Retired Executive Vice President and Chief Administrative Officer of Dean Witter InterCapital Inc. and Dean Witter Trust Co. GEORGE LATIMER, Chief Executive Officer, National Equity Funds OFFICERS - -------------------------------------------------------------------------------- WILLIAM H. ELLIS, Chairman of the Board PAUL A. DOW, President ROBERT H. NELSON, Vice President and Treasurer SUSAN SHARP MILEY, Secretary INVESTMENT ADVISOR - -------------------------------------------------------------------------------- PIPER CAPITAL MANAGEMENT INCORPORATED 222 South Ninth Street, Minneapolis, MN 55402-3804 TRANSFER AND DIVIDEND DISBURSING AGENTS - -------------------------------------------------------------------------------- INVESTORS FIDUCIARY TRUST COMPANY 1004 Baltimore, Kansas City, MO 64105-1614 PIPER JAFFRAY INC. 222 South Ninth Street, Minneapolis, MN 55402-3804 PIPER TRUST COMPANY 222 South Ninth Street, Minneapolis, MN 55402-3804 CUSTODIAN AND ACCOUNTING AGENT - -------------------------------------------------------------------------------- INVESTORS FIDUCIARY TRUST COMPANY 801 Pennsylvania, Kansas City, MO 64105-1307 INDEPENDENT AUDITORS - -------------------------------------------------------------------------------- KPMG PEAT MARWICK LLP 4200 Norwest Center, Minneapolis, MN 55402 LEGAL COUNSEL - -------------------------------------------------------------------------------- DORSEY & WHITNEY LLP 220 South Sixth Street, Minneapolis, MN 55402 FOR MORE INFORMATION BY PHONE [GRAPHIC] 800 866-7778 FOR GENERAL INFORMATION press 5, our Mutual Fund Services representatives are ready to answer your questions. TO ORDER LITERATURE press 5, ask a service representative to mail you additional literature, including a Quarterly Update. You can also request to be put on a mailing list to receive this information automatically each quarter. BY MAIL [GRAPHIC] Piper Capital Management Attn: Mutual Fund Services 222 South Ninth Street Minneapolis, MN 55402-3804 In an effort to reduce costs to our shareholders, we have implemented a process to reduce duplicate mailings of the funds' shareholder reports. This householding process should allow us to mail one report to each address where one or more registered shareholders with the same last name reside. If you would like to have additional reports mailed to your address, please call our Mutual Fund Services area at 800 866-7778, or mail a request to us. ON-LINE [GRAPHIC] http://www.piperjaffray.com/ GROWTH AND INCOME FUNDS - -------------------------------------------------------------------------------- INTERNATIONAL GROWTH FUNDS - -------------------------------------------------------------------------------- Emerging Markets Growth Fund Pacific-European Growth Fund U.S. GROWTH FUNDS - -------------------------------------------------------------------------------- Small Company Growth Fund Emerging Growth Fund Growth Fund GROWTH AND INCOME FUNDS - -------------------------------------------------------------------------------- Growth and Income Fund Balanced Fund Portfolios composed of quality stocks and bonds offer the potential for both investment income and capital appreciation, considered a valuable combination by many investors. INCOME FUNDS - -------------------------------------------------------------------------------- Government Income Fund Intermediate Bond Fund Adjustable Rate Mortgage Securities Fund TAX-EXEMPT INCOME FUNDS - -------------------------------------------------------------------------------- National Tax-Exempt Fund Minnesota Tax-Exempt Fund CASH MANAGEMENT FUNDS* - -------------------------------------------------------------------------------- Money Market Fund U.S. Government Money Market Fund Tax-Exempt Money Market Fund Institutional Money Market Fund Piper Funds provide you with the flexibility to help you pursue your financial goals. Among our funds, we offer a spectrum of investment objectives and convenient shareholder services to meet the varied needs of today's investors. Contact your Piper Jaffray Investment Executive for more information, including prospectuses, about the Piper Funds or call Mutual Fund Services at 800 866-7778. Please read the prospectuses carefully before investing or sending money. *An investment in a Piper money market fund is neither insured nor guaranteed by the U.S. government, and there can be no assurance that the fund will be able to maintain a stable net asset value of $1 per share. PIPER JAFFRAY INC., FUND DISTRIBUTOR AND NASD MEMBER. #10300 11/1997 266-97 [LOGO] 222 SOUTH NINTH STREET MINNEAPOLIS, MN 55402-3804 Bulk Rate U.S. Postage PAID Permit No. 3008 Mpls., MN -----END PRIVACY-ENHANCED MESSAGE-----