-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, dYoSkPBGejy0f0n3xAMoLiSJRBpzMJjgvwrhQTMcF0Sf+WBHe3AtNyESJ5eOlC/v lA8MSNwRPRcUsD7Gd7CyBg== 0000912057-95-002756.txt : 19950428 0000912057-95-002756.hdr.sgml : 19950428 ACCESSION NUMBER: 0000912057-95-002756 CONFORMED SUBMISSION TYPE: N14EL24 PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19950426 SROS: MSE SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: JAFFRAY FUNDS INC CENTRAL INDEX KEY: 0000943887 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: MN FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: N14EL24 SEC ACT: 1933 Act SEC FILE NUMBER: 033-58849 FILM NUMBER: 95531689 BUSINESS ADDRESS: STREET 1: PIPER CAPITAL MANAGEMENT STREET 2: 222 S 9TH STREET 20TH FLOOR CITY: MINNEAPOLIS STATE: MN ZIP: 55402 BUSINESS PHONE: 6123426412 MAIL ADDRESS: STREET 1: C/O PIPER CAPITAL MANAGEMENT STREET 2: 222 59TH STREET 20TH FLOOR CITY: MINNEAPOLIS STATE: MN ZIP: 55402 N14EL24 1 N14EL24 Registration No. 33-____________ As filed with the Securities and Exchange Commission on April 26, 1995 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-14 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Pre-Effective Amendment No. ______ / / Post-Effective Amendment No. _____ / / (Check appropriate box or boxes) ______________________________ Exact name of Registrant as Specified in Charter: JAFFRAY FUNDS INC. Area Code and Telephone Number: (800) 333-6000 Address of Principal Executive Offices: Piper Jaffray Tower 222 South Ninth Street Minneapolis, Minnesota 55402-3804 Name and Address of Agent for Service: Charles N. Hayssen Piper Jaffray Tower 222 South Ninth Street Minneapolis, Minnesota 55402 Copies to: Kathleen L. Prudhomme, Esq. Stuart Strauss, Esq. Dorsey & Whitney P.L.L.P. Gordon, Altman, Butowsky, 220 South Sixth Street Weitzen, Shalov & Wein Minneapolis, Minnesota 55402 114 West 47th Street New York, New York 10036 Approximate Date of Proposed Public Offering: As soon as possible following the effective date of this Registration Statement.
- -------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------- Title of Proposed Maximum Proposed Maximum Amount of Securities Being Amount Being Offering Price Aggregate Registration Registered Registered Per Unit Offering Price Fee - -------------------------------------------------------------------------------------- Common Shares, par value $.01 per share $500* - -------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------- * Pursuant to Regulation 270.24f-2 under the Investment Company Act of 1940, the Registrant hereby elects to register an indefinite number of its common shares.
______________________________ The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 9(a), may determine. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ARM FUND A SERIES OF JAFFRAY FUNDS INC. REGISTRATION STATEMENT ON FORM N-14 CROSS REFERENCE SHEET (AS REQUIRED BY RULE 481(a))
PART A OF FORM N-14 PROSPECTUS--PROXY CAPTION - ------------------- ------------------------- 1 Beginning of Registration Statement and Outside Front Cover Page of Prospectus ............. Cross Reference Sheet; Cover Page 2. Beginning and Outside Back Cover Page of Prospectus ..................................... Table of Contents 3. Fee Table, Synopsis Information and Risk Factors .. Summary; Risk Factors; Proposal No. 1-- The Merger--Fees and Expenses 4. Information About the Transaction ................. Proposal No. 1--The Merger--Terms of the Merger and --Reasons for the Merger; Voting Information 5. Information About the Registrant .................. Summary; Risk Factors; Proposal No. 1--The Merger; Proposal No. 2--Election of Directors; Supplemental Information With Respect to the Adviser; Available Information 6. Information About the Company being Acquired ...... Summary; Risk Factors; Proposal No. 1--The Merger; Proposal No. 2--Election of Directors; Supplemental Information With Respect to the Adviser; Supplemental Information With Respect to the Trusts; Available Information 7. Voting Information ................................ Summary; Voting Information 8. Interest of Certain Persons and Experts ........... Not Applicable 9. Additional Information Required for Reoffering by Persons Deemed to be Underwriters .............. Not Applicable PART B OF FORM N-14 STATEMENT OF ADDITIONAL INFORMATION CAPTION - ------------------- ------------------------------------------- 10. Cover Page ....................................... Cover Page 11. Table of Contents ................................ Table of Contents 12. Additional Information About the Registrant ...... Statement of Additional Information--All Sections 13. Additional Information About the Company Being Acquired ................................... Statement of Additional Information--All Sections 14. Financial Statements ............................. Cover Page; Unaudited Combining Financial Statements PART C OF FORM N-14 - ------------------- Information required to be included in Part C is set forth under the appropriate item in Part C of this Registration Statement.
Piper Capital Management 222 South Ninth Street Minneapolis, MN 55402-3804 800 866-7778 Dear Shareholders: Enclosed is the Joint Proxy Statement/Prospectus for a meeting of shareholders of the American Adjustable Rate Term Trusts 1996, 1997, 1998 and 1999 (BDJ, CDJ, DDJ and EDJ) to be held on August 1, 1995. THE PRINCIPAL PURPOSE OF THE JOINT PROXY STATEMENT/PROSPECTUS IS TO SEEK SHAREHOLDER APPROVAL TO MERGE EACH OF THE CLOSED-END TERM TRUSTS INTO A SINGLE OPEN-END FUND. The boards of directors for BDJ, CDJ, DDJ and EDJ approved this proposal, subject to a shareholder vote. We, like you, are disappointed with the performance of the term trusts and regret that they are not expected to achieve their $10 per share objective at termination. Given that conclusion, we believe the proposal to merge the trusts is in the best interests of shareholders as it would eliminate the market discount at which the term trust shares are currently trading, thereby allowing you to access your assets under more favorable terms. The Joint Proxy Statement/Prospectus also seeks shareholder approval to set the number of board members for each trust at seven, to elect each trust's board of directors to serve until the next annual meeting, and to ratify the selection of KPMG Peat Marwick LLP as independent public accountants for each trust for the fiscal year ending August 31, 1995. Shareholders are being asked to vote on these measures in the event that their trust does not pass the merger proposal. BOARD MEMBERS RECOMMEND YOU VOTE FOR EACH OF THE PROPOSALS CONTAINED IN THE JOINT PROXY STATEMENT/ PROSPECTUS. The enclosed shareholder Q&A and Joint Proxy Statement/Prospectus give more detailed information about the proposals and the reasons why the boards recommend you vote in favor of them. Please read these documents carefully. PLEASE TAKE A MOMENT NOW TO SIGN AND RETURN THE PROXY CARD(S)* IN THE ENCLOSED POSTAGE-PAID ENVELOPE. As the date of the meeting approaches, if you haven't already voted, you may receive a telephone call from Shareholder Communications Corporation, a professional proxy solicitation firm, reminding you to exercise your right to vote. If you have questions about these proposals, please contact your broker. Thank you. Sincerely, William H. Ellis President * If you hold shares in more than one of the American Adjustable Rate Term Trusts, you will receive a separate proxy package for each fund you hold. PLEASE BE SURE TO SIGN AND RETURN EACH PROXY CARD REGARDLESS OF HOW MANY YOU RECEIVE. SPECIAL SHAREHOLDER Q&A APRIL ___, 1995 - -------------------------------------------------------------------------------- QUESTIONS AND ANSWERS CONCERNING THE PROPOSAL TO MERGE THE AMERICAN ADJUSTABLE RATE TERM TRUSTS 1996, 1997, 1998 AND 1999 (NYSE SYMBOLS: BDJ, CDJ, DDJ AND EDJ) THE ITEM IN THE JOINT PROXY STATEMENT/PROSPECTUS THAT HAS THE GREATEST IMPACT ON YOU AS A SHAREHOLDER IS THE PROPOSAL TO MERGE EACH OF THE CLOSED-END TERM TRUSTS INTO A SINGLE OPEN-END MUTUAL FUND CALLED ARM FUND. THIS Q&A AND THE JOINT PROXY STATEMENT/PROSPECTUS GIVE DETAILS ABOUT THE PROPOSED MERGER. WHY HAS THE ADVISER PROPOSED TO MERGE THE FOUR TERM TRUSTS INTO ONE OPEN-END FUND? Piper Capital Management, as adviser to BDJ, CDJ, DDJ and EDJ, has determined that none of the term trusts is expected to accomplish its objective of returning $10 per share on its termination date without taking unacceptable risks. In light of that fact, Piper Capital proposed the merger as an alternative to continuing to manage the trusts to achieve a specific net asset value at a final termination date, and the trusts' boards agreed with the recommendation. WHY IS IT IN MY BEST INTEREST TO VOTE FOR THIS PROPOSAL? Merging each closed-end term trust into one open-end fund has two principal advantages: ELIMINATION OF MARKET DISCOUNT -- The price of your term trust shares would immediately increase because the merger would eliminate the market discounts at which the term trust shares currently trade. Shares in ARM Fund could be redeemed on each business day at net asset value, unlike shares of the term trusts which trade at market price on the New York and Chicago stock exchanges. MARKET DISCOUNTS OF BDJ THROUGH EDJ AS OF FEBRUARY 9, 1995 (THE DAY BEFORE THE MERGER PROPOSAL WAS ANNOUNCED)
NET ASSET MARKET PERCENT SHARES TOTAL $ VALUE VALUE PRICE DISCOUNT OUTSTANDING OF DISCOUNT ----------- ----------- ----------- ------------- -------------- BDJ $ 8.95 $ 8.25 7.8% 21,877,782 $ 15,314,447 CDJ $ 8.70 $ 7.88 9.5% 42,486,299 $ 35,051,197 DDJ $ 8.58 $ 7.75 9.7% 47,142,517 $ 39,128,289 EDJ $ 8.41 $ 7.63 9.3% 28,160,272 $ 22,105,814
GREATER INVESTMENT FLEXIBILITY -- The current term trust structure imposes constraints on portfolio management that would not be applicable to ARM Fund. The elimination of the term trust structure would, in the Adviser's view, facilitate ARM Fund's ability to obtain a higher investment return by allowing it to purchase and retain longer maturity securities than the trusts could under the term trust structure. WHAT IS THE IMPACT OF THE MERGER ON FEES AND EXPENSES? Piper Capital has agreed to cap total expenses for ARM Fund through August 31, 1996, at 0.60% of the Fund's daily net assets (provided that at least three of the four term trusts approve the merger). A comparison of fees and expenses as a percent of average daily net assets, assuming the fee cap for ARM Fund, is shown in the table below.
BDJ CDJ DDJ EDJ ARM FUND ----------- ----------- ----------- ----------- -------------- Advisory Fee.................................................. 0.35% 0.35% 0.35% 0.35% 0.32%* Administration Fee............................................ 0.15% 0.15% 0.15% 0.15% N/A Rule 12b-1 Service Fee........................................ N/A N/A N/A N/A 0.15% Other expenses (excluding interest expense)................... 0.15% 0.11% 0.10% 0.10% 0.13% --- --- --- --- --- Total expenses.............................................. 0.65% 0.61% 0.60% 0.60% 0.60% --- --- --- --- --- --- --- --- --- ---
- ------------------------ * 0.35% ON FIRST $500 MILLION IN NET ASSETS AND 0.30% ON NET ASSETS GREATER THAN $500 MILLION. THE 0.32% FEE ASSUMES THAT EACH TRUST APPROVES THE MERGER AND THAT REDEMPTIONS ARE MINIMAL. FEES SHOWN FOR BDJ, CDJ, DDJ AND EDJ ARE FOR THE FISCAL YEAR ENDED AUGUST 31, 1994. WHAT WOULD BE THE COSTS TO ME AS A SHAREHOLDER FOR IMPLEMENTING THIS PROPOSAL? There would be no costs to shareholders for merging and converting the funds. Piper Capital has agreed to pay for the costs specific to the merger of the term trusts, estimated at approximately $500,000. This includes Securities and Exchange Commission and state registration fees, legal and accounting fees, proxy solicitation fees, shareholder meeting expenses, and the cost of preparing, printing and mailing the Joint Proxy Statement/Prospectus and other printed materials. WHAT ARE THE TAX CONSEQUENCES OF THE MERGER? It is intended that the merger will be treated as a tax-free reorganization for federal tax purposes so that, for federal income tax purposes, shareholders will not recognize any income, gain or loss when exchanging term trust shares for ARM Fund shares. However, each approving term trust intends to make a distribution, immediately prior to the effectiveness of the merger, of all its undistributed net income and net realized capital gains for the current taxable year, and this distribution will be taxable to approving term trust shareholders. It is currently estimated that such distributions for BDJ, CDJ, DDJ and EDJ will be $0.45, $0.26, $0.08, and $0.00 per share, respectively. WILL THE PENDING LAWSUITS AGAINST THE TERM TRUSTS AFFECT THIS PROPOSAL? The pending lawsuits against the term trusts do not affect this proposal. Piper Jaffray Companies and Piper Capital have agreed to pay all the costs and expenses involved with these lawsuits to ensure that ARM Fund is protected against any losses that may be incurred. WHAT WOULD BE THE INVESTMENT OBJECTIVE OF ARM FUND? The investment objective of ARM Fund would be to provide the maximum current income that is consistent with a low volatility of principal. There would be no final termination date or final termination value in the ARM Fund objective. HOW WOULD THE INVESTMENTS IN THE ARM FUND DIFFER FROM THE TRUSTS? ARM Fund would be more limited in its investments and investment techniques than the term trusts. The chart below shows investments and investment techniques for the term trusts vs. ARM Fund.
TERM INVESTMENTS TRUSTS ARM FUND - ---------------------------------------------------------------------------------------- --------- --------- Adjustable Rate Mortgage-Backed Securities (ARMs)....................................... Yes Yes Mortgage-Backed Securities Other Than ARMs.............................................. Yes Yes U.S. Government Securities.............................................................. Yes Yes U.S. Government Zero-Coupon Securities.................................................. Yes Yes Asset-Backed Securities................................................................. Yes Yes Corporate Debt Securities............................................................... Yes Yes Interest Rate Caps and Floors........................................................... Yes Yes
TERM INVESTMENTS TRUSTS ARM FUND - ---------------------------------------------------------------------------------------- --------- --------- Options................................................................................. Yes Yes Futures (Including Eurodollars)......................................................... Yes Yes Zero-Coupon Securities (Other Than U.S. Government)..................................... Yes No Mortgage Dollar Rolls................................................................... Yes No Inverse Floaters........................................................................ Yes No Interest-Only Securities................................................................ Yes No Principal-Only Securities............................................................... Yes No Stripped Mortgage-Backed Securities..................................................... Yes No Canadian Debt Securities................................................................ Yes No Foreign Exchange Transactions........................................................... Yes No Foreign Linked Index Instruments........................................................ Yes No Interest Rate Swaps..................................................................... Yes No
FOR A COMPLETE LIST OF INVESTMENTS AND INVESTMENT TECHNIQUES INCLUDING PERCENTAGE REQUIREMENTS OR LIMITS, SEE THE JOINT PROXY STATEMENT/PROSPECTUS. WOULD ARM FUND PAY A MONTHLY DIVIDEND? ARM Fund would pay dividends from its net investment income on a monthly basis and distribute net realized capital gains, if any, on an annual basis. ARM Fund would not attempt to stabilize distributions by retaining income but instead would distribute to its shareholders substantially all of the investment income earned during any period. Dividends and capital gains would be payable in additional shares of ARM Fund or any other fund managed by the adviser or payable in cash. HOW WOULD THE EXCHANGE RATIO OF TERM TRUST SHARES FOR ARM FUND SHARES BE DETERMINED? Shareholders of each approving trust would become shareholders of ARM Fund and would receive, on the effective date, shares of ARM Fund with a total net asset value equal to the total net asset value of their term trust shares on that date. For example, someone who owns $100 worth of BDJ shares immediately prior to the merger would own $100 worth of ARM Fund shares immediately after the merger. WOULD ARM FUND BE PREPARED FOR REDEMPTIONS AS A RESULT OF THIS MERGER? The adviser believes ARM Fund will have no difficulties satisfying redemption requests. WHO WOULD BE THE PORTFOLIO MANAGERS FOR ARM FUND? Tom McGlinch, who was added to the term trusts' management team in October 1994, and Mike Jansen, who was added in February 1995, will manage the portfolios regardless of the open- or closed-end status. IF I HOLD MY TERM TRUST SHARES AT A FIRM OTHER THAN PIPER JAFFRAY INC., HOW WILL I REDEEM MY SHARES OR BUY MORE SHARES OF ARM FUND? If you want to redeem your shares after the merger, you can do so through Investors Fiduciary Trust Company. If you want to buy shares after the merger takes place, ARM Fund shares may be purchased through Piper Jaffray and any other firms which have sales agreements with Piper Jaffray. IF SHAREHOLDERS APPROVE THIS PROPOSAL, WHEN WILL IT BECOME EFFECTIVE? The merger is expected to become effective at the close of business on or about August 31, 1995, for each term trust which approves the proposal. WHAT PERCENTAGE OF "YES" VOTES ARE NEEDED FOR EACH TRUST TO APPROVE THE MERGER? Each trust votes separately on the merger. Two-thirds of each trust's outstanding shares must vote "yes" in order for this proposal to pass for that trust. WHEN IS MY PROXY DUE? WHERE DO I SEND IT? We'd like to receive your completed, signed and dated proxy as soon as possible. A postage-paid envelope is enclosed for mailing your proxy. If you have misplaced your envelope, please mail your proxy to: ADP, _______ _______ _______ _______ _______. If you haven't returned your ballot as the meeting date approaches, you may receive a call from Shareholder Communications Corporation (SCC) reminding you to vote. Piper Capital has hired SCC to assist with the solicitation of proxies. WHEN AND WHERE WILL THE SHAREHOLDER MEETING TAKE PLACE? The shareholder meeting will take place on August 1, 1995, on the eleventh floor of the Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota. Regardless of whether you plan to attend the meeting, you should return your proxy card in the mail as soon as possible. AMERICAN ADJUSTABLE RATE TERM TRUST INC. -- 1996 AMERICAN ADJUSTABLE RATE TERM TRUST INC. -- 1997 AMERICAN ADJUSTABLE RATE TERM TRUST INC. -- 1998 AMERICAN ADJUSTABLE RATE TERM TRUST INC. -- 1999 PIPER JAFFRAY TOWER 222 SOUTH NINTH STREET MINNEAPOLIS, MINNESOTA 55402-3804 NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON , 1995 NOTICE IS HEREBY GIVEN that the annual meeting of shareholders of American Adjustable Rate Term Trust Inc. -- 1996, American Adjustable Rate Term Trust Inc. -- 1997, American Adjustable Rate Term Trust Inc. -- 1998 and American Adjustable Rate Term Trust Inc. -- 1999 (individually, a "Trust," and collectively, the "Trusts") will be held at , Central Time, on , 1995, on the eleventh floor of the Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota. The purposes of the meeting are as follows: 1. To approve, for each Trust, an Agreement and Plan of Merger whereby each approving Trust will merge with and into ARM Fund, a series of a newly created, open-end management investment company, with ARM Fund as the surviving entity (the "Merger"). 2. To set the number of members of the Board of Directors of each Trust at seven and to elect each Trust's Board of Directors to serve until the next Annual Meeting or until their successors have been duly elected and qualified (or, if the Merger is approved with respect to a Trust, until the effective time of the Merger). 3. To ratify the selection by a majority of the independent members of the Board of Directors of each Trust of KPMG Peat Marwick LLP as independent public accountants for each Trust for the fiscal year ending August 31, 1995. 4. To transact such other business as may properly come before the meeting. Shareholders of record on , 1995, are the only persons entitled to notice of and to vote at the meeting. Your attention is directed to the attached Joint Proxy Statement/Prospectus. WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE UPCOMING MEETING, PLEASE FILL IN, SIGN, DATE, AND MAIL THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN ORDER TO SAVE THE TRUSTS FURTHER SOLICITATION EXPENSE. A stamped return envelope is enclosed for your convenience. David Evans Rosedahl SECRETARY Dated: , 1995 MERGER OF AMERICAN ADJUSTABLE RATE TERM TRUST INC. -- 1996 AMERICAN ADJUSTABLE RATE TERM TRUST INC. -- 1997 AMERICAN ADJUSTABLE RATE TERM TRUST INC. -- 1998 AMERICAN ADJUSTABLE RATE TERM TRUST INC. -- 1999 INTO ARM FUND A SERIES OF JAFFRAY FUNDS INC. JOINT PROXY STATEMENT/PROSPECTUS , 1995 This Joint Proxy Statement/Prospectus is being furnished in connection with the Annual Meeting of Shareholders (the "Meeting") of American Adjustable Rate Term Trust Inc. -- 1996 ("BDJ"), American Adjustable Rate Term Trust Inc. -- 1997 ("CDJ"), American Adjustable Rate Term Trust Inc. -- 1998 ("DDJ") and American Adjustable Rate Term Trust Inc. -- 1999 ("EDJ") (BDJ, CDJ, DDJ and EDJ are sometimes referred to herein collectively as the "Trusts" or individually as a "Trust"), to be held on , 1995. This document is both a proxy statement for each of the Trusts, discussing items that Trust shareholders will be asked to vote upon at the Meeting, and a prospectus for the shares of ARM Fund. At the Meeting, shareholders of each Trust are being asked to approve the merger (the "Merger") of the Trusts pursuant to an Agreement and Plan of Merger (the "Merger Agreement") between the Trusts and Jaffray Funds Inc. (the "Company"), a newly created, open-end management investment company. The Merger Agreement provides for the merger of the Trusts into the Company. Shareholders of each Trust approving the Merger will become shareholders of ARM Fund, a series of the Company, and will receive, on the effective date of the Merger, shares of ARM Fund with a net asset value equal to the net asset value of their Trust shares on that date. The terms and conditions of the Merger are more fully described in this Joint Proxy Statement/Prospectus and in the Merger Agreement, a copy of which is attached as Appendix A hereto. Shareholders of each Trust are being asked to vote on certain additional matters unrelated to the Merger to avoid the need for a separate meeting in the event the Merger is not approved by their Trust. These matters are the election of directors and the ratification of the selection of KPMG Peat Marwick LLP as each Trust's independent accountants. The Company is a newly created, open-end management investment company, of which ARM Fund is a series. The investment objective of ARM Fund is to provide the maximum current income that is consistent with a low volatility of principal. The principal executive offices of both the Trusts and the Company are located at Piper Jaffray Tower, 222 South Ninth Street, 20th Floor, Minneapolis, Minnesota 55402. Their telephone number is (800) 333-6000 (ext. 6387). This Joint Proxy Statement/Prospectus sets forth concisely the information that shareholders of the Trusts should know about ARM Fund before voting on the proposed Merger. It should be read and retained for future reference. A Statement of Additional Information dated , 1995 containing additional information about the Trusts and the Company has been filed with the Securities and Exchange Commission (the "Commission") and is hereby incorporated by reference in its entirety into this Joint Proxy Statement/Prospectus. A copy of the Statement of Additional Information is available without charge upon request by writing or calling the Company or the Trusts at the address or telephone number set forth above. Shares of ARM Fund are not bank deposits and are not federally insured by, guaranteed by, obligations of or otherwise supported by the U.S. Government, the Federal Deposit Insurance Corporation, the Federal Reserve Bank or any other governmental agency. Investment in ARM Fund may involve certain investment risks, including the possible loss of principal. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. No person has been authorized to give any information or to make any representations other than those contained in this Joint Proxy Statement/Prospectus and in the materials expressly incorporated herein by reference and, if given or made, such other information or representations must not be relied upon as having been authorized by the Trusts or the Company. 1 TABLE OF CONTENTS
PAGE --------- Summary.................................................................................................... 3 Risk Factors............................................................................................... 8 The Annual Meetings........................................................................................ 11 General.................................................................................................. 11 Voting; Proxies.......................................................................................... 11 Proposal No. 1 -- The Merger............................................................................... 12 General.................................................................................................. 12 Terms of the Merger...................................................................................... 13 Reasons for the Merger................................................................................... 14 Federal Income Tax Consequences.......................................................................... 15 Expenses Associated with the Merger...................................................................... 17 Fees and Expenses........................................................................................ 18 Capitalization........................................................................................... 19 Description and Comparison of Trust and ARM Fund Shares.................................................. 19 History of Public Trading of the Trusts' Common Shares................................................... 21 Comparison of Investment Objectives and Policies of ARM Fund and the Trusts.............................. 22 Management of the Trusts and ARM Fund.................................................................... 27 Share Purchase, Exchange and Redemption Procedures....................................................... 29 Valuation of Shares...................................................................................... 31 Dividends, Distributions and Taxes....................................................................... 31 Surrender of Approving Trust Share Certificates.......................................................... 32 Portfolio Transactions and Brokerage Commissions......................................................... 33 Pending Litigation....................................................................................... 33 Dissenters' Rights....................................................................................... 33 Vote Required............................................................................................ 34 Recommendation of the Board of Directors................................................................. 34 Proposal No. 2 -- Election of Directors.................................................................... 34 Proposal No. 3 -- Ratification of Independent Public Accountants........................................... 37 Proposals for the Next Annual Meeting...................................................................... 38 Legal Matters.............................................................................................. 38 Financial Statements and Experts........................................................................... 38 Available Information...................................................................................... 38 Other Matters.............................................................................................. 39 Appendix A -- Agreement and Plan of Merger................................................................. A-1 Appendix B -- Investments, Investment Techniques and Risks................................................. B-1 Appendix C -- Shareholder Guide to Investing............................................................... C-1 Appendix D -- Dissenting Shareholders' Rights of Appraisal................................................. D-1 Appendix E -- Indemnification Agreement.................................................................... E-1
2 SUMMARY THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN THIS JOINT PROXY STATEMENT/PROSPECTUS. THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION CONTAINED HEREIN AND IN THE ATTACHED APPENDICES. SHAREHOLDERS SHOULD READ THE ENTIRE JOINT PROXY STATEMENT/PROSPECTUS. CERTAIN CAPITALIZED TERMS USED BUT NOT DEFINED IN THIS SUMMARY ARE DEFINED ELSEWHERE IN THE TEXT OF THIS JOINT PROXY STATEMENT/PROSPECTUS OR IN APPENDIX A HERETO. THE MEETING This Joint Proxy Statement/Prospectus (the "Joint Proxy Statement/Prospectus") is being furnished to shareholders in connection with the solicitation of proxies by the Boards of Directors of American Adjustable Rate Term Trust Inc. -- 1996 ("BDJ"), American Adjustable Rate Term Trust Inc. -- 1997 ("CDJ"), American Adjustable Rate Term Trust Inc. -- 1998 ("DDJ") and American Adjustable Rate Term Trust Inc. -- 1999 ("EDJ") (BDJ, CDJ, DDJ and EDJ are sometimes referred to herein collectively as the "Trusts" or individually as a "Trust") to be held on , 1995 at a.m. local time at the Piper Jaffray Tower, 222 South Ninth Street, Floor, Minneapolis, Minnesota 55402, and any adjournment thereof, for the purposes set forth in the foregoing Notice of Annual Meeting of Shareholders. Holders of record of shares of each Trust as of the close of business on , 1995 will be entitled to notice of and to vote at their respective Trust's Meeting, as described elsewhere in this Joint Proxy Statement/Prospectus. The first mailing of this Joint Proxy Statement/Prospectus and the enclosed form of proxy (the "Proxy") is expected to occur on or about , 1995. The annual report of the Trusts for the fiscal year ended August 31, 1994 and semiannual report for the six months ended February 28, 1995, including financial statements, were previously mailed to shareholders. The Meeting has been called for the principal purpose of considering the merger of each Trust, as described in more detail below (the "Merger"), into a single series of Jaffray Funds Inc. (the "Company"), an open-end management investment company. Such series will be called ARM Fund. Shareholders of each Trust approving the Merger will become shareholders of ARM Fund and will receive, on the effective date of the Merger, shares of ARM Fund with a net asset value equal to the net asset value of their Trust shares on that date. THE BOARD OF DIRECTORS OF EACH TRUST RECOMMENDS THAT THE SHAREHOLDERS OF THE RESPECTIVE TRUSTS VOTE FOR THE MERGER. In addition, in accordance with the Trusts' regular annual meeting procedures, the shareholders of each Trust are being asked to approve the election of seven directors to serve until their successors are duly elected and qualified and to ratify the selection of KPMG Peat Marwick LLP as independent accountants for their respective Trusts. Shareholders are being asked to vote on these additional matters in case their Trust does not participate in the Merger and remains a separate entity. THE MERGER The Merger Agreement sets forth the terms of the Merger under which each Trust approving the transaction (individually an "Approving Trust" and collectively the "Approving Trusts") will merge with and into the Company, with the Company as the surviving entity. As a result of the Merger, the assets and liabilities of each Approving Trust will be combined, and the shareholders of each Approving Trust will become shareholders of ARM Fund. The articles of incorporation, bylaws, Investment Advisory Agreement, Rule 12b-1 Plan and Distribution Agreement of ARM Fund described herein, in effect immediately prior to the Merger, will be those of the surviving corporation. The Board of Directors of the Company, which consists of the same individuals who serve as directors of the Trusts, will continue as the directors of the surviving corporation. If the proposal relating to the Merger Agreement is approved, the Merger will become effective at the close of business on the date the Articles of Merger are filed with the Secretary of State of the State of Minnesota (the "Effective Time"), which is expected to occur on or about August 31, 1995. 3 REASONS FOR THE MERGER Piper Capital Management Incorporated (the "Adviser") believes that none of the Trusts can be expected to accomplish its objective of returning $10 per share on its termination date without incurring an unacceptable level of risk. In light of the foregoing, the Adviser has proposed and the Board of Directors has recommended, as an alternative to continuing to manage the Trusts subject to the constraints of the term trust structure, merging each Trust into one newly organized open-end fund. The Merger is intended to offer the following benefits to shareholders of each Trust: ELIMINATION OF MARKET DISCOUNT On February 9, 1995, immediately prior to the public announcement of the Merger proposal, each Trust's shares were trading at discounts to net asset value as follows:
NET ASSET MARKET PERCENT SHARES DOLLAR VALUE VALUE PRICE DISCOUNT OUTSTANDING OF DISCOUNT ----------- --------- ------------ ------------- -------------- BDJ..................................... $ 8.950 $ 8.250 7.82% 21,877,782 $ 15,314,447 CDJ..................................... $ 8.700 $ 7.875 9.48% 42,486,299 $ 35,051,197 DDJ..................................... $ 8.580 $ 7.750 9.67% 47,142,517 $ 39,128,289 EDJ..................................... $ 8.410 $ 7.625 9.33% 28,160,272 $ 22,105,814
The Merger would effectively eliminate this market discount because Approving Trust shareholders would receive in the Merger redeemable shares of ARM Fund with a net asset value equal to the net asset value of their Trust shares on the date of the Merger. ENHANCED INVESTMENT FLEXIBILITY The Adviser believes the term trust structure imposes constraints on portfolio management that would not be applicable to a fund like ARM Fund. In the Adviser's view, the increased flexibility it would have in managing ARM Fund should facilitate its ability to achieve a higher investment return than it could obtain in continuing to manage the Trusts under the term trust structure. FEES AND EXPENSES While open-end funds like ARM Fund generally require more effort and expense to administer than closed-end funds, the Adviser has agreed to cap expenses of ARM Fund through August 31, 1996 at .60% of average net assets (the expense ratios of DDJ and EDJ for the most recent fiscal year, excluding interest expense), provided that shareholders of at least three of the Trusts approve the Merger. In addition, the Adviser has agreed to bear all expenses incurred in connection with the Merger (estimated at approximately $500,000). RECOMMENDATION OF THE BOARD OF DIRECTORS The Board of Directors considered a variety of factors in evaluating the Merger, including (a) the potential benefits associated with elimination of the market discount at which the Trusts' shares are trading; (b) the continuing appropriateness of the term trust structure in light of the Adviser's view that each Trust cannot be expected to achieve its objective of returning $10 per share on its termination date without incurring an unacceptable level of risk; (c) the potential benefits associated with affording the Adviser greater flexibility to manage the portfolios through elimination of the term trust structure; and (d) the risks and costs to shareholders of each Trust associated with the Merger. After consideration of all of the factors deemed relevant by them, the Board of Directors of each Trust unanimously determined that the Merger is in the best interests of each Trust and its shareholders. DISSENTING SHAREHOLDERS' RIGHTS OF APPRAISAL Although under Minnesota law shareholders of a company acquired in a merger who do not vote to approve the merger generally have "appraisal rights" (where they may elect to have the "fair value" of their shares (determined in accordance with Minnesota law) judicially appraised and paid to 4 them), the Division of Investment Management of the Commission has taken the position that Rule 22c-1 under the Investment Company Act of 1940 (the "1940 Act") supersedes appraisal provisions in state statutes. This rule provides that no open-end investment company may redeem its shares other than at net asset value next computed after receipt of a tender of such security for redemption. See "Proposal No. 1 -- Dissenting Shareholders' Rights of Appraisal" and Appendix D. TAX CONSEQUENCES OF THE REORGANIZATION It is intended that the Merger will be treated as a tax-free reorganization within the meaning of Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the "Code") and that, for federal income tax purposes, no income, gain or loss will be recognized by any shareholder of any Approving Trust upon the receipt solely of ARM Fund common shares for Approving Trust common shares pursuant to the Merger. For federal income tax reasons, each Approving Trust will distribute to its respective shareholders, immediately prior to the Effective Time, all of its net income and net realized capital gains for the current taxable year not previously distributed, if any, prior to the end of the fiscal year, and this distribution will be taxable to Approving Trust shareholders subject to taxation. See "Proposal No. 1 -- Tax Consequences of the Merger." COMPARISON OF ARM FUND AND THE TRUSTS GENERAL Each Trust is a closed-end, diversified management investment company. ARM Fund is a diversified series of an open-end investment company. Shares of each Trust are listed and currently trade on the New York and the Chicago Stock Exchanges and may only be purchased and sold at their current market price through a broker that customarily charges sales commissions. Shares of ARM Fund will be offered to the public on a continuous basis at net asset value plus a sales charge and may be redeemed on each business day at net asset value or exchanged for shares of certain other open-end investment companies managed by ARM Fund's investment adviser. The Company and the Trusts are organized as corporations under the laws of the State of Minnesota. The common shares of each Trust and of ARM Fund have equal voting rights and equal rights with respect to the payment of dividends and distribution of assets upon liquidation and have no preemptive, conversion or exchange rights or rights to cumulative voting. See "Proposal No. 1 -- Description and Comparison of Trust and ARM Fund Shares." INVESTMENT OBJECTIVES AND POLICIES The investment objectives and policies of ARM Fund and each Trust are similar. Each Trust's investment objective is to provide a high level of current income and to return $10 per share to common shareholders on its termination date. ARM Fund has an investment objective of providing the maximum current income that is consistent with low volatility of principal. In seeking to achieve their respective investment objectives, ARM Fund and the Trusts are guided by many similar policies and restrictions that should be considered by the shareholders of the Trusts. No assurance can be given that the investment objectives of ARM Fund or any Trust will be achieved. The Trusts and ARM Fund each seek to achieve their investment objectives by investing primarily (at least 65% of total assets under normal market conditions) in a portfolio of Mortgage-Backed Securities (as defined herein) having adjustable interest rates which reset at periodic intervals ("adjustable rate mortgage securities" or "ARMS"). The balance of ARM Fund's assets (up to 35% of total assets) may be invested in (a) Mortgage-Backed Securities (other than ARMS), (b) U.S. Government Securities (including, with respect to 10% of ARM Fund's net assets, U.S. Government Zero Coupon Securities), (c) Asset-Backed Securities and (d) Corporate Debt Securities (each as defined herein). 5 The balance of each Trust's total assets (up to 35% of total assets) may be invested in a slightly broader range of assets, including (a) Mortgage-Backed Securities (other than ARMS), (b) U.S. Government Securities, (c) Asset-Backed Securities, (d) Corporate Debt Securities, (e) Zero Coupon Securities, (f) Canadian Debt Securities and (g) Foreign Index-Linked Instruments (each as defined herein). The Trusts and ARM Fund may engage in options and financial futures transactions which relate to the securities in which they invest, may purchase and sell interest rate caps and floors, may purchase or sell securities on a when-issued or forward commitment basis (including, with respect to the Trusts but not ARM Fund, the use of mortgage dollar rolls), may make investments in Eurodollar instruments for hedging purposes and may lend their portfolio securities. The Trusts also may enter into interest rate swaps and, in connection with their investments in Canadian Debt Securities, may enter into foreign exchange transactions, currency forward and futures contracts and foreign currency options. ARM Fund may not make such investments. The types of securities in which the Trusts and ARM Fund may invest are discussed in more detail below. See "Proposal No. 1 -- Comparison of Investment Objectives and Policies of ARM Fund and the Trusts" and Appendix B. MANAGEMENT OF THE TRUSTS ARM Fund and each Trust have the same directors and the same officers. In addition, the Adviser acts as the investment adviser for, and manages the investment and reinvestment of the assets of, each Trust and will also act in that capacity for ARM Fund. Pursuant to an Investment Advisory Agreement between the Adviser and each Trust, each Trust pays an annual management fee for the services and facilities furnished by the Adviser on a monthly basis at the rate of .35% of each Trust's average weekly net assets. The Investment Advisory Agreement between the Adviser and ARM Fund provides for an advisory fee of .35% of average daily net assets on the first $500 million of ARM Fund net assets and .30% on assets in excess of $500 million. The Adviser also acts as the administrator for each Trust pursuant to Administration Agreements between the Adviser and each Trust. Under each Administration Agreement, the Adviser is required to manage the respective Trust's business affairs, supervise its overall day-to-day operations (other than providing investment advice) and provide other administrative expenses. For the administrative services rendered to the Trusts, each Trust currently pays the Adviser an administrative fee, calculated and paid monthly, at an annual rate of .15% of such Trust's average weekly net assets. ARM Fund will not enter into an Administration Agreement with the Adviser. However, the Adviser will continue to provide the services it currently provides under the Administration Agreement, without additional compensation. An open-end investment company, unlike a closed-end investment company, is permitted to finance the distribution of its shares by adopting a plan of distribution pursuant to Rule 12b-1 under the 1940 Act. ARM Fund has entered into an Underwriting and Distribution Agreement with Piper Jaffray Inc. (the "Distributor") pursuant to a Distribution Plan adopted in accordance with Rule 12b-1. Pursuant to the provisions of the Distribution Plan, ARM Fund will pay a monthly service fee to the Distributor at an annual rate of .15% of such Fund's average daily net assets in connection with servicing of the Fund's shareholder accounts. This fee is intended to compensate the Distributor for the ongoing servicing and/or maintenance of ARM Fund shareholder accounts and the costs incurred in connection therewith. The Distributor will use all or a portion of its Rule 12b-1 service fee to make payments to investment executives of the Distributor and broker-dealers which have entered into sales agreements with the Distributor. See "Proposal No. 1 -- Management of the Trusts and ARM Fund." EXCHANGE AND REDEMPTION Currently, Trust shareholders, as shareholders of a closed-end investment company, must sell their shares at market prices through a broker (which prices may be at either a discount or a premium 6 to net asset value), with a commission generally charged for each sale. In addition, the shareholders of each Trust, at a meeting held August 22, 1994, approved a fundamental policy that allows shareholders to periodically tender their shares back to the respective Trust at net asset value. Following the Merger of the Trusts into an open-end investment company, shareholders will be permitted to redeem their shares at net asset value on each business day. In addition, following the Merger, shareholders of the Trusts will be able to (a) purchase additional shares of ARM Fund at net asset value plus any applicable sales charge or (b) exchange their shares for shares of certain other open-end investment companies managed by the Adviser at net asset value plus any difference in sales charge. See "Proposal No. 1 -- Share Purchase, Exchange and Redemption Procedures." DIVIDENDS AND DISTRIBUTIONS The Trusts have identical dividend policies. Each Trust's present policy, which may be changed by its Board, is to make regular monthly cash distributions to holders of its common shares at a level rate that reflects the past and projected performance of such Trust, which over time will result in the distribution of all net investment income of such Trust. Holders of common shares of each Trust may elect to have all distributions automatically reinvested in common shares of that Trust at the prevailing market price, plus customary brokerage charges, pursuant to that Trust's Dividend Reinvestment Plan. See "Proposal No. 1 -- Dividends, Distributions and Taxes." ARM Fund intends to pay dividends from its net investment income on a monthly basis and distribute net realized capital gains, if any, on an annual basis. ARM Fund will not attempt to stabilize distributions and intends to distribute to its shareholders substantially all of the net investment income earned during any period. All net investment income dividends and net realized capital gains distributions for ARM Fund generally will be payable in additional shares of ARM Fund (or, if requested, shares of another mutual fund managed by the Adviser) at net asset value. Shareholders who want to receive their distributions in cash must notify their investment executive. The taxable status of income dividends and/or net capital gains distributions is not affected by whether they are reinvested or paid in cash. 7 RISK FACTORS INVESTMENT RISKS Because ARM Fund and the Trusts each seek to achieve their investment objectives by investing primarily (at least 65% of total assets under normal market conditions) in a portfolio of Mortgage-Backed Securities (as defined herein) having adjustable interest rates which reset at periodic intervals ("adjustable rate mortgage securities" or "ARMS"), they are subject to many of the same risks. The risks of the securities in which ARM Fund and the Trusts may invest are set forth in detail in Appendix B. These risks include, but are not limited to, the following: INTEREST RATE RISK. Because interest rates on ARMS are adjusted in response to changing interest rates, fluctuations in prices of ARMS due to changes in interest rates should be less than in the case of traditional debt securities. The adjustable rate feature of ARMS will not, however, eliminate such price fluctuations, particularly during periods of extreme fluctuations in interest rates. Also, since many adjustable rate mortgages only reset on an annual basis, it can be expected that the prices of ARMS will fluctuate to the extent that changes in prevailing interest rates are not immediately reflected in the interest rates payable on the underlying adjustable rate mortgages. PREPAYMENT RISK. ARMS, like other Mortgage-Backed Securities, differ from conventional bonds in that principal is paid back over the life of the ARMS rather than at maturity. As a result, the holder of the ARMS receives monthly scheduled payments of principal and interest and may receive unscheduled principal payments representing prepayments on the underlying mortgages. When the holder reinvests the payments and any unscheduled prepayments of principal it receives, it may receive a rate of interest which is lower than the rate on the existing ARMS. For this reason, ARMS are less effective than longer-term securities as a means of "locking in" long-term interest rates. ARMS, while having less risk of price decline during periods of rapidly rising rates than other investments of comparable maturities, will have less potential for capital appreciation due to the likelihood of increased prepayments of mortgages as interest rates decline. In addition, to the extent ARMS are purchased at a premium, mortgage foreclosures and unscheduled principal prepayments will result in some loss of the holders' principal investment to the extent of the premium paid. On the other hand, if ARMS are purchased at a discount, both a scheduled payment of principal and an unscheduled prepayment of principal will increase current and total returns and will accelerate the recognition of income which, when distributed to shareholders, will be taxable as ordinary income. CAP RISK. Adjustable rate mortgages typically have caps which limit the maximum amount by which the interest rate may be increased in any one year or over the life of the loan. Such annual caps currently range from 1% to 2% per year; lifetime caps currently range from 5% to 6%. The adjustable rate portion of collateralized mortgage obligations ("CMOs") ("floating rate CMOs") also generally have lifetime caps on the amount by which the coupon rate thereon may be increased. To the extent that ARMS cannot be adjusted in response to interest rate increases due to caps, such ARMS will behave more like securities backed by fixed rate mortgages than by adjustable rate mortgages. Consequently, interest rate increases in excess of caps can be expected to cause ARMS to behave more like traditional debt securities than adjustable rate securities and accordingly to decline in value to a greater extent than would be the case in the absence of such caps. DERIVATIVE MORTGAGE-BACKED SECURITIES. Certain derivative Mortgage-Backed Securities (such as certain tranches of CMOs and Stripped Mortgage-Backed Securities) may involve risks in addition to those found in other Mortgage-Backed Securities. These risks are discussed in detail under "Other Eligible Investments -- Mortgage-Backed Securities" in Appendix B. However, ARM Fund will not invest in inverse floating, interest-only or principal-only tranches of CMOs or in stripped Mortgage-Backed Securities. The Trusts are subject to no such limitation and may each invest up to 35% of their total assets in such securities. ZERO COUPON SECURITIES. The Trusts may invest up to 35% of their total assets in Zero Coupon Securities. ARM Fund may invest up to 10% of its net assets in U.S. Government Zero Coupon 8 Securities. The market prices of Zero Coupon Securities are generally more volatile than the market prices of securities that pay interest periodically and are likely to respond to changes in interest rates to a greater degree than non-Zero Coupon Securities having similar maturities and credit quality. ILLIQUID SECURITIES. Certain of the securities in which ARM Fund and each Trust is authorized to invest may lack an established secondary trading market or otherwise be considered illiquid. ARM Fund or a Trust may be limited in its ability to sell such securities at a time when the Adviser deems it advisable to do so. As an open-end investment company, ARM Fund may invest no more than 15% of its net assets in illiquid securities. The Trusts may currently invest up to 10% of their total assets in securities that are not listed on a stock exchange or traded in an over-the-counter market and that cannot be readily resold due to legal or contractual restrictions or which otherwise are not readily marketable. OTHER INVESTMENT TECHNIQUES. ARM Fund and each Trust may engage in options and financial futures transactions which relate to the securities in which they invest, may purchase and sell interest rate caps and floors, may make investments in Eurodollar instruments for hedging purposes, may purchase or sell securities on a when-issued or forward commitment basis (including, with respect to the Trusts but not ARM Fund, the use of mortgage dollar rolls), may lend their portfolio securities and may enter into repurchase agreements pertaining to the securities in which they may invest. In addition, each Trust also may enter into interest rate swaps and, in connection with its investments in Canadian Debt Securities, may enter into foreign exchange transactions, currency forward and futures contracts and foreign currency options. ARM Fund may not make such investments. Each of these investment techniques involves certain risks, as set forth in Appendix B. DIFFERENCES BETWEEN CLOSED- AND OPEN-END FUNDS ELIMINATION OF POTENTIAL FOR PURCHASE DISCOUNT OR SALE PREMIUM. To the extent Trust shares trade at a discount from net asset value, shareholders currently may purchase shares at this discounted price and hold them until the Trust's termination date, at which time such shares will be liquidated at their net asset value. If the Merger is approved, shares of ARM Fund will be purchased and redeemed at their net asset value (plus, in the case of purchases, any applicable sales load), thereby eliminating the potential of purchasing at a discount from, and later liquidating at, net asset value. In addition, shareholders in ARM Fund who wish to realize the value of their shares will be able to do so by redeeming their shares at net asset value. While this will eliminate any discount from the net asset value, it also will eliminate any possibility that a shareholder will be able to sell his or her shares at a premium over net asset value. SALES LOADS. Shares of the Trusts are currently traded on the New York and Chicago Stock Exchanges. Investors thus generally pay brokerage commissions when purchasing and selling shares of the Trusts. Investors in ARM Fund will not be required to pay brokerage commissions; however, investors will pay a sales charge upon the purchase of ARM Fund shares (other than shares acquired as a result of the Merger), as described herein. Sales charges may discourage future investment in ARM Fund and restrict the size of ARM Fund, thereby limiting the investment opportunities available to ARM Fund, which could adversely affect ARM Fund. The Board of Directors of the Trusts, however, believes that the activity of the Distributor's sales force in distributing shares of ARM Fund, in part resulting from the incentive of sales charges, will likely offset any risk resulting from the sales loads. EXPENSES; POTENTIAL NET REDEMPTIONS. The Adviser has undertaken to cap ARM Fund's fees and expenses at .60% of net assets through August 31, 1996, provided that shareholders of at least three of the Trusts approve the merger. Absent such cap, it is possible that ARM Fund's fees and expenses might be greater than those of any individual Trust, particularly if only one Trust approves the Merger. See "Proposal No. 1 -- Fees and Expenses." There could be immediate, substantial redemptions following the Merger which, if only one Trust approves the Merger, would result in ARM Fund having an asset base of decreased size when compared to the asset base of such Trust prior to the 9 Merger. Accordingly, ARM Fund's ratio of operating costs to average net assets could increase substantially. In addition, the costs of additional services available to shareholders of an open-end investment company would contribute to an increased expense ratio. PORTFOLIO MANAGEMENT. Unlike open-end funds, closed-end investment companies are not subject to pressures to sell portfolio securities at disadvantageous times in order to meet net redemptions. Most open-end funds maintain adequate reserves of cash or cash equivalents in order to meet net redemptions as they arise. Because closed-end investment companies do not have to meet redemptions, their cash reserves can be substantial or minimal, depending primarily on management's perception of market conditions and on decisions to use fund assets to repurchase shares. The larger reserves of cash or cash equivalents required to operate prudently as an open-end fund when net redemptions are anticipated could reduce ARM Fund's investment flexibility and the scope of its investment opportunities. ARM Fund may have to sell portfolio securities in order to accommodate the need for larger reserves of cash or cash equivalents, resulting in an increase in transaction costs, taxable distributions and portfolio turnover. INVESTMENT RESTRICTIONS. In order to register its shares and continuously offer such shares to the public under state securities laws as an open-end investment company, ARM Fund will have to agree to conform to certain restrictions imposed by laws and regulations of various states concerning mutual fund investments. The Trusts are not currently subject to these restrictions. The Adviser does not believe that the existence of these restrictions will affect the fundamental investment policies or investment practices of ARM Fund or hamper ARM Fund's ability to react to changing market conditions. SENIOR SECURITIES. The Investment Company Act of 1940, as amended (the "1940 Act") prohibits open-end investment companies from issuing "senior securities" representing indebtedness (I.E., bonds, debentures, notes and other similar securities), other than indebtedness to banks where there is an asset coverage of at least 300% for all borrowings. Closed-end investment companies, on the other hand, are permitted to issue senior securities representing indebtedness to any lender if the requirement of 300% asset coverage is met. In addition, closed-end investment companies may issue preferred stock (subject to various limitations), whereas open-end investment companies generally may not issue preferred stock. Currently, each Trust has a fundamental investment restriction providing that it may borrow money in an amount up to 33 1/3% of its total assets. ARM Fund has a fundamental investment restriction providing that it may borrow money only for temporary or emergency purposes in an amount up to 10% of the value of its total assets. The Adviser does not believe this limitation will impair ARM Fund's operations. QUALIFICATION AS A REGULATED INVESTMENT COMPANY. ARM Fund intends to qualify for treatment as a regulated investment company under the Internal Revenue Code of 1986, as amended (the "Code"), so that it will be relieved of federal income tax on that part of its investment company taxable income and net capital gains that is distributed to its shareholders. To qualify for this treatment, ARM Fund must currently meet several requirements, one of which is that less than 30% of ARM Fund's gross income each taxable year may be derived from the sale or other disposition of securities, options or futures contracts held for less than three months. No assurance exists that this requirement will be met under all possible circumstances, particularly if ARM Fund is required to sell recently acquired portfolio securities because of unexpectedly large net redemptions or large influxes of cash followed within a short time by significant redemptions of ARM Fund shares. LITIGATION RISK On October 20, 1994, a complaint purporting to be a class action was filed by Herman D. Gordon in the U.S. District Court for the District of Minnesota against DDJ and EDJ, the Adviser, the Distributor, Piper Jaffray Companies Inc. ("Piper") (the holder of all of the outstanding shares of the Adviser and the Distributor) and certain associated individuals (the "Gordon Litigation"). The complaint alleges that the defendants violated the federal securities laws by making materially misleading 10 statements in prospectuses and other disclosure documents concerning risks associated with an investment in the Trusts and compliance with the Trusts' investment policies. Damages are being sought in an unspecified amount. The defendants intend to defend the Gordon Litigation vigorously. On April 14, 1995, a complaint purporting to be a class action was filed by Frank Donio, I.R.A. and others in the U.S. District Court for the District of Minnesota against BDJ, CDJ, DDJ and EDJ, the Adviser, the Distributor, Piper and certain associated individuals (the "Donio Litigation"). The complaint alleges that the defendants violated certain federal and state securities laws by making materially misleading statements in prospectuses and other disclosures concerning risks associated with investing in the Trusts, compliance with the Trusts' investment policies, and the reasons for proposing and the benefits to be obtained by shareholders from the Merger and by allegedly breaching their fiduciary duties. Damages are being sought in an unspecified amount. The defendants intend to defend the Donio Litigation vigorously. PIPER AND THE ADVISER HAVE AGREED TO INDEMNIFY THE COMPANY AGAINST ANY LOSSES (AS THAT TERM IS DEFINED IN THE INDEMNIFICATION AGREEMENT BETWEEN AND AMONG PIPER, THE ADVISER AND THE COMPANY ATTACHED HERETO AS APPENDIX E) INCURRED IN CONNECTION WITH THE GORDON LITIGATION AND THE DONIO LITIGATION (THE "LITIGATIONS"). THIS MEANS THAT PIPER AND THE ADVISER HAVE AGREED TO BEAR ALL COSTS AND EXPENSES ASSOCIATED WITH THE LITIGATIONS. THE ANNUAL MEETINGS GENERAL This Joint Proxy Statement/Prospectus is furnished in connection with the solicitation by the Boards of Directors of the Trusts of proxies to be voted at the annual meeting of shareholders of each Trust to be held on , 1995, and any adjournments thereof. The costs of solicitation, including the cost of preparing, printing and mailing the Notice of Meeting and this Joint Proxy Statement -- Prospectus, will be paid by the Adviser, and such mailing will take place on approximately , 1995. Additional solicitation may be made by letter, telephone or telegraph by officers or employees of the Adviser or the Distributor, or by dealers and their representatives. In addition, the Trusts have engaged Shareholder Communications Corporation to assist in the solicitation of proxies, the cost of which will be borne by the Adviser. The Trusts' annual reports for the fiscal year ended August 31, 1994 and semiannual reports for the six months ended February 28, 1995, including financial statements, were previously mailed to shareholders. These reports are on file with the Commission, and the financial statements included therein are hereby incorporated by reference into this Joint Proxy Statement/Prospectus. See "Available Information." If you have not received a report for your Trust or would like to receive another copy, please call the Trusts at (800) 333-6000, extension 6387, and one will be sent by first-class mail within 48 hours. VOTING; PROXIES A Proxy may be revoked before the meeting by giving written notice in person or by mail of revocation to the Secretary of the applicable Trust, by delivery of a duly executed Proxy bearing a later date or by attending and voting at the Meeting. A quorum of shareholders is required to take action at the Meeting. A majority of the shares entitled to vote at the Meeting, represented in person or by proxy, will constitute a quorum of shareholders at the Meeting. For purposes of determining the approval of the matters submitted to shareholders for a vote, in instances where choices are specified by the shareholders in the Proxy, those Proxies will be voted or the vote will be withheld in accordance with the shareholder's choice. If no specification is made in the Proxy, it will be voted for approval of the Merger and each of the other matters referred to in the Notice of Meeting attached hereto. If a shareholder abstains from voting as to any matter, then the shares held by such shareholder shall be deemed present at the meeting for purposes of determining a 11 quorum and for purposes of calculating the vote with respect to such matter, but shall not be deemed to have been voted in favor of such matter. If a broker returns a "non-vote" proxy, indicating a lack of authority to vote on such matter, then the shares covered by such non-vote shall be deemed present at the meeting for purposes of determining a quorum but shall not be deemed to be represented at the meeting for purposes of calculating the vote with respect to such matter. Brokers and nominees will not have discretionary authority to vote shares for which instructions are not received from the beneficial owner with respect to approval of the proposed Merger. The details of each proposal to be voted on by the shareholders of each Trust and the vote required for approval of each proposal are set forth under the description of each proposal below. So far as the Boards of Directors of the Trusts are aware, no matters other than those described in this Joint Proxy Statement/Prospectus will be acted upon at the meeting. Should any other matters properly come before the meeting calling for a vote of shareholders, it is the intention of the persons named as proxies in the enclosed Proxy to vote upon such matters according to their best judgment. Only shareholders of record on , 1995 (the "Record Date") may vote at the Meeting or any adjournments thereof. At the close of business on the Record Date, there were issued and outstanding common shares of BDJ, issued and outstanding common shares of CDJ, issued and outstanding common shares of DDJ and issued and outstanding common shares of EDJ. Each Trust shareholder is entitled to one vote for each share held. Proposal No. 1 entitles shareholders to appraisal rights under state law. It is the position of the Commission, however, that these appraisal rights are preempted by federal law. See "Proposal No. 1 -- Dissenters' Rights." In the event that sufficient Proxy votes for any of the Trusts in favor of the proposals set forth in Item 1 of the Notice of Meeting of Shareholders are not received by , 1995, the persons named as proxies may propose one or more adjournments of the Meeting to permit further solicitation of Proxies. In determining whether to adjourn the meeting, the following factors may be considered: the nature of the proposals that are the subject of the meeting, the percentage of votes actually cast, the percentage of negative votes actually cast, the nature of any further solicitation, and the information to be provided to shareholders with respect to the reasons for the solicitation. Any adjournment will require the affirmative vote of a majority of those shares represented at the meeting in person or by Proxy. No person or entity, to the knowledge of Trust management, held of record or beneficially more than 5% of the outstanding common shares of any of the Trusts as of , 1995. In addition, as of such date, the officers and directors of the Trusts, as a group, beneficially owned less than 1% of the outstanding common shares of each Trust. PROPOSAL NO. 1 -- THE MERGER THE TERMS AND CONDITIONS OF THE MERGER ARE SET FORTH IN THE AGREEMENT AND PLAN OF MERGER (THE "MERGER AGREEMENT"). SIGNIFICANT PROVISIONS OF THE MERGER AGREEMENT ARE SUMMARIZED BELOW; HOWEVER, THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MERGER AGREEMENT, A COPY OF WHICH IS ATTACHED AS APPENDIX A TO THIS JOINT PROXY STATEMENT/PROSPECTUS. GENERAL The Merger Agreement sets forth the terms of the Merger under which each Trust approving the transaction (individually an "Approving Trust" and collectively the "Approving Trusts") will merge with and into the Company, with the Company as the surviving entity. As a result of the Merger, the assets and liabilities of each Approving Trust will be combined, and the shareholders of the Approving Trusts will become shareholders of ARM Fund, a series of the Company. The investment objective and policies of ARM Fund are similar to those of the Trusts, as described below under "Comparison of Investment Objectives and Policies of ARM Fund and the Trusts," and the general portfolio characteristics of ARM Fund after the Merger will be similar to those of each of the separate Trusts. If the proposal relating to the Merger Agreement is approved, the Merger will become effective at the close of business on the date the Articles of Merger are filed with the Secretary of State of the State of 12 Minnesota (the "Effective Time"), which is expected to occur on or about August 31, 1995. Following the Merger, each Approving Trust will terminate its registration as an investment company under the 1940 Act by filing a Form N-8F with the Commission. Because the Merger will involve only those Trusts whose shareholders approve the transaction, there are a number of different possible Trust combinations. In the event only one Trust approves the transaction, the merger of that Trust with ARM Fund, which is a series of a newly formed corporation without any assets, will have substantially the same effect as open-ending the approving Trust. If more than one Trust approves the transaction, the Merger will result in the combination of assets of those approving Trusts. Unless otherwise indicated, the discussion below applies to all of the possible combinations. TERMS OF THE MERGER If the Merger is approved and the other conditions to closing are satisfied or waived, at the Effective Time the Approving Trusts will merge with and into the Company, with the Company as the surviving entity. The articles of incorporation, bylaws, Investment Advisory Agreement, Rule 12b-1 Plan and Distribution Agreement of ARM Fund described herein, in effect immediately prior to the Merger, will be those of the surviving corporation. The Board of Directors of ARM Fund, which consists of the same individuals who serve as directors of the Trusts, will continue as the directors of the surviving corporation. At the Effective Time, common shares of an Approving Trust will be converted into common shares of ARM Fund having the same aggregate net asset value, determined as of the Effective Time. Following the Merger, every shareholder of an Approving Trust will own common shares of ARM Fund that have an aggregate net asset value immediately after the Effective Time equal to the aggregate net asset value of the Shareholder's Approving Trust common shares immediately prior to the Effective Time. See "Description and Comparison of Trust and ARM Fund Shares" for a description of the rights of such shareholders. Net asset value per share of common stock of an Approving Trust as of the Effective Time will be determined by adding the market value of all securities in the Trust's portfolio and other assets, subtracting liabilities incurred or accrued, and dividing by the total number shares of common stock then outstanding. Securities in an Approving Trust's portfolio will be valued at market value or fair value if market quotations are not readily available, pursuant to the procedures set forth under "Valuation of Shares." Immediately prior to the Merger, each Approving Trust will make a distribution, in cash, of all its net income and net realized capital gains for the current taxable year that have not previously been distributed. The option normally available to shareholders of reinvesting dividends in additional Trust shares will not be available for this final dividend. It is currently estimated that such distributions for BDJ, CDJ, DDJ and EDJ will be approximately $.45, $.26, $.08 and $.00 per share, respectively. These distributions will be taxable to all Approving Trust shareholders who are subject to taxation. As soon as practicable after the Effective Time, Investors Fiduciary Trust Company ("IFTC"), the transfer agent for the Trusts and ARM Fund, will send a notice and transmittal form to each record holder of Approving Trust common shares at the Effective Time advising such holder of the effectiveness of the Merger and of the procedure for surrendering to IFTC his or her certificates formerly evidencing common shares of the Approving Trust. APPROVING TRUST SHAREHOLDERS SHOULD NOT SEND IN THEIR SHARE CERTIFICATES UNTIL THEY RECEIVE THE LETTER OF TRANSMITTAL FORM AND INSTRUCTIONS FROM IFTC. Ownership of ARM Fund shares by former shareholders of an Approving Trust will be recorded in book-entry form, and ARM Fund will issue confirmations to such shareholders setting forth the number and net asset value of ARM Fund shares held by such shareholders. ARM Fund will not issue share certificates. Any share certificates not submitted to IFTC within three months of the Effective Time will be automatically deemed submitted and then canceled and recorded in book-entry form. Under the terms of the Merger Agreement, the Merger is conditioned upon (a) approval by the shareholders of at least one Trust, as described under "Voting Information" below, (b) the receipt of 13 an opinion to the effect that the Merger will qualify as a tax-free reorganization under the Code (which opinion has already been received), (c) the absence of legal proceedings challenging the Merger, (d) the receipt from Piper and the Adviser of an agreement to indemnify the Company against any losses incurred in connection with certain litigations involving the Trusts (see "Pending Litigation") and (e) the receipt of certain routine certificates and legal opinions or other conditions set forth in the Merger Agreement; provided, however, that all of the foregoing conditions, except conditions (a) and (d), may be waived. The Merger Agreement may be terminated and the Merger abandoned, whether before or after approval by the shareholders of one or more of the Trusts, at any time prior to the Effective Time by any Trust if circumstances should develop that, in the good faith opinion of such Trust's Board of Directors, make proceeding with the Merger Agreement not in the best interests of the Trust's shareholders. In the event that a particular Trust terminates the Merger Agreement, the Merger Agreement will remain in effect as to the Company and the other Trusts. REASONS FOR THE MERGER The respective Boards of Directors of the Trusts, which consist of the same individuals, have concluded that the Merger is in the best interests of the shareholders of their respective Trusts and unanimously recommend that the shareholders of their respective Trusts vote FOR approval of the Merger. When each Trust was organized, a closed-end format was chosen as the most appropriate for achieving such Trust's dual objectives of providing a high level of current income and returning $10 per share to common shareholders on the Trust's termination date. In particular, it was believed that the pressures and constraints to which open-end investment companies are subject as a result of cash inflows and redemptions would not be consistent with an objective of returning $10 per share upon termination of each Trust. For the reasons discussed in the next paragraph, however, it has been determined that none of the Trusts can be expected to reach this $10 per share objective without incurring an unacceptable level of risk. Commencing February 1994, the Federal Reserve Board initiated seven separate increases to short-term interest rates. This rapid and significant increase in interest rates caused a corresponding decline in the net asset values of the Trusts. Market conditions failed to improve and, after conducting an in-depth review of the portfolio of each Trust using both internal resources and the independent appraisal of an external consultant, the Adviser concluded that none of the Trusts can be expected to reach $10 per share at termination without taking risks that the Adviser deems unacceptable. In light of the foregoing, the Adviser proposed, as an alternative to continuing to manage the Trusts subject to the constraints of the term trust structure, merging each Trust into a newly formed open-end fund. The Merger is intended to offer the following benefits to shareholders of each Trust: ELIMINATION OF MARKET DISCOUNT As noted above, the shares of each Trust are currently trading at a discount to net asset value. The Merger would effectively eliminate the market discounts at which each Trust's shares currently trade because Approving Trust shareholders would receive in the Merger redeemable shares of ARM Fund with a net asset value equal to the net asset value of their Trust shares on the date of the Merger. ENHANCED INVESTMENT FLEXIBILITY The Adviser believes that elimination of the term trust structure would facilitate its ability to obtain a higher investment return on the Trust's portfolio securities. The Adviser believes this would be the case despite the additional limitations on borrowing imposed on ARM Fund and the greater liquidity requirements that ARM Fund would have as a result of its open-end structure. See "Risk Factors -- Differences Between Closed- and Open-End Funds." 14 Under the term trust structure, the Adviser is required to manage the portfolios to achieve a specified net asset value on a fixed termination date. Elimination of the term trust structure would, according to the Adviser, facilitate the Adviser's ability to obtain a higher investment return by allowing it to purchase and retain longer maturity securities than it could under the term trust structure. Currently, as a Trust approaches its termination date, duration is shortened by selling longer maturity securities and purchasing shorter maturity securities. This is done to lessen risk and volatility as a Trust approaches its termination date. The shorter duration, however, generally will also result in a lower yield. By contrast, ARM Fund could be continuously managed to a constant duration benchmark rather than the declining duration benchmark required by the term trust structure. FEES AND EXPENSES While open-end funds are generally more expensive to operate and administer than closed-end funds, the Adviser has agreed to cap expenses of ARM Fund through August 31, 1996 at .60% of average net assets (the expense ratios of DDJ and EDJ for the most recent fiscal year, exclusive of interest expense), provided that shareholders of at least three Trusts approve the Merger. In addition, ARM Fund should, to the extent more than one Trust approves the Merger, have a significantly larger shareholder base than any one Trust approving the Merger. Higher aggregate net assets should enable shareholders to obtain the benefits of economies of scale to the extent that fixed and certain variable costs can be spread over a larger asset base. These economies of scale may offset in whole or in part any increases in expenses that would be associated with ARM Fund in the absence of the cap. RECOMMENDATION OF THE BOARD OF DIRECTORS The Trusts' directors, including the independent directors acting with the advice of independent legal counsel, evaluated with respect to each Trust the benefits, risks and costs of the proposed Merger. Among other things, the directors considered, with respect to each Trust, (a) the potential benefits to shareholders associated with elimination, through the Merger, of the market discount at which the Trust shares currently trade; (b) the continuing appropriateness of the term trust structure in light of the Adviser's view that each Trust cannot be expected to achieve its objective of returning $10 per share on its termination date without incurring an unacceptable level of risk; (c) the potential benefits associated with affording the Adviser greater flexibility to manage the portfolios by eliminating the term trust structure; (d) that the interests of Approving Trust shareholders will not be diluted as a result of the Merger; (e) the effect on each Trust of combining its portfolio with the portfolios of each other Trust and the effect of such pooling on overall portfolio quality and the level of dividend income; (f) the increased risks associated with managing the Trusts to a constant duration rather than, as is currently the case under the term trust structure, reducing durations as the Trusts approach their respective termination dates; (g) the relative fees and expenses of ARM Fund as compared to the Trusts; (h) the potential adverse effects of the litigations against the Trusts to which the Company will become subject in the event that any Trust approves the Merger and the extent to which the indemnification of the Company by Piper and the Adviser against the costs of such litigation ameliorates any such adverse effects (see "Pending Litigation"); and (i) the benefits and costs associated with alternative structures such as converting each Trust into a separate open-end investment company. Based on consideration of the foregoing and all other factors deemed relevant by them, the Independent Directors of each Trust and the Company unanimously concluded that the Merger is in the best interests of each Trust and its shareholders and in the best interests of the Company, that the terms of the Merger are fair and reasonable, and that the interests of each Trust's shareholders will not be diluted as a result of the Merger. FEDERAL INCOME TAX CONSEQUENCES It is intended that the Merger will be treated as a tax-free reorganization within the meaning of Section 368(a)(1)(A) of the Code and that, for federal income tax purposes, no income, gain or loss will 15 be recognized by any shareholder of the Approving Trusts upon the receipt solely of ARM Fund common shares for Approving Trust common shares pursuant to the Merger. (Each Approving Trust, however, intends to make a distribution, immediately prior to the Effective Time, of all its net income and net realized capital gains for the current taxable year not previously distributed, if any, and this distribution will be taxable to Approving Trust shareholders subject to taxation. It is currently estimated that such distributions for BDJ, CDJ, DDJ and EDJ will be approximately $.45, $.26, $.08 and $.00 per share, respectively.) ARM Fund has not asked, nor will it ask, the Internal Revenue Service to rule upon the tax consequences of the Merger. The Trusts will receive an opinion from Dorsey & Whitney P.L.L.P., counsel to the Trusts, based upon facts described herein and upon certain representations made by each Trust and the Adviser, that the federal income tax consequences of the Merger will be substantially as follows: (a) The Merger will qualify as a "reorganization" under Section 368(a) of the Code, and each of the Approving Trusts will qualify as a party to the reorganization under Section 368(b) of the Code; (b) Approving Trust shareholders will recognize no income, gain or loss upon the exchange of Approving Trust common shares for ARM Fund common shares in the Merger. Approving Trust shareholders subject to taxation will recognize income upon receipt of any net investment income or net capital gains of an Approving Trust distributed by the Approving Trust prior to the Effective Time; (c) The basis of ARM Fund common shares received by each Approving Trust shareholder pursuant to the Merger will be the same as the basis of the Approving Trust common shares surrendered in exchange therefor; (d) The holding period of ARM Fund common shares received by each Approving Trust shareholder pursuant to the Merger will include the period during which the shareholder held the Approving Trust common shares surrendered in exchange therefor, provided that the Approving Trust common shares were held as a capital asset at the Effective Time; (e) Each Approving Trust will recognize no income, gain or loss by reason of the Merger; (f) The tax basis of the assets received by ARM Fund pursuant to the Merger will be the same as the basis of those assets in the hands of the Approving Trust as of the Effective Time; (g) The holding period of the assets received by ARM Fund pursuant to the Merger will include the period during which such assets were held by the Approving Trust that previously held the assets; and (h) ARM Fund will succeed to and take into account the earnings and profits, or deficit in earnings and profits, of each Approving Trust as of the Effective Time. The foregoing opinion will be based upon certain representations, including the representation that the shareholders of each Approving Trust do not have any plan or intention to sell, exchange or otherwise dispose of a number of ARM Fund common shares received pursuant to the Merger that would reduce the ownership by such shareholders of each Approving Trust of ARM Fund common shares to a number of shares having a value, as of the date of the Merger, which is less than 50% of the value of all of the formerly outstanding Approving Trust common shares held by such Approving Trust shareholders as of the same date. If, regardless of the representation described above, shortly after the Effective Date the shareholders of any Approving Trust sell or otherwise dispose of a number of ARM Fund common shares received pursuant to the Merger having a value significantly in excess of 50% of the value of the shares of such Approving Trust held immediately before the Merger, the Merger may be treated under the Code as a taxable transaction with respect to that Approving Trust and its shareholders. The Approving Trust shareholders would then be treated as having received their ARM Fund common shares in a 16 taxable distribution in complete liquidation of the Approving Trust. Shareholders would recognize taxable gain or loss measured by the difference between their basis for tax purposes in the Approving Trust shares they had exchanged and the fair market value of ARM Fund common shares they received pursuant to the Merger. (The gain or loss would be capital gain or loss, assuming that the shareholders held their Approving Trust shares as capital assets.) Management of the Trusts and ARM Fund intends to take the position that the Merger qualifies as a tax-free reorganization, as described above, and to report the consequences of the Merger to shareholders accordingly. If, after the Effective Date, management of the Trusts and of ARM Fund determines that the Merger should be treated as a taxable transaction with respect to one or more of the Approving Trusts, it will notify the former shareholders of such Approving Trust or Approving Trusts of that fact and will report the consequences of the Merger to them accordingly. Shareholders of the Approving Trusts should consult their own tax advisors as to the effect, if any, of the proposed Merger in light of their own facts and circumstances and also as to any state, local, foreign or other tax consequences arising out of the proposed Merger. EXPENSES ASSOCIATED WITH THE MERGER The Adviser has agreed to bear all of the expenses of the Merger, including Commission and state registration fees, legal and accounting fees, proxy solicitation and shareholder meeting expenses, and the costs of printing and mailing this Joint Proxy Statement/Prospectus. The costs of registering additional shares of ARM Fund for sale after the Merger will be borne by ARM Fund. 17 FEES AND EXPENSES The following tables set forth the expenses and fees that the shareholders of each Trust incurred during the most recent fiscal year and can expect to bear if the Merger is not approved, and that the shareholders of ARM Fund can expect to bear if each Trust approves the Merger. FEES AND EXPENSES
ARM BDJ CDJ DDJ EDJ FUND ------- ------- ---- ---- ------- SHAREHOLDER TRANSACTION EXPENSES Maximum sales load imposed on purchases (as a percentage of offering price)... (1) (1) (1) (1) None(2) Dividend reinvestment plan fees............................................... None None None None N/A Exchange fee (3).............................................................. N/A N/A N/A N/A $0 ANNUAL EXPENSES (as a percentage of net assets attributable to common shares) Management fee................................................................ .35% .35% .35% .35% .32%(4) Administration fee............................................................ .15% .15% .15% .15% N/A Rule 12b-1 service fee........................................................ N/A N/A N/A N/A .15% Other expenses (after voluntary expense reimbursement in the case of ARM Fund)........................................................................ .15% .11% .10% .10% .13% Total annual expenses (after voluntary expense reimbursement in the case of ARM Fund)(5)....................................................................... .65% .61% .60% .60% .60% - ------------------------ (1) Shareholders purchasing shares of a Trust in the initial public offering paid a sales load of 4%. Thereafter, shares have been purchased through brokers at market price plus a brokerage commission. (2) No sales charge will be imposed on ARM shares acquired pursuant to the Merger. Subsequent purchases of ARM shares will be subject to a maximum sales load of 1.5%. (3) There is a $5.00 fee for each exchange in excess of four exchanges per year. See "Shareholder Services -- Exchange Privilege" in Appendix C. (4) The management fee for ARM Fund is .35% on the first $500 million of ARM Fund's net assets and .30% on net assets in excess of $500 million. (5) Excludes interest payments on borrowed funds equal to 1.13%, 1.10%, 1.03% and 1.09% for BDJ, CDJ, DDJ and EDJ, respectively. If these interest payments were included, the annual expenses for BDJ, CDJ, DDJ and EDJ would be 1.78%, 1.71%, 1.63% and 1.69%, respectively.
EXAMPLES Shareholders of the Trusts and ARM Fund would pay the following expenses (excluding sales loads and interest expense) on a $1,000 investment, assuming a 5% annual return and, in the case of ARM Fund, redemption at the end of each time period:
ARM BDJ CDJ DDJ EDJ FUND ---- ---- ---- ---- --- 1 year....................................... $ 7 $ 6 $ 6 $ 6 $6 3 years...................................... $ 21 $ 20 $ 19 $ 19 $19 5 years...................................... $ 36 $ 34 $ 33 $ 33 10 years..................................... $ 81 $ 76 $ 75 $ 75
18 Including interest expense for the Trusts and sales loads for the Trusts and ARM Fund, shareholders of the Trusts and ARM Fund would pay the following expenses on a $1,000 investment, assuming a 5% annual return and, in the case of ARM Fund, redemption at the end of each time period.
ARM BDJ CDJ DDJ EDJ FUND ---- ---- ---- ---- ---- 1 year....................................... $ 57 $ 57 $ 56 $ 56 $ 21 3 years...................................... $ 94 $ 92 $ 89 $ 91 $ 34 5 years...................................... $133 $129 $125 $128 10 years..................................... $241 $234 $226 $232
The purpose of the above tables is to assist you in understanding the various costs and expenses that shareholders of each Trust bear directly and indirectly, and that shareholders in ARM Fund after the Merger can be expected to bear directly or indirectly. THE EXAMPLES SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The information in the above tables relating to the Trusts is based on actual expenses incurred by such Trusts during the fiscal year ended August 31, 1994. The information in the above tables relating to ARM Fund assumes that all Trusts approve the Merger and reflects the Adviser's undertaking to reimburse ARM Fund, in that event, for the amount, if any, by which total ARM Fund operating expenses for the fiscal year ending August 31, 1996 exceed .60% of average daily net assets. The Adviser does not intend to reimburse ARM Fund operating expenses if less than three Trusts approve the Merger. Assuming approval of the Merger by the shareholders of one, two, three or four Trusts, respectively, and absent any voluntary expense reimbursements by the Adviser, ARM Fund would have management fees of .35%, .35%, .33% and .32% of average daily net assets, estimated other expenses of .25%, .20%, .17% and .13% of average daily net assets, and total expenses of .75%, .70%, .65% and .60% of average daily net assets. CAPITALIZATION The following table sets forth the unaudited capitalization of the Trusts as of February 28, 1995 and as adjusted to give effect to the Merger of all four Trusts into ARM Fund. The pro forma financial information is based on the assumption that each of the Trusts will approve the Merger. However, as noted above under "General," only those Trusts that approve the Merger will participate therein.
ARM FUND PRO FORMA BDJ CDJ DDJ EDJ COMBINED -------- -------- -------- -------- ---------- Net assets (000's omitted)................... $197,538 $374,820 $409,244 $239,721 $1,221,324 Net asset value per share.................... $ 9.03 $ 8.82 $ 8.68 $ 8.52 $ 8.68 Shares outstanding (000's omitted)........... 21,874 42,482 47,141 28,153 140,685
Based on the above capitalization table, shareholders holding 1 share of BDJ, CDJ, DDJ and EDJ would receive 1.040, 1.016, 1 and .982 shares of ARM Fund, respectively, upon effectiveness of the Merger. DESCRIPTION AND COMPARISON OF TRUST AND ARM FUND SHARES The Company is an open-end management investment company organized under the laws of the State of Minnesota on April 10, 1995. ARM Fund is a diversified series of the Company. BDJ, CDJ, DDJ and EDJ are closed-end management investment companies organized under the laws of the State of Minnesota on July 25, 1990, May 30, 1991, November 26, 1991 and July 6, 1992, respectively. Each ARM Fund share to be issued to the Trusts' shareholders pursuant to the Merger will be duly authorized, validly issued, fully paid and nonassessable when issued, will be transferable without restriction and will have no preemptive rights. 19 The voting rights of Approving Trust shareholders will not change upon effectiveness of the Merger. Shareholders of ARM Fund will be entitled to one vote for each full share held and fractional votes for fractional shares held, and will vote in the aggregate and not by class or series except as otherwise required by law or when the Board of Directors of the Company determines that a matter to be voted upon affects only the interests of the shareholders of a particular class or series. Voting rights are not cumulative except to the extent required by law, so that the holders of more than 50% of the shares voting in any election of directors of the Company can, if they so choose, elect all the directors. ARM Fund will be the only outstanding series of the Company immediately after the Merger. As the Company establishes additional series of common shares, all shareholders of such series will vote as a group on certain matters, such as the election of directors. If, however, a matter only affects one series of common shares, each series will vote separately on such matter. Each Trust's Bylaws currently require that an annual meeting of shareholders be held, as do the regulations of the New York Stock Exchange. The Company is not required to, nor does it currently intend to, hold annual meetings of shareholders for the election of directors and other business unless and until such time as less than a majority of the directors holding office have been elected by the shareholders, at which time the directors then in office will call a shareholders' meeting for the election of directors. Under certain circumstances, however, shareholders have the right to call a meeting of shareholders for the purpose of electing or removing directors. Minnesota corporation law provides that if a regular meeting of shareholders has not been held during the immediately preceding 15 months, a shareholder or shareholders holding 3% or more of the voting shares of a corporation may demand a regular meeting of shareholders by written notice given to the chief executive officer or chief financial officer. The 1940 Act requires a shareholder meeting (a) if the number of directors elected by the shareholders is less than a majority of the total number of directors, (b) for all amendments to fundamental investment policies and restrictions, (c) for all investment advisory contracts and amendments thereto, and (d) for all Rule 12b-1 distribution plans and amendments thereto (where such change involves a material increase in Trust expenses). The 1940 Act also requires the directors to call a meeting of shareholders for the purpose of voting upon the question of removal of any director or directors when requested in writing to do so by the record holders of not less than 10% of the outstanding shares. To the extent required by law, the Company will assist in shareholder communications in such matters. The Board of Directors may, in its discretion, call annual shareholders' meetings. Shares representing interests in a particular series of the Company are entitled to participate in the dividends and distributions declared by the Company's Board of Directors with respect to such portfolio and in the net distributable assets of the portfolio on liquidation. Each ARM Fund share will therefore represent an equal interest in the assets of ARM Fund and will be preferred over shares representing interests in any other series of the Company as to the assets of ARM Fund. The Board of Directors of the Company may, without shareholder approval, create and issue one or more additional classes of shares within ARM Fund, as well as within any series of the Company created in the future. All classes of shares in a series would be identical, except that each class of shares would be available through a different distribution channel and certain classes might incur different expenses for the provision of distribution services or the provision of shareholder services or administration assistance by institutions. Shares of each class would share equally in the gross income of a series, but any variation in expenses would be charged separately against the income of the particular class incurring such expenses. This would result in variations in net investment income accrued and dividends paid by and in the net asset value of the different classes of a series. This ability to create multiple classes of shares within each series of the Company will allow the Company in the future the flexibility to better tailor its methods of marketing, administering and distributing shares of the series to the needs of particular investors and to allocate expenses related to such marketing, administration and distribution methods to the particular classes of shareholders of the series incurring such expenses. 20 HISTORY OF PUBLIC TRADING OF THE TRUSTS' COMMON SHARES The following table shows the history of public trading of the common shares of each Trust, by quarter, for the last two fiscal years and for each full fiscal quarter since the beginning of the current fiscal year, as reported on the New York Stock Exchange.
PERCENTAGE PERCENTAGE NET ASSET VALUE MARKET PRICE DISCOUNT PREMIUM QUARTER ---------------- ------------------ ---------------- --------------- ENDED HIGH LOW HIGH LOW HIGH LOW HIGH LOW - -------- ------ ------ ------- ------- ------ ----- ----- ----- AMERICAN ADJUSTABLE RATE TERM TRUST 1996 11/30/92 $ 9.730 $ 9.490 $ 10.250 $ 10.000 N/A N/A 5.80% 3.73% 02/28/93 $ 9.510 $ 9.430 $ 10.125 $ 9.750 N/A N/A 6.69% 2.65% 05/31/93 $ 9.530 $ 9.460 $ 9.875 $ 9.625 N/A N/A 4.39% 1.00% 08/31/93 $ 9.600 $ 9.480 $ 9.750 $ 9.500 0.94% 0.42% 2.52% 0.68% 11/30/93 $ 9.620 $ 9.550 $ 9.750 $ 9.375 2.04% 0.73% 1.88% 0.16% 02/28/94 $ 9.660 $ 9.470 $ 9.625 $ 9.250 3.34% 0.16% 0.57% 0.57% 05/31/94 $ 9.370 $ 9.050 $ 9.625 $ 8.250 9.14% 0.32% 2.35% 0.37% 08/31/94 $ 9.050 $ 8.970 $ 8.625 $ 8.375 7.46% 5.24% N/A N/A 11/30/94 $ 9.040 $ 8.910 $ 8.750 $ 8.375 6.63% 4.27% N/A N/A 02/28/95 $ 9.030 $ 8.820 $ 8.625 $ 8.125 8.40% 4.17% N/A N/A AMERICAN ADJUSTABLE RATE TERM TRUST 1997 11/30/92 $ 9.670 $ 9.490 $ 10.125 $ 9.875 N/A N/A 5.37% 3.41% 02/28/93 $ 9.560 $ 9.440 $ 10.000 $ 9.500 0.52% 0.52% 5.60% 2.42% 05/31/93 $ 9.600 $ 9.540 $ 9.750 $ 9.500 0.73% 0.73% 2.20% 0.13% 08/31/93 $ 9.660 $ 9.560 $ 9.750 $ 9.375 1.66% 0.05% 1.35% 0.26% 11/30/93 $ 9.660 $ 9.590 $ 9.750 $ 9.375 0.36% 0.05% 1.46% 0.16% 02/28/94 $ 9.660 $ 9.420 $ 9.625 $ 9.125 3.85% 0.84% N/A N/A 05/31/94 $ 9.300 $ 8.920 $ 9.500 $ 8.000 10.61% 0.90% 1.13% 0.81% 08/31/94 $ 8.920 $ 8.840 $ 8.500 $ 8.125 8.91% 5.37% N/A N/A 11/30/94 $ 8.900 $ 8.670 $ 8.500 $ 7.750 9.38% 3.85% N/A N/A 02/28/95 $ 8.820 $ 8.590 $ 8.250 $ 7.625 11.65% 6.25% N/A N/A AMERICAN ADJUSTABLE RATE TERM TRUST 1998 11/30/92 $ 9.730 $ 9.520 $ 10.000 $ 9.875 N/A N/A 4.17% 1.49% 02/28/93 $ 9.650 $ 9.460 $ 10.000 $ 9.500 N/A N/A 4.28% 1.35% 05/31/93 $ 9.670 $ 9.620 $ 9.750 $ 9.500 1.35% 0.05% 1.35% 0.05% 08/31/93 $ 9.680 $ 9.620 $ 9.750 $ 9.500 0.47% 0.16% 1.35% 0.83% 11/30/93 $ 9.670 $ 9.600 $ 9.750 $ 9.500 1.76% 0.05% 1.46% 0.05% 02/28/94 $ 9.710 $ 9.470 $ 9.625 $ 9.125 5.24% 0.94% 0.26% 0.26% 05/31/94 $ 9.350 $ 8.940 $ 9.250 $ 7.875 12.21% 1.88% N/A N/A 08/31/94 $ 8.930 $ 8.800 $ 8.500 $ 8.000 10.71% 5.15% N/A N/A 11/30/94 $ 8.820 $ 8.500 $ 8.500 $ 7.625 9.67% 3.07% N/A N/A 02/28/95 $ 8.680 $ 8.470 $ 8.500 $ 7.375 13.44% 5.74% N/A N/A AMERICAN ADJUSTABLE RATE TERM TRUST 1999 11/30/92 $ 9.580 $ 9.370 $ 10.250 $ 9.750 N/A N/A 6.27% 3.72% 02/28/93 $ 9.590 $ 9.270 $ 10.125 $ 9.500 N/A N/A 7.87% 0.89% 05/31/93 $ 9.620 $ 9.550 $ 9.750 $ 9.375 1.04% 0.63% 1.67% 0.05% 08/31/93 $ 9.630 $ 9.560 $ 9.625 $ 9.500 1.35% 0.05% 0.68% 0.16% 11/30/93 $ 9.630 $ 9.550 $ 9.625 $ 9.500 1.35% 0.52% 0.05% 0.05% 02/28/94 $ 9.690 $ 9.470 $ 9.625 $ 9.125 5.05% 0.73% 0.68% 0.68% 05/31/94 $ 9.350 $ 8.870 $ 9.375 $ 8.000 10.71% 0.11% N/A N/A 08/31/94 $ 8.860 $ 8.670 $ 8.375 $ 7.875 10.10% 3.85% N/A N/A 11/30/94 $ 8.710 $ 8.390 $ 8.375 $ 7.500 9.12% 2.71% N/A N/A 02/28/95 $ 8.510 $ 8.300 $ 8.000 $ 7.250 11.78% 6.58% N/A N/A
21 The market prices and net asset values of the common shares of the Trusts as of , 1995 were as follows:
BDJ CDJ DDJ EDJ --------- --------- --------- --------- Market Price............................................. Net Asset Value..........................................
Since February 1994, the shares of each Trust have generally traded at a discount to net asset value. Prior to that time, the shares of each Trust generally traded for an amount exceeding net asset value. Each Trust has had a share repurchase program in place since February 18, 1994, pursuant to which each Trust may repurchase shares of its common stock in the open market on any day when the previous day's closing market price per share was at a discount from net asset value. Under this program, as of March 16, 1995, BDJ, CDJ, DDJ and EDJ had repurchased a total of 316,400; 709,800; 823,000 and 442,100 shares, respectively. In addition, the shareholders of each Trust, at a meeting held August 22, 1994, approved a fundamental policy that allows shareholders to periodically tender their shares back to the respective Trusts at net asset value. Pursuant to this policy, each Trust is required to offer shareholders an annual opportunity to tender between 5% and 25% of such Trust's outstanding shares. The deadline for participating in the first tender offer, which was an offer to purchase up to 25% of each Trust's outstanding shares, was October 3, 1994. Shareholders tendered 18%, 15%, 16% and 16%, respectively, of the outstanding shares of BDJ, CDJ, DDJ and EDJ. The measures described in this paragraph have only slightly reduced each Trust's discount to net asset value. COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES OF ARM FUND AND THE TRUSTS INVESTMENT OBJECTIVES Each Trust's investment objective is to provide a high level of current income and to return $10 per share to common shareholders on the Trust's termination date. ARM Fund has an investment objective of providing the maximum current income that is consistent with low volatility of principal. In seeking to achieve their respective investment objectives, the Trusts and ARM Fund are guided by many similar policies and restrictions that should be considered by the shareholders of the Trusts. Unless otherwise specified, the following investment policies and restrictions of the Trusts and ARM Fund may be changed without shareholder approval. The Trusts' and ARM Fund's investment objectives, and investment policies or restrictions stated as fundamental, may not be changed without a majority vote, which means the approval of the lesser of (a) a majority of the outstanding shares, or (b) 67% or more of the shares represented at a meeting of shareholders at which the holders of more than 50% of the outstanding shares are represented. Except for the investment policies discussed below regarding borrowing, if a percentage restriction set forth below is adhered to at the time of an investment, a later increase or decrease in percentage resulting from changes in values or assets will not constitute a violation of such restriction. INVESTMENT POLICIES The Trusts and ARM Fund each seek to achieve their investment objectives by investing primarily (at least 65% of total assets under normal market conditions) in a portfolio of Mortgage-Backed Securities (as defined herein) having adjustable interest rates which reset at periodic intervals ("adjustable rate mortgage securities" or "ARMS"). The balance of ARM Fund's assets (up to 35% of total assets) may be invested in (a) Mortgage-Backed Securities (other than ARMS); (b) U.S. Government Securities (including, with respect to 10% of ARM Fund's net assets, U.S. Government Zero Coupon Securities); (c) Asset-Backed Securities; and (d) Corporate Debt Securities (each as defined below). With respect to the Trusts, the balance of total assets may be invested in a slightly broader range of assets, including (i) Zero Coupon Securities (both U.S. Government and non-U.S. Government); (ii) Mortgage-Backed Securities other than ARMS; (iii) Asset-Backed Securities; (iv) Corporate Debt 22 Securities; (v) Canadian Debt Securities; (vi) Foreign Index-Linked Instruments; and (vii) U.S. Government Securities (each as defined below); provided, however, that no more than 10% of any Trust's assets may be invested in any one of the following: taxable Zero Coupon Securities, Asset-Backed Securities, Canadian Debt Securities, Corporate Debt Securities or Foreign Index-Linked Instruments. With respect to ARM Fund, at least 85% of total assets (other than U.S. Government Securities) must be rated, as of the date of purchase, AA or better by Standard & Poor's Ratings Group ("Standard & Poor's"), Aa or better by Moody's Investors Service, Inc. ("Moody's"), comparably rated by any other nationally recognized statistical rating organization ("NRSRO") or, if unrated, be of a comparable quality as determined by the Adviser. Up to 15% of total assets may be invested in securities rated, as of the date of purchase, A by Standard & Poor's or Moody's, comparably rated by any other NRSRO or, if unrated, of comparable quality as determined by the Adviser. ARM Fund may not invest in any security rated, as of the date of purchase, lower than A by Standard & Poor's or Moody's, lower than a rating comparable to A by any other NRSRO or, if unrated, of a quality lower than A as determined by the Adviser. In the event that a security is downgraded to a rating below A by Standard & Poor's or Moody's (or below a comparable rating by any other NRSRO) or, if unrated, is no longer of a quality comparable to a security rated A, as determined by the Adviser, ARM Fund must sell such a security as promptly as possible. For a discussion of Standard & Poor's and Moody's ratings, see Appendix A to the Statement of Additional Information. The Trusts are subject to the same ratings criteria, provided that rated securities in which the Trusts invest must be rated by Standard & Poor's. The Trusts and ARM Fund may engage in options and financial futures transactions which relate to the securities in which they invest, may purchase and sell interest rate caps and floors, may make investments in Eurodollar instruments for hedging purposes, may purchase or sell securities on a when-issued or forward commitment basis (including, with respect to the Trusts but not ARM Fund, the use of mortgage dollar rolls) and may lend their portfolio securities. The Trusts also may enter into interest rate swaps and, in connection with their investments in Canadian Debt Securities, may enter into foreign exchange transactions, currency forward and futures contracts and foreign currency options. ARM Fund may not make such investments. For temporary defensive purposes, the Trusts and ARM Fund may invest without limitation in cash or in high quality debt securities with remaining maturities of one year or less. Such securities may include (a) commercial paper rated A-1+ by Standard & Poor's (or, in the case of ARM Fund, rated P-1 by Moody's or comparably rated by any other NRSRO); (b) certificates of deposit, time deposits and bankers' acceptances with any bank the unsecured commercial paper of which is rated A-1+ by Standard & Poor's (or, in the case of ARM Fund, rated P-1 by Moody's or comparably rated by any other NRSRO) (or, in the case of the principal bank in a bank holding company, the unsecured commercial paper of the bank holding company); and (c) U.S. Government securities. Set forth below is a brief description of the types of securities in which the Trusts and ARM Fund may invest and the investment techniques they may employ. A more detailed description of these securities and investment techniques, including the risks thereof, is set forth in Appendix B. ADJUSTABLE RATE MORTGAGE SECURITIES Under normal market conditions, each Trust and ARM Fund must invest at least 65% of their total assets in adjustable rate mortgage securities or ARMS, which are Mortgage-Backed Securities (as defined below) that have adjustable interest rates which reset at periodic intervals. ARMS include "pass-through" securities issued or guaranteed by the U.S. Government or one of its agencies or instrumentalities as well as those issued by originators of and investors in mortgage loans, including savings and loan associations, mortgage bankers, commercial banks, investment banks and special purpose subsidiaries of the foregoing. Pass-through securities represent ownership interests in underlying pools of adjustable rate mortgage loans originated by private lenders. 23 ARMS in which the Trusts and ARM Fund may invest also include collateralized mortgage obligations and multi-class pass-through securities, which are derivative mortgage securities. Collateralized mortgage obligations and multi-class pass-through securities (collectively, "CMOs" unless the context indicates otherwise) may be issued by agencies or instrumentalities of the U.S. Government or by private organizations. In a CMO, a series of bonds or certificates is issued in multiple classes or tranches. As discussed below, the principal and interest on the mortgages underlying a CMO may be allocated among the CMO's tranches in many ways. One or more tranches of a CMO may have coupon rates which reset periodically at a specified increment over an index such as the London Interbank Offered Rate ("LIBOR"). These adjustable rate tranches, known as "floating rate CMOs," are considered ARMS by the Trusts and ARM Fund. ARM Fund may not invest in inverse floating, interest-only or principal-only tranches of CMOs. See "Other Eligible Investments -- Mortgage-Backed Securities" below. OTHER ELIGIBLE INVESTMENTS The balance of the assets of each Trust and ARM Fund (35% of total assets) may be invested in the following types of securities, to the extent set forth below: MORTGAGE-BACKED SECURITIES. In addition to ARMS, each Trust and ARM Fund may invest in other types of Mortgage-Backed Securities. Mortgage-Backed Securities are securities which represent interests in or are collateralized by mortgages. Such securities are issued by agencies of the U.S. Government and by private organizations and take the same structure as ARMS, I.E., pass-through securities and CMOs. The Trusts may invest in any type of Mortgage-Backed Security, including traditional fixed rate Mortgage-Backed Securities and more recently developed instruments such as Stripped Mortgage-Backed Securities and CMOs (described below). ARM Fund will not invest in inverse floating, interest-only or principal-only tranches of CMOs, or in Stripped Mortgage-Backed Securities. See "Investment Objectives, Policies and Restrictions -- Mortgage-Backed Securities -- Restrictions on Investments in Mortgage-Backed Securities" in the Statement of Additional Information. - CMOS. As discussed above, investments in ARMS include floating rate CMOs. The Trusts' investments in Mortgage-Backed Securities other than ARMS may include any other tranche of a CMO, other than residual interests of CMOs. ARM Fund may also invest in other tranches of CMOs, provided that it may not invest in inverse floating, interest-only or principal-only tranches of CMOs or in residual interests of CMOs. - STRIPPED MORTGAGE-BACKED SECURITIES. The Trusts' investments in Mortgage-Backed Securities other than ARMS may include Stripped Mortgage-Backed Securities ("SMBS"), which are derivative multi-class mortgage securities. There are generally two types of classes of SMBS, one of which (the interest only or "IO" class) entitles the holders thereof to receive distributions consisting solely or primarily of all or a portion of the interest on the underlying pool of mortgage loans or Mortgage-Backed Securities ("Mortgage Assets") and the other of which (the principal only or "PO" class) entitles the holders thereof to receive distributions consisting solely or primarily of all or a portion of the principal of the underlying pool of Mortgage Assets. ARM Fund may not invest in SMBS. ZERO COUPON SECURITIES. Each Trust may invest up to 35% of its total assets in Zero Coupon Securities, including tax-exempt municipal Zero Coupon Securities. However, no Trust may invest more than 10% of its total assets in taxable Zero Coupon Securities. ARM Fund may invest up to 10% of its net assets in U.S. Government Zero Coupon Securities but may not invest in any other type of Zero Coupon Security. Zero Coupon Securities are debt obligations which do not entitle the holder to any periodic payments of interest prior to maturity; rather, they offer the right to receive a fixed cash payment at maturity but without any payments before that date. As a result, Zero Coupon Securities are issued and traded at a discount from their face amounts. 24 CORPORATE DEBT SECURITIES. ARM Fund and each Trust may invest in Corporate Debt Securities, which are debt obligations of U.S. corporations (other than ARMS or Mortgage-Backed Securities). Each Trust's investment in these securities is limited to 10% of its total assets. ARM Fund has no such limitation and thus may invest up to 35% of its total assets in Corporate Debt Securities. U.S. GOVERNMENT SECURITIES. In addition to U.S. Government ARMS and other U.S. Government Mortgage-Backed Securities, ARM Fund and each Trust may invest in other securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities. ASSET-BACKED SECURITIES. ARM Fund and each Trust may invest in Asset-Backed Securities, which are securities that directly or indirectly represent a participation in or are secured by and payable from a pool of assets representing the obligations of a number of different parties. Each Trust's investment in these securities is limited to 10% of its total assets. ARM Fund is subject to no such percentage limitation. However, ARM Fund will only invest in Asset-Backed Securities rated, as of the date of purchase, AAA by Standard & Poor's, Aaa by Moody's, comparably rated by any other NRSRO or, if unrated, of comparable quality as determined by the Adviser. CANADIAN DEBT SECURITIES. Each Trust may invest up to 10% of its total assets in Canadian Debt Securities. ARM Fund may not invest in such securities. FOREIGN INDEX LINKED INSTRUMENTS. Each Trust may invest up to 10% of its total assets in fixed-income securities issued by U.S. issuers and denominated in U.S. dollars but which return principal and/or pay interest to investors in amounts which are linked to the level of a particular foreign index ("Foreign Index Linked Instruments"). ARM Fund may not invest in such securities. PUT OPTION. ARMS typically have caps, which limit the maximum amount by which the interest rate may be increased or decreased at periodic intervals or over the life of the underlying mortgages. To the extent that interest rates rise faster than the allowable caps on ARMS, such ARMS will behave more like securities backed by fixed rate mortgages than by adjustable rate mortgage loans. Consequently, interest rate increases in excess of caps can be expected to cause ARMS to behave more like traditional debt securities than adjustable rate securities and accordingly to decline in value to a greater extent than would be the case in the absence of such caps. In order to hedge against "cap risk," each Trust purchased put options on four-year U.S. Treasury securities that are exercisable on or immediately prior to the respective termination dates of the Trusts. Pursuant to these put options, each Trust will be entitled to a cash payment from the issuer of the option if, at the termination of such Trust, interest rates on four year Treasury securities are in excess of the interest rate specified in the put option. Because ARM Fund does not have a fixed termination date, it will not hold any such put options. Each Approving Trust will sell its put options prior to the Effective Time of the Merger. NEW INSTRUMENTS. ARM Fund and each Trust expect that, consistent with their respective investment limitations, they will invest in those new types of ARMS, other Mortgage-Backed Securities, Asset-Backed Securities, Zero Coupon Securities, hedging instruments and other securities in which they may invest that the Adviser believes may assist them in achieving their objectives. Shareholders will receive written notice in advance of a significant investment (I.E., in excess of 5% of a Trust's total assets or 5% of ARM Fund's net assets) in such newly developed securities. OTHER INVESTMENT TECHNIQUES HEDGING TRANSACTIONS. Both ARM Fund and the Trusts may purchase and sell interest rate caps and floors, enter into options and futures transactions and make investments in Eurodollar instruments, to the extent described in Appendix B. The Trusts also may enter into foreign exchange transactions, currency forward and futures contracts and foreign currency options in connection with their investments in Canadian Debt Securities and may enter into interest rate swaps. ARM Fund may not engage in these transactions. WHEN-ISSUED SECURITIES. ARM Fund and the Trusts may purchase securities on a "when-issued" basis and may purchase or sell securities on a "forward commitment" basis. The Trusts may enter 25 into "mortgage dollar rolls" whereby a Trust sells securities for delivery in the current month and simultaneously contracts with the same counterparty to repurchase similar (I.E., same type, coupon and maturity) but not identical securities on a specified future date. A Trust will receive a fee for its agreement to roll over its purchase commitment. ARM Fund will not enter into mortgage dollar rolls but will generally purchase securities on a when-issued or forward commitment basis with the intention of acquiring such securities for its portfolio. ARM Fund may dispose of a commitment prior to settlement, however, if the Adviser deems it appropriate to do so. ILLIQUID SECURITIES. As an open-end investment company, ARM Fund may invest up to 15% of its net assets in illiquid securities. Each Trust may invest up to 10% of its total assets in such securities, excluding certain hedging instruments, all of which must mature on or before March 31 in the year of the Trust's termination. Illiquid securities may offer a higher yield than securities which are more readily marketable, but they may not always be marketable on advantageous terms. LENDING OF PORTFOLIO SECURITIES. In order to generate income, ARM Fund and each Trust may lend portfolio securities up to 30% of the value of their total assets to broker-dealers, banks or other financial borrowers of securities. REPURCHASE AGREEMENTS. ARM Fund and each Trust may enter into repurchase agreements pertaining to the securities in which they may invest. A repurchase agreement involves the purchase by ARM Fund or a Trust of securities with the condition that after a stated period of time the original seller (a member bank of the Federal Reserve System or a recognized securities dealer) will buy back the same securities ("collateral") at a predetermined price or yield. BORROWING. Each Trust may borrow money in an amount up to 33 1/3% of its total assets (including the amount borrowed), less all liabilities other than the bank or other borrowings. Each Trust may also borrow an additional 5% of its total assets for temporary defensive purposes without regard to the foregoing limitation and may also borrow for emergency purposes, for the payment of dividends, for share repurchases or for the clearance of transactions. ARM Fund may borrow money only for temporary or emergency purposes in an amount up to 10% of the value of its total assets. ARM Fund will not purchase portfolio securities while outstanding borrowings exceed 5% of the value of its total assets. ARM Fund and each Trust may borrow from an unrelated financial institution and may also borrow by entering into reverse repurchase agreements. Under a reverse repurchase agreement, ARM Fund or a Trust sells securities and agrees to repurchase them at a mutually agreed date and price. ARM Fund and each Trust may mortgage, pledge or hypothecate their assets to secure permitted borrowings. The policies set forth in this section are fundamental and may not be changed without a majority vote of ARM Fund's or the respective Trust's shares. INVESTMENT RESTRICTIONS ARM Fund and the Trusts have each adopted certain investment restrictions, which are set forth in detail in the Statement of Additional Information under "Investment Objectives, Policies and Restrictions." Fundamental restrictions of ARM Fund and the Trusts which may not be changed without a majority vote of shareholders include, among others, the following: (1) Neither ARM Fund nor any Trust will invest 25% or more of its total assets in the securities of issuers conducting their principal business activities in the same industry, provided that this limitation does not apply to securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities. Notwithstanding the foregoing, ARM Fund and each Trust may invest in private mortgage pass-through securities without regard to this limitation. (2) Neither ARM Fund nor any Trust, with respect to 75% of its total assets, will invest more than 5% of the value of its total assets (taken at market value at the time of purchase) in the outstanding securities of any one issuer, or own more than 10% of the outstanding voting securities of any one issuer, in each case other than securities issued or guaranteed by the U.S. Government or any agency or instrumentality thereof. As a nonfundamental investment restriction which may be changed at any time without shareholder approval, ARM Fund will not invest more than 5% of its total assets in the securities of issuers which, with their predecessors, have a record of less than three years' continuous operation. 26 PORTFOLIO TURNOVER Each Trust actively uses trading to benefit from yield disparities among different issues of securities or otherwise to achieve its investment objectives and policies. ARM Fund will use the same strategy. This strategy may result in a greater degree of portfolio turnover and, thus, a higher incidence of short-term capital gain than might be expected from investment companies that invest substantially all of their funds on a long-term basis. Such a strategy will also result in higher transaction costs. The cash inflows and redemptions that will result from ARM Fund operating as an open-end investment company may result in increased portfolio turnover when compared to the Trusts. It is estimated that ARM Fund's annual portfolio turnover rate will not exceed 100%. The method of calculating portfolio turnover rate is set forth in the Statement of Additional Information under "Investment Objectives, Policies and Restrictions -- Portfolio Turnover." MANAGEMENT OF THE TRUSTS AND ARM FUND BOARD OF DIRECTORS The Boards of Directors of the Trusts and the Company, which consist of the same individuals, have the primary responsibility for overseeing the overall management of the Trusts and ARM Fund and electing their officers. INVESTMENT ADVISER The Adviser has been retained under separate Investment Advisory and Management Agreements (the "Advisory Agreements") to act as the investment adviser to each Trust and to ARM Fund, subject to the authority of the respective Boards of Directors. The Advisory Agreements have been approved by the Boards of Directors of the respective Trusts and ARM Fund (including, in each case, a majority of the Directors who are not parties to the agreement, or interested persons of any such party, other than as directors of the respective Trust or ARM Fund) and the shareholders of the respective Trusts. In addition to acting as the investment adviser for the Trusts, the Adviser, which was incorporated in 1983, also serves as investment adviser to a number of other open-end and closed-end investment companies and furnishes investment advice to various concerns, including pension and profit sharing funds, corporate trusts and individuals. As of February 28, 1995, the Adviser rendered investment advice with respect to approximately $10.3 billion of assets. The Adviser is a wholly owned subsidiary of Piper Jaffray Companies Inc., a publicly held corporation which is engaged through its subsidiaries in various aspects of the financial services industry. The address of the Adviser is Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota 55402-3804. The Adviser furnishes each Trust and ARM Fund with investment advice and, in general, supervises their management and investment programs. The Adviser furnishes, at its own expense, all necessary administrative services, office space, equipment and clerical personnel for servicing the investments of the Trusts and ARM Fund, and investment advisory facilities and executive and supervisory personnel for managing their investments and effecting their portfolio transactions. In addition, the Adviser pays the salaries and fees of all officers and directors of the Trusts who are affiliated persons of the Adviser, and the Adviser will do the same with respect to ARM Fund. Under each Trust's Advisory Agreement, the Adviser receives a monthly fee which is paid at an annual rate of .35% of such Trust's average weekly net assets. For purposes of the calculation of the fee payable to the Adviser, average weekly net assets are determined on the basis of the average net assets of each Trust for each weekly period ending during the month. The net assets for each weekly period are determined by averaging the net assets on the last day of such weekly period with the net assets on the last day of the immediately preceding weekly period. Under the Advisory Agreement with the Company, the advisory fee will be .35% on the first $500 million of ARM Fund's net assets and .30% on assets in excess of $500 million. The Trusts' net 27 asset values currently are determined and published weekly, but the 1940 Act generally requires open-end funds to value their assets on each business day in order to determine the current net asset value on the basis of which their shares may be redeemed by shareholders or purchased by investors. As a result, the advisory fee with respect to ARM Fund will be calculated based on average daily net assets. Each Advisory Agreement terminates automatically in the event of its assignment. In addition, each agreement is terminable at any time, without penalty, by the Board of Directors of the respective Trust or ARM Fund, as the case may be, or by vote of a majority of the outstanding voting securities of such Trust or ARM Fund on not more than 60 days' written notice to the Adviser, and by the Adviser on 60 days' written notice to such Trust or ARM Fund. Unless sooner terminated, each agreement shall continue in effect for more than two years after its execution only so long as such continuance is specifically approved at least annually by either the Board of Directors or by a vote of a majority of the outstanding voting securities of the respective Trust or ARM Fund, provided that in either event such continuance is also approved by a vote of a majority of the directors who are not parties to such agreement, or interested persons of such parties, cast in person at a meeting called for the purpose of voting on such approval. The Adviser intends, although not required under the Advisory Agreement, to reimburse ARM Fund for the amount, if any, by which the total operating and management expenses of such Fund (including the Adviser's compensation and amounts paid pursuant to the ARM Fund's Rule 12b-1 plan (as described below), but excluding interest, taxes, brokerage fees and commissions, and extraordinary expenses) for the fiscal year ending August 31, 1996, exceed .60% of average net assets. However, the Adviser will agree to cap expenses at .60% of average daily net assets only if at least three of the Trusts approve the proposed Merger. If less than three Trusts approve the Merger, the Adviser will not agree to limit expenses to .60% of average daily net assets. In addition, even if three or more Trusts approve the Merger, the Adviser's limitation on expenses is voluntary and may be modified or discontinued at any time after August 31, 1996, at the Adviser's discretion. In the event of discontinuance of this arrangement, ARM Fund will still be subject to the laws of certain states, which require that if a mutual fund's expenses (including advisory fees but excluding interest, taxes, brokerage commissions and extraordinary expenses) exceed certain percentages of average net assets, the fund must be reimbursed for such excess expenses. The Advisory Agreement provides that the Adviser must make any expense reimbursements to ARM Fund required under state law. The laws of California provide that aggregate annual expenses of a mutual fund shall not normally exceed 2 1/2% of the first $30 million of the average net assets, 2% of the next $70 million of the average net assets and 1 1/2% of the remaining average net assets. Such expenses include the Adviser's compensation, but exclude interest, taxes, brokerage fees and commissions, extraordinary expenses and amounts paid under the Rule 12b-1 plan. The Adviser does not believe that the laws of any other state in which ARM Fund's shares may be offered for sale contain expense reimbursement requirements. PORTFOLIO MANAGEMENT Michael P. Jansen and Thomas S. McGlinch have been primarily responsible for the management of each Trust's portfolio since February 10, 1995 and October 24, 1994, respectively, and they also will be primarily responsible for the management of ARM Fund's portfolio. Mr. Jansen has been a Senior Vice President of the Adviser since October 14, 1993, prior to which he had been a Managing Director of the Distributor since 1987. He has been an Executive Vice President and Director of Piper Mortgage Acceptance Corporation, a wholly owned subsidiary of Piper Jaffray Companies Inc., since 1991 and served as an Executive Vice President and Director of Premier Acceptance Corporation, a wholly owned subsidiary of Piper Jaffray Companies Inc. issuing mortgage-backed securities, from 1988 to October 1994. Mr. McGlinch is a Vice President and fixed-income portfolio manager for the Adviser. Prior to joining the Adviser in 1992, Mr. McGlinch was an institutional mortgage-backed securities trader for the Distributor during 1992. From 1988 to January 1992, Mr. McGlinch was a specialty products trader at FBS Investment Services, Inc. He is a C.F.A. with an M.B.A. from the University of St. Thomas. 28 ADMINISTRATION AGREEMENT The Adviser also acts as each Trust's administrator pursuant to an Administration Agreement between the Adviser and such Trust. Under each Administration Agreement, the Adviser is required to manage the respective Trust's business affairs, supervise its overall day-to-day operations (other than providing investment advice) and provide other administrative services. For the services rendered to the Trusts and related expenses borne by the Adviser in its capacity as the Trusts' administrator and not paid by the Trusts, each Trust currently pays the Adviser an administrative fee, calculated and paid monthly, at an annual rate of .15% of such Trust's average weekly net assets. ARM Fund will not enter into an Administration Agreement with the Adviser. The Adviser will continue to provide the services it currently provides under the Administration Agreement, without additional compensation. PLAN OF DISTRIBUTION An open-end investment company, unlike a closed-end investment company, is permitted to finance the distribution of its shares by adopting a plan of distribution pursuant to Rule 12b-1 under the 1940 Act. Rule 12b-1(b) under the 1940 Act provides that any payments made by any mutual funds in connection with financing the distribution of their shares may only be made pursuant to a written plan describing all aspects of the proposed financing of distribution and also requires that all agreements with any person relating to the implementation of the plan must be in writing. Because some of the payments to be made by ARM Fund are distribution expenses within the meaning of Rule 12b-1, the Company has entered into an Underwriting and Distribution Agreement with the Distributor pursuant to a Distribution Plan adopted in accordance with Rule 12b-1. Pursuant to the provisions of the Distribution Plan, ARM Fund will pay a monthly service fee to the Distributor at an annual rate of .15% of such Fund's average daily net assets in connection with servicing of the Fund's shareholder accounts. This fee is intended to compensate the Distributor for the ongoing servicing and/or maintenance of ARM Fund shareholder accounts and the costs incurred in connection therewith (the "Shareholder Servicing Costs"). Shareholder Servicing Costs include all expenses of the Distributor incurred in connection with providing shareholder liaison services, including, but not limited to, an allocation of the Distributor's overhead and payments made to persons, including employees of the Distributor, who respond to inquiries of shareholders regarding their ownership of shares or their accounts with ARM Fund and provide information on shareholders' investments. The Distributor will use all or a portion of its Rule 12b-1 service fee to make payments to investment executives of the Distributor and broker-dealers which have entered into sales agreements with the Distributor. If shares of ARM Fund are sold by a representative of a broker-dealer other than the Distributor, the broker-dealer is paid .15% of the average daily net assets of the Fund attributable to shares sold by the broker-dealer's representative. If shares of ARM Fund are sold by an investment executive of the Distributor, compensation is paid to the investment executive in the manner set forth in a written agreement, in an amount not to exceed .15% of the average daily net assets of ARM Fund attributable to shares sold by the investment executive. These payments will be made with respect to shares acquired in the Merger. TRANSFER AGENT AND DIVIDEND DISBURSING AGENT Investors Fiduciary Trust Company ("IFTC"), 127 West Tenth Street, Kansas City, Missouri 64104, (800) 874-6205, will serve as ARM Fund's custodian, dividend disbursing agent, transfer agent, registrar and accounting agent. IFTC also serves in these capacities for each Trust. SHARE PURCHASE, EXCHANGE AND REDEMPTION PROCEDURES SHARE PURCHASES GENERAL. The Trusts' common shares currently trade on the New York and Chicago Stock Exchanges. Shares of ARM Fund will be offered to the public on a continuous basis and will not be 29 listed on any stock exchange. Common Shares of the Trusts may only be purchased through a broker. Following the Merger, ARM Fund shares may be purchased at the public offering price from the Distributor and from other broker-dealers who have sales agreements with the Distributor. The address of the Distributor is that of ARM Fund and the Trusts. PURCHASE PRICE. Shares of the Trusts may be purchased at their current market price (which may be higher or lower than their current net asset value) plus a brokerage commission. Following the Merger, shares of ARM Fund will be available for purchase at the net asset value per share next calculated after receipt of an order by an investor's investment executive, plus a maximum front end sales charge of 1.50% of the offering price (1.52% of the net asset value) on purchases of less than $100,000. The sales charge will be reduced on a graduated scale on purchases of $100,000 or more. In connection with purchases of $500,000 or more, there is no initial sales charge; however, a .2% contingent deferred sales charge will be imposed in the event of a redemption transaction occurring within 24 months following such a purchase. There is no front end or contingent deferred sales charge for shares acquired as a result of the Merger. Additional information on sales charges on ARM Fund shares, ways in which investors may qualify for a reduced sales charge, and information on special purchase plans is set forth in Appendix C. ARM Fund will generally require a minimum initial investment of $250. This minimum initial investment is waived for the Merger. There is no minimum for subsequent investments. REDEMPTIONS Shares of the Trusts may be sold through broker-dealers on any business day. A commission is generally charged for each sale. After the Merger, shares of ARM Fund will be redeemable, in whole or in part, on any business day at the net asset value next calculated after the receipt of redemption instructions in good form by an investor's investment executive. No fee or other charge is imposed on the redemption of ARM Fund shares, except that, as mentioned above, a contingent deferred sales charge will be imposed upon the redemption of certain shares initially purchased without a sales charge. No contingent deferred sales charge will be imposed on sales of shares acquired as a result of the Merger. ARM Fund reserves the right to redeem an account at any time the net asset value of that account falls below $200 as the result of a redemption or exchange request. Shareholders will be notified in writing prior to any such redemption and will be allowed 30 days to make additional investments before the redemption is processed. Additional information regarding redemption procedures, contingent deferred sales charges and the payment of redemption procedures is set forth in Appendix C. EXCHANGES Shareholders of ARM Fund will be able to exchange their shares for shares of any other mutual fund managed by the Adviser that is open to new investors. All exchanges will be subject to the eligibility of share purchases in an investor's state as well as the minimum investment requirements and any other applicable terms in the prospectus of the fund being acquired. Exchanges will be made on the basis of the net asset values of the funds involved, except that investors exchanging into a fund which has a higher sales charge must pay the difference. Additional information regarding exchange procedures is set forth in Appendix C. OTHER SHAREHOLDER SERVICES ARM Fund shareholders will have other shareholder services available, such as an automatic monthly investment program, a systematic withdrawal plan, telephone transaction privileges, the ability to reinvest shares within 30 days of a redemption without payment of an additional sales charge, and the ability to direct that income dividends and capital gains distributions on ARM Fund shares be invested in any other mutual fund managed by the Adviser (other than a money market fund) that is offered in the shareholder's state. Additional information regarding these shareholder services is set forth in Appendix C. 30 VALUATION OF SHARES The Trusts currently calculate the net asset values of their shares on a weekly basis as of the primary closing time on the New York Stock Exchange (the "Exchange") (currently 4:00 p.m. New York time). ARM Fund will compute its net asset value on each day the Exchange is open for business, provided that the net asset value need not be determined for ARM Fund on days on which changes in the value of its portfolio securities will not materially affect the current net asset value of the Fund's shares and days when no Fund shares are tendered for redemption and no order for Fund shares is received. The calculation is made as of the regular close of the Exchange after ARM Fund has declared any applicable dividends. The net asset value per share for each Trust and for ARM Fund is determined by dividing the value of the securities owned by the Trust or Fund plus any cash and other assets (including interest accrued and dividends declared but not collected) less all liabilities by the number of Trust or Fund shares outstanding. For the purposes of determining the aggregate net assets of the Trusts or ARM Fund, cash and receivables will be valued at their face amounts. Interest will be recorded as accrued. The value of certain fixed-income securities will be provided by an independent pricing service, which determines these valuations at a time earlier than the close of the Exchange. Pricing services consider such factors as security prices, yields, maturities, call features, ratings and developments relating to specific securities in arriving at securities valuations. Occasionally events affecting the value of such securities may occur between the time valuations are determined and the close of the Exchange. If events materially affecting the value of such securities occur during such period, or if management determines for any other reason that valuations provided by the pricing service are inaccurate, such securities will be valued at their fair value according to procedures decided upon in good faith by the Board of Directors. In addition, any securities or other assets of a Trust or the Fund for which market prices are not readily available will be valued at their fair value in accordance with such procedures. DIVIDENDS, DISTRIBUTIONS AND TAXES It is the practice of each Trust to distribute monthly dividends from its net investment income. Each Trust attempts to maintain a level rate of monthly distributions based on what the Adviser believes the Trust's annualized average net investment income will be. Each Trust may at times pay out more or less than the entire amount of net investment income in any particular period in order to permit the Trust to maintain this stable level of distributions. Any such amount retained by a Trust is available to stabilize future distributions. As a result, the distributions paid by a Trust for any particular period may be more or less than the amount of net investment income earned by the Trust during such period. Monthly distributions may also include amounts attributable to net short-term capital gains if necessary to maintain a stable level of distributions. This may result in a portion of the monthly distributions constituting a return of capital to the extent the Trust subsequently realizes capital loss. Net short-term capital gains not previously distributed and net long-term gains, if any, will be distributed at least once annually. The net investment income of ARM Fund will be declared as dividends daily and paid monthly. Each daily dividend will be payable to ARM Fund shareholders of record at the time of its declaration. The term "shareholders of record" includes holders of shares purchased for which payment has been received by the Distributor or IFTC, as appropriate, and excludes holders of shares redeemed on that day. Shares redeemed will earn dividends through the day prior to the day of redemption. ARM Fund will not attempt to stabilize distributions, and intends to distribute to its shareholders substantially all of the net investment income earned during any period. Thus, ARM Fund dividends can be expected to vary from month to month. 31 Shareholders of each Trust may elect to participate in a dividend reinvestment plan and have dividends and capital gains distributions reinvested automatically in shares of such Trust. Reinvestments under the Trusts' dividend reinvestment plans are made at market price plus brokerage commissions, which may be more or less than a Trust's net asset value per share. All net investment income dividends and net realized capital gains distributions for ARM Fund will be payable in additional shares of ARM Fund at net asset value unless a shareholder notifies his or her investment executive of an election to receive cash. Shareholders may elect either to receive income dividends in cash and capital gains in additional ARM Fund shares at net asset value, or to receive both income dividends and capital gains in cash. ARM Fund shareholders also may direct that income dividends and capital gains distributions be invested in another mutual fund managed by the Adviser, provided the fund is open to new investors and is offered in the shareholder's state. Any such investment will be made at net asset value and will not be subject to a minimum investment amount, except that the shareholder must hold shares in such fund (including the shares being acquired with the dividend or distribution) with a value at least equal to such fund's minimum initial investment amount. The taxable status of income dividends and/or net capital gains distributions is not affected by whether they are reinvested or paid in cash. Each Trust has qualified as a regulated investment company under Subchapter M of the Code and has not been subject to federal income tax on taxable income and capital gains which have been distributed to shareholders, and ARM Fund intends to so qualify as well. If ARM Fund so qualifies, it will not be liable for federal income taxes to the extent it distributes its taxable income to shareholders. Distributions by ARM Fund generally will be taxable to shareholders, whether received in cash or additional shares of the Fund (or, at the option of the shareholder, shares of another mutual fund managed by the Adviser). Distributions of net capital gains (designated as "capital gain dividends") are taxable to shareholders as long-term capital gains, regardless of the length of time the shareholder has held the shares of ARM Fund. ARM Fund will send written notices to shareholders regarding the tax status of all distributions made during each year. A shareholder will recognize a capital gain or loss upon the sale or exchange of ARM Fund shares if, as is normally the case, the shares are capital assets in the shareholder's hands. This capital gain or loss will be long-term if the shares have been held for more than one year. The foregoing relates to federal income taxation as in effect as of the date of this Joint Proxy Statement/Prospectus. For a more detailed discussion of the federal income tax consequences of investing in shares of ARM Fund, see "Taxation" in the Statement of Additional Information. Shareholders should also check the consequences of their local and state tax laws. SURRENDER OF APPROVING TRUST SHARE CERTIFICATES As soon as practicable after the Effective Time, IFTC, the transfer agent for the Trusts and ARM Fund, will send a notice and transmittal form to each record holder at the Effective Time of Approving Trust common shares advising such holder of the effectiveness of the Merger and of the procedure for surrendering to IFTC his or her certificates formerly evidencing common shares of the Approving Trust. APPROVING TRUST SHAREHOLDERS SHOULD NOT SEND IN THEIR SHARE CERTIFICATES UNTIL THEY RECEIVE THE LETTER OF TRANSMITTAL FORM AND INSTRUCTIONS FROM IFTC. Ownership of ARM Fund shares by former shareholders of an Approving Trust will be recorded electronically, and ARM Fund will issue confirmations to such shareholders setting forth the number and net asset value of ARM Fund shares held by such shareholders. ARM Fund will not issue share certificates. Any share certificates not submitted to IFTC within three months of the Effective Time will be automatically deemed submitted and then canceled and recorded in book-entry form. 32 PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS The Adviser selects brokers and futures commission merchants to use for the Trusts' and ARM Fund's portfolio transactions. In making its selection, the Adviser may consider a number of factors, which are more fully discussed in the Statement of Additional Information, including, but not limited to, research services, the reasonableness of commissions and quality of services and execution. A broker's sale of shares of any fund managed by the Adviser may also be considered a factor if the Adviser is satisfied that a Trust or the Fund would receive from that broker the most favorable price and execution then available for a transaction. Portfolio transactions for the Trusts or ARM Fund may be effected through the Distributor on a securities exchange in compliance with Section 17(e) of the 1940 Act. For more information, see "Portfolio Transactions and Allocation of Brokerage" in the Statement of Additional Information. PENDING LITIGATION On October 20, 1994, Herman D. Gordon filed a complaint purporting to be a class action in the U.S. District Court for the District of Minnesota against DDJ and EDJ, the Adviser, the Distributor, Piper and certain associated individuals (the "Gordon Litigation"). The complaint (No. 3-94-CV-1377) alleges that the defendants violated certain federal securities laws by making materially misleading statements in prospectuses and other disclosures concerning risks associated with an investment in the Trusts and compliance with the Trusts' investment policies. Damages are being sought in an unspecified amount. The defendants intend to defend the Gordon Litigation vigorously. On April 14, 1995, Frank Donio, I.R.A. and other plaintiffs filed a complaint purporting to be a class action in the U.S. District Court for the District of Minnesota against BDJ, CDJ, DDJ and EDJ, the Adviser, the Distributor, Piper and certain associated individuals (the "Donio Litigation"). The complaint alleges that the defendants violated certain federal and state securities laws by making materially misleading statements in prospectuses and other disclosures concerning risks associated with investing in the Trusts, compliance with the Trusts' investment policies, and the reasons for proposing and the benefits to be obtained by shareholders from the Merger and by allegedly breaching their fiduciary duties. Damages are being sought in an unspecified amount. The defendants intend to defend the Donio Litigation vigorously. In the event that the shareholders of any of the Trusts approve the Merger, the Company may be deemed to be a successor by merger to such Trusts and, as such, may succeed to their liabilities, including damages sought in the Litigations. Piper and the Adviser have agreed, pursuant to an indemnification agreement between and among Piper, the Adviser and the Company (the "Indemnification Agreement"), to indemnify the Company against any losses incurred in connection with such Litigations. A copy of the Indemnification Agreement is attached as Appendix E to this Joint Proxy Statement/Prospectus. In addition to the complaint against DDJ and EDJ described above, complaints have also been filed in U.S. District Court against the Adviser and the Distributor relating to several other investment companies for which the Adviser acts or has acted as investment adviser or subadviser. These lawsuits do not involve the Trusts. The Adviser and Distributor do not believe that the lawsuits will have a material adverse effect upon their ability to perform under their agreements with the Trusts or ARM Fund, and they intend to defend the lawsuits vigorously. DISSENTERS' RIGHTS Pursuant to Sections 302A.471 and 302A.473 of the Minnesota Business Corporation Act (the "MBCA Sections"), record holders of shares of the Trusts on , 1995 are entitled to assert dissenters' rights in connection with the Merger and obtain payment of the "fair value" of their shares, provided that such shareholders comply with the requirements of the MBCA Sections. NOTWITHSTANDING THE PROVISIONS OF THE MBCA SECTIONS, THE DIVISION OF INVESTMENT MANAGEMENT OF THE COMMISSION HAS TAKEN THE POSITION THAT ADHERENCE TO STATE APPRAISAL PROCEDURES BY A REGISTERED INVESTMENT 33 COMPANY ISSUING REDEEMABLE SECURITIES WOULD CONSTITUTE A VIOLATION OF RULE 22C-1 UNDER THE 1940 ACT. THIS RULE PROVIDES THAT NO OPEN-END INVESTMENT COMPANY MAY REDEEM ITS SHARES OTHER THAN AT NET ASSET VALUE NEXT COMPUTED AFTER RECEIPT OF A TENDER OF SUCH SECURITY FOR REDEMPTION. IT IS THE VIEW OF THE DIVISION OF INVESTMENT MANAGEMENT THAT RULE 22C-1 SUPERSEDES APPRAISAL PROVISIONS IN STATE STATUTES. In the interests of ensuring equal valuation of all interests in the Trusts, the Company will determine dissenters' rights in accordance with the Division interpretation. Accordingly, in the event that any shareholder elects to exercise dissenters' rights under Minnesota law, the Company intends to submit this question to a court of competent jurisdiction. In such event, a dissenting shareholder would not receive any payment until disposition of any such court proceeding. It should be emphasized that Trust shareholders may sell their shares in the open market prior to the Effective Time, provided that it is expected that trading of shares will be suspended [time period] prior to the Effective Time. In addition, shareholders will be able to redeem ARM Fund shares immediately after the Effective Time at their net asset value. A summary of the statutory procedures to be followed by Trust shareholders electing to exercise their dissenters' rights, along with copies of the relevant MBCA Sections, is set forth in Appendix D. Shareholders who wish to assert their dissenters' rights or who wish to preserve the right to do so should review the MBCA Sections carefully, since failure to comply with the procedures set forth in the MBCA Sections will result in the loss of such dissenters' rights. VOTE REQUIRED Approval of the Merger by a Trust requires the affirmative vote of the holders of at least two-thirds of such Trust's outstanding common shares. Unless otherwise instructed, the proxies will vote for the Merger. If the shareholders of any Trust do not approve the proposed Merger, or the Merger is not consummated for any other reason, then such Trusts will continue their current operations. RECOMMENDATION OF THE BOARD OF DIRECTORS The Board of Directors has determined that the transactions contemplated by the Merger Agreement would be in the best interests of each of the Trusts and their respective shareholders and that the interests of the existing shareholders of each of the Trusts would not be diluted as a result of the Merger. Accordingly, the Board of Directors recommends that shareholders of each of the Trusts vote FOR the proposed Merger. PROPOSAL NO. 2 -- ELECTION OF DIRECTORS Shareholders of each Trust are being asked to elect Directors in case their Trust does not participate in the Merger and remains a separate entity. If their Trust participates in the Merger, such shareholders will become shareholders of ARM Fund, a series of the Company. The Directors of the Company are the same individuals listed below for election as Directors of the Trusts. The Bylaws of each Trust provide that the shareholders have the power to fix the number of Directors. The Directors recommend that the size of the Board of Directors of each Trust be maintained at seven. It is intended that the enclosed Proxy will be voted for the election of the seven persons named below as Directors of each Trust unless such authority has been withheld in the Proxy. The term of office of each person elected will be until the next annual meeting of shareholders or until his or her successor is duly elected and shall qualify (or, if a Trust participates in the Merger, until the earlier Effective Time of the Merger). Pertinent information regarding each nominee for the past five years is set forth following his or her name below. Each of the nominees also serves as a Director of each of the other closed-end and open-end investment companies managed by the Adviser (except that Mr. Bennett does not serve as a Director of Piper Global Funds Inc.). Each of the nominees, other than Mr. Latimer and Ms. Emmerich, has served as a Director of the Trusts since each Trust commenced 34 operations. Mr. Latimer has served as a Director of BDJ and CDJ since October 23, 1991 and as a Director of DDJ and EDJ since their commencement of operations. Ms. Emmerich has served as a Director of each Trust since May 18, 1993.
NAME AGE PRINCIPAL OCCUPATION - ----------------- --- ---------------------------------------------------------------------------------------------------- David T. Bennett 54 Of counsel to the law firm of Gray, Plant, Mooty, Mooty & Bennett, P.A., located in Minneapolis, Minnesota. Mr. Bennett also serves on the board of directors of a number of privately held and nonprofit corporations. Jaye F. Dyer 68 President of Dyer Management Company, a private management company, since January 1, 1991; prior thereto, Mr. Dyer was President and Chief Executive Officer of Dyco Petroleum Corporation, a Minneapolis-based oil and natural gas development subsidiary of Arkla, Inc., from 1971, when he founded the company, until March 1, 1989, and Chairman of the Board until December 31, 1990. Mr. Dyer serves on the board of directors of Northwestern National Life Insurance Company, The ReliaStar Financial Corp. (the holding company of Northwestern National Life Insurance Company) and various privately held and nonprofit corporations. William H. Ellis* 53 President of Piper Jaffray Companies Inc. and Piper Jaffray Inc. since September 1982 and Chief Operating Officer of the same two companies since August 1983; Director and Chairman of the Board of the Adviser since October 1985 and President of the Adviser since December 1994. Karol D. Emmerich 46 President of The Paraclete Group, a consultant to nonprofit and other organizations, since May 1993; prior thereto, Ms. Emmerich was Vice President and Treasurer of Dayton Hudson Corporation from 1980 to May 1993 and Chief Accounting Officer from 1989 to May 1993. Ms. Emmerich also serves on the board of directors of a number of privately held and nonprofit corporations. Luella G. 58 Ms. Goldberg serves on the board of directors of Northwestern National Life Insurance Company (since Goldberg 1976), The ReliaStar Financial Corp. (since 1989), TCF Bank Savings fsb (since 1986), TCF Financial Corporation, the holding company of TCF Bank Savings fsb (since 1988) and Hormel Foods Corp. (since 1993). Ms. Goldberg also serves as a Trustee of Wellesley College and as a director of a number of other organizations, including the Minnesota Orchestral Association and the University of Minnesota Foundation. Ms. Goldberg was Chairman of the Board of Trustees of Wellesley College from 1985 to 1993 and acting President from July 1, 1993 to October 1, 1993. John T. Golle 51 Chairman and Chief Executive Officer of Education Alternatives, Inc., a company in the business of providing private management for public schools, since 1986. Mr. Golle also serves on the board of directors of Children's Broadcasting Corporation.
35
NAME AGE PRINCIPAL OCCUPATION - ----------------- --- ---------------------------------------------------------------------------------------------------- George Latimer 59 Director, Special Actions Office, Office of the Secretary, Department of Housing and Urban Development since 1993; prior thereto, Mr. Latimer had been Dean of Hamline Law School, St. Paul, Minnesota, since 1990. Mr. Latimer also serves on the board of directors of Digital Biometrics, Inc. and Payless Cashways, Inc. - ------------------------ *Denotes Directors who are "interested persons" (as defined by the 1940 Act) of the Trusts. Mr. Ellis is deemed an "interested person" of the Trusts because of his positions with the Adviser and/or its affiliates.
Except as indicated above, the Directors of the Trusts are not directors of any other "reporting companies." As of , 1995, the officers and Directors of each Trust as a group beneficially owned less than 1% of the outstanding shares of each Trust. The Board of Directors of each Trust has established an Audit Committee, currently consisting of Mr. Dyer, Ms. Emmerich and Ms. Goldberg, who serves as its chairperson. The Audit Committee met two times during the fiscal year ended August 31, 1994. The functions to be performed by the Audit Committee are to recommend annually to the Board a firm of independent certified public accountants to audit the books and records of the Trusts for the ensuing year; to monitor that firm's performance; to review with the firm the scope and results of each audit and determine the need, if any, to extend audit procedures; to confer with the firm and representatives of the Trusts on matters concerning the Trusts' financial statements and reports, including the appropriateness of its accounting practices and of its financial controls and procedures; to evaluate the independence of the firm; to review procedures to safeguard portfolio securities; to review the purchase by the Trusts from the firm of non-audit services; to review all fees paid to the firm; and to facilitate communications between the firm and the Trusts' officers and Directors. The Board of Directors also has a Committee of the Independent Directors, consisting of Mr. Bennett, who serves as chairperson of such committee, Messrs. Dyer, Golle and Latimer, Ms. Emmerich and Ms. Goldberg, and a Derivatives Subcommittee consisting of Ms. Emmerich, who serves as chairperson of such committee, Ms. Goldberg and Mr. Dyer. Since the formation of these committees on November 1, 1994, the Committee of the Independent Directors has met four times and the Derivatives Subcommittee has met twice. The functions of the Committee of the Independent Directors are: (a) recommendation to the full Board of approval of any management, advisory, sub-advisory and/or administration agreements; (b) recommendation to the full Board of approval of any underwriting and/or distribution agreements; (c) review of the fidelity bond and premium allocation; (d) review of errors and omissions and any other joint insurance policies and premium allocation; (e) review of, and monitoring of compliance with, procedures adopted pursuant to certain rules promulgated under the 1940 Act; and (f) such other duties as the independent directors shall, from time to time, conclude are necessary or appropriate to carry out their duties under the 1940 Act. The functions of the Derivatives Subcommittee are: (i) to oversee practices, policies and procedures of the Adviser in connection with the use of derivatives; (ii) to receive periodic reports from management and independent accountants; and (iii) to report periodically to the Committee of the Independent Directors and the Board of Directors. The Trusts do not have nominating or compensation committees. During the fiscal year ended August 31, 1994, there were nine meetings of the Board of Directors of each Trust. All Directors attended at least 75% of those meetings of the Board of Directors and committees of which they were members that were held while they were serving on the Board of Directors or on such committee. No compensation is paid by the Trusts to any Directors who are officers or employees of the Adviser or any of its affiliates. The Trusts, together with all closed-end investment companies managed by the Adviser, pay each of the other Directors an aggregate quarterly retainer of $5,000, which is 36 allocated among the Trusts and such other investment companies on the basis of each company's net assets. In addition, each Trust pays each such Director a fee for each in-person meeting of the Board of Directors he or she attends. Such fee is based on the net asset value of the Trust and ranges from $250 (for net assets of less than $200 million) to $1,500 (for net assets of $5 billion or more). Members of the Audit Committee who are not affiliated with the Adviser receive $1,000 per meeting attended ($2,000 for the chairperson of such Committee), with such fee being allocated among all closed-end and open-end investment companies managed by the Adviser on the basis of relative net asset values. Members of the Committee of the Independent Directors and the Derivatives Committee currently receive no additional compensation. Directors are reimbursed for expenses incurred in connection with attending meetings. The following table sets forth the aggregate compensation received by each Director from each Trust during the fiscal year ended August 31, 1994, as well as the total compensation received by each Director from the Trusts and all other open-end and closed-end investment companies managed by the Adviser or an affiliate of the Adviser during the calendar year ended December 31, 1994. Directors who are officers or employees of the Adviser or any of its affiliates did not receive any such compensation and are not included in the table. No other individuals received compensation from the Trusts during the fiscal year ended August 31, 1994.
PENSION OR AGGREGATE COMPENSATION RETIREMENT TOTAL FROM THE TRUSTS BENEFITS ACCRUED ESTIMATED ANNUAL COMPENSATION ------------------------------------------ AS PART BENEFITS UPON FROM FUND DIRECTOR BDJ CDJ DDJ EDJ OF FUND EXPENSE RETIREMENT COMPLEX* - ------------------------------- --------- --------- --------- --------- ------------------ ---------------- ------------- David T. Bennett............... $ 2,943 $ 2,943 $ 3,943 $ 2,943 None None $ 57,500 Jaye F. Dyer................... $ 2,996 $ 2,996 $ 3,996 $ 2,996 None None $ 61,500 Karol D. Emmerich.............. $ 2,996 $ 2,996 $ 3,996 $ 2,996 None None $ 61,500 Luella G. Goldberg............. $ 3,049 $ 3,049 $ 4,049 $ 3,049 None None $ 63,500 John T. Golle.................. $ 2,943 $ 2,943 $ 3,943 $ 2,943 None None $ 59,500 George Latimer................. $ 2,943 $ 2,943 $ 3,943 $ 2,943 None None $ 59,500 - ------------------------ *Consists of 26 open-end and closed-end investment companies managed by the Adviser or an affiliate of the Adviser, including the Trusts. Each director included in the table, other than Mr. Bennett, serves on the board of each such open-end and closed-end investment company. Mr. Bennett serves on the board of 25 of such open-end and closed-end investment companies.
VOTE REQUIRED The vote of a majority of shares of each Trust represented at the meeting, provided at least a quorum (a majority of the outstanding shares) is represented in person or by Proxy, is sufficient for the election of the above nominees. Unless otherwise instructed, the proxies will vote for the above seven nominees. In the event any of the above nominees are not candidates for election at the meeting, the proxies will vote for such other persons as the Board of Directors may designate. Nothing currently indicates that such a situation will arise. RECOMMENDATION OF THE BOARD OF DIRECTORS The Board of Directors recommends that shareholders of each Trust vote FOR the election as Directors of the seven nominees named in this Joint Proxy Statement/Prospectus. PROPOSAL NO. 3 -- RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS The 1940 Act provides that every registered investment company shall be audited at least once each year by independent public accountants selected by a majority of the directors of the investment company who are not interested persons of the investment company or its investment adviser. The 1940 Act requires that the selection be submitted for ratification or rejection by the shareholders at their next annual meeting following such selection. 37 The Directors, including a majority who are not interested persons of the Adviser or the Trusts, have selected KPMG Peat Marwick LLP to be each Trust's independent public accountants for the fiscal year ending August 31, 1995. KPMG Peat Marwick LLP has no direct or material indirect financial interest in the Trusts or in the Adviser, other than receipt of fees for services to the Trusts. KPMG Peat Marwick LLP also serves as the independent public accountants for each of the other investment companies managed by the Adviser. KPMG Peat Marwick LLP has been the independent public accountants for each Trust since each commenced operations. Representatives of KPMG Peat Marwick LLP are expected to be present at the meeting. Such representatives will be given the opportunity to make a statement to the shareholders if they desire to do so and are expected to be available to respond to any questions that may be raised at the meeting. VOTE REQUIRED The affirmative vote of at least a majority of the shares present, in person or by proxy, at the Meeting is required for ratification of the selection of KPMG Peat Marwick LLP as each Trust's independent accountants. Unless otherwise instructed, the proxies will vote for the ratification of the selection of KPMG Peat Marwick LLP as each Trust's independent public accountants. RECOMMENDATION OF THE BOARD OF DIRECTORS The Board of Directors recommends that shareholders of each Trust vote FOR the ratification of the selection of KPMG Peat Marwick LLP as independent accountants for such Trust. PROPOSALS FOR THE NEXT ANNUAL MEETING Any proposal by a shareholder to be considered for presentation at the next Annual Meeting must be received at the Trusts' offices, Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota 55402, no later than , 1996. Each Trust approving Proposal One, however, will be merged into ARM Fund. It is unlikely that ARM Fund will hold a 1996 shareholders' meeting. LEGAL MATTERS Certain legal matters in connection with the common shares of ARM Fund to be issued pursuant to the Merger will be passed upon by Dorsey & Whitney P.L.L.P., Minneapolis, Minnesota. FINANCIAL STATEMENTS AND EXPERTS The audited statements of assets and liabilities, including the schedules of investments in securities, of BDJ, CDJ, DDJ and EDJ as of August 31, 1994 and the related statements of operations and cash flows for the year then ended, the statements of changes in net assets for each of the fiscal years in the two-year period then ended, and the financial highlights, have been incorporated by reference into this Joint Proxy Statement/Prospectus in reliance on the report of KPMG Peat Marwick LLP, independent auditors for each of the Trusts, given on the authority of such firm as experts in accounting and auditing. In addition, the unaudited financial statements of BDJ, CDJ, DDJ and EDJ for the six-month period ended February 28, 1995, as included in the Trusts' semi-annual report, are incorporated herein by reference. AVAILABLE INFORMATION Each Trust is subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and the 1940 Act, and in accordance therewith is required to file reports, proxy statements and other information with the Commission. Any such reports, proxy statements and other information can be inspected and copied at the public reference facilities of the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Midwest Regional Office, Suite 1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661-2511. Copies of such materials can be obtained from the Public Reference Branch, Office of Consumer Affairs and Information Services of the Commission at 450 Fifth Street, N.W., Washington, 38 D.C. 20549, at prescribed rates. The common shares of the Trusts are listed on the New York Stock Exchange, and such reports, proxy statements and other information concerning the Trusts can also be inspected at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005, and at the Chicago Stock Exchange, One Financial Plaza, 440 S. LaSalle Street, Chicago, Illinois 60605. ARM Fund has filed with the Commission a registration statement on Form N-14 (referred to herein, together with all amendments and exhibits, as the "Registration Statement") under the Securities Act of 1933, as amended, relating to ARM Fund shares to be issued pursuant to the Merger. This Joint Proxy Statement/Prospectus and the related Statement of Additional Information do not contain all of the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information with respect to ARM Fund shares to be issued pursuant to the Merger, reference is hereby made to the Registration Statement. Statements contained in the Joint Proxy Statement/Prospectus and the related Statement of Additional Information as to the content of any contract or any other document referred to are not necessarily complete, and in each instance reference is made to the copy of such contract or other document included as an Appendix hereto or filed as an exhibit to the Registration Statement. Based on Trust records and other information, the Trusts believe that all SEC filing requirements applicable to their Directors, officers, Adviser and companies affiliated with the Adviser, pursuant to Section 16(a) of the Securities Exchange Act of 1934, as amended, with respect to the Trusts' fiscal year ending August 31, 1994, were satisfied. The information in this Joint Proxy Statement/Prospectus concerning ARM Fund has been furnished by ARM Fund, and the information concerning each of the Trusts has been furnished by such Trust. This Joint Proxy Statement/Prospectus constitutes a prospectus of ARM Fund with respect to ARM Fund shares issued pursuant to the Merger. OTHER MATTERS At the time of the preparation of this Joint Proxy Statement/Prospectus, management has not been informed of any matters that will be presented for action at the Meeting other than the proposals specifically set forth in the Notice of Meeting. If other matters are properly presented to the Meeting for action, it is intended that the persons named in the Proxy will vote or refrain from voting in accordance with their best judgment on such matters. By Order of the Board of Directors -------------------------------------- SECRETARY , 1995 39 APPENDIX A AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER (the "Agreement") is made as of this day of , 1995, by and among American Adjustable Rate Term Trust Inc. -- 1996 ("BDJ"), American Adjustable Rate Term Trust Inc. -- 1997 ("CDJ"), American Adjustable Rate Term Trust Inc. -- 1998 ("DDJ"), and American Adjustable Rate Term Trust Inc. -- 1999 ("EDJ") (BDJ, CDJ, DDJ and EDJ are sometimes referred to herein collectively as the "Trusts" or individually as a "Trust"), and Jaffray Funds Inc. (hereinafter referred to as the "Company"), each of which is a Minnesota corporation. This Agreement is intended to be and is adopted as a plan of reorganization pursuant to Section 368(a)(1) of the Internal Revenue Code of 1986, as amended (the "Code"). WITNESSETH: WHEREAS, the Company is an open-end management investment company registered with the Securities and Exchange Commission (the "SEC") under the Investment Company Act of 1940, as amended (the "1940 Act"); WHEREAS, the Company may offer its common shares in multiple series, each of which represents a separate and distinct portfolio of assets and liabilities; WHEREAS, certain of the authorized shares of the Company have been designated as Series A common shares, which are the shares of ARM Fund (such shares sometimes are hereinafter referred to as "ARM Fund common shares"); WHEREAS, each of the Trusts is a registered, closed-end management investment company registered with the SEC under the 1940 Act; WHEREAS, the Boards of Directors of the Company and each of the Trusts have determined that it is advisable and in the best interests of their respective corporations and shareholders to merge into a single corporation by merging each Trust into the Company, whereupon the common shares of each Trust shall be converted into the Company's ARM Fund common shares; NOW, THEREFORE, in consideration of the premises and of the covenants and agreements hereinafter set forth, the parties hereto covenant and agree as follows: 1. THE MERGER 1.1 Subject to the terms and conditions herein set forth and on the basis of the representations and warranties contained herein, the Company and each Trust agrees that each Trust shall be merged with and into the Company (hereinafter, the "Merger") as of the effective time provided for in Section 3.01 (the "Effective Time"). The Merger shall be conducted in accordance with Minnesota Statutes Section 302A.601, Subd. 1. The Company shall be the surviving corporation and shall be governed by the laws of the State of Minnesota. The terms and conditions of the Merger and the mode of carrying the same into effect are as herein set forth in this Agreement. 1.2 The Articles of Incorporation of the Company, as in effect at the Effective Time, shall continue to be the articles of incorporation of the surviving corporation until amended in accordance with the provisions thereof and applicable law. 1.3 The Bylaws of the Company, as in effect at the Effective Time, shall continue to be the Bylaws of the surviving corporation until amended in accordance with the provisions thereof and applicable law. 1.4 The directors of the Company shall continue in office for their current terms and until their successors are elected and qualified, or until their death, resignation or removal. A-1 1.5 The officers of the Company shall remain the officers of the Company at the Effective Time and shall serve at the pleasure of the Board of Directors of the Company. 1.6 The Investment Advisory Agreement, Rule 12b-1 Plan and Distribution Agreement of the Company relating to ARM Fund, as in effect at the Effective Time, shall continue to be the Investment Advisory Agreement, Rule 12b-1 Plan and Distribution Agreement of the surviving corporation until amended in accordance with the provisions thereof. 1.7 KPMG Peat Marwick LLP shall continue as auditors to report upon the financial condition of the surviving corporation. 2. VALUATION; ISSUANCE OF ARM FUND SHARES 2.1 At the Effective Time, each common share of a Trust issued and outstanding shall be converted by reason of the Merger and without any action on the part of the holders thereof into the Company's ARM Fund common shares. The manner and basis of converting the issued and outstanding common shares of each Trust into ARM Fund common shares shall be as follows: (a) Immediately prior to the Effective Time, each Trust will make a distribution to its shareholders, in cash, of all its net income and net realized capital gains for the current taxable year that have not previously been distributed. (b) At the Effective Time, common shares of each Trust will be converted into ARM Fund common shares having the same aggregate net asset value, determined as of the Effective Time. (c) Net asset value per common share of a Trust as of the Effective Time will be determined by adding the market value of all securities in such Trust's portfolio and other assets, subtracting liabilities incurred or accrued, and dividing by the total number of common shares then outstanding. Such calculation shall be made using the valuation procedures set forth in the Joint Proxy Statement/ Prospectus of the Trusts and the Company (the "Joint Proxy Statement/Prospectus") under the caption "Proposal No. 1 -- Valuation of Shares." 2.2 As soon as practicable after the Effective Time, Investors Fiduciary Trust Company ("IFTC"), the transfer agent for the Trusts and the Company, will send a notice and transmittal form to each record holder of a Trust's common shares at the Effective Time advising such holder of the effectiveness of the Merger and of the procedure for surrendering to IFTC his or her certificates formerly evidencing common shares of such Trust. Ownership of ARM Fund shares by former shareholders of a Trust will be recorded in book-entry form, and ARM Fund will issue confirmations to such shareholders setting forth the number and net asset value of ARM Fund common shares held by such shareholders. [Fractional shares of ARM Fund will be carried to the third decimal place.] ARM Fund will not issue share certificates. Any stock certificates not submitted to IFTC within three months of the Effective Time will be automatically deemed submitted and then canceled and recorded in book-entry form. 2.3 Each of the ARM Fund common shares issued and outstanding at the Effective Time shall remain issued and outstanding and unaltered by the terms of this Agreement. 3. EFFECTIVE TIME OF THE MERGER 3.1 After the adoption of this Agreement by the vote of the requisite number of holders of shares of one or more of the Trusts, the Merger shall become effective at the close of business on the date the Articles of Merger are filed with the Secretary of State of Minnesota (the "Effective Time"). 3.2 At the Effective Time, the separate existence of each Trust shall cease, each Trust shall be merged with and into the Company as the surviving corporation, all of the property, assets, rights, privileges, powers, franchises and immunities of each Trust and the Company shall vest in the surviving corporation, and all of the debts, liabilities, duties and obligations of each Trust and the Company shall become the debts, liabilities, and obligations of the surviving corporation. A-2 4. REPRESENTATIONS, WARRANTIES AND COVENANTS 4.1 Each Trust represents, warrants and covenants to the Company, as to itself, as follows: (a) Such Trust is duly organized, validly existing and in good standing under the laws of the State of Minnesota and is qualified as a foreign corporation in each state in which it does business except where failure to do so would not materially and adversely affect its financial condition or the conduct of its business. (b) Such Trust has full power and authority to carry on its business as it is presently being conducted and to enter into this Agreement and the Merger contemplated hereby. (c) Such Trust is a closed-end diversified management investment company registered under the 1940 Act, and such registration is in full force and effect. (d) Such Trust is not in violation, and the execution, delivery and performance of this Agreement will not result in a violation, of its Articles of Incorporation, as amended, or Bylaws, as amended, or of any material agreement, indenture, instrument, contract, lease or other undertaking to which such Trust is a party or by which it is bound. (e) Other than as set forth in the Joint Proxy Statement/Prospectus under "Proposal No. 1 -- Pending Litigation," no material litigation or administrative proceeding or investigation of or before any court or governmental body is presently pending or, to such Trust's knowledge, threatened against such Trust or any of its properties or assets. Such Trust is not a party to or subject to the provisions of any order, injunction, decree or judgment of any court or governmental body which materially and adversely affects its business or its ability to consummate the transactions herein contemplated. (f) The audited financial statements of such Trust at August 31, 1994 and for the period then ended and the unaudited financial statements of such Trust at February 28, 1995 and for the period then ended have been prepared in accordance with generally accepted accounting principles consistently applied, and present fairly, in all material respects, the financial position of such Trust as of such respective dates thereof, and there are no known material liabilities (contingent or otherwise) of the Trust as of such respective dates not disclosed therein. (g) Such Trust has filed, or has obtained extensions to file, with immaterial exceptions, all federal, state and local tax returns which are required to be filed by it, and has paid or has obtained extensions to pay, all federal, state and local taxes shown or to be shown on such returns to be due and all assessments received by it. All of its tax liabilities, to the extent material, have been adequately provided for on its books, and, to its best knowledge, no tax deficiency or liability has been asserted against it and no question with respect thereto has been raised by the Internal Revenue Service or by any state or local tax authority for taxes in excess of those already paid. (h) For each taxable year of its operation, such Trust has met the requirements of Subchapter M of the Code for qualification and treatment as a regulated investment company, and the Trust intends to meet the requirements of Subchapter M of the Code for qualification and treatment as a regulated investment company for its final, partial taxable year. (i) The authorized capital of such Trust consists of 1,000,000,000 common shares, par value $.01 per share. All issued and outstanding shares of such Trust are, and at the Effective Time will be, duly and validly issued and outstanding, fully paid and non-assessable. All of the issued and outstanding shares of such Trust will, at the Effective Time, be held by the persons and in the amounts set forth in the records of the Trust. Such Trust does not have outstanding any options, warrants or other rights to subscribe for or purchase any of such Trust's shares, and there is not outstanding any security convertible into any of the Trust's shares. (j) The execution, delivery and performance of this Agreement will have been duly authorized prior to the Effective Time by all necessary action on the part of such Trust's Board of A-3 Directors, and, subject to the approval of the Trust's shareholders, this Agreement will constitute a valid and binding obligation of the Trust, enforceable in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, merger, moratorium, fraudulent conveyance and other laws relating to or affecting creditors' rights and to the application of equitable principles in any proceeding, whether at law or in equity. (k) All information pertaining to such Trust and included in the Registration Statement referred to in Section 5.5 (or supplied by such Trust for inclusion in said Registration Statement), on the effective date of said Registration Statement and up to and including the Effective Time, will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which such statements are made, not misleading (other than as may timely be remedied by further appropriate disclosure). (l) Immediately prior to the Effective Time, such Trust will have good, marketable and unencumbered title to its cash, securities and other assets. (m) No consent, approval, authorization or order of any court or governmental authority is required for the consummation by such Trust of the transactions contemplated by the Agreement, except such as may be required under the Securities Act of 1933, as amended (the "1933 Act"), the Securities Exchange Act of 1934, as amended (the "1934 Act"), the 1940 Act, the rules and regulations thereunder, or state securities laws. 4.2 The Company represents, warrants and covenants to each Trust as follows: (a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Minnesota. (b) The Company has full power and authority to enter into this Agreement and the Merger contemplated hereby. (c) The Company is an open-end management investment company, and its registration with the Commission as an investment company under the 1940 Act, and the registration of ARM Fund common shares to be issued in connection with the Merger under the 1933 Act, is or will be, at or before the Effective Time, in full force and effect. (d) At or before the Effective Time, ARM Fund common shares to be issued in connection with the Merger will be registered in all jurisdictions in which they will be required to be registered under the state securities laws and any other laws, and said registrations, including any periodic reports or supplemental filings, will be complete and current, and all fees required to be paid will have been paid, and the Company will be in good standing, will not be subject to any stop orders, and will be fully qualified to sell its common shares issued in connection with the Merger in any state in which its shares will have been registered. (e) The Company is not in violation, and the execution, delivery and performance of this Agreement will not result in a violation, of any provision of its Articles of Incorporation or Bylaws or of any material agreement, indenture, instrument, contract, lease or other undertaking to which the Company is a party or by which it is bound. (f) No material litigation or administrative proceeding or investigation of or before any court or governmental body is presently pending or, to the Company's knowledge, threatened against the Company or any of its properties or assets. The Company is not a party to or subject to the provisions of any order, injunction, decree or judgment of any court or governmental body which materially and adversely affects its business or its ability to consummate the transactions herein contemplated. (g) ARM Fund intends to meet the requirements of Subchapter M of the Code for qualification and treatment as a regulated investment company in the current and future years. A-4 (h) At the Effective Time, the ARM Fund common shares to be issued in connection with the Merger will have been duly authorized and, when so issued, will be duly and validly issued, fully paid and non-assessable. (i) The authorized capital of the Company consists of 100,000,000,000 common shares, par value $.01 per share, of which 10,000,000,000 shares have been designated as Series A common shares. The only issued and outstanding shares of the Company are Series A common shares issued to Piper Jaffray Companies Inc., and such shares are, and at the Effective Time will be, duly and validly issued, fully paid and non-assessable. The Company does not have outstanding any options, warrants or other rights to subscribe for or purchase any of the Company's common shares, and there is not outstanding any security convertible into any of the Company's common shares. (j) At the Effective Time, the Company will have good and marketable title to its cash, securities and other assets, if any. (k) The execution, delivery and performance of this Agreement will have been duly authorized prior to the Effective Time by all necessary action, if any, on the part of the Board of Directors of the Company, as issuer of the ARM Fund common shares, and its shareholders and this Agreement will constitute a valid and binding obligation of the Company enforceable in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, merger, moratorium, fraudulent conveyance and other laws relating to or affecting creditors' rights and to the application of equitable principles in any proceeding, whether at law or in equity. (l) The Registration Statement referred to in Section 5.5, on its effective date and up to and including the Effective Time, will (i) conform in all material respects to the applicable requirements of the 1933 Act, the 1934 Act, and the 1940 Act and the rules and regulations of the Commission thereunder, and (ii) not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which such statements were made, not misleading (other than as may timely be remedied by further appropriate disclosure); provided, however, that the representations and warranties in clause (ii) of this paragraph shall not apply to statements in (or omissions from) the Registration Statement made in reliance upon and in conformity with information furnished by the respective Trust for use therein. 5. FURTHER COVENANTS OF THE COMPANY AND THE TRUSTS 5.1 Each Trust will operate its business in the ordinary course between the date hereof and the Effective Time, it being understood that such ordinary course of business will include the declaration and payment of customary dividends and distributions, and any other distributions that may be advisable (which may include distributions prior to the Effective Time of net income and/or net realized capital gains not previously distributed). 5.2 Each Trust will call a meeting of its shareholders to consider and act upon this Agreement and to take all other action necessary to obtain approval of the transactions contemplated herein. 5.3 Each Trust will assist the Company in obtaining such information as the Company reasonably requests concerning the beneficial ownership of the Trust's common shares. 5.4 Subject to the provisions of this Agreement, the Company and each Trust will take, or cause to be taken, all actions, and do or cause to be done, all things reasonably necessary, proper or advisable to consummate and make effective the transactions contemplated by this Agreement. 5.5 Each Trust will provide the Company with information reasonably necessary with respect to such Trust for the preparation of the Registration Statement on Form N-14 of the Company (the "Registration Statement"), in compliance with the 1933 Act, the 1934 Act and the 1940 Act. A-5 5.6 The Company agrees to use all reasonable efforts to obtain the approvals and authorizations required by the 1933 Act, the 1934 Act, the 1940 Act and such of the state blue sky or securities laws as may be necessary in order to conduct its operations after the Effective Time. 6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE TRUSTS The obligation of each Trust to consummate the transactions provided for herein shall be subject, at its election, to the performance by the Company of all the obligations to be performed by it hereunder at or before the Effective Time, and, in addition thereto, the following further conditions (any of which may be waived by a Trust, in its sole and absolute discretion): 6.1 All representations and warranties of the Company contained in this Agreement shall be true and correct as of the date hereof and, except as they may be affected by the transactions contemplated by this Agreement, as of the Effective Time with the same force and effect as if made at such time. 6.2 The Company shall have delivered to the Trusts a certificate executed in its name by its President or Vice President and its Treasurer or Assistant Treasurer, in a form reasonably satisfactory to each Trust and dated as of the date of the Closing, to the effect that the representations and warranties of the Company made in this Agreement are true and correct at the Effective Time, except as they may be affected by the transactions contemplated by this Agreement and as to such other matters as the Trust shall reasonably request. 7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY The obligations of the Company to complete the transactions provided for herein with respect to a particular Trust shall be subject, at its election, to the performance by the applicable Trust of all of the obligations to be performed by it hereunder at or before the Effective Time and, in addition thereto, the following conditions (any of which may be waived by the Company as to a particular Trust, in its sole and absolute discretion): 7.1 All representations and warranties of each Trust contained in this Agreement shall be true and correct as of the date hereof and, except as they may be affected by the transactions contemplated by this Agreement, as of the Effective Time with the same force and effect as if made at such time; 7.2 Each Trust shall have delivered to the Company a certificate executed in its name by its President or Vice President and its Treasurer or Assistant Treasurer, in form and substance satisfactory to the Company and dated as of the date of the Closing, to the effect that the representations and warranties such Trust made in this Agreement are true and correct at and as of the Effective Time, except as they may be affected by the transactions contemplated by this Agreement, and as to such other matters as the Company shall reasonably request. 8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY AND THE TRUSTS The following shall constitute further conditions precedent to the consummation of the Merger between the Company and any particular Trust; provided, however, that any of the following conditions may be waived by the Company and any Trust except for the conditions set forth in Sections 8.1 and 8.4: 8.1 The Agreement and the transactions contemplated herein shall have been approved by the requisite vote of the holders of the outstanding shares of the Trust in accordance with the provisions of its Articles of Incorporation and Bylaws and applicable law, and certified copies of the resolutions evidencing such approval shall have been delivered to the Company. Notwithstanding the foregoing, in the event that the shareholder approval required by this paragraph 8.1 is not obtained with respect to any Trust (a "Non-Approving Trust") but is obtained with respect to one or more of the other Trusts (an "Approving Trust"), the conditions set forth in this paragraph 8.1 shall be satisfied as to the Approving Trust or Trusts and (assuming satisfaction of the other conditions herein) the Approving Trust or Trusts shall consummate the transactions contemplated hereby as if the Non-Approving Trust or Trusts were not "Trusts" hereunder. A-6 8.2 The Company's investment adviser shall have paid or agreed to pay the costs incurred by the Company and each Trust in connection with the Merger, including the fees and expenses associated with the preparation and filing of the Registration Statement referred to in Section 5.5 above, and the expenses of printing and mailing the Joint Proxy Statement/Prospectus, soliciting proxies and holding the shareholders meeting required to approve the transactions contemplated by this Agreement. 8.3 As of the Effective Time, no action, suit, injunction or other proceeding shall be threatened or pending before any court or governmental agency in which it is sought to restrain or prohibit, or obtain damages or other relief in connection with, this Agreement or the transactions contemplated herein. 8.4 ARM Fund shall have received from Piper Jaffray Companies Inc. and Piper Capital Management Incorporated an indemnification agreement substantially in the form set forth as Appendix E to the Joint Proxy Statement/Prospectus. 8.5 All consents of other parties and all other consents, orders and permits of federal, state and local regulatory authorities deemed necessary by the Company or the Trusts to permit consummation, in all material respects, of the transactions contemplated hereby shall have been obtained, except where failure to obtain any such consent, order or permit would not involve a risk of a material adverse effect on the assets or properties of the Company or the Trusts, provided that any party hereto may for itself waive any of such conditions; 8.6 The Registration Statement shall have become effective under the 1933 Act, and no stop orders suspending the effectiveness thereof shall have been issued and, to the best knowledge of the parties hereto, no investigation or proceeding for that purpose shall have been instituted or be pending, threatened or contemplated under the 1933 Act; and 8.7 The parties shall have received the opinion of Dorsey & Whitney P.L.L.P. addressed to each Trust, based in part on certain representations to be furnished by the Trusts, the Company, and their investment adviser, substantially to the effect that: (a) The Merger will qualify as a "reorganization" under Section 368(a) of the Code, and each of the Trusts will qualify as a party to the reorganization under Section 368(b) of the Code; (b) Trust shareholders will recognize no income, gain or loss upon the exchange of Trust common shares for ARM Fund common shares in the Merger. Trust shareholders subject to taxation will recognize income upon receipt of any net investment income or net capital gains of a Trust distributed by the Trust prior to the Effective Time; (c) The basis of ARM Fund common shares received by each shareholder of a Trust pursuant to the Merger will be the same as the basis of the common shares of such Trust surrendered in exchange therefor; (d) The holding period of ARM Fund common shares received by each shareholder of a Trust pursuant to the Merger will include the period during which the shareholder held the common shares of such Trust surrendered in exchange therefor, provided that such common shares were held as a capital asset at the Effective Time; (e) Each Trust will recognize no income, gain or loss by reason of the Merger; (f) The tax basis of the assets received by ARM Fund pursuant to the Merger will be the same as the basis of those assets in the hands of the Trust as of the Effective Time; (g) The holding period of the assets received by ARM Fund pursuant to the Merger will include the period during which such assets were held by the Trust that previously held the assets; and (h) ARM Fund will succeed to and take into account the earnings and profits, or deficit in earnings and profits, of each Trust as of the Effective Time. A-7 9. FURTHER ASSURANCES From time to time on and after the Effective Date, each party hereto agrees that it will execute and deliver or cause to be executed and delivered all such further assignments, assurances or other instruments, and shall take or cause to be taken all such further actions, as may be necessary or desirable to complete the Merger and the other transactions contemplated by this Agreement. 10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES 10.1 The Company and each Trust agree that neither the Company nor such Trust has made any representation, warranty or covenant not set forth herein and that this Agreement constitutes the entire agreement between the parties. 10.2 The representations and warranties contained in this Agreement or in any document delivered pursuant hereto or in connection herewith shall survive the consummation of the transactions contemplated hereunder. 11. TERMINATION This Agreement and the transactions contemplated hereby may be terminated and abandoned by any party by resolution of the party's Board of Directors, at any time prior to the Effective Time, if circumstances should develop that, in the good faith opinion of such Board, make proceeding with the Agreement not in the best interest of the applicable party's shareholders. In the event that a particular Trust terminates this Agreement, the Agreement will remain in effect as to the Company and the other Trusts. 12. AMENDMENTS This Agreement may be amended, modified or supplemented in such manner as may be mutually agreed upon in writing by the authorized officers of any of the Trusts and the Company; provided, however, that following the meeting of a particular Trust's shareholders called by such Trust pursuant to Section 5.2 of this Agreement, no such amendment may have the effect of changing the provisions for determining the number of ARM Fund common shares to be issued to such Trust's shareholders under this Agreement to the detriment of such shareholders without their further approval. 13. NOTICES Any notice, report, statement or demand required or permitted by any provisions of this Agreement shall be in writing and shall be deemed duly given if delivered or mailed by registered mail, postage prepaid, addressed to the Company or the Trusts, Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota 55402, Attention: President (with copies to Dorsey & Whitney P.L.L.P., 220 South Sixth Street, Minneapolis, Minnesota 55402, Attention: Kathleen L. Prudhomme, and Gordon, Altman, Butowsky, Weitzen, Shalov & Wein, 114 West 47th Street, New York, New York, 10036, Attention: Stuart Strauss). 14. HEADINGS; COUNTERPARTS; ASSIGNMENT; LIMITATION OF LIABILITY; MISCELLANEOUS 14.1 The Article and Section headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 14.2 This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same agreement. 14.3 This Agreement shall bind and inure to the benefit of the parties hereto and their respective successors and assigns, but no assignment or transfer hereof or of any rights or obligations hereunder shall be made by any party without the prior written consent of the other party. Nothing herein expressed or implied is intended or shall be construed to confer upon or give any person, firm or corporation, other than the parties hereto and their respective successors and assigns, any rights or remedies under or by reason of this Agreement. A-8 14.4 The validity, interpretation and effect of this Agreement shall be governed exclusively by the laws of the State of Minnesota, without giving effect to the principles of conflict of laws thereof. IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed by its President or Vice President. AMERICAN ADJUSTABLE RATE TERM TRUST INC. -- 1996 By ___________________________________ Its __________________________________ AMERICAN ADJUSTABLE RATE TERM TRUST INC. -- 1997 By ___________________________________ Its __________________________________ AMERICAN ADJUSTABLE RATE TERM TRUST INC. -- 1998 By ___________________________________ Its __________________________________ AMERICAN ADJUSTABLE RATE TERM TRUST INC. -- 1999 By ___________________________________ Its __________________________________ JAFFRAY FUNDS INC. By ___________________________________ Its __________________________________ A-9 APPENDIX B INVESTMENTS, INVESTMENT TECHNIQUES AND RISKS The types of securities in which the Trusts and ARM Fund may invest and the investment techniques they may employ are described briefly in the Joint Proxy Statement/Prospectus under "Proposal No. 1 -- Comparison of Investment Objectives and Policies of ARM Fund and the Trusts." A more detailed description of these securities and investment techniques, including the risks thereof, is set forth below. ADJUSTABLE RATE MORTGAGE SECURITIES Under normal market conditions, each Trust and ARM Fund must invest at least 65% of their total assets in adjustable rate mortgage securities or ARMS, which include the types of securities discussed below. U.S. GOVERNMENT MORTGAGE PASS-THROUGH SECURITIES. ARMS include "pass-through" securities issued or guaranteed by the U.S. Government or one of its agencies or instrumentalities ("U.S. Government Pass-Throughs"). Pass-through securities constituting ARMS represent ownership interests in underlying pools of adjustable rate mortgage loans originated by private lenders. Such securities differ from conventional debt securities, which provide for periodic payment of interest in fixed amounts (usually semi-annually) and principal payments at maturity or on specified call dates, in that pass-through securities provide for monthly payments that are a pass-through of the monthly interest and principal payments (including any prepayments) made by the individual borrowers on the pooled mortgage loans, net of any fees paid to the guarantor of such securities and the servicers of the underlying mortgage loans. The U.S. Government Pass-Throughs in which the Trusts and ARM Fund may invest are issued or guaranteed by the Government National Mortgage Association ("GNMA"), the Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). Each of GNMA, FNMA and FHLMC guarantee timely distributions of interest to securities holders. GNMA and FNMA also guarantee timely distribution of scheduled principal. FHLMC generally guarantees only ultimate collection of principal on the underlying loans, which collection may take up to one year. GNMA is a wholly owned corporate instrumentality of the U.S. Government within the Department of Housing and Urban Development, and its guarantee is backed by the full faith and credit of the U.S. Government. FNMA and FHLMC are federally chartered corporations, and their respective guarantees are not backed by the full faith and credit of the U.S. Government. The mortgages underlying ARMS issued by GNMA are fully guaranteed by the Federal Housing Administration ("FHA") or the Veterans Administration ("VA"). The mortgages underlying ARMS issued by FNMA or FHLMC may be backed by conventional adjustable rate mortgages not guaranteed by FHA or VA. PRIVATE MORTGAGE PASS-THROUGH SECURITIES. Private mortgage pass-through securities ("Private Pass-Throughs") are structured similarly to the GNMA, FNMA and FHLMC mortgage pass-through securities described above and are issued by originators of and investors in mortgage loans, including savings and loan associations, mortgage bankers, commercial banks, investment banks and special purpose subsidiaries of the foregoing. Private Pass-Throughs constituting ARMS are backed by a pool of conventional adjustable rate mortgage loans. Since Private Pass-Throughs are not guaranteed by an entity having the credit status of GNMA, FNMA or FHLMC, such securities generally are structured with one or more types of credit enhancement. See "Types of Credit Support" below. CMOS AND MULTI-CLASS PASS-THROUGH SECURITIES. ARMS in which the Trusts and ARM Fund may invest also include collateralized mortgage obligations and multiclass pass-through securities, which are derivative mortgage securities. Collateralized mortgage obligations are debt instruments issued by special purpose entities which are secured by pools of mortgage loans or other Mortgage- B-1 Backed Securities. Multiclass pass-through securities are equity interests in a trust composed of mortgage loans or other Mortgage-Backed Securities. Payments of principal and interest on underlying collateral provide the funds to pay debt service on the collateralized mortgage obligation or make scheduled distributions on the multiclass pass-through security. Collateralized mortgage obligations and multiclass pass-through securities (collectively, "CMOs" unless the context indicates otherwise) may be issued by agencies or instrumentalities of the U.S. Government or by private organizations. In a CMO, a series of bonds or certificates is issued in multiple classes. Each class of CMO, often referred to as a "tranche," is issued at a specified coupon rate and has a stated maturity or final distribution date. Principal prepayments on collateral underlying a CMO may cause it to be retired substantially earlier than the stated maturities or final distribution dates. ARM Fund may not invest in inverse floating, interest-only or principal-only tranches of CMOs. See "Other Eligible Investments -- Mortgage-Backed Securities" below. The principal and interest on the mortgages underlying a CMO may be allocated among the CMO's tranches in many ways. See "Other Eligible Investments - -- Mortgage-Backed Securities -- CMOs" below. One or more tranches of a CMO may have coupon rates which reset periodically at a specified increment over an index such as the London Interbank Offered Rate ("LIBOR"). These adjustable rate tranches, known as "floating rate CMOs," are considered ARMS by the Trusts and ARM Fund. Floating rate CMOs may be backed by fixed rate or adjustable rate mortgages; to date, fixed rate mortgages have been more commonly utilized for this purpose. Floating rate CMOs are typically issued with lifetime caps on the coupon rate thereon. These caps, similar to the caps on adjustable rate mortgages, represent a ceiling beyond which the coupon rate on a floating rate CMO may not be increased regardless of increases in the interest rate index to which the floating rate CMO is geared, which may cause the security to be valued at a greater discount than if the security was not subject to a ceiling. TYPES OF CREDIT SUPPORT. To lessen the effect of failures by mortgagors to make payments on underlying mortgages, ARMS and other Mortgage-Backed Securities may contain elements of credit support. Such credit support falls into two categories: (a) liquidity protection and (b) protection against losses resulting from ultimate default by an obligor on the underlying assets. Liquidity protection refers to the provision of advances, generally by the entity administering the pool of assets, to ensure that the pass-through of payments due on the underlying pool occurs in a timely fashion. Protection against losses resulting from ultimate default enhances the likelihood of ultimate payment of the obligations on at least a portion of the assets in the pool. Such protection may be provided through guarantees, insurance policies or letters of credit obtained by the issuer or sponsor from third parties, through various means of structuring the transaction or through a combination of such approaches. The Trusts and ARM Fund do not pay any additional fees for such credit support, although the existence of credit support may increase the price of a security. The ratings of securities for which third-party credit enhancement provides liquidity protection or protection against losses from default are generally dependent upon the continued creditworthiness of the enhancement provider. The ratings of such securities could be downgraded in the event of deterioration in the creditworthiness of the credit enhancement provider even in cases where the delinquency and loss experience on the underlying pool of assets is better than expected. Examples of credit support arising out of the structure of the transaction include "senior-subordinated securities" (multiple class securities with one or more classes subordinate to other classes as to the payment of principal thereof and interest thereon, with the result that defaults on the underlying assets are borne first by the holders of the subordinated class), creation of "reserve funds" (where cash or investments, sometimes funded from a portion of the payments on the underlying assets, are held in reserve against future losses) and "over-collateralization" (where the scheduled payments on, or the principal amount of, the underlying assets exceed those required to make payment on the securities and pay any servicing or other fees). The degree of credit support provided for each issue is generally based on historical information with respect to the level of credit risk B-2 associated with the underlying assets. Other information which may be considered includes demographic factors, loan underwriting practices and general market and economic conditions. Delinquency or loss in excess of that which is anticipated (and in excess of the degree of credit support provided) will adversely affect the return on an investment in such a security by decreasing the yield and value of such security. HOW INTEREST RATES ARE SET. The interest rates on ARMS are reset at periodic intervals (generally one year or less) to an increment over some predetermined interest rate index. There are two main categories of indices: those based on U.S. Treasury securities and those derived from a calculated measure such as a cost of funds index or a moving average of mortgage rates. Commonly utilized indices include the one-year and five-year constant maturity Treasury note rates, the three-month Treasury bill rate, the 180-day Treasury bill rate, rates on longer-term Treasury securities, the 11th District Federal Home Loan Bank Cost of Funds Index, the National Median Cost of Funds, the one- month or three-month LIBOR, the prime rate of a specific bank, or commercial paper rates. Some indices, such as the one-year constant maturity Treasury note rate, closely mirror changes in market interest rate levels. Others, such as the 11th District Home Loan Bank Cost of Funds Index (often related to ARMS issued by FNMA), tend to lag changes in market rate levels and tend to be somewhat less volatile. For both the Trusts and ARM Fund, the Adviser seeks to diversify investments in ARMS among a variety of indices and reset periods to reduce the exposure to the risk of interest rate fluctuations. In selecting a type of ARMS for investment, the Adviser also considers the liquidity of the market for such ARMS. The underlying adjustable rate mortgages which back ARMS will frequently have caps and floors which limit the maximum amount by which the loan rate to the residential borrower may change up or down (a) per reset or adjustment interval and (b) over the life of the loan. Some residential adjustable rate mortgage loans restrict periodic adjustments by limiting changes in the borrower's monthly principal and interest payments rather than limiting interest rate changes. These payment caps may result in negative amortization, I.E., increase in the balance of the mortgage loan. Floating rate CMOs are generally backed by fixed rate mortgages and generally have lifetime caps on the coupon rate thereon. INTEREST RATE RISK. The values of ARMS, like other debt securities, generally vary inversely with changes in market interest rates (increasing in value during periods of declining interest rates and decreasing in value during periods of increasing interest rates); however, the values of ARMS should generally be more resistant to price swings than other debt securities because the interest rates of ARMS move with market interest rates. The adjustable rate feature of ARMS will not, however, eliminate fluctuations in the prices of ARMS, particularly during periods of extreme fluctuations in interest rates. Also, since many adjustable rate mortgages only reset on an annual basis, it can be expected that the prices of ARMS will fluctuate to the extent changes in prevailing interest rates are not immediately reflected in the interest rates payable on the underlying adjustable rate mortgages. PREPAYMENT RISK. ARMS, like other Mortgage-Backed Securities, differ from conventional bonds in that principal is paid back over the life of the ARMS rather than at maturity. As a result, the holder of the ARMS receives monthly scheduled payments of principal and interest and may receive unscheduled principal payments representing prepayments on the underlying mortgages. When the holder reinvests the payments and any unscheduled prepayments of principal it receives, it may receive a rate of interest which is lower than the rate on the existing ARMS. For this reason, ARMS are less effective than longer-term debt securities as a means of "locking in" long-term interest rates. ARMS, while having less risk of price decline during periods of rapidly rising rates than other investments of comparable maturities, will have less potential for capital appreciation due to the likelihood of increased prepayments of mortgages as interest rates decline. In addition, to the extent ARMS are purchased at a premium, mortgage foreclosures and unscheduled principal prepayments will result in some loss of the holders' principal investment to the extent of the premium paid. On the B-3 other hand, if ARMS are purchased at a discount, both a scheduled payment of principal and an unscheduled prepayment of principal will increase current and total returns and will accelerate the recognition of income which, when distributed to shareholders, will be taxable as ordinary income. OTHER ELIGIBLE INVESTMENTS The balance of the assets of each Trust and ARM Fund (35% of total assets) may be invested in the following types of securities, to the extent set forth below: MORTGAGE-BACKED SECURITIES - GENERAL. In addition to ARMS, each Trust and ARM Fund may invest in other types of Mortgage-Backed Securities. Mortgage-Backed Securities are securities which represent interests in or are collateralized by mortgages. Such securities are issued by GNMA, FNMA, FHLMC and by private organizations and take the same structure as ARMS, I.E., pass-through securities and CMOs. The Trusts may invest in any type of Mortgage-Backed Security, including traditional fixed rate Mortgage-Backed Securities and more recently developed instruments such as Stripped Mortgage-Backed Securities and CMOs. ARM Fund will not invest in inverse floating, interest-only or principal-only tranches of CMOs, or in Stripped Mortgage-Backed Securities. The Trusts may also invest in Mortgage-Backed Securities backed by fixed rate mortgages and, in conjunction therewith, pursuant to an interest rate swap, exchange its right to receive payments at fixed rates of interest for floating rate payments. The intended net effect of the transaction would be the creation of a security with the economic characteristics of an adjustable rate mortgage security. Such "synthetic ARMS" are not considered as ARMS for purposes of the requirement that at least 65% of total assets be invested in ARMS. - CMOS. As discussed above, investments in ARMS include floating rate CMOs. The Trusts' investments in Mortgage-Backed Securities other than ARMS may include any other tranche of a CMO, other than residual interests of CMOs. ARM Fund may also invest in other tranches of CMOs, provided that it may not invest in inverse floating, interest-only or principal-only tranches of CMOs or in residual interests of CMOs. The principal and interest on the mortgages underlying a CMO may be allocated among the CMO's several tranches in many ways. For example, certain tranches may have variable or floating interest rates, and others may provide only the principal or interest feature of the underlying security (interest-only ("IO") or principal-only ("PO") tranches). Generally, the purpose of the allocation of the cash flow of a CMO to the various tranches is to obtain a more predictable cash flow to certain of the individual tranches than exists with the underlying collateral of the CMO. As a general rule, the more predictable the cash flow is on a CMO tranche, the lower the anticipated yield will be on that tranche at the time of issuance relative to prevailing market yields on mortgage-related securities. As part of the process of creating more predictable cash flows on most of the tranches of CMOs, one or more tranches generally must be created that absorb most of the volatility in the cash flows on the underlying mortgage loans. The yields on these tranches, which may include inverse floaters, IOs, POs and Z tranches, discussed below, are generally higher than prevailing market yields on mortgage-related securities with similar maturities. As a result of the uncertainty of the cash flows of these tranches, the market prices of and yields on these tranches generally may be more volatile. ARM Fund may not invest in inverse floaters, IOs or POs. An inverse floater is a CMO tranche with a coupon rate that moves inversely to a designated index, such as LIBOR or COFI (Cost of Funds Index). Like most other fixed-income securities, the value of inverse floaters will decrease as interest rates increase and increase as interest rates decrease. Inverse floaters, however, may exhibit greater price volatility with changes in interest rates than the majority of mortgage pass-through securities or CMOs. Coupon rates on inverse floaters typically change at a multiple of the change in the relevant index rate. Thus, any rise in the index rate (as a consequence of an increase in interest rates) causes a correspondingly greater drop in the coupon rate B-4 of an inverse floater, while any drop in the index rate causes a correspondingly greater increase in the coupon of an inverse floater. Some inverse floaters also exhibit extreme sensitivity to changes in prepayments. Z tranches of CMOs defer interest and principal payments until one or more other classes of the CMO have been paid in full. Interest accretes on the Z tranche, being added to principal, and is compounded through the accretion period. After the other classes have been paid in full, interest payments begin and continue through maturity. Z tranches have characteristics similar to zero coupon bonds. See "Zero Coupon Securities" below. Like a zero coupon bond, during its accretion period a Z tranche has the advantage of eliminating the risk of reinvesting interest payments at lower rates during a period of declining market interest rates. At the same time, however, and also like a zero coupon bond, the market value of a Z tranche can be expected to fluctuate more widely with changes in market interest rates than would the market value of a tranche which pays interest currently. In addition, changes in prepayment rates on the underlying mortgage loans will affect the accretion period of a Z tranche and, therefore, also are likely to influence its market value. - STRIPPED MORTGAGE-BACKED SECURITIES. The Trusts' investments in Mortgage-Backed Securities other than ARMS may include Stripped Mortgage-Backed Securities ("SMBS"), which are derivative multi-class mortgage securities. ARM Fund may not invest in SMBS. SMBS may be issued by agencies or instrumentalities of the U.S. Government or by private originators of, or investors in, mortgage loans, including savings and loan associations, mortgage bankers, commercial banks, investment banks and special purpose subsidiaries of the foregoing. There are generally two types of classes of SMBS, one of which (the interest only or "IO" class) entitles the holders thereof to receive distributions consisting solely or primarily of all or a portion of the interest on the underlying pool of mortgage loans or Mortgage-Backed Securities ("Mortgage Assets") and the other of which (the principal only or "PO" class) entitles the holders thereof to receive distributions consisting solely or primarily of all or a portion of the principal of the underlying pool of Mortgage Assets. IOs and POs issued by the U.S. Government or its agencies and instrumentalities may be determined to be liquid pursuant to procedures adopted by the Board of Directors. Otherwise, each Trust will treat IOs and POs as liquid and subject to its restriction on investments in illiquid securities. See "Special Investment Methods -- Illiquid Securities" below. The cash flows and yields on IO and PO classes are extremely sensitive to the rate of principal payments (including prepayments) on the related underlying Mortgage Assets. For example, a rapid or slow rate of principal payments will have a material adverse effect on the yield to maturity of IOs or POs, respectively. If the underlying Mortgage Assets experience greater than anticipated prepayments of principal, an investor in an IO class may incur substantial losses, even if the IO class is rated AAA. Conversely, if the underlying Mortgage Assets experience slower than anticipated prepayments of principal, the yield on a PO class will be affected more severely than would be the case with a traditional Mortgage-Backed Security. Under the Internal Revenue Code, each Trust will be required to accrue a portion of the original issue discount on a PO as income during each year even though such Trust receives no cash distribution on the security during the year. - RISKS OF MORTGAGE-BACKED SECURITIES. Mortgage-Backed Securities (other than ARMS) are subject generally to the same risks as ARMS; however, such other Mortgage-Backed Securities can be expected to be affected to a greater extent than ARMS by fluctuating interest rates and prepayments and to have different yield characteristics, due to the fact that fixed rate rather than adjustable rate mortgages underlie such securities. Generally, prepayments on fixed rate mortgages will increase during a period of falling interest rates and decrease during a period of rising interest rates. Accordingly, amounts available for reinvestment are likely to be greater during a period of declining interest rates than during a period of rising interest rates, and the yield on the securities in which such amounts are reinvested is likely to be lower than the yield on the securities that were prepaid or the yield that could be achieved if such amounts were reinvested during a period of rising interest rates. If B-5 ARM Fund or a Trust purchases Mortgage-Backed Securities at a premium, a prepayment rate that is faster than expected will reduce both the market value and the yield to maturity from that which was anticipated, while a prepayment rate that is slower than expected will have the opposite effect of increasing yield to maturity and market value. Conversely, if ARM Fund or a Trust purchases Mortgage-Backed Securities at a discount, faster than expected prepayments will increase, while slower than expected prepayments will reduce, yield to maturity and market value. Mortgage-Backed Securities may decrease in value as a result of increases in interest rates and may benefit less than other fixed income securities from declining interest rates because of the risk of prepayment. Investments in derivative Mortgage-Backed Securities such as certain classes of CMOs and Stripped Mortgage-Backed Securities, as discussed above, may involve risks in addition to those found in other Mortgage-Backed Securities. The market experience of 1994 has shown that certain derivative mortgage securities may be highly sensitive to changes in interest and prepayment rates and, as a result, the prices of such securities may be highly volatile. In addition, such market experience has shown that during periods of rising interest rates, the market for certain derivative mortgage securities may become more unstable and such securities may become more difficult to sell as market makers either choose not to repurchase such securities or offer prices, based on current market conditions, which are unacceptable to ARM Fund or a Trust. As discussed above, ARM Fund may not invest in inverse floaters, IO and PO tranches of CMOs or Stripped Mortgage-Backed Securities. ZERO COUPON SECURITIES. Each Trust may invest up to 35% of its total assets in Zero Coupon Securities (but no more than 10% of its total assets in taxable Zero Coupon Securities). ARM Fund may invest up to 10% of its net assets in U.S. Government Zero Coupon Securities. Zero Coupon Securities are debt obligations which do not entitle the holder to any periodic payments of interest prior to maturity; rather, they offer the right to receive a fixed cash payment at maturity but without any payments before that date. As a result, Zero Coupon Securities are issued and traded at a discount from their face amounts. Through investment in Zero Coupon Securities, an investor is able to in effect lock in a return of principal to the extent such instruments are held to maturity. Accordingly, the Trusts invested in such instruments to facilitate their ability to return $10 per common share upon termination. U.S. Government Zero Coupon Securities are issued by the U.S. Treasury through its STRIPS program and constitute direct obligations of the U.S. Government. ARM Fund may invest up to 10% of its net assets in such securities. Each Trust may also invest in such securities, subject to the limitation that no more than 10% of a Trust's total assets may be invested in taxable Zero Coupon Securities. Each Trust also may invest in receipts or certificates issued by banks and brokerage firms which separate the principal portions from the coupon portions of U.S. Treasury bonds and notes and sell them separately, and in other Zero Coupon Securities issued by private issuers (again subject to the limitation that no more than 10% of a Trust's total assets may be invested in taxable Zero Coupon Securities). The Trusts' investments in Zero Coupon Securities include municipal Zero Coupon Securities issued by a variety of tax-exempt issuers such as state and local governments and their agencies and instrumentalities. Because accreted income on municipal Zero Coupon Securities is generally not taxable to holders, municipal Zero Coupon Securities have lower yields than other Zero Coupon Securities. The accreted income on such securities is not taxable to the Trust holding such securities (except that a portion of the income on the security will be taxable if the yield at which the security was acquired is greater than the yield at original issuance); however, when distributed to shareholders, the accreted income is taxed in the same manner as other distributions. Municipal Zero Coupon Securities can be an appropriate investment for the Trusts because any accreted income from municipal Zero Coupon Securities which is not distributed will increase the net value of the Trusts' shares, in furtherance of the investment objective of returning $10 per share upon termination. ARM Fund may not invest in municipal Zero Coupon Securities. B-6 - RISKS OF ZERO COUPON SECURITIES. Zero Coupon Securities do not entitle the holder to any periodic payments of interest prior to maturity and therefore are issued and trade at a discount from their face or par value. The discount, in the absence of financial difficulties of the issuer, decreases as the final maturity of the security approaches. Zero Coupon Securities can be sold prior to their due date in the secondary market at the then prevailing market value, which depends primarily on the time remaining to maturity, prevailing levels of interest rates and the perceived credit quality of the issuer. The market prices of Zero Coupon Securities are more volatile than the market prices of securities of comparable quality and similar maturity that pay interest periodically and may respond to a greater degree to fluctuations in interest rates than do such non-Zero Coupon Securities. CORPORATE DEBT SECURITIES. ARM Fund and each Trust may invest in Corporate Debt Securities, which are debt obligations of U.S. corporations (other than ARMS or Mortgage-Backed Securities). Each Trust's investments in these securities is limited to 10% of its total assets. ARM Fund has no such limitation and thus may invest up to 35% of its total assets in Corporate Debt Securities. The values of Corporate Debt Securities typically will fluctuate in response to general economic conditions, to changes in interest rates and, to a greater extent than the values of ARMS or Mortgage-Backed Securities, to business conditions affecting the specific industries in which the issuers are engaged. Corporate Debt Securities will typically decrease in value as a result of increases in interest rates. ARM Fund and each Trust may invest in certain types of Corporate Debt Securities that have been issued with original issue discount or market discount. An investment in such securities poses certain economic risks and may have certain adverse cash flow consequences to the investor. U.S. GOVERNMENT SECURITIES. In addition to U.S. Government ARMS and other U.S. Government Mortgage-Backed Securities, ARM Fund and each Trust may invest in other securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities. Such securities include a variety of Treasury securities, which differ in their interest rates, maturities and times of issuance. Treasury bills have maturities of one year or less, Treasury notes have maturities of one to ten years, and Treasury bonds generally have maturities of greater than ten years. Some obligations issued or guaranteed by U.S. Government agencies or instrumentalities, for example, GNMA pass-through certificates, are supported by the full faith and credit of the U.S. Treasury; others, such as those of the Federal Home Loan Banks, by the right of the issuer to borrow from the Treasury; others, such as those issued by FNMA, by the discretionary authority of the U.S. Government to purchase certain obligations of the agency or instrumentality; and others, such as those issued by the Student Loan Marketing Association, only by the credit of the agency or instrumentality. While the U.S. Government provides financial support to such U.S. Government-sponsored agencies and instrumentalities, no assurance can be given that it will always do so since it is not so obligated by law. ASSET-BACKED SECURITIES. ARM Fund and each Trust may invest in Asset-Backed Securities, which are securities that directly or indirectly represent a participation in or are secured by and payable from a pool of assets representing the obligations of a number of different parties. Each Trust's investments in these securities is limited to 10% of its total assets. ARM Fund is subject to no such percentage limitation. However, ARM Fund will only invest in Asset-Backed Securities rated, as of the date of purchase, AAA by Standard & Poor's, Aaa by Moody's, comparably rated by any other NRSRO or, if unrated, of comparable quality as determined by the Adviser. The securitization techniques used to develop Mortgage-Backed Securities are now being applied to a broad range of assets. Through the use of trusts and special purpose corporations, various types of assets, primarily automobile and credit card receivables, are being securitized in pass-through structures similar to the mortgage pass-through structures described above or in a pay-through structure similar to the CMO structure. In general, the collateral supporting Asset-Backed Securities is of shorter maturity than mortgage loans and is less likely to experience substantial prepayments. As with Mortgage-Backed Securities, Asset-Backed Securities are often backed by a pool of assets representing the obligations of a number of different parties and use similar credit enhancement techniques. B-7 Asset-Backed Securities do not have the benefit of the same security interest in the related collateral as do Mortgage-Backed Securities. Credit card receivables are generally unsecured, and the debtors are entitled to the protection of a number of state and federal consumer credit laws, many of which give such debtors the right to set off certain amounts owed on the credit cards, thereby reducing the balance due. Most issuers of automobile receivables permit the servicers to retain possession of the underlying obligations. If the servicer were to sell these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that of the holders of the related automobile receivables. In addition, because of the large number of vehicles involved in a typical issuance and technical requirements under state laws, the trustee for the holders of the automobile receivables may not have a perfected security interest in all of the obligations backing such receivables. Therefore, there is the possibility that recoveries on repossessed collateral may not, in some cases, be available to support payments on these securities. CANADIAN DEBT SECURITIES. Each Trust may invest up to 10% of its total assets in Canadian Debt Securities. ARM Fund may not invest in such securities. Canadian Debt Securities are debt securities issued by Canadian corporations or issued or guaranteed by the Canadian federal government, Canadian provincial governments and political subdivisions, agencies or instrumentalities thereof. Investing in Canadian Debt Securities involves considerations and possible risks not typically associated with investing in U.S. securities, including possible application of Canadian tax laws (including possible future withholding taxes), potential difficulties in enforcing contractual obligations, changes in governmental administrations or economic or monetary policy (in this country or Canada) or changed circumstances in dealing between the United States and Canada. Canadian brokerage commissions may be higher than those in the United States, and Canadian securities markets may be less liquid, more volatile and less subject to governmental supervision than those in the United States. The value of an investment denominated in Canadian dollars could be adversely affected by a decline in the value of the Canadian dollar relative to the U.S. dollar. FOREIGN INDEX LINKED INSTRUMENTS. Each Trust may invest up to 10% of its total assets in fixed-income securities issued by U.S. issuers and denominated in U.S. dollars but which return principal and/or pay interest to investors in amounts which are linked to the level of a particular foreign index ("Foreign Index Linked Instruments"). ARM Fund may not invest in such securities. Foreign Index Linked Instruments present certain risks not applicable to other securities in which the Trusts invest. Foreign Index Linked Instruments may offer higher yields than comparable securities linked to purely domestic indices but also may be more volatile. Foreign Index Linked Instruments are relatively recent innovations for which the market has not yet been fully developed and, accordingly, they typically are less liquid than comparable securities linked to purely domestic indices. In addition, the value of Foreign Index Linked Instruments will be affected by fluctuations in foreign exchange rates or in foreign interest rates, factors which do not typically bear on the values of ARMS or most other securities in which the Trusts invest. If the Adviser is incorrect in its prediction as to the movements in the direction of particular foreign currencies or foreign interest rates, the return realized by a Trust on a Foreign Index Linked Instrument may be lower than if the Trust had invested in a similarly rated domestic security. The skills needed to predict foreign currency and foreign interest rates are different from those needed to select domestic portfolio securities. Foreign currency gains and losses with respect to Foreign Index Linked Instruments may affect the amount and timing of income recognized by a Trust. OTHER INVESTMENT TECHNIQUES A detailed description of the investment techniques that may be used by ARM Fund and the Trusts, and the risks thereof, is set forth below. For purposes of this section, ARM Fund and the Trusts are sometimes referred to individually as a "Fund." B-8 HEDGING TRANSACTIONS. Both ARM Fund and the Trusts may enter into certain interest rate, options and futures transactions, as described below and may make investments in Eurodollar instruments for hedging purposes. The Trusts also may enter into foreign exchange transactions, currency forward and futures contracts and foreign currency options in connection with their investments in Canadian Debt Securities. ARM Fund may not engage in such transactions. - INTEREST RATE TRANSACTIONS. To preserve a return or spread on a particular investment or portion of its portfolio, to create synthetic adjustable rate mortgage securities or for other non-speculative purposes, ARM Fund and each Trust may purchase or sell interest rate caps and floors. In addition, each Trust may enter into interest rate swaps. ARM Fund may not enter into interest rate swaps. Neither ARM Fund nor any Trust intends to use interest rate transactions for speculative purposes. Interest rate swaps involve the exchange by a Trust with another party of their respective commitments to pay or receive interest, E.G., an exchange of floating rate payments for fixed rate payments. The purchase of an interest rate cap entitles the purchaser, to the extent a specified index exceeds a predetermined interest rate, to receive payments of interest on a contractually-based principal amount from the party selling such interest rate cap. The purchase of an interest rate floor entitles the purchaser, to the extent a specified index falls below a predetermined interest rate, to receive payments of interest on a contractually-based principal amount from the party selling such interest rate floor. ARM Fund and each Trust may enter into interest rate caps and floors, and each Trust may enter into interest rate swaps, on either an asset-based or liability-based basis, depending on whether it is hedging its assets or its liabilities, and the Trusts usually enter into interest rate swaps on a net basis, I.E., the two payment streams are netted out, with the Trust receiving or paying, as the case may be, only the net amount of the two payments. The net amount of the excess, if any, of a Trust's obligations over its entitlements with respect to each interest rate swap will be accrued on a daily basis, and an amount of cash or high quality liquid securities having an aggregate net asset value at least equal to the accrued excess will be maintained in a segregated account by the Trust's custodian. If a Trust enters into an interest rate swap on other than a net basis, the Trust would maintain a segregated account in the full amount accrued on a daily basis of the Trust's obligations with respect to the swap. To the extent ARM Fund or any Trust sells (I.E., writes) caps and floors, it will maintain in a segregated account cash or high quality liquid debt securities having an aggregate net asset value at least equal to the full amount, accrued on a daily basis, of the Fund's or Trust's obligations with respect to any caps or floors. The Trusts will not enter into any interest rate transaction unless the unsecured senior debt or the claims-paying ability of the other party thereto is rated at least A by Standard & Poor's, in the case of the Trusts, or at least A by Standard & Poor's or Moody's or comparably rated by any other NRSRO, in the case of ARM Fund. The Adviser will monitor the creditworthiness of contra-parties on an ongoing basis. If there is a default by the other party to such a transaction, the Fund or Trust will have contractual remedies pursuant to the agreements related to the transaction. The swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation. The Adviser has determined that, as a result, the swap market has become relatively liquid. Caps and floors are more recent innovations for which standardized documentation has not yet been developed and, accordingly, they are less liquid than swaps. There is no limit on the amount of interest rate swap transactions that may be entered into by any Trust. These transactions do not involve the delivery of securities or other underlying assets or principal. Accordingly, the risk of loss with respect to interest rate swaps is limited to the net amount of interest payments that a Trust is contractually obligated to make. If the other party to an interest rate swap defaults, the Trust's risk of loss consists of the net amount of interest payments that the Trust contractually is entitled to receive. The aggregate purchase price of caps and floors held by either ARM Fund or any Trust may not exceed 5% of such Fund's or Trust's total assets. ARM Fund and the Trusts may sell (I.E., write) caps and floors without limitation, subject to the segregated account requirement described above. B-9 - OPTIONS TRANSACTIONS. ARM Fund and the Trusts may write (I.E., sell) covered put and call options with respect to the securities in which they may invest. A put option is sometimes referred to as a "standby commitment," and a call is sometimes referred to as a "reverse standby commitment." By writing a call option, a Fund becomes obligated during the term of the option to deliver the securities underlying the option upon payment of the exercise price if the option is exercised. By writing a put option, a Fund becomes obligated during the term of the option to purchase the securities underlying the option at the exercise price if the option is exercised. The Trusts and ARM Fund may not write puts if, as a result, more than 50% of their assets would be required to be segregated. The principal reason for writing call or put options is to obtain, through the receipt of premiums, a greater return than would be realized on the underlying securities alone. A Fund receives premiums from writing call or put options, which it retains whether or not the options are exercised. By writing a call option, a Fund might lose the potential for gain on the underlying security while the option is open, and by writing a put option the Fund might become obligated to purchase the underlying security for more than its current market price upon exercise. The Trusts may write call options that are not covered for cross-hedging purposes. A call option written for cross-hedging purposes is designed to provide a hedge against a decline in the value of another security that a Trust owns or has the right to acquire. Options written for cross-hedging purposes involve the risk of imperfect correlation between price changes in the security on which the option is written and price changes in the security in the Trust's portfolio. ARM Fund does not write uncovered call options for cross-hedging purposes. Both ARM Fund and the Trusts may purchase put options, solely for hedging purposes, in order to protect portfolio holdings in an underlying security against a substantial decline in the market value of such holdings ("protective puts"). Such protection is provided during the life of the put because a Fund may sell the underlying security at the put exercise price, regardless of a decline in the underlying security's market price. Any loss to a Fund is limited to the premium paid for, and transaction costs paid in connection with, the put plus the initial excess, if any, of the market price of the underlying security over the exercise price. However, if the market price of such security increases, the profit the Fund realizes on the sale of the security will be reduced by the premium paid for the put option less any amount for which the put is sold. Both ARM Fund and the Trusts also may purchase call options solely for the purpose of hedging against an increase in prices of securities that a Fund ultimately wants to buy. Such protection is provided during the life of the call options because the Fund may buy the underlying security at the call exercise price regardless of any increase in the underlying security's market price. In order for a call option to be profitable, the market price of the underlying security must rise sufficiently above the exercise price to cover the premium and transaction costs. By using call options in this manner, a Fund will reduce any profit it might have realized had it bought the underlying security at the time it purchased the call option by the premium paid for the call option and by transaction costs. Both ARM Fund and the Trusts may purchase and write exchange-traded put and call options, and over-the-counter ("OTC") put and call options in negotiated transactions with the writers of the options, since options on many of the portfolio securities held by ARM Fund and the Trusts are not traded on an exchange. ARM Fund and the Trusts will purchase OTC options only from investment dealers and other financial institutions (such as commercial banks or savings and loan associations) deemed creditworthy by the Adviser. OTC options are two-party contracts with price and terms negotiated between buyer and seller. In contrast, exchange-traded options are third-party contracts with standardized strike prices and expiration dates, and are purchased from a clearing corporation. Exchange-traded options have a continuous liquid market, while OTC options may not. The staff of the Commission has taken the position that purchased OTC options and the assets used to "cover" written OTC options are illiquid securities, provided the entire amount of assets used to cover OTC options written by a Fund will not be B-10 treated as illiquid in certain circumstances, as set forth in the Statement of Additional Information. Both ARM Fund and the Trusts will treat OTC options, to the extent set forth in the Statement of Additional Information, as subject to their respective limitations on investments in illiquid securities. See "Illiquid Securities" below. For further information concerning the characteristics and risks of options transactions, see "Investment Objectives, Policies and Restrictions -- Options" in the Statement of Additional Information. - FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. Both ARM Fund and the Trusts may enter into contracts for the purchase or sale for future delivery of fixed-income securities or contracts based on financial indices including any index of securities in which ARM Fund or the Trusts may invest ("futures contracts"). A "sale" of a futures contract means the acquisition of a contractual obligation to deliver the securities called for by the contract at a specified price on a specified date. The purchaser of a futures contract on an index agrees to take or make delivery of an amount of cash equal to the difference between a specified dollar multiple of the value of the index on the expiration date of the contract ("current contract value") and the price at which the contract was originally struck. No physical delivery of the fixed-income securities underlying the index is made. The futures contracts in which ARM Fund and the Trusts may invest have been developed by and are traded on national commodity exchanges. The purpose of the acquisition or sale of a futures contract by a Fund is to hedge against fluctuations in the value of the Fund's portfolio without actually buying or selling securities. For example, if a Fund owns long-term debt securities and interest rates are expected to increase, the Fund might sell futures contracts. If interest rates did increase, the value of the debt securities in the Fund's portfolio would decline, but the value of the Fund's futures contracts would increase at approximately the same rate, thereby keeping the net asset value of the Fund from declining as much as it otherwise would have. If, on the other hand, the Fund held cash reserves and short-term investments pending anticipated investment in long-term obligations and interest rates were expected to decline, the Fund might purchase futures contracts for U.S. Government securities. Since the behavior of such contracts would generally be similar to that of long-term securities, the Fund could take advantage of the anticipated rise in the value of long-term securities without actually buying them until the market had stabilized. At that time, the Fund could accept delivery under the futures contracts or the futures contracts could be liquidated and the Fund's reserves could then be used to buy long-term securities in the cash market. ARM Fund and the Trusts will engage in such transactions only for hedging purposes, on either an asset-based or a liability-based basis, in each case in accordance with the rules and regulations of the Commodity Futures Trading Commission. See Appendix B to the Statement of Additional Information. ARM Fund and the Trusts may purchase and sell put and call options on futures contracts and enter into closing transactions with respect to such options to terminate existing positions. ARM Fund and the Trusts may use such options on futures contracts in connection with their hedging strategies in lieu of purchasing and writing options directly on the underlying securities or purchasing and selling the underlying futures contracts. There are risks in using futures contracts and options on futures contracts as hedging devices. The primary risks associated with the use of futures contracts and options thereon are (a) the prices of futures contracts and options may not correlate perfectly with the market value of the underlying security held by a Fund, and (b) the possible lack of a liquid secondary market for a futures contract and the resulting inability to close a futures position prior to its maturity date. The risk that a Fund will be unable to close out a futures position will be minimized by entering into such transactions on a national exchange with an active and liquid secondary market. Additional information with respect to futures contracts and options on futures contracts is set forth in Appendix B to the Statement of Additional Information. B-11 The effective use of futures contracts, options on futures contracts and the other hedging techniques discussed above is dependent upon the Adviser's judgment regarding interest rate movements and other economic factors. To the extent this judgment is incorrect, a Fund will be in a worse position than if such hedging techniques had not been used. - EURODOLLAR INSTRUMENTS. ARM Fund and the Trusts may make investments in Eurodollar instruments for hedging purposes only. Eurodollar instruments are essentially U.S. dollar denominated futures contracts or options thereon that are linked to LIBOR. Eurodollar futures contracts enable purchasers to obtain a fixed rate for the lending of funds and sellers to obtain a fixed rate for borrowings. ARM Fund and the Trusts use Eurodollar futures contracts and options thereon to hedge against changes in LIBOR, to which many short-term borrowings and floating rate securities are linked. Eurodollar instruments are subject to the same limitations and risks as other futures contracts and options thereon. FOREIGN CURRENCY TRANSACTIONS RELATING TO CANADIAN DEBT SECURITIES. As noted above, each Trust may invest up to 10% of its assets in securities denominated in Canadian dollars. The Trusts may engage in foreign currency exchange transactions to protect them against uncertainty in the level of the rate of exchange between the Canadian and U.S. dollars. The Trusts may engage in such transactions in connection with the purchase and sale of portfolio securities ("transaction hedging") and to protect the value of specific portfolio positions ("position hedging"). ARM Fund may not engage in such transactions. Each Trust may engage in "transaction hedging" to protect against a change in the exchange rate between the date on which the Trust contracts to purchase or sell the security and the settlement date, or to "lock in" the U.S. dollar equivalent of a dividend or interest payment in Canadian dollars. For that purpose, the Trusts may purchase or sell Canadian dollars on a spot (or cash) basis at the prevailing spot rate in connection with the settlement of transactions in portfolio securities denominated in Canadian dollars. If conditions warrant, the Trusts may also enter into contracts to purchase or sell Canadian dollars at a future date ("forward contracts") and may purchase and sell Canadian dollars or futures contracts as a hedge against changes in Canadian dollars or exchange rates between the trade and settlement dates on particular transactions and not for speculation. A foreign currency forward contract is a negotiated agreement to exchange currency at a future time at a rate or rates that may be higher or lower than the spot rate. Foreign currency futures contracts are standardized exchange-traded contracts and have margin requirements. For transaction hedging purposes, the Trusts may also purchase exchange-listed and over-the-counter call and put options on Canadian dollars or futures contracts thereon. A put option on a futures contract gives a Trust the right to assume a short position in the futures contract until expiration of the option. A put option on currency gives a Trust the right to sell a currency at an exercise price until the expiration of the option. A call option on a futures contract gives a Trust the right to assume a long position in the futures contract until the expiration of the option. A call option on currency gives a Trust the right to purchase a currency at the exercise price until the expiration of the option. The Trusts may engage in "position hedging" to protect against a decline in the value relative to the U.S. dollar in their securities denominated in Canadian dollars (or an increase in the value of the Canadian dollar for securities which a Trust intends to buy, when it holds cash reserves and short- term investments). For position hedging purposes, the Trusts may purchase or sell Canadian dollar futures contracts and forward contracts and may purchase put or call options on Canadian dollars or on futures contracts thereon on exchanges or over-the-counter markets. In connection with position hedging, the Trusts may also purchase or sell Canadian dollars on a spot basis. The precise matching of the amounts of foreign currency exchange transactions and the value of the portfolio securities involved generally will not be possible since the future value of such securities in foreign currencies will change as a consequence of market movements in the value of these securities between the dates the currency exchange transactions are entered into and the dates they mature. B-12 It is impossible to forecast with precision the market value of portfolio securities at the expiration or maturity of a forward or futures contract. Accordingly, it may be necessary for a Trust to purchase additional Canadian dollars on the spot market (and bear the expenses of such purchase) if the market value of the security or securities being hedged is less than the amount of Canadian dollars the Trust is obligated to deliver and if a decision is made to sell the security or securities and make delivery of the Canadian dollars. Conversely, it may be necessary to sell on the spot market some of the Canadian dollars received upon the sale of the portfolio security or securities if the market value of such security or securities exceeds the amount of Canadian dollars the Trust is obligated to deliver. Hedging transactions involve costs and may result in losses. The Trusts may write covered call options on Canadian dollars to offset some of such costs. The Trusts may engage in over-the-counter transactions only when appropriate exchange-traded transactions are unavailable and when, in the opinion of the Adviser, the pricing mechanism and liquidity are satisfactory and the participants are responsible parties likely to meet their contractual obligations. A Trust's ability to engage in hedging and related option transactions may be limited by tax considerations. Transaction and position hedging do not eliminate fluctuations in the underlying prices of the securities which a Trust owns or intends to purchase or sell. They simply establish a rate of exchange which one can achieve at some future point in time. Additionally, although these techniques tend to minimize the risk of loss due to a decline in the value of the hedged currency, they tend to limit any potential gain which might result from the increase in the value of such currency. A forward foreign currency exchange contract involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract as agreed by the parties, at a price set at the time of the contract. In the case of a cancelable forward contract, the holder has the unilateral right to cancel the contract at maturity by paying a specified fee. The contracts are traded in the interbank market conducted directly between currency traders (usually large commercial banks) and their customers. A forward contract generally has no deposit requirement, and no commissions are charged at any stage for trades. A foreign currency futures contract is a standardized contract for the future delivery of a specified amount of a foreign currency at a future date at a price set at the time of the contract. Foreign currency futures contracts traded in the United States are designated by and traded on exchanges regulated by the Commodity Futures Trading Commission (the "CFTC"), such as the New York Mercantile Exchange. The Trusts would enter into foreign currency futures contracts solely for hedging or other appropriate risk management purposes as defined in CFTC regulations. Forward foreign currency exchange contracts differ from foreign currency futures contracts in certain respects. For example, the maturity date of a forward contract may be any fixed number of days from the date of the contract agreed upon by the parties, rather than a predetermined date in any given month. Forward contracts may be in any amounts agreed upon by the parties rather than predetermined amounts. Also, forward foreign exchange contracts are traded directly between currency traders so that no intermediary is required. A forward contract generally requires no margin or other deposit. At the maturity of a foreign or futures contract, a Trust may either accept or make delivery of the currency specified in the contract, or at or prior to maturity enter into a closing transaction involving the purchase or sale of an offsetting contract. Closing transactions with respect to forward contracts are effected with the currency trader who is a party to the original forward contract. Closing transactions with respect to futures contracts are effected on a commodities exchange; a clearing corporation associated with the exchange assumes responsibility for closing out such contracts. Positions in foreign currency futures contracts may be closed out only on an exchange or board of trade which provides a secondary market in such contracts. Although the Trusts intend to purchase or sell foreign currency futures contracts only on exchanges or boards of trade where there appears to be an active secondary market, there is no assurance that a secondary market on an exchange or board of B-13 trade will exist for any particular contract or at any particular time. In such event, it may not be possible to close a futures position and, in the event of adverse price movements, a Trust would continue to be required to make daily cash payments of variation margin. Options on foreign currencies operate similarly to options on securities and are traded primarily in the over-the-counter market, although options on foreign currencies have recently been listed on several exchanges. Options traded in the over-the-counter market are illiquid, and it may not be possible for a Trust to dispose of an option it has purchased or terminate its obligations under an option it has written at a time when the Adviser believes it would be advantageous to do so. Options on foreign currencies are affected by all of those factors which influence foreign exchange rates and investments generally. The value of a foreign currency option is dependent upon the value of the foreign currency and the U.S. dollar and may have no relationship to the investment merits of a foreign debt security. Because foreign currency transactions occurring in the interbank market involve substantially larger amounts than those that may be involved in the use of foreign currency options, investors may be disadvantaged by having to deal in an odd lot market (generally consisting of transactions of less than $1 million) for the underlying foreign currencies at prices that are less favorable than for round lots. There is no systematic reporting of last sale information for foreign currencies, and there is no regulatory requirement that quotations available through dealers or other market sources be firm or revised on a timely basis. Available quotation information is generally representative of very large transactions in the interbank market and thus may not reflect relatively smaller transactions (less than $1 million) where rates may be less favorable. The interbank market in foreign currencies is a global, around-the-clock market. To the extent the U.S. options markets are closed while the markets for the underlying currencies remain open, significant price and rate movements may take place in the underlying markets that cannot be reflected in the options markets. Although foreign exchange dealers do not charge a fee for currency conversion, they do realize a profit based on the difference (the "spread") between prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign currency to a Trust at one rate, while offering a lesser rate of exchange should the Trust desire to resell that currency to the dealer. WHEN-ISSUED SECURITIES. ARM Fund and the Trusts may purchase securities on a "when-issued" basis and may purchase or sell securities on a forward commitment basis. When such transactions are negotiated, the price is fixed at the time the commitment is made, but delivery and payment for the securities take place at a later date. ARM Fund and the Trusts do not accrue income with respect to when-issued or forward commitment securities prior to their stated delivery date. Pending delivery of the securities, ARM Fund and each Trust maintain in a segregated account cash or liquid high-grade debt obligations in an amount sufficient to meet their purchase commitments. ARM Fund and the Trusts likewise segregate securities they sell on a forward commitment basis. The purchase of securities on a when-issued or forward commitment basis exposes ARM Fund and the Trusts to risk because the securities may decrease in value prior to their delivery. Purchasing securities on a when-issued or forward commitment basis involves the additional risk that the return available in the market when the delivery takes place will be higher than that obtained in the transaction itself. ILLIQUID SECURITIES. ARM Fund may invest up to 15% of its net assets in illiquid securities. Each Trust may invest up to 10% of its total assets in such securities, excluding certain hedging instruments, all of which must mature on or before March 31 in the year of the Trust's termination. Illiquid securities may offer a higher yield than securities which are more readily marketable, but they may not always be marketable on advantageous terms. The sale of illiquid securities often requires more time and results in higher brokerage charges or dealer discounts than does the sale of securities eligible for trading on national securities exchanges or in the over-the-counter markets. A Fund may be restricted in its ability to sell such securities at a time B-14 when the Adviser deems it advisable to do so. In addition, in order to meet redemption requests, a Fund may have to sell other assets, rather than such illiquid securities, at a time which is not advantageous. "Restricted securities" are securities which were originally sold in private placements and which have not been registered under the Securities Act of 1933 (the "1933 Act"). Such securities generally have been considered illiquid, since they may be resold only subject to statutory restrictions and delays or if registered under the 1933 Act. In 1990, however, the SEC adopted Rule 144A under the 1933 Act, which provides a safe harbor exemption from the registration requirements of the 1933 Act for resales of restricted securities to "qualified institutional buyers," as defined in the rule. The result of this rule has been the development of a more liquid and efficient institutional resale market for restricted securities. Thus, restricted securities are no longer necessarily illiquid. ARM Fund and the Trusts are not subject to any limitation on their ability to invest in securities simply because such securities are restricted. These securities will be treated as liquid when they have been determined to be liquid by the Board of Directors of the respective Fund or by the Adviser subject to the oversight of and pursuant to procedures adopted by the Board of Directors. See "Investment Objectives, Policies and Restrictions -- Illiquid Securities" in the Statement of Additional Information. Similar determinations may be made with respect to commercial paper issued in reliance upon the so-called "private placement" exemption from registration under Section 4(2) of the 1933 Act and with respect to IO and PO classes of Mortgage-Backed Securities issued by the U.S. Government or its agencies and instrumentalities. (ARM Fund will not invest in IO or PO classes of Mortgage-Backed Securities.) LENDING OF PORTFOLIO SECURITIES. In order to generate income, ARM Fund and each Trust may lend portfolio securities up to 30% of the value of their total assets to broker-dealers, banks or other financial borrowers of securities. As with other extensions of credit, there are risks of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. However, ARM Fund and the Trusts will only enter into loan arrangements with broker-dealers, banks or other institutions which the Adviser has determined are creditworthy under guidelines established by the respective Fund's Board of Directors and will receive collateral in the form of cash, U.S. Government Securities or other high-grade debt obligations equal to at least 100% of the value of the securities loaned. The value of the collateral and of the securities loaned is marked to market on a daily basis. During the time portfolio securities are on loan, the borrower pays the respective Fund an amount equivalent to any interest paid on the securities and the Fund may invest the cash collateral and earn income or may receive an agreed upon amount of interest income from the borrower. However, the amounts received by a Fund may be reduced by finders fees paid to broker-dealers. Collateral (including any securities purchased with cash collateral) will be maintained by the Fund's custodian in a segregated account. REPURCHASE AGREEMENTS. ARM Fund and each Trust may enter into repurchase agreements pertaining to the securities in which they may invest. A repurchase agreement involves the purchase by a Fund of securities with the condition that after a stated period of time the original seller (a member bank of the Federal Reserve System or a recognized securities dealer) will buy back the same securities ("collateral") at a predetermined price or yield. Repurchase agreements involve certain risks not associated with direct investments in securities. In the event the original seller defaults on its obligation to repurchase, as a result of its bankruptcy or otherwise, the respective Fund will seek to sell the collateral, which action could involve costs or delays. In such case, the Fund's ability to dispose of the collateral to recover such investment may be restricted or delayed. While collateral will at all times be maintained in an amount equal to the repurchase price under the agreement (including accrued interest due thereunder), to the extent proceeds from the sale of collateral were less than the repurchase price, a Fund would suffer a loss. In the event of a seller's bankruptcy, a Fund might be delayed in, or prevented from, selling the collateral to the Fund's benefit. Repurchase agreements maturing in more than seven days are considered illiquid and subject to ARM Fund's and the Trusts' respective restrictions on investing in illiquid securities. See "Illiquid Securities" above. B-15 BORROWING. Each Trust may borrow money in an amount up to 33 1/3% of its total assets (including the amount borrowed), less all liabilities other than bank or other borrowings. Each Trust may also borrow an additional 5% of its total assets for temporary defensive purposes without regard to the foregoing limitation and may also borrow for emergency purposes, for the payment of dividends, for share repurchases or for the clearance of transactions. Each Trust may borrow from a financial institution unrelated to the Trust and may also borrow by entering into reverse repurchase agreements with the same parties with whom it may enter into repurchase agreements (as discussed above). Borrowing by a Trust creates an opportunity for increased net income, but at the same time creates special risk considerations. For example, leveraging may exaggerate changes in the net asset value of the Trust shares and in the yield on the Trust's portfolio. Although the principal of such borrowings will be fixed, the Trust's assets may change in value during the time the borrowing is outstanding. Borrowings will create interest expense for the Trust which can exceed the income from the assets retained. To the extent income derived from securities purchased with borrowed funds exceeds the interest the Trust will have to pay, the Trust's net income will be greater than if borrowings were not used. Conversely, if the income from the assets retained with borrowed funds is not sufficient to cover the cost of borrowing, the net income of the Trust will be less than if borrowing were not used and, therefore, the amount available for distribution to shareholders as dividends will be reduced. ARM Fund may borrow money only for temporary or emergency purposes in an amount up to 10% of the value of its total assets. ARM Fund may borrow from a financial institution unrelated to the Fund or by entering into reverse repurchase agreements with the same parties with whom it may enter into repurchase agreements (as discussed above). Interest paid by ARM Fund on borrowed funds would decrease the net earnings of the Fund. ARM Fund will not purchase portfolio securities while outstanding borrowings exceed 5% of the value of the Fund's total assets. ARM Fund and each Trust may mortgage, pledge or hypothecate its assets to secure permitted borrowings. The policies set forth in this section are fundamental and may not be changed without a majority vote of the respective Fund's shares. Under a reverse repurchase agreement, a Fund sells securities and agrees to repurchase them at a mutually agreed date and price. Reverse repurchase agreements involve the risk that the market value of the securities sold by the Fund may decline below the price at which the Fund is obligated to repurchase such securities. In the event the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, such buyer or its trustee or receiver may receive an extension of time to determine whether to enforce the Fund's obligation to repurchase the securities, and the Fund's use of the proceeds of the reverse repurchase agreement may effectively be restricted pending such decisions. Reverse repurchase agreements create leverage, a speculative factor, and are considered borrowings for purposes of ARM Fund's and the Trusts' respective limitations on borrowing. B-16 APPENDIX C SHAREHOLDER GUIDE TO INVESTING HOW TO PURCHASE SHARES GENERAL ARM Fund's shares may be purchased at the public offering price from the Distributor and from other broker-dealers who have sales agreements with the Distributor. The address of the Distributor is that of ARM Fund. The Distributor reserves the right to reject any purchase order. You should be aware that, because ARM Fund does not issue stock certificates, ARM Fund shares must be kept in an account with the Distributor or with IFTC. All investments must be arranged through your Piper Jaffray investment executive or other broker-dealer. PURCHASE PRICE You may purchase shares of ARM Fund at the net asset value per share next calculated after receipt of your order by your Piper Jaffray investment executive or other broker-dealer, plus a front-end sales charge as follows:
SALES CHARGE SALES CHARGE AS A PERCENTAGE OF AS A PERCENTAGE OF AMOUNT OF TRANSACTION AT OFFERING PRICE OFFERING PRICE OFFERING PRICE - ------------------------------------------------------------------ ------------------- ------------------- Less than $100,000................................................ 1.50% 1.52% $100,000 but less than $250,000................................... 1.25% 1.27% $250,000 but less than $500,000................................... 1.00% 1.01% $500,000 and over................................................. 0.00% 0.00%
This table sets forth total sales charges or underwriting commissions. The Distributor may reallow up to the entire sales charge to broker-dealers in connection with their sales of shares. These broker-dealers may, by virtue of such reallowance, be deemed to be "underwriters" under the Securities Act of 1933, as amended. The Distributor will make certain payments to its investment executives and to other broker-dealers in connection with their sales of ARM Fund shares. See "Proposal No. 1 -- Management of the Trusts and ARM Fund -- Plan of Distribution" in the Joint Proxy Statement/Prospectus. In addition, the Distributor or the Adviser, at their own expense, will provide promotional incentives to investment executives of the Distributor and to broker-dealers who have sales agreements with the Distributor in connection with sales of shares of ARM Fund and other mutual funds for which the Adviser acts as investment adviser. In some instances, these incentives may be made available only to certain investment executives or broker-dealers who have sold or may sell significant amounts of such shares. The incentives may include payment for travel expenses, including lodging at luxury resorts, incurred in connection with sales seminars. PURCHASES OF $500,000 OR MORE If you make a purchase of $500,000 or more (including purchases made under a Letter of Intent), a .2% contingent deferred sales charge will be assessed in the event you redeem shares within 24 months following the purchase. This sales charge will be paid to the Distributor. For more information, please refer to the Contingent Deferred Sales Charge section of "How to Redeem Shares." The Distributor will pay its investment executives and other broker-dealers in connection with these purchases as follows:
FEES AS A PERCENTAGE OF AMOUNT OF TRANSACTION OFFERING PRICE - --------------------------------------------------------------------- ----------------- First $3,000,000..................................................... .20% Next $2,000,000...................................................... .15% Next $5,000,000...................................................... .10% Above $10,000,000.................................................... .05%
C-1 Piper Jaffray investment executives and other broker-dealers generally will not receive a fee in connection with purchases on which the contingent deferred sales charge is waived. However, the Distributor, in its discretion, may pay a fee out of its own assets to its investment executives and other broker-dealers in connection with purchases by employee benefit plans on which no sales charge is imposed. Please see the Special Purchase Plans section of "Reducing Your Sales Charge." MINIMUM INVESTMENTS A minimum initial investment of $250 is required. There is no minimum for subsequent investments. The Distributor, in its discretion, may waive the minimum. REDUCING YOUR SALES CHARGE You may qualify for a reduced sales charge through one or more of several plans. You must notify your Piper Jaffray investment executive or broker-dealer at the time of purchase to take advantage of these plans. AGGREGATION Front-end or initial sales charges may be reduced or eliminated by aggregating your purchase with purchases of certain related personal accounts. In addition, purchases made by members of certain organized groups will be aggregated for purposes of determining sales charges. Sales charges are calculated by adding the dollar amount of your current purchase to the higher of the cost or current value of shares of any Piper fund sold with a sales charge that are currently held by you and your related accounts or by other members of your group. QUALIFIED GROUPS. You may group purchases in the following personal accounts together: - Your individual account. - Your spouse's account. - Your children's accounts (if they are under the age of 21). - Your employee benefit plan accounts if they are exclusively for your benefit. This includes accounts such as IRAs, individual 403(b) plans or single-participant Keogh-type plans. - A single trust estate or single fiduciary account if you are the trustee or fiduciary. Additionally, purchases made by members of any organized group meeting the requirements listed below may be aggregated for purposes of determining sales charges: - The group has been in existence for more than six months. - It is not organized for the purpose of buying redeemable securities of a registered investment company. - Purchases must be made through a central administration, or through a single dealer, or by other means that result in economy of sales effort or expense. An organized group does not include a group of individuals whose sole organizational connection is participation as credit card holders of a company, policyholders of an insurance company, customers of either a bank or broker-dealer, or clients of an investment adviser. RIGHT OF ACCUMULATION Sales charges for purchases of ARM Fund shares into Piper Jaffray accounts will be automatically calculated taking into account the dollar amount of any purchases along with the higher of current value or cost of shares previously purchased in the Piper funds that were sold with a sales charge. For other broker-dealer accounts, you should notify your investment executive at the time of purchase of additional Piper fund shares you may own. C-2 LETTER OF INTENT Your sales charge may be reduced by signing a non-binding Letter of Intent. This Letter of Intent will state your intention to invest $100,000 or more in any of the Piper funds sold with a sales charge over a 13-month period, beginning not earlier than 90 days prior to the date you sign the Letter. You will pay the lower sales charge applicable to the total amount you plan to invest over the 13-month period. Part of your shares will be held in escrow to cover additional sales charges that may be due if you do not invest the planned amount. Please see "Purchase of Shares" in the Statement of Additional Information for more details. You can contact your Piper Jaffray investment executive or other broker-dealer for an application. SPECIAL PURCHASE PLANS For more information on any of the following special purchase plans, contact your Piper Jaffray investment executive or other broker-dealer. PURCHASES BY PIPER JAFFRAY COMPANIES INC., ITS SUBSIDIARIES AND ASSOCIATED PERSONS Piper Jaffray Companies Inc. and its subsidiaries may buy shares of ARM Fund without incurring a sales charge. The following persons associated with such entities also may buy ARM Fund shares without paying a sales charge: - Officers, directors and partners. - Employees and retirees. - Sales representatives. - Spouses or children under the age of 21 of any of the above. - Any trust, pension, profit-sharing or other benefit plan for any of the above. PURCHASES BY BROKER-DEALERS Employees of broker-dealers who have entered into sales agreements with the Distributor, and spouses and children under the age of 21 of such employees, may buy shares of ARM Fund without incurring a sales charge. PURCHASES BY OTHER INDIVIDUALS WITHOUT A SALES CHARGE - Clients of the Adviser may buy shares of ARM Fund in their advisory accounts without incurring a sales charge. - Discretionary accounts at Piper Trust Company and participants in investment companies exempt from registration under the 1940 Act that are managed by the Adviser also may buy shares of ARM Fund without incurring a sales charge. - Trust companies and bank trust departments using funds over which they exercise exclusive discretionary investment authority and which are held in a fiduciary, agency, advisory, custodial or similar capacity also may buy ARM Fund shares without incurring a sales charge. - Investors purchasing shares through a Piper Jaffray investment executive may buy shares in ARM Fund without paying a sales charge if the purchase of such shares is funded by the proceeds from the sale of shares of any non-money market open-end mutual fund. This privilege is available for 30 days after the sale. PURCHASES BY EMPLOYEE BENEFIT PLANS AND TAX-SHELTERED ANNUITIES - Shares of ARM Fund will be sold at net asset value, without a sales charge, to employee benefit plans containing an actively maintained qualified cash or deferred arrangement under Section 401(k) of the Internal Revenue Code of 1986, as amended (the "Code") ("401(k) Plan"). In the event a 401(k) Plan of an employer has purchased shares in the Fund during any calendar C-3 quarter, any other employee benefit plan of such employer that is a qualified plan under Section 401(a) of the Code also may purchase shares of ARM Fund during such quarter without incurring a sales charge. - Custodial accounts under Section 403(b) of the Code (known as tax-sheltered annuities) also may buy shares of ARM Fund without incurring a sales charge. HOW TO REDEEM SHARES NORMAL REDEMPTION You may redeem all or a portion of your shares on any day that ARM Fund values its shares. (Please refer to "Proposal No. 1 -- Share Purchase, Exchange and Redemption Procedures -- Redemptions" in the Joint Proxy Statement/Prospectus for more information.) Your shares will be redeemed at the net asset value next calculated after the receipt of your instructions in good form by your Piper Jaffray investment executive or other broker-dealer as explained below. PIPER JAFFRAY INC. ACCOUNTS. To redeem your shares, please contact your Piper Jaffray investment executive with an oral request to redeem your shares. OTHER BROKER-DEALER ACCOUNTS. To redeem your shares, you may either contact your broker-dealer with an oral request or send a written request directly to the Funds' transfer agent, IFTC. This request should contain the dollar amount or number of shares to be redeemed, your Fund account number and either a social security or tax identification number (as applicable). You should sign your request in exactly the same way the account is registered. If there is more than one owner of the shares, all owners must sign. A signature guarantee is required for redemptions over $25,000. Please contact IFTC or refer to "Redemption of Shares" in the Statement of Additional Information for more details. CONTINGENT DEFERRED SALES CHARGE If you invest $500,000 or more and, as a result, pay no front-end sales charge, you may incur a contingent deferred sales charge if you redeem within 24 months. This charge will be equal to .2% of the lesser of the net asset value of the shares at the time of purchase or at the time of redemption. This charge does not apply to amounts representing an increase in the value of Fund shares due to capital appreciation or to shares acquired through reinvestment of dividend or capital gain distributions. In determining whether a contingent deferred sales charge is payable, shares that are not subject to any deferred sales charge will be redeemed first, and other shares will then be redeemed in the order purchased. LETTER OF INTENT. In the case of a Letter of Intent, the 24-month period begins on the date the Letter of Intent is completed. SPECIAL PURCHASE PLANS. If you purchased your shares through one of the plans described above under "Special Purchase Plans," the contingent deferred sales charge will be waived. In addition, the contingent deferred sales charge will be waived in the event of: - The death or disability (as defined in Section 72(m)(7) of the Code) of the shareholder. (This waiver will be applied to shares held at the time of death or the initial determination of disability of either an individual shareholder or one who owns the shares as a joint tenant with the right of survivorship or as a tenant in common.) - A lump sum distribution from an employee benefit plan qualified under Section 401(a) of the Code, an individual retirement account under Section 408(a) of the Code or a simplified employee pension plan under Section 408(k) of the Code. - Systematic withdrawals from any such plan or account if the shareholder is at least 59 1/2 years old. C-4 - A tax-free return of the excess contribution to an individual retirement account under Section 408(a) of the Code. - Involuntary redemptions effected pursuant to the right to liquidate shareholder accounts having an aggregate net asset value of less than $200. EXCHANGES. If you exchange your shares, no contingent deferred sales charge will be imposed. However, the charge will apply if you subsequently redeem the new shares within 24 months of the original purchase. REINSTATEMENT PRIVILEGE. If you elect to use the Reinvestment Privilege (please see "Shareholder Services" below), any contingent deferred sales charge you paid will be credited to your account (proportional to the amount reinvested). Please see "Redemption of Shares" in the Statement of Additional Information for more details. PAYMENT OF REDEMPTION PROCEEDS After your shares have been redeemed, proceeds will normally be sent to you or your broker-dealer within five business days. In no event will payment be made more than seven days after receipt of your order in good form. However, payment may be postponed or the right of redemption suspended for more than seven days under unusual circumstances, such as when trading is not taking place on the New York Stock Exchange. Payment of redemption proceeds may also be delayed if the shares to be redeemed were purchased by a check drawn on a bank which is not a member of the Federal Reserve System, until such checks have cleared the banking system (normally up to 15 days from the purchase date). INVOLUNTARY REDEMPTION ARM Fund reserves the right to redeem your account at any time the net asset value of the account falls below $200 as the result of a redemption or exchange request. You will be notified in writing prior to any such redemption and will be allowed 30 days to make additional investments before the redemption is processed. SHAREHOLDER SERVICES AUTOMATIC MONTHLY INVESTMENT PROGRAM You may arrange to make additional automated purchases of ARM Fund shares or shares of certain other mutual funds managed by the Adviser. You can automatically transfer $100 or more per month from your bank, savings and loan or other financial institution to purchase additional shares. In addition, if you hold your shares in a Piper Jaffray account, you may arrange to make such additional purchases by having $25 or more automatically transferred each month from any of the money market fund series of the Company. You should contact your Piper Jaffray investment executive or IFTC to obtain authorization forms or for additional information. REINSTATEMENT PRIVILEGE If you have redeemed shares of ARM Fund, you may be eligible to reinvest in shares of any fund managed by the Adviser without payment of an additional sales charge. The reinvestment request must be made within 30 days of the redemption. This privilege is subject to the eligibility of share purchases in your state as well as the minimum investment requirements and any other applicable terms in the prospectus of the fund being acquired. EXCHANGE PRIVILEGE If your investment goals change, you may prefer a fund with a different objective. If you are considering an exchange into another mutual fund managed by the Adviser, you should carefully read the appropriate prospectus for additional information about that fund. A prospectus may be obtained through your Piper Jaffray investment executive, your broker-dealer or the Distributor. You may exchange your shares for shares of any other mutual fund managed by the Adviser that is open to new investors. All exchanges are subject to the eligibility of share purchases in your state as C-5 well as the minimum investment requirements and any other applicable terms in the prospectus of the fund being acquired. Exchanges are made on the basis of the net asset values of the funds involved, except that investors exchanging into a fund which has a higher sales charge must pay the difference. To exchange your shares, please contact your Piper Jaffray investment executive, your broker-dealer or IFTC. You may make four exchanges per year without payment of a service charge. Thereafter you will pay a $5.00 service charge for each exchange. The Company reserves the right to change or discontinue the exchange privilege, or any aspect of the privilege, upon 60 days' written notice. TELEPHONE TRANSACTION PRIVILEGES PIPER JAFFRAY INC. ACCOUNTS. If you hold your shares in a Piper Jaffray account, you may telephone your investment executive to execute any transaction or to apply for many shareholder services. In some cases, you may be required to complete a written application. OTHER BROKER-DEALER ACCOUNTS. If you hold your shares in an account with your broker-dealer or at IFTC, you may authorize telephone privileges by completing the Account Application and Services Form. Please contact your broker-dealer or IFTC (800/874-6025) for an application or for more details. ARM Fund will employ reasonable procedures to confirm that a telephone request is genuine, including requiring that payment be made only to the address of record or the bank account designated on the Account Application and Services Form and requiring certain means of telephonic identification. ARM Fund will not be liable for following instructions communicated by telephone that it reasonably believes to be genuine. DIRECTED DIVIDENDS You may direct income dividends and capital gains distributions from ARM Fund to be invested in any other mutual fund managed by the Adviser (other than a money market fund) that is offered in your state. This investment will be made at net asset value. It will not be subject to a minimum investment amount except that you must hold shares in such fund (including the shares being acquired with the dividend or distribution) with a value at least equal to such fund's minimum initial investment amount. SYSTEMATIC WITHDRAWAL PLAN If your account has a value of $5,000 or more, you may establish a Systematic Withdrawal Plan. This plan will allow you to receive regular periodic payments by redeeming as many shares from your account as necessary. As with other redemptions, a redemption to make a withdrawal is a sale for federal income tax purposes. Payments made under a Systematic Withdrawal Plan cannot be considered as actual yield or income since part of the payments may be a return of capital. A request to establish a Systematic Withdrawal Plan must be submitted in writing to your Piper Jaffray investment executive or other broker-dealer. There are no service charges for maintenance; the minimum amount that you may withdraw each period is $100. You will be required to have any income dividends and any capital gains distributions reinvested. You may choose to have withdrawals made monthly, quarterly or semi-annually. Please contact your Piper Jaffray investment executive, other broker-dealer or IFTC for more information. You should be aware that additional investments in an account that has an active Systematic Withdrawal Plan may be inadvisable due to sales charges and tax liabilities. As a result, you will not be allowed to make additional investments of less than $5,000 or three times the annual withdrawals while you have the plan in effect. Please refer to "Redemption of Shares" in the Statement of Additional Information for additional details. C-6 ACCOUNT PROTECTION If you purchased your shares of ARM Fund through a Piper Jaffray investment executive, you may choose from several account options. Your investments in the Fund held in a Piper Jaffray account (except for non-"PAT" accounts) would be protected up to $25 million. Investments held in non-"PAT" Piper Jaffray accounts are protected up to $2.5 million. In each case, the Securities Investor Protection Corporation ("SIPC") provides $500,000 of protection; the additional coverage is provided by The Aetna Casualty & Surety Company. This protection does not cover any declines in the net asset value of Fund shares. CONFIRMATION OF TRANSACTIONS AND REPORTING OF OTHER INFORMATION Each time there is a transaction involving your ARM Fund shares, such as a purchase, redemption or dividend reinvestment, you will receive a confirmation statement describing that activity. This information will be provided to you from either Piper Jaffray, your broker-dealer or IFTC. In addition, you will receive various IRS forms after the first of each year detailing important tax information, and ARM Fund is required to supply annual and semiannual reports that list securities held by the Fund and include the current financial statements of the Fund. HOUSEHOLDING. If you have multiple accounts with Piper Jaffray, you may receive some of the above information in combined mailings. This will not only help to reduce Fund expenses, it will help the environment by saving paper. Please contact your Piper Jaffray investment executive for more information. C-7 APPENDIX D DISSENTING SHAREHOLDERS' RIGHTS OF APPRAISAL Shareholders who elect to exercise dissenters' rights must satisfy each of the following conditions: (a) dissenting holders must file with the Company, before the vote on the Merger is taken, written notice of their intention to demand payment of the fair value of their shares (this written notice must be in addition to and separate from any proxy or vote against the Merger -- voting against or failing to vote for the Merger will not constitute such a notice); and (b) dissenting holders must not vote in favor of the Merger (a failure to vote will satisfy this requirement, but a vote in favor of the Merger, by proxy or in person, will constitute a waiver of dissenters' rights and will nullify any previously filed written notice of intent to demand payment). Shareholders who fail to comply with either of these conditions will have no dissenters' rights with respect to their shares. SHAREHOLDERS SHOULD BE AWARE THAT THE DIVISION OF INVESTMENT MANAGEMENT OF THE COMMISSION HAS TAKEN THE POSITION THAT ADHERENCE TO STATE APPRAISAL PROCEDURES BY A REGISTERED INVESTMENT COMPANY ISSUING REDEEMABLE SECURITIES WOULD CONSTITUTE A VIOLATION OF RULE 22C-1 UNDER THE 1940 ACT. THIS RULE PROVIDES THAT NO OPEN-END INVESTMENT COMPANY MAY REDEEM ITS SHARES OTHER THAN AT NET ASSET VALUE NEXT COMPUTED AFTER RECEIPT OF A TENDER OF SUCH SECURITY FOR REDEMPTION. IT IS THE VIEW OF THE DIVISION OF INVESTMENT MANAGEMENT THAT RULE 22C-1 SUPERSEDES APPRAISAL PROVISIONS IN STATE STATUTES. IN THE INTERESTS OF ENSURING EQUAL VALUATION OF ALL INTERESTS IN THE TRUSTS, THE COMPANY WILL DETERMINE DISSENTERS' RIGHTS IN ACCORDANCE WITH THE DIVISION INTERPRETATION. ACCORDINGLY, IN THE EVENT THAT ANY SHAREHOLDER ELECTS TO EXERCISE DISSENTERS' RIGHTS UNDER MINNESOTA LAW, THE COMPANY INTENDS TO SUBMIT THIS QUESTION TO A COURT OF COMPETENT JURISDICTION. All written notices should be addressed to: Jaffray Funds Inc., Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota 55402, Attention: Corporate Secretary, and should be executed by, or with the consent of, the holder of record. The notice must identify the shareholder and indicate the intention of such shareholder to demand payment of fair value of his or her shares. In the notice the shareholder's name should be stated as it appears on his or her stock certificates, if any, or in the manner in which his or her shares are registered. A beneficial owner of shares who is not the registered owner may assert dissenters' rights as to shares held on such person's behalf, provided that such beneficial owner submits a written consent of the registered owner to the Company at or before the time such rights are asserted. A Trust shareholder may not assert dissenters' rights as to less than all of the shares registered in such shareholder's name, except in the situation in which certain shares are beneficially owned by another person but registered in such shareholder's name. If a shareholder wishes to dissent with respect to shares beneficially owned by another person, such shareholder must dissent with respect to all of such shares and disclose the name and address of the beneficial owner on whose behalf the holder is dissenting. After a vote approving the Merger, and assuming the Merger is consummated, the Company must give written notice that the Merger has been approved to each shareholder who filed a written notice of intent to demand payment for such shareholder's shares and who did not vote in favor of the Merger. This notice sent by the Company shall specify the address to which a demand for payment and stock certificates, if any, must be sent by such shareholder in order to obtain payment and shall include a form for demanding payment to be completed by the shareholder. In order to receive the fair value of his or her shares, a dissenting shareholder must, within 30 days after the date of such notice, send such holder's share certificates, if any, together with certain information concerning such shareholder's shares, on the form supplied by the Company. After a valid demand for payment and the related certificates, if any, are received, the Company must remit to each dissenting shareholder who has complied with the above-referenced requirements the amount it deems to be the fair value of that shareholder's shares, plus interest from the fifth day after the effective date of the Merger to the date of such payment, together with a brief description of the method used to reach such estimate and certain updated interim financial data of the Company, if available. D-1 If a dissenting shareholder believes that the amount remitted by the Company is less than the fair value of such shareholder's shares, plus interest, the shareholder may give written notice to the Company of his own estimate of fair value of his Trust shares within 30 days after the mailing date of the remittance and demand payment of the difference. If the shareholder fails to give written notice of such estimate and demand for the difference with the 30-day time period, the shareholder will be entitled only to the amount remitted. If the Trust and the dissenting shareholder are unable to settle the shareholder's demand within 60 days, the Company shall file in court a petition requesting that the court determine the fair value of the shares, plus interest. All shareholders whose demands are not settled within the applicable 60-day settlement periods shall be made parties to this proceeding. The court, after determining that the shareholder has complied with all statutory requirements, may use any valuation method or combination of methods it deems appropriate, whether or not used by the Company or the dissenting shareholder, or may appoint appraisers to determine the fair value of the shares. The court's determination is binding on all shareholders of the Trusts, and the court must enter judgment for any amount by which the court determines fair value exceeds the amount remitted to the shareholders by the Company. The costs and expenses of such a proceeding, including the expenses and compensation of any appraisers, will be assessed against the Company unless the court, in its discretion, determines that the dissenting shareholder's action in demanding supplemental payment was arbitrary, vexatious, or not in good faith, in which event the court may assess all or a part of such costs against the shareholder. Fees and expenses of counsel for the dissenting shareholder may be awarded by the court out of the amount, if any, awarded to such shareholder. The following sections of the Minnesota Business Corporation Act set forth the rights of dissenting shareholders and the procedures to be followed for asserting dissentors' rights: 302A.471. RIGHTS OF DISSENTING SHAREHOLDERS SUBDIVISION 1. ACTIONS CREATING RIGHTS. A shareholder of a corporation may dissent from, and obtain payment for the fair value of the shareholder's shares in the event of, any of the following corporate actions: (a) An amendment of the articles that materially and adversely affects the rights or preferences of the shares of the dissenting shareholder in that it: (1) alters or abolishes a preferential right of the shares; (2) creates, alters, or abolishes a right in respect of the redemption of the shares, including a provision respecting a sinking fund for the redemption or repurchase of the shares; (3) alters or abolishes a preemptive right of the holder of the shares to acquire shares, securities other than shares, or rights to purchase shares or securities other than shares; (4) excludes or limits the right of a shareholder to vote on a matter, or to cumulate votes, except as the right may be excluded or limited through the authorization or issuance of securities of an existing or new class or series with similar or different voting rights; except that an amendment to the articles of an issuing public corporation that provides that section 302A.671 does not apply to a control share acquisition does not give rise to the right to obtain payment under this section; (b) A sale, lease, transfer, or other disposition of all or substantially all of the property and assets of the corporation, but not including a transaction permitted without shareholder approval in section 302A.661, subdivision 1, or a disposition in dissolution described in section 302A.725, subdivision 2, or a disposition pursuant to an order of a court, or a disposition for cash on terms D-2 requiring that all or substantially all of the net proceeds of disposition be distributed to the shareholders in accordance with their respective interests within one year after the date of disposition; (c) A plan of merger, whether under this chapter or under chapter 322B, to which the corporation is a party, except as provided in subdivision 3; (d) A plan of exchange, whether under this chapter or under chapter 322B, to which the corporation is a party as the corporation whose shares will be acquired by the acquiring corporation, if the shares of the shareholder are entitled to be voted on the plan; or (e) Any other corporate action taken pursuant to a shareholder vote with respect to which the articles, the bylaws, or a resolution approved by the board directs that dissenting shareholders may obtain payment for their shares. SUBD. 2. BENEFICIAL OWNERS. (a) A shareholder shall not assert dissenters' rights as to less than all of the shares registered in the name of the shareholder, unless the shareholder dissents with respect to all the shares that are beneficially owned by another person but registered in the name of the shareholder and discloses the name and address of each beneficial owner on whose behalf the shareholder dissents. In that event, the rights of the dissenter shall be determined as if the shares as to which the shareholder has dissented and the other shares were registered in the names of different shareholders. (b) The beneficial owner of shares who is not the shareholder may assert dissenters' rights with respect to shares held on behalf of the beneficial owner, and shall be treated as a dissenting shareholder under the terms of this section and section 302A.473, if the beneficial owner submits to the corporation at the time of or before the assertion of the rights a written consent of the shareholder. SUBD. 3. RIGHTS NOT TO APPLY. Unless the articles, the bylaws, or a resolution approved by the board otherwise provide, the right to obtain payment under this section does not apply to a shareholder of the surviving corporation in a merger, if the shares of the shareholder are not entitled to be voted on the merger. SUBD. 4. OTHER RIGHTS. The shareholders of a corporation who have a right under this section to obtain payment for their shares do not have a right at law or in equity to have a corporate action described in subdivision 1 set aside or rescinded, except when the corporate action is fraudulent with regard to the complaining shareholder or the corporation. 302A.473. PROCEDURES FOR ASSERTING DISSENTERS' RIGHTS SUBDIVISION 1. DEFINITIONS. (a) For purposes of this section, the terms defined in this subdivision have the meanings given them. (b) "Corporation" means the issuer of the shares held by a dissenter before the corporate action referred to in section 302A.471, subdivison 1 or the successor by merger of that issuer. (c) "Fair value of the shares" means the value of the shares of a corporation immediately before the effective date of the corporate action referred to in section 302A.471, subdivision 1. (d) "Interest" means interest commencing five days after the effective date of the corporate action referred to in section 302A.471, subdivision 1, up to and including the date of payment, calculated at the rate provided in section 549.09 for interest on verdicts and judgments. SUBD. 2. NOTICE OF ACTION. If a corporation calls a shareholder meeting at which any action described in section 302A.471, subdivision 1 is to be voted upon, the notice of the meeting shall inform each shareholder of the right to dissent and shall include a copy of section 302A.471 and this section and a brief description of the procedure to be followed under these sections. D-3 SUBD. 3. NOTICE OF DISSENT. If the proposed action must be approved by the shareholders, a shareholder who wishes to exercise dissenters' rights must file with the corporation before the vote on the proposed action a written notice of intent to demand the fair value of the shares owned by the shareholder and must not vote the shares in favor of the proposed action. SUBD. 4. NOTICE OF PROCEDURE; DEPOSIT OF SHARES. (a) After the proposed action has been approved by the board and, if necessary, the shareholders, the corporation shall send to all shareholders who have complied with subdivision 3 and to all shareholders entitled to dissent if no shareholder vote was required, a notice that contains: (1) The address to which a demand for payment and certificates of certificated shares must be sent in order to obtain payment and the date by which they must be received; (2) Any restrictions on transfer of uncertificated shares that will apply after the demand for payment is received; (3) A form to be used to certify the date on which the shareholder, or the beneficial owner on whose behalf the shareholder dissents, acquired the shares or an interest in them and to demand payment; and (4) A copy of section 302A.471 and this section and a brief description of the procedures to be followed under these sections. (b) In order to receive the fair value of the shares, a dissenting shareholder must demand payment and deposit certificated shares or comply with any restrictions on transfer of uncertificated shares within 30 days after the notice required by paragraph (a) was given, but the dissenter retains all other rights of a shareholder until the proposed action takes effect. SUBD. 5. PAYMENT; RETURN OF SHARES. (a) After the corporate action takes effect, or after the corporation receives a valid demand for payment, whichever is later, the corporation shall remit to each dissenting shareholder who has complied with subdivisions 3 and 4 the amount the corporation estimates to be the fair value of the shares, plus interest, accompanied by: (1) The corporation's closing balance sheet and statement of income for a fiscal year ending not more than 16 months before the effective date of the corporate action, together with the latest available interim financial statements; (2) An estimate by the corporation of the fair value of the shares and a brief description of the method used to reach the estimate; and (3) A copy of section 302A.471 and this section, and a brief description of the procedure to be followed in demanding supplemental payment. (b) The corporation may withhold the remittance described in paragraph (a) from a person who was not a shareholder on the date the action dissented from was first announced to the public or who is dissenting on behalf of a person who was not a beneficial owner on that date. If the dissenter has complied with subdivisions 3 and 4, the corporation shall forward to the dissenter the materials described in paragraph (a), a statement of the reason for withholding the remittance, and an offer to pay to the dissenter the amount listed in the materials if the dissenter agrees to accept that amount in full satisfaction. The dissenter may decline the offer and demand payment under subdivision 6. Failure to do so entitles the dissenter only to the amount offered. If the dissenter makes demand, subdivisions 7 and 8 apply. (c) If the corporation fails to remit payment within 60 days of the deposit of certificates or the imposition of transfer restrictions on uncertificated shares, it shall return all deposited certificates and cancel all transfer restrictions. However, the corporation may again give notice under subdivision 4 and require deposit or restrict transfer at a later time. D-4 SUBD. 6. SUPPLEMENTAL PAYMENT; DEMAND. If a dissenter believes that the amount remitted under subdivision 5 is less than the fair value of the shares plus interest, the dissenter may give written notice to the corporation of the dissenter's own estimate of the fair value of the shares, plus interest, within 30 days after the corporation mails the remittance under subdivision 5, and demand payment of the difference. Otherwise, a dissenter is entitled only to the amount remitted by the corporation. SUBD. 7. PETITION; DETERMINATION. If the corporation receives a demand under subdivision 6, it shall, within 60 days after receiving the demand, either pay to the dissenter the amount demanded or agreed to by the dissenter after discussion with the corporation or file in court a petition requesting that the court determine the fair value of the shares, plus interest. The petition shall be filed in the county in which the registered office of the corporation is located, except that a surviving foreign corporation that receives a demand relating to the shares of a constituent domestic corporation shall file the petition in the county in this state in which the last registered office of the constituent corporation was located. The petition shall name as parties all dissenters who have demanded payment under subdivision 6 and who have not reached agreement with the corporation. The corporation shall, after filing the petition, serve all parties with a summons and copy of the petition under the rules of civil procedure. Nonresidents of this state may be served by registered or certified mail or by publication as provided by law. Except as otherwise provided, the rules of civil procedure apply to this proceeding. The jurisdiction of the court is plenary and exclusive. The court may appoint appraisers, with powers and authorities the court deems proper, to receive evidence on and recommend the amount of the fair value of the shares. The court shall determine whether the shareholder or shareholders in question have fully complied with the requirements of this section, and shall determine the fair value of the shares, taking into account any and all factors the court finds relevant, computed by any method or combination of methods that the court, in its discretion, sees fit to use, whether or not used by the corporation or by a dissenter. The fair value of the shares as determined by the court is binding on all shareholders, wherever located. A dissenter is entitled to judgement in cash for the amount by which the fair value of the shares as determined by the court, plus interest, exceeds the amount, if any, remitted under subdivision 5, but shall not be liable to the corporation for the amount, if any, by which the amount, if any, remitted to the dissenter under subdivision 5 exceeds the fair value of the shares as determined by the court, plus interest. SUBD. 8. COSTS; FEES AND EXPENSES. (a) The court shall determine the costs and expenses of a proceeding under subdivision 7, including the reasonable expenses and compensation of any appraisers appointed by the court, and shall assess those costs and expenses against the corporation, except that the court may assess part or all of those costs and expenses against a dissenter whose action in demanding payment under subdivision 6 is found to be arbitrary, vexatious, or not in good faith. (b) If the court finds that the corporation has failed to comply substantially with this section, the court may assess all fees and expenses of any experts or attorneys as the court deems equitable. These fees and expenses may also be assessed against a person who has acted arbitrarily, vexatiously, or not in good faith in bringing the proceeding, and may be awarded to a party injured by those actions. (c) The court may award, in its discretion, fees and expenses to an attorney for the dissenters out of the amount awarded to the dissenters, if any. D-5 APPENDIX E INDEMNIFICATION AGREEMENT INDEMNIFICATION AGREEMENT dated as of , 1995 by and among Piper Jaffray Companies Inc., a Delaware corporation, Piper Capital Management Incorporated, a Delaware corporation (the "Indemnifying Parties") and Jaffray Funds Inc., a Minnesota corporation ("Jaffray Funds"). WHEREAS, the parties hereto desire to provide for certain indemnification by the Indemnifying Parties, as described in this Agreement; NOW, THEREFORE, in consideration of the premises and mutual agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. INDEMNIFICATION. From and after the Effective Time (as such term is defined in the Agreement and Plan of Merger by and among Jaffray Funds and American Adjustable Rate Term Trust Inc. -- 1996 ("BDJ"), American Adjustable Rate Term Trust Inc. -- 1997 ("CDJ"), American Adjustable Rate Term Trust Inc. - -- 1998 ("DDJ") and American Adjustable Rate Term Trust Inc. -- 1999 ("EDJ") (BDJ, CDJ, DDJ and EDJ are sometimes referred to herein collectively as the "Trusts" or individually as a "Trust") dated , 1995 (the "Merger Agreement")), the Indemnifying Parties shall jointly and severally defend, indemnify and hold harmless Jaffray Funds and each of Jaffray Funds' predecessors and successors (whether by merger or otherwise) (all of the foregoing, collectively, the "Indemnified Parties") from and against any and all Losses (as defined in Section 2 below) incurred or sustained by such Indemnified Parties arising from or in connection with the Litigation (as defined in Section 2 below). 2. DEFINITIONS. As used herein: (i) "Losses" means all losses, claims, payments (including, without limitation, indemnification payments), expenses (including, without limitation, attorneys' fees and disbursements), penalties, fines, fees, damages, liabilities (including, without limitation, amounts paid in settlement of or otherwise in connection with any claim, litigation, arbitration or mediation) and costs (including, without limitation, interest that may be imposed in connection with any of the foregoing and court costs); and (ii) "Litigation" means the legal proceedings GORDON V. AMERICAN ADJUSTABLE RATE TERM TRUST 1998 ET AL., and DONIO I.R.A. V. AMERICAN ADJUSTABLE RATE TRUST 1996 ET AL., currently pending in the United States District Court for the District of Minnesota and any actions, suits, proceedings, appeals, arbitrations, investigations, compromises, assessments or judgments, negotiations or settlements of any nature whatsoever arising from, relating to or in connection with the subject matter thereof that involve any one or more of the Trusts. 3. NOTICES; RIGHT TO DEFEND. If any legal proceeding shall be instituted or any claim or demand made against any of the Indemnified Parties in respect of which the Indemnifying Parties may be liable under this Agreement, then one or more of such Indemnified Parties, reasonably promptly after obtaining knowledge thereof, will give written notice thereof to the Indemnifying Parties in reasonable detail (unless the Indemnifying Parties have knowledge thereof, in which case no such notice is necessary); PROVIDED, HOWEVER, that the failure to give prompt notice shall not relieve the Indemnifying Parties of any liability hereunder, except to the extent the Indemnifying Parties are prejudiced by such failure. The Indemnifying Parties shall have the right (without prejudice to the right of each of the Indemnified Parties to participate at its own expense through counsel of its own choosing) to defend such proceeding, claim or demand at the Indemnifying Parties' expense and through counsel of their own choosing which is reasonably acceptable to the Indemnified Parties if the Indemnifying Parties give notice of their intention to do so, not later than ten (10) days following their receipt of notice of such proceeding, claim or demand from the relevant Indemnified Parties or, if the Indemnifying Parties had knowledge thereof, not later than ten (10) days following the date on which the Indemnifying Parties first had such knowledge (or such shorter time period as is required so that the interests of the Indemnified Parties would not be prejudiced as a result of their failure to have received such notice from the Indemnifying Parties); PROVIDED, HOWEVER, that if the defendants in any action E-1 shall include one or more Indemnifying Parties and one or more Indemnified Parties and one or more of such Indemnified Parties shall have reasonably concluded that counsel selected by the Indemnifying Parties may have a potential conflict of interest, whether because of the availability of different or additional defenses to such Indemnified Parties or otherwise, such Indemnified Parties shall have the right to select separate counsel to participate in the defense of such action on their behalf, at the expense of the Indemnifying Parties. The Indemnifying Parties shall not have the power to bind any Indemnified Party without such Indemnified Party's prior written consent, which shall not be unreasonably withheld or delayed, with respect to any settlement pursuant to which anything is required other than the payment of money and then only to the extent that the Indemnifying Parties shall make full payment of such money. If the Indemnifying Parties do not so choose to defend any such proceeding, claim or demand asserted by a third party for which one or more Indemnified Parties would be entitled to indemnification hereunder, then each such Indemnified Party shall be entitled to recover from the Indemnifying Parties, on a monthly basis, all of such Indemnified Party's attorneys' fees and disbursements and other costs and expenses of litigation of any nature whatsoever incurred in the defense of such proceeding, claim or demand. If any one or more of the Indemnifying Parties assume the defense of any such proceeding, claim or demand, the Indemnifying Parties will hold such Indemnified Parties harmless from and against any and all damages arising out of any settlement approved by the Indemnifying Parties or any judgment in connection with such proceeding, claim or demand. Notwithstanding the assumption of the defense of any proceeding, claim or demand by the Indemnifying Parties pursuant to this Agreement, each Indemnified Party shall have the right to approve the terms of any settlement of a proceeding, claim or demand (which approval shall not be unreasonably withheld or delayed). Notwithstanding anything to the contrary contained herein, the Indemnifying Parties will not be liable for any settlement of a proceeding, claim or demand effected without their prior written consent; PROVIDED, HOWEVER, that such consent shall not be unreasonably withheld or delayed. 4. COOPERATION; EXPENSES. The Indemnified Parties and the Indemnifying Parties shall cooperate in furnishing evidence and testimony and in any other manner that the other may reasonably request, including, without limitation, by executing and delivering promptly to the other all such further instruments and documents as may be reasonably requested by such other parties at any time in order to carry out fully the intent, and to accomplish the purposes, of the transactions referred to in this Agreement. Each Indemnified Party shall be entitled to reimbursement for out-of-pocket expenses reasonably incurred by it in connection with such cooperation. Except as otherwise specified in this Agreement, each party shall bear its own fees and expenses incurred pursuant to this Agreement. 5. REPRESENTATIONS AND WARRANTIES. Each of the parties hereto represents and warrants to the other parties hereto as follows: (a) It is a corporation duly organized and validly existing and in good standing under the laws of the State of Delaware (in the case of each of the Indemnifying Parties) and Minnesota (in the case of Jaffray Funds). It has all necessary corporate power and authority and has taken all corporate action necessary to enter into this Agreement, to consummate the transactions contemplated hereby and to perform its obligations hereunder. (b) This Agreement has been duly executed and delivered by it and is a legal, valid and binding obligation of it, enforceable against it in accordance with its terms, except as such enforceability may be limited by (i) the effect of bankruptcy, insolvency, reorganization, moratorium, marshalling or other similar laws now or hereafter in effect relating to or affecting the rights and remedies of creditors generally and (ii) general principles of equity, whether such enforceability is considered in a proceeding in equity or at law. (c) Neither the execution and delivery by it of this Agreement nor the performance by it of its obligations hereunder will: (i) with or without the giving of notice or the passage of time, or both, violate, or be in conflict with, or permit the termination of, or constitute a default under, or cause the acceleration of the maturity of, any agreement, debt or obligation of any nature of it or to which it is a party or bound; (ii) require the consent of any party to any agreement, instrument E-2 or commitment to which it is a party or to which it or its properties is bound; or (iii) violate any statute or law or any judgment, decree, order, regulation or rule of any court, regulatory authority or other governmental agency or authority to which it is subject. (d) No consent, approval or authorization of, or declaration, filing or registration with, any regulatory authority or other governmental agency or authority is required to be made or obtained by it in connection with the execution, delivery and performance of this Agreement, the performance by it of its obligations hereunder or the consummation of the transactions contemplated hereby. 6. MISCELLANEOUS. (a) CHOICE OF LAW. This Agreement shall be governed and interpreted, and all rights and obligations of the parties hereunder, shall be governed and determined, in accordance with the laws of the State of Minnesota, without regard to its conflict of laws rules. (b) NOTICES. Except as otherwise specifically provided in this Agreement, all notices, requests, demands, waivers, consents, approvals, invoices or other communications to either party hereunder shall be in writing and shall be deemed to have been duly given if delivered personally to such party or sent to such party by Federal Express, DHL or other reputable overnight courier service, telegram or telex, or by registered or certified mail, postage prepaid, to the following addresses: If to the Indemnifying Parties: --------------------------------------------- --------------------------------------------- --------------------------------------------- With a copy to: --------------------------------------------- --------------------------------------------- --------------------------------------------- If to Jaffray Funds: --------------------------------------------- --------------------------------------------- --------------------------------------------- With a copy to: --------------------------------------------- --------------------------------------------- --------------------------------------------- E-3 or to such other address as the addressee may have specified in notice duly given to the sender as provided herein. Such notice, request, demand, waiver, consent, approval, invoice or other communications will be deemed to have been given as of the date so delivered, telegraphed, telexed, or five (5) days after so mailed. (c) SEVERABILITY. Any provision of this Agreement that may be prohibited or unenforceable in law or equity in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions thereof. Any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. To the extent permitted by law, the parties hereby waive any provision of law that renders any provision of this Agreement prohibited or unenforceable in any respect. In addition, in the event of any such prohibition or unenforceability, the parties agree that it is their intention and agreement that any such provision which is held or determined to be prohibited or unenforceable, as written, in any jurisdiction shall nonetheless be in force and binding to the fullest extent permitted by law of such jurisdiction as though such provision had been written in such a manner and to such an extent as to be enforceable therein under the circumstances. (d) ENTIRE AGREEMENT; AMENDMENTS. This Agreement states the entire agreement reached between the parties hereto with respect to the subject matter hereof and may not be amended or modified except by written instrument duly executed by the parties hereto. Any and all previous agreements and understandings between the parties regarding the subject matter hereof, whether written or oral, are superseded by this Agreement. (e) HEADINGS; CONSTRUCTION. All section headings contained in this Agreement are for convenience of reference only, do not form a part of this Agreement and shall not affect in any way the meaning or interpretation of this Agreement. (f) COUNTERPARTS. This Agreement may be executed in any number of counterparts and each party hereto may execute any such counterpart, each of which when executed and delivered shall be deemed to be an original and all of which counterparts taken together shall constitute but one and the same instrument. It shall not be necessary in making proof of this Agreement or any counterpart hereof to account for any of the other counterparts. (g) SURVIVAL. The indemnity obligations of the parties pursuant to this Agreement shall survive forever the execution and delivery of this Agreement and the consummation of the transactions contemplated by the Merger Agreement. (h) BINDING EFFECT. This Agreement and the rights and interests granted herein shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective successors (whether by merger or otherwise) and assigns. (i) NO WAIVER. No failure or delay by any party hereto to insist upon the strict performance of any term, condition, covenant or agreement contained in this Agreement or to exercise any right, power or remedy hereunder or consequent upon a breach hereof shall constitute a waiver of any such term, condition, covenant, agreement, right, power or remedy or of any such breach, or preclude such party from exercising any such right, power or remedy at any later time or times. E-4 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered on the day and year first above written. PIPER JAFFRAY COMPANIES INC. By: __________________________________ Name: ________________________________ Title: _______________________________ PIPER CAPITAL MANAGEMENT INCORPORATED By: __________________________________ Name: ________________________________ Title: _______________________________ JAFFRAY FUNDS INC. By: __________________________________ Name: ________________________________ Title: _______________________________ E-5 PART B ARM FUND A SERIES OF JAFFRAY FUNDS INC. STATEMENT OF ADDITIONAL INFORMATION ______________, 1995 This Statement of Additional Information relates to the common shares of ARM Fund ("ARM Fund" or the "Fund") to be issued by Jaffray Funds Inc. (the "Company") pursuant to an Agreement and Plan of Merger, dated as of _________, 1995 (the "Agreement") by and between the Company and American Adjustable Rate Term Trust Inc.--1996 ("BDJ"), American Adjustable Rate Term Trust Inc.--1997 ("CDJ"), American Adjustable Rate Term Trust Inc.--1998 ("DDJ") and American Adjustable Rate Term Trust Inc.--1999 ("EDJ") (BDJ, CDJ, DDJ and EDJ are sometimes referred to herein collectively as the "Trusts" or individually as a "Trust"). This Statement of Additional Information does not constitute a prospectus, but should be read in conjunction with the Joint Proxy Statement/Prospectus, dated ________, 1995. This Statement of Additional Information does not include all information that a shareholder should consider before voting on the proposals contained in the Joint Proxy Statement/Prospectus, and shareholders should obtain and read the Joint Proxy Statement/Prospectus prior to voting. A copy of the Joint Proxy Statement/Prospectus may be obtained without charge by mailing a written request to the Fund or to any Trust at Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota 55402-3804, or by calling (800) 333-6000 (ext. 6387). TABLE OF CONTENTS
Page ---- Investment Objectives, Policies and Restrictions ..................... 2 Directors and Executive Officers ..................................... 11 Investment Advisory and Other Services ............................... 12 Portfolio Transactions and Allocation of Brokerage ................... 16 Capital Stock and Ownership of Shares ................................ 18 Net Asset Value and Public Offering Price ............................ 18 Calculation of Performance Data ...................................... 18 Purchase of Shares ................................................... 20 Redemption of Shares ................................................. 20 Taxation ............................................................. 22 General Information .................................................. 24 Pending Litigation ................................................... 25 Unaudited Combining Financial Statements.............................. F-1 Appendix A - Corporate Bond and Commercial Paper Ratings ............. A-1 Appendix B - Interest Rate Futures Contracts and Related Options ..... B-1
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS Each Trust is a closed-end investment company, and each Trust's investment objective is to provide a high level of current income and to return $10 per share to common shareholders on its termination date. ARM Fund, the only outstanding series of the Company, an open-end investment company, has an investment objective of providing the maximum current income that is consistent with low volatility of principal. The investment objectives and policies of ARM Fund and each Trust are set forth in the Joint Proxy Statement/Prospectus. Certain additional investment information is set forth below. REPURCHASE AGREEMENTS ARM Fund and each Trust may enter into repurchase agreements pertaining to the securities in which they may invest. The custodian of ARM Fund and each Trust will hold the securities underlying any repurchase agreement or such securities will be part of the Federal Reserve Book Entry System. The market value of the collateral underlying the repurchase agreement will be determined on each business day. If at any time the market value of the collateral falls below the repurchase price of the repurchase agreement (including any accrued interest), ARM Fund or each Trust will promptly receive additional collateral (so that the total collateral is an amount at least equal to the repurchase price plus accrued interest). The closed-end and open-end investment companies currently managed by Piper Capital Management Incorporated (the "Adviser") and all future investment companies advised by the Adviser or its affiliates have received from the Securities and Exchange Commission (the "SEC") an exemptive order permitting them to deposit uninvested cash balances into a large single joint account to be used to enter into one or more large repurchase agreements. WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES ARM Fund and each Trust may purchase securities offered on a "when-issued" basis and may purchase or sell securities on a "forward commitment" basis. When ARM Fund or any Trust purchases securities on a when-issued or forward commitment basis, it will maintain in a segregated account with its custodian cash or liquid high-grade debt obligations having an aggregate value equal to the amount of such purchase commitments until payment is made; such Fund or Trust will likewise segregate securities it sells on a forward commitment basis. -2- MORTGAGE-BACKED SECURITIES GENERAL. Many Mortgage-Backed Securities (principally collateralized mortgage obligations ("CMOs") secured by GNMA, FNMA and/or FHLMC Certificates) are issued by entities that operate under orders from the SEC exempting such issuers from the provisions of the Investment Company Act of 1940, as amended (the "1940 Act"). Until recently, the staff of the Division of Investment Management of the SEC had taken the position that such issuers were investment companies pursuant to Section 3 of the 1940 Act and that, accordingly, an investment by an investment company (such as ARM Fund) in the securities of such issuers was subject to limitations imposed by Section 12 of the 1940 Act. However, in reliance on an SEC staff interpretation, ARM Fund may invest in securities issued by certain "exempted issuers" without regard to the limitations of Section 12 of the 1940 Act. In its interpretation, the SEC staff defined "exempted issuers" as unmanaged, fixed asset issuers that (a) invest primarily in Mortgage-Backed Securities, (b) do not issue redeemable securities as defined in Section 2(a)(32) of the Act, (c) operate under general exemptive orders exempting them from "all provisions of the [1940] Act" and (d) are not registered or regulated under the 1940 Act as investment companies. PASS-THROUGH SECURITIES. The investments of ARM Fund and each Trust in Mortgage-Backed Securities include government guaranteed pass-through securities. These obligations are described below. (1) GNMA CERTIFICATES. Certificates of the Government National Mortgage Association ("GNMA Certificates") are Mortgage-Backed Securities which evidence an ownership interest in a pool of mortgage loans. GNMA Certificates differ from bonds in that principal is paid back monthly by the borrower over the term of the loan rather than returned in a lump sum at maturity. GNMA GUARANTEE--The National Housing Act authorizes GNMA to guarantee the timely payment of principal and interest on securities backed by a pool of mortgages insured by the Federal Housing Administration ("FHA") or the Farmers' Home Administration ("FHA") or guaranteed by the Veterans Administration ("VA"). The GNMA guarantee is backed by the full faith and credit of the United States. GNMA is also empowered to borrow without limitation from the U.S. Treasury if necessary to make any payments required under its guarantee. LIFE OF GNMA CERTIFICATES--The average life of a GNMA Certificate is likely to be substantially less than the original maturity of the mortgage pools underlying the securities. Prepayments of principal by mortgagors and mortgage foreclosures will usually result in the return of the greater part of principal investment long before the maturity of the mortgages in the pool. Foreclosures impose no risk to principal investment because of the GNMA guarantee. -3- Because prepayment rates of individual mortgage pools vary widely, it is not possible to predict accurately the average life of a particular issue of GNMA Certificates. However, statistics published by the FHA indicate that the average life of single-family dwelling mortgages with 25- to 30-year maturities, the type of mortgages backing the vast majority of GNMA Certificates, is approximately 12 years. Therefore, it is customary to treat GNMA Certificates as 30-year mortgage-backed securities which prepay fully in the twelfth year. YIELD CHARACTERISTICS OF GNMA CERTIFICATES--The coupon rate of interest on GNMA Certificates is lower than the interest rate paid on the VA-guaranteed or FHA-insured mortgages underlying the Certificates by the amount of the fees paid to GNMA and the issuer. The coupon rate by itself, however, does not indicate the yield which will be earned on GNMA Certificates. First, GNMA Certificates may be issued at a premium or discount, rather than at par, and, after issuance, GNMA Certificates may trade in the secondary market at a premium or discount. Second, interest is earned monthly, rather than semi-annually as with traditional bonds; monthly compounding raises the effective yield earned. Finally, the actual yield of a GNMA Certificate is influenced by the prepayment experience of the mortgage pool underlying it. For example, if the higher-yielding mortgages from the pool are prepaid, the yield on the remaining pool will be reduced. (2) FHLMC SECURITIES. The Federal Home Loan Mortgage Corporation ("FHLMC") was created in 1970 through enactment of Title III of the Emergency Home Finance Act of 1970. Its purpose is to promote development of a nationwide secondary market in conventional residential mortgages. FHLMC issues two types of mortgage pass-through securities, mortgage participation certificates ("PCs") and guaranteed mortgage certificates ("GMCs"). PCs resemble GNMA Certificates in that each PC represents a pro rata share of all interest and principal payments made and owed on the underlying pool. FHLMC guarantees timely payment of interest on PCs and the full return of principal. Like GNMA Certificates, PCs are assumed to be prepaid fully in their twelfth year. GMCs also represent a pro rata interest in a pool of mortgages. However, these instruments pay interest semi-annually and return principal once a year in guaranteed minimum payments. The expected average life of these securities is approximately ten years. (3) FNMA SECURITIES. The Federal National Mortgage Association was established in 1938 to create a secondary market in mortgages insured by the FHA. FNMA issues guaranteed mortgage pass-through certificates ("FNMA Certificates"). FNMA Certificates resemble GNMA Certificates in that each FNMA Certificate represents a pro rata share of all interest and principal payments made -4- and owed on the underlying pool. FNMA guarantees timely payment of interest on FNMA Certificates and the full return of principal. Like GNMA Certificates, FNMA Certificates are assumed to be prepaid fully in their twelfth year. RESTRICTIONS ON INVESTMENTS IN MORTGAGE-BACKED SECURITIES. As set forth in the Joint Proxy Statement/Prospectus, ARM Fund will not invest in any inverse floating, interest-only or principal-only tranches of CMOs and Stripped Mortgage-Backed Securities. In addition, ARM Fund will not invest in any other mortgage-backed securities that are considered "high risk" under applicable supervisory policies of the Office of the Comptroller of the Currency (the "OCC"). In OCC Banking Circular 228 (Rev.) (January 10, 1992), the OCC defined a "high-risk mortgage security" as any mortgage derivative product that at the time of purchase, or at a subsequent testing date, meets any of the following three tests: 1. AVERAGE LIFE TEST. The mortgage derivative product has an expected weighted average life greater than 10.0 years. 2. AVERAGE LIFE SENSITIVITY TEST. The expected weighted average life of the mortgage derivative product: a. Extends by more than 4.0 years, assuming an immediate and sustained parallel shift in the yield curve of plus 300 basis points, or b. Shortens by more than 6.0 years, assuming an immediate and sustained parallel shift in the yield curve of minus 300 basis points. 3. PRICE SENSITIVITY TEST. The estimated change in the price of the mortgage derivative product is more than 17%, due to an immediate and sustained parallel shift in the yield curve of plus or minus 300 basis points. Examples of certain "high-risk mortgage securities" include interest-only and principal-only classes of stripped mortgage-backed securities, inverse floating CMOs and certain zero coupon Treasury securities. OPTIONS As set forth in the Joint Proxy Statement/Prospectus, ARM Fund and each Trust may write covered put and call options with respect to the securities in which they may invest. The principal reason for writing call or put options is to obtain, through receipt of premiums, a greater current return than would be realized on the underlying securities alone. ARM Fund and each Trust receive premiums from writing call or put options, which they retain whether or not the option is exercised. The writing by ARM Fund or any Trust of options on securities will be subject to limitations established by each of the registered securities exchanges on which such options are traded. Such limitations govern the maximum number of options -5- in each class which may be written by a single investor or group of investors acting in concert, regardless of whether the options are written on the same or different securities exchanges or are held or written on one or more accounts or through one or more brokers. Thus, the number of options which ARM Fund or any Trust may write may be affected by options written by other investment companies managed by and other investment advisory clients of the Adviser. An exchange may order the liquidation of positions found to be in excess of these limits, and it may impose certain other sanctions. OVER-THE-COUNTER OPTIONS. ARM Fund and each Trust may purchase and write over-the-counter ("OTC") put and call options in negotiated transactions. The staff of the SEC has previously taken the position that the value of purchased OTC options and the assets used as "cover" for written OTC options are illiquid securities and, as such, are to be included in the calculation of ARM Fund's 15% limitation and each Trust's 10% limitation on illiquid securities. However, the staff has eased its position somewhat in certain limited circumstances. ARM Fund and each Trust will attempt to enter into contracts with certain dealers with which it writes OTC options. Each such contract will provide that ARM Fund and each Trust has the absolute right to repurchase the options it writes at any time at a repurchase price which represents the fair market value, as determined in good faith through negotiation between the parties, but which in no event will exceed a price determined pursuant to a formula contained in the contract. Although the specific details of such formula may vary among contracts, the formula will generally be based upon a multiple of the premium received by ARM Fund and each Trust for writing the option, plus the amount, if any, of the option's intrinsic value. The formula will also include a factor to account for the difference between the price of the security and the strike price of the option if the option is written out-of-the-money. With respect to each OTC option for which such a contract is entered into, ARM Fund and each Trust will count as illiquid only the initial formula price minus the option's intrinsic value. ARM Fund and each Trust will enter into such contracts only with primary U.S. Government securities dealers recognized by the Federal Reserve Bank of New York. Moreover, such primary dealers will be subject to the same standards as are imposed upon dealers with which ARM Fund and each Trust enters into repurchase agreements. ILLIQUID SECURITIES As set forth in the Joint Proxy Statement/Prospectus, ARM Fund and each Trust may invest in Rule 144A securities, commercial paper issued pursuant to Rule 4(2) under the Securities Act of 1933, as amended, and, with respect to the Trusts only, interest-only and principal-only classes of Mortgage-Backed Securities issued by the U.S. Government or its agencies or instrumentalities, and treat such securities as liquid when they have been determined to be liquid by the Board of Directors or by the Adviser subject to the oversight of and pursuant to procedures -6- adopted by the Board of Directors. Under these procedures, factors taken into account in determining the liquidity of a security include (a) the frequency of trades and quotes for the security; (b) the number of dealers willing to purchase or sell the security and the number of other potential purchasers; (c) dealer undertakings to make a market in the security; and (d) the nature of the security and the nature of the marketplace trades (e.g., the time needed to dispose of the security, the method of soliciting offers and the mechanics of transfer). With respect to Rule 144A securities, investing in such securities could have the effect of increasing the level of ARM Fund or Trust illiquidity to the extent that qualified institutional buyers become, for a time, uninterested in purchasing these securities. PORTFOLIO TURNOVER Portfolio turnover is the ratio of the lesser of annual purchases or sales of portfolio securities to the average monthly value of portfolio securities, not including securities maturing in less than 12 months. A 100% portfolio turnover rate would occur, for example, if the lesser of the value of purchases or sales of portfolio securities for a particular year were equal to the average monthly value of the portfolio securities owned during such year. For purposes of calculating portfolio turnover, the maturity of investment purchases and sales related to dollar roll transactions of any Trust is considered to be less than 12 months. See "Comparison of Investment Objectives, Policies and Risks of ARM Fund and the Trusts--Portfolio Turnover" in the Joint Proxy Statement/Prospectus. INVESTMENT RESTRICTIONS In addition to the investment objectives and policies set forth in the Joint Proxy Statement/Prospectus, ARM Fund and the Trusts are subject to certain fundamental and nonfundamental investment restrictions, as set forth below. Fundamental investment restrictions may not be changed without the vote of a majority of ARM Fund or any Trust's outstanding shares. "Majority," as used in the Joint Proxy Statement/Prospectus and in this Statement of Additional Information, means the lesser of (a) 67% of ARM Fund's or any Trust's outstanding shares present at a meeting of the holders if more than 50% of the outstanding shares are present in person or by proxy or (b) more than 50% of ARM Fund's or any Trust's outstanding shares. All other investment policies or practices are considered by ARM Fund or the Trusts not to be fundamental and, accordingly, may be changed without shareholder approval. Currently, no Trust may: (1) with respect to 75% of its total assets, invest more than 5% of the value of its total assets (taken at market value at the time of purchase) in the outstanding securities of any one issuer, or own more than 10% of the outstanding voting securities of any one issuer, in each case other than -7- securities issued or guaranteed by the United States Government or any agency or instrumentality thereof; (2) invest 25% or more of the value of its total assets in the securities of issuers conducting their principal business activities in the same industry, provided that this limitation does not apply to securities issued or guaranteed by the United States Government or its agencies or instrumentalities. Notwithstanding the foregoing, each Trust may invest in private mortgage pass-through securities without regard to this limitation; (3) issue senior securities in the form of indebtedness or borrow money (including on margin if marginable securities are owned), other than for the temporary purposes permitted by the 1940 Act, in excess of 33-1/3% of each Trust's total assets (including the proceeds of such senior securities issued and money borrowed) or pledge its assets other than to secure such issuances or borrowings or in connection with, to the extent permitted under the 1940 Act, hedging transactions, reverse repurchase agreements, when-issued and forward commitment transactions and similar investment strategies. The Trusts' collateral arrangements with respect to options, futures contracts, and options on futures contracts and collateral requirements with respect to initial and variation margin are not considered by the Trusts to be the issuance of a senior security; (4) pledge, hypothecate, mortgage or otherwise encumber its assets, except to secure issuances or borrowings permitted by restriction (3) above (collateral arrangements with respect to reverse repurchase agreements or to margin for futures contracts and options are not deemed to be pledges or other encumbrances for purposes of this restriction); (5) make loans of money or property to any person, except through loans of portfolio securities, the purchase of debt obligations in which any Trust may invest consistently with such Trust's investment objectives and policies, or the acquisition of securities subject to repurchase agreements; (6) underwrite the securities of other issuers, except to the extent that in connection with the disposition of portfolio securities or the sale of its own shares of capital stock the Trust may be deemed to be an underwriter; (7) invest for the purpose of exercising control over management of any company; (8) purchase real estate or interests therein other than ARMS, other Mortgage-Backed Securities, and similar instruments; (9) purchase or sell commodities or commodity contracts except for hedging purposes; or -8- (10) make any short sales of securities. Following the Merger, ARM Fund will not: (1) with respect to 75% of its total assets, invest more than 5% of the value of its total assets (taken at market value at the time of purchase) in the outstanding securities of any one issuer, or own more than 10% of the outstanding voting securities of any one issuer, in each case other than securities issued or guaranteed by the U.S. Government or any agency or instrumentality thereof. For purposes of these restrictions, the government of any country (other than the U.S.), including its governmental subdivisions, is each considered a single issuer; (2) invest 25% or more of the value of its total assets in the securities of issuers conducting their principal business activities in any one industry, provided that this restriction does not apply to securities of the U.S. Government or its agencies and instrumentalities and repurchase agreements relating thereto. The various types of utilities companies, such as gas, electric, telephone, telegraph, satellite and microwave communications companies, are considered as separate industries; (3) issue any senior securities, as defined in the 1940 Act, other than as set forth in restriction #4 below and except to the extent that using options and futures contracts or purchasing or selling securities on a when-issued or forward commitment basis may be deemed to constitute issuing a senior security; (4) borrow money, except for temporary or emergency purposes. The amount of such borrowing (including borrowing through reverse repurchase agreements) may not exceed 10% of the value of the Fund's total assets. Interest paid on borrowed funds will decrease the net earnings of the Fund. The Fund will not purchase portfolio securities while outstanding borrowing exceeds 5% of the value of the Fund's total assets. The Fund will not borrow money for leverage purposes; (5) mortgage, pledge or hypothecate its assets, except in an amount not exceeding 10% of the value of its total assets to secure temporary or emergency borrowing. For purposes of this policy, collateral arrangements for margin deposits on futures contracts or with respect to the writing of options are not deemed to be a pledge of assets; (6) purchase or sell commodities or commodity futures contracts, except that the Fund may enter into financial futures contracts and engage in related options transactions; -9- (7) purchase or sell real estate or interests therein (other than securities backed by mortgages and similar instruments); (8) act as an underwriter of securities of other issuers, except insofar as the Fund may be technically deemed an underwriter under the federal securities laws in connection with the disposition of portfolio securities; or (9) make loans of money or property to any person, except through loans of portfolio securities, the purchase of debt obligations in which the Fund may invest consistently with the Fund's investment objective and policies or the acquisition of securities subject to repurchase agreements. Following the Merger, as nonfundamental investment restrictions that may be changed at any time without shareholder approval, ARM Fund will not: (1) invest in warrants; (2) invest more than 5% of the value of its total assets in the securities of any issuers which, with their predecessors, have a record of less than three years' continuous operation. (Securities of such issuers will not be deemed to fall within this limitation if they are guaranteed by an entity in continuous operation for more than three years. The value of all securities issued or guaranteed by such guarantor and owned by the Fund shall not exceed 10% of the value of the total assets of the Fund.); (3) make short sales of securities; (4) purchase any securities on margin except to obtain such short-term credits as may be necessary for the clearance of transactions and except that the Fund may make margin deposits in connection with futures and options contracts; (5) purchase or retain the securities of any issuer if, to the Fund's knowledge, those officers or directors of the Company or its affiliates or of its investment adviser who individually own beneficially more than 0.5% of the outstanding securities of such issuer, together own more than 5% of such outstanding securities; (6) invest for the purpose of exercising control or management; (7) purchase or sell oil, gas or other mineral leases, rights or royalty contracts, except that the Fund may purchase or sell securities of companies investing in the foregoing; (8) purchase the securities of other investment companies except as part of a merger, consolidation or acquisition of assets; -10- (9) invest in real estate limited partnerships. (10) invest in the securities of foreign issuers; or (11) invest more than 15% of its net assets in illiquid securities. Any investment restriction or limitation referred to above or in the Joint Proxy Statement/Prospectus, except the borrowing policy, which involves a maximum percentage of securities or assets, shall not be considered to be violated unless an excess over the percentage occurs immediately after an acquisition of securities or utilization of assets and such excess results therefrom. DIRECTORS AND EXECUTIVE OFFICERS The names, addresses and principal occupations during the past five years of the executive officers of ARM Fund are given below. The names, addresses and principal occupations of the directors of ARM Fund are set forth in the Joint Proxy Statement/Prospectus under "Proposal No. 2 -- Election of Directors."
NAME, ADDRESS POSITION(S) HELD PRINCIPAL OCCUPATION(S) AND AGE WITH REGISTRANT DURING PAST 5 YEARS - -------------- ----------------- ----------------------- Paul A. Dow (44) President Senior Vice President of the Adviser Piper Jaffray Tower since February 1989 and Chief Investment 222 South Ninth Street Officer of the Adviser since December Minneapolis, MN 55402 1989. Michael P. Jansen (35) Senior Vice Senior Vice President of the Adviser Piper Jaffray Tower President since October 1993, a Managing Director 222 South Ninth Street of the Distributor since 1987, an Executive Minneapolis, MN 55402 Vice President and Director of Piper Mortgage Acceptance Corporation, a wholly owned subsidiary of Piper Jaffray Companies Inc., since 1991 and an Executive Vice President and Director of Premier Acceptance Corporation, a wholly owned subsidiary of Piper Jaffray Companies Inc., since 1988. Robert H. Nelson (31) Senior Vice Senior Vice President of the Adviser since Piper Jaffray Tower President November 1993, prior to which he had 222 South Ninth Street been a Vice President of the Adviser since Minneapolis, MN 55402 November 1991 and an employee of the Adviser since 1988.
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NAME, ADDRESS POSITION(S) HELD PRINCIPAL OCCUPATION(S) AND AGE WITH REGISTRANT DURING PAST 5 YEARS - -------------- ---------------- ----------------------- Amy K. Johnson (29) Vice President Vice President of the Adviser since Piper Jaffray Tower November 1994 and an employee of the 222 South Ninth Street Adviser since 1992. Prior to joining the Minneapolis, MN 55402 Adviser, she was an audit senior with KPMG Peat Marwick LLP, where she was employed from 1990 to 1992. Thomas S. McGlinch (38) Vice President Vice President of the Adviser since Piper Jaffray Tower 1992, prior to which he had been an 222 South Ninth Street institutional trader for the Distributor Minneapolis, MN 55402 during 1992 and a specialty products trader for FBS Investment Services, Inc. from 1988 to January 1992. David E. Rosedahl (48) Secretary Secretary and a Director of the Piper Jaffray Tower Adviser since October 1985, a 222 South Ninth Street Managing Director of the Distributor since Minneapolis, MN 55402 November 1986, a Managing Director of Piper Jaffray Companies Inc. since November 1987, Secretary of the Distributor since 1993 and General Counsel for the Distributor and Piper Jaffray Companies Inc. since 1979. Charles N. Hayssen (44) Treasurer Managing Director of the Distributor since Piper Jaffray Tower November 1986 and of Piper Jaffray 222 South Ninth Street Companies Inc. since November 1987, Minneapolis, MN 55402 Chief Financial Officer of the Distributor since January 1988, Director and Chief Financial Officer of the Adviser since January 1989 and Chief Operating Officer of the Adviser since December 1994.
As of ______, 1995, the officers and Directors of ARM Fund as a group beneficially owned less than 1% of the outstanding shares of ARM Fund. The officers of ARM Fund receive no remuneration from ARM Fund or the Company. Each of the other directors receives from the Company a quarterly retainer of $1,000, plus a fee of $1,000 for each regular quarterly Board of Directors meeting attended. (The per-meeting fee will increase to $1,500 in the event that total assets reach $5 billion or more.) In the event the Company offers additional series of its shares (i.e., funds in addition to ARM Fund), these fees will be allocated among all of the series on the basis of each series' total assets. In addition, members of the Audit Committee not affiliated with the Adviser receive $1,000 for each Audit Committee meeting attended ($2,000 with respect to the chairperson of the Committee), with such fee being allocated among all closed-end and open-end investment companies managed by the Adviser on the basis of relative net asset values. Members of the Committee of Independent Directors and the Derivatives Subcommittee currently receive no additional compensation from the Company. Directors are reimbursed for expenses incurred in connection with attending meetings. INVESTMENT ADVISORY AND OTHER SERVICES The investment adviser for ARM Fund is Piper Capital Management Incorporated (the "Adviser"). Its affiliate, Piper Jaffray Inc. (the "Distributor"), acts as -12- the distributor for the Fund. Each acts as such pursuant to a written agreement which is periodically approved by the directors or the shareholders of the Fund. The address of both the Adviser and the Distributor is Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota 55402-3804. CONTROL OF THE ADVISER AND THE DISTRIBUTOR The Adviser and the Distributor are both wholly owned subsidiaries of Piper Jaffray Companies Inc., a publicly held corporation which is engaged through its subsidiaries in various aspects of the financial services industry. INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT The Adviser has been retained under an Investment Advisory and Management Agreement (the "Advisory Agreement") to act as the investment adviser to ARM Fund, subject to the authority of the Board of Directors. Under the Advisory Agreement, the Adviser provides ARM Fund with advice and assistance in the selection and disposition of ARM Fund's investments. All investment decisions are subject to review by the Board of Directors of the Company. The Adviser is obligated to pay the salaries and fees of any affiliates of the Adviser serving as officers or directors of the Company. The same security may be suitable for ARM Fund and/or other series of the Company or other funds or private accounts managed by the Adviser or its affiliates. If and when two or more funds or accounts simultaneously purchase or sell the same security, the transactions will be allocated as to price and amount in accordance with arrangements equitable to each fund or account. The simultaneous purchase or sale of the same securities by ARM Fund and other series of the Company or other funds or accounts may have a detrimental effect on ARM Fund, as this may affect the price paid or received by the Fund or the size of the position obtainable or able to be sold by the Fund. EXPENSES The expenses of ARM Fund are deducted from its income before dividends are paid. These expenses include, but are not limited to, organizational costs, fees paid to the Adviser, fees and expenses of officers and directors who are not affiliated with the Adviser, taxes, interest, legal fees, transfer agent, dividend disbursing agent and custodian fees, audit fees, brokerage fees and commissions, fees and expenses of registering and qualifying ARM Fund and its shares for distribution under federal and state securities laws, expenses of preparing the prospectus and statement of additional information and of printing and distributing the prospectus and statement of additional information annually to existing shareholders, the expenses of reports to shareholders, shareholders' meetings and proxy solicitations, distribution expenses pursuant to the Rule 12b-1 plan, and other expenses which are not expressly assumed by the Adviser under the Advisory Agreement. Any general -13- expenses of the Company that are not readily identifiable as belonging to a particular series of the Company will be allocated among the series based upon the relative net assets of the series at the time such expenses were incurred. DISTRIBUTION PLAN Rule 12b-1(b) under the 1940 Act provides that any payments made by an open-end investment company such as the Company in connection with financing the distribution of its shares may only be made pursuant to a written plan describing all aspects of the proposed financing of distribution, and also requires that all agreements with any person relating to the implementation of the plan must be in writing. Rule 12b-1(b)(1) requires that such plan be approved by a majority of ARM Fund's outstanding shares, and Rule 12b-1(b)(2) requires that such plan, together with any related agreements, be approved by a vote of the Board of Directors and of the directors who are not interested persons of ARM Fund and who have no direct or indirect interest in the operation of the plan or in the agreements related to the plan, cast in person at a meeting called for the purpose of voting on such plan or agreement. Rule 12b-1(b)(3) requires that the plan or agreement provide, in substance: (a) that it shall continue in effect for a period of more than one year from the date of its execution or adoption only so long as such continuance is specifically approved at least annually in the manner described in paragraph (b)(2) of Rule 12b-1; (b) that any person authorized to direct the disposition of monies paid or payable by ARM Fund pursuant to the plan or any related agreement shall provide to ARM Fund's Board of Directors, and the directors shall review, at least quarterly, a written report of the amounts so expended and the purposes for which such expenditures were made; and (c) in the case of a plan, that it may be terminated at any time by a vote of a majority of the members of the Board of Directors of ARM Fund who are not interested persons of ARM Fund and who have no direct or indirect financial interest in the operation of the plan or in any agreements related to the plan or by a vote of a majority of the outstanding voting securities of ARM Fund. Rule 12b-1(b)(4) requires that such a plan may not be amended to increase materially the amount to be spent for distribution without shareholder approval and that all material amendments of the plan must be approved in the manner described in paragraph (b)(2) of Rule 12b-1. -14- Rule 12b-1(c) provides that ARM Fund may rely upon Rule 12b-1(b) only if the selection and nomination of ARM Fund's disinterested directors are committed to the discretion of such disinterested directors. Rule 12b-1(e) provides that ARM Fund may implement or continue a plan pursuant to Rule 12b-1(b) only if the directors who vote to approve such implementation or continuation conclude, in the exercise of reasonable business judgment and in light of their fiduciary duties under state law, and under Sections 36(a) and (b) of the 1940 Act, that there is a reasonable likelihood that the plan will benefit ARM Fund and its shareholders. The Board of Directors has concluded that there is a reasonable likelihood that the Distribution Plan will benefit ARM Fund and its shareholders. Pursuant to the provisions of the Distribution Plan, ARM Fund will pay to the Distributor a monthly service fee equal, on an annual basis, to .15% of such Fund's average daily net assets in connection with the servicing of the Fund's shareholder accounts. For additional information on ARM Fund's Distribution Plan, see "Proposal No. 1--Management of the Trusts and ARM Fund--Plan of Distribution" in the Joint Proxy Statement/Prospectus." UNDERWRITING AND DISTRIBUTION AGREEMENT Pursuant to the Underwriting and Distribution Agreement, the Distributor has agreed to act as the principal underwriter for ARM Fund in the sale and distribution to the public of shares of the Fund, either through dealers or otherwise. The Distributor has agreed to offer such shares for sale at all times when such shares are available for sale and may lawfully be offered for sale and sold. As compensation for its services, in addition to receiving its service fees pursuant to the Distribution Plan discussed above, the Distributor receives the sales load on sales of ARM Fund shares set forth in the Joint Proxy Statement/Prospectus. -15- PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE The Adviser is responsible for decisions to buy and sell securities, the selection of broker-dealers to effect the transactions, and the negotiation of brokerage commissions, if any, with respect to ARM Fund. In placing orders for securities transactions, the primary criterion for the selection of a broker-dealer is the ability of the broker-dealer, in the opinion of the Adviser, to secure prompt execution of the transactions on favorable terms, including the reasonableness of the commission and considering the state of the market at the time. When consistent with these objectives, business may be placed with broker-dealers who furnish research information and statistical and other services to the Adviser. Such research or services include advice, both directly and in writing, as to the value of securities; the advisability of investing in, purchasing, or selling securities; and the availability of securities, or purchasers or sellers of securities; as well as analyses and reports concerning issues, industries, securities, economic factors and trends, portfolio strategy, and the performance of accounts. This allows the Adviser to supplement its own investment research activities and enables the Adviser to obtain the views and information of individuals and -16- research staffs of many different securities firms prior to making investment decisions for ARM Fund. To the extent portfolio transactions are effected with broker-dealers who furnish research services to the Adviser, the Adviser receives a benefit, not capable of evaluation in dollar amounts, without providing any direct monetary benefit to ARM Fund from these transactions. The Adviser believes that most research services obtained by it generally benefit several or all of the investment companies and private accounts which it manages, as opposed to solely benefiting one specific managed fund or account. Normally, research services obtained through managed funds or accounts investing in common stocks would primarily benefit the managed funds or accounts which invest in common stocks; similarly, services obtained from transactions in fixed-income securities would normally be of greater benefit to the managed funds or accounts which invest in debt securities. The Adviser has not entered into any formal or informal agreements with any broker-dealers, nor does it maintain any "formula" which must be followed in connection with the placement of portfolio transactions in exchange for research services provided the Adviser. However, the Adviser does maintain an informal list of broker-dealers, which is used from time to time as a general guide in the placement of ARM Fund's business, in order to encourage certain broker-dealers to provide the Adviser with research services which the Adviser anticipates will be useful to it. Because the list is merely a general guide, which is to be used only after the primary criterion for the selection of broker-dealers (discussed above) has been met, substantial deviations from the list are permissible and may be expected to occur. The Adviser will authorize ARM Fund to pay an amount of commission for effecting a securities transaction in excess of the amount of commission another broker-dealer would have charged only if the Adviser determines in good faith that such amount of commission is reasonable in relation to the value of the brokerage and research services provided by such broker-dealer, viewed in terms of either that particular transaction or the Adviser's overall responsibilities with respect to the accounts as to which it exercises investment discretion. Generally, ARM Fund will pay higher than the lowest commission rates available. ARM Fund will not purchase at a higher price or sell at a lower price in connection with transactions effected with a dealer, acting as principal, who furnishes research services to the Adviser than would be the case if no weight were given by the Adviser to the dealer's furnishing of such services. Transactions in securities, options on securities, futures contracts, and options on futures contracts may be effected through the Distributor. In determining the commissions to be paid to the Distributor in connection with portfolio transactions on national securities exchanges or commodities exchanges, it is the policy of ARM Fund that such commissions will, in the judgment of the Adviser, subject to review by the Board of Directors, be both (a) at least as favorable as those which would be charged by other qualified brokers in connection with comparable transactions during a comparable period of time, and (b) at least as favorable as commissions contemporaneously charged by the Distributor on comparable transactions for its -17- most favored comparable unaffiliated customers. While ARM Fund does not deem it practicable and in its best interest to solicit competitive bids for commission rates on each transaction, consideration will regularly be given to posted commission rates as well as to other information concerning the level of commissions charged on comparable transactions by other qualified brokers. CAPITAL STOCK AND OWNERSHIP OF SHARES ARM Fund shares of common stock have a par value of $.01 per share and have equal rights to share in dividends and assets. The shares possess no preemptive or conversion rights. Cumulative voting is not authorized. This means that the holders of more than 50% of the shares voting for the election of directors can elect 100% of the directors if they choose to do so, and in such event the holders of the remaining shares will be unable to elect any directors. As of ____________, 1995, no shareholder was known by ARM Fund to own beneficially 5% or more of the outstanding shares of ARM Fund. NET ASSET VALUE AND PUBLIC OFFERING PRICE The method for determining the public offering price of ARM Fund shares is summarized in the Joint Proxy Statement/Prospectus in the text following the headings "Valuation of Shares" and in Appendix B entitled "Shareholder Guide to Investing--How to Purchase Shares." The net asset value of ARM Fund's shares is determined on each day on which the New York Stock Exchange is open, provided that the net asset value need not be determined on days when no ARM Fund shares are tendered for redemption and no order for Fund shares is received. The New York Stock Exchange is not open for business on the following holidays (or on the nearest Monday or Friday if the holiday falls on a weekend): New Year's Day, Presidents' Day, Good Friday, Memorial Day, July 4th, Labor Day, Thanksgiving and Christmas. CALCULATION OF PERFORMANCE DATA Advertisements and other sales literature for ARM Fund may refer to "average annual total return," "cumulative total return" and "yield." The Adviser may waive or pay certain expenses of ARM Fund, thereby increasing total return and yield. These expenses may or may not be waived or paid in the future in the Adviser's discretion. No performance data is provided for ARM Fund since no shares were outstanding as of the date of the Joint Proxy Statement/Prospectus and this Statement of Additional Information. Average annual total return figures are computed by finding the average annual compounded rates of return over the periods indicated in the advertisement that would equate the initial amount invested to the ending redeemable value, according to the following formula: -18- n P(1+T) = ERV Where: P = a hypothetical initial payment of $1,000; T = average annual total return; n = number of years; and ERV = ending redeemable value at the end of the period of a hypothetical $1,000 payment made at the beginning of such period. This calculation deducts the maximum sales charge from the initial hypothetical $1,000 investment, assumes all dividends and capital gains distributions are reinvested at net asset value on the appropriate reinvestment dates as described in the Joint Proxy Statement/Prospectus, and includes all recurring fees, such as investment advisory and management fees, charged to all shareholder accounts. Cumulative total return is computed by finding the cumulative compounded rate of return over the period indicated in the advertisement that would equate the initial amount invested to the ending redeemable value, according to the following formula: (ERV-P) CTR = ----- 100 P Where: CTR = Cumulative total return; ERV = ending redeemable value at the end of the period of a hypothetical $1,000 payment made at the beginning of such period; and P = initial payment of $1,000. This calculation assumes all dividends and capital gain distributions are reinvested at net asset value on the appropriate reinvestment dates as described in the Joint Proxy Statement/Prospectus and includes all recurring fees, such as investment advisory and management fees, charged to all shareholder accounts. Yield is computed by dividing the net investment income per share (as defined under SEC rules and regulations) earned during the computation period by the maximum offering price per share on the last day of the period and annualizing the result, according to the following formula: 6 YIELD = 2[(a-b + 1) - 1] --- cd Where: a = dividends and interest earned during the period; b = expenses accrued for the period (net of reimbursements); c = the average daily number of shares outstanding during the period that were entitled to receive dividends; and -19- d = the maximum offering price per share on the last day of the period. Expenses accrued for the period include any fees charged to all shareholders during the base period. PURCHASE OF SHARES An investor in ARM Fund may qualify for a reduced sales charge immediately by signing a nonbinding Letter of Intent stating the investor's intention to invest within a 13-month period, beginning not earlier than 90 days prior to the date of execution of the Letter of Intent, a specified amount which, if made at one time, would qualify for a reduced sales charge. Reinvested dividends will be treated as purchases of additional shares. Any redemptions made during the term of the Letter of Intent will be subtracted from the amount of purchases in determining whether the Letter of Intent has been completed. During the term of a Letter of Intent, IFTC will hold shares representing 5% of the amount that the investor intends to invest during the 13-month period in escrow for payment of a higher sales charge if the full amount indicated in the Letter of Intent is not purchased. Dividends on the escrowed shares will be paid to the shareholder. The escrowed shares will be released when the full amount indicated has been purchased. If the full indicated amount is not purchased within the 13-month period, the investor will be required to pay, either in cash or by liquidating escrowed shares, an amount equal to the difference in the dollar amount of sales charge actually paid and the amount of sales charge the investor would have paid on his or her aggregate purchases if the total of such purchases had been made at a single time. REDEMPTION OF SHARES GENERAL Redemption of shares, or payment, may be suspended at times (a) when the New York Stock Exchange is closed for other than customary weekend or holiday closings, (b) when trading on the New York Stock Exchange is restricted, (c) when an emergency exists, as a result of which disposal by ARM Fund of securities owned by them is not reasonably practicable, or it is not reasonably practicable for ARM Fund fairly to determine the value of their net assets, or (d) during any other period when the SEC, by order, so permits, provided that applicable rules and regulations of the SEC shall govern as to whether the conditions prescribed in (b) or (c) exist. Shareholders who purchased ARM Fund shares through a broker-dealer other than the Distributor may also redeem such shares by written request to IFTC at the address set forth in the Joint Proxy Statement/Prospectus. To be considered in proper form, written requests for redemption should indicate the dollar amount or number of shares to be redeemed, refer to the shareholder's account number, and give either a social security or tax identification number. The request should be -20- signed in exactly the same way the account is registered. If there is more than one owner of the shares, all owners must sign. If shares to be redeemed have a value of $10,000 or more or redemption proceeds are to be paid to someone other than the shareholder at the shareholder's address of record, the signature(s) must be guaranteed by an "eligible guarantor institution," which includes a commercial bank that is a member of the Federal Deposit Insurance Corporation, a trust company, a member firm of a domestic stock exchange, a savings association or a credit union that is authorized by its charter to provide a signature guarantee. IFTC may reject redemption instructions if the guarantor is neither a member of nor a participant in a signature guarantee program. Signature guarantees by notaries public are not acceptable. The purpose of a signature guarantee is to protect shareholders against the possibility of fraud. Further documentation will be requested from corporations, administrators, executors, personal representatives, trustees and custodians. Redemption requests given by facsimile will not be accepted. Unless other instructions are given in proper form, a check for the proceeds of the redemption will be sent to the shareholder's address of record. REINSTATEMENT PRIVILEGE A shareholder who has redeemed shares of ARM Fund may reinvest all or part of the redemption proceeds in shares of ARM Fund within 30 days without payment of an additional sales charge. The Distributor will refund to any shareholder a pro rata amount of any contingent deferred sales charge paid by such shareholder in connection with a redemption of ARM Fund shares if and to the extent that the redemption proceeds are reinvested within 30 days of such redemption in any mutual fund managed by the Adviser. Such refund will be based upon the ratio of the net asset value of shares purchased in the reinvestment to the net asset value of shares redeemed. Reinvestments will be allowed at net asset value without the payment of a front-end sales charge, irrespective of the amounts of the reinvestment, but shall be subject to the same pro rata contingent deferred sales charge that was applicable to the earlier investment; however, the period during which the contingent deferred sales charge shall apply on the newly issued shares shall be the period applicable to the redeemed shares extended by the number of days between the redemption and the reinvestment dates (inclusive). SYSTEMATIC WITHDRAWAL PLAN To establish a Systematic Withdrawal Plan for ARM Fund and receive regular periodic payments, an account must have a value of $5,000 or more. A request to establish a Systematic Withdrawal Plan must be submitted in writing to an investor's Piper Jaffray investment executive or other broker-dealer. There are no service charges for maintenance; the minimum amount that may be withdrawn each period is $100. (This is merely the minimum amount allowed and should not be interpreted as a recommended amount.) The holder of a Systematic Withdrawal Plan will have any income dividends and any capital gains distributions reinvested in full and fractional shares at net asset value. To provide funds for payment, ARM -21- Fund will redeem as many full and fractional shares as necessary at the redemption price, which is net asset value. Redemption of shares may reduce or possibly exhaust the shares in a shareholder's account, particularly in the event of a market decline. As with other redemptions, a redemption to make a withdrawal payment is a sale for federal income tax purposes. Payments made pursuant to a Systematic Withdrawal Plan cannot be considered as actual yield or income since part of such payments may be a return of capital. The maintenance of a Systematic Withdrawal Plan for ARM Fund concurrent with purchases of additional shares of that Fund would be disadvantageous because of the sales commission involved in the additional purchases. Additional investments of less than $5,000 or three times the annual withdrawals under the Systematic Withdrawal Plan will ordinarily not be allowed during the time the plan is in effect. A confirmation of each transaction showing the sources of the payment and the share and cash balance remaining in the account will be sent. The plan may be terminated on written notice by the shareholder or ARM Fund, and it will terminate automatically if all shares are liquidated or withdrawn from the account or upon the death or incapacity of the shareholder. The amount and schedule of withdrawal payments may be changed or suspended by giving written notice to a Piper Jaffray investment executive or other broker-dealer at least seven business days prior to the end of the month preceding a scheduled payment. TAXATION FEDERAL TAX TREATMENT OF ARM FUND ARM Fund intends to qualify each year as a "regulated investment company" under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). To qualify as a regulated investment company, ARM Fund must, among other things, receive at least 90% of its gross income each year from dividends, interest, gains from the sale or other disposition of securities and certain other types of income, including income from options and futures contracts. The Code also forbids a regulated investment company from earning 30% or more of its gross income from the sale or other disposition of securities held less than three months. This restriction may limit the extent to which ARM Fund may purchase futures contracts and options. To the extent ARM Fund engages in short-term trading and enters into futures and options transactions, the likelihood of violating this 30% requirement is increased. The Code requires a regulated investment company to diversify its holdings. The Internal Revenue Service has not made its position clear regarding the treatment of futures contracts and options for purposes of the diversification test, and the extent to which ARM Fund can buy or sell futures contracts and options may be limited by this requirement. -22- If for any taxable year ARM Fund does not qualify as a regulated investment company, all of its taxable income will be subject to tax at regular corporate rates without any deduction for distributions to shareholders, and such distributions will be taxable to shareholders of ARM Fund as ordinary dividends to the extent of current or accumulated earnings and profits of ARM Fund. ARM Fund will be subject to a nondeductible excise tax equal to 4% of the excess, if any, of the amount required to be distributed pursuant to the Code for each calendar year over the amount actually distributed. No amount of such excess, however, will be subject to the excise tax to the extent it is subject to the corporate-level income tax. In order to avoid the imposition of this excise tax, ARM Fund generally must declare dividends by the end of a calendar year representing 98% of ARM Fund's ordinary income for the calendar year and 98% of capital gain net income (both long-term and short-term capital gains) for the 12-month period ending October 31 of the calendar year. Gain or loss on futures contracts and options is taken into account when realized by entering into a closing transaction or by exercise. In addition, with respect to many types of futures contracts and options held at the end of ARM Fund's taxable year, unrealized gain or loss on such contracts is taken into account at the then current fair market value thereof under a special "marked-to-market, 60/40 system," and such gain or loss is recognized for tax purposes. The gain or loss from such futures contracts and options (including premiums on certain options that expire unexercised) is treated as 60% long-term and 40% short-term capital gain or loss, regardless of their holding period. The amount of any capital gain or loss actually realized by ARM Fund in a subsequent sale or other disposition of such futures contracts will be adjusted to reflect any capital gain or loss taken into account by ARM Fund in a prior year as a result of the constructive sale under the "marked-to-market, 60/40 system." Notwithstanding the rules described above, with respect to certain futures contracts, ARM Fund may make an election that will have the effect of exempting all or a part of those identified futures contracts from being treated for federal income tax purposes as sold on the last business day of ARM Fund's taxable year. All or part of any loss realized by ARM Fund on any closing of a futures contract may be deferred until all of the offsetting positions of ARM Fund with respect to the futures contract are closed. Ordinarily, distributions and redemption proceeds earned by a ARM Fund shareholder are not subject to withholding of federal income tax. However, 31% of a ARM Fund shareholder's distributions and redemption proceeds must be withheld if the shareholder fails to supply ARM Fund or its agents with such shareholder's taxpayer identification number or if the ARM Fund shareholder who is otherwise exempt from withholding fails to properly document such shareholder's status as an exempt recipient. ARM Fund may make investments that produce income that is not matched by a corresponding distribution to the Fund, such as investments in obligations -23- having original issue discount, such as Zero Coupon Securities, or market discount (if ARM Fund elects to accrue the market discount on a current basis with respect to such instruments). Such income would be treated as income earned by ARM Fund and therefore would be subject to the distribution requirements of the Code. Because such income may not be matched by a corresponding cash distribution to ARM Fund, the Fund may be required to borrow money or dispose of other securities to be able to make distributions to shareholders. Any loss on the sale or exchange of shares of ARM Fund generally will be disallowed to the extent that a shareholder acquires or contracts to acquire shares of ARM Fund within 30 days before or after such sale or exchange. In addition, if a shareholder disposes of shares within 90 days of acquiring such shares and purchases other shares of the Company or of another mutual fund managed by the Adviser at a reduced sales charge, the shareholder's tax basis for determining gain or loss on the shares which are disposed of is reduced by the lesser of the amount of the sales charge that was paid when the shares disposed of were acquired or the amount by which the sales charge for the new shares is reduced. If a shareholder's tax basis is so reduced, the amount of the reduction is treated as part of the tax basis of the new shares. Additionally, distributions may be subject to state and local income taxes, and the treatment thereof may differ from the federal income tax consequences discussed above. GENERAL INFORMATION Minnesota has enacted legislation which authorizes corporations to eliminate or limit the personal liability of a director to the corporation or its shareholders for monetary damages for breach of the fiduciary duty of "care" (the duty to act with the care an ordinarily prudent person in a like position would exercise under similar circumstances). Minnesota law does not, however, permit a corporation to eliminate or limit the liability of a director (a) for any breach of the director's duty of "loyalty" to the corporation or its shareholders (the duty to act in good faith and in a manner reasonably believed to be in the best interest of the corporation), (b) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (c) for authorizing a dividend, stock repurchase or redemption or other distribution in violation of Minnesota law or for violation of certain provisions of Minnesota securities laws, or (d) for any transaction from which the director derived an improper personal benefit. Minnesota law does not permit elimination or limitation of a director's liability under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, and the 1940 Act prohibits elimination or limitation of a director's liability for acts involving willful malfeasance, bad faith, gross negligence or reckless disregard of the duties of a director. The Articles of Incorporation of the Company limit the liability of directors to the fullest extent permitted by Minnesota law and the 1940 Act. -24- PENDING LITIGATION Complaints have been filed in federal court relating to one open-end and six closed-end investment companies managed by the Adviser and to two open-end funds for which the Adviser acts as sub-adviser. A complaint was filed on October 5, 1994 in the United States District Court, District of Minnesota, against the Institutional Government Income Portfolio (a series of Piper Funds Inc.), the Adviser, the Distributor, William H. Ellis and Edward J. Kohler alleging certain violations of federal and state securities laws, including the making of materially misleading statements in the prospectus, common law negligent misrepresentation and breach of fiduciary duty. Plaintiffs in the complaint, which purports to be a class action and represents the consolidation of a number of previously filed complaints, are Richard J. Rodney, Jr., Doug Shonka, Carl Patrick Monahan, Jerry Hoehnen, Rosemary Boris, Thomas W. Newcome, Delvin D. Junker, Printing Mailing Trade District (affiliated with the Newspaper Drivers' Division of the International Brotherhood of the Teamsters), The History Theatre, Inc., Paul Gold, and Bernard Friedman. Piper Jaffray Companies and attorneys representing the plaintiffs in the complaint recently reached a $70 million agreement in principle to settle the lawsuit. The agreement requires court approval and the acceptance of the settlement by a large percentage of Institutional Government Income Portfolio shareholders. Three additional complaints, which are based on claims similar to those asserted in the first complaint, have been filed relating to Institutional Government Income Portfolio. The first of such complaints was filed in the same court against the same parties on October 21, 1994, by Eltrax Systems, Inc. A second additional complaint was filed against the Company, the Adviser, the Distributor and Piper Jaffray Companies Inc. on September 30, 1994 in the United States District Court, District of Colorado. Plaintiffs in the complaint are Gary Pashel and Gregg S. Hayutin, Trustees of the Mae Pashel Trust; Mae Pashel, individually; Gary Pashel and Michael H. Feinstein, Trustees of the Robert Hayutin Insurance Trust; and Dennis E. Hayutin, Gregg S. Hayutin and Gary Pashel, Trustees of the Marie Ellen Hayutin Trust. The third additional complaint, a putative class action, was filed on November 1, 1994 in the United States District Court, District of Idaho by the Idaho Association of Realtors, Inc., a non-profit Idaho corporation. The complaint was filed against Institutional Government Income Portfolio, the Adviser, the Distributor, Piper Jaffray Companies Inc., William H. Ellis and Edward J. Kohler. A complaint was filed by Herman D. Gordon on October 20, 1994, in the United States District Court, District of Minnesota, against American Adjustable Rate Term Trust Inc.--1998, American Adjustable Rate Term Trust Inc.--1999, the Adviser, the Distributor, Piper Jaffray Companies Inc., Benjamin Rinkey, Jeffrey Griffin, Charles N. Hayssen and Edward J. Kohler. The complaint, which purports to be a class action, alleges that the defendants violated the federal securities laws by making materially misleading statements in prospectuses and other disclosure documents. -25- A complaint was filed by Frank Donio, I.R.A. and other plaintiffs on April 14, 1995, in the United States District Court, District of Minnesota, against American Adjustable Rate Term Trust Inc.--1996, American Adjustable Rate Term Trust Inc.--1997, American Adjustable Rate Term Trust Inc.--1998, American Adjustable Rate Term Trust Inc.--1999, the Adviser, the Distributor, Piper Jaffray Companies Inc. and certain associated individuals. The complaint, which purports to be a class action, alleges that the defendants violated certain federal and state securities laws by making materially misleading statements in prospectuses and other disclosure documents and by breaching their fiduciary duties. A complaint was filed by Carson H. Bradley on February 3, 1995 in the Sixth Judicial District of the State of Idaho against American Government Income Fund Inc., American Government Income Portfolio Inc., the Adviser, the Distributor and Worth Bruntjen. The complaint alleges negligent misrepresentation, breach of fiduciary duty and breach of contract. Complaints have also been filed relating to two open-end funds for which the Adviser has acted as sub-adviser, Managers Intermediate Mortgage Fund and Managers Short Government Fund. A complaint was filed on September 26, 1994 in the United States District Court, District of Connecticut, by Florence R. Hosea, Bobby W. Hosea, Getrud B. Dale and Peter M. Dale, Andrew Poffel and Diane Poffel as tenants by the Entireties, Myrone Sarone, Donna M. DiPalo, Bernard B. Geltner and Gail Geltner and Paul Delman. The complaint was filed against The Managers Funds, the Managers Funds, L.P., Robert P. Watson, the Adviser, the Distributor, an individual associated with the Adviser, Evaluation Associates, Inc. and Managers Intermediate Mortgage Fund. The complaint, which is a putative class action, alleges certain violations of federal securities laws, including the making of false and misleading statements in the prospectus, and alleges negligent misrepresentation, breach of fiduciary duty and common law fraud. A similar complaint filed as a putative class action in the same court on November 4, 1994 was consolidated with the first complaint on December 13, 1994. The complaint was filed by Karen E. Kopelman against The Managers Fund, The Managers Funds, L.P., Robert P. Watson, the Adviser, the Distributor, Worth Bruntjen, Evaluation Associates, Inc. and Managers Intermediated Mortgage Fund. A complaint was filed on November 18, 1994 in the United States District Court, District of Minnesota. The complaint was filed by Robert Fleck as a putative class action against The Managers Funds, The Managers Funds, L.P., the Adviser, the Distributor, Worth Bruntjen, Evaluation Associates, Inc., Robert P. Watson, John E. Rosati, William M. Graulty, Madeline H. McWhinney, Steven J. Pasggioli, Thomas R. Schneeweis and Managers Short Government Fund, F/K/A/ Managers Short Government Income Fund. The complaint alleges certain violations of federal securities laws, including the making of false and misleading statements in the prospectus, and negligent misrepresentation. -26- The Adviser and Distributor do not believe that the settlement reached in connection with the first lawsuit described above, or any other of the above lawsuits, will have a material adverse effect upon their ability to perform under their agreements with the Funds, and they intend to defend the remaining lawsuits vigorously. -27- UNAUDITED COMBINING FINANCIAL STATEMENTS FOR THE MERGER OF AMERICAN ADJUSTABLE RATE TERM TRUST INC. -- 1996 AMERICAN ADJUSTABLE RATE TERM TRUST INC. -- 1997 AMERICAN ADJUSTABLE RATE TERM TRUST INC. -- 1998 AMERICAN ADJUSTABLE RATE TERM TRUST INC. -- 1999 INTO ARM FUND A SERIES OF JAFFRAY FUNDS INC FEBRUARY 28, 1995 The accompanying unaudited pro forma combining statement of assets and liabilities, including the schedule of investments in securities, and the statement of operations reflect the accounts of the American Adjustable Rate Term Trust Inc. -- 1996 (BDJ), American Adjustable Rate Term Trust Inc. -- 1997 (CDJ), American Adjustable Rate Term Trust Inc. -- 1998 (DDJ) and American Adjustable Rate Term Trust Inc. -- 1999 (EDJ) (BDJ, CDJ, DDJ and EDJ are collectively referred to herein as the "Trusts") as of and for the twelve-month period ended February 28, 1995. These statements have been derived from the semi-annual report of the Trusts as of February 28, 1995 and the underlying accounting records used in calculating net asset values for the twelve-month period ended February 28, 1995. Under the proposed plan of reorganization, shares of the Trusts would be exchanged for shares of ARM Fund, a newly created series of Jaffray Funds Inc. The pro forma combining statements have been prepared assuming that all four Trusts are merged into ARM Fund. In addition, the pro forma combining statements have been prepared based upon the proposed fee and expense structure of ARM Fund, including the overall cap on expenses of 0.60% of total net assets, which requires that at least three of the Trusts merge into ARM Fund. The statements do not reflect the effects of proposed differing investment objectives and policies of the Trusts and ARM Fund, including, but not limited to, the ability to borrow, enter into "mortgage dollar rolls" and invest in municipal zero-coupon securities. F-1 ARM FUND PRO FORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) FEBRUARY 28, 1995
AMERICAN AMERICAN AMERICAN AMERICAN ADJUSTABLE ADJUSTABLE ADJUSTABLE ADJUSTABLE ARM FUND RATE TERM RATE TERM RATE TERM RATE TERM PRO FORMA TRUST 1996 TRUST 1997 TRUST 1998 TRUST 1999 COMBINED ----------- ----------- ----------- ----------- ----------------- Assets: Investments in securities, at market value* including repurchase agreements of $27,747,000; $46,476,000; $32,816,000; $17,032,000 and $124,071,000, respectively $ 221,204,945 452,005,820 460,488,418 267,022,964 1,400,722,147 Investments in put options (cost: $1,528,800; $2,575,600; $2,613,500; $2,010,000 and $8,727,900, respectively) 30,412 440,335 1,049,577 1,323,278 2,843,602 Cash in bank on demand deposit 53,806 50,802 185,826 145,470 435,904 Accrued interest receivable 1,583,689 2,552,686 3,179,373 2,573,348 9,889,096 Receivable for investment securities sold -- 10,772,536 9,608,323 5,024,719 25,405,578 ----------- ----------- ----------- ----------- ------------- Total assets 222,872,852 465,822,179 474,511,517 276,089,779 1,439,296,327 ----------- ----------- ----------- ----------- ------------- Liabilities: Reverse repurchase agreements payable 25,000,000 90,000,000 65,000,000 36,000,000 216,000,000 Accrued investment management fee 52,649 99,539 108,753 63,524 324,465 Accrued administrative fee 22,564 42,660 46,608 27,225 139,057 Accrued interest 115,218 788,541 55,521 236,641 1,195,921 Payable for federal excise taxes 96,670 -- -- -- 96,670 Other accrued expenses 47,383 71,137 56,408 41,415 216,343 ----------- ----------- ----------- ----------- ------------- Total liabilities 25,334,484 91,001,877 65,267,290 36,368,805 217,972,456 ----------- ----------- ----------- ----------- ------------- Net assets applicable to outstanding capital stock $ 197,538,368 374,820,302 409,244,227 239,720,974 1,221,323,871 ----------- ----------- ----------- ----------- ------------- ----------- ----------- ----------- ----------- ------------- Represented by: Capital stock and additional paid-in capital (note 2), outstanding, 21,874,282; 42,481,599; 47,141,017 28,152,572 and 139,649,470 shares, respectively $ 212,450,652 413,903,595 461,065,033 276,181,172 1,363,600,452 Undistributed net investment income 11,434,011 12,200,609 6,890,639 1,516,163 32,041,422 Accumulated net realized loss from investments (21,174,651) (42,707,902) (47,636,669) (32,634,607) (144,153,829) Unrealized depreciation of investments (5,171,644) (8,576,000) (11,074,776) (5,341,754) (30,164,174) ----------- ----------- ----------- ----------- ------------- Total representing net assets applicable to outstanding capital stock $ 197,538,368 374,820,302 409,244,227 239,720,974 1,221,323,871 ----------- ----------- ----------- ----------- ------------- ----------- ----------- ----------- ----------- ------------- Net asset value per share of outstanding capital stock $ 9.03 8.82 8.68 8.52 8.68 ----------- ----------- ----------- ----------- ------------- ----------- ----------- ----------- ----------- ------------- * Investments in securities, at identified cost $ 224,878,201 458,446,555 469,999,271 271,677,996 1,425,002,023 ----------- ----------- ----------- ----------- ------------- ----------- ----------- ----------- ----------- -------------
See accompanying Notes to Pro Forma Combining Financial Statements. F-2 ARM FUND PRO FORMA COMBINING STATEMENT OF OPERATIONS (UNAUDITED) FOR THE TWELVE-MONTH PERIOD ENDED FEBRUARY 28, 1995
AMERICAN AMERICAN AMERICAN AMERICAN JAFFRAY FUNDS INC. ADJUSTABLE ADJUSTABLE ADJUSTABLE ADJUSTABLE PRO FORMA ARM FUND RATE TERM RATE TERM RATE TERM RATE TERM ADJUSTMENTS PRO FORMA TRUST 1996 TRUST 1997 TRUST 1998 TRUST 1999 (NOTE 3) COMBINED ----------- ----------- ----------- ----------- ------------- ------------------ Investment Income $ 14,903,791 28,043,501 29,975,593 18,287,027 91,209,912 ----------- ----------- ----------- ----------- ------------------ Expenses: Investment management fee 791,308 1,471,050 1,631,225 957,386 (414,723) (a) 4,436,246 Administrative fee 339,132 630,451 693,281 405,281 (2,068,145) (b) 0 Distribution fee 0 0 0 0 2,068,145 (c) 2,068,145 Custodian, accounting and transfer agent fees 169,031 231,578 252,923 174,050 (129,874) (d) 697,708 Audit and legal fees 35,041 34,081 34,501 30,626 (84,249) (d) 50,000 Directors' fees 16,166 17,666 22,165 17,665 (48,662) (d) 25,000 Registration fees 32,340 48,410 40,650 24,260 29,340 (d) 175,000 Shareholder reports 87,747 154,855 137,996 79,706 460,304 Federal excise tax expense 94,880 0 0 0 (94,880) (e) 0 Other expenses 1,064 71,888 12,156 4,358 90,006 ----------- ----------- ----------- ----------- ------------------ Total expenses 1,567,249 2,659,979 2,824,897 1,693,332 8,002,409 ----------- ----------- ----------- ----------- ------------------ Net investment income 13,336,542 25,383,522 27,150,696 16,593,695 83,207,503 ----------- ----------- ----------- ----------- ------------------ Realized and unrealized gains (losses) on investments: Net realized loss on investments (13,945,577) (26,338,861) (29,948,858) (23,162,705) (93,396,001) Net realized gain (loss) on interest rate swap transactions 527,325 (2,873,457) (11,344,913) (9,252,406) (22,943,451) Net realized gain (loss) on closed futures contracts 2,299,263 2,325,744 2,316,133 1,996,084 8,937,224 ----------- ----------- ----------- ----------- ------------------ Net realized loss on investments (11,118,989) (26,886,574) (38,977,638) (30,419,027) (107,402,228) Net change in unrealized appreciation or depreciation of investments (4,760,526) (7,028,291) (6,670,421) (2,005,566) (20,464,804) ----------- ----------- ----------- ----------- ------------------ Net loss on investments (15,879,515) (33,914,865) (45,648,059) (32,424,593) (127,867,032) ----------- ----------- ----------- ----------- ------------------ Net decrease in net assets resulting from operations $ (2,542,973) (8,531,343) (18,497,363) (15,830,898) (44,659,529) ----------- ----------- ----------- ----------- ------------------ ----------- ----------- ----------- ----------- ------------------
See accompanying Notes to Pro Forma Combining Financial Statements. F-3 JAFFRAY FUNDS INC. - ARM FUND NOTES TO PRO FORMA COMBINING FINANCIAL STATEMENTS (UNAUDITED AT FEBRUARY 28, 1995) (1) BASIS OF COMBINATION The accompanying unaudited pro forma combining statement of assets and liabilities, including the schedule of investments in securities, and the statement of operations reflect the accounts of the Trusts, as of and for the twelve-month period ended February 28, 1995. These statements have been derived from the semi-annual report of the Trusts as of February 28, 1995 and the underlying accounting records used in calculating net asset values for the twelve-month period ended February 28, 1995. The pro forma combining statements have been prepared assuming that all four Trusts are merged into ARM Fund. In addition, the pro forma combining statements have been prepared based upon the proposed fee and expense structure of ARM Fund, including the overall cap on expenses of 0.60% of total net assets, which requires that at least three of the Trusts merge into ARM Fund. The pro forma statements give effect to the proposed transfer of the assets and liabilities of the Trusts in exchange for shares of ARM Fund under generally accepted accounting principles. The historical cost of the investments in securities will be carried forward to ARM Fund as the reorganization will be accounted for as a tax-free transaction. The pro forma combining statements should be read in conjunction with the historical financial statements of the Trusts and the notes thereto incorporated by reference in the Statement of Additional Information. (2) CAPITAL SHARES The pro forma combining statement of assets and liabilities assumes the issuance of shares of ARM Fund if the reorganization had taken place on February 28, 1995 and is based on the net asset value of DDJ, the surviving entity for accounting purposes. The pro forma number of shares outstanding consists of 21,874,282; 42,481,599; 47,141,017 and 28,152,572 shares assumed to be issued to shareholders of BDJ, CDJ, DDJ and EDJ, respectively. (3) PRO FORMA ADJUSTMENTS (a) INVESTMENT MANAGEMENT FEE - The investment management fee has been adjusted to reflect the fee structure of ARM Fund. Each of the four Trusts pays a per annum rate of 0.35% of average weekly net assets to Piper Capital (the Adviser). The investment management agreement of ARM Fund provides for a management fee of 0.35% on the first $500 million of average daily net assets and 0.30% on average daily net assets in excess of $500 million. (b) ADMINISTRATIVE FEE - Each of the four Trusts pays a per annum fee of 0.15% of average weekly net assets to Piper Capital (the administrator) for certain recordkeeping, regulatory and reporting expenses. ARM Fund will not incur an administrative fee. (c) DISTRIBUTION FEE - As an open-end fund, ARM Fund will pay to distributors of fund shares a fee at an annual rate of 0.15% of average daily net assets pursuant to a distribution plan adopted in accordance with Rule 12b-1 of the Investment Company Act of 1940. F-4 (d) OTHER FEES AND EXPENSES - The pro forma adjustments to custodian, accounting, transfer agent, legal and auditing, registration and directors fees reflect the estimated differences resulting from the single surviving entity having a greater level of net assets and number of shareholders, the open-end structure of ARM Fund, savings due to economies of scale and decreases in certain expenses duplicated between the four Trusts. (E) FEDERAL EXCISE TAX EXPENSE - BDJ paid excise taxes on income retained in the fiscal year ended August 31, 1994. ARM Fund intends to distribute substantially all its net investment income and not incur excise taxes. (4) INVESTMENT OBJECTIVES AND POLICIES These statements do not reflect the effects of the proposed differing investment objectives and policies of the Trusts and ARM Fund, including, but not limited to, the ability to borrow, enter into "mortgage dollar rolls" and invest in zero-coupon municipal securities. F-5
JAFFRAY FUNDS INC. - ARM FUND PRO FORMA COMBINING SCHEDULE OF INVESTMENTS (UNAUDITED) AMERICAN AMERICAN AMERICAN FEBRUARY 28, 1995 ADJUSTABLE RATE ADJUSTABLE RATE ADJUSTABLE RATE PRINCIPAL TERM TRUST 1996 TERM TRUST 1997 TERM TRUST 1998 NAME OF ISSUER AMOUNT MARKET VALUE (a) MARKET VALUE (a) MARKET VALUE (a) - ---------------------------------------------------------- -------------- ------------------- ------------------- ------------------ (Percentages of each pro forma combined market value by investment category relate to total pro forma combined net assets) Mortgage-Backed Securities (86.5%): U.S. Agency Adjustable-Rate Mortgages (44.0%): FHLMC, 5.94%, 4/01/22 1,050,711 -- 1,065,484 -- FHLMC, 5.96%, 1/01/21 6,236,161 -- -- 6,261,106 FHLMC, 6.00%, 1/01/24 1,679,507 1,679,507 -- -- FHLMC, 6.00%, 1/01/24 2,522,527 -- 2,522,527 -- FHLMC, 6.00%, 5/01/17 3,778,140 -- -- 3,791,401 FHLMC, 6.07%, 9/01/23 1,619,298 1,601,081 -- -- FHLMC, 6.07%, 9/01/23 1,619,298 -- 1,601,081 -- FHLMC, 6.10%, 10/01/23 1,684,822 -- 1,695,352 -- FHLMC, 6.10%, 10/01/23 3,369,644 -- -- 3,390,704 FHLMC, 6.12%, 8/01/23 7,140,906 -- -- 7,123,054 FHLMC, 6.24%, 1/01/24 1,890,572 1,904,751 -- -- FHLMC, 6.24%, 1/01/24 4,145,150 -- 4,176,238 -- FHLMC, 6.28%, 7/01/23 5,900,016 -- -- -- FHLMC, 6.30%, 6/01/22 29,434,791 -- -- -- FHLMC, 6.34%, 8/01/19 2,013,726 -- 2,038,898 -- FHLMC, 6.37%, 7/01/23 7,543,059 7,651,490 -- -- FHLMC, 6.50%, 8/01/20 10,918,192 11,054,669 -- -- FHLMC, 6.52%, 4/01/23 4,599,168 -- -- -- FHLMC, 6.86%, 6/01/21 4,735,260 -- 4,868,416 -- FHLMC, 6.88%, 6/01/21 2,711,992 2,774,693 -- -- FHLMC, 6.93%, 5/01/19 2,244,192 2,279,246 -- -- FHLMC, 7.04%, 10/01/18 7,158,192 7,274,513 -- -- FHLMC, 7.05%, 2/01/22 12,510,519 -- -- 12,655,172 FHLMC, 7.10%, 5/01/20 2,485,069 -- 2,545,208 -- FHLMC, 7.13%, 11/01/16 3,702,454 -- -- 3,732,518 FHLMC, 7.14%, 2/01/22 17,026,683 -- -- 17,420,340 FHLMC, 7.24%, 9/01/22 5,906,203 -- -- -- FHLMC, 7.25%, 11/01/16 10,395,903 10,493,313 -- -- FHLMC, 7.27%, 11/01/22 10,835,163 -- -- -- FHLMC, 7.30%, 1/01/19 209,536 -- 214,118 -- FHLMC, 7.37%, 10/01/19 2,744,581 2,815,337 -- -- FHLMC, 7.41%, 10/01/22 2,976,706 3,039,961 -- -- FHLMC, 7.41%, 10/01/22 5,953,412 -- 6,079,922 -- FHLMC, 7.41%, 6/01/18 2,243,436 2,285,500 -- -- FNMA, 4.01%, 3/01/24 4,505,705 -- 4,432,487 -- FNMA, 5.96%, 2/01/24 8,857,861 -- 8,780,355 -- FNMA, 5.96%, 2/01/24 8,857,861 -- -- -- FNMA, 6.01%, 12/01/23 3,897,917 -- 3,934,441 -- FNMA, 6.03%, 12/01/23 3,794,163 3,749,088 -- -- FNMA, 6.03%, 12/01/23 1,686,295 -- -- 1,666,261 FNMA, 6.07%, 8/01/23 2,305,412 2,339,993 -- -- FNMA, 6.08%, 12/01/23 3,813,400 -- 3,856,301 -- FNMA, 6.10%, 2/01/24 4,328,577 -- -- 4,312,344 JAFFRAY FUNDS INC. - ARM FUND PRO FORMA COMBINING SCHEDULE OF INVESTMENTS (UNAUDITED) AMERICAN ARM FUND FEBRUARY 28, 1995 ADJUSTABLE RATE PRO FORMA TERM TRUST 1999 COMBINED NAME OF ISSUER MARKET VALUE (a) MARKET VALUE (a) - ---------------------------------------------------------- ------------------- ------------------- (Percentages of each pro forma combined market value by investment category relate to total pro forma combined net assets) Mortgage-Backed Securities (86.5%): U.S. Agency Adjustable-Rate Mortgages (44.0%): FHLMC, 5.94%, 4/01/22 -- 1,065,484 FHLMC, 5.96%, 1/01/21 -- 6,261,106 FHLMC, 6.00%, 1/01/24 -- 1,679,507 FHLMC, 6.00%, 1/01/24 -- 2,522,527 FHLMC, 6.00%, 5/01/17 -- 3,791,401 FHLMC, 6.07%, 9/01/23 -- 1,601,081 FHLMC, 6.07%, 9/01/23 -- 1,601,081 FHLMC, 6.10%, 10/01/23 -- 1,695,352 FHLMC, 6.10%, 10/01/23 -- 3,390,704 FHLMC, 6.12%, 8/01/23 -- 7,123,054 FHLMC, 6.24%, 1/01/24 -- 1,904,751 FHLMC, 6.24%, 1/01/24 -- 4,176,238 FHLMC, 6.28%, 7/01/23 5,984,829 5,984,829 FHLMC, 6.30%, 6/01/22 29,986,694 29,986,694 FHLMC, 6.34%, 8/01/19 -- 2,038,898 FHLMC, 6.37%, 7/01/23 -- 7,651,490 FHLMC, 6.50%, 8/01/20 -- 11,054,669 FHLMC, 6.52%, 4/01/23 4,665,258 4,665,258 FHLMC, 6.86%, 6/01/21 -- 4,868,416 FHLMC, 6.88%, 6/01/21 -- 2,774,693 FHLMC, 6.93%, 5/01/19 -- 2,279,246 FHLMC, 7.04%, 10/01/18 -- 7,274,513 FHLMC, 7.05%, 2/01/22 -- 12,655,172 FHLMC, 7.10%, 5/01/20 -- 2,545,208 FHLMC, 7.13%, 11/01/16 -- 3,732,518 FHLMC, 7.14%, 2/01/22 -- 17,420,340 FHLMC, 7.24%, 9/01/22 6,016,944 6,016,944 FHLMC, 7.25%, 11/01/16 -- 10,493,313 FHLMC, 7.27%, 11/01/22 11,068,796 11,068,796 FHLMC, 7.30%, 1/01/19 -- 214,118 FHLMC, 7.37%, 10/01/19 -- 2,815,337 FHLMC, 7.41%, 10/01/22 -- 3,039,961 FHLMC, 7.41%, 10/01/22 -- 6,079,922 FHLMC, 7.41%, 6/01/18 -- 2,285,500 FNMA, 4.01%, 3/01/24 -- 4,432,487 FNMA, 5.96%, 2/01/24 -- 8,780,355 FNMA, 5.96%, 2/01/24 8,780,355 8,780,355 FNMA, 6.01%, 12/01/23 -- 3,934,441 FNMA, 6.03%, 12/01/23 -- 3,749,088 FNMA, 6.03%, 12/01/23 -- 1,666,261 FNMA, 6.07%, 8/01/23 -- 2,339,993 FNMA, 6.08%, 12/01/23 -- 3,856,301 FNMA, 6.10%, 2/01/24 -- 4,312,344
F-6
JAFFRAY FUNDS INC. - ARM FUND PRO FORMA COMBINING SCHEDULE OF INVESTMENTS (UNAUDITED) AMERICAN AMERICAN AMERICAN FEBRUARY 28, 1995 ADJUSTABLE RATE ADJUSTABLE RATE ADJUSTABLE RATE PRINCIPAL TERM TRUST 1996 TERM TRUST 1997 TERM TRUST 1998 NAME OF ISSUER AMOUNT MARKET VALUE (a) MARKET VALUE (a) MARKET VALUE (a) - ------------------------------------------------------------ ------------- ------------------ ------------------- ------------------ FNMA, 6.12%, 1/01/24 3,593,808 -- 3,631,974 -- FNMA, 6.13%, 7/01/23 4,987,106 -- 5,050,691 -- FNMA, 6.21%, 11/01/22 3,504,049 -- -- -- FNMA, 6.28%, 5/01/21 7,408,603 -- 7,552,107 -- FNMA, 6.49%, 7/01/17 1,945,441 1,929,625 -- -- FNMA, 6.62%, 1/01/20 3,252,843 -- 3,252,843 -- FNMA, 6.69%, 11/01/17 10,572,300 -- -- 10,691,238 FNMA, 6.71%, 1/01/20 2,185,878 2,236,415 -- -- FNMA, 6.73%, 11/01/20 5,272,421 -- -- 5,236,147 FNMA, 6.73%, 11/01/21 7,893,764 -- -- 8,012,170 FNMA, 6.78%, 12/01/20 8,316,137 -- 8,430,484 -- FNMA, 6.78%, 4/01/18 5,218,850 5,287,321 -- -- FNMA, 6.78%, 4/01/18 8,744,722 -- 8,859,452 -- FNMA, 6.83%, 11/01/20 5,837,002 -- 5,917,261 -- FNMA, 6.93%, 9/01/17 4,086,944 -- -- 4,145,673 FNMA, 6.96%, 1/01/28 2,507,498 2,549,023 -- -- FNMA, 6.96%, 1/01/28 1,355,888 -- 1,378,341 -- FNMA, 6.97%, 5/01/18 1,635,526 -- 1,656,984 -- FNMA, 6.97%, 5/01/18 6,371,737 -- -- 6,455,334 FNMA, 6.98%, 3/01/28 10,724,485 -- 10,871,947 -- FNMA, 6.99%, 1/01/29 3,856,473 -- 3,909,499 -- FNMA, 7.01%, 10/01/20 3,773,294 -- -- 3,615,268 FNMA, 7.04%, 7/01/17 6,700,593 -- -- 6,784,350 FNMA, 7.07%, 5/01/27 1,847,177 1,881,239 -- -- FNMA, 7.07%, 8/01/27 9,372,030 -- 9,506,706 -- FNMA, 7.15%, 7/01/19 4,570,437 -- -- 4,687,532 FNMA, 7.32%, 8/01/21 3,956,202 -- 4,017,998 -- FNMA, 7.53%, 1/01/18 2,137,600 -- 2,180,352 -- FNMA, 7.93%, 7/01/19 2,910,727 -- -- 2,933,922 GNMA II, 4.50%, 4/20/24 739,542 -- 685,926 -- GNMA II, 4.50%, 5/20/24 5,025,168 -- 4,761,347 -- GNMA II, 4.50%, 6/20/24 4,292,885 -- 4,067,509 -- GNMA II, 4.50%, 4/20/24 6,189,564 -- -- 5,740,821 GNMA II, 4.50%, 5/20/24 3,854,407 -- -- 3,652,050 GNMA II, 5.50%, 12/20/23 9,147,443 -- 8,735,808 -- GNMA II, 6.00%, 4/20/22 7,229,997 -- -- 7,166,734 GNMA II, 6.00%, 5/20/21 4,909,887 4,897,612 -- -- GNMA II, 6.00%, 5/20/22 3,222,573 -- -- 3,194,375 GNMA II, 6.00%, 6/20/22 8,907,032 -- -- 8,851,363 GNMA II, 6.00%, 7/20/22 8,641,928 -- -- 8,539,262 GNMA II, 6.00%, 7/20/23 6,661,894 -- -- -- GNMA II, 6.00%, 8/20/21 7,807,772 -- 7,798,012 -- GNMA II, 6.00%, 9/20/22 2,549,517 -- -- -- GNMA II, 6.13%, 10/20/21 7,708,113 -- 7,606,906 -- GNMA II, 6.50%, 10/20/23 4,613,352 -- 4,590,285 -- GNMA II, 6.50%, 10/20/23 9,226,707 -- -- 9,180,573 GNMA II, 6.50%, 11/20/23 4,599,503 -- 4,576,506 -- GNMA II, 6.50%, 6/20/22 1,213,992 -- 1,227,650 -- JAFFRAY FUNDS INC. - ARM FUND PRO FORMA COMBINING SCHEDULE OF INVESTMENTS (UNAUDITED) AMERICAN ARM FUND FEBRUARY 28, 1995 ADJUSTABLE RATE PRO FORMA TERM TRUST 1999 COMBINED NAME OF ISSUER MARKET VALUE (a) MARKET VALUE (a) - ---------------------------------------------------------- ------------------- ------------------- FNMA, 6.12%, 1/01/24 -- 3,631,974 FNMA, 6.13%, 7/01/23 -- 5,050,691 FNMA, 6.21%, 11/01/22 3,545,677 3,545,677 FNMA, 6.28%, 5/01/21 -- 7,552,107 FNMA, 6.49%, 7/01/17 -- 1,929,625 FNMA, 6.62%, 1/01/20 -- 3,252,843 FNMA, 6.69%, 11/01/17 -- 10,691,238 FNMA, 6.71%, 1/01/20 -- 2,236,415 FNMA, 6.73%, 11/01/20 -- 5,236,147 FNMA, 6.73%, 11/01/21 -- 8,012,170 FNMA, 6.78%, 12/01/20 -- 8,430,484 FNMA, 6.78%, 4/01/18 -- 5,287,321 FNMA, 6.78%, 4/01/18 -- 8,859,452 FNMA, 6.83%, 11/01/20 -- 5,917,261 FNMA, 6.93%, 9/01/17 -- 4,145,673 FNMA, 6.96%, 1/01/28 -- 2,549,023 FNMA, 6.96%, 1/01/28 -- 1,378,341 FNMA, 6.97%, 5/01/18 -- 1,656,984 FNMA, 6.97%, 5/01/18 -- 6,455,334 FNMA, 6.98%, 3/01/28 -- 10,871,947 FNMA, 6.99%, 1/01/29 -- 3,909,499 FNMA, 7.01%, 10/01/20 -- 3,615,268 FNMA, 7.04%, 7/01/17 -- 6,784,350 FNMA, 7.07%, 5/01/27 -- 1,881,239 FNMA, 7.07%, 8/01/27 -- 9,506,706 FNMA, 7.15%, 7/01/19 -- 4,687,532 FNMA, 7.32%, 8/01/21 -- 4,017,998 FNMA, 7.53%, 1/01/18 -- 2,180,352 FNMA, 7.93%, 7/01/19 -- 2,933,922 GNMA II, 4.50%, 4/20/24 -- 685,926 GNMA II, 4.50%, 5/20/24 -- 4,761,347 GNMA II, 4.50%, 6/20/24 -- 4,067,509 GNMA II, 4.50%, 4/20/24 -- 5,740,821 GNMA II, 4.50%, 5/20/24 -- 3,652,050 GNMA II, 5.50%, 12/20/23 -- 8,735,808 GNMA II, 6.00%, 4/20/22 -- 7,166,734 GNMA II, 6.00%, 5/20/21 -- 4,897,612 GNMA II, 6.00%, 5/20/22 -- 3,194,375 GNMA II, 6.00%, 6/20/22 -- 8,851,363 GNMA II, 6.00%, 7/20/22 -- 8,539,262 GNMA II, 6.00%, 7/20/23 6,549,441 6,549,441 GNMA II, 6.00%, 8/20/21 -- 7,798,012 GNMA II, 6.00%, 9/20/22 2,519,229 2,519,229 GNMA II, 6.13%, 10/20/21 -- 7,606,906 GNMA II, 6.50%, 10/20/23 -- 4,590,285 GNMA II, 6.50%, 10/20/23 -- 9,180,573 GNMA II, 6.50%, 11/20/23 -- 4,576,506 GNMA II, 6.50%, 6/20/22 -- 1,227,650
F-7
JAFFRAY FUNDS INC. - ARM FUND PRO FORMA COMBINING SCHEDULE OF INVESTMENTS (UNAUDITED) AMERICAN AMERICAN FEBRUARY 28, 1995 ADJUSTABLE RATE ADJUSTABLE RATE PRINCIPAL TERM TRUST 1996 TERM TRUST 1997 NAME OF ISSUER AMOUNT MARKET VALUE (a) MARKET VALUE (a) - -------------------------------------------------------------------------------- -------------- ------------------ ----------------- GNMA II, 6.50%, 7/20/22 8,338,926 -- -- GNMA II, 6.50%, 7/20/22 4,169,463 -- -- GNMA II, 6.50%, 9/20/22 3,781,360 -- -- GNMA II, 6.63%, 11/20/21 4,017,589 -- 4,050,212 GNMA II, 6.75%, 6/20/23 1,730,580 -- 1,737,069 GNMA II, 6.75%, 6/20/23 8,652,899 -- -- GNMA II, 6.75%, 6/20/23 5,628,874 -- -- GNMA II, 7.00%, 8/20/23 5,105,190 5,143,479 -- GNMA II, 7.00%, 8/20/23 9,556,745 -- -- ------------------ ----------------- 84,867,856 173,864,697 ------------------ ----------------- Collateralized Mortgage Obligations and Other Mortgage-Backed Securities (b) (42.5%): U.S. Agency Adjustable Rate (1.3%): FHLMC, 7.00%, Series 1249, Class A, LIBOR, 4/15/22 15,144,357 15,115,885 -- ------------------ ----------------- Private Adjustable Rate (41.2%) California Federal, Series 1987-F, Class A2, 6.73%, 7/01/17 5,629,518 -- -- Citicorp Mortgage Securities, Series 1991-14, Class M, 6.48%, 9/25/21 5,879,874 5,802,701 -- Columbia Savings and Loan, Series 1987-1, Class A, 7.36%, 12/01/17 396,157 396,977 -- Columbia Savings and Loan, Series 1987-1, Class A, 7.36%, 12/01/17 594,234 -- -- Donaldson, Lufkin and Jenrette, Series 1991-3, Class A1, 6.79%, 3/20/21 7,948,462 -- -- Donaldson, Lufkin and Jenrette, Series 1992-12, Class A1, 6.94%, 12/25/22 6,779,144 -- -- Donaldson, Lufkin and Jenrette, Series 1992-6, Class A3, 6.71%, 7/25/22 3,512,459 -- -- Donaldson, Lufkin and Jenrette, Series 1992-MF3, Class A3, 7.70%, 5/25/22 17,000,000 -- 17,265,625 Donaldson, Lufkin and Jenrette, Series 1992-MF3, Class A3, 7.70%, 5/25/22 5,000,000 -- -- Donaldson, Lufkin and Jenrette, Series 1992-MF3, Class A3, 7.70%, 5/25/22 10,000,000 -- -- Donaldson, Lufkin and Jenrette, Series 1992-MF3, Class A3, 7.70%, 5/25/22 6,000,000 6,093,750 -- First Federal of Rochester, Series 1988-SE1, Class A, 7.17%, 10/25/18 3,122,188 -- 3,091,942 First Federal of Rochester, Series 1988-SE1, Class A, 7.17%, 10/25/18 6,634,649 -- -- First Federal of Rochester, Series 1988-SE1, Class A, 7.17%, 10/25/18 10,572,510 -- -- Glendale Federal Savings, 6.37%, 8/01/28 6,740,191 -- -- Glendale Federal Savings, Series 1989-5, Class A, 6.78%, 4/01/29 19,295,932 -- 19,155,265 Greenwich Capital Acceptance, Series 1992-LB5, Class A3, 6.89%, 7/25/22 12,883,000 -- 12,432,095 Meridian Asset Acceptance Corporation, Series 1991-1, Class A1, 6.47%, 4/27/20 2,400,677 2,367,668 -- Meridian Asset Acceptance Corporation, Series 1991-1, Class A1, 6.47%, 4/27/20 5,404,404 -- -- Merrill Lynch Mortgage Investors, 5.24%, 3/01/18 3,740,036 -- -- Merrill Lynch Mortgage Investors, 6.66%, 6/15/17 25,000,000 -- -- Merrill Lynch Mortgage Investors, 7.13%, 1/25/19 1,155,110 -- -- Merrill Lynch Mortgage Investors, Series 1988-M, Class A, 6.76%, 10/01/18 3,386,628 -- 3,360,009 Merrill Lynch Mortgage Investors, Series 1992-E, Class A3, 6.66%, 9/15/17 5,000,000 -- -- Merrill Lynch Mortgage Investors, Series 1992-H, Class A1-2, 7.69%, 1/25/23 4,392,791 -- -- Merrill Lynch Mortgage Investors, Series 1993-B, Class A3, 6.71%, 12/15/17 13,650,000 -- -- Merrill Lynch Mortgage Investors, Series 1993-C, Class A4, 6.81%, 3/15/18 7,000,000 -- 6,816,250 Merrill Lynch Mortgage Investors, Series 1993-D, Class A1-2, 5.69%, 10/25/23 2,000,000 1,924,380 -- Merrill Lynch Mortgage Investors, Series 1993-D, Class A1-2, 5.69%, 10/25/23 6,000,000 -- 5,773,140 JAFFRAY FUNDS INC. - ARM FUND PRO FORMA COMBINING SCHEDULE OF INVESTMENTS (UNAUDITED) AMERICAN AMERICAN ARM FUND FEBRUARY 28, 1995 ADJUSTABLE RATE ADJUSTABLE RATE PRO FORMA TERM TRUST 1998 TERM TRUST 1999 COMBINED NAME OF ISSUER MARKET VALUE (a) MARKET VALUE (a) MARKET VALUE (a) - ---------------------------------------------------------------------------- ------------------ ----------------- ------------------ GNMA II, 6.50%, 7/20/22 8,380,621 -- 8,380,621 GNMA II, 6.50%, 7/20/22 -- 4,190,310 4,190,310 GNMA II, 6.50%, 9/20/22 -- 3,800,267 3,800,267 GNMA II, 6.63%, 11/20/21 -- -- 4,050,212 GNMA II, 6.75%, 6/20/23 -- -- 1,737,069 GNMA II, 6.75%, 6/20/23 8,685,347 -- 8,685,347 GNMA II, 6.75%, 6/20/23 -- 5,649,982 5,649,982 GNMA II, 7.00%, 8/20/23 -- -- 5,143,479 GNMA II, 7.00%, 8/20/23 9,628,421 -- 9,628,421 ------------------ ----------------- ------------------ 185,934,101 92,757,782 537,424,436 ------------------ ----------------- ------------------ Collateralized Mortgage Obligations and Other Mortgage-Backed Securities (b) (42.5%): U.S. Agency Adjustable Rate (1.3%): FHLMC, 7.00%, Series 1249, Class A, LIBOR, 4/15/22 -- -- 15,115,885 Private Adjustable Rate (41.2%) California Federal, Series 1987-F, Class A2, 6.73%, 7/01/17 -- 5,531,002 5,531,002 Citicorp Mortgage Securities, Series 1991-14, Class M, 6.48%, 9/25/21 -- -- 5,802,701 Columbia Savings and Loan, Series 1987-1, Class A, 7.36%, 12/01/17 -- -- 396,977 Columbia Savings and Loan, Series 1987-1, Class A, 7.36%, 12/01/17 595,464 -- 595,464 Donaldson, Lufkin and Jenrette, Series 1991-3, Class A1, 6.79%, 3/20/21 -- 8,013,043 8,013,043 Donaldson, Lufkin and Jenrette, Series 1992-12, Class A1, 6.94%, 12/25/22 -- 6,815,158 6,815,158 Donaldson, Lufkin and Jenrette, Series 1992-6, Class A3, 6.71%, 7/25/22 -- 3,497,092 3,497,092 Donaldson, Lufkin and Jenrette, Series 1992-MF3, Class A3, 7.70%, 5/25/22 -- -- 17,265,625 Donaldson, Lufkin and Jenrette, Series 1992-MF3, Class A3, 7.70%, 5/25/22 5,078,125 -- 5,078,125 Donaldson, Lufkin and Jenrette, Series 1992-MF3, Class A3, 7.70%, 5/25/22 -- 10,156,250 10,156,250 Donaldson, Lufkin and Jenrette, Series 1992-MF3, Class A3, 7.70%, 5/25/22 -- -- 6,093,750 First Federal of Rochester, Series 1988-SE1, Class A, 7.17%, 10/25/18 -- -- 3,091,942 First Federal of Rochester, Series 1988-SE1, Class A, 7.17%, 10/25/18 6,570,376 -- 6,570,376 First Federal of Rochester, Series 1988-SE1, Class A, 7.17%, 10/25/18 -- 10,470,088 10,470,088 Glendale Federal Savings, 6.37%, 8/01/28 6,651,726 -- 6,651,726 Glendale Federal Savings, Series 1989-5, Class A, 6.78%, 4/01/29 -- -- 19,155,265 Greenwich Capital Acceptance, Series 1992-LB5, Class A3, 6.89%, 7/25/22 -- -- 12,432,095 Meridian Asset Acceptance Corporation, Series 1991-1, Class A1, 6.47%, 4/27/20 -- -- 2,367,668 Meridian Asset Acceptance Corporation, Series 1991-1, Class A1, 6.47%, 4/27/20 5,330,094 -- 5,330,094 Merrill Lynch Mortgage Investors, 5.24%, 3/01/18 3,524,984 -- 3,524,984 Merrill Lynch Mortgage Investors, 6.66%, 6/15/17 24,926,750 -- 24,926,750 Merrill Lynch Mortgage Investors, 7.13%, 1/25/19 1,145,003 -- 1,145,003 Merrill Lynch Mortgage Investors, Series 1988-M, Class A, 6.76%, 10/01/18 -- -- 3,360,009 Merrill Lynch Mortgage Investors, Series 1992-E, Class A3, 6.66%, 9/15/17 -- 4,983,750 4,983,750 Merrill Lynch Mortgage Investors, Series 1992-H, Class A1-2, 7.69%, 1/25/23 -- 4,399,511 4,399,511 Merrill Lynch Mortgage Investors, Series 1993-B, Class A3, 6.71%, 12/15/17 -- 13,649,864 13,649,864 Merrill Lynch Mortgage Investors, Series 1993-C, Class A4, 6.81%, 3/15/18 -- -- 6,816,250 Merrill Lynch Mortgage Investors, Series 1993-D, Class A1-2, 5.69%, 10/25/23 -- -- 1,924,380 Merrill Lynch Mortgage Investors, Series 1993-D, Class A1-2, 5.69%, 10/25/23 -- -- 5,773,140
F-8
JAFFRAY FUNDS INC. - ARM FUND PRO FORMA COMBINING SCHEDULE OF INVESTMENTS (UNAUDITED) AMERICAN AMERICAN FEBRUARY 28, 1995 ADJUSTABLE ADJUSTABLE RATE RATE TERM TRUST TERM TRUST 1996 1997 NAME OF ISSUER PRINCIPAL MARKET MARKET AMOUNT VALUE (a) VALUE (a) - ------------------------------------------------------------------------------------------- ------------ ------------- ------------- Merrill Lynch Mortgage Investors, Series 1993-D, Class A1-2, 5.69%, 10/25/23 6,000,000 -- -- Merrill Lynch Mortgage Investors, Series 1993-D, Class A1-2, 5.69%, 10/25/23 4,000,000 -- -- Merrill Lynch Mortgage Investors, Series 1993-E, Class A4, 6.81%, 6/15/18 6,500,000 -- -- Merrill Lynch Mortgage Investors, Series 1993-H, Class A1-2, 6.00%, 10/25/23 2,320,000 2,228,105 -- Merrill Lynch Mortgage Investors, Series 1993-H, Class A1-2, 6.00%, 10/25/23 6,523,000 -- 6,264,624 Merrill Lynch Mortgage Investors, Series 1993-H, Class A1-2, 6.00%, 10/25/23 7,340,000 -- -- Merrill Lynch Mortgage Investors, Series 1993-H, Class A1-2, 6.00%, 10/25/23 3,640,000 -- -- Paine Webber Mortgage Acceptance Corporation, Series 1993-10, Class M1, 6.00%, 11/25/23 13,226,235 13,160,104 -- Paine Webber Mortgage Acceptance Corporation, Series 1993-11, Class M1, 6.35%, 12/01/23 2,890,709 -- 2,878,063 Paine Webber Mortgage Acceptance Corporation, Series 1993-11, Class M1, 6.35%, 12/01/23 2,951,731 -- -- Paine Webber Mortgage Acceptance Corporation, Series 1993-11, Class M1, 6.35%, 12/01/23 1,475,865 -- -- Paine Webber Mortgage Acceptance Corporation, Series 1993-8, Class M1, 7.01%, 8/25/23 6,771,161 -- -- Paine Webber Mortgage Acceptance Corporation, Series 1993-8, Class M1, 7.01%, 8/25/23 6,771,161 -- -- Paine Webber Mortgage Acceptance Corporation, Series 1993-8, Class M2, 7.01%, 8/25/23 5,115,940 4,860,143 -- PaineWebber Mortgage Acceptance, 6.30%, 4/25/23 2,720,913 -- -- Prudential Home Mortgage, Series 1991-9, Class A1, 7.19%, 7/25/21 7,220,737 -- 7,286,518 Prudential Home Mortgage, Series 1991-9, Class A1, 7.19%, 7/25/21 7,220,653 -- -- Residential Funding Corporation, 7.19%, 3/25/22 12,752,859 -- -- Residential Funding Corporation, Series 1992-S25, Class A, 6.63%, 7/25/22 5,054,286 5,065,254 -- Residential Funding Corporation, Series 1992-S25, Class A, 6.63%, 7/25/22 12,635,715 -- 12,663,134 Residential Funding Corporation, Series 1992-S25, Class A, 6.63%, 7/25/22 12,635,715 -- -- Residential Funding Corporation, Series 1992-S25, Class A, 6.63%, 7/25/22 3,689,629 -- -- Residential Funding Corporation, Series Series 1993-S8, Class A, 7.54%, 2/25/23 5,651,338 5,722,601 -- Residential Funding Corporation, Series Series 1993-S8, Class A, 7.54%, 2/25/23 8,477,007 -- 8,583,902 Residential Funding Corporation, Series Series 1993-S8, Class A, 7.54%, 2/25/23 8,477,007 -- -- Residential Funding Corporation, Series Series 1993-S8, Class A, 7.54%, 2/25/23 5,651,338 -- -- Resolution Trust Corporation, 5.68%, 9/25/19 8,094,806 -- -- Resolution Trust Corporation, 6.85%, 5/25/28 3,793,198 -- -- Resolution Trust Corporation, Series 1991-10, Class A1, 7.23%, 5/25/21 5,604,194 -- 5,574,267 Resolution Trust Corporation, Series 1991-2, Class B, 6.74%, 4/25/21 5,000,000 -- 4,997,000 Resolution Trust Corporation, Series 1991-8, Class A-1, 7.39%, 12/25/20 12,625,787 -- 12,955,241 Resolution Trust Corporation, Series 1992-4, Class B2, 6.78%, 7/25/28 15,000,601 -- 14,871,690 Resolution Trust Corporation, Series 1992-4, Class B2, 6.78%, 7/25/28 10,000,401 -- -- Resolution Trust Corporation, Series 1992-4, Class B2, 6.78%, 7/25/28 3,000,120 -- -- Resolution Trust Corporation, Series 1992-6, Class B3, 5.88%, 1/25/26 10,002,236 -- -- Resolution Trust Corporation, Series 1992-6, Class B3, 7.06%, 1/25/26 13,342,983 -- -- Resolution Trust Corporation, Series 1992-9, Class A6, 7.39%, 7/25/20 2,053,453 -- 2,004,684 Ryland Mortgage Securities, Series 1991-B1, Class 1, 6.70%, 3/25/20 1,770,646 1,784,756 -- Ryland Mortgage Securities, Series 1991-B1, Class 1, 6.70%, 3/25/20 6,843,105 -- 6,897,636 Ryland Mortgage Securities, Series 1991-B1, Class 1, 6.70%, 3/25/20 5,663,259 -- -- Salomon Brothers Mortgage, Series 1987-2, Class A, 7.04%, 12/25/16 3,122,465 3,044,403 -- Salomon Brothers Mortgage, Series 1988-3, Class A, 5.61%, 6/25/17 751,830 732,094 -- Salomon Brothers Mortgage, Series 1992-5, Class A1, 7.74%, 11/25/22 3,348,845 -- -- Sears Mortgage Securities, 6.32%, 9/25/21 16,149,816 -- -- Sears Mortgage Securities, Series 1992-12, Class A1, 6.52%, 7/25/22 5,940,407 -- -- ------------- ------------- 53,182,936 152,871,085 ------------- ------------- Total Mortgage-Backed Securities (combined cost: $ 1,084,445,154) 153,166,677 326,735,782 ------------- ------------- JAFFRAY FUNDS INC. - ARM FUND PRO FORMA COMBINING SCHEDULE OF INVESTMENTS (UNAUDITED) AMERICAN AMERICAN FEBRUARY 28, 1995 ADJUSTABLE ADJUSTABLE RATE RATE ARM FUND TERM TRUST TERM TRUST PRO FORMA 1998 1999 COMBINED NAME OF ISSUER MARKET MARKET MARKET VALUE (a) VALUE (a) VALUE (a) - ------------------------------------------------------------------------------------------ ------------ ------------ --------------- Merrill Lynch Mortgage Investors, Series 1993-D, Class A1-2, 5.69%, 10/25/23 5,773,140 -- 5,773,140 Merrill Lynch Mortgage Investors, Series 1993-D, Class A1-2, 5.69%, 10/25/23 -- 3,848,760 3,848,760 Merrill Lynch Mortgage Investors, Series 1993-E, Class A4, 6.81%, 6/15/18 -- 6,326,320 6,326,320 Merrill Lynch Mortgage Investors, Series 1993-H, Class A1-2, 6.00%, 10/25/23 -- -- 2,228,105 Merrill Lynch Mortgage Investors, Series 1993-H, Class A1-2, 6.00%, 10/25/23 -- -- 6,264,624 Merrill Lynch Mortgage Investors, Series 1993-H, Class A1-2, 6.00%, 10/25/23 7,049,263 -- 7,049,263 Merrill Lynch Mortgage Investors, Series 1993-H, Class A1-2, 6.00%, 10/25/23 -- 3,495,820 3,495,820 Paine Webber Mortgage Acceptance Corporation, Series 1993-10, Class M1, 6.00%, 11/25/23 -- -- 13,160,104 Paine Webber Mortgage Acceptance Corporation, Series 1993-11, Class M1, 6.35%, 12/01/23 -- -- 2,878,063 Paine Webber Mortgage Acceptance Corporation, Series 1993-11, Class M1, 6.35%, 12/01/23 2,938,817 -- 2,938,817 Paine Webber Mortgage Acceptance Corporation, Series 1993-11, Class M1, 6.35%, 12/01/23 -- 1,469,408 1,469,408 Paine Webber Mortgage Acceptance Corporation, Series 1993-8, Class M1, 7.01%, 8/25/23 6,720,377 -- 6,720,377 Paine Webber Mortgage Acceptance Corporation, Series 1993-8, Class M1, 7.01%, 8/25/23 -- 6,720,377 6,720,377 Paine Webber Mortgage Acceptance Corporation, Series 1993-8, Class M2, 7.01%, 8/25/23 -- -- 4,860,143 PaineWebber Mortgage Acceptance, 6.30%, 4/25/23 2,666,494 -- 2,666,494 Prudential Home Mortgage, Series 1991-9, Class A1, 7.19%, 7/25/21 -- -- 7,286,518 Prudential Home Mortgage, Series 1991-9, Class A1, 7.19%, 7/25/21 7,286,434 -- 7,286,434 Residential Funding Corporation, 7.19%, 3/25/22 12,799,407 -- 12,799,407 Residential Funding Corporation, Series 1992-S25, Class A, 6.63%, 7/25/22 -- -- 5,065,254 Residential Funding Corporation, Series 1992-S25, Class A, 6.63%, 7/25/22 -- -- 12,663,134 Residential Funding Corporation, Series 1992-S25, Class A, 6.63%, 7/25/22 12,663,134 -- 12,663,134 Residential Funding Corporation, Series 1992-S25, Class A, 6.63%, 7/25/22 -- 3,697,635 3,697,635 Residential Funding Corporation, Series Series 1993-S8, Class A, 7.54%, 2/25/23 -- -- 5,722,601 Residential Funding Corporation, Series Series 1993-S8, Class A, 7.54%, 2/25/23 -- -- 8,583,902 Residential Funding Corporation, Series Series 1993-S8, Class A, 7.54%, 2/25/23 8,583,902 -- 8,583,902 Residential Funding Corporation, Series Series 1993-S8, Class A, 7.54%, 2/25/23 -- 5,722,601 5,722,601 Resolution Trust Corporation, 5.68%, 9/25/19 8,013,858 -- 8,013,858 Resolution Trust Corporation, 6.85%, 5/25/28 3,770,325 -- 3,770,325 Resolution Trust Corporation, Series 1991-10, Class A1, 7.23%, 5/25/21 -- -- 5,574,267 Resolution Trust Corporation, Series 1991-2, Class B, 6.74%, 4/25/21 -- -- 4,997,000 Resolution Trust Corporation, Series 1991-8, Class A-1, 7.39%, 12/25/20 -- -- 12,955,241 Resolution Trust Corporation, Series 1992-4, Class B2, 6.78%, 7/25/28 -- -- 14,871,690 Resolution Trust Corporation, Series 1992-4, Class B2, 6.78%, 7/25/28 9,914,460 -- 9,914,460 Resolution Trust Corporation, Series 1992-4, Class B2, 6.78%, 7/25/28 -- 2,974,338 2,974,338 Resolution Trust Corporation, Series 1992-6, Class B3, 5.88%, 1/25/26 -- 9,852,202 9,852,202 Resolution Trust Corporation, Series 1992-6, Class B3, 7.06%, 1/25/26 13,142,838 -- 13,142,838 Resolution Trust Corporation, Series 1992-9, Class A6, 7.39%, 7/25/20 -- -- 2,004,684 Ryland Mortgage Securities, Series 1991-B1, Class 1, 6.70%, 3/25/20 -- -- 1,784,756 Ryland Mortgage Securities, Series 1991-B1, Class 1, 6.70%, 3/25/20 -- -- 6,897,636 Ryland Mortgage Securities, Series 1991-B1, Class 1, 6.70%, 3/25/20 5,708,389 -- 5,708,389 Salomon Brothers Mortgage, Series 1987-2, Class A, 7.04%, 12/25/16 -- -- 3,044,403 Salomon Brothers Mortgage, Series 1988-3, Class A, 5.61%, 6/25/17 -- -- 732,094 Salomon Brothers Mortgage, Series 1992-5, Class A1, 7.74%, 11/25/22 -- 3,323,729 3,323,729 Sears Mortgage Securities, 6.32%, 9/25/21 15,685,508 -- 15,685,508 Sears Mortgage Securities, Series 1992-12, Class A1, 6.52%, 7/25/22 -- 5,769,620 5,769,620 ------------ ------------ -------------- 176,538,868 120,716,568 503,309,457 ------------ ------------ -------------- Total Mortgage-Backed Securities (combined cost: $ 1,084,445,154) 362,472,969 213,474,350 1,055,849,778 ------------ ------------ --------------
F-9 JAFFRAY FUNDS INC. - ARM FUND PRO FORMA COMBINING SCHEDULE OF INVESTMENTS (UNAUDITED) FEBRUARY 28, 1995
AMERICAN AMERICAN ADJUSTABLE RATE ADJUSTABLE RATE PRINCIPAL TERM TRUST 1996 TERM TRUST 1997 NAME OF ISSUER AMOUNT MARKET VALUE (a) MARKET VALUE (a) - ----------------------------------------------------------- --------------- ------------------ ------------------ Municipal Zero-Coupon Securities (c) (18.1%): Alabama State Public School and College, 6.73%, 11/01/96 725,000 662,469 -- Alief, Texas, School District, 4.24%, 2/15/97 760,000 690,650 -- Allegheny County, Pennsylvania, 4.69%, 2/15/98 2,000,000 -- -- Amarillo, Texas, School District, 5.44%, 2/01/99 4,300,000 -- -- Arlington, Texas, Independent School District, 6.10%-6.78%, 2/15/96 680,000 649,400 -- Austin, Texas, Public Parking, 5.72%-6.03%, 9/01/97 5,000,000 -- 4,443,750 Bellevue, Washington Convention Ctr Auth Prerefunded-B, 6.05%, 12/01/96 290,000 266,800 -- Bellevue, Washington Convention Ctr Auth Prerefunded-B, 6.24%, 12/01/97 285,000 -- 248,663 Bellevue, Washington Convention Ctr Auth Unrefunded Bal-B, 6.05%, 12/01/96 710,000 651,425 -- Bellevue, Washington Convention Ctr Auth Unrefunded Bal-B, 6.24%, 12/01/97 1,085,000 -- 939,881 Bismark, North Dakota, Hospital Revenue, 6.19%, 5/01/97 2,530,000 -- 2,289,650 Blue Ridge, Texas, Utility District, 6.09%, 4/01/97 440,000 -- 399,850 Boulder, Colorado, School District, 6.26%, 12/15/97 4,000,000 -- 3,530,000 Boulder, Larimer and Weld County, South Dakota, School District, 5.58%, 12/15/98 4,000,000 -- -- Brazoria County, Texas, General Obligation, 5.54%, 9/01/99 500,000 -- -- Brazoria County, Texas, General Obligation, 5.59%, 9/01/00 925,000 -- -- Calallen, Texas, School District, 5.88%, 2/15/98 1,485,000 -- 1,282,669 California State, 4.62%, 4/25/96 12,000,000 11,340,360 -- California State, 4.62%, 4/25/96 519,863 491,283 -- California State, 4.68%, 7/25/95 690,000 678,960 -- California, General Obligation, Various Purpose, 5.72%, 3/01/98 3,655,000 -- -- California, General Obligation, Various Purpose, 5.72%, 9/01/98 3,655,000 -- -- California, General Obligation, Various Purpose, 5.93%, 3/01/99 3,155,000 -- -- Cambria, Pennsylvania, School District, 6.39%, 8/15/97 1,030,000 -- 912,838 Chelan County, Washington, Public Utilities District, 5.88%, 7/01/98 1,370,000 -- -- Chelan County, Washington, Public Utilities District, 5.98%, 7/01/99 2,735,000 -- -- Chelan County, Washington, Public Utilities District, 6.09%, 7/01/00 235,000 -- -- Clairton, Pennsylvania, School District, 6.83%, 11/01/96 1,035,000 949,613 -- Collin County, Texas, Community College District, 5.98%, 8/15/98 4,475,000 -- -- Connecticut, State College, Capital Appreciation, 5.27%, 12/15/97 985,000 -- -- Cook and Will County, Illinois, Series A, 5.63%, 12/01/99 2,390,000 -- -- Copperas Cove, Texas, School District, 5.52%, 6/01/99 920,000 -- -- Corpus Christi, Texas, General Improvement Refunding Bonds, 5.59%, 11/01/98 40,000 -- -- Corpus Christi, Texas, General Improvement Refunding Bonds, 5.59%, 11/01/98 4,185,000 -- -- Corpus Christi, Texas, Series A, 6.78%, 11/01/96 615,000 567,338 -- Corpus Christi, Texas, Series A, 6.78%, 11/01/96 120,000 111,150 -- Cypress-Fairbanks, Texas, School District, 5.40%, 2/01/99 1,850,000 -- -- Cypress-Fairbanks, Texas, School District, 5.49%, 2/01/00 2,215,000 -- -- Cypress-Fairbanks, Texas, School District, 5.58%, 2/01/00 1,000,000 -- -- Cypress-Fairbanks, Texas, School District, 5.82%-5.93%, 2/01/98 8,340,000 -- 7,203,675 Dallas County, Texas, Road Improvement Refunding Bonds, 6.19%, 8/15/98 3,085,000 -- -- District of Columbia, General Obligation, 5.57%, 6/01/99 7,000,000 -- -- District of Columbia, General Obligation, 5.71%, 6/01/00 6,900,000 -- -- AMERICAN AMERICAN ARM FUND ADJUSTABLE RATE ADJUSTABLE RATE PRO FORMA TERM TRUST 1998 TERM TRUST 1999 COMBINED NAME OF ISSUER MARKET VALUE (a) MARKET VALUE (a) MARKET VALUE (a) - ----------------------------------------------------------- ------------------ ------------------ ------------------- Municipal Zero-Coupon Securities (c)(18.1%): Alabama State Public School and College, 6.73%, 11/01/96 -- -- 662,469 Alief, Texas, School District, 4.24%, 2/15/97 -- -- 690,650 Allegheny County, Pennsylvania, 4.69%, 2/15/98 1,905,000 -- 1,905,000 Amarillo, Texas, School District, 5.44%, 2/01/99 -- 3,504,500 3,504,500 Arlington, Texas, Independent School District, 6.10%-6.78%, 2/15/96 -- -- 649,400 Austin, Texas, Public Parking, 5.72%-6.03%, 9/01/97 -- -- 4,443,750 Bellevue, Washington Convention Ctr Auth Prerefunded-B, 6.05%, 12/01/96 -- -- 266,800 Bellevue, Washington Convention Ctr Auth Prerefunded-B, 6.24%, 12/01/97 -- -- 248,663 Bellevue, Washington Convention Ctr Auth Unrefunded Bal-B, 6.05%, 12/01/96 -- -- 651,425 Bellevue, Washington Convention Ctr Auth Unrefunded Bal-B, 6.24%, 12/01/97 -- -- 939,881 Bismark, North Dakota, Hospital Revenue, 6.19%, 5/01/97 -- -- 2,289,650 Blue Ridge, Texas, Utility District, 6.09%, 4/01/97 -- -- 399,850 Boulder, Colorado, School District, 6.26%, 12/15/97 -- -- 3,530,000 Boulder, Larimer and Weld County, South Dakota, School District, 5.58%, 12/15/98 3,305,000 -- 3,305,000 Brazoria County, Texas, General Obligation, 5.54%, 9/01/99 -- 394,375 394,375 Brazoria County, Texas, General Obligation, 5.59%, 9/01/00 -- 690,281 690,281 Calallen, Texas, School District, 5.88%, 2/15/98 -- -- 1,282,669 California State, 4.62%, 4/25/96 -- -- 11,340,360 California State, 4.62%, 4/25/96 -- -- 491,283 California State, 4.68%, 7/25/95 -- -- 678,960 California, General Obligation, Various Purpose, 5.72%, 3/01/98 3,129,594 -- 3,129,594 California, General Obligation, Various Purpose, 5.72%, 9/01/98 3,051,925 -- 3,051,925 California, General Obligation, Various Purpose, 5.93%, 3/01/99 2,551,606 -- 2,551,606 Cambria, Pennsylvania, School District, 6.39%, 8/15/97 -- -- 912,838 Chelan County, Washington, Public Utilities District, 5.88%, 7/01/98 1,155,938 -- 1,155,938 Chelan County, Washington, Public Utilities District, 5.98%, 7/01/99 -- 2,184,581 2,184,581 Chelan County, Washington, Public Utilities District, 6.09%, 7/01/00 -- 176,838 176,838 Clairton, Pennsylvania, School District, 6.83%, 11/01/96 -- -- 949,613 Collin County, Texas, Community College District, 5.98%, 8/15/98 3,753,406 -- 3,753,406 Connecticut, State College, Capital Appreciation, 5.27%, 12/15/97 858,181 -- 858,181 Cook and Will County, Illinois, Series A, 5.63%, 12/01/99 -- 1,852,250 1,852,250 Copperas Cove, Texas, School District, 5.52%, 6/01/99 -- 733,700 733,700 Corpus Christi, Texas, General Improvement Refunding Bonds, 5.59%, 11/01/98 33,400 -- 33,400 Corpus Christi, Texas, General Improvement Refunding Bonds, 5.59%, 11/01/98 3,473,550 -- 3,473,550 Corpus Christi, Texas, Series A, 6.78%, 11/01/96 -- -- 567,338 Corpus Christi, Texas, Series A, 6.78%, 11/01/96 -- -- 111,150 Cypress-Fairbanks, Texas, School District, 5.40%, 2/01/99 -- 1,510,063 1,510,063 Cypress-Fairbanks, Texas, School District, 5.49%, 2/01/00 -- 1,708,319 1,708,319 Cypress-Fairbanks, Texas, School District, 5.58%, 2/01/00 -- 770,000 770,000 Cypress-Fairbanks, Texas, School District, 5.82%-5.93%, 2/01/98 -- -- 7,203,675 Dallas County, Texas, Road Improvement Refunding Bonds, 6.19%, 8/15/98 2,602,969 -- 2,602,969 District of Columbia, General Obligation, 5.57%, 6/01/99 -- 5,486,250 5,486,250 District of Columbia, General Obligation, 5.71%, 6/01/00 -- 5,123,250 5,123,250
F-10 JAFFRAY FUNDS INC. - ARM FUND PRO FORMA COMBINING SCHEDULE OF INVESTMENTS (UNAUDITED) FEBRUARY 28, 1995
AMERICAN AMERICAN ADJUSTABLE RATE ADJUSTABLE RATE PRINCIPAL TERM TRUST 1996 TERM TRUST 1997 NAME OF ISSUER AMOUNT MARKET VALUE (a) MARKET VALUE (a) - ----------------------------------------------------------- --------------- ------------------ ------------------ Eastern Camden, New Jersey, School District, 5.88%, 9/01/97 500,000 -- 442,500 Eastern Illinois University Facility, 5.67%, 10/01/96 1,055,000 985,106 -- Grand Prairie, Texas, Independent School District, 5.93%, 2/15/98 1,150,000 -- -- Harris County, Texas, Toll Road Refunding Bonds, 6.09%, 8/15/98 845,000 -- -- Idaho Falls, Idaho, General Obligation and Electric Refunding Bonds, 5.63%, 4/01/98 1,500,000 -- -- Illinois Educational Facility, 6.07%, 7/01/96 5,550,000 5,223,938 -- Illinois State College Savers, 5.93%, 8/01/98 890,000 -- 744,263 Illinios State Sales Tax Revenue, 6.38%, 6/15/96 500,000 471,875 -- Intermountain Power Authority, 3.10%, 7/01/97 470,000 -- 478,813 Irving, Texas, School District, 6.31%, 2/15/97 960,000 -- 871,200 Kansas City, Kansas Utility Systems Revenue, 6.24%, 9/01/97 2,215,000 -- 1,968,581 Kansas City, Kansas Utility Systems Revenue, 6.26%, 9/01/97 4,305,000 -- 3,836,831 Kentucky Development Finance Authority, 5.60%-6.08%, 11/01/97 1,980,000 -- 1,732,500 Kentucky Turnpike Revenue, 3.95%, 7/01/97 1,000,000 -- 1,057,500 Lake County, Illinois, General Obligation Forest Preservation District, 6.09%, 12/01/98 1,000,000 -- -- Larimer, Weld and Boulder County, Colorado, School District, 5.50%, 12/15/98 3,260,000 -- -- Lewisburg, Pennsylvania, School District, 6.29%, 8/15/97 500,000 -- 444,375 Louisiana College Savers, General Obligation, 5.99%, 7/01/97 4,000,000 -- 3,580,000 Lubbock, Texas, Electric Power, 6.29%, 4/15/97 700,000 -- 635,250 Lubbock, Texas, Electric Power, 6.29%, 4/15/97 660,000 -- 598,950 Maricopa County, Arizona, School District, 5.47%, 7/01/97 1,010,000 -- 900,163 Maricopa County, Arizona, School District, 5.47%, 1/01/98 540,000 -- -- Maricopa County, Arizona, School District, 5.47%, 7/01/98 3,340,000 -- -- Maricopa County, Arizona, School District, 5.60%, 1/01/98 1,225,000 -- -- Maricopa County, Arizona, School District, 5.60%, 7/01/98 4,190,000 -- -- Maricopa County, Arizona, School District, 5.78%, 7/01/99 5,620,000 -- -- Maricopa County, Arizona, School District, 6.38%, 7/01/96 3,050,000 2,863,188 -- Maricopa County, Arizona, School District, 6.74%, 1/01/99 1,225,000 -- -- Massachussetts, General Obligation, 5.96%, 6/01/98 2,095,000 -- 1,775,513 Massachussetts, General Obligation, 5.98%, 6/01/98 10,250,000 -- 8,686,875 McHenry County, Illinois, Conservation District, 5.88%, 2/01/98 1,580,000 -- 1,360,775 Mesa, Arizona, General Obligation, 6.01%, 7/01/96 1,845,000 1,729,688 -- Mesquite, Texas, School District, 5.57%, 8/15/98 2,665,000 -- -- Mesquite, Texas, School District, 5.63%, 8/15/99 1,605,000 -- -- Mesquite, Texas, School District, 5.73%, 8/15/99 1,000,000 -- -- Metropolitan Pier and Exposition Authority, Illinois, State Revenue, 5.67%, 6/15/99 4,005,000 -- -- Metropolitan Pier and Exposition Authority, Illinois, State Revenue, 5.69%, 12/15/99 3,870,000 -- -- Michigan Municipal Bond Authority, 6.09%, 5/15/97 1,500,000 -- 1,338,750 North East, Texas, Independent School District, 5.98%, 2/01/99 1,000,000 -- -- North Lawrence, Indiana, School Building Refunding, Capital Appreciation, 5.62%, 1/01/98 580,000 -- -- North Lawrence, Indiana, School Building Refunding, Capital Appreciation, 5.62%, 7/01/98 580,000 -- -- North Lawrence, Indiana, School Building Refunding, Capital Appreciation, 5.88%, 1/01/99 580,000 -- -- North Lawrence, Indiana, School Building Refunding, Capital Appreciation, 5.88%, 7/01/99 580,000 -- -- North Montgomery, Indiana, School Bond, 5.82%, 1/01/97 525,000 -- 478,406 North Montgomery, Indiana, School Bond, 5.82%, 7/01/97 525,000 -- 464,622 North Montgomery, Indiana, School Bond, 5.94%, 1/01/98 525,000 -- 452,156 North Montgomery, Indiana, School Bond, 5.98%, 7/01/98 525,000 -- 439,688 North Slope Boro, Alaska, 5.58%, 6/30/99 4,710,000 -- -- AMERICAN AMERICAN ARM FUND ADJUSTABLE RATE ADJUSTABLE RATE PRO FORMA TERM TRUST 1998 TERM TRUST 1999 COMBINED NAME OF ISSUER MARKET VALUE (a) MARKET VALUE (a) MARKET VALUE (a) - ----------------------------------------------------------- ------------------ ------------------ ------------------- Eastern Camden, New Jersey, School District, 5.88%, 9/01/97 -- -- 442,500 Eastern Illinois University Facility, 5.67%, 10/01/96 -- -- 985,106 Grand Prairie, Texas, Independent School District, 5.93%, 2/15/98 993,313 -- 993,313 Harris County, Texas, Toll Road Refunding Bonds, 6.09%, 8/15/98 708,744 -- 708,744 Idaho Falls, Idaho, General Obligation and Electric Refunding Bonds, 5.63%, 4/01/98 1,286,250 -- 1,286,250 Illinois Educational Facility, 6.07%, 7/01/96 -- -- 5,223,938 Illinois State College Savers, 5.93%, 8/01/98 -- -- 744,263 Illinios State Sales Tax Revenue, 6.38%, 6/15/96 -- -- 471,875 Intermountain Power Authority, 3.10%, 7/01/97 -- -- 478,813 Irving, Texas, School District, 6.31%, 2/15/97 -- -- 871,200 Kansas City, Kansas Utility Systems Revenue, 6.24%, 9/01/97 -- -- 1,968,581 Kansas City, Kansas Utility Systems Revenue, 6.26%, 9/01/97 -- -- 3,836,831 Kentucky Development Finance Authority, 5.60%-6.08%, 11/01/97 -- -- 1,732,500 Kentucky Turnpike Revenue, 3.95%, 7/01/97 -- -- 1,057,500 Lake County, Illinois, General Obligation Forest Preservation District, 6.09%, 12/01/98 823,750 -- 823,750 Larimer, Weld and Boulder County, Colorado, School District, 5.50%, 12/15/98 2,709,875 -- 2,709,875 Lewisburg, Pennsylvania, School District, 6.29%, 8/15/97 -- -- 444,375 Louisiana College Savers, General Obligation, 5.99%, 7/01/97 -- -- 3,580,000 Lubbock, Texas, Electric Power, 6.29%, 4/15/97 -- -- 635,250 Lubbock, Texas, Electric Power, 6.29%, 4/15/97 -- -- 598,950 Maricopa County, Arizona, School District, 5.47%, 7/01/97 -- -- 900,163 Maricopa County, Arizona, School District, 5.47%, 1/01/98 467,775 -- 467,775 Maricopa County, Arizona, School District, 5.47%, 7/01/98 2,818,125 -- 2,818,125 Maricopa County, Arizona, School District, 5.60%, 1/01/98 1,061,156 -- 1,061,156 Maricopa County, Arizona, School District, 5.60%, 7/01/98 3,535,313 -- 3,535,313 Maricopa County, Arizona, School District, 5.78%, 7/01/99 4,474,925 -- 4,474,925 Maricopa County, Arizona, School District, 6.38%, 7/01/96 -- -- 2,863,188 Maricopa County, Arizona, School District, 6.74%, 1/01/99 1,001,435 -- 1,001,435 Massachussetts, General Obligation, 5.96%, 6/01/98 -- -- 1,775,513 Massachussetts, General Obligation, 5.98%, 6/01/98 -- -- 8,686,875 McHenry County, Illinois, Conservation District, 5.88%, 2/01/98 -- -- 1,360,775 Mesa, Arizona, General Obligation, 6.01%, 7/01/96 -- -- 1,729,688 Mesquite, Texas, School District, 5.57%, 8/15/98 2,228,606 -- 2,228,606 Mesquite, Texas, School District, 5.63%, 8/15/99 -- 1,265,944 1,265,944 Mesquite, Texas, School District, 5.73%, 8/15/99 788,750 -- 788,750 Metropolitan Pier and Exposition Authority, Illinois, State Revenue, 5.67%, 6/15/99 -- 3,204,000 3,204,000 Metropolitan Pier and Exposition Authority, Illinois, State Revenue, 5.69%, 12/15/99 -- 3,013,763 3,013,763 Michigan Municipal Bond Authority, 6.09%, 5/15/97 -- -- 1,338,750 North East, Texas, Independent School District, 5.98%, 2/01/99 817,500 -- 817,500 North Lawrence, Indiana, School Building Refunding, Capital Appreciation, 5.62%, 1/01/98 498,800 -- 498,800 North Lawrence, Indiana, School Building Refunding, Capital Appreciation, 5.62%, 7/01/98 485,750 -- 485,750 North Lawrence, Indiana, School Building Refunding, Capital Appreciation, 5.88%, 1/01/99 469,800 -- 469,800 North Lawrence, Indiana, School Building Refunding, Capital Appreciation, 5.88%, 7/01/99 457,475 -- 457,475 North Montgomery, Indiana, School Bond, 5.82%, 1/01/97 -- -- 478,406 North Montgomery, Indiana, School Bond, 5.82%, 7/01/97 -- -- 464,622 North Montgomery, Indiana, School Bond, 5.94%, 1/01/98 -- -- 452,156 North Montgomery, Indiana, School Bond, 5.98%, 7/01/98 -- -- 439,688 North Slope Boro, Alaska, 5.58%, 6/30/99 -- 3,673,800 3,673,800
F-11 JAFFRAY FUNDS INC. - ARM FUND PRO FORMA COMBINING SCHEDULE OF INVESTMENTS (UNAUDITED) FEBRUARY 28, 1995
AMERICAN AMERICAN ADJUSTABLE RATE ADJUSTABLE RATE PRINCIPAL TERM TRUST 1996 TERM TRUST 1997 NAME OF ISSUER AMOUNT MARKET VALUE (a) MARKET VALUE (a) - ----------------------------------------------------------- --------------- ------------------ ------------------ North Slope Boro, Alaska, 5.88%, 6/30/98 5,000,000 -- 4,162,500 North Slope Boro, Alaska, 6.39%, 6/30/97 7,000,000 -- 6,177,500 North Slope Boro, Alaska, Series I, 5.76%-6.68%, 6/30/96 9,800,000 9,163,000 -- Oklahoma City, Oklahoma, Water and Sewer, 5.83%, 7/01/97 1,000,000 -- 898,750 Orleans Parish, Louisiana, School Board, 4.10%-4.33%, 2/1/95-8/01/96 400,000 426,000 -- Phoenix, Arizona, Excise Tax Parking Revenue, 6.22%, 7/01/96 1,000,000 940,000 -- Pleasanton, California, School District, 5.78%, 8/01/98 1,000,000 -- -- Rosemont, Illinois, Various Purpose, 6.22%, 12/01/97 1,510,000 -- 1,311,813 Rosemont, Illinois, Various Purpose, 6.22%, 12/01/97 1,160,000 -- 1,007,750 Salt Lake County, Utah, Water Conservation District, 5.83%, 10/01/98 1,300,000 -- -- Shreveport, Louisianna, Water and Sewer, 6.03%, 12/01/98 5,880,000 -- -- Sioux City, Iowa, Hospital Revenue, 2.93%, 1/01/97 11,510,000 -- 11,697,038 State of Texas, Veterans' Land General Obligation, 5.76%, 6/01/98 1,000,000 -- -- Tarrant County, Texas, Junior College District, 6.08%, 2/15/98 1,750,000 -- -- Texas State General Obligation, 5.68%, 10/01/00 1,655,000 -- -- Tomball, Texas, Hospital Authority Revenue, 6.09%, 7/01/99 1,000,000 -- -- University of Illinois Auxillary Facility, 6.01%, 4/01/96 1,140,000 1,085,850 -- Utah Associated Municipal Power System, 5.57%, 7/01/98 2,765,000 -- -- Vermont State College Savers, General Obligation, 5.57%, 10/15/96 370,000 343,175 -- Will County, Illinois, School District, 5.57%, 12/15/98 1,800,000 -- -- ------------ ------------ Total Municipal Zero-Coupon Securities (combined cost: $ 216,485,869) 40,291,268 78,794,038 ------------ ------------ Short-Term Securities (10.2%): Repurchase agreement with Goldman in a joint trading account, 6.10% acquired on 02/28/95 and due 03/01/95 with accrued interest of $4,702 (collateralized by U.S. government agency obligations) 27,747,000 27,747,000 -- Repurchase agreement with Morgan Stanley in a joint trading account, 5.97% acquired on 02/28/95 and due 03/01/95 with accrued interest of $7,707 (collateralized by U.S. government agency obligations) 46,476,000 -- 46,476,000 Repurchase agreement with Goldman in a joint trading account, 6.10% acquired on 02/28/95 and due 03/01/95 with accrued interest of $5,560 (collateralized by U.S. government agency obligations) 32,816,000 -- -- AMERICAN AMERICAN ARM FUND ADJUSTABLE RATE ADJUSTABLE RATE PRO FORMA TERM TRUST 1998 TERM TRUST 1999 COMBINED NAME OF ISSUER MARKET VALUE (a) MARKET VALUE (a) MARKET VALUE (a) - ----------------------------------------------------------- ------------------ ------------------ ------------------- North Slope Boro, Alaska, 5.88%, 6/30/98 -- -- 4,162,500 North Slope Boro, Alaska, 6.39%, 6/30/97 -- -- 6,177,500 North Slope Boro, Alaska, Series I, 5.76%-6.68%, 6/30/96 -- -- 9,163,000 Oklahoma City, Oklahoma, Water and Sewer, 5.83%, 7/01/97 -- -- 898,750 Orleans Parish, Louisiana, School Board, 4.10%-4.33%, 2/1/95-8/01/96 -- -- 426,000 Phoenix, Arizona, Excise Tax Parking Revenue, 6.22%, 7/01/96 -- -- 940,000 Pleasanton, California, School District, 5.78%, 8/01/98 848,750 -- 848,750 Rosemont, Illinois, Various Purpose, 6.22%, 12/01/97 -- -- 1,311,813 Rosemont, Illinois, Various Purpose, 6.22%, 12/01/97 -- -- 1,007,750 Salt Lake County, Utah, Water Conservation District, 5.83%, 10/01/98 1,090,375 -- 1,090,375 Shreveport, Louisianna, Water and Sewer, 6.03%, 12/01/98 4,821,600 -- 4,821,600 Sioux City, Iowa, Hospital Revenue, 2.93%, 1/01/97 -- -- 11,697,038 State of Texas, Veterans' Land General Obligation, 5.76%, 6/01/98 855,000 -- 855,000 Tarrant County, Texas, Junior College District, 6.08%, 2/15/98 1,502,813 -- 1,502,813 Texas State General Obligation, 5.68%, 10/01/00 -- 1,224,700 1,224,700 Tomball, Texas, Hospital Authority Revenue, 6.09%, 7/01/99 800,000 -- 800,000 University of Illinois Auxillary Facility, 6.01%, 4/01/96 -- -- 1,085,850 Utah Associated Municipal Power System, 5.57%, 7/01/98 2,350,250 -- 2,350,250 Vermont State College Savers, General Obligation, 5.57%, 10/15/96 -- -- 343,175 Will County, Illinois, School District, 5.57%, 12/15/98 1,482,750 -- 1,482,750 ------------ ------------ ------------ Total Municipal Zero-Coupon Securities (combined cost: $ 216,485,869) 65,199,449 36,516,614 220,801,369 ------------ ------------ ------------ Short-Term Securities (10.2%): Repurchase agreement with Goldman in a joint trading account, 6.10% acquired on 02/28/95 and due 03/01/95 with accrued interest of $4,702 (collateralized by U.S. government agency obligations) -- -- 27,747,000 Repurchase agreement with Morgan Stanley in a joint trading account, 5.97% acquired on 02/28/95 and due 03/01/95 with accrued interest of $7,707 (collateralized by U.S. government agency obligations) -- -- 46,476,000 Repurchase agreement with Goldman in a joint trading account, 6.10% acquired on 02/28/95 and due 03/01/95 with accrued interest of $5,560 (collateralized by U.S. government agency obligations) 32,816,000 -- 32,816,000
F-12 JAFFRAY FUNDS INC. - ARM FUND PRO FORMA COMBINING SCHEDULE OF INVESTMENTS (UNAUDITED) FEBRUARY 28, 1995
AMERICAN AMERICAN ADJUSTABLE RATE ADJUSTABLE RATE PRINCIPAL TERM TRUST 1996 TERM TRUST 1997 NAME OF ISSUER AMOUNT MARKET VALUE (a) MARKET VALUE (a) - ----------------------------------------------------------- --------------- ------------------ ------------------ Repurchase agreement with Goldman in a joint trading account, 6.10% acquired on 02/28/95 and due 03/01/95 with accrued interest of $2,886 (collateralized by U.S. government agency obligations) 17,032,000 -- -- ------------ ------------ Total Short-Term Securities (combined cost: $ 124,071,000) 27,747,000 46,476,000 ------------ ------------ Total Investments in Securities (combined cost: $ 1,425,002,023)(d) 221,204,945 452,005,820 ------------ ------------ ------------ ------------ Notes to Pro Forma Investments in Securities: (a) See historical financial statements and footnotes thereto of each of the Trusts regarding valuation of securities. (b) Descriptions of certain indices are as follows: LIBOR - London InterBank Offered Rate COFI (11th District) - Cost of Funds Index of the Federal Reserve's 11th District (c) For zero-coupon investments, the interest rate shown is the effective yield on the date of purchase. (d) On February 28, 1995, for federal income tax purposes, the combined pro forma cost of investments in securities, including the put options shown in the pro forma combining statement of assets and liabilities, approximated $1,433,729,923. The aggregate gross unrealized appreciation and depreciation of investments in securities based on this cost were as follows: Gross appreciation 465,593 2,550,712 Gross depreciation (5,637,237) (11,126,712) ------------ ------------ Net depreciation (5,171,644) (8,576,000) ------------ ------------ ------------ ------------ JAFFRAY FUNDS INC. AMERICAN AMERICAN ARM FUND ADJUSTABLE RATE ADJUSTABLE RATE PRO FORMA TERM TRUST 1998 TERM TRUST 1999 COMBINED NAME OF ISSUER MARKET VALUE (a) MARKET VALUE (a) MARKET VALUE (a) - ----------------------------------------------------------- ------------------ ------------------ ------------------- Repurchase agreement with Goldman in a joint trading account, 6.10% acquired on 02/28/95 and due 03/01/95 with accrued interest of $2,886 (collateralized by U.S. government agency obligations) -- 17,032,000 17,032,000 ------------ ------------ ------------ Total Short-Term Securities (combined cost: $ 124,071,000) 32,816,000 17,032,000 124,071,000 ------------ ------------ ------------ Total Investments in Securities (combined cost: $ 1,425,002,023)(d) 460,488,418 267,022,964 1,400,722,147 ------------ ------------ ------------ ------------ ------------ ------------ Notes to Pro Forma Investments in Securities: (a) See historical financial statements and footnotes thereto of each of the Trusts regarding valuation of securities. (b) Descriptions of certain indices are as follows: LIBOR - London InterBank Offered Rate COFI (11th District) - Cost of Funds Index of the Federal Reserve's 11th District (c) For zero-coupon investments, the interest rate shown is the effective yield on the date of purchase. (d) On February 28, 1995, for federal income tax purposes, the combined pro forma cost of investments in securities, including the put options shown in the pro forma combining statement of assets and liabilities, approximated $1,433,729,923. The aggregate gross unrealized appreciation and depreciation of investments in securities based on this cost were as follows: Gross appreciation 1,305,568 427,964 4,749,837 Gross depreciation (12,380,344) (5,769,718) (34,914,011) ------------ ------------ ------------ Net depreciation (11,074,776) (5,341,754) (30,164,174) ------------ ------------ ------------ ------------ ------------ ------------
F-13 APPENDIX A CORPORATE BOND AND COMMERCIAL PAPER RATINGS COMMERCIAL PAPER RATINGS STANDARD & POOR'S RATINGS GROUP. Commercial paper ratings are graded into four categories, ranging from "A" for the highest quality obligations to "D" for the lowest. Issues assigned the A rating are regarded as having the greatest capacity for timely payment. Issues in this category are further refined with designation 1, 2 and 3 to indicate the relative degree of safety. The "A-1" designation indicates that the degree of safety regarding timely payment is very strong. Those issues determined to possess overwhelming safety characteristics will be denoted with a plus sign designation. MOODY'S INVESTORS SERVICE, INC. Moody's commercial paper ratings are opinions of the ability of the issuers to repay punctually promissory obligations not having an original maturity in excess of nine months. Moody's makes no representation that such obligations are exempt from registration under the Securities Act of 1933, as amended, nor does it represent that any specific note is a valid obligation of a rated issuer or issued in conformity with any applicable law. Moody's employs the following three designations, all judged to be investment grade, to indicate the relative repayment capacity of rated issuers: Prime-1 Superior capacity for repayment of short-term promissory obligations Prime-2 Strong capacity for repayment of short-term promissory obligations Prime-3 Acceptable capacity for repayment of short-term promissory obligations CORPORATE BOND RATINGS STANDARD & POOR'S RATINGS GROUP. Standard & Poor's ratings for corporate bonds have the following definitions: Debt rated "AAA" has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is extremely strong. Debt rated "AA" has a very strong capacity to pay interest and repay principal and differs from the higher rated issues only in a small degree. Debt rated "A" has a strong capacity to pay interest and repay principal, although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories. Debt rated "BBB" is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories. MOODY'S INVESTORS SERVICE, INC. Moody's ratings for corporate bonds include the following: Bonds which are rated "Aaa" are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large or by an exceptionally stable margin, and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Bonds which are rated "Aa" are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities, fluctuation of protective elements may be of greater amplitude, or there may be other elements present which make the long-term risk appear somewhat larger than in Aaa securities. Bonds which are rated "A" possess many favorable attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. Bonds which are rated "Baa" are considered as medium grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present, but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. A-2 APPENDIX B INTEREST RATE FUTURES CONTRACTS AND RELATED OPTIONS INTEREST RATE FUTURES CONTRACTS ARM Fund and each Trust may purchase and sell interest rate futures contracts and options thereon. An interest rate futures contract creates an obligation on the part of the seller (the "short") to deliver, and an offsetting obligation on the part of the purchaser (the "long") to accept delivery of, the type of financial instrument called for in the contract in a specified delivery month for a stated price. A majority of transactions in interest rate futures contracts, however, do not result in the actual delivery of the underlying instrument, but are settled through liquidation, i.e., by entering into an offsetting transaction. The interest rate futures contracts to be traded by ARM Fund or any Trust are traded only on commodity exchanges--known as "contract markets"--approved for such trading by the Commodity Futures Trading Commission and must be executed through a futures commission merchant or brokerage firm which is a member of the relevant contract market. These contract markets, through their clearing corporations, guarantee that the contracts will be performed. Presently, futures contracts are based upon such debt securities as long-term U.S. Treasury bonds, Treasury notes, Government National Mortgage Association modified pass-through mortgage-backed securities, three-month U.S. Treasury bills and bank certificates of deposit. In addition, futures contracts are traded in the Moody's Investment Grade Corporate Bond Index and the Long Term Corporate Bond Index. Although most futures contracts by their terms call for actual delivery or acceptance of commodities or securities, in most cases the contracts are closed out before the settlement date without the making or taking of delivery. Closing out a short position is effected by purchasing a futures contract for the same aggregate amount of the specific type of financial instrument or commodity and the same delivery month. If the price of the initial sale of the futures contract exceeds the price of the offsetting purchase, the seller is paid the difference and realizes a gain. Conversely, if the price of the offsetting purchase exceeds the price of the initial sale, the trader realizes a loss. Similarly, the closing out of a long position is effected by the purchaser entering into a futures contract sale. If the offsetting sale price exceeds the purchase price, the purchaser realizes a gain and, if the purchase price exceeds the offsetting sale price, the purchaser realizes a loss. The purchase or sale of a futures contract differs from the purchase or sale of a security in that no price or premium is paid or received. Instead, an amount of cash or securities acceptable to the Adviser and the relevant contract market, which varies but is generally about 2% of the contract amount, must be deposited with the custodian in the name of the broker. This amount is known as "initial margin," and represents a "good faith" deposit assuring the performance of both the purchaser and the seller under the futures contract. Subsequent payments to and from the broker, known as "variation margin," are required to be made on a daily B-1 basis as the price of the futures contract fluctuates, making the long or short positions in the futures contract more or less valuable, a process known as "marking to the market." Prior to the settlement date of the futures contract, the position may be closed out by taking an opposite position which will operate to terminate the position in the futures contract. A final determination of variation margin is then made, additional cash is required to be paid to or released by the broker, and the purchaser realizes a loss or gain. In addition, a commission is paid on each completed purchase and sale transaction. The purpose of the acquisition or sale of a futures contract by ARM Fund or any Trust, as the holder of long-term fixed-income securities, is to hedge against fluctuations in rates on such securities without actually buying or selling long-term fixed-income securities. For example, if ARM Fund or a Trust owns long-term bonds and interest rates are expected to increase, the Fund or Trust might sell futures contracts. Such a sale would have much the same effect as selling some of the long-term bonds in the Fund's or Trust's portfolio. If interest rates increase as anticipated by the Adviser, the value of certain long-term securities in the portfolio would decline, but the value of the Fund's or Trust's futures contracts would increase at approximately the same rate, thereby keeping the net asset value of the Fund or the Trust from declining as much as it otherwise would have. Of course, since the value of the securities in the Fund's or the Trust's portfolio will far exceed the value of the futures contracts sold by the Fund or Trust, an increase in the value of the futures contracts could only mitigate--but not totally offset--the decline in the value of the portfolio. Similarly, when it is expected that interest rates may decline, futures contracts could be purchased to hedge against ARM Fund's or a Trust's anticipated purchases of long-term fixed-income securities, such as bonds, at higher prices. Since the rate of fluctuation in the value of futures contracts should be similar to that of long-term bonds, the Fund or Trust could take advantage of the anticipated rise in the value of long-term bonds without actually buying them until the market had stabilized. At that time, the futures contracts could be liquidated, and the Fund's or Trust's cash could then be used to buy long-term bonds on the cash market. ARM Fund or any Trust could accomplish similar results by selling bonds with long maturities and investing in bonds with short maturities when interest rates are expected to increase or by buying bonds with long maturities and selling bonds with short maturities when interest rates are expected to decline. However, in circumstances when the market for bonds may not be as liquid as that for futures contracts, the ability to invest in such contracts could enable the Fund or Trust to react more quickly to anticipated changes in market conditions or interest rates. B-2 OPTIONS ON INTEREST RATE FUTURES CONTRACTS ARM Fund and the Trusts may purchase and sell put and call options on interest rate futures contracts which are traded on a United States exchange or board of trade as a hedge against changes in interest rates, and will enter into closing transactions with respect to such options to terminate existing positions. An interest rate futures contract provides for the future sale by one party and the purchase by the other party of a certain amount of a specific financial instrument (debt security) at a specified price, date, time and place. An option on an interest rate futures contract, as contrasted with the direct investment in such a contract, gives the purchaser the right, in return for the premium paid, to assume a position in an interest rate futures contract at a specified exercise price at any time prior to the expiration date of the option. Options on interest rate futures contracts are similar to options on securities, which give the purchaser the right, in return for the premium paid, to purchase or sell securities. A call option gives the purchaser of such option the right to buy, and obliges its writer to sell, a specified underlying futures contract at a specified exercise price at any time prior to the expiration date of the option. A purchaser of a put option has the right to sell, and the writer has the obligation to buy, such contract at the exercise price during the option period. Upon exercise of an option, the delivery of the futures position by the writer of the option to the holder of the option will be accompanied by delivery of the accumulated balance in the writer's future margin account, which represents the amount by which the market price of the futures contract exceeds, in the case of a call, or is less than, in the case of a put, the exercise price of the option on the futures contract. If an option is exercised on the last trading day prior to the expiration date of the option, the settlement will be made entirely in cash equal to the difference between the exercise price of the option and the closing price of the interest rate futures contract on the expiration date. ARM Fund and the Trusts will pay premiums for purchasing options on interest rate futures contracts. Because the value of the option is fixed at the point of sale, there are no daily cash payments to reflect changes in the value of the underlying contract; however, the value of the option does change daily and that change would be reflected in the net asset value of ARM Fund or any Trust. In connection with the writing of options on interest rate futures contracts, ARM Fund and the Trusts will make initial margin deposits and make or receive maintenance margin payments that reflect changes in the market value of such options. Premiums received from the writing of an option are included in initial margin deposits. PURCHASE OF PUT OPTIONS ON FUTURES CONTRACTS. ARM Fund and the Trusts will purchase put options on interest rate futures contracts if the Adviser anticipates a rise in interest rates. Because the value of an interest rate futures contract moves inversely in relation to changes in interest rates, a put option on such a contract becomes more valuable as interest rates rise. By purchasing put options on interest rate futures contracts at a time when the Adviser expects interest rates to rise, each of ARM Fund and the Trusts will seek to realize a profit to offset the loss in value of its portfolio securities. B-3 PURCHASE OF CALL OPTIONS ON FUTURES CONTRACTS. ARM Fund and the Trusts will purchase call options on interest rate futures contracts if the Adviser anticipates a decline in interest rates. The purchase of a call option on an interest rate futures contract represents a means of obtaining temporary exposure to market appreciation at limited risk. Because the value of an interest rate futures contract moves inversely in relation to changes to interest rates, a call option on such a contract becomes more valuable as interest rates decline. ARM Fund or a Trust will purchase a call option on an interest rate futures contract to hedge against a decline in interest rates in a market advance when the Fund or Trust is holding cash. The Fund or Trust can take advantage of the anticipated rise in the value of long-term securities without actually buying them until the market is stabilized. At that time, the options can be liquidated, and the Fund's or Trust's cash can be used to buy long-term securities. WRITING CALL OPTIONS ON FUTURES CONTRACTS. ARM Fund and the Trusts will write call options on interest rate futures contracts if the Adviser anticipates a rise in interest rates. As interest rates rise, a call option on such a contract becomes less valuable. If the futures contract price at expiration of the option is below the exercise price, the option will not be exercised and ARM Fund or a Trust will retain the full amount of the option premium. Such amount provides a partial hedge against any decline that may have occurred in the Fund's or Trust's portfolio securities. WRITING PUT OPTIONS ON FUTURES CONTRACTS. ARM Fund and the Trusts will write put options on interest rate futures contracts if the Adviser anticipates a decline in interest rates. As interest rates decline, a put option on an interest rate futures contract becomes less valuable. If the futures contract price at expiration of the option has risen due to declining interest rates and is above the exercise price, the option will not be exercised, and the Fund or Trust will retain the full amount of the option premium. Such amount can then be used by the Fund or Trust to buy long-term securities when the market has stabilized. RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS HEDGING RISKS IN FUTURES CONTRACTS TRANSACTIONS. There are several risks in using futures contracts as hedging devices. One risk arises because the prices of futures contracts may not correlate perfectly with movements in the underlying fixed-income security due to certain market distortions. First, all participants in the futures market are subject to initial margin and variation margin requirements. Rather than making additional variation margin payments, investors may close the contracts through offsetting transactions which could distort the normal relationship between the security and the futures market. Second, the margin requirements in the futures market are lower than margin requirements in the securities market, and as a result the futures market may attract more speculators than does the securities market. Increased participation by speculators in the futures B-4 market may also cause temporary price distortions. Because of possible price distortion in the futures market and because of imperfect correlation between movements in securities and movements in the prices of futures contracts, even a correct forecast of general market trends may not result in a successful hedging transaction over a very short period. Another risk arises because of imperfect correlation between movements in the value of the futures contracts and movements in the value of securities subject to the hedge. Successful use of futures contracts by ARM Fund or a Trust is subject to the ability of the Adviser to predict correctly movements in the direction of interest rates. If the Fund or Trust has hedged against the possibility of an increase in interest rates adversely affecting the value of fixed-income securities held in its portfolio and interest rates decrease instead, the Fund or Trust will lose part or all of the benefit of the increased value of its security which it has hedged because it will have offsetting losses in its futures positions. In addition, in such situations, if the Fund or Trust has insufficient cash, it may have to sell securities to meet daily variation margin requirements. Such sales of securities may, but will not necessarily, be at increased prices which reflect the decline in interest rates. The Fund or Trust may have to sell securities at a time when it may be disadvantageous to do so. LIQUIDITY OF FUTURES CONTRACTS. ARM Fund or a Trust may elect to close some or all of its contracts prior to expiration. The purpose of making such a move would be to reduce or eliminate the hedge position held by the Fund or Trust. The Fund or Trust may close its positions by taking opposite positions. Final determinations of variation margin are then made, additional cash as required is paid by or to the Fund or Trust, and the Fund or Trust realizes a loss or a gain. Positions in futures contracts may be closed only on an exchange or board of trade providing a secondary market for such futures contracts. Although ARM Fund and the Trusts intend to enter into futures contracts only on exchanges or boards of trade where there appears to be an active secondary market, there can be no assurance that a liquid secondary market will exist for any particular contract at any particular time. In addition, most domestic futures exchanges and boards of trade limit the amount of fluctuation permitted in futures contract prices during a single trading day. The daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day's settlement price at the end of a trading session. Once the daily limit has been reached in a particular contract, no trades may be made that day at a price beyond that limit. The daily limit governs only price movement during a particular trading day and therefore does not limit potential losses because the limit may prevent the liquidation of unfavorable positions. It is possible that futures contract prices could move to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of futures positions and subjecting some futures B-5 traders to substantial losses. In such event, it will not be possible to close a futures position and, in the event of adverse price movements, ARM Fund or a Trust would be required to make daily cash payments of variation margin. In such circumstances, an increase in the value of the portion of the portfolio being hedged, if any, may partially or completely offset losses on the futures contract. However, as described above, there is no guarantee that the price of the securities being hedged will, in fact, correlate with the price movements in the futures contract and thus provide an offset to losses on a futures contract. RISKS OF OPTIONS ON FUTURES CONTRACTS. The use of options on futures contracts also involves additional risk. Compared to the purchase or sale of futures contracts, the purchase of call or put options on futures contracts involves less potential risk to ARM Fund and the Trusts because the maximum amount at risk is the premium paid for the options (plus transactions costs). The writing of a call option on a futures contract generates a premium which may partially offset a decline in the value of a Fund's or Trust's portfolio assets. By writing a call option, ARM Fund or a Trust becomes obligated to sell a futures contract, which may have a value higher than the exercise price. Conversely, the writing of a put option on a futures contract generates a premium, but the Fund or Trust becomes obligated to purchase a futures contract, which may have a value lower than the exercise price. Thus, the loss incurred by the Fund or Trust in writing options on futures contracts may exceed the amount of the premium received. The effective use of options strategies is dependent, among other things, on the Fund's or Trust's ability to terminate option positions at a time when the Adviser deems it desirable to do so. Although ARM Fund and the Trusts will enter into option positions only if the Adviser believes that a liquid secondary market exists for such options, there is no assurance that ARM Fund or any Trust will be able to effect closing transactions at any particular time or at an acceptable price. ARM Fund's and the Trusts' transactions involving options on futures contracts will be conducted only on recognized exchanges. ARM Fund's and the Trusts' purchases and sales of put or call options on futures contracts will be based upon predictions as to anticipated interest rates by the Adviser, which could prove to be inaccurate. Even if the expectations of the Adviser are correct, there may be an imperfect correlation between the change in the value of the options and of the Fund's or Trust's portfolio securities. REGULATORY MATTERS To the extent required to comply with applicable Securities and Exchange Commission releases and staff positions, when entering into futures contracts, ARM Fund and the Trusts each will maintain, in a segregated account, cash or liquid high-grade debt securities equal to the value of such contracts. The Commodity Futures Trading Commission (the "CFTC"), a federal agency, regulates trading activity on the exchanges pursuant to the Commodity Exchange B-6 Act, as amended. The CFTC requires the registration of "commodity pool operators," defined as any person engaged in a business which is of the nature of a Company, syndicate or a similar form of enterprise and who, in connection therewith, solicits, accepts or receives from others, funds, securities or property for the purpose of trading in any commodity for future delivery on or subject to the rules of any contract market. The CFTC has adopted Rule 4.5, which provides an exclusion from the definition of commodity pool operator for any registered investment company which meets the requirements of the Rule. Rule 4.5 requires, among other things, that an investment company wishing to avoid commodity pool operator status use futures and options positions only (a) for "bona fide hedging purposes" (as defined in CFTC regulations) or (b) for other purposes so long as aggregate initial margins and premiums required in connection with non-hedging positions do not exceed 5% of the liquidation value of the investment company's portfolio. Any investment company wishing to claim the exclusion provided in Rule 4.5 must file a notice of eligibility with both the CFTC and the National Futures Association. Before engaging in transactions involving interest rate futures contracts, ARM Fund and the Trusts will file such notices and meet the requirements of Rule 4.5, or such other requirements as the CFTC or its staff may from time to time issue, in order to render registration as a commodity pool operator unnecessary. B-7 PART C OTHER INFORMATION JAFFRAY FUNDS INC. ITEM 15. INDEMNIFICATION The Articles of Incorporation and Bylaws of the Registrant provide that the Registrant shall indemnify such persons for such expenses and liabilities, in such manner and under such circumstances, to the full extent permitted by Section 302A.521, Minnesota Statutes, as now enacted or hereafter amended, provided that no such indemnification may be made if it would be in violation of Section 17(h) of the Investment Company Act of 1940, as now enacted or hereafter amended. Section 302A.521 of the Minnesota Statutes, as now enacted, provides that a corporation shall indemnify a person made or threatened to be made a party to a proceeding by reason of the former or present official capacity of the person against judgments, penalties, fines, settlements, and reasonable expenses, including attorneys fees and disbursements, incurred by the person in connection with the proceeding if, with respect to the acts or omissions of the person complained of in the proceeding, the person has not been indemnified by another organization for the same judgments, penalties, fines, settlements, and reasonable expenses incurred by the person in connection with the proceeding with respect to the same acts or omissions; acted in good faith, received no improper personal benefit and the Minnesota Statutes dealing with directors conflicts of interest, if applicable, have been satisfied; in the case of a criminal proceeding, had no reasonable cause to believe that the conduct was unlawful; and reasonably believed that the conduct was in the best interests of the corporation or, in certain circumstances, reasonably believed that the conduct was not opposed to the best interests of the corporation. The Registrant undertakes that no indemnification or advance will be made unless it is consistent with Sections 17(h) or 17(i) of the Investment Company Act of 1940, as now enacted or hereafter amended, and Securities and Exchange Commission rules, regulations, and releases (including, without limitation, Investment Company Act of 1940 Release No 11330 (September 2, 1980)). Insofar as the indemnification for liability arising under the Securities Act of 1933, as amended, may be permitted to directors, officers, and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit, or proceeding) is asserted by such director, officer, or controlling person C-1 in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933, as amended, and will be governed by the final adjudication of such issue. ITEM 16. EXHIBITS - ------------------ 1. Articles of Incorporation of Registrant 2. Bylaws of Registrant 3. Not applicable. 4. Agreement and Plan of Merger is attached as Exhibit A to Part A of this Registration Statement on Form N-14. 5. Not applicable. 6. Form of Investment Advisory Agreement between Registrant and Piper Capital Management Incorporated.* 7. Form of Distribution Agreement between Registrant and Piper Jaffray Inc.* 8. Not applicable. 9. Form of Custodian Agreement between Registrant and Investors Fiduciary Trust Company.* 10. Form of Plan of Distribution between Registrant and Piper.* 11. Form of Opinion and Consent of Dorsey & Whitney P.L.L.P. with respect to the legality of the securities being registered. 12. Form of Opinion and Consent of Dorsey & Whitney P.L.L.P. with respect to tax matters. 13. Not applicable. 14. Consent of KPMG Peat Marwick LLP. 15. Not applicable. 16. Power of Attorney. C-2 17.1 Form of Proxy Cards. 17.2 Financial Statements for the Six Months Ended February 28, 1995, as included in the American Adjustable Rate Term Trusts (1996-1999) 1995 Semi-Annual Report. 17.3 Financial Statements for the Year Ended August 31, 1994, as included in the American Adjustable Rate Term Trusts (1996-1999) 1994 Annual Report. - ------------------- * To be filed by amendment. ITEM 17. UNDERTAKINGS (1) The undersigned Registrant agrees that prior to any public reoffering of the securities registered through the use of a prospectus which is a part of this Registration Statement by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c) of the Securities Act, the reoffering prospectus will contain the information called for by the applicable registration form for reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form. (2) The undersigned Registrant agrees that every prospectus that is filed under paragraph (1) above will be filed as a part of an amendment to the Registration Statement and will not be used until the amendment is effective, and that, in determining any liability under the 1933 Act, each post-effective amendment shall be deemed to be a new registration statement for the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering of them. SIGNATURES As required by the Securities Act of 1933, this Registration Statement has been signed on behalf of the Registrant in the City of Minneapolis, State of Minnesota, on the 25th day of April, 1995. JAFFRAY FUNDS INC. By /s/ Paul A. Dow ------------------------------- Paul A. Dow, President As required by the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/ Paul A. Dow President (Principal April 25, 1995 - ---------------------- Executive Officer) Paul A. Dow /s/ Charles N. Hayssen Treasurer (Principal April 25, 1995 - ---------------------- Financial and Accounting Charles N. Hayssen Officer) /s/ David T. Bennett Director April 25, 1995 - ---------------------- David T. Bennett /s/ Jaye F. Dyer Director April 25, 1995 - ---------------------- Jaye F. Dyer /s/ William H. Ellis Director April 25, 1995 - ---------------------- William H. Ellis /s/ Karol D. Emmerich Director April 25, 1995 - ---------------------- Karol D. Emmerich /s/ Luella G. Goldberg Director April 25, 1995 - ---------------------- Luella G. Goldberg Director - ---------------------- John T. Golle /s/ George Latimer Director April 25, 1995 - ---------------------- George Latimer C-3 EXHIBIT INDEX ARM FUND A SERIES OF JAFFRAY FUNDS INC. REGISTRATION STATEMENT ON FORM N-14 SEQUENTIAL EXHIBIT PAGE NO. - ----------------------------------------------------- ---------- 1 Articles of Incorporation ____ 2 Bylaws ____ 11 Form of Opinion and Consent of Dorsey & Whitney P.L.L.P. ____ 12 Form of Opinion and Consent of Dorsey & Whitney P.L.L.P. regarding tax matters ____ 14 Consent of KPMG Peat Marwick LLP ____ 16 Power of Attorney ____ 17.1 Form of Proxy Cards 17.2 Financial Statements from Semi-Annual Report ____ 17.3 Financial Statements from Annual Report ____ EX-1 2 EXHIBIT 1 EXHIBIT 1 ARTICLES OF INCORPORATION ARTICLES OF INCORPORATION OF JAFFRAY FUNDS INC. For the purpose of forming a corporation pursuant to the provisions of Minnesota Statutes, Chapter 302A, the following Articles of Incorporation are adopted: 1. The name of the corporation (the "Corporation") is Jaffray Funds Inc. 2. The Corporation shall have general business purposes and shall have unlimited power to engage in and do any lawful act concerning any and all lawful businesses for which corporations may be organized under the Minnesota Statutes, Chapter 302A. Without limiting the generality of the foregoing, the Corporation shall have specific power: (a) To conduct, operate and carry on the business of a so-called "open-end" management investment company pursuant to applicable state and federal regulatory statutes, and exercise all the powers necessary and appropriate to the conduct of such operations. (b) To purchase, subscribe for, invest in or otherwise acquire, and to own, hold, pledge, mortgage, hypothecate, sell, possess, transfer or otherwise dispose of, or turn to account or realize upon, and generally deal in, all forms of securities of every kind, nature, character, type and form, and other financial instruments which may not be deemed to be securities, including but not limited to futures contracts and options thereon. Such securities and other financial instruments may include but are not limited to shares, stocks, bonds, debentures, notes, scrip, participation certificates, rights to subscribe, warrants, options, certificates of deposit, bankers' acceptances, repurchase agreements, commercial paper, choses in action, evidences of indebtedness, certificates of indebtedness and certificates of interest of any and every kind and nature whatsoever, secured and unsecured, issued or to be issued, by any corporation, company, partnership (limited or general), association, trust, entity or person, public or private, whether organized under the laws of the United States, or any state, commonwealth, territory or possession thereof, or organized under the laws of any foreign country, or any state, province, territory or possession thereof, or issued or to be issued by the United States government or any agency or instrumentality thereof, options on stock indexes, stock index and interest rate futures contracts and options thereon, and other futures contracts and options thereon. (c) In the above provisions of this Article 2, purposes shall also be construed as powers and powers shall also be construed as purposes, and the enumeration of specific purposes or powers shall not be construed to limit other statements of purposes or to limit purposes or powers which the Corporation may otherwise have under applicable law, all of the same being separate and cumulative, and all of the same may be carried on, promoted and pursued, transacted or exercised in any place whatsoever. 3. The Corporation shall have perpetual existence. 4. The location and post office address of the registered office in Minnesota is 222 South Ninth Street, Minneapolis, Minnesota 55402-3804. 5. The total authorized number of shares of the Corporation is one hundred billion (100,000,000,000), all of which shall be common shares of the par value of $.01 per share (individually, a "Share" and collectively, the "Shares"). The Corporation may issue and sell any of its Shares in fractional denominations to the same extent as its whole Shares, and Shares and fractional denominations shall have, in proportion to the relative fractions represented thereby, all the rights of whole Shares, including, without limitation, the right to vote, the right to receive dividends and distributions, and the right to participate upon liquidation of the Corporation. (a) Ten billion (10,000,000,000) of the Shares may be issued by the Corporation in a series designated "Series A Common Shares" and the remaining ninety billion (90,000,000,000) Shares authorized by this Article 5 shall initially be undesignated Shares (the "Undesignated Shares"). Any series of the Shares shall be referred to herein individually as a "Series" and collectively herein, together with any further series from time to time created by the Board of Directors, as "Series." The Undesignated Shares may be issued in such Series with such designations, preferences and relative, participating, optional or other special rights, or qualifications, limitations or restrictions thereof, as shall be stated or expressed in a resolution or resolutions providing for the issue of any Series as may be adopted from time to time by the Board of Directors of the Corporation pursuant to the authority hereby vested in the Board of Directors. Each Series of Shares which the Board of Directors may establish, as provided herein, may evidence, if the Board of Directors shall so determine by resolution, an interest in a separate and distinct portion of the Corporation's assets, which shall take the form of a separate portfolio of investment securities, cash and other assets. Authority to establish such separate portfolios is hereby vested in the Board of Directors of the Corporation, and such separate portfolios may be established by the Board of Directors without the authorization or approval of the holders of any Series of Shares of the Corporation. Such investment portfolios in which Shares of the Series represent interests are also hereinafter referred to as "Series." (b) The Shares of each Series may be classified by the Board of Directors in one or more classes (individually, a "Class" and, collectively, together with any other class or classes within any Series, the "Classes") with such relative rights and preferences as shall be stated or expressed in a resolution or resolutions providing for the issue of any such Class or Classes as may be adopted from time to time by the Board of Directors of the Corporation pursuant to the authority hereby vested in the Board of Directors and Minnesota Statutes, Section 302A.401, Subd. 3, or any successor provision. The Shares of each Class within a Series may be subject to such charges and expenses (including by way of example, but not by way of limitation, front-end and deferred sales charges, expenses under Rule 12b-1 plans, administration plans, service plans, or other plans or arrangements, however designated) adopted from time to time by the Board of Directors in accordance, to the extent applicable, with the Investment Company Act of 1940, as amended (together with the rules and regulations promulgated thereunder, the "1940 Act"), which charges and expenses may differ from those applicable to another Class within such Series, and all of the charges and expenses to which a Class is subject shall be borne by such Class and shall be appropriately reflected (in the manner determined by the Board of Directors in the resolution or resolutions providing for the issue of such Class) in determining the net asset value and the amounts payable with respect to dividends and distributions on and redemptions or liquidations of, such Class. Subject to compliance with the requirements of the 1940 Act, the Board of Directors shall have the authority to provide that Shares of any Class shall be convertible (automatically, optionally or otherwise) into Shares of one or more other Classes in accordance with such requirements and procedures as may be established by the Board of Directors. 6. The shareholders of each Series (or Class thereof) of common shares of the Corporation: (a) shall not have the right to cumulate votes for the election of directors; and (b) shall have no preemptive right to subscribe to any issue of shares of any Series (or Class thereof) of the Corporation now or hereafter created, designated or classified. 7. A description of the relative rights and preferences of all Series of Shares (and Classes thereof) is as follows, unless otherwise set forth in one or more amendments to these Articles of Incorporation or in the resolution providing for the issue of such Series (and Classes thereof): 2 (a) On any matter submitted to a vote of shareholders of the Corporation, all Shares of the Corporation then issued and outstanding and entitled to vote, irrespective of Series or Class, shall be voted in the aggregate and not by Series or Class, except: (i) when otherwise required by Minnesota Statutes, Chapter 302A, in which case shares will be voted by individual Series or Class, as applicable; (ii) when otherwise required by the 1940 Act or the rules adopted thereunder, in which case shares shall be voted by individual Series or Class, as applicable; and (iii) when the matter does not affect the interests of a particular Series or Class thereof, in which case only shareholders of the Series or Class thereof affected shall be entitled to vote thereon and shall vote by individual Series or Class, as applicable. (b) All consideration received by the Corporation for the issue or sale of Shares of any Series, together with all assets, income, earnings, profits and proceeds derived therefrom (including all proceeds derived from the sale, exchange or liquidation thereof and, if applicable, any assets derived from any reinvestment of such proceeds in whatever form the same may be) shall become part of the assets of the portfolio to which the Shares of that Series relate, for all purposes, subject only to the rights of creditors, and shall be so treated upon the books of account of the Corporation. Such assets, income, earnings, profits and proceeds (including any proceeds derived from the sale, exchange or liquidation thereof and, if applicable, any assets derived from any reinvestment of such proceeds in whatever form the same may be) are herein referred to as "assets belonging to" such Series of Shares of the Corporation. (c) Assets of the Corporation not belonging to any particular Series are referred to herein as "General Assets." General Assets shall be allocated to each Series in proportion to the respective net assets belonging to such Series. The determination of the Board of Directors shall be conclusive as to the amount of assets, as to the characterization of assets as those belonging to a Series or as General Assets, and as to the allocation of General Assets. (d) The assets belonging to a particular Series of Shares shall be charged with the liabilities incurred specifically on behalf of such Series of Shares ("Special Liabilities"). Such assets shall also be charged with a share of the general liabilities of the Corporation ("General Liabilities") in proportion to the respective net assets belonging to such Series of common shares. The determination of the Board of Directors shall be conclusive as to the amount of liabilities, including accrued expenses and reserves, as to the characterization of any liability as a Special Liability or General Liability, and as to the allocation of General Liabilities among Series. (e) The Board of Directors may, to the extent permitted by Minnesota Statutes, Chapter 302A or any successor provision thereto, declare and pay dividends or distributions in Shares, cash or other property on any or all Series (or Classes thereof) of Shares, the amount of such dividends and the payment thereof being wholly in the discretion of the Board of Directors. (f) In the event of the liquidation or dissolution of the Corporation, holders of the Shares of any Series shall have priority over the holders of any other Series with respect to, and shall be entitled to receive, out of the assets of the Corporation available for distribution to holders of shares, the assets belonging to such Series of Shares and the General Assets allocated to such Series of Shares, and the assets so distributable to the holders of the Shares of any Series shall be distributed among such holders in proportion to the number of Shares of such Series held by each such shareholder and recorded on the books of the Corporation, except that, in the case of a Series with more than one Class of Shares, such distributions shall be adjusted to appropriately reflect any charges and expenses borne by each individual Class. 3 (g) With the approval of a majority of the shareholders of each of the affected Series of Shares present in person or by proxy at a meeting called for the following purpose (provided that at least 10% of the issued and outstanding Shares of the affected Series is present at such meeting in person or by proxy), the Board of Directors may transfer the assets of any Series to any other Series. Upon such a transfer, the Corporation shall issue Shares representing interests in the Series to which the assets were transferred in exchange for all Shares representing interests in the Series from which the assets were transferred. Such Shares shall be exchanged at their respective net asset values. 8. The following additional provisions, when consistent with law, are hereby established for the management of the business, for the conduct of the affairs of the Corporation, and for the purpose of describing certain specific powers of the Corporation and of its directors and shareholders. (a) In furtherance and not in limitation of the powers conferred by statute and pursuant to these Articles of Incorporation, the Board of Directors is expressly authorized to do the following: (i) to make, adopt, alter, amend and repeal Bylaws of the Corporation unless reserved to the shareholders by the Bylaws or by the laws of the State of Minnesota, subject to the power of the shareholders to change or repeal such Bylaws; (ii) to distribute, in its discretion, for any fiscal year (in the year or in the next fiscal year) as ordinary dividends and as capital gains distributions, respectively, amounts sufficient to enable each Series to qualify under the Internal Revenue Code as a regulated investment company to avoid any liability for federal income tax in respect of such year. Any distribution or dividend paid to shareholders from any capital source shall be accompanied by a written statement showing the source or sources of such payment; (iii) to authorize, subject to such vote, consent, or approval of shareholders and other conditions, if any, as may be required by any applicable statute, rule or regulation, the execution and performance by the Corporation of any agreement or agreements with any person, corporation, association, company, trust, partnership (limited or general) or other organization whereby, subject to the supervision and control of the Board of Directors, any such other person, corporation, association, company, trust, partnership (limited or general), or other organization shall render managerial, investment advisory, distribution, transfer agent, accounting and/or other services to the Corporation (including, if deemed advisable, the management or supervision of the investment portfolios of the Corporation) upon such terms and conditions as may be provided in such agreement or agreements; (iv) to authorize any agreement of the character described in subparagraph 3 of this paragraph (a) with any person, corporation, association, company, trust, partnership (limited or general) or other organization, although one or more of the members of the Board of Directors or officers of the Corporation may be the other party to any such agreement or an officer, director, employee, shareholder, or member of such other party, and no such agreement shall be invalidated or rendered voidable by reason of the existence of any such relationship; 4 (v) to allot and authorize the issuance of the authorized but unissued Shares of any Series, or Class thereof, of the Corporation; (vi) to accept or reject subscriptions for Shares of any Series, or Class thereof, made after incorporation; (vii) to fix the terms, conditions and provisions of and authorize the issuance of options to purchase or subscribe for Shares of any Series, or Class thereof, including the option price or prices at which Shares may be purchased or subscribed for; (viii) to take any action which might be taken at a meeting of the Board of Directors, or any duly constituted committee thereof, without a meeting pursuant to a writing signed by that number of directors or committee members that would be required to take the same action at a meeting of the Board of Directors or committee thereof at which all directors or committee members were present; provided, however, that, if such action also requires shareholder approval, such writing must be signed by all of the directors or committee members entitled to vote on such matter; and (ix) to determine what constitutes net income, total assets and the net asset value of the Shares of each Series (or Class thereof) of the Corporation. Any such determination made in good faith shall be final and conclusive, and shall be binding upon the Corporation, and all holders (past, present and future) of Shares of each Series and Class thereof. (b) Except as provided in the next sentence of this paragraph (b), Shares of any Series, or Class thereof, hereafter issued which are redeemed, exchanged, or otherwise acquired by the Corporation shall return to the status of authorized and unissued Shares of such Series or Class. Upon the redemption, exchange, or other acquisition by the Corporation of all outstanding Shares of any Series (or Class thereof), hereafter issued, such Shares shall return to the status of authorized and unissued Shares without designation as to series (if no Shares of the Series remain outstanding) or with the same designation as to Series, but no designation as to Class within such Series (if Shares of such Series remain outstanding, but no Shares of such Class thereof remain outstanding), and all provisions of these articles of incorporation relating to such Series, or Class thereof (including, without limitation, any statement establishing or fixing the rights and preferences of such Series, or Class thereof), shall cease to be of further effect and shall cease to be a part of these articles. Upon the occurrence of such events, the Board of Directors of the Corporation shall have the power, pursuant to Minnesota Statutes Section 302A.135, Subdivision 5 or any successor provision and without shareholder action, to cause restated articles of incorporation of the Corporation to be prepared and filed with the Secretary of State of the State of Minnesota which reflect such removal from these articles of all such provisions relating to such Series, or Class thereof. (c) The determination as to any of the following matters made by or pursuant to the direction of the Board of Directors consistent with these Articles of Incorporation and in the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of duties, shall be final and conclusive and shall be binding upon the Corporation and every holder of shares of its capital stock: namely, the amount of the assets, obligations, liabilities and expenses of each Series (or Class thereof) of the Corporation; the amount of the net income of each Series (or Class thereof) of the 5 Corporation from dividends and interest for any period and the amount of assets at any time legally available for the payment of dividends in each Series (or Class thereof); the amount of paid-in surplus, other surplus, annual or other net profits, or net assets in excess of capital, undivided profits, or excess of profits over losses on sales of securities of each Series (or Class thereof); the amount, purpose, time of creation, increase or decrease, alteration or cancellation of any reserves or charges and the propriety thereof (whether or not any obligation or liability for which such reserves or charges shall have been created shall have been paid or discharged); the market value, or any sale, bid or asked price to be applied in determining the market value, of any security owned or held by or in each Series of the Corporation; the fair value of any other asset owned by or in each Series of the Corporation; the number of Shares of each Series (or Class thereof) of the Corporation issued or issuable; any matter relating to the acquisition, holding and disposition of securities and other assets by each Series of the Corporation; and any question as to whether any transaction constitutes a purchase of securities on margin, a short sale of securities, or an underwriting of the sale of, or participation in any underwriting or selling group in connection with the public distribution of any securities. (d) The Board of Directors or the shareholders of the Corporation may adopt, amend, affirm or reject investment policies and restrictions upon investment or the use of assets of each Series of the Corporation and may designate some such policies as fundamental and not subject to change other than by a vote of a majority of the outstanding voting securities, as such phrase is defined in the 1940 Act, of the affected Series of the Corporation. 9. The Corporation shall indemnify such persons for such expenses and liabilities, in such manner, under such circumstances, and to the full extent permitted by Section 302A.521 of the Minnesota Statutes, as now enacted or hereafter amended, provided, however, that no such indemnification may be made if it would be in violation of Section 17(h) of the 1940 Act, as now enacted or hereafter amended. 10. To the fullest extent permitted by the Minnesota Statutes, Chapter 302A, as the same exists or may hereafter be amended (except as prohibited by the 1940 Act, as the same exists or may hereafter be amended), a director of the Corporation shall not be liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director. 11. The names of the first directors, who shall serve until the first regular or special meeting of shareholders or until their successors are elected and qualify, are: David T. Bennett Jaye F. Dyer William H. Ellis Karol D. Emmerich Luella G. Goldberg John T. Golle George Latimer 6 12. The name and address of the incorporator, who is a natural person of full age, are: Kathleen L. Prudhomme 220 South Sixth Street Minneapolis, Minnesota 55402-1498 ____________ IN WITNESS WHEREOF, the undersigned sole incorporator has executed these Articles of Incorporation on April 10, 1995. ________________________________ Kathleen L. Prudhomme 7 EX-2 3 EXHIBIT 2 EXHIBIT 2 BYLAWS BYLAWS OF JAFFRAY FUNDS INC. (as adopted by the Board of Directors on April 13, 1995) ARTICLE I OFFICES, CORPORATE SEAL Section 1.01. NAME. The name of the corporation is "JAFFRAY FUNDS INC." Each designated series of the corporation's common shares shall represent a separate mutual fund, the names of which are set forth in Exhibit A hereto. Section 1.02. REGISTERED OFFICE. The registered office of the corporation in Minnesota shall be that set forth in the Articles of Incorporation or in the most recent amendment of the Articles of Incorporation or resolution of the directors filed with the Secretary of State of Minnesota changing the registered office. Section 1.03. OTHER OFFICES. The corporation may have such other offices, within or without the State of Minnesota, as the directors shall, from time to time, determine. Section 1.04. NO CORPORATE SEAL. The corporation shall have no corporate seal. ARTICLE II MEETINGS OF SHAREHOLDERS Section 2.01. PLACE AND TIME OF MEETING. Except as provided otherwise by Minnesota Statutes Chapter 302A, meetings of the shareholders may be held at any place, within or without the State of Minnesota, designated by the directors and, in the absence of such designation, shall be held at the registered office of the corporation in the State of Minnesota. The directors shall designate the time of day for each meeting and, in the absence of such designation, every meeting of shareholders shall be held at ten o'clock a.m. Section 2.02. REGULAR MEETINGS. Annual meetings of shareholders are not required by these Bylaws. Regular meetings shall be held only with such frequency and at such times and places as provided in and required by Minnesota Statutes Section 302A.431. Section 2.03. SPECIAL MEETINGS. Special meetings of the shareholders may be held at any time and for any purpose and may be called by the Chairman of the Board, the President, any two directors, or by one or more shareholders holding ten percent (10%) or more of the shares entitled to vote on the matters to be presented to the meeting. Section 2.04. QUORUM, ADJOURNED MEETINGS. The holders of ten percent (10%) of the shares outstanding and entitled to vote shall constitute a quorum for the transaction of business at any regular or special meeting. In case a quorum shall not be present at a meeting, those present in person or by proxy shall adjourn the meeting to such day as they shall, by majority vote, agree upon without further notice other than by announcement at the meeting at which such adjournment is taken. If a quorum is present, a meeting may be adjourned from time to time without notice other than announcement at the meeting. At adjourned meetings at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally noticed. If a quorum is present, the shareholders may continue to transact business until adjournment notwithstanding the withdrawal of enough shareholders to leave less than a quorum. Section 2.05. VOTING. At each meeting of the shareholders, every shareholder having the right to vote shall be entitled to vote either in person or by proxy. Each shareholder, unless the Articles of Incorporation provide otherwise, shall have one vote for each share having voting power registered in his name on the books of the corporation. Except as otherwise specifically provided by these Bylaws or as required by provisions of the Investment Company Act of 1940 or other applicable laws, all questions shall be decided by a majority vote of the number of shares entitled to vote and represented at the meeting at the time of the vote. If the matter(s) to be presented at a regular or special meeting relates only to particular classes or series of the corporation, then only the shareholders of such classes or series are entitled to vote on such matter(s). Section 2.06. VOTING - PROXIES. The right to vote by proxy shall exist only if the instrument authorizing such proxy to act shall have been executed in writing by the shareholder himself or by his attorney thereunto duly authorized in writing. No proxy shall be voted after eleven months from its date unless it provides for a longer period. Section 2.07. CLOSING OF BOOKS. The Board of Directors may fix a time, not exceeding sixty (60) days preceding the date of any meeting of shareholders, as a record date for the determination of the shareholders entitled to notice of, and to vote at, such meeting, notwithstanding any transfer of shares on the books of the corporation after any record date so fixed. The Board of Directors may close the books of the corporation against the transfer of shares during the whole or any part of such period. If the Board of Directors fails to fix a record date for determination of the shareholders entitled to notice of, and to vote at, any meeting of shareholders, the record date shall be the thirtieth (30th) day preceding the date of such meeting. Section 2.08. NOTICE OF MEETINGS. There shall be mailed to each shareholder, shown by the books of the corporation to be a holder of record of -2- voting shares, at his address as shown by the books of the corporation, a notice setting out the date, time and place of each regular meeting and each special meeting, except where the meeting is an adjourned meeting and the date, time and place of the meeting were announced at the time of adjournment, which notice shall be mailed within the period required by law. Every notice of any special meeting shall state the purpose or purposes for which the meeting has been called, pursuant to Section 2.03, and the business transacted at all special meetings shall be confined to the purpose stated in such notice. Section 2.09. WAIVER OF NOTICE. Notice of any regular or special meeting may be waived either before, at or after such meeting orally or in a writing signed by each shareholder or representative thereof entitled to vote the shares so represented. A shareholder by his attendance at any meeting of shareholders, shall be deemed to have waived notice of such meeting, except where the shareholder objects at the beginning of the meeting to the transaction of business because the item may not lawfully be considered at that meeting and does not participate at that meeting in the consideration of the item at that meeting. Section 2.10. WRITTEN ACTION. Any action which might be taken at a meeting of the shareholders may be taken without a meeting if done in writing and signed by all of the shareholders entitled to vote on that action. If the action to be taken relates to particular classes or series of the corporation, then only shareholders of such classes or series are entitled to vote on such action. ARTICLE III DIRECTORS Section 3.01. NUMBER, QUALIFICATION AND TERM OF OFFICE. Until the first meeting of shareholders, the number of directors shall be the number named in the Articles of Incorporation. Thereafter, the number of directors shall be established by resolution of the shareholders (subject to the authority of the Board of Directors to increase or decrease the number of directors as permitted by law). In the absence of such shareholder resolution, the number of directors shall be the number last fixed by the shareholders, the Board of Directors or the Articles of Incorporation. Directors need not be shareholders. Each of the directors shall hold office until the regular meeting of shareholders next held after his election and until his successor shall have been elected and shall qualify, or until the earlier death, resignation, removal or disqualification of such director. Section 3.02. ELECTION OF DIRECTORS. Except as otherwise provided in Sections 3.11 and 3.12 hereof, the directors shall be elected at the regular shareholders' meeting. In the event that directors are not elected at a regular shareholders' meeting, then directors may be elected at a special shareholders' meeting, provided that the notice of such meeting shall contain mention of such purpose. At each shareholders' meeting for the election of directors, the directors shall be elected by a plurality of the votes validly cast at such election. Each holder -3- of shares of each class or series of stock of the corporation shall be entitled to vote for directors and shall have equal voting power for each share of each class or series of the corporation. Section 3.03. GENERAL POWERS. (a) Except as otherwise permitted by statute, the property, affairs and business of the corporation shall be managed by the Board of Directors, which may exercise all the powers of the corporation except those powers vested solely in the shareholders of the corporation by statute, the Articles of Incorporation or these Bylaws, as amended. (b) All acts done by any meeting of the Directors or by any person acting as a director, so long as his successor shall not have been duly elected or appointed, shall, notwithstanding that it be afterwards discovered that there was some defect in the election of the directors or such person acting as aforesaid or that they or any of them were disqualified, be as valid as if the directors or such other person, as the case may be, had been duly elected and were or was qualified to be directors or a director of the corporation. Section 3.04. POWER TO DECLARE DIVIDENDS. (a) The Board of Directors, from time to time as they may deem advisable, may declare and pay dividends in cash or other property of the corporation, out of any source available for dividends, to the shareholders of each class or series of stock of the corporation according to their respective rights and interests in the investment portfolio of the corporation issuing such class or series of stock. (b) The Board of Directors shall cause to be accompanied by a written statement any dividend payment wholly or partly from any source other than (i) the accumulated and accrued undistributed net income of each class or series (determined in accordance with generally accepted accounting practice and the rules and regulations of the Securities and Exchange Commission then in effect) and not including profits or losses realized upon the sale of securities or other properties; or (ii) the net income of each class or series so determined for the current or preceding fiscal year. Such statement shall adequately disclose the source or sources of such payment and the basis of calculation and shall be in such form as the Securities and Exchange Commission may prescribe. (c) Notwithstanding the above provisions of this Section 3.04, the Board of Directors may at any time declare and distribute pro rata among the -4- shareholders of each class or series of stock a "stock dividend" out of the authorized but unissued shares of stock of each class or series, including any shares previously purchased by a class or series of the corporation. Section 3.05. BOARD MEETINGS. Meetings of the Board of Directors may be held from time to time at such time and place within or without the State of Minnesota as may be designated in the notice of such meeting. Section 3.06. CALLING MEETINGS, NOTICE. A director may call a board meeting by giving ten (10) days notice to all directors of the date, time and place of the meeting; provided that if the day or date, time and place of a board meeting have been announced at a previous meeting of the board, no notice is required. Section 3.07. WAIVER OF NOTICE. Notice of any meeting of the Board of Directors may be waived by any director either before, at or after such meeting orally or in a writing signed by such director. A director, by his attendance and participation in the action taken at any meeting of the Board of Directors, shall be deemed to have waived notice of such meeting, except where the director objects at the beginning of the meeting to the transaction of business because the item may not lawfully be considered at that meeting and does not participate at that meeting in the consideration of the item at that meeting. Section 3.08. QUORUM. A majority of the directors holding office immediately prior to a meeting of the Board of Directors shall constitute a quorum for the transaction of business at such meeting; provided however, notwithstanding the above, if the Board of Directors is taking action pursuant to the Investment Company Act of 1940, as now enacted or hereafter amended, a majority of directors who are not "interested persons" (as defined by the Investment Company Act of 1940, as now enacted or hereafter amended) of the corporation shall constitute a quorum for taking such action. Section 3.09. ADVANCE CONSENT OR OPPOSITION. A director may give advance written consent or opposition to a proposal to be acted on at a meeting of the Board of Directors. If such director is not present at the meeting, consent or opposition to a proposal does not constitute presence for purposes of determining the existence of a quorum, but consent or opposition shall be counted as a vote in favor of or against the proposal and shall be entered in the minutes or other record of action at the meeting, if the proposal acted on at the meeting is substantially the same or has substantially the same effect as the proposal to which the director has consented or objected. This procedure shall not be used to act on any investment advisory agreement or plan of distribution adopted under Rule 12b-1 of the Investment Company Act of 1940, as amended. Section 3.10. CONFERENCE COMMUNICATIONS. Any or all directors may participate in any meeting of the Board of Directors, or of any duly constituted committee thereof, by any means of communication through which the directors may simultaneously hear each other during such meeting. For the purposes of -5- establishing a quorum and taking any action at the meeting, such directors participating pursuant to this Section 3.10 shall be deemed present in person at the meeting, and the place of the meeting shall be the place of origination of the conference communication. This procedure shall not be used to act on any investment advisory agreement or plan of distribution adopted under Rule 12b-1 of the Investment Company Act of 1940, as amended. Section 3.11. VACANCIES; NEWLY CREATED DIRECTORSHIPS. Vacancies in the Board of Directors of this corporation occurring by reason of death, resignation, removal or disqualification shall be filled for the unexpired term by a majority of the remaining directors of the Board although less than a quorum; newly created directorships resulting from an increase in the authorized number of directors by action of the Board of Directors as permitted by Section 3.01 may be filled by a two-thirds (2/3) vote of the directors serving at the time of such increase; and each person so elected shall be a director until his successor is elected by the shareholders at their next regular or special meeting; provided, however, that no vacancy can be filled as provided above if prohibited by the provisions of the Investment Company Act of 1940. Section 3.12. REMOVAL. The entire Board of Directors or an individual director may be removed from office, with or without cause, by a vote of the shareholders holding a majority of the shares entitled to vote at an election of directors. In the event that the entire Board or any one or more directors be so removed, new directors shall be elected at the same meeting, or the remaining directors may, to the extent vacancies are not filled at such meeting, fill any vacancy or vacancies created by such removal. A director named by the Board of Directors to fill a vacancy may be removed from office at any time, with or without cause, by the affirmative vote of the remaining directors if the shareholders have not elected directors in the interim between the time of the appointment to fill such vacancy and the time of the removal. Section 3.13. COMMITTEES. A resolution approved by the affirmative vote of a majority of the Board of Directors may establish committees having the authority of the board in the management of the business of the corporation to the extent provided in the resolution. A committee shall consist of one or more persons, who need not be directors, appointed by affirmative vote of a majority of the directors present. Committees are subject to the direction and control of, and vacancies in the membership thereof shall be filled by, the Board of Directors. A majority of the members of the committee present at a meeting is a quorum for the transaction of business, unless a larger or smaller proportion or number is provided in a resolution approved by the affirmative vote of a majority of the directors present. Section 3.14. WRITTEN ACTION. Except as provided in the Investment Company Act of 1940, as amended, any action which might be taken at a meeting of the Board of Directors, or any duly constituted committee thereof, may be taken -6- without a meeting if done in writing and signed by that number of directors or committee members that would be required to take the same action at a meeting of the board or committee thereof at which all directors or committee members were present; provided, however, that any action which also requires shareholder approval may be taken by written action only if such writing is signed by all of the directors or committee members entitled to vote on such matter. Section 3.15. COMPENSATION. Directors shall receive such fixed sum per meeting attended and/or such fixed annual sum as shall be determined, from time to time, by resolution of the Board of Directors. All directors shall receive their expenses, if any, of attendance at meetings of the Board of Directors or any committee thereof. Nothing herein contained shall be construed to preclude any director from serving this corporation in any other capacity and receiving proper compensation therefor. ARTICLE IV OFFICERS Section 4.01. NUMBER. The officers of the corporation shall consist of a Chairman of the Board (if one is elected by the Board), the President, one or more Vice Presidents (if desired by the Board), a Secretary, a Treasurer and such other officers and agents as may, from time to time, be elected by the Board of Directors. Any number of offices may be held by the same person. Section 4.02. ELECTION, TERM OF OFFICE AND QUALIFICATIONS. The Board of Directors shall elect, from within or without their number, the officers referred to in Section 4.01 of these Bylaws, each of whom shall have the powers, rights, duties, responsibilities and terms in office provided for in these Bylaws or a resolution of the Board not inconsistent therewith. The President and all other officers who may be directors shall continue to hold office until the election and qualification of their successors, notwithstanding an earlier termination of their directorship. Section 4.03. RESIGNATION. Any officer may resign his office at any time by delivering a written resignation to the corporation. Unless otherwise specified therein, such resignation shall take effect upon delivery. Section 4.04. REMOVAL AND VACANCIES. Any officer may be removed from his office by a majority of the Board of Directors with or without cause. Such removal, however, shall be without prejudice to the contract rights of the person so removed. If there be a vacancy among the officers of the corporation by reason of death, resignation or otherwise, such vacancy shall be filled for the unexpired term by the Board of Directors. Section 4.05. CHAIRMAN OF THE BOARD. The Chairman of the Board, if one is elected, shall preside at all meetings of the shareholders and directors and -7- shall have such other duties as may be prescribed, from time to time, by the Board of Directors. Section 4.06. PRESIDENT. The President shall have general active management of the business of the corporation. In the absence of the Chairman of the Board, he shall preside at all meetings of the shareholders and directors. He shall be the chief executive officer of the corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. He shall be ex officio a member of all standing committees. He may execute and deliver, in the name of the corporation, any deeds, mortgages, bonds, contracts or other instruments pertaining to the business of the corporation and, in general, shall perform all duties usually incident to the office of the President. He shall have such other duties as may, from time to time, be prescribed by the Board of Directors. Section 4.07. VICE PRESIDENT. Each Vice President shall have such powers and shall perform such duties as may be specified in the Bylaws or prescribed by the Board of Directors or by the President. In the event of absence or disability of the President, Vice Presidents shall succeed to his power and duties in the order designated by the Board of Directors. Section 4.08. SECRETARY. The Secretary shall be secretary of, and shall attend, all meetings of the shareholders and Board of Directors and shall record all proceedings of such meetings in the minute book of the corporation. He shall give proper notice of meetings of shareholders and directors. He shall perform such other duties as may, from time to time, be prescribed by the Board of Directors or by the President. Section 4.09. TREASURER. The Treasurer shall be the chief financial officer and shall keep accurate accounts of all money of the corporation received or disbursed. He shall deposit all moneys, drafts and checks in the name of, and to the credit of, the corporation in such banks and depositories as a majority of the Board of Directors shall, from time to time, designate. He shall have power to endorse, for deposit, all notes, checks and drafts received by the corporation. He shall disburse the funds of the corporation, as ordered by the Board of Directors, making proper vouchers therefor. He shall render to the President and the directors, whenever required, an account of all his transactions as Treasurer and of the financial condition of the corporation, and shall perform such other duties as may, from time to time, be prescribed by the Board of Directors or by the President. Section 4.10. ASSISTANT SECRETARIES. At the request of the Secretary, or in his absence or disability, any Assistant Secretary shall have power to perform all the duties of the Secretary, and, when so acting, shall have all the powers of, and be subject to all restrictions upon, the Secretary. The Assistant Secretaries shall perform such other duties as from time to time may be assigned to them by the Board of Directors or the President. -8- Section 4.11. ASSISTANT TREASURERS. At the request of the Treasurer, or in his absence or disability, any Assistant Treasurer shall have power to perform all the duties of the Treasurer, and when so acting, shall have all the powers of, and be subject to all the restrictions upon, the Treasurer. The Assistant Treasurers shall perform such other duties as from time to time may be assigned to them by the Board of Directors or the President. Section 4.12. COMPENSATION. The officers of this corporation shall receive such compensation for their services as may be determined, from time to time, by resolution of the Board of Directors. Section 4.13. SURETY BONDS. The Board of Directors may require any officer or agent of the corporation to execute a bond (including, without limitation, any bond required by the Investment Company Act of 1940 and the rules and regulations of the Securities and Exchange Commission) to the corporation in such sum and with such surety or sureties as the Board of Directors may determine, conditioned upon the faithful performance of his duties to the corporation, including responsibility for negligence and for the accounting of any of the corporation's property, funds or securities that may come into his hands. In any such case, a new bond of like character shall be given at least every six years, so that the dates of the new bond shall not be more than six years subsequent to the date of the bond immediately preceding. ARTICLE V SHARES AND THEIR TRANSFER AND REDEMPTION Section 5.01. NO CERTIFICATES. The corporation shall not issue share certificates for any classes or series. Section 5.02. ISSUANCE OF SHARES. The Board of Directors is authorized to cause to be issued shares of the corporation up to the full amount authorized by the Articles of Incorporation in such classes or series and in such amounts as may be determined by the Board of Directors and as may be permitted by law. No shares shall be allotted except in consideration of cash or other property, tangible or intangible, received or to be received by the corporation under a written agreement, of services rendered or to be rendered to the corporation under a written agreement, or of an amount transferred from surplus to stated capital upon a share dividend. At the time of such allotment of shares, the Board of Directors making such allotments shall state, by resolution, their determination of the fair value to the corporation in monetary terms of any consideration other than cash for which shares are allotted. No shares of stock issued by the corporation shall be issued, sold or exchanged by or on behalf of the corporation for any amount less than the net asset value per share of the shares outstanding as determined pursuant to Article X hereunder. -9- Section 5.03. REDEMPTION OF SHARES. Upon the demand of any shareholder, this corporation shall redeem any share of stock issued by it held and owned by such shareholder at the net asset value thereof as determined pursuant to Article X hereunder. The Board of Directors may suspend the right of redemption or postpone the date of payment during any period when: (a) trading on the New York Stock Exchange is restricted or such Exchange is closed for other than weekends or holidays; (b) the Securities and Exchange Commission has by order permitted such suspension; or (c) an emergency as defined by rules of the Securities and Exchange Commission exists, making disposal of portfolio securities or valuation of net assets of the corporation not reasonably practicable. If following a redemption request by any shareholder of this corporation, the value of such shareholder's interest in the corporation falls below the required minimum investment, as may be set from time to time by the Board of Directors, the corporation's officers are authorized, in their discretion and on behalf of the corporation, to redeem such shareholder's entire interest and remit such amount, provided that such a redemption will only be effected by the corporation following: (a) a redemption by a shareholder, which causes the value of such shareholder's interest in the corporation to fall below the required minimum investment; (b) the mailing by the corporation to such shareholder of a "notice of intention to redeem"; and (c) the passage of at least sixty (60) days from the date of such mailing, during which time the shareholder will have the opportunity to make an additional investment in the corporation to increase the value of such shareholder's account to at least the required minimum investment. Section 5.04. TRANSFER OF SHARES. Transfer of shares on the books of the corporation may be authorized only by the shareholder, or the shareholder's legal representative, or the shareholder's duly authorized attorney-in-fact, and upon the surrender of a duly executed assignment covering such shares. The corporation may treat, as the absolute owner of shares of the corporation, the person or persons in whose name shares are registered on the books of the corporation. Section 5.05. REGISTERED SHAREHOLDERS. The corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and accordingly shall not be bound to recognize any equitable or other claim to or interest in such share on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise expressly provided by the laws of Minnesota. Section 5.06. TRANSFER OF AGENTS AND REGISTRARS. The Board of Directors may from time to time appoint or remove transfer agents and/or registrars of transfers of shares of stock of the corporation, and it may appoint the same person as both transfer agent and registrar. Section 5.07. TRANSFER REGULATIONS. The shares of stock of the corporation may be freely transferred, and the Board of Directors may from time to -10- time adopt rules and regulations with reference to the method of transfer of shares of stock of the corporation. ARTICLE VI DIVIDENDS Section 6.01. The net investment income of each class or series of the corporation will be determined, and its dividends shall be declared and made payable at such time(s) as the Board of Directors shall determine. Dividends shall be payable to shareholders of record as of the date of declaration. It shall be the policy of each series of the corporation to qualify for and elect the tax treatment applicable to regulated investment companies under the Internal Revenue Code, so that such series will not be subjected to federal income tax on such part of its income or capital gains as it distributes to shareholders. ARTICLE VII BOOKS AND RECORDS, AUDIT, FISCAL YEAR Section 7.01. SHARE REGISTER. The Board of Directors of the corporation shall cause to be kept at its principal executive office, or at another place or places within the United States determined by the board: (1) a share register not more than one year old, containing the names and addresses of the shareholders and the number and classes or series of shares held by each shareholder; and (2) a record of the dates on which transaction statements representing shares were issued. Section 7.02. OTHER BOOKS AND RECORDS. The Board of Directors shall cause to be kept at its principal executive office, or, if its principal executive office is not in Minnesota, shall make available at its registered office within ten days after receipt by an officer of the corporation of a written demand for them made by a shareholder or other person authorized by Minnesota Statutes Section 302A.461, originals or copies of: (1) records of all proceedings of shareholders for the last three years; (2) records of all proceedings of the Board of Directors for the last three years; (3) its articles and all amendments currently in effect; -11- (4) its bylaws and all amendments currently in effect; (5) financial statements required by Minnesota Statutes Section 302A.463 and the financial statement for the most recent interim period prepared in the course of the operation of the corporation for distribution to the shareholders or to a governmental agency as a matter of public record; (6) reports made to shareholders generally within the last three years; (7) a statement of the names and usual business addresses of its directors and principal officers; (8) any shareholder voting or control agreements of which the corporation is aware; and (9) such other records and books of account as shall be necessary and appropriate to the conduct of the corporate business. Section 7.03. AUDIT; ACCOUNTANT. (a) The Board of Directors shall cause the records and books of account of the corporation to be audited at least once in each fiscal year and at such other times as it may deem necessary or appropriate. (b) The corporation shall employ an independent public accountant or firm of independent public accountants to examine the accounts of the corporation and to sign and certify financial statements filed by the corporation. The independent accountant's certificates and reports shall be addressed both to the Board of Directors and to the shareholders. Section 7.04. FISCAL YEAR. The fiscal year of the corporation shall be determined by the Board of Directors. ARTICLE VIII INDEMNIFICATION OF CERTAIN PERSONS Section 8.01. The corporation shall indemnify such persons, for such expenses and liabilities, in such manner, under such circumstances, and to such extent as permitted by Section 302A.521 of the Minnesota Statutes, as now enacted or hereafter amended, provided, however, that no such indemnification may be made if it would be in violation of Section 17(h) of the Investment Company Act of 1940, as now enacted or hereinafter amended. -12- ARTICLE IX VOTING OF STOCK HELD Section 9.01. Unless otherwise provided by resolution of the Board of Directors, the President, any Vice President, the Secretary or the Treasurer may from time to time appoint an attorney or attorneys or agent or agents of the corporation, in the name and on behalf of the corporation, to cast the votes which the corporation may be entitled to cast as a stockholder or otherwise in any other corporation or association, any of whose stock or securities may be held by the corporation, at meetings of the holders of the stock or other securities of any such other corporation or association, or to consent in writing to any action by any such other corporation or association, and may instruct the person or persons so appointed as to the manner of casting such votes or giving such consent, and may execute or cause to be executed on behalf of the corporation and under its corporate seal, or otherwise, such written proxies, consents, waivers or other instruments as it may deem necessary or proper; or any of such officers may themselves attend any meeting of the holders of stock or other securities of any such corporation or association and thereat vote or exercise any or all other rights of the corporation as the holder of such stock or other securities of such other corporation or association, or consent in writing to any action by any such other corporation or association. ARTICLE X VALUATION OF NET ASSET VALUE 10.01. The net asset value per share of each class or series of stock of the corporation shall be determined in good faith by or under supervision of the officers of the corporation as authorized by the Board of Directors as often and on such days and at such time(s) as the Board of Directors shall determine, or as otherwise may be required by law, rule, regulation or order of the Securities and Exchange Commission. ARTICLE XI CUSTODY OF ASSETS Section 11.01. All securities and cash owned by this corporation shall, as hereinafter provided, be held by or deposited with a bank or trust company having (according to its last published report) not less than Two Million Dollars ($2,000,000) aggregate capital, surplus and undivided profits (the "Custodian"). This corporation shall enter into a written contract with the custodian regarding the powers, duties and compensation of the Custodian with respect to the cash and securities of this corporation held by the Custodian. Said contract and all amendments thereto shall be approved by the Board of Directors of this corporation. In the event of the Custodian's resignation or termination, the corporation shall use its best efforts promptly to obtain a successor Custodian and shall require that the -13- cash and securities owned by this corporation held by the Custodian be delivered directly to such successor Custodian. ARTICLE XII AMENDMENTS Section 12.01. These Bylaws may be amended or altered by a vote of the majority of the Board of Directors at any meeting, provided that notice of such proposed amendment shall have been given in the notice given to the directors of such meeting. Such authority in the Board of Directors is subject to the power of the shareholders to change or repeal such bylaws by a majority vote of the shareholders present or represented at any regular or special meeting of shareholders called for such purpose, and the Board of Directors shall not make or alter any Bylaws fixing a quorum for meetings of shareholders, prescribing procedures for removing directors or filling vacancies in the Board of Directors, or fixing the number of directors or their classifications, qualifications or terms of office, except that the Board of Directors may adopt or amend any Bylaw to increase or decrease their number. ARTICLE XIII MISCELLANEOUS Section 13.01. INTERPRETATION. When the context in which words are used in these Bylaws indicates that such is the intent, singular words will include the plural and vice versa, and masculine words will include the feminine and neuter genders and vice versa. Section 13.02. ARTICLE AND SECTION TITLES. The titles of Sections and Articles in these Bylaws are for descriptive purposes only and will not control or alter the meaning of any of these Bylaws as set forth in the text. -14- EXHIBIT A Series of Common Shares Name of Mutual Fund - ----------------------- ------------------- Series A ARM Fund -15- EX-11 4 EXHIBIT 11 EXHIBIT 11 FORM OF OPINION [DORSEY & WHITNEY LETTERHEAD] Jaffray Funds Inc. 222 South Ninth Street Minneapolis, Minnesota 55402 Ladies and Gentlemen: We have acted as counsel to Jaffray Funds Inc., a Minnesota corporation (the "Fund"), in connection with a Registration Statement on Form N-14 (the "Registration Statement") relating to the sale by the Fund of an indefinite number of shares of the Fund's Series A common stock, par value of $.01 per share (the "Shares"). We have examined such documents and have reviewed such questions of law as we have considered necessary and appropriate for the purposes of our opinions set forth below. In rendering our opinions set forth below, we have assumed the authenticity of all documents submitted to us as originals, the genuineness of all signatures and the conformity to authentic originals of all documents submitted to us as copies. We have also assumed the legal capacity for all purposes relevant hereto of all natural persons and, with respect to all parties to agreements or instruments relevant hereto other than the Fund, that such parties had the requisite power and authority (corporate or otherwise) to execute, deliver and perform such agreements or instruments, that such agreements or instruments have been duly authorized by all requisite action (corporate or otherwise), executed and delivered by such parties and that such agreements or instruments are the valid, binding and enforceable obligations of such parties. As to questions of fact material to our opinions, we have relied upon certificates of officers of the Fund and of public officials. We have also assumed that the Shares will be issued and sold as described in the Registration Statement. Based on the foregoing, we are of the opinion that the Shares have been duly authorized by all requisite corporate action and, upon issuance, delivery and payment therefor as described in the Registration Statement, will be validly issued, fully paid and nonassessable. Our opinions expressed above are limited to the laws of the State of Minnesota. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to our firm under the caption "Legal Piper Funds, Inc. ________, 1995 Page 2 Matters" in the Joint Proxy Statement/Prospectus constituting part of the Registration Statement. Dated: ________, 1995 Very truly yours, EX-12 5 EXHIBIT 12 EXHIBIT 12 FORM OF TAX OPINION [DORSEY & WHITNEY LETTERHEAD] April __, 1995 American Adjustable Rate Term Trust Inc. -- 1996 Piper Jaffray Tower 222 South Ninth Street Minneapolis, Minnesota 55402 Ladies and Gentlemen: We have acted as counsel to American Adjustable Rate Term Trust Inc. -- 1996 (the "Trust") and Jaffray Funds, Inc. ("Jaffray Funds"), in connection with the proposed merger of the Trust with and into Jaffray Funds, pursuant to an Agreement and Plan of Merger dated as of ________, 1995, by and among the Trust, American Adjustable Rate Term Trust Inc. -- 1997, American Adjustable Rate Term Trust Inc. -- 1998, American Adjustable Rate Term Trust Inc. -- 1999) (collectively, the "Trusts"), and Jaffray Funds (the "Plan"). You have asked for our opinion concerning certain federal income tax consequences of the Merger and the distribution of the shares of Jaffray Funds to the Trust stockholders pursuant to the Merger. In this regard we have examined (1) the Plan, (2) the Registration Statement on Form N-14 (including, but not limited to, the Joint Proxy Statement/Prospectus included therein) filed with the Securities and Exchange Commission on or about April 26, 1995, and such other documents and records as we consider necessary in order to render this opinion. Unless otherwise provided herein, capitalized terms used in this opinion shall have the same meaning as set forth in the Joint Proxy Statement/Prospectus or the Plan, as the case may be. Pursuant to the Plan, the Trust will merge with and into Jaffray Funds, with Jaffray Funds as the surviving entity. Contingent upon approval by their shareholders, each of the other Trusts will also merge with and into Jaffray Funds. As a result of the Merger, the assets and liabilities of the Trust will become the assets and liabilities of Jaffray Funds, and the shareholders of the Trust will become shareholders of Jaffray Funds. Immediately after the Merger, each shareholder of the Trust will hold shares of ARM Fund, a separate series of Jaffray Funds, having the same aggregate net asset value as the shares of the Trust held by such shareholder at the time of the closing of the Merger. April __, 1995 Page 2 The Merger is being undertaken because the Board of the Trust believes that elimination of the term trust structure will facilitate the Trust's ability to obtain a higher investment return on its portfolio securities by allowing it to purchase and retain longer maturity securities than it could under the term trust structure. Furthermore, shareholders will benefit from the elimination, through the Merger, of the market discount at which the Trust shares currently trade. Our opinion is based upon existing law and currently applicable Treasury Regulations, currently published administrative positions of the Internal Revenue Service contained in Revenue Rulings and Revenue Procedures, and judicial decisions, all of which are subject to change prospectively and retroactively. It is not a guarantee of the current status of the law and should not be accepted as a guarantee that a court of law or an administrative agency will concur in the opinion. Based on the Plan, the other documents referred to herein, the facts and assumptions stated above, as well as representations made by the Trust in a Certificate dated April ___, 1995, representations made by Jaffray Funds in a Certificate dated April ___, 1995, representations made by the Adviser in a Certificate dated April ___, 1995, the provisions of the Code and judicial and administrative interpretations as in existence on the date hereof, it is our opinion that the Merger of the Trust with and into Jaffray Funds, pursuant to the Plan, will constitute a reorganization within the meaning of Section 368(a)(1)(A) of the Code, and that the Trust and Jaffray Funds will each be a party to the reorganization within the meaning of Section 368(b) of the Code. On the basis of the foregoing opinion that the Merger will constitute a reorganization within the meaning of Section 368 of the Code, it is further our opinion that: (i) Trust shareholders will recognize no income, gain or loss upon the exchange of Trust common shares for ARM Fund common shares in the Merger. Trust shareholders subject to taxation will recognize income upon receipt of any net investment income or April __, 1995 Page 3 net capital gains of the Trust distributed by the Trust prior to the Effective Time; (ii) The basis of ARM Fund common shares received by each Trust shareholder pursuant to the Merger will be the same as the basis of the Trust common shares surrendered in exchange therefor; (iii) The holding period of ARM Fund common shares received by a Trust shareholder pursuant to the Merger will include the period during which the shareholder held the Trust common shares surrendered in exchange therefor, provided that the Trust common shares were held as a capital asset at the Effective Time; (iv) The Trust will recognize no income, gain or loss by reason of the Merger; (v) The tax basis of the assets received by ARM Fund pursuant to the Merger will be the same as the basis of those assets in the hands of the Trust as of the Effective Time; (vi) The holding period of the assets received by ARM Fund pursuant to the Merger will include the period during which such assets were held by the Trust; and (vii) ARM Fund will succeed to and take into account the earnings and profits, or deficit in earnings and profits, of the Trust as of the Effective Time. We consent to the filing of this opinion as an exhibit to the above-referenced Registration Statement on Form N-14 and to the reference to this firm under the caption "The Merger--Federal Income Tax Consequences" in the Joint Proxy Statement/Prospectus included in Part A of said Registration Statement. Very truly yours, [DORSEY & WHITNEY LETTERHEAD] April __, 1995 American Adjustable Rate Term Trust Inc. -- 1997 Piper Jaffray Tower 222 South Ninth Street Minneapolis, Minnesota 55402 Ladies and Gentlemen: We have acted as counsel to American Adjustable Rate Term Trust Inc. -- 1997 (the "Trust") and Jaffray Funds, Inc. ("Jaffray Funds"), in connection with the proposed merger of the Trust with and into Jaffray Funds, pursuant to an Agreement and Plan of Merger dated as of ________, 1995, by and among the Trust, American Adjustable Rate Term Trust Inc. -- 1996, American Adjustable Rate Term Trust Inc. -- 1998, American Adjustable Rate Term Trust Inc. -- 1999) (collectively, the "Trusts"), and Jaffray Funds (the "Plan"). You have asked for our opinion concerning certain federal income tax consequences of the Merger and the distribution of the shares of Jaffray Funds to the Trust stockholders pursuant to the Merger. In this regard we have examined (1) the Plan, (2) the Registration Statement on Form N-14 (including, but not limited to, the Joint Proxy Statement/Prospectus included therein) filed with the Securities and Exchange Commission on or about April 26, 1995, and such other documents and records as we consider necessary in order to render this opinion. Unless otherwise provided herein, capitalized terms used in this opinion shall have the same meaning as set forth in the Joint Proxy Statement/Prospectus or the Plan, as the case may be. Pursuant to the Plan, the Trust will merge with and into Jaffray Funds, with Jaffray Funds as the surviving entity. Contingent upon approval by their shareholders, each of the other Trusts will also merge with and into Jaffray Funds. As a result of the Merger, the assets and liabilities of the Trust will become the assets and liabilities of Jaffray Funds, and the shareholders of the Trust will become shareholders of Jaffray Funds. Immediately after the Merger, each shareholder of the Trust will hold shares of ARM Fund, a separate series of Jaffray Funds, having the same aggregate net asset value as the shares of the Trust held by such shareholder at the time of the closing of the Merger. April __, 1995 Page 2 The Merger is being undertaken because the Board of the Trust believes that elimination of the term trust structure will facilitate the Trust's ability to obtain a higher investment return on its portfolio securities by allowing it to purchase and retain longer maturity securities than it could under the term trust structure. Furthermore, shareholders will benefit from the elimination, through the Merger, of the market discount at which the Trust shares currently trade. Our opinion is based upon existing law and currently applicable Treasury Regulations, currently published administrative positions of the Internal Revenue Service contained in Revenue Rulings and Revenue Procedures, and judicial decisions, all of which are subject to change prospectively and retroactively. It is not a guarantee of the current status of the law and should not be accepted as a guarantee that a court of law or an administrative agency will concur in the opinion. Based on the Plan, the other documents referred to herein, the facts and assumptions stated above, as well as representations made by the Trust in a Certificate dated April ___, 1995, representations made by Jaffray Funds in a Certificate dated April ___, 1995, representations made by the Adviser in a Certificate dated April ___, 1995, the provisions of the Code and judicial and administrative interpretations as in existence on the date hereof, it is our opinion that the Merger of the Trust with and into Jaffray Funds, pursuant to the Plan, will constitute a reorganization within the meaning of Section 368(a)(1)(A) of the Code, and that the Trust and Jaffray Funds will each be a party to the reorganization within the meaning of Section 368(b) of the Code. On the basis of the foregoing opinion that the Merger will constitute a reorganization within the meaning of Section 368 of the Code, it is further our opinion that: (i) Trust shareholders will recognize no income, gain or loss upon the exchange of Trust common shares for ARM Fund common shares in the Merger. Trust shareholders subject to taxation will recognize income upon receipt of any net investment income or April __, 1995 Page 3 net capital gains of the Trust distributed by the Trust prior to the Effective Time; (ii) The basis of ARM Fund common shares received by each Trust shareholder pursuant to the Merger will be the same as the basis of the Trust common shares surrendered in exchange therefor; (iii) The holding period of ARM Fund common shares received by a Trust shareholder pursuant to the Merger will include the period during which the shareholder held the Trust common shares surrendered in exchange therefor, provided that the Trust common shares were held as a capital asset at the Effective Time; (iv) The Trust will recognize no income, gain or loss by reason of the Merger; (v) The tax basis of the assets received by ARM Fund pursuant to the Merger will be the same as the basis of those assets in the hands of the Trust as of the Effective Time; (vi) The holding period of the assets received by ARM Fund pursuant to the Merger will include the period during which such assets were held by the Trust; and (vii) ARM Fund will succeed to and take into account the earnings and profits, or deficit in earnings and profits, of the Trust as of the Effective Time. We consent to the filing of this opinion as an exhibit to the above-referenced Registration Statement on From N-14 and to the reference to this firm under the caption "The Merger--Federal Income Tax Consequences" in the Joint Proxy Statement/Prospectus included in Part A of said Registration Statement. Very truly yours, [DORSEY & WHITNEY LETTERHEAD] April __, 1995 American Adjustable Rate Term Trust Inc. -- 1998 Piper Jaffray Tower 222 South Ninth Street Minneapolis, Minnesota 55402 Ladies and Gentlemen: We have acted as counsel to American Adjustable Rate Term Trust Inc. -- 1998 (the "Trust") and Jaffray Funds, Inc. ("Jaffray Funds"), in connection with the proposed merger of the Trust with and into Jaffray Funds, pursuant to an Agreement and Plan of Merger dated as of ________, 1995, by and among the Trust, American Adjustable Rate Term Trust Inc. -- 1996, American Adjustable Rate Term Trust Inc -- 1997, American Adjustable Rate Term Trust Inc. -- 1999) (collectively, the "Trusts"), and Jaffray Funds (the "Plan"). You have asked for our opinion concerning certain federal income tax consequences of the Merger and the distribution of the shares of Jaffray Funds to the Trust stockholders pursuant to the Merger. In this regard we have examined (1) the Plan, (2) the Registration Statement on Form N-14 (including, but not limited to, the Joint Proxy Statement/Prospectus included therein) filed with the Securities and Exchange Commission on or about April 26, 1995, and such other documents and records as we consider necessary in order to render this opinion. Unless otherwise provided herein, capitalized terms used in this opinion shall have the same meaning as set forth in the Joint Proxy Statement/Prospectus or the Plan, as the case may be. Pursuant to the Plan, the Trust will merge with and into Jaffray Funds, with Jaffray Funds as the surviving entity. Contingent upon approval by their shareholders, each of the other Trusts will also merge with and into Jaffray Funds. As a result of the Merger, the assets and liabilities of the Trust will become the assets and liabilities of Jaffray Funds, and the shareholders of the Trust will become shareholders of Jaffray Funds. Immediately after the Merger, each shareholder of the Trust will hold shares of ARM Fund, a separate series of Jaffray Funds, having the same aggregate net asset value as the shares of the Trust held by such shareholder at the time of the closing of the Merger. April __, 1995 Page 2 The Merger is being undertaken because the Board of the Trust believes that elimination of the term trust structure will facilitate the Trust's ability to obtain a higher investment return on its portfolio securities by allowing it to purchase and retain longer maturity securities than it could under the term trust structure. Furthermore, shareholders will benefit from the elimination, through the Merger, of the market discount at which the Trust shares currently trade. Our opinion is based upon existing law and currently applicable Treasury Regulations, currently published administrative positions of the Internal Revenue Service contained in Revenue Rulings and Revenue Procedures, and judicial decisions, all of which are subject to change prospectively and retroactively. It is not a guarantee of the current status of the law and should not be accepted as a guarantee that a court of law or an administrative agency will concur in the opinion. Based on the Plan, the other documents referred to herein, the facts and assumptions stated above, as well as representations made by the Trust in a Certificate dated April ___, 1995, representations made by Jaffray Funds in a Certificate dated April ___, 1995, representations made by the Adviser in a Certificate dated April ___, 1995, the provisions of the Code and judicial and administrative interpretations as in existence on the date hereof, it is our opinion that the Merger of the Trust with and into Jaffray Funds, pursuant to the Plan, will constitute a reorganization within the meaning of Section 368(a)(1)(A) of the Code, and that the Trust and Jaffray Funds will each be a party to the reorganization within the meaning of Section 368(b) of the Code. On the basis of the foregoing opinion that the Merger will constitute a reorganization within the meaning of Section 368 of the Code, it is further our opinion that: (i) Trust shareholders will recognize no income, gain or loss upon the exchange of Trust common shares for ARM Fund common shares in the Merger. Trust shareholders subject to taxation will recognize income upon receipt of any net investment income or net capital gains of the Trust distributed by the Trust prior to the Effective Time; (ii) The basis of ARM Fund common shares received by each Trust shareholder pursuant to the Merger will be the same as the basis of the Trust common shares surrendered in exchange therefor; (iii) The holding period of ARM Fund common shares received by a Trust shareholder pursuant to the Merger will include the period during which the shareholder held the Trust common shares surrendere in exchange therefor, provided that the Trust common shares were held as a capital asset at the Effective Time; (iv) The Trust will recognize no income, gain or loss by reason of the Merger; (v) The tax basis of the assets received by ARM Fund pursuant to the Merger will be the same as the basis of those assets in the hands of the Trust as of the Effective Time; (vi) The holding period of the assets received by ARM Fund pursuant to the Merger will include the period during which such assets were held by the Trust; and (vii) ARM Fund will succeed to and take into account the earnings and profits, or deficit in earnings and profits, of the Trust as of the Effective Time. We consent to the filing of this opinion as an exhibit to the above-referenced Registration Statement on Form N-14 and to the reference to this firm under the caption "The Merger--Federal Income Tax Consequences" in the Joint Proxy Statement/Prospectus included in Part A of said Registration Statement. Very truly yours, [DORSEY & WHITNEY LETTERHEAD] April __, 1995 American Adjustable Rate Term Trust Inc. -- 1999 Piper Jaffray Tower 222 South Ninth Street Minneapolis, Minnesota 55402 Ladies and Gentlemen: We have acted as counsel to American Adjustable Rate Term Trust Inc. -- 1999 (the "Trust") and Jaffray Funds, Inc. ("Jaffray Funds"), in connection with the proposed merger of the Trust with and into Jaffray Funds, pursuant to an Agreement and Plan of Merger dated as of ________, 1995, by and among the Trust, American Adjustable Rate Term Trust Inc. -- 1996, American Adjustable Rate Term Trust Inc. -- 1997, American Adjustable Rate Term Trust Inc. -- 1998) (collectively, the "Trusts"), and Jaffray Funds (the "Plan"). You have asked for our opinion concerning certain federal income tax consequences of the Merger and the distribution of the shares of Jaffray Funds to the Trust stockholders pursuant to the Merger. In this regard we have examined (1) the Plan, (2) the Registration Statement on Form N-14 (including, but not limited to, the Joint Proxy Statement/Prospectus included therein) filed with the Securities and Exchange Commission on or about April 26, 1995, and such other documents and records as we consider necessary in order to render this opinion. Unless otherwise provided herein, capitalized terms used in this opinion shall have the same meaning as set forth in the Joint Proxy Statement/Prospectus or the Plan, as the case may be. Pursuant to the Plan, the Trust will merge with and into Jaffray Funds, with Jaffray Funds as the surviving entity. Contingent upon approval by their shareholders, each of the other Trusts will also merge with and into Jaffray Funds. As a result of the Merger, the assets and liabilities of the Trust will become the assets and liabilities of Jaffray Funds, and the shareholders of the Trust will become shareholders of Jaffray Funds. Immediately after the Merger, each shareholder of the Trust will hold shares of ARM Fund, a separate series of Jaffray Funds, having the same aggregate net asset value as the shares of the Trust held by such shareholder at the time of the closing of the Merger. April __, 1995 Page 2 The Merger is being undertaken because the Board of the Trust believes that elimination of the term trust structure will facilitate the Trust's ability to obtain a higher investment return on its portfolio securities by allowing it to purchase and retain longer maturity securities than it could under the term trust structure. Furthermore, shareholders will benefit from the elimination, through the Merger, of the market discount at which the Trust shares currently trade. Our opinion is based upon existing law and currently applicable Treasury Regulations, currently published administrative positions of the Internal Revenue Service contained in Revenue Rulings and Revenue Procedures, and judicial decisions, all of which are subject to change prospectively and retroactively. It is not a guarantee of the current status of the law and should not be accepted as a guarantee that a court of law or an administrative agency will concur in the opinion. Based on the Plan, the other documents referred to herein, the facts and assumptions stated above, as well as representations made by the Trust in a Certificate dated April ___, 1995, representations made by Jaffray Funds in a Certificate dated April ___, 1995, representations made by the Adviser in a Certificate dated April ___, 1995, the provisions of the Code and judicial and administrative interpretations as in existence on the date hereof, it is our opinion that the Merger of the Trust with and into Jaffray Funds, pursuant to the Plan, will constitute a reorganization within the meaning of Section 368(a)(1)(A) of the Code, and that the Trust and Jaffray Funds will each be a party to the reorganization within the meaning of Section 368(b) of the Code. On the basis of the foregoing opinion that the Merger will constitute a reorganization within the meaning of Section 368 of the Code, it is further our opinion that: (i) Trust shareholders will recognize no income, gain or loss upon the exchange of Trust common shares for ARM Fund common shares in the Merger. Trust shareholders subject to taxation will recognize income upon receipt of any net investment income or April __, 1995 Page 3 net capital gains of the Trust distributed by the Trust prior to the Effective Time; (ii) The basis of ARM Fund common shares received by each Trust shareholder pursuant to the Merger will be the same as the basis of the Trust common shares surrendered in exchange therefor; (iii) The holding period of ARM Fund common shares received by a Trust shareholder pursuant to the Merger will include the period during which the shareholder held the Trust common shares surrendered in exchange therefor, provided that the Trust common shares were held as a capital asset at the Effective Time; (iv) The Trust will recognize no income, gain or loss by reason of the Merger; (v) The tax basis of the assets received by ARM Fund pursuant to the Merger will be the same as the basis of those assets in the hands of the Trust as of the Effective Time; (vi) The holding period of the assets received by ARM Fund pursuant to the Merger will include the period during which such assets were held by the Trust; and (vii) ARM Fund will succeed to and take into account the earnings and profits, or deficit in earnings and profits, of the Trust as of the Effective Time. We consent to the filing of this opinion as an exhibit to the above-referenced Registration Statement on Form N-14 and to the reference to this firm under the caption "The Merger--Federal Income Tax Consequences" in the Joint Proxy Statement/Prospectus included in Part A of said Registration Statement. Very truly yours, EX-14 6 EXHIBIT 14 EXHIBIT 14 INDEPENDENT AUDITORS' CONSENT [KPMG Peat Marwick LLP Letterhead] INDEPENDENT AUDITORS' CONSENT The Board of Directors American Adjustable Rate Term Trust Inc. -- 1996, American Adjustable Rate Term Trust Inc. -- 1997, American Adjustable Rate Term Trust Inc. -- 1998, and American Adjustable Rate Term Trust Inc. -- 1999; We consent to the incorporation by reference in the registration statement on Form N-14 of ARM Fund (a series of Jaffray Funds Inc.) of our report dated October 20, 1994, appearing in the 1994 Annual Report of the American Adjustable Rate Term Trusts (1996-1999) and to the reference to our Firm under the heading "FINANCIAL STATEMENTS AND EXPERTS" in the registration statement. /s/ KPMG Peat Marwick LLP KPMG Peat Marwick LLP Minneapolis, Minnesota April 19, 1995 EX-16 7 EXHIBIT 16 EXHIBIT 16 POWER OF ATTORNEY JAFFRAY FUNDS INC. POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Paul A. Dow, William H. Ellis and Charles N. Hayssen, and each of them, his or her true and lawful attorneys-in- fact and agents, each acting alone, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign a Registration Statement on Form N-14 of Jaffray Funds Inc. (the "Company") relating to the merger of American Adjustable Rate Term Trust Inc.-1996, American Adjustable Rate Term Trust Inc.-1997, American Adjustable Rate Term Trust Inc.-1998 and American Adjustable Rate Term Trust Inc.-1999 into ARM Fund, a series of the Company, and any and all amendments thereto, including post-effective amendments, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, each acting alone, or the substitutes for such attorneys-in-fact and agents, may lawfully do or cause to be done by virtue hereof. Signature Title Date --------- ----- ---- /s/ Paul A. Dow - ----------------------------------- President April 25, 1995 Paul A. Dow /s/ Charles N. Hayssen - ----------------------------------- Treasurer April 25, 1995 Charles N. Hayssen /s/ David T. Bennett - ----------------------------------- Director April 25, 1995 David T. Bennett /s/ Jaye F. Dyer - ----------------------------------- Director April 25, 1995 Jaye F. Dyer /s/ William H. Ellis - ----------------------------------- Director April 25, 1995 William H. Ellis /s/ Karol D. Emmerich - ----------------------------------- Director April 25, 1995 Karol D. Emmerich /s/ Luella G. Goldberg - ----------------------------------- Director April 25, 1995 Luella G. Goldberg - ----------------------------------- Director John T. Golle /s/ George Latimer - ----------------------------------- Director April 25, 1995 George Latimer EX-17 8 EXHIBIT 17.1 EXHIBIT 17.1 FORM OF PROXY CARDS PROXY AMERICAN ADJUSTABLE RATE TERM TRUST INC.--1996 PIPER JAFFRAY TOWER 222 SOUTH NINTH STREET MINNEAPOLIS, MINNESOTA 55402-3804 THIS PROXY IS BEING SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF AMERICAN ADJUSTABLE RATE TERM TRUST INC.--1996. The undersigned hereby appoints Paul A. Dow, William H. Ellis and Charles N. Hayssen, and each of them, with power to act without the other and with the right of substitution in each, as proxies of the undersigned and hereby authorizes each of them to represent and to vote, as designated below, all the shares of American Adjustable Rate Term Trust Inc.--1996 (the "Trust"), held of record by the undersigned on _______, 1995, at the Special Meeting of shareholders of the Trust to be held on ________, 1995, or any adjournments or postponements thereof, with all powers the undersigned would possess if present in person. All previous proxies given with respect to the Special Meeting are hereby revoked. THE PROXIES ARE INSTRUCTED TO VOTE AS FOLLOWS: 1. PROPOSAL TO APPROVE AN AGREEMENT AND PLAN OF MERGER whereby the Trust will merge with and into ARM Fund, a series of a newly created, open-end management investment company, with ARM Fund as the surviving entity. / / FOR / / AGAINST / / ABSTAIN 2. ELECTION OF DIRECTORS / / FOR all nominees listed below / / WITHHOLD AUTHORITY to vote (except as marked to the for all nominees listed below contrary below) INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, STRIKE A LINE THROUGH THE NOMINEE'S NAME IN THE LIST BELOW. David T. Bennett Jaye F. Dyer Karol D. Emmerich Luella G. Goldberg John T. Golle George Latimer 3. PROPOSAL TO RATIFY OR REJECT THE APPOINTMENT OF KPMG PEAT MARWICK LLP as the Trust's independent public accountants for the current fiscal year. / / FOR / / AGAINST / / ABSTAIN 4. In their discretion, the Proxies are authorized to vote upon such other business as may properly come before the Special Meeting or any adjournments or postponements thereof. THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED "FOR" PROPOSALS 1 THROUGH 3 ABOVE. RECEIPT OF THE NOTICE OF SPECIAL MEETING OF SHAREHOLDERS AND THE PROXY STATEMENT RELATING TO THE MEETING IS ACKNOWLEDGED BY YOUR EXECUTION OF THIS PROXY. IN THE EVENT THAT THE MERGER IS APPROVED BY TRUST SHAREHOLDERS, PLEASE INDICATE BELOW WHETHER YOU CURRENTLY INTEND TO REDEEM YOUR ARM FUND SHARES IMMEDIATELY FOLLOWING THE MERGER OR WHETHER YOU INTEND TO RETAIN SUCH SHARES. PLEASE NOTE THAT ANY SUCH INTENTION IS NONBINDING AND MAY BE CHANGED AT ANY TIME UP TO OR FOLLOWING THE MERGER. / / REDEEM ARM FUND SHARES / / RETAIN ARM FUND SHARES PLEASE SIGN THIS PROXY EXACTLY AS YOUR NAME APPEARS BELOW. WHEN SHARES ARE HELD BY JOINT TENANTS, BOTH SHOULD SIGN. WHEN SIGNING AS ATTORNEY, EXECUTOR, ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH. IF A CORPORATION, PLEASE SIGN IN FULL CORPORATE NAME BY PRESIDENT OR OTHER AUTHORIZED OFFICER. IF A PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY PARTNER OR OTHER AUTHORIZED PERSON. DATED: ___________, 1995 ------------------------------ Signature [SHAREHOLDER INFORMATION] ------------------------------ Signature if held jointly TO SAVE FURTHER SOLICITATION EXPENSE, PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED POSTAGE-PREPAID ENVELOPE. PROXY AMERICAN ADJUSTABLE RATE TERM TRUST INC.--1997 PIPER JAFFRAY TOWER 222 SOUTH NINTH STREET MINNEAPOLIS, MINNESOTA 55402-3804 THIS PROXY IS BEING SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF AMERICAN ADJUSTABLE RATE TERM TRUST INC.--1997. The undersigned hereby appoints Paul A. Dow, William H. Ellis and Charles N. Hayssen, and each of them, with power to act without the other and with the right of substitution in each, as proxies of the undersigned and hereby authorizes each of them to represent and to vote, as designated below, all the shares of American Adjustable Rate Term Trust Inc.--1997 (the "Trust"), held of record by the undersigned on _______, 1995, at the Special Meeting of shareholders of the Trust to be held on ________, 1995, or any adjournments or postponements thereof, with all powers the undersigned would possess if present in person. All previous proxies given with respect to the Special Meeting are hereby revoked. THE PROXIES ARE INSTRUCTED TO VOTE AS FOLLOWS: 1. PROPOSAL TO APPROVE AN AGREEMENT AND PLAN OF MERGER whereby the Trust will merge with and into ARM Fund, a series of a newly created, open-end management investment company, with ARM Fund as the surviving entity. / / FOR / / AGAINST / / ABSTAIN 2. ELECTION OF DIRECTORS / / FOR all nominees listed below / / WITHHOLD AUTHORITY to vote (except as marked to the for all nominees listed below contrary below) INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, STRIKE A LINE THROUGH THE NOMINEE'S NAME IN THE LIST BELOW. David T. Bennett Jaye F. Dyer Karol D. Emmerich Luella G. Goldberg John T. Golle George Latimer 3. PROPOSAL TO RATIFY OR REJECT THE APPOINTMENT OF KPMG PEAT MARWICK LLP as the Trust's independent public accountants for the current fiscal year. / / FOR / / AGAINST / / ABSTAIN 4. In their discretion, the Proxies are authorized to vote upon such other business as may properly come before the Special Meeting or any adjournments or postponements thereof. THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED "FOR" PROPOSALS 1 THROUGH 3 ABOVE. RECEIPT OF THE NOTICE OF SPECIAL MEETING OF SHAREHOLDERS AND THE PROXY STATEMENT RELATING TO THE MEETING IS ACKNOWLEDGED BY YOUR EXECUTION OF THIS PROXY. IN THE EVENT THAT THE MERGER IS APPROVED BY TRUST SHAREHOLDERS, PLEASE INDICATE BELOW WHETHER YOU CURRENTLY INTEND TO REDEEM YOUR ARM FUND SHARES IMMEDIATELY FOLLOWING THE MERGER OR WHETHER YOU INTEND TO RETAIN SUCH SHARES. PLEASE NOTE THAT ANY SUCH INTENTION IS NONBINDING AND MAY BE CHANGED AT ANY TIME UP TO OR FOLLOWING THE MERGER. / / REDEEM ARM FUND SHARES / / RETAIN ARM FUND SHARES PLEASE SIGN THIS PROXY EXACTLY AS YOUR NAME APPEARS BELOW. WHEN SHARES ARE HELD BY JOINT TENANTS, BOTH SHOULD SIGN. WHEN SIGNING AS ATTORNEY, EXECUTOR, ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH. IF A CORPORATION, PLEASE SIGN IN FULL CORPORATE NAME BY PRESIDENT OR OTHER AUTHORIZED OFFICER. IF A PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY PARTNER OR OTHER AUTHORIZED PERSON. DATED: ___________, 1995 ------------------------------ Signature [SHAREHOLDER INFORMATION] ------------------------------ Signature if held jointly TO SAVE FURTHER SOLICITATION EXPENSE, PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED POSTAGE-PREPAID ENVELOPE. PROXY AMERICAN ADJUSTABLE RATE TERM TRUST INC.--1998 PIPER JAFFRAY TOWER 222 SOUTH NINTH STREET MINNEAPOLIS, MINNESOTA 55402-3804 THIS PROXY IS BEING SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF AMERICAN ADJUSTABLE RATE TERM TRUST INC.--1998. The undersigned hereby appoints Paul A. Dow, William H. Ellis and Charles N. Hayssen, and each of them, with power to act without the other and with the right of substitution in each, as proxies of the undersigned and hereby authorizes each of them to represent and to vote, as designated below, all the shares of American Adjustable Rate Term Trust Inc.--1998 (the "Trust"), held of record by the undersigned on _______, 1995, at the Special Meeting of shareholders of the Trust to be held on ________, 1995, or any adjournments or postponements thereof, with all powers the undersigned would possess if present in person. All previous proxies given with respect to the Special Meeting are hereby revoked. THE PROXIES ARE INSTRUCTED TO VOTE AS FOLLOWS: 1. PROPOSAL TO APPROVE AN AGREEMENT AND PLAN OF MERGER whereby the Trust will merge with and into ARM Fund, a series of a newly created, open-end management investment company, with ARM Fund as the surviving entity. / / FOR / / AGAINST / / ABSTAIN 2. ELECTION OF DIRECTORS / / FOR all nominees listed below / / WITHHOLD AUTHORITY to vote (except as marked to the for all nominees listed below contrary below) INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, STRIKE A LINE THROUGH THE NOMINEE'S NAME IN THE LIST BELOW. David T. Bennett Jaye F. Dyer Karol D. Emmerich Luella G. Goldberg John T. Golle George Latimer 3. PROPOSAL TO RATIFY OR REJECT THE APPOINTMENT OF KPMG PEAT MARWICK LLP as the Trust's independent public accountants for the current fiscal year. / / FOR / / AGAINST / / ABSTAIN 4. In their discretion, the Proxies are authorized to vote upon such other business as may properly come before the Special Meeting or any adjournments or postponements thereof. THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED "FOR" PROPOSALS 1 THROUGH 3 ABOVE. RECEIPT OF THE NOTICE OF SPECIAL MEETING OF SHAREHOLDERS AND THE PROXY STATEMENT RELATING TO THE MEETING IS ACKNOWLEDGED BY YOUR EXECUTION OF THIS PROXY. IN THE EVENT THAT THE MERGER IS APPROVED BY TRUST SHAREHOLDERS, PLEASE INDICATE BELOW WHETHER YOU CURRENTLY INTEND TO REDEEM YOUR ARM FUND SHARES IMMEDIATELY FOLLOWING THE MERGER OR WHETHER YOU INTEND TO RETAIN SUCH SHARES. PLEASE NOTE THAT ANY SUCH INTENTION IS NONBINDING AND MAY BE CHANGED AT ANY TIME UP TO OR FOLLOWING THE MERGER. / / REDEEM ARM FUND SHARES / / RETAIN ARM FUND SHARES PLEASE SIGN THIS PROXY EXACTLY AS YOUR NAME APPEARS BELOW. WHEN SHARES ARE HELD BY JOINT TENANTS, BOTH SHOULD SIGN. WHEN SIGNING AS ATTORNEY, EXECUTOR, ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH. IF A CORPORATION, PLEASE SIGN IN FULL CORPORATE NAME BY PRESIDENT OR OTHER AUTHORIZED OFFICER. IF A PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY PARTNER OR OTHER AUTHORIZED PERSON. DATED: ___________, 1995 ------------------------------ Signature [SHAREHOLDER INFORMATION] ------------------------------ Signature if held jointly TO SAVE FURTHER SOLICITATION EXPENSE, PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED POSTAGE-PREPAID ENVELOPE. PROXY AMERICAN ADJUSTABLE RATE TERM TRUST INC.--1999 PIPER JAFFRAY TOWER 222 SOUTH NINTH STREET MINNEAPOLIS, MINNESOTA 55402-3804 THIS PROXY IS BEING SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF AMERICAN ADJUSTABLE RATE TERM TRUST INC.--1999. The undersigned hereby appoints Paul A. Dow, William H. Ellis and Charles N. Hayssen, and each of them, with power to act without the other and with the right of substitution in each, as proxies of the undersigned and hereby authorizes each of them to represent and to vote, as designated below, all the shares of American Adjustable Rate Term Trust Inc.--1999 (the "Trust"), held of record by the undersigned on _______, 1995, at the Special Meeting of shareholders of the Trust to be held on ________, 1995, or any adjournments or postponements thereof, with all powers the undersigned would possess if present in person. All previous proxies given with respect to the Special Meeting are hereby revoked. THE PROXIES ARE INSTRUCTED TO VOTE AS FOLLOWS: 1. PROPOSAL TO APPROVE AN AGREEMENT AND PLAN OF MERGER whereby the Trust will merge with and into ARM Fund, a series of a newly created, open-end management investment company, with ARM Fund as the surviving entity. / / FOR / / AGAINST / / ABSTAIN 2. ELECTION OF DIRECTORS / / FOR all nominees listed below / / WITHHOLD AUTHORITY to vote (except as marked to the for all nominees listed below contrary below) INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, STRIKE A LINE THROUGH THE NOMINEE'S NAME IN THE LIST BELOW. David T. Bennett Jaye F. Dyer Karol D. Emmerich Luella G. Goldberg John T. Golle George Latimer 3. PROPOSAL TO RATIFY OR REJECT THE APPOINTMENT OF KPMG PEAT MARWICK LLP as the Trust's independent public accountants for the current fiscal year. / / FOR / / AGAINST / / ABSTAIN 4. In their discretion, the Proxies are authorized to vote upon such other business as may properly come before the Special Meeting or any adjournments or postponements thereof. THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED "FOR" PROPOSALS 1 THROUGH 3 ABOVE. RECEIPT OF THE NOTICE OF SPECIAL MEETING OF SHAREHOLDERS AND THE PROXY STATEMENT RELATING TO THE MEETING IS ACKNOWLEDGED BY YOUR EXECUTION OF THIS PROXY. IN THE EVENT THAT THE MERGER IS APPROVED BY TRUST SHAREHOLDERS, PLEASE INDICATE BELOW WHETHER YOU CURRENTLY INTEND TO REDEEM YOUR ARM FUND SHARES IMMEDIATELY FOLLOWING THE MERGER OR WHETHER YOU INTEND TO RETAIN SUCH SHARES. PLEASE NOTE THAT ANY SUCH INTENTION IS NONBINDING AND MAY BE CHANGED AT ANY TIME UP TO OR FOLLOWING THE MERGER. / / REDEEM ARM FUND SHARES / / RETAIN ARM FUND SHARES PLEASE SIGN THIS PROXY EXACTLY AS YOUR NAME APPEARS BELOW. WHEN SHARES ARE HELD BY JOINT TENANTS, BOTH SHOULD SIGN. WHEN SIGNING AS ATTORNEY, EXECUTOR, ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH. IF A CORPORATION, PLEASE SIGN IN FULL CORPORATE NAME BY PRESIDENT OR OTHER AUTHORIZED OFFICER. IF A PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY PARTNER OR OTHER AUTHORIZED PERSON. DATED: ___________, 1995 ------------------------------ Signature [SHAREHOLDER INFORMATION] ------------------------------ Signature if held jointly TO SAVE FURTHER SOLICITATION EXPENSE, PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED POSTAGE-PREPAID ENVELOPE. EX-17.2 9 EXHIBIT 17.2 EXHIBIT 17.2 FINANCIAL STATEMENTS FROM AMERICAN ADJUSTABLE RATE TERM TRUSTS (1996-1999) * * * SEMI-ANNUAL REPORT 1995 - -------------------------------------------------------------------------------- FINANCIAL STATEMENTS (UNAUDITED) STATEMENTS OF ASSETS AND LIABILITIES FEBRUARY 28, 1995
American American American American Adjustable Adjustable Adjustable Adjustable Rate Term Rate Term Rate Term Rate Term Trust 1996 Trust 1997 Trust 1998 Trust 1999 ----------- ----------- ----------- ----------- ASSETS: Investments in securities at market value* (including repurchase agreements of $27,747,000; $46,476,000; $32,816,000 and $17,032,000, respectively) .............................. $ 221,204,945 452,005,820 460,488,418 267,022,964 Investments in put options (note 5) (cost: $1,528,800; $2,575,600; $2,613,500 and $2,010,000, respectively) .................... 30,412 440,335 1,049,577 1,323,278 Cash in bank on demand deposit ................. 53,806 50,802 185,826 145,470 Receivable for investment securities sold ...... -- 10,772,536 9,608,323 5,024,719 Accrued interest receivable .................... 1,583,689 2,552,686 3,179,373 2,573,348 ----------- ----------- ----------- ----------- Total assets ............................... 222,872,852 465,822,179 474,511,517 276,089,779 ----------- ----------- ----------- ----------- LIABILITIES: Reverse repurchase agreements payable .......... 25,000,000 90,000,000 65,000,000 36,000,000 Accrued investment management fee .............. 52,649 99,539 108,753 63,524 Accrued administrative fee ..................... 22,564 42,660 46,608 27,225 Accrued interest ............................... 115,218 788,541 55,521 236,641 Payable for federal excise taxes (note 2) ...... 96,670 -- -- -- Other accrued expenses ......................... 47,383 71,137 56,408 41,415 ----------- ----------- ----------- ----------- Total liabilities .......................... 25,334,484 91,001,877 65,267,290 36,368,805 ----------- ----------- ----------- ----------- Net assets applicable to outstanding capital stock ........................................ $ 197,538,368 374,820,302 409,244,227 239,720,974 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- REPRESENTED BY: Capital stock - authorized 1 billion shares of $0.01 par value; outstanding, 21,874,282; 42,481,599; 47,141,017 and 28,152,572 shares, respectively (notes 7 and 8) ............... $ 218,743 424,816 471,410 281,526 Additional paid-in capital ..................... 212,231,909 413,478,779 460,593,623 275,899,646 Undistributed net investment income ............ 11,434,011 12,200,609 6,890,639 1,516,163 Accumulated net realized loss on investments ... (21,174,651) (42,707,902) (47,636,669) (32,634,607) Unrealized depreciation of investments ......... (5,171,644) (8,576,000) (11,074,776) (5,341,754) ----------- ----------- ----------- ----------- Total - representing net assets applicable to outstanding capital stock ........... $ 197,538,368 374,820,302 409,244,227 239,720,974 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net asset value per share of outstanding capital stock ................................ $ 9.03 8.82 8.68 8.52 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- * Investments in securities at identified cost ......................................... $ 224,878,201 458,446,555 469,999,271 271,677,996 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
See Accompanying Notes to Financial Statements. - -------------------------------------------------------------------------------- FINANCIAL STATEMENTS (UNAUDITED) STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED FEBRUARY 28, 1995
American American American American Adjustable Adjustable Adjustable Adjustable Rate Term Rate Term Rate Term Rate Term Trust 1996 Trust 1997 Trust 1998 Trust 1999 ------------ ------------ ------------- ------------- INCOME: Interest (net of interest expense of $1,362,361; $3,055,019; $3,124,489 and $1,894,709, respectively) .............................. $ 6,154,161 11,860,545 12,991,817 7,688,337 Fee income (note 2) ............................ 130,648 356,398 300,962 197,723 ------------ ------------ ------------- ------------- Total investment income .................... 6,284,809 12,216,943 13,292,779 7,886,060 ------------ ------------ ------------- ------------- EXPENSES (NOTE 3): Investment management fee ...................... 359,741 671,098 727,704 423,772 Administrative fee ............................. 154,175 287,614 306,057 176,590 Custodian, accounting and transfer agent fees ......................................... 74,016 100,041 100,051 75,549 Reports to shareholders ........................ 56,387 98,846 80,994 47,395 Audit and legal fees ........................... 26,675 25,900 26,240 24,907 Directors' fees ................................ 7,333 8,833 10,333 8,833 Federal excise taxes (note 2) .................. 96,670 -- -- -- Other expenses ................................. -- 59,505 -- -- ------------ ------------ ------------- ------------- Total expenses ............................. 774,997 1,251,837 1,251,379 757,046 ------------ ------------ ------------- ------------- Net investment income ...................... 5,509,812 10,965,106 12,041,400 7,129,014 ------------ ------------ ------------- ------------- NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS: Net realized loss on investments (note 4) ...... (3,070,178) (8,355,566) (8,990,424) (6,969,365) Net realized gain (loss) on closed interest rate swap contracts ............................... 527,325 1,374,546 (9,831,106) (7,968,599) Net realized gain on closed futures contracts .................................... 75,713 148,300 209,151 116,228 ------------ ------------ ------------- ------------- Net realized loss on investments ............. (2,467,140) (6,832,720) (18,612,379) (14,821,736) Net change in unrealized appreciation or depreciation of investments .................. 779,579 1,647,292 10,658,039 8,773,058 ------------ ------------ ------------- ------------- Net loss on investments ...................... (1,687,561) (5,185,428) (7,954,340) (6,048,678) ------------ ------------ ------------- ------------- Net increase in net assets resulting from operations ............................. $ 3,822,251 5,779,678 4,087,060 1,080,336 ------------ ------------ ------------- ------------- ------------ ------------ ------------- -------------
See Accompanying Notes to Financial Statements. 2 - -------------------------------------------------------------------------------- FINANCIAL STATEMENTS (UNAUDITED) STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED FEBRUARY 28, 1995
American American American American Adjustable Adjustable Adjustable Adjustable Rate Term Rate Term Rate Term Rate Term Trust 1996 Trust 1997 Trust 1998 Trust 1999 ----------- ------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Interest and fee income ...................... $ 6,284,809 12,216,943 13,292,779 7,886,060 Expenses ....................................... (774,997) (1,251,837) (1,251,379) (757,046) ----------- ------------- ------------- ------------- Net investment income ...................... 5,509,812 10,965,106 12,041,400 7,129,014 ----------- ------------- ------------- ------------- Adjustments to reconcile net investment income to cash provided by operating expenses: Change in accrued interest receivable ........ 1,238,442 784,028 1,048,441 94,235 Net amortization of bond discount and premium .................................... (1,113,530) (2,100,514) (1,804,849) (994,739) Change in accrued fees and expenses .......... (31,686) 469,996 (257,583) 98,584 ----------- ------------- ------------- ------------- Total adjustments .......................... 93,226 (846,490) (1,013,991) (801,920) ----------- ------------- ------------- ------------- Net cash provided by operating activities ............................... 5,603,038 10,118,616 11,027,409 6,327,094 ----------- ------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of investments ............. 88,991,602 159,338,925 169,659,830 111,945,755 Purchases of investments ....................... (41,689,620) (68,887,500) (63,564,700) (48,867,190) Net sales of short-term securities ............. 39,838,995 11,408,866 69,410,303 45,328,307 Cash received from (paid for) interest rate swap transactions ................................. 527,325 1,374,546 (11,533,881) (9,245,680) Net variation margin received from futures contracts .................................... 75,713 148,300 209,151 116,228 ----------- ------------- ------------- ------------- Net cash provided by investing activities ............................... 87,744,015 103,383,137 164,180,703 99,277,420 ----------- ------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net payments for reverse repurchase agreements ................................... (45,000,000) (35,000,000) (80,000,000) (49,000,000) Tender of fund shares (note 8) ................. (42,827,852) (65,033,835) (79,419,655) (47,240,592) Retirement of fund shares (note 7) ............. (1,289,698) (3,149,477) (3,450,850) (1,740,741) Distributions paid to shareholders ............. (4,314,211) (10,313,160) (12,211,005) (7,728,042) ----------- ------------- ------------- ------------- Net cash used by financing activities ...... (93,431,761) (113,496,472) (175,081,510) (105,709,375) ----------- ------------- ------------- ------------- Net increase (decrease) in cash ................ (84,708) 5,281 126,602 (104,861) Cash at beginning of period .................... 138,514 45,521 59,224 250,331 ----------- ------------- ------------- ------------- Cash at end of period .................... $ 53,806 50,802 185,826 145,470 ----------- ------------- ------------- ------------- ----------- ------------- ------------- ------------- Supplemental disclosure of cash flow information: Cash paid for interest on reverse repurchase agreements ................................. $ 1,510,810 2,608,695 3,380,326 1,802,243 ----------- ------------- ------------- ------------- ----------- ------------- ------------- -------------
See Accompanying Notes to Financial Statements. 3 - -------------------------------------------------------------------------------- FINANCIAL STATEMENTS STATEMENTS OF CHANGES IN NET ASSETS AMERICAN ADJUSTABLE RATE TERM TRUST 1996
Six Months Ended 2/28/95 Year Ended (Unaudited) 8/31/94 ------------- ------------- OPERATIONS: Net investment income ........................ $ 5,509,812 17,520,126 Net realized loss on investments ............... (2,467,140) (10,318,058) Net change in unrealized appreciation or depreciation of investments .................. 779,579 (9,945,239) ------------- ------------- Net increase (decrease) in net assets resulting from operations ................... 3,822,251 (2,743,171) ------------- ------------- DISTRIBUTIONS TO SHAREHOLDERS: From net investment income ..................... (4,314,211) (12,495,376) ------------- ------------- CAPITAL SHARE TRANSACTIONS: Payments for tender of 4,767,018 shares (note 8) ........................................... (42,827,852) -- Payments for retirement of 146,000 and 142,700 shares, respectively (note 7) ................ (1,229,488) (1,215,470) ------------- ------------- Decrease in net assets from capital share transactions ................................ (44,057,340) (1,215,470) ------------- ------------- Total decrease in net assets ............... (44,549,300) (16,454,017) Net assets at beginning of period ................ 242,087,668 258,541,685 ------------- ------------- Net assets at end of period .................... $ 197,538,368 242,087,668 ------------- ------------- ------------- ------------- Undistributed net investment income ............ $ 11,434,011 10,238,410 ------------- ------------- ------------- -------------
STATEMENTS OF CHANGES IN NET ASSETS AMERICAN ADJUSTABLE RATE TERM TRUST 1997
Six Months Ended 2/28/95 Year Ended (Unaudited) 8/31/94 ------------- ------------- OPERATIONS: Net investment income ........................ $ 10,965,106 31,764,264 Net realized loss on investments ............... (6,832,720) (23,803,088) Net change in unrealized appreciation or depreciation of investments .................. 1,647,292 (19,413,596) ------------- ------------- Net increase (decrease) in net assets resulting from operations ................... 5,779,678 (11,452,420) ------------- ------------- DISTRIBUTIONS TO SHAREHOLDERS: From net investment income ..................... (10,313,160) (26,867,223) ------------- ------------- CAPITAL SHARE TRANSACTIONS: Payments for tender of 7,396,113 shares (note 8) ........................................... (65,033,835) -- Payments for retirement of 372,200 and 290,700 shares, respectively (note 7) ................ (3,000,946) (2,437,499) ------------- ------------- Decrease in net assets from capital share transactions ................................ (68,034,781) (2,437,499) ------------- ------------- Total decrease in net assets ............... (72,568,263) (40,757,142) Net assets at beginning of period ................ 447,388,565 488,145,707 ------------- ------------- Net assets at end of period .................... $ 374,820,302 447,388,565 ------------- ------------- ------------- ------------- Undistributed net investment income ............ $ 12,200,609 11,548,663 ------------- ------------- ------------- -------------
See Accompanying Notes to Financial Statements. 4 - -------------------------------------------------------------------------------- FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS AMERICAN ADJUSTABLE RATE TERM TRUST 1998 Six Months Ended 2/28/95 Year Ended (Unaudited) 8/31/94 ------------- ------------- OPERATIONS: Net investment income ........................ $ 12,041,400 33,892,114 Net realized loss on investments ............... (18,612,379) (25,012,875) Net change in unrealized appreciation or depreciation of investments .................. 10,658,039 (25,676,685) ------------- ------------- Net increase (decrease) in net assets resulting from operations ................... 4,087,060 (16,797,446) ------------- ------------- DISTRIBUTIONS TO SHAREHOLDERS: From net investment income ..................... (12,211,005) (31,740,989) ------------- ------------- CAPITAL SHARE TRANSACTIONS: Payments for tender of 9,135,819 shares (note 8) ........................................... (79,419,655) -- Payments for retirement of 413,100 and 335,000 shares, respectively (note 7) ................ (3,273,925) (2,768,772) ------------- ------------- Decrease in net assets from capital share transactions ................................ (82,693,580) (2,768,772) ------------- ------------- Total decrease in net assets ............... (90,817,525) (51,307,207) Net assets at beginning of period ................ 500,061,752 551,368,959 ------------- ------------- Net assets at end of period .................... $ 409,244,227 500,061,752 ------------- ------------- ------------- ------------- Undistributed net investment income ............ $ 6,890,639 7,060,244 ------------- ------------- ------------- -------------
STATEMENTS OF CHANGES IN NET ASSETS AMERICAN ADJUSTABLE RATE TERM TRUST 1999 Six Months Ended 2/28/95 Year Ended (Unaudited) 8/31/94 ------------- ------------- OPERATIONS: Net investment income ........................ $ 7,129,014 20,160,682 Net realized loss on investments ............... (14,821,736) (17,443,179) Net change in unrealized appreciation or depreciation of investments .................. 8,773,058 (14,015,353) ------------- ------------- Net increase (decrease) in net assets resulting from operations ................... 1,080,336 (11,297,850) ------------- ------------- DISTRIBUTIONS TO SHAREHOLDERS: From net investment income ..................... (7,728,042) (19,270,500) In excess of net realized gains ................ -- (183,586) ------------- ------------- Total distributions .......................... (7,728,042) (19,454,086) ------------- ------------- CAPITAL SHARE TRANSACTIONS: Payments for tender of 5,535,062 shares (note 8) ........................................... (47,240,592) -- Payments for retirement of 198,600 and 205,100 shares, respectively (note 7) ................ (1,549,618) (1,674,424) ------------- ------------- Decrease in net assets from capital share transactions ................................ (48,790,210) (1,674,424) ------------- ------------- Total decrease in net assets ............... (55,437,916) (32,426,360) Net assets at beginning of period ................ 295,158,890 327,585,250 ------------- ------------- Net assets at end of period .................... $ 239,720,974 295,158,890 ------------- ------------- ------------- ------------- Undistributed net investment income ............ $ 1,516,163 2,115,191 ------------- ------------- ------------- -------------
See Accompanying Notes to Financial Statements. 5 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (1) ORGANIZATION American Adjustable Rate Term Trusts 1996 (BDJ), 1997 (CDJ), 1998 (DDJ) and 1999 (EDJ) are registered under the Investment Company Act of 1940 (as amended) as diversified, closed-end management investment companies. BDJ, CDJ, DDJ and EDJ commenced operations on September 27, 1990; July 24, 1991; January 30, 1992; and September 24, 1992; respectively, upon completion of initial public offerings of common stock. Shares of the funds are listed on the New York Stock Exchange and the Chicago Stock Exchange. The funds will terminate operations and distribute all of their respective net assets to shareholders on or shortly before March 31, 1996 (BDJ); March 31, 1997 (CDJ); March 31, 1998 (DDJ) and March 31, 1999 (EDJ). (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES INVESTMENTS IN SECURITIES The values of fixed income securities are determined using pricing services or prices quoted by independent brokers. Exchange-listed options are valued at the last sale price and open financial futures contracts are valued at the last settlement price. When market quotations are not readily available, securities are valued at fair value according to methods selected in good faith by the board of directors. Short-term securities with maturities less than 60 days are valued at amortized cost which approximates market value. Securities transactions are accounted for on the date the securities are purchased or sold. Realized gains and losses are calculated on the identified-cost basis. Interest income, including amortization of bond discount and premium computed on a level-yield basis, is accrued daily. OPTION TRANSACTIONS For hedging purposes, the funds may buy and sell put and call options, write covered call options on portfolio securities, write cash-secured puts, and write call options that are not covered for cross-hedging purposes. The risk in writing a call option is that a fund gives up the opportunity for profit if the market price of the security increases. The risk in writing a put option is that a fund may incur a loss if the market price of the security decreases and the option is exercised. The risk in buying an option is that a fund pays a premium whether or not the option is exercised. A fund also has the additional risk of not being able to enter into a closing transaction if a liquid secondary market does not exist. The funds also may write over-the-counter options where the completion of the obligation is dependent upon the credit standing of another party. Option contracts are valued daily, and unrealized appreciation or depreciation is recorded. A fund will realize a gain or loss upon expiration or closing of the option transaction. When an option is exercised, the proceeds on sales for a written call option, the purchase cost for a written put option, or the cost of a security for a purchased put or call option is adjusted by the amount of premium received or paid. FUTURES TRANSACTIONS In order to gain exposure to or protect against changes in the market, the funds may buy and sell interest rate futures contracts and related options. Risks of entering into futures contracts and related options include the possibility of an illiquid market and that a change in the value of the contract or option may not correlate with changes in the value of the underlying securities. Upon entering into a futures contract, the fund is required to deposit either cash or securities in an amount (initial margin) equal to a certain percentage of the contract value. Subsequent payments (variation margin) are made or received by a fund each 6 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (UNAUDITED) day. The variation margin payments are equal to the daily changes in the contract value and are recorded as unrealized gains and losses. A fund recognizes a realized gain or loss when the contract is closed or expires. INTEREST RATE TRANSACTIONS To preserve a return or spread on a particular investment or portion of its portfolio or for other non-speculative purposes, the funds may enter into interest rate swaps and the purchase or sale of interest rate caps and floors. Interest rate swaps involve the exchange of commitments to pay or receive interest, e.g., an exchange of floating-rate payments for fixed rate payments. The purchase of an interest rate cap entitles the purchaser, to the extent that a specified index exceeds a predetermined interest rate, to receive payments of interest on a contractually based notional principal amount from the party selling such an interest rate cap. The purchase of an interest rate floor entitles the purchaser, to the extent that a specified index falls below a predetermined interest rate, to receive payments of interest on a contractually based notional principal amount from the party selling such an interest rate floor. If forecasts of interest rates and other market factors are incorrect, investment performance will diminish compared to what performance would have been if these investment techniques were not used. Even if the forecasts are correct, there is risk that the positions may correlate imperfectly with the asset or liability being hedged. Other risks of entering into these transactions are that a liquid secondary market may not always exist, or that another party to a transaction may not perform. For interest rate swaps, the funds accrue weekly, as an increase or decrease to interest income, the net amount due or owed by the funds. Interest rate swap, cap and floor valuations are based on prices quoted by independent brokers. These valuations represent the net present value of all future cash settlement amounts based on implied forward interest rates. As of February 28, 1995, the funds had no open interest rate swap agreements. SECURITIES PURCHASED ON A WHEN-ISSUED BASIS Delivery and payment for securities that have been purchased by the funds on a forward-commitment or when-issued basis can take place one month or more after the transaction date. During this period, such securities do not earn interest, are subject to market fluctuations and may increase or decrease in value prior to their delivery. The funds maintain, in segregated accounts with their custodian, securities with a market value equal to the amount of their purchase commitments. The purchase of securities on a when-issued or forward-commitment basis may increase the volatility of the funds' NAVs to the extent the funds make such purchases while remaining substantially fully invested. As of February 28, 1995, the funds had no outstanding when-issued or forward commitments. Consistent with their ability to purchase securities on a when-issued or forward- commitment basis, the funds may enter into mortgage "dollar rolls" in which the funds sell securities for delivery in the current month and simultaneously contract with the same counterparty to repurchase similar (same type, coupon and maturity) but not identical securities. As an inducement to "roll over" their purchase commitments, the funds receive negotiated fees. For the six months ended February 28, 1995, such fees earned by the funds amounted to $130,648; $356,398; $300,962 and $197,723 for BDJ, CDJ, DDJ and EDJ, respectively. FEDERAL TAXES Each fund's policy is to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and not be subject to federal income 7 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (UNAUDITED) tax. Therefore, no income tax provision is required. However, BDJ incurred federal excise taxes of $96,670 ($0.004 per share) on income retained by the fund during the 1994 excise tax year. Net investment income and net realized gains (losses) may differ for financial statement and tax purposes primarily because of the recognition of certain foreign currency gains (losses) as ordinary income for tax purposes, and losses deferred due to "wash sale" and "straddle" transactions. The character of distributions made during the year from net investment income or net realized gains may differ from their ultimate characterization for federal income tax purposes. The effect on dividend distributions of certain book-to-tax differences is presented an as "excess distribution" in the statement of changes in net assets and the financial highlights. Also, due to the timing of dividend distributions, the fiscal year in which amounts are distributed may differ from the year that the income or realized gains (losses) were recorded by the fund. DISTRIBUTIONS The funds pay monthly distributions from net investment income. Realized capital gains, if any, will be distributed on an annual basis. These distributions are recorded as of the close of business on the ex-dividend date. Such distributions are payable in cash or, pursuant to the funds' dividend reinvestment plan, reinvested in additional shares of the funds' common stock. Under the plan, fund shares will be purchased in the open market. REPURCHASE AGREEMENTS For repurchase agreements entered into with certain broker-dealers, the funds along with other affiliated registered investment companies may transfer uninvested cash balances into a joint trading account, the daily aggregate of which is invested in repurchase agreements secured by U.S. government and agency obligations. Securities pledged as collateral for all individual and joint repurchase agreements are held by the funds' custodian bank until maturity of the repurchase agreements. Provisions for all agreements ensure the daily market value of the collateral is in excess of the repurchase amount in the event of default. (3) EXPENSES The funds have entered into the following agreements with Piper Capital Management Incorporated (the adviser and administrator): The investment advisory agreement provides the adviser with a monthly investment management fee based on each fund's average weekly net assets computed at the per-annum rate of 0.35%. For its fee, the adviser provides investment advice and, in general, conducts the management and investment activity of the fund. The administration agreement provides the administrator with a monthly fee in an amount equal to an annualized rate of 0.15% of the each fund's average weekly net assets. For its fee, the administrator provides certain reporting, regulatory and record-keeping services for the funds. In addition to the investment management fee and the administrative fee, the funds are responsible for paying most other operating expenses including outside directors' fees and expenses, custodian fees, registration fees, printing and shareholder reports, transfer agent fees and expenses, legal, auditing and accounting services, insurance, interest, taxes and other miscellaneous expenses. 8 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (4) SECURITIES TRANSACTIONS Cost of purchases and proceeds from sales of securities (other than temporary investments in short-term securities) for the six months ended February 28, 1995, were as follows:
Sales Purchases Proceeds ----------- ------------ BDJ .......................................... $ 18,413,992 88,991,602 CDJ .......................................... $ 7,034,889 170,111,461 DDJ .......................................... $ 21,641,424 179,268,153 EDJ .......................................... $ 10,863,492 116,970,474
During the six months ended February 28, 1995, the funds paid Piper Jaffray Inc., an affiliated broker, brokerage commissions of $850; $1,700; $1,700 and $850 for BDJ, CDJ, DDJ and EDJ, respectively. (5) INVESTMENTS IN PUT OPTIONS In order to hedge the value of adjustable rate mortgage securities under certain interest rate scenarios, each fund purchased four-year U.S. Treasury note put option contracts. Each fund will be entitled to a cash payment during the exercise period if at such time yields on the then current four-year U.S. Treasury notes are in excess of the strike yield specified in the option contracts.
American American American American Adjustable Adjustable Adjustable Adjustable Rate Term Rate Term Rate Term Rate Term Trust 1996 Trust 1997 Trust 1998 Trust 1999 -------------- -------------- -------------- -------------- Number of contracts ..... 2,170 4,060 4,550 2,650 Notional value ........ $ 217,000,000 406,000,000 455,000,000 265,000,000 Purchase price ........ $ 1,528,800 2,575,600 2,613,500 2,010,000 Exercise period ......... 3/1/96-3/31/96 3/1/97-3/31/97 3/1/98-3/31/98 3/1/99-3/31/99 Strike yield ............ 11.25% 11.00% 11.00% 10.50%
(6) CAPITAL LOSS CARRYOVER For federal income tax purposes, the funds had capital loss carryovers of $18,707,511; $35,875,182; $29,024,290 and $17,812,871 for BDJ, CDJ, DDJ and EDJ, respectively, at August 31, 1994. If these loss carryovers are not offset by subsequent capital gains, they will expire at various times during 1999 through 2003. It is unlikely the board of directors will authorize a distribution of any net realized capital gains until the available capital loss carryovers have been offset or expire. (7) RETIREMENT OF FUND SHARES The funds' board of directors has approved a plan to repurchase shares of the funds in the open market and retire those shares. Repurchases may only be made when the previous day's closing market price was at a discount from net asset value. Daily repurchases are limited to 25% of the previous four weeks average daily trading volume on the New York Stock Exchange. Under the current plan, cumulative repurchases in each fund cannot exceed 3% of the total shares originally issued. The board of directors will review the plan every six months and may change the amount which may be repurchased. The plan was last reviewed and reapproved by the board of directors on February 9, 1995. Pursuant to the plan, the funds have repurchased and retired the following cumulative number of shares as of February 28, 1995:
Shares Percent of Shares Repurchased Originally Issued ------------ ------------------- BDJ ....................................... 288,700 1.07% CDJ ....................................... 662,900 1.31% DDJ ....................................... 748,100 1.31% EDJ ....................................... 403,700 1.18%
9 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (8) TENDER OFFER OF FUND SHARES On August 22, 1994, shareholders of the funds approved a fundamental policy that allows shareholders of BDJ, CDJ, DDJ, and EDJ to periodically tender their shares back to the respective fund at net asset value. A tender of 5% to 25% of the outstanding shares will be offered annually and is voluntary. Shareholders may elect not to tender their shares or may tender only a portion of their shares. The first tender offer to repurchase up to 25% of each fund's outstanding shares was mailed to shareholders on September 6, 1994. The deadline for participating in the offer was October 3, 1994. The repurchase prices were determined on October 10, 1994, at the close of the New York Stock Exchange (4 p.m. Eastern Time). Proceeds of the tender offer were paid to shareholders on October 17, 1994. The total proceeds (including tender fees) paid by the funds and number and percentage of shares tendered are as follows:
Percentage Shares Proceeds Tendered Tendered Paid --------------- --------- ------------ BDJ .......................................... 18% 4,767,018 $ 42,827,852 CDJ .......................................... 15% 7,396,113 $ 65,033,835 DDJ .......................................... 16% 9,135,819 $ 79,419,655 EDJ .......................................... 16% 5,535,062 $ 47,240,592
(9) PENDING LITIGATION A complaint purporting to be a class action lawsuit has been filed in the United States District Court for the District of Minnesota, by Herman D. Gordon, against DDJ and EDJ, Piper Capital Management Incorporated, Piper Jaffray Inc., and certain affiliated individuals. The complaint, which was filed on October 20, 1994, alleges violations of federal securities laws. DDJ and EDJ intend to defend this lawsuit vigorously. Although it is impossible to predict the outcome, management believes, based on the facts currently available, there will be no material adverse effect on the financial statements of DDJ or EDJ. (10) PROPOSED REORGANIZATION OF THE FUNDS The funds' boards of directors have approved a plan to reorganize the funds, subject to shareholder approval. In effect, the reorganization would convert the four funds from separate closed-end investment companies into a single open-end mutual fund. The funds' termination dates would be eliminated and shares would no longer trade on the New York Stock Exchange or Chicago Stock Exchange at market prices. Instead, shareholders could redeem shares at net asset value on a daily basis and purchase new shares at net asset value plus sales charges, if applicable. The proxy statement will be filed with the Securities and Exchange Commission (SEC) for review as promptly as possible. Following the SEC review, which is expected to take at least 30 days, shareholders will receive a proxy statement in the mail. The proposal to reorganize will be voted upon separately for each fund and must be approved by the vote of two-thirds of the outstanding shares. It is anticipated that, if approved, the merger would occur in August 1995. 10 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (11) QUARTERLY DATA
Net Realized Net Increase Total and Unrealized (Decrease) in Net Distributions Quarter End Investment Net Investment Gains (Losses) Assets Resulting From Net Investment Net Asset Quarter Ended Income Income on Investments from Operations Income Value - ------------------ ---------- ----------------- ------------------- ------------------ ------------------- ----------- AMERICAN ADJUSTABLE RATE TERM TRUST 1996 Per Per Per Per Amount Share Amount Share Amount Share Amount Share ---------- ----- ----------- ----- ---------- ----- ----------- ----- 11/30/94 $ 3,467,478 2,960,212 0.13 (3,750,264) (0.16) (790,052) (0.03) (2,177,611) (0.10) 8.91 2/28/95 2,817,331 2,549,600 0.12 2,062,703 0.09 4,612,303 0.21 (2,136,600) (0.09) 9.03 ---------- ---------- ----- ----------- ----- ---------- ----- ----------- ----- $ 6,284,809 5,509,812 0.25 (1,687,561) (0.07) 3,822,251 0.18 (4,314,211) (0.19) ---------- ---------- ----- ----------- ----- ---------- ----- ----------- ----- ---------- ---------- ----- ----------- ----- ---------- ----- ----------- ----- AMERICAN ADJUSTABLE RATE TERM TRUST 1997 Per Per Per Per Amount Share Amount Share Amount Share Amount Share ---------- ----- ----------- ----- ---------- ----- ----------- ----- 11/30/94 $ 6,734,775 6,055,630 0.15 (10,412,854) (0.23) (4,357,224) (0.08) (5,200,212) (0.12) 8.70 2/28/95 5,482,168 4,909,476 0.12 5,227,426 0.12 10,136,902 0.24 (5,112,948) (0.12) 8.82 ---------- ---------- ----- ----------- ----- ---------- ----- ----------- ----- $ 12,216,943 10,965,106 0.27 (5,185,428) (0.11) 5,779,678 0.16 (10,313,160) (0.24) ---------- ---------- ----- ----------- ----- ---------- ----- ----------- ----- ---------- ---------- ----- ----------- ----- ---------- ----- ----------- ----- AMERICAN ADJUSTABLE RATE TERM TRUST 1998 Per Per Per Per Amount Share Amount Share Amount Share Amount Share ---------- ----- ----------- ----- ---------- ----- ----------- ----- 11/30/94 $ 7,336,741 6,642,223 0.14 (13,545,000) (0.28) (6,902,777) (0.14) (6,183,665) (0.12) 8.56 2/28/95 5,956,038 5,399,177 0.12 5,590,660 0.12 10,989,837 0.24 (6,027,340) (0.12) 8.68 ---------- ---------- ----- ----------- ----- ---------- ----- ----------- ----- $ 13,292,779 12,041,400 0.26 (7,954,340) (0.16) 4,087,060 0.10 (12,211,005) (0.24) ---------- ---------- ----- ----------- ----- ---------- ----- ----------- ----- ---------- ---------- ----- ----------- ----- ---------- ----- ----------- ----- AMERICAN ADJUSTABLE RATE TERM TRUST 1999 Per Per Per Per Amount Share Amount Share Amount Share Amount Share ---------- ----- ----------- ----- ---------- ----- ----------- ----- 11/30/94 $ 4,210,736 3,781,356 0.13 (9,724,958) (0.32) (5,943,602) (0.19) (3,917,275) (0.13) 8.39 2/28/95 3,675,324 3,347,658 0.12 3,676,280 0.14 7,023,938 0.26 (3,810,767) (0.13) 8.52 ---------- ---------- ----- ----------- ----- ---------- ----- ----------- ----- $ 7,886,060 7,129,014 0.25 (6,048,678) (0.18) 1,080,336 0.07 (7,728,042) (0.26) ---------- ---------- ----- ----------- ----- ---------- ----- ----------- ----- ---------- ---------- ----- ----------- ----- ---------- ----- ----------- -----
11 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (12) FINANCIAL HIGHLIGHTS Per-share data for a share of capital stock outstanding throughout each period and selected information for each period are as follows: AMERICAN ADJUSTABLE RATE TERM TRUST 1996
Six Months Period from Ended 2/28/95 Year Ended Year Ended Year Ended 9/27/90* to (Unaudited) 8/31/94 8/31/93 8/31/92 8/31/91 ------------- ---------- ---------- ---------- ----------- PER-SHARE DATA Net asset value, beginning of period ........... $ 9.04 9.60 9.74 9.64 9.53 ------ ---------- ---------- ---------- ----------- Operations: Net investment income .......................... 0.25 0.65 0.75 0.82 0.83 Net realized and unrealized gains (losses) on investments .................................. (0.07) (0.75) (0.27) 0.07 0.05 ------ ---------- ---------- ---------- ----------- Total from operations ........................ 0.18 (0.10) 0.48 0.89 0.88 ------ ---------- ---------- ---------- ----------- Distributions to shareholders: From net investment income ..................... (0.19) (0.46) (0.62) (0.79) (0.77) ------ ---------- ---------- ---------- ----------- Net asset value, end of period ................. $ 9.03 9.04 9.60 9.74 9.64 ------ ---------- ---------- ---------- ----------- ------ ---------- ---------- ---------- ----------- Per share market value, end of period .......... $ 8.63 8.50 9.50 10.25 10.13 ------ ---------- ---------- ---------- ----------- ------ ---------- ---------- ---------- ----------- SELECTED INFORMATION Total investment return, net asset value+ ........ 2.03% (1.06%) 5.18% 9.58% 9.55% Total investment return, market value** .......... 3.75% (5.94%) (1.37%) 9.29% 9.15% Net assets at end of period (in millions) ...... $ 197 242 259 262 260 Ratio of expenses to average weekly net assets*** ...................................... 0.75%++ 0.65% 0.61% 0.62% 0.64%++ Ratio of net investment income to average weekly net assets*** .................................. 5.36%++ 6.97% 7.91% 8.44% 9.90%++ Portfolio turnover rate (excluding short-term securities) .................................... 8% 43% 58% 26% 60% Amount of borrowings outstanding at end of period (in millions)+++ ............................. $ 25 70 86 70 70 Per-share amount of borrowings outstanding at end of period .................................... $ 1.14 2.61 3.18 2.60 2.60 Per-share asset coverage of borrowings outstanding at end of period++++ ......................... $ 10.17 11.65 12.78 12.34 12.24
* Commencement of operations. ** Total investment return, market value, is based on the change in market price of a share during the period and assumes reinvestment of distributions at actual prices pursuant to the fund's dividend reinvestment plan. *** Includes 0.09% and 0.01% from federal excise taxes in the six months ended february 28, 1995 and fiscal year 1994, respectively. + Total investment return, net asset value, is based on the change in net asset value of a share during the period and assumes reinvestment of distributions at net asset value. ++ Adjusted to an annual basis. +++ Securities purchased on a when-issued basis for which liquid, high-grade obligations are maintained in a segregated account are not considered borrowings. see footnote 2 in the notes to financial statements. ++++ Represents net assets (excluding borrowings) divided by shares outstanding. 12 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (12) FINANCIAL HIGHLIGHTS (CONTINUED) Per-share data for a share of capital stock outstanding throughout each period and selected information for each period are as follows: AMERICAN ADJUSTABLE RATE TERM TRUST 1997
Six Months Period from Ended 2/28/95 Year Ended Year Ended Year Ended 7/24/91* to (Unaudited) 8/31/94 8/31/93 8/31/92 8/31/91 ------------- ---------- ---------- ---------- ----------- PER-SHARE DATA Net asset value, beginning of period ........... $ 8.90 9.66 9.68 9.68 9.58 ------ ---------- ---------- ---------- ----------- Operations: Net investment income .......................... 0.27 0.63 0.72 0.78 0.07 Net realized and unrealized gains (losses) on investments .................................. (0.11) (0.86) (0.10) 0.05 0.03 ------ ---------- ---------- ---------- ----------- Total from operations ........................ 0.16 (0.23) 0.62 0.83 0.10 ------ ---------- ---------- ---------- ----------- Distributions to shareholders: From net investment income ..................... (0.24) (0.53) (0.63) (0.80) -- From net realized gains ........................ -- -- (0.01) (0.03) -- ------ ---------- ---------- ---------- ----------- Total distributions to shareholders .......... (0.24) (0.53) (0.64) (0.83) -- ------ ---------- ---------- ---------- ----------- Net asset value, end of period ................. $ 8.82 8.90 9.66 9.68 9.68 ------ ---------- ---------- ---------- ----------- ------ ---------- ---------- ---------- ----------- Per share market value, end of period .......... $ 8.25 8.50 9.38 10.00 10.25 ------ ---------- ---------- ---------- ----------- ------ ---------- ---------- ---------- ----------- SELECTED INFORMATION Total investment return, net asset value+ ........ 1.80% (2.46%) 6.73% 8.97% 1.04% Total investment return, market value** .......... (0.13%) (3.96%) 0.04% 5.87% 2.50% Net assets at end of period (in millions) ...... $ 375 447 488 489 212 Ratio of expenses to average weekly net assets ... 0.65%++ 0.61% 0.58% 0.60% 0.60%++ Ratio of net investment income to average weekly net assets ..................................... 5.71%++ 6.76% 7.55% 7.99% 7.88%++ Portfolio turnover rate (excluding short-term securities) .................................... 1% 43% 47% 38% 10% Amount of borrowings outstanding at end of period (in millions)+++ ............................. $ 90 125 162 143 50 Per-share amount of borrowings outstanding at end of period .................................... $ 2.12 2.49 3.20 2.83 2.29 Per-share asset coverage of borrowings outstanding at end of period++++ ......................... $ 10.94 11.39 12.86 12.51 11.97
* Commencement of operations. ** Total investment return, market value, is based on the change in market price of a share during the period and assumes reinvestment of distributions at actual prices pursuant to the fund's dividend reinvestment plan. + Total investment return, net asset value, is based on the change in net asset value of a share during the period and assumes reinvestment of distributions at net asset value. ++ Adjusted to an annual basis. +++ Securities purchased on a when-issued basis for which liquid, high-grade obligations are maintained in a segregated account are not considered borrowings. see footnote 2 in the notes to financial statements. ++++ Represents net assets (excluding borrowings) divided by shares outstanding. 13 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (12) FINANCIAL HIGHLIGHTS (CONTINUED) Per-share data for a share of capital stock outstanding throughout each period and selected information for each period are as follows: AMERICAN ADJUSTABLE RATE TERM TRUST 1998
Six Months Period from Ended 2/28/95 Year Ended Year Ended 1/30/92* to (Unaudited) 8/31/94 8/31/93 8/31/92 ------------- ---------- ---------- ----------- PER-SHARE DATA Net asset value, beginning of period ........... $ 8.82 9.67 9.74 9.58 ------ ---------- ---------- ----------- Operations: Net investment income .......................... 0.26 0.60 0.69 0.43 Net realized and unrealized gains (losses) on investments .................................. (0.16) (0.89) (0.10) 0.08 ------ ---------- ---------- ----------- Total from operations ........................ 0.10 (0.29) 0.59 0.51 ------ ---------- ---------- ----------- Distributions to shareholders: From net investment income ..................... (0.24) (0.56) (0.66) (0.35) ------ ---------- ---------- ----------- Net asset value, end of period ................. $ 8.68 8.82 9.67 9.74 ------ ---------- ---------- ----------- ------ ---------- ---------- ----------- Per share market value, end of period .......... $ 8.13 8.38 9.63 9.88 ------ ---------- ---------- ----------- ------ ---------- ---------- ----------- SELECTED INFORMATION Total investment return, net asset value+ ........ 1.30% (3.18%) 6.24% 5.49% Total investment return, market value** .......... 0.08% (7.48%) 4.23% 2.31% Net assets at end of period (in millions) ...... $ 409 500 551 555 Ratio of expenses to average weekly net assets ... 0.59%++ 0.60% 0.58% 0.58%++ Ratio of net investment income to average weekly net assets ..................................... 5.70%++ 6.39% 7.25% 7.70%++ Portfolio turnover rate (excluding short-term securities) .................................... 4% 39% 39% 41% Amount of borrowings outstanding at end of period (in millions)+++ ............................. $ 65 145 145 145 Per-share amount of borrowings outstanding at end of period .................................... $ 1.38 2.56 2.54 2.54 Per-share asset coverage of borrowings outstanding at end of period++++ ......................... $ 10.06 11.38 12.21 12.28
* Commencement of operations. ** Total investment return, market value, is based on the change in market price of a share during the period and assumes reinvestment of distributions at actual prices pursuant to the fund's dividend reinvestment plan. + Total investment return, net asset value, is based on the change in net asset value of a share during the period and assumes reinvestment of distributions at net asset value. ++ Adjusted to an annual basis. +++ Securities purchased on a when-issued basis for which liquid, high-grade obligations are maintained in a segregated account are not considered borrowings. see footnote 2 in the notes to financial statements. ++++ Represents net assets (excluding borrowings) divided by shares outstanding. 14 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (12) FINANCIAL HIGHLIGHTS (CONTINUED) Per-share data for a share of capital stock outstanding throughout each period and selected information for each period are as follows: AMERICAN ADJUSTABLE RATE TERM TRUST 1999
Six Months Period from Ended 2/28/95 Year Ended 9/24/92* to (Unaudited) 8/31/94 8/31/93 ------------- ---------- ----------- PER-SHARE DATA Net asset value, beginning of period ........... $ 8.71 9.61 9.58 ----- ---------- ----------- Operations: Net investment income .......................... 0.25 0.60 0.60 Net realized and unrealized losses on investments .................................. (0.18) (0.93) (0.04) ----- ---------- ----------- Total from operations ........................ 0.07 (0.33) 0.56 ----- ---------- ----------- Distributions to shareholders: From net investment income ..................... (0.26) (0.56) (0.53) In excess of net realized gains ................ -- (0.01) -- ----- ---------- ----------- Total distributions to shareholders .......... (0.26) (0.57) (0.53) ----- ---------- ----------- Net asset value, end of period ................. $ 8.52 8.71 9.61 ----- ---------- ----------- ----- ---------- ----------- Per share market value, end of period .......... $ 7.88 8.25 9.63 ----- ---------- ----------- ----- ---------- ----------- SELECTED INFORMATION Total investment return, net asset value+ ........ 0.81% (3.61%) 6.05% Total investment return, market value** .......... (1.31%) (8.75%) 1.62% Net assets at end of period (in millions) ...... $ 240 295 328 Ratio of expenses to average weekly net assets ... 0.61%++ 0.60% 0.57%++ Ratio of net investment income to average weekly net assets ..................................... 5.77%++ 6.40% 6.76%++ Portfolio turnover rate (excluding short-term securities) .................................... 4% 35% 40% Amount of borrowings outstanding at end of period (in millions)+++ ............................. $ 36 85 102 Per-share amount of borrowings outstanding at end of period .................................... $ 1.28 2.51 3.00 Per-share asset coverage of borrowings outstanding at end of period++++ ......................... $ 9.79 11.22 12.61
* Commencement of operations. ** Total investment return, market value, is based on the change in market price of a share during the period and assumes reinvestment of distributions at actual prices pursuant to the fund's dividend reinvestment plan. + Total investment return, net asset value, is based on the change in net asset value of a share during the period and assumes reinvestment of distributions at net asset value. ++ Adjusted to an annual basis. +++ Securities purchased on a when-issued basis for which liquid, high-grade obligations are maintained in a segregated account are not considered borrowings. see footnote 2 in the notes to financial statements. ++++ Represents net assets (excluding borrowings) divided by shares outstanding. 15 - -------------------------------------------------------------------------------- INVESTMENTS IN SECURITIES (UNAUDITED) AMERICAN ADJUSTABLE RATE TERM TRUST 1996 FEBRUARY 28, 1995
Principal Market Name of Issuer Amount Value (a) - --------------------------------------------------------- -------------- ------------ (PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS) MORTGAGE-BACKED SECURITIES (77.5%): U.S. AGENCY ADJUSTABLE-RATE MORTGAGES (43.0%): 7.41%, FHLMC, 10/1/22 .............................. $ 2,976,706 3,039,958 6.37%, FHLMC, 7/1/23 ................................. 7,543,059 7,651,490 6.07%, FHLMC, 9/1/23 ................................. 1,619,298 1,601,081 6.88%, FHLMC, 6/1/21 ................................. 2,711,992 2,774,693 7.25%, FHLMC, 11/1/16 ................................ 10,395,903(b) 10,493,313 7.41%, FHLMC, 6/1/18 ................................. 2,243,436 2,285,500 6.93%, FHLMC, 5/1/19 ................................. 2,244,192 2,279,246 7.04%, FHLMC, 10/1/18 ................................ 7,158,192(b) 7,274,513 7.37%, FHLMC, 10/1/19 ................................ 2,744,581 2,815,337 6.50%, FHLMC, 8/1/20 ................................. 10,918,192 11,054,669 6.00%, FHLMC, 1/1/24 ................................. 1,679,507 1,679,507 6.24%, FHLMC, 1/1/24 ................................. 1,890,572 1,904,751 6.49%, FNMA, 7/1/17 .................................. 1,945,441 1,929,625 6.62%, FNMA, 4/1/18 .................................. 5,218,850 5,287,321 6.96%, FNMA, 1/1/28 .................................. 2,507,498 2,549,023 7.07%, FNMA, 5/1/27 .................................. 1,847,177 1,881,239 6.71%, FNMA, 1/1/20 .................................. 2,185,878 2,236,415 6.03%, FNMA, 12/1/23 ................................. 3,794,163 3,749,088 6.07%, FNMA, 8/1/23 .................................. 2,305,412 2,339,993 7.00%, GNMA II, 8/20/23 .............................. 5,105,190(b) 5,143,479 6.00%, GNMA II, 5/20/21 .............................. 4,909,887(b) 4,897,612 ------------ 84,867,853 ------------ COLLATERALIZED MORTGAGE OBLIGATIONS AND OTHER MORTGAGE-BACKED SECURITIES (34.6%): ADJUSTABLE RATE (34.6%): 6.48%, Citicorp Mortgage Securities, Series 1991-14, Class M, 9/25/21 .................................... 5,879,874 5,802,701 7.36%, Columbia Savings and Loan, Series 1987-1, Class A, 12/1/17 .......................................... 396,157 396,977 7.79%, Donaldson, Lufkin and Jenrette, Series 1992-MF3, Class A3, 5/25/22 ......................... 6,000,000 6,093,750 7.00%, FHLMC, Series 1249, Class A, 4/15/22 .......... 15,144,357 15,115,885 6.47%, Meridian Asset Acceptance Corporation, Series 1991-1, Class A1, 4/27/20 ........................... 2,400,677 2,367,668 5.69%, Merrill Lynch Mortgage Investors, Series 1993-D, Class A1-2, 10/25/23 ........................ 2,000,000 1,924,380 6.00%, Merrill Lynch Mortgage Investors, Series 1993-H, Class A1-2, 10/25/23 ........................ 2,320,000 2,228,105 6.00%, Paine Webber Mortgage Acceptance Corporation, Series 1993-10, Class M1, 11/25/23 .................. 13,226,235 13,160,104 7.01%, Paine Webber Mortgage Acceptance Corporation, Series 1993-8, Class M2, 8/25/23 .................... 5,115,940 4,860,143 6.63%, Residential Funding Corporation, Series 1992-S25, Class A, 7/25/22 .......................... 5,054,286 5,065,254
Principal Market Name of Issuer Amount Value (a) - --------------------------------------------------------- -------------- ------------ 7.54%, Residential Funding Corporation, Series 1993-S8, Class A, 2/25/23 ......................... $ 5,651,338 5,722,601 6.70%, Ryland Mortgage Securities, Series 1991-B1, Class 1, 3/25/20 .................................... 1,770,646 1,784,756 7.04%, Salomon Brothers Mortgage, Series 1987-2, Class A, 12/25/16 ......................................... 3,122,465 3,044,403 5.61%, Salomon Brothers Mortgage, Series 1988-3, Class A, 6/25/17 .......................................... 751,830 732,094 ------------ 68,298,821 ------------ Total Mortgage-Backed Securities (cost: $157,202,562) ............................... 153,166,674 ------------ MUNICIPAL ZERO-COUPON SECURITIES (C) (20.4%): Alabama State Public School and College, 6.73%, 11/1/96 ............................................. 725,000 662,469 Alief, Texas, School District, 4.24%, 2/15/97 ........ 760,000 690,650 Arlington, Texas, Independent School District, 6.10%-6.78%, 2/15/96 ................................ 680,000 649,400 Bellevue, Washington Convention Center, 6.06%, 12/1/96 ............................................. 1,000,000 918,225 California State Custodial Receipts, 4.63%-4.68%, 7/25/95-4/25/96 ..................................... 13,209,863 12,510,606 Clairton, Pennsylvania, School District, 6.83%, 11/1/96 ............................................. 1,035,000 949,613 Corpus Christi, Texas, Series A, 6.78%, 11/1/96 ...... 735,000 678,488 Eastern Illinois University Facility, 5.67%, 10/1/96 ............................................. 1,055,000 985,106 Illinois Educational Facility, 6.07%, 7/1/96 ......... 5,550,000 5,223,938 Maricopa County, Arizona, School District, 6.48%, 7/1/96 .............................................. 3,050,000 2,863,188 Mesa, Arizona, General Obligation, 6.01%, 7/1/96 ..... 1,845,000 1,729,688 North Slope Boro, Alaska, Series I, 5.07%-5.72%, 6/30/96 ............................................. 9,800,000 9,163,000 Orleans Parish, Louisiana, School Board, 5.83%, 8/1/96 .............................................. 400,000 426,000 Phoenix, Arizona, Excise Tax Parking Revenue, 6.22%, 7/1/96 .............................................. 1,000,000 940,000 Illinois State Sales Tax Revenue, 6.38%, 6/15/96 ...................................... 500,000 471,875 University of Illinois Auxillary Facility, 6.01%, 4/1/96 .............................................. 1,140,000 1,085,850 Vermont State College Savers, General Obligation, 5.75%, 10/15/96 ..................................... 370,000 343,175 ------------ Total Municipal Zero-Coupon Securities (cost: $39,928,639) ................................ 40,291,271 ------------
See Accompanying Notes to Investments in Securities. 16 - -------------------------------------------------------------------------------- INVESTMENTS IN SECURITIES (UNAUDITED) AMERICAN ADJUSTABLE RATE TERM TRUST 1996 (CONTINUED)
Principal Market Name of Issuer Amount Value (a) - --------------------------------------------------------- -------------- ------------ SHORT-TERM SECURITIES (14.0%): Repurchase agreement with Morgan Stanley in a joint trading account collateralized by U.S. government agency securities, acquired on 2/28/95, accrued interest at repurchase date of $4,702, 6.10%, 3/1/95 (cost: $27,747,000) ............................... $ 27,747,000 27,747,000 ------------ Total Investments in Securities (cost: $224,878,201) (d) ......................... $ 221,204,945 ------------ ------------
NOTES TO INVESTMENTS IN SECURITIES: (A) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO THE FINANCIAL STATEMENTS. (B) ON FEBRUARY 28, 1995, SECURITIES VALUED AT $26,618,103 ARE PLEDGED AS COLLATERAL FOR THE FOLLOWING OUTSTANDING REVERSE REPURCHASE AGREEMENTS:
NAME OF BROKER AND DESCRIPTION ACQUISITION ACCRUED OF AMOUNT DATE RATE* DUE INTEREST COLLATERAL - ------------ ---------- --------- --------- --------- ------------ $25,000,000 2/2/95 6.15% 5/30/95 $115,218 (1) *INTEREST RATE IS AS OF FEBRUARY 28, 1995. RATE IS BASED ON THE LONDON INTERBANK OFFERED RATE (LIBOR) AND RESETS MONTHLY.
NAME OF BROKER AND DESCRIPTION OF COLLATERAL: (1) MORGAN STANLEY: GNMA II, ARM, 7.00%, 8/20/23, $5,105,190 PAR. GNMA II, ARM, 6.00%, 5/20/21, $4,909,887 PAR. FHLMC, ARM, 7.25%, 11/1/16, $10,395,903 PAR. FHLMC, ARM, 7.04%, 10/1/18, $5,986,419 PAR. (C) FOR ZERO-COUPON INVESTMENTS, THE INTEREST RATE SHOWN IS THE EFFECTIVE YIELD ON THE DATE OF PURCHASE. (D) AT FEBRUARY 28, 1995, FOR FEDERAL INCOME TAX PURPOSES, THE COST OF INVESTMENTS IN SECURITIES, INCLUDING THE PUT OPTIONS DESCRIBED IN NOTE 5 TO THE FINANCIAL STATEMENTS, APPROXIMATED $226,407,001. THE AGGREGATE GROSS UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED ON THIS COST WERE AS FOLLOWS:
GROSS UNREALIZED APPRECIATION .... $ 465,593 GROSS UNREALIZED DEPRECIATION ...... (5,637,237) ------------- NET UNREALIZED DEPRECIATION .... $ (5,171,644) ------------- -------------
AMERICAN ADJUSTABLE RATE TERM TRUST 1997 FEBRUARY 28, 1995
Principal Market Name of Issuer Amount Value (a) - --------------------------------------------------------- -------------- ------------ (PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS) MORTGAGE-BACKED SECURITIES (87.2%): U.S. AGENCY ADJUSTABLE-RATE MORTGAGES (46.4%): 7.10%, FHLMC, 5/1/20 ............................... $ 2,485,069 2,545,208 6.86%, FHLMC, 6/1/21 ................................. 4,735,260(b) 4,868,416 7.41%, FHLMC, 10/1/22 ................................ 5,953,412 6,079,922 6.07%, FHLMC, 9/1/23 ................................. 1,619,298 1,601,081 6.34%, FHLMC, 8/1/19 ................................. 2,013,726 2,038,898 7.30%, FHLMC, 1/1/19 ................................. 209,536 214,118 5.94%, FHLMC, 4/1/22 ................................. 1,050,711 1,065,484 6.10%, FHLMC, 10/1/23 ................................ 1,684,822 1,695,352 6.00%, FHLMC, 1/1/24 ................................. 2,522,527(b) 2,522,527 6.24%, FHLMC, 1/1/24 ................................. 4,145,150 4,176,238 7.53%, FNMA, 1/1/18 .................................. 2,137,600 2,180,352 6.99%, FNMA, 1/1/29 .................................. 3,856,473 3,909,499 6.97%, FNMA, 5/1/18 .................................. 1,635,526 1,656,984 7.07%, FNMA, 8/1/27 .................................. 9,372,030(b) 9,506,706 6.62%, FNMA, 4/1/18 .................................. 8,744,722 8,859,452 6.96%, FNMA, 1/1/28 .................................. 1,355,888 1,378,341 6.98%, FNMA, 3/1/28 .................................. 10,724,485(b) 10,871,947 6.62%, FNMA, 1/1/20 .................................. 3,252,843(b) 3,252,843 6.83%, FNMA, 11/1/20 ................................. 5,837,002 5,917,261 6.78%, FNMA, 12/1/20 ................................. 8,316,137(b) 8,430,484 6.28%, FNMA, 5/1/21 .................................. 7,408,603(b) 7,552,107 7.32%, FNMA, 8/1/21 .................................. 3,956,202(b) 4,017,998 6.01%, FNMA, 12/1/23 ................................. 3,897,917 3,934,441 6.08%, FNMA, 12/1/23 ................................. 3,813,400(b) 3,856,301 6.12%, FNMA, 1/1/24 .................................. 3,593,808(b) 3,631,974 6.13%, FNMA, 7/1/23 .................................. 4,987,106 5,050,691 5.96%, FNMA, 2/1/24 .................................. 8,857,861(b) 8,780,355 4.01%, FNMA, 3/1/24 .................................. 4,505,705 4,432,487 6.63%, GNMA II, 11/20/21 ............................. 4,017,589(b) 4,050,212 6.50%, GNMA II, 6/20/22 .............................. 1,213,992 1,227,650 6.75%, GNMA II, 6/20/23 .............................. 1,730,580 1,737,069 6.50%, GNMA II, 10/20/23 ............................. 4,613,352(b) 4,590,285 6.50%, GNMA II, 11/20/23 ............................. 4,599,503(b) 4,576,506 5.50%, GNMA II, 12/20/23 ............................. 9,147,443(b) 8,735,808 4.50%, GNMA II, 5/20/24 .............................. 5,025,168(b) 4,761,347 4.50%, GNMA II, 4/20/24 .............................. 739,542 685,926 4.50%, GNMA II, 6/20/24 .............................. 4,292,885(b) 4,067,509 6.00%, GNMA II, 8/20/21 .............................. 7,807,772(b) 7,798,012 6.13%, GNMA II, 10/20/21 ............................. 7,708,113(b) 7,606,906 ------------ 173,864,697 ------------ COLLATERALIZED MORTGAGE OBLIGATIONS AND OTHER MORTGAGE-BACKED SECURITIES (40.8%): ADJUSTABLE RATE (40.8%): 7.79%, Donaldson, Lufkin and Jenrette, Series 1992-MF3, Class A3, 5/25/22 ......................... 17,000,000 17,265,621 7.17%, First Federal of Rochester, Series 1988-SE1, Class A, 10/25/18 ................................... 3,122,188 3,091,942 6.78%, Glendale Federal Savings, Series 1989-5, Class A, 4/1/29 ........................................... 19,295,932 19,155,265 6.89%, Greenwich Capital Acceptance, Series 1992-LB5, Class A3, 7/25/22 ................................... 12,883,000 12,432,095 6.76%, Merrill Lynch Mortgage Investors, Series 1988-M, Class A, 10/1/18 ............................ 3,386,628 3,360,009
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES. - -------------------------------------------------------------------------------- INVESTMENTS IN SECURITIES (UNAUDITED) AMERICAN ADJUSTABLE RATE TERM TRUST 1997 (CONTINUED)
Principal Market Name of Issuer Amount Value (a) - --------------------------------------------------------- -------------- ------------ 6.81%, Merrill Lynch Mortgage Investors, Series 1993-C, Class A4, 3/15/18 ......................... $ 7,000,000 6,816,250 5.69%, Merrill Lynch Mortgage Investors, Series 1993-D, Class A1-2, 10/25/23 ........................ 6,000,000 5,773,140 6.00%, Merrill Lynch Mortgage Investors, Series 1993-H, Class A1-2, 10/25/23 ........................ 6,523,000 6,264,624 6.35%, Paine Webber Mortgage Acceptance Corporation, Series 1993-11, Class M1, 12/1/23 ................... 2,890,709 2,878,063 7.19%, Prudential Home Mortgage Securities, Series 1991-9, Class A1, 7/25/21 ........................... 7,220,737 7,286,518 6.63%, Residential Funding Corporation, Series 1992-S25, Class A, 7/25/22 .......................... 12,635,715 12,663,134 7.54%, Residential Funding Corporation, Series 1993-S8, Class A, 2/25/23 ........................... 8,477,007 8,583,902 7.23%, Resolution Trust Corporation, Series 1991-10, Class A1, 5/25/21 ................................... 5,604,194 5,574,267 6.74%, Resolution Trust Corporation, Series 1991-2, Class B, 4/25/21 .................................... 5,000,000 4,997,000 7.39%, Resolution Trust Corporation, Series 1991-8, Class A-1, 12/25/20 ................................. 12,625,787 12,955,241 6.78%, Resolution Trust Corporation, Series 1992-4, Class B2, 7/25/28 ................................... 15,000,601 14,871,690 7.39%, Resolution Trust Corporation, Series 1992-9, Class A6, 7/25/20 ................................... 2,053,453 2,004,684 6.70%, Ryland Mortgage Securities, Series 1991-B1, Class 1, 3/25/20 .................................... 6,843,105 6,897,636 ------------ 152,871,081 ------------ Total Mortgage-Backed Securities (cost: $335,696,515) ............................... 326,735,778 ------------ MUNICIPAL ZERO-COUPON SECURITIES (C) (21.0%): Austin, Texas, Public Parking, 5.72%-6.03%, 9/1/97 ... 5,000,000 4,443,750 Bellevue, Washington, Convention Center, 6.24%, 12/1/97 ............................................. 1,370,000 1,188,544 Bismark, North Dakota, Hospital Revenue, 6.19%, 5/1/97 .............................................. 2,530,000 2,289,650 Blue Ridge Texas, West Municipal Utility General Obligation, 6.09%, 4/1/97 ........................... 440,000 399,850 Boulder, Colorado, School District, 6.26%, 12/15/97 ............................................ 4,000,000 3,530,000 Calallen, Texas, School District, 5.88%, 2/15/98 ..... 1,485,000 1,282,669 Cambria, Pennsylvania, School District, 6.39%, 8/15/97 ............................................. 1,030,000 912,838
Principal Market Name of Issuer Amount Value (a) - --------------------------------------------------------- -------------- ------------ Cypress-Fairbanks, Texas, School District, 5.82%-5.93%, 2/1/98 ............................... $ 8,340,000 7,203,675 Eastern Camden, New Jersey, School District, 5.88%, 9/1/97 .............................................. 500,000 442,500 Illinois State College Savers, 5.93%, 8/1/98 ......... 890,000 744,263 Intermountain Power Authority, 3.10%, 7/1/97 ......... 470,000 478,813 Irving, Texas, School District, 6.31%, 2/15/97 ....... 960,000 871,200 Kansas City, Kansas Utility Systems Revenue, 6.24%-6.26%, 9/1/97 ................................. 6,520,000 5,805,412 Kentucky Development Finance Authority, 5.60%-6.08%, 11/1/97 ............................................. 1,980,000 1,732,500 Kentucky Turnpike Revenue, 3.95%, 7/1/97 ............. 1,000,000 1,057,500 Lewisburg, Pennsylvania, School District, 6.29%, 8/15/97 ............................................. 500,000 444,375 Louisiana College Savers, General Obligation, 5.99%, 7/1/97 .............................................. 4,000,000 3,580,000 Lubbock, Texas, Electric Power, 6.29%, 4/15/97 ....... 1,360,000 1,234,200 Maricopa County, Arizona, School District, 5.47%, 7/1/97 .............................................. 1,010,000 900,163 Massachusetts, General Obligation Bonds, 5.96%-5.98%, 6/1/98 .............................................. 12,345,000 10,462,388 McHenry County, Illinois, Conservation District, 5.88%, 2/1/98 ....................................... 1,580,000 1,360,775 Michigan Municipal Bond Authority, 6.02%, 5/15/97 .... 1,500,000 1,338,750 North Montgomery, Indiana, School Bond, 5.82%-5.98%, 1/1/97-7/1/98 ....................................... 2,100,000 1,834,875 North Slope Boro, Alaska, 5.88%-6.39%, 6/30/97-6/30/98 ..................................... 12,000,000 10,340,000 Oklahoma City, Oklahoma, Water and Sewer, 5.83%, 7/1/97 .............................................. 1,000,000 898,750 Rosemont, Illinois, Various Purpose, 6.22%, 12/1/97 ............................................. 2,670,000 2,319,563 Sioux City, Iowa, Hospital Revenue, 2.93%, 1/1/97 .... 11,510,000 11,697,039 ------------ Total Municipal Zero-Coupon Securities (cost: $76,274,040) ................................ 78,794,042 ------------ SHORT-TERM SECURITIES (12.4%): Repurchase agreement with Morgan Stanley in a joint trading account collateralized by U.S. government agency securities, acquired on 2/28/95, accrued interest at repurchase date of $7,707, 5.97%, 3/1/95 (cost: $46,476,000) ................................. 46,476,000 46,476,000 ------------ Total Investments in Securities (cost: $458,446,555) (d) ......................... $ 452,005,820 ------------ ------------
- -------------------------------------------------------------------------------- INVESTMENTS IN SECURITIES (UNAUDITED) NOTES TO INVESTMENTS IN SECURITIES: (A) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO THE FINANCIAL STATEMENTS. (B) ON FEBRUARY 28, 1995, SECURITIES VALUED AT $97,556,369 WERE PLEDGED AS COLLATERAL FOR THE FOLLOWING OUTSTANDING REVERSE REPURCHASE AGREEMENTS:
NAME OF BROKER AND DESCRIPTION ACQUISITION ACCRUED OF AMOUNT DATE RATE* DUE INTEREST COLLATERAL - ------------ ---------- --------- --------- --------- ------------ $50,000,000 2/1/95 6.16% 8/1/95 $239,652 (1) 40,000,000 12/15/94 6.50% 3/15/95 548,889 (2) - ------------ --------- $90,000,000 $788,541 - ------------ --------- - ------------ --------- *INTEREST RATE IS AS OF FEBRUARY 28, 1995. RATES ARE BASED ON THE LONDON INTERBANK OFFERED RATE (LIBOR) AND RESET MONTHLY OR QUARTERLY.
NAME OF BROKER AND DESCRIPTION OF COLLATERAL: (1) MORGAN STANLEY: GNMA II, ARM, 4.50%, 5/20/24, $5,025,168 PAR. GNMA II, ARM, 4.50%, 6/20/24, $4,292,885 PAR. GNMA II, ARM, 6.63%, 11/20/21, $4,017,589 PAR. FNMA, ARM, 7.07%, 8/1/27, $2,343,008 PAR. FNMA, ARM, 6.78%, 12/1/20, $8,316,137 PAR. FNMA, ARM, 7.32%, 8/1/21, $3,956,202 PAR. FNMA, ARM, 6.08%, 12/1/23, $3,813,400 PAR. FNMA, ARM, 6.12%, 1/1/24, $3,194,496 PAR. FNMA, ARM, 5.96%, 2/1/24, $8,857,861 PAR. FNMA, ARM, 6.62%, 1/1/20, $3,252,843 PAR. FHLMC, ARM, 6.86%, 6/1/21, $4,735,260 PAR. FHLMC, ARM, 6.00%, 1/1/24, $2,522,527 PAR. (2) MORGAN STANLEY: GNMA II, ARM, 6.00%, 8/20/21, $7,807,772 PAR. GNMA II, ARM, 6.13%, 10/20/21, $7,708,113 PAR. GNMA II, ARM, 6.50%, 11/20/23, $4,599,503 PAR. GNMA II, ARM, 6.50%, 10/20/23, $4,613,352 PAR. GNMA II, ARM, 5.50%, 12/20/23, $9,147,443 PAR. FNMA, ARM, 6.28%, 5/1/21, $910,752 PAR. FNMA, ARM, 7.07%, 8/1/27, $5,154,617 PAR. FNMA, ARM, 6.98%, 3/1/28, $3,865,529 PAR. (C) FOR ZERO-COUPON INVESTMENTS, THE INTEREST RATE SHOWN IS THE EFFECTIVE YIELD ON THE DATE OF PURCHASE. (D) AT FEBRUARY 28, 1995, FOR FEDERAL INCOME TAX PURPOSES, THE COST OF INVESTMENTS IN SECURITIES, INCLUDING THE PUT OPTIONS DESCRIBED IN NOTE 5 TO THE FINANCIAL STATEMENTS, APPROXIMATED $461,022,155. THE AGGREGATE GROSS UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED ON THIS COST WERE AS FOLLOWS:
GROSS UNREALIZED APPRECIATION .... $ 2,550,712 GROSS UNREALIZED DEPRECIATION ...... (11,126,712) ------------- NET UNREALIZED DEPRECIATION .... $ (8,576,000) ------------- -------------
AMERICAN ADJUSTABLE RATE TERM TRUST 1998 FEBRUARY 28, 1995
Principal Market Name of Issuer Amount Value (a) - --------------------------------------------------------- -------------- ------------ (PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS) MORTGAGE-BACKED SECURITIES (88.6%): U.S. AGENCY ADJUSTABLE-RATE MORTGAGES (45.4%): 7.05%, FHLMC, 2/1/22 ............................... $ 12,510,519(b) 12,655,172 7.14%, FHLMC, 2/1/22 ................................. 17,026,683(b) 17,420,340 6.12%, FHLMC, 8/1/23 ................................. 7,140,906(b) 7,123,054 7.13%, FHLMC, 11/1/16 ................................ 3,702,454 3,732,518 6.00%, FHLMC, 5/1/17 ................................. 3,778,140 3,791,401 5.96%, FHLMC, 1/1/21 ................................. 6,236,161(b) 6,261,106 6.10%, FHLMC, 10/1/23 ................................ 3,369,644(b) 3,390,704 6.93%, FNMA, 9/1/17 .................................. 4,086,944 4,145,673 6.97%, FNMA, 5/1/18 .................................. 6,371,737(b) 6,455,334 7.04%, FNMA, 7/1/17 .................................. 6,700,593 6,784,350 7.93%, FNMA, 7/1/19 .................................. 2,910,727 2,933,922 6.73%, FNMA, 11/1/20 ................................. 5,272,421(b) 5,236,147 6.69%, FNMA, 11/1/17 ................................. 10,572,300 10,691,238 7.15%, FNMA, 7/1/19 .................................. 4,570,437 4,687,532 6.73%, FNMA, 11/1/21 ................................. 7,893,764 8,012,170 7.01%, FNMA, 10/1/20 ................................. 3,773,294 3,615,268 6.03%, FNMA, 12/1/23 ................................. 1,686,295 1,666,261 6.10%, FNMA, 2/1/24 .................................. 4,328,577 4,312,344 6.00%, GNMA II, 7/20/22 .............................. 8,641,928(b) 8,539,262 6.50%, GNMA II, 7/20/22 .............................. 8,338,926(b) 8,380,621 6.00%, GNMA II, 4/20/22 .............................. 7,229,997 7,166,734 6.00%, GNMA II, 5/20/22 .............................. 3,222,573(b) 3,194,375 6.00%, GNMA II, 6/20/22 .............................. 8,907,032 8,851,363 6.75%, GNMA II, 6/20/23 .............................. 8,652,899 8,685,347 7.00%, GNMA II, 8/20/23 .............................. 9,556,745(b) 9,628,421 6.50%, GNMA II, 10/20/23 ............................. 9,226,707(b) 9,180,573 4.50%, GNMA II, 5/20/24 .............................. 3,854,407 3,652,050 4.50%, GNMA II, 4/20/24 .............................. 6,189,564 5,740,821 ------------ 185,934,101 ------------ COLLATERALIZED MORTGAGE OBLIGATIONS AND OTHER MORTGAGE-BACKED SECURITIES (43.2%): ADJUSTABLE RATE (43.2%): 7.36%, Columbia Savings and Loan, Series 1987-1, Class A, 12/1/17 .......................................... 594,234 595,464 7.79%, Donaldson, Lufkin and Jenrette, Series 1992-MF3, Class A3, 5/25/22 ......................... 5,000,000 5,078,125 7.17%, First Federal of Rochester, Series 1988-SE1, Class A, 10/25/18 ................................... 6,634,649 6,570,376 6.37%, Glendale Federal Savings, Series 1988-3, 8/1/28 .............................................. 6,740,191 6,651,726 6.47%, Meridian Asset Acceptance Corporation, Series 1991-1, Class A1, 4/27/20 ........................... 5,404,404 5,330,094 7.13%, Merrill Lynch Mortgage Investor, Series 88-V, Class A, 1/25/19 . 1,155,110 1,145,003 6.66%, Merrill Lynch Mortgage Investors, Series 1992-C, Class A-2, 6/15/17 .......................... 25,000,000 24,926,750 5.69%, Merrill Lynch Mortgage Investors, Series 1993-D, Class A1-2, 10/25/23 ........................ 6,000,000 5,773,140 6.00%, Merrill Lynch Mortgage Investors, Series 1993-H, Class A1-2, 10/25/23 ........................ 7,340,000 7,049,263
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES. - -------------------------------------------------------------------------------- INVESTMENTS IN SECURITIES (UNAUDITED) AMERICAN ADJUSTABLE RATE TERM TRUST 1998 (CONTINUED)
Principal Market Name of Issuer Amount Value (a) - --------------------------------------------------------- -------------- ------------ 5.24%, Merrill Lynch Mortgage Investors, Series 88-C, 3/1/18 ............................................ $ 3,740,036 3,524,984 6.30%, Paine Webber Mortgage Acceptance, Series 1993-3, Class M2, 4/25/23 ........................... 2,720,913 2,666,494 6.35%, Paine Webber Mortgage Acceptance Corporation, Series 1993-11, Class M1, 12/1/23 ................... 2,951,731 2,938,817 7.01%, Paine Webber Mortgage Acceptance Corporation, Series 1993-8, Class M1, 8/25/23 .................... 6,771,161 6,720,377 7.19%, Prudential Home Mortgage Securities, Series 1991-9, Class A1, 7/25/21 ........................... 7,220,653 7,286,434 7.19%, Residential Funding Corporation, Series 1992-S8, Class A, 3/25/22 ........................... 12,752,859 12,799,407 6.63%, Residential Funding Corporation, Series 1992-S25, Class A, 7/25/22 .......................... 12,635,715 12,663,134 7.54%, Residential Funding Corporation, Series 1993-S8, Class A, 2/25/23 ........................... 8,477,007 8,583,902 6.85%, Resolution Trust Corporation, Series 1992-1, Class A1, 5/25/28 ................................... 3,793,198 3,770,325 5.68%, Resolution Trust Corporation, Series 1992-3, Class B2, 9/25/19 ................................... 8,094,806 8,013,858 6.78%, Resolution Trust Corporation, Series 1992-4, Class B2, 7/25/28 ................................... 10,000,401 9,914,460 7.06%, Resolution Trust Corporation, Series 1992-6, Class B3, 1/25/26 ................................... 13,342,983 13,142,838 6.70%, Ryland Mortgage Securities, Series 1991-B1, Class 1, 3/25/20 .................................... 5,663,259 5,708,389 6.32%, Sears Mortgage Securities, Series 1991-K, Class A1, 9/25/21 ......................................... 16,149,816 15,685,508 ------------ 176,538,868 ------------ Total Mortgage-Backed Securities (cost: $373,289,389) ............................... 362,472,969 ------------ MUNICIPAL ZERO-COUPON SECURITIES (C) (15.9%): Allegheny County, Pennsylvania, 4.69%, 2/15/98 ....... 2,000,000 1,905,000 Boulder, Larimer and Weld County, South Dakota, School District, 5.58%, 12/15/98 ........................... 4,000,000 3,305,000 California, General Obligation, Various Purpose, 5.72%-5.93%, 3/1/98-3/1/99 . 10,465,000 8,733,125 Chelan County, Washington, Public Utilities District, 5.88%, 7/1/98 ....................................... 1,370,000 1,155,938 Collin County, Texas, Community College District, 5.98%, 8/15/98 ...................................... 4,475,000 3,753,406 Connecticut, State College, Capital Appreciation, 5.27%, 12/15/97 ..................................... 985,000 858,181 Corpus Christi, Texas, General Improvement Refunding Bonds, 5.59%, 11/1/98 ............................... 4,225,000 3,506,950
Principal Market Name of Issuer Amount Value (a) - --------------------------------------------------------- -------------- ------------ Dallas County, Texas, Road Improvement Refunding Bonds, 6.19%, 8/15/98 ............................. $ 3,085,000 2,602,969 Grand Prairie, Texas, Independent School District, 5.93%, 2/15/98 ...................................... 1,150,000 993,313 Harris County, Texas, Toll Road Refunding Bonds, 6.09%, 8/15/98 ...................................... 845,000 708,744 Idaho Falls, Idaho, General Obligation and Electric Refunding Bonds, 5.63%, 4/1/98 ...................... 1,500,000 1,286,250 Lake County, Illinois, General Obligation Forest Preservation District, 6.09%, 12/1/98 ............... 1,000,000 823,750 Larimer, Weld and Boulder County, Colorado, School District, 5.58%, 12/15/98 ........................... 3,260,000 2,709,875 Maricopa County, Arizona, School District, 5.57%-5.88%, 1/1/98-7/1/99 .......................... 16,140,000 13,358,732 Mesquite, Texas, School District, 5.57%-5.73%, 8/15/98-8/15/99 ..................................... 3,665,000 3,017,356 North East, Texas, Independent School District, 5.98%, 2/1/99 .............................................. 1,000,000 817,500 North Lawrence, Indiana, School Building Refunding, Capital Appreciation, 5.62%-5.88%, 1/1/98-7/1/99 .... 2,320,000 1,911,825 Pleasanton, California, School District, 5.78%, 8/1/98 .............................................. 1,000,000 848,750 Salt Lake County, Utah, Water Conservation District, 5.83%, 10/1/98 . 1,300,000 1,090,372 Shreveport, Louisianna, Water and Sewer, 6.03%, 12/1/98 ............................................. 5,880,000 4,821,600 State of Texas, Veterans' Land General Obligation, 5.83%, 6/1/98 ....................................... 1,000,000 855,000 Tarrant County, Texas, Junior College District, 6.08%, 2/15/98 ............................................. 1,750,000 1,502,813 Tomball, Texas, Hospital Authority Revenue, 6.09%, 7/1/99 .............................................. 1,000,000 800,000 Utah Associated Municipal Power System, 5.57%, 7/1/98 .............................................. 2,765,000 2,350,250 Will County, Illinois, School District, 5.57%, 12/15/98 ............................................ 1,800,000 1,482,750 ------------ Total Municipal Zero-Coupon Securities (cost: $63,893,882) ................................ 65,199,449 ------------ SHORT-TERM SECURITIES (8.0%): Repurchase agreement with Morgan Stanley in a joint trading account collateralized by U.S. government agency securities, acquired on 2/28/95, accrued interest at repurchase date of $5,560, 6.10%, 3/1/95 (cost: $32,816,000) ................................. 32,816,000 32,816,000 ------------ Total Investments in Securities (cost: $469,999,271) (d) ......................... $ 460,488,418 ------------ ------------
- -------------------------------------------------------------------------------- INVESTMENTS IN SECURITIES (UNAUDITED) NOTES TO INVESTMENTS IN SECURITIES: (A) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO THE FINANCIAL STATEMENTS. (B) ON FEBRUARY 28, 1995, SECURITIES VALUED AT $70,488,321 WERE PLEDGED AS COLLATERAL FOR THE FOLLOWING OUTSTANDING REVERSE REPURCHASE AGREEMENTS:
NAME OF BROKER AND DESCRIPTION ACQUISITION ACCRUED OF AMOUNT DATE RATE* DUE INTEREST COLLATERAL - ------------ ---------- --------- --------- --------- ------------ $65,000,000 2/24/95 6.15% 3/2/95 $55,521 (1) *INTEREST RATE IS AS OF FEBRUARY 28, 1995. RATES ARE BASED ON THE LONDON INTERBANK OFFERED RATE (LIBOR) AND RESET MONTHLY.
NAME OF BROKER AND DESCRIPTION OF COLLATERAL: (1) MORGAN STANLEY: FHLMC, ARM, 7.05%, 2/1/22, $12,510,519 PAR. FHLMC, ARM, 7.14%, 2/1/22, $2,642,072 PAR. FHLMC, ARM, 6.12%, 8/1/23, $7,140,906 PAR. FHLMC, ARM, 5.96%, 1/1/21, $6,236,161 PAR. FHLMC, ARM, 6.10%, 10/1/23, $3,369,644 PAR. FNMA, ARM, 6.97%, 5/1/18, $3,748,081 PAR. FNMA, ARM, 6.73%, 11/1/20, $2,146,999 PAR. GNMA II, ARM, 6.00%, 7/20/22, $8,641,928 PAR. GNMA II, ARM, 6.50%, 7/20/22, $8,338,926 PAR. GNMA II, ARM, 7.00%, 8/20/23, $3,107,507 PAR. GNMA II, ARM, 6.50%, 10/20/23, $9,226,707 PAR. GNMA II, ARM, 6.00%, 5/20/22, $3,222,573 PAR. (D) AT FEBRUARY 28, 1995, FOR FEDERAL INCOME TAX PURPOSES, THE COST OF INVESTMENTS IN SECURITIES, INCLUDING THE PUT OPTIONS DESCRIBED IN NOTE 5 TO THE FINANCIAL STATEMENTS, APPROXIMATED $472,612,771. THE AGGREGATE GROSS UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED ON THIS COST WERE AS FOLLOWS:
GROSS UNREALIZED APPRECIATION .... $ 1,305,568 GROSS UNREALIZED DEPRECIATION ...... (12,380,344) ------------- NET UNREALIZED DEPRECIATION .... $ (11,074,776) ------------- -------------
AMERICAN ADJUSTABLE RATE TERM TRUST 1999 FEBRUARY 28, 1995
Principal Market Name of Issuer Amount Value (a) - --------------------------------------------------------- -------------- ------------ (PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS) MORTGAGE-BACKED SECURITIES (89.1%): U.S. AGENCY ADJUSTABLE-RATE MORTGAGES (38.7%): 6.30%, FHLMC, 6/1/22 ............................... $ 29,434,791(b) 29,986,694 7.27%, FHLMC, 11/1/22 ................................ 10,835,163 11,068,796 7.34%, FHLMC, 9/1/22 ................................. 5,906,203 6,016,944 6.37%, FHLMC, 7/1/23 ................................. 5,900,016(b) 5,984,829 6.52%, FHLMC, 4/1/23 ................................. 4,599,168 4,665,258 6.21%, FNMA, 11/1/22 ................................. 3,504,049 3,545,677 5.96%, FNMA, 2/1/24 .................................. 8,857,861 8,780,355 6.50%, GNMA II, 7/20/22 .............................. 4,169,463(b) 4,190,310 6.50%, GNMA II, 9/20/22 .............................. 3,781,360(b) 3,800,267 6.00%, GNMA II, 9/20/22 .............................. 2,549,517 2,519,229 6.00%, GNMA II, 7/20/23 .............................. 6,661,894(b) 6,549,441 6.75%, GNMA II, 6/20/23 .............................. 5,628,874 5,649,982 ------------ 92,757,782 ------------ COLLATERALIZED MORTGAGE OBLIGATIONS AND OTHER MORTGAGE-BACKED SECURITIES (50.4%): ADJUSTABLE RATE (50.4%): 6.73%, California Federal, Series 1987-F, Class A2, 7/1/17 .............................................. 5,629,518 5,531,002 6.79%, Donaldson, Lufkin and Jenrette, Series 1991-3, Class A1, 3/20/21 ................................... 7,948,462 8,013,043 6.94%, Donaldson, Lufkin and Jenrette, Series 1992-12, Class A1, 12/25/22 .................................. 6,779,144 6,815,158 6.71%, Donaldson, Lufkin and Jenrette, Series 1992-6, Class A3, 7/25/22 ................................... 3,512,459 3,497,092 7.79%, Donaldson, Lufkin and Jenrette, Series 1992-MF3, Class A3, 5/25/22 ......................... 10,000,000 10,156,250 7.17%, First Federal of Rochester, Series 1988-SE1, Class A, 10/25/18 ................................... 10,572,510 10,470,088 6.66%, Merrill Lynch Mortgage Investors, Series 1992-E, Class A3, 9/15/17 ........................... 5,000,000 4,983,750 7.69%, Merrill Lynch Mortgage Investors, Series 1992-H, Class A1-2, 1/25/23 ......................... 4,392,791 4,399,512 6.71%, Merrill Lynch Mortgage Investors, Series 1993-B, Class A3, 12/15/17 .......................... 13,650,000 13,649,864 5.69%, Merrill Lynch Mortgage Investors, Series 1993-D, Class A1-2, 10/25/23 ........................ 4,000,000 3,848,760 6.81%, Merrill Lynch Mortgage Investors, Series 1993-E, Class A4, 6/15/18 ........................... 6,500,000 6,326,320 6.00%, Merrill Lynch Mortgage Investors, Series 1993-H, Class A1-2, 10/25/23 ........................ 3,640,000 3,495,820 6.35%, Paine Webber Mortgage Acceptance Corporation, Series 1993-11, Class M1, 12/1/23 ................... 1,475,865 1,469,408 7.01%, Paine Webber Mortgage Acceptance Corporation, Series 1993-8, Class M1, 8/25/23 .................... 6,771,161 6,720,377
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES. - -------------------------------------------------------------------------------- INVESTMENTS IN SECURITIES (UNAUDITED) AMERICAN ADJUSTABLE RATE TERM TRUST 1999 (CONTINUED)
Principal Market Name of Issuer Amount Value (a) - --------------------------------------------------------- -------------- ------------ 6.63%, Residential Funding Corporation, Series 1992-S25, Class A, 7/25/22 ........................ $ 3,689,629 3,697,635 7.54%, Residential Funding Corporation, Series 1993-S8, Class A, 2/25/23 ........................... 5,651,338 5,722,601 6.78%, Resolution Trust Corporation, Series 1992-4, Class B2, 7/25/28 ................................... 3,000,120 2,974,338 7.06%, Resolution Trust Corporation, Series 1992-6, Class B3, 1/25/26 ................................... 10,002,236 9,852,202 7.74%, Salomon Brothers Mortgage, Series 1992-5, Class A1, 11/25/22 ........................................ 3,348,845 3,323,729 6.52%, Sears Mortgage Securities, Series 1992-12, Class A1, 7/25/22 ................................... 5,940,407 5,769,620 ------------ 120,716,569 ------------ Total Mortgage-Backed Securities (cost: $218,256,688) ............................... 213,474,351 ------------ MUNICIPAL ZERO-COUPON SECURITIES (C) (15.2%): Amarillo, Texas, School District, 5.44%, 2/1/99 ...... 4,300,000 3,504,500 Brazoria County, Texas, General Obligation, 5.54%-5.59%, 9/1/99-9/1/00 .......................... 1,425,000 1,084,656 Chelan County, Washington, Public Utilities District, 5.98%-6.09%, 7/1/99-7/1/00 .......................... 2,970,000 2,361,419 Cook and Will County, Illinois, Series A, 5.63%, 12/1/99 ............................................. 2,390,000 1,852,250 Copperas Cove, Texas, School District, 5.52%, 6/1/99 .............................................. 920,000 733,700 Cypress-Fairbanks, Texas, School District, 5.47%-5.64%, 2/1/99-2/1/00 .......................... 5,065,000 3,988,382 District of Columbia, General Obligation, 5.57%-5.71%, 6/1/99-6/1/00 ....................................... 13,900,000 10,609,500 Mesquite, Texas, School District, 5.63%, 8/15/99 ..... 1,605,000 1,265,944 Metropolitan Pier and Exposition Authority, Illinois, State Revenue, 5.67%-5.69%, 6/15/99-12/15/99 ........ 7,875,000 6,217,762 North Slope Boro, Alaska, 5.58%, 6/30/99 ............. 4,710,000 3,673,800 Texas State General Obligation, 5.68%, 10/1/00 ....... 1,655,000 1,224,700 ------------ Total Municipal Zero-Coupon Securities (cost: $36,389,308) ................................ 36,516,613 ------------
Principal Market Name of Issuer Amount Value (a) - --------------------------------------------------------- -------------- ------------ SHORT-TERM SECURITIES (7.1%): Repurchase agreement with Morgan Stanley in a joint trading account collateralized by U.S. government agency securities, acquired on 2/28/95, accrued interest at repurchase date of $2,886, 6.10%, 3/1/95 (cost: $17,032,000) ............................... $ 17,032,000 17,032,000 ------------ Total Investments in Securities (cost: $271,677,996) (d) ......................... $ 267,022,964 ------------ ------------
NOTES TO INVESTMENTS IN SECURITIES: (A) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO THE FINANCIAL STATEMENTS. (D) ON FEBRUARY 28, 1995, SECURITIES VALUED AT $39,416,280 WERE PLEDGED AS COLLATERAL FOR THE FOLLOWING OUTSTANDING REVERSE REPURCHASE AGREEMENTS:
NAME OF BROKER AND DESCRIPTION ACQUISITION ACCRUED OF AMOUNT DATE RATE* DUE INTEREST COLLATERAL - ------------ ---------- --------- --------- --------- ------------ $16,000,000 12/15/94 6.50% 3/15/95 $219,558 (1) 20,000,000 2/24/95 6.15% 3/2/95 17,083 (2) - ------------ --------- $36,000,000 $236,641 - ------------ --------- - ------------ --------- *INTEREST RATE IS AS OF FEBRUARY 28, 1995. RATES ARE BASED ON THE LONDON INTERBANK OFFERED RATE (LIBOR) AND RESET MONTHLY OR QUARTERLY.
NAME OF BROKER AND DESCRIPTION OF COLLATERAL: (1) MORGAN STANLEY: FHLMC, ARM, 6.37%, 8/1/23, $1,269,624 PAR. FHLMC, ARM, 6.30%, 6/1/22, $15,507,412 PAR. (2) MORGAN STANLEY: GNMA II, ARM, 6.50%, 7/20/22, $4,169,463 PAR. GNMA II, ARM, 6.50%, 9/20/22, $1,167,374 PAR. GNMA II, ARM, 6.00%, 7/20/23, $2,893,178 PAR. FHLMC, ARM, 6.30%, 6/1/22, $13,210,017 PAR. (C) FOR ZERO-COUPON INVESTMENTS, THE INTEREST RATE SHOWN IS THE EFFECTIVE YIELD ON THE DATE OF PURCHASE. (D) AT FEBRUARY 28, 1995, FOR FEDERAL INCOME TAX PURPOSES, THE COST OF INVESTMENT IN SECURITIES, INCLUDING THE PUT OPTIONS DESCRIBED IN NOTE 5 TO THE FINANCIAL STATEMENTS, APPROXIMATED $273,687,996. THE AGGREGATE GROSS UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED ON THIS COST WERE AS FOLLOWS:
GROSS UNREALIZED APPRECIATION .... $ 427,964 GROSS UNREALIZED DEPRECIATION ...... (5,769,718) ------------- NET UNREALIZED DEPRECIATION .... $ (5,341,754) ------------- -------------
EX-17.3 10 EXHIBIT 17.3 EXHIBIT 17.3 FINANCIAL STATEMENTS FROM AMERICAN ADJUSTABLE RATE TERM TRUSTS (1996-1999) * * * ANNUAL REPORT 1994 INDEPENDENT AUDITORS REPORT THE BOARD OF DIRECTORS AND SHAREHOLDERS American Adjustable Rate Term Trust Inc. -- 1996, American Adjustable Rate Term Trust Inc. -- 1997, American Adjustable Rate Term Trust Inc. -- 1998, and American Adjustable Rate Term Trust Inc. -- 1999: We have audited the accompanying statements of assets and liabilities, including the schedules of investments in securities, of American Adjustable Rate Term Trust Inc. -- 1996, American Adjustable Rate Term Trust Inc. -- 1997, American Adjustable Rate Term Trust Inc. -- 1998, and American Adjustable Rate Term Trust Inc. -- 1999 as of August 31, 1994, and the related statements of operations and cash flows for the year then ended, the statements of changes in net assets for each of the years in the two-year period ended August 31, 1994 (year ended August 31, 1994 and the period from September 24, 1992, commencement of operations, to August 31, 1993 for American Adjustable Rate Term Trust Inc. -- 1999) and the financial highlights presented in footnote 12 to the financial statements. These financial statements and the financial highlights are the responsibility of the funds' management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Investment securities held in custody are confirmed to us by the custodian. As to securities purchased but not received, we request confirmations from brokers and, where replies are not received, we carry out other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of American Adjustable Rate Term Trust Inc. -- 1996, American Adjustable Rate Term Trust Inc. -- 1997, American Adjustable Rate Term Trust Inc. -- 1998, and American Adjustable Rate Term Trust Inc. -- 1999 as of August 31, 1994, the results of their operations and cash flows for the year then ended, the changes in their net assets for each of the years in the two-year period ended August 31, 1994 (year ended August 31, 1994 and the period from September 24, 1992 to August 31, 1993 for American Adjustable Rate Term Trust Inc. -- 1999) and the financial highlights presented in footnote 12 to the financial statements, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Minneapolis, Minnesota October 20, 1994 FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES AUGUST 31, 1994 American American American American Adjustable Adjustable Adjustable Adjustable Rate Term Rate Term Rate Term Rate Term Trust 1996 Trust 1997 Trust 1998 Trust 1999 ---------- ---------- ---------- ---------- ASSETS: Investments in securities at market value* (note 2) (including repurchase agreements of $27,020,000; $18,339,000; $33,714,000 and $25,644,000, respectively). . . . . . . . . . . . . $ 333,049,555 629,727,397 690,171,194 420,463,243 Investments in put options at market value (note 6) (cost: $1,528,800; $2,575,600; $2,613,500 and $2,010,000, respectively) . . . . . . . . . . . . . . . . . . . . . 9,233 1,367,220 2,846,703 3,729,875 Open interest rate swap transactions at market value (note 2). . . . . 883,773 2,545,250 2,494,235 276,000 Cash in bank on demand deposit . . . . . . . . . . . . . . . . . . . . 138,514 45,521 59,224 250,331 Accrued interest and mortgage security paydowns receivable . . . . . . 2,822,131 3,336,714 4,227,814 2,667,583 ------------- ------------ ------------ ------------ Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 336,903,206 637,022,102 699,799,170 427,387,032 ------------- ------------ ------------ ------------ LIABILITIES: Payable for interest rate swap transactions at market value (note 2) . -- -- 8,604,720 6,491,280 Deferred interest received on interest rate swap transaction (note 2). -- -- 1,702,775 1,277,081 Payable for investment securities purchased -- when-issued transactions (note 2) . . . . . . . . . . . . . . . . . . . . . . . 24,389,158 63,953,125 43,728,125 38,998,437 Reverse repurchase agreements payable. . . . . . . . . . . . . . . . . 70,000,000 125,000,000 145,000,000 85,000,000 Payable for fund shares retired. . . . . . . . . . . . . . . . . . . . 60,210 148,531 176,925 191,123 Accrued investment management fee. . . . . . . . . . . . . . . . . . . 71,752 132,765 149,458 88,232 Accrued administrative fee . . . . . . . . . . . . . . . . . . . . . . 30,751 56,899 64,057 37,814 Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 263,667 342,217 311,358 144,175 ------------- ------------ ------------ ------------ Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 94,815,538 189,633,537 199,737,418 132,228,142 ------------- ------------ ------------ ------------ Net assets applicable to outstanding capital stock. . . . . . . . . $ 242,087,668 447,388,565 500,061,752 295,158,890 ------------- ------------ ------------ ------------ ------------- ------------ ------------ ------------ REPRESENTED BY: Capital stock -- authorized 1 billion shares of $0.01 par value for each fund, outstanding, 26,787,300; 50,249,912; 56,689,936 and 33,886,234 shares, respectively (note 7) . . . . . . . . . . . . . . . . . . . . . . . $ 267,873 502,499 566,899 338,862 Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 256,240,119 481,435,877 543,191,714 324,632,520 Undistributed net investment income. . . . . . . . . . . . . . . . . . 10,238,410 11,548,663 7,060,244 2,115,191 Accumulated net realized loss on investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (18,707,511) (35,875,182) (29,024,290) (17,812,871) Unrealized depreciation of investments (note 2). . . . . . . . . . . . (5,951,223) (10,223,292) (21,732,815) (14,114,812) ------------- ------------ ------------ ------------ Total representing net assets applicable to outstanding capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . $ 242,087,668 447,388,565 500,061,752 295,158,890 ------------- ------------ ------------ ------------ ------------- ------------ ------------ ------------ Net asset value per share of outstanding capital stock . . . . . . . . $ 9.04 8.90 8.82 8.71 ------------- ------------ ------------ ------------ ------------- ------------ ------------ ------------ * Investments in securities at identified cost . . . . . . . . . . . . $ 338,364,984 641,287,559 706,026,727 430,082,650 ------------- ------------ ------------ ------------ ------------- ------------ ------------ ------------
See Accompanying Notes to Financial Statements. 2 FINANCIAL STATEMENTS
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED AUGUST 31, 1994 American American American American Adjustable Adjustable Adjustable Adjustable Rate Term Rate Term Rate Term Rate Term Trust 1996 Trust 1997 Trust 1998 Trust 1999 ---------- ---------- ---------- ---------- INCOME: Interest (net of interest expense of $2,836,648; $5,157,609; $5,444,229 and $3,440,574, respectively). . . . . . . $ 16,577,759 30,631,250 32,695,497 18,701,634 Fee income (note 2) . . . . . . . . . . . . . . . . . . . . . . . . 2,564,315 3,976,672 4,378,739 3,347,864 ------------- ------------ ------------ ------------ Total income. . . . . . . . . . . . . . . . . . . . . . . . . . . 19,142,074 34,607,922 37,074,236 22,049,498 ------------- ------------ ------------ ------------ EXPENSES (note 3): Investment management fee . . . . . . . . . . . . . . . . . . . . . 880,094 1,643,704 1,857,513 1,101,996 Administrative fee. . . . . . . . . . . . . . . . . . . . . . . . . 377,183 704,445 796,077 472,284 Custodian, accounting and transfer agent fees . . . . . . . . . . . 165,276 235,002 258,270 177,831 Audit and legal fees. . . . . . . . . . . . . . . . . . . . . . . . 24,443 33,061 33,141 29,593 Directors' fees . . . . . . . . . . . . . . . . . . . . . . . . . . 22,481 22,481 29,980 22,480 Registration fees . . . . . . . . . . . . . . . . . . . . . . . . . 32,340 48,410 40,650 24,260 Shareholder reports . . . . . . . . . . . . . . . . . . . . . . . . 73,503 120,315 131,840 54,088 Federal excise tax expense (note 2) . . . . . . . . . . . . . . . . 26,538 -- -- -- Other expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . 20,090 36,240 34,651 6,284 ------------- ------------ ------------ ------------ Total expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 1,621,948 2,843,658 3,182,122 1,888,816 ------------- ------------ ------------ ------------ Investment income -- net. . . . . . . . . . . . . . . . . . . . . 17,520,126 31,764,264 33,892,114 20,160,682 ------------- ------------ ------------ ------------ REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS: Net realized loss on investments (note 4) . . . . . . . . . . . . . (11,402,927) (19,668,298) (23,344,737) (16,565,853) Net realized gain on closed or expired option contracts written (note 5) . . . . . . . . . . . . . . . . 62,650 87,650 87,650 86,869 Net realized loss on closed interest rate swap transactions . . . . -- (4,248,003) (1,513,807) (1,283,807) Net realized gain (loss) on closed futures contracts. . . . . . . . 1,022,219 25,563 (241,981) 319,612 ------------- ------------ ------------ ------------ Net realized loss on investments. . . . . . . . . . . . . . . . . (10,318,058) (23,803,088) (25,012,875) (17,443,179) Net change in unrealized appreciation or depreciation of investments . . . . . . . . . . . . . . . . . . . (9,945,239) (19,413,596) (25,676,685) (14,015,353) ------------- ------------ ------------ ------------ Net loss on investments. . . . . . . . . . . . . . . . . . . . . (20,263,297) (43,216,684) (50,689,560) (31,458,532) ------------- ------------ ------------ ------------ Net decrease in net assets resulting from operations. . . . . . . . . . . . . . . . . . . . . . . . . $ (2,743,171) (11,452,420) (16,797,446) (11,297,850) ------------- ------------ ------------ ------------ ------------- ------------ ------------ ------------
See Accompanying Notes to Financial Statements. 3 FINANCIAL STATEMENTS STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED AUGUST 31, 1994
American American American American Adjustable Adjustable Adjustable Adjustable Rate Term Rate Term Rate Term Rate Term Trust 1996 Trust 1997 Trust 1998 Trust 1999 ---------- ---------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Interest and fee income . . . . . . . . . . . . . . . . . . . . . . $ 19,142,074 34,607,922 37,074,236 22,049,498 Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,621,948) (2,843,658) (3,182,122) (1,888,816) ------------- ------------ ------------ ------------ Net investment income . . . . . . . . . . . . . . . . . . . . . . 17,520,126 31,764,264 33,892,114 20,160,682 ------------- ------------ ------------ ------------ ADJUSTMENTS TO RECONCILE NET INVESTMENT INCOME TO CASH PROVIDED (USED) BY OPERATING ACTIVITIES: Change in accrued interest and mortgage security paydowns receivable. . . . . . . . . . . . . . . . . . . 1,484,909 2,761,661 2,181,429 2,340,832 Net amortization of discount and premium. . . . . . . . . . . . . . (2,166,643) (3,681,606) (3,114,617) (1,718,087) Change in accrued fees/expenses and other payables. . . . . . . . . 52,655 158,268 155,968 70,981 ------------- ------------ ------------ ------------ Total adjustments . . . . . . . . . . . . . . . . . . . . . . . . (629,079) (761,677) (777,220) 693,726 ------------- ------------ ------------ ------------ Net cash provided by operating activities . . . . . . . . . . . 16,891,047 31,002,587 33,114,894 20,854,408 ------------- ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of investments. . . . . . . . . . . . . . . . . 311,555,744 481,222,722 530,203,690 325,116,671 Purchases of investments. . . . . . . . . . . . . . . . . . . . . . (236,101,024) (394,836,979) (433,538,389) (249,792,032) Net purchases of short-term securities. . . . . . . . . . . . . . . (66,810,995) (52,049,866) (99,832,303) (60,993,307) Cash received (paid) for interest rate swap transactions. . . . . . -- (4,248,003) 188,968 (6,726) Net variation margin receipts for futures contracts . . . . . . . . 2,894,094 3,002,126 2,984,582 2,583,675 Net premium receipts (payments) for option contracts written . . . . . . . . . . . . . . . . . . . . . . . . 20,462 3,275 3,275 (10,006) ------------- ------------ ------------ ------------ Net cash provided by investment activities. . . . . . . . . . . 11,558,281 33,093,275 9,823 16,898,275 ------------- ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Retirement of fund shares (note 7). . . . . . . . . . . . . . . . . (1,155,260) (2,288,968) (2,591,847) (1,483,301) Net payments for reverse repurchase agreements. . . . . . . . . . . (15,574,000) (36,500,000) -- (17,148,000) Distributions paid to shareholders. . . . . . . . . . . . . . . . . (12,495,376) (26,867,223) (31,740,989) (19,454,086) ------------- ------------ ------------ ------------ Net cash used by financing activities . . . . . . . . . . . . . (29,224,636) (65,656,191) (34,332,836) (38,085,387) ------------- ------------ ------------ ------------ Net decrease in cash . . . . . . . . . . . . . . . . . . . . . . . . . (775,308) (1,560,329) (1,208,119) (332,704) Cash at beginning of year. . . . . . . . . . . . . . . . . . . . . . . 913,822 1,605,850 1,267,343 583,035 ------------- ------------ ------------ ------------ Cash at end of year. . . . . . . . . . . . . . . . . . . . . . . . . . $ 138,514 45,521 59,224 250,331 ------------- ------------ ------------ ------------ ------------- ------------ ------------ ------------ Supplemental disclosure of cash flow information: Cash paid for interest on reverse repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . $ 2,764,019 4,964,126 5,248,856 3,346,462 ------------- ------------ ------------ ------------ ------------- ------------ ------------ ------------
See Accompanying Notes to Financial Statements. 4 FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS AMERICAN ADJUSTABLE RATE TERM TRUST 1996 Year Year Ended Ended 8/31/94 8/31/93 ------------ ----------- OPERATIONS: Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,520,126 20,300,960 Net realized loss on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,318,058) (8,675,071) Net change in unrealized appreciation or depreciation of investments . . . . . . . . . . . . (9,945,239) 1,318,716 ------------ ----------- Net increase (decrease) in net assets resulting from operations. . . . . . . . . . . . . . (2,743,171) 12,944,605 ------------ ----------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,495,376) (16,736,995) ------------ ----------- CAPITAL STOCK TRANSACTIONS: Payments for retirement of 142,700 and 0 shares, respectively (note 7) . . . . . . . . . . . (1,215,470) -- ------------ ----------- Total decrease in net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (16,454,017) (3,792,390) Net assets at beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 258,541,685 262,334,075 ------------ ----------- Net assets at end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 242,087,668 258,541,685 ------------ ----------- ------------ ----------- Undistributed net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,238,410 5,738,725 ------------ ----------- ------------ -----------
STATEMENTS OF CHANGES IN NET ASSETS AMERICAN ADJUSTABLE RATE TERM TRUST 1997 Year Year Ended Ended 8/31/94 8/31/93 ------------ ----------- OPERATIONS: Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 31,764,264 36,536,397 Net realized loss on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (23,803,088) (12,813,686) Net change in unrealized appreciation or depreciation of investments . . . . . . . . . . . . (19,413,596) 7,929,744 ------------ ----------- Net increase (decrease) in net assets resulting from operations. . . . . . . . . . . . . . (11,452,420) 31,652,455 ------------ ----------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (26,867,223) (32,189,316) Net realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (368,946) ------------ ----------- Total distributions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (26,867,223) (32,558,262) ------------ ----------- CAPITAL STOCK TRANSACTIONS: Payments for retirement of 290,700 and 0 shares, respectively (note 7) . . . . . . . . . . . (2,437,499) -- ------------ ----------- Total decrease in net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (40,757,142) (905,807) Net assets at beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 488,145,707 489,051,514 ------------ ----------- Net assets at end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 447,388,565 488,145,707 ------------ ----------- ------------ ----------- Undistributed net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,548,663 7,788,501 ------------ ----------- ------------ -----------
See Accompanying Notes to Financial Statements. 5 FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS AMERICAN ADJUSTABLE RATE TERM TRUST 1998 Year Year Ended Ended 8/31/94 8/31/93 ------------ ----------- OPERATIONS: Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 33,892,114 39,718,318 Net realized loss on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25,012,875) (4,404,168) Net change in unrealized appreciation or depreciation of investments . . . . . . . . . . . . (25,676,685) (1,499,321) ------------ ----------- Net increase (decrease) in net assets resulting from operations. . . . . . . . . . . . . . (16,797,446) 33,814,829 ------------ ----------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (31,740,989) (37,830,343) ------------ ----------- CAPITAL STOCK TRANSACTIONS: Payments for retirement of 335,000 and 0 shares, respectively (note 7) . . . . . . . . . . . (2,768,772) -- ------------ ----------- Total decrease in net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (51,307,207) (4,015,514) Net assets at beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 551,368,959 555,384,473 ------------ ----------- Net assets at end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 500,061,752 551,368,959 ------------ ----------- ------------ ----------- Undistributed net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,060,244 6,170,672 ------------ ----------- ------------ -----------
See Accompanying Notes to Financial Statements. 6 FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS AMERICAN ADJUSTABLE RATE TERM TRUST 1999 Year Period from Ended 9/24/92* to 8/31/94 8/31/93 ------------ ----------- OPERATIONS: Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,160,682 18,083,052 Net realized loss on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17,443,179) (1,365,376) Net change in unrealized depreciation of investments . . . . . . . . . . . . . . . . . . . . (14,015,353) (99,459) ------------ ----------- Net increase (decrease) in net assets resulting from operations. . . . . . . . . . . . . . (11,297,850) 16,618,217 ------------ ----------- DISTRIBUTIONS TO SHAREHOLDERS: From net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (19,270,500) (15,678,773) In excess of net realized gains (note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . (183,586) -- ------------ ----------- Total distributions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (19,454,086) (15,678,773) ------------ ----------- CAPITAL STOCK TRANSACTIONS: Proceeds from initial and additional public offerings of 30,000,000 total shares, net of underwriting discounts and offering expenses of $12,635,000 . . . . . . . . . . . . -- 287,365,000 Proceeds from issuance of 4,081,334 shares in connection with exercising of over-allotment options granted to underwriters of the initial and additional public offerings, net of underwriting discounts of $1,632,534. . . . . . . . . . . . . . . -- 39,180,806 Payments for retirement of 205,100 and 0 shares, respectively (note 7) . . . . . . . . . . . (1,674,424) -- ------------ ----------- Increase (decrease) in net assets from capital stock transactions. . . . . . . . . . . . . . (1,674,424) 326,545,806 ------------ ----------- Total increase (decrease) in net assets. . . . . . . . . . . . . . . . . . . . . . . . . (32,426,360) 327,485,250 Net assets at beginning of period (note 1) . . . . . . . . . . . . . . . . . . . . . . . . . . 327,585,250 100,000 ------------ ----------- Net assets at end of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 295,158,890 327,585,250 ------------ ----------- ------------ ----------- Undistributed net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,115,191 2,321,134 ------------ ----------- ------------ ----------- *Commencement of Operations.
See Accompanying Notes to Financial Statements. 7 NOTES TO FINANCIAL STATEMENTS (1) ORGANIZATION American Adjustable Rate Term Trusts 1996 (BDJ), 1997 (CDJ), 1998 (DDJ) and 1999 (EDJ) are registered under the Investment Company Act of 1940 (as amended) as diversified, closed-end management investment companies. BDJ, CDJ, DDJ and EDJ commenced operations on September 27, 1990; July 24, 1991; January 30, 1992; and September 24, 1992; respectively, upon completion of initial public offerings of common stock. Shares of the funds are listed on the New York Stock Exchange. The only transaction for each fund prior to commencement of operations was the sale to Piper Jaffray Companies Inc. of 10,000 shares of common stock for $100,000. The funds will terminate operations and distribute all of their respective net assets to shareholders on or shortly before March 31, 1996 (BDJ); March 31, 1997 (CDJ); March 31, 1998 (DDJ) and March 31, 1999 (EDJ). (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES INVESTMENTS IN SECURITIES The values of fixed income securities are determined using pricing services or prices quoted by independent brokers. Exchange-listed options are valued at the last sale price and open financial futures contracts are valued at the last settlement price. When market quotations are not readily available, securities are valued at fair value according to methods selected in good faith by the board of directors. Short-term securities with maturities less than 60 days are valued at amortized cost which approximates market value. Securities transactions are accounted for on the date the securities are purchased or sold. Realized gains and losses are calculated on the identified-cost basis. Interest income, including amortization of bond discount and premium computed on a level-yield basis, is accrued daily. OPTION TRANSACTIONS For hedging purposes, the funds may buy and sell put and call options, write covered call options on portfolio securities, write cash-secured puts, and write call options that are not covered for cross-hedging purposes. The risk in writing a call option is that a fund gives up the opportunity for profit if the market price of the security increases. The risk in writing a put option is that a fund may incur a loss if the market price of the security decreases and the option is exercised. The risk in buying an option is that a fund pays a premium whether or not the option is exercised. A fund also has the additional risk of not being able to enter into a closing transaction if a liquid secondary market does not exist. The funds also may write over-the-counter options where the completion of the obligation is dependent upon the credit standing of another party. Option contracts are valued daily, and unrealized appreciation or depreciation is recorded. A fund will realize a gain or loss upon expiration or closing of the option transaction. When an option is exercised, the proceeds on sales for a written call option, the purchase cost for a written put option, or the cost of a security for a purchased put or call option is adjusted by the amount of premium received or paid. FUTURES TRANSACTIONS In order to gain exposure to or protect against changes in the market, the funds may buy and sell interest rate futures contracts and related options. Risks of entering into futures contracts and related options include the possibility of an illiquid market and that a change in the value of the contract or option may not correlate with changes in the value of the underlying securities. Upon entering into a futures contract, a fund is required to deposit either cash or securities in an amount (initial margin) equal to a certain percentage of the contract value. Subsequent payments (variation margin) are made or received by a fund each day. The variation margin payments are equal to the daily changes in the contract value and are recorded as unrealized gains and losses. A fund recognizes a realized gain or loss when the contract is closed or expires. INTEREST RATE TRANSACTIONS To preserve a return or spread on a particular investment or portion of its portfolio or for other non-speculative purposes, the funds may enter into interest rate swaps and the purchase or sale of interest rate caps and floors. Interest rate swaps involve the exchange of commitments to pay or receive interest, e.g., an exchange of floating-rate payments for fixed rate payments. The purchase of an interest rate cap entitles the purchaser, to the extent that a specified index exceeds a predetermined interest rate, to receive payments of interest on a contractually based notional principal amount from the party selling such an interest rate cap. The purchase of 8 NOTES TO FINANCIAL STATEMENTS an interest rate floor entitles the purchaser, to the extent that a specified index falls below a predetermined interest rate, to receive payments of interest on a contractually based notional principal amount from the party selling such an interest rate floor. If forecasts of interest rates and other market factors are incorrect, investment performance will diminish compared to what performance would have been if these investment techniques were not used. Even if the forecasts are correct, there is risk that the positions may correlate imperfectly with the asset or liability being hedged. Other risks of entering into these transactions are that a liquid secondary market may not always exist, or that another party to a transaction may not perform. For interest rate swaps, the funds accrue weekly, as an increase or decrease to interest income, the net amount due or owed by the funds. Interest rate swap, cap and floor valuations are based on prices quoted by independent brokers. These valuations represent the net present value of all future cash settlement amounts based on implied forward interest rates. As of August 31, 1994, BDJ, CDJ, DDJ and EDJ had entered into the following interest rate swap agreements. In each agreement, the funds have exchanged floating rates for floating or fixed rates. The terms vary among the contracts but provide for the interest rate differential to be settled either on a monthly, quarterly or semi-annual basis. During the year ended August 31, 1994, cash payments were received by DDJ and EDJ in connection with certain interest rate swap agreements. The payments were initially deferred and are being amortized as interest income over the life of the interest rate swap agreements. At August 31, 1994, remaining amounts of deferred interest were $1,702,775 and $1,277,081 for DDJ and EDJ, respectively.
Rate Paid Rate Received Net Net Swap Notional by the Fund by the Fund Floating Termination Unrealized Unrealized Fund Counter-Party Principal at 8/31/94 at 8/31/94 Rate Index Date Gain Loss - ---- --------------- ------------ ----------- ------------- ------------------- ----------- ----------- ---------- BDJ Lehman Brothers $ 30,000,000 3.80% (a) 6.76% (b) 11th District COFI 3/22/96 $ 883,773 -- ----------- ---------- ----------- ---------- CDJ Lehman Brothers $ 50,000,000 3.80% (a) 6.76% (b) 11th District COFI 11/22/96 $ 1,726,225 -- Lehman Brothers 25,000,000 3.08% (a) 6.63% (b) 11th District COFI 2/27/97 819,025 -- ----------- ---------- $ 2,545,250 -- ----------- ---------- ----------- ---------- DDJ Lehman Brothers $ 50,000,000 3.80% (a) 6.67% (b) 11th District COFI 1/28/97 $ 1,675,730 -- Lehman Brothers 25,000,000 3.08% (a) 6.63% (b) 11th District COFI 5/25/97 818,505 -- Merrill Lynch 100,000,000 4.98% (a) 3.59% (a) FNMA Discount Rate/ 10x10-year Swap Spread 4/23/98 -- (8,604,720) ----------- ---------- $ 2,494,235 (8,604,720) ----------- ---------- ----------- ---------- EDJ Merrill Lynch $ 30,000,000 3.08% (a) 5.53% (b) 11th District COFI 10/5/97 $ 276,000 -- Merrill Lynch 75,000,000 4.98% (a) 3.59% (a) FNMA Discount Rate/ 10x10-year Swap Spread 4/23/98 -- (6,491,280) ----------- ---------- $ 276,000 (6,491,280) ----------- ---------- ----------- ---------- (a) Floating rate. (b) Fixed rate.
SECURITIES PURCHASED ON A WHEN-ISSUED BASIS Delivery and payment for securities that have been purchased by the funds on a forward-commitment or when-issued basis can take place one month or more after the transaction date. During this period, such securities do not earn interest, are subject to market fluctuations and may increase or decrease in value prior to their delivery. The funds maintain, in segregated accounts with their custodian, securities with a market value equal to the amount of their purchase commitments. The purchase of securities on a when-issued or forward-commitment basis may increase the volatility of the funds' NAVs to the extent the funds make such purchases while remaining substantially fully invested. As of August 31, 1994, the funds had entered into outstanding when-issued or forward commitments of $24,389,158; $63,953,125; $43,728,125 and $38,998,437 for BDJ, CDJ, DDJ and EDJ, respectively. Consistent with their ability to purchase securities on a when-issued or forward-commitment basis, the funds may enter into mortgage "dollar rolls" in which the funds sell securities for delivery in the current month and simultaneously contract with the same counterparty to repurchase similar (same type, coupon and maturity) but not identical securities sold. As an inducement to "roll over" their purchase commitments, the funds receive negotiated fees. For the year ended August 31, 1994, such fees earned by the funds amounted to $2,564,315; $3,976,672; $4,378,739 and $3,347,864 for BDJ, CDJ, DDJ and EDJ, respectively. 9 NOTES TO FINANCIAL STATEMENTS FEDERAL TAXES Each fund's policy is to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and not be subject to federal income tax. Therefore, no income tax provision is required. However, BDJ incurred federal excise taxes of $26,538 ($0.001 per share) on income retained by the funds during the 1993 excise tax year. Net investment income and net realized gains (losses) may differ for financial statement and tax purposes primarily because of the recognition of certain foreign currency gains (losses) as ordinary income for tax purposes, and losses deferred due to "wash sale" and "straddle" transactions. The character of distributions made during the year from net investment income or net realized gains may differ from their ultimate characterization for federal income tax purposes. The effect on dividend distributions of certain book-to-tax differences is presented as an "excess distribution" in the statement of changes in net assets. Also, due to the timing of dividend distributions, the fiscal year in which amounts are distributed may differ from the year that the income or realized gains (losses) were recorded by the fund. On the statements of assets and liabilities, as a result of permanent book-to-tax differences, reclassification adjustments have been made as follows:
- -------------------------------------------------------------------------------- BDJ CDJ DDJ EDJ --------- --------- --------- --------- Decrease accumulated net realized loss on investments............... $ 551,603 1,136,879 1,261,553 1,096,125 Decrease undistributed net investment income................. 525,065 1,136,879 1,261,553 1,096,125 --------- --------- --------- --------- Decrease additional paid-in capital........................... $ 26,538 -- -- -- --------- --------- -------- -------- --------- --------- -------- -------- - --------------------------------------------------------------------------------
DISTRIBUTIONS The funds pay monthly distributions from net investment income. Realized capital gains, if any, will be distributed on an annual basis. These distributions are recorded as of the close of business on the ex-dividend date. Such distributions are payable in cash or, pursuant to the funds' dividend reinvestment plan, reinvested in additional shares of the funds' common stock. Under the plan, fund shares will be purchased in the open market. REPURCHASE AGREEMENTS For repurchase agreements entered into with certain broker-dealers, the funds along with other affiliated registered investment companies may transfer uninvested cash balances into a joint trading account, the daily aggregate of which is invested in repurchase agreements secured by U.S. government and agency obligations. Securities pledged as collateral for all individual and joint repurchase agreements are held by the funds' custodian bank until maturity of the repurchase agreements. Provisions for all agreements ensure the daily market value of the collateral is in excess of the repurchase amount in the event of default. (3) EXPENSES The funds have entered into the following agreements with Piper Capital Management Incorporated (the adviser and administrator): The investment advisory agreement provides the adviser with a monthly investment management fee based on fund's average weekly net assets computed at the per-annum rate of 0.35%. For its fee, the adviser provides investment advice and, in general, conducts the management and investment activity of the fund. The administration agreement provides the administrator with a monthly fee in an amount equal to an annualized rate of 0.15% of the fund's average weekly net assets. For its fee, the administrator provides certain reporting, regulatory and record-keeping services for the funds. In addition to the investment management fee and the administrative fee, the funds are responsible for paying most other operating expenses including outside directors' fees and expenses, custodian fees, registration fees, printing and shareholder reports, transfer agent fees and expenses, legal, auditing and accounting services, insurance, interest, taxes and other miscellaneous expenses. 10 NOTES TO FINANCIAL STATEMENTS (4) SECURITIES TRANSACTIONS Cost of purchases and proceeds from sales of securities (other than temporary investments in short-term securities) for the year ended August 31, 1994, were as follows:
Purchases Sales Proceeds ----------- -------------- BDJ............................$ 162,505,754 311,372,150 CDJ............................$ 302,755,288 480,590,691 DDJ............................$ 299,438,007 529,572,440 EDJ............................$ 165,609,875 324,311,984
During the year ended August 31, 1994, the funds paid Piper Jaffray Inc., an affiliated broker, brokerage commissions of $48,875; $61,625; $63,325 and $48,450 for BDJ, CDJ, DDJ and EDJ, respectively. (5) OPTION CONTRACTS WRITTEN The number of contracts and premium amounts associated with option contracts written during the year ended August 31, 1994, for BDJ, CDJ, DDJ and EDJ were as follows:
Call Options Put Options --------------------- --------------------- Number of Premium Number of Premium Contracts Amount Contracts Amount --------- --------- --------- --------- AMERICAN ADJUSTABLE RATE TERM TRUST 1996 Balance at August 31, 1993.................. 100 $ 42,188 -- $ -- Opened...................................... 350 239,775 100 16,338 Closed or expired........................... (450) (281,963) (100) (16,338) ---- -------- ---- ------- Balance at August 31, 1994.................. -- $ -- -- $ -- ---- -------- ---- ------- ---- -------- ---- -------
Call Options Put Options --------------------- --------------------- Number of Premium Number of Premium Contracts Amount Contracts Amount --------- --------- --------- --------- AMERICAN ADJUSTABLE RATE TERM TRUST 1997 Balance at August 31, 1993.................. 200 $ 84,375 -- $ -- Opened...................................... 600 450,713 100 16,338 Closed or expired........................... (800) (535,088) (100) (16,338) ---- -------- ---- ------- Balance at August 31, 1994.................. -- $ -- -- $ -- ---- -------- ---- ------- ---- -------- ---- -------
Call Options Put Options --------------------- --------------------- Number of Premium Number of Premium Contracts Amount Contracts Amount --------- --------- --------- --------- AMERICAN ADJUSTABLE RATE TERM TRUST 1998 Balance at August 31, 1993.................. 200 $ 84,375 -- $ -- Opened...................................... 600 450,713 100 16,338 Closed or expired........................... (800) (535,088) (100) (16,338) ---- -------- ---- ------- Balance at August 31, 1994.................. -- $ -- -- $ -- ---- -------- ---- ------- ---- -------- ---- -------
11 NOTES TO FINANCIAL STATEMENTS (5) OPTION CONTRACTS WRITTEN (CONTINUED)
Call Options Put Options --------------------- --------------------- Number of Premium Number of Premium Contracts Amount Contracts Amount --------- --------- --------- --------- AMERICAN ADJUSTABLE RATE TERM TRUST 1999 Balance at August 31, 1993.................. 200 $ 96,875 -- $ -- Opened...................................... 800 503,838 100 16,338 Closed or expired........................... (1,000) (600,713) (100) (16,338) ------ -------- ---- ------- Balance at August 31, 1994.................. -- $ -- -- $ -- ------ -------- ---- ------- ------ -------- ---- -------
(6) INVESTMENTS IN PUT OPTIONS In order to hedge the value of adjustable rate mortgage securities under certain interest rate scenarios, each fund purchased four-year U.S. Treasury note put option contracts. Each fund will be entitled to a cash payment during the exercise period if at such time yields on the then current four-year U.S. Treasury notes are in excess of the strike yield specified in the option contracts.
American American American American Adjustable Adjustable Adjustable Adjustable Rate Term Rate Term Rate Term Rate Term Trust 1996 Trust 1997 Trust 1998 Trust 1999 -------------- -------------- -------------- -------------- Number of contracts........ 2,170 4,060 4,550 2,650 Notional value............$ 217,000,000 406,000,000 455,000,000 265,000,000 Purchase price............$ 1,528,800 2,575,600 2,613,500 2,010,000 Exercise period............ 3/1/96-3/31/96 3/1/97-3/31/97 3/1/98-3/31/98 3/1/99-3/31/99 Strike yield 11.25% 11.00% 11.00% 10.50%
(7) RETIREMENT OF FUND SHARES The funds' board of directors has approved a plan to repurchase shares of the funds in the open market and retire those shares. Repurchases may only be made when the previous day's closing market price was at a discount from net asset value. Daily repurchases are limited to 25% of the previous four weeks average daily trading volume on the New York Stock Exchange. Under the current plan, cumulative repurchases in each fund cannot exceed 3% of the total shares originally issued. The board of directors will review the plan every six months and may change the amount which may be repurchased. The plan was last reviewed and reapproved by the board of directors on August 22, 1994. Pursuant to the plan, the funds have repurchased and retired the following number of shares as of August 31, 1994:
Shares Percent of Shares Repurchased Originally Issued ----------- ----------------- BDJ........................... 142,700 0.53% CDJ........................... 290,700 0.58% DDJ........................... 335,000 0.59% EDJ........................... 205,100 0.60%
12 NOTES TO FINANCIAL STATEMENTS (8) QUARTERLY DATA (UNAUDITED)
Net Realized Net Increase Distributions Distributions Quarter Total Net and Unrealized (Decrease) in Net From Net in Excess of End Investment Investment Losses Assets Resulting Investment Net Realized Net Asset Quarter Ended Income Income on Investments from Operations Income Gains Value - ------------- ----------- ---------------- ------------------ ------------------ ------------------ ------------- --------- AMERICAN ADJUSTABLE RATE TERM TRUST 1996 Per Per Per Per Per Amount Share Amount Share Amount Share Amount Share Amount Share ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- November 30, 1993 $ 5,253,479 4,840,044 0.18 (1,053,003) (0.04) 3,787,041 0.14 (3,616,699) (0.13) -- -- 9.61 February 28, 1994 5,269,613 4,853,352 0.18 (5,018,340) (0.19) (164,988) (0.01) (3,433,577) (0.13) -- -- 9.47 May 31, 1994 4,357,981 3,973,214 0.15 (12,433,124) (0.46) (8,459,910) (0.31) (3,029,250) (0.11) -- -- 9.05 August 31, 1994 4,261,001 3,853,516 0.14 (1,758,830) (0.06) 2,094,686 0.08 (2,415,850) (0.09) -- -- 9.04 ---------- ---------- ---- ----------- ----- ---------- ----- ----------- ----- ------- ----- $19,142,074 17,520,126 0.65 (20,263,297) (0.75) (2,743,171) (0.10) (12,495,376) (0.46) -- -- ---------- ---------- ---- ----------- ----- ---------- ----- ----------- ----- ------- ----- ---------- ---------- ---- ----------- ----- ---------- ----- ----------- ----- ------- ----- AMERICAN ADJUSTABLE RATE TERM TRUST 1997 Per Per Per Per Per Amount Share Amount Share Amount Share Amount Share Amount Share ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- November 30, 1993 $ 9,463,769 8,686,761 0.17 (3,784,984) (0.08) 4,901,777 0.09 (7,581,090) (0.15) -- -- 9.60 February 28, 1994 9,317,595 8,659,087 0.17 (10,702,263) (0.21) (2,043,176) (0.04) (7,126,226) (0.14) -- -- 9.42 May 31, 1994 8,134,251 7,497,603 0.15 (26,630,581) (0.53) (19,132,978) (0.38) (6,492,302) (0.13) -- -- 8.91 August 31, 1994 7,692,307 6,920,813 0.14 (2,098,856) (0.04) 4,821,957 0.10 (5,667,605) (0.11) -- -- 8.90 ---------- ---------- ---- ----------- ----- ---------- ----- ----------- ----- ------- ----- $34,607,922 31,764,264 0.63 (43,216,684) (0.86) (11,452,420) (0.23) (26,867,223) (0.53) -- -- ---------- ---------- ---- ----------- ----- ---------- ----- ----------- ----- ------- ----- ---------- ---------- ---- ----------- ----- ---------- ----- ----------- ----- ------- ----- AMERICAN ADJUSTABLE RATE TERM TRUST 1998 Per Per Per Per Per Amount Share Amount Share Amount Share Amount Share Amount Share ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- November 30, 1993 $10,296,384 9,487,106 0.17 (3,332,834) (0.06) 6,154,272 0.11 (8,895,890) (0.16) -- -- 9.62 February 28, 1994 10,095,038 9,295,712 0.16 (9,663,007) (0.17) (367,295) (0.01) (8,382,665) (0.15) -- -- 9.46 May 31, 1994 9,009,810 8,188,824 0.15 (30,378,368) (0.53) (22,189,544) (0.38) (7,640,641) (0.13) -- -- 8.95 August 31, 1994 7,673,004 6,920,472 0.12 (7,315,351) (0.13) (394,879) (0.01) (6,821,793) (0.12) -- -- 8.82 ---------- ---------- ---- ----------- ----- ---------- ----- ----------- ----- ------- ----- $37,074,236 33,892,114 0.60 (50,689,560) (0.89) (16,797,446) (0.29) (31,740,989) (0.56) -- -- ---------- ---------- ---- ----------- ----- ---------- ----- ----------- ----- ------- ----- ---------- ---------- ---- ----------- ----- ---------- ----- ----------- ----- ------- ----- AMERICAN ADJUSTABLE RATE TERM TRUST 1999 Per Per Per Per Per Amount Share Amount Share Amount Share Amount Share Amount Share ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- November 30, 1993 $ 5,927,953 5,463,717 0.16 (486,747) (0.01) 4,976,970 0.15 (5,318,248) (0.16) -- -- 9.60 February 28, 1994 5,720,578 5,232,284 0.16 (4,595,870) (0.13) 636,414 0.03 (5,113,700) (0.15) (183,586) (0.01) 9.47 May 31, 1994 5,533,724 5,067,342 0.15 (20,710,774) (0.61) (15,643,432) (0.46) (4,503,696) (0.13) -- -- 8.88 August 31, 1994 4,867,243 4,397,339 0.13 (5,665,141) (0.18) (1,267,802) (0.05) (4,334,856) (0.12) -- -- 8.71 ---------- ---------- ---- ----------- ----- ---------- ----- ----------- ----- ------- ----- $22,049,498 20,160,682 0.60 (31,458,532) (0.93) (11,297,850) (0.33) (19,270,500) (0.56) (183,586) (0.01) ---------- ---------- ---- ----------- ----- ---------- ----- ----------- ----- ------- ----- ---------- ---------- ---- ----------- ----- ---------- ----- ----------- ----- ------- -----
13 (9) CAPITAL LOSS CARRYOVER For federal income tax purposes, the funds had capital loss carryovers of $18,707,511; $35,875,182; $29,024,290 and $17,812,871 for BDJ, CDJ, DDJ and EDJ, respectively, at August 31, 1994. If these loss carryovers are not offset by subsequent capital gains, they will expire at various times during 1999 through 2003. It is unlikely the board of directors will authorize a distribution of any net realized capital gains until the available capital loss carryovers have been offset or expire. (10) SUBSEQUENT EVENT -- TENDER OFFER OF FUND SHARES On August 22, 1994, shareholders of the funds approved a fundamental policy that allows shareholders of BDJ, CDJ, DDJ, and EDJ to periodically tender their shares back to the respective fund at net asset value. A tender of 5% to 25% of the outstanding shares will be offered annually and is voluntary. Shareholders may elect not to tender their shares, or may tender only a portion of their shares. The first tender offer to repurchase up to 25% of each fund's outstanding shares was mailed to shareholders on September 6, 1994. The deadline for participating in the offer was October 3, 1994. The repurchase prices were determined on October 10, 1994, at the close of the New York Stock Exchange (4 p.m. Eastern Time). Proceeds of the tender offer were paid to shareholders on October 17, 1994. The total proceeds paid by the funds and number and percentage of shares tendered are as follows:
Percentage Shares Repurchase Proceeds Tendered Tendered Price Paid ---------- --------- ---------- ----------- BDJ 18% 4,767,018 $8.98 $42,807,822 CDJ 15% 7,396,113 $8.79 $65,011,833 DDJ 16% 9,135,819 $8.69 $79,390,267 EDJ 16% 5,535,062 $8.53 $47,214,079
(11) SUBSEQUENT EVENT -- PENDING LITIGATION A complaint purporting to be a class action lawsuit has been filed in the United States District Court for the District of Minnesota, by Herman D. Gordon, against DDJ and EDJ, Piper Capital Management Incorporated, Piper Jaffray Inc., and certain affiliated individuals. The complaint, which was filed on October 20, 1994, alleges violations of federal securities laws. DDJ and EDJ intend to defend this lawsuit vigorously. Although it is impossible to predict the outcome, management believes, based on the facts currently available, there will be no material adverse effect on the financial statements of DDJ or EDJ. 14 NOTES TO FINANCIAL STATEMENTS (12) FINANCIAL HIGHLIGHTS Per-share data for a share of capital stock outstanding throughout each period and selected information for each period are as follows:
AMERICAN ADJUSTABLE RATE TERM TRUST 1996 Year Year Year Period from Ended Ended Ended 9/27/90* PER-SHARE DATA 8/31/94 8/31/93 8/31/92 to 8/31/91 ------- ------- ------- ----------- Net asset value, beginning of period...............................$ 9.60 9.74 9.64 9.53 ----- ----- ----- ----- Operations: Net investment income............................................. 0.65 0.75 0.82 0.83 Net realized and unrealized gains (losses) on investments......... (0.75) (0.27) 0.07 0.05 ----- ----- ----- ----- Total from operations........................................... (0.10) 0.48 0.89 0.88 ----- ----- ----- ----- Distributions to shareholders from: Net investment income............................................. (0.46) (0.62) (0.79) (0.77) ----- ----- ----- ----- Net asset value, end of period.....................................$ 9.04 9.60 9.74 9.64 ----- ----- ----- ----- ----- ----- ----- ----- Per share market value, end of period..............................$ 8.50 9.50 10.25 10.13 ----- ----- ----- ----- ----- ----- ----- ----- SELECTED INFORMATION Total investment return, market value**............................. (5.94%) (1.37%) 9.29% 9.15% Total investment return, net asset value+........................... (1.06%) 5.18% 9.58% 9.55% Net assets at end of period (000s omitted).........................$ 242,088 258,542 262,334 259,506 Ratio of expenses to average weekly net assets***................... 0.65% 0.61% 0.62% 0.64%++ Ratio of net investment income to average weekly net assets***...... 6.97% 7.91% 8.44% 9.09%++ Portfolio turnover rate (excluding short-term securities)........... 43% 58% 26% 60% Amount of borrowings outstanding at end of period (000s omitted)+++................................................$ 70,000 85,574 70,000 70,117 Per-share amount of borrowings outstanding at end of period........$ 2.61 3.18 2.60 2.60 Per-share asset coverage of borrowings outstanding at end of period++++.......................................................$ 11.65 12.78 12.34 12.24 * Commencement of operations. ** Total investment return, market value, is based on the change in market price of a common share during the period and assumes reinvestment of distributions at actual prices pursuant to the fund's dividend reinvestment plan. *** Includes 0.01% from federal excise taxes in fiscal year 1994. + total investment return, net asset value, is based on the change in net asset value of a common share during the period and assumes reinvestment of distributions at net asset value. ++ Adjusted to an annual basis. +++ Securities purchased on a when-issued basis for which liquid, high-grade debt obligations are maintained in a segregated account are not considered borrowings. See footnote 2 in the notes to financial statements. ++++ Represents net assets (excluding borrowings) divided by common shares outstanding.
15 NOTES TO FINANCIAL STATEMENTS (12) FINANCIAL HIGHLIGHTS (CONTINUED) Per-share data for a share of capital stock outstanding throughout each period and selected information for each period are as follows:
AMERICAN ADJUSTABLE RATE TERM TRUST 1997 Year Year Year Period from Ended Ended Ended 7/24/91* PER-SHARE DATA 8/31/94 8/31/93 8/31/92 to 8/31/91 ------- ------- ------- ----------- Net asset value, beginning of period...............................$ 9.66 9.68 9.68 9.58 ----- ----- ----- ----- Operations: Net investment income............................................. 0.63 0.72 0.78 0.07 Net realized and unrealized gains (losses) on investments......... (0.86) (0.10) 0.05 0.03 ----- ----- ----- ----- Total from operations........................................... (0.23) 0.62 0.83 0.10 ----- ----- ----- ----- Distributions to shareholders from: Net investment income............................................. (0.53) (0.63) (0.80) -- Net realized gains................................................ -- (0.01) (0.03) -- ----- ----- ----- ----- Total distributions to shareholders............................. (0.53) (0.64) (0.83) -- ----- ----- ----- ----- Net asset value, end of period.....................................$ 8.90 9.66 9.68 9.68 ----- ----- ----- ----- ----- ----- ----- ----- Per share market value, end of period..............................$ 8.50 9.38 10.00 10.25 ----- ----- ----- ----- ----- ----- ----- ----- SELECTED INFORMATION Total investment return, market value**............................. (3.96%) 0.04% 5.87% 2.50% Total investment return, net asset value+........................... (2.46%) 6.73% 8.97% 1.04% Net assets at end of period (000s omitted).........................$ 447,389 488,146 489,052 211,731 Ratio of expenses to average weekly net assets...................... 0.61% 0.58% 0.60% 0.60%++ Ratio of net investment income to average weekly net assets......... 6.76% 7.55% 7.99% 7.88%++ Portfolio turnover rate (excluding short-term securities)........... 43% 47% 38% 10% Amount of borrowings outstanding at end of period (000s omitted)+++................................................$ 125,000 161,500 143,000 50,000 Per-share amount of borrowings outstanding at end of period........$ 2.49 3.20 2.83 2.29 Per-share asset coverage of borrowings outstanding at end of period++++.......................................................$ 11.39 12.86 12.51 11.97 * Commencement of operations. ** Total investment return, market value, is based on the change in market price of a common share during the period and assumes reinvestment of distributions at actual prices pursuant to the fund's dividend reinvestment plan. + Total investment return, net asset value, is based on the change in net asset value of a common share during the period and assumes reinvestment of distributions at net asset value. ++ Adjusted to an annual basis. +++ Securities purchased on a when-issued basis for which liquid, high-grade debt obligations are maintained in a segregated account are not considered borrowings. see footnote 2 in the notes to financial statements. ++++ Represents net assets (excluding borrowings) divided by common shares outstanding.
16 NOTES TO FINANCIAL STATEMENTS (12) FINANCIAL HIGHLIGHTS (CONTINUED) Per-share data for a share of capital stock outstanding throughout each period and selected information for each period are as follows:
AMERICAN ADJUSTABLE RATE TERM TRUST 1998 Year Year Period from Ended Ended 1/30/92* PER-SHARE DATA 8/31/94 8/31/93 to 8/31/92 ------- ------- ----------- Net asset value, beginning of period...............................$ 9.67 9.74 9.58 ----- ----- ----- Operations: Net investment income............................................. 0.60 0.69 0.43 Net realized and unrealized gains (losses) on investments......... (0.89) (0.10) 0.08 ----- ----- ----- Total from operations........................................... (0.29) 0.59 0.51 ----- ----- ----- Distributions to shareholders from: Net investment income............................................. (0.56) (0.66) (0.35) ----- ----- ----- Net asset value, end of period.....................................$ 8.82 9.67 9.74 ----- ----- ----- ----- ----- ----- Per share market value, end of period..............................$ 8.38 9.63 9.88 ----- ----- ----- ----- ----- ----- SELECTED INFORMATION Total investment return, market value**............................. (7.48%) 4.23% 2.31% Total investment return, net asset value+........................... (3.18%) 6.24% 5.49% Net assets at end of period (000s omitted).........................$ 500,062 551,369 555,384 Ratio of expenses to average weekly net assets...................... 0.60% 0.58% 0.58%++ Ratio of net investment income to average weekly net assets......... 6.39% 7.25% 7.70%++ Portfolio turnover rate (excluding short-term securities)........... 39% 39% 41% Amount of borrowings outstanding at end of period (000s omitted)+++................................................$ 145,000 145,000 145,000 Per-share amount of borrowings outstanding at end of period........$ 2.56 2.54 2.54 Per-share asset coverage of borrowings outstanding at end of period++++.......................................................$ 11.38 12.21 12.28 * Commencement of operations. ** Total investment return, market value, is based on the change in market price of a common share during the period and assumes reinvestment of distributions at actual prices pursuant to the fund's dividend reinvestment plan. + Total investment return, net asset value, is based on the change in net asset value of a common share during the period and assumes reinvestment of distributions at net asset value. ++ Adjusted to an annual basis. +++ Securities purchased on a when-issued basis for which liquid, high-grade debt obligations are maintained in a segregated account are not considered borrowings. see footnote 2 in the notes to financial statements. ++++ Represents net assets (excluding borrowings) divided by common shares outstanding.
17 NOTES TO FINANCIAL STATEMENTS (12) FINANCIAL HIGHLIGHTS (CONTINUED) Per-share data for a share of capital stock outstanding throughout each period and selected information for each period are as follows:
AMERICAN ADJUSTABLE RATE TERM TRUST 1999 Year Period from Ended 9/24/92* PER-SHARE DATA 8/31/94 to 8/31/93 ------- ----------- Net asset value, beginning of period...............................$ 9.61 9.58 ----- ----- Operations: Net investment income............................................. 0.60 0.60 Net realized and unrealized losses on investments................. (0.93) (0.04) ----- ----- Total from operations........................................... (0.33) 0.56 ----- ----- Distributions to shareholders: From net investment income........................................ (0.56) (0.53) In excess of net realized gains................................... (0.01) -- ----- ----- Total distributions to shareholders............................. (0.57) (0.53) ----- ----- Net asset value, end of period.....................................$ 8.71 9.61 ----- ----- ----- ----- Per share market value, end of period..............................$ 8.25 9.63 ----- ----- ----- ----- SELECTED INFORMATION Total investment return, market value**............................. (8.75%) 1.62% Total investment return, net asset value+........................... (3.61%) 6.05% Net assets at end of period (000s omitted).........................$ 295,159 327,585 Ratio of expenses to average weekly net assets...................... 0.60% 0.57%++ Ratio of net investment income to average weekly net assets......... 6.40% 6.76%++ Portfolio turnover rate (excluding short-term securities)........... 35% 40% Amount of borrowings outstanding at end of period (000s omitted)+++................................................$ 85,000 102,148 Per-share amount of borrowings outstanding at end of period........$ 2.51 3.00 Per-share asset coverage of borrowings outstanding at end of period++++.......................................................$ 11.22 12.61 * Commencement of operations. ** Total investment return, market value, is based on the change in market price of a common share during the period and assumes reinvestment of distributions at actual prices pursuant to the fund's dividend reinvestment plan. + Total investment return, net asset value, is based on the change in net asset value of a common share during the period and assumes reinvestment of distributions at net asset value. ++ Adjusted to an annual basis. +++ Securities purchased on a when-issued basis for which liquid, high-grade debt obligations are maintained in a segregated account are not considered borrowings. See footnote 2 in the notes to financial statements. ++++ Represents net assets (excluding borrowings) divided by common shares outstanding.
18 INVESTMENTS IN SECURITIES
AMERICAN ADJUSTABLE RATE TERM TRUST 1996 AUGUST 31, 1994 Principal Market Name of Issuer Amount Value (a) - -------------- --------- --------- (PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS) MORTGAGE-BACKED SECURITIES (86.0%): U.S. AGENCY FIXED-RATE MORTGAGES (4.0%): GNMA, 7.00%, 1/1/23 . . . . . . . . . . . . . . $ 5,000,000(b) 4,670,300 FNMA, 7.50%, 1/1/2000 . . . . . . . . . . . . . 5,000,000(b) 5,046,850 ------------ 9,717,150 ------------ U.S. AGENCY ADJUSTABLE-RATE MORTGAGES (43.7%): GNMA, 5.50%, 1/01/21. . . . . . . . . . . . . . 15,000,000(b) 14,634,450 GNMA, 6.00%, 5/20/21. . . . . . . . . . . . . . 5,168,529(d) 5,026,394 GNMA, 6.00%, 8/20/23. . . . . . . . . . . . . . 5,316,737(d) 5,353,289 FHLMC, 5.25%, 11/1/16 . . . . . . . . . . . . . 11,177,126(d) 11,386,697 FHLMC, 5.65%, 6/1/18. . . . . . . . . . . . . . 2,444,273(d) 2,506,896 FHLMC, 5.91%, 10/1/18 . . . . . . . . . . . . . 7,543,482(d) 7,656,634 FHLMC, 5.83%, 5/1/19. . . . . . . . . . . . . . 2,333,229(d) 2,385,727 FHLMC, 5.97%, 10/1/19 . . . . . . . . . . . . . 2,901,352(d) 2,983,866 FHLMC, 5.79%, 8/1/20. . . . . . . . . . . . . . 11,407,536(d) 11,614,241 FHLMC, 6.88%, 6/1/21. . . . . . . . . . . . . . 2,941,847(d) 3,026,426 FHLMC, 5.81%, 10/1/22 . . . . . . . . . . . . . 3,379,510(d) 3,474,575 FHLMC, 6.10%, 7/1/23. . . . . . . . . . . . . . 8,214,973 8,327,929 FHLMC, 4.26%, 9/1/23. . . . . . . . . . . . . . 1,782,342(d) 1,766,747 FHLMC, 4.00%, 1/1/24. . . . . . . . . . . . . . 1,880,500(d) 1,892,253 FHLMC, 4.22%, 1/1/24. . . . . . . . . . . . . . 1,959,936(d) 1,981,985 FNMA, 6.19%, 7/1/17 . . . . . . . . . . . . . . 2,061,445(d) 2,105,250 FNMA, 5.47%, 4/1/18 . . . . . . . . . . . . . . 5,626,155 5,742,166 FNMA, 5.83%, 1/1/20 . . . . . . . . . . . . . . 2,209,143(d) 2,268,502 FNMA, 5.82%, 8/1/23 . . . . . . . . . . . . . . 2,681,479(d) 2,745,164 FNMA, 5.09%, 12/1/23. . . . . . . . . . . . . . 4,110,957(d) 4,100,679 FNMA, 5.99%, 5/1/27 . . . . . . . . . . . . . . 1,950,119 1,985,163 FNMA, 6.23%, 1/1/28 . . . . . . . . . . . . . . 2,693,377(d) 2,734,208 ------------ 105,699,241 ------------ COLLATERALIZED MORTGAGE OBLIGATIONS AND OTHER MORTGAGE-BACKED SECURITIES (e)(38.3%): U.S. AGENCY ADJUSTABLE RATE (6.8%): FHLMC, 7.00%, Series 1249, Class A, 4/15/22 . . . . . . . . . . . . . . . . . 16,312,777 16,455,514 ------------ PRIVATE ADJUSTABLE RATE (30.3%): California Federal, Series 1988-PAL, Class A, 6.17%, 4/1/17. . . . . . . . . . 1,821,211 1,799,584 Citicorp Mortgage Securities, Series 1991-14, Class M, 5.34%, 9/25/21. . . . . 6,080,207 6,049,806 Columbia Savings and Loan, Series 1987-1, Class A, 6.14%, 12/1/17 . . . . . 674,796 674,796 Donaldson, Lufkin and Jenrette, Series 1992-MF3, Class A3, 6.26%, 5/25/22. . . . . . . . . . . . . . 6,000,000 6,127,500 Glendale Federal Savings, Series 1988-1, Class A, 5.42%, 11/25/27. . . . . 1,154,212 1,149,884 Glendale Federal Savings, Series 1988-2, Class A, 5.82%, 5/1/28. . . . . . 4,343,547 4,359,836 Meridian Asset Acceptance Corporation, Series 1991-1, Class A1, 5.71%, 4/27/20. . . . . . . . . . . . . . 2,696,131 2,702,872 Merrill Lynch Mortgage Investors, Series 1993-D, Class A1-2, 4.82%, 10/25/23 . . . . . . . . . . . . . 2,000,000 1,975,320 Merrill Lynch Mortgage Investors, Series 1993-H, Class A1-2, 4.99%, 10/25/23 . . . . . . . . . . . . . 2,320,000 2,279,122 Paine Webber Mortgage Acceptance Corporation, Series 1993-10, Class M1, 5.71%, 11/25/23 . . . . . . . . 13,300,648 13,483,532 Paine Webber Mortgage Acceptance Corporation, Series 1993-8, Class M2, 5.83%, 8/25/23. . . . . . . . . 5,152,523 5,068,794 Residential Funding Corporation, Series 1992-S25, Class A, 6.04%, 7/25/22. . . . . . . . . . . . . . 5,942,189 5,957,461 Residential Funding Corporation, Series 1993-S8, Class A, 5.88%, 2/25/23. . . . . . . . . . . . . . 6,837,646 6,898,364 Resolution Trust Corporation, Series 1991-5 Class A-1, 6.42%, 9/25/19. . . . . 2,250,122 2,261,440 Ryland - First Nationwide, Series 1989-FN1, Class A, 5.72%, 11/1/18 . . . . 6,367,354 6,361,384 Ryland Mortgage Securities, Series 1991-B1, Class 1, 5.65%, 3/25/20. . . . . 1,955,153 1,955,153 Salomon Brothers Mortgage, Series 1987-2, Class A, 6.98%, 12/25/16. . . . . 3,354,854 3,346,467 Salomon Brothers Mortgage, Series 1988-3, Class A, 5.76%, 6/25/17 . . . . . 879,738 863,516 ------------ 73,314,831 ------------ U.S. AGENCY INVERSE FLOATER (1.0%): FHLMC, 8.26%, Series 1362, Class S, Treasury, 1/15/21 . . . . . . . . . . . . 3,000,000 2,218,125 FNMA, 9.63%, Series G93-19, Class SM, COFI, 4/25/23 . . . . . . . . . . . . . . 336,075 157,955 ------------ 2,376,080 ------------ U.S. AGENCY INVERSE INTEREST-ONLY (0.2%): FHLMC, 12.03%, Series 1381, Class SB, COFI, 10/15/07. . . . . . . . . . . . . . -- 607,379 ------------ Total Mortgage-Backed Securities (cost: $212,680,343). . . . . . . . . . . 208,170,195 ------------ STRUCTURED SECURITIES (g)(2.5%): FOREIGN LINKED INDEX SECURITIES (2.0%): Commerzbank, A.G., New York, 9.00%, due 3/20/95. . . . . . . . . . . . . . . . . 3,000,000(1) 2,791,590 Rabobank Nederland, New York, 10.00%, due 7/17/95. . . . . . . . . . . . . . . . . 2,000,000(2) 1,993,000 ------------ 4,784,590 ------------ OTHER STRUCTURED SECURITIES (0.5%): Bayerische Vereinsbank, New York, 10.00% due 8/15/95. . . . . . . . . . . . . . . . . 1,500,000(3) 1,240,050 ------------ Total Structured Securities (cost: $6,500,000) . . . . . . . . . . . . . 6,024,640 ------------ MUNICIPAL ZERO-COUPON SECURITIES (c)(14.6%): Alabama State Public School and College, 6.73%, 11/1/96 (callable at 94.03 on 11/1/95) . . . . . . . 725,000 649,781 Alief, Texas, School District, 4.24%, 2/15/97 . . . . . . . . . . . . . . . 760,000 679,250 Arlington, Texas, Independent School District, 6.10%-6.78%, 2/15/96 . . . . . . . 1,120,000 1,049,750 Bellevue, Washington, Convention Center, 6.05%, 12/1/96 . . . . . . . . . . . 1,000,000 902,500 Clairton, Pennsylvania, School District, 6.83%, 11/1/96 . . . . . . . . . . 1,035,000 932,794 SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES. 22 AMERICAN ADJUSTABLE RATE TERM TRUST 1996 (CONTINUED) Principal Market Name of Issuer Amount Value (a) - -------------- --------- --------- Corpus Christi, Texas, Series A, 6.78%, 11/1/96 . . . . . . . . . . . . . . . $ 735,000 669,638 Eastern Illinois University Facility, 5.67%, 10/1/96 . . . . . . . . . . . . . . . 1,055,000 960,050 Illinois Educational Facility, 6.07%, 7/1/96. . . . . . . . . . . . . . . . 5,550,000 5,112,938 Maricopa County, Arizona, School District, 6.48%, 7/1/96. . . . . . . . . . . 3,050,000 2,821,250 Mesa, Arizona, General Obligation, 6.01%, 7/1/96. . . . . . . . . . . . . . . . 1,845,000 1,699,706 North Slope Boro, Alaska, Series I, 5.76% - 6.68%, 6/30/96 . . . . . . . . . . . 14,300,000 13,227,500 Orleans Parish, Louisiana, School Board, 4.10%-4.33%, 2/1/96-8/1/96. . . . . . 800,000 846,000 Phoenix, Arizona, Excise Tax Parking Revenue, 6.22%, 7/1/96 . . . . . . . . . . . 1,000,000 922,500 Provo, Utah, Energy System Revenue, 4.68%, 11/1/96 . . . . . . . . . . . . . . . 3,000,000 3,108,750 Illinois State Sales Tax Revenue, 6.38%, 6/15/96 . . . . . . . . . . . . . . . 500,000 461,875 University of Illinois Auxiliary Facility, 6.01%, 4/1/96. . . . . . . . . . . 1,140,000 1,064,475 Vermont State College Savers, General Obligation, 5.57%, 10/15/96. . . . . . . . . 370,000 338,088 ------------ Total Municipal Zero-Coupon Securities (cost: $34,128,414). . . . . . . . . . . . . 35,446,845 ------------ CANADIAN SECURITIES (f)(6.5%): Canadian Government Real Return Bond, 4.25%, 12/1/21 . . . . . . . . . . . . . . . 3,000,000 2,099,468 Canadian Government Note, 8.49%, 3/1/96 . . . . . . . . . . . . . . . . . . . 5,000,000 3,278,724 Canadian Government Residual, 7.23%, 6/1/95 . . . . . . . . . . . . . . . . . . . 1,320,000(c) 919,994 Canadian Treasury Bill, 7.27%, 5/4/95 . . . . . 1,900,000(c) 1,333,154 Firstline Trust, 7.13%, 3/1/98. . . . . . . . . 2,361,105 1,646,419 Manufacturers Life, 7.50%, 8/1/95 . . . . . . . 2,738,895 2,005,886 Manufacturers Life, 8.25%, 8/1/97 . . . . . . . 2,175,304 1,578,571 Royal Trust, 9.00%, 3/1/97. . . . . . . . . . . 3,882,873 2,872,241 ------------ Total Canadian Securities (cost: $17,135,225). . . . . . . . . . . . . 15,734,457 ------------ INTEREST RATE CONTRACTS (0.0%): Interest rate floor with Morgan Stanley, $5,000,000 notional principal on three- month Deutschemark LIBOR, (5.00% on 8/31/94), exercise rate of 5.00%, due 4/6/98 (cost: $81,861). . . . . . . . . . . . . . . -- 12,000 ------------ OPTIONS (0.0%): Canadian dollar, 200 put option contracts, exercise price of 1.37, expire September 1994 (cost: $253,146). . . . . . . -- 93,118 ------------ SHORT-TERM SECURITIES (27.9%): U.S. Treasury Bill, 5.29%, 4/6/95 . . . . . . . 20,000,000 19,400,800 U.S. Treasury Bill, 5.23%, 6/1/95 . . . . . . . 22,000,000 21,147,500 Repurchase agreement with Morgan Stanley in a joint trading account, 4.65%, acquired on 8/31/94 and due 9/1/94 with accrued interest of $3,490 (collateralized by U.S. government agency obligations). . . . . 27,020,000 27,020,000 ------------ Total Short-Term Securities (cost: $67,585,995). . . . . . . . . . . . . 67,568,300 ------------ Total Investments in Securities (cost: $338,364,984)(h). . . . . . . . . . . $ 333,049,555 ------------ ------------ NOTES TO INVESTMENTS IN SECURITIES: (A) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO THE FINANCIAL STATEMENTS. (B) ON AUGUST 31, 1994, THE TOTAL COST OF INVESTMENTS PURCHASED ON A WHEN-ISSUED BASIS WAS $24,389,158. (C) FOR ZERO-COUPON INVESTMENTS, THE INTEREST RATE SHOWN IS THE EFFECTIVE YIELD ON THE DATE OF PURCHASE. (D) ON AUGUST 31, 1994, SECURITIES VALUED AT $72,768,640 WERE PLEDGED AS COLLATERAL FOR THE FOLLOWING OUTSTANDING REVERSE REPURCHASE AGREEMENT: NAME OF BROKER AND ACQUISITION ACCRUED DESCRIPTION AMOUNT DATE RATE* DUE INTEREST OF COLLATERAL ------ ------------ ----- --- -------- ------------- $ 70,000,000 6/2/94 4.52% 5/30/95 $263,667 (1) * INTEREST RATE IS AS OF AUGUST 31, 1994. RATE IS BASED ON THE LONDON INTERBANK OFFERED RATE (LIBOR) AND RESETS MONTHLY. NAME OF BROKER AND DESCRIPTION OF COLLATERAL: (1) MORGAN STANLEY; GNMA, 6.00%, 8/20/23, $5,316,737 PAR. GNMA, 6.00%, 5/20/21, $5,168,529 PAR. FNMA, 6.19%, 7/1/17, $2,061,445 PAR. FNMA, 6.23%, 1/1/28, $2,693,377 PAR. FNMA, 5.83%, 1/1/20, $2,209,143 PAR. FNMA, 5.09%, 12/1/23, $4,110,957 PAR. FNMA, 5.82%, 8/1/23, $2,681,479 PAR. FHLMC, 5.81%, 10/1/22, $2,838,790 PAR. FHLMC, 4.26%, 9/1/23, $1,336,757 PAR. FHLMC, 6.88%, 6/1/21, $2,941,847 PAR. FHLMC, 5.25%, 11/1/16, $11,177,126 PAR. FHLMC, 5.65%, 6/1/18, $2,444,273 PAR. FHLMC, 5.83%, 5/1/19, $2,333,229 PAR. FHLMC, 5.91%, 10/1/18, $7,543,482 PAR. FHLMC, 5.79%, 8/1/20, $11,407,536 PAR. FHLMC, 5.97%, 10/1/19, $1,692,455 PAR. FHLMC, 4.00%, 1/1/24, $1,880,500 PAR. FHLMC, 4.22%, 1/1/24, $1,959,936 PAR. 23 AMERICAN ADJUSTABLE RATE TERM TRUST 1996 (CONTINUED) (E) DESCRIPTIONS OF CERTAIN COLLATERALIZED MORTGAGE OBLIGATIONS ARE AS FOLLOWS: LIBOR - LONDON INTERBANK OFFERED RATE COFI (11TH DISTRICT) - COST OF FUNDS INDEX OF THE FEDERAL RESERVE'S 11TH DISTRICT. INVERSE FLOATER - REPRESENT SECURITIES THAT PAY INTEREST AT RATES THAT INCREASE (DECREASE) WITH A DECLINE (INCREASE) IN A SPECIFIED INDEX. THE RELATIONSHIP BETWEEN A CHANGE IN THE SPECIFIED INDEX AND THE INTEREST RATE PAID BY THE INVERSE FLOATER IS GENERALLY GREATER THAN A ONE-TO-ONE RELATIONSHIP. INTEREST RATES DISCLOSED ARE IN EFFECT ON AUGUST 31, 1994. INVERSE INTEREST-ONLY - REPRESENT SECURITIES THAT ENTITLE HOLDERS TO RECEIVE ONLY INTEREST PAYMENTS ON THE UNDERLYING MORTGAGES. INTEREST IS PAID AT A RATE THAT INCREASES (DECREASES) WITH A DECLINE (INCREASE) IN A SPECIFIED INDEX. THE YIELD TO MATURITY OF AN INVERSE INTEREST-ONLY IS EXTREMELY SENSITIVE TO THE RATE OF PRINCIPAL PAYMENTS ON THE UNDERLYING MORTGAGE ASSETS. A RAPID (SLOW) RATE OF PRINCIPAL REPAYMENTS MAY HAVE AN ADVERSE (POSITIVE) EFFECT ON YIELD TO MATURITY. INTEREST RATE DISCLOSED REPRESENTS CURRENT YIELD BASED UPON THE CURRENT COST BASIS AND ESTIMATED TIMING AND AMOUNT OF FUTURE CASH FLOWS. (F) PAR VALUE IS IN CANADIAN DOLLARS. (G) STRUCTURED SECURITIES ARE ISSUED BY U.S. ISSUERS AND ARE DENOMINATED IN U.S. DOLLARS. THESE SECURITIES WERE PURCHASED AS PART OF A PRIVATE PLACEMENT, HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933 AND ARE DEEMED TO BE ILLIQUID BY THE ADVISER. THESE SECURITIES RETURN PRINCIPAL AND/OR INTEREST IN AMOUNTS WHICH ARE LINKED TO THE INDICES INDICATED BELOW. PRINCIPAL RECEIVED AT MATURITY AND INTEREST EARNED MAY BE LIMITED TO CERTAIN MAXIMUM AND MINIMUM LEVELS. THE RELATIONSHIP BETWEEN THE SPECIFIED INDEX AND THE RESULTANT EFFECT ON PRINCIPAL OR INTEREST MAY BE GREATER THAN A ONE-TO-ONE RELATIONSHIP. (1) PRINCIPAL AMOUNT AT MATURITY IS LINKED INVERSELY TO THE CANADIAN DOLLAR/U.S. DOLLAR EXCHANGE RATE. (2) COUPON IS EARNED WHEN THE SPREAD BETWEEN THE TWO-YEAR FRENCH FRANC SWAP RATE AND THE TWO-YEAR GERMAN DEUTSCHEMARK SWAP RATE STAYS WITHIN A RANGE OF 60 TO 75 BASIS POINTS. (3) PRINCIPAL AMOUNT AT MATURITY IS LINKED TO THE SPREAD BETWEEN THE TEN-YEAR U.S. SWAP RATE AND THE YIELD ON THE TEN-YEAR 10.75% U.S. TREASURY BOND. (H) ON AUGUST 31, 1994, FOR FEDERAL INCOME TAX PURPOSES, THE COST OF INVESTMENTS IN SECURITIES, INCLUDING THE PUT OPTIONS DESCRIBED IN NOTE 6 TO AND THE INTEREST RATE SWAP TRANSACTIONS DESCRIBED IN NOTE 2 TO THE FINANCIAL STATEMENTS, WAS $339,880,537. THE AGGREGATE GROSS UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED ON THIS COST WERE AS FOLLOWS: GROSS UNREALIZED APPRECIATION....... $ 2,489,440 GROSS UNREALIZED DEPRECIATION....... (8,427,416) --------- NET UNREALIZED DEPRECIATION........ $ (5,937,976) --------- ---------
AMERICAN ADJUSTABLE RATE TERM TRUST 1997 AUGUST 31, 1994 Principal Market Name of Issuer Amount Value (a) - -------------- --------- --------- (PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS) MORTGAGE-BACKED SECURITIES (97.8%): U.S. AGENCY FIXED-RATE MORTGAGES (7.7%): GNMA, 8.00%, 4/1/22 . . . . . . . . . . . . . . $ 10,000,000(b) 9,937,500 FNMA, 7.50%, 1/1/00 . . . . . . . . . . . . . . 5,000,000(b) 5,046,850 FNMA, 8.00%, 1/1/21 . . . . . . . . . . . . . . 15,000,000(b) 14,943,750 FNMA, 7.00%, 1/1/23 . . . . . . . . . . . . . . 5,000,000(b) 4,726,550 ------------ 34,654,650 ------------ U.S. AGENCY ADJUSTABLE-RATE MORTGAGES (48.2%): GNMA, 5.50%, 1/1/21 . . . . . . . . . . . . . . 30,000,000(b) 29,268,900 GNMA, 5.00%, 8/20/21. . . . . . . . . . . . . . 8,119,309(d) 8,017,818 GNMA, 5.13%, 10/20/21 . . . . . . . . . . . . . 8,071,340(d) 7,829,199 GNMA, 5.63%, 11/20/21 . . . . . . . . . . . . . 4,239,500(d) 4,205,033 GNMA, 6.50%, 6/20/22. . . . . . . . . . . . . . 1,287,432 1,297,886 GNMA, 6.75%, 6/20/23. . . . . . . . . . . . . . 1,812,872 1,826,469 GNMA, 5.50%, 10/20/23 . . . . . . . . . . . . . 4,744,763(d) 4,697,316 GNMA, 5.50%, 11/20/23 . . . . . . . . . . . . . 4,705,150(d) 4,658,099 GNMA, 5.50%, 12/20/23 . . . . . . . . . . . . . 9,451,803(d) 9,227,323 GNMA, 4.50%, 4/20/24. . . . . . . . . . . . . . 748,763 695,878 GNMA, 4.50%, 5/20/24. . . . . . . . . . . . . . 5,084,598(d) 4,696,898 GNMA, 4.50%, 6/20/24. . . . . . . . . . . . . . 4,336,933(d) 4,006,242 FHLMC, 5.99%, 1/1/19. . . . . . . . . . . . . . 257,304 264,861 FHLMC, 6.33%, 8/1/19. . . . . . . . . . . . . . 2,123,616(d) 2,135,551 FHLMC, 5.90%, 5/1/20. . . . . . . . . . . . . . 2,640,466(d) 2,715,112 FHLMC, 6.63%, 6/1/21. . . . . . . . . . . . . . 5,248,266(d) 5,412,274 FHLMC, 5.94%, 4/1/22. . . . . . . . . . . . . . 1,115,413(d) 1,137,375 FHLMC, 5.81%, 10/1/22 . . . . . . . . . . . . . 6,759,019(d) 6,949,150 FHLMC, 4.26%, 9/1/23. . . . . . . . . . . . . . 1,782,342 1,766,747 FHLMC, 4.13%, 10/1/23 . . . . . . . . . . . . . 1,802,866 1,831,026 FHLMC, 4.00%, 1/1/24. . . . . . . . . . . . . . 2,824,408 2,842,060 FHLMC, 4.22%, 1/1/24. . . . . . . . . . . . . . 4,297,233 4,345,576 FNMA, 5.54%, 1/1/18 . . . . . . . . . . . . . . 2,467,688 2,544,803 FNMA, 5.47%, 4/1/18 . . . . . . . . . . . . . . 9,427,203(d) 9,621,592 FNMA, 5.42%, 5/1/18 . . . . . . . . . . . . . . 1,818,950 1,857,602 FNMA, 5.63%, 1/1/20 . . . . . . . . . . . . . . 3,651,428(d) 3,674,249 FNMA, 6.47%, 11/1/20. . . . . . . . . . . . . . 6,649,015(d) 6,686,383 FNMA, 5.81%, 12/1/20. . . . . . . . . . . . . . 9,025,436(d) 9,200,259 FNMA, 6.22%, 5/1/21 . . . . . . . . . . . . . . 7,508,445(d) 7,602,301 FNMA, 7.32%, 8/1/21 . . . . . . . . . . . . . . 4,627,660(d) 4,723,083 FNMA, 6.14%, 7/1/23 . . . . . . . . . . . . . . 5,539,431 5,647,617 FNMA, 4.02%, 12/1/23. . . . . . . . . . . . . . 4,095,779 4,157,216 FNMA, 4.05%, 12/1/23. . . . . . . . . . . . . . 4,179,436(d) 4,249,943 FNMA, 4.14%, 1/1/24 . . . . . . . . . . . . . . 4,105,729(d) 4,167,315 FNMA, 3.98%, 2/1/24 . . . . . . . . . . . . . . 9,504,790(d) 9,445,385 FNMA, 4.01%, 3/1/24 . . . . . . . . . . . . . . 4,783,351 4,662,272 FNMA, 5.88%, 8/1/27 . . . . . . . . . . . . . . 9,892,434(d) 10,102,648 FNMA, 6.23%, 1/1/28 . . . . . . . . . . . . . . 1,456,398 1,478,477 FNMA, 5.49%, 3/1/28 . . . . . . . . . . . . . . 11,347,177(d) 11,609,524 FNMA, 5.99%, 1/1/29 . . . . . . . . . . . . . . 4,128,315 4,205,721 ------------ 215,463,183 ------------ COLLATERALIZED MORTGAGE OBLIGATIONS AND OTHER MORTGAGE-BACKED SECURITIES(e)(41.9%): PRIVATE ADJUSTABLE RATE (37.7%): Donaldson, Lufkin and Jenrette, Series 1992-MF3, CLass A3, 6.26%, 5/25/22 . . . . . . . . . . . . . . . 17,000,000 17,361,250 First Federal of Rochester, Series 1988-SE1, Class A, 5.58%, 10/25/18 . . . . . 3,332,902 3,307,906 Glendale Federal Savings, Series 1989-5, Class A, 5.79%, 4/1/29 . . . . . . . 20,668,576 20,678,083 SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES. 24 AMERICAN ADJUSTABLE RATE TERM TRUST 1997 (CONTINUED) Principal Market Name of Issuer Amount Value (a) - -------------- --------- --------- Greenwich Capital Acceptance, Series 1992-LB5, Class A3, 6.19%, 7/25/22 . . . . . $ 12,883,000 12,887,026 Merrill Lynch Mortgage Investors, Series 1988-M, Class A, 5.42%, 10/1/18 . . . . . . . . . . . . . . . 3,996,310 3,993,592 Merrill Lynch Mortgage Investors, Series 1993-C, Class A4, 5.63%, 3/15/18 . . . . . . . . . . . . . . . 7,000,000 6,864,900 Merrill Lynch Mortgage Investors, Series 1993-D, Class A1-2, 4.82%, 10/25/23. . . . . . . . . . . . . . . 6,000,000 5,925,960 Merrill Lynch Mortgage Investors, Series 1993-H, Class A1-2, 4.99%, 10/25/23. . . . . . . . . . . . . . . 6,523,000 6,408,065 Paine Webber Mortgage Acceptance Corporation, Series 1993-11, Class M1, 5.15%, 12/1/23 . . . . . . . . . . . . . 2,908,087 2,886,277 Prudential Home Mortgage, Series 1991-9, Class A1, 6.69%, 7/25/21 . . . . . . 8,180,329 8,272,849 Residential Funding Corporation, Series 1992-S25, Class A, 6.04%, 7/25/22 . . . . . . . . . . . . . . . 14,855,473 14,893,652 Residential Funding Corporation, Series 1993-S8, Class A, 5.88%, 2/25/23 . . . . . . . . . . . . . . . 10,256,468 10,347,546 Resolution Trust Corporation, Series 1991-10, Class A1, 6.56%, 5/25/21 . . . . . . . . . . . . . . . 6,025,729 6,006,145 Resolution Trust Corporation, Series 1991-2, Class B, 5.18%, 4/25/21 . . . . . . . . . . . . . . . 5,000,000 4,976,500 Resolution Trust Corporation, Series 1991-5 Class A-1, 6.42%, 9/25/19 . . . . . . . . . . . . . . . 4,500,243 4,522,879 Resolution Trust Corporation, Series 1991-8, Class A-1, 6.70%, 12/25/20. . . . . . . . . . . . . . . 13,749,561 13,801,121 Resolution Trust Corporation, Series 1992-4, Class B2, 5.92%, 7/25/28 . . . . . . . . . . . . . . . 15,000,428 14,962,927 Resolution Trust Corporation, Series 1992-9, Class A6, 7.49%, 7/25/20 . . . . . . . . . . . . . . . 2,216,331 2,249,298 Ryland - First Nationwide, Series 1989-FN1, Class A, 5.72%, 11/1/18 . . . . . . . . . . . . . . . 819,560 818,792 Ryland Mortgage Securities, Series 1991-B1, Class 1, 5.65%, 3/25/20 . . . . . . . . . . . . . . . 7,556,178 7,556,175 ------------ 168,720,943 ------------ U.S. AGENCY INVERSE FLOATER (2.6%): FHLMC, 17.31%, Series 1269, Class S, COFI, 5/15/97. . . . . . . . . . . . . . . . 2,244,435 2,581,100 FHLMC, 12.71%, Series 1404, Class HA, COFI, 10/15/07 . . . . . . . . . . . . . . . 3,958,000 3,027,870 FNMA, 12.94%, Series 92-155, Class SA, COFI, 10/25/05 . . . . . . . . . . . . . . . 5,572,000 5,209,820 FNMA, 4.99%, Series 94-23, Class PS, Treasury, 4/25/23. . . . . . . . . . . . . . 1,000,000 605,000 ------------ 11,423,790 ------------ U.S. AGENCY INVERSE INTEREST-ONLY (0.2%): FHLMC, 0.00%, Series 1381, Class SB, COFI, 10/15/07 . . . . . . . . . . . . . . . --(h) 1,138,835 U.S. AGENCY PRINCIPAL-ONLY (1.4%): FNMA, 1.09%, Series 224, Class A1, 6/25/23. . . . . . . . . . . . . . . . . . . 8,804,465 6,295,192 ------------ TOTAL MORTGAGE-BACKED SECURITIES (cost: $448,303,435) . . . . . . . . . . . . 437,696,593 ------------ STRUCTURED SECURITIES (g)(5.6%): FOREIGN LINKED INDEX SECURITIES (5.4%): Bayerische Landesbank, New York, 9.60%, due 6/26/95 . . . . . . . . . . . . . 5,000,000(1) 4,907,000 Commerzbank, A.G., New York, 9.00%, due 3/20/95. . . . . . . . . . . . . . . . . 5,000,000(2) 4,652,650 Bayerische Landesbank, New York, 6.81%, 5/26/95 . . . . . . . . . . . . . . . 5,000,000(3) 4,628,500 Rabobank Nederland, New York, 10.00%, due 7/17/95. . . . . . . . . . . . . . . . . 5,000,000(4) 4,982,500 Swiss Bank Corporation, New York, 8.50%, due 7/10/95 . . . . . . . . . . . . . 5,000,000(5) 5,100,000 ------------ 24,270,650 ------------ OTHER STRUCTURED SECURITIES (0.2%): Bayerische Vereinsbank, New York, 10.00%, due 8/15/95. . . . . . . . . . . . . 1,000,000(6) 826,700 ------------ Total Structured Securities (cost: $26,000,000). . . . . . . . . . . . . 25,097,350 ------------ MUNICIPAL ZERO-COUPON SECURITIES (c)(17.3%): Austin, Texas, Public Parking, 5.72%-6.03%, 9/1/97. . . . . . . . . . . . . 5,000,000 4,368,750 Bellevue, Washington, Convention Center, 6.24%, 12/1/97 . . . . . . . . . . . 1,370,000 1,173,063 Bismarck, North Dakota, Hospital Revenue, 6.19%, 5/1/97 . . . . . . . . . . . 2,530,000 2,232,725 Blue Ridge, Texas, West Municipal Utility, 6.09%, 4/1/97 . . . . . . . . . . . 440,000 389,950 Boulder, Colorado, School District, 6.26%, 12/15/97 . . . . . . . . . . . . . . 4,000,000 3,435,000 Calallen, Texas, School District, 5.88%, 2/15/98 . . . . . . . . . . . . . . . 1,485,000 1,262,250 Cambria, Pennsylvania, School District, 6.39%, 8/15/97 . . . . . . . . . . . . . . . 1,030,000 896,100 Cypress-Fairbanks, Texas, School District, 5.82%-5.93%, 2/1/98 . . . . . . . 8,340,000 7,089,000 Eastern Camden, New Jersey, School District, 5.88%, 9/1/97 . . . . . . . . . . 500,000 436,250 Illinois State College Savers, 5.93%, 8/1/98. . . . . . . . . . . . . . . . 890,000 732,025 Intermountain Power Authority, Utah, 3.10% 7/1/97 . . . . . . . . . . . . . . . . 470,000 465,300 Irving, Texas, School District, 6.31%, 2/15/97 . . . . . . . . . . . . . . . 960,000 858,000 Kansas City, Kansas, Utility Revenue, 6.24%-6.26%, 9/1/97 . . . . . . . . 6,520,000 5,675,012 Kentucky Development Finance Authority, 5.60%-6.08%, 11/1/97 . . . . . . . . . . . . 1,980,000 1,700,325 Kentucky Turnpike Revenue, 3.95%, 7/1/97. . . . . . . . . . . . . . . . 1,000,000 1,031,250 Lewisburg, Pennsylvania, School District, 6.29%, 8/15/97 . . . . . . . . . . 500,000 436,875 Louisiana College Savers, General Obligation, 5.99%, 7/1/97 . . . . . . . . . 4,000,000 3,520,000 SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES. 25 AMERICAN ADJUSTABLE RATE TERM TRUST 1997 (CONTINUED) Principal Market Name of Issuer Amount Value (a) - -------------- --------- --------- Lubbock, Texas, Electric Power, 6.29%, 4/15/97 . . . . . . . . . . . . . . . $ 1,360,000 1,201,900 Maricopa County, Arizona, School District, 5.47%, 7/1/97 . . . . . . . . . . 1,010,000 887,538 Massachusetts, General Obligation, 5.96%-5.98%, 6/1/98 . . . . . . . . . . . . 12,345,000 10,277,213 McHenry County, Illinois, Conservation District, 5.88%, 2/1/98 . . . . . . . . . . 1,580,000 1,339,050 Michigan Municipal Bond Authority, 6.09%, 5/15/97 . . . . . . . . . . . . . . . 1,500,000 1,312,500 North Montgomery, Indiana, School Bond, 5.82%-5.98%, 1/1/97-7/1/98 . . . . . . 2,100,000 1,794,844 North Slope Boro, Alaska, 5.88%-6.39%, 6/30/97-6/30/98 . . . . . . . . 12,000,000 10,328,750 Oklahoma City, Oklahoma, Water and Sewer, 5.83%, 7/1/97 . . . . . . . . . . . . 1,000,000 876,250 Rosemont, Illinois, Various Purpose, 6.22%, 12/1/97 . . . . . . . . . . . . . . . 2,670,000 2,286,188 Sioux City, Iowa, Hospital Revenue, 2.93%, 1/1/97 . . . . . . . . . . . . . . . 11,510,000 11,438,063 ------------ Total Municipal Zero-Coupon Securities (cost: $74,255,797). . . . . . . . . . . . . 77,444,171 ------------ CANADIAN SECURITIES (f)(7.0%): Bank of Nova Scotia, 7.13%, 8/1/97. . . . . . . 4,940,671 3,450,845 Canadian Government Real Return Bond, 4.25%, 12/1/21 . . . . . . . . . . . . . . . 5,000,000 3,499,114 Canadian Government Note, 8.49%, 3/1/96 . . . . . . . . . . . . . . . . . . . 10,000,000 6,557,449 Canadian Government Residual, 7.23%, 6/1/95 . . . . . . . . . . . . . . . . . . . 3,550,000(c) 2,474,225 Canadian Treasury Bill, 7.27%, 5/4/95 . . . . . 4,500,000(c) 3,157,471 Firstline Trust, 8.50%, 4/1/97. . . . . . . . . 3,154,964 2,297,473 Manufacturers Life, 8.25%, 8/1/97 . . . . . . . 3,625,509 2,630,953 Manufacturers Life, 7.75%, 5/1/19 . . . . . . . 2,489,662 1,635,551 Royal Trust, 9.00%, 3/1/97. . . . . . . . . . . 7,765,748 5,744,484 ------------ Total Canadian Securities (cost: $34,192,844). . . . . . . . . . . . . 31,447,565 ------------ INTEREST RATE CONTRACTS (0.0%): Interest rate floor with Morgan Stanley, $15,000,000 notional principal on three- month Deutschemark LIBOR, (5.00% on 8/31/94), exercise rate of 5.00%, due 4/6/98 (cost: $245,583) . . . . . . . . . . . . . . -- 36,000 ------------ Options (0.0%): Canadian dollar, 320 put option contracts, exercise price of 1.37, expire September 1994 (cost: $405,034) . . . . . . . . . . . . . . -- 149,988 ------------ Short-Term Securities (12.9%): U.S. Treasury Bill, 5.30%, 4/6/95 . . . . . . . 12,000,000 11,640,480 U.S. Treasury Bill, 5.23%, 6/1/95 . . . . . . . 29,000,000 27,876,250 Repurchase agreement with Morgan Stanley in a joint trading account, 4.65%, acquired on 8/31/94 and due 9/1/94 with accrued interest of $646 (collateralized by U.S. government agency obligations). . . . . 5,000,000 5,000,000 Repurchase agreement with Goldman Sachs in a joint trading account, 4.80%, acquired on 8/31/94 and due 9/1/94 with accrued interest of $1,779 (collateralized by U.S. government agency obligations). . . . . 13,339,000 13,339,000 ------------ Total Short-Term Securities (cost: $57,884,866). . . . . . . . . . . . . 57,855,730 ------------ Total Investments in Securities (cost: $641,287,559)(i) . . . . . . . . . $ 629,727,397 ------------ ------------ NOTES TO INVESTMENTS IN SECURITIES: (A) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO THE FINANCIAL STATEMENTS. (B) ON AUGUST 31, 1994, THE TOTAL COST OF INVESTMENTS PURCHASED ON A WHEN-ISSUED BASIS WAS $63,953,125. (C) FOR ZERO-COUPON INVESTMENTS, THE INTEREST RATE SHOWN IS THE EFFECTIVE YIELD ON THE DATE OF PURCHASE. (D) ON AUGUST 31, 1994, SECURITIES VALUED AT $131,903,181 WERE PLEDGED AS COLLATERAL FOR THE FOLLOWING OUTSTANDING REVERSE REPURCHASE AGREEMENTS: NAME OF BROKER AND ACQUISITION ACCRUED DESCRIPTION AMOUNT DATE RATE* DUE INTEREST OF COLLATERAL ------ ----------- ----- --- -------- ------------- $ 50,000,000 8/4/94 4.54% 8/1/95 $176,556 (1) 75,000,000 10/14/93 4.68% 10/6/94 165,661 (2) ----------- ------- $125,000,000 $342,217 ----------- ------- ----------- ------- * INTEREST RATE IS AS OF AUGUST 31, 1994. RATES ARE BASED ON THE LONDON INTERBANK OFFERED RATE (LIBOR) AND RESET MONTHLY. NAME OF BROKER AND DESCRIPTION OF COLLATERAL: (1) MORGAN STANLEY; FNMA, 5.88%, 8/1/27, $2,473,108 PAR. FNMA, 5.81%, 12/1/20, $9,025,436 PAR. FNMA, 7.32%, 8/1/21, $4,627,660 PAR. FNMA, 4.05%, 12/1/23, $4,179,436 PAR. FNMA, 4.14%, 1/1/24, $3,649,537 PAR. FNMA, 3.98%, 2/1/24, $9,504,790 PAR. FHLMC, 6.63%, 6/1/21, $5,248,266 PAR. GNMA, 4.50%, 5/20/24, $5,084,598 PAR. GNMA, 4.50%, 6/20/24, $4,336,933 PAR. GNMA, 5.63%, 11/20/21, $4,239,500 PAR. FNMA, 5.63%, 1/1/20, $3,651,428 PAR. (2) MORGAN STANLEY; FNMA, 6.47%, 11/1/20, $6,649,015 PAR. FNMA, 6.22%, 5/1/21, $7,508,445 PAR. GNMA, 5.00%, 8/20/21, $8,119,309 PAR. GNMA, 5.13%, 10/20/21, $8,071,340 PAR. FNMA, 5.47%, 4/1/18, $9,427,203 PAR. FHLMC, 6.33%, 8/1/19, $400,970 PAR. FHLMC, 5.81%, 10/1/22, $5,542,396 PAR. FHLMC, 5.94%, 4/1/22, $1,115,413 PAR. FNMA, 5.88%, 8/1/27, $5,440,839 PAR. GNMA, 5.50%, 10/20/23, $4,744,763 PAR. GNMA, 5.50%, 11/20/23, $4,705,150 PAR. GNMA, 5.50%, 12/20/23, $9,451,803 PAR. FNMA, 5.49%, 3/1/28, $4,089,971 PAR. FHLMC, 5.90%, 5/1/20, $719,611 PAR. 26 AMERICAN ADJUSTABLE RATE TERM TRUST 1997 (CONTINUED) (E) DESCRIPTIONS OF CERTAIN COLLATERALIZED MORTGAGE OBLIGATIONS ARE AS FOLLOWS: LIBOR - LONDON INTERBANK OFFERED RATE COFI (11TH DISTRICT) - COST OF FUNDS INDEX OF THE FEDERAL RESERVE'S 11TH DISTRICT INVERSE FLOATER - REPRESENT SECURITIES THAT PAY INTEREST AT RATES THAT INCREASE (DECREASE) WITH A DECLINE (INCREASE) IN A SPECIFIED INDEX. THE RELATIONSHIP BETWEEN A CHANGE IN THE SPECIFIED INDEX AND INTEREST RATE PAID BY THE INVERSE FLOATER IS GENERALLY GREATER THAN A ONE-TO-ONE RELATIONSHIP. INTEREST RATES DISCLOSED ARE IN EFFECT ON AUGUST 31, 1994. PRINCIPAL-ONLY - REPRESENT SECURITIES THAT ENTITLE HOLDERS TO RECEIVE ONLY PRINCIPAL PAYMENTS ON THE UNDERLYING MORTGAGES. THE YIELD TO MATURITY OF A PRINCIPAL-ONLY SECURITY IS EXTREMELY SENSITIVE TO THE RATE OF PRINCIPAL PAYMENTS ON THE UNDERLYING MORTGAGE ASSETS. A SLOWER (MORE RAPID) THAN EXPECTED RATE OF PRINCIPAL REPAYMENTS MAY HAVE AN ADVERSE (POSITIVE) EFFECT ON YIELD TO MATURITY. INTEREST RATE DISCLOSED REPRESENTS CURRENT YIELD BASED UPON THE CURRENT COST BASIS AND ESTIMATED TIMING OF FUTURE CASH FLOWS. INVERSE INTEREST-ONLY - REPRESENT SECURITIES THAT ENTITLE HOLDERS TO RECEIVE ONLY INTEREST PAYMENTS ON THE UNDERLYING MORTGAGES. INTEREST IS PAID AT A RATE THAT INCREASES (DECREASES) WITH A DECLINE (INCREASE) IN A SPECIFIED INDEX. THE YIELD TO MATURITY OF AN INVERSE INTEREST-ONLY IS EXTREMELY SENSITIVE TO THE RATE OF PRINCIPAL PAYMENTS ON THE UNDERLYING MORTGAGE ASSETS. A RAPID (SLOW) RATE OF PRINCIPAL REPAYMENTS MAY HAVE AN ADVERSE (POSITIVE) EFFECT ON YIELD TO MATURITY. INTEREST RATE DISCLOSED REPRESENTS CURRENT YIELD BASED UPON THE CURRENT COST BASIS AND ESTIMATED TIMING AND AMOUNT OF FUTURE CASH FLOWS. (F) PAR VALUE IS IN CANADIAN DOLLARS. (G) STRUCTURED SECURITIES ARE ISSUED BY U.S. ISSUERS AND ARE DENOMINATED IN U.S. DOLLARS. THESE SECURITIES WERE PURCHASED AS PART OF A PRIVATE PLACEMENT, HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933 AND ARE DEEMED TO BE ILLIQUID BY THE ADVISER. THESE SECURITIES RETURN PRINCIPAL AND/OR INTEREST IN AMOUNTS WHICH ARE LINKED TO THE INDICES INDICATED BELOW. PRINCIPAL RECEIVED AT MATURITY AND INTEREST EARNED MAY BE LIMITED TO CERTAIN MAXIMUM AND MINIMUM LEVELS. THE RELATIONSHIP BETWEEN THE SPECIFIED INDEX AND THE RESULTANT EFFECT ON PRINCIPAL OR INTEREST MAY BE GREATER THAN A ONE-TO-ONE RELATIONSHIP. (1) COUPON IS EARNED WHEN THE SPREAD BETWEEN THE TWO-YEAR BRITISH STERLING SWAP RATE AND THE SEVEN-YEAR BRITISH STERLING SWAP RATE STAYS BETWEEN 1.30% AND 2.46%. (2) PRINCIPAL AMOUNT AT MATURITY IS LINKED INVERSELY TO THE CANADIAN DOLLAR/U.S. DOLLAR EXCHANGE RATE. (3) PRINCIPAL AMOUNT AT MATURITY IS LINKED INVERSELY TO THE ONE-YEAR GERMAN DEUTSCHEMARK SWAP RATE. THE COUPON VARIES WITH THE ONE-MONTH U.S. DOLLAR LIBOR. (4) COUPON IS EARNED WHEN THE SPREAD BETWEEN THE TWO-YEAR FRENCH FRANC SWAP RATE AND THE TWO-YEAR GERMAN DEUTSCHEMARK SWAP RATE STAYS WITHIN A RANGE OF 60 TO 75 BASIS POINTS. (5) PRINCIPAL AMOUNT AT MATURITY IS LINKED WITH THE JAPANESE YEN/U.S. DOLLAR EXCHANGE RATE. (6) PRINCIPAL AMOUNT AT MATURITY IS LINKED TO THE SPREAD BETWEEN THE TEN-YEAR U.S. SWAP RATE AND THE YIELD ON THE TEN-YEAR 10.75% U.S. TREASURY BOND. (H) BASED UPON ESTIMATED TIMING AND AMOUNT OF FUTURE CASH FLOWS, INCOME IS CURRENTLY NOT BEING RECOGNIZED ON THE INVERSE INTEREST-ONLY SECURITY WITH A MARKET VALUE OF $1,138,835. (I) ON AUGUST 31, 1994, FOR FEDERAL INCOME TAX PURPOSES, THE COST OF INVESTMENTS IN SECURITIES, INCLUDING THE PUT OPTIONS DESCRIBED IN NOTE 6 AND THE INTEREST RATE SWAP TRANSACTIONS DESCRIBED IN NOTE 2 TO THE FINANCIAL STATEMENTS, WAS $644,256,895. THE AGGREGATE GROSS UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED ON THIS COST WERE AS FOLLOWS: GROSS UNREALIZED APPRECIATION...... $ 6,616,450 GROSS UNREALIZED DEPRECIATION...... (17,233,478) ---------- NET UNREALIZED DEPRECIATION........ $ (10,617,028) ---------- ----------
AMERICAN ADJUSTABLE RATE TERM TRUST 1998 AUGUST 31, 1994 Principal Market Name of Issuer Amount Value (a) - -------------- --------- --------- (PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS) MORTGAGE-BACKED SECURITIES (92.1%): U.S. AGENCY FIXED-RATE MORTGAGES (5.8%): GNMA, 7.50%, 5/17/22. . . . . . . . . . . . . . $ 10,000,000(b) 9,656,200 GNMA, 7.00%, 1/1/23 . . . . . . . . . . . . . . 10,000,000(b) 9,340,600 FNMA, 7.50%, 1/1/2000 . . . . . . . . . . . . . 10,000,000(b) 10,093,700 ------------ 29,090,500 ------------ U.S. AGENCY ADJUSTABLE-RATE MORTGAGES (42.7%): GNMA, 5.50%, 1/1/21 . . . . . . . . . . . . . . 15,000,000(b) 14,634,450 GNMA, 6.00%, 4/20/22. . . . . . . . . . . . . . 7,526,536 7,408,897 GNMA, 6.00%, 5/20/22. . . . . . . . . . . . . . 3,361,294(d) 3,308,757 GNMA, 6.00%, 6/20/22. . . . . . . . . . . . . . 9,211,419(d) 9,107,790 GNMA, 5.00%, 7/20/22. . . . . . . . . . . . . . 8,925,977(d) 8,641,417 GNMA, 5.50%, 7/20/22. . . . . . . . . . . . . . 8,637,022(d) 8,550,652 GNMA, 6.75%, 6/20/23. . . . . . . . . . . . . . 9,064,363(d) 9,132,346 GNMA, 6.00%, 8/20/23. . . . . . . . . . . . . . 9,952,754(d) 10,021,179 GNMA, 5.50%, 10/20/23 . . . . . . . . . . . . . 9,489,530(d) 9,394,634 GNMA, 4.50%, 4/20/24. . . . . . . . . . . . . . 6,266,734(d) 5,824,115 GNMA, 4.50%, 5/20/24. . . . . . . . . . . . . . 3,899,991(d) 3,602,616 FHLMC, 5.13%, 11/1/16 . . . . . . . . . . . . . 3,979,091(d) 4,041,245 FHLMC, 6.00%, 5/1/17. . . . . . . . . . . . . . 3,994,148(d) 4,050,306 FHLMC, 5.77%, 1/1/21. . . . . . . . . . . . . . 6,705,542 6,772,598 FHLMC, 5.61%, 2/1/22. . . . . . . . . . . . . . 13,909,686(d) 14,153,105 FHLMC, 6.03%, 2/1/22. . . . . . . . . . . . . . 18,431,489(d) 18,984,434 FHLMC, 5.53%, 8/1/23. . . . . . . . . . . . . . 7,913,719(d) 7,992,856 FHLMC, 4.13%, 10/1/23 . . . . . . . . . . . . . 3,605,731(d) 3,662,053 FNMA, 5.25%, 7/1/17 . . . . . . . . . . . . . . 7,072,404(d) 7,218,237 FNMA, 6.04%, 9/1/17 . . . . . . . . . . . . . . 4,511,380(d) 4,601,608 FNMA, 5.54%, 11/1/17. . . . . . . . . . . . . . 11,660,928(d) 11,646,352 FNMA, 5.42%, 5/1/18 . . . . . . . . . . . . . . 7,086,324(d) 7,236,909 FNMA, 6.47%, 7/1/19 . . . . . . . . . . . . . . 4,801,897(d) 4,948,931 FNMA, 6.74%, 7/1/19 . . . . . . . . . . . . . . 3,150,445(d) 3,161,274 FNMA, 6.51%, 10/1/20. . . . . . . . . . . . . . 4,180,840 4,073,685 FNMA, 5.74%, 11/1/20. . . . . . . . . . . . . . 5,792,403(d) 5,748,960 FNMA, 5.73%, 11/1/21. . . . . . . . . . . . . . 8,777,389(d) 8,935,119 FNMA, 5.09%, 12/1/23. . . . . . . . . . . . . . 1,827,092 1,822,524 FNMA, 4.11%, 2/1/24 . . . . . . . . . . . . . . 4,912,324(d) 4,857,060 ------------ 213,534,109 ------------ COLLATERALIZED MORTGAGE OBLIGATIONS AND OTHER MORTGAGE-BACKED SECURITIES (e)(43.6%): PRIVATE ADJUSTABLE RATE (39.9%): Columbia Savings and Loan, Series 1987-1, Class A, 6.14%, 12/1/17 . . . . . 1,012,174 1,012,174 Donaldson, Lufkin and Jenrette, Series 1992-MF3, Class A3, 5.39%, 5/25/22. . . . . . . . . . . . . . 5,000,000 5,106,250 First Federal of Rochester, Series 1988-SE1, Class A, 5.58%, 10/25/18. . . . 7,082,418 7,029,299 Glendale Federal Savings, 5.73%, 8/1/28. . . 7,411,799 7,439,593 Glendale Federal Savings, Series 1988-2, Class A, 5.82%, 5/1/28. . . . . . 6,612,700 6,637,497 Meridian Asset Acceptance Corporation, Series 1991-1, Class A1, 5.71%, 4/27/20. . . . . . . . . . . . . . 6,069,531 6,084,705 Merrill Lynch Mortgage Investors, 5.18%, 3/1/18 . . . . . . . . . . . . . . 4,095,885 3,923,090 Merrill Lynch Mortgage Investors, 5.48%, 6/15/17. . . . . . . . . . . . . . 25,000,000 25,000,000 SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES. 27 AMERICAN ADJUSTABLE RATE TERM TRUST 1998 (CONTINUED) Principal Market Name of Issuer Amount Value (a) - -------------- --------- --------- Merrill Lynch Mortgage Investors, 6.15%, 1/25/19 . . . . . . . . . . . . . . . $ 1,298,208 1,299,020 Merrill Lynch Mortgage Investors, Series 1993-D, Class A1-2, 4.82%, 10/25/23. . . . . . . . . . . . . . . 6,000,000 5,925,960 Merrill Lynch Mortgage Investors, Series 1993-H, Class A1-2, 4.99%, 10/25/23. . . . . . . . . . . . . . . 7,340,000 7,210,669 Paine Webber Mortgage Acceptance Corporation, Series 1993-11, Class M1, 5.15%, 12/1/23 . . . . . . . . . . 2,969,475 2,947,204 Paine Webber Mortgage Acceptance Corporation, Series 1993-8, Class M1, 5.83%, 8/25/23 . . . . . . . . . . 6,819,580 6,828,104 Paine Webber Mortgage Acceptance, 5.28%, 4/25/23 . . . . . . . . . . . . . . . 3,052,621 2,993,476 Prudential Home Mortgage, Series 1991-9, Class A1, 6.69%, 7/25/21 . . . . . . 8,180,329 8,272,849 Residential Funding Corporation, 5.98%, 3/25/22 . . . . . . . . . . . . . . . 15,449,434 15,508,915 Residential Funding Corporation, Series 1992-S25, Class A, 6.04%, 7/25/22 . . . . . . . . . . . . . . . 14,855,473 14,893,652 Residential Funding Corporation, Series 1993-S8, Class A, 5.88%, 2/25/23 . . . . . . . . . . . . . . . 10,256,468 10,347,546 Resolution Trust Corporation, 5.63%, 9/25/19 . . . . . . . . . . . . . . . 8,173,967 8,255,707 Resolution Trust Corporation, 5.97%, 5/25/28 . . . . . . . . . . . . . . . 4,199,933 4,209,593 Resolution Trust Corporation, Series 1992-4, Class B2, 5.92%, 7/25/28 . . . . . . . . . . . . . . . 10,000,286 9,975,285 Resolution Trust Corporation, Series 1992-6, Class B3, 6.27%, 1/25/26 . . . . . . . . . . . . . . . 13,342,952 13,317,934 Ryland Mortgage Securities, Series 1991-B1, Class 1, 5.65%, 3/25/20 . . . . . . . . . . . . . . . 6,253,388 6,253,388 Ryland Perpetual Savings, Series 1988-P1, Class A1, 5.74%, 12/25/18. . . . . . . . . . . . . . . 1,241,376 1,228,962 Sears Mortgage Securities, Series 1991-K, Class A1, 5.32%, 9/25/21 . . . . . . . . . . . . . . . 17,815,872 17,871,545 ------------ 199,572,417 ------------ U.S. AGENCY INVERSE FLOATER (2.2%): FHLMC, 17.31%, Series 1269, Class S, COFI, 5/15/97. . . . . . . . . . . . . . . . 3,968,609 4,563,900 FHLMC, 11.69%, Series 1469, Class I, COFI, 3/15/2000. . . . . . . . . . . . . . . 1,885,254 1,852,262 FNMA, 12.12%, Series 1992-201, Class SB COFI, 10/25/22 . . . . . . . . . . . . . . . 4,205,000 3,148,494 FNMA, 4.99%, Series 94-23, Class PS Treasury, 4/25/23. . . . . . . . . . . . . . 2,500,000 1,512,500 ------------ 11,077,156 ------------ U.S. AGENCY INVERSE INTEREST-ONLY (0.2%): FHLMC, 0.00%, Series 1381, Class SB, COFI floater, 10/15/07 . . . . . . . . . . . --(h) 1,138,835 ------------ U.S. AGENCY PRINCIPAL-ONLY (1.3%): FNMA, 1.09%, Series 224, Class A1, 6/25/23. . . . . . . . . . . . . . . . . . . $ 8,804,465 6,295,192 ------------ Total Mortgage-Backed Securities (cost: $472,966,201) . . . . . . . . . . . . 460,708,209 ------------ STRUCTURED SECURITIES (g)(5.0%): FOREIGN LINKED INDEX SECURITIES (4.8%): Bayerische Landesbank, New York, 9.60%, due 6/26/95 . . . . . . . . . . . . . 5,000,000(1) 4,907,000 Commerzbank, A.G., New York, 9.00%, due 3/20/1995. . . . . . . . . . . . . . . . 5,000,000(2) 4,652,650 Bayerische Landesbank, New York, 6.81%, 5/26/95 . . . . . . . . . . . . . . . 5,000,000(3) 4,628,500 Rabobank Nederland, New York, 10.00%, due 7/17/95 . . . . . . . . . . . . . . . 5,000,000(4) 4,982,500 Swiss Bank Corporation, New York, 8.50%, due 7/10/95. . . . . . . . . . . . 5,000,000(5) 5,100,000 ------------ 24,270,650 ------------ OTHER STRUCTURED SECURITIES (0.2%): Bayerische Vereinsbank, New York, 10.00%, due 8/15/95. . . . . . . . . . . . . 1,000,000(6) 826,700 ------------ Total Structured Securities (cost: $26,000,000). . . . . . . . . . . . . 25,097,350 ------------ MUNICIPAL ZERO-COUPON SECURITIES (c)(12.8%): Allegheny County, Pennsylvania, 4.69%, 2/15/98 . . . . . . . . . . . . . . . 2,000,000 1,857,500 Boulder, Larimer and Weld County, Colorado, School District, 5.58%, 12/15/98 . . . . . . . . . . . . . . 7,260,000 5,933,200 California, General Obligation, Various Purpose, 5.72%-5.93%, 3/1/98-3/1/99. . . . . . . . . . . . . . . . 10,465,000 8,567,638 Chelan County, Washington, Public Utilities District, 5.88%, 7/1/98 . . . . . 1,370,000 1,133,675 Collin County, Texas, Community College District, 5.98%, 8/15/98 . . . . . . 4,475,000 3,697,469 Connecticut, State College, Capital Appreciation, 5.27%, 12/15/97 . . . . . . . 985,000 855,719 Corpus Christi, Texas, General Improvement Refunding Bonds, 5.59%, 11/1/98 . . . . . . . . . . . . . . . 4,225,000 3,453,688 Dallas County, Texas, Road Improvement Refunding Bonds, 6.19%, 8/15/98 . . . . . . 3,085,000 2,556,694 Grand Prairie, Texas, Independent School District, 5.93%, 2/15/98 . . . . . . 1,150,000 977,500 Harris County, Texas, Toll Road Refunding Bonds, 6.09%, 8/15/98 . . . . . . 845,000 698,181 Idaho Falls, Idaho, General Obligation and Electric Refunding Bonds, 5.63%, 4/1/98 . . . . . . . . . . . . . . . 1,500,000 1,267,500 Lake County, Illinois, General Obligation Forest Preservation District, 6.09%, 12/1/98 . . . . . . . . . . 1,000,000 810,000 Maricopa County, Arizona, School District, 5.57%-5.88%, 1/1/98-7/1/99 . . . . . . . . . . . . . . . 16,140,000 13,171,213 Mesquite, Texas, School District, 5.57%-5.73%, 8/15/98-8/15/99 . . . . . . . . 3,665,000 2,978,206 North East, Texas, Independent School District, 5.98%, 2/1/99 . . . . . . . 1,000,000 802,500 SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES. 28 AMERICAN ADJUSTABLE RATE TERM TRUST 1998 (CONTINUED) Principal Market Name of Issuer Amount Value (a) - -------------- --------- --------- North Lawrence, Indiana, School Building Refunding, Capital Appreciation 5.62%-5.88%, 1/1/98-7/1/99 . . . . . . . . . $ 2,320,000 1,869,050 Pleasanton, California, School District, 5.78%, 8/1/98 . . . . . . . . . . 1,000,000 830,000 Salt Lake County, Utah, Water Conservation District, 5.83%, 10/1/98 . . . 1,300,000 1,064,375 Shreveport, Louisiana, Water and Sewer, 6.03%, 12/1/98 . . . . . . . . . . . 5,880,000 4,748,100 State of Texas, Veterans Land General Obligation, 5.76%, 6/1/98 . . . . . 1,000,000 832,500 Tarrant County, Texas, Junior College District, 6.08%, 2/15/98 . . . . . . . . . . 1,750,000 1,476,563 Tomball, Texas, Hospital Authority Revenue, 6.09%, 7/1/99 . . . . . . . . . . . 1,000,000 781,250 Utah Associated Municipal Power System, 5.57%, 7/1/98 . . . . . . . . . . . 2,765,000 2,291,494 Will County, Illinois, School District, 5.57%, 12/15/98 . . . . . . . . . 1,800,000 1,467,000 ------------ Total Municipal Zero-Coupon Securities (cost: $62,151,252). . . . . . . . . . . . . 64,121,015 ------------ CANADIAN SECURITIES (f)(7.6%): Bank of Nova Scotia, 7.13%, 8/1/97. . . . . . . 4,940,671 3,450,845 Canadian Government Real Return Bond, 4.25%, 12/1/21 . . . . . . . . . . . . . . . 13,000,000 9,097,696 Canadian Government Note, 8.49%, 3/1/96 . . . . . . . . . . . . . . . . . . . 9,000,000 5,901,704 Canadian Government Residual, 7.23%, 6/1/95 . . . . . . . . . . . . . . . . . . . 3,550,000(c) 2,474,225 Canadian Treasury Bill, 7.27%, 5/4/95 . . . . . 4,500,000(c) 3,157,471 Firstline Trust, 8.50%, 4/1/97. . . . . . . . . 3,154,966 2,297,474 Firstline Trust, 8.50%, 6/1/18. . . . . . . . . 2,418,236 1,653,520 Manufacturers Life, 8.25%, 8/1/97 . . . . . . . 7,251,020 5,261,908 Manufacturers Life, 7.75%, 5/1/19 . . . . . . . 2,489,663 1,635,552 Royal Trust, 9.00%, 3/1/97. . . . . . . . . . . 3,882,874 2,872,242 ------------ Total Canadian Securities (cost: $41,829,838) . . . . . . . . . . . 37,802,637 ------------ INTEREST RATE CONTRACTS (0.0%): Interest rate floor with Morgan Stanley, $15,000,000 notional principal on three- month Deutschemark LIBOR, (5.00% on 8/31/94), exercise rate of 5.00%, due 4/6/98 (cost: $245,583) . . . . . . . . . . . . . . -- 36,000 ------------ OPTIONS (0.00%): Canadian dollar, 480 put option contracts, exercise price of 1.3668, expire September 1994 (cost: $607,550) . . . . . . . . . . . . . . -- 223,483 ------------ SHORT-TERM SECURITIES (20.4%): U.S. Treasury Bill, 5.30%, 4/6/95 . . . . . . . 25,000,000 24,251,000 U.S. Treasury Bill, 5.23%, 6/1/95 . . . . . . . 46,000,000 44,217,500 Repurchase agreement with Goldman Sachs in a joint trading account, 4.80%, acquired on 8/31/94 and due 9/1/94 with accrued interest of $4,495 (collateralized by U.S. government agency obligations). . . . . 33,714,000 33,714,000 ------------ Total Short-Term Securities (cost: $102,226,303) . . . . . . . . . . . . 102,182,500 ------------ Total Investments in Securities (cost: $706,026,727)(i). . . . . . . . . . . $ 690,171,194 ------------ ------------ NOTES TO INVESTMENTS IN SECURITIES: (A) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO THE FINANCIAL STATEMENTS. (B) ON AUGUST 31, 1994, THE TOTAL COST OF INVESTMENTS PURCHASED ON A WHEN-ISSUED BASIS WAS $43,728,125. (C) FOR ZERO-COUPON INVESTMENTS, THE INTEREST RATE SHOWN IS THE EFFECTIVE YIELD ON THE DATE OF PURCHASE. (D) ON AUGUST 31, 1994, SECURITIES VALUED AT $154,581,991 WERE PLEDGED AS COLLATERAL FOR THE FOLLOWING OUTSTANDING REVERSE REPURCHASE AGREEMENTS: NAME OF BROKER AND ACQUISITION ACCRUED DESCRIPTION AMOUNT DATE RATE* DUE INTEREST OF COLLATERAL ------ ----------- ----- --- -------- ------------- $ 100,000,000 2/16/94 4.75% 2/9/95 $211,111 (1) 45,000,000 7/14/94 4.72% 7/13/95 100,247 (2) ----------- ------- $ 145,000,000 $311,358 ----------- ------- ----------- ------- * INTEREST RATE IS AS OF AUGUST 31, 1994. RATES ARE BASED ON THE LONDON INTERBANK OFFERED RATE (LIBOR) AND RESET MONTHLY. NAME OF BROKER AND DESCRIPTION OF COLLATERAL: (1) MORGAN STANLEY: FNMA, 5.25%, 07/1/17, $7,072,404 PAR. FNMA, 5.54%, 11/1/17, $11,660,928 PAR. FHLMC, 5.61%, 2/1/22, $13,909,686 PAR. FNMA, 6.74%, 7/1/19, $3,150,445 PAR. FNMA, 5.74%, 11/1/20, $2,358,742 PAR. FNMA, 5.42%, 5/1/18, $4,168,425 PAR. GNMA, 5.50%, 7/20/22, $8,637,022 PAR. FHLMC, 5.53%, 8/1/23, $7,913,719 PAR. FNMA, 6.04%, 9/1/17, $4,511,380 PAR. FHLMC, 4.13%, 10/1/23, $3,605,731 PAR. GNMA, 5.50%, 10/20/23, $9,489,530 PAR. GNMA, 6.00%, 5/20/22, $3,361,294 PAR. GNMA, 6.00%, 8/20/23, $3,236,274 PAR. FNMA, 6.47%, 7/1/19, $4,801,897 PAR. FHLMC, 6.00%, 5/1/17, $3,994,148 PAR. GNMA, 5.00%, 7/20/22, $8,925,977 PAR. FHLMC, 6.03%, 2/1/22, $4,766,764 PAR. (2) MORGAN STANLEY: FHLMC, 5.13%, 11/1/16, $3,979,091 PAR. GNMA, 6.00%, 8/20/23, $1,849,299 PAR. FNMA, 5.73%, 11/1/21, $8,777,389 PAR. GNMA, 6.00%, 6/20/22, $6,602,276 PAR. FNMA, 4.11%, 2/1/24, $4,912,323 PAR. GNMA, 6.75%, 6/20/23, $7,160,848 PAR. GNMA, 6.00%, 8/20/23, $4,867,180 PAR. GNMA, 4.50%, 4/20/24, $6,266,734 PAR. GNMA, 4.50%, 5/20/24, $3,899,991 PAR. FHLMC, 6.03%, 2/1/22, $699,125 PAR. (E) DESCRIPTIONS OF CERTAIN COLLATERALIZED MORTGAGE OBLIGATIONS ARE AS FOLLOWS: LIBOR - LONDON INTERBANK OFFERED RATE COFI (11TH DISTRICT) - COST OF FUNDS INDEX OF THE FEDERAL RESERVE'S 11TH DISTRICT 29 AMERICAN ADJUSTABLE RATE TERM TRUST 1998 (CONTINUED) INVERSE FLOATER - REPRESENT SECURITIES THAT PAY INTEREST AT RATES THAT INCREASE (DECREASE) WITH A DECLINE (INCREASE) IN A SPECIFIED INDEX. THE RELATIONSHIP BETWEEN A CHANGE IN THE SPECIFIED INDEX AND INTEREST RATE PAID BY THE INVERSE FLOATER IS GENERALLY GREATER THAN A ONE-TO-ONE RELATIONSHIP. INTEREST RATES DISCLOSED ARE IN EFFECT ON AUGUST 31, 1994. PRINCIPAL-ONLY - REPRESENT SECURITIES THAT ENTITLE HOLDERS TO RECEIVE ONLY PRINCIPAL PAYMENTS ON THE UNDERLYING MORTGAGES. THE YIELD TO MATURITY OF A PRINCIPAL-ONLY SECURITY IS EXTREMELY SENSITIVE TO THE RATE OF PRINCIPAL PAYMENTS ON THE UNDERLYING MORTGAGE ASSETS. A SLOWER (MORE RAPID) THAN EXPECTED RATE OF PRINCIPAL REPAYMENTS MAY HAVE AN ADVERSE (POSITIVE) EFFECT ON YIELD TO MATURITY. INTEREST RATE DISCLOSED REPRESENTS CURRENT YIELD BASED UPON THE CURRENT COST BASIS AND ESTIMATED TIMING OF FUTURE CASH FLOWS. INVERSE INTEREST-ONLY - REPRESENT SECURITIES THAT ENTITLE HOLDERS TO RECEIVE ONLY INTEREST PAYMENTS ON THE UNDERLYING MORTGAGES. INTEREST IS PAID AT A RATE THAT INCREASES (DECREASES) WITH A DECLINE (INCREASE) IN A SPECIFIED INDEX. THE YIELD TO MATURITY OF AN INVERSE INTEREST-ONLY IS EXTREMELY SENSITIVE TO THE RATE OF PRINCIPAL PAYMENTS ON THE UNDERLYING MORTGAGE ASSETS. A RAPID (SLOW) RATE OF PRINCIPAL REPAYMENTS MAY HAVE AN ADVERSE (POSITIVE) EFFECT ON YIELD TO MATURITY. INTEREST RATE DISCLOSED REPRESENTS CURRENT YIELD BASED UPON THE CURRENT COST BASIS AND ESTIMATED TIMING AND AMOUNT OF FUTURE CASH FLOWS. (F) PAR VALUE IS IN CANADIAN DOLLARS. (G) STRUCTURED SECURITIES ARE ISSUED BY U.S. ISSUERS AND ARE DENOMINATED IN U.S. DOLLARS. THESE SECURITIES WERE PURCHASED AS PART OF A PRIVATE PLACEMENT, HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933 AND ARE DEEMED TO BE ILLIQUID BY THE ADVISER. THESE SECURITIES RETURN PRINCIPAL AND/OR INTEREST IN AMOUNTS WHICH ARE LINKED TO THE INDICES INDICATED BELOW. PRINCIPAL RECEIVED AT MATURITY AND INTEREST EARNED MAY BE LIMITED TO CERTAIN MAXIMUM AND MINIMUM LEVELS. THE RELATIONSHIP BETWEEN THE SPECIFIED INDEX AND THE RESULTANT EFFECT ON PRINCIPAL OR INTEREST MAY BE GREATER THAN A ONE-TO-ONE RELATIONSHIP. (1) COUPON IS EARNED WHEN THE SPREAD BETWEEN THE TWO-YEAR BRITISH STERLING SWAP RATE AND THE SEVEN-YEAR BRITISH STERLING SWAP RATE STAYS BETWEEN 1.30% AND 2.46%. (2) PRINCIPAL AMOUNT AT MATURITY IS LINKED INVERSELY TO THE CANADIAN DOLLAR/U.S. DOLLAR EXCHANGE RATE. (3) PRINCIPAL AMOUNT AT MATURITY IS LINKED INVERSELY TO THE ONE-YEAR GERMAN DEUTSCHEMARK SWAP RATE. THE COUPON VARIES WITH THE ONE-MONTH U.S. DOLLAR LIBOR. (4) COUPON IS EARNED WHEN THE SPREAD BETWEEN THE TWO-YEAR FRENCH FRANC SWAP RATE AND THE TWO-YEAR GERMAN DEUTSCHEMARK SWAP RATE STAYS WITHIN A RANGE OF 60 TO 75 BASIS POINTS. (5) PRINCIPAL AMOUNT AT MATURITY IS LINKED TO THE JAPANESE YEN/U.S. DOLLAR EXCHANGE RATE. (6) PRINCIPAL AMOUNT AT MATURITY IS LINKED TO THE SPREAD BETWEEN THE TEN-YEAR U.S. SWAP RATE AND THE YIELD ON THE TEN-YEAR 10.75% U.S. TREASURY BOND. (H) BASED UPON ESTIMATED TIMING AND AMOUNT OF FUTURE CASH FLOWS, INCOME IS CURRENTLY NOT BEING RECOGNIZED ON THE INVERSE INTEREST-ONLY SECURITY WITH A MARKET VALUE OF $1,138,835. (I) ON AUGUST 31, 1994, FOR FEDERAL INCOME TAX PURPOSES, THE COST OF INVESTMENTS IN SECURITIES, INCLUDING THE PUT OPTIONS DESCRIBED IN NOTE 6 AND THE INTEREST RATE SWAP TRANSACTIONS DESCRIBED IN NOTE 2 TO THE FINANCIAL STATEMENTS, WAS $708,754,169. THE AGGREGATE GROSS UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED ON THIS COST WERE AS FOLLOWS: GROSS UNREALIZED APPRECIATION..... $ 5,742,681 GROSS UNREALIZED DEPRECIATION..... (27,589,438) ---------- NET UNREALIZED DEPRECIATION....... $ (21,846,757) ---------- ----------
AMERICAN ADJUSTABLE RATE TERM TRUST 1999 AUGUST 31, 1994 Principal Market Name of Issuer Amount Value (a) - -------------- --------- --------- (PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS) MORTGAGE-BACKED SECURITIES (95.1%): U.S. Agency Fixed-Rate Mortgages (6.6%): FNMA, 7.50%, 1/1/2000 . . . . . . . . . . . . . $ 10,000,000(b) 10,093,700 FNMA, 7.00%, 1/1/23 . . . . . . . . . . . . . . 10,000,000(b) 9,453,100 ------------ 19,546,800 ------------ U.S. AGENCY ADJUSTABLE-RATE MORTGAGES (40.2%): GNMA, 5.50%, 1/1/21 . . . . . . . . . . . . . . 20,000,000(b) 19,512,600 GNMA, 5.50%, 7/20/22. . . . . . . . . . . . . . 4,318,511 4,275,326 GNMA, 5.00%, 9/20/22. . . . . . . . . . . . . . 2,643,309(d) 2,559,040 GNMA, 5.50%, 9/20/22. . . . . . . . . . . . . . 3,944,605(d) 3,905,159 GNMA, 6.75%, 6/20/23. . . . . . . . . . . . . . 5,896,540(d) 5,940,764 GNMA, 5.00%, 7/20/23. . . . . . . . . . . . . . 6,821,012(d) 6,603,558 FHLMC, 6.28%, 6/1/22. . . . . . . . . . . . . . 31,605,955(d) 32,376,192 FHLMC, 6.02%, 9/1/22. . . . . . . . . . . . . . 6,728,115(d) 6,963,599 FHLMC, 5.91%, 11/1/22 . . . . . . . . . . . . . 11,864,666(d) 12,131,621 FHLMC, 5.70%, 4/1/23. . . . . . . . . . . . . . 4,635,114(d) 4,736,484 FHLMC, 6.10%, 7/1/23. . . . . . . . . . . . . . 6,425,573 6,513,925 FNMA, 5.46%, 11/1/22. . . . . . . . . . . . . . 3,688,644 3,783,184 FNMA, 3.99%, 2/1/24 . . . . . . . . . . . . . . 9,504,790(d) 9,445,385 ------------ 118,746,837 ------------ COLLATERALIZED MORTGAGE OBLIGATIONS AND OTHER MORTGAGE-BACKED SECURITIES (e)(48.3%): PRIVATE ADJUSTABLE RATE (45.4%): California Federal, Series 1987-F, Class A2, 6.39%, 7/1/17. . . . . . . . . . . 5,986,639 5,898,710 Capstead Security Corporation, Series 1992-9, Class B, 5.60%, 6/25/20 . . . . . . . . . . . . . . . 4,894,823 4,824,338 Donaldson, Lufkin and Jenrette, Series 1991-3, Class A1, 5.51%, 3/20/21 . . . . . . . . . . . . . . . 8,457,703 8,531,708 Donaldson, Lufkin and Jenrette, Series 1992-12, Class A1, 5.93%, 12/25/22. . . . . . . . . . . . . . . 7,428,386 7,433,029 Donaldson, Lufkin and Jenrette, Series 1992-6, Class A3, 5.71%, 7/25/22 . . . . . . . . . . . . . . . 3,798,142 3,744,730 Donaldson, Lufkin and Jenrette, Series 1992-MF3, Class A3, 6.26%, 5/25/22 . . . . . . . . . . . . . . . 10,000,000 10,212,500 First Federal of Rochester, Series 1988-SE1, Class A, 5.56%, 10/25/18 . . . . . 11,286,041 11,201,395 Merrill Lynch Mortgage Investors, Series 1992-E, Class A3, 5.48%, 9/15/17 . . . . . . . . . . . . . . . 5,000,000 5,000,000 Merrill Lynch Mortgage Investors, Series 1992-H, Class A1-2, 5.70%, 1/25/23 . . . . . . . . . . . . . . . 5,757,410 5,788,788 Merrill Lynch Mortgage Investors, Series 1993-B, Class A3, 5.53%, 12/15/17. . . . . . . . . . . . . . . 13,650,000 13,700,642 Merrill Lynch Mortgage Investors, Series 1993-D, Class A1-2, 4.82%, 10/25/23. . . . . . . . . . . . . . . 4,000,000 3,950,640 Merrill Lynch Mortgage Investors, Series 1993-E, Class A4, 5.63%, 6/15/18 . . . . . . . . . . . . . . . 6,500,000 6,372,665 SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES. 30 AMERICAN ADJUSTABLE RATE TERM TRUST 1999 (CONTINED) Principal Market Name of Issuer Amount Value (a) - -------------- --------- --------- Merrill Lynch Mortgage Investors, Series 1993-H, Class A1-2, 4.99%, 10/25/23. . . . . . . . . . . . . . .$ 3,640,000 3,575,863 Paine Webber Mortgage Acceptance Corporation, Series 1993-11, Class M1, 5.15%, 12/1/23 . . . . . . . . . . 1,484,738 1,473,602 Paine Webber Mortgage Acceptance Corporation, Series 1993-8, Class M1, 5.83%, 8/25/23 . . . . . . . . . . 6,819,580 6,828,104 Residential Funding Corporation, Series 1992-S25, Class A, 6.04%, 7/25/22 . . . . . . . . . . . . . . . 4,337,798 4,348,946 Residential Funding Corporation, Series 1993-S8, Class A, 5.88%, 2/25/23 . . . . . . . . . . . . . . . 6,837,646 6,898,364 Resolution Trust Corporation, Series 1992-4, Class B2, 5.92%, 7/25/28 . . . . . . . . . . . . . . . 3,000,086 2,992,585 Resolution Trust Corporation, Series 1992-6, Class B3, 6.27%, 1/25/26 . . . . . . . . . . . . . . . 10,002,213 9,983,459 Salomon Brothers Mortgage, Series 1992-5, Class A1, 5.86%, 11/25/22. . . . . . 4,594,124 4,640,065 Sears Mortgage Securities, Series 1992-12, Class A1, 5.52%, 7/25/22. . . . . . 6,520,333 6,467,358 ------------ 133,867,491 ------------ U.S. AGENCY INVERSE FLOATER (2.4%): FHLMC, 8.26%, Series 1362, Class S, Treasury, 1/15/21. . . . . . . . . . . . . . 4,000,000 2,957,500 FNMA, 12.12%, Series 1992-201, Class SB, COFI, 10/25/22 . . . . . . . . . . . . . 4,000,000 2,995,000 FNMA, 4.99%, Series 94-23, Class PS, Treasury, 4/25/23. . . . . . . . . . . . . . 1,754,000 1,061,170 ------------ 7,013,670 ------------ U.S. AGENCY PRINCIPAL-ONLY (0.5%): FNMA, 1.09%, Series 224, Class A1, 6/25/23. . . . . . . . . . . . . . 2,173,828 1,554,287 ------------ Total Mortgage-Backed Securities (cost: $287,991,626) . . . . . . . . . . . . 280,729,085 ------------ STRUCTURED SECURITIES (g)(5.2%): FOREIGN LINKED INDEX SECURITIES (5.2%): Bayerische Landesbank, New York, 9.60%, due 6/26/95 . . . . . . . . . . . . . 3,000,000(1) 2,944,200 Commerzbank, A.G., New York, 9.00%, due 3/20/1995. . . . . . . . . . . . . . . . 4,000,000(2) 3,722,120 Bayerische Landesbank, New York, 6.81%, 5/26/95 . . . . . . . . . . . . . . . 3,000,000(3) 2,777,100 Rabobank Nederland, New York, 10.00%, due 7/17/95. . . . . . . . . . . . . . . . . 3,000,000(4) 2,989,500 Swiss Bank Corporation, New York, 8.50%, due 7/10/95 . . . . . . . . . . . . . 3,000,000(5) 3,060,000 ------------ Total Structured Securities (cost: $16,000,000). . . . . . . . . . . . . 15,492,920 ------------ MUNICIPAL ZERO-COUPON SECURITIES (c)(12.2%): Amarillo, Texas, School District, 5.44%, 2/1/99. . . . . . . . . . . . . . . . 4,300,000 3,445,375 Brazoria County, Texas, General Obligation, 5.54%-5.59%, 9/1/99-9/1/00 . . . . . . . . . 1,425,000 1,064,531 Chelan County, Washington, Public Utilities District, 5.98%-6.09%, 7/1/99-7/1/00 . . . . . . . . . . . . . . . $ 2,970,000 2,312,863 Cook and Will County, Illinois, Series A, 5.63%, 12/1/99 . . . . . . . . . . 2,390,000 1,813,413 Copperas Cove, Texas, School District, 5.52%, 6/1/99 . . . . . . . . . . . . . . . 920,000 722,200 Cypress-Fairbanks, Texas, School District 5.47%-5.64%, 2/1/99-2/1/00 . . . . . . . . . 5,065,000 3,908,844 District of Columbia, General Obligation 5.57%-5.71%, 6/1/99-6/1/00 . . . . . . . . . 13,900,000 10,548,750 Mesquite, Texas, School District, 5.63%, 8/15/99 . . . . . . . . . . . . . . . 1,605,000 1,245,881 Metropolitan Pier and Exposition Authority, Illinois, State Revenue, 5.67%-5.69%, 6/15/99-12/15/99 . . . . . . . 7,875,000 6,045,413 North Slope Boro, Alaska, 5.58%, 6/30/99 . . . 4,710,000 3,697,350 Texas State General Obligation, 5.68%, 10/1/00 . . . . . . . . . . . . . . . 1,655,000 1,201,944 ------------ Total Municipal Zero-Coupon Securities (cost: $35,428,697). . . . . . . . . . . . . 36,006,564 ------------ CANADIAN SECURITIES (f)(21.1%): Canadian Government Real Return Bond, 4.25%, 12/1/21 . . . . . . . . . . . . . . . 6,353,000 4,445,974 Canadian Government Note, 8.49%, 3/1/96. . . . . . . . . . . . . . . . 6,000,000 3,934,469 Canadian Government Residual, 7.23%, 6/1/95 . . . . . . . . . . . . . . . . . . . 2,358,000 1,643,443 Canadian Treasury Bill, 7.27%, 5/4/95 . . . . . 3,000,000 2,104,981 Firstline Trust, 7.38%, 11/1/97 . . . . . . . . 2,944,714 2,081,932 Firstline Trust, 7.88%, 2/1/98. . . . . . . . . 8,431,648 6,022,156 Firstline Trust, 7.97%, 4/1/18. . . . . . . . . 1,652,838 1,130,803 Manufacturers Life, 7.75%, 5/1/19 . . . . . . . 1,867,246 1,226,663 Royal Trust, 7.50%, 9/1/97. . . . . . . . . . . 4,371,714 3,111,965 ------------ Total Canadian Securities (cost: $27,651,403). . . . . . . . . . . . . 25,702,386 ------------ INTEREST RATE CONTRACTS (0.0%): Interest rate floor with Morgan Stanley, $15,000,000 notional principal on three- month Deutschemark LIBOR, (5.00% on 8/31/94), exercise rate of 5.00%, due 4/6/98, (cost: $245,583) . . . . . . . . . . . . . . -- 36,000 ------------ Options (0.0%): Canadian dollar, 320 put option contracts, exercise price of 1.3668, expire September 1994 (cost: $405,034) . . . . . . . . . . . . . . -- 148,988 ------------ Short-Term Securities (21.1%): U.S. Treasury Bill, 5.30%, 4/6/95 . . . . . . . 20,000,000 19,400,800 U.S. Treasury Bill, 5.23%, 6/1/95 . . . . . . . 18,000,000 17,302,500 SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES. 31 AMERICAN ADJUSTABLE RATE TERM TRUST 1999 (CONTINED) Principal Market Name of Issuer Amount Value (a) - -------------- --------- --------- Repurchase agreement with Goldman Sachs in a joint trading account, 4.80%, acquired on 8/31/94 and due 9/1/94 with accrued interest of $3,419 (collateralized by U.S. government agency obligations). . . . . $ 25,644,000 25,644,000 ------------ Total Short-Term Securities (cost: $62,360,307) . . . . . . . . . . . 62,347,300 ------------ Total Investments in Securities (cost: $430,082,650)(h) . . . . . . . . . $ 420,463,243 ------------ ------------ NOTES TO INVESTMENTS IN SECURITIES: (A) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO THE FINANCIAL STATEMENTS. (B) ON AUGUST 31, 1994, THE TOTAL COST OF INVESTMENTS PURCHASED ON A WHEN-ISSUED BASIS WAS $38,998,437. (C) FOR ZERO-COUPON INVESTMENTS, THE INTEREST RATE SHOWN IS THE EFFECTIVE YIELD ON THE DATE OF PURCHASE. (D) ON AUGUST 31, 1994, SECURITIES VALUED AT $90,470,961 WERE PLEDGED AS COLLATERAL FOR THE FOLLOWING OUTSTANDING REVERSE REPURCHASE AGREEMENTS: NAME OF BROKER AND ACQUISITION ACCRUED DESCRIPTION AMOUNT DATE RATE* DUE INTEREST OF COLLATERAL ------ ----------- ----- --- -------- ------------- $ 50,000,000 10/21/93 4.80% 10/13/94 $ 66,701 (1) 35,000,000 2/14/94 4.69% 2/9/95 77,474 (2) ----------- ------- $ 85,000,000 $144,175 ----------- ------- ----------- ------- * INTEREST RATE IS AS OF AUGUST 31, 1994. RATES ARE BASED ON THE LONDON INTERBANK OFFERED RATE (LIBOR) AND RESET MONTHLY. NAME OF BROKER AND DESCRIPTION OF COLLATERAL: (1) MORGAN STANLEY: FHLMC, 6.28%, 6/1/22, $16,651,267 PAR. FHLMC, 5.91%, 11/1/22, $11,864,666 PAR. FHLMC, 6.10%, 7/1/23, $3,660,137 PAR. FHLMC, 5.70%, 4/1/23, $2,495,115 PAR. FNMA, 3.99%, 2/1/24, $3,861,996 PAR. GNMA, 5.50%, 9/20/22, $2,204,933 PAR. GNMA, 5.00%, 9/20/22, $2,643,309 PAR. GNMA, 6.75%, 6/20/23, $5,896,540 PAR. GNMA, 5.00%, 7/20/23, $2,894,049 PAR. (2) MORGAN STANLEY: FHLMC, 6.28%, 6/1/22, $14,954,688 PAR. FHLMC, 6.02%, 9/1/22, $6,728,115 PAR. FHLMC, 6.10%, 7/1/23, $1,382,718 PAR. FNMA, 3.99%, 2/1/24, $5,642,794 PAR. GNMA, 5.50%, 7/20/22, $4,318,511 PAR. GNMA, 5.50%, 9/20/22, $1,217,770 PAR. GNMA, 5.00%, 7/20/23, $2,962,281 PAR. (E) DESCRIPTIONS OF CERTAIN COLLATERALIZED MORTGAGE OBLIGATIONS ARE AS FOLLOWS: LIBOR - LONDON INTERBANK OFFERED RATE COFI (11TH DISTRICT) - COST OF FUNDS INDEX OF THE FEDERAL RESERVE'S 11TH DISTRICT INVERSE FLOATER - REPRESENT SECURITIES THAT PAY INTEREST AT RATES THAT INCREASE (DECREASE) WITH A DECLINE (INCREASE) IN A SPECIFIED INDEX. THE RELATIONSHIP BETWEEN A CHANGE IN THE SPECIFIED INDEX AND INTEREST RATE PAID BY THE INVERSE FLOATER IS GENERALLY GREATER THAN A ONE-TO-ONE RELATIONSHIP. INTEREST RATES DISCLOSED ARE IN EFFECT ON AUGUST 31, 1994. PRINCIPAL-ONLY - REPRESENT SECURITIES THAT ENTITLE HOLDERS TO RECEIVE ONLY PRINCIPAL PAYMENTS ON THE UNDERLYING MORTGAGES. THE YIELD TO MATURITY OF A PRINCIPAL-ONLY SECURITY IS EXTREMELY SENSITIVE TO THE RATE OF PRINCIPAL PAYMENTS ON THE UNDERLYING MORTGAGE ASSETS. A SLOWER (MORE RAPID) THAN EXPECTED RATE OF PRINCIPAL REPAYMENTS MAY HAVE AN ADVERSE (POSITIVE) EFFECT ON YIELD TO MATURITY. INTEREST RATE DISCLOSED REPRESENTS CURRENT YIELD BASED UPON THE CURRENT COST BASIS AND ESTIMATED TIMING OF FUTURE CASH FLOWS. (F) PAR VALUE IS IN CANADIAN DOLLARS. (G) STRUCTURED SECURITIES ARE ISSUED BY U.S. ISSUERS AND ARE DENOMINATED IN U.S. DOLLARS. THESE SECURITIES WERE PURCHASED AS PART OF A PRIVATE PLACEMENT, HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933 AND ARE DEEMED TO BE ILLIQUID BY THE ADVISER. THESE SECURITIES RETURN PRINCIPAL AND/OR INTEREST IN AMOUNTS WHICH ARE LINKED TO THE INDICES INDICATED BELOW. PRINCIPAL RECEIVED AT MATURITY AND INTEREST EARNED MAY BE LIMITED TO CERTAIN MAXIMUM AND MINIMUM LEVELS. THE RELATIONSHIP BETWEEN THE SPECIFIED INDEX AND THE RESULTANT EFFECT ON PRINCIPAL OR INTEREST MAY BE GREATER THAN A ONE-TO-ONE RELATIONSHIP. (1) COUPON IS EARNED WHEN THE SPREAD BETWEEN THE TWO-YEAR BRITISH STERLING SWAP RATE AND THE SEVEN-YEAR BRITISH STERLING SWAP RATE STAYS BETWEEN 1.30% AND 2.46%. (2) PRINCIPAL AMOUNT AT MATURITY IS LINKED INVERSELY TO THE CANADIAN DOLLAR/U.S. DOLLAR EXCHANGE RATE. (3) PRINCIPAL AMOUNT AT MATURITY IS LINKED INVERSELY TO THE ONE-YEAR GERMAN DEUTSCHEMARK SWAP RATE. THE COUPON VARIES WITH THE ONE-MONTH U.S. DOLLAR LIBOR. (4) COUPON IS EARNED WHEN THE SPREAD BETWEEN THE TWO-YEAR FRENCH FRANC SWAP RATE AND THE TWO-YEAR GERMAN DEUTSCHEMARK SWAP RATE STAYS WITHIN A RANGE OF 60 TO 75 BASIS POINTS. (5) PRINCIPAL AMOUNT AT MATURITY IS LINKED TO THE JAPANESE YEN/U.S. DOLLAR EXCHANGE RATE. (H) ON AUGUST 31, 1994, FOR FEDERAL INCOME TAX PURPOSES, THE COST OF INVESTMENTS IN SECURITIES, INCLUDING THE PUT OPTIONS DESCRIBED IN NOTE 6 AND THE INTEREST RATE SWAP TRANSACTIONS DESCRIBED IN NOTE 2 TO THE FINANCIAL STATEMENTS, WAS $432,126,396. THE AGGREGATE GROSS UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED ON THIS COST WERE AS FOLLOWS: GROSS UNREALIZED APPRECIATION...... $ 3,218,256 GROSS UNREALIZED DEPRECIATION...... (17,366,814) ---------- NET UNREALIZED DEPRECIATION........ $ (14,148,558) ---------- ----------
32 FEDERAL TAX INFORMATION FEDERAL TAX INFORMATION FOR THE FISCAL YEAR ENDED AUGUST 31, 1994 Distributions shown below are taxable as dividend income. None qualify for the corporate dividends received deduction. In February 1995, each shareholder will receive a breakdown of income earned by investment category for calendar year 1994. Information for federal income tax purposes is presented as an aid to shareholders in reporting the distributions shown below. Shareholders should consult a tax adviser on how to report these distributions for state and local income taxes. Total distributions include net short-term capital gains of $0.0054 for American Adjustable Rate Term Trust 1999 (EDJ).
American American American American Adjustable Adjustable Adjustable Adjustable Rate Term Rate Term Rate Term Rate Term Trust 1996 Trust 1997 Trust 1998 Trust 1999 Payable Date ---------- ---------- ---------- ---------- - ------------- September 22, 1993 $0.0463 0.0500 0.0520 0.0520 October 27, 1993 0.0440 0.0500 0.0520 0.0520 November 24, 1993 0.0440 0.0500 0.0520 0.0520 December 22, 1993 0.0425 0.0470 0.0490 0.0500 January 14, 1994 0.0425 0.0470 0.0490 0.0500 February 23, 1994 0.0425 0.0470 0.0490 0.0500 March 23, 1994 0.0425 0.0455 0.0470 0.0475 April 27, 1994 0.0400 0.0455 0.0470 0.0475 May 25, 1994 0.0300 0.0375 0.0400 0.0425 June 22, 1994 0.0300 0.0375 0.0400 0.0425 July 27, 1994 0.0300 0.0375 0.0400 0.0425 August 24, 1994 0.0300 0.0375 0.0400 0.0425 ------ ------ ------ ------ Total distributions $0.4643 0.5320 0.5570 0.5710 ------ ------ ------ ------ ------ ------ ------ ------
34 SHAREHOLDER UPDATE SHARE REPURCHASE PROGRAM Your fund's board of directors has reapproved a share repurchase program, which enables each fund to 'buy back' shares of its common stock in the open market. Repurchases may only be made when the previous day's closing market price per share was at a discount from net asset value. Repurchases cannot exceed 3% of each fund's originally issued shares. WHAT EFFECT WILL THIS PROGRAM HAVE ON SHAREHOLDERS? - - We do not expect any adverse impact on the adviser's ability to manage the fund. - - Because repurchases will be at a price below net asset value, remaining shares outstanding may experience a slight increase in net asset value. - - Although the effect of share repurchases on market price is less certain, the board of directors believes the program may have a favorable effect on the market price of fund shares. - - We do not anticipate any material increase in the fund's expense ratio. WHEN WILL SHARES BE REPURCHASED? Share repurchases may be made from time to time in the open market when shares are trading at a discount from net asset value and may be discontinued at any time. Share repurchases are not mandatory when fund shares are trading at a discount from net asset value; all repurchases will be at the discretion of the fund's investment adviser. The board of directors will consider whether to continue the Share Repurchase Program on at least a semiannual basis and will notify shareholders of its determination in the next semiannual or annual report. HOW WILL SHARES BE REPURCHASED? We expect to finance the repurchase of shares by liquidating portfolio securities or using current cash balances. We do not anticipate borrowing in order to finance share repurchases. - -------------------------------------------------------------------------------- TERMS AND CONDITIONS OF THE TERM TRUST DIVIDEND REINVESTMENT PLAN As a shareholder, you may choose to participate in the Term Trust Dividend Reinvestment Plan. It is a convenient and economical way to buy additional shares of the fund by automatically reinvesting dividends and capital gains distributions. The plan is administered by Investors Fiduciary Trust Company (IFTC), the plan agent. ELIGIBILITY/PARTICIPATION You may join the plan at any time. Reinvestment of distributions will begin with the next distribution paid, provided your enrollment card is received at least 10 days before the record date for that distribution. If your shares are in certificate form, you may join the plan directly and have your distributions reinvested in additional shares of the fund. To enroll in this plan, call IFTC at 1-800-543-1627. If your shares are registered in your brokerage firm's name or another name, ask the holder of your shares how you may participate. Banks, brokers or nominees, on behalf of their beneficial owners who wish to reinvest dividend and capital gain distributions, may participate in the plan by informing Investors Fiduciary Trust Company (IFTC) at least 10 days before the record date for any dividend and/or capital gains distribution. PLAN ADMINISTRATION Beginning no more than five business days before the dividend payment date, IFTC will buy shares of the fund on the New York Stock Exchange or elsewhere on the open market. The fund will not issue any new shares in connection with the plan. All reinvestments will be at a market price plus a pro rata share of any brokerage commissions, which may be more or less than the fund's net asset value per share. The number of shares allocated to you is determined by dividing the amount of the dividend or distribution by the applicable price per share. There is no direct charge for reinvestment of dividends and capital gains, since IFTC fees are paid for by the fund. However, if fund shares are purchased in the open market, each participant pays a pro rata portion of the brokerage commissions. Brokerage charges are expected to be lower than those for individual transactions because shares are purchased for all participants in blocks. As long as you continue to participate in the plan, distributions paid on the shares in your term trust account will be reinvested. IFTC maintains accounts for plan participants holding shares in certificate form. You will receive a monthly statement detailing total dividend and capital gain distributions, date of investment, shares acquired, price per share, and total shares held in your account, both certificate-form shares and unissued shares acquired through the plan. 35 SHAREHOLDER UPDATE TAX INFORMATION Distributions reinvested in additional shares of the fund are subject to income tax, just as they would if received in cash. In general, the tax basis of such shares will equal the price paid by IFTC plus the pro rata share of any commission. Each January, you will receive IRS Form 1099 regarding the federal tax status of the prior year's distributions. PLAN WITHDRAWAL If you hold your shares in certificate form, you may terminate your participation in the plan at any time by giving written notice to IFTC. If your shares are registered in your brokerage firm's name, you may terminate your participation via verbal or written instructions to your investment professional. Written instructions should include your name and address as they appear on the certificate or account. If notice is received at least 10 days before the record date, all future distributions will be paid directly to the shareholder of record. If your shares are in certificate form and you discontinue your participation in the plan, you (or your nominee) will receive an additional certificate for all full shares and a check for any fractional shares in your account. PLAN AMENDMENT/TERMINATION The funds reserve the right to amend or terminate the plan. Should the plan be terminated, participants will be notified in writing at least 90 days before the record date for the next dividend or distribution. The plan may also be amended or terminated by IFTC with at least 90 days' written notice to participants in the plan. Any questions about the plan should be directed to your investment professional or to Investors Fiduciary Trust Company, P.O. Box 419432, Kansas City, Missouri 64141, 1-800-543-1627. - -------------------------------------------------------------------------------- PERIODIC REPURCHASE POLICY At a meeting of the funds' shareholders held on August 22, 1994, shareholders adopted the following fundamental policy requiring each fund to make an annual offer to repurchase between 5% and 25% of its outstanding shares: (a) The fund will make repurchase offers ("Repurchase Offers") at annual intervals pursuant to Rule 23c-3 under the Investment Company Act of 1940, as such rule may be amended from time to time. (b) October 1 of each year, or the next business day if October 1 is not a business day, will be the deadline (the "Repurchase Request Deadline") by which the fund must receive repurchase requests submitted by shareholders in response to the most recent Repurchase Offer. (c) The date on which the repurchase price for shares is determined (the "Repurchase Pricing Date") will occur on the seventh day after a Repurchase Request Deadline, or the next business day if the seventh day is not a business day. Under this new fundamental policy, each fund mailed to shareholders on September 6, 1994, an offer to repurchase up to 25% of its shares outstanding on October 3, 1993, the Repurchase Request Deadline. The percentage and number of shares tendered for each fund were as follows:
Percentage Number of Tendered Shares Tendered ---------- --------------- BDJ . . . . . 18% 4,767,018 CDJ . . . . . 15% 7,396,113 DDJ . . . . . 16% 9,135,819 EDJ . . . . . 16% 5,535,062
Because shares tendered did not exceed the repurchase offer amount, the funds were able to accept all tenders that were made in good order and it was not necessary to repurchase shares tendered on a pro rata basis. For additional information, see footnote 10 to the funds' Financial Statements. 36 DIRECTORS AND OFFICERS DIRECTORS David T. Bennett, ATTORNEY, PRINCIPAL, GRAY, PLANT, MOOTY, MOOTY & BENNETT, P.A. Jaye F. Dyer, PRESIDENT, DYER MANAGEMENT COMPANY William H. Ellis, PRESIDENT, PIPER JAFFRAY COMPANIES INC. Karol D. Emmerich, PARACLETE GROUP Luella G. Goldberg, DIRECTOR, TCF FINANCIAL, NWNL COMPANIES, HORMEL FOODS CORP. John T. Golle, CHAIRMAN AND CEO, EDUCATION ALTERNATIVES Edward J. Kohler, PRESIDENT, PIPER CAPITAL MANAGEMENT INCORPORATED George Latimer, SPECIALIST CONSULTANT, DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT OFFICERS Edward J. Kohler, CHAIRMAN OF THE BOARD Benjamin S. Rinkey, PRESIDENT/SENIOR VICE PRESIDENT Jeffrey B. Griffin, PRESIDENT/SENIOR VICE PRESIDENT Thomas S. McGlinch, SENIOR VICE PRESIDENT Douglas J. White, SENIOR VICE PRESIDENT Beverly J. Zimmer, SENIOR VICE PRESIDENT Amy K. Johnson, VICE PRESIDENT Robert H. Nelson, VICE PRESIDENT J. Bradley Stone, VICE PRESIDENT David E. Rosedahl, SECRETARY Mary McGraw, ASSISTANT SECRETARY Charles N. Hayssen, TREASURER INVESTMENT ADVISER Piper Capital Management Incorporated 222 SOUTH NINTH STREET, MINNEAPOLIS, MN 55402-3804 CUSTODIAN AND TRANSFER AGENT Investors Fiduciary Trust Company 127 WEST 10TH STREET, KANSAS CITY, MO 64105-1716 LEGAL COUNSEL Dorsey & Whitney 220 SOUTH SIXTH STREET, MINNEAPOLIS, MN 55402 INDEPENDENT AUDITORS KPMG Peat Marwick LLP 4200 NORWEST CENTER, MINNEAPOLIS, MN 55402 [PIPER CAPITAL MANAGEMENT LOGO] PIPER JAFFRAY INC., FUND SPONSOR AND NASD MEMBER. -----END PRIVACY-ENHANCED MESSAGE-----