-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HwboLkRhXZM/6JmoXKhcxX5zCMOJUKucnNB4B/u6Xij4Azd/NKM8p3vjQ0s4ItaW vUViKr86xtGfCH61VYSLAw== 0000912057-96-010135.txt : 19960518 0000912057-96-010135.hdr.sgml : 19960518 ACCESSION NUMBER: 0000912057-96-010135 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960229 FILED AS OF DATE: 19960516 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PIPER FUNDS INC II CENTRAL INDEX KEY: 0000943887 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: MN FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-07279 FILM NUMBER: 96568488 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 FORMER COMPANY: FORMER CONFORMED NAME: JAFFRAY FUNDS INC DATE OF NAME CHANGE: 19950413 N-30D 1 N-30D ADJUSTABLE RATE MORTGAGE SECURITIES FUND 1996 SEMIANNUAL REPORT TABLE OF CONTENTS Letter to Shareholders.................2 Investments in Securities..............5 Financial Statements and Notes.........6
ADJUSTABLE RATE MORTGAGE SECURITIES FUND Adjustable Rate Mortgage Securities Fund is a diversified, open-end mutual fund with an investment objective of providing the maximum current income that is consistent with low volatility of principal. The fund invests primarily in adjustable rate mortgage (ARM) securities. It may also invest in mortgage-backed securities other than ARM securities, U.S. government securities, asset-backed securities and corporate debt securities. The fund's Nasdaq symbol is PJARX. As with other mutual funds, there can be no assurance the fund will achieve its objective. CALL TO RECEIVE QUARTERLY UPDATES If you would like to be put on our mailing list to receive quarterly fund summaries for Adjustable Rate Mortgage Securities Fund, call our Shareholder Services Department at 1 800 866-7778. THIS REPORT IS INTENDED FOR SHAREHOLDERS OF ADJUSTABLE RATE MORTGAGE SECURITIES FUND, BUT IT MAY ALSO BE USED AS SALES LITERATURE IF PRECEDED OR ACCOMPANIED BY A PROSPECTUS. THE PROSPECTUS GIVES DETAILS ABOUT THE CHARGES, INVESTMENT RESULTS AND OPERATING POLICIES OF THE FUND. SHAREHOLDER SERVICES AS A SHAREHOLDER IN PIPER FUNDS, YOU HAVE ACCESS TO A FULL RANGE OF SERVICES AND BENEFITS. IF YOU HOLD YOUR FUND SHARES THROUGH A BROKER/DEALER OTHER THAN PIPER JAFFRAY, THESE SERVICES MAY NOT BE AVAILABLE TO YOU. CHECK YOUR PROSPECTUS FOR DETAILS ABOUT SERVICES AND ANY LIMITATIONS THAT MIGHT APPLY TO YOUR FUND. LOW MINIMUM INVESTMENTS You can open most Piper mutual fund accounts with a minimum investment of $250. QUANTITY DISCOUNTS If your initial investment exceeds a specified amount, if an investment combined with the value of your existing Piper shares exceeds a specified amount, or if your investments combined during a 13-month period exceed a specified amount, you can reduce or even eliminate the front-end sales charge. WAIVER OF SALES CHARGES Money market funds carry no sales charges.* Sales charges on other Piper funds are waived on purchases of $500,000 or more. However, a contingent deferred sales charge may be imposed. See your prospectus for details. AUTOMATIC REINVESTMENT OF DIVIDENDS For maximum growth of your assets, you can reinvest dividends and capital gains automatically in additional shares of your fund without a sales charge. CROSS-REINVESTMENT OF DISTRIBUTIONS Diversify your holdings by reinvesting dividends and capital gains from one Piper fund into another. CASH DISTRIBUTIONS If you prefer, take your dividends and/or capital gains in cash. AUTOMATIC MONTHLY INVESTMENT PROGRAM You may automatically transfer $25 or more each month from any Piper money market fund into many other Piper funds.* AUTOMATIC MONTHLY MONEY TRANSFER PROGRAM If you are starting a savings discipline or seeking a convenient way to invest, you can transfer a minimum of $100 automatically from your bank, savings and loan or other financial institution into many of the Piper funds. EXCHANGE PRIVILEGES Revise your investment plan without incurring a sales charge by moving assets from one Piper fund to another with the same fee structure. See your prospectus for restrictions involving exchanges between funds with different sales charges. REINVESTMENT PRIVILEGES If you buy a fund with a sales charge and later redeem your shares, you may reinvest all or part of the proceeds in shares of that fund or another Piper fund within 30 days and pay no additional sales charge, subject to each fund's minimum investment requirements. SYSTEMATIC WITHDRAWAL PLAN If your account has a value of $5,000 or more, you can elect to receive periodic payments of $100 or more, at no cost, excluding money market funds. ACCOUNT STATEMENTS Whenever you add to or withdraw money from your account, you'll receive a monthly statement from Piper Jaffray. Accounts with no activity receive a quarterly statement instead. Periodic dividend and capital gain distributions, if any, also appear on your statement. CONFIRMATION OF TRANSACTIONS You receive a confirmation statement following every transaction, except in the money market funds. All transactions are reflected on your account statement. $25 MILLION SHAREHOLDER PROTECTION If you have a Piper Jaffray PRIME or PAT account, you are protected up to $25 million in the unlikely event that Piper Jaffray were to fail financially. This is in addition to basic Securities Investor Protection Corporation (SIPC) coverage, which protects up to $500,000 in cash and securities ($100,000 in cash only) per customer. This protection does not cover market loss. * AN INVESTMENT IN A PIPER MONEY MARKET FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1 PER SHARE. 1 ADJUSTABLE RATE MORTGAGE SECURITIES FUND [PHOTO TOM MCGLINCH] FPO 65% [PHOTO WAN-CHONG KUNG] FPO 52% TOM MCGLINCH SHARES PRIMARY RESPONSIBILITY FOR THE MANAGEMENT OF ADJUSTABLE RATE MORTGAGE SECURITIES FUND. HE HAS 15 YEARS OF INVESTMENT EXPERIENCE. WAN-CHONG KUNG SHARES PRIMARY RESPONSIBILITY FOR THE MANAGEMENT OF ADJUSTABLE RATE MORTGAGE SECURITIES FUND. SHE HAS FOUR YEARS OF INVESTMENT EXPERIENCE. PORTFOLIO COMPOSITION FEBRUARY 29, 1996 [CHART] U.S. Agency ARM Securities 69% Short-Term 1% U.S. Treasuries 11% U.S. Agency Fixed Rate Mortgage-Backed Securities 2% Privately Issued ARM Securities 16% Other Assets 1% INVESTMENT CATEGORIES REFLECT PERCENTAGE OF TOTAL ASSETS. April 17, 1996 Dear Shareholders: FOR THE SIX-MONTH PERIOD ENDED FEBRUARY 29, 1996, ADJUSTABLE RATE MORTGAGE SECURITIES FUND HAD A TOTAL RETURN OF 3.51%* which includes reinvested distributions but not the fund's sales charge. The fund's emphasis on high-quality securities helped it outperform the Lipper Adjustable Rate Mortgage Funds Average return of 1.31% for the same period. The fund performed in line with the Lehman Brothers Adjustable Rate Mortgage Index which returned 3.92% for the same six-month period. The slight outperformance by the Lehman index resulted from its larger allocation to Government National Mortgage Association (GNMA) securities and securities with coupon rates that reset to the Cost of Funds Index (COFI). Although these securities typically experience greater price appreciation during periods of falling interest rates such as we experienced for most of the six-month period, they produce less income than the higher-coupon issues held by the fund. THE FUND'S NET ASSET VALUE HAS EXPERIENCED LITTLE VOLATILITY SINCE IT WAS BROUGHT OUT AT $8.00 PER SHARE AFTER THE MERGER OF THE FOUR TERM TRUSTS. Over the last six months, interest rates generally declined as the Federal Reserve lowered the fed funds rate once in December from 5.75% to 5.50%, and another time in January from 5.50% to 5.25% to try to stimulate the economy. The rate cuts helped to move short-term interest rates lower which in turn increased the prices of ARM securities. This was reflected in a modest rise in the net asset value of Adjustable Rate Mortgage Securities Fund to a high of $8.08 on February 2. However, we positioned the fund to emphasize income more than an increase in net asset value as we expected the Federal Reserve to ease rates much less aggressively than did the market in general. This strategy paid off in February when the bond market realized it had effectively "overanticipated" the number of rate cuts the Federal Reserve would make and rates began to rise. In late February, the net asset value of the fund dropped only slightly and is currently $8.03 as of April 17. SINCE THE MERGER LAST FALL, WE HAVE FOCUSED OUR EFFORTS ON IMPROVING THE LEVEL AND PREDICTABILITY OF DIVIDEND INCOME TO SHAREHOLDERS. The lower rate environment throughout most of the period decreased the interest rates on mortgages, causing investors in ARM securities to experience a gradual reduction in coupon income as the underlying mortgage loans reset. We took steps to extend the average number of * FIGURES SHOWN REFLECT PAST PERFORMANCE AND DO NOT GUARANTEE FUTURE RESULTS. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT FUND SHARES, WHEN SOLD, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. 2 ADJUSTABLE RATE MORTGAGE SECURITIES FUND [CHART] Adjustable Rate Mortgage Securities Fund (Results include historical net asset value performance of American Adjustable Rate Term Trust--1998, assume reinvested distribution and reflect the funds 1.5% sales charge since inception) Lehman Brothers Adjustable Rate Mortgage Index, an unmanaged index of all U.S. agency adjustable rate mortgage securities Lipper Adjustable Rate Mortgage Funds Average, the average total return, with distributions reinvested, of similar funds as characterized by Lipper Analytical Services IF YOU HAD INVESTED $10,000 IN JANUARY 1992 AND HELD YOUR INVESTMENT THROUGH FEBRUARY 29, 1996, REINVESTING ALL DISTRIBUTIONS, YOUR INVESTMENT WOULD HAVE GROWN TO $11,690. IN COMPARING THE FUND TO THE LEHMAN BROTHERS INDEX AND THE LIPPER AVERAGE, KEEP IN MIND THAT THE FUND'S PERFORMANCE REFLECTS THE SALES CHARGE, WHILE NO SUCH CHARGES ARE REFLECTED IN THE INDEX OR THE AVERAGE. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. AVERAGE ANNUAL TOTAL RETURNS THROUGH 2/29/96, INCLUDING 1.5% SALES CHARGE One Year..............................6.26% Since Inception (1/30/92).............3.90%
FUND RESULTS INCLUDE REINVESTED DISTRIBUTIONS AND REFLECT THE ADJUSTABLE RATE MORTGAGE SECURITIES FUND'S MAXIMUM 1.5% SALES CHARGE AS IF IT WAS APPLIED SINCE THE FUND'S INCEPTION. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. ON SEPTEMBER 1, 1995, FOUR AMERICAN ADJUSTABLE RATE TERM TRUSTS MERGED INTO THE ADJUSTABLE RATE MORTGAGE SECURITIES FUND. ALL PERFORMANCE RESULTS ABOVE INCLUDE THE HISTORICAL NET ASSET VALUE PERFORMANCE THROUGH SEPTEMBER 1, 1995, OF AMERICAN ADJUSTABLE RATE TERM TRUST-1998, THE FUND'S PREDECESSOR FOR PERFORMANCE AND FINANCIAL REPORTING PURPOSES. months for coupons to reset by increasing the fund's allocation to GNMA ARM securities. These securities have coupons ranging from 6.0% to 7.38% that won't reset until the fourth quarter of 1996. In addition, we overweighted ARM securities indexed to the one-year Constant Maturity Treasury, which reset less frequently than LIBOR-based or Treasury bill-based ARM securities. The lower rates also caused many adjustable rate mortgage borrowers to prepay their mortgages and lock in a lower rate with fixed rate mortgages. This level of prepayments also reduced the fund's income level. That's because the fund purchased many of these mortgages at premium prices and the prepayments forced the fund to amortize these premiums more quickly. We reduced the fund's exposure to prepayments by selling higher cost, faster prepaying ARM securities for lower cost, slower prepaying ARM securities. THESE ACTIONS, IN ADDITION TO A SMALLER CASH POSITION IN THE FUND, HAVE RESULTED IN A HIGHER LEVEL OF DIVIDEND INCOME TO SHAREHOLDERS. The dividend has increased from the September 1995 level of $0.0340 per share to the March 1996 level of $0.0403 per share. The dividend policy for the fund is to distribute to shareholders substantially all of the investment income earned during any period. Therefore, we will not attempt to stabilize monthly distributions by retaining income in a dividend reserve. THE FUND IS STILL EXPERIENCING REDEMPTIONS THAT BEGAN AFTER THE MERGER LAST FALL. We have continued to meet redemption requests without disruption to the fund's net asset value or income. This has been accomplished by maintaining a small cash position in the fund at all times and by selling privately issued and U.S. government agency ARM securities or U.S. Treasury securities when necessary. THROUGHOUT MOST OF THE SEMIANNUAL PERIOD, THE FUND MAINTAINED A HIGH PERCENTAGE IN ARM SECURITIES. We believed they represented a good value when comparing their level of income to their price stability. As of February 29, 85% of the fund's total assets were invested in ARM securities (see pie chart on page 2), with 69% issued by a U.S. government agency and 16% privately issued and rated AAA or AA by Standard and Poor's. Nearly all of these ARM securities had coupons which were indexed to the one-year Constant Maturity Treasury yield and which reset on an annual basis. 3 ADJUSTABLE RATE MORTGAGE SECURITIES FUND WHAT ARE ADJUSTABLE RATE MORTGAGE (ARM) SECURITIES?* An ARM security represents ownership in a pool of adjustable rate mortgage loans. Payments on the ARM securities come from payments on the adjustable rate mortgages. When a borrower's mortgage rate resets to a higher (lower) rate due to changes in a market index, the coupon on the ARM security also resets to a higher (lower) level. This results in a larger (smaller) interest payment that is then passed through to investors. The borrower's loan document specifically states the dates on which the rate will change, the market index on which the new rate is based, and the margin by which the rate is set over the index rate. For example, many borrowers have loans indexed to the one-year Treasury rate plus a margin of 2.75%, which reset once a year. If, on the reset date, the one-year Treasury rate is 5.50%, the borrower's new rate for the following 12 months will increase to 8.25%. Likewise, the rate passed through to the investor will increase to 8.25% minus a mortgage servicer and guarantee fee. Almost all ARM loans have periodic reset caps and lifetime caps, which limit how often and how high rates can reset. Smaller periodic caps and lower lifetime caps work to the advantage of the borrower and to the disadvantage of the investor when rates are rising. Although ARM pools are made up of thousands of similarly indexed loans, in any particular month only a portion of the loans reset to a current market rate, creating lags in the adjustment process. * ARM SECURITIES ARE DEFINED MORE BROADLY IN THE FUND'S PROSPECTUS. PLEASE SEE THE PROSPECTUS FOR A COMPLETE DEFINITION. RECENT VOLATILITY IN THE BOND MARKET HAS CAUSED US TO REDUCE THE ARM SECURITIES PORTION OF THE FUND BY ABOUT 5% AND PURCHASE TWO-YEAR U.S. TREASURY NOTES. This volatility, and higher rates, were the result of good economic data concerning job growth that came out in March and April. Positive job growth data and a stronger economy reignite inflation concerns, which in turn cause rates to rise. LOOKING AHEAD, WE EXPECT A RELATIVELY STABLE INTEREST RATE ENVIRONMENT THROUGH THE FUND'S FISCAL YEAR END IN AUGUST. The higher interest rates we're experiencing, and the additional income that now comes from extending maturities, could lead to opportunities in fixed rate securities and a reduction in the percentage of ARM securities the fund holds. SINCE WE LAST REPORTED TO YOU IN OCTOBER, WE HAVE ADDED A NEW PORTFOLIO MANAGER TO THE FUND. Wan-Chong Kung joined the fund as a co-manager in December. Wan-Chong, a vice president and fixed income portfolio manager at Piper Capital Management, also assists with the management of Highlander Income Fund and several separately managed accounts. Prior to joining Piper Capital in 1993, Wan-Chong was a senior consultant for a financial services firm. She has four years of financial experience. Mike Jansen, who previously co-managed the fund, has left Piper Capital to pursue other career opportunities. Thank you for your investment in the Adjustable Rate Mortgage Securities Fund. We remain committed to providing you with top-quality investment management and service. Sincerely, [sig] Tom McGlinch Portfolio Manager 4 - -------------------------------------------------------------------------------- INVESTMENTS IN SECURITIES (UNAUDITED) ADJUSTABLE RATE MORTGAGE SECURITIES FUND FEBRUARY 29, 1996
Principal Market Name of Issuer Amount Value (a) - --------------------------------------------------------- ---------- ----------- (PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS) U.S. GOVERNMENT SECURITIES (10.7%): U.S. Treasury Note, 6.38%, 6/30/97 ................. $ 10,000,000 10,136,100 U.S. Treasury Note, 6.00%, 11/30/97 .................. 23,000,000 23,218,500 U.S. Treasury Note, 6.63%, 3/31/97 ................... 7,500,000 7,606,200 ----------- Total U.S. Government Securities (cost: $40,937,953) ............................... 40,960,800 ----------- MORTGAGE-BACKED SECURITIES (87.7%): U.S. Agency Fixed Rate Mortgages (1.8%): 10.00%, FNMA, 12/1/21 ................................ 2,205,323 2,426,517 9.00%, GNMA, 5/15/16 ................................. 1,272,415 1,359,868 10.00%, GNMA, 2/15/25 ................................ 2,876,741 3,180,554 ----------- 6,966,939 ----------- U.S. Agency Adjustable Rate Mortgages (67.4%): 7.95%, FHLMC, 2/1/22 ................................. 14,279,780 14,768,148 8.01%, FHLMC, 9/1/22 ................................. 4,485,622 4,602,651 7.50%, FHLMC, 11/1/16 ................................ 8,889,192 9,066,709 8.00%, FHLMC, 5/1/17 ................................. 3,199,579 3,252,979 7.73%, FHLMC, 6/1/18 ................................. 1,816,259 1,870,638 7.74%, FHLMC, 1/1/21 ................................. 5,230,181 5,340,643 7.72%, FHLMC, 5/1/19 ................................. 1,841,215 1,877,910 7.77%, FHLMC, 10/1/18 ................................ 6,029,254 6,197,712 7.71%, FHLMC, 8/1/20 ................................. 9,633,482 9,866,420 7.69%, FNMA, 1/1/18 .................................. 1,876,024 1,940,165 7.71%, FNMA, 1/1/29 .................................. 3,362,914 3,453,276 7.40%, FNMA, 5/1/18 .................................. 6,690,528 6,827,282 7.33%, FNMA, 3/1/28 .................................. 9,239,020 9,430,637 7.43%, FNMA, 7/1/19 .................................. 2,572,057 2,626,276 7.30%, FNMA, 11/1/17 ................................. 8,863,650 8,981,270 7.81%, FNMA, 1/1/20 .................................. 1,812,091 1,865,185 7.55%, FNMA, 12/1/20 ................................. 7,062,010 7,220,834 7.49%, FNMA, 11/1/21 ................................. 6,319,834 6,466,960 7.33%, FNMA, 10/1/25 ................................. 7,405,840 7,479,899 7.00%, GNMA, 5/20/23 ................................. 10,130,390 10,273,633 7.25%, GNMA, 9/20/23 ................................. 8,020,783 8,150,158 7.00%, GNMA, 6/20/24 ................................. 9,627,184 9,791,423 6.50%, GNMA, 9/20/25 ................................. 14,639,769 14,928,026 6.00%, GNMA, 8/20/25 ................................. 21,155,800 21,411,574 6.00%, GNMA, 9/20/25 ................................. 21,152,554 21,408,712 7.00%, GNMA II, 7/20/22 .............................. 7,667,352 7,800,074 7.25%, GNMA II, 7/20/22 .............................. 10,943,011 11,164,716 7.00%, GNMA II, 6/20/22 .............................. 7,710,315 7,818,414 7.38%, GNMA II, 6/20/23 .............................. 16,515,271 16,784,635 7.00%, GNMA II, 8/20/21 .............................. 6,916,383 7,056,370 7.00%, GNMA II, 10/20/21 ............................. 6,772,966 6,914,047 ----------- 256,637,376 ----------- Collateralized Mortgage Obligations (b) (18.5%): U.S. Agency Floating Rate (2.3%): 4.88%, FHLMC 1693, Class FA, Treasury, 3/15/09 ....... 9,139,139 8,789,568 -----------
Principal Market Name of Issuer Amount Value (a) - --------------------------------------------------------- ---------- ----------- Private Floating Rate (16.2%): 7.79%, Donaldson, Lufkin and Jenrette, Series 1992-MF3, Class A3, LIBOR, 6/18/07 ................ $ 13,000,000 13,130,000 8.16%, Resolution Trust Corporation, Series 1991-8, Class A1, Treasury, 12/25/20 ........................ 11,002,561 11,105,710 7.85%, Resolution Trust Corporation, Series 1992-6, Class B3, Treasury, 1/25/26 ......................... 23,345,266 23,491,174 7.15%, Sears Mortgage Securities, Series 1991-K, Class A1, LIBOR, 9/25/21 .................................. 13,776,414 13,776,414 ----------- 61,503,298 ----------- Total Mortgage-Backed Securities (cost: $335,964,435) .............................. 333,897,181 ----------- SHORT-TERM SECURITIES (1.4%): Repurchase agreement with Goldman Sachs in a joint trading account collateralized by U.S. government agency securities, acquired on 2/29/96, accrued interest at repurchase date of $803, 5.42%, 3/1/96 (cost: $5,331,000) .................................. 5,331,000 5,331,000 ----------- Total Investments in Securities (99.8%) (cost: $382,233,388) (c) .......................... 380,188,981 ----------- Other assets in excess of liabilities (0.2%) ....... 599,523 ----------- Net assets (100.0%) ............................... $ 380,788,504 ----------- -----------
NOTES TO INVESTMENTS IN SECURITIES: (A) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO THE FINANCIAL STATEMENTS. (B) DESCRIPTIONS OF CERTAIN COLLATERALIZED MORTGAGE OBLIGATIONS ARE AS FOLLOWS: LIBOR - LONDON INTERBANK OFFERED RATE. FLOATING RATE - REPRESENT SECURITIES THAT PAY INTEREST AT RATES THAT INCREASE (DECREASE) WITH AN INCREASE (DECREASE) IN A SPECIFIED INDEX. (C) ALSO REPRESENTS COST FOR FEDERAL INCOME TAX PURPOSES. THE AGGREGATE GROSS UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED ON THIS COST WERE AS FOLLOWS: GROSS UNREALIZED APPRECIATION .... $ 631,844 GROSS UNREALIZED DEPRECIATION ...... (2,676,251) ---------- NET UNREALIZED DEPRECIATION .... $ (2,044,407) ---------- ----------
5 - -------------------------------------------------------------------------------- FINANCIAL STATEMENTS (UNAUDITED) STATEMENT OF ASSETS AND LIABILITIES FEBRUARY 29, 1996 ASSETS: Investments in securities at market value* (including a repurchase agreement of $5,331,000) (note 2) ......... $ 380,188,981 Cash in bank on demand deposit ........................... 26,385 Mortgage security paydowns receivable .................... 958,307 Accrued interest receivable .............................. 3,052,533 ---------------- Total assets ......................................... 384,226,206 ---------------- LIABILITIES: Dividends payable to shareholders ($0.0407 per share) .... 1,924,914 Payable for fund shares redeemed ......................... 1,244,988 Accrued investment management fee ........................ 109,211 Accrued distribution fee ................................. 158,589 ---------------- Total liabilities .................................... 3,437,702 ---------------- Net assets applicable to outstanding capital stock ....... $ 380,788,504 ---------------- ---------------- REPRESENTED BY: Capital stock - authorized 1 billion shares of $0.01 par value; outstanding, 47,281,277 shares ................ $ 472,813 Additional paid-in capital ............................... 526,223,960 Undistributed net investment income ...................... 57,012 Accumulated net realized loss on investments ............. (143,920,874) Unrealized depreciation of investments ................... (2,044,407) ---------------- Total - representing net assets applicable to outstanding capital stock ........................ $ 380,788,504 ---------------- ---------------- Net asset value per share of outstanding capital stock ... $ 8.05 ---------------- ---------------- * Investments in securities at identified cost ........... $ 382,233,388 ---------------- ----------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 6 - -------------------------------------------------------------------------------- FINANCIAL STATEMENTS (UNAUDITED) STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED FEBRUARY 29, 1996 INCOME: Interest ............................................... $ 17,006,142 ---------------- EXPENSES (NOTE 3): Investment management fee ................................ 916,089 Distribution fees ........................................ 395,218 Custodian, accounting and transfer agent fees ............ 463,088 Shareholder account servicing fees ....................... 21,055 Registration fees ........................................ 69,631 Reports to shareholders .................................. 54,111 Directors' fees .......................................... 17,603 Audit and legal fees ..................................... 26,751 Other expenses ........................................... 29,844 ---------------- Total expenses ....................................... 1,993,390 Less expenses waived by the adviser ...................... (375,349) ---------------- Net expenses before expenses paid indirectly ........... 1,618,041 Less expenses paid indirectly ............................ (9,013) ---------------- Total net expenses ................................... 1,609,028 ---------------- Net investment income ................................ 15,397,114 ---------------- NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS: Net realized loss on investments (note 4) ................ (1,876,436) Net change in unrealized appreciation or depreciation of investments ............................................ 6,268,848 ---------------- Net gain on investments ................................ 4,392,412 ---------------- Net increase in net assets resulting from operations ....................................... $ 19,789,526 ---------------- ----------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 7 - -------------------------------------------------------------------------------- FINANCIAL STATEMENTS STATEMENTS OF CHANGES IN NET ASSETS
Six Months Ended 2/29/96 Year Ended (Unaudited) 8/31/95* ---------------- ---------------- OPERATIONS: Net investment income .................................. $ 15,397,114 23,499,426 Net realized loss on investments ......................... (1,876,436) (20,761,474) Net change in unrealized appreciation or depreciation of investments . 6,268,848 17,558,315 ---------------- ---------------- Net increase in net assets resulting from operations ... 19,789,526 20,296,267 ---------------- ---------------- DISTRIBUTIONS TO SHAREHOLDERS: From net investment income ............................... (15,340,102) (27,746,007) ---------------- ---------------- CAPITAL SHARE TRANSACTIONS: Proceeds from sales of 344,857 shares .................... 2,765,136 -- Proceeds from issuance of 959,489 shares for reinvestment of distributions ....................................... 7,705,791 -- Payments for 105,492,397 shares redeemed ................. (845,180,658) -- Payments for retirement of 488,000 shares (note 6) ....... -- (3,579,372) Payments for tender of 9,135,819 shares respectively (note 7) ..................................................... -- (79,726,515) Net asset value of 104,403,211 shares issued in connection with merger transaction** (note 9) ..................... 801,742,686 -- ---------------- ---------------- Decrease in net assets from capital share transactions ......................................... (32,967,045) (83,305,887) ---------------- ---------------- Total decrease in net assets ......................... (28,517,621) (90,755,627) Net assets at beginning of period .......................... 409,306,125 500,061,752 ---------------- ---------------- Net assets at end of period .............................. $ 380,788,504 409,306,125 ---------------- ---------------- ---------------- ---------------- Undistributed net investment income ...................... $ 57,012 -- ---------------- ---------------- ---------------- ----------------
* REPRESENTS HISTORICAL FINANCIAL INFORMATION OF AMERICAN ADJUSTABLE RATE TERM TRUST 1998. ** INCLUDES 100,218,356 SHARES ISSUED IN CONNECTION WITH THE MERGER OF AMERICAN ADJUSTABLE RATE TERM TRUST 1996, AMERICAN ADJUSTABLE RATE TERM TRUST 1997 AND AMERICAN ADJUSTABLE RATE TERM TRUST 1999, AND AN INCREASE OF 4,184,855 SHARES DUE TO THE DIFFERENCE BETWEEN THE ENDING NET ASSET VALUE PER SHARE OF AMERICAN ADJUSTABLE RATE TERM TRUST 1998 AND THE INITIAL NET ASSET VALUE PER SHARE OF THE FUND. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 8 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (1) ORGANIZATION Piper Funds Inc. - II (the company) was incorporated on April 10, 1995 and is registered under the Investment Company Act of 1940 (as amended) as a single, open-end investment management company. The company currently includes only the Adjustable Rate Mortgage Securities Fund (the fund), which is classified as a diversified fund. The company's articles of incorporation permit the board of directors to create additional funds in the future. The fund invests primarily in adjustable rate mortgage (ARM) securities. It may also invest in mortgage-backed securities other than ARM securities, U.S. government securities, asset-backed securities and corporate debt securities. For financial reporting purposes, American Adjustable Rate Term Trust 1998 (DDJ) (a closed-end fund) is considered the surviving entity of the merger of American Adjustable Rate Term Trust 1996 (BDJ), American Adjustable Rate Term Trust 1997 (CDJ), American Adjustable Rate Term Trust 1998 (DDJ) and American Adjustable Rate Term Trust 1999 (EDJ) into Piper Funds Inc. - II Adjustable Rate Mortgage Securities Fund, which was effective September 1, 1995. As such, only historical financial information of DDJ is relevant with respect to the future financial reporting of Piper Funds Inc. - II Adjustable Rate Mortgage Securities Fund. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES INVESTMENTS IN SECURITIES The values of fixed income securities are determined using pricing services or prices quoted by independent brokers. Exchange-listed options are valued at the last sale price and open financial futures contracts are valued at the last settlement price. When market quotations are not readily available, securities are valued at fair value according to methods selected in good faith by the board of directors. Short-term securities with maturities of 60 days or less are valued at amortized cost which approximates market value. Securities transactions are accounted for on the date the securities are purchased or sold. Realized gains and losses are calculated on the identified-cost basis. Interest income, including amortization of bond discount and premium computed on a level-yield basis, is accrued daily. OPTION TRANSACTIONS For hedging purposes, the fund may purchase and write put and call options which are exchange-traded and cannot write call options that are not covered. The risk in writing a call option is that the fund gives up the opportunity for profit if the market price of the security increases. The risk in writing a put option is that the fund may incur a loss if the market price of the security decreases and the option is exercised. The risk in buying an option is that the fund pays a premium whether or not the option is exercised. The fund also has the additional risk of not being able to enter into a closing transaction if a liquid secondary market does not exist. Option contracts are valued daily, and unrealized appreciation or depreciation is recorded. The fund will realize a gain or loss upon expiration or closing of the option transaction. When an option is exercised, the proceeds on sales for a written call option, the purchase cost for a written put option, or the cost of a security for a purchased put or call option is adjusted by the amount of premium received or paid. 9 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (UNAUDITED) FUTURES TRANSACTIONS In order to gain exposure to or protect against changes in the market, the fund may buy and sell interest rate futures contracts and related options. Risks of entering into futures contracts and related options include the possibility of an illiquid market and that a change in the value of the contract or option may not correlate with changes in the value of the underlying securities. Upon entering into a futures contract, the fund is required to deposit either cash or securities in an amount (initial margin) equal to a certain percentage of the contract value. Subsequent payments (variation margin) are made or received by the fund each day. The variation margin payments are equal to the daily changes in the contract value and are recorded as unrealized gains and losses. The fund recognizes the realized gain or loss when the contract is closed or expires. INTEREST RATE TRANSACTIONS To preserve a return or spread on a particular investment or portion of its portfolio or for other non-speculative purposes, the fund may purchase and sell interest rate caps and floors. The purchase of an interest rate cap entitles the purchaser, to the extent that a specified index exceeds a predetermined interest rate, to receive payments of interest on a contractually based notional principal amount from the party selling the interest rate cap. The purchase of an interest rate floor entitles the purchaser, to the extent that a specified index falls below a predetermined interest rate, to receive payments of interest on a contractually based notional principal amount from the party selling the interest rate floor. If forecasts of interest rates and other market factors are incorrect, investment performance will diminish compared to what performance would have been if these investment techniques were not used. Even if the forecasts are correct, there is risk that the positions may correlate imperfectly with the asset or liability being hedged. Other risks of entering into these transactions are that a liquid secondary market may not always exist, or that another party to a transaction may not perform. SECURITIES PURCHASED ON A WHEN-ISSUED BASIS Delivery and payment for securities that have been purchased by the fund on a forward-commitment or when-issued basis can take place one month or more after the transaction date. During this period, such securities do not earn interest, are subject to market fluctuations and may increase or decrease in value prior to their delivery. The fund maintains, in a segregated account with its custodian, cash or securities with a market value equal to the amount of its purchase commitments. The purchase of securities on a when-issued or forward-commitment basis may increase the volatility of the fund's NAV to the extent the fund makes such purchases while remaining substantially fully invested. As of February 29, 1996, the fund had no outstanding when-issued or forward commitments. FEDERAL TAXES The fund's policy is to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and not be subject to federal income tax. Therefore, no income tax provision is required. Net investment income and net realized gains (losses) may differ for financial statement and tax purposes primarily because of the recognition of certain foreign currency gains (losses) as ordinary income for tax purposes, and losses deferred due to "wash sale" and "straddle" transactions. The character of distributions made during the year from net investment income or net realized gains may differ from their ultimate characterization for federal income tax purposes. Also, due to the 10 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (UNAUDITED) timing of dividend distributions, the fiscal year in which amounts are distributed may differ from the year that the income or realized gains (losses) were recorded by the fund. DISTRIBUTIONS Distributions to shareholders from net investment income for the fund will be declared daily and paid monthly in cash or reinvested in additional shares. Distributions from net realized gains, if any, will be made on at least an annual basis. REPURCHASE AGREEMENTS For repurchase agreements entered into with certain broker-dealers, the fund, along with other affiliated registered investment companies may transfer uninvested cash balances into a joint trading account, the daily aggregate of which is invested in repurchase agreements secured by U.S. government and agency obligations. Securities pledged as collateral for all individual and joint repurchase agreements are held by the fund's custodian bank until maturity of the repurchase agreements. Provisions for all agreements ensure the daily market value of the collateral is in excess of the repurchase amount in the event of default. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the results of operations during the reporting period. Actual results could differ from those estimates. (3) EXPENSES The Company has entered into an investment management agreement with Piper Capital Management Incorporated (Piper Capital) under which Piper Capital manages the fund's assets and furnishes related office facilities, equipment, research and personnel. The agreement requires the fund to pay Piper Capital a monthly fee based on its average daily net assets. The fee is equal to an annual rate of 0.35% of the first $500 million in net assets and 0.30% of net assets in excess of $500 million. The fund will pay Piper Jaffray Inc. (Piper Jaffray) a monthly fee for expenses incurred in the distribution and promotion of fund shares. The fee is limited to an annual rate of 0.15% of the fund's average daily net assets and is payable as a servicing fee. The fund has also entered into shareholder account servicing agreements under which Piper Jaffray and Piper Trust Company perform various transfer and dividend disbursing agent services. The fees, which are paid monthly to Piper Jaffray and Piper Trust Company for providing such services, are equal to an annual rate of $6.00 per active shareholder account, and $1.60 per closed shareholder account. In addition to these fees the fund is responsible for paying most other operating expenses including outside directors' fees and expenses, custodian fees, registration fees, printing and shareholder reports, transfer agent fees and expenses, legal, auditing and accounting services, insurance, interest, taxes and other miscellaneous expenses. Sales charges paid to Piper Jaffray for distributing the fund's shares were $4,792 for the six months ended February 29, 1996. 11 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (UNAUDITED) Expenses paid indirectly represent a reduction of custodian fees for earnings on cash balances maintained with the custodian by the fund. (4) SECURITIES TRANSACTIONS Cost of purchases and proceeds from sales of securities (other than temporary investments in short-term securities) for the six months ended February 29, 1996, were $115,831,023 and $763,165,053, respectively. During the six months ended February 29, 1996, the fund paid Piper Jaffray Inc., an affiliated broker, no brokerage commissions. (5) CAPITAL LOSS CARRYOVER For federal income tax purposes, after giving effect to capital loss carryovers acquired in the merger, the fund had capital loss carryovers of $141,672,558 at September 1, 1995. If these loss carryovers are not offset by subsequent capital gains, they will expire at various times during 1999 through 2002. It is unlikely the board of directors will authorize a distribution of any net realized capital gains until the available capital loss carryovers have been offset or expire. (6) RETIREMENT OF FUND SHARES The board of directors of DDJ (a closed-end fund) had approved a plan to repurchase shares of the fund in the open market and retire those shares. Repurchases were only made when the previous day's closing market price was at a discount from net asset value. Daily repurchases were limited to 25% of the previous four weeks average daily trading volume on the New York Stock Exchange. Under the plan, cumulative repurchases were limited to 3% of the total shares originally issued. Pursuant to the plan, DDJ cumulatively repurchased and retired 823,000 shares (1.44% of originally issued shares) as of August 31, 1995. (7) TENDER OFFER OF FUND SHARES On August 22, 1994, shareholders of DDJ approved a fundamental policy that allowed shareholders to periodically tender their shares back to the fund at net asset value. A tender offer to repurchase up to 25% of DDJ's outstanding shares was mailed to shareholders on September 6, 1994. The deadline for participating in the offer was October 3, 1994. The repurchase price was determined on October 10, 1994, at the close of the New York Stock Exchange (4 p.m. Eastern Time). Proceeds from the tender offer were paid to shareholders on October 17, 1994. The total proceeds (including tender fees) paid by DDJ as well as the number and percentage of shares tendered were as follows:
Percentage Shares Proceeds Tendered Tendered Paid --------------- --------- ------------ 16% 9,135,819 $ 79,726,515
(8) PENDING LITIGATION On October 20, 1994, a complaint was filed by Herman D. Gordon in the U.S. District Court for the District of Minnesota against DDJ, EDJ, Piper Jaffray Companies Inc. (Piper Companies), Piper Capital Management Incorporated (Piper Capital), Piper Jaffray Inc. (Piper Jaffray) and certain associated individuals. A second complaint was filed on April 14, 1995, in the same court by Frank Donio, I.R.A., and other plaintiffs against BDJ, CDJ, DDJ and EDJ, Piper Companies, Piper Capital, Piper Jaffray and certain associated individuals. Plaintiffs in both actions filed a Consolidated Amended Class Action Complaint on May 23, 1995, alleging violations of certain federal and state securities laws. Piper Companies and Piper Capital have agreed to indemnify Piper Funds Inc. II Adjustable Rate Mortgage Securities Fund (as the successor by merger to BDJ, CDJ, DDJ and EDJ) against any expenses or losses incurred in connection with such complaint. The parties have 12 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (UNAUDITED) reached an agreement-in-principal to settle all outstanding claims of the purported class action. If approved by the Court and a sufficiently large percentage of the class, a settlement agreement consistent with the terms of the agreement-in-principle would provide $14 million in principal payments consisting of $500,000 payable upon execution of the settlement agreement, $1.5 million payable upon final approval by the court, and payments of $3 million on each anniversary of the final court approval for the next four years, with accrued interest payments of up to $1.8 million. (9) MERGER As described in note 1, BDJ, CDJ, DDJ and EDJ were combined on September 1, 1995 to create the fund. The merger was accounted for as a tax free reorganization. The following table presents the shares issued by the fund in exchange for the net assets of BDJ, CDJ, DDJ and EDJ and the composition of such net assets at September 1, 1995.
BDJ CDJ EDJ Total(a) DDJ ------------ ------------ ------------ ------------ ------------ Shares issued by Adjustable Rate Mortgage Securities fund on 9/1/95 ....................... 23,619,989 46,350,330 30,248,037 100,218,356 51,250,972 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Net assets of acquired funds on 9/1/95 ......... $ 188,958,910 370,800,763 241,983,013 801,742,686 410,006,496 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Composition of net assets: Capital stock ................................ $ 212,202,280 413,741,503 274,887,229 900,831,012 460,623,794 Accumulated net realized loss on investments ... (21,813,013) (41,193,687) (31,942,871) (94,949,571) (47,214,017) Unrealized depreciation of investments.......... (1,430,357) (1,747,053) (961,345) (4,138,755) (3,403,281) ------------ ------------ ------------ ------------ ------------ $ 188,958,910 370,800,763 241,983,013 801,742,686 410,006,496 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
(A) SINCE DDJ IS CONSIDERED THE SURVIVING ENTITY FOR FINANCIAL REPORTING PURPOSES THE COMBINED NET ASSETS OF BDJ, CDJ AND EDJ ARE PRESENTED AS BEING ACQUIRED BY THE SURVIVING ENTITY IN THE STATEMENT OF CHANGES IN NET ASSETS. 13 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (10) FINANCIAL HIGHLIGHTS Per-share data for a share of capital stock outstanding throughout each period and selected information for each period are as follows:
Six Months Ended Year Year Year 2/29/96 Ended Ended Ended Period Ended (Unaudited) 8/31/95 8/31/94 8/31/93 8/31/92(b) ----------- ------- ------- ------- ------------ PER-SHARE DATA (A) Net asset value, beginning of period ........... $ 7.99 8.10 8.88 8.95 8.80 ----- ------- ------- ------- ----- Operations: Net investment income .......................... 0.25 0.47 0.55 0.63 0.40 Net realized and unrealized gains (losses) on investments .................................. 0.04 (0.05) (0.82) (0.09) 0.07 ----- ------- ------- ------- ----- Total from operations ........................ 0.29 0.42 (0.27) 0.54 0.47 ----- ------- ------- ------- ----- Distributions to shareholders: From net investment income ..................... (0.23) (0.53) (0.51) (0.61) (0.32) ----- ------- ------- ------- ----- Net asset value, end of period ................. $ 8.05 7.99 8.10 8.88 8.95 ----- ------- ------- ------- ----- ----- ------- ------- ------- ----- SELECTED INFORMATION (A) Total investment return (c) ...................... 3.51% 5.43% -3.18% 6.24% 5.49% Net assets at end of period (in millions) ...... $ 381 409 500 551 555 Ratio of expenses to average net assets (d) ...... 0.60%(f) 0.63% 0.60% 0.58% 0.58%(f) Ratio of net investment income to average net assets (d) ..................................... 5.73%(f) 5.62% 6.39% 7.25% 7.70%(f) Portfolio turnover rate (excluding short-term securities) .................................... 25% 36% 39% 39% 41% Amount of borrowings outstanding at end of period (in millions) (e) ............................ $ n/a -- 145 145 145 Average amount of borrowings outstanding during the period (in millions) (e) ................. $ n/a 57 145 149 90 Average number of shares outstanding during the period (in millions) (e) ....................... n/a 53 62 62 52 Average per-share amount of borrowings outstanding during the period (e) ........................ $ n/a 1.09 2.34 2.41 1.67
(A) ON SEPTEMBER 1, 1995 FOUR CLOSED-END FUNDS, AMERICAN ADJUSTABLE RATE TERM TRUST 1996, AMERICAN ADJUSTABLE RATE TERM TRUST 1997, AMERICAN ADJUSTABLE RATE TERM TRUST 1998 (DDJ) AND AMERICAN ADJUSTABLE RATE TERM TRUST 1999 WERE COMBINED TO CREATE THE FUND. DDJ IS CONSIDERED THE SURVIVING ENTITY FOR FINANCIAL REPORTING PURPOSES. THE FINANCIAL HIGHLIGHTS PRESENTED FOR THE PERIODS PRIOR TO SEPTEMBER 1, 1995 ARE THOSE OF DDJ. THE PER SHARE INFORMATION FOR SUCH PERIODS HAS BEEN RESTATED TO REFLECT THE IMPACT OF ADDITIONAL SHARES CREATED RESULTING FROM THE DIFFERENCE IN THE NET ASSET VALUE PER SHARE OF DDJ AT THE TIME OF THE MERGER ($8.71) AND THE INITIAL NET ASSET VALUE PER SHARE OF THE FUND ($8.00). (B) COMMENCEMENT OF OPERATIONS OF DDJ WAS JANUARY 30, 1992. (C) TOTAL INVESTMENT RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE, ASSUMES REINVESTMENT OF DISTRIBUTIONS AT NET ASSET VALUE AND DOES NOT REFLECT A SALES CHARGE. (D) VARIOUS FEES AND EXPENSES OF THE FUND WERE VOLUNTARILY WAIVED OR ABSORBED BY PIPER CAPITAL DURING FISCAL YEAR 1996. THE ANNUALIZED RATIOS OF EXPENSES AND NET INVESTMENT INCOME TO AVERAGE DAILY NET ASSETS WOULD HAVE BEEN 0.74%/5.59%, RESPECTIVELY, FOR THE SIX MONTHS ENDED 2/29/96. BEGINNING IN FISCAL YEAR 1996, THE EXPENSE RATIO REFLECTS THE EFFECT OF GROSS EXPENSES PAID INDIRECTLY BY THE FUND. PRIOR PERIOD EXPENSE RATIOS HAVE NOT BEEN ADJUSTED. (E) DDJ WAS A CLOSED-END INVESTMENT MANAGEMENT COMPANY AND WAS PERMITTED TO ENTER INTO BORROWINGS FOR OTHER THAN TEMPORARY OR EMERGENCY PURPOSES. ADJUSTABLE RATE MORTGAGE SECURITIES FUND MAY BORROW ONLY FOR TEMPORARY OR EMERGENCY PURPOSES. (F) ADJUSTED TO AN ANNUAL BASIS. 14 - -------------------------------------------------------------------------------- DIRECTORS AND OFFICERS OF PIPER FUNDS INC. - II DIRECTORS David T. Bennett, CHAIRMAN, HIGHLAND HOMES, INC., USL PRODUCTS, INC., KIEFER BUILT, INC., OF COUNSEL, GRAY, PLANT, MOOTY, MOOTY & BENNETT, P.A. Jaye F. Dyer, PRESIDENT, DYER MANAGEMENT COMPANY William H. Ellis, CHAIRMAN OF THE BOARD, PRESIDENT, PIPER CAPITAL MANAGEMENT INCORPORATED, PIPER JAFFRAY COMPANIES INC. Karol D. Emmerich, PRESIDENT, THE PARACLETE GROUP Luella G. Goldberg, DIRECTOR, TCF FINANCIAL, RELIASTAR CORP., HORMEL FOODS CORP. George Latimer, CHIEF EXECUTIVE OFFICER, NATIONAL EQUITY FUNDS OFFICERS Paul A. Dow, PRESIDENT Robert H. Nelson, SENIOR VICE PRESIDENT/TREASURER Thomas S. McGlinch, SENIOR VICE PRESIDENT Amy K. Johnson, VICE PRESIDENT Susan Miley, SECRETARY INVESTMENT ADVISER Piper Capital Management Incorporated 222 SOUTH NINTH STREET, MINNEAPOLIS, MN 55402-3804 CUSTODIAN AND Investors Fiduciary Trust Company TRANSFER AGENT 127 WEST 10TH STREET, KANSAS CITY, MO 64105-1716 LEGAL COUNSEL Dorsey & Whitney LLP 220 SOUTH SIXTH STREET, MINNEAPOLIS, MN 55402 15 PIPER CAPITAL MANAGEMENT --------------- Bulk Rate U.S. Postage PIPER CAPITAL MANAGEMENT INCORPORATED PAID 222 SOUTH NINTH STREET Permit No. 3008 MINNEAPOLIS, MN 55402-3804 Mpls., MN --------------- PIPER JAFFREY INC., FUND DISTRIBUTOR AND NASD MEMBER. [LOGO] THIS DOCUMENT IS PRINTED ON PAPER MADE FROM 100% TOTAL RECOVERED FIBER, INCLUDING 15% POST-CONSUMER WASTE. In an effort to reduce costs to our shareholders, we have implemented a process to reduce duplicate mailings of the fund's shareholder reports. This householding process should allow us to mail one report to each address where one or more registered shareholders with the same last name reside. If you would like to have additional reports mailed to your address, please call our Shareholder Services area at 1 800 866-7778, or mail your request to: Piper Capital Management Attn: Communications Department 222 South Ninth Street Minneapolis, MN 55402-3804 http://www.piperjaffray.com 115-96 PJARX-02 5/96 -----END PRIVACY-ENHANCED MESSAGE-----