<PAGE>
AMERICAN GOVERNMENT
INCOME PORTFOLIO
******
SEMIANNUAL REPORT
1995
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TABLE OF CONTENTS
<TABLE>
<S> <C>
LETTER TO SHAREHOLDERS ................ 1
FINANCIAL STATEMENTS AND NOTES ........ 7
INVESTMENTS IN SECURITIES ............. 18
SHAREHOLDER UPDATE .................... 23
</TABLE>
AMERICAN GOVERNMENT INCOME PORTFOLIO
This fund seeks to obtain a high level of current income while preserving
shareholder capital. To realize its objective, the fund invests principally in
obligations of the U.S. government, its agencies and instrumentalities,
including mortgage-backed derivative securities. The fund may purchase
securities through the sale-forward (dollar-roll) program. Investments in
mortgage-backed derivative securities and the purchase of securities through the
sale-forward program may cause the fund's net asset value (NAV) to fluctuate to
a greater extent than would be expected from interest rate movements alone. As
with other mutual funds, there can be no assurance the fund will achieve its
objective. Since its inception on September 29, 1988, the fund has been rated
AAf by Standard & Poor's Corporation (S&P).* Fund shares trade on the New York
Stock Exchange under the symbol AAF.
*THE FUND IS RATED AAf, WHICH MEANS INVESTMENTS IN THE FUND HAVE AN OVERALL
CREDIT QUALITY OF AA. CREDIT QUALITIES ARE ASSESSED BY STANDARD & POOR'S MUTUAL
FUNDS RATING GROUP. S&P DOES NOT EVALUATE THE MARKET RISK OF AN INVESTMENT WHEN
ASSIGNING A CREDIT RATING. SEE STANDARD & POOR'S CORPORATE AND MUNICIPAL RATING
DEFINITIONS FOR AN EXPLANATION OF AA.
THE FUND HAS ALSO BEEN GIVEN A MARKET RISK RATING BY S&P, WHICH WE CANNOT
PUBLISH DUE TO NASD REGULATIONS. RISK RATINGS EVALUATE VARIOUS INVESTMENT RISKS
THAT CAN AFFECT THE PERFORMANCE OF A BOND FUND AND INDICATE THE FUND'S OVERALL
STABILITY AND SENSITIVITY TO CHANGING MARKET CONDITIONS. THESE RATINGS ARE
AVAILABLE BY CALLING S&P AT 1-800-424-FUND.
PAST PERFORMANCE DOES 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.
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AMERICAN GOVERNMENT INCOME PORTFOLIO
[GRAPH]
AMERICAN GOVERNMENT INCOME PORTFOLIO'S TOTAL RETURN FIGURES ARE BASED ON THE
CHANGE IN ITS NET ASSET VALUE (NAV), ASSUME ALL DISTRIBUTIONS WERE REINVESTED
AND DO NOT REFLECT SALES CHARGES. NAV-BASED PERFORMANCE IS USED TO MEASURE
INVESTMENT MANAGEMENT RESULTS.
AVERAGE ANNUAL TOTAL RETURNS BASED ON THE CHANGE IN MARKET PRICE FOR THE YEAR,
FIVE YEAR AND SINCE INCEPTION PERIODS ENDED APRIL 30, 1995, WERE -20.79%, 5.17%
AND 5.96%, RESPECTIVELY. THESE FIGURES ALSO ASSUME DISTRIBUTIONS WERE REINVESTED
AND DO NOT REFLECT SALES CHARGES.
AS DISCUSSED IN THE SHAREHOLDER LETTER, THE SALOMON BROTHERS MORTGAGE INDEX HAS
REPLACED THE LEHMAN BROTHERS GOVERNMENT CORPORATE INDEX AS THE INDEX AGAINST
WHICH THE FUND'S PERFORMANCE WILL BE MEASURED. THE LEHMAN INDEX'S TOTAL RETURNS
FOR THE PERIODS ENDED APRIL 30, 1995, WERE: SIX MONTH 6.96%, ONE YEAR 6.92%,
FIVE YEARS 9.51% AND SINCE AAF'S INCEPTION 9.10%.
THE SALOMON BROTHERS MORTGAGE INDEX IS AN UNMANAGED INDEX OF MORTGAGE SECURITIES
WHICH HAVE AN AVERAGE LIFE OF ONE YEAR OR MORE, ARE RATED BBB- OR HIGHER BY
STANDARD & POOR'S OR BAA3 OR HIGHER BY MOODY'S, AND HAVE A PRINCIPAL AMOUNT OF
AT LEAST $1 BILLION. THE LEHMAN BROTHERS GOVERNMENT CORPORATE INDEX IS AN
UNMANAGED INDEX COMPRISED OF APPROXIMATELY 5,400 GOVERNMENT SECURITIES AND
INVESTMENT-GRADE CORPORATE DEBT SECURITIES.
June 12, 1995
Dear Shareholders:
AFTER AN EXTREMELY DISAPPOINTING 1994, AMERICAN GOVERNMENT INCOME PORTFOLIO HAS
PERFORMED WELL IN 1995, BASED ON ITS NET ASSET VALUE (NAV) TOTAL RETURN. A
powerful rally in interest rates, most notably in long-term rates, has helped
the fund achieve a 16.75% total return so far this calendar year through May 31.
During the six-month period ended April 30, 1995, which was the fund's
semiannual reporting period, the fund's total return was 7.85%.
UNFORTUNATELY, MARKET PRICE PERFORMANCE HAS NOT BEEN AS GOOD. After years of
trading at a premium to its net asset value, the fund's shares have traded at a
discount for the past several months, resulting in returns based on market price
for the five months ended May 31, 1995, and the six months ended April 30, 1995,
of 0.75% and -6.10%, respectively. It is my hope that the recent strengthening
of the fund's NAV return and our current investment strategy, which I outline in
this letter, will improve investors' sentiments about the fund and,
consequently, its market price.
1
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AMERICAN GOVERNMENT INCOME PORTFOLIO
[PHOTO]
Worth Bruntjen, (above)
IS PRIMARILY RESPONSIBLE FOR THE MANAGEMENT OF AMERICAN GOVERNMENT INCOME
PORTFOLIO. HE HAS 28 YEARS OF FINANCIAL EXPERIENCE.
[PHOTO]
Marijo Goldstein, (below)
ASSISTS WITH THE MANAGEMENT OF AMERICAN GOVERNMENT INCOME PORTFOLIO.
SHE HAS 10 YEARS OF FINANCIAL EXPERIENCE.
IN LAST DECEMBER'S ANNUAL REPORT, I EXPLAINED THE FACTORS THAT LED TO A VERY
DISAPPOINTING YEAR FOR THE FUND AND SHARED WITH YOU OUR STRATEGY TO IMPROVE THE
FUND'S PERFORMANCE. Our goals were to reduce volatility, maintain high monthly
income, and increase net asset value. Prioritizing these goals has often
required compromise, since they may conflict with one another. As a result,
decisions which we have made in recent months, while helping us to achieve our
first two goals, have clearly made our third goal more difficult.
OUR PRIMARY FOCUS HAS BEEN TO REDUCE THE POTENTIAL FOR VOLATILITY IN THE
FUND -- A PROCESS WE WILL CONTINUE THROUGHOUT 1995. In early April, we suspended
the sale-forward (dollar-roll) program, primarily due to the increased
volatility it can create within the portfolio. Also, the fee income it would
generate in the current market is not as attractive as when short-term interest
rates were much lower. Because this program has historically provided a strong
level of income for the fund, it may be reinstated in the future if more
favorable market conditions emerge. Additionally, as prices have improved, we
have been selectively selling securities that are particularly sensitive to
changes in interest rates. These include longer-maturity U.S. agency
Z-tranches and other mortgage-backed derivative securities, such as
principal-only and inverse interest-only securities. In early June, we took
advantage of the improved prices of the fund's principal-only securities, which
were due to anticipated increases in mortgage refinancings, and reduced their
position to approximately 1% of total assets. The proceeds were invested in
fixed-rate, mortgage-backed securities. We plan to further reduce the fund's
potentially more volatile derivative securities as attractive opportunities
become available. It is important to remember, however, that as we continue our
efforts
2
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AMERICAN GOVERNMENT INCOME PORTFOLIO
[GRAPH]
INVESTMENT CATEGORIES REFLECT PERCENTAGE OF TOTAL ASSETS.
to reduce volatility, we also reduce the fund's potential for net asset
value improvement.
OVER THE PAST FEW MONTHS, WE ADDED A 16% POSITION IN U.S. AGENCY FLOATERS.
ALTHOUGH FLOATERS ARE CONSIDERED A DERIVATIVE BY MANY INDUSTRY SOURCES, THEY
TEND TO BE MORE PREDICTABLE SECURITIES, WHICH WE BELIEVE WILL ASSIST US IN OUR
GOAL OF MAKING THE PORTFOLIO LESS VOLATILE. In cases where we can find an exact
match, we may recombine a U.S. agency floater with a U.S. agency inverse floater
to create a non-derivative mortgage-backed security. If matched, the price
offered for the recombined security is generally higher than for the derivative
components. Unmatched, floaters and inverse floaters have somewhat offsetting
characteristics. For example, floaters help offset the decrease in income
currently being experienced by the fund's inverse floaters. Inverse floaters
have coupon rates that move inversely to a designated short-term index, such as
the Cost of Funds Index (COFI). Floaters, on the other hand, have coupon rates
that move in the same direction as the designated index. Recently, these indexes
have risen, causing the coupon paid by inverse floaters to fall and the coupon
paid by floaters to rise. It's important to note, however, that floaters cannot
be considered a complete
3
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AMERICAN GOVERNMENT INCOME PORTFOLIO
DISTRIBUTION HISTORY
SINCE INCEPTION (SEPTEMBER 1988) THROUGH
APRIL 30, 1995
<TABLE>
<S> <C>
Monthly Income
Dividends Paid ............................. 78
Total Monthly
Income Dividends ........................... $7.45
Capital Gains
Distributions Paid ......................... 8
Total Capital
Gains Distributions ........................ $0.87
Total Distributions
Per Share .................................. $8.32
</TABLE>
hedge to inverse floaters because coupon rates on inverse floaters typically
change at a multiple of the changes in the designated index.
THESE ACTIONS TO LOWER VOLATILITY HAVE REDUCED THE PORTFOLIO'S AVERAGE EFFECTIVE
DURATION TO 5.4 YEARS, AS OF JUNE 12. Last year, the slowdown in mortgage
prepayments due to higher interest rates caused the effective duration of many
of the fund's mortgage-backed securities to be extended significantly. Effective
duration estimates the interest rate risk of a security, in other words how much
the value of the security is expected to change with a given change in interest
rates. The longer a security's (or portfolio's) effective duration, the more
sensitive its price is to changes in interest rates. Please note that while
effective duration is a valuable measure, it has several limitations, which are
further explained on page five. While these actions have enabled the fund to
lower its potential volatility, it is important to remember that they also
reduce the fund's potential for improvement of its net asset value.
THE INDEX AGAINST WHICH THE FUND'S PERFORMANCE IS MEASURED WAS RECENTLY CHANGED
TO THE SALOMON BROTHERS MORTGAGE INDEX. Because this index is composed of agency
mortgage-backed securities, unlike the Lehman Brothers Government Corporate
Index it replaced, we believe it is a more appropriate performance benchmark for
the fund. So far this calendar year, the fund has outperformed both the Salomon
and Lehman indexes due to its longer effective duration. As I previously noted,
the fund's NAV total return for 1995, through May 31, was 16.75%, which compares
to 10.14% for the Salomon index and 10.91% for the Lehman index.
4
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AMERICAN GOVERNMENT INCOME PORTFOLIO
EFFECTIVE DURATION
Effective duration estimates the interest rate risk of a security, in other
words how much the value of the security is expected to change with a given
change in interest rates. The longer a security's effective duration, the more
sensitive its price is to changes in interest rates. For example, if interest
rates were to increase by 1%, the market value of a bond with an effective
duration of five years would decrease by about 5%, with all other factors being
constant.
It is important to understand that, while a valuable measure, effective duration
is based upon certain assumptions and has several limitations. It is most
effective as a measure of interest rate risk when interest rate changes are
small, rapid and occur equally across all the different points of the yield
curve. In addition, effective duration is difficult to calculate precisely for
bonds with prepayment options, such as mortgage-backed securities, because the
calculation requires assumptions about prepayment rates. For example, when
interest rates go down, homeowners may prepay their mortgages at a higher rate
than assumed in the initial effective duration calculation, thereby shortening
the effective duration of the fund's mortgage-backed securities. Conversely, if
rates increase, prepayments may decrease to a greater extent than assumed,
extending the effective duration of such securities. For these reasons, the
effective durations of funds that invest a significant portion of their assets
in mortgage-backed securities can be greatly affected by changes in interest
rates.
OVER THE PAST SEVERAL MONTHS, THE FUND'S OVERALL LEVEL OF INCOME HAS DECREASED.
In addition to the fee income lost due to the suspension of the sale-forward
program and the lower coupons paid by inverse floating and inverse interest-only
securities, the portfolio experienced a reduced level of income from its
principal-only securities.
THE FUND'S DIVIDEND WILL NEED TO BE ADJUSTED IF EARNINGS IN THE PORTFOLIO REMAIN
AT CURRENT LEVELS OR DECREASE FURTHER. As earnings in the portfolio have
declined, we've maintained our dividend level over the past several months by
tapping the fund's undistributed net investment income (dividend reserve). Keep
in mind that the dividend reserve is reflected in the fund's net asset value and
any reduction of this amount will reduce the fund's net asset value penny for
penny. By May 31, the fund's monthly earnings had decreased to approximately
5 cents per share, causing us to draw upon the fund's dividend reserve to pay
its 8 cents per share dividend. As of May 31, the dividend reserve was
approximately 37 cents per share. The fund's dividend committee will continue
to monitor the income levels and dividend reserve. Should the fund continue to
fall short of earning its monthly dividend, gradual changes will be made to the
dividend until the fund has reached an appropriate payment level in relation
to its earnings.
5
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AMERICAN GOVERNMENT INCOME PORTFOLIO
OBVIOUSLY, DRAWING DOWN THE DIVIDEND RESERVE WORKS AGAINST OUR FINAL GOAL OF
INCREASING THE FUND'S NET ASSET VALUE, AS DOES REDUCING THE FUND'S VOLATILITY.
Although the fund's net asset value has increased rather quickly in the past
several months -- from $6.45 on December 31, 1994, to $7.10 as of May 31,
1995 -- shareholders should not expect future increases, should they occur,
to be as dramatic. Market conditions that we needed to see for improvement have
for the most part already emerged, and we believe the market for mortgage-
backed bonds, including derivative securities, has stabilized. These improving
market conditions contributed to the fund's increase in net asset value. Any
future changes in interest rates, either positive or negative, should have less
impact on the fund than in the past year due to our continuing efforts to make
the fund less volatile.
IN THE MONTHS AND YEARS AHEAD, I BELIEVE THAT YOU WILL FIND THE FUND'S NET ASSET
VALUE TO BE LESS VOLATILE, WITH NEITHER THE DOWNSIDE RISK EXPERIENCED LAST YEAR
NOR THE DRAMATIC GROWTH ACHIEVED IN PREVIOUS YEARS. As we implement our
investment strategy, we will continue to work to meet the fund's objectives of
high current income and preservation of capital. We look forward to serving your
investment needs and welcome any comments or questions you relay through your
investment professional.
Sincerely,
/s/ Worth Bruntjen
Worth Bruntjen
Portfolio Manager
6
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FINANCIAL STATEMENTS (UNAUDITED)
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1995
<TABLE>
<S> <C>
ASSETS:
Investments in securities at market value*
(including a repurchase agreement of $6,644,000) (note
2) ................................................... $ 165,132,742
Cash in bank on demand deposit ........................... 23,087
Receivable for investment securities sold ................ 20,313
Accrued interest receivable .............................. 1,730,375
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Total assets ......................................... 166,906,517
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LIABILITIES:
Payable for fund shares retired .......................... 82,530
Accrued investment management fee ........................ 81,769
Accrued administrative fee ............................... 27,256
Other accrued expenses ................................... 24,531
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Total liabilities .................................... 216,086
----------------
Net assets applicable to outstanding capital stock ....... $ 166,690,431
----------------
----------------
REPRESENTED BY:
Capital stock - authorized 1 billion shares of $0.01 par
value; outstanding, 24,697,777 shares ................ $ 246,978
Additional paid-in capital ............................... 227,544,794
Undistributed net investment income ...................... 9,899,542
Accumulated net realized loss from investments ........... (40,438,847)
Unrealized depreciation of investments ................... (30,562,036)
----------------
Total - representing net assets applicable to
outstanding capital stock ........................ $ 166,690,431
----------------
----------------
Net asset value per share of outstanding capital stock ... $ 6.75
----------------
----------------
* Investments in securities at identified cost ........... $ 195,694,778
----------------
----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
7
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FINANCIAL STATEMENTS (UNAUDITED)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 1995
<TABLE>
<S> <C>
INCOME:
Interest ............................................... $ 7,597,176
Fee income (note 2) ...................................... 240,012
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Total investment income .............................. 7,837,188
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EXPENSES (NOTE 3):
Investment management fee ................................ 483,218
Administrative fee ....................................... 161,072
Custodian, accounting and transfer agent fees ............ 90,462
Reports to shareholders .................................. 10,530
Directors' fees .......................................... 5,833
Audit and legal fees ..................................... 23,527
Federal excise taxes (note 2) ............................ 637,551
Other expenses ........................................... 42,705
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Total expenses ....................................... 1,454,898
----------------
Net investment income ................................ 6,382,290
----------------
NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized loss on investments (note 4) ................ (14,238,127)
Net change in unrealized appreciation or depreciation of
investments ............................................ 20,006,833
----------------
Net gain on investments ................................ 5,768,706
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Net increase in net assets resulting from
operations ....................................... $ 12,150,996
----------------
----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
8
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FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months
Ended 4/30/95 Year Ended
(Unaudited) 10/31/94
---------------- ----------------
<S> <C> <C>
OPERATIONS:
Net investment income .................................. $ 6,382,290 22,329,410
Net realized loss on investments ......................... (14,238,127) (21,690,701)
Net change in unrealized appreciation or depreciation of
investments ............................................ 20,006,833 (63,985,983)
---------------- ----------------
Net increase (decrease) in net assets resulting from
operations ........................................... 12,150,996 (63,347,274)
---------------- ----------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ............................... (14,298,572) (34,045,815)
From net realized gains .................................. -- --
In excess of net realized gains (note 2) ................. -- (3,482,402)
---------------- ----------------
Total distributions .................................... (14,298,572) (37,528,217)
---------------- ----------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from issuance of 354,188 and 699,201 shares for
the dividend reinvestment plan, respectively ........... 2,442,217 6,860,985
Payments for retirement of 114,100 and 0 shares,
respectively (note 6) .................................. (712,078) --
---------------- ----------------
Increase in net assets from capital share
transactions ......................................... 1,730,139 6,860,985
---------------- ----------------
Total decrease in net assets ......................... (417,437) (94,014,506)
Net assets at beginning of period .......................... 167,107,868 261,122,374
---------------- ----------------
Net assets at end of period .............................. $ 166,690,431 167,107,868
---------------- ----------------
---------------- ----------------
Undistributed net investment income ...................... $ 9,899,542 17,815,824
---------------- ----------------
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</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
9
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(1) ORGANIZATION
The American Government Income Portfolio Inc. (the fund) is
registered under the Investment Company Act of 1940 (as amended)
as a non-diversified, closed-end management investment company.
Shares of the fund are listed on the New York Stock Exchange
under the symbol AAF.
(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 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.
OPTIONS TRANSACTIONS
For hedging purposes, the fund may buy and sell put and call
options, write covered call options on fund securities, and
write cash-secured puts. The risk in writing a call option is
the fund gives up the opportunity of profit if the market price
of the security increases. The risk in writing a put option is
the fund may incur a loss if the market price for 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. The fund also may write over-the-counter
options where the completion of the obligation is dependent upon
the credit standing of the other party.
Option contracts are valued daily and unrealized appreciation or
depreciation is recorded. The fund will realize a gain or loss
upon expiration or closing of the option transaction. When an
option is exercised, the proceeds on the sale of a written call
option, the purchase cost of a written put option, or the cost
of a security for purchased put and call options is adjusted by
the amount of premium received or paid.
10
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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 financial futures contracts
and related options. Risks of entering into futures contracts
and related options include the possibility there may be an
illiquid market and that a change in the value of the contract
or option may not correlate with changes in the value of the
underlying securities.
Upon entering into a futures contract, the fund is required to
deposit either cash or securities in an amount (initial margin)
equal to a certain percentage of the contract value. Subsequent
payments (variation margin) are made or received by the fund
each day. The variation margin payments are equal to the daily
changes in the contract value and are recorded as unrealized
gains and losses. The fund recognizes a realized gain or loss
when the contract is closed or expires.
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 enter into various hedging transactions, such as
interest rate swaps and the purchase 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 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 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 the other party to the transaction may not
perform.
11
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
For interest rate swaps, caps and floors, the fund accrues
weekly, as an increase or decrease to interest income, the
current net amount due to or owed by the fund. Interest rate
swaps, caps and floors are valued from prices quoted by
independent brokers. These valuations represent the present
value of all future cash settlement amounts based on implied
forward interest rates.
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 a month or more after the transaction date. During this
period, such securities do not earn interest, are subject to
market fluctuation and may increase or decrease in value prior
to their delivery. The fund maintains, in a segregated account
with its custodian, assets 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
April 30, 1995, the fund had no outstanding when-issued or
forward commitments.
In connection with its ability to purchase securities on a
when-issued or forward-commitment basis, the fund may enter into
mortgage "dollar rolls" in which the fund sells securities for
delivery in the current month and simultaneously contracts with
the same counterparty to repurchase similar (same type, coupon
and maturity) but not identical securities on a specified future
date. As an inducement to "roll over" its purchase commitments,
the fund receives negotiated fees. For the six months ended
April 30, 1995, such fees earned by the fund amounted to
$240,012.
FEDERAL TAXES
The fund intends to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and
not be subject to federal income tax. Therefore, no income tax
provision is required. However, the fund incurred federal excise
taxes of $637,551 or $0.026 per share on income retained by the
fund during the excise tax year ended December 31, 1994.
Net investment income and net realized gains (losses) may differ
for financial statement and tax purposes primarily because of
the recognition of losses deferred due to "wash sale"
transactions and
12
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
the timing of recognition of income on certain interest-only and
principal-only securities. The character of distributions made
during the year from net investment income or net realized gains
may also differ from their ultimate characterization for federal
income tax purposes. In addition, due to the timing of dividend
distributions, the fiscal year in which amounts are distributed
may differ from the year that the income or realized gains
(losses) were recorded by the fund. 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.
DISTRIBUTIONS
The fund pays 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 fund's dividend reinvestment plan,
reinvested in additional shares of the fund's capital stock.
Under the plan, fund shares will be purchased in the open
market. However, if the current market price plus commissions
exceeds the net asset value by 10% or more, the fund will issue
new shares at a discount of up to 5% from the market price.
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 agreement. Provisions for
all agreements ensure that the daily market value of the
collateral is in excess of the repurchase amount in the event of
default.
(3) EXPENSES
The fund has entered into the following agreements with Piper
Capital Management Incorporated (the adviser and the
administrator):
The investment advisory agreement provides the adviser with a
monthly investment management fee in an amount equal to the sum
of 0.025% of the average weekly net assets of the fund during
the
13
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
month (approximately 0.30% on an annual basis) and 5.25% of the
daily gross income (i.e., investment income, including
amortization of discount and premium, other than gains from the
sale of securities or gains received from options and futures
contracts less interest on money borrowed by the fund) accrued
by the fund during the month. The monthly management fee shall
not exceed in the aggregate 1/12th of 0.60% of the fund's
average weekly net assets during the month (approximately 0.60%
on an annual basis). For its fee, the adviser will provide
investment advice and, in general, conduct the management and
investment of
the fund.
The administration agreement provides the administrator with a
monthly fee in an amount equal to an annualized rate of 0.20% of
the fund's average weekly net assets. For its fee, the
administrator will provide certain reporting, regulatory and
record-keeping services for the fund.
In addition to the investment management fee and the
administrative fee, the fund is responsible for paying most
other operating expenses including outside directors' fees and
expenses, custodian fees, registration fees, printing and
shareholder reports, transfer agent fees and expenses, legal,
auditing and accounting services, insurance, interest, taxes,
and other miscellaneous expenses.
(4) SECURITIES
TRANSACTIONS
Cost of purchases and proceeds from sales of securities (other
than short-term securities) aggregated $97,150,957 and
$108,491,024, respectively, for the six months ended April 30,
1995. During the six months ended April 30, 1995, the fund paid
no brokerage commissions to Piper Jaffray Inc., an affiliated
broker.
(5) CAPITAL LOSS
CARRYOVER
For federal income tax purposes, the fund had capital loss
carryovers of $26,147,375 on October 31, 1994, which, if not
offset by subsequent capital gains, will expire in 2002. It is
unlikely the board of directors will authorize a distribution of
any net realized capital gains until the available capital loss
carryover has been offset or expires.
14
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(6) 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 fund cumulatively repurchased
and retired 114,100 shares as of April 30, 1995, which
represents 0.53% of the shares originally issued.
15
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(7) FINANCIAL
HIGHLIGHTS
Per-share data for a share of capital stock outstanding
throughout each period and selected information for each period
are as follows:
<TABLE>
<CAPTION>
Six Months
ended
4/30/95 Fiscal year ended October 31,
(Unaudited) 1994 1993 1992 1991 1990
---------- -------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ........... $ 6.83 10.99 11.00 10.02 8.73 9.16
----- -------- ------ ------ ------ ------
Operations:
Net investment income .......................... 0.25 0.90 1.90 1.37 1.05 0.79
Net realized and unrealized gains (losses) on
investments .................................. 0.25 (3.50) (0.04) 0.71 1.24 (0.22)
----- -------- ------ ------ ------ ------
Total from operations ........................ 0.50 (2.60) 1.86 2.08 2.29 0.57
----- -------- ------ ------ ------ ------
Distributions to shareholders:
From net investment income ..................... (0.58) (1.41) (1.27) (1.04) (1.00) (0.79)
In excess of net investment income ............. -- -- -- -- -- (0.18)
From net realized gains ........................ -- (0.15)TRIANGLE (0.60) (0.06) -- (0.03)
----- -------- ------ ------ ------ ------
Total distributions to shareholders .......... (0.58) (1.56) (1.87) (1.10) (1.00) (1.00)
----- -------- ------ ------ ------ ------
Net asset value, end of period ................. $ 6.75 6.83 10.99 11.00 10.02 8.73
----- -------- ------ ------ ------ ------
----- -------- ------ ------ ------ ------
Per-share market value, end of period .......... $ 6.25 7.25 12.00 11.00 10.13 8.88
----- -------- ------ ------ ------ ------
----- -------- ------ ------ ------ ------
Total return, net asset value* ................... 7.85% (25.93%) 18.66% 21.86% 27.65% 6.64%
Total return, market value** ..................... (6.10%) (29.14%) 28.18% 20.15% 26.36% 0.44%
Net assets at end of period (in millions) ...... $ 167 167 261 257 234 204
Ratio of total expenses to average weekly net
assets + ....................................... 1.81% 1.28% 0.95% 1.25% 1.01% 1.03%
Ratio of net investment income to average weekly
net assets ..................................... 7.93% 10.84% 17.42% 13.12% 11.25% 8.80%
Portfolio turnover rate (excluding short-term
securities) .................................... 56% 106% 79% 100% 94% 49%
Amount of borrowings outstanding at end of period
(in millions)*** ............................. $ -- -- 97 95 61 51
Per-share amount of borrowings outstanding at end
of period .................................... $ -- -- 4.06 4.07 2.61 2.19
Per-share asset coverage of borrowings outstanding
at end of period ++ .......................... $ -- -- 15.05 15.07 12.63 10.92
<FN>
* TOTAL 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.
** TOTAL 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.
*** 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.
+ INCLUDES 0.79%, 0.30% AND 0.26% FROM FEDERAL EXCISE TAXES IN THE SIX MONTHS
ENDED 4/30/95 AND FISCAL YEARS 1994 AND 1992, RESPECTIVELY.
++ REPRESENTS THE FUND'S NET ASSETS (EXCLUDING BORROWINGS) DIVIDED BY COMMON
SHARES OUTSTANDING.
TRIANGLE INCLUDES $0.15 PER SHARE OF DISTRIBUTONS IN ECXESS OF NET REALIZED GAINS
RESULTING FROM BOOK-TO-TAX DIFFERENCES. SEE FOOTNOTE 2 IN THE NOTES TO
FINANCIAL STATEMENTS.
</TABLE>
16
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(8) QUARTERLY DATA
DOLLAR AMOUNTS
<TABLE>
<CAPTION>
Net Increase
in Net
Net Realized Assets Distributions
Total Net and Unrealized Resulting from Net
Investment Investment Gains (Losses) from Investment
Income Income on Investments Operations Income
----------- ----------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
1/31/95 $ 3,802,585 2,791,954 (1,555,555) 1,236,399 (8,349,341)
4/30/95 4,034,603 3,590,336 7,324,261 10,914,597 (5,949,231)
----------- ----------- -------------- ------------ ------------
$ 7,837,188 6,382,290 5,768,706 12,150,996 (14,298,572)
----------- ----------- -------------- ------------ ------------
----------- ----------- -------------- ------------ ------------
</TABLE>
PER SHARE AMOUNTS
<TABLE>
<CAPTION>
Net Realized and Net Increase in Distributions
Net Unrealized Gains Net Assets from Net
Investment (Losses) on Resulting from Investment Quarter-End Net
Income Investments Operations Income Asset Value
------------- ----------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
1/31/95 $ 0.11 (0.05) 0.06 (0.34) 6.55
4/30/95 0.14 0.30 0.44 (0.24) 6.75
--- ----- --- -----
$ 0.25 0.25 0.50 (0.58)
--- ----- --- -----
--- ----- --- -----
</TABLE>
17
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
AMERICAN GOVERNMENT INCOME PORTFOLIO
APRIL 30, 1995
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- --------------------------------------------------------- ----------- ------------
<S> <C> <C>
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS)
U.S. GOVERNMENT AND AGENCY SECURITIES (17.3%):
U.S. AGENCY DEBENTURES (5.7%):
FHLMC Medium-Term Note, 5.20%, 8/4/97 .............. $ 2,750,000 2,640,138
FNMA Medium-Term Note, 5.19%, 7/20/98 ................ 5,150,000 4,878,441
FNMA Medium-Term Note, 6.26%, 12/22/97 ............... 2,000,000 1,966,600
------------
9,485,179
------------
U.S. GOVERNMENT SECURITIES (11.6%):
U.S. Treasury Note, 5.88%, 5/31/96 ................... 19,500,000 19,402,890
------------
Total U.S. Government and Agency Securities
(cost: $28,513,111) ................................ 28,888,069
------------
MORTGAGE-BACKED SECURITIES (74.5%):
U.S. AGENCY FIXED RATE MORTGAGES (12.5%):
7.00%, FNMA, 1/1/08 .................................. 999,119 977,559
7.00%, FNMA, 5/1/09 .................................. 2,911,729 2,848,894
7.50%, FNMA, 11/1/01 ................................. 1,009,590 998,848
7.50%, FNMA, 11/1/01 ................................. 983,863 987,543
7.50%, FNMA, 10/1/01 ................................. 3,041,714 3,053,090
7.50%, FNMA, 10/1/01 ................................. 1,954,442 1,961,752
7.50%, FNMA, 1/1/02 .................................. 9,934,582 9,971,737
------------
20,799,423
------------
COLLATERALIZED MORTGAGE OBLIGATIONS (B) (61.3%):
U.S. AGENCY FIXED RATE (.7%):
6.00%, FHLMC, Series 1378, Class L, 12/15/21 ......... 1,503,506 1,287,467
------------
U.S. AGENCY FLOATING RATE (15.7%):
6.58%, FHLMC, Series 1506, Class F, COFI, 5/15/08 .... 3,633,404 3,620,651
6.33%, FHLMC, Series 1552, Class V, COFI, 5/15/23 .... 8,996,227 8,603,992
6.13%, FNMA, Series 1993-133, Class FE, COFI,
8/25/23 ............................................. 3,000,000 2,874,780
7.84%, FNMA, Series 1993-246, Class F, LIBOR,
10/25/23 ............................................ 6,020,887 4,816,709
5.93%, FNMA, Series 1994-33, Class FD, COFI,
3/25/09 ............................................. 2,000,000 1,891,840
6.33%, FNMA, Series 1994-76, Class FA, COFI,
4/25/24 ............................................. 4,530,213 4,424,840
------------
26,232,812
------------
U.S. AGENCY INTEREST-ONLY (4.0%):
8.97%, FHLMC, Series 1759, Class J, 4/15/19 .......... -- 526,641
7.90%, FHLMC-GNMA, Series 30, Class J, 2/25/23 ....... -- 2,295,276
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
18
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
AMERICAN GOVERNMENT INCOME PORTFOLIO
(CONTINUED)
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- --------------------------------------------------------- ----------- ------------
<S> <C> <C>
26.93%, FNMA, Series 1992-197, Class B, 7/25/18 .... $ -- 1,142,375
16.20%, FNMA, Series 1993-31, Class N, 4/25/22 ....... -- 396,120
8.40%, FNMA, Series 1994-28, Class JC, 3/25/23 ....... -- 2,270,730
------------
6,631,142
------------
U.S. AGENCY INVERSE INTEREST-ONLY (7.6%):
65.63%, FHLMC, Series 1382, Class LD, LIBOR,
11/15/18 ............................................ -- 1,770,716
43.25%, FHLMC, Series 1421, Class I, LIBOR,
11/15/22 ............................................ -- 662,489
56.44%, FHLMC, Series 1454, Class MJ, LIBOR,
4/15/22 ............................................. -- 839,731
23.81%, FHLMC, Series 1491, Class K, LIBOR,
11/15/21 ............................................ -- 900,797
4.00%, FHLMC, Series 1669, Class JB, LIBOR,
7/15/20 ............................................. -- 617,223
9.51%, FHLMC, Series 1684, Class JB, LIBOR,
9/15/21 ............................................. -- 1,030,149
15.26%, FHLMC, Series 1695, Class AD, LIBOR,
1/15/24 ............................................. -- 1,039,810
41.76%, FHLMC, Series 27, Class S, LIBOR, 9/25/23 .... -- 491,901
5.71%, FNMA, Series 1992-200, Class SJ, LIBOR,
11/25/22 ............................................ -- 890,130
94.74%, FNMA, Series 1992-204, Class SD, LIBOR,
4/25/19 ............................................. -- 682,296
49.19%, FNMA, Series 1992-82, Class SA, LIBOR,
5/25/23 ............................................. -- 636,943
6.36%, FNMA, Series 1993-50, Class SD, LIBOR,
12/25/16 ............................................ -- 1,104,820
3.43%, FNMA, Series 1994-37, Class SA, LIBOR,
8/25/19 ............................................. -- 729,918
16.26%, FNMA, Series G 1992-64, Class S, LIBOR,
12/25/18 ............................................ -- 369,950
19.74%, FNMA, Series G 1993-17, Class S, LIBOR,
4/25/23 ............................................. -- 997,444
------------
12,764,317
------------
OTHER INVERSE INTEREST-ONLY (0.3%):
0.00%, Citicorp Mortgage Securities, Series 1993-4,
Class A2, LIBOR, 3/25/22 ............................ --(c) 285,082
16.55%, Countrywide Mortgage-Backed Securities Inc.,
Series 1993-4, Class A6, LIBOR, 11/25/08 ............ -- 97,444
0.00%, FBS Mortgage Corporation, Series 1992-DF, Class
F4, LIBOR, 10/25/07 ................................. --(c) 45,649
0.00%, Prudential Home Mortgage Securities, Series
1992-51, Class A2, LIBOR, 2/25/23 ................... --(c) 8,438
0.00%, Residential Funding Corporation, Series
1992-S34, Class A5, LIBOR, 12/25/15 ................. --(c) 7,626
0.00%, Sears Mortgage Securities, Series 1992-14,
Class S1, LIBOR, 5/25/21 ............................ --(c) 55,109
------------
499,348
------------
U.S. AGENCY INVERSE FLOATER (16.5%):
4.65%, FHLMC, Series 1487, Class IB, Treasury,
3/15/23 ............................................. 2,252,490 1,333,789
7.88%, FHLMC, Series 1487, Class M, LIBOR, 3/15/23 ... 1,186,963 633,957
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
19
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
AMERICAN GOVERNMENT INCOME PORTFOLIO
(CONTINUED)
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- --------------------------------------------------------- ----------- ------------
<S> <C> <C>
9.08%, FHLMC, Series 1542, Class OB, COFI,
7/15/22 ........................................... $ 1,463,098 842,934
5.87%, FHLMC, Series 1564, Class SC, Treasury,
8/15/08 ............................................. 920,163 622,030
7.89%, FHLMC, Series 1587, Class SG, COFI,
10/15/08 ............................................ 2,865,870 1,805,498
7.97%, FHLMC, Series 1606, Class S, COFI, 5/15/08 .... 4,460,086 2,739,073
5.21%, FHLMC, Series 1612, Class S, COFI, 10/15/07 ... 973,776 481,990
7.27%, FHLMC, Series 1614, Class TB, COFI,
11/15/23 ............................................ 3,771,252 1,998,763
5.97%, FHLMC, Series 1635, Class K, COFI, 12/15/08 ... 4,816,084 2,485,051
7.42%, FHLMC, Series 1655, Class SB, COFI,
12/15/08 ............................................ 922,514 605,381
6.58%, FHLMC, Series 1671, Class MD, Treasury,
2/15/24 ............................................. 2,379,458 1,842,343
7.57%, FHLMC, Series 1704, Class S, COFI, 3/15/09 .... 1,907,641 1,297,196
9.51%, FNMA, Series 1992-168, Class S, COFI,
10/25/22 ............................................ 566,052 407,557
7.85%, FNMA, Series 1993-181, Class S, COFI,
2/25/08 ............................................. 1,213,215 828,019
6.14%, FNMA, Series 1993-20, Class SK, LIBOR,
7/25/23 ............................................. 3,652,717 2,022,692
6.81%, FNMA, Series 1993-221, Class SA, COFI,
3/25/08 ............................................. 958,587 530,817
5.80%, FNMA, Series 1994-33, Class SA, COFI,
2/25/08 ............................................. 2,260,066 1,262,043
6.11%, FNMA, Series G 1993-14, Class SG, Treasury,
3/25/23 . 2,000,000 1,084,200
8.81%, FNMA, Series G-50, Class SB, LIBOR,
12/25/21 ............................................ 5,570,808 4,722,151
------------
27,545,484
------------
OTHER INVERSE FLOATER (1.3%):
9.51%, Capstead Securities Corporation, Series
1993-E2, Class K, COFI, 10/25/23 .................... 1,988,196 1,332,092
10.20%, Marine Midland, Series 1991-3, Class A7,
LIBOR, 12/25/22 ..................................... 213,226 204,697
3.94%, Residential Funding Mortgage Securities, Series
1994-S8, Class A8, Treasury, 3/25/09 ................ 914,450 563,530
------------
2,100,319
------------
U.S. AGENCY PRINCIPAL-ONLY (6.9%):
3.20%, FHLMC, Series 173, Class F, 6/15/21 ........... 2,793,209 2,283,476
0.88%, FNMA, Series 1993-283, Class G, 11/25/23 ...... 4,991,824 1,909,373
1.72%, FNMA, Series 1993-90, Class C, 6/25/21 ........ 4,540,257 1,747,999
1.08%, FNMA, Series 1994-53, Class E, 11/25/23 ....... 7,520,496 3,711,816
1.70%, FNMA, Series 1994-54, Class C, 11/25/23 ....... 2,729,434 1,364,717
200.00%, FNMA, Series G 1992-37, Class B, 6/25/22 .... 1,144,166 512,014
------------
11,529,395
------------
OTHER PRINCIPAL-ONLY (3.1%):
1.82%, Bear Stearns, Series 1988-6, Class D,
12/1/18 ............................................. 3,000,000 1,455,000
4.08%, Collateralized Mortgage Obligation Trust,
Series 50, Class B, 10/1/18 ......................... 1,277,949 747,600
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
20
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
AMERICAN GOVERNMENT INCOME PORTFOLIO
(CONTINUED)
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- --------------------------------------------------------- ----------- ------------
<S> <C> <C>
1.65%, Drexel Burnham Lambert CMO Trust, Series Z,
Class 3, 1/1/19 ................................... $ 604,637 349,178
5.07%, Morgan Stanley Mortgage Trust, Series 36, Class
4, 5/20/21 .......................................... 976,034 683,224
3.71%, Paine Webber Mortgage Acceptance Corporation,
Series 1993-5, Class A14, 6/25/08 ................... 460,666 303,464
5.70%, Westam Mortgage Financing Corporation, Series
10, Class D, 7/26/18 ................................ 3,796,270 1,546,980
------------
5,085,446
------------
U.S. AGENCY Z-TRANCHE (5.9%):
9.45%, FNMA, Series 1988-9, Class Z, 4/25/18 ......... 9,460,532 9,788,529
------------
Total Mortgage-Backed Securities
(cost: $158,606,699) ............................... 124,263,683
------------
INTEREST RATE CONTRACTS (3.2%):
Interest rate cap with Merrill Lynch, $20,000,000
notional principal on one-month LIBOR (6.125% on
4/30/95), 4.50%, 9/10/97 ............................ -- 2,756,400
Interest rate cap with Morgan Stanley, $15,000,000
notional principal on one-month LIBOR (6.125% on
4/30/95), 6.00%, 1/25/98 ............................ -- 372,221
Interest rate cap with Morgan Stanley, $15,000,000
notional principal on one-month LIBOR (6.125% on
4/30/95), 6.00%, 2/2/98 ............................. -- 381,369
Interest rate contract with JP Morgan, $70,000,000
notional principal on one-month LIBOR (6.125% on
4/30/95), 6.00%, 2/15/98 ............................ -- 1,827,000
------------
Total Interest Rate Contracts
(cost: $1,930,967) ................................. 5,336,990
------------
SHORT-TERM SECURITIES (4.0%):
Repurchase agreement with Goldman Sachs in a joint
trading account collateralized by U.S. government
agency securities, acquired on 4/28/95, accrued
interest at repurchase date of $1,089, 5.90%, 5/1/95
(cost: $6,644,000) .................................. 6,644,000 6,644,000
------------
Total Investments in Securities
(cost: $195,694,778) (d) ......................... $ 165,132,742
------------
------------
</TABLE>
21
<PAGE>
- --------------------------------------------------------------------------------
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) 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 - REPRESENTS SECURITIES THAT PAY INTEREST AT RATES THAT
INCREASE (DECREASE) WITH A DECLINE (INCREASE) IN THE SPECIFIED INDEX. THE
INTEREST RATE PAID BY THE INVERSE FLOATER WILL GENERALLY CHANGE AT A
MULTIPLE OF ANY CHANGE IN THE INDEX. INTEREST RATES DISCLOSED ARE IN
EFFECT ON APRIL 30, 1995.
INTEREST-ONLY - REPRESENTS SECURITIES THAT ENTITLE HOLDERS TO RECEIVE ONLY
INTEREST PAYMENTS ON THE UNDERLYING MORTGAGES. THE YIELD TO MATURITY OF
AN 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 RATES DISCLOSED REPRESENT CURRENT YIELDS BASED UPON THE CURRENT
COST BASIS AND ESTIMATED TIMING AND AMOUNT OF FUTURE CASH FLOWS.
INVERSE INTEREST-ONLY - REPRESENTS 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
THE SPECIFIED INDEX. THE YIELD TO MATURITY OF AN INVERSE INTEREST-ONLY IS
EXTREMELY SENSITIVE TO THE RATE 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 RATES DISCLOSED
REPRESENT CURRENT YIELDS BASED UPON THE CURRENT COST BASIS AND ESTIMATED
TIMING AND AMOUNT OF FUTURE CASH FLOWS.
PRINCIPAL-ONLY - REPRESENTS SECURITIES THAT ENTITLE HOLDERS TO RECEIVE ONLY
PRINCIPAL PAYMENTS ON THE UNDERLYING MORTGAGES. THE YIELD TO MATURITY OF
A PRINCIPAL-ONLY IS EXTREMELY SENSITIVE TO THE RATE OF PRINCIPAL PAYMENTS
ON THE UNDERLYING MORTGAGE ASSETS. A SLOW (RAPID) RATE OF PRINCIPAL
REPAYMENTS MAY HAVE AN ADVERSE (POSITIVE) EFFECT ON YIELD TO MATURITY.
INTEREST RATES DISCLOSED REPRESENT CURRENT YIELDS BASED UPON THE CURRENT
COST BASIS AND ESTIMATED TIMING OF FUTURE CASH FLOWS.
Z-TRANCHE - REPRESENTS SECURITIES THAT PAY NO INTEREST OR PRINCIPAL DURING
THEIR INITIAL ACCRUAL PERIODS, BUT ACCRUE ADDITIONAL PRINCIPAL AT
SPECIFIED RATES. INTEREST RATE DISCLOSED REPRESENTS CURRENT YIELD BASED
UPON THE CURRENT COST BASIS AND ESTIMATED TIMING OF FUTURE CASH FLOWS.
(C) BASED UPON ESTIMATED TIMING AND AMOUNT OF FUTURE CASH FLOWS, INCOME IS
CURRENTLY NOT BEING RECOGNIZED ON CERTAIN INVERSE INTEREST-ONLY SECURITIES
WITH AN AGGREGATE MARKET VALUE OF $401,904.
(D) ALSO APPROXIMATES COST FOR FEDERAL INCOME TAX PURPOSES. THE AGGREGATE GROSS
UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED
ON THIS COST WERE AS FOLLOWS:
<TABLE>
<S> <C>
GROSS UNREALIZED APPRECIATION .... $ 6,232,997
GROSS UNREALIZED DEPRECIATION ...... (36,795,033)
------------
NET UNREALIZED DEPRECIATION .... $ (30,562,036)
------------
------------
</TABLE>
22
<PAGE>
- --------------------------------------------------------------------------------
SHAREHOLDER UPDATE
SHARE REPURCHASE PROGRAM
Your fund's board of directors has reapproved the fund's share repurchase
program, which enables the 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 the 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 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.
23
<PAGE>
- --------------------------------------------------------------------------------
SHAREHOLDER UPDATE
ANNUAL MEETING RESULTS
An annual meeting of the fund's shareholders was held on August 22, 1994. Each
matter voted upon at the meeting, as well as the number of votes cast for,
against or withheld, the number of absentions, and the number of broker
non-votes with respect to such matter, are set forth below.
1. The fund's shareholders elected the following eight directors:
<TABLE>
<CAPTION>
Shares Shares Withholding
Voted "For" Authority to Vote
----------- ------------------
<S> <C> <C>
David T. Bennett 16,644,861 495,413
Jaye F. Dyer 16,641,428 498,846
William H. Ellis 16,645,036 495,238
Karol D. Emmerich 16,648,271 492,003
Luella G. Goldberg 16,635,935 504,339
John T. Golle* 16,635,378 504,896
Edward J. Kohler* 16,646,232 494,042
George Latimer 16,632,775 507,499
<FN>
*MR. KOHLER RESIGNED AS DIRECTOR OF THE FUND, EFFECTIVE NOVEMBER 30, 1994.
MR. GOLLE RESIGNED AS DIRECTOR OF THE FUND, EFFECTIVE JUNE 1, 1995.
</TABLE>
2. The fund's shareholders ratified the selection by a majority of the
independent members of the fund's Boards of Directors of KPMG Peat
Marwick LLP as the independent public accountants for the fund for the
fiscal year ending October 31, 1994. The following votes were cast
regarding this matter:
<TABLE>
<CAPTION>
Shares Shares Voted
Voted "For" "Against" Absentions
- ----------- ------------ -----------
<S> <C> <C>
16,564,969 152,543 422,762
</TABLE>
24
<PAGE>
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
<TABLE>
<S> <C>
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, PRESIDENT, PIPER JAFFRAY COMPANIES INC.,
PIPER CAPITAL MANAGEMENT INCORPORATED
Karol D. Emmerich, PRESIDENT, THE PARACLETE GROUP
Luella G. Goldberg, DIRECTOR, TCF FINANCIAL,
RELIASTAR FINANCIAL CORP., HORMEL FOODS CORP.
George Latimer, SPECIALIST CONSULTANT,
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
OFFICERS William H. Ellis, CHAIRMAN OF THE BOARD
Worth Bruntjen, PRESIDENT
Marijo Goldstein, VICE PRESIDENT
Robert H. Nelson, VICE PRESIDENT
Marcy K. Winson, VICE PRESIDENT
Amy K. Johnson, VICE PRESIDENT
David E. Rosedahl, SECRETARY
Charles N. Hayssen, TREASURER
INVESTMENT Piper Capital Management Incorporated
ADVISER 222 SOUTH 9TH 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 P.L.L.P.
220 SOUTH SIXTH STREET, MINNEAPOLIS, MN 55402
</TABLE>
25
<PAGE>
PIPER CAPITAL MANAGEMENT Bulk Rate
PIPER CAPITAL MANAGEMENT INCORPORATED U.S. Postage
222 SOUTH NINTH STREET PAID
MINNEAPOLIS, MN 55402-3804 Permit No. 3008
Mpls., MN
PIPER JAFFRAY INC., FUND SPONSOR AND NASD MEMBER
[LOGO] THIS DOCUMENT IS PRINTED ON PAPER MADE FROM
100% TOTAL RECOVERED FIBER, INCLUDING 15% POST-CONSUMER WASTE.
212-95 AAF-02
