<PAGE>
AMERICAN
GOVERNMENT
INCOME
PORTFOLIO
* * *
SEMIANNUAL
REPORT
1996
<PAGE>
TABLE OF CONTENTS
AVERAGE ANNUALIZED TOTAL RETURNS .................. 1
LETTER TO SHAREHOLDERS ............................ 2
FINANCIAL STATEMENTS AND NOTES .................... 10
INVESTMENTS IN SECURITIES ......................... 22
AMERICAN GOVERNMENT INCOME PORTFOLIO
This fund seeks to obtain high current income consistent with preservation of
capital. In seeking 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 dollar-roll program. Investments in certain
mortgage-backed derivative securities and the purchase of securities through
the dollar-roll program may cause the fund's net asset value 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 Sept. 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.
CALL FOR MORE INFORMATION
If you would like to be put on our mailing list to receive quarterly fund
summaries for American Government Income Portfolio (NYSE symbol: AAF), call
our Mutual Fund Services Department at 1 800 866-7778. In addition, beginning
in August, you can call that same number and listen to portfolio manager
commentaries for the fund which will be updated monthly.
<PAGE>
AVERAGE ANNUALIZED TOTAL RETURNS
PERIODS ENDED APRIL 30, 1996
[GRAPH]
AMERICAN GOVERNMENT INCOME PORTFOLIO'S AVERAGE ANNUALIZED 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 ANNUALIZED TOTAL RETURNS BASED ON THE CHANGE IN MARKET PRICE FOR THE
ONE-YEAR, FIVE-YEAR AND SINCE INCEPTION PERIODS ENDED APRIL 30, 1996, WERE
7.02%, 3.66% AND 6.09%, RESPECTIVELY. THESE FIGURES ALSO ASSUME DISTRIBUTIONS
WERE REINVESTED AND DO NOT REFLECT SALES CHARGES.
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.
* DURING THE SIX-MONTH PERIOD, THE FUND'S BENCHMARK WAS CHANGED FROM THE
SALOMON BROTHERS MORTGAGE INDEX TO THE LEHMAN BROTHERS U.S. MORTGAGE INDEX.
ALTHOUGH THE COMPOSITIONS AND EFFECTIVE DURATIONS OF THESE TWO INDEXES ARE
SIMILAR, PIPER CAPITAL IS MOVING TOWARD USING LEHMAN INDEXES FOR FUND
COMPARISONS WHENEVER POSSIBLE BECAUSE INFORMATION REGARDING LEHMAN INDEXES IS
MORE READILY AVAILABLE.
THE LEHMAN BROTHERS U.S. MORTGAGE INDEX IS AN UNMANAGED INDEX THAT REPRESENTS
THE TOTAL RETURN, WITH DISTRIBUTIONS REINVESTED, OF U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES WITH UP TO 30 YEARS TO MATURITY. THE SINCE
INCEPTION NUMBER FOR THE LEHMAN INDEX IS CALCULATED FROM THE MONTH END
CLOSEST TO THE FUND'S INCEPTION THROUGH APRIL 30, 1996.
1
<PAGE>
AMERICAN GOVERNMENT INCOME PORTFOLIO
[PHOTO]
WILLIAM H. ELLIS
PRESIDENT, PIPER CAPITAL MANAGEMENT
June 26, 1996
Dear Shareholders:
On June 21, 1996, Piper Jaffray Companies announced it had reached an
agreement in principle to settle purported class action litigation brought on
behalf of shareholders of American Government Income Portfolio and seven
other Piper Capital closed-end funds. The settlement, if approved by the
court, would result in payment to the fund's investors by Piper Jaffray
Companies and Piper Capital Management of $15.5 million, less attorney's
fees, over a four-year schedule. Investors who acquired shares during the
putative class period (May 25, 1988, through May 1, 1995) would be eligible
to submit claims to recover losses regardless of whether they are current
shareholders in the funds.
Under the agreement in principle, American Government Income Portfolio would
also offer to repurchase up to 25% of its outstanding shares from current
shareholders at net asset value. The repurchase offer would be made as soon
as possible after the effective date of the settlement, which follows final
court approval. This could take many months. The repurchase offer was
considered carefully by the fund's board of directors and was approved
because they considered it to be in shareholders' best interest. Existing
shareholders, many of whom we believe are putative class members, would have
an opportunity to sell shares and receive net asset value for their shares.
Currently, the fund is trading at a significant discount to net asset value.
Shares that are repurchased by the fund would be retired, reducing the number
of fund shares outstanding. In the event that holders of more than 25% of
shares subscribe to the offer, the fund may only be able to accept a prorated
portion of shares tendered for repurchase.
2
<PAGE>
AMERICAN GOVERNMENT INCOME PORTFOLIO
PREMIUM VS. DISCOUNT
The underlying value of a fund's securities and other assets, minus its
liabilities, is the fund's "net asset value." Closed-end funds may trade in
the market at a price that is equal to, above, or below this net asset value.
Shares are trading at a "premium" when investors purchase or sell shares in
the market at a price that is greater than the shares' net asset value.
Conversely, when investors purchase or sell shares in the market at a price
that is lower than the shares' net asset value, they are said to be trading
at a "discount."
Additionally, if the discount between net asset value and market price of this
fund does not decrease to 5% or less within approximately two years after the
effective date of the settlement, the fund's board would submit a proposal to
shareholders to convert this fund to an open-end format, unless the board
determines at that time that it would not be in fund shareholders' best interest
to do so. Until January 1995, American Government Income Portfolio shares
generally traded at a premium to net asset value, benefiting shareholders.
Closed-end bond funds are now trading at historical lows relative to their net
asset values. Although we believe it is preferable to continue to offer the fund
as a closed-end investment company, if the discount hasn't narrowed to 5% or
less in approximately two years after the effective date of the settlement, then
we currently believe converting the fund to an open-end format will be the best
way to eliminate the market discount.
We expect that the settlement agreement will be presented to the court for
preliminary approval this fall. If preliminary court approval is given,
notices of the settlement will be mailed to all known putative class members.
Legal notices also will be published in major newspapers at approximately the
same time. The next step is for final court approval to be given and an
effective date to be established.
Putative class members can expect to learn more about the settlement proposal
via mail and/or newspaper advertising in late 1996 or early 1997 or by
contacting Steve Berman, Hagens & Berman, counsel for the plaintiffs, at
206 623-7292.
3
<PAGE>
AMERICAN GOVERNMENT INCOME PORTFOLIO
We believe this settlement is a timely and reasonable resolution to this
issue that will benefit shareholders. We also believe changes to the fund's
dividend and additions to the management team outlined below are positive
moves for the fund.
Since we last reported to you, the fund's Dividend Committee reduced the
monthly dividend twice from 8 cents per share to 3.5 cents per share. These
reductions were part of Piper Capital's effort to bring the fund's dividends
in line with its earnings. Because the fund's regular and special dividends
exceeded earnings by 28 cents per share during the six-month period, it was
necessary to rely on the fund's dividend reserve to pay these dividends,
which reduced the fund's net asset value by that same amount. As of June 26,
1996, the dividend reserve for this fund has been eliminated.
In March, Bruce Salvog and Tom McGlinch joined the management team for the
fund. Bruce is director of taxable fixed income at Piper Capital with 26
years of financial experience. Prior to joining Piper Capital in 1992, Bruce
was a portfolio manager at Kennedy Associates, Inc. Tom, a Chartered
Financial Analyst, is a senior vice president at Piper Capital with 15 years
of financial experience. Before joining Piper Capital in 1992, Tom was a
mortgage-backed securities trader at Piper Jaffray Inc. Prior to that, he was
a specialty products trader at FBS Investment Services, Inc.
4
<PAGE>
AMERICAN GOVERNMENT INCOME PORTFOLIO
I'd like to congratulate Marijo Goldstein, who previously assisted with the
management of the fund since its inception in 1988, on her new position as
director of taxable fixed income research for Piper Capital Management.
Marijo will no longer be involved with the management of the fund as she
concentrates on her new duties.
Thank you for your investment in the fund. We remain committed to providing
you with quality service and look forward to helping you achieve your
financial goals.
Sincerely,
/s/ William H. Ellis
William H. Ellis
President, Piper Capital Management
5
<PAGE>
AMERICAN GOVERNMENT INCOME PORTFOLIO
[PHOTO]
[PHOTO]
[PHOTO]
WORTH BRUNTJEN, (TOP)
SHARES PRIMARY RESPONSIBILITY FOR THE MANAGEMENT OF AMERICAN GOVERNMENT INCOME
PORTFOLIO. HE HAS 29 YEARS OF FINANCIAL EXPERIENCE.
BRUCE SALVOG, (MIDDLE)
SHARES PRIMARY RESPONSIBILITY FOR THE MANAGEMENT OF AMERICAN GOVERNMENT INCOME
PORTFOLIO. HE HAS 26 YEARS OF FINANCIAL EXPERIENCE.
TOM MCGLINCH, (BOTTOM)
SHARES PRIMARY RESPONSIBILITY FOR THE MANAGEMENT OF AMERICAN GOVERNMENT INCOME
PORTFOLIO. HE HAS 15 YEARS OF INVESTMENT EXPERIENCE.
Dear Shareholders:
FOR THE SIX-MONTH PERIOD ENDED APRIL 30, 1996, AMERICAN GOVERNMENT INCOME
PORTFOLIO PRODUCED A NET ASSET VALUE TOTAL RETURN OF 2.07%.* The fund
outperformed the Lehman Brothers U.S. Mortgage Index, which increased 1.66%
during the same time frame. Our decision to reduce the effective duration of
the portfolio in late 1995, before interest rates began to rise sharply,
helped our investment results. Then in late March when rates began to
stabilize, we also benefited from extending the portfolio's effective
duration to equal that of the Lehman Brothers U.S. Mortgage Index. As of
April 30, the fund's effective duration was 4.3 years. (See page 7 for more
information about effective duration.) Although the fund outperformed based
on its net asset value return, its six-month total return based on market
price was -11.43%.* We are disappointed that the fund continues to trade at a
discount to its net asset value. However, we hope the repurchase proposal
outlined in William Ellis' letter will help improve the fund's market price
over time.
DURING THE PAST SIX-MONTH PERIOD, THE BOND MARKET FIRST EXPERIENCED A STRONG
QUARTER, FOLLOWED BY ITS THIRD WORST QUARTER SINCE INTEREST RATES PEAKED IN
1981. The period began with concerns of a slowdown in economic activity that
caused interest rates to fall and bond prices to
* ALL RETURNS ABOVE INCLUDE REINVESTED DISTRIBUTIONS BUT NOT SALES CHARGES.
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.
6
<PAGE>
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.
increase. But early in 1996, the economy showed signs of picking up and interest
rates began to inch higher. On March 8, the government released February
employment data that showed a surprisingly strong increase in new jobs. Interest
rates rose and bond prices fell sharply, ending the bond market rally.
IN THIS ENVIRONMENT, WE SOLD THE FUND'S REMAINING INVERSE INTEREST-ONLY
SECURITIES AS WELL AS MOST OF ITS INVERSE FLOATING RATE SECURITIES. These
sales contributed to the fund's reduced net asset value volatility during a
very volatile period in the bond market. Proceeds from the sale of these
securities were invested in U.S. agency fixed rate mortgage-backed
securities. Over the past year, we have sold the majority of the fund's
interest-only, principal-only, inverse interest-only and inverse floating
rate securities in an attempt to provide more consistent returns and lower
volatility than in the past. We may invest in these securities to a limited
extent in the future if market conditions dictate.
THE FUND'S EMPHASIS ON U.S. AGENCY MORTGAGE-BACKED SECURITIES HELPED
PERFORMANCE. The mortgage sector outperformed Treasury securities during the
first three months of 1996. The fund's investments in U.S. agency
mortgage-backed securities included securities issued by the Government
National Mortgage Association (GNMA), the Federal National
7
<PAGE>
AMERICAN GOVERNMENT INCOME PORTFOLIO
PORTFOLIO COMPOSITION
APRIL 30, 1996
[GRAPH]
Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation
(FHLMC). The rest of the portfolio was invested primarily in U.S. Treasuries.
AFTER RATES ROSE DURING THE PERIOD, WE INCREASED THE EFFECTIVE DURATION OF
THE FUND. We have also begun borrowing in the form of reverse repurchase
agreements (8% of total assets as of May 31). In addition, we have
selectively added dollar-roll transactions (5% of total assets as of May 31).
Both of these techniques may enhance the fund's income, but may also increase
its net asset value volatility.
LOOKING AHEAD, WE ARE ANTICIPATING A MODERATE RATE OF ECONOMIC GROWTH. Our
estimates for Gross Domestic Product growth (economic growth) for 1996 are
between 1.5% and 2.5%. We believe inflation will remain benign. Our estimate
for the Consumer Price Index (the key inflation rate) in 1996 is between 2.5%
and 3.5%. Given these projections, we expect the Federal Reserve to assume a
neutral monetary policy near-term, meaning we don't expect the Fed to raise
or lower short-term interest rates. We believe this subdued environment
should
8
<PAGE>
AMERICAN GOVERNMENT INCOME PORTFOLIO
benefit the fixed income market. We remain optimistic about the mortgage
securities market and will view market weakness as an opportunity to add to
select holdings at attractive prices when possible.
As always, we appreciate your investment in American Government Income
Portfolio.
Sincerely,
/s/ Worth Bruntjen
Worth Bruntjen
Portfolio Manager
/s/ Bruce Salvog
Bruce Salvog
Portfolio Manager
/s/ Tom McGlinch
Tom McGlinch
Portfolio Manager
9
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS (Unaudited)
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1996
<TABLE>
<S> <C>
ASSETS:
Investments in securities at market value* (note 2)
(including a repurchase agreement of $1,063,000) ..... $ 177,805,727
Cash in bank on demand deposit ........................... 50,333
Other assets ............................................. 20,104
Mortgage security paydowns receivable .................... 14,345
Accrued interest receivable .............................. 1,439,671
----------------
Total assets ......................................... 179,330,180
----------------
LIABILITIES:
Reverse repurchase agreements payable .................... 14,500,000
Accrued investment management fee ........................ 68,027
Accrued administrative fee ............................... 27,051
Accrued interest ......................................... 22,533
Other accrued expenses ................................... 38,436
----------------
Total liabilities .................................... 14,656,047
----------------
Net assets applicable to outstanding capital stock ....... $ 164,674,133
----------------
----------------
REPRESENTED BY:
Capital stock - authorized 1 billion shares of $0.01 par
value; outstanding, 24,469,677 shares ................ $ 244,697
Additional paid-in capital ............................... 225,396,482
Undistributed net investment income ...................... 2,600,773
Accumulated net realized loss on investments ............. (60,647,150)
Unrealized depreciation of investments ................... (2,920,669)
----------------
Total - representing net assets applicable to
outstanding capital stock ........................ $ 164,674,133
----------------
----------------
Net asset value per share of outstanding capital stock ... $ 6.73
----------------
----------------
* Investments in securities at identified cost ........... $ 180,726,396
----------------
----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
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FINANCIAL STATEMENTS (UNAUDITED)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 1996
<TABLE>
<S> <C>
INCOME:
Interest (net of interest expense of $22,533) .......... $ 6,149,890
----------------
EXPENSES (NOTE 3):
Investment management fee ................................ 490,868
Administrative fee ....................................... 167,998
Custodian, accounting and transfer agent fees ............ 98,023
Reports to shareholders .................................. 24,008
Directors' fees .......................................... 5,650
Audit and legal fees ..................................... 27,006
Federal excise taxes (note 2) ............................ 105,449
Other expenses ........................................... 23,247
----------------
Total expenses ....................................... 942,249
Less expenses paid indirectly ............................ (410)
----------------
Total net expenses ................................... 941,839
----------------
Net investment income ................................ 5,208,051
----------------
NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized loss on investments (note 4) ................ (4,058,951)
Net change in unrealized appreciation or depreciation of
investments ............................................ 2,387,670
----------------
Net loss on investments ................................ (1,671,281)
----------------
Net increase in net assets resulting from
operations ....................................... $ 3,536,770
----------------
----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS (UNAUDITED)
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED APRIL 30, 1996
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest income ........................................ $ 6,149,890
Net expenses ............................................. (941,839)
----------------
Net investment income ................................ 5,208,051
----------------
Adjustments to reconcile net investment income to net cash
provided by operating activities:
Change in accrued interest and mortgage security
paydowns receivable .................................. 57,049
Net amortization of bond discount and premium .......... 306,917
Change in accrued fees and expenses .................... 18,008
----------------
Total adjustments .................................... 381,974
----------------
Net cash provided by operating activities ............ 5,590,025
----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments ....................... 127,982,526
Purchases of investments ................................. (135,980,991)
Net sales of short-term securities ....................... 496,000
----------------
Net cash used by investing activities ................ (7,502,465)
----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from reverse repurchase agreements .......... 14,500,000
Retirement of fund shares ................................ (505,457)
Distributions paid to shareholders ....................... (12,132,877)
----------------
Net cash provided by financing activities ............ 1,861,666
----------------
Net decrease in cash ..................................... (50,774)
Cash at beginning of period .............................. 101,107
----------------
Cash at end of period .............................. $ 50,333
----------------
----------------
Supplemental disclosure of cash flow information:
Cash paid for interest on reverse repurchase
agreements ........................................... $ --
----------------
----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
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FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended
4/30/96 Year Ended
(Unaudited) 10/31/95
---------------- ----------------
<S> <C> <C>
OPERATIONS:
Net investment income .................................. $ 5,208,051 13,335,445
Net realized loss on investments ......................... (4,058,951) (25,907,303)
Net change in unrealized appreciation or depreciation of
investments ............................................ 2,387,670 45,260,530
---------------- ----------------
Net increase in net assets resulting from operations ... 3,536,770 32,688,672
---------------- ----------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ............................... (12,132,877) (26,743,397)
---------------- ----------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from issuance of 354,188 shares for the dividend
reinvestment plan ...................................... -- 2,442,217
Payments for retirement of 68,900 and 273,300 shares,
respectively (note 6) .................................. (456,107) (1,769,013)
---------------- ----------------
Increase (decrease) in net assets from capital share
transactions ......................................... (456,107) 673,204
---------------- ----------------
Total increase (decrease) in net assets .............. (9,052,214) 6,618,479
Net assets at beginning of period .......................... 173,726,347 167,107,868
---------------- ----------------
Net assets at end of period .............................. $ 164,674,133 173,726,347
---------------- ----------------
---------------- ----------------
Undistributed net investment income ...................... $ 2,600,773 9,525,599
---------------- ----------------
---------------- ----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(1) ORGANIZATION
American Government Income Portfolio Inc. (the fund) is
registered under the Investment Company Act of 1940 (as amended)
as a non-diversified, closed-end investment management company.
The fund invests primarily in obligations issued or guaranteed
by the U.S. government, its agencies and instrumentalities,
including mortgage-backed securities. The fund's investments in
mortgage-backed securities include derivative securities, and
the fund may purchase securities through the sale-forward
(dollar-roll) program. Fund shares 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 sales 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.
OPTIONS TRANSACTIONS
For hedging purposes, the fund may buy and sell put and call
options, write covered call options on portfolio securities, and
write cash-secured puts. The risk in writing a call option is
that the 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 of
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
14
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
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.
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 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
15
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
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.
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 net asset value if the fund makes such
purchases while remaining substantially fully invested. As of
April 30, 1996, 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, 1996, the fund earned no such fees.
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
16
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
is required. However, the fund incurred federal excise taxes of
$105,449, or $0.004 per share, on income retained during the
1995 excise tax year.
Net investment income and net realized gains (losses) may differ
for financial statement and tax purposes primarily because of
the differences in amortization policies for notional principal
contracts, losses deferred due to "wash sale" transactions, the
timing of recognition of income on certain collateralized
mortgage-backed securities, and the non-deductibility of excise
tax payments made. The character of distributions made during
the year from net investment income or net realized gains may
differ from its ultimate characterization for federal income tax
purposes. In addition, due to the timing of dividend
distributions, the fiscal year in which amounts are distributed
may differ from the year that the income or realized gains
(losses) were recorded by the fund.
DISTRIBUTIONS TO SHAREHOLDERS
Distributions from net investment income are made monthly and
realized capital gains, if any, will be distributed at least
annually. 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
unless the market price plus commissions exceeds the net asset
value by 10% or more. If, at the close of business on the
dividend payment date, the shares purchased in the open market
are insufficient to satisfy the dividend reinvestment
requirement, the fund will issue new shares at a discount of up
to 5% from the current 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 or
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
17
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
value of the collateral is in excess of the repurchase amount,
including accrued interest, to protect the fund in the event of
a 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 and disclosures of contingent assets
and liabilities at the date of the financial statements and the
reported results of operations during the reporting period.
Actual results could differ from those estimates.
(3) EXPENSES
The fund has entered into the following agreements with Piper
Capital Management Incorporated (the adviser and administrator):
The investment advisory agreement provides the adviser with a
monthly investment management fee in an amount equal to an
annualized rate of 0.30% of the fund's average weekly net assets
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 from options and futures
contracts less interest on money borrowed by the fund) accrued
by the fund during the month. The monthly investment 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 provides
investment advice and conducts the management and investment
activity of the fund.
The administration agreement provides the administrator with a
monthly fee in an amount equal to an annualized rate of 0.20% of
the fund's average weekly net assets. For its fee, the
administrator provides reporting, regulatory and record-keeping
services for the fund.
In addition to the investment management and administrative
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.
18
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Expenses paid indirectly represent a reduction of custodian fees
for earnings on cash balances maintained by the fund.
(4) INVESTMENT SECURITY TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other
than temporary investments in short-term securities, for the six
months ended April 30, 1996 aggregated $128,192,824 and
$121,563,605, respectively. During the six months ended April
30, 1996, 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 $56,588,199 as of October 31, 1995, which, if not
offset by subsequent capital gains, will expire in 2002 and
2003. 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.
(6) RETIREMENT OF FUND SHARES
The fund's board of directors has approved a plan to discontinue
the share repurchase plan effective February 6, 1996. Pursuant
to the plan, the fund had cumulatively repurchased and retired
342,200 shares as of February 5, 1996, which represents 1.6% of
the shares originally issued.
(7) PENDING LITIGATION
An amended complaint purporting to be a class action was filed
on September 7, 1995, in the United States District Court for
the Western District of Washington against the fund, seven other
closed-end investment companies for which Piper Capital
Management Incorporated acts as investment adviser: American
Government Income Fund Inc. (AGF); American Opportunity Income
Fund Inc. (OIF); American Government Income Portfolio Inc.
(AAF); American Strategic Income Portfolio (ASP); American
Strategic Income Portfolio II (BSP); American Strategic Income
Portfolio II (CSP) and American Select Portfolio (SLA), Piper
Jaffray Companies Inc., Piper Jaffray Inc., Piper Capital
Management Incorporated and certain individuals. The complaint
alleges, among other things, violations of federal and state
securities laws. The named plaintiffs and defendants in this
putative class action have reached an agreement-in-principle on
a proposed settlement and are negotiating the terms of a
definitive settlement agreement. If approved by the Court, a
definitive settlement agreement consistent with the terms of the
agreement-in-principle would provide $15.5 million to class
members
19
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
in payments by Piper Jaffray Companies Inc. and Piper Capital
Management Incorporated scheduled during the next four years.
The settlement also includes an agreement that each of AGF, AAF
and OIF would offer to repurchase up to 25 percent of their
outstanding shares from current shareholders at net asset value.
If the discounts between net asset value and market price of
these funds do not decrease to 5 percent or less within
approximately two years after the effective date of the
settlement, the fund boards would submit shareholder proposals
to convert these funds to an open-end format unless the boards
determine at that time that it would not be in fund
shareholders' best interests to do so. Finally, the agreement
stipulates that each of ASP, BSP, CSP and SLA would offer to
repurchase up to 10 percent of their outstanding shares from
current shareholders at net asset value. The repurchase offers
would occur after the effective date of the settlement following
Court approval.
20
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(8) 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 Fiscal year ended October 31,
4/30/96 --------------------------------------------------------
(Unaudited) 1995 1994 1993 1992 1991
-------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period ... $ 7.08 6.83 10.99 11.00 10.02 8.73
-------- ------- -------- ------- ------- -------
Operations:
Net investment income .................. 0.21 0.54 0.90 1.90 1.37 1.05
Net realized and unrealized gains
(losses) on investments .............. (0.06) 0.80 (3.50) (0.04) 0.71 1.24
-------- ------- -------- ------- ------- -------
Total from operations ............... 0.15 1.34 (2.60) 1.86 2.08 2.29
-------- ------- -------- ------- ------- -------
Distributions to shareholders:
From net investment income ............. (0.50) (1.09) (1.41) (1.27) (1.04) (1.00)
Net realized gains on investments ...... -- -- -- (0.60) (0.06) --
In excess of net realized gains on
investments .......................... -- -- (0.15) -- -- --
-------- ------- -------- ------- ------- -------
Total distributions to shareholders
................................... (0.50) (1.09) (1.56) (1.87) (1.10) (1.00)
-------- ------- -------- ------- ------- -------
Net asset value, end of period ..... $ 6.73 7.08 6.83 10.99 11.00 10.02
-------- ------- -------- ------- ------- -------
Market value, end of period ........ $ 5.75 7.00 7.25 12.00 11.00 10.13
-------- ------- -------- ------- ------- -------
-------- ------- -------- ------- ------- -------
SELECTED INFORMATION
Total return, net asset value (a) ........ 2.07% 21.40% (25.93)% 18.66% 21.86% 27.65%
Total return, market value (b) ........... (11.43)% 13.46% (29.14)% 28.18% 20.15% 26.36%
Net assets at end of period (in
millions) ............................ $ 165 174 167 261 257 234
Ratio of expenses to average weekly net
assets (c) ............................. 1.12%(f) 1.41% 1.28% 0.95% 1.25% 1.01%
Ratio of net investment income to average
weekly net assets ...................... 6.20%(f) 7.93% 10.84% 17.42% 13.12% 11.25%
Portfolio turnover rate (excluding short-
term securities) ....................... 72% 206% 106% 79% 100% 94%
Amount of borrowings outstanding at end of
period (in millions) (d) ............. $ 15 -- -- 97 95 61
Per-share amount of borrowings outstanding
at end of period ..................... $ 0.59 -- -- 4.06 4.07 2.61
Per-share amount of net assets, excluding
borrowings, at end of period ......... $ 7.32 -- -- 15.05 15.07 12.63
Asset coverage ratio (e) ................. 1,236% -- -- 370% 370% 484%
</TABLE>
(A) BASED ON THE CHANGE IN NET ASSET VALUE OF A SHARE DURING THE PERIOD AND
ASSUMES REINVESTMENT OF DISTRIBUTIONS AT NET ASSET VALUE.
(B) BASED ON THE CHANGE IN MARKET PRICE OF A SHARE DURING THE PERIOD AND
ASSUMES REINVESTMENT OF DISTRIBUTIONS AT ACTUAL PRICES PURSUANT TO THE
FUND'S DIVIDEND REINVESTMENT PLAN.
(C) INCLUDES 0.13%, 0.38%, 0.30%, AND 0.26% FROM FEDERAL EXCISE TAXES IN THE
SIX MONTHS ENDED 4/30/96 AND FISCAL YEARS 1995, 1994 AND 1992 RESPECTIVELY.
BEGINNING IN FISCAL 1995, THE EXPENSE RATIOS REFLECT THE EFFECT OF GROSS
EXPENSES PAID INDIRECTLY BY THE FUND. PRIOR PERIOD EXPENSE RATIOS HAVE NOT
BEEN ADJUSTED.
(D) 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.
(E) REPRESENTS NET ASSETS, EXCLUDING BORROWINGS, AT END OF PERIOD DIVIDED BY
BORROWINGS OUTSTANDING AT END OF PERIOD.
(F) ADJUSTED TO AN ANNUAL BASIS.
21
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (Unaudited)
AMERICAN GOVERNMENT INCOME PORTFOLIO
APRIL 30, 1996
<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 (106.7%):
U.S. Government Treasury Securities (19.8%):
U.S. Treasury Note, 6.38%, 8/15/02 ................. $ 2,000,000 1,985,620
U.S. Treasury Note, 5.75%, 8/15/03 ................... 28,500,000(b) 27,118,035
U.S. Treasury Note, 6.13%, 5/15/98 ................... 2,000,000 2,002,780
U.S. Treasury Note, 6.50%, 8/15/05 ................... 1,500,000 1,480,065
-----------
32,586,500
-----------
U.S. Mortgage-Backed Securities (c) (86.9%):
U.S. Agency Fixed Rate (79.8%):
7.00%, FHLMC, 9/1/10 ................................. 4,733,404 4,683,040
6.50%, FHLMC, 2/1/26 ................................. 3,983,315 3,740,531
6.50%, FHLMC, 11/1/25 ................................ 2,543,844 2,388,796
6.50%, FHLMC, 2/1/26 ................................. 512,520 481,281
6.50%, FHLMC, 3/1/26 ................................. 1,462,547 1,373,405
7.50%, FHLMC, 8/1/25 ................................. 9,457,183 9,353,627
7.00%, FHLMC, 9/1/10 ................................. 2,796,963 2,767,203
7.00%, FHLMC, 10/1/10 ................................ 10,523,329 10,411,361
7.00%, FNMA, 1/1/08 .................................. 879,544 871,567
7.00%, FNMA, 5/1/09 .................................. 2,626,785 2,598,021
7.00%, FNMA, 10/1/25 ................................. 3,569,869 3,442,639
7.00%, FNMA, 4/1/26 .................................. 5,004,931 4,825,066
6.50%, FNMA, 4/1/11 .................................. 5,100,000 4,939,031
6.50%, FNMA, 3/1/11 .................................. 3,042,002 2,946,879
7.50%, FNMA, 1/1/26 .................................. 8,206,718 8,109,141
7.50%, FNMA, 2/1/26 .................................. 8,560,827 8,459,039
7.00%, FNMA, 4/1/26 .................................. 12,119,998 11,688,041
7.00%, FNMA, 3/1/26 .................................. 6,434,999 6,205,656
6.50%, FNMA, 4/1/11 .................................. 2,450,000 2,373,389
6.50%, GNMA, 10/15/10 ................................ 2,367,134 2,308,666
7.00%, GNMA, 12/15/10 ................................ 5,352,652 5,319,091
9.00%, GNMA II, 5/20/22 .............................. 2,830,002 2,953,758
8.50%, GNMA II, 2/20/25 .............................. 7,665,852 7,886,169
9.00%, GNMA II, 1/20/25 .............................. 2,905,235 3,032,281
9.00%, GNMA II, 4/20/25 .............................. 1,398,889 1,460,063
8.00%, GNMA II, 6/20/25 .............................. 5,075,865 5,112,259
8.50%, GNMA II, 6/20/25 .............................. 2,163,130 2,225,299
9.00%, GNMA II, 5/20/25 .............................. 1,572,502 1,641,267
8.00%, GNMA II, 7/20/25 .............................. 2,992,218 3,013,672
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
22
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
AMERICAN GOVERNMENT INCOME PORTFOLIO
(CONTINUED)
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- --------------------------------------------------------- ---------- -----------
<S> <C> <C>
8.00%, GNMA II, 10/20/25 ........................... $ 4,817,335 4,851,876
-----------
131,462,114
-----------
U.S. Agency Adjustable Rate (3.5%):
6.88%, FHLMC, 10/1/19 ................................ 5,717,781 5,712,921
-----------
U.S. Agency Inverse Floater (1.1%):
5.86%, FHLMC, Series 1487, Class IB, 7 year CMT,
3/15/23 ............................................. 2,252,490 1,758,271
-----------
U.S. Agency Z-Tranche (2.5%):
7.56%, FNMA, Series 1994-52, Class Z, 4/25/07 ........ 4,336,925 4,130,921
-----------
Total U.S. Mortgage-Backed Securities .............. 143,064,227
-----------
Total U.S. Government and Agency Securities
(cost: $179,165,375) .............................. 175,650,727
-----------
INTEREST RATE CONTRACTS (C) (0.7%):
Interest rate cap with Goldman Sachs, $20,000,000
notional principal on one-month LIBOR (5.44% on
4/30/96), 4.50%, 9/10/97 ............................ -- 364,000
Interest rate cap with Merrill Lynch, $20,000,000
notional principal on one-month LIBOR (5.44% on
4/30/96), 4.50%, 9/10/97 ............................ -- 364,000
Interest rate cap with Morgan Stanley, $20,000,000
notional principal on one-month LIBOR (5.44% on
4/30/96), 4.50%, 9/10/97 ............................ -- 364,000
-----------
Total Interest Rate Contracts
(cost: $498,021) .................................. 1,092,000
-----------
SHORT-TERM SECURITIES (0.6%):
Repurchase agreement with Goldman Sachs in a joint
trading account, collateralized by U.S. government
agency securities, acquired on 4/30/96 accrued
interest of $157, 5.33%, 5/1/96
(cost: $1,063,000) .................................. 1,063,000 1,063,000
-----------
Total Investments in Securities
(cost: $180,726,396) (d) ......................... $ 177,805,727
-----------
-----------
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
23
<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) ON APRIL 30, 1996, SECURITIES VALUED AT $14,455,340 WERE PLEDGED AS
COLLATERAL FOR THE FOLLOWING OUTSTANDING REVERSE REPURCHASE AGREEMENTS:
<TABLE>
<S> <C> <C> <C> <C> <C>
NAME OF BROKER
ACQUISITION ACCRUED AND DESCRIPTION
AMOUNT DATE RATE DUE INTEREST OF COLLATERAL
- ------------ ---------- ----------- --------- --------- ---------------
$ 8,000,000 4/11/96 5.33 % 6/13/96 $ 17,766 (1)
6,500,000 4/25/96 5.28 % 6/25/96 4,767 (2)
- ------------ ---------
$ 14,500,000 $ 22,533
- ------------ ---------
- ------------ ---------
</TABLE>
NAME OF BROKER AND DESCRIPTION OF COLLATERAL:
(1) MORGAN STANLEY; U.S. TREASURY NOTE, 5.75%, 8/15/03, $8,000,000 PAR
(2) MORGAN STANLEY; U.S. TREASURY NOTE, 5.75%, 8/15/03, $6,760,000 PAR
(C) DEFINITION OF CERTAIN TERMS:
ADJUSTABLE RATE - REPRESENTS SECURITIES THAT PAY INTEREST AT RATES THAT
INCREASE (DECREASE) WITH AN INCREASE (DECREASE) IN THE SPECIFIED INDEX.
CMT - CONSTANT MATURITY TREASURY.
LIBOR - LONDON INTERBANK OFFERED RATE.
INVERSE FLOATER - REPRESENTS SECURITIES THAT PAY INTEREST AT RATES THAT
INCREASE (DECREASE) WITH A DECREASE (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, 1996.
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 COST BASIS AND ESTIMATED TIMING OF FUTURE CASH FLOWS.
(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 .... $ 834,944
GROSS UNREALIZED DEPRECIATION ...... (3,755,613)
-----------
NET UNREALIZED DEPRECIATION .... $ (2,920,669)
-----------
-----------
</TABLE>
24
<PAGE>
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
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, CHIEF EXECUTIVE OFFICER, NATIONAL
EQUITY FUNDS
OFFICERS William H. Ellis, CHAIRMAN OF THE BOARD
Worth Bruntjen, PRESIDENT
Paul A. Dow, SENIOR VICE PRESIDENT
Bruce D. Salvog, SENIOR VICE PRESIDENT
Thomas S. McGlinch, SENIOR VICE PRESIDENT
Robert H. Nelson, SENIOR VICE PRESIDENT AND
TREASURER
Molly J. Destro, VICE PRESIDENT
Amy K. Johnson, VICE PRESIDENT
Paul D. Pearson, VICE PRESIDENT
Susan Sharp 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
25
<PAGE>
---------------
PIPER CAPITAL Bulk Rate
MANAGEMENT U.S. Postage
PAID
PIPER CAPITAL MANAGEMENT INCORPORATED Permit No. 3008
222 SOUTH NINTH STREET Mpls., MN
MINNEAPOLIS, MN 55402-3804 ---------------
[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
#21120 7/96 141-96
