<PAGE>
American Government Income Portfolio - 1997 Semiannual Report
1997 Semiannual Report
AMERICAN
GOVERNMENT
INCOME
PORTFOLIO
AAF
[LOGO]
<PAGE>
[LOGO]
CONTENTS
Average Annualized Total Returns . . . . . . . . . . . . . . . . . . . . . . 1
Portfolio Managers' Letter . . . . . . . . . . . . . . . . . . . . . . . . . 2
Financial Statements and Notes . . . . . . . . . . . . . . . . . . . . . . . 5
Investments in Securities. . . . . . . . . . . . . . . . . . . . . . . . . .16
Glossary***. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
***This report includes a glossary to help you understand financial terms
used in the portfolio managers' letter. When you see this symbol, it
indicates a word that is defined in the glossary.
AMERICAN GOVERNMENT INCOME PORTFOLIO
- ------------------------------------
PRIMARY INVESTMENTS
Obligations issued or guaranteed by the U.S. government, its agencies and
instrumentalities, including mortgage-backed derivative securities. The fund
may purchase securities through the dollar-roll program and enter into
reverse repurchase agreements. Investments in certain mortgage-backed
derivative securities, the purchase of securities through the dollar-roll
program and the use of reverse repurchase agreements may cause the fund's net
asset value to fluctuate to a greater extent than would be expected from
interest rate movements alone.
FUND OBJECTIVE
High current income consistent with preservation of capital. As with other
investment companies, there can be no assurance this fund will achieve its
objective.
*** - This symbol represents a graduation cap, used throughout this report to
indicate terms defined in the glossary.
<PAGE>
AVERAGE ANNUALIZED TOTAL RETURNS
- --------------------------------------------------------------------------------
Based on net asset value for the periods ended April 30, 1997
- --------------------------------------------------------------------------------
[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, 1997, were
15.08%, 2.60%, and 7.10%, respectively. These figures also assume
distributions were reinvested and do not reflect sales charges.
PLEASE REMEMBER, YOU COULD LOSE MONEY WITH THIS INVESTMENT. NEITHER SAFETY OF
PRINCIPAL NOR STABILITY OF INCOME IS GUARANTEED. 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.
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 index does
not reflect expenses or transaction costs. The since inception number for the
Lehman index is calculated from the month end following the fund's inception
through April 30, 1997.
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1997 Semiannual Report 1 American Government Income Portfolio
<PAGE>
PORTFOLIO MANAGERS' LETTER
- --------------------------------------------------------------------------------
[PHOTO]
WORTH BRUNTJEN
shares responsibility
for the management
of American
Government Income
Portfolio. He has 30
years of financial
experience.
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June 13, 1997
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DEAR SHAREHOLDERS:
FOR THE SIX-MONTH PERIOD ENDED APRIL 30, 1997, AMERICAN GOVERNMENT INCOME
PORTFOLIO HAD A NET ASSET VALUE TOTAL RETURN OF 2.09%.* In comparison, the
fund's benchmark,*** the Lehman Brothers U.S. Mortgage Index, returned 2.64%.
The fund's six-month total return based on market price was 5.61%. During the
period, the fund's effective duration*** was slightly longer than that of its
benchmark, which resulted in its underperformance in a period of rising
interest rates. Over time, the duration of the fund will typically be longer
than that of its benchmark index in order to help produce more income. As a
result, the returns of the fund should fluctuate more than those of the
index. We'll further discuss our duration strategy later in this letter.
DURING THE SIX-MONTH REPORTING PERIOD, CONDITIONS WERE RIGHT FOR
MORTGAGE-BACKED SECURITIES, INCLUDING THOSE IN THIS FUND, TO OUTPERFORM OTHER
SECTORS OF THE BOND MARKET. This was a time of rising interest rates,
triggered by strong economic reports (which raised inflation concerns among
investors) and a move by the
* ALL RETURNS 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.
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PORTFOLIO COMPOSITION
- --------------------------------------------------------------------------------
As a percentage of total assets on April 30, 1997
[GRAPH]
*** - This symbol represents a graduation cap, used throughout this report to
indicate terms defined in the glossary.
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1997 Semiannual Report 2 American Government Income Portfolio
<PAGE>
PORTFOLIO MANAGERS' LETTER (CONTINUED)
- --------------------------------------------------------------------------------
[PHOTO]
BRUCE SALVOG
shares responsibility
for the management
of American
Government Income
Portfolio. He has 27
years of financial
experience.
- --------------------------------------------------------------------------------
Federal Reserve Board to slightly tighten monetary policy and raise the
federal funds rate.*** The yield on the 10-year Treasury note rose during the
period from a low of 6.04% in November to 6.98% in April. In this
environment, mortgage-backed securities performed well for four reasons:
higher yields, slightly shorter effective durations in comparison to other
fixed income securities of comparable maturities, an easing of refinancing
fears and relatively low market volatility.
IN LATE APRIL, WE BEGAN TO LENGTHEN THE FUND'S EFFECTIVE DURATION IN
ANTICIPATION OF STABLE TO LOWER INTEREST RATES. Because of its extended
duration, the fund was well positioned for the bond market rally that has
since unfolded. We based our strategy on our belief that yields on the
10-year Treasury (which were near 7% at that time) represented value to
shareholders over the long run. At the end of the reporting period, duration
was 5.2 years, compared to 4 years for the fund's benchmark. We extended
duration by slightly increasing the amount of mortgage-backed securities in
the fund's dollar-roll program*** and by adding a combination of three-year
and 20-year maturity U.S. Treasury securities to the fund's portfolio. We
continue to have the flexibility to extend duration further to enhance the
fund's long-term income producing potential.
OTHER CHANGES TO THE FUND DURING THE SIX-MONTH PERIOD INCLUDED AN INCREASE IN
THE FUND'S ALLOCATION TO TREASURY SECURITIES, WHICH REPRESENTED 23% OF THE
FUND'S TOTAL ASSETS ON APRIL 30. This is a higher allocation than normal for
this fund; however, we believe that mortgage-backed securities have become fully
valued,*** with yield spreads*** more typical of a higher interest rate
environment. Long duration Treasury securities typically outperform mortgage
securities when interest rates fall.
WE EXPECT THAT A SLOWER, MORE SUSTAINABLE PACE OF ECONOMIC GROWTH OVER THE
REST OF THE YEAR WILL KEEP INFLATION LOW. Continued low inflation is the key
variable in our positive outlook for lower rates and favorable bond market
returns.
SETTLEMENT OF THE CLASS ACTION LAWSUIT AGAINST THE FUND IS PROGRESSING AND
SHOULD BE COMPLETE THIS YEAR. Preliminary approval of the
*** - This symbol represents a graduation cap, used throughout this report to
indicate terms defined in the glossary.
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1997 Semiannual Report 3 American Government Income Portfolio
<PAGE>
PORTFOLIO MANAGERS' LETTER (CONTINUED)
- --------------------------------------------------------------------------------
[PHOTO]
TOM MCGLINCH, CFA
shares responsibility
for the management
of American
Government Income
Portfolio. He has 16 years
of financial
experience.
- --------------------------------------------------------------------------------
settlement was granted by the court, and members of the class received
settlement notices and Proof of Claim and Release forms. These forms are
being collected now, with a deadline of October 21, 1997. A court hearing is
scheduled for July 11 for final approval of the settlement. Assuming approval
is granted, notices will be sent to class members regarding the fund's offer
to repurchase up to 25% of outstanding shares at net asset value. (These
notices will be sent within 45 days.) A repurchase fee of approximately 1 to
2 cents per share will be charged on all shares that are repurchased. This
fee will be paid to the fund and used to pay for repurchase offer costs,
which include legal, printing, mailing and other miscellaneous expenses.
Thank you for investing in American Government Income Portfolio. We
appreciate the opportunity to help you meet your investment goals.
Sincerely,
/s/Worth Bruntjen
Worth Bruntjen
Portfolio Manager
/s/Bruce Salvog
Bruce Salvog
Portfolio Manager
/s/Tom McGlinch
Tom McGlinch
Portfolio Manager
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1997 Semiannual Report 4 American Government Income Portfolio
<PAGE>
Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES April 30, 1997
..................................................................
<TABLE>
<S> <C>
ASSETS:
Investments in securities at market value* (including a
repurchase agreement of $914,000) (note 2) ............... $193,436,665
Cash in bank on demand deposit ............................. 42,025
Principal receivable on mortgage securities ................ 67,367
Accrued interest receivable ................................ 1,581,607
------------------
Total assets ............................................. 195,127,664
------------------
LIABILITIES:
Payable for investment securities purchased on a when-issued
basis (note 2) ........................................... 16,186,570
Reverse repurchase agreements payable ...................... 14,500,000
Accrued investment management fee .......................... 80,066
Accrued administrative fee ................................. 26,689
Accrued interest ........................................... 84,231
Other accrued expenses ..................................... 51,886
------------------
Total liabilities ...................................... 30,929,442
------------------
Net assets applicable to outstanding capital stock ....... $164,198,222
------------------
------------------
REPRESENTED BY:
Capital stock - authorized 1 billion shares of $0.01 par
value; outstanding, 24,469,677 shares .................... $ 244,697
Additional paid-in capital ................................. 225,291,032
Undistributed net investment income ........................ 564,920
Accumulated net realized loss on investments ............... (61,969,733)
Unrealized appreciation of investments ..................... 67,306
------------------
Total - representing net assets applicable to outstanding
capital stock .......................................... $164,198,222
------------------
------------------
Net asset value per share of outstanding capital stock ..... $ 6.71
------------------
------------------
* Investments in securities at identified cost ............. $193,369,359
------------------
------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
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1997 Semiannual Report 5 American Government Income Portfolio
<PAGE>
Financial Statements (Unaudited) (continued)
- ---------------------------------------------------------------------
STATEMENT OF OPERATIONS For the Six Months Ended April 30, 1997
..................................................................
<TABLE>
<S> <C>
INCOME:
Interest (net of interest expense of $391,627) ............. $ 5,887,108
Fee income (note 2) ........................................ 88,326
-----------------
Total investment income .................................. 5,975,434
-----------------
EXPENSES (NOTE 3):
Investment management fee .................................. 490,532
Administrative fee ......................................... 163,511
Custodian and accounting fees .............................. 71,651
Transfer agent fees ........................................ 9,017
Reports to shareholders .................................... 33,476
Audit and legal fees ....................................... 33,575
Other expenses ............................................. 38,364
-----------------
Total expenses ........................................... 840,126
Less expenses paid indirectly .......................... (112)
-----------------
Total net expenses ....................................... 840,014
-----------------
Net investment income .................................... 5,135,420
-----------------
NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized loss on investments (note 4) .................. (102,325)
Net realized loss on closed futures contracts .............. (559,985)
-----------------
Net realized loss on investments ......................... (662,310)
Net change in unrealized appreciation or depreciation of
investments .............................................. (1,145,703)
-----------------
Net loss on investments .................................. (1,808,013)
-----------------
Net increase in net assets resulting from operations ... $ 3,327,407
-----------------
-----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
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1997 Semiannual Report 6 American Government Income Portfolio
<PAGE>
Financial Statements (Unaudited) (continued)
- ---------------------------------------------------------------------
STATEMENT OF CASH FLOWS For the Six Months Ended April 30, 1997
..................................................................
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest and fee income .................................... $ 5,975,434
Net expenses ............................................... (840,014)
-----------------
Net investment income .................................... 5,135,420
-----------------
Adjustments to reconcile net investment income to net cash
provided by operating activities:
Change in accrued interest receivable and principal
receivable on mortgage securities ...................... (354,953)
Net amortization of bond discount and premium ............ (54,580)
Change in accrued fees and expenses ...................... 85,730
-----------------
Total adjustments ...................................... (323,803)
-----------------
Net cash provided by operating activities .............. 4,811,617
-----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments ......................... 65,867,881
Purchases of investments ................................... (66,831,546)
Net sales of short-term securities ......................... 1,281,000
Net variation margin received from futures contracts ....... 26,187
-----------------
Net cash provided by investing activities .............. 343,522
-----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions paid to shareholders ......................... (5,138,632)
-----------------
Net cash used by financing activities .................. (5,138,632)
-----------------
Net decrease in cash ....................................... 16,507
Cash at beginning of period ................................ 25,518
-----------------
Cash at end of period .................................. $ 42,025
-----------------
-----------------
Supplemental disclosure of cash flow information:
Cash paid for interest on reverse repurchase
agreements ............................................. $ 347,601
-----------------
-----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
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1997 Semiannual Report 7 American Government Income Portfolio
<PAGE>
Financial Statements (continued)
- ---------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
..................................................................
<TABLE>
<CAPTION>
SIX MONTHS ENDED
4/30/97 YEAR ENDED
(UNAUDITED) 10/31/96
---------------- ----------------
<S> <C> <C>
OPERATIONS:
Net investment income ...................................... $ 5,135,420 $ 10,372,155
Net realized loss on investments ........................... (662,310) (5,659,302)
Net change in unrealized appreciation or depreciation of
investments .............................................. (1,145,703) 6,521,348
---------------- ----------------
Net increase in net assets resulting from operations ..... 3,327,407 11,234,201
---------------- ----------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ................................. (5,138,632) (18,494,993)
---------------- ----------------
CAPITAL SHARE TRANSACTIONS:
Payments for retirement of 68,900 shares (note 6) .......... -- (456,108)
---------------- ----------------
Total decrease in net assets ............................. (1,811,225) (7,716,900)
Net assets at beginning of period .......................... 166,009,447 173,726,347
---------------- ----------------
Net assets at end of period ................................ $164,198,222 $166,009,447
---------------- ----------------
---------------- ----------------
Undistributed net investment income ........................ $ 564,920 $ 568,132
---------------- ----------------
---------------- ----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
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1997 Semiannual Report 8 American Government Income Portfolio
<PAGE>
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 management investment 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 may purchase
securities through the dollar-roll program. In addition, the fund
may borrow through the use of reverse repurchase agreements. Fund
shares are listed on the New York Stock Exchange under the symbol
AAF.
(2) SUMMARY OF
SIGNIFICANT
ACCOUNTING
POLICIES
................................
INVESTMENTS IN SECURITIES
Portfolio securities for which market quotations are readily
available shall be valued at current market value. If market
quotations or valuations are not available, or if Piper Capital
Management Incorporated believes such quotations or valuations
are inaccurate, unreliable or not reflective of market value,
portfolio securities shall be valued in good faith at "fair
value", that is, a price that the fund might reasonably expect to
receive for the security or other asset upon its current sale.
The current market value of certain fixed income securities will
be provided by an independent pricing service. Fixed income
securities for which prices are not available from an independent
pricing service but where an active market exists will be valued
using market quotations obtained from one or more dealers that
make markets in the securities or from a widely used quotation
system. Short-term securities with maturities of 60 days or less
are valued at amortized cost, which approximates market value.
Exchange-traded options are valued at last sales price on the
exchange prior to the time when assets are valued. If no sales
were reported that day, options will be valued at the mean
between the current closing bid and asked prices.
Over-the-counter options are valued using market quotations
obtained from broker-dealers.
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1997 Semiannual Report 9 American Government Income Portfolio
<PAGE>
Notes to Financial Statements (Unaudited) (continued)
- ---------------------------------------------------------------------
Financial futures are valued at the last settlement price
established each day by the board of trade or exchange on which
they are traded.
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, is recorded
on an accrual basis.
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 that there may be an
illiquid market and that a change in the value of the contract or
option may not correlate with changes in the value of the
underlying securities.
Upon entering into a futures contract, the 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.
SECURITIES PURCHASED ON A WHEN-ISSUED BASIS
Delivery and payment for securities that have been purchased by
the fund on a when-issued or forward-commitment basis can take
place a month or more after the transaction date. During this
period, such securities do not earn interest, are subject to
market fluctuation and may increase or decrease in value prior to
their delivery. The fund segregates, 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
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1997 Semiannual Report 10 American Government Income Portfolio
<PAGE>
Notes to Financial Statements (Unaudited) (continued)
- ---------------------------------------------------------------------
substantially fully invested. As of April 30, 1997, the fund had
entered into outstanding when-issued or forward commitments of
$16,186,570.
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
purchased on a forward commitment basis and simultaneously
contracts with a 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, 1997, such fees earned by the fund
amounted to $88,326.
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. The fund also intends to distribute its
taxable net investment income and realized gains, if any, to
avoid the payment of any federal excise taxes.
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
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1997 Semiannual Report 11 American Government Income Portfolio
<PAGE>
Notes to Financial Statements (Unaudited) (continued)
- ---------------------------------------------------------------------
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 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
in the financial statements. Actual results could differ from
these 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
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1997 Semiannual Report 12 American Government Income Portfolio
<PAGE>
Notes to Financial Statements (Unaudited) (continued)
- ---------------------------------------------------------------------
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 activities 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.
Expenses paid indirectly represent a reduction of custodian fees
for earnings on miscellaneous 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 and dollar
roll transactions, for the six months ended April 30, 1997,
aggregated $74,095,196 and $65,867,881, respectively. Including
dollar rolls, purchases and sales aggregated $108,295,829 and
$100,068,514, respectively.
(5) CAPITAL LOSS
CARRYOVER
................................
For federal income tax purposes, the fund had capital loss
carryovers of $61,307,423 as of October 31, 1996, which, if not
offset by subsequent capital gains, will expire in 2002 through
2004. 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.
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1997 Semiannual Report 13 American Government Income Portfolio
<PAGE>
Notes to Financial Statements (Unaudited) (continued)
- ---------------------------------------------------------------------
(6) RETIREMENT OF
FUND SHARES
................................
The fund's board of directors voted to discontinue the share
repurchase program effective February 6, 1996. Pursuant to the
plan, the fund has cumulatively repurchased and retired 342,200
shares 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, Piper Jaffray
Companies Inc., Piper Jaffray Inc., Piper Capital Management
Incorporated and certain individuals. The named plaintiffs and
defendants have executed a settlement agreement which the Court
has preliminarily approved. If approved by by a sufficiently
large percentage of the class and granted final approval by the
court, the settlement agreement will provide $15.5 million to
class members 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 AAF
will offer to repurchase up to 25 percent of its outstanding
shares from current shareholders at net asset value. The
repurchase offer will occur after the effective date of the of
the settlement following Court approval. If the discount between
net asset value and market price of this fund does not decrease
to 5 percent or less within approximately two years after the
effective date of the settlement, the fund's board will submit a
shareholder proposal 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 interests to do so.
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1997 Semiannual Report 14 American Government Income Portfolio
<PAGE>
Notes to Financial Statements (continued)
- ---------------------------------------------------------------------
(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 Year Ended October 31,
4/30/97 -------------------------------------------------------
(Unaudited) 1996 1995 1994 1993 1992
---------- ------ ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period ........ $6.78 $ 7.08 $ 6.83 $ 10.99 $ 11.00 $ 10.02
---------- ------ ------- -------- ------- -------
Operations:
Net investment income ..................... 0.21 0.42 0.54 0.90 1.90 1.37
Net realized and unrealized gains (losses)
on investments .......................... (0.07) 0.04 0.80 (3.50) (0.04) 0.71
---------- ------ ------- -------- ------- -------
Total from operations ................... 0.14 0.46 1.34 (2.60) 1.86 2.08
---------- ------ ------- -------- ------- -------
Distributions to shareholders:
From net investment income ................ (0.21) (0.76) (1.09) (1.41) (1.27) (1.04)
From net realized gains on investments .... -- -- -- -- (0.60) (0.06)
In excess of net realized gains on
investments ............................. -- -- -- (0.15) -- --
---------- ------ ------- -------- ------- -------
Total distributions to shareholders ..... (0.21) (0.76) (1.09) (1.56) (1.87) (1.10)
---------- ------ ------- -------- ------- -------
Net asset value, end of period .............. $6.71 $ 6.78 $ 7.08 $ 6.83 $ 10.99 $ 11.00
---------- ------ ------- -------- ------- -------
---------- ------ ------- -------- ------- -------
Market value, end of period ................. $6.13 $ 6.00 $ 7.00 $ 7.25 $ 12.00 $ 11.00
---------- ------ ------- -------- ------- -------
---------- ------ ------- -------- ------- -------
SELECTED INFORMATION
Total return, net asset value (a) ........... 2.09% 6.90% 21.40% (25.93)% 18.66% 21.86%
Total return, market value (b) .............. 5.61% (3.48)% 13.46% (29.14)% 28.18% 20.15%
Net assets at end of period (in millions) ... $ 164 $ 166 $ 174 $ 167 $ 261 $ 257
Ratio of expenses to average weekly net
assets (c) ................................ 1.03%(f) 1.06% 1.41% 1.28% 0.95% 1.25%
Ratio of expenses to average weekly net
assets including interest expense ......... 1.51%(f) 1.31% -- 2.46% 2.34% 2.34%
Ratio of net investment income to average
weekly net assets ......................... 6.28%(f) 6.26% 7.93% 10.84% 17.42% 13.12%
Portfolio turnover rate (excluding short-term
securities and dollar roll
transactions) ............................. 37% 132% 206% 106% 79% 100%
Amount of borrowings outstanding at end of
period (in millions) (d) .................. $ 15 $ 15 $ -- $ -- $ 97 $ 95
Per-share amount of borrowings outstanding at
end of period ............................. $0.59 $ 0.59 $ -- $ -- $ 4.06 $ 4.07
Per-share amount of net assets, excluding
borrowings, at end of period .............. $7.30 $ 7.37 $ -- $ -- $ 15.05 $ 15.07
Asset coverage ratio (e) .................... 1232% 1245% -- -- 370% 370%
</TABLE>
(A) ASSUMES REINVESTMENT OF DISTRIBUTIONS AT NET ASSET VALUE AND DOES NOT
REFLECT A SALES CHARGE.
(B) ASSUMES REINVESTMENT OF DISTRIBUTIONS AT ACTUAL PRICES PURSUANT TO THE
FUND'S DIVIDEND REINVESTMENT PLAN.
(C) INCLUDES 0.06%, 0.38%, 0.30%, AND 0.26% FROM FEDERAL EXCISE TAXES IN FISCAL
YEARS 1996, 1995, 1994 AND 1992, RESPECTIVELY.
(D) SECURITIES PURCHASED ON A WHEN-ISSUED BASIS FOR WHICH LIQUID SECURITIES ARE
MAINTAINED IN A SEGREGATED ACCOUNT ARE NOT CONSIDERED BORROWINGS. SEE NOTE
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) ANNUALIZED.
- ---------------------------------------------------------------------
1997 Semiannual Report 15 American Government Income Portfolio
<PAGE>
Investments in Securities (Unaudited)
- ---------------------------------------------------------------------
<TABLE>
<CAPTION>
AMERICAN GOVERNMENT INCOME PORTFOLIO April 30, 1997
.......................................................................................
Principal Market
Description of Security Amount Value (a)
- --------------------------------------------------------- ----------- ------------
<S> <C> <C>
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS)
U.S. GOVERNMENT AND AGENCY SECURITIES (117.2%):
U.S. AGENCY MORTGAGE-BACKED SECURITIES (89.8%):
ADJUSTABLE RATE (B) (2.8%):
6.60%, FHLMC, COFI, 10/1/19 ....................... $ 4,711,308 $ 4,674,843
------------
FIXED RATE (81.8%):
7.00%, FHLMC, 9/1/10 .............................. 4,442,879 4,413,734
6.50%, FHLMC, 2/1/26 .............................. 3,797,498 3,600,104
6.50%, FHLMC, 11/1/25 ............................. 2,420,267 2,294,461
6.50%, FHLMC, 5/1/26 .............................. 5,346,947 5,069,012
9.00%, FHLMC, 3/1/21 .............................. 2,081,279 2,200,952
9.50%, FHLMC, 6/1/21 .............................. 2,583,692 2,800,877
10.00%, FHLMC, 12/1/19 ............................ 3,085,583 3,358,471
7.00%, FHLMC, 9/1/10 .............................. 2,486,751 2,470,438
6.00%, FHLMC, 5/1/03 .............................. 2,827,758 2,747,337
7.00%, FNMA, 1/1/08 ............................... 727,637 726,502
7.00%, FNMA, 5/1/09 ............................... 2,314,359 2,306,397
7.00%, FNMA, 10/1/25 .............................. 3,370,144 3,268,601
7.00%, FNMA, 5/1/26 ............................... 4,808,478 4,663,598
6.50%, FNMA, 5/1/11 ............................... 4,741,578 4,618,439
6.50%, FNMA, 4/1/04 ............................... 6,930,000 6,802,232
6.50%, FNMA, 4/1/11 ............................... 2,812,343 2,739,307
7.00%, FNMA, 4/1/26 ............................... 10,100,556 9,796,227
6.50%, FNMA, 4/1/11 ............................... 2,253,687 2,195,159
6.50%, FNMA, 7/1/26 ............................... 5,498,528 5,198,968
7.50%, FNMA, 10/1/26 .............................. 6,054,372 6,008,964
7.50%, FNMA, 10/1/26 .............................. 5,043,348 5,005,523
8.00%, FNMA, 4/1/27 ............................... 7,158,000(c) 7,249,694
7.00%, FNMA, 1/1/08 ............................... 9,000,000(c) 8,921,250
6.50%, FNMA, Series 1997-1, Class B, 2/18/04 ...... 4,500,000 4,384,215
8.00%, GNMA, 7/15/26 .............................. 1,184,052 1,200,700
8.00%, GNMA, 7/15/26 .............................. 5,019,571 5,090,146
9.00%, GNMA, 11/15/21 ............................. 4,406,459 4,677,721
8.00%, GNMA, 9/15/25 .............................. 6,202,670 6,297,633
6.50%, GNMA, 10/15/10 ............................. 2,131,755 2,083,663
7.00%, GNMA, 12/15/10 ............................. 3,408,472 3,410,586
9.00%, GNMA, 4/15/21 .............................. 4,986,221 5,313,417
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
- ---------------------------------------------------------------------
1997 Semiannual Report 16 American Government Income Portfolio
<PAGE>
Investments in Securities (Unaudited) (continued)
- ---------------------------------------------------------------------
AMERICAN GOVERNMENT INCOME PORTFOLIO
(CONTINUED)
<TABLE>
<CAPTION>
Principal Market
Description of Security Amount Value (a)
- --------------------------------------------------------- ----------- ------------
<S> <C> <C>
9.00%, GNMA, 10/15/22 ............................. $ 3,157,625 $ 3,352,009
------------
134,266,337
------------
Z-BOND (B) (5.2%):
8.16%, FHLMC, Series 1870, Class Z, 1/15/24 ....... 6,264,983 5,079,522
8.14%, Vendee Mortgage Trust, Series 1996-1, Class
1Z, 2/15/26 ..................................... 4,326,780 3,428,238
------------
8,507,760
------------
U.S. GOVERNMENT SECURITIES (27.4%):
7.50%, U. S. Treasury Bond, 11/15/16 .............. 3,500,000 3,674,545
6.13%, U. S. Treasury Note, 7/31/00 ............... 16,500,000 16,351,500
6.50%, U. S. Treasury Note, 8/15/05 ............... 1,500,000 1,478,310
6.13%, U. S. Treasury Note, 9/30/00 ............... 13,000,000(d) 12,865,710
5.63%, U. S. Treasury Note, 11/30/00 .............. 11,000,000(d) 10,703,660
------------
45,073,725
------------
Total U.S. Government and Agency Securities
(cost: $192,455,359) ......................... 192,522,665
------------
SHORT-TERM SECURITIES (0.6%):
Repurchase agreement with Goldman Sachs, acquired
on 4/30/97, accrued interest of $140, 5.53%,
5/1/97
(cost: $914,000) ................................ 914,000(e) 914,000
------------
Total Investments in Securities
(cost: $193,369,359) (f) ..................... $193,436,665
------------
------------
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
- ---------------------------------------------------------------------
1997 Semiannual Report 17 American Government Income Portfolio
<PAGE>
Investments in Securities (Unaudited) (continued)
- ---------------------------------------------------------------------
NOTES TO INVESTMENTS IN SECURITIES:
(A) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO
THE FINANCIAL STATEMENTS.
(B) PORTFOLIO ABBREVIATIONS AND DEFINITIONS:
COFI (11TH DISTRICT) - COST OF FUNDS INDEX OF THE FEDERAL RESERVE'S
11TH DISTRICT
ADJUSTABLE RATE - REPRESENTS SECURITIES THAT PAY INTEREST AT RATES THAT
INCREASE (DECREASE) WITH AN INCREASE (DECREASE) IN THE SPECIFIED
INDEX.
Z-BOND - 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.
VENDEE - SECURITIES ISSUED THROUGH THE VENDEE LOAN PROGRAM,
ADMINISTERED AND GUARANTEED AS TO PAYMENT OF PRINCIPAL AND INTEREST BY
THE VETERANS AD MINISTRATION (VA). THE VA GUARANTEE IS BACKED BY THE
FULL FAITH AND CREDIT OF THE UNITED STATES GOVERNMENT.
(C) ON APRIL 30, 1997, THE TOTAL COST OF INVESTMENTS PURCHASED ON A WHEN-ISSUED
BASIS WAS $16,186,570.
(D) ON APRIL 30, 1997, SECURITIES VALUED AT $14,672,237 WERE PLEDGED AS
COLLATERAL FOR THE FOLLOWING OUTSTANDING REVERSE REPURCHASE AGREEMENTS:
<TABLE>
<CAPTION>
NAME OF BROKER
ACQUISITION ACCRUED AND DESCRIPTION
AMOUNT DATE RATE* DUE INTEREST OF COLLATERAL
- ------------ ---------- --------- --------- --------- -------------------
<S> <C> <C> <C> <C> <C>
$ 6,500,000 4/15/97 5.68% 7/14/97 $ 16,409 (1)
8,000,000 3/6/97 5.45% 6/4/97 67,822 (2)
- ------------ ---------
$ 14,500,000 $ 84,231
- ------------ ---------
- ------------ ---------
</TABLE>
* INTEREST RATE AS OF APRIL 30, 1997. RATES ARE BASED ON THE LONDON INTERBANK
OFFERED RATE (LIBOR) AND RESET QUARTERLY.
NAME OF BROKER AND DESCRIPTION OF COLLATERAL:
(1) MORGAN STANLEY; U.S. TREASURY NOTE, 5.63%, 11/30/00, $6,600,000 PAR
(2) MORGAN STANLEY: U.S. TREASURY NOTE, 6.13%, 9/30/00, $4,010,000 PAR
U.S. TREASURY NOTE, 5.63%, 11/30/00, $4,400,000 PAR
(E) REPURCHASE AGREEMENT IN A JOINT TRADING ACCOUNT WHICH IS COLLATERALIZED BY
U.S. GOVERNMENT AGENCY SECURITIES. ACCRUED INTEREST SHOWN REPRESENTS
INTEREST DUE AT MATURITY OF THE REPURCHASE AGREEMENT.
(F) 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 ...... $ 858,631
GROSS UNREALIZED DEPRECIATION ...... (791,325)
------------
NET UNREALIZED APPRECIATION ...... $ 67,306
------------
------------
</TABLE>
- ---------------------------------------------------------------------
1997 Semiannual Report 18 American Government Income Portfolio
<PAGE>
GLOSSARY OF TERMS***
- --------------------------------------------------------------------------------
BENCHMARK
A benchmark is an established basis of comparison for an investment's
performance. A benchmark may be an unmanaged market index or a group of
similar investments.
DOLLAR-ROLL PROGRAM
The dollar-roll program allows a fund to generate fee income by committing to
pay for securities in the future at today's prices. Participation in the
dollar-roll program increases the amount of assets exposed to market and
interest rate risk, and therefore may, to the extent a fund remains fully
invested, increase its net asset value volatility.
EFFECTIVE DURATION
Effective duration estimates how much the value of a security is expected to
change with a given change in interest rates. Longer effective durations
indicate more sensitivity to changes in interest rates. For example, if
interest rates were to increase by 1%, the market value of a bond with an
effective duration of five years would decrease by about 5%, with all other
factors being constant. It is important to remember that effective duration
is based on certain assumptions and has several limitations. It is most
effective as a measure when interest rate changes are small, rapid and occur
equally across all 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.
If a fund has an AGGRESSIVE EFFECTIVE DURATION, it means its managers have
set a longer duration posture in comparison to the fund's benchmark. A fund
with a long effective duration is more sensitive to changing interest rates.
If a fund has a DEFENSIVE EFFECTIVE DURATION, it means its managers have set
a shorter duration posture in comparison to the fund's benchmark, to make the
fund less sensitive to changing interest rates.
If a fund has a NEUTRAL EFFECTIVE DURATION, the duration is approximately the
same as that of its benchmark.
*** - This symbol represents a graduation cap, used throughout this report to
indicate terms defined in the glossary.
- --------------------------------------------------------------------------------
1997 Semiannual Report 19 American Government Income Portfolio
<PAGE>
GLOSSARY OF TERMS (CONTINUED)
- --------------------------------------------------------------------------------
FEDERAL FUNDS RATE
The federal funds rate is the interest rate charged by banks with excess
reserves at a Federal Reserve district bank to banks needing overnight loans
to meet reserve requirements. The federal funds rate is the most sensitive
indicator of the direction of interest rates, since it is set daily by the
market, unlike the prime rate and the discount rate, which are periodically
changed by banks and by the Federal Reserve Board, respectively.
FULLY VALUED
A security is considered fully valued if it has reached a price at which
analysts think its earnings power has been recognized by the market. If the
security is valued higher than that price, it is considered overvalued. If
its price goes down, it is termed undervalued.
YIELD SPREAD
The difference in yield between various issues of securities.
- --------------------------------------------------------------------------------
1997 Semiannual Report 20 American Government Income Portfolio
<PAGE>
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.
DAVID A. HUGHEY, Retired Executive Vice President and Chief Administrative
Officer of Dean Witter InterCapital Inc. and Dean Witter Trust Co.
GEORGE LATIMER, Chief Executive Officer, National Equity Funds
OFFICERS
- -------------------------------------------------------------------------------
WILLIAM H. ELLIS, Chairman of the Board
PAUL A. DOW, President
ROBERT H. NELSON, Vice President and Treasurer
SUSAN SHARP MILEY, Secretary
INVESTMENT ADVISER
- --------------------------------------------------------------------------------
PIPER CAPITAL MANAGEMENT INCORPORATED
222 South Ninth Street, Minneapolis, MN 55402-3804
CUSTODIAN, ACCOUNTING AND TRANSFER AGENT
- --------------------------------------------------------------------------------
INVESTORS FIDUCIARY TRUST COMPANY
127 West 10th Street, Kansas City, MO 64105-1716
LEGAL COUNSEL
- --------------------------------------------------------------------------------
DORSEY & WHITNEY LLP
220 South Sixth Street, Minneapolis, MN 55402
FOR MORE INFORMATION
BY PHONE [GRAPHIC]
1 800 866-7778
FOR GENERAL INFORMATION
press 5, our Mutual Fund Services representatives are ready to answer your
questions.
TO LISTEN TO MONTHLY FUND UPDATES
press 3, press 2, then press:
30 American Government Income Portfolio
TO ORDER LITERATURE
press 5, ask a service representative to mail you additional literature,
including a Quarterly Update. You can also request to be put on a mailing
list to receive this information automatically each quarter.
BY MAIL [GRAPHIC]
Piper Capital Management
Attn: Mutual Fund Services
222 South Ninth Street
Minneapolis, MN 55402-3804
In an effort to reduce costs to our shareholders, we have implemented a
process to reduce duplicate mailings of the 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
Mutual Fund Services area at 1 800 866-7778, or mail a request to us.
ON-LINE [GRAPHIC]
http://www.piperjaffray.com/
<PAGE>
[LOGO]
PIPER CAPITAL MANAGEMENT INCORPORATED
222 SOUTH NINTH STREET
MINNEAPOLIS, MN 55402-3804
[LOGO] THIS DOCUMENT IS PRINTED ON PAPER MADE FROM 100% TOTAL RECOVERED FIBER,
INCLUDING 15% POST-CONSUMER WASTE.
#21120 6/1997 185-97
Bulk Rate
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