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[GRAPHIC]
AMERICAN OPPORTUNITY
INCOME FUND
* * *
SEMIANNUAL REPORT
1995
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TABLE OF CONTENTS
LETTER TO SHAREHOLDERS..................1
FINANCIAL STATEMENTS AND NOTES..........7
INVESTMENT IN SECURITIES...............20
SHAREHOLDER UPDATE.....................26
AMERICAN OPPORTUNITY INCOME FUND
This fund's primary objective is to seek a high level of current income. Its
secondary objective is capital appreciation. To realize its objectives, the fund
invests principally in mortgage-backed securities, including U.S. government and
agency securities and privately issued 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. Investments
in mortgage-backed derivative securities and the purchase of securities through
the sale-forward program may cause the fund's net asset value (NAV) to fluctuate
to a greater extent than would be expected from interest rate movements alone.
As with other mutual funds, there can be no assurance the fund will achieve its
objective. Since its inception on September 29, 1989, 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 OIF.
*THE FUND IS RATED AAf, WHICH MEANS INVESTMENTS IN THE FUND HAVE AN OVERALL
CREDIT QUALITY OF AA. CREDIT QUALITIES ARE ASSESSED BY STANDARD & POOR'S MUTUAL
FUNDS RATING GROUP. S&P DOES NOT EVALUATE THE MARKET RISK OF AN INVESTMENT WHEN
ASSIGNING A CREDIT RATING. SEE STANDARD & POOR'S CORPORATE AND MUNICIPAL RATING
DEFINITIONS FOR AN EXPLANATION OF AA.
THE FUND HAS ALSO BEEN GIVEN A MARKET RISK RATING BY S&P, WHICH WE CANNOT
PUBLISH DUE TO NASD REGULATIONS. RISK RATINGS EVALUATE VARIOUS INVESTMENT RISKS
THAT CAN AFFECT THE PERFORMANCE OF A BOND FUND AND INDICATE THE FUND'S OVERALL
STABILITY AND SENSITIVITY TO CHANGING MARKET CONDITIONS. THESE RATINGS ARE
AVAILABLE BY CALLING S&P AT 1-800-424-FUND.
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT FUND SHARES, WHEN SOLD,
MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
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AMERICAN OPPORTUNITY INCOME FUND
AVERAGE ANNUAL TOTAL RETURNS
APRIL 30, 1995
[GRAPH]
AMERICAN OPPORTUNITY INCOME FUND'S TOTAL RETURN FIGURES ARE BASED ON THE
CHANGE IN ITS NET ASSET VALUE (NAV), ASSUME ALL DISTRIBUTIONS WERE REINVESTED
AND DO NOT REFLECT SALES CHARGES. NAV-BASED PERFORMANCE IS USED TO MEASURE
INVESTMENT MANAGEMENT RESULTS.
AVERAGE ANNUAL TOTAL RETURNS BASED ON THE CHANGE IN MARKET PRICE FOR THE
YEAR, FIVE YEAR AND SINCE INCEPTION PERIODS ENDED APRIL 30, 1995, WERE
- -25.43%, 4.99% AND 4.54%, RESPECTIVELY. THESE FIGURES ALSO ASSUME
DISTRIBUTIONS WERE REINVESTED AND DO NOT REFLECT SALES CHARGE.
AS DISCUSSED IN THE SHAREHOLDER LETTER, THE SALOMON BROTHERS MORTGAGE INDEX
HAS REPLACED THE LIPPER U.S. MORTGAGE BOND FUNDS AVERAGE AS THE INDEX AGAINST
WHICH THE FUND'S PERFORMANCE WILL BE MEASURED. THE LIPPER AVERAGE'S TOTAL
RETURNS FOR THE PERIODS ENDED APRIL 30, 1995, WERE: SIX MONTH 8.13% AND ONE
YEAR 6.56%. RETURNS FOR FIVE YEARS AND SINCE OIF'S INCEPTION ARE NOT AVAILABLE.
THE SALOMON BROTHERS MORTGAGE INDEX IS AN UNMANAGED INDEX OF MORTGAGE
SECURITIES WHICH HAVE AN AVERAGE LIFE OF ONE YEAR OR MORE, ARE RATED BBB- OR
HIGHER BY STANDARD & POOR'S OR Baa3 OR HIGHER BY MOODY'S, AND HAVE A
PRINCIPAL AMOUNT OF AT LEAST $1 BILLION. THE LIPPER U.S. MORTGAGE BOND FUNDS
AVERAGE IS THE AVERAGE TOTAL RETURN, WITH DISTRIBUTIONS REINVESTED, OF
SIMILAR FUNDS AS CATEGORIZED BY LIPPER ANALYTICAL SERVICES.
June 12, 1995
Dear Shareholders:
AFTER AN EXTREMELY DISAPPOINTING 1994, AMERICAN OPPORTUNITY INCOME FUND HAS
PERFORMED WELL IN 1995, BASED ON ITS NET ASSET VALUE (NAV) TOTAL RETURN. A
powerful rally in interest rates, most notably in long-term rates, has helped
the fund achieve a 16.95% total return so far this calendar year, through May
31. During the six-month period ended April 30, 1995, which was the fund's
semiannual reporting period, the fund's total return was 9.11%.
UNFORTUNATELY, MARKET PRICE PERFORMANCE HAS NOT BEEN AS GOOD. After years of
trading at a premium to its net asset value, the fund's shares have traded at a
discount for the past several months, resulting in returns based on market price
for the five months ended May 31, 1995, and for the six months ended April 30,
1995, of 2.93% and -8.86%, respectively. It is my hope that the recent
strengthening of the fund's NAV return and our current investment strategy,
which I outline in this letter, will improve investors' sentiments about the
fund and, consequently, its market price.
1
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AMERICAN OPPORTUNITY INCOME FUND
[PHOTO]
[PHOTO]
Worth Bruntjen, (above) IS PRIMARILY RESPONSIBLE FOR THE MANAGEMENT OF
AMERICAN OPPORTUNITY INCOME FUND. HE HAS 28 YEARS OF FINANCIAL EXPERIENCE.
Marijo Goldstein, (below) ASSISTS WITH THE MANAGEMENT OF AMERICAN OPPORTUNITY
INCOME FUND. SHE HAS 10 YEARS OF FINANCIAL EXPERIENCE.
IN LAST DECEMBER'S ANNUAL REPORT, I EXPLAINED THE FACTORS THAT LED TO A VERY
DISAPPOINTING YEAR FOR THE FUND AND SHARED WITH YOU OUR STRATEGY TO IMPROVE THE
FUND'S PERFORMANCE. Our goals were to reduce volatility, maintain high monthly
income, and increase net asset value. Prioritizing these goals has often
required compromise, since they may conflict with one another. As a result,
decisions which we have made in recent months, while helping us to achieve our
first two goals, have clearly made our third goal more difficult.
OUR PRIMARY FOCUS HAS BEEN TO REDUCE THE POTENTIAL FOR VOLATILITY IN THE FUND
- - A PROCESS WE WILL CONTINUE THROUGHOUT 1995. In early April, we suspended the
sale-forward (dollar-roll) program, primarily due to the increased volatility it
can create within the portfolio. Also, the fee income it would generate in the
current market is not as attractive as when short-term interest rates were much
lower. Because this program has historically provided a strong level of income
for the fund, it may be reinstated in the future if more favorable market
conditions emerge. Additionally, as prices have improved, we have been
selectively selling securities that are particularly sensitive to changes in
interest rates. These include longer-maturity U.S. agency
Z-tranches and other mortgage-backed derivative securities, such as
principal-only and inverse interest-only securities. In early June, we took
advantage of the improved prices of the fund's principal-only securities, which
were due to anticipated increases in mortgage refinancings, and reduced their
position to approximately 1% of total assets. The proceeds were invested in
fixed-rate, mortgage-backed securities. We plan to further reduce the fund's
potentially more volatile derivative securities as attractive opportunities
become available. It is important to remember, however, that as we continue our
efforts
2
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AMERICAN OPPORTUNITY INCOME FUND
PORTFOLIO COMPOSITION
APRIL 30, 1995
[GRAPH]
INVESTMENT CATEGORIES REFLECT PERCENTAGE OF TOTAL ASSETS.
to reduce volatility, we also reduce the fund's potential for net asset
value improvement.
OVER THE PAST FEW MONTHS, WE ADDED A 17% POSITION IN U.S. AGENCY FLOATERS.
ALTHOUGH FLOATERS ARE CONSIDERED A DERIVATIVE BY MANY INDUSTRY SOURCES, THEY
TEND TO BE MORE PREDICTABLE SECURITIES, WHICH WE BELIEVE WILL ASSIST US IN OUR
GOAL OF MAKING THE PORTFOLIO LESS VOLATILE. In cases where we can find an exact
match, we may recombine a U.S. agency floater with a U.S. agency inverse floater
to create a non-derivative mortgage-backed security. If matched, the price
offered for the recombined security is generally higher than for the derivative
components. Unmatched, floaters and inverse floaters have somewhat offsetting
characteristics. For example, floaters help offset the decrease in income
currently being experienced by the fund's inverse floaters. Inverse floaters
have coupon rates that move inversely to a designated short-term index, such as
the Cost of Funds Index (COFI). Floaters, on the other hand, have coupon rates
that move in the same direction as the designated index. Recently, these indexes
have risen, causing the coupon paid by inverse floaters to fall and the coupon
paid by floaters to rise. It's important to note, however, that floaters
3
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AMERICAN OPPORTUNITY INCOME FUND
DISTRIBUTION HISTORY
SINCE INCEPTION (SEPTEMBER 1989) THROUGH APRIL 30, 1995
Monthly Income
Dividends Paid........................66
Total Monthly
Income Dividends...................$6.44
Capital Gains
Distributions Paid.....................9
Total Capital
Gains Distributions................$1.32
Total Distributions
Per Share..........................$7.76
cannot be considered a complete hedge to inverse floaters because coupon
rates on inverse floaters typically change at a multiple of the changes in
the designated index.
THESE ACTIONS TO LOWER VOLATILITY HAVE REDUCED THE PORTFOLIO'S AVERAGE EFFECTIVE
DURATION TO 5.2 YEARS, AS OF JUNE 12. Last year, the slowdown in mortgage
prepayments due to higher interest rates caused the effective duration of many
of the fund's mortgage-backed securities to be extended significantly. Effective
duration estimates the interest rate risk of a security, in other words how much
the value of the security is expected to change with a given change in interest
rates. The longer a security's (or portfolio's) effective duration, the more
sensitive its price is to changes in interest rates. Please note that while
effective duration is a valuable measure, it has several limitations, which are
further explained on page five. While these actions have enabled the fund to
lower its potential volatility, it is important to remember that they also
reduce the fund's potential for improvement of its net asset value.
THE SALOMON BROTHERS MORTGAGE INDEX RECENTLY REPLACED THE LIPPER U.S. MORTGAGE
BOND FUNDS AVERAGE AS THE INDEX AGAINST WHICH THE FUND'S PERFORMANCE IS
MEASURED. Because the Salomon index is a broad-based industry index composed of
agency mortgage-backed securities, we believe it is a more appropriate
performance benchmark for the fund. So far this calendar year, the fund has
outperformed both the Salomon index and the Lipper average due to its longer
effective duration. As I previously noted, the fund's NAV total return for 1995,
through May 31, was 16.95%, which compares to 10.14% for the Salomon index and
12.33% for the Lipper average.
4
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AMERICAN OPPORTUNITY INCOME FUND
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.
DUE TO A DECREASE IN THE FUND'S OVERALL LEVEL OF INCOME, WE REDUCED THE FUND'S
DIVIDEND TO 7 CENTS PER SHARE, DOWN FROM 8.33 CENTS PER SHARE, BEGINNING WITH
THE JULY DISTRIBUTION. In addition to the fee income lost due to the suspension
of the sale-forward program and the lower coupons paid by inverse floating and
inverse interest-only securities, the portfolio experienced a reduced level of
income from its principal-only securities. As earnings in the portfolio declined
over the past several months, we maintained the 8.33 cents per share dividend by
tapping the fund's undistributed net investment income (dividend reserve). Keep
in mind that the dividend reserve is reflected in the fund's net asset value and
any reduction of this amount will reduce the fund's net asset value penny for
penny. By May 31, monthly earnings had decreased to approximately 4.5 cents per
share and the dividend reserve was approximately 26 cents per share. Because the
fund has consistently fallen short of earning its monthly dividend over the past
several months, the fund's dividend committee reduced the dividend so it better
reflects the fund's monthly income. Should the fund continue to fall short of
earning its dividend, gradual changes will be made to the dividend until the
fund has reached an appropriate payment level in relation to its earnings.
5
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AMERICAN OPPORTUNITY INCOME FUND
OBVIOUSLY, DRAWING DOWN THE DIVIDEND RESERVE WORKS AGAINST OUR FINAL GOAL OF
INCREASING THE FUND,S NET ASSET VALUE, AS DOES REDUCING THE FUND'S VOLATILITY.
Although the fund's net asset value has increased rather quickly in the past
several months - from $6.12 on December 31, 1994, to $6.71 as of May 31, 1995
- - shareholders should not expect future increases, should they occur, to be as
dramatic. Market conditions that we needed to see for improvement have for the
most part already emerged, and we believe the market for mortgage-backed bonds,
including derivative securities, has stabilized. These improving market
conditions contributed to the fund's increase in net asset value. Any future
changes in interest rates, either positive or negative, should have less impact
on the fund than in the past year due to our continuing efforts to make the fund
less volatile.
IN THE MONTHS AND YEARS AHEAD, I BELIEVE THAT YOU WILL FIND THE FUND'S NET ASSET
VALUE TO BE LESS VOLATILE, WITH NEITHER THE DOWNSIDE RISK EXPERIENCED LAST YEAR
NOR THE DRAMATIC GROWTH ACHIEVED IN PREVIOUS YEARS. As we implement our
investment strategy, we will continue to work to meet the fund's objective of
delivering high current income and, secondarily, seeking capital appreciation.
We look forward to serving your investment needs and welcome any comments or
questions you relay through your investment professional.
Sincerely,
/s/ Worth Bruntjen
Worth Bruntjen
Portfolio Manager
6
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FINANCIAL STATEMENTS (UNAUDITED)
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1995
<TABLE>
<S> <C>
ASSETS:
Investments in securities at market value* (note 2)
(including a repurchase agreement of $3,855,000) ..... $ 149,188,980
Cash in bank on demand deposit ........................... 50,623
Accrued interest receivable .............................. 1,401,096
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Total assets ......................................... 150,640,699
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LIABILITIES:
Payable for investment securities purchased .............. 2,192,540
Payable for fund shares retired .......................... 65,945
Accrued investment management fee ........................ 78,761
Accrued administrative fee ............................... 24,217
Other accrued expenses ................................... 21,796
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Total liabilities .................................... 2,383,259
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Net assets applicable to outstanding capital stock ....... $ 148,257,440
----------------
----------------
REPRESENTED BY:
Capital stock - authorized 250 million shares of $0.01 par
value; outstanding, 23,091,873 shares ................ $ 230,919
Additional paid-in capital ............................... 212,580,411
Undistributed net investment income ...................... 6,836,772
Accumulated net realized loss on investments ............. (44,910,204)
Unrealized depreciation of investments ................... (26,480,458)
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Total - representing net assets applicable to
outstanding capital stock ........................ $ 148,257,440
----------------
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Net asset value per share of outstanding capital stock ... $ 6.42
----------------
----------------
Investments in securities at identified cost* ........... $ 175,669,438
----------------
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</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
7
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FINANCIAL STATEMENTS (UNAUDITED)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 1995
<TABLE>
<S> <C>
INCOME:
Interest ............................................... $ 6,450,729
Fee income (note 2) ...................................... 245,272
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Total investment income .............................. 6,696,001
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EXPENSES (NOTE 3):
Investment management fee ................................ 443,703
Administrative fee ....................................... 142,383
Custodian, accounting and transfer agent fees ............ 50,620
Reports to shareholders .................................. 12,884
Directors' fees .......................................... 5,833
Audit and legal fees ..................................... 23,580
Federal excise taxes (note 2) ............................ 435,133
Other expenses ........................................... 48,461
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Total expenses ....................................... 1,162,597
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Net investment income ................................ 5,533,404
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NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized loss on investments (note 4) ................ (12,379,074)
Net change in unrealized appreciation or depreciation of
investments ............................................ 19,295,258
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Net gain on investments ................................ 6,916,184
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Net increase in net assets resulting from
operations ....................................... $ 12,449,588
----------------
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</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
8
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FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months
Ended 4/30/95 Year Ended
(Unaudited) 10/31/94
---------------- ----------------
<S> <C> <C>
OPERATIONS:
Net investment income .................................. $ 5,533,404 19,451,846
Net realized loss on investments ......................... (12,379,074) (25,183,321)
Net change in unrealized appreciation or depreciation of
investments ............................................ 19,295,258 (54,618,467)
---------------- ----------------
Net increase (decrease) in net assets resulting from
operations ........................................... 12,449,588 (60,349,942)
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DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ............................... (12,636,213) (32,683,779)
In excess of net realized gains (note 2) ................. -- (2,221,393)
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Total distributions .................................... (12,636,213) (34,905,172)
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CAPITAL SHARE TRANSACTIONS:
Proceeds from issuance of 398,296 and 1,004,985 shares for
the dividend reinvestment plan, respectively ........... 2,706,941 8,977,681
Payments for retirement of 71,800 and 0 shares,
respectively (note 6) .................................. (437,303) --
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Increase in net assets from capital share
transactions ......................................... 2,269,638 8,977,681
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Total increase (decrease) in net assets .............. 2,083,013 (86,277,433)
Net assets at beginning of period .......................... 146,174,427 232,451,860
---------------- ----------------
Net assets at end of period .............................. $ 148,257,440 146,174,427
---------------- ----------------
---------------- ----------------
Undistributed net investment income ...................... $ 6,836,772 13,939,581
---------------- ----------------
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</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
9
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(1) ORGANIZATION
American Opportunity Income Fund Inc. (the fund) is registered
under the Investment Company Act of 1940 (as amended) as a
diversified, closed-end management investment company. Shares of
the fund are listed on the New York Stock Exchange under the
symbol OIF.
(2) SUMMARY OF
SIGNIFICANT
ACCOUNTING
POLICIES
INVESTMENTS IN SECURITIES
The values of fixed income securities are determined using
pricing services or prices quoted by independent brokers.
Exchange-listed options are valued at the last sale price, and
open financial futures contracts are valued at the last
settlement price. Foreign currency forward contracts are valued
at the current cost of covering the offsetting contract. When
market quotations are not readily available, securities are
valued at fair value according to methods selected in good faith
by the board of directors. Short-term securities with maturities
of 60 days or less are valued at amortized cost which
approximates market value.
Securities transactions are accounted for on the date the
securities are purchased or sold. Realized gains and losses are
calculated on the identified-cost basis. Interest income,
including amortization of bond discount and premium computed on
a level-yield basis, is accrued daily.
OPTION TRANSACTIONS
For hedging purposes, the fund may 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 of profit if the market
price of the security increases. The risk in writing a put
option is the fund may incur a loss if the market price of the
security decreases and the option is exercised. The risk in
buying an option is the fund pays a premium whether or not the
option is exercised. The fund also has the additional risk of
not being able to enter into a closing transaction if a liquid
secondary market does not exist. The fund may also write
over-the-counter options where the completion of the obligation
is dependent upon the credit standing of the other party.
Option contracts are valued daily, and unrealized appreciation
or depreciation is recorded. The fund will realize a gain or
loss upon
10
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
expiration or closing of the option transaction. When an option
is exercised, the proceeds on the sale of a written call option,
the purchase cost for a written put option, or the cost of a
security for a purchased put or call option, is adjusted by the
amount of premium received or paid.
FUTURES TRANSACTIONS
In order to gain exposure to or protect against changes in the
market, the 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.
FOREIGN TRANSACTIONS AND CURRENCY TRANSLATION
The books and records of the fund are maintained in U.S.
dollars. The market value of securities and other assets and
liabilities that are denominated in foreign currencies are
translated into U.S. dollar amounts at current exchange rates at
the end of the period. Purchases and sales of securities, income
and expenses are translated at exchange rates on the respective
dates of such transactions. It is not practical to identify the
portion of each amount shown in the fund's statement of
operations under the caption "realized and unrealized gains
(losses) on investments" that arises from changes in foreign
currency exchange rates.
The fund also may enter into forward foreign currency exchange
contracts for operational and hedging purposes. The net U.S.
dollar value of foreign currency underlying all contractual
commitments held by the fund and the resulting unrealized
appreciation or depreciation are determined using foreign
currency exchange rates
11
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
from an independent pricing service. The fund is subject to the
credit risk that the other party will not complete the
obligations of the contract.
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 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 upon 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
12
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
may increase or decrease in value prior to their delivery. The
fund maintains, in a segregated account with its custodian,
assets with a market value equal to the amount of its purchase
commitments. The purchase of securities on a when-issued or
forward-commitment basis may increase the volatility of the
fund's NAV to the extent the fund makes such purchases while
remaining substantially fully invested. As of April 30, 1995,
the fund had no outstanding when-issued or forward commitments.
In connection with its ability to purchase securities on a
when-issued or forward-commitment basis, the fund may enter into
mortgage "dollar rolls" in which the fund sells securities for
delivery in the current month and simultaneously contracts with
the same counterparty to repurchase similar (same type, coupon
and maturity) but not identical securities on a specified future
date. As an inducement to "roll over" its purchase commitments,
the fund receives negotiated fees. For the six months ended
April 30, 1995, such fees earned by the fund amounted to
$245,272.
FEDERAL TAXES
The fund intends to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and
not be subject to federal income tax. Therefore, no income tax
provision is required. However, the fund incurred federal excise
taxes of $435,133 or $0.019 per share on income retained by the
fund during the excise tax year ended December 31, 1994.
Net investment income and net realized gains (losses) may differ
for financial statement and tax purposes primarily because of
the recognition of certain foreign currency gains (losses) as
ordinary income (expense) for tax purposes, the recognition of
losses deferred due to "wash sale" transactions and the timing
of recognition of income on certain interest-only and
principal-only securities. The character of distributions made
during the year from net investment income or net realized gains
may also differ from their ultimate characterization for federal
income tax purposes. In addition, due to the timing of dividend
distributions, the fiscal year in which amounts are distributed
may differ from the year that the income or realized gains
(losses) were recorded by the fund. The effect on dividend
distributions of certain book-to-tax differences is presented as
an "excess distribution" in the statement of changes in net
assets.
13
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
DISTRIBUTIONS
The fund will pay monthly distributions from net investment
income, and realized capital gains, if any, will be distributed
on an annual basis. These distributions are recorded as of the
close of business on the ex-dividend date. Such distributions
are payable in cash or, pursuant to the fund's dividend
reinvestment plan, reinvested in additional shares of the fund's
capital stock. Under the plan, fund shares will be purchased in
the open market. However, if the market price plus commissions
exceeds the net asset value by 10% or more, the fund will issue
new shares at a discount of as much as 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 and
agency obligations. Securities pledged as collateral for all
individual and joint repurchase agreements are held by the
fund's custodian bank until maturity of the repurchase
agreement. Provisions for all agreements ensure the daily market
value of the collateral is in excess of the repurchase amount in
the event of default.
(3) EXPENSES
The fund has entered into the following agreements with Piper
Capital Management Incorporated (the adviser and administrator):
The investment advisory agreement provides the adviser with a
monthly investment management fee in an amount equal to the sum
of 0.01667% of the average weekly net assets of the fund during
the month (approximately 0.20% on an annual basis) and 4.50% of
the daily gross income (i.e., 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. Such monthly investment management fee shall
not exceed in the aggregate 0.0604% of the fund's average weekly
net assets during the month (approximately 0.725% on an annual
basis). For its fee, the adviser will provide investment advice
and, in general, conduct the management and investment activity
of the fund.
14
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
The administration agreement provides the administrator with a
monthly fee in an amount equal to an annualized rate of 0.20% of
the fund's average weekly net assets. For its fee, the
administrator will provide certain reporting, regulatory and
record-keeping services for the fund.
In addition to the investment management fee and administrative
fee, the fund is responsible for paying most other operating
expenses including outside directors' fees and expenses,
custodian fees, registration fees, printing and shareholder
reporting expenses, transfer agent fees and expenses, legal
fees, auditing and accounting fees, taxes, insurance, interest
and other miscellaneous expenses.
(4) SECURITIES
TRANSACTIONS
Cost of purchases and proceeds from sales of securities (other
than short-term securities) aggregated $106,493,196 and
$111,832,564, respectively, for the six months ended April 30,
1995. During the six months ended April 30, 1995, the fund paid
no brokerage commissions to Piper Jaffray Inc., an affiliated
broker.
(5) CAPITAL LOSS
CARRYOVER
For federal income tax purposes, the fund had capital loss
carryovers of $32,486,286 on October 31, 1994, which, if not
offset by subsequent capital gains, will expire in 2001 and
2002. It is unlikely the board of directors will authorize a
distribution of any net realized capital gains until the
available capital loss carryover has been offset or expires.
(6) RETIREMENT OF
FUND SHARES
The fund's board of directors has approved a plan to repurchase
shares of the fund in the open market and retire those shares.
Repurchases may only be made when the previous day's closing
market price was trading at a discount from net asset value.
Daily repurchases are limited to 25% of the previous four weeks
average daily trading volume on the New York Stock Exchange.
Under the current plan, cumulative repurchases in the fund
cannot exceed 3% of the total shares originally issued. The
board of directors will review the plan every six months and may
change the amount which may be repurchased. The plan was last
reviewed and reapproved by the board of directors on February 9,
1995. Pursuant to the plan, the fund has cumulatively
repurchased and retired 71,800 shares as of April 30, 1995,
which represents 0.35% of the shares originally issued.
15
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(7) FINANCIAL
HIGHLIGHTS
Per share data for a share of capital stock outstanding
throughout each period and selected information for each period
are as follows:
<TABLE>
<CAPTION>
Six Months Two Fiscal Years Ended August 31,
Ended Year Months
4/30/95 Ended Ended -------------------------------
(Unaudited) 10/31/94 10/31/93 1993 1992 1991
----------- -------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period.............$ 6.42 10.68 10.88 11.33 9.81 9.13
----------- -------- -------- ------- ------- -------
Operations:
Net investment income .......................... 0.23 0.85 0.34 1.71 1.49 1.01
Net realized and unrealized gains (losses) on
investments .................................. 0.32 (3.53) (0.37) (0.02) 1.35 0.80
----------- -------- -------- ------- ------- -------
Total from operations ........................ 0.55 (2.68) (0.03) 1.69 2.84 1.81
----------- -------- -------- ------- ------- -------
Distributions to shareholders:
From net investment income ..................... (0.55) (1.48) (0.17) (1.22) (1.08) (1.05)
In excess of net investment income ............. -- (0.10)+ -- (0.92) (0.24) (0.08)
----------- -------- -------- ------- ------- -------
Total distributions to shareholders .......... (0.55) (1.58) (0.17) (2.14) (1.32) (1.13)
----------- -------- -------- ------- ------- -------
Net asset value, end of period...................$ 6.42 6.42 10.68 10.88 11.33 9.81
----------- -------- -------- ------- ------- -------
----------- -------- -------- ------- ------- -------
Per share market value, end of
period.........................................$ 5.88 7.00 11.63 11.63 11.50 10.25
----------- -------- -------- ------- ------- -------
----------- -------- -------- ------- ------- -------
Total return, net asset value** .................. 9.11% (27.61%) (0.29%) 17.30% 30.83% 20.99%
Total return, market value+++ .................... (8.86%) (28.77%) 1.43% 21.82% 26.40% 26.15%
Net assets at end of period (in millions)........$ 148 146 232 237 239 206
Ratio of total expenses to average weekly net
assets* ........................................ 1.63%++ 1.39% 1.10%++ 1.33% 1.15% 1.15%
Ratio of net investment income to average weekly
net assets ..................................... 7.77%++ 10.73% 19.11%++ 15.83% 14.36% 10.64%
Portfolio turnover rate (excluding short-term
securities) .................................... 80% 169% 21% 104% 92% 115%
Amount of borrowings outstanding at end of period
(in millions) TRIANGLE ........................$ -- -- 87 99 72 77
Per share amount of borrowings outstanding at end
of
period.........................................$ -- -- 4.01 4.57 3.43 3.64
Per-share asset coverage of borrowings outstanding
at end of period*** . $ -- -- 14.69 15.45 14.76 13.45
<FN>
* INCLUDES 0.61% DURING THE SIX MONTHS ENDED APRIL 30, 1995, 0.31% IN FISCAL
1994, 0.29% IN THE YEAR ENDED AUGUST 31, 1993 AND 0.05% IN FISCAL 1992 FROM
FEDERAL EXCISE TAXES.
** BASED ON THE CHANGE IN NET ASSET VALUE OF A SHARE DURING THE PERIOD AND
ASSUMES REINVESTMENT OF DISTRIBUTIONS AT NET ASSET VALUE.
*** REPRESENTS NET ASSETS (EXCLUDING BORROWINGS) DIVIDED BY SHARES OUTSTANDING.
+ INCLUDES $0.10 PER SHARE OF DISTRIBUTIONS IN EXCESS OF NET REALIZED GAINS
RESULTING FROM BOOK-TO-TAX DIFFERENCES. SEE FOOTNOTE 2 IN THE NOTES TO
FINANCIAL STATEMENTS.
++ ADJUSTED TO AN ANNUAL BASIS.
+++ 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.
TRIANGLE 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.
</TABLE>
16
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(8) QUARTERLY DATA
DOLLAR AMOUNTS
<TABLE>
<CAPTION>
Net Increase
in Net
Net Realized Assets Distributions
Total Net and Unrealized Resulting from Net
Investment Investment Gains (Losses) from Investment
Income Income on Investments Operations Income
----------- ----------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
1/31/95 $ 3,334,836 2,548,797 (888,136) 1,660,661 (6,856,592)
4/30/95 3,361,165 2,984,607 7,804,320 10,788,927 (5,779,621)
----------- ----------- -------------- ------------ ------------
$ 6,696,001 5,533,404 6,916,184 12,449,588 (12,636,213)
----------- ----------- -------------- ------------ ------------
----------- ----------- -------------- ------------ ------------
</TABLE>
PER SHARE AMOUNTS
<TABLE>
<CAPTION>
Net Realized and Net Increase in Distributions
Net Unrealized Gains Net Assets from Net Quarter End
Investment (Losses) Resulting from Investment Net Asset
Income on Investments Operations Income Value
------------- ----------------- ----------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
1/31/95 $ 0.11 (0.03) 0.08 (0.30) 6.20
4/30/95 0.12 0.35 0.47 (0.25) 6.42
--- ----- ----- -----
$ 0.23 0.32 0.55 (0.55)
--- ----- ----- -----
--- ----- ----- -----
</TABLE>
17
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
AMERICAN OPPORTUNITY INCOME FUND
APRIL 30, 1995
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- --------------------------------------------------------- ---------- -------------
<S> <C> <C>
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS)
U.S. GOVERNMENT AND AGENCY SECURITIES (11.7%):
U.S. AGENCY DEBENTURES (5.3%):
FHLMC Medium-Term Note, 6.00%, 1/13/98 ............. $ 3,000,000 2,934,510
FNMA Medium-Term Note, 6.26%, 12/22/97 ............... 5,000,000 4,916,500
-------------
7,851,010
-------------
U.S. GOVERNMENT SECURITIES (6.4%):
U.S. Treasury Note, 5.88%, 5/31/96 ................... 9,550,000 9,502,441
-------------
Total U.S. Government and Agency Securities
(cost: $17,134,852) ................................ 17,353,451
-------------
MORTGAGE-BACKED SECURITIES (82.4%):
U.S. AGENCY FIXED RATE MORTGAGES (13.7%):
7.50%, FNMA, 1/1/02 .................................. 17,882,248 17,949,127
7.00%, FNMA, 10/1/08 ................................. 983,237 962,019
7.00%, FNMA, 12/1/07 ................................. 998,915 977,359
7.00%, FNMA, 11/1/09 ................................. 500,480 489,680
-------------
20,378,185
-------------
COLLATERALIZED MORTGAGE OBLIGATIONS (B) (68.7%):
U.S. AGENCY FIXED RATE (0.9%):
6.00%, FHLMC, Series 1403, Class OA, 11/15/21 ........ 1,444,950 1,317,433
-------------
U.S. AGENCY FLOATING RATE (17.1%):
6.58%, FHLMC, Series 1506, Class F, COFI, 5/15/08 .... 2,825,981 2,816,062
5.93%, FHLMC, Series 1619, Class FC, COFI,
11/15/23 ............................................ 2,779,655 2,620,909
6.13%, FNMA, Series 1993-133, Class FE, COFI,
8/25/23 ............................................. 2,000,000 1,916,520
7.84%, FNMA, Series 1993-246, Class F, LIBOR,
10/25/23 ............................................ 7,741,140 6,192,912
5.93%, FNMA, Series 1994-33, Class FD, COFI,
3/25/09 ............................................. 12,500,000 11,824,000
-------------
25,370,403
-------------
U.S. AGENCY INTEREST-ONLY (6.0%):
9.55%, FHLMC, Series 1437, Class P, 7/15/14 .......... -- 535,140
8.97%, FHLMC, Series 1759, Class J, 4/15/19 .......... -- 642,479
7.90%, FHLMC-GNMA, Series 30, Class J, 2/25/23 ....... -- 4,931,920
16.20%, FNMA, Series 1993-31, Class N, 4/25/22 ....... -- 396,120
8.40%, FNMA, Series 1994-28, Class JC, 3/25/23 ....... -- 2,398,558
-------------
8,904,217
-------------
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
18
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
AMERICAN OPPORTUNITY INCOME FUND
(CONTINUED)
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- --------------------------------------------------------- ---------- -------------
<S> <C> <C>
OTHER INTEREST-ONLY (0.0%):
0.00%, Residential Funding Mortgage Securities, Series
1992-S1, Class A7, 1/25/22 ........................ $ --(c) 55,993
-------------
U.S. AGENCY INVERSE INTEREST-ONLY (5.8%):
43.25%, FHLMC, Series 1421, Class I, LIBOR,
11/15/22 ............................................ -- 736,805
29.28%, FHLMC, Series 1568, Class K, LIBOR,
8/15/23 ............................................. -- 497,562
4.00%, FHLMC, Series 1669, Class JB, LIBOR,
7/15/20 ............................................. -- 925,835
9.51%, FHLMC, Series 1684, Class JB, LIBOR,
9/15/21 ............................................. -- 1,536,188
15.26%, FHLMC, Series 1695, Class AD, LIBOR,
1/15/24 ............................................. -- 1,879,656
41.76%, FHLMC, Series 27, Class S, LIBOR, 9/25/23 .... -- 491,901
49.19%, FNMA, Series 1992-82, Class SA, LIBOR,
5/25/23 ............................................. -- 1,486,199
9.00%, FNMA, Series 1993-73, Class SB, LIBOR,
5/25/23 ............................................. -- 449,906
3.43%, FNMA, Series 1994-37, Class SA, LIBOR,
8/25/19 ............................................. -- 638,678
-------------
8,642,730
-------------
OTHER INVERSE INTEREST-ONLY (0.7%):
182.33%, Citicorp Mortgage Securities, Series 1992-9,
Class AS, LIBOR, 4/25/21 ............................ -- 189,627
0.00%, Citicorp Mortgage Securities, Series 1993-4,
Class A2, LIBOR, 3/25/22 ............................ --(c) 285,081
16.55%, Countrywide Mortgage Backed Securities, Inc.,
Series 1993-4, Class A6, LIBOR, 11/25/08 ............ -- 239,180
0.00%, FBS Mortgage Corporation, Series 1992-DF, Class
F4, LIBOR, 10/25/07 ................................. --(c) 59,615
0.00%, Prudential Home Mortgage Securities, Series
1992-51, Class A2, LIBOR, 2/25/23 ................... --(c) 9,704
0.00%, Residential Funding Mortgage Securities, Series
1993-S36, Class A6, LIBOR, 10/25/08 ................. --(c) 124,934
0.00%, Sears Mortgage Securities, Series 1992-14,
Class S1, LIBOR, 5/25/21 ............................ --(c) 84,284
0.00%, Sears Mortgage Securities, Series 1993-1, Class
S, LIBOR, 6/25/19 ................................... --(c) 76,009
-------------
1,068,434
-------------
U.S. AGENCY INVERSE FLOATER (13.4%):
6.48%, FHLMC, Series 1504, Class SA, LIBOR,
10/15/22 ............................................ 930,388 501,033
7.97%, FHLMC, Series 1606, Class S, COFI, 5/15/08 .... 4,025,951 2,472,457
5.21%, FHLMC, Series 1612, Class S, COFI, 10/15/07 ... 973,776 481,990
7.28%, FHLMC, Series 1619, Class SC, COFI,
11/15/23 ............................................ 4,632,759 2,403,475
5.97%, FHLMC, Series 1635, Class K, COFI, 12/15/08 ... 1,873,437 966,675
3.03%, FHLMC, Series 1640, Class SC, LIBOR,
12/15/00 ............................................ 1,000,000 756,930
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
19
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
AMERICAN OPPORTUNITY INCOME FUND
(CONTINUED)
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- --------------------------------------------------------- ---------- -------------
<S> <C> <C>
6.58%, FHLMC, Series 1671, Class MD, Treasury,
2/15/24 ........................................... $ 2,379,458 1,842,343
7.57%, FHLMC, Series 1704, Class S, COFI, 3/15/09 .... 953,821 648,598
10.53%, FNMA, Series 1991-87, Class S, LIBOR,
8/25/21 ............................................. 1,860,757 1,669,137
6.63%, FNMA, Series 1993-138, Class SK, COFI,
8/25/23 ............................................. 6,853,445 3,426,722
6.81%, FNMA, Series 1993-221, Class SA, COFI,
3/25/08 ............................................. 958,587 530,817
7.10%, FNMA, Series 1993-43, Class SC, Treasury,
4/25/08 ............................................. 1,100,745 770,522
5.80%, FNMA, Series 1994-33, Class SA, COFI,
2/25/08 ............................................. 4,068,119 2,271,677
7.92%, FNMA, Series G 1992-64, Class SB, Treasury,
11/25/22 1,504,148 1,115,115
-------------
19,857,491
-------------
OTHER INVERSE FLOATER (3.7%):
9.51%, Capstead Securities Corporation, Series
1993-E2, Class K, COFI, 10/25/23 .................... 2,414,814 1,617,925
20.78%, Citicorp Mortgage Securities, Series 90-14,
Class A6, LIBOR, 9/25/20 ............................ 2,901,791 2,976,163
3.94%, Residential Funding Mortgage Securities, Series
1994-S8, Class A8, Treasury, 3/25/09 ................ 1,327,782 818,246
-------------
5,412,334
-------------
U.S. AGENCY PRINCIPAL-ONLY (7.2%):
3.20%, FHLMC, Series 173, Class F, 6/15/21 ........... 5,521,357 4,513,764
6.35%, FHLMC, Series 206, Class C, 8/15/16 ........... 1,897,493 1,240,485
1.80%, FNMA, Series 1989-43, Class E, 10/25/17 ....... 2,250,000 1,148,918
1.08%, FNMA, Series 1994-53, Class E, 11/25/23 ....... 7,520,496 3,711,816
-------------
10,614,983
-------------
OTHER PRINCIPAL-ONLY (4.6%):
1.82%, Bear Stearns, Series 1988-6, Class D,
12/1/18 ............................................. 3,000,000 1,455,000
2.42%, Bear Stearns, Series 1988-8, Class D,
12/1/18 ............................................. 1,870,896 842,408
3.18%, Collateralized Mortgage Obligation Trust,
Series 55, Class B, 11/1/18 ......................... 3,886,384 2,059,783
1.65%, Drexel Burnham Lambert CMO Trust, Series Z,
Class 3, 1/1/19 ..................................... 1,209,275 698,357
5.07%, Morgan Stanley Mortgage Trust, Series 36, Class
4, 5/20/21 .......................................... 2,236,557 1,565,590
1.83%, Sears Mortgage Securities, Series 1992-19,
Class P, 9/25/22 .................................... 429,920 257,282
-------------
6,878,420
-------------
U.S. AGENCY Z-TRANCHE (8.2%):
7.98%, FHLMC, Series 1388, Class L, 10/15/07 ......... 2,395,172 2,135,823
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
20
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
AMERICAN OPPORTUNITY INCOME FUND
(CONTINUED)
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- --------------------------------------------------------- ---------- -------------
<S> <C> <C>
8.07%, FNMA, Series 1993-106, Class Z, 6/25/13 ..... $ 11,365,081 9,983,200
-------------
12,119,023
-------------
OTHER Z-TRANCHE (1.1%):
8.13%, Pacific Collateralized Mortgage Obligation
Trust, Series 3, 5/1/17 ............................. 1,649,812 1,635,524
-------------
Total Mortgage-Backed Securities
(cost: $152,559,849) ............................... 122,255,170
-------------
INTEREST RATE CONTRACTS (3.9%):
Interest rate cap with Goldman Sachs, $20,000,000
notional principal on one-month LIBOR (6.125% on
4/30/95), 4.50%, 9/10/97 ............................ -- 918,800
Interest rate cap with JP Morgan, $75,000,000 notional
principal on one-month LIBOR (6.125% on 4/30/95),
6.00%, 2/15/98 ...................................... -- 1,957,500
Interest rate cap with Merrill Lynch, $15,000,000
notional principal on one-month LIBOR (6.125% on
4/30/95), 4.50%, 9/2/97 ............................. -- 693,104
Interest rate cap with Merrill Lynch, $5,000,000
notional principal on one-month LIBOR (6.125% on
4/30/95), 4.50%, 9/10/97 ............................ -- 229,700
Interest rate cap with Morgan Stanley, $10,000,000
notional principal on one-month LIBOR (6.125% on
4/30/95), 4.50%, 9/2/97 ............................. -- 462,069
Interest rate cap with Morgan Stanley, $10,000,000
notional principal on one-month LIBOR (6.125% on
4/30/95), 4.50%, 9/10/97 ............................ -- 459,400
Interest rate cap with Morgan Stanley, $20,000,000
notional principal on one-month LIBOR (6.125% on
4/30/95), 6.00%, 1/25/98 ............................ -- 496,294
Interest rate cap with Morgan Stanley, $20,000,000
notional principal on one-month LIBOR (6.125% on
4/30/95), 6.00%, 2/2/98 ............................. -- 508,492
-------------
Total Interest Rate Contracts
(cost: $2,119,737) ................................. 5,725,359
-------------
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
21
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
AMERICAN OPPORTUNITY INCOME FUND
(CONTINUED)
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- --------------------------------------------------------- ---------- -------------
<S> <C> <C>
SHORT-TERM SECURITIES (2.6%):
Repurchase agreement with Goldman Sachs in a joint
trading account, collateralized by U.S. government
agency securities, acquired on 4/28/95, accrued
interest at repurchase date of $1,895, 5.90%, 5/1/95
(cost: $3,855,000) ................................ $ 3,855,000 3,855,000
-------------
Total Investments in Securities
(cost: $175,669,438)(d) .......................... $ 149,188,980
-------------
-------------
<FN>
NOTES TO INVESTMENTS IN SECURITIES:
(A) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO
THE FINANCIAL STATEMENTS.
(B) DESCRIPTIONS OF CERTAIN COLLATERALIZED MORTGAGE OBLIGATIONS ARE AS FOLLOWS:
LIBOR - LONDON INTERBANK OFFERED RATE
COFI (11TH DISTRICT) - COST OF FUNDS INDEX OF THE FEDERAL RESERVE'S 11TH
DISTRICT
INVERSE FLOATER - REPRESENTS SECURITIES THAT PAY INTEREST AT RATES THAT
INCREASE (DECREASE) WITH A DECLINE (INCREASE) IN THE SPECIFIED INDEX. THE
INTEREST RATE PAID BY THE INVERSE FLOATER WILL GENERALLY CHANGE AT A
MULTIPLE OF ANY CHANGE IN THE INDEX. INTEREST RATES DISCLOSED ARE IN
EFFECT ON APRIL 30, 1995.
INTEREST-ONLY - REPRESENTS SECURITIES THAT ENTITLE HOLDERS TO RECEIVE ONLY
INTEREST PAYMENTS ON THE UNDERLYING MORTGAGES. THE YIELD TO MATURITY OF
AN INVERSE INTEREST-ONLY IS EXTREMELY SENSITIVE TO THE RATE OF PRINCIPAL
PAYMENTS ON THE UNDERLYING MORTGAGE ASSETS. A RAPID (SLOW) RATE OF
PRINCIPAL REPAYMENTS MAY HAVE AN ADVERSE (POSITIVE) EFFECT ON YIELD TO
MATURITY. INTEREST RATES DISCLOSED REPRESENT CURRENT YIELDS BASED UPON
THE CURRENT COST BASIS AND ESTIMATED TIMING AND AMOUNT OF FUTURE CASH
FLOWS.
INVERSE INTEREST-ONLY - REPRESENTS SECURITIES THAT ENTITLE HOLDERS TO
RECEIVE ONLY INTEREST PAYMENTS ON THE UNDERLYING MORTGAGES. INTEREST IS
PAID AT A RATE THAT INCREASES (DECREASES) WITH A DECLINE (INCREASE) IN
THE SPECIFIED INDEX. THE YIELD TO MATURITY OF AN INTEREST-ONLY IS
EXTREMELY SENSITIVE TO THE RATE PRINCIPAL PAYMENTS ON THE UNDERLYING
MORTGAGE ASSETS. A RAPID (SLOW) RATE OF PRINCIPAL REPAYMENTS MAY HAVE AN
ADVERSE (POSITIVE) EFFECT ON YIELD TO MATURITY. INTEREST RATES DISCLOSED
REPRESENT CURRENT YIELDS BASED UPON THE CURRENT COST BASIS AND ESTIMATED
TIMING AND AMOUNT OF FUTURE CASH FLOWS.
PRINCIPAL-ONLY - REPRESENTS SECURITIES THAT ENTITLE HOLDERS TO RECEIVE ONLY
PRINCIPAL PAYMENTS ON THE UNDERLYING MORTGAGES. THE YIELD TO MATURITY OF
A PRINCIPAL-ONLY IS EXTREMELY SENSITIVE TO THE RATE OF PRINCIPAL PAYMENTS
ON THE UNDERLYING MORTGAGE ASSETS. A SLOW (RAPID) RATE OF PRINCIPAL
REPAYMENTS MAY HAVE AN ADVERSE (POSITIVE) EFFECT ON YIELD TO MATURITY.
INTEREST RATES DISCLOSED REPRESENT CURRENT YIELDS BASED UPON THE CURRENT
COST BASIS AND ESTIMATED TIMING OF FUTURE CASH FLOWS.
</TABLE>
22
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
<TABLE>
<S> <C>
Z-TRANCHE - REPRESENTS SECURITIES THAT PAY NO INTEREST OR PRINCIPAL DURING
THEIR INITIAL ACCRUAL PERIODS, BUT ACCRUE ADDITIONAL PRINCIPAL AT
SPECIFIED RATES. INTEREST RATE DISCLOSED REPRESENTS CURRENT YIELD BASED
UPON THE CURRENT COST BASIS AND ESTIMATED TIMING OF FUTURE CASH FLOWS.
(C) BASED UPON ESTIMATED TIMING AND AMOUNT OF FUTURE CASH FLOWS, INCOME IS
CURRENTLY NOT BEING RECOGNIZED ON CERTAIN INVERSE INTEREST-ONLY SECURITIES
WITH AN AGGREGATE MARKET VALUE OF $695,620.
(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>
<TABLE>
<S> <C>
GROSS UNREALIZED APPRECIATION .... $ 5,417,373
GROSS UNREALIZED DEPRECIATION ...... (31,897,831)
----------
NET UNREALIZED DEPRECIATION .... $ (26,480,458)
----------
----------
</TABLE>
23
<PAGE>
- --------------------------------------------------------------------------------
SHAREHOLDER UPDATE
SHARE REPURCHASE PROGRAM
Your fund's board of directors has reapproved the fund's share repurchase
program, which enables the fund to 'buy back' shares of its common stock in the
open market. Repurchases may only be made when the previous day's closing market
price per share was at a discount from net asset value. Repurchases cannot
exceed 3% of the fund's originally issued shares.
WHAT EFFECT WILL THIS PROGRAM HAVE ON SHAREHOLDERS?
- - We do not expect any adverse impact on the adviser's ability to manage the
fund.
- - Because repurchases will be at a price below net asset value, remaining shares
outstanding may experience a slight increase in net asset value.
- - Although the effect of share repurchases on market price is less certain, the
board of directors believes the program may have a favorable effect on the
market price of fund shares.
- - We do not anticipate any material increase in the fund's expense ratio.
WHEN WILL SHARES BE REPURCHASED?
Share repurchases may be made from time to time and may be discontinued at any
time. Share repurchases are not mandatory when fund shares are trading at a
discount from net asset value; all repurchases will be at the discretion of the
fund's investment adviser. The board of directors will consider whether to
continue the share repurchase program on at least a semiannual basis and will
notify shareholders of its determination in the next semiannual or annual
report.
HOW WILL SHARES BE REPURCHASED?
We expect to finance the repurchase of shares by liquidating portfolio
securities or using current cash balances. We do not anticipate borrowing in
order to finance share repurchases.
24
<PAGE>
- --------------------------------------------------------------------------------
SHAREHOLDER UPDATE
ANNUAL MEETING RESULTS
An annual meeting of the fund's shareholders was held on August 22, 1994. Each
matter voted upon at the meeting, as well as the number of votes cast for,
against or withheld, the number of absentions, and the number of broker
non-votes with respect to such matter, are set forth below.
1. The fund's shareholders elected the following eight directors:
<TABLE>
<CAPTION>
Shares Shares Withholding
Voted "For" Authority to Vote
----------- ------------------
<S> <C> <C>
David T. Bennett 14,203,765 473,408
Jaye F. Dyer 14,183,904 493,269
William H. Ellis 14,208,943 468,230
Karol D. Emmerich 14,214,736 462,436
Luella G. Goldberg 14,194,300 482,873
John T. Golle 14,196,048 481,125
Edward J. Kohler* 14,206,846 470,326
George Latimer 14,144,986 532,187
<FN>
*MR. KOHLER RESIGNED AS DIRECTOR OF THE FUND, EFFECTIVE NOVEMBER 30, 1994.
MR. GOLLE RESIGNED AS DIRECTOR OF THE FUND JUNE 1, 1995.
</TABLE>
2. The fund's shareholders ratified the selection by a majority of the
independent members of the fund's Boards of Directors of KPMG Peat
Marwick LLP as the independent public accountants for the fund for the
fiscal year ending October 31, 1994. The following votes were cast
regarding this matter:
<TABLE>
<CAPTION>
Shares Shares Voted Broker
Voted "For" "Against" Absentions Non-Votes
- ----------- ------------ ----------- ---------------
<S> <C> <C> <C>
14,085,751 227,570 363,851 --
</TABLE>
25
<PAGE>
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
<TABLE>
<S> <C>
DIRECTORS David T. Bennett, CHAIRMAN, HIGHLAND HOMES, INC., USL
PRODUCTS, INC., KIEFER BUILT, INC.,
OF COUNSEL, GRAY, PLANT, MOOTY, MOOTY & BENNETT, P.A.
Jaye F. Dyer, PRESIDENT, DYER MANAGEMENT COMPANY
William H. Ellis, PRESIDENT, PIPER CAPITAL MANAGEMENT
INCORPORATED, PIPER JAFFRAY COMPANIES INC.
Karol D. Emmerich, PRESIDENT, THE PARACLETE GROUP
Luella G. Goldberg, DIRECTOR, TCF FINANCIAL,
RELIASTAR FINANCIAL CORP., HORMEL FOODS CORP.
George Latimer, SPECIAL CONSULTANT,
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
OFFICERS William H. Ellis, CHAIRMAN OF THE BOARD
Worth Bruntjen, PRESIDENT
Marijo Goldstein, VICE PRESIDENT
Robert H. Nelson, VICE PRESIDENT
Marcy K. Winson, VICE PRESIDENT
Amy K. Johnson, VICE PRESIDENT
David E. Rosedahl, SECRETARY
Charles N. Hayssen, TREASURER
INVESTMENT Piper Capital Management Incorporated
ADVISER 222 SOUTH 9TH STREET, MINNEAPOLIS, MN 55402-3804
CUSTODIAN AND Investors Fiduciary Trust Company
TRANSFER AGENT 127 WEST 10TH STREET, KANSAS CITY, MO 64105-1716
LEGAL COUNSEL Dorsey & Whitney P.L.L.P.
220 SOUTH SIXTH STREET, MINNEAPOLIS, MN 55402
</TABLE>
26
<PAGE>
[LOGO]
PIPER CAPITAL MANAGEMENT INCORPORATED
222 SOUTH NINTH STREET
MINNEAPOLIS, MN 55402-3804
[LOGO]
PIPER JAFFRAY INC., FUND SPONSOR AND NASD MEMBER.
THIS DOCUMENT IS PRINTED ON PAPER MADE FROM
100% TOTAL RECOVERED FIBER, INCLUDING 15% POST-CONSUMER WASTE.
213-95 OIF-02
Bulk Rate
U.S. Postage
PAID
Permit No. 3008
Mpls., MN
