<PAGE>
AMERICAN
OPPORTUNITY
INCOME
FUND
* * *
SEMIANNUAL
REPORT
1996
<PAGE>
TABLE OF CONTENTS
AVERAGE ANNUALIZED TOTAL RETURNS ........................... 1
LETTER TO SHAREHOLDERS ..................................... 2
FINANCIAL STATEMENTS AND NOTES ............................. 10
INVESTMENTS IN SECURITIES .................................. 22
AMERICAN OPPORTUNITY INCOME FUND
This fund's primary objective is to obtain high current income. Its secondary
objective is capital appreciation. In seeking 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 dollar-roll program. Investments
in certain mortgage-backed derivative securities and the purchase of
securities through the dollar-roll program may cause the fund's net asset
value to fluctuate to a greater extent than would be expected from interest
rate movements alone. As with other mutual funds, there can be no assurance
the fund will achieve its objectives. Since its inception on Sept. 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.
CALL FOR MORE INFORMATION
If you would like to be put on our mailing list to receive quarterly fund
summaries for American Opportunity Income Fund (NYSE symbol: OIF), call our
Mutual Fund Services Department at 1 800 866-7778. In addition, beginning in
August, you can call that same number and listen to portfolio manager
commentaries for the fund which will be updated monthly.
<PAGE>
AVERAGE ANNUALIZED TOTAL RETURNS
PERIODS ENDED APRIL 30, 1996
[GRAPH]
AMERICAN OPPORTUNITY INCOME FUND'S AVERAGE ANNUALIZED TOTAL RETURN FIGURES
ARE BASED ON THE CHANGE IN ITS NET ASSET VALUE (NAV), ASSUME ALL
DISTRIBUTIONS WERE REINVESTED AND DO NOT REFLECT SALES CHARGES. NAV-BASED
PERFORMANCE IS USED TO MEASURE INVESTMENT MANAGEMENT RESULTS.
AVERAGE ANNUALIZED TOTAL RETURNS BASED ON THE CHANGE IN MARKET PRICE FOR THE
ONE-YEAR, FIVE-YEAR AND SINCE INCEPTION PERIODS ENDED APRIL 30, 1996, WERE
7.18%, 2.93% AND 4.94%, RESPECTIVELY. THESE FIGURES ALSO ASSUME DISTRIBUTIONS
WERE REINVESTED AND DO NOT REFLECT SALES CHARGES.
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT FUND SHARES, WHEN
SOLD, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
* BEGINNING IN APRIL 1996, THE FUND'S BENCHMARK WAS CHANGED FROM THE SALOMON
BROTHERS MORTGAGE INDEX TO THE LEHMAN BROTHERS MUTUAL FUND 5-10 YEAR
GOVERNMENT INDEX TO MORE ACCURATELY REFLECT THE EFFECTIVE DURATION RANGE FOR
THE FUND GOING FORWARD. ALSO, PIPER CAPITAL IS USING LEHMAN INDEXES FOR FUND
COMPARISONS WHENEVER POSSIBLE BECAUSE INFORMATION REGARDING LEHMAN INDEXES IS
MORE READILY AVAILABLE.
THE LEHMAN BROTHERS MUTUAL FUND 5-10 YEAR GOVERNMENT INDEX IS AN UNMANAGED
INDEX OF MORTGAGE SECURITIES THAT 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 SINCE INCEPTION
NUMBER FOR THE LEHMAN INDEX IS CALCULATED FROM THE MONTH END CLOSEST TO THE
FUND'S INCEPTION THROUGH APRIL 30, 1996.
1
<PAGE>
AMERICAN OPPORTUNITY INCOME FUND
[PHOTO]
WILLIAM H. ELLIS
PRESIDENT, PIPER CAPITAL MANAGEMENT
June 26, 1996
Dear Shareholders:
On June 21, 1996, Piper Jaffray Companies announced it had reached an
agreement in principle to settle purported class action litigation brought on
behalf of shareholders of American Opportunity Income Fund and seven other
Piper Capital closed-end funds. The settlement, if approved by the court,
would result in payment to the fund's investors by Piper Jaffray Companies
and Piper Capital Management of $15.5 million, less attorney's fees, over a
four-year schedule. Investors who acquired shares during the putative class
period (May 25, 1988, through May 1, 1995) would be eligible to submit claims
to recover losses regardless of whether they are current shareholders in the
funds.
Under the agreement in principle, American Opportunity Income Fund would also
offer to repurchase up to 25% of its outstanding shares from current
shareholders at net asset value. The repurchase offer would be made as soon
as possible after the effective date of the settlement, which follows final
court approval. This could take many months. The repurchase offer was
considered carefully by the fund's board of directors and was approved
because they considered it to be in shareholders' best interest. Existing
shareholders, many of whom we believe are putative class members, would have
an opportunity to sell shares and receive net asset value for their shares.
Currently, the fund is trading at a significant discount to net asset value.
Shares that are repurchased by the fund would be retired, reducing the number
of fund shares outstanding. In the event that holders of more than 25% of
shares subscribe to the offer, the fund may only be able to accept a prorated
portion of shares tendered for repurchase.
2
<PAGE>
AMERICAN OPPORTUNITY INCOME FUND
PREMIUM VS. DISCOUNT
The underlying value of a fund's securities and other assets, minus its
liabilities, is the fund's "net asset value." Closed-end funds may trade in the
market at a price that is equal to, above, or below this net asset value. Shares
are trading at a "premium" when investors purchase or sell shares in the market
at a price that is greater than the shares' net asset value. Conversely, when
investors purchase or sell shares in the market at a price that is lower than
the shares' net asset value, they are said to be trading at a "discount."
Additionally, if the discount between net asset value and market price of
this fund does not decrease to 5% or less within approximately two years
after the effective date of the settlement, the fund's board would submit a
proposal to shareholders to convert this fund to an open-end format, unless
the board determines at that time that it would not be in fund shareholders'
best interest to do so. Until January 1995, American Opportunity Income Fund
shares generally traded at a premium to net asset value, benefiting
shareholders. Closed-end bond funds are now trading at historical lows
relative to their net asset values. Although we believe it is preferable to
continue to offer the fund as a closed-end investment company, if the
discount hasn't narrowed to 5% or less in approximately two years after the
effective date of the settlement, then we currently believe converting the
fund to an open-end format will be the best way to eliminate the market
discount.
We expect that the settlement agreement will be presented to the court for
preliminary approval this fall. If preliminary court approval is given,
notices of the settlement will be mailed to all known putative class members.
Legal notices also will be published in major newspapers at approximately the
same time. The next step is for final court approval to be given and an
effective date to be established.
Putative class members can expect to learn more about the settlement proposal
via mail and/or newspaper advertising in late 1996 or early 1997 or by
contacting Steve Berman, Hagens & Berman, counsel for the plaintiffs, at
206 623-7292.
3
<PAGE>
AMERICAN OPPORTUNITY INCOME FUND
We believe this settlement is a timely and reasonable resolution to this
issue that will benefit shareholders. We also believe changes to the fund's
dividend and additions to the management team outlined below are positive
moves for the fund.
Since we last reported to you, the fund's Dividend Committee reduced the
monthly dividend twice from 7 cents per share to 3.7 cents per share. These
reductions were part of Piper Capital's effort to bring the fund's dividends
in line with its earnings. Because the fund's regular and special dividends
exceeded earnings by 16 cents per share during the six-month period, it was
necessary to rely on the fund's dividend reserve to pay these dividends,
which reduced the fund's net asset value by that same amount. As of June 26,
1996, the dividend reserve for this fund was less than 1 cent per share.
In March, Bruce Salvog and Tom McGlinch joined the management team for the
fund. Bruce is director of taxable fixed income at Piper Capital with 26
years of financial experience. Prior to joining Piper Capital in 1992, Bruce
was a portfolio manager at Kennedy Associates, Inc. Tom, a Chartered
Financial Analyst, is a senior vice president at Piper Capital with 15 years
of financial experience. Before joining Piper Capital in 1992, Tom was a
mortgage-backed securities trader at Piper Jaffray Inc. Prior to that, he was
a specialty products trader at FBS Investment Services, Inc.
4
<PAGE>
AMERICAN OPPORTUNITY INCOME FUND
I'd like to congratulate Marijo Goldstein, who previously assisted with the
management of the fund since its inception in 1989, on her new position as
director of taxable fixed income research for Piper Capital Management.
Marijo will no longer be involved with the management of the fund as she
concentrates on her new duties.
Thank you for your investment in the fund. We remain committed to providing
you with quality service and look forward to helping you achieve your
financial goals.
Sincerely,
/s/ William H. Ellis
William H. Ellis
President, Piper Capital Management
5
<PAGE>
AMERICAN OPPORTUNITY INCOME FUND
[PHOTO]
[PHOTO]
[PHOTO]
WORTH BRUNTJEN, (TOP)
SHARES PRIMARY RESPONSIBILITY FOR THE MANAGEMENT OF AMERICAN OPPORTUNITY
INCOME FUND. HE HAS 29 YEARS OF FINANCIAL EXPERIENCE.
BRUCE SALVOG, (MIDDLE)
SHARES PRIMARY RESPONSIBILITY FOR THE MANAGEMENT OF AMERICAN OPPORTUNITY
INCOME FUND. HE HAS 26 YEARS OF FINANCIAL EXPERIENCE.
TOM MCGLINCH, (BOTTOM)
SHARES PRIMARY RESPONSIBILITY FOR THE MANAGEMENT OF AMERICAN OPPORTUNITY
INCOME FUND. HE HAS 15 YEARS OF INVESTMENT EXPERIENCE.
Dear Shareholders:
FOR THE SIX-MONTH PERIOD ENDED APRIL 30, 1996, AMERICAN OPPORTUNITY INCOME
FUND PRODUCED A NET ASSET VALUE TOTAL RETURN OF 2.63%.* The fund outperformed
the Lehman Brothers Mutual Fund 5-10 Year Government Index, which returned
- -0.36% during the same time frame. Our decision to reduce the effective
duration of the portfolio in late 1995, before interest rates began to rise
sharply, helped our investment results. Then in late March when rates began
to stabilize, we also benefited from extending the portfolio's effective
duration to equal that of the Lehman Brothers Mutual Fund 5-10 Year
Government Index. As of April 30, the fund's effective duration was 4.8
years. (See page 7 for more information about effective duration.) Although
the fund outperformed based on its net asset value return, its six-month
total return based on market price was -4.38%.* We are disappointed that the
fund continues to trade at a discount to its net asset value. However, we
hope the repurchase proposal outlined in William Ellis' letter will help
improve the fund's market price over time.
DURING THE PAST SIX-MONTH PERIOD, THE BOND MARKET FIRST EXPERIENCED A STRONG
QUARTER, FOLLOWED BY ITS THIRD WORST QUARTER SINCE INTEREST RATES PEAKED IN
1981. The period began with concerns of a slowdown in economic activity that
caused interest rates to fall and bond prices to
* ALL RETURNS ABOVE INCLUDE REINVESTED DISTRIBUTIONS BUT NOT SALES CHARGES.
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT FUND SHARES, WHEN
SOLD, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
6
<PAGE>
AMERICAN 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.
increase. But early in 1996, the economy showed signs of picking up and
interest rates began to inch higher. On March 8, the government released
February employment data that showed a surprisingly strong increase in new
jobs. Interest rates rose and bond prices fell sharply, ending the bond
market rally.
IN THIS ENVIRONMENT, WE SOLD THE FUND'S REMAINING INVERSE INTEREST-ONLY
SECURITIES AS WELL AS MOST OF ITS INVERSE FLOATING RATE SECURITIES. These
sales contributed to the fund's reduced net asset value volatility during a
very volatile period in the bond market. Proceeds from the sale of these
securities were invested in U.S. agency fixed rate mortgage-backed
securities. Over the past year, we have sold the majority of the fund's
interest-only, principal-only, inverse interest-only and inverse floating
rate securities in an attempt to provide more consistent returns and lower
volatility than in the past. We may invest in these securities to a limited
extent in the future if market conditions dictate.
THE FUND'S EMPHASIS ON U.S. AGENCY MORTGAGE-BACKED SECURITIES HELPED
PERFORMANCE. The mortgage sector outperformed Treasury securities during the
first three months of 1996. The fund's investments in U.S. agency
mortgage-backed securities included securities issued by the Government
National Mortgage Association (GNMA), the Federal National
7
<PAGE>
AMERICAN OPPORTUNITY INCOME FUND
PORTFOLIO COMPOSITION
APRIL 30, 1996
[GRAPH]
Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation
(FHLMC). The rest of the portfolio was invested primarily in U.S. Treasuries.
AFTER RATES ROSE DURING THE PERIOD, WE INCREASED THE EFFECTIVE DURATION OF
THE FUND. We have also begun borrowing in the form of reverse repurchase
agreements (13% of total assets as of May 31). In addition, we have
selectively added dollar-roll transactions (5% of total assets as of May 31).
Both of these techniques may enhance the fund's income, but may also increase
its net asset value volatility.
LOOKING AHEAD, WE ARE ANTICIPATING A MODERATE RATE OF ECONOMIC GROWTH. Our
estimates for Gross Domestic Product growth (economic growth) for 1996 are
between 1.5% and 2.5%. We believe inflation will remain benign. Our estimate
for the Consumer Price Index (the key inflation rate) in 1996 is between 2.5%
and 3.5%. Given these projections, we expect the Federal Reserve to assume a
neutral monetary policy near-term, meaning we don't expect the Fed to raise
or lower short-term interest rates. We believe this subdued environment
should benefit the fixed income
8
<PAGE>
AMERICAN OPPORTUNITY INCOME FUND
market. We remain optimistic about the mortgage securities market and will
view market weakness as an opportunity to add to select holdings at
attractive prices when possible.
As always, we appreciate your investment in American Opportunity Income Fund.
Sincerely,
/s/ Worth Bruntjen
Worth Bruntjen
Portfolio Manager
/s/ Bruce Salvog
Bruce Salvog
Portfolio Manager
/s/ Tom McGlinch
Tom McGlinch
Portfolio Manager
9
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS (Unaudited)
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1996
<TABLE>
<S> <C>
ASSETS:
Investments in securities at market value* (note 2)
(including a repurchase agreement of $988,000) ........ $ 166,017,450
Cash in bank on demand deposit ........................... 1,505,036
Other assets ............................................. 20,104
Mortgage security paydowns receivable .................... 9,548
Accrued interest receivable .............................. 1,394,419
-----------------
Total assets ......................................... 168,946,557
-----------------
LIABILITIES:
Payable for investment securities purchased .............. 1,454,191
Reverse repurchase agreements payable .................... 21,000,000
Accrued investment management fee ........................ 64,146
Accrued administrative fee ............................... 24,068
Accrued interest ......................................... 39,200
Other accrued expenses ................................... 19,165
-----------------
Total liabilities .................................... 22,600,770
-----------------
Net assets applicable to outstanding capital stock ....... $ 146,345,787
-----------------
-----------------
REPRESENTED BY:
Capital stock - authorized 250 million shares of $0.01 par
value; outstanding, 22,663,473 shares ................ $ 226,635
Additional paid-in capital ............................... 209,560,445
Undistributed net investment income ...................... 1,342,470
Accumulated net realized loss on investments ............. (62,097,659)
Unrealized depreciation of investments ................... (2,686,104)
-----------------
Total - representing net assets applicable to
outstanding capital stock ........................ $ 146,345,787
-----------------
-----------------
Net asset value per share of outstanding capital stock ... $ 6.46
-----------------
-----------------
* Investments in securities at identified cost ........... $ 168,703,554
-----------------
-----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS (UNAUDITED)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 1996
<TABLE>
<S> <C>
INCOME:
Interest (net of interest expense of $39,200) .......... $ 5,722,060
----------------
EXPENSES (NOTE 3):
Investment management fee ................................ 406,839
Administrative fee ....................................... 149,346
Custodian, accounting and transfer agent fees ............ 64,398
Reports to shareholders .................................. 25,468
Directors' fees .......................................... 5,649
Audit and legal fees ..................................... 26,911
Federal excise taxes (note 2) ............................ 99,532
Other expenses ........................................... 22,124
----------------
Total expenses ....................................... 800,267
Less expenses paid indirectly ............................ (399)
----------------
Total net expenses ................................... 799,868
----------------
Net investment income ................................ 4,922,192
----------------
NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized loss on investments (note 4) ................ (4,038,696)
Net change in unrealized appreciation or depreciation of
investments ............................................ 2,800,339
----------------
Net loss on investments ................................ (1,238,357)
----------------
Net increase in net assets resulting from
operations ....................................... $ 3,683,835
----------------
----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS (UNAUDITED)
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED APRIL 30, 1996
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest ............................................... $ 5,722,060
Net expenses ............................................. (799,868)
----------------
Net investment income ................................ 4,922,192
----------------
Adjustments to reconcile net investment income to net cash
provided by operating activities:
Change in accrued interest and mortgage security
paydowns receivable .................................. (67,884)
Net amortization of bond discount and premium .......... 245,991
Change in accrued fees and expenses .................... 28,862
----------------
Total adjustments .................................... 206,969
----------------
Net cash provided by operating activities ............ 5,129,161
----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments ....................... 101,289,657
Purchases of investments ................................. (117,290,021)
Net sales of short-term securities ....................... 1,453,000
----------------
Net cash used by investing activities ................ (14,547,364)
----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from reverse repurchase agreements .......... 21,000,000
Retirement of fund shares ................................ (1,679,800)
Distributions paid to shareholders ....................... (8,541,130)
----------------
Net cash provided by financing activities ............ 10,779,070
----------------
Net increase in cash ..................................... 1,360,867
Cash at beginning of period .............................. 144,169
----------------
Cash at end of period .............................. $ 1,505,036
----------------
----------------
Supplemental disclosure of cash flow information:
Cash paid for interest on reverse repurchase
agreements ........................................... $ --
----------------
----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended
4/30/96 Year Ended
(Unaudited) 10/31/95
----------------- -----------------
<S> <C> <C>
OPERATIONS:
Net investment income .................................. $ 4,922,192 11,469,020
Net realized loss on investments ......................... (4,038,696) (23,480,082)
Net change in unrealized appreciation or depreciation of
investments ............................................ 2,800,339 40,289,273
----------------- -----------------
Net increase in net assets resulting from operations ... 3,683,835 28,278,211
----------------- -----------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ............................... (8,541,130) (22,930,077)
----------------- -----------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from issuance of 398,296 shares for the dividend
reinvestment plan ...................................... -- 2,706,941
Payments for retirement of 265,800 and 234,400 shares,
respectively (note 6) .................................. (1,606,701) (1,419,719)
----------------- -----------------
Increase (decrease) in net assets from capital share
transactions ......................................... (1,606,701) 1,287,222
----------------- -----------------
Total increase (decrease) in net assets .............. (6,463,996) 6,635,356
Net assets at beginning of period .......................... 152,809,783 146,174,427
----------------- -----------------
Net assets at end of period .............................. $ 146,345,787 152,809,783
----------------- -----------------
----------------- -----------------
Undistributed net investment income ...................... $ 1,342,470 4,961,408
----------------- -----------------
----------------- -----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
- --------------------------------------------------------------------------------
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 investment management company. The fund
invests principally in mortgage-backed securities including U.S.
government 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. Fund shares 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 sales price, and
open financial futures contracts are valued at the last
settlement price. When market quotations are not readily
available, securities are valued at fair value according to
methods selected in good faith by the board of directors.
Short-term securities with maturities of 60 days or less are
valued at amortized cost which approximates market value.
Securities transactions are accounted for on the date the
securities are purchased or sold. Realized gains and losses are
calculated on the identified-cost basis. Interest income,
including amortization of bond discount and premium computed on
a level-yield basis, is accrued daily.
OPTIONS TRANSACTIONS
For hedging purposes, the fund may buy and sell put and call
options, write covered call options on portfolio securities, and
write cash-secured puts. The risk in writing a call option is
that the fund gives up the opportunity for profit if the market
price of the security increases. The risk in writing a put
option is that the fund may incur a loss if the market price of
the security decreases and the option is exercised. The risk of
buying an option is that the fund pays a premium whether or not
the option is exercised. The fund also has the additional risk
of not being able to enter into a closing transaction if a
liquid secondary market does not exist.
Option contracts are valued daily and unrealized appreciation or
depreciation is recorded. The fund will realize a gain or loss
upon expiration or closing of the option transaction. When an
option is
14
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
exercised, the proceeds on the sale of a written call option,
the purchase cost of a written put option, or the cost of a
security for purchased put and call options is adjusted by the
amount of premium received or paid.
FUTURES TRANSACTIONS
In order to gain exposure to or protect against changes in the
market, the fund may buy and sell financial futures contracts
and related options. Risks of entering into futures contracts
and related options include the possibility there may be an
illiquid market and that a change in the value of the contract
or option may not correlate with changes in the value of the
underlying securities.
Upon entering into a futures contract, the fund is required to
deposit either cash or securities in an amount (initial margin)
equal to a certain percentage of the contract value. Subsequent
payments (variation margin) are made or received by the fund
each day. The variation margin payments are equal to the daily
changes in the contract value and are recorded as unrealized
gains and losses. The fund recognizes a realized gain or loss
when the contract is closed or expires.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
Securities and other assets and liabilities denominated in
foreign currencies are translated into U.S. dollars at the
closing rate of exchange. Foreign currency amounts related to
the purchase or sale of securities and income and expenses are
translated at the exchange rate on the transaction date. For
financial reporting purposes the realized and unrealized gain
(loss) on investments reflects changes in exchange rates as well
as changes in the foreign denominated market value of
investments.
The fund also may enter into forward foreign currency exchange
contracts for 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 from independent pricing sources. The fund is subject to
the credit risk that the other party will not complete the
obligations of the contract.
15
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
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 on implied
forward interest rates.
SECURITIES PURCHASED ON A WHEN-ISSUED BASIS
Delivery and payment for securities that have been purchased by
the fund on a forward-commitment or when-issued basis can take
place a month or more after the transaction date. During this
period, such securities do not earn interest, are subject to
market fluctuation and may increase or decrease in value prior
to their delivery. The fund maintains, in a segregated account
with its custodian, assets with a market value equal to the
amount of its purchase commitments. The purchase of securities
on a when-issued or forward-commitment
16
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
basis may increase the volatility of the fund's net asset value
if the fund makes such purchases while remaining substantially
fully invested. As of April 30, 1996, the fund had no
outstanding when-issued or forward-commitments.
In connection with its ability to purchase securities on a
when-issued or forward-commitment basis, the fund may enter into
mortgage "dollar rolls" in which the fund sells securities for
delivery in the current month and simultaneously contracts with
the same counterparty to repurchase similar (same type, coupon
and maturity) but not identical securities on a specified future
date. As an inducement to "roll over" its purchase commitments,
the fund receives negotiated fees. For six months ended April
30, 1996, the fund earned no such fees.
FEDERAL TAXES
The fund intends to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and
not be subject to federal income tax. Therefore, no income tax
provision is required. However, the fund incurred federal excise
taxes of $99,532, or $0.004, on income retained during the 1995
excise tax year.
Net investment income and net realized gains (losses) may differ
for financial statement and tax purposes primarily because of
losses deferred due to "wash sale" transactions, differences in
amortization policies for notional principal contracts, the
timing of recognition of income on certain collateralized
mortgage-backed securities and the non-deductibility of excise
tax payments made. The character of distributions made during
the year from net investment income or net realized gains may
differ from its ultimate characterization for federal income tax
purposes. In addition, due to the timing of dividend
distributions, the fiscal year in which amounts are distributed
may differ from the year that the income or realized gains
(losses) were recorded by the fund.
DISTRIBUTIONS TO SHAREHOLDERS
Distributions from net investment income are made monthly and
realized capital gains, if any, will be distributed at least
annually. These distributions are recorded as of the close of
business on the ex-dividend date. Such distributions are payable
in cash or, pursuant
17
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
to the fund's dividend reinvestment plan, reinvested in
additional shares of the fund's capital stock. Under the plan,
fund shares will be purchased in the open market unless the
market price plus commissions exceeds the net asset value by 10%
or more. If, at the close of business on the dividend payment
date, the shares purchased in the open market are insufficient
to satisfy the dividend reinvestment requirement, the fund will
issue new shares at a discount of up to 5% from the current
market price.
REPURCHASE AGREEMENTS
For repurchase agreements entered into with certain
broker-dealers, the fund, along with other affiliated registered
investment companies, may transfer uninvested cash balances into
a joint trading account, the daily aggregate of which is
invested in repurchase agreements secured by U.S. government or
agency obligations. Securities pledged as collateral for all
individual and joint repurchase agreements are held by the
fund's custodian bank until maturity of the repurchase
agreement. Provisions for all agreements ensure that the daily
market value of the collateral is in excess of the repurchase
amount, including accrued interest, to protect the fund in the
event of a default.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the
reported results of operations during the reporting period.
Actual results could differ from those estimates.
(3) EXPENSES
The fund has entered into the following agreements with Piper
Capital Management Incorporated (the adviser and administrator):
The investment advisory agreement provides the adviser with a
monthly investment management fee in an amount equal to an
annualized rate of 0.20% of the funds average weekly net assets
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. The
18
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
monthly investment management fee shall not exceed in the
aggregate 1/12th of 0.725% of the fund's average weekly net
assets during the month (approximately 0.725% 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 will provide 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 cash balances maintained by the fund.
(4) INVESTMENT SECURITY TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other
than temporary investments in short-term securities, for the six
months ended April 30, 1996, aggregated $111,016,971 and
$94,561,359, respectively.
During the six months ended April 30, 1996, the fund paid no
brokerage commissions to Piper Jaffray Inc., an affiliated
broker.
(5) CAPITAL LOSS CARRYOVER
For federal income tax purposes, the fund had capital loss
carryovers of $58,006,703 as of October 31, 1995, which, if not
offset by subsequent capital gains, will expire in 2001 through
2003. It is unlikely the board of directors will authorize a
distribution of any net realized capital gains until the
available capital loss carryover has been offset or expires.
19
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(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 500,200
shares as of February 8, 1996, which represents 2.5% of the
shares originally issued.
(7) PENDING LITIGATION
An amended complaint purporting to be a class action was filed
on September 7, 1995, in the United States District Court for
the Western District of Washington against the fund, seven other
closed-end investment companies for which Piper Capital
Management Incorporated acts as investment adviser: American
Government Income Fund Inc. (AGF); American Government Income
Portfolio Inc. (AAF); American Strategic Income Portfolio (ASP);
American Strategic Income Portfolio II (BSP); American Strategic
Income Portfolio III (CSP); and American Select Portfolio (SLA),
Piper Jaffray Companies Inc., Piper Jaffray Inc., Piper Capital
Management Incorporated and certain individuals. The complaint
alleges, among other things, violations of federal and state
securities laws. The named plaintiffs and defendants in this
putative class action have reached an agreement-in-principle on
a proposed settlement and are negotiating the terms of a
definitive settlement agreement. If approved by the Court, a
definitive settlement agreement consistent with the terms of the
agreement-in-principle would provide $15.5 million to class
members in payments by Piper Jaffray Companies Inc. and Piper
Capital Management Incorporated scheduled during the next four
years. The settlement also includes an agreement that each of
AGF, AAF and OIF would offer to repurchase up to 25 percent of
their outstanding shares from current shareholders at net asset
value. If the discounts between net asset value and market price
of these funds do not decrease to 5 percent or less within
approximately two years after the effective date of the
settlement, the fund boards would submit shareholder proposals
to convert these funds to an open-end format unless the boards
determine at that time that it would not be in fund
shareholders' best interests to do so. Finally, the agreement
stipulates that each of ASP, BSP, CSP and SLA would offer to
repurchase up to 10 percent of their outstanding shares from
current shareholders at net asset value. The repurchase offers
would occur after the effective date of the settlement following
Court approval.
20
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(8) FINANCIAL HIGHLIGHTS
Per-share data for a share of capital stock outstanding
throughout each period and selected information for each period
are as follows:
<TABLE>
<CAPTION>
Six Months Two
Ended Year Year Months Year Year
4/30/96 Ended Ended Ended Ended Ended
(Unaudited) 10/31/95 10/31/94 10/31/93 8/31/93 8/31/92
------------ ------- --------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of
period ............................. $ 6.66 6.42 10.68 10.88 11.33 9.81
----- ------- --------- ------- ------- -------
Operations:
Net investment income ................ 0.22 0.49 0.85 0.34 1.71 1.49
Net realized and unrealized gains
(losses) on investments ............ (0.04) 0.75 (3.53) (0.37) (0.02) 1.35
----- ------- --------- ------- ------- -------
Total from operations ............. 0.18 1.24 (2.68) (0.03) 1.69 2.84
----- ------- --------- ------- ------- -------
Distributions to shareholders:
From net investment income ........... (0.38) (1.00) (1.48) (0.17) (1.22) (1.08)
Net realized gains on investments .... - - - - (0.92) (0.24)
In excess of net realized gains on
investments ........................ - - (0.10) - - -
----- ------- --------- ------- ------- -------
Total distributions to shareholders
................................. (0.38) (1.00) (1.58) (0.17) (2.14) (1.32)
----- ------- --------- ------- ------- -------
Net asset value, end of period ... $ 6.46 6.66 6.42 10.68 10.88 11.33
----- ------- --------- ------- ------- -------
----- ------- --------- ------- ------- -------
Market value, end of period ...... $ 5.50 6.13 7.00 11.63 11.63 11.50
----- ------- --------- ------- ------- -------
----- ------- --------- ------- ------- -------
SELECTED INFORMATION
Total return, net asset value (a) ...... 2.63% 20.98% (27.61)% (0.29)% 17.30% 30.83%
Total return, market value (b) ......... (4.38)% 2.16% (28.77)% 1.43% 21.82% 26.40%
Net assets at end of period (in
millions) .......................... $ 146 153 146 232 237 239
Ratio of expenses to average weekly net
assets (c) ........................... 1.07%(f) 1.29% 1.39% 1.10%(f) 1.33% 1.15%
Ratio of net investment income to
average weekly net assets ............ 6.57%(f) 7.74% 10.73% 19.11%(f) 15.83% 14.36%
Portfolio turnover rate (excluding
short-term securities) ............... 63% 139% 169% 21% 104% 92%
Amount of borrowings outstanding at end
of period (in millions) (d) ........ $ 21 - - 87 99 72
Per-share amount of borrowings
outstanding at end of period ....... $ 0.93 - - 4.01 4.57 3.43
Per-share amount of net assets,
excluding borrowings, at end of
period ............................. $ 7.39 - - 14.69 15.45 14.76
Asset coverage ratio (e) ............... 797% - - 366% 338% 431%
</TABLE>
(A) BASED ON THE CHANGE IN NET ASSET VALUE OF A SHARE DURING THE PERIOD AND
ASSUMES REINVESTMENT OF DISTRIBUTIONS AT NET ASSET VALUE.
(B) BASED ON THE CHANGE IN MARKET PRICE OF A SHARE DURING THE PERIOD AND
ASSUMES REINVESTMENT OF DISTRIBUTIONS AT ACTUAL PRICES PURSUANT TO THE
FUND'S DIVIDEND REINVESTMENT PLAN.
(C) INCLUDES 0.12%, 0.30%, 0.31%, 0.29% AND 0.05% FROM FEDERAL EXCISE TAXES IN
THE SIX MONTHS ENDED 4/30/96, FISCAL 1995, 1994, 1993, AND 1992,
RESPECTIVELY. BEGINNING IN FISCAL 1995, THE EXPENSE RATIOS REFLECT THE
EFFECT OF GROSS EXPENSES PAID INDIRECTLY BY THE FUND. PRIOR PERIOD EXPENSE
RATIOS HAVE NOT BEEN ADJUSTED.
(D) SECURITIES PURCHASED ON A WHEN-ISSUED BASIS FOR WHICH LIQUID, HIGH-GRADE
DEBT OBLIGATIONS ARE MAINTAINED IN A SEGREGATED ACCOUNT ARE NOT CONSIDERED
BORROWINGS. SEE FOOTNOTE 2 IN THE NOTES TO FINANCIAL STATEMENTS.
(E) REPRESENTS NET ASSETS, EXCLUDING BORROWINGS, AT END OF PERIOD DIVIDED BY
BORROWINGS OUTSTANDING AT END OF PERIOD.
(F) ADJUSTED TO AN ANNUAL BASIS.
21
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (Unaudited)
AMERICAN OPPORTUNITY INCOME FUND
APRIL 30, 1996
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- --------------------------------------------------------- ---------- -----------
<S> <C> <C>
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS)
U.S. GOVERNMENT AND AGENCY SECURITIES (110.0%):
U.S. Government Treasury Securities (28.8%):
U.S. Treasury Bond, 7.25%, 5/15/16 ................. $ 4,500,000 4,589,415
U.S. Treasury Note, 6.38%, 8/15/02 ................... 3,500,000 3,474,835
U.S. Treasury Note, 6.00%, 10/15/99 .................. 8,000,000(c) 7,941,600
U.S. Treasury Note, 5.75%, 8/15/03 ................... 18,000,000(c) 17,127,180
U.S. Treasury Note, 6.13%, 5/15/98 ................... 2,500,000 2,503,475
U.S. Treasury Note, 5.88%, 8/15/98 ................... 3,500,000 3,482,640
U.S. Treasury Strip, 6.60%, 8/15/06 .................. 6,000,000(b) 2,984,460
-----------
42,103,605
-----------
U.S. Mortgage-Backed Securities (d) (81.2%):
U.S. Agency Fixed Rate (68.6%):
7.00%, FHLMC, 9/1/10 ................................. 1,782,444 1,763,479
6.50%, FHLMC, 1/1/26 ................................. 2,845,000 2,671,597
6.50%, FHLMC, 3/1/26 ................................. 125,509 117,859
6.50%, FHLMC, 4/1/26 ................................. 1,530,000 1,436,747
6.50%, FHLMC, 4/1/26 ................................. 3,000,000 2,817,150
7.50%, FHLMC, 8/1/25 ................................. 11,821,479 11,692,034
7.00%, FHLMC, 9/1/10 ................................. 4,661,604 4,612,005
7.00%, FHLMC, 10/1/10 ................................ 7,212,039 7,135,303
7.50%, FNMA, 11/1/25 ................................. 7,303,077 7,216,244
7.00%, FNMA, 4/1/26 .................................. 4,080,000 3,933,375
6.50%, FNMA, 4/1/11 .................................. 4,080,000 3,951,225
7.50%, FNMA, 2/1/26 .................................. 1,467,880 1,450,427
7.00%, FNMA, 4/1/26 .................................. 2,292,919 2,211,199
6.50%, FNMA, 4/1/11 .................................. 1,960,000 1,898,711
6.50%, FNMA, 4/1/11 .................................. 980,000 949,355
6.50%, FNMA, 4/1/11 .................................. 4,900,000 4,746,777
6.50%, GNMA, 10/15/10 ................................ 6,631,607 6,467,806
7.00%, GNMA, 12/15/10 ................................ 5,839,257 5,802,645
9.00%, GNMA II, 8/20/22 .............................. 1,068,677 1,115,410
9.00%, GNMA II, 12/20/24 ............................. 1,193,372 1,245,558
8.50%, GNMA II, 5/20/25 .............................. 3,805,668 3,915,043
9.50%, GNMA II, 5/20/25 .............................. 4,004,679 4,241,156
8.00%, GNMA II, 7/20/25 .............................. 1,841,365 1,854,567
8.50%, GNMA II, 7/20/25 .............................. 2,545,789 2,618,955
8.00%, GNMA II, 8/20/25 .............................. 5,636,016 5,676,426
8.00%, GNMA II, 10/20/25 ............................. 5,883,936 5,926,124
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
22
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
AMERICAN OPPORTUNITY INCOME FUND
(CONTINUED)
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- --------------------------------------------------------- ---------- -----------
<S> <C> <C>
8.50%, GNMA II, 10/20/25 ........................... $ 2,842,306 2,923,991
-----------
100,391,168
-----------
U.S. Agency Adjustable Rate (2.6%):
6.88%, FHLMC, 10/1/19 ................................ 3,805,696 3,802,461
-----------
U.S. Agency Z-Tranche (10.0%):
11.50%, FHLMC, Series 1388, Class L, 10/15/07 ........ 2,553,424 2,280,693
8.44%, FNMA, Series 1993-106, Class Z, 6/25/13 ....... 12,186,663 11,281,804
8.56%, FNMA, Series 1994-93, Class Z, 2/25/24 ........ 1,159,775 1,089,515
-----------
14,652,012
-----------
Total U.S. Mortgage-Backed Securities .............. 118,845,641
-----------
Total U.S. Government and Agency Securities
(cost: $163,257,365) .............................. 160,949,246
-----------
PRIVATE MORTGAGE-BACKED SECURITIES (D) (2.4%):
Private Interest-Only (0.0%):
0.00%, Residential Funding Mortgage Securities I,
Series 1992-S1, Class A7, 1/25/22 ................... --(e) 25,314
-----------
Private Inverse Floater (1.1%):
23.75%, Citicorp Mortgage Securities, Series 1990-14,
Class A6, LIBOR, 9/25/20 ............................ 1,586,373 1,603,229
-----------
Private Z-Tranche (1.3%):
8.10%, Pacific Collateralized Mortgage Obligation
Trust, Series 3, Class Z, 5/1/17 .................... 1,794,579 1,814,661
-----------
Total Private Mortgage-Backed Securities
(cost: $4,164,445) ................................ 3,443,204
-----------
INTEREST RATE CONTRACTS (D) (0.4%):
Interest rate cap with Goldman Sachs, $20,000,000
notional principal on one-month LIBOR (5.44% on
4/30/96), 4.50%, 9/10/97 ............................ -- 364,000
Interest rate cap with Merrill Lynch, $5,000,000
notional principal on one-month LIBOR (5.44% on
4/30/96), 4.50%, 9/10/97 ............................ -- 91,000
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
23
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
AMERICAN OPPORTUNITY INCOME FUND
(CONTINUED)
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- --------------------------------------------------------- ---------- -----------
<S> <C> <C>
Interest rate cap with Morgan Stanley, $10,000,000
notional principal on one-month LIBOR (5.44% on
4/30/96), 4.50%, 9/10/97 .......................... $ -- 182,000
-----------
Total Interest Rate Contracts
(cost: $293,744) .................................. 637,000
-----------
SHORT-TERM SECURITIES (0.7%):
Repurchase agreement with Goldman Sachs in a joint
trading account, collateralized by U.S. government
agency securities, acquired on 4/30/96, accrued
interest of $146, 5.33%, 5/1/96
(cost: $988,000) .................................... 988,000 988,000
-----------
Total Investments in Securities (f)
(cost: $168,703,554) ............................. $ 166,017,450
-----------
-----------
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
24
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
NOTES TO INVESTMENTS IN SECURITIES:
(A) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO
THE FINANCIAL STATEMENTS.
(B) FOR ZERO-COUPON INVESTMENTS, THE INTEREST RATE SHOWN IS THE EFFECTIVE YIELD
ON THE DATE OF PURCHASE.
(C) ON APRIL 30, 1996, SECURITIES VALUED AT $21,059,400 WERE PLEDGED AS
COLLATERAL FOR THE FOLLOWING OUTSTANDING REVERSE REPURCHASE AGREEMENTS:
<TABLE>
<CAPTION>
NAME OF BROKER
AND
ACQUISITION ACCRUED DESCRIPTION
AMOUNT DATE RATE DUE INTEREST OF COLLATERAL
- -------------- ------------ ----- --------- --------- --------------
<S> <C> <C> <C> <C> <C>
$ 16,000,000 4/11/96 5.33% 6/13/96 $ 35,533 (1)
5,000,000 4/25/96 5.28% 6/25/96 3,667 (2)
- -------------- ---------
$ 21,000,000 $ 39,200
- -------------- ---------
- -------------- ---------
</TABLE>
NAME OF BROKER AND DESCRIPTION OF COLLATERAL:
(1) MORGAN STANLEY; U.S. TREASURY NOTE, 5.75%, 8/15/03, $16,864,000 PAR
(2) MORGAN STANLEY; U.S. TREASURY NOTE, 6.00%, 10/15/99, $5,050,000 PAR
(D) DEFINITION OF CERTAIN TERMS:
ADJUSTABLE RATE - REPRESENTS SECURITIES THAT PAY INTEREST AT RATES THAT
INCREASE (DECREASE) WITH AN INCREASE (DECREASE) IN THE SPECIFIED INDEX.
LIBOR - LONDON INTERBANK OFFERED RATE.
INVERSE FLOATER - REPRESENTS SECURITIES THAT PAY INTEREST AT RATES THAT
INCREASE (DECREASE) WITH A DECREASE (INCREASE) IN THE SPECIFIED INDEX.
THE INTEREST RATE PAID BY THE INVERSE FLOATER WILL GENERALLY CHANGE AT A
MULTIPLE OF ANY CHANGE IN THE INDEX. INTEREST RATES DISCLOSED ARE IN
EFFECT ON APRIL 30, 1996.
INTEREST-ONLY - REPRESENTS SECURITIES THAT ENTITLE HOLDERS TO RECEIVE ONLY
INTEREST PAYMENTS ON THE UNDERLYING MORTGAGES. THE YIELD TO MATURITY OF
AN INTEREST-ONLY IS EXTREMELY SENSITIVE TO THE RATE OF PRINCIPAL PAYMENTS
ON THE UNDERLYING MORTGAGE ASSETS. A RAPID (SLOW) RATE OF PRINCIPAL
REPAYMENTS MAY HAVE AN ADVERSE (POSITIVE) EFFECT ON YIELD TO MATURITY.
INTEREST RATES DISCLOSED REPRESENT CURRENT YIELDS BASED UPON THE CURRENT
COST BASIS AND ESTIMATED TIMING AND AMOUNT OF FUTURE CASH FLOWS.
Z-TRANCHE - REPRESENTS SECURITIES THAT PAY NO INTEREST OR PRINCIPAL DURING
THEIR INITIAL ACCRUAL PERIODS, BUT ACCRUE ADDITIONAL PRINCIPAL AT
SPECIFIED RATES. INTEREST RATE DISCLOSED REPRESENTS CURRENT YIELD BASED
UPON THE COST BASIS AND ESTIMATED TIMING OF FUTURE CASH FLOWS.
(E) BASED UPON ESTIMATED TIMING AND AMOUNT OF FUTURE CASH FLOWS, INCOME IS
CURRENTLY NOT BEING RECOGNIZED ON CERTAIN INTEREST-ONLY SECURITIES WITH AN
AGGREGATE MARKET VALUE OF $25,314.
(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 .... $ 1,258,614
GROSS UNREALIZED DEPRECIATION ...... (3,944,718)
-----------
NET UNREALIZED DEPRECIATION .... $ (2,686,104)
-----------
-----------
</TABLE>
25
<PAGE>
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
DIRECTORS David T. Bennett, CHAIRMAN, HIGHLAND HOMES, INC.,
USL PRODUCTS, INC., KIEFER BUILT, INC., OF
COUNSEL, GRAY, PLANT, MOOTY, MOOTY & BENNETT,
P.A.
Jaye F. Dyer, PRESIDENT, DYER MANAGEMENT COMPANY
William H. Ellis, PRESIDENT, PIPER JAFFRAY
COMPANIES INC., PIPER CAPITAL MANAGEMENT
INCORPORATED
Karol D. Emmerich, PRESIDENT, THE PARACLETE GROUP
Luella G. Goldberg, DIRECTOR, TCF FINANCIAL,
RELIASTAR FINANCIAL CORP., HORMEL FOODS CORP.
George Latimer, CHIEF EXECUTIVE OFFICER, NATIONAL
EQUITY FUNDS
OFFICERS William H. Ellis, CHAIRMAN OF THE BOARD
Worth Bruntjen, PRESIDENT
Paul A. Dow, SENIOR VICE PRESIDENT
Bruce D. Salvog, SENIOR VICE PRESIDENT
Thomas S. McGlinch, SENIOR VICE PRESIDENT
Robert H. Nelson, SENIOR VICE PRESIDENT AND
TREASURER
Molly J. Destro, VICE PRESIDENT
Amy K. Johnson, VICE PRESIDENT
Paul D. Pearson, VICE PRESIDENT
Susan Sharp Miley, SECRETARY
INVESTMENT ADVISER Piper Capital Management Incorporated
222 SOUTH NINTH STREET, MINNEAPOLIS, MN 55402-3804
CUSTODIAN AND Investors Fiduciary Trust Company
TRANSFER AGENT 127 WEST 10TH STREET, KANSAS CITY, MO 64105-1716
LEGAL COUNSEL Dorsey & Whitney LLP
220 SOUTH SIXTH STREET, MINNEAPOLIS, MN 55402
26
<PAGE>
---------------
PIPER CAPITAL Bulk Rate
MANAGEMENT U.S. Postage
PAID
PIPER CAPITAL MANAGEMENT INCORPORATED Permit No. 3008
222 SOUTH NINTH STREET Mpls., MN
MINNEAPOLIS, MN 55402-3804 ---------------
[LOGO] THIS DOCUMENT IS PRINTED ON PAPER MADE FROM
100% TOTAL RECOVERED FIBER, INCLUDING 15% POST-CONSUMER WASTE.
In an effort to reduce costs to our shareholders, we have
implemented a process to reduce duplicate mailings of
the fund's shareholder reports. This householding
process should allow us to mail one report to each
address where one or more registered shareholders with
the same last name reside. If you would like to have
additional reports mailed to your address, please call our
Shareholder Services area at 1 800 866-7778, or mail
your request to:
Piper Capital Management
Attn: Communications Department
222 South Ninth Street
Minneapolis, MN 55402-3804
#21130 7/96 143-96