<PAGE>
[PHOTO]
[PHOTO]
AMERICAN STRATEGIC
INCOME PORTFOLIO II
* * *
ANNUAL REPORT
1995
[PHOTO]
[PHOTO]
<PAGE>
TABLE OF CONTENTS
FUND PERFORMANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
LETTER TO SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
FINANCIAL STATEMENTS AND NOTES . . . . . . . . . . . . . . . . . . . . . . . . 9
INVESTMENTS IN SECURITIES. . . . . . . . . . . . . . . . . . . . . . . . . . .23
INDEPENDENT AUDITORS' REPORT . . . . . . . . . . . . . . . . . . . . . . . . .30
FEDERAL TAX INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . .31
SHAREHOLDER UPDATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32
AMERICAN STRATEGIC INCOME PORTFOLIO II
American Strategic Income Portfolio II is a diversified, closed-end management
investment company. The fund's primary objective is to provide a high level of
current income, and its secondary objective is to seek capital appreciation. To
realize its objectives, the fund emphasizes investments in mortgage-related
assets that directly or indirectly represent a participation in or are secured
by and payable from mortgage loans. It may also invest in asset-backed
securities, U.S. government securities, corporate debt securities, municipal
obligations, unregistered securities, mortgage-backed derivative securities and
mortgage servicing rights. The fund may also borrow by entering into reverse
repurchase agreements and may purchase securities through the sale-forward
(dollar-roll) program. Use of these investments and investment techniques 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 objectives. Since the
fund's inception, July 30, 1992, it has been rated Af by Standard & Poor's
Corporation (S&P).* Fund shares trade on the New York Stock Exchange under the
symbol BSP.
*THE FUND IS RATED Af, WHICH MEANS INVESTMENTS IN THE FUND HAVE AN OVERALL
CREDIT QUALITY OF A. 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 A.
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.
<PAGE>
FUND PERFORMANCE
AVERAGE ANNUALIZED TOTAL RETURNS FOR THE PERIODS ENDED MAY 31, 1995
[Graph]
The average annual total returns for American Strategic Income Portfolio II 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
one-year and since inception periods ended May 31, 1995, were -5.38% and 0.28%,
respectively. These figures assume reinvestment of distributions and do not
reflect sales charges.
The Lehman Brothers Mutual Fund Government/Mortgage Index is comprised of all
U.S. government agency and Treasury securities and agency mortgage-backed
securities. Developed by Lehman Brothers for comparative use by the mutual fund
industry, this index is unmanaged and does not include any fees or expenses in
its total return figure.
The Lipper Closed-End U.S. Mortgage Funds Average represents the average total
return, with distributions reinvested, of similar closed-end mutual funds as
characterized by Lipper Analytical Services.
Past performance does not guarantee future results. The return and principal
value of your investment will fluctuate so that shares, when sold, may be worth
more or less than their original cost.
1
<PAGE>
AMERICAN STRATEGIC INCOME PORTFOLIO II
July 10, 1995
Dear Shareholders:
LONG-TERM INTEREST RATES HAVE COME DOWN CONSIDERABLY SINCE THE END OF LAST YEAR,
PROMPTED BY A SLOWDOWN IN U.S. ECONOMIC GROWTH AND LOW TO MODERATE INFLATION.
Due to declining interest rates, the net asset value (NAV) total return for
American Strategic Income Portfolio II (BSP) was favorable for the 12-month
period ended May 31, 1995, at 11.56%. The fund's market price return for that
period, however, was -5.38%.* (All returns include reinvested distributions and
do not include sales charges.) I am disappointed that the market price has not
kept pace with the fund's improvement in NAV. I believe this is due to the
fund's erratic performance over the past year, which was largely related to the
fund's holdings of mortgage-backed derivative securities. For performance
comparison purposes, during the 12-month period ended May 31, 1995, the Lehman
Brothers Mutual Fund Government/Mortgage Index return was 11.07% and the Lipper
Closed-End U.S. Mortgage Funds Average return was 12.24%.
AS I MENTIONED IN LAST JANUARY'S SEMIANNUAL REPORT, WE HAVE REDUCED THE INTEREST
RATE SENSITIVITY OF THE FUND. To do so, we suspended the sale-forward program,
reduced the amount of borrowing and allowed some of the fund's mortgage-backed
derivatives to pay off. We redirected these investments into mortgage loans and
Treasury securities, investments that should be less sensitive to changes in
interest rates.
[Photo]
Mike Jansen, (above)
IS PRIMARILY RESPONSIBLE FOR THE MANAGEMENT OF AMERICAN
STRATEGIC INCOME PORTFOLIO II. HE HAS 14 YEARS OF FINANCIAL EXPERIENCE.
Kevin Jansen, (below)
ASSISTS WITH THE MANAGEMENT OF AMERICAN STRATEGIC INCOME
PORTFOLIO II. HE HAS SEVEN YEARS OF FINANCIAL EXPERIENCE.
*PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. THE RETURN AND PRINCIPAL
VALUE OF YOUR INVESTMENT WILL FLUCTUATE SO THAT SHARES, WHEN SOLD, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST.
2
<PAGE>
AMERICAN STRATEGIC INCOME PORTFOLIO II
[Graph]
TO PROVIDE GREATER NAV AND INCOME STABILITY, WE RECENTLY SOLD MOST OF THE
PORTFOLIO'S MORTGAGE-BACKED DERIVATIVE SECURITIES. While there is no definition
for derivatives that is universally agreed upon, as of June 30 the fund no
longer owned any inverse floaters, principal-only strips, or inverse
interest-only securities. (Please note that the portfolio composition at left is
as of May 31.) We still hold a 5% position in U.S. agency Z-bonds and a very
small position in interest only securities (less than one-half of a percent of
the fund's total assets). We intend to sell these positions in the near future
as mortgage loans become available. We also own some subordinated
mortgage-backed securities which, although are referred to as derivatives in the
fund's prospectus, are not typically considered derivatives in the securities
market nor are they perceived by us to have the same volatility characteristics
as the derivative securities we sold. We currently do not intend to sell these
subordinated bonds and may make additional investments in these securities in
the future. While the derivative securities we sold offer potentially greater
income than more traditional mortgage securities, their prices and income can
also be much more volatile, as we experienced in 1994. The prices of BSP's
mortgage-backed derivative securities dropped significantly last year and
accounted for a disproportionate share of the fund's poor performance during
1994. This year, the prices of these derivative securities improved in response
to the recovery of the bond market. Yet the income from some of these
securities, such as the
3
<PAGE>
AMERICAN STRATEGIC INCOME PORTFOLIO II
<TABLE>
<CAPTION>
NET ASSET VALUE SUMMARY
JULY 30, 1992 TO MAY 31, 1995
<S> <C>
Initial Offering Price (7/30/92) . . . . . . . . . . . . . . . . . . . . $15.00
Initial Offering and
Underwriting Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . ($0.93)
Accumulated
Realized Losses (5/31/95). . . . . . . . . . . . . . . . . . . . . . . . ($1.60)
------
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12.47
Undistributed Net
Investment Income/
Dividend Reserve (5/31/95) . . . . . . . . . . . . . . . . . . . . . . . $0.24
Unrealized Appreciation
on Investments (5/31/95) . . . . . . . . . . . . . . . . . . . . . . . . $0.29
------
NET ASSET VALUE (5/31/95) . . . . . . . . . . . . . . . . . . . . . . . $13.00
</TABLE>
inverse floaters, declined. Consequently, we selectively sold these derivatives
at improved prices and invested the proceeds into mortgage loans.
LOWER PORTFOLIO EARNINGS CAUSED THE FUND TO REDUCE ITS MONTHLY DIVIDEND TO
10.25 CENTS PER SHARE FROM 11.25 CENTS PER SHARE, BEGINNING WITH THE JULY
DISTRIBUTION. Over the past few months, the fund has been relying on its
accumulated undistributed net investment income (dividend reserve) to pay its
monthly dividend. As a result, the fund's dividend committee reduced the
dividend to bring it more in line with the fund's earnings. On June 30, the
fund's earnings were approximately 8.6 cents per share and its dividend reserve
was approximately 21 cents per share. The dividend reserve should continue to
decline in the coming months since we believe portfolio earnings will remain at
approximately the current level in the near term. In the future, we intend to
maintain a small dividend reserve in the fund. So as the reserve declines, the
fund's dividend committee will make gradual changes to the dividend to bring it
in line with the fund's earnings. Once the dividend reserve reaches our targeted
range, the dividend committee will set a dividend level that it believes is
sustainable, given the fund's income level at that time. Of course, the dividend
is not fixed and may fluctuate. Keep in mind that any reduction in the dividend
reserve reduces the fund's NAV penny for penny.
ALTHOUGH THE DERIVATIVE SECURITIES WE SOLD WERE AT IMPROVED PRICES, WE REALIZED
LOSSES THAT MAY KEEP THE FUND FROM RETURNING TO ITS NAV LEVELS OF EARLY LAST
YEAR. We are currently managing significantly less per share from BSP's original
4
<PAGE>
AMERICAN STRATEGIC INCOME PORTFOLIO II
<TABLE>
<CAPTION>
DISTRIBUTION HISTORY
SINCE INCEPTION (JULY 1992) THROUGH
MAY 31, 1995
<S> <C>
Monthly Income
Dividends Paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
Total Monthly
Income Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3.67
Capital Gains
Distributions Paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Total Capital
Gains Distributions. . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.04
Total Distributions
Per Share. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3.71
</TABLE>
offering price of $15, due to the fund's realized losses since inception and its
initial offering and underwriting expenses. (See chart on page 4.) While the NAV
could one day return to the $14 to $15 range, it would most likely take many
years because of the realized losses. Even though the NAV of the fund had
improved to $13.00 on May 31, 1995, from a low of $11.94 on January 5, 1995, you
should not expect future increases, should they occur, to be as significant.
WE DO NOT PLAN TO INVEST IN INVERSE FLOATERS, PRINCIPAL-ONLY STRIPS,
INTEREST-ONLY STRIPS, INVERSE INTEREST-ONLY SECURITIES OR Z-BONDS IN THE FUTURE.
We intend to focus our efforts on mortgage loans, which have consistently
performed well for the fund. Also, we do not have any immediate plans to
reinstate the sale-forward (dollar-roll) program. In the event that we will
again invest in these types of mortgage-backed derivatives or reinstate the
sale-forward program, we will notify you in advance.
GOING FORWARD, THE FUND'S INVESTMENTS WILL BE MORE FOCUSED ON MORTGAGE LOANS AND
TREASURY SECURITIES. As of the end of June, 42% of the fund's total assets were
invested in single family (home) loans, 19% in multifamily (apartment) loans, 1%
in commercial loans, 8% in private mortgage-backed securities, and 17% in
Treasuries. Our current strategy is to eventually have approximately 80%
invested in mortgage loans and private mortgage-backed securities, and 20% in
Treasury securities. We will continue to use borrowing in the fund through
reverse repurchase agreements, which as of June 30 accounted for 16% of the
fund's total assets, and invest the proceeds in Treasury securities. Keep in
mind that while borrowing can potentially increase the fund's
5
<PAGE>
AMERICAN STRATEGIC INCOME PORTFOLIO II
income, it can also increase the fund's NAV volatility, which can in turn be
reflected in the fund's market price.
OUR STRATEGY FOR INVESTING IN MORTGAGE LOANS REMAINS THE SAME. We purchase pools
of home loans from mortgage lending organizations at a discount from their face
values. We also purchase apartment loans and commercial loans that meet our
strict underwriting standards. Because we assume and manage the real estate risk
of these loans and purchase many of them at discounts, the potential yields from
these investments are typically much greater than those offered by securities
backed by mortgages, which frequently are guaranteed or backed by a letter of
credit.
WE CAN BUY HOME LOANS AT A DISCOUNT FOR A NUMBER OF REASONS. Lenders find it
difficult to sell loans that do not conform to industry standards. For example,
many buyers will not purchase loans that have missing loan documents, unusual
loan terms, delinquent payments or loans in bankruptcy or foreclosure. Unlike
many buyers, we agree to purchase loan pools that may include such mortgages.
Based on our credit analysis, we purchase these mortgages below what we believe
to be the market value of the home backing the mortgage. For example, a loan
with delinquent payments will typically be purchased at a deep discount to our
estimated market value because of its greater potential for default. If we
purchase the mortgage loans an appropriate price, mortgage defaults will not
have a negative impact on the fund. Of course, depending on the purchase price
of the loan, we could recognize losses.
WE ALSO BUY APARTMENT AND COMMERCIAL LOANS. We purchase apartment loans and
commercial loans at a level that we believe the property value exceeds the
mortgage amount by a wide margin. We also require borrowers to have a
significant amount of their own money (equity) at risk. Any losses from these
loans will first go against the borrowers' investment (equity), which helps
limit our risk with these investments.
6
<PAGE>
AMERICAN STRATEGIC INCOME PORTFOLIO II
NOW THAT OUR INVESTMENTS ARE EVEN MORE FOCUSED ON MORTGAGE LOANS, WE BELIEVE THE
FUND'S PRIMARY RISKS ARE CREDIT RISK AND THE OTHER RISKS ASSOCIATED WITH
INVESTMENTS IN REAL ESTATE. By selling most of the fund's mortgage-backed
derivative securities, the fund has less market risk (the risk associated with
changes in interest rates). But because most of the mortgages we purchase are
not backed by the U.S. government or one of its agencies, they are subject to
credit risk or the risk of failure to make payments. Apart from credit risk,
these mortgages are also subject to property risk (physical condition and value
of the property), prepayment risk (the risk that mortgages will be prepaid and
the proceeds will have to be invested in lower-yielding loans), and the legal
risks associated with holding any mortgage. Part of our strategy to manage the
real estate risks of our home loans is to purchase mortgages located throughout
the country, which helps reduce the potential impact of a regional economic
recession or natural disaster. Many of the home loans we purchase are older
mortgages secured by smaller homes. These loans usually have an established
history of timely payments and are less likely to be delinquent, and the
homeowners have often built up a considerable amount of equity. We also purchase
home loans on which the borrowers have not made all of their mortgage payments
on time, if we can obtain the loans at a price that we believe compensates us
for the higher risk for default. We believe there are good opportunities to
invest in these types of loans because many potential buyers are unwilling to
buy delinquent loans. Consequently, we have increased the percentage of
delinquent loans in the fund over the past year. As part of our home loan risk
analysis, we also review the loan's legal documents, review the borrower's
mortgage payment history, assess the local market, and assess the property
value. We perform a drive-by assessment of the property or we have a local real
estate agent do the assessment for us when it is difficult or impossible for us
to perform the assessment ourselves.
7
<PAGE>
AMERICAN STRATEGIC INCOME PORTFOLIO II
AS PART OF OUR RISK MANAGEMENT STRATEGY FOR OUR APARTMENT AND COMMERCIAL LOANS,
WE PERFORM A DETAILED INSPECTION OF EACH PROPERTY; STUDY THE COMPETING
PROPERTIES IN THE AREA; INTERVIEW THE PROPERTY MANAGER; AND OBTAIN ENGINEERING
AND ENVIRONMENTAL REPORTS FROM EXPERTS. While we focus on smaller apartment and
commercial loans, these loans are still much larger than the fund's home loans.
As a result, defaults on our apartment and commercial loans could have a much
greater impact on the fund than defaults on our home loans. Our extensive risk
analysis has helped keep the fund's net realized losses from home mortgage
foreclosures and write-offs to a minimum (less than two cents per share since
the fund's inception through May 31). We have not suffered any realized losses
on our apartment or commercial loans.
THE CREDITWORTHINESS OF THE FUND'S LOANS ARE ANALYZED BY STANDARD & POOR'S
CORPORATION (S&P), WHICH ISSUES A CREDIT RATING FOR THE FUND'S ENTIRE PORTFOLIO.
The final step of our risk analysis is a credit rating by S&P. Each quarter we
submit a report of the fund's loans to S&P for review. Since its inception in
July 1992, BSP has maintained a credit rating of Af. Keep in mind that S&P does
not evaluate the market risk of an investment when assigning a credit rating.
NOW THAT THE FUND IS FOCUSING EVEN MORE ON MORTGAGE LOANS, I BELIEVE IT WILL BE
LESS VOLATILE AND EARN MORE CONSISTENT INCOME LEVELS THAN IN THE PAST. I hope
this will attract more buyers to the fund and help narrow the current gap
between the NAV and market price. Going forward, we intend to follow the
investment strategy we have implemented during the past few months. If you have
questions about your investment in American Strategic Income Portfolio II, don't
hesitate to contact your investment professional.
Sincerely,
/s/ Mike Jansen
Mike Jansen
Portfolio Manager
8
<PAGE>
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FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1995
<TABLE>
<S> <C>
ASSETS:
Investments in securities at market value*
(including a repurchase agreement of $13,041,000) (note
2) ................................................... $ 307,680,896
Real estate owned (identified cost: $2,701,168) (note
2) ..................................................... 2,807,372
Cash in bank on demand deposit ........................... 786,809
Receivable for investment securities sold ................ 2,506,750
Accrued interest receivable .............................. 2,960,397
----------------
Total assets ......................................... 316,742,224
----------------
LIABILITIES:
Open option contracts written at market value (premium
received of $434,766) (note 5) ......................... 1,000,781
Reverse repurchase agreements payable .................... 52,700,000
Payable for fund shares retired .......................... 101,640
Accrued investment management fee ........................ 136,378
Accrued administrative fee ............................... 44,098
Accrued interest ......................................... 273,583
Other accrued expenses ................................... 30,346
----------------
Total liabilities .................................... 54,286,826
----------------
Net assets applicable to outstanding capital stock ....... $ 262,455,398
----------------
----------------
REPRESENTED BY:
Capital stock - authorized 1 billion shares of $0.01 par
value; outstanding, 20,191,535 shares ................ $ 201,915
Additional paid-in capital ............................... 284,531,738
Undistributed net investment income ...................... 4,750,082
Accumulated net realized loss on investments ............. (32,946,074)
Unrealized appreciation of investments ................... 5,917,737
----------------
Total - representing net assets applicable to
outstanding capital stock ........................ $ 262,455,398
----------------
----------------
Net asset value per share of outstanding capital stock ... $ 13.00
----------------
----------------
* Investments in securities at identified cost ........... $ 301,303,348
----------------
----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
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FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MAY 31, 1995
<TABLE>
<S> <C>
INCOME:
Interest (net of interest expense of $5,707,397) ....... $ 27,536,024
Fee income (note 2) ...................................... 201,788
----------------
Total investment income .............................. 27,737,812
----------------
EXPENSES (NOTE 3):
Investment management fee ................................ 1,759,648
Administrative fee ....................................... 510,315
Custodian, accounting and transfer agent fees ............ 137,346
Reports to shareholders .................................. 60,883
Mortgage servicing fees .................................. 451,993
Directors' fees .......................................... 14,802
Audit and legal fees ..................................... 55,738
Federal excise taxes (note 2) ............................ 169,296
Other expenses ........................................... 79,603
----------------
Total expenses ....................................... 3,239,624
----------------
Net investment income ................................ 24,498,188
----------------
NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized loss on investments (note 4) ................ (26,173,662)
Net realized gain on closed or expired option contracts
written (note 5) ....................................... 756,762
----------------
Net realized loss on investments ....................... (25,416,900)
Net change in unrealized appreciation or depreciation of
investments ............................................ 28,618,130
----------------
Net gain on investments ................................ 3,201,230
----------------
Net increase in net assets resulting from
operations ....................................... $ 27,699,418
----------------
----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED MAY 31, 1995
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest and fee income ................................ $ 27,737,812
Expenses ................................................. (3,239,624)
----------------
Net investment income ................................ 24,498,188
----------------
Adjustments to reconcile net investment income to net cash
provided by operating activities:
Change in accrued interest receivable .................. 1,629,321
Net amortization of bond discount and premium .......... (1,796,282)
Change in accrued fees and expenses and other
payables ............................................. 116,844
----------------
Total adjustments .................................... (50,117)
----------------
Net cash provided by operating activities ............ 24,448,071
----------------
CASH FLOWS FROM INVESTMENT ACTIVITIES:
Proceeds from sales of investments ....................... 225,470,617
Purchases of investments ................................. (180,198,299)
Net purchases of short-term securities ................... (7,154,000)
Net premiums received for option contracts written ....... 401,372
----------------
Net cash provided by investment activities ........... 38,519,690
----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments for reverse repurchase agreements ........... (32,350,000)
Distributions paid to shareholders ....................... (27,495,115)
Retirement of fund shares ................................ (2,748,162)
----------------
Net cash used by financing activities ................ (62,593,277)
----------------
Net increase in cash ...................................... 374,484
Cash at beginning of year .................................. 412,325
----------------
Cash at end of year ...................................... $ 786,809
----------------
----------------
Supplemental disclosure of cash flow information:
Cash paid for interest on reverse
repurchase agreements ................................ $ 5,576,656
----------------
----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended Year Ended
5/31/95 5/31/94
---------------- ----------------
<S> <C> <C>
OPERATIONS:
Net investment income .................................. $ 24,498,188 31,955,680
Net realized loss on investments ......................... (25,416,900) (3,892,195)
Net change in unrealized appreciation or depreciation of
investments ............................................ 28,618,130 (32,538,307)
---------------- ----------------
Net increase (decrease) in net assets resulting from
operations ........................................... 27,699,418 (4,474,822)
---------------- ----------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ............................... (27,495,115) (26,755,195)
In excess of net realized gains (note 2) ................. -- (838,183)
---------------- ----------------
Total distributions .................................... (27,495,115) (27,593,378)
---------------- ----------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from issuance of 45,009 shares for the dividend
reinvestment plan ...................................... -- 668,108
Payments for retirement of 252,000 shares (note 8) ....... (2,849,802) --
---------------- ----------------
Increase (decrease) in net assets from capital share
transactions ......................................... (2,849,802) 668,108
---------------- ----------------
Total decrease in net assets ......................... (2,645,499) (31,400,092)
Net assets at beginning of year ............................ 265,100,897 296,500,989
---------------- ----------------
Net assets at end of year ................................ $ 262,455,398 265,100,897
---------------- ----------------
---------------- ----------------
Undistributed net investment income ...................... $ 4,750,082 6,431,361
---------------- ----------------
---------------- ----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
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NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION
American Strategic Income Portfolio Inc. II (the fund), is
registered under the Investment Company Act of 1940 (as amended)
as a diversified, closed-end management investment company. The
fund commenced operations on July 30, 1992, upon completion of
its initial public offering of common stock. Shares of the fund
are listed on the New York Stock Exchange under the symbol BSP.
(2) SIGNIFICANT
ACCOUNTING
POLICIES
INVESTMENTS IN SECURITIES
The fund's mortgage-related investments such as whole loans,
participation mortgages and mortgage servicing rights are
initially valued at cost and their values are subsequently
monitored and adjusted pursuant to a pricing model designed to
reflect the present value of the projected stream of cash flows
on such investments. The pricing model takes into account a
number of relevant factors including the projected rate of
prepayments, the projected rate and severity of defaults, the
delinquency profile, the age of the underlying mortgages, the
historical payment record thereon, the expected yield at
purchase, changes in prevailing interest rates and changes in
the real or perceived liquidity of whole loans and participation
mortgages, as the case may be. Certain elements of the pricing
model involve subjective judgment. Additionally, certain other
factors will be considered in the determination of the valuation
of investments in multifamily and commercial loans, including
but not limited to, results of annual inspections of the
properties by the adviser or a servicing agent retained by the
adviser, reviews of annual unaudited financial statements of the
properties, monitoring of local and other economic conditions
and their impact on local real estate values and analysis of
rental vacancy rates at the properties. Subjective adjustments
to the valuation of such investments in multifamily and
commercial loans may be made based upon the adviser's analysis
of such information. The actual values that may be realized upon
the sale of whole loans and participation mortgages can only be
determined in negotiations between the fund and third parties.
The values of other 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.
13
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
When market quotations for other fixed income securities are not
readily available, such securities are valued at fair value
according to methods selected in good faith by the board of
directors.
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. Costs associated with
acquiring whole loans and participation mortgages are
capitalized and included in the cost basis of the loans
purchased.
OPTION TRANSACTIONS
For hedging purposes, the fund may buy and sell put and call
options, write covered call options on portfolio securities,
write cash-secured puts, and write call options that are not
covered for cross-hedging purposes. The risk in writing a call
option is the fund gives up the opportunity for profit if the
market price of the security increases and the option is
exercised. 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 also may write over-the-counter options where
the completion of the obligation is dependent upon the credit
standing of the other party.
Option contracts are valued daily and unrealized appreciation or
depreciation is recorded. The fund will realize a gain or loss
upon expiration or closing of the option transaction. When an
option is exercised, the proceeds on the sale of a written call
option, the purchase cost for a written put option or the
security cost of 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
14
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
options include the possibility there may be an illiquid market
and that a change in the value of the contract or option may not
correlate with changes in the value of the underlying
securities.
Upon entering into a futures contract, the fund is required to
deposit either cash or securities in an amount (initial margin)
equal to a certain percentage of the contract value. Subsequent
payments (variation margin) are made or received by the fund
each day. The variation margin payments are equal to the daily
changes in the contract value and are recorded as unrealized
gains and losses. The fund recognizes a realized gain or loss
when the contract is closed or expires.
INTEREST RATE TRANSACTIONS
To preserve a return or spread on a particular investment or
portion of its portfolio or for other non-speculative purposes,
the fund may enter into various hedging transactions, such as
interest rate swaps and the purchase of interest rate caps and
floors. Interest rate swaps involve the exchange of commitments
to pay or receive interest, e.g., an exchange of floating rate
payments for fixed rate payments. The purchase of an interest
rate cap entitles the purchaser, to the extent that a specified
index exceeds a predetermined interest rate, to receive payments
of interest on a contractually based notional principal amount
from the party selling the interest rate cap. The purchase of an
interest rate floor entitles the purchaser, to the extent that a
specified index falls below a predetermined interest rate, to
receive payments of interest on a contractually based notional
principal amount from the party selling the interest rate floor.
If forecasts of interest rates and other market factors are
incorrect, investment performance will diminish compared to what
performance would have been if these investment techniques were
not used. Even 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
15
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
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.
WHOLE LOANS AND PARTICIPATION MORTGAGES
Whole loans and participation mortgages may bear a greater risk
of loss arising from a default on the part of the borrower of
the underlying loans than do traditional mortgage-backed
securities. This is because whole loans and participation
mortgages, unlike most mortgage-backed securities, generally are
not backed by any government guarantee or private credit
enhancement. Such risk may be greater during a period of
declining or stagnant real estate values. In addition,
individual loans underlying whole loans and participation
mortgages may be larger than those underlying mortgage-backed
securities. At May 31, 1995, whole loans representing 6% of net
assets were considered by the fund to be delinquent as to the
timely monthly payment of principal and interest. The fund does
not record past due interest as income until it is received.
There may be certain costs and delays in the event of a
foreclosure. Also, there is no assurance that the subsequent
sale of the property will produce an amount equal to the sum of
the unpaid principal balance of the loan as of the date the
borrower went into default, accrued unpaid interest and all
foreclosure expenses. In this case the fund may suffer a loss.
Real estate acquired through foreclosure, if any, is recorded at
estimated fair value. At May 31, 1995, the fund owned 42 homes
valued at $2,807,372, or 1% of net assets. The fund recognized
net realized losses of $333,038 on real estate sold during the
year ended May 31, 1995. Additionally, with respect to
participation mortgages, the fund generally will not be able to
unilaterally enforce its rights in the event of a default, but
rather will be dependent upon the cooperation of the other
participation holders.
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
16
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
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 May 31, 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 year ended May 31,
1995, such fees earned by the fund amounted to $201,788.
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 $169,296, or $0.008 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
losses deferred due to "wash sale" and "straddle" transactions,
the timing of recognition of income on certain interest-only and
principal-only 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 their ultimate characterization for federal income
tax purposes. The effect on dividend distribution of certain
book-to-tax differences is presented as an "excess distribution"
in the Statement of Changes in Net Assets and Financial
Highlights. In addition, due to the timing of dividend
distributions, the fiscal year in which amounts are distributed
may differ from the year the income or realized gains (losses)
were recorded by the fund.
17
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
On the Statement of Assets and Liabilities, as a result of
permanent book-to-tax differences, a reclassification adjustment
has been made to increase undistributed net investment income by
$1,315,648, increase accumulated net realized losses on
investments by $1,146,678 and decrease additional paid-in
capital by $168,970.
DISTRIBUTIONS
The fund pays monthly distributions from net investment income.
Realized capital gains, if any, will be distributed on an annual
basis. These distributions are recorded as of the close of
business on the ex-dividend date. Such distributions are payable
in cash or, pursuant to the fund's dividend reinvestment plan,
reinvested in additional shares of the fund's capital stock.
Under the plan, fund shares will be purchased in the open
market. However, if the market price plus commission exceeds the
net asset value by 5% or more, 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 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 the
administrator):
The investment advisory agreement provides the adviser with a
monthly investment management fee based on the fund's average
weekly net assets computed at the per annum rate of 0.20% and
4.5% of the daily gross income (i.e., investment income,
including amortization of discount and premium, other than gains
from the sale of securities or gains received from options and
futures contracts, less interest on money borrowed by the fund)
accrued by
18
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
the fund during the month. Such monthly management fee shall not
exceed the aggregate of 1/12 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 will provide investment
advice and, in general, will conduct the management and
investment activity of the fund.
The administration agreement provides the administrator with a
monthly fee in an amount equal to an annualized rate of 0.20% of
the fund's average weekly net assets. For its fee, the
administrator will provide regulatory, reporting and
record-keeping services for the fund.
When acquiring whole loans and participation mortgages, the fund
enters into mortgage servicing agreements with mortgage
servicers. For a fee, mortgage servicers maintain loan records
such as insurance and taxes and the proper allocation of
payments between principal and interest.
In addition to the advisory, administrative and mortgage
servicing 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, fees to
outside parties retained to assist in conducting due diligence,
taxes and other miscellaneous expenses.
(4) SECURITIES
TRANSACTIONS
Cost of purchases and proceeds from sales of securities (other
than short-term securities) aggregated $178,374,268 and
$227,977,367, respectively, for the year ended May 31, 1995.
During the year ended May 31, 1995, the fund paid no brokerage
commissions to Piper Jaffray Inc., an affiliated broker.
19
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(5) OPTION
CONTRACTS
WRITTEN
The number of contracts and premium amounts associated with call
option contracts written for year ended May 31, 1995, were as
follows:
<TABLE>
<CAPTION>
Number of Premium
Contracts Amount
----------- -----------
<S> <C> <C>
Balance at 5/31/94......................... 900 $ 790,156
Opened................................... 10,256 8,277,676
Closed or expired........................ (10,071) (7,915,566)
Exercised................................ (560) (717,500)
----------- -----------
Balance at 5/31/95......................... 525 $ 434,766
----------- -----------
----------- -----------
</TABLE>
(6) CAPITAL LOSS
CARRYOVER
For federal income tax purposes, the fund had a capital loss
carryover of $32,289,824 on May 31, 1995, which if not offset by
subsequent capital gains, will expire in 2003 and 2004. It is
unlikely the board of directors will authorize a distribution of
any net realized capital gains until the available capital loss
carryover has been offset or expires.
(7) 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 May 19,
1995. Pursuant to the plan, the fund has cumulatively
repurchased and retired 252,000 shares as of May 31, 1995, which
represents 1.26% of the shares originally issued.
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>
Year Year Period from
Ended Ended 7/30/92* to
5/31/95 5/31/94 5/31/93
-------- ------- -----------
<S> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period ..................... $ 12.97 14.54 14.07
-------- ------- -----------
Operations:
Net investment income .................................... 1.21 1.56 1.07
Net realized and unrealized gains (losses) on
investments ............................................ 0.17 (1.78) 0.41
-------- ------- -----------
Total from operations .................................. 1.38 (0.22) 1.48
-------- ------- -----------
Distributions to shareholders:
From net investment income ............................... (1.35) (1.31) (1.01)
In excess of net realized gains .......................... -- (0.04) --
-------- ------- -----------
Total distributions to shareholders .................... (1.35) (1.35) (1.01)
-------- ------- -----------
Net asset value, end of period ........................... $ 13.00 12.97 14.54
-------- ------- -----------
-------- ------- -----------
Per-share market value, end of period .................... $ 11.50 13.63 15.75
-------- ------- -----------
-------- ------- -----------
SELECTED INFORMATION
Total return, net asset value** ............................ 11.56% (2.15%) 10.97%
Total return, market value*** .............................. (5.38%) (5.38%) 12.57%
Net assets at end of period (in millions) ................ $ 262 265 297
Ratio of expenses to average weekly net assets++ ........... 1.27% 1.20% 1.09%+
Ratio of net investment income to average weekly net
assets ................................................... 9.60% 10.68% 9.08%+
Portfolio turnover rate (excluding short-term
securities) .............................................. 52% 117% 64%
Amount of borrowings outstanding at end of period
(in millions) .......................................... $ 53 85 76
Per-share amount of borrowings outstanding
at end of period TRIANGLE ............................. $ 2.61 4.16 3.71
Per-share asset coverage of borrowings outstanding
at end of period+++ .................................... $ 15.61 17.13 18.25
<FN>
* COMMENCEMENT OF OPERATIONS.
** BASED ON THE CHANGE IN NET ASSET VALUE OF A SHARE DURING THE PERIOD.
ASSUMES REINVESTMENT OF DISTRIBUTIONS AT NET ASSET VALUE.
*** BASED ON THE CHANGE IN MARKET PRICE OF A SHARE DURING THE PERIOD. 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.
+ ADJUSTED TO AN ANNUAL BASIS.
++ INCLUDES 0.07% AND 0.04% FROM FEDERAL EXCISE TAXES IN FISCAL YEARS 1995 AND
1994, RESPECTIVELY.
+++ REPRESENTS THE FUND'S NET ASSETS (EXCLUDING BORROWINGS) DIVIDED BY CAPITAL
SHARES OUTSTANDING.
</TABLE>
21
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(9) QUARTERLY DATA
(UNAUDITED)
DOLLAR AMOUNTS
<TABLE>
<CAPTION>
Net Increase
(Decrease)
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>
8/31/94 $ 7,218,256 6,347,518 1,093,326 7,440,844 (6,889,693)
11/30/94 7,566,976 6,650,916 (18,386,160) (11,735,244) (6,904,697)
2/28/95 6,492,377 5,711,152 9,111,665 14,822,817 (6,863,604)
5/31/95 6,460,203 5,788,602 11,382,399 17,171,001 (6,837,121)
----------- ----------- -------------- ------------ ------------
$ 27,737,812 24,498,188 3,201,230 27,699,418 (27,495,115)
----------- ----------- -------------- ------------ ------------
----------- ----------- -------------- ------------ ------------
</TABLE>
PER-SHARE AMOUNTS
<TABLE>
<CAPTION>
Net Realized and Net Increase Distributions
Net Unrealized Gains (Decrease) in Net from Net Quarter End
Investment (Losses) on Assets Resulting Investment Net Asset
Income Investments from Operations Income Value
------------- ----------------- ----------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
8/31/94 $ 0.32 0.05 0.37 (0.34) 13.00
11/30/94 0.33 (0.90) (0.57) (0.34) 12.09
2/28/95 0.28 0.45 0.73 (0.33) 12.49
5/31/95 0.28 0.57 0.85 (0.34) 13.00
--- ----- ----- -----
$ 1.21 0.17 1.38 (1.35)
--- ----- ----- -----
--- ----- ----- -----
</TABLE>
(10) SUBSEQUENT
EVENT -
PENDING
LITIGATION
A complaint purporting to be a class action lawsuit has been
filed against the fund, Piper Jaffray Companies Inc., Piper
Capital Management Incorporated, Piper Jaffray Inc. and certain
affiliated individuals in the United States District Court for
the Western District of Washington. The complaint was filed on
June 28, 1995, by Gary E. Nelson, who purports to represent all
persons who purchased shares of the fund between July 30, 1992
and October 3, 1994. The complaint alleges violations of federal
and Washington state securities laws and the Washington Consumer
Protection Act, breach of fiduciary duty and negligent
misrepresentation. The fund intends to defend this lawsuit
vigorously. Although it is impossible to predict the outcome,
management believes, based on the facts currently available,
that this lawsuit will have no material adverse effect on the
financial statements of the fund.
22
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
AMERICAN STRATEGIC INCOME PORTFOLIO II
MAY 31, 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 SECURITIES (20.7%):
U.S. Treasury Note, 6.88%, 3/31/00
(cost: $52,757,099) ............................... $ 52,500,000( ,d) 54,239,325
----------
MORTGAGE-BACKED SECURITIES (15.2%):
COLLATERALIZED MORTGAGE OBLIGATIONS (C) (15.2%):
PRIVATE FIXED RATE (6.5%):
8.60%, Chemical Mortgage Securities, Series 1991-1,
Subordinated Class B, 9/25/21 ....................... 3,026,600(g) 2,883,784
6.00%, CMI Trust 1, Series 1991-1, Subordinated,
3/1/22 .............................................. 3,796,904(g) 3,478,913
9.25%, FBS Mortgage Corporation, Series 1991-B,
Subordinated Class D, 11/1/31 ....................... 1,291,844(g) 1,242,592
7.43%, First Boston, Series 1993-2R, Subordinated
Class B-3A, 3/28/33 ................................. 3,578,565(g) 2,967,248
14.13%, Foremost Financial Services Corp, Subordinated
Class 82-B, 10/10/97 ................................ 67,022(g) 66,783
12.50%, Foremost Financial Services Corp, Subordinated
Class 83-A, 2/2/98 .................................. 308,150(g) 307,558
12.25%, Foremost Financial Services Corp, Subordinated
Class 83-B, 4/15/98 ................................. 565,692(g) 564,242
9.35%, GMBS Inc., Series 1990-4, Subordinated Class S,
10/25/20 ............................................ 1,876,683(g) 1,813,931
10.22%, Residential Funding Mortgage Securities,
Series 1987, Class S-8B, 8/25/17 .................... 1,957,832(g) 1,705,761
9.25%, Salomon Brothers Mortgage Securities VII,
Series 1990-1, Class G-1, 8/25/20 ................... 1,227,030(g) 1,178,728
9.25%, Salomon Brothers Mortgage Securities VII,
Series 1990-1, Class G-2, 8/25/20 ................... 696,220(g) 669,032
----------
16,878,572
----------
PRIVATE INTEREST-ONLY (0.4%):
2.10%, Farmer Mac Agricultural Real Estate Trust,
Series 1992-A, Subordinated Class X1, 4/25/04 ....... --(g) 1,108,240
----------
U.S. AGENCY INVERSE FLOATER (2.7%):
7.90%, FHLMC, Series 1552, Class LA, LIBOR,
8/15/23 ............................................. 3,596,820 2,805,520
5.69%, FHLMC, Series 1712, Class SA, COFI, 3/15/08 ... 1,865,377 1,615,883
10.23%, FNMA, Series 1993-185, Class S, LIBOR,
9/25/23 ............................................. 4,502,880 2,609,823
----------
7,031,226
----------
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
23
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
AMERICAN STRATEGIC INCOME PORTFOLIO II
(CONTINUED)
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- --------------------------------------------------------- --------- ----------
<S> <C> <C>
U.S. AGENCY Z-TRANCHE (5.6%):
8.50%, FHLMC, Series 1339, Class PZ, 7/15/22 ....... $ 9,457,020 9,791,988
7.50%, FHLMC, Series 1510, Class N, 5/15/13 .......... 5,049,356 4,976,897
----------
14,768,885
----------
Total Mortgage-Backed Securities
(cost: $40,211,570) ................................ 39,786,923
----------
WHOLE LOANS AND PARTICIPATION MORTGAGES (E,F,G) (76.4%):
COMMERCIAL LOANS (1.6%):
Countyside Village Mobile Home Park, 9.00%,
10/10/95 ............................................ 1,041,190 1,062,118
Harbour West Mobile Home Park, 9.63%, 12/10/95 ....... 1,529,246 1,562,278
Ridgewood Estates Mobile Home Park, 9.00%, 6/10/95 ... 1,664,503 1,689,970
----------
4,314,366
----------
MULTIFAMILY LOANS (23.0%):
Chase Hill Apartments, 9.00%, 4/1/01 ................. 3,095,705 3,104,992
Claridge Apartments, 10.06%, 9/1/01 .................. 5,578,970 5,727,929
Colony Square Apartments, 10.25%, 12/1/01 ............ 1,361,006 1,408,641
Colorado Springs Multifamily, 10.00%, 1/30/08 ........ 10,281,072 10,640,910
Dakota Creekside, 10.00%, 3/1/23 ..................... 1,701,911 1,761,478
Deering Manor, 9.50%, 12/8/22 ........................ 1,321,687 1,351,425
Green Acres Apartments, 10.38%, 10/1/01 .............. 1,094,363 1,132,666
Harbor View Apartments, 9.50%, 1/25/18 ............... 797,248 815,585
Lexington Apartments, 9.13%, 6/1/02 .................. 1,500,000 1,500,000
Minnesota Multifamily, 9.88%, 12/1/22 ................ 1,725,079 1,785,457
Newport Apartments, 9.75%, 4/1/02 .................... 1,400,000 1,449,000
Normandale Lake Estates, 10.55%, 8/1/01 .............. 2,266,330 2,345,652
Normandy Village Apartments, 10.31%, 10/1/01 ......... 2,738,178 2,691,355
Park Dale Lane Apartments, 9.63%, 6/1/01 ............. 970,003 990,858
Park Place of Venice Apartments, 10.75%, 4/1/02 ...... 2,700,000 2,794,500
Railview Apartments, 9.50%, 12/8/22 .................. 1,533,840 1,568,351
Rhode Island Chateau Apartments, 10.61%, 9/1/01 ...... 2,426,235 2,511,154
Rockwell Plaza Apartments, 9.88%, 8/1/01 ............. 4,308,428 4,403,644
Sunland Manor Apartments, 10.13%, 11/1/01 ............ 1,296,709 1,337,037
The Hedges Apartments, 10.13%, 8/1/01 ................ 5,014,037 5,155,934
Weatheridge Apartments, 9.63%, 4/1/04 ................ 1,486,203 1,538,220
Willmar Multifamily, 10.25%, 1/20/18 ................. 1,091,573 1,091,573
Windgate Apartments, 10.38%, 8/1/01 .................. 3,178,818 3,290,076
----------
60,396,437
----------
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
24
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
AMERICAN STRATEGIC INCOME PORTFOLIO II
(CONTINUED)
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- --------------------------------------------------------- --------- ----------
<S> <C> <C>
SINGLE FAMILY LOANS (51.8%):
Amerivest Mortgage, 8.69%, 5/1/12 .................. $ 3,105,591 3,083,448
CTX Mortgage, 9.09%, 11/23/22 ........................ 3,262,351 3,254,489
Energy Park Loans, 12.20%, 12/1/22 ................... 600,309 616,925
Fairbanks Capital, 10.10%, 7/29/97 ................... 7,451,968 7,535,803
Fairbanks Capital Corp., 9.95%, 1/1/07 ............... 3,210,613 2,913,824
Fairbanks IV, 8.94%, 7/3/11 .......................... 1,275,289 1,179,923
First Federal of Delaware, 8.39%, 2/1/18 ............. 7,878,372 7,422,135
Heartland Federal Savings & Loan, 10.49%, 11/17/22 ... 859,614 835,081
Kentucky Central Life, 9.32%, 5/1/22 ................. 9,459,585(b) 9,437,639
Kislak, 9.99%, 6/30/20 ............................... 9,503,563 8,662,514
Maryland National Bank, 9.59%, 9/1/18 ................ 1,813,041 1,842,575
McDowell, 10.10%, 12/1/20 ............................ 5,948,747 5,688,965
Merchants Bank, 10.22%, 12/1/20 ...................... 3,295,328 3,384,302
Meridian, 9.72%, 10/15/22 ............................ 2,299,164 2,372,047
Meridian III, 9.55%, 12/1/20 ......................... 6,716,487 6,433,008
Nations Bank, 8.21%, 10/1/07 ......................... 326,261 337,631
Neslund Properties, 9.88%, 2/1/23 .................... 9,235,317 8,997,100
Nomura I, 10.09%, 12/16/23 ........................... 16,562,702(b) 16,677,150
Nomura II, 8.64%, 3/22/15 ............................ 17,641,018 15,681,047
Old Hickory Credit Union, 10.09%, 10/15/22 ........... 4,267,178 4,363,744
Paine Webber, New Jersey, 12.02%, 10/15/20 ........... 1,019,843 973,542
PHH US Mortgage, 8.86%, 1/1/12 ....................... 11,479,003 11,189,364
President Homes 92-4, Sales Inventory, 8.14%,
10/15/20 ............................................ 614,254 603,855
President Homes 92-5, Sales Inventory, 8.14%,
10/15/20 ............................................ 318,053 312,668
President Homes 92-6, Sales Inventory, 8.14%,
10/15/20 ............................................ 390,805 384,189
President Homes 92-7, Sales Inventory, 8.14%,
10/15/20 ............................................ 504,314 495,776
President Homes 92-8, Sales Inventory, 8.14%,
11/24/22 ............................................ 1,067,166 1,049,099
President Homes 94-1A, Sales Inventory, 8.14%,
12/28/22 ............................................ 1,201,247 1,180,909
President Homes 94-1A, Warehouse Inventory, 10.00%,
12/28/22 ............................................ 460,481 414,433
President Homes 94-1B, Warehouse Inventory, 10.00%,
6/4/24 . 449,501 404,551
Progressive Consumers Federal Credit Union, 11.14%,
10/15/22 ............................................ 1,620,626 1,555,509
Salomon Pool, 7.76%, 12/28/16 ........................ 5,956,117 5,780,769
Sears Mortgage, 8.53%, 11/18/22 ...................... 832,273 838,831
----------
135,902,845
----------
Total Whole Loans and Participation Mortgages
(cost: $195,293,679) ............................... 200,613,648
----------
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
25
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
AMERICAN STRATEGIC INCOME PORTFOLIO II
(CONTINUED)
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- --------------------------------------------------------- --------- ----------
<S> <C> <C>
SHORT-TERM SECURITIES (5.0%):
Repurchase agreement with Morgan Stanley in a joint
trading account, collateralized by U.S. government
agency securities, acquired on 5/31/95, accrued
interest at repurchase date of $2,090, 5.85%, 6/1/95
(cost: $13,041,000) ............................... $ 13,041,000 13,041,000
----------
Total Investments in Securities
(cost: $301,303,348) (h) ......................... $ 307,680,896
----------
----------
</TABLE>
NOTES TO INVESTMENTS IN SECURITIES:
<TABLE>
<S> <C>
(A) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO THE
FINANCIAL STATEMENTS.
(B) ON MAY 31, 1995, SECURITIES VALUED AT $77,709,302 WERE PLEDGED AS COLLATERAL FOR THE
FOLLOWING OUTSTANDING REVERSE REPURCHASE AGREEMENTS:
</TABLE>
<TABLE>
<CAPTION>
NAME
OF BROKER AND
ACQUISITION ACCRUED DESCRIPTION
AMOUNT DATE RATE* DUE INTEREST OF COLLATERAL
- ------------ ----------- ----------- ----------- --------- -------------------
<S> <C> <C> <C> <C> <C>
$ 2,450,000 3/1/95 5.96% 6/1/95 $ 12,579 (1)
2,700,000 7/25/94 6.94% 1/25/97 16,129 (2)
1,500,000 9/14/94 5.96% 9/1/95 7,702 (3)
8,000,000 4/3/95 5.96% 6/1/95 41,075 (4)
10,900,000 5/1/95 5.96% 7/5/95 55,964 (5)
9,150,000 5/1/95 5.96% 8/1/95 46,980 (6)
950,000 5/1/95 5.96% 6/1/95 4,878 (7)
5,600,000 8/16/94 6.01% 6/1/95 28,994 (8)
5,850,000 8/16/94 6.01% 8/1/95 30,288 (9)
5,600,000 8/16/94 6.01% 7/5/95 28,994 (9)
- ------------ ---------
$ 52,700,000 $ 273,583
- ------------ ---------
- ------------ ---------
</TABLE>
*INTEREST RATE IS AS OF MAY 31, 1995. RATES ARE BASED ON THE LONDON INTERBANK
OFFERED RATE (LIBOR) AND RESET MONTHLY.
NAME OF BROKER AND DESCRIPTION OF COLLATERAL:
(1) NOMURA; U.S. TREASURY NOTE, 6.88%, 3/31/00, $2,445,000 PAR
(2) NOMURA; KENTUCKY CENTRAL LIFE, 9.32%, 5/1/22, $9,459,585 PAR
NOMURA I, 10.09%, 12/16/23, $16,562,702 PAR
(3) NOMURA; U.S. TREASURY NOTE, 6.88%, 3/31/00, $1,500,000 PAR
(4) NOMURA; U.S. TREASURY NOTE, 6.88%, 3/31/00, $7,990,000 PAR
(5) NOMURA; U.S. TREASURY NOTE, 6.88%, 3/31/00, $10,885,000 PAR
(6) NOMURA; U.S. TREASURY NOTE, 6.88%, 3/31/00, $9,140,000 PAR
26
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
<TABLE>
<S> <C>
(7) NOMURA; U.S. TREASURY NOTE, 6.88%, 3/31/00, $950,000 PAR
(8) NOMURA; U.S. TREASURY NOTE, 6.88%, 3/31/00, $5,480,000 PAR
(9) NOMURA; U.S. TREASURY NOTE, 6.88%, 3/31/00, $11,550,000 PAR
</TABLE>
(C) 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 MAY 31, 1995.
INTEREST-ONLY - REPRESENTS SECURITIES THAT ENTITLE HOLDERS TO RECEIVE ONLY
INTEREST PAYMENTS ON THE UNDERLYING MORTGAGES. THE YIELD TO MATURITY OF
AN INTEREST-ONLY IS EXTREMELY SENSITIVE TO THE RATE OF PRINCIPAL PAYMENTS
ON THE UNDERLYING MORTGAGE ASSETS. A RAPID (SLOW) RATE OF PRINCIPAL
REPAYMENTS MAY HAVE AN ADVERSE (POSITIVE) EFFECT ON YIELD TO MATURITY.
INTEREST RATES DISCLOSED REPRESENT CURRENT YIELDS BASED UPON THE CURRENT
COST BASIS AND ESTIMATED TIMING AND AMOUNT OF FUTURE CASH FLOWS.
Z-TRANCHE - REPRESENTS SECURITIES THAT PAY NO INTEREST OR PRINCIPAL DURING
THEIR INITIAL ACCRUAL PERIODS, BUT ACCRUE ADDITIONAL PRINCIPAL AT
SPECIFIED RATES. INTEREST RATES DISCLOSED REPRESENT CURRENT YIELDS BASED
UPON THE CURRENT COST BASIS AND ESTIMATED TIMING OF FUTURE CASH FLOWS.
(D) ISSUE IS IDENTIFIED IN CONNECTION WITH THE FOLLOWING OPEN CALL OPTIONS
WRITTEN:
<TABLE>
<CAPTION>
TYPE OF NUMBER OF EXERCISE EXPIRATION MARKET
CONTRACT CALLS PRICE DATE VALUE
- ------------------ --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. TREASURY NOTE
6.88%, 3/31/00 525 101.45 6/15/95 $ 1,000,781
</TABLE>
(E) INTEREST RATE AND MATURITY DATE DISCLOSED REPRESENT THE WEIGHTED AVERAGE
COUPON AND WEIGHTED AVERAGE MATURITY FOR THE UNDERLYING MORTGAGE LOANS AS
OF MAY 31, 1995.
(F) FOR INVESTMENT SCHEDULE PRESENTATION, SINGLE FAMILY DIRECT MORTGAGE
PURCHASES ARE SUMMARIZED BY THE INSTITUTION FROM WHICH THEY WERE PURCHASED.
TOTAL NUMBER OF LOANS AND GENERAL GEOGRAPHICAL LOCATION ASSOCIATED WITH
EACH LOAN GROUP ARE AS FOLLOWS:
COMMERCIAL LOANS:
COUNTRYSIDE VILLAGE MOBILE HOME PARK - 1 COMMERCIAL LOAN LOCATED IN
BOWLING GREEN, KENTUCKY.
HARBOUR WEST MOBILE HOME PARK - 1 COMMERCIAL LOAN LOCATED IN LINCOLN,
NEBRASKA.
RIDGEWOOD ESTATES MOBILE HOME PARK - 1 COMMERCIAL LOAN LOCATED IN LAYTON,
UTAH.
MULTIFAMILY LOANS:
CHASE HILL APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN SAN ANTONIO, TEXAS.
CLARIDGE APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN HOUSTON, TEXAS.
COLONY SQUARE APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN FORT WORTH,
TEXAS.
COLORADO SPRINGS MULTIFAMILY - 5 MULTIFAMILY LOANS LOCATED IN COLORADO
SPRINGS, COLORADO.
DAKOTA CREEKSIDE - 1 MULTIFAMILY LOAN LOCATED IN PENSACOLA, FLORIDA.
DEERING MANOR - 1 MULTIFAMILY LOAN LOCATED IN NASHWAUK, MINNESOTA
GREEN ACRES APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN YOUNGSTOWN, OHIO
HARBOR VIEW APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN GRAND MARAIS,
MINNESOTA.
LEXINGTON APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN EAST POINT, GEORGIA.
MINNESOTA MULTIFAMILY - 3 LOANS LOCATED IN MINNEAPOLIS, MINNESOTA.
NEWPORT APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN WHITE SETTLEMENT,
TEXAS.
27
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
<TABLE>
<S> <C>
NORMANDALE LAKE ESTATES - 1 MULTIFAMILY LOAN LOCATED IN BLOOMINGTON,
MINNESOTA.
NORMANDY VILLAGE APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN MIAMI BEACH,
FLORIDA.
PARK DALE LANE APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN FORT WORTH,
TEXAS.
PARK PLACE OF VENICE APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN VENICE,
FLORIDA.
RAILVIEW APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN PROCTOR, MINNESOTA.
RHODE ISLAND CHATEAU APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN ST. LOUIS
PARK, MINNESOTA.
ROCKWELL PLAZA APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN OKLAHOMA CITY,
OKLAHOMA.
SUNLAND MANOR APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN MESA, ARIZONA.
THE HEDGES APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN GREENSBORO, NORTH
CAROLINA.
WEATHERIDGE APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN HOUSTON, TEXAS.
WILLMAR MULTIFAMILY - 1 LOAN LOCATED IN WILLMAR, MINNESOTA.
WINDGATE APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN LOUISVILLE, KENTUCKY.
SINGLE FAMILY LOANS:
AMERIVEST MORTGAGE - 46 LOANS LOCATED IN MASSACHUSETTS.
CTX MORTGAGE - 31 LOANS LOCATED THROUGHOUT THE UNITED STATES.
ENERGY PARK LOANS - 9 LOANS LOCATED IN ST. PAUL, MINNESOTA.
FAIRBANKS CAPITAL - SENIOR DEBT SECURITY COLLATERALIZED BY A POOL OF
NON-PERFORMING WHOLE LOANS LOCATED THROUGHOUT THE EASTERN UNITED
STATES.
FAIRBANKS CAPITAL CORP - 46 LOANS LOCATED IN THE WESTERN UNITED STATES.
FAIRBANKS IV - 24 LOANS LOCATED THROUGHOUT THE UNITED STATES.
FIRST FEDERAL OF DELAWARE - 152 LOANS LOCATED THROUGHOUT THE UNITED
STATES.
HEARTLAND FEDERAL SAVINGS & LOAN - 8 LOANS LOCATED IN CALIFORNIA.
KENTUCKY CENTRAL LIFE - 160 LOANS LOCATED IN KENTUCKY.
KISLAK - 167 LOANS LOCATED IN THE CENTRAL AND SOUTHERN UNITED STATES.
MARYLAND NATIONAL BANK - 31 LOANS LOCATED IN THE EASTERN UNITED STATES.
MCDOWELL - 119 LOANS LOCATED IN GEORGIA.
MERCHANTS BANK - 99 LOANS LOCATED IN VERMONT.
MERIDIAN - 19 LOANS LOCATED IN CALIFORNIA AND FLORIDA.
MERIDIAN III - 113 LOANS LOCATED IN CALIFORNIA.
NATIONS BANK - 32 LOANS LOCATED IN GEORGIA.
NESLUND PROPERTIES - 211 LOANS LOCATED IN MINNEAPOLIS, MINNESOTA.
NOMURA II - 288 LOANS LOCATED THROUGHOUT THE UNITED STATES.
NOMURA I - 330 LOANS LOCATED PRIMARILY IN CALIFORNIA AND TEXAS.
OLD HICKORY CREDIT UNION - 119 LOANS LOCATED IN TENNESSEE.
PAINE WEBBER, NEW JERSEY - 30 LOANS LOCATED IN NEW JERSEY.
PHH US MORTGAGE - 154 LOANS LOCATED THROUGHOUT THE UNITED STATES.
PRESIDENT HOMES, SALES INVENTORY - 43 LOANS LOCATED THROUGHOUT THE
MIDWESTERN STATES.
PRESIDENT HOMES, WAREHOUSE INVENTORY - 7 LOANS LOCATED THROUGHOUT THE
MIDWESTERN STATES.
PROGRESSIVE CONSUMERS FEDERAL CREDIT UNION - 13 LOANS LOCATED IN
MASSACHUSETTS.
SALOMON POOL - 66 LOANS LOCATED IN NEW JERSEY.
SEARS MORTGAGE - 10 LOANS LOCATED THROUGHOUT THE UNITED STATES.
(G) SECURITIES PURCHASED AS PART OF A PRIVATE PLACEMENT WHICH HAVE NOT BEEN
REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES
ACT OF 1933.
</TABLE>
28
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
<TABLE>
<S> <C>
(H) ON MAY 31, 1995, THE COST OF INVESTMENTS IN SECURITIES FOR FEDERAL INCOME
TAX PURPOSES WAS $302,246,376. 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 .... $ 9,458,712
GROSS UNREALIZED DEPRECIATION ...... (4,024,192)
----------
NET UNREALIZED APPRECIATION .... $ 5,434,520
----------
----------
</TABLE>
29
<PAGE>
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS
AMERICAN STRATEGIC INCOME PORTFOLIO INC. II:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments in securities, of American Strategic Income
Portfolio Inc. II (the fund) as of May 31, 1995 and the related statements of
operations and cash flows for the year then ended, the statements of changes in
net assets for each of the years in the two-year period ended May 31, 1995 and
the financial highlights presented in footnote 8 to the financial statements.
These financial statements and the financial highlights are the responsibility
of the fund's management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Investment securities held in custody are confirmed to us by the
custodian. As to securities sold but not delivered, we request confirmation from
brokers, and where replies are not received, we carry out other appropriate
auditing procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of
American Strategic Income Portfolio Inc. II as of May 31, 1995, the results of
its operations and cash flows for the year then ended, the changes in its net
assets for each of the years in the two-year period ended May 31, 1995 and the
financial highlights presented in footnote 8 to the financial statements, in
conformity with generally accepted accounting principles.
As discussed in Note 2, the financial statements include real estate owned and
certain mortgage related investments (representing 78% of net assets at May 31,
1995) which are stated at estimated value as determined by the investment
adviser using procedures approved by the Board of Directors. We have reviewed
the procedures used in arriving at the estimated values and have inspected
underlying documentation, and, in the circumstances, we believe the procedures
are reasonable and the documentation appropriate. However, because of the
inherent uncertainty of valuation, those estimated values may differ from actual
values realized upon a sale as determined in a negotiation between the fund and
third parties.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
July 14, 1995
30
<PAGE>
- --------------------------------------------------------------------------------
FEDERAL TAX INFORMATION
Fiscal Year Ended May 31, 1995
Federal tax information is presented as an aid to you in
reporting distributions. Please consult a tax adviser on
how to report these distributions at the state and local
levels.
Distributions shown below are taxable as dividend
income. None qualify for corporate dividends received
deduction. In early February 1996, you will receive a
breakdown of income earned by investment category for
calendar year 1995.
<TABLE>
<CAPTION>
Payable Date Per Share
- ----------------------------------------------- -----------
<S> <C>
June 22, 1994 ............................... $ 0.1125
July 27, 1994 ................................. 0.1125
August 24, 1994 ............................... 0.1125
September 28, 1994 ............................ 0.1125
October 26, 1994 .............................. 0.1125
November 23, 1994 ............................. 0.1125
December 28, 1994 ............................. 0.1125
January 13, 1995 .............................. 0.1125
February 22, 1995 ............................. 0.1125
March 29, 1995 ................................ 0.1125
April 26, 1995 ................................ 0.1125
May 24, 1995 .................................. 0.1125
-----------
$ 1.3500
-----------
-----------
</TABLE>
31
<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 abstentions, 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 12,663,909 333,579
Jaye F. Dyer 12,657,693 339,736
William H. Ellis 12,663,112 334,316
Karol D. Emmerich 12,672,856 324,572
Luella G. Goldberg 12,668,066 329,362
John T. Golle* 12,659,681 337,747
Edward J. Kohler* 12,670,705 326,724
George Latimer 12,649,928 347,501
<FN>
* MR. KOHLER RESIGNED AS DIRECTOR OF THE FUND, EFFECTIVE NOVEMBER 30, 1994.
MR. GOLLE RESIGNED AS DIRECTOR OF THE FUND, EFFECTIVE JUNE 1, 1995.
</TABLE>
2. The fund's shareholders ratified the selection by a majority of the
independent members of the fund's Board of Directors of KPMG Peat
Marwick LLP as the independent public accountants for the fund for the
fiscal year ending May 31, 1995. The following votes were cast regarding
this matter:
<TABLE>
<CAPTION>
Shares Shares Voted Broker
Voted "For" "Against" Abstentions Non-Votes
- ----------- ------------- ----------- ---------------
<S> <C> <C> <C>
12,521,588 106,480 369,361 --
</TABLE>
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.
32
<PAGE>
- --------------------------------------------------------------------------------
SHAREHOLDER UPDATE
- - 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.
TERMS AND CONDITIONS OF THE DIVIDEND REINVESTMENT PLAN
As a shareholder, you may choose to participate in the Dividend Reinvestment
Plan. It's a convenient and economical way to buy additional shares of the fund
by automatically reinvesting dividends and capital gains. The plan is
administered by Investors Fiduciary Trust Company (IFTC), the plan agent.
ELIGIBILITY/PARTICIPATION
You may join the plan at any time. Reinvestment of distributions will begin with
the next distribution paid, provided your request is received at least 10 days
before the record date for that distribution.
If your shares are in certificate form, you may join the plan directly and have
your distributions reinvested in additional shares of the fund. To enroll in
this plan, call IFTC at 1-800-543-1627. If your shares are registered in your
brokerage firm's name or another name, ask the holder of your shares how you may
participate.
Banks, brokers or nominees, on behalf of their beneficial owners who wish to
reinvest dividend and capital gain distributions, may participate in the plan by
informing IFTC at least 10 days before each share's dividend and/or capital
gains distribution.
33
<PAGE>
- --------------------------------------------------------------------------------
SHAREHOLDER UPDATE
PLAN ADMINISTRATION
Beginning no more than five business days before the dividend payment date, IFTC
will buy shares of the fund on the New York Stock Exchange or elsewhere on the
open market only when the price of the fund's shares on the NYSE plus
commissions is less than a 5% premium over the fund's most recently calculated
net asset value (NAV) per share. 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, IFTC will accept payment of the
dividend, or the remaining portion, in authorized but unissued shares of the
fund. These shares will be issued at a per-share price equal to the higher of
(a) the NAV per share as of the close of business on the payment date or (b) 95%
of the closing market price per share on the payment date.
By participating in the dividend reinvestment plan, you may receive benefits not
available to shareholders who elect not to participate. For example, if the
market price plus commissions of the fund's shares is 5% or more above the NAV,
you will receive shares at a discount of up to 5% from the current market value.
However, if the market price plus commissions is below the NAV, you will receive
distributions in shares with a NAV greater than the value of any cash
distributions you would have received.
There is no direct charge for reinvestment of dividends and capital gains, since
IFTC fees are paid for by the fund. However, if fund shares are purchased in the
open market, each participant pays a pro rata portion of the brokerage
commissions. Brokerage charges are expected to be lower than those for
individual transactions because shares are purchased for all participants in
blocks. As long as you continue to participate in the plan, distributions paid
on the shares in your account will be reinvested.
IFTC maintains accounts for plan participants holding shares in certificate
form. You will receive a monthly statement detailing total dividend and capital
gain distributions, date of investment, shares acquired, price per share, and
total shares held in your account, both certificate-form shares and unissued
shares acquired through the plan.
TAX INFORMATION
Distributions reinvested in additional shares of the fund are subject to income
tax, just as they would be if received in cash. When shares are issued by the
fund at a discount from market value, shareholders will be treated as having
received distributions of an amount equal to the full market value of those
shares. Shareholders, as required by the Internal Revenue Service, will receive
Form 1099 regarding the federal tax status of the prior year's distributions.
34
<PAGE>
- --------------------------------------------------------------------------------
SHAREHOLDER UPDATE
PLAN WITHDRAWAL
If you hold your shares in certificate form, you may terminate your
participation in the plan at any time by giving written notice to IFTC. If your
shares are registered in your brokerage firm's name, you may terminate your
participation via verbal or written instructions to your investment
professional. Written instructions should include your name and address as they
appear on the certificate or account.
If notice is received at least 10 days before the record date, all future
distributions will be paid directly to the shareholder of record.
If your shares are in certificate form and you discontinue your participation in
the plan, you (or your nominee) will receive an additional certificate for all
full shares and a check for any fractional shares in your account.
PLAN AMENDMENT/TERMINATION
The funds reserve the right to amend or terminate the plan. Should the plan be
amended or terminated, participants will be notified in writing at least 90 days
before the record date for such dividend or distribution. The plan may also be
amended or terminated by IFTC with at least 90 days written notice to
participants in the plan.
Any questions about the plan should be directed to your investment professional
or to Investors Fiduciary Trust Company, P.O. Box 419432, Kansas City, Missouri
64141, 1-800-543-1627.
35
<PAGE>
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
<TABLE>
<S> <C>
DIRECTORS David T. Bennett, CHAIRMAN, HIGHLAND HOMES, INC.,
USL PRODUCTS, INC., AND 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 CORP., HORMEL FOODS CORP.
George Latimer, DIRECTOR, SPECIAL ACTIONS OFFICE, OFFICE
OF THE SECRETARY, DEPARTMENT OF HOUSING AND URBAN
DEVELOPMENT
OFFICERS William H. Ellis, CHAIRMAN OF THE BOARD
Michael P. Jansen, PRESIDENT
Worth Bruntjen, SENIOR VICE PRESIDENT
Marijo A. Goldstein, SENIOR VICE PRESIDENT
Robert H. Nelson, SENIOR VICE PRESIDENT
Kevin A. Jansen, VICE PRESIDENT
John G. Wenker, VICE PRESIDENT
Charles N. Hayssen, TREASURER
David E. Rosedahl, SECRETARY
INVESTMENT Piper Capital Management Incorporated
ADVISER 222 SOUTH NINTH STREET, MINNEAPOLIS, MN 55402
TRANSFER AGENT Investors Fiduciary Trust Company
AND RECORD 127 WEST 10TH STREET, KANSAS CITY, MO 64105-1716
KEEPER
LEGAL COUNSEL Dorsey & Whitney P.L.L.P.
220 SOUTH SIXTH STREET, MINNEAPOLIS, MN 55402
CUSTODIAN First Trust
180 EAST FIFTH STREET, ST. PAUL, MN 55101
INDEPENDENT KPMG Peat Marwick LLP
AUDITORS 4200 NORWEST CENTER, MINNEAPOLIS, MN 55402
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PIPER CAPITAL MANAGEMENT INCORPORATED
222 SOUTH NINTH STREET
MINNEAPOLIS, MN 55402-3804
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.
239-95 BSP-01
STAPLES
