<PAGE>
AMERICAN
STRATEGIC
INCOME
PORTFOLIO III
* * *
SEMIANNUAL
REPORT
1995
<PAGE>
TABLE OF CONTENTS
AMERICAN STRATEGIC INCOME PORTFOLIO III
AVERAGE ANNUALIZED TOTAL RETURNS . . 1
LETTER TO SHAREHOLDERS . . . . . . . 2
MANAGING RISK . . . . . . . . . . . 8
FINANCIAL STATEMENTS AND NOTES . . . 9
INVESTMENTS IN SECURITIES . . . . . 23
SHAREHOLDER UPDATE . . . . . . . . . 30
American Strategic Income Portfolio III is a diversified, closed-end
investment management company. The fund's primary objective is to provide a
high level of current income; 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
securities and mortgage servicing rights. The fund may borrow, including
through the use of reverse repurchase agreements, and may purchase securities
through the sale-forward (dollar-roll) program. Use of certain of these
investments and investment techniques 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 the fund's inception on March 25,
1993, it has been rated Af by Standard & Poor's Ratings Group (S&P).* Fund
shares trade on the New York Stock Exchange under the symbol CSP.
*THE FUND IS RATED Af, WHICH MEANS THE FUND'S INVESTMENTS 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>
AVERAGE ANNUALIZED TOTAL RETURNS
PERIODS ENDED NOVEMBER 30, 1995
[GRAPH]
THE AVERAGE ANNUALIZED TOTAL RETURN FIGURES FOR AMERICAN STRATEGIC INCOME
PORTFOLIO III 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.
TOTAL RETURNS BASED ON THE CHANGE IN MARKET PRICE FOR THE ONE-YEAR AND SINCE
INCEPTION PERIODS ENDED NOVEMBER 30, 1995, WERE 13.44% AND -1.69%,
RESPECTIVELY. THESE FIGURES ALSO ASSUME REINVESTED 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 FIGURES.
THE LIPPER CLOSED-END U.S. MORTGAGE FUNDS AVERAGE REPRESENTS THE AVERAGE
ANNUALIZED TOTAL RETURN, WITH DIVIDENDS REINVESTED, OF SIMILAR CLOSED-END
MUTUAL FUNDS AS CHARACTERIZED BY LIPPER ANALYTICAL SERVICES.
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. THE INVESTMENT RETURN AND
MARKET VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT FUND SHARES, WHEN SOLD,
MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
1
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AMERICAN STRATEGIC INCOME PORTFOLIO III
[PHOTO]
JOHN WENKER
[PHOTO]
DAVID STEELE
JOHN WENKER ASSUMED THE ROLE OF PRIMARY PORTFOLIO MANAGER OF AMERICAN
STRATEGIC INCOME PORTFOLIO III IN NOVEMBER 1995. JOHN, WHO HAS ASSISTED WITH
THE FUND'S MANAGEMENT SINCE 1992, HAS BEEN RESPONSIBLE FOR THE ACQUISITION
AND DUE DILIGENCE OF MANY OF THE SINGLE-FAMILY, MULTIFAMILY AND COMMERCIAL
MORTGAGE LOANS IN THE FUND. PRIOR TO JOINING PIPER CAPITAL MANAGEMENT, JOHN
MANAGED SINGLE-FAMILY AND MULTIFAMILY REVENUE BOND FINANCINGS FOR A FINANCIAL
FIRM. RUSS KAPPENMAN WILL ASSIST PRIMARILY WITH THE ACQUISITION OF THE FUND'S
MORTGAGE LOANS. DAVID STEELE WILL HELP MANAGE THE FUND'S OTHER SECURITIES.
MIKE JANSEN, WHO PREVIOUSLY MANAGED THE FUND, AND KEVIN JANSEN, AN ASSISTANT
FUND MANAGER, HAVE LEFT PIPER CAPITAL TO PURSUE OTHER CAREER OPPORTUNITIES.
January 26, 1996
Dear Shareholders:
FOR THE SIX-MONTH PERIOD ENDED NOVEMBER 30, 1995, AMERICAN STRATEGIC INCOME
PORTFOLIO III HAD A NET ASSET VALUE TOTAL RETURN OF 5.05%.* This includes
reinvested distributions but not sales charges. This compares to a 6.13%
return for the Lehman Brothers Mutual Fund Government/Mortgage Index and a
6.24% return for the Lipper Closed-End U.S. Mortgage Funds Average during
this same period. The fund's underperformance is primarily due to price caps
on the mortgage loans in the fund. These caps limited the price increase on
these mortgage loans as interest rates fell. The index and average did not
contain mortgage loans and were not restricted by these caps. While the fund
continues to trade at a discount to net asset value, we believe the changes
we've made to reduce its net asset value volatility and stabilize earnings,
as discussed below, could help improve the fund's market price over time.
(See page 4 for an explanation of premium vs. discount.) As of January 18,
the fund's market price was $11.00 and its net asset value was $12.49 per
share. For the six-month period ended November 30, 1995, the fund's total
return based on market price was 4.74%, including reinvested distributions
but not sales charges.
* PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. THE INVESTMENT RETURN
AND MARKET VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT FUND SHARES, WHEN
SOLD, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
2
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AMERICAN STRATEGIC INCOME PORTFOLIO III
PORTFOLIO COMPOSITION
NOVEMBER 30, 1995
[GRAPH]
THE MARKET ENVIRONMENT DURING THE YEAR PLAYED A MAJOR ROLE IN THE FUND'S
STRONG NET ASSET VALUE PERFORMANCE. Interest rates have declined since the
beginning of 1995 due to signs of slowing economic growth. As a result, bond
prices in general increased. In addition, an improved market for rental
housing during the year increased the value of the fund's holdings of
multifamily loans. If rates remain at current levels or decline further for a
sustained period of time, the prepayment rates for mortgage loans in the fund
may accelerate. Because most of the mortgages in the fund are purchased at a
discount and prepay at face value, prepayments could temporarily increase
earnings in the fund. However, we would then have to reinvest these
prepayments at lower interest rates which would ultimately decrease the
fund's earnings.
DURING THE YEAR, OUR GOAL HAS BEEN TO STABILIZE THE FUND'S NET ASSET VALUE
AND EARNINGS. We did this by selling substantially all of the fund's Z-bonds,
inverse floaters, principal-only, interest-only and inverse interest-only
securities. As interest rates fell, the fund benefited from the increase in
value of these mortgage-backed derivatives following their lows in 1994. The
fund does have a small position remaining in principal-only securities, which
represents less than 0.5% of total assets. Also, in December we significantly
decreased the fund's position in subordinated mortgage-backed securities;
however, the fund does still own a small position in these securities.
3
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AMERICAN STRATEGIC INCOME PORTFOLIO III
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, shares are said to be trading
at a "discount."
AS WE SOLD THE MORTGAGE-BACKED SECURITIES LISTED ABOVE, WE REINVESTED THE
PROCEEDS IN MORTGAGE LOANS AND U.S. TREASURY SECURITIES. As of November 30,
37% of the fund's total assets were invested in single-family (home) loans,
32% in multifamily (apartment) loans, and 20% in Treasury securities. It is
our goal to maintain the fund's investments in mortgage loans and Treasuries
at approximately these levels. This is consistent with our strategy of
focusing on securities that may involve more credit risk and moving away from
those that are more sensitive to changing interest rates. We continue to
borrow in the fund through reverse repurchase agreements, which as of
November 30 accounted for 18% of the fund's total assets, and invest the
proceeds in Treasury securities. While borrowing can potentially increase the
fund's earnings, it can also increase the fund's net asset value volatility.
ON JANUARY 26, PIPER CAPITAL ANNOUNCED THAT BEGINNING IN FEBRUARY, THE FUND'S
MONTHLY DIVIDEND WILL BE REDUCED FROM 10.625 CENTS PER SHARE TO 9.625 CENTS
PER SHARE. Because the fund is only earning 8.57 cents per share (based on a
three-month average), it has been relying on its dividend reserve to help pay
its monthly dividend. Therefore, the fund's Dividend Committee lowered the
monthly dividend to bring it closer to the fund's monthly earnings. While we
believe the recent changes we've made to the fund have resulted in more
stable monthly earnings, the fund is still earning less than the 9.625 cents
per share dividend we will begin paying in February. If the fund continues to
earn less than its monthly dividend, further reductions will be made until
the fund has
4
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AMERICAN STRATEGIC INCOME PORTFOLIO III
GEOGRAPHICAL DISTRIBUTION
NOVEMBER 30, 1995
[MAP]
reached an appropriate dividend level given its monthly earnings. As of
November 30, the fund's dividend reserve was approximately 24 cents per
share. Keep in mind that the dividend reserve is reflected in the fund's net
asset value and any reduction in the dividend reserve will reduce the fund's
net asset value penny for penny.
ALTHOUGH THE FUND'S EARNINGS HAVE DECLINED FROM THEIR HIGHS IN PREVIOUS
YEARS, THE FUND CONTINUES TO GENERATE ATTRACTIVE EARNINGS LEVELS. The fund's
current monthly earnings rate of 8.57 cents per share (based on a three-month
average) would result in an annualized earnings rate of 9.35% on the November
30 market price and
5
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AMERICAN STRATEGIC INCOME PORTFOLIO III
6.86% on the initial public offering price of $15 per share. Keep in mind
that past performance does not guarantee future results and these rates will
fluctuate.
DURING THE YEAR, WE SUCCESSFULLY MANAGED THE RISKS INVOLVED WITH MORTGAGE
LOANS. (See page 8 for a discussion of risks.) We believe we are better able
to manage and predict credit risk and loss on loans for moderately valued
homes than for higher valued homes. As of November 30, the fund held 2,762
single-family loans which, on average, had a relatively modest value of
approximately $70,000. The average balance remaining on these loans was
approximately $54,700. To date, we have kept our losses from single-family
loans to less than one cent per share. We follow a similar philosophy when
purchasing multifamily loans. We believe that smaller loans spread out in
several states are less likely to cause losses in the fund. On November 30,
we had 52 multifamily loans with an average loan balance of approximately
$2,399,200. To date, there have been no losses to the fund from our
investments in multifamily loans. Although we conduct extensive risk analysis
on loans we purchase, delinquent loans are an inherent risk in the fund. A
loan is considered delinquent when a borrower has missed two or more
payments. As of November 30, mortgage loans representing 6% of total net
assets were delinquent. Because delinquent loans require a high level of
attention, we place them with loan servicers who work hard to convey to
borrowers that their first responsibility each month is to make their house
payments. If it becomes necessary to put a loan in foreclosure, our loan
servicers will proceed with the process as quickly as possible.
6
<PAGE>
AMERICAN STRATEGIC INCOME PORTFOLIO III
WE BELIEVE GEOGRAPHIC DIVERSIFICATION IS ESSENTIAL TO THE FUND. The mortgage
loans in which the fund invests are backed by property located throughout the
country. (See map on page 5.) Our largest concentrations of loans are in
Texas and California. Because these states have large populations, they offer
more loans. In addition, these states experienced adverse economic conditions
during the past few years, and we have been able to purchase loans at what we
believe are attractive price levels. Both Texas and California are currently
experiencing economic recoveries.
LOOKING AHEAD, WE BELIEVE THE FUND'S NET ASSET VALUE AND EARNINGS SHOULD BE
MORE CONSISTENT THAN IN THE PAST. By selling most of the fund's Z-bonds,
inverse floaters, principal-only, interest-only and inverse interest-only
securities, we believe we have reduced interest rate risk and focused the
fund's investments where we feel we can currently add the most value - in the
mortgage loan area. We will continue to emphasize mortgage loans in an effort
to achieve high current income.
Although Ihave assisted with the fund's management in the past, I am pleased
to be addressing you for the first time as the fund's manager. My efforts and
those of the fund's management team continue to be dedicated to reaching the
fund's objectives and helping you achieve your financial goals. Thank you for
your investment in American Strategic Income Portfolio III.
Sincerely,
/s/ John Wenker
John Wenker
Portfolio Manager
7
<PAGE>
MANAGING RISK
MANAGING THE RISKS OF MORTGAGE-RELATED ASSETS
All funds that invest in mortgage-related securities are subject to certain
risks. This list briefly summarizes some of the primary risks associated with
mortgage-related assets and does not include all risks related to mortgage
securities.
Among these risks is PREPAYMENT RISK in which principal payments are prepaid
at unexpected rates. Prepayment rates are influenced by changes in interest
rates and a variety of other factors. If the fund buys a mortgage loan at a
premium, a fast prepayment rate will reduce the fund's yield and a slow
prepayment rate will increase its yield. If a mortgage loan is purchased at a
discount, the opposite will occur. There is also the chance that proceeds
from prepaid loans will have to be reinvested in lower-yielding investments.
Like all fixed income investments, the prices of securities in the fund are
sensitive to changing interest rates - otherwise known as INTEREST RATE RISK.
When rates increase, the value of securities can decrease. Conversely, when
rates decline, the value of securities can rise. However, mortgage-related
assets may benefit less than other fixed income securities from declining
interest rates because of prepayment risk.
The fund's mortgage loans are subject to some unique risks such as credit
risk and real estate risk. Since the fund's mortgage loans generally aren't
backed by any government guarantee or private credit enhancement, they face
CREDIT RISK. This is the risk of loss arising from default if the borrower
fails to make payments on the loan. This risk may be greater during periods
of declining or stagnant real estate values. Mortgage loans are also subject
to REAL ESTATE RISKS such as: property risk (the risk that the physical
condition and value of the property will decline) and the legal risk of
holding any mortgage.
To date, we have successfully managed the unique risks of mortgage loans
through extensive risk analysis. We review the loan's legal documents and the
borrower's mortgage payment history; assess the local market and property
value; and obtain a drive-by assessment of the property. As part of our
strategy to manage the real estate risk of the fund's multifamily (apartment)
loans, we perform a detailed inspection of each property; study the competing
properties in the area; interview property managers; and obtain engineering
and environmental reports from experts.
8
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FINANCIAL STATEMENTS (UNAUDITED)
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1995
<TABLE>
<S> <C>
ASSETS:
Investments in securities at market value* (note 2)
(including a repurchase agreement of $12,718,000) ...... $ 404,740,889
Real estate owned (identified cost: $1,654,844) (note
2) ..................................................... 1,444,995
Cash in bank on demand deposit ........................... 1,686,112
Mortgage security paydowns receivable .................... 19,269
Accrued interest receivable .............................. 3,561,952
----------------
Total assets ......................................... 411,453,217
----------------
LIABILITIES:
Reverse repurchase agreements payable .................... 75,000,000
Payable for fund shares retired .......................... 133,100
Accrued investment management fee ........................ 176,911
Accrued administrative fee ............................... 54,725
Accrued interest ......................................... 361,250
Payable for federal excise taxes (note 2) ................ 74,448
Other accrued expenses ................................... 31,104
----------------
Total liabilities .................................... 75,831,538
----------------
Net assets applicable to outstanding capital stock ....... $ 335,621,679
----------------
----------------
REPRESENTED BY:
Capital stock - authorized 1 billion shares of $0.01 par
value; outstanding, 26,898,846 shares ................ $ 268,988
Additional paid-in capital ............................... 379,653,935
Undistributed net investment income ...................... 6,207,113
Accumulated net realized loss on investments ............. (58,205,887)
Unrealized appreciation of investments ................... 7,697,530
----------------
Total - representing net assets applicable to
outstanding capital stock ........................ $ 335,621,679
----------------
----------------
Net asset value per share of outstanding capital stock ... $ 12.48
----------------
----------------
* Investments in securities at identified cost ........... $ 396,833,510
----------------
----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
9
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FINANCIAL STATEMENTS (UNAUDITED)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 1995
<TABLE>
<S> <C>
INCOME:
Interest (net of interest expense of $2,417,060) ....... $ 15,827,387
----------------
EXPENSES (NOTE 3):
Investment management fee ................................ 1,050,141
Administrative fee ....................................... 336,272
Custodian, accounting and transfer agent fees ............ 98,875
Reports to shareholders .................................. 73,449
Mortgage servicing fees .................................. 461,987
Directors' fees .......................................... 7,767
Audit and legal fees ..................................... 68,418
Federal excise taxes (note 2) ............................ 74,448
Other expenses ........................................... 60,655
----------------
Total expenses ....................................... 2,232,012
Less expenses paid indirectly ............................ (11,262)
----------------
Total net expenses ................................... 2,220,750
----------------
Net investment income ................................ 13,606,637
----------------
NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS
Net realized loss on investments (note 4) ................ (2,735,525)
Net realized gain on closed or expired option contracts
written (note 5) ....................................... 450,547
----------------
Net realized loss on investments ....................... (2,284,978)
Net change in unrealized appreciation or depreciation of
investments ............................................ 5,043,790
----------------
Net gain on investments ................................ 2,758,812
----------------
Net increase in net assets resulting from
operations ....................................... $ 16,365,449
----------------
----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
10
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FINANCIAL STATEMENTS (UNAUDITED)
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 1995
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest income ........................................ $ 15,827,387
Net expenses ............................................. (2,220,750)
----------------
Net investment income ................................ 13,606,637
----------------
Adjustments to reconcile net investment income to net cash
provided by operating activities:
Change in accrued interest and mortgage security
paydowns receivable .................................. 498,290
Net amortization of bond discount and premium .......... 29,652
Change in accrued fees and expenses .................... 94,838
----------------
Total adjustments .................................... 622,780
----------------
Net cash provided by operating activities ............ 14,229,417
----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments ....................... 310,717,874
Purchases of investments ................................. (296,423,314)
Net purchases of short-term securities ................... (9,003,000)
Net premiums received from option contracts written ...... 138,047
----------------
Net cash provided by investing activities ............ 5,429,607
----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Retirement of fund shares ................................ (1,857,808)
Distributions paid to shareholders ....................... (17,232,080)
----------------
Net cash used by financing activities ................ (19,089,888)
----------------
Net increase in cash ....................................... 569,136
Cash at beginning of period ................................ 1,116,976
----------------
Cash at end of period .................................... $ 1,686,112
----------------
----------------
Supplemental disclosure of cash flow information:
Cash paid for interest on reverse repurchase
agreements ........................................... $ 2,364,675
----------------
----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
11
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FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended
11/30/95 Year Ended
(Unaudited) 5/31/95
---------------- ----------------
<S> <C> <C>
OPERATIONS:
Net investment income .................................. $ 13,606,637 31,467,846
Net realized loss on investments ......................... (2,284,978) (40,932,927)
Net change in unrealized appreciation or depreciation of
investments ............................................ 5,043,790 40,650,149
---------------- ----------------
Net increase in net assets resulting from operations ... 16,365,449 31,185,068
---------------- ----------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ............................... (17,232,080) (34,841,094)
---------------- ----------------
CAPITAL SHARE TRANSACTIONS:
Payments for retirement of 169,900 and 381,000 shares,
respectively (note 7) .................................. (1,876,706) (4,157,498)
---------------- ----------------
Total decrease in net assets ......................... (2,743,337) (7,813,524)
Net assets at beginning of period .......................... 338,365,016 346,178,540
---------------- ----------------
Net assets at end of period .............................. $ 335,621,679 338,365,016
---------------- ----------------
---------------- ----------------
Undistributed net investment income ...................... $ 6,207,113 9,832,556
---------------- ----------------
---------------- ----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
12
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(1) ORGANIZATION
American Strategic Income Portfolio Inc. III (the fund), is
registered under the Investment Company Act of 1940 (as amended)
as a diversified, closed-end management investment company. The
fund's primary objective is to provide a high level of current
income; 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. The fund commenced operations on March 25, 1993, 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 CSP.
(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 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 properties, 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
13
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
futures contracts are valued at the last settlement price. 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 and
write cash-secured puts. 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
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
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
15
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
due to or owed by the fund. Interest rate swaps, caps and floors
are valued from prices quoted by independent brokers. These
valuations represent the present value of all future cash
settlement amounts based upon implied forward interest rates.
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 November 30, 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 November 30, 1995, the fund owned 22
homes valued at $1,444,995; or 0.43% of net assets. The fund
recognized net realized gains of $153,787 on real estate sold
during the six months ended November 30, 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
16
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
securities do not earn interest, are subject to market
fluctuation and may increase or decrease in value prior to their
delivery. The fund maintains, in a segregated account with its
custodian, assets with a market value equal to the amount of its
purchase commitments. The purchase of securities on a
when-issued or forward-commitment basis may increase the
volatility of the fund's NAV to the extent the fund makes such
purchases while remaining substantially fully invested. As of
November 30, 1995, the fund had no outstanding when-issued or
forward commitments.
In connection with its ability to purchase securities on a
when-issued or forward-commitment basis, the fund may enter into
mortgage "dollar rolls" in which the fund sells securities for
delivery in the current month and simultaneously contracts with
the same counterparty to repurchase similar (same type, coupon
and maturity) but not identical securities on a specified future
date. As an inducement to "roll over" its purchase commitments,
the fund receives negotiated fees. For the six months ended
November 30, 1995 the fund had no outstanding when-issued or
forward commitments.
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 $74,448, or $0.003 per share, on income retained by the
fund during the excise tax year ended December 31, 1995.
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 principal-only securities
and the non-deductibility of excise tax payments for the purpose
of computing taxable income. 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 distributions of
certain book-to-tax differences is presented as an "excess
distribution" in the Financial Highlights. In
17
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
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 were recorded by the fund.
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
unless the market price plus commission exceeds the net asset
value by 5% 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 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.
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 disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates.
18
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(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 in an amount equal to an
annualized rate of 0.20% of the fund's average weekly net assets
plus 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 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 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 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, 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, taxes,
fees to outside parties retained to assist in conducting due
diligence and other miscellaneous expenses.
Expenses paid indirectly represent a reduction of custodian fees
for earnings on cash balances maintained with the custodian by
the fund.
19
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(4) SECURITIES
TRANSACTIONS
Cost of purchases and proceeds from sales of securities (other
than short-term securities) aggregated $296,393,662 and
$303,542,687, respectively, for the six months ended November
30, 1995. During the six months ended November 30, 1995, the
fund paid no brokerage commissions to Piper Jaffray Inc., an
affiliated broker.
(5) OPTION
CONTRACTS
WRITTEN
The number of contracts and premium amounts associated with call
option contracts written for the six months ended November 30,
1995, were as follows:
<TABLE>
<CAPTION>
Number of Premium
Contracts Amount
------------- -----------
<S> <C> <C>
Balance at 5/31/95......................... 800 $ 312,500
Opened................................... 2,345 1,300,078
Closed or expired........................ (3,145) (1,612,578)
------ -----------
Balance at 11/30/95........................ -- $ --
------ -----------
------ -----------
</TABLE>
(6) CAPITAL LOSS
CARRYOVER
(AUDITED)
For federal income tax purposes, the fund had a capital loss
carryover of $56,504,352 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 quarterly and may change
the amount which may be repurchased. The plan was last reviewed
and approved by the board of directors on November 30, 1995.
Pursuant to the plan, the fund has cumulatively repurchased and
retired 550,900 shares as of November 30, 1995, which represents
2.02% 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>
Six
Months
Ended Year Year Period from
11/30/95 Ended Ended 3/25/93* to
(Unaudited) 5/31/95 5/31/94 5/31/93
-------- -------- ------- -----------
<S> <C> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period ..................... $ 12.50 12.61 14.04 14.07
-------- -------- ------- -----------
Operations:
Net investment income .................................... 0.51 1.18 1.37 0.19
Net realized and unrealized gains (losses) on
investments ............................................ 0.11 (0.01) (1.52) (0.11)
-------- -------- ------- -----------
Total from operations .................................. 0.62 1.17 (0.15) 0.08
-------- -------- ------- -----------
Distributions to shareholders:
From net investment income ............................... (0.64) (1.28) (1.07) (0.11)
In excess of net realized gains .......................... -- -- (0.21) --
-------- -------- ------- -----------
Total distributions to shareholders .................... (0.64) (1.28) (1.28) (0.11)
-------- -------- ------- -----------
Net asset value, end of period ........................... $ 12.48 12.50 12.61 14.04
-------- -------- ------- -----------
-------- -------- ------- -----------
Per-share market value, end of period .................... $ 11.00 11.13 12.75 15.38
-------- -------- ------- -----------
-------- -------- ------- -----------
SELECTED INFORMATION
Total return, net asset value** ............................ 5.05% 10.03% (1.78%) 0.54%
Total return, market value*** .............................. 4.74% (2.42%) (9.52%) 3.23%
Net assets at end of period (in millions) ................ $ 336 338 346 384
Ratio of expenses to average weekly net assets++ ........... 1.32%+ 1.29% 1.19% 1.01%+
Ratio of net investment income to average weekly net
assets++ ................................................. 8.07%+ 9.48% 9.57% 7.46%+
Portfolio turnover rate (excluding short-term
securities) .............................................. 75% 49% 155% 2%
Amount of borrowings outstanding at end of period
(in millions) TRIANGLE ................................ $ 75 75 159 15
Per-share amount of borrowings outstanding
at end of period ....................................... $ 2.79 2.77 5.79 0.55
Per-share amount of net assets, excluding borrowings, at end
of period .............................................. $ 15.27 15.27 18.40 14.59
Asset coverage ratio TRIANGLE TRIANGLE ................... 547% 551% 317% 2,659%
</TABLE>
* COMMENCEMENT OF OPERATIONS.
** BASED ON THE CHANGE IN NET ASSET VALUE OF A SHARE DURING THE PERIOD AND
ASSUMES REINVESTMENT OF DISTRIBUTIONS AT NET ASSET VALUE.
*** 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.
+ ADJUSTED TO AN ANNUAL BASIS.
++ INCLUDES 0.04%, 0.09% AND 0.06% FROM FEDERAL EXCISE TAXES IN THE SIX MONTHS
ENDED 11/30/95, THE FISCAL YEARS 1995 AND 1994, RESPECTIVELY. BEGINNING IN
FISCAL 1995, THE EXPENSE RATIO REFLECTS THE EFFECT OF GROSS EXPENSES PAID
INDIRECTLY BY THE FUND. PRIOR PERIOD EXPENSE RATIOS HAVE NOT BEEN ADJUSTED.
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 TO THE NOTES TO FINANCIAL STATEMENTS.
TRIANGLE TRIANGLE REPRESENTS THE FUND'S NET ASSETS, EXCLUDING BORROWINGS,
DIVIDED BY BORROWINGS OUTSTANDING AT THE END OF THE PERIOD.
21
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(9) SUBSEQUENT
EVENT --
PENDING
LITIGATION
An amended complaint purporting to be a class action was filed
on September 7, 1995, in the United States District Court for
the Western District of Washington against the fund, seven other
closed-end investment companies for which Piper Capital
Management Incorporated acts as investment adviser, Piper
Jaffray Companies Inc., Piper Jaffray Inc., Piper Capital
Management Incorporated and certain individuals. The complaint
alleges, among other things, violations of federal and state
securities laws. Damages are being sought in an unspecified
amount. 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 there
will be no material adverse effect on the financial results of
the fund.
(10) QUARTERLY DATA
DOLLAR AMOUNTS
<TABLE>
<CAPTION>
Net Realized Net Increase Distributions
Total Net and Unrealized in Net Assets from Net
Investment Investment Gains on Resulting from Investment
Income Income Investments Operations Income
----------- ----------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
8/31/95 $ 7,994,111 6,862,857 1,713,970 8,576,827 (8,626,081)
11/30/95 7,833,276 6,743,780 1,044,842 7,788,622 (8,605,999)
----------- ----------- -------------- -------------- ------------
$ 15,827,387 13,606,637 2,758,812 16,365,449 (17,232,080)
----------- ----------- -------------- -------------- ------------
----------- ----------- -------------- -------------- ------------
</TABLE>
PER-SHARE AMOUNTS
<TABLE>
<CAPTION>
Net Realized Net Increase in Distributions
Net and Unrealized Net Assets from Net Quarter End
Investment Gains on Resulting from Investment Net Asset
Income Investments Operations Income Value
------------- ----------------- ----------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
8/31/95 $ 0.26 0.06 0.32 (0.32) 12.50
11/30/95 0.25 0.05 0.30 (0.32) 12.48
--- --- --- -----
$ 0.51 0.11 0.62 (0.64)
--- --- --- -----
--- --- --- -----
</TABLE>
22
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
AMERICAN STRATEGIC INCOME PORTFOLIO III
NOVEMBER 30, 1995
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- ---------------------------------------------------- ----------- -----------
<S> <C> <C>
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS)
U.S. GOVERNMENT SECURITIES (25.1%):
U.S. Treasury Note, 6.50%, 4/30/99 ............ $ 3,000,000 3,094,380
U.S. Treasury Note, 5.75%, 10/31/00 ............. 80,500,000(b) 81,225,306
-----------
Total U.S. Government Securities
(cost: $83,341,648) .......................... 84,319,686
-----------
MORTGAGE-BACKED SECURITIES (5.4%):
COLLATERALIZED MORTGAGE OBLIGATIONS (5.4%):
SUBORDINATED MORTGAGE-BACKED (5.4%):
8.60%, Chemical Mortgage Securities, Series
1991-1, Class B, 9/25/21 ....................... 2,996,606(f) 2,858,013
9.75%, Citicorp Mortgage Securities, Series
1990-3, Class A3, 2/25/05 ...................... 3,023,235(f) 3,058,191
9.00%, Citicorp Mortgage Securities, Series
1991-4, Class B, 4/25/21 ....................... 5,000,000(f) 4,975,000
9.20%, FBS Mortgage Corporation, Series 1991-B,
Class D, 11/1/21 ............................... 1,006,030(f) 956,672
8.87%, First Gibralter, Series 1992-MM, Class B,
10/25/21 ....................................... 2,859,655(f) 293,115
9.35%, GMBS Inc., Series 1990-4, Class S,
10/25/20 ....................................... 1,844,063(f) 1,781,250
7.09%, J P Morgan, Series 1988-1, Class B-1,
1/25/19 ........................................ 3,249,784(f) 2,404,840
9.25%, Salomon Brothers Mortgage Securities VII,
Series 1990-1, Class G-1, 8/25/20 .............. 1,150,731(f) 1,106,500
9.25%, Salomon Brothers Mortgage Securities VII,
Series 1990-1, Class G-2, 8/25/20 .............. 674,174(f) 648,260
-----------
18,081,841
-----------
PRIVATE PRINCIPAL-ONLY (C) (0.0%):
4.80%, American Mortgage Trust, Series 1993-2,
Subordinated Class 2-B, 3/1/24 ................. 961,180(f) 67,283
-----------
Total Mortgage-Backed Securities
(cost: $19,357,626) .......................... 18,149,124
-----------
WHOLE LOANS AND PARTICIPATION MORTGAGES (D,E,F) (86.3%):
COMMERCIAL LOANS (2.7%):
Golden Estates Mobile Home Park, 10.75%,
12/10/96 ....................................... 1,541,230 1,541,230
Hillside Colony Mobile Home Park, 9.00%,
11/10/96 ....................................... 3,490,788 3,525,696
Pacific Shores RV Park, 11.12%, 12/1/09 ......... 2,816,210 2,914,777
Sweetwater Shoals Mobile Home Park, 8.25%,
3/10/96 ........................................ 309,683 309,683
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
23
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
AMERICAN STRATEGIC INCOME PORTFOLIO III
(CONTINUED)
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- ---------------------------------------------------- ----------- -----------
<S> <C> <C>
Wilton Mobile Home Park, 9.00%, 8/10/96 ....... $ 914,707 914,707
-----------
9,206,093
-----------
MULTIFAMILY LOANS (38.8%):
Ambassador House Apartments, 10.13%, 12/1/01 .... 2,389,261 2,472,885
Ashley Square Apartments, 8.31%, 6/1/99 ......... 966,031 991,051
Berryhill Apartments, 9.06%, 9/1/01 ............. 1,588,929 1,644,542
Briarwood Apartments, 10.24%, 12/1/01 ........... 995,632 1,030,480
Champlin Drive Apartments, 10.00%, 7/15/08 ...... 2,221,236 2,221,236
Concord Apartments, 8.69%, 5/1/01 ............... 2,081,995 2,150,909
Crane Zion I, 10.00%, 9/1/08 .................... 2,668,411 2,534,990
Deer Creek Apartments, 9.00%, 7/1/99 ............ 2,580,075 2,670,377
El Camino Apartments, 10.65%, 2/1/02 ............ 4,784,760 4,952,226
El Toro Blanco Apartments, 10.05%, 1/1/02 ....... 1,345,132 1,392,212
Esplanade Apartments, 9.88%, 12/1/01 ............ 2,189,627 2,266,264
Essex II, 10.00%, 8/1/08 ........................ 2,073,154 2,073,154
Everhard Road Apartments, 9.31%, 9/1/01 ......... 494,686 512,000
Falls Apartments, 9.88%, 7/1/03 ................. 3,944,455 4,082,511
Faronia Square Apartments, 10.40%, 1/1/02 ....... 3,586,379 3,711,902
Geneva Village Apartments, 9.50%, 11/1/04 ....... 1,403,228 1,452,341
Grand Forks Multifamily, 9.94%, 12/1/01 ......... 2,430,708 2,515,783
Harpers Ferry Apartments, 10.56%, 12/1/01 ....... 1,832,493 1,896,631
Hidden Pines Apartments, 8.31%, 6/1/99 .......... 2,140,130 2,195,560
Huntington Hills Apartments, 8.75%, 11/1/05 ..... 1,420,000 1,462,032
Jeanne Manor Apartments, 10.32%, 8/1/01 ......... 1,584,368 1,639,821
Johnson/Wilson Apartments, 10.00%, 9/1/18 ....... 803,655 803,655
Karrington of Bexley Apartments, 9.42%,
11/1/01 ........................................ 3,978,501 4,117,749
Kingstown Colony Apartments, 9.98%, 11/1/01 ..... 1,790,828 1,853,507
Lake Conway Woods, 9.55%, 8/1/01 ................ 2,982,038 3,086,410
Maple Village Apartments, 9.50%, 11/1/04 ........ 1,466,350 1,517,672
Mapleview Apartments, 9.63%, 5/1/02 ............. 3,740,872 3,871,803
Marina Del Ray Apartments, 10.00%, 1/1/02 ....... 3,864,027 3,999,268
Meadowview Apartments, 9.50%, 11/1/04 ........... 1,040,525 1,076,944
Mission Village Apartments, 8.94%, 9/1/01 ....... 2,214,859 2,292,379
Oak Grove Apartments, 10.05%, 12/2/01 ........... 907,899 939,675
Ocean Cove Apartments, 9.44%, 10/1/04 ........... 3,082,164 3,190,040
Palm Court Apartments, 10.00%, 9/1/98 ........... 6,918,102 7,160,236
Parkway Village Apartments, 9.50%, 11/1/04 ...... 1,009,936 1,045,284
Regency Manor Apartments, 10.30%, 1/1/00 ........ 5,304,421 5,490,076
Riverbrook Apartments, 10.38%, 1/1/02 ........... 2,086,169 2,159,185
Rose Park Apartments, 9.50%, 11/1/04 ............ 925,527 957,920
Royal Court Apartments, 9.31%, 9/1/01 ........... 1,790,678 1,316,148
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
24
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
AMERICAN STRATEGIC INCOME PORTFOLIO III
(CONTINUED)
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- ---------------------------------------------------- ----------- -----------
<S> <C> <C>
Shelter Island Apartments, 10.00%, 10/1/01 .... $ 12,147,301 12,643,579
Shenandoah Woods Apartments, 8.31%, 6/1/99 ...... 2,917,909 2,993,483
Southlake Villa Apartments, 9.50%, 11/1/04 ...... 1,555,306 1,609,742
Studio One Apartments, 8.31%, 6/1/99 ............ 891,721 914,817
The Timbers Apartments, 8.31%, 6/1/99 ........... 2,724,703 2,795,273
Timberlea Terrace Apartments, 10.00%, 11/1/08 ... 889,952 889,952
Twin Lakes Apartments, 9.80%, 11/1/01 ........... 3,580,955 3,706,288
Valley Manor Apartments, 8.45%, 11/1/02 ......... 3,425,000 3,487,678
Victoria Gardens Apartments, 9.06%, 9/1/01 ...... 1,390,717 1,439,392
Village Green Apartments, 10.00%, 8/1/08 ........ 937,855 937,855
Webster/Regency/Bell Rose Apts, 10.50%,
1/1/02 ......................................... 1,490,327 1,542,488
Westree Apartments, 10.00%, 9/1/03 .............. 3,372,479 3,490,516
Westree Apartments II, 13.00%, 10/1/96 .......... 1,000,000 948,300
Windswept Village Apartments, 8.31%, 6/1/99 ..... 2,050,958 2,104,078
-----------
130,250,299
-----------
SINGLE FAMILY LOANS (44.8%):
Barclays, 8.48%, 6/7/25 ......................... 4,337,151 4,098,607
Bayview Financial, 5.73%, 2/21/20 ............... 1,262,922 1,093,691
Delaware II, 8.64%, 11/27/07 .................... 10,032,784 9,826,109
Delta Funding, 10.50%, 5/1/22 ................... 2,034,768 2,044,942
Fairbanks Capital, 10.00%, 11/1/97 .............. 972,364 991,811
Fairbanks Capital, 10.00%, 6/27/97 .............. 180,914 184,532
Fairbanks IV, 7.58%, 4/3/19 ..................... 3,835,516 3,425,883
Federal Mortgage, 8.11%, 12/15/20 ............... 4,347,594 4,005,438
First Boston II, 8.60%, 7/31/09 ................. 4,279,578 4,064,316
First Boston III, 8.41%, 2/1/13 ................. 5,544,544 5,053,852
First Boston IV, 8.92%, 3/1/12 .................. 4,328,935 4,156,643
First Boston V, 8.10%, 5/26/16 .................. 4,749,525 4,730,527
Kidder Peabody I, 10.10%, 9/1/10 ................ 6,658,952 6,491,812
Kidder Peabody II, 9.78%, 5/1/13 ................ 1,609,255 1,613,761
Knutson III, 8.30%, 4/1/15 ...................... 2,351,621 2,382,427
Maryland National, 9.52%, 9/1/19 ................ 2,528,846 2,438,819
Meridian IV, 7.62%, 8/16/16 ..................... 9,823,949 9,660,478
Meridian V, 7.77%, 10/6/17 ...................... 6,771,221 6,703,508
Mortgage Access, 9.03%, 9/30/19 ................. 1,184,108 1,161,254
Nomura III, 8.48%, 12/29/17 ..................... 25,078,084 21,587,450
Nomura, National Pool, 10.00%, 12/16/23 ......... 44,830,797 45,297,316
President Homes 93-6C, Sales Inventory, 6.76%,
8/1/23 ......................................... 111,066 112,032
President Homes 93-6E, Sales Inventory, 6.65%,
11/1/22 ........................................ 172,686 174,189
President Homes 93-6F, Sales Inventory, 6.65%,
11/1/22 ........................................ 364,799 367,973
President Homes 94 1B, Sales Inventory, 10.00%,
11/18/23 ....................................... 105,730 106,649
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
25
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
AMERICAN STRATEGIC INCOME PORTFOLIO III
(CONTINUED)
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- ---------------------------------------------------- ----------- -----------
<S> <C> <C>
Sears Mortgage, 8.19%, 10/1/17 ................ $ 987,185 969,021
Shearson Lehman, 9.55%, 6/1/17 .................. 6,431,540 6,499,071
The Crossings, 10.38%, 10/1/11 .................. 830,660 855,576
-----------
150,097,687
-----------
Total Whole Loans and Participation Mortgages
(cost: $281,416,236) ......................... 289,554,079
-----------
SHORT-TERM SECURITIES (3.8%):
Repurchase agreement with Goldman Sachs in a
joint trading account, collateralized by U.S.
government agency securities, acquired on
11/30/95, accrued interest at repurchase date of
$1,975, 5.85%, 12/1/95
(cost: $12,718,000) ............................ 12,718,000 12,718,000
-----------
Total Investments in Securities
(cost: $396,833,510) (g) ................... $ 404,740,889
-----------
-----------
</TABLE>
NOTES TO INVESTMENTS IN SECURITIES:
(A) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO
THE FINANCIAL STATEMENTS.
(B) ON NOVEMBER 30, 1995, SECURITIES VALUED AT $76,054,130 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>
$25,000,000 9/29/95 5.78% 1/2/96 $120,417 (1)
25,000,000 11/1/95 5.78% 2/1/96 120,417 (2)
25,000,000 9/1/95 5.78% 12/1/95 120,416 (3)
- ----------- --------
$75,000,000 $361,250
- ----------- --------
- ----------- --------
</TABLE>
*INTEREST RATE IS AS OF NOVEMBER 30, 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, 5.75%, 10/31/00, $25,125,000 PAR
(2) NOMURA; U.S. TREASURY NOTE, 5.75%, 10/31/00, $25,125,000 PAR
(3) NOMURA; U.S. TREASURY NOTE, 5.75%, 10/31/00, $25,125,000 PAR
26
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
(C) DESCRIPTIONS OF CERTAIN COLLATERALIZED MORTGAGE OBLIGATIONS ARE AS FOLLOWS:
PRINCIPAL-ONLY -- REPRESENTS SECURITIES THAT ENTITLE HOLDERS TO RECEIVE
ONLY PRINCIPAL PAYMENTS ON THE UNDERLYING MORTGAGES. THE YIELD TO
MATURITY OF AN PRINCIPAL-ONLY IS EXTREMELY SENSITIVE TO THE RATE OF
PRINCIPAL PAYMENTS ON THE UNDERLYING MORTGAGE ASSETS. A SLOW (RAPID) RATE
OF PRINCIPAL REPAYMENTS MAY HAVE AN ADVERSE (POSITIVE) EFFECT ON YIELD TO
MATURITY. INTEREST RATES DISCLOSED REPRESENT CURRENT YIELDS BASED UPON
THE CURRENT COST BASIS AND ESTIMATED TIMING OF FUTURE CASH FLOWS.
(D) INTEREST RATE AND MATURITY DATE DISCLOSED REPRESENT THE WEIGHTED AVERAGE
COUPON AND WEIGHTED AVERAGE MATURITY FOR THE UNDERLYING MORTGAGE LOANS AS
OF NOVEMBER 30, 1995.
(E) FOR INVESTMENT SCHEDULE PRESENTATION, 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:
GOLDEN ESTATES MOBILE HOME PARK -- 1 COMMERCIAL LOAN LOCATED IN
DOUGLASVILLE, GEORGIA.
HILLSIDE COLONY MOBILE HOME PARK -- 1 COMMERCIAL LOAN LOCATED IN
STILLWATER, NEW YORK.
PACIFIC SHORES RV PARK -- 1 COMMERCIAL LOAN LOCATED IN NEWPORT, OREGON.
SWEETWATER SHOALS MOBILE HOME PARK -- 1 COMMERCIAL LOAN LOCATED IN
AUSTELL, GEORGIA.
WILTON MOBILE HOME PARK -- 1 COMMERCIAL LOAN LOCATED IN WILTON, NEW
YORK.
MULTIFAMILY LOANS:
AMBASSADOR HOUSE APARTMENTS -- 1 MULTIFAMILY LOAN LOCATED IN OKLAHOMA
CITY, OKLAHOMA.
ASHLEY SQUARE APARTMENTS -- 1 MULTIFAMILY LOAN LOCATED IN HOUSTON,
TEXAS.
BERRYHILL APARTMENTS -- 1 MULTIFAMILY LOAN LOCATED IN OREGON CITY,
OREGON.
BRIARWOOD APARTMENTS -- 1 MULTIFAMILY LOAN LOCATED IN GREELEY,
COLORADO.
CHAMPLIN DRIVE APARTMENTS -- 1 MULTIFAMILY LOAN LOCATED IN CHAMPLIN,
MINNESOTA.
CONCORD APARTMENTS -- 1 MULTIFAMILY LOAN LOCATED IN MIDWEST CITY,
OKLAHOMA.
CRANE ZION I -- 1 MULTIFAMILY LOAN LOCATED IN ZION, ILLINOIS.
DEER CREEK APARTMENTS -- 1 MULTIFAMILY LOAN LOCATED IN HOUSTON, TEXAS.
EL CAMINO APARTMENTS -- 1 MULTIFAMILY LOAN LOCATED IN PHOENIX, ARIZONA.
EL TORO BLANCO APARTMENTS -- 1 MULTIFAMILY LOAN LOCATED IN COLORADO
SPRINGS, COLORADO.
ESPLANADE APARTMENTS -- 1 MULTIFAMILY LOAN LOCATED IN PHOENIX, ARIZONA.
ESSEX II -- 1 MULTIFAMILY LOAN LOCATED IN ROCHESTER, MINNESOTA.
EVERHARD ROAD APARTMENTS -- 1 MULTIFAMILY LOAN LOCATED IN NORTH CANTON,
OHIO.
FALLS APARTMENTS -- 1 MULTIFAMILY LOAN IN COLORADO SPRINGS, COLORADO.
FARONIA SQUARE APARTMENTS -- 1 MULTIFAMILY LOAN LOCATED IN MEMPHIS,
TENNESSEE.
GENEVA VILLAGE APARTMENTS -- 1 MULTIFAMILY LOAN LOCATED IN WEST JORDAN,
UTAH.
GRAND FORKS MULTIFAMILY -- 1 MULTIFAMILY LOAN LOCATED IN GRAND FORKS,
NORTH DAKOTA.
HARPER'S FERRY APARTMENTS -- 1 MULTIFAMILY LOAN LOCATED IN LAFAYETTE,
LOUISIANA.
HIDDEN PINES APARTMENTS -- 1 MULTIFAMILY LOAN LOCATED IN HOUSTON,
TEXAS.
HUNTINGTON HILLS APARTMENTS -- 1 MULTIFAMILY LOAN LOCATED IN MANKATO,
MINNESOTA.
JEANNE MANOR APARTMENTS -- 1 MULTIFAMILY LOAN LOCATED IN PORTLAND,
OREGON
JOHNSON/WILSON APARTMENTS -- 1 MULTIFAMILY LOAN LOCATED IN ST. PAUL,
MINNESOTA.
KARRINGTON OF BEXLEY APARTMENTS -- 1 MULTIFAMILY LOAN LOCATED IN
BEXLEY, OHIO.
KINGSTOWN COLONY APARTMENTS -- 1 MULTIFAMILY LOAN LOCATED IN MARYVILLE,
TENNESSEE.
LAKE CONWAY WOODS -- 1 MULTIFAMILY LOAN LOCATED IN ORLANDO, FLORIDA.
MAPLE VILLAGE APARTMENTS -- 1 MULTIFAMILY LOAN LOCATED IN AMERICAN
FORK, UTAH.
27
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
<TABLE>
<S> <C>
MAPLEVIEW APARTMENTS -- 1 MULTIFAMILY LOAN LOCATED IN MERCHANTVILLE,
NEW JERSEY.
MARINA DEL RAY APARTMENTS -- 1 MULTIFAMILY LOAN LOCATED IN GRAPEVINE,
TEXAS.
MEADOWVIEW APARTMENTS -- 1 MULTIFAMILY LOAN LOCATED IN WEST JORDAN,
UTAH.
MISSION VILLAGE APARTMENTS -- 1 MULTIFAMILY LOAN LOCATED IN TUCSON,
ARIZONA.
OAK GROVE APARTMENTS -- 1 MULTIFAMILY LOAN LOCATED IN MINNEAPOLIS,
MINNESOTA.
OCEAN COVE APARTMENTS -- 1 MULTIFAMILY LOAN LOCATED IN SEMINOLE,
PINNELLAS CITY, FLORIDA.
PALM COURT APARTMENTS -- 1 MULTIFAMILY LOAN IN LOS ANGELES, CALIFORNIA.
PARKWAY VILLAGE APARTMENTS -- 1 MULTIFAMILY LOAN LOCATED IN WEST
JORDAN, UTAH.
REGENCY MANOR APARTMENTS -- 1 MULTIFAMILY LOAN LOCATED IN GRAND ISLAND,
NEW YORK.
RIVERBROOK APARTMENTS -- 1 MULTIFAMILY LOAN LOCATED IN TAMPA, FLORIDA.
ROSE PARK APARTMENTS -- 1 MULTIFAMILY LOAN LOCATED IN VERNAL, UTAH.
ROYAL COURT APARTMENTS -- 1 MULTIFAMILY LOAN LOCATED IN MIAMI BEACH,
FLORIDA.
SHELTER ISLAND APARTMENTS -- 1 MULTIFAMILY LOAN LOCATED IN LAS VEGAS,
NEVADA.
SHENANDOAH WOODS APARTMENTS -- 1 MULTIFAMILY LOAN LOCATED IN HOUSTON,
TEXAS.
SOUTH LAKE VILLA APARTMENTS -- 1 MULTIFAMILY LOAN LOCATED IN SALT LAKE
CITY, UTAH.
STUDIO ONE APARTMENTS -- 1 MULTIFAMILY LOAN LOCATED IN HOUSTON, TEXAS.
THE TIMBERS APARTMENTS -- 1 MULTIFAMILY LOAN LOCATED IN HOUSTON, TEXAS.
TIMBERLEA TERRACE APARTMENTS -- 1 MULTIFAMILY LOAN LOCATED IN WACONIA,
MINNESOTA.
TWIN LAKES APARTMENTS -- 1 MULTIFAMILY LOAN LOCATED IN WARR ACRES,
OKLAHOMA.
VALLEY MANOR APARTMENTS -- 1 MULTIFAMILY LOAN LOCATED IN HASTINGS,
MINNESOTA.
VICTORIA GARDENS APARTMENTS -- 1 MULTIFAMILY LOAN LOCATED IN VICTORIA,
TEXAS.
VILLAGE GREEN APARTMENTS -- 1 MULTIFAMILY LOAN LOCATED IN FAIRBAULT,
MINNESOTA.
WEBSTER/REGENCY/BELL ROSE APARTMENTS -- 1 MULTIFAMILY LOAN LOCATED IN
LAKEWOOD AND LITTLETON, COLORADO.
WESTREE APARTMENTS -- 1 MULTIFAMILY LOAN LOCATED IN COLORADO SPRINGS,
COLORADO.
WESTREE APARTMENTS II -- 1 MULTIFAMILY LOAN LOCATED IN COLORADO
SPRINGS, COLORADO.
WINDSWEPT VILLAGE APARTMENTS -- 1 MULTIFAMILY LOAN LOCATED IN HOUSTON,
TEXAS.
SINGLE FAMILY LOANS:
BARCLAY -- 27 LOAN LOCATED THROUGHOUT THE MIDWESTERN STATES.
BAYVIEW FINANCIAL -- 12 LOANS LOCATED IN MARYLAND.
DELAWARE II -- 250 LOANS LOCATED IN TEXAS.
DELTA FUNDING -- SENIOR DEBT SECURITY COLLATERALIZED BY A POOL OF
NON-PERFORMING WHOLE LOANS LOCATED THROUGHOUT THE UNITED STATES.
FAIRBANKS CAPITAL -- SENIOR DEBT SECURITY COLLATERALIZED BY A POOL OF
NON-PERFORMING WHOLE LOANS LOCATED THROUGHOUT THE UNITED STATES.
FAIRBANKS IV -- 41 LOANS LOCATED THROUGHOUT THE UNITED STATES.
FEDERAL MORTGAGE -- 53 LOANS LOCATED IN CONNECTICUT.
FIRST BOSTON II -- 93 LOANS LOCATED THROUGHOUT THE UNITED STATES,
PRIMARILY IN TEXAS.
FIRST BOSTON III -- 119 LOANS LOCATED PRIMARILY IN TEXAS AND FLORIDA.
FIRST BOSTON IV -- 101 LOANS LOCATED PRIMARILY IN TEXAS, OKLAHOMA, AND
MASSACHUSETTS.
FIRST BOSTON V -- 43 LOANS LOCATED THROUGHOUT THE UNITED STATES.
KIDDER PEABODY I -- 182 LOANS LOCATED THROUGHOUT THE UNITED STATES.
KIDDER PEABODY II -- 20 LOANS LOCATED PRIMARILY IN ARIZONA AND
COLORADO.
KNUTSON III -- 33 LOANS LOCATED THROUGHOUT THE UNITED STATES.
MARYLAND NATIONAL -- 34 LOANS LOCATED THROUGHOUT THE UNITED STATES.
MERIDIAN IV -- 135 LOANS LOCATED THROUGHOUT THE MIDWESTERN STATES.
MERIDIAN V -- 93 LOANS LOCATED THROUGHOUT THE UNITED STATES.
MORTGAGE ACCESS -- 8 LOANS LOCATED IN NEW JERSEY.
</TABLE>
28
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
<TABLE>
<S> <C>
NOMURA, NATIONAL POOL -- 971 LOANS LOCATED PRIMARILY IN CALIFORNIA AND
TEXAS.
NOMURA III, NATIONAL POOL -- 379 LOANS LOCATED THROUGHOUT THE
MIDWESTERN STATES.
PRESIDENT HOMES, SALES INVENTORY -- 7 LOANS LOCATED THROUGHOUT THE
MIDWESTERN STATES.
SEARS MORTGAGE -- 15 LOANS LOCATED THROUGHOUT THE MIDWESTERN STATES.
SHEARSON LEHMAN -- 132 LOANS LOCATED THROUGHOUT THE UNITED STATES.
THE CROSSINGS -- 14 LOANS LOCATED IN MINNEAPOLIS, MINNESOTA.
(F) 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.
(G) ON NOVEMBER 30, 1995, THE COST, INCLUDING REAL ESTATE OWNED, FOR FEDERAL
INCOME TAX PURPOSES WAS APPROXIMATELY $398,488,354. 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 .... $ 11,085,935
GROSS UNREALIZED DEPRECIATION ...... (3,388,405)
----------
NET UNREALIZED APPRECIATION .... $ 7,697,530
----------
----------
</TABLE>
29
<PAGE>
- --------------------------------------------------------------------------------
SHAREHOLDER UPDATE
ANNUAL MEETING RESULTS
An annual meeting of the fund's shareholders was held on August 17, 1995. 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 matters, are set forth below.
1. The fund's shareholders elected the following six directors:
<TABLE>
<CAPTION>
Shares Shares Withholding
Voted "For" Authority to Vote
----------- ------------------
<S> <C> <C>
David T. Bennett..... 18,414,660 442,337
Jaye F. Dyer......... 18,414,660 442,337
William H. Ellis..... 18,414,660 442,337
Karol D. Emmerich.... 18,414,660 442,337
Luella G. Goldberg... 18,414,660 442,337
George Latimer....... 18,414,360 442,637
</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 ended May 31, 1996. The following votes were cast regarding
this matter:
<TABLE>
<CAPTION>
Shares Shares Voted Broker
Voted "For" "Against" Absentions non-votes
- ----------- --------------- ----------- -----------
<S> <C> <C> <C>
18,391,238 214,419 251,341 --
</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.
- - 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.
30
<PAGE>
- --------------------------------------------------------------------------------
SHAREHOLDER UPDATE
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.
31
<PAGE>
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
<TABLE>
<S> <C>
DIRECTORS David T. Bennett, CHAIRMAN, HIGHLAND HOMES, INC.,
USL PRODUCTS, INC., KIEFER BUILT, INC., OF COUNSEL,
GRAY, PLANT, MOOTY, MOOTY & BENNETT, P.A.
Jaye F. Dyer, PRESIDENT, DYER MANAGEMENT COMPANY
William H. Ellis, PRESIDENT, PIPER 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
John G. Wenker, PRESIDENT
Worth Bruntjen, SENIOR VICE PRESIDENT
Marijo A. Goldstein, SENIOR VICE PRESIDENT
Robert H. Nelson, SENIOR VICE PRESIDENT AND 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
</TABLE>
32
<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
PIPER JAFFRAY INC., FUND SPONSOR AND NASD MEMBER.
[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 annual and semiannual 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:
Corporate Communications
Piper Capital Management
222 South Ninth Street
Minneapolis, MN 55402-3804
056-96 CSP02 1/96
STAPLES
