-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, kwRxD6Jhg6IiELNUeaaiPR95bo1WwSB7Ozo/sMpGoNhCd7ppyTnkysMUfBZSPB+y E4ERF/MA1JpNG6ESMwl1iw== 0000912057-95-005046.txt : 199506300000912057-95-005046.hdr.sgml : 19950630 ACCESSION NUMBER: 0000912057-95-005046 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19950430 FILED AS OF DATE: 19950629 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN GOVERNMENT INCOME FUND INC CENTRAL INDEX KEY: 0000829344 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 411608092 STATE OF INCORPORATION: MN FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-05470 FILM NUMBER: 95551030 BUSINESS ADDRESS: STREET 1: 222 S NINTH ST CITY: MINNEAPOLIS STATE: MN ZIP: 55402 BUSINESS PHONE: 6123426231 MAIL ADDRESS: STREET 2: 222 S 9TH STREET CITY: MINNEAPOLIS STATE: MN ZIP: 55402 N-30D 1 N-30D [GRAPHIC] AMERICAN GOVERNMENT INCOME FUND * * * SEMIANNUAL REPORT 1995 Table of Contents LETTER TO SHAREHOLDERS...............1 FINANCIAL STATEMENTS AND NOTES.......7 INVESTMENTS IN SECURITIES...........18 SHAREHOLDER UPDATE..................23 AMERICAN GOVERNMENT INCOME FUND This fund seeks to obtain a high level of current income while preserving shareholder capital. To realize its objective, the fund invests principally in obligations of the U.S. government, its agencies and instrumentalities, including mortgage-backed derivative securities. The fund may purchase securities through the sale-forward (dollar-roll) program. Investments in mortgage-backed derivative securities and the purchase of securities through the sale-forward program may cause the fund's net asset value (NAV) to fluctuate to a greater extent than would be expected from interest rate movements alone. As with other mutual funds, there can be no assurance the fund will achieve its objective. Since its inception on April 28, 1988, the fund has been rated AAf by Standard & Poor's Corporation (S&P).* Fund shares trade on the New York Stock Exchange under the symbol AGF. *THE FUND IS RATED AAf, WHICH MEANS INVESTMENTS IN THE FUND HAVE AN OVERALL CREDIT QUALITY OF AA. CREDIT QUALITIES ARE ASSESSED BY STANDARD & POOR'S MUTUAL FUNDS RATING GROUP. S&P DOES NOT EVALUATE THE MARKET RISK OF AN INVESTMENT WHEN ASSIGNING A CREDIT RATING. SEE STANDARD & POOR'S CORPORATE AND MUNICIPAL RATING DEFINITIONS FOR AN EXPLANATION OF AA. THE FUND HAS ALSO BEEN GIVEN A MARKET RISK RATING BY S&P, WHICH WE CANNOT PUBLISH DUE TO NASD REGULATIONS. RISK RATINGS EVALUATE VARIOUS INVESTMENT RISKS THAT CAN AFFECT THE PERFORMANCE OF A BOND FUND AND INDICATE THE FUND'S OVERALL STABILITY AND SENSITIVITY TO CHANGING MARKET CONDITIONS. THESE RATINGS ARE AVAILABLE BY CALLING S&P AT 1-800-424-FUND. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT FUND SHARES, WHEN SOLD, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. AMERICAN GOVERNMENT INCOME FUND AVERAGE ANNUAL TOTAL RETURNS APRIL 30, 1995 [GRAPH] AMERICAN GOVERNMENT INCOME FUND'S TOTAL RETURN FIGURES ARE BASED ON THE CHANGE IN ITS NET ASSET VALUE (NAV), ASSUME ALL DISTRIBUTIONS WERE REINVESTED AND DO NOT REFLECT SALES CHARGES. NAV-BASED PERFORMANCE IS USED TO MEASURE INVESTMENT MANAGEMENT RESULTS. AVERAGE ANNUAL TOTAL RETURNS BASED ON THE CHANGE IN MARKET PRICE FOR THE YEAR, FIVE YEAR AND SINCE INCEPTION PERIODS ENDED APRIL 30, 1995, WERE -22.29%, 3.85% AND 5.34%, RESPECTIVELY. THESE FIGURES ALSO ASSUME DISTRIBUTIONS WERE REINVESTED AND DO NOT REFLECT SALES CHARGES. AS DISCUSSED IN THE SHAREHOLDER LETTER, THE SALOMON BROTHERS MORTGAGE INDEX HAS REPLACED THE LEHMAN BROTHERS GOVERNMENT CORPORATE INDEX AS THE MARKET INDEX AGAINST WHICH THE FUND'S PERFORMANCE WILL BE MEASURED. THE LEHMAN INDEX'S TOTAL RETURNS FOR THE PERIODS ENDED APRIL 30, 1995, WERE: SIX MONTH 6.96%, ONE YEAR 6.92%, FIVE YEARS 9.51% AND SINCE AGF'S INCEPTION 9.10%. THE SALOMON BROTHERS MORTGAGE INDEX IS AN UNMANAGED INDEX OF MORTGAGE SECURITIES WHICH HAVE AN AVERAGE LIFE OF ONE YEAR OR MORE, ARE RATED BBB- OR HIGHER BY STANDARD & POOR'S OR BAA3 OR HIGHER BY MOODY'S, AND HAVE A PRINCIPAL AMOUNT OF AT LEAST $1 BILLION. THE LEHMAN BROTHERS GOVERNMENT CORPORATE INDEX IS AN UNMANAGED INDEX COMPRISED OF APPROXIMATELY 5,400 GOVERNMENT SECURITIES AND INVESTMENT-GRADE CORPORATE DEBT SECURITIES. June 12, 1995 Dear Shareholders: AFTER AN EXTREMELY DISAPPOINTING 1994, AMERICAN GOVERNMENT INCOME FUND HAS PERFORMED WELL IN 1995, BASED ON ITS NET ASSET VALUE (NAV) TOTAL RETURN. A powerful rally in interest rates, most notably in long-term rates, has helped the fund achieve an 18.43% total return so far this calendar year, through May 31. During the six-month period ended April 30, 1995, which was the fund's semiannual reporting period, the fund's total return was 8.64%. UNFORTUNATELY, MARKET PRICE PERFORMANCE HAS NOT BEEN AS GOOD. After years of trading at a premium to its net asset value, the fund's shares have traded at a discount for the past several months, resulting in returns based on market price for the five months ended May 31, 1995, and the six months ended April 30, 1995, of -2.85% and -10.00%, respectively. It is my hope that the recent strengthening of the fund's NAV return and our current investment strategy, which I outline in this letter, will improve investors' sentiments about the fund and, consequently, its market price. 1 AMERICAN GOVERNMENT INCOME FUND [PHOTO] [PHOTO] Worth Bruntjen, (above) IS PRIMARILY RESPONSIBLE FOR THE MANAGEMENT OF AMERICAN GOVERNMENT INCOME FUND. HE HAS 28 YEARS OF FINANCIAL EXPERIENCE. Marijo Goldstein, (below) ASSISTS WITH THE MANAGEMENT OF AMERICAN GOVERNMENT INCOME FUND. SHE HAS 10 YEARS OF FINANCIAL EXPERIENCE. IN LAST DECEMBER'S ANNUAL REPORT, I EXPLAINED THE FACTORS THAT LED TO A VERY DISAPPOINTING YEAR FOR THE FUND AND SHARED WITH YOU OUR STRATEGY TO IMPROVE THE FUND'S PERFORMANCE. Our goals were to reduce volatility, maintain high monthly income, and increase net asset value. Prioritizing these goals has often required compromise, since they may conflict with one another. As a result, decisions which we have made in recent months, while helping us to achieve our first two goals, have clearly made our third goal more difficult. OUR PRIMARY FOCUS HAS BEEN TO REDUCE THE POTENTIAL FOR VOLATILITY IN THE FUND - - A PROCESS WE WILL CONTINUE THROUGHOUT 1995. In early April, we suspended the sale-forward (dollar-roll) program, primarily due to the increased volatility it can create within the portfolio. Also, the fee income it would generate in the current market is not as attractive as when short-term interest rates were much lower. Because this program has historically provided a strong level of income for the fund, it may be reinstated in the future if more favorable market conditions emerge. Additionally, as prices have improved, we have been selectively selling securities that are particularly sensitive to changes in interest rates. These include longer-maturity U.S. agency Z-tranches and other mortgage-backed derivative securities, such as principal-only and inverse interest-only securities. In early June, we took advantage of the improved prices of the fund's principal-only securities, which were due to anticipated increases in mortgage refinancings, and reduced their position to approximately 1% of total assets. The proceeds were invested in fixed-rate, mortgage-backed securities. We plan to further reduce the fund's potentially more volatile derivative securities as attractive opportunities become available. It is important to remember, 2 AMERICAN GOVERNMENT INCOME FUND PORTFOLIO COMPOSITION APRIL 30, 1995 [GRAPH] INVESTMENT CATEGORIES REFLECT PERCENTAGE OF TOTAL ASSETS. however, that as we continue our efforts to reduce volatility, we also reduce the fund's potential for net asset value improvement. OVER THE PAST FEW MONTHS, WE ADDED A 19% POSITION IN U.S. AGENCY FLOATERS. ALTHOUGH FLOATERS ARE CONSIDERED A DERIVATIVE BY MANY INDUSTRY SOURCES, THEY TEND TO BE MORE PREDICTABLE SECURITIES, WHICH WE BELIEVE WILL ASSIST US IN OUR GOAL OF MAKING THE PORTFOLIO LESS VOLATILE. In cases where we can find an exact match, we may recombine a U.S. agency floater with a U.S. agency inverse floater to create a non-derivative mortgage-backed security. If matched, the price offered for the recombined security is generally higher than for the derivative components. Unmatched, floaters and inverse floaters have somewhat offsetting characteristics. For example, floaters help offset the decrease in income currently being experienced by the fund's inverse floaters. Inverse floaters have coupon rates that move inversely to a designated short-term index, such as the Cost of Funds Index (COFI). Floaters, on the other hand, have coupon rates that move in the same direction as the designated index. Recently, these indexes have risen, causing the coupon paid by inverse floaters to fall and the coupon paid by floaters to rise. It's important to note, however, that 3 American Government Income Fund DISTRIBUTION HISTORY SINCE INCEPTION (APRIL 1988) THROUGH APRIL 30, 1995 Monthly Income Dividends Paid......................83 Total Monthly Income Dividends.................$5.98 Capital Gains Distributions Paid...................4 Total Capital Gains Distributions..............$0.47 Total Distributions Per Share........................$6.45 floaters cannot be considered a complete hedge to inverse floaters because coupon rates on inverse floaters typically change at a multiple of the changes in the designated index. THESE ACTIONS TO LOWER VOLATILITY HAVE REDUCED THE PORTFOLIO'S AVERAGE EFFECTIVE DURATION TO 5.8 YEARS, AS OF JUNE 12. Last year, the slowdown in mortgage prepayments due to higher interest rates caused the effective duration of many of the fund's mortgage-backed securities to be extended significantly. Effective duration estimates the interest rate risk of a security, in other words how much the value of the security is expected to change with a given change in interest rates. The longer a security's (or portfolio's) effective duration, the more sensitive its price is to changes in interest rates. Please note that while effective duration is a valuable measure, it has several limitations, which are further explained on page five. While these actions have enabled the fund to lower its potential volatility, it is important to remember that they also reduce the fund's potential for improvement of its net asset value. THE INDEX AGAINST WHICH THE FUND'S PERFORMANCE IS MEASURED WAS RECENTLY CHANGED TO THE SALOMON BROTHERS MORTGAGE INDEX. Because this index is composed of agency mortgage-backed securities, unlike the Lehman Brothers Government Corporate Index it replaced, we believe it is a more appropriate performance benchmark for the fund. So far this calendar year, the fund has outperformed both the Salomon and Lehman indexes due to its longer effective duration. As I previously noted, the fund's NAV total return for 1995, through May 31, was 18.43%, which compares to 10.14% for the Salomon index and 10.91% for the Lehman index. 4 American Government Income Fund EFFECTIVE DURATION Effective duration estimates the interest rate risk of a security, in other words how much the value of the security is expected to change with a given change in interest rates. The longer a security's effective duration, the more sensitive its price is to changes in interest rates. For example, if interest rates were to increase by 1%, the market value of a bond with an effective duration of five years would decrease by about 5%, with all other factors being constant. It is important to understand that, while a valuable measure, effective duration is based upon certain assumptions and has several limitations. It is most effective as a measure of interest rate risk when interest rate changes are small, rapid and occur equally across all the different points of the yield curve. In addition, effective duration is difficult to calculate precisely for bonds with prepayment options, such as mortgage-backed securities, because the calculation requires assumptions about prepayment rates. For example, when interest rates go down, homeowners may prepay their mortgages at a higher rate than assumed in the initial effective duration calculation, thereby shortening the effective duration of the fund's mortgage-backed securities. Conversely, if rates increase, prepayments may decrease to a greater extent than assumed, extending the effective duration of such securities. For these reasons, the effective durations of funds that invest a significant portion of their assets in mortgage-backed securities can be greatly affected by changes in interest rates. OVER THE PAST SEVERAL MONTHS, THE FUND'S OVERALL LEVEL OF INCOME HAS DECREASED. In addition to the fee income lost due to the suspension of the sale-forward program and the lower coupons paid by inverse floating and inverse interest-only securities, the portfolio experienced a reduced level of income from its principal-only securities. THE FUND'S DIVIDEND WILL NEED TO BE ADJUSTED IF EARNINGS IN THE PORTFOLIO REMAIN AT CURRENT LEVELS OR DECREASE FURTHER. As earnings in the portfolio have declined, we've maintained our dividend level over the past several months by tapping the fund's undistributed net investment income (dividend reserve). Keep in mind that the dividend reserve is reflected in the fund's net asset value and any reduction of this amount will reduce the fund's net asset value penny for penny. By May 31, the fund's monthly earnings had decreased to approximately 4 cents per share, causing us to draw upon the fund's dividend reserve to pay its 6.4 cents per share dividend. As of May 31, the dividend reserve was approximately 30 cents per share. The fund's dividend committee will continue to monitor the income levels and dividend reserve. Should the fund continue to fall short of earning its monthly dividend, gradual changes will be made to the dividend until the fund has reached an appropriate payment level in relation to its earnings. 5 American Government Income Fund OBVIOUSLY, DRAWING DOWN THE DIVIDEND RESERVE WORKS AGAINST OUR FINAL GOAL OF INCREASING THE FUND'S NET ASSET VALUE, AS DOES REDUCING THE FUND'S VOLATILITY. Although the fund's net asset value has increased rather quickly in the past several months - from $5.30 on December 31, 1994, to $5.93 as of May 31, 1995 - shareholders should not expect future increases, should they occur, to be as dramatic. Market conditions that we needed to see for improvement have for the most part already emerged, and we believe the market for mortgage-backed bonds, including derivative securities, has stabilized. These improving market conditions contributed to the fund's increase in net asset value. Any future changes in interest rates, either positive or negative, should have less impact on the fund than in the past year due to our continuing efforts to make the fund less volatile. IN THE MONTHS AND YEARS AHEAD, I BELIEVE THAT YOU WILL FIND THE FUND'S NET ASSET VALUE TO BE LESS VOLATILE, WITH NEITHER THE DOWNSIDE RISK EXPERIENCED LAST YEAR NOR THE DRAMATIC GROWTH ACHIEVED IN PREVIOUS YEARS. As we implement our investment strategy, we will continue to work to meet the fund's objectives of high current income and preservation of capital. We look forward to serving your investment needs and welcome any comments or questions you relay through your investment professional. Sincerely, /s/ Worth Bruntjen Worth Bruntjen Portfolio Manager 6 - -------------------------------------------------------------------------------- FINANCIAL STATEMENTS (UNAUDITED) STATEMENT OF ASSETS AND LIABILITIES APRIL 30, 1995 ASSETS: Investments in securities at market value* (note 2) (including a repurchase agreement of $2,334,000) ..... $ 122,479,928 Accrued interest receivable .............................. 1,308,148 ----------------- Total assets ......................................... 123,788,076 ----------------- LIABILITIES: Payable for investment securities purchased .............. 2,166,758 Payable for fund shares retired .......................... 59,085 Accrued investment management fee ........................ 59,569 Accrued administrative fee ............................... 19,856 Other accrued expenses ................................... 17,871 ----------------- Total liabilities .................................... 2,323,139 ----------------- Net assets applicable to outstanding capital stock ....... $ 121,464,937 ----------------- ----------------- REPRESENTED BY: Capital stock - authorized 1 billion shares of $0.01 par value; outstanding, 21,698,149 shares ................ $ 216,981 Additional paid-in capital ............................... 160,222,273 Undistributed net investment income ...................... 6,998,712 Accumulated net realized loss on investments ............. (25,553,596) Unrealized depreciation of investments ................... (20,419,433) ----------------- Total - representing net assets applicable to outstanding capital stock ........................ $ 121,464,937 ----------------- ----------------- Net asset value per share of outstanding capital stock ... $ 5.60 ----------------- ----------------- *Investments in securities at identified cost ............ $ 142,899,361 ----------------- -----------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 7 - -------------------------------------------------------------------------------- FINANCIAL STATEMENTS (UNAUDITED) STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED APRIL 30, 1995 INCOME: Interest ............................................... $ 5,352,451 Fee income (note 2) ...................................... 264,453 ---------------- Total investment income .............................. 5,616,904 ---------------- EXPENSES (NOTE 3): Investment management fee ................................ 350,535 Administrative fee ....................................... 116,845 Custodian, accounting and transfer agent fees ............ 74,137 Reports to shareholders .................................. 12,587 Directors' fees .......................................... 5,833 Audit and legal fees ..................................... 22,478 Federal excise taxes (note 2) ............................ 392,413 Other expenses ........................................... 23,088 ---------------- Total expenses ....................................... 997,916 ---------------- Net investment income ................................ 4,618,988 ---------------- NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS: Net realized loss on investments (note 4) ................ (8,846,238) Net change in unrealized appreciation or depreciation of investments ............................................ 13,881,550 ---------------- Net gain on investments ................................ 5,035,312 ---------------- Net increase in net assets resulting from operations ....................................... $ 9,654,300 ---------------- ----------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 8 - -------------------------------------------------------------------------------- FINANCIAL STATEMENTS STATEMENTS OF CHANGES IN NET ASSETS
Six Months Ended 4/30/95 Year Ended (Unaudited) 10/31/94 ----------------- ----------------- OPERATIONS: Net investment income .................................. $ 4,618,988 14,053,234 Net realized loss on investments ......................... (8,846,238) (11,432,538) Net change in unrealized appreciation or depreciation of investments ............................................ 13,881,550 (49,287,501) ----------------- ----------------- Net increase (decrease) in net assets resulting from operations ........................................... 9,654,300 (46,666,805) ----------------- ----------------- DISTRIBUTIONS TO SHAREHOLDERS: From net investment income ............................... (9,416,741) (18,004,244) From net realized gains .................................. -- (138,574) In excess of net realized gains (note 2) ................. -- (4,673,317) ----------------- ----------------- Total distributions .................................... (9,416,741) (22,816,135) ----------------- ----------------- CAPITAL SHARE TRANSACTIONS: Proceeds from issuance of 188,042 and 408,320 shares for the dividend reinvestment plan, respectively ........... 1,071,839 3,149,271 Payments for retirement of 91,900 and 0 shares, respectively (note 6) .................................. (477,208) -- ----------------- ----------------- Increase in net assets from capital share transactions ......................................... 594,631 3,149,271 ----------------- ----------------- Total increase (decrease) in net assets .............. 832,190 (66,333,669) Net assets at beginning of period .......................... 120,632,747 186,966,416 ----------------- ----------------- Net assets at end of period .............................. $ 121,464,937 120,632,747 ----------------- ----------------- ----------------- ----------------- Undistributed net investment income ...................... $ 6,998,712 11,796,465 ----------------- ----------------- ----------------- -----------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 9 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (1) ORGANIZATION American Government Income Fund Inc. (the fund) is registered under the Investment Company Act of 1940 (as amended) as a non- diversified, closed-end management investment company. Shares of the fund are listed on the New York Stock Exchange under the symbol AGF. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES INVESTMENTS IN SECURITIES The values of fixed income securities are determined using pricing services or prices quoted by independent brokers. Exchange-listed options are valued at the last sales price, and open financial futures contracts are valued at the last settlement price. When market quotations are not readily available, securities are valued at fair value according to methods selected in good faith by the board of directors. Short-term securities with maturities of 60 days or less are valued at amortized cost which approximates market value. Securities transactions are accounted for on the date the securities are purchased or sold. Realized gains and losses are calculated on the identified-cost basis. Interest income, including amortization of bond discount and premium computed on a level-yield basis, is accrued daily. OPTIONS TRANSACTIONS For hedging purposes, the fund may buy and sell put and call options, write covered call options on portfolio securities, and write cash-secured puts. The risk in writing a call option is that the fund gives up the opportunity for profit if the market price of the security increases. The risk in writing a put option is that the fund may incur a loss if the market price of the security decreases and the option is exercised. The risk in buying an option is that the fund pays a premium whether or not the option is exercised. The fund also has the additional risk of not being able to enter into a closing transaction if a liquid secondary market does not exist. 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 10 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (UNAUDITED) purchase cost for a written put option, or the cost of a security for purchased put and call options is adjusted by the amount of premium received or paid. FUTURES TRANSACTIONS In order to gain exposure to or protect against changes in the market, the fund may buy and sell financial futures contracts and related options. Risks of entering into futures contracts and related options include the possibility there may be an illiquid market and that a change in the value of the contract or option may not correlate with changes in the value of the underlying securities. Upon entering into a futures contract, the fund is required to deposit either cash or securities in an amount (initial margin) equal to a certain percentage of the contract value. Subsequent payments (variation margin) are made or received by the fund each day. The variation margin payments are equal to the daily changes in the contract value and are recorded as unrealized gains and losses. The fund recognizes a realized gain or loss when the contract is closed or expires. 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 11 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (UNAUDITED) not used. Even if the forecasts are correct, there is risk that the positions may correlate imperfectly with the asset or liability being hedged. Other risks of entering into these transactions are that a liquid secondary market may not always exist, or that the other party to the transaction may not perform. For interest rate swaps, caps and floors, the fund accrues weekly, as an increase or decrease to interest income, the current net amount due to or owed by the fund. Interest rate swaps, caps and floors are valued from prices quoted by independent brokers. These valuations represent the present value of all future cash settlement amounts based upon implied forward interest rates. SECURITIES PURCHASED ON A WHEN-ISSUED BASIS Delivery and payment for securities that have been purchased by the fund on a forward-commitment or when-issued basis can take place a month or more after the transaction date. During this period, such securities do not earn interest, are subject to market fluctuation and may increase or decrease in value prior to their delivery. The fund maintains, in a segregated account with its custodian, assets with a market value equal to the amount of its purchase commitments. The purchase of securities on a when-issued or forward-commitment basis may increase the volatility of the fund's NAV to the extent the fund makes such purchases while remaining substantially fully invested. As of April 30, 1995, the fund had no outstanding when-issued or forward commitments. In connection with its ability to purchase securities on a when-issued or forward-commitment basis, the fund may enter into mortgage "dollar rolls" in which the fund sells securities for delivery in the current month and simultaneously contracts with the same counterparty to repurchase similar (same type, coupon and maturity) but not identical securities on a specified future date. As an inducement to "roll over" its purchase commitments, the fund receives negotiated fees. For the six months ended April 30, 1995, such fees earned by the fund amounted to $264,453. FEDERAL TAXES The fund intends to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and not 12 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (UNAUDITED) be subject to federal income tax. Therefore, no income tax provision is required. However, the fund incurred federal excise taxes of $392,413 or $0.018 per share on income retained by the fund during the excise tax year ended December 31, 1994. Net investment income and net realized gains (losses) may differ for financial statement and tax purposes primarily because of the recognition of losses deferred due to "wash sale" transactions and the timing of recognition of income on certain interest-only and principal-only securities. The character of distributions made during the year from net investment income or net realized gains may also differ from their ultimate characterization for federal income tax purposes. In addition, due to the timing of dividend distributions, the fiscal year in which amounts are distributed may differ from the year that the income or realized gains (losses) were recorded by the fund. The effect on dividend distributions of certain book-to-tax differences is presented as an "excess distribution" in the statement of changes in net assets. 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 commissions exceeds the net asset value by 10% 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 13 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (UNAUDITED) the repurchase agreement. Provisions for all agreements ensure that 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 in an amount equal to the sum of 0.025% of the average weekly net assets of the fund during the month (approximately 0.30% on an annual basis) and 5.25% of the daily gross income (i.e., investment income, including amortization of discount and premium, other than gains from the sale of securities or gains from options and futures contracts less interest on money borrowed by the fund) accrued by the fund during the month. The monthly investment management fee shall not exceed in the aggregate 1/12th of 0.60% of the fund's average weekly net assets during the month (approximately 0.60% on an annual basis). For its fee, the adviser provides investment advice and, 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 certain reporting, regulatory and record-keeping services for the fund. In addition to the investment management fee and the administrative fee, the fund is responsible for paying most other operating expenses including outside directors' fees and expenses, custodian fees, registration fees, printing and shareholder reports, transfer agent fees and expenses, legal, auditing and accounting services, insurance, interest, taxes and other miscellaneous expenses. 14 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (4) SECURITIES TRANSACTIONS Cost of purchases and proceeds from sales of securities (other than short-term securities) aggregated $89,149,175 and $93,509,378, respectively, for the six months ended April 30, 1995. During the six months ended April 30, 1995, the fund paid no brokerage commissions to Piper Jaffray Inc., an affiliated broker. (5) CAPITAL LOSS CARRYOVER For federal income tax purposes, the fund had capital loss carryovers of $16,702,453 on October 31, 1994, which, if not offset by subsequent capital gains, will expire in 2002. It is unlikely the board of directors will authorize a distribution of any net realized capital gains until the available capital loss carryover has been offset or expires. (6) RETIREMENT OF FUND SHARES The fund's board of directors has approved a plan to repurchase shares of the fund in the open market and retire those shares. Repurchases may only be made when the previous day's closing market price was trading at a discount from net asset value. Daily repurchases are limited to 25% of the previous four weeks average daily trading volume on the New York Stock Exchange. Under the current plan, cumulative repurchases in the fund cannot exceed 3% of the total shares originally issued. The board of directors will review the plan every six months and may change the amount which may be repurchased. The plan was last reviewed and reapproved by the board of directors on February 9, 1995. Pursuant to the plan, the fund has cumulatively repurchased and retired 91,900 shares as of April 30, 1995, which represents 0.48% of the shares originally issued. 15 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (7) FINANCIAL HIGHLIGHTS Per share data for a share of capital stock outstanding throughout each period and selected information for each period are as follows:
Six Months Ended 4/30/95 FISCAL YEARS ENDED OCTOBER 31, (Unaudited) 1994 1993 1992 1991 1990 -------------- ----------- ----------- ----------- ----------- ----------- Net asset value, beginning of period....$ 5.58 8.82 8.39 7.68 6.76 7.09 ------- ----------- ----------- ----------- ----------- ----------- Operations: Net investment income ................. 0.21 0.64 1.27 1.00 0.77 0.60 Net realized and unrealized gains (losses) on investments ............. 0.24 (2.81) 0.39 0.53 0.95 (0.15) ------- ----------- ----------- ----------- ----------- ----------- Total from operations ............... 0.45 (2.17) 1.66 1.53 1.72 0.45 ------- ----------- ----------- ----------- ----------- ----------- Distributions to shareholders: From net investment income ............ (0.43) (0.84) (0.93) (0.82) (0.77) (0.60) In excess of net investment income .... -- -- -- -- (0.03) (0.18) From net realized gains ............... -- (0.23)++ (0.30) -- -- -- ------- ----------- ----------- ----------- ----------- ----------- Total distributions to shareholders ...................... (0.43) (1.07) (1.23) (0.82) (0.80) (0.78) ------- ----------- ----------- ----------- ----------- ----------- Net asset value, end of period..........$ 5.60 5.58 8.82 8.39 7.68 6.76 ------- ----------- ----------- ----------- ----------- ----------- ------- ----------- ----------- ----------- ----------- ----------- Per-share market value, end of period...$ 5.00 6.00 9.38 8.75 8.13 7.25 ------- ----------- ----------- ----------- ----------- ----------- ------- ----------- ----------- ----------- ----------- ----------- Total return, net asset value** ......... 8.64% (26.43%) 21.34% 20.88% 26.71% 6.80% Total return, market value TRIANGLE .... (10.00%) (26.54%) 22.64% 18.52% 24.16% 2.80% Net assets at end of period (in millions).............................$ 121 121 187 175 159 139 Ratio of total expenses to average weekly net assets*** ......................... 1.71%* 1.32% 0.99% 1.25% 1.02% 1.04% Ratio of net investment income to average weekly net assets ..................... 7.91%* 9.44% 14.87% 12.48% 10.63% 8.64% Portfolio turnover rate (excluding short- term securities) ...................... 94% 199% 93% 123% 111% 61% Amount of borrowings outstanding at end of period (in millions)+..............$ -- -- 69 54 36 31 Per-share amount of borrowings outstanding at end of period..........$ -- -- 3.27 2.60 1.73 1.50 Per-share asset coverage of borrowings outstanding at end of period TRIANGLE TRIANGLE ............$ -- -- 12.09 10.99 9.41 8.26 * ADJUSTED TO AN ANNUAL BASIS. ** BASED ON THE CHANGE IN NET ASSET VALUE OF A SHARE DURING THE PERIOD AND ASSUMES REINVESTMENT OF DISTRIBUTIONS AT NET ASSET VALUE. *** INCLUDES 0.67%, 0.31% AND 0.21% FROM FEDERAL EXCISE TAXES IN THE SIX MONTHS ENDED 4/30/95 AND IN FISCAL YEARS 1994 AND 1992, RESPECTIVELY. TRIANGLE BASED ON THE CHANGE IN MARKET PRICE OF A SHARE DURING THE PERIOD AND ASSUMES REINVESTMENT OF DISTRIBUTIONS AT ACTUAL PRICES PURSUANT TO THE FUND'S DIVIDEND REINVESTMENT PLAN. TRIANGLE TRIANGLE REPRESENTS NET ASSETS (EXCLUDING BORROWINGS) DIVIDED BY SHARES OUTSTANDING. + 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. ++ INCLUDES $0.22 PER SHARE OF DISTRIBUTIONS IN EXCESS OF NET REALIZED GAINS RESULTING FROM BOOK-TO-TAX DIFFERENCES. SEE FOOTNOTE 2 IN THE NOTES TO FINANCIAL STATEMENTS.
16 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (8) QUARTERLY DATA DOLLAR AMOUNTS
Net Realized Net Increase and in Net Unrealized Assets Distributions Total Net Gains Resulting from Net Investment Investment (Losses) on from Investment Income Income Investments Operations Income ----------- ----------- ------------- ------------ ------------ 1/31/95 $ 2,770,760 2,104,739 (1,159,066) 945,673 (5,235,413) 4/30/95 2,846,144 2,514,249 6,194,378 8,708,627 (4,181,328) ----------- ----------- ------------- ------------ ------------ $ 5,616,904 4,618,988 5,035,312 9,654,300 (9,416,741) ----------- ----------- ------------- ------------ ------------ ----------- ----------- ------------- ------------ ------------
PER-SHARE AMOUNTS
Net Realized and Net Increase Distributions Net Unrealized Gains in Net Assets from Net Quarter End Investment (Losses) on Resulting from Investment Net Asset Income Investments Operations Income Value ------------- ----------------- ----------------- --------------- ------------- 1/31/95 $ 0.10 (0.05) 0.05 (0.24) 5.39 4/30/95 0.11 0.29 0.40 (0.19) 5.60 --- ----- ----- ----- $ 0.21 0.24 0.45 (0.43) --- ----- ----- ----- --- ----- ----- -----
17 - -------------------------------------------------------------------------------- INVESTMENTS IN SECURITIES (UNAUDITED) AMERICAN GOVERNMENT INCOME FUND APRIL 30, 1995
Principal Market Name of Issuer Amount Value (a) - --------------------------------------------------------- ----------- ------------ (PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS) U.S. GOVERNMENT AND AGENCY SECURITIES (18.2%): U.S. AGENCY DEBENTURES (5.6%): FHLMC Medium-Term Note, 6.00%, 1/13/98 ............. $ 2,000,000 1,956,340 FNMA Medium-Term Note, 6.26%, 12/22/97 ............... 5,000,000 4,916,500 ------------ 6,872,840 ------------ U.S. GOVERNMENT SECURITIES (12.6%): U.S. Treasury Note, 5.88%, 5/31/96 ................... 15,350,000 15,273,557 ------------ Total U.S. Government and Agency Securities (cost: $21,928,864) ................................ 22,146,397 ------------ MORTGAGE-BACKED SECURITIES (77.4%): U.S. AGENCY FIXED RATE MORTGAGES (11.1%): 7.50%, FNMA, 1/1/02 .................................. 13,405,591 13,455,728 ------------ COLLATERALIZED MORTGAGE OBLIGATIONS (B) (66.3%): U.S. AGENCY FLOATING RATE (19.5%): 6.58%, FHLMC, Series 1506, Class F, COFI, 5/15/08 .... 3,633,404 3,620,651 5.78%, FHLMC, Series 1606, Class F, COFI, 5/15/08 .... 4,318,777 4,058,355 7.84%, FNMA, Series 1993-246, Class F, LIBOR, 10/25/23 ............................................ 5,160,760 4,128,608 5.93%, FNMA, Series 1994-33, Class FD, COFI, 3/25/09 ............................................. 12,500,000 11,824,000 ------------ 23,631,614 ------------ U.S. AGENCY INTEREST-ONLY (3.1%): 13.75%, FHLMC, Series 165, Class L, 9/15/21 .......... -- 1,101,476 8.97%, FHLMC, Series 1759, Class J, 4/15/19 .......... -- 428,319 26.93%, FNMA, Series 1992-197, Class B, 7/25/18 ...... -- 1,976,247 16.20%, FNMA, Series 1993-31, Class N, 4/25/22 ....... -- 285,569 ------------ 3,791,611 ------------ U.S. AGENCY INVERSE INTEREST-ONLY (7.0%): 65.63%, FHLMC, Series 1382, Class LD, LIBOR, 11/15/18 ............................................ -- 788,471 56.44%, FHLMC, Series 1454, Class MJ, LIBOR, 4/15/22 ............................................. -- 544,690 23.81%, FHLMC, Series 1491, Class K, LIBOR, 11/15/21 ............................................ -- 600,500 29.28%, FHLMC, Series 1568, Class K, LIBOR, 8/15/23 ............................................. -- 497,562 4.00%, FHLMC, Series 1669, Class JB, LIBOR, 7/15/20 ............................................. -- 925,835 9.51%, FHLMC, Series 1684, Class JB, LIBOR, 9/15/21 ............................................. -- 686,766 15.26%, FHLMC, Series 1695, Class AD, LIBOR, 1/15/24 ............................................. -- 1,039,810 41.76%, FHLMC, Series 27, Class S, LIBOR, 9/25/23 .... -- 386,493
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES. 18 - -------------------------------------------------------------------------------- INVESTMENTS IN SECURITIES (UNAUDITED) AMERICAN GOVERNMENT INCOME FUND (CONTINUED)
Principal Market Name of Issuer Amount Value (a) - --------------------------------------------------------- ----------- ------------ 0.00%, FNMA, Series 1992-204, Class SC, LIBOR, 10/25/13 . $ --(c) 20,387 49.19%, FNMA, Series 1992-82, Class SA, LIBOR, 5/25/23 ............................................. -- 679,405 3.43%, FNMA, Series 1994-37, Class SA, LIBOR, 8/25/19 ............................................. -- 72,992 16.26%, FNMA, Series G 1992-64, Class S, LIBOR, 12/25/18 ............................................ -- 1,250,992 19.74%, FNMA, Series G 1993-17, Class S, LIBOR, 4/25/23 ............................................. -- 997,444 ------------ 8,491,347 ------------ OTHER INVERSE INTEREST-ONLY (0.3%): 0.00%, Citicorp Mortgage Securities, Series 1993-4, Class A2, LIBOR, 3/25/22 ............................ --(c) 184,404 16.55%, Countrywide Mortgage Backed Securities, Inc., Series 1993-4, Class A6, LIBOR, 11/25/08 ............ -- 53,607 0.00%, Residential Funding Corporation, Series 1992-S41, Class A6, LIBOR, 12/25/07 ................. --(c) 47,548 0.00%, Sears Mortgage Securities, Series 1992-14, Class S1, LIBOR, 5/25/21 ............................ --(c) 55,109 0.00%, Sears Mortgage Securities, Series 1993-1, Class S, LIBOR, 6/25/19 ................................... --(c) 50,673 ------------ 391,341 ------------ U.S. AGENCY INVERSE FLOATER (17.1%): 12.52%, FHLMC, Series 1041, Class F, LIBOR, 2/15/21 ............................................. 352,187 302,881 8.34%, FHLMC, Series 1421, Class NB, COFI, 11/15/22 ............................................ 4,410,517 2,462,303 7.88%, FHLMC, Series 1487, Class M, LIBOR, 3/15/23 ... 503,871 269,118 8.61%, FHLMC, Series 1512, Class N, COFI, 5/15/08 .... 2,146,182 1,489,557 7.45%, FHLMC, Series 1535, Class SA, Treasury, 12/15/22 ............................................ 1,500,000 1,084,395 9.08%, FHLMC, Series 1542, Class OB, COFI, 7/15/22 ... 731,549 421,467 8.29%, FHLMC, Series 1563, Class S, COFI, 10/15/07 ... 1,558,125 1,090,687 7.89%, FHLMC, Series 1587, Class SG, COFI, 10/15/08 ............................................ 1,102,258 694,422 7.97%, FHLMC, Series 1606, Class S, COFI, 5/15/08 .... 1,341,984 824,152 7.27%, FHLMC, Series 1614, Class TB, COFI, 11/15/23 ............................................ 2,828,439 1,499,073 5.97%, FHLMC, Series 1635, Class K, COFI, 12/15/08 ... 1,926,434 994,020 3.03%, FHLMC, Series 1640, Class SC, LIBOR, 12/15/00 ............................................ 1,250,000 946,163 7.42%, FHLMC, Series 1655, Class SB, COFI, 12/15/08 ............................................ 919,551 603,437 6.58%, FHLMC, Series 1671, Class MD, Treasury, 2/15/24 ............................................. 1,903,566 1,473,874 7.57%, FHLMC, Series 1704, Class S, COFI, 3/15/09 .... 1,907,641 1,297,196 8.17%, FNMA, Series 1993-119, Class SH, Treasury, 7/25/23 ............................................. 1,936,607 964,120 7.85%, FNMA, Series 1993-181, Class S, COFI, 2/25/08 ............................................. 2,022,025 1,380,033 5.80%, FNMA, Series 1994-33, Class SA, COFI, 2/25/08 ............................................. 3,164,092 1,766,861 6.11%, FNMA, Series G 1993-14, Class SG, Treasury, 3/25/23 . 2,162,106 1,172,078 ------------ 20,735,837 ------------
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES. 19 - -------------------------------------------------------------------------------- INVESTMENTS IN SECURITIES (UNAUDITED) AMERICAN GOVERNMENT INCOME FUND (CONTINUED)
Principal Market Name of Issuer Amount Value (a) - --------------------------------------------------------- ----------- ------------ OTHER INVERSE FLOATER (1.3%): 9.51%, Capstead Securities Corporation, Series 1993-E2, Class K, COFI, 10/25/23 .................. $ 1,576,873 1,056,505 3.94%, Residential Funding Mortgage Securities, Series 1994-S8, Class A8, Treasury, 3/25/09 ................ 914,450 563,530 ------------ 1,620,035 ------------ U.S. AGENCY PRINCIPAL-ONLY (4.5%): 3.20%, FHLMC, Series 173, Class F, 6/15/21 ........... 2,793,209 2,283,476 6.45%, FNMA, Series 1993-152, Class J, 8/25/23 ....... 957,580 363,047 1.08%, FNMA, Series 1994-53, Class E, 11/25/23 ....... 5,640,372 2,783,862 ------------ 5,430,385 ------------ OTHER PRINCIPAL-ONLY (3.5%): 1.82%, Bear Stearns, Series 1988-6, Class D, 12/1/18 ............................................. 3,000,000 1,455,000 2.42%, Bear Stearns, Series 1988-8, Class D, 12/1/18 ............................................. 465,645 209,666 4.08%, Collateralized Mortgage Obligation Trust, Series 50, Class B, 10/1/18 ......................... 1,277,949 747,600 1.65%, Drexel Burnham Lambert CMO Trust, Series Z, Class 3, 1/1/19 ..................................... 1,209,275 698,356 9.67%, Sears Mortgage Securities, Series 1992-10, Class P, 6/25/22 .................................... 62,449 39,421 5.70%, Westam Mortgage Financing Corporation, Series 10, Class D, 7/26/18 ................................ 2,780,987 1,133,253 ------------ 4,283,296 ------------ U.S. AGENCY Z-TRANCHE (10.0%): 7.98%, FHLMC, Series 1388, Class L, 10/15/07 ......... 2,395,172 2,135,823 8.02%, FNMA, Series 1993-131, Class Z, 7/25/08 ....... 11,299,169 10,036,035 ------------ 12,171,858 ------------ Total Mortgage-Backed Securities (cost: $117,206,204) ............................... 94,003,052 ------------ INTEREST RATE CONTRACTS (3.3%): Interest rate cap with Goldman Sachs, $10,000,000 notional principal on one-month LIBOR (6.125% on 4/30/95), 4.50%, 9/10/97 ............................ -- 459,400 Interest rate cap with Merrill Lynch, $15,000,000 notional principal on one-month LIBOR (6.125% on 4/30/95), 4.50%, 9/10/97 ............................ -- 689,100
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES. 20 - -------------------------------------------------------------------------------- INVESTMENTS IN SECURITIES (UNAUDITED) AMERICAN GOVERNMENT INCOME FUND (CONTINUED)
Principal Market Name of Issuer Amount Value (a) - --------------------------------------------------------- ----------- ------------ Interest rate cap with Morgan Stanley, $10,000,000 notional principal on one-month LIBOR (6.125% on 4/30/95), 6.00%, 2/2/98 ........................... $ -- 248,147 Interest rate cap with Morgan Stanley, $15,000,000 notional principal on one-month LIBOR (6.125% on 4/30/95), 4.50%, 9/10/97 ............................ -- 689,100 Interest rate cap with Morgan Stanley, $20,000,000 notional principal on one-month LIBOR (6.125% on 4/30/95), 6.00%, 1/25/98 ............................ -- 496,294 Interest rate cap with Morgan Stanley, $57,000,000 notional principal on one-month LIBOR (6.125% on 4/30/95), 6.00%, 2/7/98 ............................. -- 1,414,438 ------------ Total Interest Rate Contracts (cost: $1,430,293) ................................. 3,996,479 ------------ SHORT-TERM SECURITIES (1.9%): Repurchase agreement with Goldman Sachs in a joint trading account, collateralized by U.S. government agency securities, acquired on 4/28/95, accrued interest at repurchase date of $1,148, 5.90%, 5/1/95 (cost: $2,334,000) .................................. 2,334,000 2,334,000 ------------ Total Investments in Securities (cost: $142,899,361) (d) ......................... $ 122,479,928 ------------ ------------
21 - -------------------------------------------------------------------------------- INVESTMENTS IN SECURITIES (UNAUDITED) NOTES TO INVESTMENTS IN SECURITIES: (A) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO THE FINANCIAL STATEMENTS. (B) DESCRIPTIONS OF CERTAIN COLLATERALIZED MORTGAGE OBLIGATIONS ARE AS FOLLOWS: LIBOR - LONDON INTERBANK OFFERED RATE COFI (11TH DISTRICT) - COST OF FUNDS INDEX OF THE FEDERAL RESERVE'S 11TH DISTRICT INVERSE FLOATER - REPRESENTS SECURITIES THAT PAY INTEREST AT RATES THAT INCREASE (DECREASE) WITH A DECLINE (INCREASE) IN THE SPECIFIED INDEX. THE INTEREST RATE PAID BY THE INVERSE FLOATER WILL GENERALLY CHANGE AT A MULTIPLE OF ANY CHANGE IN THE INDEX. INTEREST RATES DISCLOSED ARE IN EFFECT ON APRIL 30, 1995. INTEREST-ONLY - REPRESENTS SECURITIES THAT ENTITLE HOLDERS TO RECEIVE ONLY INTEREST PAYMENTS ON THE UNDERLYING MORTGAGES. THE YIELD TO MATURITY OF AN INTEREST-ONLY IS EXTREMELY SENSITIVE TO THE RATE OF PRINCIPAL PAYMENTS ON THE UNDERLYING MORTGAGE ASSETS. A RAPID (SLOW) RATE OF PRINCIPAL REPAYMENTS MAY HAVE AN ADVERSE (POSITIVE) EFFECT ON YIELD TO MATURITY. INTEREST RATES DISCLOSED REPRESENT CURRENT YIELDS BASED UPON THE CURRENT COST BASIS AND ESTIMATED TIMING AND AMOUNT OF FUTURE CASH FLOWS. INVERSE INTEREST-ONLY - REPRESENTS SECURITIES THAT ENTITLE HOLDERS TO RECEIVE ONLY INTEREST PAYMENTS ON THE UNDERLYING MORTGAGES. INTEREST IS PAID AT A RATE THAT INCREASES (DECREASES) WITH A DECLINE (INCREASE) IN THE SPECIFIED INDEX. THE YIELD TO MATURITY OF AN INVERSE INTEREST-ONLY IS EXTREMELY SENSITIVE TO THE RATE PRINCIPAL PAYMENTS ON THE UNDERLYING MORTGAGE ASSETS. A RAPID (SLOW) RATE OF PRINCIPAL REPAYMENTS MAY HAVE AN ADVERSE (POSITIVE) EFFECT ON YIELD TO MATURITY. INTEREST RATES DISCLOSED REPRESENT CURRENT YIELDS BASED UPON THE CURRENT COST BASIS AND ESTIMATED TIMING AND AMOUNT OF FUTURE CASH FLOWS. PRINCIPAL-ONLY - REPRESENTS SECURITIES THAT ENTITLE HOLDERS TO RECEIVE ONLY PRINCIPAL PAYMENTS ON THE UNDERLYING MORTGAGES. THE YIELD TO MATURITY OF A PRINCIPAL-ONLY IS EXTREMELY SENSITIVE TO THE RATE OF PRINCIPAL PAYMENTS ON THE UNDERLYING MORTGAGE ASSETS. A SLOW (RAPID) RATE OF PRINCIPAL REPAYMENTS MAY HAVE AN ADVERSE (POSITIVE) EFFECT ON YIELD TO MATURITY. INTEREST RATES DISCLOSED REPRESENT CURRENT YIELDS BASED UPON THE CURRENT COST BASIS AND ESTIMATED TIMING OF FUTURE CASH FLOWS. Z-TRANCHE - REPRESENTS SECURITIES THAT PAY NO INTEREST OR PRINCIPAL DURING THEIR INITIAL ACCRUAL PERIODS, BUT ACCRUE ADDITIONAL PRINCIPAL AT SPECIFIED RATES. INTEREST RATE DISCLOSED REPRESENTS CURRENT YIELD BASED UPON THE CURRENT COST BASIS AND ESTIMATED TIMING OF FUTURE CASH FLOWS. (C) BASED UPON ESTIMATED TIMING AND AMOUNT OF FUTURE CASH FLOWS, INCOME IS CURRENTLY NOT BEING RECOGNIZED ON CERTAIN INVERSE INTEREST-ONLY SECURITIES WITH AN AGGREGATE MARKET VALUE OF $358,121. (D) ALSO APPROXIMATES COST FOR FEDERAL INCOME TAX PURPOSES. THE AGGREGATE GROSS UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED ON THIS COST WERE AS FOLLOWS: GROSS UNREALIZED APPRECIATION .... $ 4,012,373 GROSS UNREALIZED DEPRECIATION ...... (24,431,806) ------------ NET UNREALIZED DEPRECIATION .... $ (20,419,433) ------------ ------------
22 - -------------------------------------------------------------------------------- SHAREHOLDER UPDATE ANNUAL MEETING RESULTS An annual meeting of the fund's shareholders was held on August 22, 1994. Each matter voted upon at the meeting, as well as the number of votes cast for, against or withheld, the number of absentions, and the number of broker non-votes with respect to such matter, are set forth below. 1. The fund's shareholders elected the following eight directors:
Shares Shares Withholding Voted "For" Authority to Vote ----------- ------------------ David T. Bennett 14,125,131 354,467 Jaye F. Dyer 14,125,281 354,317 William H. Ellis 14,126,288 353,309 Karol D. Emmerich 14,128,774 350,824 Luella G. Goldberg 14,109,753 369,845 John T. Golle* 14,105,415 374,183 Edward J. Kohler* 14,126,594 353,004 George Latimer 14,116,352 363,246 *MR. KOHLER RESIGNED AS DIRECTOR OF THE FUND, EFFECTIVE NOVEMBER 30, 1994. MR. GOLLE RESIGNED AS DIRECTOR OF THE FUND, EFFECTIVE JUNE 1, 1995.
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 October 31, 1994. The following votes were cast regarding this matter:
Shares Shares Voted Voted "For" "Against" Absentions Broker Non-Votes - ----------- ------------- ----------- ----------------- 13,879,837 189,078 410,682 1
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. 23 - -------------------------------------------------------------------------------- SHAREHOLDER UPDATE - - Because repurchases will be at a price below net asset value, remaining shares outstanding may experience a slight increase in net asset value. - - Although the effect of share repurchases on market price is less certain, the board of directors believes the program may have a favorable effect on the market price of fund shares. - - We do not anticipate any material increase in the fund's expense ratio. WHEN WILL SHARES BE REPURCHASED? Share repurchases may be made from time to time and may be discontinued at any time. Share repurchases are not mandatory when fund shares are trading at a discount from net asset value; all repurchases will be at the discretion of the fund's investment adviser. The board of directors will consider whether to continue the share repurchase program on at least a semiannual basis and will notify shareholders of its determination in the next semiannual or annual report. HOW WILL SHARES BE REPURCHASED? We expect to finance the repurchase of shares by liquidating portfolio securities or using current cash balances. We do not anticipate borrowing in order to finance share repurchases. 24 - -------------------------------------------------------------------------------- DIRECTORS AND OFFICERS DIRECTORS David T. Bennett, CHAIRMAN, HIGHLAND HOMES, INC., USL PRODUCTS INC., KIEFER BUILT, INC. OF COUNSEL, GRAY, PLANT, MOOTY, MOOTY, & BENNETT, P.A. Jaye F. Dyer, PRESIDENT, DYER MANAGEMENT COMPANY William H. Ellis, PRESIDENT, PIPER CAPITAL MANAGEMENT INCORPORATED, PIPER JAFFRAY COMPANIES INC. Karol D. Emmerich, PRESIDENT, THE PARACLETE GROUP Luella G. Goldberg, DIRECTOR, TCF FINANCIAL, RELIASTAR FINANCIAL CORP., HORMEL FOODS CORP. George Latimer, SPECIALIST CONSULTANT, DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT OFFICERS William H. Ellis, CHAIRMAN OF THE BOARD Worth Bruntjen, PRESIDENT Marijo Goldstein, VICE PRESIDENT Robert H. Nelson, VICE PRESIDENT Marcy K. Winson, VICE PRESIDENT Amy K. Johnson, VICE PRESIDENT David E. Rosedahl, SECRETARY Charles N. Hayssen, TREASURER INVESTMENT Piper Capital Management Incorporated ADVISER 222 SOUTH 9TH STREET, MINNEAPOLIS, MN 55402-3804 CUSTODIAN AND Investors Fiduciary Trust Company TRANSFER AGENT 127 WEST 10TH STREET, KANSAS CITY, MO 64105-1716 LEGAL COUNSEL Dorsey & Whitney P.L.L.P. 220 SOUTH SIXTH STREET, MINNEAPOLIS, MN 55402
25 [LOGO] PIPER CAPITAL MANAGEMENT INCORPORATED 222 SOUTH NINTH STREET MINNEAPOLIS, MN 55402-3804 [LOGO] PIPER JAFFRAY INC., FUND SPONSOR AND NASD MEMBER. THIS DOCUMENT IS PRINTED ON PAPER MADE FROM 100% TOTAL RECOVERED FIBER, INCLUDING 15% POST-CONSUMER WASTE. 211-95 AGF-02 Bulk Rate U.S. Postage PAID Permit No. 3008 Mpls., MN -----END PRIVACY-ENHANCED MESSAGE-----