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<IMS-DOCUMENT>0000912057-95-005046.txt : 19950630<IMS-HEADER>0000912057-95-005046.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
</IMS-HEADER>
<DOCUMENT>
<TYPE>N-30D
<SEQUENCE>1
<DESCRIPTION>N-30D
<TEXT>
<PAGE>
[GRAPHIC]
AMERICAN GOVERNMENT
INCOME FUND
* * *
SEMIANNUAL REPORT
1995
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS (UNAUDITED)
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1995
<TABLE>
<S> <C>
ASSETS:
Investments in securities at market value* (note 2)
(including a repurchase agreement of $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
-----------------
-----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS (UNAUDITED)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 1995
<TABLE>
<S> <C>
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
----------------
----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months
Ended 4/30/95 Year Ended
(Unaudited) 10/31/94
----------------- -----------------
<S> <C> <C>
OPERATIONS:
Net investment income .................................. $ 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
----------------- -----------------
----------------- -----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
- --------------------------------------------------------------------------------
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
<PAGE>
- --------------------------------------------------------------------------------
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
<PAGE>
- --------------------------------------------------------------------------------
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
<PAGE>
- --------------------------------------------------------------------------------
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
<PAGE>
- --------------------------------------------------------------------------------
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
<PAGE>
- --------------------------------------------------------------------------------
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 $16,702,453 on October 31, 1994, which, if not
offset by subsequent capital gains, will expire in 2002. It is
unlikely the board of directors will authorize a distribution of
any net realized capital gains until the available capital loss
carryover has been offset or expires.
(6) RETIREMENT OF
FUND SHARES
The fund's board of directors has approved a plan to repurchase
shares of the fund in the open market and retire those shares.
Repurchases may only be made when the previous day's closing
market price was trading at a discount from net asset value.
Daily repurchases are limited to 25% of the previous four weeks
average daily trading volume on the New York Stock Exchange.
Under the current plan, cumulative repurchases in the fund
cannot exceed 3% of the total shares originally issued. The
board of directors will review the plan every six months and may
change the amount which may be repurchased. The plan was last
reviewed and reapproved by the board of directors on February 9,
1995. Pursuant to the plan, the fund has cumulatively
repurchased and retired 91,900 shares as of April 30, 1995,
which represents 0.48% of the shares originally issued.
15
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(7) FINANCIAL
HIGHLIGHTS
Per share data for a share of capital stock outstanding
throughout each period and selected information for each period
are as follows:
<TABLE>
<CAPTION>
Six Months
Ended 4/30/95 FISCAL YEARS ENDED OCTOBER 31,
(Unaudited) 1994 1993 1992 1991 1990
-------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period....$ 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
<FN>
* 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.
</TABLE>
16
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(8) QUARTERLY DATA
DOLLAR AMOUNTS
<TABLE>
<CAPTION>
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
----------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
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)
----------- ----------- ------------- ------------ ------------
----------- ----------- ------------- ------------ ------------
</TABLE>
PER-SHARE AMOUNTS
<TABLE>
<CAPTION>
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
------------- ----------------- ----------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
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)
--- ----- ----- -----
--- ----- ----- -----
</TABLE>
17
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
AMERICAN GOVERNMENT INCOME FUND
APRIL 30, 1995
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- --------------------------------------------------------- ----------- ------------
<S> <C> <C>
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS)
U.S. GOVERNMENT AND AGENCY SECURITIES (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
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
18
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
AMERICAN GOVERNMENT INCOME FUND
(CONTINUED)
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- --------------------------------------------------------- ----------- ------------
<S> <C> <C>
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
------------
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
19
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
AMERICAN GOVERNMENT INCOME FUND
(CONTINUED)
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- --------------------------------------------------------- ----------- ------------
<S> <C> <C>
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
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
20
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
AMERICAN GOVERNMENT INCOME FUND
(CONTINUED)
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- --------------------------------------------------------- ----------- ------------
<S> <C> <C>
Interest rate cap with Morgan Stanley, $10,000,000
notional principal on one-month LIBOR (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
------------
------------
</TABLE>
21
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
NOTES TO INVESTMENTS IN SECURITIES:
(A) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO
THE FINANCIAL STATEMENTS.
(B) 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:
<TABLE>
<S> <C>
GROSS UNREALIZED APPRECIATION .... $ 4,012,373
GROSS UNREALIZED DEPRECIATION ...... (24,431,806)
------------
NET UNREALIZED DEPRECIATION .... $ (20,419,433)
------------
------------
</TABLE>
22
<PAGE>
- --------------------------------------------------------------------------------
SHAREHOLDER UPDATE
ANNUAL MEETING RESULTS
An annual meeting of the fund's shareholders was held on August 22, 1994. Each
matter voted upon at the meeting, as well as the number of votes cast for,
against or withheld, the number of absentions, and the number of broker
non-votes with respect to such matter, are set forth below.
1. The fund's shareholders elected the following eight directors:
<TABLE>
<CAPTION>
Shares Shares Withholding
Voted "For" Authority to Vote
----------- ------------------
<S> <C> <C>
David T. Bennett 14,125,131 354,467
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
<FN>
*MR. KOHLER RESIGNED AS DIRECTOR OF THE FUND, EFFECTIVE NOVEMBER 30, 1994.
MR. GOLLE RESIGNED AS DIRECTOR OF THE FUND, EFFECTIVE JUNE 1, 1995.
</TABLE>
2. The fund's shareholders ratified the selection by a majority of the
independent members of the fund's Board of Directors of KPMG Peat
Marwick LLP as the independent public accountants for the fund for the
fiscal year ending October 31, 1994. The following votes were cast
regarding this matter:
<TABLE>
<CAPTION>
Shares Shares Voted
Voted "For" "Against" Absentions Broker Non-Votes
- ----------- ------------- ----------- -----------------
<S> <C> <C> <C>
13,879,837 189,078 410,682 1
</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.
23
<PAGE>
- --------------------------------------------------------------------------------
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
<PAGE>
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
<TABLE>
<S> <C>
DIRECTORS David T. Bennett, CHAIRMAN, HIGHLAND HOMES, INC., USL
PRODUCTS INC., KIEFER BUILT, INC. OF COUNSEL, GRAY,
PLANT, MOOTY, MOOTY, & BENNETT, P.A.
Jaye F. Dyer, PRESIDENT, DYER MANAGEMENT COMPANY
William H. Ellis, PRESIDENT, PIPER CAPITAL MANAGEMENT
INCORPORATED, PIPER JAFFRAY COMPANIES INC.
Karol D. Emmerich, PRESIDENT, THE PARACLETE GROUP
Luella G. Goldberg, DIRECTOR, TCF FINANCIAL,
RELIASTAR FINANCIAL CORP., HORMEL FOODS CORP.
George Latimer, 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
</TABLE>
25
<PAGE>
[LOGO]
PIPER CAPITAL MANAGEMENT INCORPORATED
222 SOUTH NINTH STREET
MINNEAPOLIS, MN 55402-3804
[LOGO]
PIPER JAFFRAY INC., FUND SPONSOR AND NASD MEMBER.
THIS DOCUMENT IS PRINTED ON PAPER MADE FROM
100% TOTAL RECOVERED FIBER, INCLUDING 15% POST-CONSUMER WASTE.
211-95 AGF-02
Bulk Rate
U.S. Postage
PAID
Permit No. 3008
Mpls., MN
</TEXT>
</DOCUMENT>
</IMS-DOCUMENT>
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