-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LLgTGvEYBFTfoALyGAxlpLhDViWr9yCmT4O4NjqfzCv90nUl9dfiWYS2ZQEY+B81 A0BgHvf+tAkoSC05PRWWrg== 0001047469-98-024581.txt : 19980619 0001047469-98-024581.hdr.sgml : 19980619 ACCESSION NUMBER: 0001047469-98-024581 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980430 FILED AS OF DATE: 19980618 SROS: NYSE 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: SEC FILE NUMBER: 811-05470 FILM NUMBER: 98650464 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 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN GOVERNMENT INCOME PORTFOLIO INC CENTRAL INDEX KEY: 0000836425 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 411620510 STATE OF INCORPORATION: MN FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-05622 FILM NUMBER: 98650465 BUSINESS ADDRESS: STREET 1: 222 S 9TH ST CITY: MINNEAPOLIS STATE: MN ZIP: 55402 BUSINESS PHONE: 6123426231 MAIL ADDRESS: STREET 2: 222 S 9TH STREET CITY: MINNEAPOLIS STATE: MN ZIP: 55402 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN GOVERNMENT SECURITIES FUND INC DATE OF NAME CHANGE: 19880919 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN OPPORTUNITY INCOME FUND INC CENTRAL INDEX KEY: 0000854125 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 061276208 STATE OF INCORPORATION: MN FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-05854 FILM NUMBER: 98650466 BUSINESS ADDRESS: STREET 1: PIPER JAFFRAY TWR 222 S NINTH ST STREET 2: C/O PIPER CAPITAL MANAGEMENT INC CITY: MINNEAPOLIS STATE: MN ZIP: 55402 BUSINESS PHONE: 6123426231 MAIL ADDRESS: STREET 2: 222 S 9TH ST CITY: MINNEAPOLIS STATE: MN ZIP: 55402 N-30D 1 N-30D AGF, AAF, OIF - 1998 Semiannual Report 1998 Semiannual Report [LOGO] American Government Income Fund American Government Income Portfolio American Opportunity Income Portfolio AGF AAF OIF [LOGO] CONTENTS AMERICAN GOVERNMENT INCOME FUND (AGF) Average Annualized Total Returns . . . . . . . . . . . . . . . . . . . . . . 2 Portfolio Managers' Letter . . . . . . . . . . . . . . . . . . . . . . . . . 5 Financial Statements and Notes . . . . . . . . . . . . . . . . . . . . . . . 9 Investments in Securities. . . . . . . . . . . . . . . . . . . . . . . . . .21 AMERICAN GOVERNMENT INCOME PORTFOLIO (AAF) Average Annualized Total Returns . . . . . . . . . . . . . . . . . . . . . . 3 Portfolio Managers' Letter . . . . . . . . . . . . . . . . . . . . . . . . . 5 Financial Statements and Notes . . . . . . . . . . . . . . . . . . . . . . .24 Investments in Securities. . . . . . . . . . . . . . . . . . . . . . . . . .36 AMERICAN OPPORTUNITY INCOME FUND (OIF) Average Annualized Total Returns . . . . . . . . . . . . . . . . . . . . . . 4 Portfolio Managers' Letter . . . . . . . . . . . . . . . . . . . . . . . . . 5 Financial Statements and Notes . . . . . . . . . . . . . . . . . . . . . . .39 Investments in Securities. . . . . . . . . . . . . . . . . . . . . . . . . .51 Glossary*** . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56 *** This report includes a glossary to help you understand financial terms used in the portfolio managers' letter. When you see this symbol, it indicates a word that is defined in the glossary. AMERICAN GOVERNMENT INCOME FUND - ------------------------------- PRIMARY INVESTMENTS Obligations issued or guaranteed by the U.S. government, its agencies and instrumentalities, including mortgage-backed derivative securities. The fund may purchase securities through the dollar-roll program or enter into reverse repurchase agreements. Investments in certain mortgage-backed derivative securities, dollar-roll transactions and the use of reverse repurchase agreements may cause the fund's net asset value to fluctuate to a greater extent than would be expected from interest rate movements alone. FUND OBJECTIVE High current income consistent with preservation of capital. As with other investment companies, there can be no assurance this fund will achieve its objective. AMERICAN GOVERNMENT INCOME PORTFOLIO PRIMARY INVESTMENTS Obligations issued or guaranteed by the U.S. government, its agencies and instrumentalities, including mortgage-backed derivative securities. The fund may purchase securities through the dollar-roll program and enter into reverse repurchase agreements. Investments in certain mortgage-backed derivative securities, dollar-roll transactions and the use of reverse repurchase agreements may cause the fund's net asset value to fluctuate to a greater extent than would be expected from interest rate movements alone. FUND OBJECTIVE High current income consistent with preservation of capital. As with other investment companies, there can be no assurance this fund will achieve its objective. AMERICAN OPPORTUNITY INCOME FUND PRIMARY INVESTMENTS Mortgage-backed securities, including U.S. government and agency securities and privately issued securities. The fund's investments in mortgage-backed securities include derivative securities, and the fund may purchase securities through the dollar-roll program and enter into reverse repurchase agreements. Investments in certain mortgage-backed derivative securities, dollar-roll transactions and the use of reverse repurchase agreements may cause the fund's net asset value to fluctuate to a greater extent than would be expected from interest rate movements alone. FUND OBJECTIVE High level of current income. Its secondary objective is capital appreciation. As with other investment companies, there can be no assurance this fund will achieve its objective. - -------------------------------------------------------------------------------- 1998 Semiannual Report 1 AGF, AAF, OIF AVERAGE ANNUALIZED TOTAL RETURNS - -------------------------------------------------------------------------------- Based on net asset value for the periods ended April 30, 1998 - -------------------------------------------------------------------------------- [GRAPH]
American Government Lehman Brothers U.S. Income Fund Mortgage Index One Year 10.32 10.02 Ten Year 9.42 9.13 Since Inception 4/28/88 9.42 9.13
American Government Income Fund's average annualized total returns are based on the change in its net asset value (NAV), assume all distributions were reinvested and do not reflect sales charges. NAV-based performance is used to measure investment management results. Average annualized total returns based on the change in market price for the one-year, ten-year and since inception periods ended April 30, 1998, were 21.45%, 7.99%, and 7.99%, respectively. These returns assume reinvestment of all distributions and reflect sales charges on those reinvestments as described in the fund's dividend reinvestment plan, but not on initial purchases. PLEASE REMEMBER, YOU COULD LOSE MONEY WITH THIS INVESTMENT. NEITHER SAFETY OF PRINCIPAL NOR STABILITY OF INCOME IS GUARANTEED. 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. Closed-end funds, such as this fund, often trade at discounts to net asset value. Therefore, you may be unable to realize the full net asset value of your shares when you sell. The Lehman Brothers U.S. Mortgage Index is an unmanaged index that represents the total return, with distributions reinvested, of U.S. government agency mortgage-backed securities with up to 30 years to maturity. The index does not reflect expenses or transaction costs. The since inception number for the Lehman index is calculated from the month end following the fund's inception through April 30, 1998. - -------------------------------------------------------------------------------- 1998 Semiannual Report 2 AGF, AAF, OIF AVERAGE ANNUALIZED TOTAL RETURNS - -------------------------------------------------------------------------------- Based on net asset value for the periods ended April 30, 1998 - -------------------------------------------------------------------------------- [GRAPH]
American Government Lehman Brothers U.S. Income Fund Mortgage Index One Year 10.21 10.02 Ten Year 2.68 694 Since Inception 4/28/88 9.52 9.04
American Government Income Portfolio's average annualized total returns are based on the change in its net asset value (NAV), assume all distributions were reinvested and do not reflect sales charges. NAV-based performance is used to measure investment management results. Average annualized total returns based on the change in market price for the one-year, five-year and since inception periods ended April 30, 1998, were 17.55%, 0.73%, and 8.15%, respectively. These returns assume reinvestment of all distributions and reflect sales charges on those reinvestments as described in the fund's dividend reinvestment plan, but not on initial purchases. PLEASE REMEMBER, YOU COULD LOSE MONEY WITH THIS INVESTMENT. NEITHER SAFETY OF PRINCIPAL NOR STABILITY OF INCOME IS GUARANTEED. 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. Closed-end funds, such as this fund, often trade at discounts to net asset value. Therefore, you may be unable to realize the full net asset value of your shares when you sell. The Lehman Brothers U.S. Mortgage Index is an unmanaged index that represents the total return, with distributions reinvested, of U.S. government agency mortgage-backed securities with up to 30 years to maturity. The index does not reflect expenses or transaction costs. The since inception number for the Lehman index is calculated from the month end following the fund's inception through April 30, 1998. - -------------------------------------------------------------------------------- 1998 Semiannual Report 3 AGF, AAF, OIF AVERAGE ANNUALIZED TOTAL RETURNS - -------------------------------------------------------------------------------- Based on net asset value for the periods ended April 30, 1998 - -------------------------------------------------------------------------------- [GRAPH]
American Opportunity Lehman Brothers Mutual Fund Income Fund 5-10 Year Government Index One Year 11.01 11.42 Five Year 2.35 6.70 Since Inception 9/29/89 9.25 9.04
American Opportunity Income Fund's average annualized total returns are based on the change in its net asset value (NAV), assume all distributions were reinvested and do not reflect sales charges. NAV-based performance is used to measure investment management results. Average annualized total returns based on the change in market price for the one-year, five-year and since inception periods ended April 30, 1998, were 19.94%, -0.77%, and 7.56%, respectively. These returns assume reinvestment of all distributions and reflect sales charges on those reinvestments as described in the fund's dividend reinvestment plan, but not on initial purchases. PLEASE REMEMBER, YOU COULD LOSE MONEY WITH THIS INVESTMENT. NEITHER SAFETY OF PRINCIPAL NOR STABILITY OF INCOME IS GUARANTEED. 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. Closed-end funds, such as this fund, often trade at discounts to net asset value. Therefore, you may be unable to realize the full net asset value of your shares when you sell. The Lehman Brothers Mutual Fund 5-10 Year Government Index is an index of all U.S. government agency and Treasury securities with maturities of 5-10 years. The index does not reflect expenses or transaction costs. The since inception number for the Lehman index is calculated from the month end following the fund's inception through April 30, 1998. - -------------------------------------------------------------------------------- 1998 Semiannual Report 4 AGF, AAF, OIF PORTFOLIO MANAGERS' LETTER - -------------------------------------------------------------------------------- [PHOTO] BRUCE SALVOG shares responsibility for the management of the funds. He has 28 years od financial experience. - -------------------------------------------------------------------------------- June 10, 1998 - -------------------------------------------------------------------------------- DEAR SHAREHOLDERS: FOR THE SIX-MONTH PERIOD ENDED APRIL 30, 1998, AMERICAN GOVERNMENT INCOME FUND ACHIEVED A NET ASSET VALUE TOTAL RETURN OF 3.29%* COMPARED TO 3.48% FOR THE FUND'S BENCHMARK,*** THE LEHMAN BROTHERS U.S. MORTGAGE INDEX. Over the same period, the fund returned 5.59% based on its market price. FOR THE SIX-MONTH PERIOD ENDED APRIL 30, 1998, AMERICAN GOVERNMENT INCOME PORTFOLIO ACHIEVED A NET ASSET VALUE TOTAL RETURN OF 3.35%* COMPARED TO 3.48% FOR THE FUND'S BENCHMARK, THE LEHMAN BROTHERS U.S. MORTGAGE INDEX. Over the same period, the fund returned 6.17% based on its market price. FOR THE SIX-MONTH PERIOD ENDED APRIL 30, 1998, AMERICAN OPPORTUNITY INCOME FUND ACHIEVED A NET ASSET VALUE TOTAL RETURN OF 3.33%* COMPARED TO 3.46% FOR THE FUND'S BENCHMARK, THE LEHMAN BROTHERS MUTUAL FUND 5-10 YEAR GOVERNMENT INDEX. Over the same period, the fund returned 5.39% based on its market price. ENTERING THE REPORTING PERIOD, EACH FUND WAS POSITIONED TO MINIMIZE THE IMPACT OF LOWER INTEREST RATES AND FASTER PREPAYMENTS. Specifically, the funds were overweighted in mortgage securities with coupons below 7% while underweighting the higher-coupon issues which are more likely to be refinanced during periods of lower interest rates. In addition, American Opportunity Income Fund added fixed rate * All returns assume reinvestment of distributions and do not reflect sales charges, except the fund's total return based on market price, which does reflect sales charges on those reinvestments as described in the fund's dividend reinvestment plan, but not on initial purchases. 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. *** - This symbol represents a graduation cap, used throughout this report to indicate terms defined in the glossary. - -------------------------------------------------------------------------------- 1998 Semiannual Report 5 AGF, AAF, OIF PORTFOLIO MANAGERS' LETTER (CONTINUED) - -------------------------------------------------------------------------------- PORTFOLIO COMPOSITIONS - -------------------------------------------------------------------------------- As a percentage of total assets on April 30, 1998
AMERICAN GOVERNMENT INCOME FUND U.S. Agency Fixed Rate Motgage-Backed Securities 88% U.S Treasury Securities 5% U.S. Agency Z-Bond Securities 3% Short-Term 3% Other Assets 1% AMERICAN GOVERNMENT INCOME PORTFOLIO U.S. Agency Fixed Rate Motgage-Backed Securities 85% U.S Treasury Securities 7% U.S. Agency Z-Bond Securities 3% Other Assets 1% Short-Term 4% AMERICAN OPPORTUNITY INCOME PORTFOLIO U.S. Agency Fixed Rate Motgage-Backed Securities 76% Other 1% Short-Term 2% U.S. Agency Z-Bond Securities 8% Private Z-Bond Securities 1% U.S Treasury Securities 5% Corporate Bonds 7%
- -------------------------------------------------------------------------------- 1998 Semiannual Report 6 AGF, AAF, OIF PORTFOLIO MANAGERS' LETTER (CONTINUED) - -------------------------------------------------------------------------------- [PHOTO] TOM MCGLINCH, CFA shares responsibility for the management of the funds. He has 17 years of financial experience. - -------------------------------------------------------------------------------- collateralized mortgage obligation bonds (CMOs) with relatively long maturities. These securities are not expected to make principal payments for a number of years, thereby reducing the reinvestment risk associated with the prepayments and helping to maintain the fund's income stream. We maintained each funds' effective duration*** at roughly four years to enhance their portfolios' income stream. BONDS TRADED WITHIN A NARROW RANGE AS THE ULTIMATE IMPACT OF THE ASIAN RECESSION ON U.S. ECONOMIC GROWTH REMAINED UNCLEAR. After beginning the reporting period at 6.14%, the yield on the Treasury's benchmark 30-year bond fell to 5.66% in January as the deepening crisis in Asia reassured investors that domestic inflation would remain under control. However, as the U.S. economy continued to show strength, the long-term Treasury yield rose modestly to close the reporting period at 5.94%. DESPITE STRONG ECONOMIC GROWTH AND A TIGHT LABOR MARKET, INFLATION REMAINED BENIGN. With no evidence of inflation, the Federal Reserve Board (Fed) kept short-term interest rates unchanged. The negative impact of a rate hike on Asian currencies may also have played a role in the Fed's decision to keep the key federal funds rate unchanged at 5.50%. MORTGAGE PREPAYMENTS COULD BECOME A CONCERN FOR THE FUNDS IF INTEREST RATES DROP SIGNIFICANTLY FROM PRESENT LEVELS. While the mortgage market is broadly affected by any acceleration in the rate of prepayments, the funds have positioned their portfolios in a way that minimizes the impact of a drop in interest rates. While we have taken steps to reduce the risk of mortgage prepayments, the funds are not immune to such refinancings, *** - This symbol represents a graduation cap, used throughout this report to indicate terms defined in the glossary. - -------------------------------------------------------------------------------- 1998 Semiannual Report 7 AGF, AAF, OIF PORTFOLIO MANAGERS' LETTER (CONTINUED) - -------------------------------------------------------------------------------- and the ongoing possibility of prepayments influences the valuation of mortgage securities. As always, we will continue to focus on maintaining a high level of current income for our shareholders. On May 1, Piper Jaffray Companies Inc., the parent company of Piper Capital, was acquired by U.S. Bancorp. As a result of this acquisition, the funds' boards of directors have approved a proposal to merge the funds into the First American Fixed Income Fund, an open-end fund with similar investment objectives, which is managed by First American Asset Management, U.S. Bancorp's asset management arm. This proposal is subject to shareholder approval and will be voted on at the funds' annual meeting in August. Thank you for your investment. We appreciate the opportunity to help you reach your financial goals. Sincerely, /s/ Bruce Salvog Bruce Salvog Portfolio Manager /s/ Tom McGlinch Tom McGlinch Portfolio Manager - -------------------------------------------------------------------------------- 1998 Semiannual Report 8 AGF, AAF, OIF Financial Statements (Unaudited) - -------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES April 30, 1998 ................................................................................ ASSETS: Investments in securities at market value* (note 2) (including a repurchase agreement of $3,036,000) ......... $112,133,725 Cash in bank on demand deposit ............................. 25,921 Accrued interest receivable ................................ 648,547 ----------------- Total assets ............................................. 112,808,193 ----------------- LIABILITIES: Payable for investment securities purchased on a when-issued basis (note 2) ........................................... 13,939,336 Reverse repurchase agreements payable ...................... 4,500,000 Accrued interest ........................................... 50,735 Other accrued expenses ..................................... 107,206 ----------------- Total liabilities ........................................ 18,597,277 ----------------- Net assets applicable to outstanding capital stock ....... $94,210,916 ----------------- ----------------- COMPOSITION OF NET ASSETS: Capital stock and additional paid-in capital ............... $127,291,132 Undistributed net investment income ........................ 106,878 Accumulated net realized loss on investments ............... (35,958,799) Unrealized appreciation of investments ..................... 2,771,705 ----------------- Total - representing net assets applicable to capital stock .................................................. $94,210,916 ----------------- ----------------- * Investments in securities at identified cost ............. $109,362,020 ----------------- ----------------- NET ASSET VALUE AND MARKET PRICE: Net assets ................................................. $94,210,916 Shares outstanding (authorized 1 billion shares of $0.01 par value) ................................................... 16,080,953 Net asset value ............................................ $ 5.86 Market price ............................................... $ 5.69
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. - --------------------------------------------------------------------- 1998 Semi-Annual Report 9 AMERICAN GOVERNMENT INCOME FUND Financial Statements (Unaudited) (continued) - --------------------------------------------------------------------- STATEMENT OF OPERATIONS For the Six Months Ended April 30, 1998 ................................................................................ INCOME: Interest (net of interest expense of $156,119) ............. $ 3,409,106 Fee income (note 2) ........................................ 70,400 ----------------- Total investment income .................................. 3,479,506 ----------------- EXPENSES (NOTE 3): Investment management fee .................................. 296,895 Administrative fee ......................................... 98,965 Custodian and accounting fees .............................. 45,229 Transfer agent fees ........................................ 9,072 Reports to shareholders .................................... 39,282 Directors' fees ............................................ 6,207 Audit and legal fees ....................................... 33,343 Other expenses ............................................. 27,507 ----------------- Total expenses ........................................... 556,500 Less expenses paid indirectly .......................... (1,793) ----------------- Total net expenses ....................................... 554,707 ----------------- Net investment income .................................... 2,924,799 ----------------- NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS: Net realized gain on investments (note 4) .................. 943,552 Net realized loss on closed futures contracts .............. (37,698) ----------------- Net realized gain on investments ......................... 905,854 Net change in unrealized appreciation or depreciation of investments .............................................. (662,651) ----------------- Net gain on investments .................................. 243,203 ----------------- Net increase in net assets resulting from operations ... $ 3,168,002 ----------------- -----------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. - --------------------------------------------------------------------- 1998 Semi-Annual Report 10 AMERICAN GOVERNMENT INCOME FUND Financial Statements (Unaudited) (continued) - --------------------------------------------------------------------- STATEMENT OF CASH FLOWS For the Six Months Ended April 30, 1998 ................................................................................ CASH FLOWS FROM OPERATING ACTIVITIES: Interest and fee income .................................... $ 3,479,506 Net expenses ............................................... (554,707) ----------------- Net investment income .................................... 2,924,799 ----------------- Adjustments to reconcile net investment income to net cash provided by operating activities: Change in accrued interest receivable and principal receivable on mortgage securities ...................... 371,386 Net amortization of bond discount and premium ............ (23,680) Change in accrued fees and expenses ...................... (13,012) ----------------- Total adjustments ...................................... 334,694 ----------------- Net cash provided by operating activities .............. 3,259,493 ----------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of investments ......................... 59,905,729 Purchases of investments ................................... (28,229,186) Net purchases of short-term securities ..................... (680,000) Net variation margin paid for futures contracts ............ (37,698) ----------------- Net cash provided by investing activities .............. 30,958,845 ----------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net payments for reverse repurchase agreements ............. (6,000,000) Retirement of fund shares .................................. (31,250,526) Distributions paid to shareholders ......................... (3,055,380) ----------------- Net cash used by financing activities .................. (40,305,906) ----------------- Net decrease in cash ....................................... (6,087,568) Cash at beginning of period ................................ 6,113,489 ----------------- Cash at end of period .................................. $ 25,921 ----------------- ----------------- Supplemental disclosure of cash flow information: Cash paid for interest on reverse repurchase agreements ............................................. $ 191,872 ----------------- -----------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. - --------------------------------------------------------------------- 1998 Semi-Annual Report 11 AMERICAN GOVERNMENT INCOME FUND Financial Statements (continued) - --------------------------------------------------------------------- STATEMENTS OF CHANGES IN NET ASSETS ................................................................................
SIX MONTHS ENDED 4/30/98 YEAR ENDED (UNAUDITED) 10/31/97 ----------------- ----------------- OPERATIONS: Net investment income ...................................... $ 2,924,799 $ 7,405,411 Net realized gain (loss) on investments .................... 905,854 (427,926) Net change in unrealized appreciation or depreciation of investments .............................................. (662,651) 3,201,771 ----------------- ----------------- Net increase in net assets resulting from operations ..... 3,168,002 10,179,256 ----------------- ----------------- DISTRIBUTIONS TO SHAREHOLDERS: From net investment income ................................. (3,055,380) (7,718,849) ----------------- ----------------- CAPITAL SHARE TRANSACTIONS (NOTE 6): Decrease in net assets from capital share transactions ..... (31,250,526) -- ----------------- ----------------- Total increase (decrease) in net assets .................. (31,137,904) 2,460,407 Net assets at beginning of period .......................... 125,348,820 122,888,413 ----------------- ----------------- Net assets at end of period ................................ $94,210,916 $125,348,820 ----------------- ----------------- ----------------- ----------------- Undistributed net investment income ........................ $ 106,878 $ 237,459 ----------------- ----------------- ----------------- -----------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. - --------------------------------------------------------------------- 1998 Semi-Annual Report 12 AMERICAN GOVERNMENT INCOME FUND 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. The fund invests primarily in obligations issued or guaranteed by the U.S. government, its agencies and instrumentalities, including mortgage-backed securities. The fund may engage in dollar-roll transactions. In addition, the fund may borrow through the use of reverse repurchase agreements. Fund shares are listed on the New York Stock Exchange under the symbol AGF. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ................................ INVESTMENTS IN SECURITIES Portfolio securities for which market quotations are readily available are valued at current market value. If market quotations or valuations are not readily available, or if such quotations or valuations are believed to be inaccurate, unreliable or not reflective of market value, portfolio securities are valued according to procedures adopted by the fund's board of directors in good faith at "fair value", that is, a price that the fund might reasonably expect to receive for the security or other asset upon its current sale. The current market value of certain fixed income securities is provided by an independent pricing service. Fixed income securities for which prices are not available from an independent pricing service but where an active market exists are valued using market quotations obtained from one or more dealers that make markets in the securities or from a widely-used quotation system. Short-term securities with maturities of 60 days or less are valued at amortized cost, which approximates market value. Exchange-traded options are valued at the last sales price on the exchange prior to the time when assets are valued. If no sales were reported that day, the options are valued at the mean between the current closing bid and asked prices. Over-the-counter options are valued using market quotations obtained - --------------------------------------------------------------------- 1998 Semi-Annual Report 13 AMERICAN GOVERNMENT INCOME FUND Notes to Financial Statements (Unaudited) (continued) - -------------------------------------------------------------------------------- from broker-dealers. Financial futures are valued at the last settlement price established each day by the board of trade or exchange on which they are traded. Securities transactions are accounted for on the date 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, is recorded on an accrual basis. 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. SECURITIES PURCHASED ON A WHEN-ISSUED BASIS Delivery and payment for securities that have been purchased by the fund on a when-issued or forward-commitment 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 segregates, 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 - --------------------------------------------------------------------- 1998 Semi-Annual Report 14 AMERICAN GOVERNMENT INCOME FUND Notes to Financial Statements (Unaudited) (continued) - -------------------------------------------------------------------------------- fund's net asset value if the fund makes such purchases while remaining substantially fully invested. As of April 30, 1998, the fund had entered into outstanding when-issued or forward commitments of $13,939,336. 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 purchased on a forward commitment basis and simultaneously contracts with a 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, 1998, such fees earned by the fund amounted to $70,400. FEDERAL TAXES The fund intends to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and not be subject to federal income tax. Therefore, no income tax provision is required. The fund also intends to distribute its taxable net investment income and realized gains, if any, to avoid the payment of any federal excise taxes. Net investment income and net realized gains (losses) may differ for financial statement and tax purposes. The character of distributions made during the year from net investment income or net realized gains may differ from its ultimate characterization for federal income tax purposes. In addition, due to the timing of dividend distributions, the fiscal year in which amounts are distributed may differ from the year that the income or realized gains or losses were recorded by the fund. DISTRIBUTIONS TO SHAREHOLDERS Distributions from net investment income are made monthly and realized capital gains, if any, will be distributed at least annually. These distributions are recorded as of the close of - --------------------------------------------------------------------- 1998 Semi-Annual Report 15 AMERICAN GOVERNMENT INCOME FUND Notes to Financial Statements (Unaudited) (continued) - -------------------------------------------------------------------------------- business on the ex-dividend date. Such distributions are payable in cash or, pursuant to the fund's dividend reinvestment plan, reinvested in additional shares of the fund's capital stock. Under the plan, fund shares will be purchased in the open market unless the market price plus commissions exceeds the net asset value by 10% or more. If, at the close of business on the dividend payment date, the shares purchased in the open market are insufficient to satisfy the dividend reinvestment requirement, the fund will issue new shares at a discount of up to 5% from the current market price. REPURCHASE AGREEMENTS For repurchase agreements entered into with certain broker- dealers, the fund, along with other affiliated registered investment companies, may transfer uninvested cash balances into a joint trading account, the daily aggregate of which is invested in repurchase agreements secured by U.S. government or agency obligations. Securities pledged as collateral for all individual and joint repurchase agreements are held by the fund's custodian bank until maturity of the repurchase agreement. Provisions for all agreements ensure that the daily market value of the collateral is in excess of the repurchase amount, including accrued interest, to protect the fund in the event of a default. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts in the financial statements. Actual results could differ from these estimates. (3) EXPENSES ................................ INVESTMENT MANAGEMENT AND ADMINISTRATIVE FEES The fund has entered into the following agreements with Piper Capital Management Incorporated (the advisor and administrator): - --------------------------------------------------------------------- 1998 Semi-Annual Report 16 AMERICAN GOVERNMENT INCOME FUND Notes to Financial Statements (Unaudited) (continued) - -------------------------------------------------------------------------------- The investment advisory agreement provides the advisor with a monthly investment management fee in an amount equal to an annualized rate of 0.30% of the fund's average weekly net assets 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 the six months ended April 30, 1998, the effective annualized investment management fee incurred by the fund was 0.60%. For its fee, the advisor provides investment advice and conducts the management and investment activities of the fund. The administration agreement provides the administrator with a monthly fee in an amount equal to an annualized rate of 0.20% of the fund's average weekly net assets. For its fee, the administrator provides reporting, regulatory and record-keeping services for the fund. OTHER FEES AND EXPENSES In addition to the investment management and administrative fees, the fund is responsible for paying most other operating expenses including: outside directors' fees and expenses; custodian fees; registration fees; printing and shareholder reports; transfer agent fees and expenses; legal, auditing and accounting services; insurance; interest; taxes and other miscellaneous expenses. Expenses paid indirectly represent a reduction of custodian fees for earnings on miscellaneous cash balances maintained by the fund. - --------------------------------------------------------------------- 1998 Semi-Annual Report 17 AMERICAN GOVERNMENT INCOME FUND Notes to Financial Statements (Unaudited) (continued) - -------------------------------------------------------------------------------- (4) INVESTMENT SECURITY TRANSACTIONS ................................ Cost of purchases and proceeds from sales of securities, other than temporary investments in short-term securities and dollar roll transactions, for the six months ended April 30, 1998, aggregated $22,055,874 and $59,905,729, respectively. Including dollar rolls, such purchases and sales aggregated $71,738,765 and $109,588,620, respectively. (5) CAPITAL LOSS CARRYOVER ................................ For federal income tax purposes, the fund had capital loss carryovers at October 31, 1997, which, if not offset by subsequent capital gains, will expire on the fund's fiscal year-ends as indicated below. It is unlikely the board of directors will authorize a distribution of any net realized capital gains until the available capital loss carryovers have been offset or expire.
CAPITAL LOSS CARRYOVER EXPIRATION ------------- ---------- $ 16,702,453 2002 17,460,619 2003 2,269,909 2004 431,672 2005 ------------- $ 36,864,653 ------------- -------------
(6) REPURCHASE OFFER ................................ The fund's board of directors concluded that an offer to repurchase up to 25% of the fund's outstanding shares would be in the best interests of shareholders. Accordingly, the board authorized such an offer as part of a settlement agreement reached in connection with class action litigation involving the fund and seven other closed-end investment companies managed by Piper Capital Management Incorporated. The repurchase offer was sent to shareholders in October 1997, and the deadline for submitting shares for repurchase was 5 p.m. Central Time on November 17, 1997. The repurchase price was determined on December 1, 1997, at the close of regular trading on the New York Stock Exchange (4 p.m. Eastern Time). The - --------------------------------------------------------------------- 1998 Semi-Annual Report 18 AMERICAN GOVERNMENT INCOME FUND Notes to Financial Statements (Unaudited) (continued) - -------------------------------------------------------------------------------- percentage of outstanding shares and the number of shares accepted for tender, the repurchase price per share and proceeds (including tender fees) paid by the fund were as follows:
PERCENTAGE SHARES REPURCHASE PROCEEDS TENDERED TENDERED PRICE PAID ---------- ------------ ----------- -------------- 25% 5,360,296 $5.81 $ 31,250,526
(7) ADVISOR ACQUISITION ................................ On May 1, 1998, Piper Jaffray Companies Inc., the parent company of the fund's investment advisor, was acquired by U.S. Bancorp. U.S. Bancorp is a multi-state bank holding company headquartered in Minneapolis, Minnesota with a geographic service area spanning 17 states. As of March 31, 1998, U.S. Bancorp was the 15th largest U.S. commercial bank holding company, with assets of nearly $70.9 billion. U.S. Bank National Association ("U.S. Bank"), a wholly owned subsidiary of U.S. Bancorp, currently acts as the investment advisor to 32 mutual funds (the "First American Funds"). As of March 31, 1998, U.S. Bank, acting through its First American Asset Management group, managed more than $65.3 billion in assets, including approximately $23.3 billion in assets of the First American Funds. Under the Investment Company Act of 1940, as amended, consummation of the acquisition of Piper Jaffray Companies by U.S. Bancorp resulted in the assignment and automatic termination of the fund's investment advisory agreement with Piper Capital Management Incorporated. The fund has entered into a new investment advisory agreement with Piper Capital Management, which shareholders will vote on at the fund's annual meeting in August. (8) REORGANIZATION OF THE FUND ................................ On April 27, 1998, the fund's board of directors approved the merger of the fund into an existing open-end fund in the First American family of funds. Shareholders will vote on the proposal at the fund's annual meeting in August. - --------------------------------------------------------------------- 1998 Semi-Annual Report 19 AMERICAN GOVERNMENT INCOME FUND Notes to Financial Statements (continued) - -------------------------------------------------------------------------------- (9) 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 Year Ended October 31, 4/30/98 ----------------------------------------------------- (Unaudited) 1997 1996 1995 1994 1993 ----------- -------- -------- -------- --------- -------- PER-SHARE DATA Net asset value, beginning of period ... $ 5.85 $ 5.73 $ 5.91 $ 5.58 $ 8.82 $ 8.39 ----------- -------- -------- -------- --------- -------- Operations: Net investment income ................ 0.18 0.35 0.36 0.44 0.64 1.27 Net realized and unrealized gains (losses) on investments ............ 0.01 0.13 0.03 0.71 (2.81) 0.39 ----------- -------- -------- -------- --------- -------- Total from operations .............. 0.19 0.48 0.39 1.15 (2.17) 1.66 ----------- -------- -------- -------- --------- -------- Distributions to shareholders: From net investment income ........... (0.18) (0.36) (0.57) (0.82) (0.84) (0.93) From net realized gains on investments ........................ -- -- -- -- (0.01) (0.30) In excess of net realized gains on investments -- -- -- -- (0.22) -- ----------- -------- -------- -------- --------- -------- Total distributions to shareholders ..................... (0.18) (0.36) (0.57) (0.82) (1.07) (1.23) ----------- -------- -------- -------- --------- -------- Net asset value, end of period ......... $ 5.86 $ 5.85 $ 5.73 $ 5.91 $ 5.58 $ 8.82 ----------- -------- -------- -------- --------- -------- ----------- -------- -------- -------- --------- -------- Market value, end of period ............ $ 5.69 $ 5.56 $ 5.13 $ 5.75 $ 6.00 $ 9.38 ----------- -------- -------- -------- --------- -------- ----------- -------- -------- -------- --------- -------- SELECTED INFORMATION Total return, net asset value (a) ...... 3.29% 8.70% 7.02% 22.31% (26.43)% 21.34% Total return, market value (b) ......... 5.59% 16.07% (0.75)% 10.96% (26.54)% 22.64% Net assets at end of period (in millions) ............................ $ 94 $ 125 $ 123 $ 127 $ 121 $ 187 Ratio of expenses to average weekly net assets excluding interest expense (c) .................................. 1.13%(f) 1.02% 1.11% 1.40% 1.32% 0.99% Ratio of expenses to average weekly net assets including interest expense (c) .................................. 1.44%(f) 1.49% 1.35% 1.40% 2.49% 2.34% Ratio of net investment income to average weekly net assets ............ 5.91%(f) 6.05% 6.37% 7.86% 9.44% 14.87% Portfolio turnover rate (excluding short-term securities and dollar roll transactions) ........................ 19% 62% 111% 149% 199% 93% Amount of borrowings outstanding at end of period (in millions) (d) .......... $ 5 $ 11 $ 11 -- -- $ 69 Per-share amount of borrowings outstanding at end of period ......... $ 0.28 $ 0.49 $ 0.49 -- -- $ 3.27 Per-share amount of net assets, excluding borrowings, at end of period ............................... $ 6.14 $ 6.34 $ 6.22 -- -- $ 12.09 Asset coverage ratio (e) ............... 2,194% 1,294% 1,270% -- -- 370%
(a) ASSUMES REINVESTMENT OF DISTRIBUTIONS AT NET ASSET VALUE AND DOES NOT REFLECT A SALES CHARGE. (b) ASSUMES REINVESTMENT OF DISTRIBUTIONS AT ACTUAL PRICES PURSUANT TO THE FUND'S DIVIDEND REINVESTMENT PLAN. (c) INCLUDES 0.07%, 0.32%, AND 0.31% FROM FEDERAL EXCISE TAXES IN FISCAL YEARS 1996, 1995, AND 1994, RESPECTIVELY. (d) SECURITIES PURCHASED ON A WHEN-ISSUED BASIS FOR WHICH LIQUID SECURITIES ARE SEGREGATED ARE NOT CONSIDERED BORROWINGS. SEE NOTE 2 IN THE NOTES TO FINANCIAL STATEMENTS. (e) REPRESENTS NET ASSETS, EXCLUDING BORROWINGS, AT END OF PERIOD DIVIDED BY BORROWINGS OUTSTANDING AT END OF PERIOD. (f) ANNUALIZED. - --------------------------------------------------------------------- 1998 Semi-Annual Report 20 AMERICAN GOVERNMENT INCOME FUND Investments in Securities (Unaudited) - ---------------------------------------------------------------------
AMERICAN GOVERNMENT INCOME FUND April 30, 1998 ....................................................................................... Principal Market Description of Security Amount Value (a) - --------------------------------------------------------- ----------- ------------ (PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS) U.S. GOVERNMENT AND AGENCY SECURITIES (115.8%): U.S. AGENCY MORTGAGE-BACKED SECURITIES (b) (109.4%): FIXED RATE (105.9%): 7.00%, FHLMC, 8/1/10 .............................. $ 1,863,223 $ 1,899,333 6.50%, FHLMC, 3/1/26 .............................. 648,308 644,664 6.50%, FHLMC, 4/1/26 .............................. 3,544,577 3,524,656 6.50%, FHLMC, 4/1/26 .............................. 765,810 760,702 6.50%, FHLMC, 4/1/26 .............................. 2,989,892 2,973,088 9.50%, FHLMC, 6/1/21 .............................. 1,520,786 1,650,053 10.00%, FHLMC, 12/1/19 ............................ 1,764,663 1,933,400 7.50%, FHLMC, 8/1/25 .............................. 3,269,066 3,367,138 6.50%, FHLMC, 1/1/26 .............................. 889,667 884,667 6.50%, FHLMC, 8/1/26 .............................. 4,011,282 3,984,526 7.00%, FHLMC, 9/1/10 .............................. 3,453,104 3,520,025 6.25%, FHLMC, Series 1638, Class E, 4/15/23 ....... 1,000,000 995,710 6.00%, FHLMC, Series 1699, Class TD, 3/15/24 ...... 3,000,000 2,800,080 7.00%, FNMA, 10/1/25 .............................. 2,128,617 2,161,206 7.00%, FNMA, 5/1/26 ............................... 4,775,729 4,839,915 6.50%, FNMA, 5/1/11 ............................... 5,002,306 5,024,216 7.00%, FNMA, 4/1/26 ............................... 5,965,000 6,045,169 6.50%, FNMA, 4/1/11 ............................... 1,571,446 1,578,816 7.50%, FNMA, 10/1/26 .............................. 4,018,782 4,131,790 6.00%, FNMA, 4/1/13 ............................... 1,010,000 995,163 6.00%, FNMA, 4/1/13 ............................... 1,009,221 994,396 6.00%, FNMA, 4/1/13 ............................... 1,004,200 989,448 6.00%, FNMA, 4/1/13 ............................... 994,855 980,241 6.00%, FNMA, 4/1/13 ............................... 998,000 983,339 6.50%, FNMA, 5/18/13 .............................. 6,500,000(c) 6,526,390 6.00%, FNMA, 2/18/13 .............................. 7,500,000(c) 7,389,825 6.25%, FNMA Series 1998-M1, Class A2, 1/25/08 ..... 2,000,000 1,993,750 6.50%, FNMA, Series 1992-169, Class J, 3/25/21 .... 3,000,000 2,980,530 6.50%, FNMA, Series 1997-1, Class B, 2/18/04 ...... 3,500,000 3,534,160 8.00%, GNMA, 7/15/26 .............................. 2,677,297 2,780,213 7.50%, GNMA, 12/15/27 ............................. 3,787,930(d) 3,893,272 7.50%, GNMA, 12/15/27 ............................. 1,782,130 1,831,691 9.00%, GNMA, 11/15/21 ............................. 2,895,975(d) 3,123,135 7.00%, GNMA, 12/15/10 ............................. 3,173,991 3,249,373 9.00%, GNMA, 4/15/21 .............................. 2,753,033(d) 2,982,746
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES. - --------------------------------------------------------------------- 1998 Semi-Annual Report 21 AMERICAN GOVERNMENT INCOME FUND Investments in Securities (Unaudited) (continued) - --------------------------------------------------------------------- AMERICAN GOVERNMENT INCOME FUND (CONTINUED)
Principal Market Description of Security Amount Value (a) - --------------------------------------------------------- ----------- ------------ 9.00%, GNMA, 10/15/22 ............................. $ 1,706,025 $ 1,840,903 ------------ 99,787,729 ------------ Z-BOND (3.5%): 8.35%, Vendee Mortgage Trust, Series 1996-1,Class 1Z, 2/15/26 ..................................... 3,471,034 3,297,586 ------------ Total U.S. Agency Mortgage-Backed Securities ... 103,085,315 ------------ U.S. GOVERNMENT SECURITIES (6.4%): 6.13%, U.S. Treasury Note, 9/30/00 ................ 1,000,000 1,011,460 5.63%, U.S. Treasury Note, 11/30/00 ............... 5,000,000 5,000,950 ------------ 6,012,410 ------------ Total U.S. Government and Agency Securities (cost: $106,326,020) ......................... 109,097,725 ------------ SHORT-TERM SECURITIES (3.2%): Repurchase agreement with Goldman Sachs, acquired on 4/30/98, interest of $464, 5.50%, 5/1/98 (cost: $3,036,000) .............................. 3,036,000(e) 3,036,000 ------------ Total Investments in Securities (cost: $109,362,020) (f) ..................... $112,133,725 ------------ ------------
NOTES TO INVESTMENTS IN SECURITIES (a) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO THE FINANCIAL STATEMENTS. (b) PORTFOLIO ABBREVIATIONS AND DEFINITIONS: Z-BOND - REPRESENTS SECURITIES THAT PAY NO INTEREST OR PRINCIPAL DURING THEIR INITIAL ACCRUAL PERIODS, BUT ACCRUE ADDITIONAL PRINCIPAL AT SPECIFIED RATES. INTEREST RATE DISCLOSED REPRESENTS CURRENT YIELD BASED UPON THE COST BASIS AND ESTIMATED TIMING OF FUTURE CASH FLOWS. VENDEE - SECURITIES ISSUED THROUGH THE VENDEE LOAN PROGRAM, ADMINISTERED AND GUARANTEED AS TO PAYMENT OF PRINCIPAL BY THE VETERANS ADMINISTRATION (VA). THE VA GUARANTEE IS BACKED BY THE FULL FAITH AND CREDIT OF THE UNITED STATES GOVERNMENT. (c) ON APRIL 30, 1998, THE TOTAL COST OF INVESTMENTS PURCHASED ON A WHEN-ISSUED BASIS WAS $13,939,336. (d) ON APRIL 30, 1998, SECURITIES VALUED AT $8,265,484 WERE PLEDGED AS COLLATERAL FOR THE FOLLOWING OUTSTANDING REVERSE REPURCHASE AGREEMENT:
NAME OF BROKER ACQUISITION ACCRUED AND DESCRIPTION AMOUNT DATE RATE* DUE INTEREST OF COLLATERAL - ----------- ----------- ---------- --------- --------- ------------------- $ 4,500,000 2/17/98 5.56% 5/19/98 $ 50,735 (1) - ----------- --------- - ----------- ---------
* INTEREST RATE AS OF APRIL 30, 1998. RATE IS BASED ON THE LONDON INTERBANK OFFERED RATE (LIBOR). - --------------------------------------------------------------------- 1998 Semi-Annual Report 22 AMERICAN GOVERNMENT INCOME FUND Investments in Securities (Unaudited) (continued) - --------------------------------------------------------------------- NAME OF BROKER AND DESCRIPTION OF COLLATERAL: (1) MORGAN STANLEY; GNMA, 7.50%, 12/15/27, $3,787,930 PAR GNMA, 9.00%, 11/15/21, $1,288,404 PAR GNMA, 9.00%, 4/15/21, $2,753,033 PAR (E) REPURCHASE AGREEMENT IN A JOINT TRADING ACCOUNT WHICH IS COLLATERALIZED BY U.S. GOVERNMENT AGENCY SECURITIES. ACCRUED INTEREST SHOWN REPRESENTS INTEREST DUE AT MATURITY OF THE REPURCHASE AGREEMENT. (F) ALSO APPROXIMATES COST FOR FEDERAL INCOME TAX PURPOSES. THE AGGREGATE GROSS UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED ON THIS COST WERE AS FOLLOWS:
GROSS UNREALIZED APPRECIATION ...... $ 2,810,027 GROSS UNREALIZED DEPRECIATION ...... (38,322) ------------ NET UNREALIZED APPRECIATION ...... $ 2,771,705 ------------ ------------
- --------------------------------------------------------------------- 1998 Semi-Annual Report 23 AMERICAN GOVERNMENT INCOME FUND Financial Statements (Unaudited) - -------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES April 30, 1998 ................................................................................ ASSETS: Investments in securities at market value* (note 2) (including a repurchase agreement of $6,474,000) ......... $ 147,639,834 Accrued interest receivable ................................ 847,297 ----------------- Total assets ............................................. 148,487,131 ----------------- LIABILITIES: Payable for investment securities purchased on a when-issued basis (note 2) ........................................... 13,982,891 Reverse repurchase agreements payable ...................... 6,500,000 Bank overdraft ............................................. 3,029 Accrued interest ........................................... 73,284 Other accrued expenses ..................................... 122,235 ----------------- Total liabilities ........................................ 20,681,439 ----------------- Net assets applicable to outstanding capital stock ....... $ 127,805,692 ----------------- ----------------- COMPOSITION OF NET ASSETS: Capital stock and additional paid-in capital ............... $ 183,181,191 Undistributed net investment income ........................ 466,813 Accumulated net realized loss on investments ............... (59,697,296) Unrealized appreciation of investments ..................... 3,854,984 ----------------- Total - representing net assets applicable to capital stock .................................................. $ 127,805,692 ----------------- ----------------- * Investments in securities at identified cost ............. $ 143,784,850 ----------------- ----------------- NET ASSET VALUE AND MARKET PRICE: Net assets ................................................. $ 127,805,692 Shares outstanding (authorized 1 billion shares of $0.01 par value) ................................................... 18,357,911 Net asset value ............................................ $ 6.96 Market price ............................................... $ 6.75
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. - --------------------------------------------------------------------- 1998 Semiannual Report 24 American Government Income Portfolio Financial Statements (Unaudited) (continued) - --------------------------------------------------------------------- STATEMENT OF OPERATIONS For the Six Months Ended April 30, 1998 ................................................................................ INCOME: Interest (net of interest expense of $222,318) ............. $ 4,617,177 Fee income (note 2) ........................................ 77,453 ----------------- Total investment income .................................. 4,694,630 ----------------- EXPENSES (NOTE 3): Investment management fee .................................. 402,718 Administrative fee ......................................... 134,240 Custodian and accounting fees .............................. 50,913 Transfer agent fees ........................................ 9,150 Reports to shareholders .................................... 42,912 Directors' fees ............................................ 6,207 Audit and legal fees ....................................... 32,773 Other expenses ............................................. 27,955 ----------------- Total expenses ........................................... 706,868 Less expenses paid indirectly .......................... (1,936) ----------------- Total net expenses ....................................... 704,932 ----------------- Net investment income .................................... 3,989,698 ----------------- NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS: Net realized gain on investments (note 4) .................. 1,548,550 Net realized loss on closed futures contracts .............. (48,307) ----------------- Net realized gain on investments ......................... 1,500,243 Net change in unrealized appreciation or depreciation of investments .............................................. (1,169,348) ----------------- Net gain on investments .................................. 330,895 ----------------- Net increase in net assets resulting from operations ... $ 4,320,593 ----------------- -----------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. - --------------------------------------------------------------------- 1998 Semiannual Report 25 American Government Income Portfolio Financial Statements (Unaudited) (continued) - --------------------------------------------------------------------- STATEMENT OF CASH FLOWS For the Six Months Ended April 30, 1998 ................................................................................ CASH FLOWS FROM OPERATING ACTIVITIES: Interest and fee income .................................... $ 4,694,630 Net expenses ............................................... (704,932) ----------------- Net investment income .................................... 3,989,698 ----------------- Adjustments to reconcile net investment income to net cash provided by operating activities: Change in accrued interest receivable and principal receivable on mortgage securities ...................... 398,690 Net amortization of bond discount and premium ............ (39,608) Change in accrued fees and expenses ...................... (37,831) ----------------- Total adjustments ...................................... 321,251 ----------------- Net cash provided by operating activities .............. 4,310,949 ----------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of investments ......................... 124,615,713 Purchases of investments ................................... (78,055,733) Net purchases of short-term securities ..................... (3,086,000) Net variation margin paid for futures contracts ............ (48,307) ----------------- Net cash provided by investing activities .............. 43,425,673 ----------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net payments for reverse repurchase agreements ............. (8,000,000) Retirement of fund shares .................................. (42,354,538) Distributions paid to shareholders ......................... (4,069,073) ----------------- Net cash used by financing activities .................. (54,423,611) ----------------- Net decrease in cash ....................................... (6,686,989) Cash at beginning of period ................................ 6,683,960 ----------------- Cash at end of period .................................. $ (3,029) ----------------- ----------------- Supplemental disclosure of cash flow information: Cash paid for interest on reverse repurchase agreements ............................................. $ 267,897 ----------------- -----------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. - --------------------------------------------------------------------- 1998 Semiannual Report 26 American Government Income Portfolio Financial Statements (continued) - --------------------------------------------------------------------- STATEMENTS OF CHANGES IN NET ASSETS ................................................................................
SIX MONTHS ENDED 4/30/98 YEAR ENDED (UNAUDITED) 10/31/97 ----------------- ----------------- OPERATIONS: Net investment income ...................................... $ 3,989,698 $ 10,255,321 Net realized gain on investments ........................... 1,500,243 109,884 Net change in unrealized appreciation or depreciation of investments .............................................. (1,169,348) 3,811,323 ----------------- ----------------- Net increase in net assets resulting from operations ..... 4,320,593 14,176,528 ----------------- ----------------- DISTRIBUTIONS TO SHAREHOLDERS: From net investment income ................................. (4,069,073) (10,277,265) ----------------- ----------------- CAPITAL SHARE TRANSACTIONS (NOTE 6): Decrease in net assets from capital share transactions ... (42,354,538) -- ----------------- ----------------- Total increase (decrease) in net assets .................. (42,103,018) 3,899,263 Net assets at beginning of period .......................... 169,908,710 166,009,447 ----------------- ----------------- Net assets at end of period ................................ $ 127,805,692 $ 169,908,710 ----------------- ----------------- ----------------- ----------------- Undistributed net investment income ........................ $ 466,813 $ 546,188 ----------------- ----------------- ----------------- -----------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. - --------------------------------------------------------------------- 1998 Semiannual Report 27 American Government Income Portfolio Notes to Financial Statements (Unaudited) - -------------------------------------------------------------------------------- (1) ORGANIZATION ................................ American Government Income Portfolio Inc. (the fund) is registered under the Investment Company Act of 1940 (as amended) as a non-diversified, closed-end management investment company. The fund invests primarily in obligations issued or guaranteed by the U.S. government, its agencies and instrumentalities, including mortgage-backed securities. The fund may enter into dollar-roll transactions. In addition, the fund may borrow through the use of reverse repurchase agreements. Fund shares are listed on the New York Stock Exchange under the symbol AAF. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ................................ INVESTMENTS IN SECURITIES Portfolio securities for which market quotations are readily available are valued at current market value. If market quotations or valuations are not readily available, or if such quotations or valuations are believed to be inaccurate, unreliable or not reflective of market value, portfolio securities are valued according to procedures adopted by the fund's board of directors in good faith at "fair value", that is, a price that the fund might reasonably expect to receive for the security or other asset upon its current sale. The current market value of certain fixed income securities is provided by an independent pricing service. Fixed income securities for which prices are not available from an independent pricing service but where an active market exists are valued using market quotations obtained from one or more dealers that make markets in the securities or from a widely-used quotation system. Short-term securities with maturities of 60 days or less are valued at amortized cost, which approximates market value. Exchange-traded options are valued at the last sales price on the exchange prior to the time when assets are valued. If no sales were reported that day, the options are valued at the mean between the current closing bid and asked prices. Over-the-counter options are valued using market quotations obtained from broker-dealers. - --------------------------------------------------------------------- 1998 Semiannual Report 28 American Government Income Portfolio Notes to Financial Statements (Unaudited) (continued) - -------------------------------------------------------------------------------- Financial futures are valued at the last settlement price established each day by the board of trade or exchange on which they are traded. Securities transactions are accounted for on the date 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, is recorded on an accrual basis. 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. SECURITIES PURCHASED ON A WHEN-ISSUED BASIS Delivery and payment for securities that have been purchased by the fund on a when-issued or forward-commitment 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 segregates, 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 net asset value if the fund makes such purchases while remaining - --------------------------------------------------------------------- 1998 Semiannual Report 29 American Government Income Portfolio Notes to Financial Statements (Unaudited) (continued) - -------------------------------------------------------------------------------- substantially fully invested. As of April 30, 1998, the fund had entered into outstanding when-issued or forward commitments of $13,982,891. 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 purchased on a forward commitment basis and simultaneously contracts with a 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, 1998, such fees earned by the fund amounted to $77,453. FEDERAL TAXES The fund intends to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and not be subject to federal income tax. Therefore, no income tax provision is required. The fund also intends to distribute its taxable net investment income and realized gains, if any, to avoid the payment of any federal excise taxes. Net investment income and net realized gains (losses) may differ for financial statement and tax purposes. The character of distributions made during the year from net investment income or net realized gains may differ from its ultimate characterization for federal income tax purposes. In addition, due to the timing of dividend distributions, the fiscal year in which amounts are distributed may differ from the year that the income or realized gains or losses were recorded by the fund. DISTRIBUTIONS TO SHAREHOLDERS Distributions from net investment income are made monthly and realized capital gains, if any, will be distributed at least annually. These distributions are recorded as of the close of business on the ex-dividend date. Such distributions are payable in cash or, pursuant to the fund's dividend reinvestment plan, reinvested in - --------------------------------------------------------------------- 1998 Semiannual Report 30 American Government Income Portfolio Notes to Financial Statements (Unaudited) (continued) - -------------------------------------------------------------------------------- additional shares of the fund's capital stock. Under the plan, fund shares will be purchased in the open market unless the market price plus commissions exceeds the net asset value by 10% or more. If, at the close of business on the dividend payment date, the shares purchased in the open market are insufficient to satisfy the dividend reinvestment requirement, the fund will issue new shares at a discount of up to 5% from the current market price. REPURCHASE AGREEMENTS For repurchase agreements entered into with certain broker-dealers, the fund, along with other affiliated registered investment companies, may transfer uninvested cash balances into a joint trading account, the daily aggregate of which is invested in repurchase agreements secured by U.S. government or agency obligations. Securities pledged as collateral for all individual and joint repurchase agreements are held by the fund's custodian bank until maturity of the repurchase agreement. Provisions for all agreements ensure that the daily market value of the collateral is in excess of the repurchase amount, including accrued interest, to protect the fund in the event of a default. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts in the financial statements. Actual results could differ from these estimates. (3) EXPENSES ................................ INVESTMENT MANAGEMENT AND ADMINISTRATIVE FEES The fund has entered into the following agreements with Piper Capital Management Incorporated (the advisor and administrator): The investment advisory agreement provides the advisor with a monthly investment management fee in an amount equal to an annualized rate of 0.30% of the fund's average weekly net assets and 5.25% of the daily gross income (i.e., investment income, - --------------------------------------------------------------------- 1998 Semiannual Report 31 American Government Income Portfolio Notes to Financial Statements (Unaudited) (continued) - -------------------------------------------------------------------------------- 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 the six months ended April 30, 1998, the effective annualized investment management fee incurred by the fund was 0.60%. For its fee, the advisor provides investment advice and conducts the management and investment activities of the fund. The administration agreement provides the administrator with a monthly fee in an amount equal to an annualized rate of 0.20% of the fund's average weekly net assets. For its fee, the administrator provides reporting, regulatory and record-keeping services for the fund. OTHER FEES AND EXPENSES In addition to the investment management and administrative fees, the fund is responsible for paying most other operating expenses including: outside directors' fees and expenses; custodian fees; registration fees; printing and shareholder reports; transfer agent fees and expenses; legal, auditing and accounting services; insurance; interest; taxes and other miscellaneous expenses. Expenses paid indirectly represent a reduction of custodian fees for earnings on miscellaneous cash balances maintained by the fund. (4) INVESTMENT SECURITY TRANSACTIONS ................................ Cost of purchases and proceeds from sales of securities, other than temporary investments in short-term securities and dollar roll transactions, for the six months ended April 30, 1998, aggregated $70,911,825 and $124,615,713, respectively. Including dollar rolls, such purchases and sales aggregated $23,620,731 and $77,324,619, respectively. - --------------------------------------------------------------------- 1998 Semiannual Report 32 American Government Income Portfolio Notes to Financial Statements (Unaudited) (continued) - -------------------------------------------------------------------------------- (5) CAPITAL LOSS CARRYOVER ................................ For federal income tax purposes, the fund had capital loss carryovers at October 31, 1997, which, if not offset by subsequent capital gains, will expire on the fund's fiscal year-ends as indicated below. It is unlikely the board of directors will authorize a distribution of any net realized capital gains until the available capital loss carryovers have been offset or expire.
CAPITAL LOSS CARRYOVER EXPIRATION ------------- --------------- $ 26,037,491 2002 30,440,824 2003 4,719,224 2004 ------------- $ 61,197,539 ------------- -------------
(6) REPURCHASE OFFER ................................ The fund's board of directors concluded that an offer to repurchase up to 25% of the fund's outstanding shares would be in the best interests of shareholders. Accordingly, the board authorized such an offer as part of a settlement agreement reached in connection with class action litigation involving the fund and seven other closed-end investment companies managed by Piper Capital Management Incorporated. The repurchase offer was sent to shareholders in October 1997, and the deadline for submitting shares for repurchase was 5 p.m. Central Time on November 17, 1997. The repurchase price was determined on December 1, 1997, at the close of regular trading on the New York Stock Exchange (4 p.m. Eastern Time). The percentage of outstanding shares and the number of shares accepted for tender, the repurchase price per share and proceeds (including tender fees) paid by the fund were as follows:
PERCENTAGE SHARES REPURCHASE PROCEEDS TENDERED TENDERED PRICE PAID ---------- ------------- ----------- -------------- 25% 6,111,766 $6.91 $ 42,354,538
(7) ADVISOR ACQUISITION ................................ On May 1, 1998, Piper Jaffray Companies Inc., the parent company of the fund's investment advisor, was acquired by U.S. Bancorp. - --------------------------------------------------------------------- 1998 Semiannual Report 33 American Government Income Portfolio Notes to Financial Statements (Unaudited) (continued) - -------------------------------------------------------------------------------- U.S. Bancorp is a multi-state bank holding company headquartered in Minneapolis, Minnesota with a geographic service area spanning 17 states. As of March 31, 1998, U.S. Bancorp was the 15th largest U.S. commercial bank holding company, with assets of nearly $70.9 billion. U.S. Bank National Association ("U.S. Bank"), a wholly owned subsidiary of U.S. Bancorp, currently acts as the investment advisor to 32 mutual funds (the "First American Funds"). As of March 31, 1998, U.S. Bank, acting through its First American Asset Management group, managed more than $65.3 billion in assets, including approximately $23.3 billion in assets of the First American Funds. Under the Investment Company Act of 1940, as amended, consummation of the acquisition of Piper Jaffray Companies by U.S. Bancorp resulted in the assignment and automatic termination of the fund's investment advisory agreement with Piper Capital Management Incorporated. The fund has entered into a new investment advisory agreement with Piper Capital Management, which shareholders will vote on at the fund's annual meeting in August. (8) REORGANIZATION OF THE FUND ................................ On April 27, 1998, the fund's board of directors approved the merger of the fund into an existing open-end fund in the First American family of funds. Shareholders will vote on the proposal at the fund's annual meeting in August. - --------------------------------------------------------------------- 1998 Semiannual Report 34 American Government Income Portfolio Notes to Financial Statements (continued) - -------------------------------------------------------------------------------- (9) 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 Year Ended October 31, 4/30/98 ---------------------------------------------------------- (Unaudited) 1997 1996 1995 1994 1993 ------------ --------- --------- --------- ---------- --------- PER-SHARE DATA Net asset value, beginning of period ... $ 6.94 $ 6.78 $ 7.08 $ 6.83 $ 10.99 $ 11.00 ------------ --------- --------- --------- ---------- --------- Operations: Net investment income ................ 0.21 0.42 0.42 0.54 0.90 1.90 Net realized and unrealized gains (losses) on investments ............ 0.02 0.16 0.04 0.80 (3.50) (0.04) ------------ --------- --------- --------- ---------- --------- Total from operations .............. 0.23 0.58 0.46 1.34 (2.60) 1.86 ------------ --------- --------- --------- ---------- --------- Distributions to shareholders: From net investment income ........... (0.21) (0.42) (0.76) (1.09) (1.41) (1.27) From net realized gains .............. -- -- -- -- -- (0.60) In excess of net realized gains ...... -- -- -- -- (0.15) -- ------------ --------- --------- --------- ---------- --------- Total distributions to shareholders ..................... (0.21) (0.42) (0.76) (1.09) (1.56) (1.87) ------------ --------- --------- --------- ---------- --------- Net asset value, end of period ......... $ 6.96 $ 6.94 $ 6.78 $ 7.08 $ 6.83 $ 10.99 ------------ --------- --------- --------- ---------- --------- ------------ --------- --------- --------- ---------- --------- Market value, end of period ............ $ 6.75 $ 6.56 $ 6.00 $ 7.00 $ 7.25 $ 12.00 ------------ --------- --------- --------- ---------- --------- ------------ --------- --------- --------- ---------- --------- SELECTED INFORMATION Total return, net asset value (a) ...... 3.35% 8.87% 6.90% 21.40% (25.93)% 18.66% Total return, market value (b) ......... 6.17% 16.93% (3.48)% 13.46% (29.14)% 28.18% Net assets at end of period (in millions) . $ 128 $ 170 $ 166 $ 174 $ 167 $ 261 Ratio of expenses to average weekly net assets excluding interest expense (c) 1.05%(f) 0.98% 1.06% 1.41% 1.28% 0.95% Ratio of expenses to average weekly net assets including interest expense (c) . 1.38%(f) 1.47% 1.31% 1.41% 2.46% 2.34% Ratio of net investment income to average weekly net assets ............ 5.94%(f) 6.19% 6.26% 7.93% 10.84% 17.42% Portfolio turnover rate (excluding short-term securities and dollar roll transactions) ........................ 15% %63 132% 206% 106% %79 Amount of borrowings outstanding at end of period (in millions) (d) .......... $ 7 $ 15 $ 15 -- -- $ 97 Per-share amount of borrowings outstanding at end of period ......... $ 0.35 $ 0.59 $ 0.59 -- -- $ 4.06 Per-share amount of net assets, excluding borrowings, at end of period $ 7.31 $ 7.53 $ 7.37 -- -- $ 15.05 Asset coverage ratio (e) ............... 2,066% 1,272% 1,245% -- -- 370%
(a) ASSUMES REINVESTMENT OF DISTRIBUTIONS AT NET ASSET VALUE AND DOES NOT REFLECT A SALES CHARGE. (b) ASSUMES REINVESTMENT OF DISTRIBUTIONS AT ACTUAL PRICES PURSUANT TO THE FUND'S DIVIDEND REINVESTMENT PLAN. (c) INCLUDES 0.06%, 0.38%, AND 0.30% FROM FEDERAL EXCISE TAXES IN FISCAL YEARS 1996, 1995 AND 1994, RESPECTIVELY. (d) SECURITIES PURCHASED ON A WHEN-ISSUED BASIS FOR WHICH LIQUID SECURITIES ARE SEGREGATED ARE NOT CONSIDERED BORROWINGS. SEE NOTE 2 IN THE NOTES TO FINANCIAL STATEMENTS. (e) REPRESENTS NET ASSETS, EXCLUDING BORROWINGS, AT END OF PERIOD DIVIDED BY BORROWINGS OUTSTANDING AT END OF PERIOD. (f) ANNUALIZED. - --------------------------------------------------------------------- 1998 Semiannual Report 35 American Government Income Portfolio Investments in Securities (Unaudited) - ---------------------------------------------------------------------
AMERICAN GOVERNMENT INCOME PORTFOLIO April 30, 1998 ....................................................................................... Principal Market Description of Security Amount Value (a) - --------------------------------------------------------- ----------- ------------ (PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS) U.S. GOVERNMENT AND AGENCY SECURITIES (110.4%): U.S. AGENCY MORTGAGE-BACKED SECURITIES (B) (101.7%): FIXED RATE (98.3%): 7.00%, FHLMC, 9/1/10 .............................. $ 3,789,291 $ 3,862,727 6.50%, FHLMC, 2/1/26 .............................. 3,518,074 3,498,302 6.50%, FHLMC, 11/1/25 ............................. 2,241,003 2,229,798 6.50%, FHLMC, 5/1/26 .............................. 4,934,816 4,907,082 9.00%, FHLMC, 3/1/21 .............................. 1,651,719 1,766,827 9.50%, FHLMC, 6/1/21 .............................. 2,015,978 2,187,336 10.00%, FHLMC, 12/1/19 ............................ 2,312,317 2,533,420 7.00%, FHLMC, 9/1/10 .............................. 2,071,862 2,112,015 6.25%, FHLMC, Series 1638, Class E, 4/15/23 ....... 1,000,000 995,710 6.00%, FHLMC, Series 1699, Class TD, 3/15/24 ...... 4,000,000 3,733,440 7.00%, FNMA, 1/1/08 ............................... 635,983 650,490 7.00%, FNMA, 5/1/09 ............................... 1,984,833 2,026,395 7.00%, FNMA, 10/1/25 .............................. 2,980,063 3,025,688 7.00%, FNMA, 5/1/26 ............................... 4,361,715 4,420,336 6.50%, FNMA, 5/1/11 ............................... 4,168,588 4,186,846 6.50%, FNMA, 4/1/11 ............................... 2,445,236 2,456,704 7.00%, FNMA, 4/1/26 ............................... 8,634,855 8,750,908 6.50%, FNMA, 4/1/11 ............................... 1,964,307 1,973,520 6.50%, FNMA, 7/1/26 ............................... 5,171,867 5,130,906 7.50%, FNMA, 10/1/26 .............................. 5,241,189 5,388,571 7.50%, FNMA, 10/1/26 .............................. 4,434,994 4,559,706 6.00%, FNMA, 3/1/13 ............................... 990,000 975,457 6.00%, FNMA, 3/1/13 ............................... 990,001 975,458 6.00%, FNMA, 4/1/13 ............................... 990,000 975,457 6.00%, FNMA, 3/1/13 ............................... 990,000 975,457 6.00%, FNMA, 3/1/13 ............................... 990,001 975,458 6.00%, FNMA, 4/1/13 ............................... 990,000 975,457 6.50%, FNMA, 5/18/13 .............................. 9,000,000(c) 9,036,540 6.00%, FNMA, 2/18/13 .............................. 5,000,000(c) 4,926,550 6.25%, FNMA Series 1998-M1, Class A2, 1/25/08 ..... 2,500,000 2,492,188 6.50%, FNMA, Series 1992-169, Class J, 3/25/21 .... 4,000,000 3,974,040 6.50%, FNMA, Series 1997-1, Class B, 2/18/04 ...... 4,500,000 4,543,920 8.00%, GNMA, 7/15/26 .............................. 981,665 1,019,400 8.00%, GNMA, 7/15/26 .............................. 3,439,907 3,572,137 7.50%, GNMA, 11/15/27 ............................. 6,295,082 6,470,148 9.00%, GNMA, 11/15/21 ............................. 3,422,516(d) 3,690,978
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES. - --------------------------------------------------------------------- 1998 Semiannual Report 36 American Government Income Portfolio Investments in Securities (Unaudited) (continued) - --------------------------------------------------------------------- AMERICAN GOVERNMENT INCOME PORTFOLIO (CONTINUED)
Principal Market Description of Security Amount Value (a) - --------------------------------------------------------- ----------- ------------ 7.00%, GNMA, 12/15/10 ............................. $ 2,822,485 $ 2,889,519 9.00%, GNMA, 4/15/21 .............................. 3,916,895(d) 4,243,720 9.00%, GNMA, 10/15/22 ............................. 2,388,434 2,577,264 ------------ 125,685,875 ------------ Z-BOND (3.4%): 8.35%, Vendee Mortgage Trust, Series 1996-1, Class 1Z, 2/15/26 ..................................... 4,628,045 4,396,782 ------------ Total U.S. Agency Mortgage-Backed Securities ... 130,082,657 ------------ U.S. GOVERNMENT SECURITIES (8.7%): 6.13%, U.S. Treasury Note, 9/30/00 ................ 5,420,000(d) 5,482,113 5.63%, U.S. Treasury Note, 11/30/00 ............... 5,600,000 5,601,064 ------------ 11,083,177 ------------ Total U.S. Government and Agency Securities (cost: $137,310,850) ......................... 141,165,834 ------------ SHORT-TERM SECURITIES (5.1%): Repurchase agreement with Goldman Sachs, acquired on 4/30/98, interest of $989, 5.50%, 5/1/98 (cost: $6,474,000) .............................. 6,474,000(e) 6,474,000 ------------ Total Investments in Securities (cost: $143,784,850)(f) ...................... $147,639,834 ------------ ------------
NOTES TO INVESTMENTS IN SECURITIES: (a) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO THE FINANCIAL STATEMENTS. (b) PORTFOLIO ABBREVIATIONS AND DEFINITIONS: Z-BOND - REPRESENTS SECURITIES THAT PAY NO INTEREST OR PRINCIPAL DURING THEIR INITIAL ACCRUAL PERIODS, BUT ACCRUE ADDITIONAL PRINCIPAL AT SPECIFIED RATES. INTEREST RATE DISCLOSED REPRESENTS CURRENT YIELD BASED UPON THE COST BASIS AND ESTIMATED TIMING OF FUTURE CASH FLOWS. VENDEE - SECURITIES ISSUED THROUGH THE VENDEE LOAN PROGRAM, ADMINISTERED AND GUARANTEED AS TO PAYMENT OF PRINCIPAL BY THE VETERANS ADMINISTRATION (VA). THE VA GUARANTEE IS BACKED BY THE FULL FAITH AND CREDIT OF THE UNITED STATES GOVERNMENT. (c) ON APRIL 30, 1998, THE TOTAL COST OF INVESTMENTS PURCHASED ON A WHEN-ISSUED BASIS WAS $13,982,891. - --------------------------------------------------------------------- 1998 Semiannual Report 37 American Government Income Portfolio Investments in Securities (Unaudited) (continued) - --------------------------------------------------------------------- (d) ON APRIL 30, 1998, SECURITIES VALUED AT $7,296,102 WERE PLEDGED AS COLLATERAL FOR THE FOLLOWING OUTSTANDING REVERSE REPURCHASE AGREEMENT:
NAME OF BROKER ACQUISITION ACCRUED AND DESCRIPTION AMOUNT DATE RATE* DUE INTEREST OF COLLATERAL - ----------- ----------- ---------- --------- --------- ------------------- $ 6,500,000 2/17/98 5.56% 5/19/98 $ 73,284 (1) - ----------- --------- - ----------- ---------
* INTEREST RATE AS OF APRIL 30, 1998. RATE IS BASED ON THE LONDON INTERBANK OFFERED RATE (LIBOR). NAME OF BROKER AND DESCRIPTION OF COLLATERAL: (1) MORGAN STANLEY; GNMA, 9.00%, 11/15/21, $2,595,895 PAR GNMA, 9.00%, 4/15/21, $3,916,895 PAR U.S. TREASURY NOTE, 6.13%, 9/30/00, $250,000 PAR (e) REPURCHASE AGREEMENT IN A JOINT TRADING ACCOUNT WHICH IS COLLATERALIZED BY U.S. GOVERNMENT AGENCY SECURITIES. ACCRUED INTEREST SHOWN REPRESENTS INTEREST DUE AT MATURITY OF THE REPURCHASE AGREEMENT. (f) ALSO APPROXIMATES COST FOR FEDERAL INCOME TAX PURPOSES. THE AGGREGATE GROSS UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED ON THIS COST WERE AS FOLLOWS: GROSS UNREALIZED APPRECIATION ...... $ 3,893,786 GROSS UNREALIZED DEPRECIATION ...... (38,802) ------------ NET UNREALIZED APPRECIATION ...... $ 3,854,984 ------------ ------------
- --------------------------------------------------------------------- 1998 Semiannual Report 38 American Government Income Portfolio Financial Statements (Unaudited) - -------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES April 30, 1998 ................................................................................ ASSETS: Investments in securities at market value* (note 2) (including a repurchase agreement of $2,637,000) ......... $ 133,522,167 Cash in bank on demand deposit ............................. 30,468 Accrued interest receivable ................................ 873,284 ----------------- Total assets ............................................. 134,425,919 ----------------- LIABILITIES: Payable for investment securities purchased on a when-issued basis (note 2) ........................................... 15,455,547 Reverse repurchase agreements payable ...................... 5,000,000 Accrued interest ........................................... 56,372 Other accrued expenses ..................................... 113,459 ----------------- Total liabilities ........................................ 20,625,378 ----------------- Net assets applicable to outstanding capital stock ....... $ 113,800,541 ----------------- ----------------- COMPOSITION OF NET ASSETS: Capital stock and additional paid-in capital ............... $ 171,728,291 Undistributed net investment income ........................ 91,163 Accumulated net realized loss on investments ............... (62,071,037) Unrealized appreciation of investments ..................... 4,052,124 ----------------- Total - representing net assets applicable to capital stock .................................................. $ 113,800,541 ----------------- ----------------- * Investments in securities at identified cost ............. $ 129,470,043 ----------------- ----------------- NET ASSET VALUE AND MARKET PRICE: Net assets ................................................. $ 113,800,541 Shares outstanding (authorized 250 million shares of $0.01 par value)................................................. 16,990,546 Net asset value ............................................ $ 6.70 Market price ............................................... $ 6.44
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. - --------------------------------------------------------------------- 1998 Semiannual Report 39 American Opportunity Income Fund Financial Statements (Unaudited) (continued) - --------------------------------------------------------------------- STATEMENT OF OPERATIONS For the Six Months Ended April 30, 1998 ................................................................................ INCOME: Interest (net of interest expense of $218,071) ............. $ 4,139,444 Fee income (note 2) ........................................ 81,621 ----------------- Total investment income .................................. 4,221,065 ----------------- EXPENSES (NOTE 3): Investment management fee .................................. 308,755 Administrative fee ......................................... 119,629 Custodian and accounting fees .............................. 49,489 Transfer agent fees ........................................ 9,052 Reports to shareholders .................................... 44,084 Directors' fees ............................................ 6,207 Audit and legal fees ....................................... 33,094 Other expenses ............................................. 27,766 ----------------- Total expenses ........................................... 598,076 Less expenses paid indirectly .......................... (940) ----------------- Total net expenses ....................................... 597,136 ----------------- Net investment income .................................... 3,623,929 ----------------- NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS: Net realized gain on investments (note 4) .................. 1,739,094 Net realized loss on closed futures contracts .............. (43,571) ----------------- Net realized gain on investments ......................... 1,695,523 Net change in unrealized appreciation or depreciation of investments .............................................. (1,549,951) ----------------- Net gain on investments .................................. 145,572 ----------------- Net increase in net assets resulting from operations ... $ 3,769,501 ----------------- -----------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. - --------------------------------------------------------------------- 1998 Semiannual Report 40 American Opportunity Income Fund Financial Statements (Unaudited) (continued) - --------------------------------------------------------------------- STATEMENT OF CASH FLOWS For the Six Months Ended April 30, 1998 ................................................................................ CASH FLOWS FROM OPERATING ACTIVITIES: Interest and fee income .................................... $ 4,221,065 Net expenses ............................................... (597,136) ----------------- Net investment income .................................... 3,623,929 ----------------- Adjustments to reconcile net investment income to net cash provided by operating activities: Change in accrued interest receivable and principal receivable on mortgage securities ...................... 500,955 Net amortization of bond discount and premium ............ (32,486) Change in accrued fees and expenses ...................... (102,083) ----------------- Total adjustments ...................................... 366,386 ----------------- Net cash provided by operating activities .............. 3,990,315 ----------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of investments ......................... 95,708,418 Purchases of investments ................................... (46,025,907) Net sales of short-term securities ......................... 4,037,000 Net variation margin paid for futures contracts ............ (43,571) ----------------- Net cash provided by investing activities .............. 53,675,940 ----------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net payments for reverse repurchase agreements ............. (16,000,000) Retirement of fund shares .................................. (37,895,152) Distributions paid to shareholders ......................... (3,766,567) ----------------- Net cash used by financing activities .................. (57,661,719) ----------------- Net increase in cash ....................................... 4,536 Cash at beginning of period ................................ 25,932 ----------------- Cash at end of period .................................. $ 30,468 ----------------- ----------------- Supplemental disclosure of cash flow information: Cash paid for interest on reverse repurchase agreements ............................................. $ 342,691 ----------------- -----------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. - --------------------------------------------------------------------- 1998 Semiannual Report 41 American Opportunity Income Fund Financial Statements (continued) - --------------------------------------------------------------------- STATEMENTS OF CHANGES IN NET ASSETS ................................................................................
SIX MONTHS ENDED 4/30/98 YEAR ENDED (UNAUDITED) 10/31/97 ----------------- ----------------- OPERATIONS: Net investment income ...................................... $ 3,623,929 $ 9,549,757 Net realized gain (loss) on investments .................... 1,695,523 (870,592) Net change in unrealized appreciation or depreciation of investments .............................................. (1,549,951) 5,150,515 ----------------- ----------------- Net increase in net assets resulting from operations ..... 3,769,501 13,829,680 ----------------- ----------------- DISTRIBUTIONS TO SHAREHOLDERS: From net investment income ................................. (3,766,567) (10,062,582) ----------------- ----------------- CAPITAL SHARE TRANSACTIONS (NOTE 6): Decrease in net assets from capital share transactions ..... (37,895,152) -- ----------------- ----------------- Total increase (decrease) in net assets .................. (37,892,218) 3,767,098 Net assets at beginning of period .......................... 151,692,759 147,925,661 ----------------- ----------------- Net assets at end of period ................................ $ 113,800,541 $ 151,692,759 ----------------- ----------------- ----------------- ----------------- Undistributed net investment income ........................ $ 91,163 $ 233,801 ----------------- ----------------- ----------------- -----------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. - --------------------------------------------------------------------- 1998 Semiannual Report 42 American Opportunity Income Fund Notes to Financial Statements (Unaudited) - -------------------------------------------------------------------------------- (1) ORGANIZATION ................................ American Opportunity Income Fund Inc. (the fund) is registered under the Investment Company Act of 1940 (as amended) as a diversified, closed-end management investment company. The fund invests principally in mortgage-backed securities including U.S. government agency securities and privately issued securities. The fund may enter into dollar-roll transactions. In addition, the fund may borrow through the use of reverse repurchase agreements. Fund shares are listed on the New York Stock Exchange under the symbol OIF. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ................................ INVESTMENTS IN SECURITIES Portfolio securities for which market quotations are readily available are valued at current market value. If market quotations or valuations are not readily available, or if such quotations or valuations are believed to be inaccurate, unreliable or not reflective of market value, portfolio securities are valued according to procedures adopted by the fund's board of directors in good faith at "fair value", that is, a price that the fund might reasonably expect to receive for the security or other asset upon its current sale. The current market value of certain fixed income securities is provided by an independent pricing service. Fixed income securities for which prices are not available from an independent pricing service but where an active market exists are valued using market quotations obtained from one or more dealers that make markets in the securities or from a widely-used quotation system. Short-term securities with maturities of 60 days or less are valued at amortized cost, which approximates market value. Exchange-traded options are valued at the last sales price on the exchange prior to the time when assets are valued. If no sales were reported that day, the options will be valued at the mean between the current closing bid and asked prices. Over-the-counter options are valued using market quotations obtained from broker-dealers. - --------------------------------------------------------------------- 1998 Semiannual Report 43 American Opportunity Income Fund Notes to Financial Statements (Unaudited) (continued) - -------------------------------------------------------------------------------- Financial futures are valued at the last settlement price established each day by the board of trade or exchange on which they are traded. Securities transactions are accounted for on the date 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, is recorded on an accrual basis. 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. SECURITIES PURCHASED ON A WHEN-ISSUED BASIS Delivery and payment for securities that have been purchased by the fund on a when-issued or forward-commitment 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 segregates, 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 net asset value if the fund makes such purchases while remaining - --------------------------------------------------------------------- 1998 Semiannual Report 44 American Opportunity Income Fund Notes to Financial Statements (Unaudited) (continued) - -------------------------------------------------------------------------------- substantially fully invested. As of April 30, 1998, the fund had entered into outstanding when-issued or forward commitments of $15,455,547. 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 purchased on a forward commitment basis and simultaneously contracts with a 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, 1998, such fees earned by the fund amounted to $81,621. FEDERAL TAXES The fund intends to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and not be subject to federal income tax. Therefore, no income tax provision is required. The fund also intends to distribute its taxable net investment income and realized gains, if any, to avoid the payment of any federal excise taxes. Net investment income and net realized gains (losses) may differ for financial statement and tax purposes. The character of distributions made during the year from net investment income or net realized gains may differ from its ultimate characterization for federal income tax purposes. In addition, due to the timing of dividend distributions, the fiscal year in which amounts are distributed may differ from the year that the income or realized gains or losses were recorded by the fund. DISTRIBUTIONS TO SHAREHOLDERS Distributions from net investment income are made monthly and realized capital gains, if any, will be distributed at least annually. These distributions are recorded as of the close of business on the ex-dividend date. Such distributions are payable in cash or, pursuant to the fund's dividend reinvestment plan, reinvested in - --------------------------------------------------------------------- 1998 Semiannual Report 45 American Opportunity Income Fund Notes to Financial Statements (Unaudited) (continued) - -------------------------------------------------------------------------------- additional shares of the fund's capital stock. Under the plan, fund shares will be purchased in the open market unless the market price plus commissions exceeds the net asset value by 10% or more. If, at the close of business on the dividend payment date, the shares purchased in the open market are insufficient to satisfy the dividend reinvestment requirement, the fund will issue new shares at a discount of up to 5% from the current market price. REPURCHASE AGREEMENTS For repurchase agreements entered into with certain broker-dealers, the fund, along with other affiliated registered investment companies, may transfer uninvested cash balances into a joint trading account, the daily aggregate of which is invested in repurchase agreements secured by U.S. government or agency obligations. Securities pledged as collateral for all individual and joint repurchase agreements are held by the fund's custodian bank until maturity of the repurchase agreement. Provisions for all agreements ensure that the daily market value of the collateral is in excess of the repurchase amount, including accrued interest, to protect the fund in the event of a default. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts in the financial statements. Actual results could differ from these estimates. (3) EXPENSES ................................ INVESTMENT MANAGEMENT AND ADMINISTRATIVE FEES The fund has entered into the following agreements with Piper Capital Management Incorporated (the advisor and administrator): The investment advisory agreement provides the advisor with a monthly investment management fee in an amount equal to an annualized rate of 0.20% of the fund's average weekly net assets and 4.50% of the daily gross income (i.e., income, including - --------------------------------------------------------------------- 1998 Semiannual Report 46 American Opportunity Income Fund Notes to Financial Statements (Unaudited) (continued) - -------------------------------------------------------------------------------- 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 0.725% of the fund's average weekly net assets during the month (approximately 0.725% on an annual basis). For the six months ended April 30, 1998, the effective annualized investment management fee incurred by the fund was 0.52%. For its fee, the advisor provides investment advice and conducts 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 reporting, regulatory and record-keeping services for the fund. OTHER FEES AND EXPENSES In addition to the investment management and administrative fees, the fund is responsible for paying most other operating expenses including: outside directors' fees and expenses; custodian fees; registration fees; printing and shareholder reports; transfer agent fees and expenses; legal, auditing and accounting services; insurance; interest; taxes and other miscellaneous expenses. Expenses paid indirectly represent a reduction of custodian fees for earnings on miscellaneous cash balances maintained by the fund. (4) INVESTMENT SECURITY TRANSACTIONS ................................ Cost of purchases and proceeds from sales of securities, other than temporary investments in short-term securities and dollar roll transactions, for the six months ended April 30, 1998 aggregated $40,903,784 and $95,708,418, respectively. Including dollar rolls, such purchases and sales aggregated $94,662,690 and $149,467,324, respectively. - --------------------------------------------------------------------- 1998 Semiannual Report 47 American Opportunity Income Fund Notes to Financial Statements (Unaudited) (continued) - -------------------------------------------------------------------------------- (5) CAPITAL LOSS CARRYOVER ................................ For federal income tax purposes, the fund had capital loss carryovers at October 31, 1997, which, if not offset by subsequent capital gains, will expire on the fund's fiscal year-ends as indicated below. It is unlikely the board of directors will authorize a distribution of any net realized capital gains until the available capital loss carryovers have been offset or expire.
CAPITAL LOSS CARRYOVER EXPIRATION ------------- --------------- $ 5,283,808 2001 27,202,478 2002 25,520,417 2003 4,873,784 2004 886,073 2005 ------------- $ 63,766,560 ------------- -------------
(6) REPURCHASE OFFER ................................ The fund's board of directors concluded that an offer to repurchase up to 25% of the fund's outstanding shares would be in the best interests of shareholders. Accordingly, the board authorized such an offer as part of a settlement agreement reached in connection with class action litigation involving the fund and seven other closed-end investment companies managed by Piper Capital Management Incorporated. The repurchase offer was sent to shareholders in October 1997, and the deadline for submitting shares for repurchase was 5 p.m. Central Time on November 17, 1997. The repurchase price was determined on December 1, 1997 at the close of regular trading on the New York Stock Exchange (4 p.m. Eastern Time). The percentage of outstanding shares and the number of shares accepted for tender, the repurchase price per share and proceeds (including tender fees) paid by the fund were as follows:
PERCENTAGE SHARES REPURCHASE PROCEEDS TENDERED TENDERED PRICE PAID ---------- ------------- ----------- -------------- 25% 5,672,927 $6.66 $ 37,895,152
- --------------------------------------------------------------------- 1998 Semiannual Report 48 American Opportunity Income Fund Notes to Financial Statements (Unaudited) (continued) - -------------------------------------------------------------------------------- (7) ADVISOR ACQUISITION ................................ On May 1, 1998, Piper Jaffray Companies Inc., the parent company of the fund's investment advisor, was acquired by U.S. Bancorp. U.S. Bancorp is a multi-state bank holding company headquartered in Minneapolis, Minnesota with a geographic service area spanning 17 states. As of March 31, 1998, U.S. Bancorp was the 15th largest U.S. commercial bank holding company, with assets of nearly $70.9 billion. U.S. Bank National Association ("U.S. Bank"), a wholly owned subsidiary of U.S. Bancorp, currently acts as the investment advisor to 32 mutual funds (the "First American Funds"). As of March 31, 1998, U.S. Bank, acting through its First American Asset Management group, managed more than $65.3 billion in assets, including approximately $23.3 billion in assets of the First American Funds. Under the Investment Company Act of 1940, as amended, consummation of the acquisition of Piper Jaffray Companies by U.S. Bancorp resulted in the assignment and automatic termination of the fund's investment advisory agreement with Piper Capital Management Incorporated. The fund has entered into a new investment advisory agreement with Piper Capital Management, which shareholders will vote on at the fund's annual meeting in August. (8) REORGANIZATION OF THE FUND ................................ On April 27, 1998, the fund's board of directors approved the merger of the fund into an existing open-end fund in the First American family of funds. Shareholders will vote on the proposal at the fund's annual meeting in August. - --------------------------------------------------------------------- 1998 Semiannual Report 49 American Opportunity Income Fund Notes to Financial Statements (continued) - -------------------------------------------------------------------------------- (9) 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 Two Ended Year Year Year Year Months 4/30/98 Ended Ended Ended Ended Ended (Unaudited) 10/31/97 10/31/96 10/31/95 10/31/94 10/31/93 ------------ --------- --------- --------- --------- --------- PER-SHARE DATA Net asset value, beginning of period ... $ 6.69 $ 6.53 $ 6.66 $ 6.42 $ 10.68 $10.88 ------------ --------- --------- --------- --------- --------- Operations: Net investment income ................ 0.21 0.42 0.43 0.49 0.85 0.34 Net realized and unrealized gains (losses) on investments ............ 0.01 0.18 0.07 0.75 (3.53) (0.37) ------------ --------- --------- --------- --------- --------- Total from operations .............. 0.22 0.60 0.50 1.24 (2.68) (0.03) ------------ --------- --------- --------- --------- --------- Distributions to shareholders: From net investment income ........... (0.21) (0.44) (0.63) (1.00) (1.48) (0.17) In excess of net realized gains ...... -- -- -- -- (0.10) -- ------------ --------- --------- --------- --------- --------- Total distributions to shareholders ..................... (0.21) (0.44) (0.63) (1.00) (1.58) (0.17) ------------ --------- --------- --------- --------- --------- Net asset value, end of period ......... $ 6.70 $ 6.69 $ 6.53 $ 6.66 $ 6.42 $10.68 ------------ --------- --------- --------- --------- --------- ------------ --------- --------- --------- --------- --------- Market value, end of period ............ $ 6.44 $ 6.31 $ 5.88 $ 6.13 $ 7.00 $11.63 ------------ --------- --------- --------- --------- --------- ------------ --------- --------- --------- --------- --------- SELECTED INFORMATION Total return, net asset value (a) ...... 3.33% 9.64% 7.98% 20.98% (27.61)% (0.29)% Total return, market value (b) ......... 5.39% 15.58% 6.85% 2.16% (28.77)% 1.43% Net assets at end of period (in millions) . $ 114 $ 152 $ 148 $ 153 $ 146 $ 232 Ratio of expenses to average weekly net assets excluding interest expense (c) . 1.00%(f) 0.92% 1.01% 1.29% 1.39% 1.10%(f) Ratio of expenses to average weekly net assets including interest expense (c) . 1.37%(f) 1.71% 1.42% 1.29% 2.58% 1.62%(f) Ratio of net investment income to average weekly net assets ............ 6.06%(f) 6.48% 6.72% 7.74% 10.73% 19.11%(f) Portfolio turnover rate (excluding short-term securities and dollar roll transactions) ........................ 29% 59% 118% 139% 169% 21% Amount of borrowings outstanding at end of period (in millions) (d) .......... $ 5 $ 21 $ 21 -- -- $ 87 Per-share amount of borrowings outstanding at end of period ......... $ 0.29 $ 0.93 $ 0.92 -- -- $ 4.01 Per-share amount of net assets, excluding borrowings, at end of period $ 6.99 $ 7.62 $ 7.45 -- -- $14.69 Asset coverage ratio (e) ............... 2,376% 822% 804% -- -- 366%
(a) ASSUMES REINVESTMENT OF DISTRIBUTIONS AT NET ASSET VALUE AND DOES NOT REFLECT A SALES CHARGE. (b) ASSUMES REINVESTMENT OF DISTRIBUTIONS AT ACTUAL PRICES PURSUANT TO THE FUND'S DIVIDEND REINVESTMENT PLAN. (c) INCLUDES 0.07%, 0.30% AND 0.31% FROM FEDERAL EXCISE TAXES IN FISCAL YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994, RESPECTIVELY. (d) SECURITIES PURCHASED ON A WHEN-ISSUED BASIS FOR WHICH LIQUID SECURITIES ARE SEGREGATED ARE NOT CONSIDERED BORROWINGS. SEE NOTE 2 IN THE NOTES TO FINANCIAL STATEMENTS. (e) REPRESENTS NET ASSETS, EXCLUDING BORROWINGS, AT END OF PERIOD DIVIDED BY BORROWINGS OUTSTANDING AT END OF PERIOD. (f) ANNUALIZED. - --------------------------------------------------------------------- 1998 Semiannual Report 50 American Opportunity Income Fund Investments in Securities (Unaudited) - ---------------------------------------------------------------------
AMERICAN OPPORTUNITY INCOME FUND April 30, 1998 ....................................................................................... Principal Market Description of Security Amount Value (a) - --------------------------------------------------------- ----------- ------------ (PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS) U.S. GOVERNMENT AND AGENCY SECURITIES (104.8%): U.S. AGENCY MORTGAGE-BACKED SECURITIES (b) (98.7%): FIXED RATE (89.5%): 7.00%, FHLMC, 9/1/10 .............................. $ 1,062,664 $ 1,083,259 6.50%, FHLMC, 1/1/26 .............................. 2,527,170(d) 2,512,967 6.50%, FHLMC, 3/1/26 .............................. 106,323 105,725 6.50%, FHLMC, 4/1/26 .............................. 1,427,964 1,418,440 6.50%, FHLMC, 4/1/26 .............................. 3,987,649 3,965,238 6.50%, FHLMC, 4/1/26 .............................. 2,509,064 2,492,328 7.50%, FHLMC, 8/1/25 .............................. 9,035,358 9,306,419 7.00%, FHLMC, 9/1/10 .............................. 3,453,104 3,520,025 6.00%, FHLMC, Series 163, Class F, 7/15/21 ........ 3,037,037 2,892,929 6.25%, FHLMC, Series 1638, Class E, 4/15/23 ....... 3,000,000 2,987,130 6.00%, FHLMC, Series 1648, Class LA, 5/15/23 ...... 4,695,000 4,318,884 6.00%, FHLMC, Series 1699, Class TD, 3/15/24 ...... 3,000,000 2,800,080 7.00%, FNMA, 10/25/21 ............................. 2,000,000 2,010,000 6.50%, FNMA, 12/18/11 ............................. 3,000,000 3,025,781 7.00%, FNMA, 5/1/26 ............................... 3,555,652 3,603,440 6.50%, FNMA, 5/1/11 ............................... 3,334,870 3,349,477 6.50%, FNMA, 4/1/11 ............................... 1,672,795 1,680,122 6.50%, FNMA, 4/1/11 ............................... 785,723 789,408 6.50%, FNMA, 4/1/11 ............................... 4,067,111 4,086,186 6.00%, FNMA, 4/1/13 ............................... 3,030,000 2,985,489 6.00%, FNMA, 4/1/13 ............................... 2,978,207 2,934,457 6.00%, FNMA, 4/1/13 ............................... 2,020,000 1,990,326 6.50%, FNMA, 5/18/13 .............................. 8,500,000(c) 8,534,510 6.00%, FNMA, 2/18/13 .............................. 7,000,000(c) 6,897,170 6.25%, FNMA Series 1998-M1, Class A2, 1/25/08 ..... 3,000,000 2,990,625 6.50%, FNMA, Series 1992-169, Class J, 3/25/21 .... 3,000,000 2,980,530 8.00%, GNMA, 7/15/26 .............................. 3,103,819 3,223,130 7.50%, GNMA, 11/15/27 ............................. 4,621,936 4,750,472 9.00%, GNMA, 11/15/21 ............................. 2,457,191(d) 2,649,933 9.00%, GNMA, 4/15/21 .............................. 3,441,291(d) 3,728,432 9.00%, GNMA, 10/15/22 ............................. 2,047,230 2,209,084 ------------ 101,821,996 ------------
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES. - --------------------------------------------------------------------- 1998 Semiannual Report 51 American Opportunity Income Fund Investments in Securities (Unaudited) (continued) - --------------------------------------------------------------------- AMERICAN OPPORTUNITY INCOME FUND (CONTINUED)
Principal Market Description of Security Amount Value (a) - --------------------------------------------------------- ----------- ------------ Z-BOND (9.2%): 8.34%, FNMA, Series 1996-35, Class Z, 7/25/26 ..... $ 6,779,501 $ 6,657,335 8.35%, Vendee Mortgage Trust, Series 1996-1,Class 1Z, 2/15/26 ..................................... 4,049,540 3,847,184 ------------ 10,504,519 ------------ Total U.S. Agency Mortgage-Backed Securities ... 112,326,515 ------------ U.S. GOVERNMENT SECURITIES (6.1%): 7.50%, U.S. Treasury Bond, 11/15/16 ............... 2,000,000 2,327,200 5.88%, U.S. Treasury Note, 2/15/04 ................ 3,000,000 3,030,660 5.63%, U.S. Treasury Note, 11/30/00 ............... 1,600,000 1,600,304 ------------ 6,958,164 ------------ Total U.S. Government and Agency Securities (cost: $115,365,246) ......................... 119,284,679 ------------ PRIVATE MORTGAGE-BACKED SECURITIES (b) (1.8%): Z-BOND (1.8%): 8.34%, Pacific Collateralized Mortgage Obligation Trust, Series 3, Class Z, 5/1/17 (cost: $2,037,573) .............................. 2,029,955 2,074,533 ------------ CORPORATE BONDS (8.4%): CONSUMER NON-DURABLES (3.2%): Coca-Cola Enterprises, 6.70%, 10/15/36 ............ 3,500,000 3,638,005 ------------ FINANCIAL SERVICES (2.9%): Lehman Brothers Inc., 7.50%, 8/1/26 ............... 3,000,000 3,256,710 ------------ UTILITIES (2.3%): Korea Electric Power ADS, 6.38%, 12/1/03 .......... 3,000,000 2,631,240 ------------ Total Corporate Bonds (cost: $9,430,224) ........................... 9,525,955 ------------ SHORT-TERM SECURITIES (2.3%): Repurchase agreement with Goldman Sachs, acquired on 4/30/98, interest of $403, 5.50%, 5/1/98 (cost: $2,637,000) .............................. 2,637,000(e) 2,637,000 ------------ Total Investments in Securities (cost: $129,470,043) (f) ..................... $133,522,167 ------------ ------------
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES. - --------------------------------------------------------------------- 1998 Semiannual Report 52 American Opportunity Income Fund Investments in Securities (Unaudited) (continued) - --------------------------------------------------------------------- Notes to Investments in Securities: (a) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO THE FINANCIAL STATEMENTS. (b) PORTFOLIO ABBREVIATIONS AND DEFINITIONS: Z-Bond - represents securities that pay no interest or principal during their initial accrual periods, but accrue additional principal at specified rates. Interest rate disclosed represents current yield based upon the cost basis and estimated timing of future cash flows. Vendee - securities issued through the Vendee Loan Program, administered and guaranteed as to payment of principal and interest by the Veterans Administration (VA). The VA guarantee is backed by the full faith and credit of the United States government. (c) ON APRIL 30, 1998, THE TOTAL COST OF INVESTMENTS PURCHASED ON A WHEN-ISSUED BASIS WAS $15,455,547. (d) ON APRIL 30, 1998, SECURITIES VALUED AT $7,672,558 WERE PLEDGED AS COLLATERAL FOR THE FOLLOWING OUTSTANDING REVERSE REPURCHASE AGREEMENT:
NAME OF BROKER ACQUISITION ACCRUED AND DESCRIPTION AMOUNT DATE RATE* DUE INTEREST OF COLLATERAL - ----------- ----------- ---------- --------- --------- ------------------- $ 5,000,000 2/17/98 5.56% 5/19/98 $ 56,372 (1) - ----------- --------- - ----------- ---------
* INTEREST RATE AS OF APRIL 30, 1998. RATE IS BASED ON THE LONDON INTERBANK OFFERED RATE (LIBOR). NAME OF BROKER AND DESCRIPTION OF COLLATERAL: (1) MORGAN STANLEY; FHLMC, 6.50%, 1/1/26, $2,527,170 PAR GNMA, 9.00%, 11/15/21, $1,327,064 PAR GNMA, 9.00%, 4/15/21, $3,441,291 PAR (e) REPURCHASE AGREEMENT IN A JOINT TRADING ACCOUNT WHICH IS COLLATERALIZED BY U.S. GOVERNMENT AGENCY SECURITIES. ACCRUED INTEREST SHOWN REPRESENTS INTEREST DUE AT MATURITY OF THE REPURCHASE AGREEMENT. (f) ALSO APPROXIMATES COST FOR FEDERAL INCOME TAX PURPOSES. THE AGGREGATE GROSS UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED ON THIS COST WERE AS FOLLOWS: GROSS UNREALIZED APPRECIATION ...... $ 4,398,340 GROSS UNREALIZED DEPRECIATION ...... (346,216) ------------ NET UNREALIZED APPRECIATION ...... $ 4,052,124 ------------ ------------
- --------------------------------------------------------------------- 1998 Semiannual Report 53 American Opportunity Income Fund THIS PAGE WAS INTENTIONALLY LEFT BLANK. 1998 Semiannual Report 54 AGF, AAF, OIF THIS PAGE WAS INTENTIONALLY LEFT BLANK. 1998 Semiannual Report 55 AGF, AAF, OIF GLOSSARY OF TERMS*** - -------------------------------------------------------------------------------- BENCHMARK A benchmark is an established basis of comparison for an investment's performance. A benchmark may be an unmanaged market index or a group of similar investments. EFFECTIVE DURATION Effective duration estimates how much the value of a security is expected to change with a given change in interest rates. Longer effective durations indicate more sensitivity 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 remember that effective duration is based on certain assumptions and has several limitations. It is most effective as a measure 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, and can be greatly affected by interest rate changes. If a fund has an AGGRESSIVE EFFECTIVE DURATION, it means its managers have set a longer duration posture in comparison to the fund's benchmark. A fund with a long effective duration is more sensitive to changing interest rates. If a fund has a DEFENSIVE EFFECTIVE DURATION, it means its managers have set a shorter duration posture in comparison to the fund's benchmark, to make the fund less sensitive to changing interest rates. If a fund has a NEUTRAL EFFECTIVE DURATION, the duration is approximately the same as that of its benchmark. *** - This symbol represents a graduation cap, used throughout this report to indicate terms defined in the glossary. - -------------------------------------------------------------------------------- 1998 Semiannual Report 56 AGF, AAF, OIF FOR MORE INFORMATION By Phone [GRAPHIC] 800 866-7778 FOR GENERAL INFORMATION press 5, our Mutual Fund Services representatives are ready to answer your questions. TO ORDER LITERATURE press 5, ask a service representative to mail you additional literature, including a Quarterly Update. You can also request to be put on a mailing list to receive this information automatically each quarter. BY MAIL [GRAPHIC] Piper Capital Management Attn: Mutual Fund Services 222 South Ninth Street Minneapolis, MN 55402-3804 In an effort to reduce costs to our shareholders, we have implemented a process to reduce duplicate mailings of the fund's shareholder reports. This householding process should allow us to mail one report to each address where one or more registered shareholders with the same last name reside. If you would like to have additional reports mailed to your address, please call our Mutual Fund Services area at 800 866-7778, or mail a request to us. On-Line [GRAPHIC] http://www.piperjaffray.com/ [LOGO] PIPER CAPITAL MANAGEMENT INCORPORATED 222 SOUTH NINTH STREET MINNEAPOLIS, MN 55402-3804 [LOGO] THIS DOCUMENT IS PRINTED ON PAPER MADE FROM 100% TOTAL RECOVERED FIBER, INCLUDING 15% POST-CONSUMER WASTE. #21001 6/1998 132-98 - -------------------------------------------------------------------------------- NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE - -------------------------------------------------------------------------------- Bulk Rate U.S. Postage PAID Permit No. 3008 Mpls., MN -----END PRIVACY-ENHANCED MESSAGE-----