-----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, V6asZEFQ3YDNsIgYpf1vFZC4fxL+oYVX3FCbuMw1XicS4UL+Nbvh1TOIchYQoUqd UdJKcjyxVdESHrGYaeTCeQ== 0000912057-97-002379.txt : 19970131 0000912057-97-002379.hdr.sgml : 19970131 ACCESSION NUMBER: 0000912057-97-002379 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19961130 FILED AS OF DATE: 19970130 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN STRATEGIC INCOME PORTFOLIO INC II CENTRAL INDEX KEY: 0000886984 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 411719822 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-06640 FILM NUMBER: 97514456 BUSINESS ADDRESS: STREET 1: PIPER JAFFRAY TWR STREET 2: 222 S NINTH ST CITY: MINNEAPOLIS STATE: MN ZIP: 55402 BUSINESS PHONE: 6123426000 MAIL ADDRESS: STREET 1: 222 S 9TH STREET CITY: MINNEAPOLIS STATE: MN ZIP: 55402 N-30D 1 N-30D American Strategic Income Portfolio II - 1996 Semiannual Report 1996 Semiannual Report AMERICAN STRATEGIC INCOME PORTFOLIO II BSP [LOGO] [LOGO] CONTENTS President's Letter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Letter to Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Financial Statements and Notes . . . . . . . . . . . . . . . . . . . . . . . 9 Investments in Securities. . . . . . . . . . . . . . . . . . . . . . . . . .24 Shareholder Update . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30 Directors and Officers . . . . . . . . . . . . . . . . . . . . . . . . . . .31 Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32 AMERICAN STRATEGIC INCOME PORTFOLIO II - -------------------------------------- PRIMARY INVESTMENTS Mortgage-related assets that directly or indirectly represent a participation in or are secured by and payable from mortgage loans. It may also invest in asset-backed securities, U.S. government securities, corporate debt securities, municipal obligations, unregistered securities, mortgage-backed securities and mortgage servicing rights. The fund may borrow, including through the use of reverse repurchase agreements, and may purchase securities through the dollar-roll program. Use of certain of these investments and investment techniques may cause the fund's net asset value to fluctuate to a greater extent than would be expected from interest rate movements alone. FUND OBJECTIVE High level of current income. Its secondary objective is to seek capital appreciation. As with other investment companies, there can be no assurance this fund will achieve its objective. AVERAGE ANNUALIZED TOTAL RETURNS - -------------------------------------------------------------------------------- Based on net asset value for the periods ended November 30, 1996. - -------------------------------------------------------------------------------- [CHART] THE AVERAGE ANNUALIZED TOTAL RETURN FIGURES FOR AMERICAN STRATEGIC INCOME PORTFOLIO II ARE BASED ON THE CHANGE IN ITS NET ASSET VALUE (NAV), ASSUME ALL DISTRIBUTIONS WERE REINVESTED AND DO NOT REFLECT SALES CHARGES. NAV-BASED PERFORMANCE IS USED TO MEASURE INVESTMENT MANAGEMENT RESULTS. TOTAL RETURNS BASED ON THE CHANGE IN MARKET PRICE FOR THE ONE-YEAR, THREE-YEAR AND SINCE INCEPTION PERIODS ENDED NOVEMBER 30, 1996, WERE 7.99%, -0.90% AND 2.76%, RESPECTIVELY. THESE FIGURES ALSO ASSUME REINVESTED DISTRIBUTIONS AND DO NOT REFLECT SALES CHARGES. 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. THE LEHMAN BROTHERS MUTUAL FUND GOVERNMENT/MORTGAGE INDEX IS COMPRISED OF ALL U.S. GOVERNMENT AGENCY AND TREASURY SECURITIES AND AGENCY MORTGAGE-BACKED SECURITIES. DEVELOPED BY LEHMAN BROTHERS FOR COMPARATIVE USE BY THE MUTUAL FUND INDUSTRY, THIS INDEX IS UNMANAGED AND DOES NOT INCLUDE ANY FEES OR EXPENSES IN ITS TOTAL RETURN FIGURES. THE LIPPER CLOSED-END U.S. MORTGAGE FUNDS AVERAGE REPRESENTS THE AVERAGE ANNUALIZED TOTAL RETURN, WITH DISTRIBUTIONS REINVESTED, OF SIMILAR CLOSED-END FUNDS AS CHARACTERIZED BY LIPPER ANALYTICAL SERVICES. THE SINCE INCEPTION NUMBERS FOR THE LEHMAN INDEX AND LIPPER AVERAGE ARE CALCULATED FROM THE MONTH END FOLLOWING THE FUND'S INCEPTION THROUGH NOVEMBER 30, 1996. - -------------------------------------------------------------------------------- 1996 Semiannual Report 1 American Strategic Income Portfolio II PRESIDENT'S LETTER - -------------------------------------------------------------------------------- [PHOTO] WILLIAM H. ELLIS President Piper Capital Management - -------------------------------------------------------------------------------- January 16, 1997 - -------------------------------------------------------------------------------- DEAR SHAREHOLDERS: Check out the best sellers' list at your local bookstore. You'll notice a number of books about companies that have gone through dramatic changes in recent years. Surprising? Not really. Every company experiences change periodically. And we're no exception. At Piper Capital Management, we've made significant changes to enhance our ability to achieve consistent, competitive performance and provide a higher level of quality service. We've upgraded our toll-free telephone system so you spend less time listening to voice response and more time receiving information you can put to use. Also, when calling our toll-free number, you now have the option to listen to our portfolio managers talk about their current investment strategies. Find out the many ways to reach us on the back page of this report. Take a close look at the semiannual report in your hand. We've made our portfolio managers' commentaries simpler and more inviting, and added a glossary of terms at the back to help you understand commonly used financial terms. Whenever you see this symbol***, it indicates a term defined in the glossary. You'll hear the word "team" more often when we talk about our portfolio managers. We've enhanced our approach, allowing managers to interact more frequently and share their best ideas to improve the investment capabilities of Piper Capital. The recent changes we have made represent a new way of doing business at Piper Capital - an approach we believe will enable us to establish an unparalleled reputation for prudent investing and high-quality service. That said, we look forward to serving your future financial needs and exceeding your expectations in every way we can. Thank you for your investment. Sincerely, /s/ William H. Ellis William H. Ellis *** - This symbol represents a graduation cap, used throughout this report to indicate terms defined in the glossary. - -------------------------------------------------------------------------------- 1996 Semiannual Report 2 American Strategic Income Portfolio II AMERICAN STRATEGIC INCOME PORTFOLIO II - -------------------------------------------------------------------------------- [PHOTO] JOHN WENKER is primarily responsible for the management of American Strategic Income Portfolio II. He has 11 years of financial experience. January 16, 1997 - -------------------------------------------------------------------------------- DEAR SHAREHOLDERS: AMERICAN STRATEGIC INCOME PORTFOLIO II PAID AN ATTRACTIVE LEVEL OF CURRENT INCOME FOR SHAREHOLDERS DURING THE SIX-MONTH PERIOD ENDED NOVEMBER 30, 1996. The fund paid $0.5075 per share in dividends, which is an annualized distribution rate of 9.23% on the November 30 market price of $11 per share, and 6.77% on the initial public offering price of $15 per share. As discussed below, the fund's dividend was reduced to bring it in line with the fund's earnings. Current monthly earnings of 8.26 cents per share (based on an average of the three months ended November 30) would result in an annualized earnings rate of 9.01% on the November 30 market price and 6.61% on the initial public offering price. Keep in mind that past performance does not guarantee future results, and these rates will fluctuate. FOR THE SIX-MONTH PERIOD, THE FUND HAD A NET ASSET VALUE TOTAL RETURN OF 4.78%.* This compares to a 7.06% return for the Lehman * ALL RETURNS INCLUDE REINVESTED DISTRIBUTIONS, BUT NOT SALES CHARGES. 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. - -------------------------------------------------------------------------------- PORTFOLIO COMPOSITION - -------------------------------------------------------------------------------- As a percentage of total assets on November 30, 1996. [CHART] - -------------------------------------------------------------------------------- 1996 Semiannual Report 3 American Strategic Income Portfolio II AMERICAN STRATEGIC INCOME PORTFOLIO II (CONTINUED) - -------------------------------------------------------------------------------- [PHOTO] DAVID STEELE assists with the management of American Strategic Income Portfolio II. He has 18 years of financial experience. - -------------------------------------------------------------------------------- Brothers Mutual Fund Government/Mortgage Index and an 8.28% return for the Lipper Closed-End U.S. Mortgage Funds Average during this same period. For the six-month period ended November 30, the fund's total return based on its market price was 8.46%.* The fund continued to trade at a discount*** to net asset value during the year, with a market price of $11 and a net asset value of $12.87 per share as of November 30. Reducing the difference between the fund's market price and net asset value has been challenging, but we believe the fund's reduced net asset value volatility and earnings stability could help improve the fund's market price over time. THE FUND'S NET ASSET VALUE UNDERPERFORMANCE WAS DUE LARGELY TO HAVING MORTGAGE LOANS IN THE PORTFOLIO. These loans are generally less sensitive to interest rate changes than securities in the index and securities held by other U.S. mortgage funds. So when interest rates fall, as they did during the last six months, these loans tend not to go up in value as much as the index or other U.S. mortgage - -------------------------------------------------------------------------------- GEOGRAPHICAL DISTRIBUTION - -------------------------------------------------------------------------------- Percentages reflect principal value of whole loans and real estate owned as of November 30, 1996. [MAP] SHADED AREAS WITHOUT VALUES INDICATE STATES IN WHICH THE FUND HAS INVESTED LESS THAN 0.50% OF ITS ASSETS. *** - This symbol represents a graduation cap, used throughout this report to indicate terms defined in the glossary. - -------------------------------------------------------------------------------- 1996 Semiannual Report 4 American Strategic Income Portfolio II AMERICAN STRATEGIC INCOME PORTFOLIO II (CONTINUED) - -------------------------------------------------------------------------------- [PHOTO] RUSS KAPPENMAN assists with the management of American Strategic Income Portfolio II. He has 11 years of financial experience. - -------------------------------------------------------------------------------- funds. However, when rates increase, our loans generally do not decline as much, giving the fund downside protection in a rising-rate environment. Another contributing factor to our underperformance was our emphasis on short-term Treasury securities. During a declining interest rate environment, short-term securities generally do not go up in value as much as long-term issues. DURING THE PERIOD, WE REMAINED FOCUSED ON STABILIZING THE FUND'S INCOME STREAM. When the dividend was reduced in July 1996, we stated that we felt we could maintain an 8.25 cents per share monthly dividend for 12 months. As of November 30, 1996, we were on track to accomplish this goal. While unexpected credit problems or severe prepayments could adversely affect the fund's ability to maintain its 8.25 cents per share monthly dividend, we remain optimistic we will achieve this objective. THE FUND'S ASSETS ARE LARGELY CONCENTRATED IN MORTGAGE LOANS. As of November 30, 46% of the fund's total assets were invested in single family (home) loans, 33% in multifamily (apartment) loans, 7% in commercial loans and 9% in Treasury securities. (See portfolio composition chart on page 3.) Assuming a market environment that is similar to the past year, we intend to maintain the fund's investments in mortgage loans and Treasuries near these levels. The greater concentration in mortgage loans is consistent with our strategy of focusing on securities subject to more credit risk and reducing our exposure to securities more sensitive to changing interest rates. General improvements in housing markets and a continued strong market for rental housing should have a positive impact on the credit worthiness of our single and multifamily portfolios. To date, we have experienced loan prepayments at expected levels and have been able to reinvest these funds at historically attractive rates. If we experience heavier prepayments, we may have to reinvest the proceeds at lower interest rates, which would ultimately decrease the fund's income. WE CONTINUED TO BORROW IN THE FUND THROUGH REVERSE REPURCHASE AGREEMENTS*** AND INVESTED THE PROCEEDS IN TREASURY SECURITIES OR NEW MORTGAGE LOANS. The Treasuries and mortgage loans acted as collateral for the reverse repurchase agreements. These reverse *** - This symbol represents a graduation cap, used throughout this report to indicate terms defined in the glossary. - -------------------------------------------------------------------------------- 1996 Semiannual Report 5 American Strategic Income Portfolio II AMERICAN STRATEGIC INCOME PORTFOLIO II (CONTINUED) - -------------------------------------------------------------------------------- repurchase agreements, expressed as a percentage of total assets, were approximately 9% as of November 30. While borrowing can potentially increase the fund's income, it can also increase the fund's net asset value volatility. WE SUCCESSFULLY MANAGED THE RISKS*** INVOLVED WITH MORTGAGE LOANS DURING THE PERIOD. (See the glossary for more on the specific risks associated with mortgage loans.) One of the ways we did this was by focusing on moderately valued homes, which have less credit risk than do higher valued homes. As of November 30, the fund held 2,241 single family loans on properties which, on average, had a value of approximately $74,000. The average balance remaining on these loans was approximately $59,000. Since the fund's inception, we have kept its principal losses from foreclosed single family loans to 6 cents per share. We followed a similar philosophy when purchasing multifamily and commercial loans. We believe that smaller loans spread out in many states are less likely to cause losses in the fund. On November 30, we had 41 multifamily loans with an average loan balance of approximately $2,246,000 and eight commercial loans with an average balance of approximately $2,294,000. Through November, there were no realized foreclosure losses to the fund from our investments in multifamily or commercial loans. However, in June 1996 we took possession of one multifamily property, and another is delinquent. Going forward, we will - -------------------------------------------------------------------------------- DELINQUENCY PROFILE - -------------------------------------------------------------------------------- The chart below shows what percentage of loans in the portfolio are 30, 60, 90 or 120 days delinquent as of November 30, 1996. CURRENT 90.5% - -------------------------------------------------------------------------------- 30 Days 3.5% - -------------------------------------------------------------------------------- 60 Days 1.0% - -------------------------------------------------------------------------------- 90 Days 0.4% - -------------------------------------------------------------------------------- 120+ Days 4.6% - -------------------------------------------------------------------------------- *** - This symbol represents a graduation cap, used throughout this report to indicate terms defined in the glossary. - -------------------------------------------------------------------------------- 1996 Semiannual Report 6 American Strategic Income Portfolio II AMERICAN STRATEGIC INCOME PORTFOLIO II (CONTINUED) - -------------------------------------------------------------------------------- continue to focus on moderately valued home loans and smaller multifamily and commercial loans. ALTHOUGH WE CONDUCT EXTENSIVE RISK ANALYSIS ON EVERY LOAN PURCHASED, DELINQUENT LOANS ARE LIKELY. Because delinquent loans require a high level of attention, we place them with loan servicers who work hard to convey to borrowers that their first responsibility each month is to make their payments. If a loan forecloses, our loan servicers will proceed with the process as quickly as possible. Although we would hope to receive all of the principal and interest owed to us on a foreclosed loan, it is likely that we may not be repaid in full. WE BELIEVE GEOGRAPHIC DIVERSIFICATION IS ESSENTIAL TO THE FUND. The fund is invested in mortgage loans backed by properties located throughout the country. (See map on page 4.) We attempt to buy mortgage loans in many parts of the country to avoid the risk of concentrating in one area. The greatest concentration of loans is in Texas, California and Minnesota. Texas and California have more loans due to their large populations. Moreover, the adverse economic conditions experienced by these two states a few years ago enabled us to purchase loans at what we believe are attractive prices. Our concentration of loans in Minnesota results from our in-depth knowledge of some markets in that state and generally favorable economic conditions there. LOOKING AHEAD, WE BELIEVE THE FUND'S NET ASSET VALUE AND EARNINGS SHOULD BE FAIRLY STABLE RELATIVE TO CHANGES IN THE INTEREST RATE ENVIRONMENT. We believe we have reduced interest rate risk and focused the fund's investments where we feel we can currently add the most value - in the mortgage loan area. This focus on mortgage loans should allow the fund to provide more consistent income levels. We hope this will attract more investors to the fund, which, in turn, could reduce the current discount of market price to net asset value. We anticipate more investments in commercial mortgage loans in the future. Commercial loans may involve more risk than multifamily or single family mortgage loans. (For more on the specific risks associated with mortgage loans, see the glossary.) - -------------------------------------------------------------------------------- 1996 Semiannual Report 7 American Strategic Income Portfolio II AMERICAN STRATEGIC INCOME PORTFOLIO II (CONTINUED) - -------------------------------------------------------------------------------- THE PROPOSED SETTLEMENT OF A CLASS ACTION LAWSUIT AGAINST THE FUND SHOULD BE PRESENTED TO THE COURT FOR PRELIMINARY APPROVAL EARLY THIS YEAR. Shareholders received details of the proposed settlement in the annual report that was mailed in July. At that time, we anticipated preliminary court approval in late 1996. Due to delays in the process, we now expect the approval early this year. There can, however, be no assurance as to the timing of preliminary court approval or the settlement itself. The efforts of the fund's management team continue to be dedicated to reaching the fund's objectives and helping you achieve your financial goals. Thank you for your investment in American Strategic Income Portfolio II. We look forward to serving your financial needs in the coming months. Sincerely, /s/John Wenker John Wenker Portfolio Manager - -------------------------------------------------------------------------------- 1996 Semiannual Report 8 American Strategic Income Portfolio II Financial Statements (Unaudited) - -------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES November 30, 1996 .................................................................. ASSETS: Investments in securities at market value* (note 2) (including a repurchase agreement of $805,000) ........... $274,138,026 Real estate owned (identified cost: $4,829,818) (note 2) ... 4,068,214 Cash in bank on demand deposit ............................. 1,264,139 Accrued interest receivable ................................ 2,552,386 ----------------- Total assets ............................................. 282,022,765 ----------------- LIABILITIES: Reverse repurchase agreements payable ...................... 25,000,000 Accrued investment management fee .......................... 129,924 Accrued administrative fee ................................. 42,017 Accrued interest ........................................... 109,865 Other accrued expenses ..................................... 20,862 ----------------- Total liabilities ........................................ 25,302,668 ----------------- Net assets applicable to outstanding capital stock ......... $256,720,097 ----------------- ----------------- REPRESENTED BY: Capital stock - authorized 1 billion shares of $0.01 par value; outstanding, 19,940,735 shares .................... $ 199,407 Additional paid-in capital ................................. 281,680,763 Undistributed net investment income ........................ 1,382,973 Accumulated net realized loss on investments ............... (30,028,587) Unrealized appreciation of investments ..................... 3,485,541 ----------------- Total - representing net assets applicable to outstanding capital stock .......................................... $256,720,097 ----------------- ----------------- Net asset value per share of outstanding capital stock ..... $ 12.87 ----------------- ----------------- * Investments in securities at identified cost ............. $269,890,881 ----------------- -----------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. - --------------------------------------------------------------------- 1996 Semiannual Report 9 American Strategic Income Portfolio II Financial Statements (Unaudited) (continued) - --------------------------------------------------------------------- STATEMENT OF OPERATIONS For the Six Months Ended November 30, 1996 .................................................................. INCOME: Interest (net of interest expense of $1,255,822) ........... $11,384,450 ----------------- EXPENSES (NOTE 3): Investment management fee .................................. 769,354 Administrative fee ......................................... 254,182 Custodian and accounting fees .............................. 85,329 Transfer agent fees ........................................ 20,734 Reports to shareholders .................................... 30,684 Mortgage servicing fees .................................... 344,449 Directors' fees ............................................ 4,320 Audit and legal fees ....................................... 55,008 Other expenses ............................................. 54,375 ----------------- Total expenses ........................................... 1,618,435 Less expenses paid indirectly .............................. (4,570) ----------------- Total net expenses ....................................... 1,613,865 ----------------- Net investment income .................................... 9,770,585 ----------------- NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS: Net realized loss on investments (note 4) .................. (184,101) Net change in unrealized appreciation or depreciation of investments .............................................. 2,389,743 ----------------- Net gain on investments .................................. 2,205,642 ----------------- Net increase in net assets resulting from operations ..... $11,976,227 ----------------- -----------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. - --------------------------------------------------------------------- 1996 Semiannual Report 10 American Strategic Income Portfolio II Financial Statements (Unaudited) (continued) - --------------------------------------------------------------------- STATEMENT OF CASH FLOWS For the Six Months Ended November 30, 1996 .................................................................. CASH FLOWS FROM OPERATING ACTIVITIES: Interest income ............................................ $11,384,450 Net expenses ............................................... (1,613,865) ----------------- Net investment income .................................... 9,770,585 ----------------- Adjustments to reconcile net investment income to net cash provided by operating activities: Change in accrued interest receivable and principal receivable on mortgage securities ...................... 49,773 Net amortization of bond discount and premium ............ (84,080) Change in accrued fees and expenses ...................... (95,602) ----------------- Total adjustments ...................................... (129,909) ----------------- Net cash provided by operating activities .............. 9,640,676 ----------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of investments ......................... 46,925,503 Purchases of investments ................................... (19,430,102) Net sales of short-term securities ......................... 572,000 ----------------- Net cash provided by investing activities .............. 28,067,401 ----------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net payments for reverse repurchase agreements ............. (28,000,000) Distributions paid to shareholders ......................... (10,119,925) ----------------- Net cash used by financing activities .................. (38,119,925) ----------------- Net decrease in cash ....................................... (411,848) Cash at beginning of period ................................ 1,675,987 ----------------- Cash at end of period .................................. $ 1,264,139 ----------------- ----------------- Supplemental disclosure of cash flow information: Cash paid for interest on reverse repurchase agreements ............................................. $ 1,378,960 ----------------- -----------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. - --------------------------------------------------------------------- 1996 Semiannual Report 11 American Strategic Income Portfolio II Financial Statements (continued) - --------------------------------------------------------------------- STATEMENTS OF CHANGES IN NET ASSETS ..................................................................
SIX MONTHS ENDED 11/30/96 YEAR ENDED (UNAUDITED) 5/31/96 ----------------- ----------------- OPERATIONS: Net investment income ...................................... $ 9,770,585 $19,897,041 Net realized gain (loss) on investments .................... (184,101) 4,450,724 Net change in unrealized appreciation or depreciation of investments .............................................. 2,389,743 (4,821,939) ----------------- ----------------- Net increase in net assets resulting from operations ..... 11,976,227 19,525,826 ----------------- ----------------- DISTRIBUTIONS TO SHAREHOLDERS: From net investment income ................................. (10,119,925) (24,290,403) ----------------- ----------------- CAPITAL SHARE TRANSACTIONS: Payments for retirement of 250,800 shares (note 6) ......... -- (2,827,026) ----------------- ----------------- Total increase (decrease) in net assets .................. 1,856,302 (7,591,603) Net assets at beginning of period .......................... 254,863,795 262,455,398 ----------------- ----------------- Net assets at end of period ................................ $256,720,097 $254,863,795 ----------------- ----------------- ----------------- ----------------- Undistributed net investment income ........................ $ 1,382,973 $ 1,732,313 ----------------- ----------------- ----------------- -----------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. - --------------------------------------------------------------------- 1996 Semiannual Report 12 American Strategic Income Portfolio II Notes to Financial Statements (Unaudited) - --------------------------------------------------------------------- (1) ORGANIZATION ................................................................................ American Strategic Income Portfolio Inc. II (the fund) is registered under the Investment Company Act of 1940 (as amended) as a diversified, closed-end management investment company. The fund emphasizes investments in mortgage-related assets that directly or indirectly represent a participation in or are secured by and payable from mortgage loans. It may also invest in asset-backed securities, U.S. government securities, corporate debt securities, municipal obligations, unregistered securities and mortgage servicing rights. The fund may borrow, including through the use of reverse repurchase agreements, and may purchase securities through the sale-forward (dollar-roll) program. Fund shares are listed on the New York Stock Exchange under the symbol BSP. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ................................................................................ INVESTMENTS IN SECURITIES The fund's mortgage related investments such as whole loans, participation mortgages and mortgage servicing rights are initially valued at cost and their values are subsequently monitored and adjusted pursuant to a pricing model approved by the board of directors and implemented by Piper Capital Management. The pricing model is designed to reflect the present value of the projected stream of cash flows on such investments. The pricing model takes into account a number of relevant factors including the projected rate of prepayments, the projected rate and severity of defaults, the delinquency profile, the expected yield at purchase, changes in prevailing interest rates and changes in the real or perceived liquidity of whole loans, participation mortgages or mortgage servicing rights as the case may be. Certain elements of the pricing model involve subjective judgment. Additionally, certain other factors will be considered in the determination of the valuation of investments in multifamily properties, including but not limited to, results of annual inspections of the multifamily property by the adviser or a servicing agent retained by the adviser, reviews of annual unaudited financial statements of the multifamily property, monitoring of local and other economic conditions and their impact on local real estate values and analyses - --------------------------------------------------------------------- 1996 Semiannual Report 13 American Strategic Income Portfolio II Notes to Financial Statements (Unaudited) (continued) - --------------------------------------------------------------------- of rental vacancy rates at the multifamily property. Subjective adjustments to the valuation of such investments in multifamily properties may be made based upon the adviser's analysis of such information. The actual values that may be realized upon the sale of whole loans, participation mortgages and mortgage servicing rights can only be determined in negotiations between the fund and third parties. The values of other fixed income securities will be provided by an independent pricing service, which determines these valuations at a time earlier than the close of the New York Stock Exchange. Fixed income securities for which prices are not available from an independent pricing service but where an active market exists will be valued using market quotations obtained from one or more dealers that make markets in the securities. Occasionally, events affecting the value of such securities may occur between the time valuations are determined and the close of the New York Stock Exchange. If events materially affecting the value of such securities occur, if the fund's management determines for any other reason that valuations provided by the pricing service or market quotations from dealers are inaccurate or when market quotations are not readily available, securities will be valued at their fair value according to procedures decided upon in good faith by the board of directors. Short-term securities with maturities of 60 days or less are valued at amortized cost, which approximates market value. 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 independent dealers that make markets in the securities. Financial futures are valued at the last settlement price established each day by the board of trade or exchange on which they are traded. - --------------------------------------------------------------------- 1996 Semiannual Report 14 American Strategic Income Portfolio II Notes to Financial Statements (Unaudited) (continued) - --------------------------------------------------------------------- Securities transactions are accounted for on the date the securities are purchased and sold. Realized gains and losses are calculated on the identified-cost basis. Interest income, including amortization of bond discount and premium computed on a level-yield basis, is accrued weekly. Costs associated with acquiring whole loans, participation mortgages and mortgage servicing rights are capitalized and included in the cost basis of the loans purchased. OPTIONS TRANSACTIONS For hedging purposes, the fund may buy and sell put and call options, write covered call options on portfolio securities, and write cash-secured puts. The risk in writing a call option is that the fund gives up the opportunity for profit if the market price of the security increases. The risk in writing a put option is that the fund may incur a loss if the market price of the security decreases and the option is exercised. The risk of buying an option is that the fund pays a premium whether or not the option is exercised. The fund also has the additional risk of not being able to enter into a closing transaction if a liquid secondary market does not exist. The fund will realize a gain or loss upon expiration or closing of the option transaction. When an option is exercised, the proceeds on the sale of a written call option, the purchase cost of a written put option, or the cost of a security for purchased put and call options is adjusted by the amount of premium received or paid. FUTURES TRANSACTIONS In order to gain exposure to or protect against changes in the market, the fund may buy and sell financial futures contracts and related options. Risks of entering into futures contracts and related options include the possibility there may be an illiquid market and that a change in the value of the contract or option may not correlate with changes in the value of the underlying securities. Upon entering into a futures contract, the fund is required to deposit either cash or securities in an amount (initial margin) equal to a certain percentage of the contract value. Subsequent payments - --------------------------------------------------------------------- 1996 Semiannual Report 15 American Strategic Income Portfolio II Notes to Financial Statements (Unaudited) (continued) - --------------------------------------------------------------------- (variation margin) are made or received by the fund each day. The variation margin payments are equal to the daily changes in the contract value and are recorded as unrealized gains and losses. The fund recognizes a realized gain or loss when the contract is closed or expires. INTEREST RATE TRANSACTIONS To preserve a return or spread on a particular investment or portion of its portfolio or for other non-speculative purposes, the fund may enter into various hedging transactions, such as interest rate swaps and the purchase of interest rate caps and floors. Interest rate swaps involve the exchange of commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments. The purchase of an interest rate cap entitles the purchaser, to the extent that a specified index exceeds a predetermined interest rate, to receive payments of interest on a contractually based notional principal amount from the party selling the interest rate cap. The purchase of an interest rate floor entitles the purchaser, to the extent that a specified index falls below a predetermined interest rate, to receive payments of interest on a contractually based notional principal amount from the party selling the interest rate floor. If forecasts of interest rates and other market factors are incorrect, investment performance will diminish compared to what performance would have been if these investment techniques were not used. Even if the forecasts are correct, there is risk that the positions may correlate imperfectly with the asset or liability being hedged. Other risks of entering into these transactions are that a liquid secondary market may not always exist or that the other party to the transaction may not perform. For interest rate swaps, caps and floors, the fund accrues weekly, as an increase or decrease to interest income, the current net amount due to or owed by the fund. Interest rate swaps, caps and floors are - --------------------------------------------------------------------- 1996 Semiannual Report 16 American Strategic Income Portfolio II Notes to Financial Statements (Unaudited) (continued) - --------------------------------------------------------------------- valued from prices quoted by independent brokers. These valuations represent the present value of all future cash settlement amounts based on implied forward interest rates. WHOLE LOANS AND PARTICIPATION MORTGAGES Whole loans and participation mortgages may bear a greater risk of loss arising from a default on the part of the borrower of the underlying loans than do traditional mortgage-backed securities. This is because whole loans and participation mortgages, unlike most mortgage-backed securities, generally are not backed by any government guarantee or private credit enhancement. Such risk may be greater during a period of declining or stagnant real estate values. In addition, the individual loans underlying whole loans and participation mortgages may be larger than the loans underlying mortgage-backed securities. With respect to participation mortgages, the fund generally will not be able to unilaterally enforce its rights in the event of a default, but rather will be dependent on the cooperation of the other participation holders. At November 30, 1996, loans representing 6.0% of the outstanding principal value of whole loans, or 5.6% of net assets were considered by the fund to be delinquent as to the timely monthly payment of principal. A loan is considered delinquent when a borrower has missed two or more payments. The fund does not record past due interest as income until received. The fund may incur certain costs and delays in the event of a foreclosure. Also, there is no assurance that the subsequent sale of the property will produce an amount equal to the sum of the unpaid principal balance of the loan as of the date the borrower went into default, the accrued unpaid interest and all of the foreclosure expenses. In this case, the fund may suffer a loss. Real estate acquired through foreclosure, if any, is recorded at estimated fair value. On November 30, 1996, the fund owned 23 homes with an aggregate value of $1,793,336 and one apartment building with a value of $2,274,878, for a total of 1.6% of net - --------------------------------------------------------------------- 1996 Semiannual Report 17 American Strategic Income Portfolio II Notes to Financial Statements (Unaudited) (continued) - --------------------------------------------------------------------- assets. The fund recognized net realized losses of $252,084, or $0.013 per share, on real estate sold during the six months ended November 30, 1996. 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 substantially fully invested. As of November 30, 1996, the fund had no outstanding when-issued or forward commitments. In connection with its ability to purchase securities on a when- issued or forward-commitment basis, the fund may enter into mortgage "dollar rolls" in which the fund sells securities 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 November 30, 1996, the fund earned no such fees. 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. For calendar year 1996, the fund intends to distribute substantially all of its taxable net investment income and realized gains, if any, to avoid the payment of any federal excise taxes. - --------------------------------------------------------------------- 1996 Semiannual Report 18 American Strategic Income Portfolio II Notes to Financial Statements (Unaudited) (continued) - --------------------------------------------------------------------- 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 (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 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 5% or more. If, at the close of business on the dividend payment date, the shares purchased in the open market are insufficient to satisfy the dividend reinvestment requirement, the fund will issue new shares at a discount of up to 5% from the current market price. REPURCHASE AGREEMENTS For repurchase agreements entered into with certain broker-dealers, the fund, along with other affiliated registered investment companies, may transfer uninvested cash balances into a joint trading account, the daily aggregate of which is invested in repurchase agreements secured by U.S. government 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. - --------------------------------------------------------------------- 1996 Semiannual Report 19 American Strategic Income Portfolio II Notes to Financial Statements (Unaudited) (continued) - --------------------------------------------------------------------- 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 ................................................................................ The fund has entered into the following agreements with Piper Capital Management Incorporated (the adviser and the administrator): The investment advisory agreement provides the adviser with a monthly investment management fee in an amount equal to an annualized rate of 0.20% of the fund's average weekly net assets and 4.50% of the daily gross income accrued by the fund during the month (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). The monthly investment management fee shall not exceed in the aggregate 1/12 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 November 30, 1996, the effective investment management fee incurred by the fund was 0.61% on annual basis. For its fee, the adviser 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 regulatory, reporting and record-keeping services for the fund. When acquiring whole loans and participation mortgages, the fund enters into mortgage servicing agreements with mortgage servicers. - --------------------------------------------------------------------- 1996 Semiannual Report 20 American Strategic Income Portfolio II Notes to Financial Statements (Unaudited) (continued) - --------------------------------------------------------------------- For a fee, mortgage servicers maintain loan records, such as insurance and taxes and the proper allocation of payments between principal and interest. In addition to the investment management, administrative and mortgage servicing fees, the fund is responsible for paying most other operating expenses, including: outside directors' fees and expenses; custodian fees; registration fees; printing and shareholder reports; transfer agent fees and expenses; legal, auditing and accounting services; insurance; interest; fees to outside parties retained to assist in conducting due diligence; taxes and other miscellaneous expenses. 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, for the six months ended November 30, 1996, aggregated $19,514,182 and $46,925,503, respectively. Included in proceeds from sales are $1,349,037 from sales of real estate owned. For the six months ended November 30, 1996, no brokerage commissions were paid to Piper Jaffray Inc., an affiliated broker. (5) CAPITAL LOSS CARRYOVER ................................................................................ For federal income tax purposes, the fund had capital loss carryovers of $29,844,486 as of May 31, 1996, which, if not offset by subsequent capital gains, will expire in 2003 through 2005. It is unlikely the board of directors will authorize a distribution of any net realized capital gains until the available capital loss carryover has been offset or expires. (6) RETIREMENT OF FUND SHARES ................................................................................ The fund's board of directors voted to discontinue the share repurchase program effective February 6, 1996. Pursuant to the plan, the fund had cumulatively repurchased and retired 502,800 shares as of November 30, 1996, which represents 2.5% of the shares originally issued. - --------------------------------------------------------------------- 1996 Semiannual Report 21 American Strategic Income Portfolio II Notes to Financial Statements (Unaudited) (continued) - --------------------------------------------------------------------- (7) PENDING LITIGATION ................................................................................ An amended complaint purporting to be a class action was filed on September 7, 1995, in the United States District Court for the Western District of Washington against the fund, seven other closed-end investment companies for which Piper Capital Management Incorporated acts as investment adviser, Piper Jaffray Companies Inc., Piper Jaffray Inc., Piper Capital Management Incorporated and certain individuals. The named plaintiffs and defendants in this putative class action have reached an agreement-in-principle on a proposed settlement and are negotiating the terms of a definitive settlement agreement. If approved by the Court, a definitive settlement agreement consistent with the terms of the agreement-in-principle would provide $15.5 million to class members in payments by Piper Jaffray Companies Inc. and Piper Capital Management Incorporated scheduled during the next four years. The agreement stipulates, among other things, that BSP would offer to repurchase up to 10 percent of its outstanding shares from current shareholders at net asset value. The repurchase offer would occur after the effective date of the settlement following Court approval. - --------------------------------------------------------------------- 1996 Semiannual Report 22 American Strategic Income Portfolio II Notes to Financial Statements (continued) - --------------------------------------------------------------------- (8) FINANCIAL HIGHLIGHTS ................................................................................ Per-share data for a share of capital stock outstanding throughout each period and selected information for each period are as follows:
Six Months Ended Year Year Year Period 11/30/96 Ended Ended Ended Ended (Unaudited) 5/31/96 5/31/95 5/31/94 5/31/93(f) ----------- ------- ------- ------- ---------- PER-SHARE DATA Net asset value, beginning of period ........ $ 12.78 $13.00 $12.97 $14.54 $14.07 ----------- ------- ------- ------- ---------- Operations: Net investment income ..................... 0.49 0.99 1.21 1.56 1.07 Net realized and unrealized gain (loss) on investments ............................. 0.11 -- 0.17 (1.78) 0.41 ----------- ------- ------- ------- ---------- Total from operations ................... 0.60 0.99 1.38 (0.22) 1.48 ----------- ------- ------- ------- ---------- Distributions to shareholders: From net investment income ................ (0.51) (1.21) (1.35) (1.31) (1.01) In excess of net realized gains on investments ............................. -- -- -- (0.04) -- ----------- ------- ------- ------- ---------- Total distributions to shareholders ..... (0.51) (1.21) (1.35) (1.35) (1.01) ----------- ------- ------- ------- ---------- Net asset value, end of period .............. $ 12.87 $12.78 $13.00 $12.97 $14.54 ----------- ------- ------- ------- ---------- ----------- ------- ------- ------- ---------- Per-share market value, end of period ....... $ 11.00 $10.63 $11.50 $13.63 $15.75 ----------- ------- ------- ------- ---------- ----------- ------- ------- ------- ---------- SELECTED INFORMATION Total return, net asset value (a) ........... 4.78% 7.84% 11.56% (2.15)% 10.97% Total return, market value (b) .............. 8.46% 2.95% (5.38)% (5.38)% 12.57% Net assets at end of period (in millions) ... $ 257 $ 255 $ 262 $ 265 $ 297 Ratio of expenses to average weekly net assets (c)(g) ............................. 1.28%(h) 1.26% 1.27% 1.20% 1.09%(h) Ratio of net investment income to average weekly net assets ......................... 7.71%(h) 7.63% 9.60% 10.68% 9.08%(h) Portfolio turnover rate (excluding short-term securities) ............................... 7% 105% 52% 117% 64% Amount of borrowings outstanding at end of period (in millions) (d) .................. $ 25 $ 53 $ 53 $ 85 $ 76 Per-share amount of borrowings outstanding at end of period ............................. $ 1.26 $ 2.66 $ 2.61 $ 4.16 $ 3.71 Per-share amount of net assets, excluding borrowings, at end of period .............. $ 14.13 $15.44 $15.61 $17.13 $18.25 Asset coverage ratio (e) .................... 1127% 581% 598% 412% 491%
(A) BASED ON THE CHANGE IN NET ASSET VALUE OF A SHARE DURING THE PERIOD AND ASSUMES REINVESTMENT OF DISTRIBUTIONS AT NET ASSET VALUE. (B) BASED ON THE CHANGE IN MARKET PRICE OF A SHARE DURING THE PERIOD AND ASSUMES REINVESTMENT OF DISTRIBUTIONS AT ACTUAL PRICES PURSUANT TO THE FUND'S DIVIDEND REINVESTMENT PLAN. (C) INCLUDES 0.01%, 0.07%, AND 0.04% FROM FEDERAL EXCISE TAXES IN FISCAL YEARS 1996, 1995 AND 1994, RESPECTIVELY. BEGINNING IN FISCAL 1995, THE EXPENSE RATIOS REFLECT THE EFFECT OF GROSS EXPENSES PAID INDIRECTLY BY THE FUND. PRIOR PERIOD EXPENSE RATIOS HAVE NOT BEEN ADJUSTED. (D) SECURITIES PURCHASED ON A WHEN-ISSUED BASIS FOR WHICH LIQUID ASSETS 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) COMMENCEMENT OF OPERATIONS WAS JULY 30, 1992. (G) THE RATIO OF EXPENSES TO AVERAGE WEEKLY NET ASSETS EXCLUDES INTEREST EXPENSE THAT HAS BEEN PRESENTED NET OF THE RELATED INTEREST INCOME IN THE FINANCIAL STATEMENTS. IF INTEREST EXPENSE HAD BEEN INCLUDED IN TOTAL EXPENSES, THE RATIOS OF EXPENSES TO AVERAGE WEEKLY NET ASSETS WOULD HAVE BEEN: 2.27%, 2.39%, 3.51%, 2.33% AND 1.74% FOR THE SIX MONTHS ENDED 11/30/96 AND FISCAL 1996, 1995, 1994 AND 1993, RESPECTIVELY. (H) ADJUSTED TO AN ANNUAL BASIS. - --------------------------------------------------------------------- 1996 Semiannual Report 23 American Strategic Income Portfolio II Investments in Securities (Unaudited) - ---------------------------------------------------------------------
AMERICAN STRATEGIC INCOME PORTFOLIO II November 30, 1996 ....................................................................................... Principal Market Description of Security Amount Value (a) - --------------------------------------------------------- ----------- ------------ (PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS) U.S. GOVERNMENT AND AGENCY SECURITIES (12.1%): U.S. AGENCY MORTGAGE-BACKED SECURITIES (1.8%): FIXED RATE (1.8%): 6.50%, FNMA, 1/1/11 ............................... $ 4,633,941 $ 4,607,666 ------------ U.S. GOVERNMENT SECURITIES (10.3%): 5.13%, U.S. Treasury Note, 4/30/98 ................ 26,500,000(b) 26,369,885 ------------ Total U.S. Government and Agency Securities (cost: $31,064,229) .......................... 30,977,551 ------------ PRIVATE MORTGAGE-BACKED SECURITIES (E) (0.9%): SUBORDINATED FIXED RATE (0.9%): 6.00%, CMI Trust 1, Series 1991-1, 3/1/22 (cost: $2,050,371) .............................. 2,339,094 2,189,976 ------------ WHOLE LOANS AND PARTICIPATION MORTGAGES (C,D,E) (93.6%): COMMERCIAL LOANS (7.3%): Canton Commerce Center, 9.25%, 7/1/01 ............. 3,369,710 3,471,813 Jamboree Building, 9.05%, 12/1/06 ................. 2,000,000 1,980,000 Oak Knoll Village Shopping Center, 8.80%, 12/1/03 ......................................... 1,150,000 1,150,000 PennMont Office Building, 8.88%, 5/1/01 ........... 1,692,144 1,711,603 PMG Center, 9.05%, 9/1/03 ......................... 2,422,855 2,489,726 Provident Bank Building, 8.80%, 11/1/01 ........... 2,800,000 2,841,160 Ridgewood Estates Mobile Home Park, 8.55%, 12/1/00 ......................................... 2,128,663 2,167,618 Wellington Professional Center, 8.80%, 11/1/01 .... 2,800,000 2,800,000 ------------ 18,611,920 ------------ MULTIFAMILY LOANS (35.9%): Autumnwood, Southern Woods, Hilton Hollow, 9.10%, 6/1/03 .......................................... 6,411,095 6,635,487 Casa Carranza Apartments, 8.35%, 12/1/02 .......... 4,057,984 4,077,056 Chase Hill Apartments, 9.00%, 4/1/01 .............. 3,059,958 3,167,057 Claridge Apartments, 9.52%, 9/1/01 ................ 5,523,368 5,716,686 Colony Square Apartments, 10.25%, 12/1/01 ......... 1,341,253 1,388,197 Crows Landing Apartments, 9.13%, 8/1/02 ........... 4,117,506 4,261,618 Deering Manor, 9.50%, 12/8/22 ..................... 1,295,195 1,340,526 Gables Apartments, 8.50%, 8/1/00 .................. 5,572,559 5,670,079 Green Acres Apartments, 9.75%, 10/1/01 ............ 1,077,311 1,115,016
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES. - --------------------------------------------------------------------- 1996 Semiannual Report 24 American Strategic Income Portfolio II Investments in Securities (Unaudited) (continued) - --------------------------------------------------------------------- AMERICAN STRATEGIC INCOME PORTFOLIO II (CONTINUED)
Principal Market Description of Security Amount Value (a) - --------------------------------------------------------- ----------- ------------ Harbor View Apartments, 9.50%, 1/25/18 ............ $ 781,410 $ 808,759 Jaccard Apartments, 8.83%, 12/1/03 ................ 2,800,000 2,800,000 Kenyon Place Apartments, 8.13%, 2/1/03 ............ 2,320,249 2,321,409 Kona Kai Apartments, 8.45%, 11/1/05 ............... 1,172,797 1,185,932 Lexington Apartments, 9.13%, 6/1/02 ............... 1,462,542 1,513,731 Minnesota Multifamily, 9.88%, 12/1/22 ............. 1,705,761 1,765,462 Newport Apartments, 9.75%, 4/1/02 ................. 1,378,754 1,427,010 Normandale Lake Estates, 8.13%, 2/1/03 ............ 2,461,737 2,462,722 Northwood Village Apartments, 8.85%, 8/1/02 ....... 942,724 970,534 Park Dale Lane Apartments, 9.50%, 6/1/01 .......... 960,122 993,727 Park Place of Venice Apartments, 10.75%, 4/1/02 ... 2,665,225 2,758,508 Park Terrace Apartments, 8.45%, 11/1/05 ........... 2,634,342 2,650,675 Partridge Court Apartments, 7.96%, 3/1/03 ......... 2,332,240 2,317,080 Pine Village Apartments, 8.75%, 10/1/02 ........... 3,077,718 3,157,123 Plainfield Apartments, 8.05%, 1/1/01 .............. 2,479,930 2,490,097 Primrose Apartments, 8.63%, 11/1/07 ............... 1,107,493 1,125,766 Railview Apartments, 9.50%, 12/8/22 ............... 1,503,095 1,555,703 Rhode Island Chateau Apartments, 10.07%, 9/1/01 ... 2,389,122 2,472,742 Rockwell Plaza Apartments, 9.59%, 8/1/01 .......... 4,266,823 3,481,727 Skyline Apartments, 8.80%, 12/1/03 ................ 2,100,000 2,096,499 Sunland Manor Apartments, 9.44%, 11/1/01 .......... 1,284,440 1,329,395 The Hedges Apartments, 9.59%, 8/1/01 .............. 2,388,022 2,471,603 Vintage Apartments, 9.00%, 8/1/05 ................. 2,926,307 3,028,728 Wahpeton Apartments, 8.63%, 11/1/07 ............... 1,767,772 1,803,481 Weatheridge Apartments, 9.63%, 4/1/04 ............. 1,460,840 1,511,969 Westview Apartments, 7.80%, 3/1/03 ................ 1,094,514 1,074,375 Whispering Hills Apartments, 8.80%, 10/1/02 ....... 2,146,038 2,193,466 Willmar Multifamily, 10.25%, 1/20/18 .............. 1,080,377 1,070,222 Windgate Apartments, 9.38%, 8/1/01 ................ 3,157,999(g) 2,210,599 Woodoaks Apartments, 8.88%, 11/1/02 ............... 1,857,345 1,819,269 ------------ 92,240,035 ------------ SINGLE FAMILY LOANS (50.4%): Amerivest Mortgage, 9.33%, 5/1/12 ................. 2,879,787 2,890,444 CTX Mortgage, 9.51%, 11/23/22 ..................... 2,652,639(b) 2,560,327 Energy Park Loans, 12.20%, 12/1/22 ................ 315,666(b) 323,684 Fairbanks III, 9.66%, 1/1/07 ...................... 2,016,578 1,783,386 Fairbanks IV, 9.07%, 7/3/11 ....................... 1,125,286 1,069,022 First Federal of Delaware, 8.54%, 2/1/18 .......... 5,575,124(b) 5,303,546 Greenwich, 9.33%, 6/16/05 ......................... 2,958,787 2,955,237 Heartland Federal Savings & Loan, 10.14%, 11/17/22 ........................................ 590,456(b) 573,451
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES. - --------------------------------------------------------------------- 1996 Semiannual Report 25 American Strategic Income Portfolio II Investments in Securities (Unaudited) (continued) - --------------------------------------------------------------------- AMERICAN STRATEGIC INCOME PORTFOLIO II (CONTINUED)
Principal Market Description of Security Amount Value (a) - --------------------------------------------------------- ----------- ------------ Kentucky Central Life, 9.35%, 5/1/22 .............. $ 6,497,138(b) $ 6,448,407 Kislak, 9.98%, 6/30/20 ............................ 7,221,613 7,109,799 Maryland National Bank, 9.98%, 9/1/18 ............. 1,129,520 1,156,741 McDowell, 9.99%, 12/1/20 .......................... 4,000,881 4,036,088 Merchants Bank, 10.22%, 12/1/20 ................... 2,188,551 2,236,821 Meridian, 9.60%, 10/15/22 ......................... 1,490,478(b) 1,529,230 Meridian III, 9.56%, 12/1/20 ...................... 4,911,528(b) 4,943,426 Minneapolis Employees Retirement Fund, 8.47%, 2/10/14 ......................................... 5,627,860 5,509,675 NationsBank, 8.25%, 10/1/07 ....................... 150,452 152,513 Neslund Properties, 9.87%, 2/1/23 ................. 6,269,152 6,450,958 Nomura I, 9.95%, 12/16/23 ......................... 11,304,908 11,338,744 Nomura II, 8.78%, 3/22/15 ......................... 13,534,457 12,461,121 Nomura III, 8.45%, 8/29/17 ........................ 20,223,577 18,542,575 Norwest IV, 8.23%, 4/23/25 ........................ 7,769,639 7,566,090 Norwest II, 7.78%, 11/27/22 ....................... 4,913,791 4,732,963 Old Hickory Credit Union, 9.99%, 10/15/22 ......... 2,303,896 2,356,885 Paine Webber, 12.22%, 10/15/20 .................... 687,272 679,094 PHH U.S. Mortgage, 9.12%, 1/1/12 .................. 7,743,154 7,789,818 President Homes 92-4, Sales Inventory, 8.28%, 10/15/20 ........................................ 174,068 174,085 President Homes 92-5, Sales Inventory, 9.38%, 10/15/20 ........................................ 104,212 75,282 President Homes 92-6, Sales Inventory, 8.43%, 10/15/20 ........................................ 171,892 156,542 President Homes 92-8, Sales Inventory, 8.44%, 11/24/22 ........................................ 126,688 114,919 President Homes 94-1A, Sales Inventory, 9.00%, 12/28/22 ........................................ 95,127 97,981 Progressive Consumers Federal Credit Union, 11.04%, 10/15/22 ........................................ 732,661(b) 742,845 Salomon, 8.08%, 12/28/16 .......................... 4,715,441 4,628,205 Sears Mortgage, 8.65%, 11/18/22 ................... 809,156(b) 823,640 ------------ 129,313,544 ------------ Total Whole Loans and Participation Mortgages (cost: $235,971,281) ......................... 240,165,499 ------------ SHORT-TERM SECURITIES (0.3%): Repurchase agreement with Goldman Sachs, acquired on 11/29/96, accrued interest of $378, 5.64%, 12/2/96 (cost: $805,000) ................................ 805,000(f) 805,000 ------------ Total Investments in Securities (cost: $269,890,881) (h) ..................... $274,138,026 ------------ ------------
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES. - --------------------------------------------------------------------- 1996 Semiannual Report 26 American Strategic Income Portfolio II 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) ON NOVEMBER 30, 1996, SECURITIES VALUED AT $27,200,898 WERE PLEDGED AS COLLATERAL FOR THE FOLLOWING OUTSTANDING REVERSE REPURCHASE AGREEMENTS:
NAME OF BROKER AND ACQUISITION ACCRUED DESCRIPTION OF AMOUNT DATE RATE* DUE INTEREST COLLATERAL - ------------ ----------- --------- ---------- --------- ------------------- $ 1,500,000 11/1/96 6.25% 12/2/96 $ 7,813 (1) 1,500,000 11/14/96 6.25% 12/2/96 4,427 (1) 22,000,000 11/1/96 5.33% 12/2/96 97,625 (2) - ------------ --------- $ 25,000,000 $ 109,865 - ------------ --------- - ------------ ---------
* INTEREST RATE IS AS OF NOVEMBER 30, 1996. RATES ARE BASED ON THE LONDON INTERBANK OFFERED RATE (LIBOR) AND RESET MONTHLY. NAME OF BROKER AND DESCRIPTION OF COLLATERAL: (1) NOMURA; CTX MORTGAGE, 9.51%, 11/23/22, $1,109,185 PAR ENERGY PARK LOANS, 12.20%, 12/1/22, $171,442 PAR FIRST FEDERAL OF DELAWARE, 8.54%, 2/1/18, $36,986 PAR HEARTLAND FEDERAL SAVINGS & LOAN, 10.14%, 11/17/22, $406,140 PAR KENTUCKY CENTRAL LIFE, 9.35%, 5/1/22, $1,356,425 PAR MERIDIAN, 9.60%, 10/15/22, $1,358,141 PAR MERIDIAN III, 9.56%, 12/1/20, $67,462 PAR PROGRESSIVE CONSUMERS FEDERAL CREDIT UNION, 11.04%, 10/15/22, $222,534 PAR SEARS MORTGAGE, 8.65%, 11/18/22, $370,247 PAR (2) NOMURA; U.S. TREASURY NOTE, 5.13%, 4/30/98, $22,225,000 PAR (C) INTEREST RATES ON COMMERCIAL AND MULTIFAMILY LOANS ARE THE RATES IN EFFECT ON NOVEMBER 30, 1996. INTEREST RATES AND MATURITY DATES DISCLOSED ON SINGLE FAMILY LOANS REPRESENT THE WEIGHTED AVERAGE COUPON AND WEIGHTED AVERAGE MATURITY FOR THE UNDERLYING MORTGAGE LOANS AS OF NOVEMBER 30, 1996. (D) COMMERCIAL AND MULTIFAMILY LOANS ARE DESCRIBED BY THE NAME OF THE MORTGAGED PROPERTY. POOLS OF SINGLE FAMILY LOANS ARE DESCRIBED BY THE NAME OF THE INSTITUTION FROM WHICH THE LOANS WERE PURCHASED. THE GEOGRAPHICAL LOCATION OF THE MORTGAGED PROPERTIES AND, IN THE CASE OF SINGLE FAMILY, THE NUMBER OF LOANS, IS PRESENTED BELOW. COMMERCIAL LOANS: CANTON COMMERCE CENTER - CANTON, MA JAMBOREE BUILDING - COLORADO SPRINGS, CO OAK KNOLL VILLAGE SHOPPING CENTER - AUSTIN, TX PENNMONT OFFICE BUILDING - ALBUQUERQUE, NM PMG CENTER - FORT LAUDERDALE, FL PROVIDENT BANK BUILDING - DESOTO, TX RIDGEWOOD ESTATES MOBILE HOME PARK - LAYTON, UT WELLINGTON PROFESSIONAL CENTER - WELLINGTON, FL MULTIFAMILY LOANS: AUTUMNWOOD, SOUTHERN WOODS, HINTON HOLLOW - KNOXVILLE, TN CASA CARRANZA APARTMENTS - MESA, AZ CHASE HILL APARTMENTS - SAN ANTONIO, TX CLARIDGE APARTMENTS - HOUSTON, TX COLONY SQUARE APARTMENTS - FORT WORTH, TX CROWS LANDING APARTMENTS - FRESNO, CA DEERING MANOR - NASHWAUK, MN GABLES APARTMENTS - OKLAHOMA CITY, OK - --------------------------------------------------------------------- 1996 Semiannual Report 27 American Strategic Income Portfolio II Investments in Securities (Unaudited) (continued) - --------------------------------------------------------------------- GREEN ACRES APARTMENTS -YOUNGSTOWN, OH HARBOR VIEW APARTMENTS - GRAND MARAIS, MN JACCARD APARTMENTS - UNIVERSITY CITY, MO KENYON PLACE APARTMENTS - ENGLEWOOD, CO KONA KAI APARTMENTS - PUEBLO, CO LEXINGTON APARTMENTS - EAST POINT, GA MINNESOTA MULTIFAMILY - MINNEAPOLIS, MN NEWPORT APARTMENTS - WHITE SETTLEMENT, TX NORMANDALE LAKE ESTATES - BLOOMINGTON, MN NORTHWOOD VILLAGE APARTMENTS - CORSICANA, TX PARK DALE LANE APARTMENTS - FORT WORTH, TX PARK PLACE OF VENICE APARTMENTS - VENICE, FL PARK TERRACE APARTMENTS - PUEBLO, CO PARTRIDGE COURT APARTMENTS - BROOMFIELD, CO PINE VILLAGE APARTMENTS - ATLANTA, GA AND SMYRNA, GA PLAINFIELD APARTMENTS - PLAINFIELD, NJ PRIMROSE APARTMENTS - GRAND FALLS, ND RAILVIEW APARTMENTS - PROCTOR, MN RHODE ISLAND CHATEAU APARTMENTS - ST. LOUIS PARK, MN ROCKWELL PLAZA APARTMENTS - OKLAHOMA CITY, OK SKYLINE APARTMENTS - KANSAS CITY, KS SUNLAND MANOR APARTMENTS - MESA, AZ THE HEDGES APARTMENTS - GREENSBORO, NC VINTAGE APARTMENTS - KERMAN, CA WAHPETON APARTMENTS - WAHPETON, ND WEATHERIDGE APARTMENTS - HOUSTON, TX WESTVIEW APARTMENTS - AUSTIN, TX WHISPERING HILLS APARTMENTS - NASHVILLE, TN WILMAR MULTIFAMILY - WILMAR, MN WINDGATE APARTMENTS - LOUISVILLE, KY WOODOAKS APARTMENTS - YUKON, OK
SINGLE FAMILY LOANS: AMERIVEST MORTGAGE - 44 LOANS, MASSACHUSETTS CTX MORTGAGE - 25 LOANS, UNITED STATES ENERGY PARK LOANS - 5 LOANS, ST. PAUL, MINNESOTA FAIRBANKS III - 33 LOANS, THE WESTERN UNITED STATES FAIRBANKS IV - 21 LOANS, UNITED STATES FIRST FEDERAL OF DELAWARE - 116 LOANS, UNITED STATES GREENWICH - 35 LOANS, COLORADO HEARTLAND FEDERAL SAVINGS & LOAN - 6 LOANS, CALIFORNIA KENTUCKY CENTRAL LIFE - 128 LOANS, KENTUCKY KISLAK - 130 LOANS, CENTRAL AND SOUTHERN UNITED STATES MARYLAND NATIONAL BANK - 22 LOANS, THE EASTERN UNITED STATES MCDOWELL - 76 LOANS, GEORGIA MERCHANTS BANK - 74 LOANS, VERMONT MERIDIAN - 13 LOANS, CALIFORNIA AND FLORIDA MERIDIAN III - 82 LOANS, CALIFORNIA MINNEAPOLIS EMPLOYEES RETIREMENT FUND - 149 LOANS, MINNESOTA NATIONSBANK - 13 LOANS, GEORGIA NESLUND PROPERTIES - 164 LOANS, MINNESOTA NOMURA I - 245 LOANS, CALIFORNIA AND TEXAS NOMURA II - 223 LOANS, UNITED STATES NOMURA III - 313 LOANS, MIDWESTERN UNITED STATES NORWEST IV - 54 LOANS, MIDWESTERN UNITED STATES - --------------------------------------------------------------------- 1996 Semiannual Report 28 American Strategic Income Portfolio II Investments in Securities (Unaudited) (continued) - --------------------------------------------------------------------- NORWEST II - 43 LOANS, MIDWESTERN UNITED STATES OLD HICKORY CREDIT UNION - 72 LOANS, TENNESSEE PAINE WEBBER - 18 LOANS, NEW JERSEY PHH U.S. MORTGAGE - 57 LOANS, UNITED STATES PRESIDENT HOMES, SALES INVENTORY - 8 LOANS, MIDWESTERN UNITED STATES PROGRESSIVE CONSUMERS FEDERAL CREDIT UNION - 6 LOANS, MASSACHUSETTS SALOMON - 56 LOANS, NEW JERSEY SEARS MORTGAGE - 10 LOANS, UNITED STATES (E) SECURITIES PURCHASED AS PART OF A PRIVATE PLACEMENT WHICH HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933. (F) 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. (G) MULTIFAMILY LOAN REPRESENTING A TOTAL MARKET VALUE OF $2,210,599, OR 0.9% OF TOTAL NET ASSETS IS IN DEFAULT ON PRINCIPAL AND INTEREST PAYMENTS. (H) ON NOVEMBER 31, 1996, THE COST OF INVESTMENTS IN SECURITIES, INCLUDING REAL ESTATE OWNED, FOR FEDERAL INCOME TAX PURPOSES WAS APPROXIMATELY $274,720,699. THE AGGREGATE GROSS UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED ON THIS COST WERE AS FOLLOWS:
GROSS UNREALIZED APPRECIATION ...... $ 7,312,423 GROSS UNREALIZED DEPRECIATION ...... (3,826,882) ------------ NET UNREALIZED APPRECIATION ...... $ 3,485,541 ------------ ------------
- --------------------------------------------------------------------- 1996 Semiannual Report 29 American Strategic Income Portfolio II Shareholder Update - ---------------------------------------- ANNUAL MEETING RESULTS An annual meeting of the fund's shareholders was held on August 23, 1996. Each matter voted upon at that meeting, as well as the number of votes cast for, against or withheld, the number of abstentions, and the number of broker non-votes with respect to such matters, are set below. (1) The fund's shareholders elected the following directors:
SHARES WITHHOLDING SHARES AUTHORITY VOTED FOR TO VOTE ----------- -------- David T. Bennett ............................ 17,515,114 810,247 Jaye F. Dyer ................................ 17,515,685 809,676 William H. Ellis ............................ 17,502,475 822,886 Karol D. Emmerich ........................... 17,514,036 811,325 Luella G. Goldberg .......................... 17,495,405 829,956 George Latimer .............................. 17,513,676 811,685
(2) The fund's shareholders ratified the selection by a majority of the independent members of the fund's Board of Directors of KPMG Peat Marwick LLP as the independent public accountants for the fund for the fiscal year ended May 31, 1997. The following votes were cast regarding this matter:
SHARES SHARES VOTED BROKER VOTED FOR AGAINST ABSTENTIONS NON-VOTES ---------- ------- ----------- ---------- 17,595,394 545,948 184,018 --
- --------------------------------------------------------------------- 1996 Semiannual Report 30 American Strategic Income Portfolio II Directors and Officers - ---------------------------------------- DIRECTORS David T. Bennett, CHAIRMAN, HIGHLAND HOMES, INC., USL PRODUCTS, INC., KIEFER BUILT, INC., OF COUNSEL, GRAY, PLANT, MOOTY, MOOTY & BENNETT, P.A. Jaye F. Dyer, PRESIDENT, DYER MANAGEMENT COMPANY William H. Ellis, PRESIDENT, PIPER JAFFRAY COMPANIES INC., PIPER CAPITAL MANAGEMENT INCORPORATED Karol D. Emmerich, PRESIDENT, THE PARACLETE GROUP Luella G. Goldberg, DIRECTOR, TCF FINANCIAL, RELIASTAR FINANCIAL CORP., HORMEL FOODS CORP. David A. Hughey, RETIRED EXECUTIVE VICE PRESIDENT AND CHIEF ADMINISTRATIVE OFFICER OF DEAN WITTER INTERCAPITAL INC. AND DEAN WITTER TRUST CO. George Latimer, CHIEF EXECUTIVE OFFICER, NATIONAL EQUITY FUNDS OFFICERS William H. Ellis, CHAIRMAN OF THE BOARD Paul A. Dow, PRESIDENT John G. Wenker, SENIOR VICE PRESIDENT Russ K. Kappenman, VICE PRESIDENT AND ASSISTANT SECRETARY Amy Ayd, VICE PRESIDENT Julene R. Melquist, VICE PRESIDENT Robert H. Nelson, VICE PRESIDENT AND TREASURER Daniel W. Schroer, VICE PRESIDENT AND ASSISTANT SECRETARY Susan S. Miley, SECRETARY INVESTMENT ADVISER Piper Capital Management Incorporated 222 SOUTH NINTH STREET, MINNEAPOLIS, MN 55402-3804 ACCOUNTING AND TRANSFER AGENT Investors Fiduciary Trust Company 127 WEST 10TH STREET, KANSAS CITY, MO 64105-1716 CUSTODIAN First Trust National Association 180 EAST FIFTH STREET, ST. PAUL, MN 55101 LEGAL COUNSEL Dorsey & Whitney LLP 220 SOUTH SIXTH STREET, MINNEAPOLIS, MN 55402 - --------------------------------------------------------------------- 1996 Semiannual Report 31 American Strategic Income Portfolio II GLOSSARY OF TERMS *** - -------------------------------------------------------------------------------- DISCOUNT Closed-end fund shares may trade in the market at prices that are equal to, above or below their net asset value (NAV). When investors purchase or sell shares at a price that is below current NAV, the shares are said to be trading at a discount. REVERSE REPURCHASE AGREEMENTS A reverse repurchase agreement is an agreement between a seller of securities (the fund) and a buyer, whereby the fund receives cash and pays interest and agrees to buy back the same securities at an agreed on price at a stated date. Reverse repurchase agreements are considered a form of borrowing. *** - This symbol represents a graduation cap, used throughout this report to indicate terms defined in the glossary. - -------------------------------------------------------------------------------- 1996 Semiannual Report 32 American Strategic Income Portfolio II GLOSSARY OF TERMS *** - -------------------------------------------------------------------------------- RISK All funds that invest in mortgage-related securities are subject to certain risks. Following is a brief summary of some of the primary risks associated with mortgage-related assets. It does not include all risks related to mortgage securities. Among these risks is PREPAYMENT RISK in which principal payments are prepaid at unexpected rates. Prepayment rates are influenced by changes in interest rates and a variety of other factors. If the fund buys a mortgage loan at a premium, a faster-than-anticipated prepayment rate will reduce the fund's yield and a slower-than-anticipated prepayment rate will increase its yield. If a mortgage loan is purchased at a discount, the opposite will occur. There is also the chance that proceeds from prepaid loans will have to be reinvested in lower-yielding investments (REINVESTMENT RISK). Like all fixed income investments, the prices of securities in the fund are sensitive to changing interest rates - otherwise known as INTEREST RATE RISK. When rates increase, the value of these securities decreases. Conversely, when rates decline, the value of these securities rises. However, mortgage-related assets may benefit less from declining interest rates than other fixed income securities because of prepayment risk. The fund's mortgage loans are subject to some unique risks such as credit risk and real estate risk. Since the fund's mortgage loans generally aren't backed by any government guarantee or private credit enhancement, they face CREDIT RISK. This is the risk of loss arising from default if the borrower fails to make payments on the loan. This risk may be greater during periods of declining or stagnant real estate values. Mortgage loans are also subject to REAL ESTATE RISKS including property risk (the risk that the physical condition and value of the property will decline) and the legal risk of holding any mortgage loan. FOR MORE INFORMATION BY PHONE [GRAPHIC] 1 800 866-7778 FOR GENERAL INFORMATION press 5, our Mutual Fund Services representatives are ready to answer your questions. TO LISTEN TO MONTHLY FUND UPDATES press 3, press 2, then press: 31 American Strategic Income Portfolio II 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 1 800 866-7778, or mail a request to us. ON-LINE [GRAPHIC] http://www.piperjaffray.com/ money_management/ *** - This symbol represents a graduation cap, used throughout this report to indicate terms defined in the glossary. 33 [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. #21520 1/1997 058-97 Bulk Rate U.S. Postage PAID Permit No. 3008 Mpls., MN -----END PRIVACY-ENHANCED MESSAGE-----