<PAGE>
1996 Annual Report
AMERICAN GOVERNMENT
INCOME
FUND
American Government Income Fund - 1996 Annual Report
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AGF
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Contents
President's Letter ............... 2
Letter to Shareholders ........... 3
Financial Statements and Notes ... 7
Investments in Securities ........ 21
Independent Auditors' Report ..... 24
Federal Tax Information .......... 25
Shareholder Update ............... 26
Directors and Officers ........... 30
Glossary ......................... 32
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AMERICAN GOVERNMENT INCOME FUND
PRIMARY INVESTMENTS
Obligations of the U.S. government, its agencies and instrumentalities,
including mortgage-backed derivative securities. The fund may purchase
securities through the dollar roll program. Investments in mortgage-backed
derivative securities and the purchase of securities through the dollar roll
program 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.
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AVERAGE ANNUALIZED TOTAL RETURNS
Based on net asset value for the periods ended October 31, 1996
[CHART]
AMERICAN GOVERNMENT INCOME FUND'S AVERAGE ANNUALIZED TOTAL RETURN FIGURES ARE
BASED ON THE CHANGE IN ITS NET ASSET VALUE (NAV), ASSUME ALL DISTRIBUTIONS WERE
REINVESTED AND DO NOT REFLECT SALES CHARGES. NAV-BASED PERFORMANCE IS USED TO
MEASURE INVESTMENT MANAGEMENT RESULTS.
AVERAGE ANNUALIZED TOTAL RETURNS BASED ON THE CHANGE IN MARKET PRICE FOR THE
ONE-YEAR, FIVE-YEAR AND SINCE INCEPTION PERIODS ENDED OCTOBER 31, 1996, WERE
- -0.75%, 3.29% AND 6.87%, RESPECTIVELY. THESE FIGURES ALSO ASSUME
DISTRIBUTIONS WERE REINVESTED 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 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 CLOSEST TO THE FUND'S INCEPTION THROUGH
OCTOBER 31, 1996.
1996 Annual Report 1 American Government Income Fund
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PRESIDENT'S LETTER
December 16, 1996
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 annual report in your hand. It's simpler and more
inviting. We've added a glossary of terms at the back to help you better
understand commonly used financial terms. Whenever you see this symbol, v it
indicates a term that is defined in the glossary.
You'll hear the word "team" more often when we talk about our portfolio
managers. We've reorganized so managers interact more frequently, sharing 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
[PHOTO]
WILLIAM H. ELLIS
President
Piper Capital
Management
1996 Annual Report 2 American Government Income Fund
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AMERICAN GOVERNMENT INCOME FUND
December 16, 1996
DEAR SHAREHOLDERS:
FOR THE ONE-YEAR PERIOD ENDED OCTOBER 31, 1996, AMERICAN GOVERNMENT INCOME
FUND ACHIEVED A NET ASSET VALUE TOTAL RETURN OF 7.02%*, WITH DISTRIBUTIONS
REINVESTED AND NOT INCLUDING SALES CHARGES. The fund's performance is
similar to the return of the Lehman Brothers U.S. Mortgage Index, which
increased 6.92% during the same period. A principal factor in the fund's
performance was our decision to reduce the fund's effective durationv in
late 1995, before interest rates began to rise in early 1996. Then, when
rates started to stabilize in late March 1996, we lengthened the effective
duration to about five years. On balance, these moves helped the fund's
investment results and contributed to its annual performance. The fund's
one-year total return based on market price was -0.75%, with distributions
reinvested and not including sales charges.
[PHOTO]
WORTH BRUNTJEN
shares responsibility for the management of American Government Income Fund. He
has 29 years of financial experience.
* 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 October 31, 1996.
[CHART]
1996 Annual Report 3 American Government Income Fund
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American Government Income Fund (continued)
SHARES CONTINUE TO TRADE AT A DISCOUNT;*** HOWEVER, WE ARE HOPEFUL THAT
CHANGES WE'VE MADE TO THE FUND AND LOWER MARKET INTEREST RATES WILL HELP
IMPROVE THE FUND'S MARKET PRICE OVER TIME. The fund's market price was $5.125
as of October 31, 1996. Its net asset value was $5.73 at that same time.
THE ECONOMY SHOWED SIGNS OF BOTH STRENGTH AND WEAKNESS OVER THE PAST 12 MONTHS,
WHICH CAUSED MIXED PERFORMANCE FOR BONDS. In late 1995, the economy slowed
significantly and interest rates fell in anticipation of further weakness.
However, as signs of a rebound emerged early in 1996, interest rates rose
sharply, with a corresponding drop in bond prices. During the fund's last fiscal
quarter, the bond market traded in a relatively narrow range of yields, which
gave us an opportunity to do some repositioning. When long-term rates were at
the high end of the recent range, we were able to acquire some longer-duration
assets with higher yields. We believe these yields will help maintain the fund's
income in a falling interest rate environment.
DURING THE YEAR, WE REINSTATED THE DOLLAR ROLL PROGRAM.*** Higher yields have
made the dollar roll program attractive again, and the fund's participation is
currently about 5% of total assets. While participation in the dollar roll
program may enhance the fund's income, it also may increase the fund's net asset
value volatility.
THE FUND ALSO BEGAN BORROWING THROUGH REVERSE REPURCHASE AGREEMENTS***
DURING THE YEAR. We were able to borrow at 5.4% and invest in securities that
were yielding more than 7%, which was beneficial to the fund. Reverse
repurchase agreements, expressed as a percentage of total assets, are
approximately 8%. While they may be beneficial to the fund's income, they may
also increase net asset value volatility.
[PHOTO]
BRUCE SALVOG
shares responsibility for the management of American Government Income Fund. He
has 26 years of financial experience.
1996 Annual Report 4 American Government Income Fund
*** This symbol represents a graduation cap
<PAGE>
American Government Income Fund (continued)
WE REDUCED HOLDINGS IN MORTGAGE-BACKED SECURITIES WITH CURRENT MARKET COUPON
RATES AS WE EXTENDED THE FUND'S EFFECTIVE DURATION. WE REPLACED THEM WITH A
COMBINATION OF DISCOUNT-PRICED MORTGAGE SECURITIES*** AND SEASONED PREMIUM
COUPON SECURITIES.*** We moved away from securities recently issued with 8%
to 8.5% coupons, which are more likely to experience prepayments as interest
rates fall over time. The replacement bonds we chose were designed to do well
in a more volatile interest rate market, and they performed well during the
volatile market we saw during the last two months of the period.
WE BELIEVE THE COMING MONTHS SHOULD BRING MODERATE ECONOMIC GROWTH WITH NO
SUSTAINABLE INCREASE IN INFLATION. Given that outlook, we intend to keep the
fund's effective duration at approximately its current position, which is near
five years. However, the portfolio is highly liquid, which gives us the ability
to quickly make changes if necessary.
THE PROPOSED SETTLEMENT OF A CLASS ACTION LAWSUIT AGAINST THE FUND SHOULD BE
PRESENTED TO THE COURT FOR PRELIMINARY APPROVAL EARLY IN 1997. Shareholders
received details of the proposed settlement in the semiannual report that was
mailed in June. At that time, we anticipated preliminary court approval in fall
1996. Due to delays in the process, we now expect the approval in early 1997.
There can, however, be no assurance as to timing of preliminary court approval
or the settlement itself. (See the inside back cover
[PHOTO]
TOM MCGLINCH, CFA
shares responsibility for the management of American Government Income Fund. He
has 15 years of financial experience.
1996 Annual Report 5 American Government Income Fund
*** This symbol represents a graduation cap
<PAGE>
American Government Income Fund (continued)
of this report for information about ordering fund literature, including past
shareholder reports.)
Thank you for investing in American Government Income Fund. We consider it a
privilege to manage your investment and help you achieve your financial goals.
Sincerely,
/s/ Worth Bruntjen
Worth Bruntjen
Portfolio Manager
/s/ Bruce Salvog
Bruce Salvog
Portfolio Manager
/s/ Tom McGlinch
Tom McGlinch
Portfolio Manager
1996 Annual Report 6 American Government Income Fund
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Financial Statements
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STATEMENT OF ASSETS AND LIABILITIES October 31, 1996
..................................................................
<TABLE>
<S> <C>
ASSETS:
Investments in securities at market value* (note 2)
(including a repurchase agreement of $1,308,000) ......... $138,862,426
Cash in bank on demand deposit ............................. 156,714
Principal receivable on mortgage securities ................ 50,030
Accrued interest receivable ................................ 946,066
----------------
Total assets ............................................. 140,015,236
----------------
LIABILITIES:
Payable for investment securities purchased on a when-issued
basis (note 2) ........................................... 6,483,750
Reverse repurchase agreements payable ...................... 10,500,000
Accrued investment management fee .......................... 61,742
Accrued administrative fee ................................. 20,581
Accrued interest ........................................... 29,187
Variation margin payable (note 2) .......................... 31,563
----------------
Total liabilities ........................................ 17,126,823
----------------
Net assets applicable to outstanding capital stock ......... $122,888,413
----------------
----------------
REPRESENTED BY:
Capital stock - authorized 1 billion shares of $0.01 par
value; outstanding, 21,441,249 shares .................... $ 214,412
Additional paid-in capital ................................. 158,327,246
Undistributed net investment income ........................ 550,897
Accumulated net realized loss on investments ............... (36,436,727)
Unrealized appreciation of investments (note 2) ............ 232,585
----------------
Total - representing net assets applicable to outstanding
capital stock .......................................... $122,888,413
----------------
----------------
Net asset value per share of outstanding capital stock ..... $ 5.73
----------------
----------------
* Investments in securities at identified cost ............. $138,218,201
----------------
----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
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1996 Annual Report 7 American Government Income Fund
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Financial Statements (continued)
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STATEMENT OF OPERATIONS For the Year Ended October 31, 1996
..................................................................
<TABLE>
<S> <C>
INCOME:
Interest (net of interest expense of $303,625) ............. $ 9,077,700
Fee income (note 2) ........................................ 74,444
----------------
Total investment income .................................. 9,152,144
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EXPENSES (NOTE 3):
Investment management fee .................................. 734,921
Administrative fee ......................................... 244,974
Custodian and accounting fees .............................. 84,399
Transfer agent and dividend disbursing agent fees .......... 34,379
Reports to shareholders .................................... 40,401
Directors' fees ............................................ 11,472
Audit and legal fees ....................................... 47,328
Federal excise taxes (note 2) .............................. 90,386
Other expenses ............................................. 65,902
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Total expenses ........................................... 1,354,162
Less expenses paid indirectly .............................. (2,351)
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Total net expenses ....................................... 1,351,811
----------------
Net investment income .................................... 7,800,333
----------------
NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized loss on investments (note 4) .................. (2,838,215)
Net change in unrealized appreciation or depreciation of
investments .............................................. 3,484,653
----------------
Net gain on investments .................................. 646,438
----------------
Net increase in net assets resulting from operations ..... $ 8,446,771
----------------
----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
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1996 Annual Report 8 American Government Income Fund
<PAGE>
Financial Statements (continued)
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STATEMENT OF CASH FLOWS For the Year Ended October 31, 1996
..................................................................
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest and fee income .................................... $ 9,152,144
Net expenses ............................................... (1,351,811)
----------------
Net investment income .................................... 7,800,333
----------------
Adjustments to reconcile net investment income to net cash
provided by operating activities:
Change in accrued interest receivable and principal
receivable on mortgage securities ...................... 12,696
Net amortization of bond discount and premium ............ 305,710
Change in accrued fees and expenses ...................... 25,140
----------------
Total adjustments ...................................... 343,546
----------------
Net cash provided by operating activities .............. 8,143,879
----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments ......................... 147,430,279
Purchases of investments ................................... (153,320,345)
Net sales of short-term securities ......................... 629,000
Net variation margin paid for futures contracts ............ (380,077)
----------------
Net cash used by investing activities .................. (5,641,143)
----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from reverse repurchase agreements ............ 10,500,000
Retirement of fund shares .................................. (715,816)
Distributions paid to shareholders ......................... (12,230,881)
----------------
Net cash used by financing activities .................. (2,446,697)
----------------
Net increase in cash ....................................... 56,039
Cash at beginning of year .................................. 100,675
----------------
Cash at end of year .................................... $ 156,714
----------------
----------------
Supplemental disclosure of cash flow information:
Cash paid for interest on reverse repurchase
agreements ............................................. $ 274,438
----------------
----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
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1996 Annual Report 9 American Government Income Fund
<PAGE>
Financial Statements (continued)
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STATEMENTS OF CHANGES IN NET ASSETS
..................................................................
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
10/31/96 10/31/95
---------------- ----------------
<S> <C> <C>
OPERATIONS:
Net investment income ...................................... $ 7,800,333 $ 9,613,267
Net realized loss on investments ........................... (2,838,215) (16,073,551)
Net change in unrealized appreciation or depreciation of
investments .............................................. 3,484,653 31,048,915
---------------- ----------------
Net increase in net assets resulting from operations ..... 8,446,771 24,588,631
---------------- ----------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ................................. (12,230,881) (17,728,689)
---------------- ----------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from issuance of 188,042 shares for the dividend
reinvestment plan ........................................ -- 1,071,839
Payments for retirement of 121,300 and 227,500 shares,
respectively (note 6) .................................... (675,216) (1,216,789)
---------------- ----------------
Decrease in net assets from capital share transactions ... (675,216) (144,950)
---------------- ----------------
Total increase (decrease) in net assets .................. (4,459,326) 6,714,992
Net assets at beginning of year ............................ 127,347,739 120,632,747
---------------- ----------------
Net assets at end of year .................................. $122,888,413 $127,347,739
---------------- ----------------
---------------- ----------------
Undistributed net investment income ........................ $ 550,897 $ 5,454,621
---------------- ----------------
---------------- ----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
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1996 Annual Report 10 American Government Income Fund
<PAGE>
Notes to Financial Statements
- ----------------------------------------
(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's investments in mortgage-
backed securities include derivative securities, and the fund may
purchase securities through the sale-forward (dollar-roll)
program. 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
The value of certain 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
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1996 Annual Report 11 American Government Income Fund
<PAGE>
Notes to Financial Statements (continued)
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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. Such
valuations are determined using independent pricing services or
prices quoted by independent brokers.
Securities transactions are accounted for on the date the
securities are purchased or sold. Realized gains and losses are
calculated on the identified-cost basis. Interest income,
including amortization of bond discount and premium computed on a
level-yield basis, is accrued daily.
OPTIONS TRANSACTIONS
For hedging purposes, the fund may buy and sell put and call
options, write covered call options on portfolio securities, and
write cash-secured puts. The risk in writing a call option is
that the fund gives up the opportunity for profit if the market
price of the security increases. The risk in writing a put option
is that the fund may incur a loss if the market price of the
security decreases and the option is exercised. The risk 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.
Option contracts are valued weekly and unrealized appreciation or
depreciation is recorded. The fund will realize a gain or loss
upon expiration or closing of the option transaction. When an
option is exercised, the proceeds on the sale of a written call
option, the purchase cost 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
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1996 Annual Report 12 American Government Income Fund
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Notes to Financial Statements (continued)
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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.
At October 31, 1996, the fund had securities with a market value
of $6,825,870 pledged as collateral to cover initial margin
deposits on the following interest rate futures sales contracts:
<TABLE>
<CAPTION>
NUMBER OF PAR MARKET UNREALIZED
TYPE OF CONTRACT CONTRACTS VALUE VALUE LOSS
- --------------------------------------------- ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
U.S. Treasury note, 5 year, December 1996 ... 50 $ 5,000,000 $ 5,361,719 $ (48,047)
U.S. Treasury note, 10 year, December
1996 ...................................... 20 2,000,000 2,192,500 (61,250)
U.S. Treasury bond, 30 year, December
1996 ...................................... 55 5,500,000 6,215,000 (302,343)
--- ------------ ------------ ----------
125 $ 12,500,000 $ 13,769,219 $ (411,640)
--- ------------ ------------ ----------
--- ------------ ------------ ----------
</TABLE>
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
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1996 Annual Report 13 American Government Income Fund
<PAGE>
Notes to Financial Statements (continued)
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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 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.
SECURITIES PURCHASED ON A WHEN-ISSUED BASIS
Delivery and payment for securities that have been purchased by
the fund on a forward-commitment or when-issued basis can take
place a month or more after the transaction date. During this
period, such securities do not earn interest, are subject to
market fluctuation and may increase or decrease in value prior to
their delivery. The fund 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 October 31, 1996,
the fund had entered into outstanding when-issued or forward
commitments of $6,483,750.
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1996 Annual Report 14 American Government Income Fund
<PAGE>
Notes to Financial Statements (continued)
- ---------------------------------------------------------------------
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 year
ended October 31, 1996, such fees earned by the fund amounted to
$74,444.
FEDERAL TAXES
The fund intends to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and not
be subject to federal income tax. Therefore, no income tax
provision is required. However, the fund incurred federal excise
taxes of $90,386, or $0.004 per share, on income retained during
the 1995 excise tax year. 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.
Net investment income and net realized gains (losses) may differ
for financial statement and tax purposes primarily because of the
differences in amortization policies for notional principal
contracts, losses deferred due to "wash sale" transactions, the
timing of recognition of income on certain collateralized
mortgage-backed securities, and the non-deductibility of excise
tax payments made.
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.
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1996 Annual Report 15 American Government Income Fund
<PAGE>
Notes to Financial Statements (continued)
- ---------------------------------------------------------------------
On the statement of assets and liabilities, as a result of
permanent book-to-tax differences, a reclassification adjustment
has been made to decrease undistributed net investment income by
$473,176, decrease accumulated net realized loss on investments
by $563,562 and decrease additional paid-in-capital by $90,386.
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 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
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1996 Annual Report 16 American Government Income Fund
<PAGE>
Notes to Financial Statements (continued)
- ---------------------------------------------------------------------
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 administrator):
The investment advisory agreement provides the adviser 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 its fee, the adviser 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.
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.
- ---------------------------------------------------------------------
1996 Annual Report 17 American Government Income Fund
<PAGE>
Notes to Financial Statements (continued)
- ---------------------------------------------------------------------
(4) INVESTMENT SECURITY TRANSACTIONS
................................................................................
Cost of purchases and proceeds from sales of securities, other
than temporary investments in short-term securities, for the year
ended October 31, 1996, aggregated $154,510,885 and $144,143,220,
respectively. For the year October 31, 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 $36,432,980 as of October 31, 1996, which, if not
offset by subsequent capital gains, will expire in 2002 through
2004. It is unlikely the board of directors will authorize a
distribution of any net realized capital gains until the
available capital loss carryover has been offset or expires.
(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 348,800
shares as of October 31, 1996, which represents 1.8% of the
shares originally issued.
(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 AGF would offer to repurchase up to 25
percent of its outstanding shares from current shareholders at
net asset value. The repurchase
- ---------------------------------------------------------------------
1996 Annual Report 18 American Government Income Fund
<PAGE>
Notes to Financial Statements (continued)
- ---------------------------------------------------------------------
offer would occur after the effective date of the settlement
following Court approval. If the discounts between net asset
value and market price of this fund do not decrease to 5 percent
or less within approximately two years after the effective date
of the settlement, the fund's board would submit a shareholder
proposal to convert this fund to an open-end format unless the
board determines at that time that it would not be in the fund
shareholders' best interest to do so.
- ---------------------------------------------------------------------
1996 Annual Report 19 American Government Income Fund
<PAGE>
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:
<TABLE>
<CAPTION>
Fiscal year ended October 31,
--------------------------------------------------------
1996 1995 1994 1993 1992
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period ........ $ 5.91 $ 5.58 $ 8.82 $ 8.39 $ 7.68
------- ------- -------- ------- -------
Operations:
Net investment income ..................... 0.36 0.44 0.64 1.27 1.00
Net realized and unrealized gains (losses)
on investments .......................... 0.03 0.71 (2.81) 0.39 0.53
------- ------- -------- ------- -------
Total from operations ................... 0.39 1.15 (2.17) 1.66 1.53
------- ------- -------- ------- -------
Distributions to shareholders:
From net investment income ................ (0.57) (0.82) (0.84) (0.93) (0.82)
From net realized gains on investments .... -- -- (0.01) (0.30) --
In excess of net realized gains on
investments ............................. -- -- (0.22) -- --
------- ------- -------- ------- -------
Total distributions to shareholders ..... (0.57) (0.82) (1.07) (1.23) (0.82)
------- ------- -------- ------- -------
Net asset value, end of period .............. $ 5.73 $ 5.91 $ 5.58 $ 8.82 $ 8.39
------- ------- -------- ------- -------
------- ------- -------- ------- -------
Market value, end of period ................. $ 5.13 $ 5.75 $ 6.00 $ 9.38 $ 8.75
------- ------- -------- ------- -------
------- ------- -------- ------- -------
SELECTED INFORMATION
Total return, net asset value(a) ............ 7.02% 22.31% (26.43)% 21.34% 20.88%
Total return, market value(b) ............... (0.75)% 10.96% (26.54)% 22.64% 18.52%
Net assets at end of period (in millions) ... $ 123 $ 127 $ 121 $ 187 $ 175
Ratio of expenses to average weekly net
assets(c)(f) .............................. 1.11% 1.40% 1.32% 0.99% 1.25%
Ratio of net investment income to average
weekly net assets ......................... 6.37% 7.86% 9.44% 14.87% 12.48%
Portfolio turnover rate (excluding short-term
securities) ............................... 111% 149% 199% 93% 123%
Amount of borrowings outstanding at end of
period (in millions)(d) ................... $ 11 $ -- $ -- $ 69 $ 54
Per-share amount of borrowings outstanding at
end of period ............................. $ 0.49 $ -- $ -- $ 3.27 $ 2.60
Per-share amount of net assets, excluding
borrowings, at end of period .............. $ 6.22 $ -- $ -- $ 12.09 $ 10.99
Asset coverage ratio(e) ..................... 1270% -- -- 370% 423%
</TABLE>
(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 0.07%, 0.32%, 0.31%, AND 0.21% FROM FEDERAL EXCISE TAXES IN FISCAL
YEARS 1996, 1995, 1994, AND 1992, 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, HIGH-GRADE
DEBT OBLIGATIONS ARE MAINTAINED IN A SEGREGATED ACCOUNT 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) 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: 1.35%, 2.49%, 2.34% AND 2.22% FOR FISCAL 1996, 1994, 1993 AND 1992,
RESPECTIVELY.
- ---------------------------------------------------------------------
1996 Annual Report 20 American Government Income Fund
<PAGE>
Investments in Securities
- ---------------------------------------------------------------------
<TABLE>
<CAPTION>
AMERICAN GOVERNMENT INCOME FUND October 31, 1996
.......................................................................................
Principal Market
Description of Security Amount Value (a)
- --------------------------------------------------------- ----------- ------------
<S> <C> <C>
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS)
U.S. GOVERNMENT AND AGENCY SECURITIES (111.9%):
U.S. AGENCY MORTGAGE-BACKED SECURITIES (B) (87.6%):
ADJUSTABLE RATE (3.5%):
6.70%, FHLMC, 10/1/19 ............................. $ 4,316,522 $ 4,311,213
------------
FIXED RATE (75.8%):
7.00%, FHLMC, 8/1/10 .............................. 2,484,415 2,494,475
6.50%, FHLMC, 3/1/26 .............................. 770,965 739,394
6.50%, FHLMC, 4/1/26 .............................. 3,978,152 3,815,247
6.50%, FHLMC, 4/1/26 .............................. 881,880 845,767
6.50%, FHLMC, 4/1/26 .............................. 3,332,971 3,196,486
9.50%, FHLMC, 6/1/21 .............................. 2,143,052 2,317,818
10.00%, FHLMC, 12/1/19 ............................ 2,624,867 2,867,641
7.50%, FHLMC, 8/1/25 .............................. 4,104,996 4,126,752
6.50%, FHLMC, 1/1/26 .............................. 962,293 924,389
6.50%, FHLMC, 8/1/26 .............................. 4,435,780 4,254,135
7.00%, FHLMC, 9/1/10 .............................. 4,353,752 4,371,385
7.00%, FHLMC, 10/1/10 ............................. 2,266,229 2,275,408
7.00%, FNMA, 10/1/25 .............................. 2,480,127 2,436,700
7.00%, FNMA, 5/1/26 ............................... 5,374,399 5,273,576
6.50%, FNMA, 5/1/11 ............................... 5,924,509 5,828,176
7.00%, FNMA, 4/1/26 ............................... 7,261,842 7,125,610
6.50%, FNMA, 4/1/11 ............................... 1,902,837 1,871,897
8.00%, FNMA, 6/1/26 ............................... 4,874,812 4,975,282
8.00%, GNMA, 7/15/26 .............................. 6,898,063 7,057,477
9.00%, GNMA, 11/15/21 ............................. 4,335,948 4,625,849
6.50%, GNMA, 10/15/10 ............................. 4,470,330 4,424,018
7.00%, GNMA, 12/15/10 ............................. 4,115,939 4,150,636
9.00%, GNMA, 4/15/21 .............................. 3,805,041 4,087,984
9.00%, GNMA, 10/15/22 ............................. 2,416,762 2,581,368
7.50%, GNMA, 1/1/23 ............................... 6,500,000(c) 6,524,245
------------
93,191,715
------------
INVERSE FLOATER (1.1%):
6.18%, FNMA, Series 1993-119, Class SH, 1 year CMT,
7/25/23 ......................................... 1,936,607 1,391,898
------------
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
- ---------------------------------------------------------------------
1996 Annual Report 21 American Government Income Fund
<PAGE>
Investments in Securities (continued)
- ---------------------------------------------------------------------
AMERICAN GOVERNMENT INCOME FUND
(CONTINUED)
<TABLE>
<CAPTION>
Principal Market
Description of Security Amount Value (a)
- --------------------------------------------------------- ----------- ------------
<S> <C> <C>
Z-BOND (7.2%):
8.18%, FHLMC, Series 1870, Class Z, 1/15/24 ....... $ 3,252,282 $ 2,658,233
8.19%, FNMA, Series 1996-35, Class Z, 7/25/26 ..... 4,094,153 3,549,733
8.05%, Vendee Mortgage Trust, Series 1996-1, Class
1Z, 2/15/26 ..................................... 3,155,337 2,611,534
------------
8,819,500
------------
U.S. GOVERNMENT SECURITIES (24.3%):
6.50%, U.S. Treasury Note, 8/15/05 ................ 6,750,000(d) 6,825,870
6.13%, U.S. Treasury Note, 9/30/00 ................ 4,000,000(e) 4,015,280
5.63%, U.S. Treasury Note, 11/30/00 ............... 7,500,000(e) 7,392,975
6.25%, U.S. Treasury Note, 7/31/98 ................ 3,500,000 3,532,340
5.75%, U.S. Treasury Note, 10/31/00 ............... 8,150,000(e) 8,073,635
------------
29,840,100
------------
Total U.S. Government and Agency Securities
(cost: $136,910,201) ......................... 137,554,426
------------
SHORT-TERM SECURITIES (1.1%):
Repurchase agreement with State Street Bank and
Trust, acquired on 10/31/96, accrued interest of
$203, 5.58%, 11/1/96
(cost: $1,308,000) .............................. 1,308,000(f) 1,308,000
------------
Total Investments in Securities
(cost: $138,218,201) (g) ..................... $138,862,426
------------
------------
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
- ---------------------------------------------------------------------
1996 Annual Report 22 American Government Income Fund
<PAGE>
Investments in Securities (continued)
- ---------------------------------------------------------------------
NOTES TO INVESTMENT IN SECURITIES:
(A) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO
THE FINANCIAL STATEMENTS.
(B) PORTFOLIO ABBREVIATIONS AND DEFINITIONS:
CMT - CONSTANT MATURITY TREASURY
ADJUSTABLE RATE - REPRESENTS SECURITIES THAT PAY INTEREST AT RATES THAT
INCREASE (DECREASE) WITH AN INCREASE (DECREASE) IN THE SPECIFIED
INDEX.
INVERSE FLOATER - REPRESENTS SECURITIES THAT PAY INTEREST AT RATES THAT
INCREASE (DECREASE) WITH A DECLINE (INCREASE) IN THE SPECIFIED INDEX.
THE INTEREST RATE PAID BY THE INVERSE FLOATER WILL GENERALLY CHANGE AT
A MULTIPLE OF ANY CHANGE IN THE INDEX. INTEREST RATES DISCLOSED ARE IN
EFFECT ON OCTOBER 31, 1996.
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 OCTOBER 31, 1996, THE TOTAL COST OF INVESTMENTS PURCHASED ON A
WHEN-ISSUED BASIS WAS $6,483,750.
(D) THIS ISSUE IS PARTIALLY PLEDGED AS INITIAL MARGIN DEPOSIT ON OPEN INTEREST
RATE FUTURES SALES CONTRACTS (SEE NOTE 2 TO THE FINANCIAL STATEMENTS).
(E) ON OCTOBER 31, 1996, SECURITIES VALUED AT $10,655,073 WERE PLEDGED AS
COLLATERAL FOR THE FOLLOWING OUTSTANDING REVERSE REPURCHASE AGREEMENTS:
<TABLE>
<CAPTION>
NAME OF BROKER
ACQUISITION ACCRUED AND DESCRIPTION
AMOUNT DATE RATE* DUE INTEREST OF COLLATERAL
- ------------ ---------- --------- ---------- --------- -------------------
<S> <C> <C> <C> <C> <C>
$ 6,000,000 10/10/96 5.26% 11/12/96 $ 19,287 (1)
4,500,000 10/17/96 5.28% 11/15/96 9,900 (2)
- ------------ ---------
$ 10,500,000 $ 29,187
- ------------ ---------
- ------------ ---------
</TABLE>
* INTEREST RATE IS AS OF OCTOBER 31, 1996. RATES ARE BASED ON THE LONDON
INTERBANK OFFERED RATE (LIBOR) AND RESET MONTHLY.
NAME OF BROKER AND DESCRIPTION OF COLLATERAL:
(1) MORGAN STANLEY; U.S. TREASURY NOTE, 6.13%, 9/30/00, $2,000,000 PAR
U.S. TREASURY NOTE, 5.63%, 11/30/00, $4,200,000 PAR
(2) MORGAN STANLEY; U.S. TREASURY NOTE, 5.75%, 10/31/00, $4,550,000 PAR
(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) ON OCTOBER 31, 1996, THE COST OF INVESTMENTS IN SECURITIES FOR FEDERAL
INCOME TAX PURPOSES WAS $138,221,948. THE AGGREGATE GROSS UNREALIZED
APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES, INCLUDING OPEN
FUTURES CONTRACTS, BASED ON THIS COST WERE AS FOLLOWS:
<TABLE>
<S> <C>
GROSS UNREALIZED APPRECIATION ...... $ 1,541,088
GROSS UNREALIZED DEPRECIATION ...... (1,312,250)
------------
NET UNREALIZED APPRECIATION ...... $ 228,838
------------
------------
</TABLE>
- ---------------------------------------------------------------------
1996 Annual Report 23 American Government Income Fund
<PAGE>
Independent Auditors' Report
- ----------------------------------------
THE BOARD OF DIRECTORS AND SHAREHOLDERS
AMERICAN GOVERNMENT INCOME FUND INC.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments in securities, of American Government Income Fund as
of October 31, 1996, and the related statements of operations and cash flows for
the year then ended, the statements of changes in net assets for each of the
years in the two-year period then ended and the financial highlights for each of
the years in the five-period then ended. These financial statements and the
financial highlights are the responsibility of the fund's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Investment securities held in custody are confirmed to us by the
custodian. As to securities purchased but not received, we request confirmations
from brokers and, where replies are not received, we carry out other appropriate
auditing procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of
American Government Income Fund Inc. as of October 31, 1996, and the results of
its operations and cash flows for the year ended, the changes in its net assets
for each of the years in the two-year period then ended and the financial
highlights for each of the years in the five-year period then ended, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
December 13, 1996
- ---------------------------------------------------------------------
1996 Annual Report 24 American Government Income Fund
<PAGE>
Federal Income Tax Information
- ----------------------------------------
The following per-share information describes the federal tax
treatment of distributions made during the fiscal year.
Distributions for the calendar year will be reported to you on
Form 1099-DIV. Please consult a tax adviser on how to report
these distributions at the state and local levels.
INCOME DISTRIBUTIONS (TAXABLE AS ORDINARY DIVIDENDS, NONE
QUALIFYING FOR DEDUCTION BY CORPORATIONS)
<TABLE>
<CAPTION>
PAYABLE DATE AMOUNT
- --------------------------------------------- --------
<S> <C>
November 27, 1995 ........................... $ 0.0640
December 27, 1995 ........................... 0.0640
January 11, 1996 ............................ 0.0640
February 21, 1996 ........................... 0.0515
March 27, 1996 .............................. 0.0515
April 24, 1996 .............................. 0.0515
May 29, 1996 ................................ 0.0515
June 26, 1996 ............................... 0.0515
July 24, 1996 ............................... 0.0300
August 28, 1996 ............................. 0.0300
September 25, 1996 .......................... 0.0300
October 23, 1996 ............................ 0.0300
--------
Total ................................... $ 0.5695
--------
--------
</TABLE>
- ---------------------------------------------------------------------
1996 Annual Report 25 American Government Income Fund
<PAGE>
Shareholder Update
- ----------------------------------------
ANNUAL MEETING RESULTS
An annual meeting of the fund's shareholders was held on August
20, 1996. Each matter voted upon at the meeting, as well as the
number of votes cast for, against or withheld, the number of
abstentions, and the number of broker non-votes with respect to
such matters, are set forth below.
1. The fund's shareholders elected the following directors:
<TABLE>
<CAPTION>
SHARES
SHARES WITHHOLDING
VOTED AUTHORITY TO
"FOR" VOTE
---------- ------------
<S> <C> <C>
David T. Bennett ......................... 18,413,522 460,616
Jaye F. Dyer ............................. 18,422,781 451,357
William H. Ellis ......................... 18,430,285 443,853
Karol D. Emmerich ........................ 18,423,779 450,359
Luella G. Goldberg ....................... 18,401,250 472,888
George Latimer ........................... 18,405,435 468,703
</TABLE>
2. The fund's shareholders ratified the selection by a majority
of the independent members of the fund's board of directors of
KPMG Peat Marwick LLP as the independent public accountants for
the fund for the fiscal year ending October 31, 1996. The
following votes were cast regarding this matter:
<TABLE>
<CAPTION>
SHARES
SHARES VOTED VOTED BROKER,
"FOR" "AGAINST" ABSTENTIONS NON-VOTES
------------ --------- ----------- ---------
<S> <C> <C> <C>
18,457,853 145,550 270,234 --
</TABLE>
TERMS AND CONDITIONS OF THE DIVIDEND REINVESTMENT PLAN
As a shareholder, you may choose to participate in the Dividend
Reinvestment Plan. It's a convenient and economical way to buy
additional shares of the fund by automatically reinvesting
dividends and capital gains. The plan is administered by
Investors Fiduciary Trust Company (IFTC), the plan agent.
- ---------------------------------------------------------------------
1996 Annual Report 26 American Government Income Fund
<PAGE>
Shareholder Update (continued)
- ---------------------------------------------------------------------
ELIGIBILITY/PARTICIPATION
You may join the plan at any time. Reinvestment of distributions
will begin with the next distribution paid, provided your request
is received at least 10 days before the record date for that
distribution.
If your shares are in certificate form, you may join the plan
directly and have your distributions reinvested in additional
shares of the fund. To enroll in this plan, call IFTC at
1-800-543-1627. If your shares are registered in your brokerage
firm's name or another name, ask the holder of your shares how
you may participate.
Banks, brokers or nominees, on behalf of their beneficial owners
who wish to reinvest dividend and capital gains distributions,
may participate in the plan by informing IFTC at least 10 days
before each share's dividend and/or capital gains distribution.
PLAN ADMINISTRATION
Beginning no more than 5 business days before the dividend
payment date, IFTC will buy shares of the fund on the New York
Stock Exchange (NYSE) or elsewhere on the open market only when
the price of the fund's shares on the NYSE plus commissions is at
less than a 10% premium over the fund's most recently calculated
net asset value (NAV) per share. 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, IFTC will accept payment of the dividend, or the
remaining portion, in authorized but unissued shares of the fund.
These shares will be issued at a per-share price equal to the
higher of (a) the NAV per share as of the close of business on
the payment date or (b) 95% of the closing market price per share
on the payment date.
By participating in the dividend reinvestment plan, you may
receive benefits not available to shareholders who elect not to
participate. For example, if the market price plus commissions of
the fund's shares is 10% or more above the NAV, you will receive
- ---------------------------------------------------------------------
1996 Annual Report 27 American Government Income Fund
<PAGE>
Shareholder Update (continued)
- ---------------------------------------------------------------------
shares at a discount of up to 5% from the current market value.
However, if the market price plus commissions is below the NAV,
you will receive distributions in shares with a NAV greater than
the value of any cash distributions you would have received.
There is no direct charge for reinvestment of dividends and
capital gains, since IFTC fees are paid for by the fund. However,
if fund shares are purchased in the open market, each participant
pays a pro rata portion of the brokerage commissions. Brokerage
charges are expected to be lower than those for individual
transactions because shares are purchased for all participants in
blocks. As long as you continue to participate in the plan,
distributions paid on the shares in your account will be
reinvested.
IFTC maintains accounts for plan participants holding shares in
certificate form. You will receive a monthly statement detailing
total dividend and capital gain distributions, date of
investment, shares acquired, price per share, and total shares
held in your account, both certificate-form shares and unissued
shares acquired through the plan.
TAX INFORMATION
Distributions invested in additional shares of the fund are
subject to income tax, just as they would be if received in cash.
When shares are issued by the fund at a discount from market
value, shareholders will be treated as having received
distributions of an amount equal to the full market value of
those shares. Shareholders, as required by the Internal Revenue
Service, will receive Form 1099 regarding the federal tax status
of the prior year's distributions.
PLAN WITHDRAWAL
If you hold your shares in certificate form, you may terminate
your participation in the plan at any time by giving written
notice to IFTC. If your shares are registered in your brokerage
firm's name, you may terminate your participation via verbal or
written
- ---------------------------------------------------------------------
1996 Annual Report 28 American Government Income Fund
<PAGE>
Shareholder Update (continued)
- ---------------------------------------------------------------------
instructions to your investment professional. Written
instructions should include your name and address as they appear
on the certificate or account.
If notice is received at least 10 days before the record date,
all future distributions will be paid directly to the shareholder
of record.
If your shares are issued in certificate form and you discontinue
your participation in the plan, you (or your nominee) will
receive an additional certificate for all full shares and a check
for any fractional shares in your account.
PLAN AMENDMENT/TERMINATION
The fund reserves the right to amend or terminate the plan.
Should the plan be amended or terminated, participants will be
notified in writing at least 90 days before the record date for
such dividend or distribution. The plan may also be amended or
terminated by IFTC with at least 90 days written notice to
participants in the plan.
Any question about the plan should be directed to your investment
professional or to Investors Fiduciary Trust Company, P.O. Box
419432, Kansas City, Missouri 64141, 1-800-543-1627.
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1996 Annual Report 29 American Government Income Fund
<PAGE>
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
Robert H. Nelson,
VICE PRESIDENT AND TREASURER
Susan Sharp Miley,
SECRETARY
INVESTMENT ADVISER
Piper Capital Management Incorporated
222 SOUTH NINTH STREET, MINNEAPOLIS, MN 55402-3804
DISTRIBUTOR
Piper Jaffray Inc.
222 SOUTH NINTH STREET, MINNEAPOLIS, MN 55402-3804
CUSTODIAN AND TRANSFER AGENT
Investors Fiduciary Trust Company
127 WEST 10TH STREET, KANSAS CITY, MO 64105-1716
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
4200 NORWEST CENTER, MINNEAPOLIS, MN 55402
LEGAL COUNSEL
Dorsey & Whitney LLP
220 SOUTH SIXTH STREET, MINNEAPOLIS, MN 55402
- ---------------------------------------------------------------------
1996 Annual Report 30 American Government Income Fund
<PAGE>
THIS PAGE WAS INTENTIONALLY LEFT BLANK.
1996 Annual Report 31 American Government Income Fund
<PAGE>
GLOSSARY OF TERMS***
DISCOUNT
Closed-end funds 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.
DISCOUNT-PRICED MORTGAGE SECURITY
Mortgage securities that trade at a discount to par value with coupon rates that
are lower than current market coupon rates.
DOLLAR ROLL PROGRAM
The dollar roll program allows a fund to generate fee income by committing to
pay for securities in the future at today's prices. Participation in the dollar
roll program increases the cost of assets exposed to market and interest rate
risk, and therefore may, to the extent the fund remains fully invested, increase
a fund's net asset value volatility. The fund segregates, with its custodian,
assets with a market value equal to the cost of its purchase commitments.
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.
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.
1996 Annual Report 32 American Government Income Fund
*** This symbol represents a graduation cap
<PAGE>
GLOSSARY OF TERMS***
If a fund has a neutral effective duration, the duration is approximately the
same as its benchmark.
REVERSE REPURCHASE AGREEMENT
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 upon price at a stated date.
Reverse repurchase agreements are considered borrowings.
SEASONED PREMIUM COUPON SECURITIES
For mortgage-backed securities, a seasoned premium security is one that has
already gone through one or more refinancing cycles and, therefore, is deemed
less likely to prepay principal at an accelerated rate if refinancings pick up
again.
For More Information
By Phone [PHONE]
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:
30 American Government
Income Fund
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 [ENVELOPE]
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
http://www.piperjaffray.com/
money_management/
33
*** This symbol represents a graduation cap
<PAGE>
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STAPLES