<PAGE>
AMERICAN
GOVERNMENT
INCOME [PHOTO]
PORTFOLIO
* * *
ANNUAL REPORT
1995
<PAGE>
TABLE OF CONTENTS
AVERAGE ANNUALIZED TOTAL RETURNS ...... 1
LETTER TO SHAREHOLDERS ................ 2
FINANCIAL STATEMENTS AND NOTES ........ 7
INVESTMENTS IN SECURITIES ............. 18
INDEPENDENT AUDITORS' REPORT .......... 22
FEDERAL TAX INFORMATION ............... 23
SHAREHOLDER UPDATE .................... 24
AMERICAN GOVERNMENT INCOME PORTFOLIO
This fund seeks to obtain high current income consistent with preservation of
capital. To realize its objective, the fund invests principally in
obligations of the U.S. government, its agencies and instrumentalities,
including mortgage-backed derivative securities. The fund may purchase
securities through the sale-forward (dollar-roll) program. Investments in
mortgage-backed derivative securities and the purchase of securities through
the sale-forward program may cause the fund's net asset value to fluctuate to
a greater extent than would be expected from interest rate movements alone.
As with other mutual funds, there can be no assurance the fund will achieve
its objective. Since its inception on September 29, 1988, the fund has been
rated AAf by Standard & Poor's Corporation (S&P).* Fund shares trade on the
New York Stock Exchange under the symbol AAF.
*THE FUND IS RATED AAf, WHICH MEANS INVESTMENTS IN THE FUND HAVE AN OVERALL
CREDIT QUALITY OF AA. CREDIT QUALITIES ARE ASSESSED BY STANDARD & POOR'S
MUTUAL FUNDS RATING GROUP. S&P DOES NOT EVALUATE THE MARKET RISK OF AN
INVESTMENT WHEN ASSIGNING A CREDIT RATING. SEE STANDARD & POOR'S CORPORATE
AND MUNICIPAL RATING DEFINITIONS FOR AN EXPLANATION OF AA.
THE FUND HAS ALSO BEEN GIVEN A MARKET RISK RATING BY S&P, WHICH WE CANNOT
PUBLISH DUE TO NASD REGULATIONS. RISK RATINGS EVALUATE VARIOUS INVESTMENT
RISKS THAT CAN AFFECT THE PERFORMANCE OF A BOND FUND AND INDICATE THE FUND'S
OVERALL STABILITY AND SENSITIVITY TO CHANGING MARKET CONDITIONS. THESE
RATINGS ARE AVAILABLE BY CALLING S&P AT 1-800-424-FUND.
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT FUND SHARES, WHEN
SOLD, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
<PAGE>
AVERAGE ANNUALIZED TOTAL RETURNS
PERIODS ENDED OCTOBER 31, 1995
[GRAPH]
AMERICAN GOVERNMENT INCOME PORTFOLIO'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, 1995, WERE
13.46%, 9.36% AND 8.37%, RESPECTIVELY. THESE FIGURES ALSO ASSUME
DISTRIBUTIONS WERE REINVESTED AND DO NOT REFLECT SALES CHARGES.
THE SALOMON BROTHERS MORTGAGE INDEX IS AN UNMANAGED INDEX OF MORTGAGE SECURITIES
WHICH HAVE AN AVERAGE LIFE OF ONE YEAR OR MORE, ARE RATED BBB- OR HIGHER BY
STANDARD & POOR'S OR BAA3 OR HIGHER BY MOODY'S, AND HAVE A PRINCIPAL AMOUNT OF
AT LEAST $1 BILLION.
1
<PAGE>
AMERICAN GOVERNMENT INCOME PORTFOLIO
[PHOTO]
WORTH BRUNTJEN
IS PRIMARILY RESPONSIBLE FOR THE
MANAGEMENT OF AMERICAN GOVERNMENT
INCOME PORTFOLIO. HE HAS 28 YEARS OF
FINANCIAL EXPERIENCE.
[PHOTO]
MARIJO GOLDSTEIN
ASSISTS WITH THE MANAGEMENT OF AMERICAN
GOVERNMENT INCOME PORTFOLIO. SHE HAS 10
YEARS OF FINANCIAL EXPERIENCE.
December 15, 1995
Dear Shareholders:
FOR THE ONE-YEAR PERIOD ENDED OCTOBER 31, 1995, AMERICAN GOVERNMENT INCOME
PORTFOLIO SHOWED A NET ASSET VALUE TOTAL RETURN OF 21.40%, WHICH INCLUDES
REINVESTED DISTRIBUTIONS BUT NOT SALES CHARGES.* The fund's return compares
to a 14.54% return for the Salomon Brothers Mortgage Index during this same
period. The fund's shares are currently trading at a premium to net asset
value after trading at a discount for most of 1995. (See page 5 for
information on premium vs. discount.) We are pleased that the fund's market
price has improved as the fund's net asset value has stabilized. The fund's
market price as of October 31 was $7.00. For the one-year period ended
October 31, 1995, the fund's total return based on market price was 13.46%,
including reinvested distributions but not sales charges.
THE MARKET ENVIRONMENT DURING THE PAST YEAR PLAYED A MAJOR ROLE IN THE FUND'S
STRONG ONE-YEAR PERFORMANCE. Interest rates have declined since the beginning
of 1995 as reports indicated slowing economic growth. As a result, bond
prices in general appreciated. The fund's performance during the past year
was further strengthened by its holdings of certain mortgage-backed
derivative securities, such as principal-only, inverse interest-only and
inverse floating rate securities, which rallied from the lows they
experienced in 1994. Because of their relatively long effective durations,
these mortgage-backed derivatives performed well
* 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.
2
<PAGE>
AMERICAN GOVERNMENT INCOME PORTFOLIO
PORTFOLIO COMPOSITION
OCTOBER 31, 1995
[GRAPH]
in 1995's declining interest rate environment. Remember, however, securities
with longer effective durations generally are more volatile and will
underperform securities with shorter effective durations in a rising interest
rate environment. In addition, the fund's holdings of mortgage-backed
derivatives account for the fund's outperformance when compared to the
Salomon index, which does not contain such securities. As discussed below, we
have taken advantage of the current market environment by selling some of the
fund's mortgage-backed derivative securities during the past several months.
As a result of these sales, the fund's effective duration has been reduced to
3.59 years as of October 31, 1995. This compares to an effective duration of
3.4 years for the Salomon index. (See page 6 for information on effective
duration.)
AS MENTIONED ABOVE, DURING THE PAST SEVERAL MONTHS WE HAVE REDUCED THE FUND'S
NET ASSET VALUE VOLATILITY BY SELLING SOME OF THESE MORTGAGE-BACKED
DERIVATIVE SECURITIES AS ATTRACTIVE MARKET OPPORTUNITIES APPEARED. As
interest rates fell, the fund benefited from the appreciation of these
securities as they increased in value following their lows in 1994. As of
October 31, 1995, we had sold all of the fund's interest-only and
principal-only securities and had reduced the fund's position in Z-tranches,
inverse interest-only securities and inverse floating rate securities to 19%
of total
3
<PAGE>
AMERICAN GOVERNMENT INCOME PORTFOLIO
DISTRIBUTION HISTORY PER SHARE
SINCE INCEPTION (SEPTEMBER 1988) THROUGH
OCTOBER 31, 1995
Monthly Income
Dividends Paid ......................... 84
Total Monthly
Income Dividends .................... $7.97
Capital Gains
Distributions Paid ...................... 8
Total Capital
Gains Distributions ................. $0.87
TOTAL DISTRIBUTIONS ................. $8.84
NET ASSET VALUE SUMMARY PER SHARE
Initial Offering Price (9/29/88) ... $10.00
Initial Offering and
Underwriting Expenses .............. -$0.70
Accumulated Realized
Losses at 10/31/95 ................. -$2.39
Subtotal ........................... $6.91
Undistributed Net Investment
Income/Dividend Reserve
at 10/31/95 ......................... $0.39
Unrealized Depreciation
on Investments at 10/31/95 ......... -$0.22
NET ASSET VALUE ON 10/31/95 ........ $7.08
assets. On October 31, 1994, these types of securities represented 53% of
total assets. While we are comfortable with the current level of volatility
in the fund, we may sell more of the fund's mortgage-backed derivatives
should attractive opportunities appear.
IN OUR EFFORTS TO DEVELOP A PORTFOLIO STRUCTURE THAT IS LESS VOLATILE, WE
REPLACED THE MORTGAGE-BACKED DERIVATIVES WITH FIXED RATE MORTGAGE-BACKED
SECURITIES. These fixed rate mortgages represented 68% of the fund's total
assets at the end of October. Given current market conditions, we believe
this increased exposure to mortgage-backed securities is compatible with our
goal of providing more consistent returns with less volatility.
AS STATED IN THE APRIL SEMIANNUAL REPORT, WE SUSPENDED THE USE OF THE
SALE-FORWARD PROGRAM TO FURTHER REDUCE VOLATILITY IN THE FUND. However,
having substantially lowered the fund's volatility by reducing its exposure
to mortgage-backed derivative securities, we have begun to re-evaluate the
sale-forward program. Because this program has historically provided a strong
level of income in the fund, we will consider reinstating it in the future.
BECAUSE THE FUND'S ABILITY TO GENERATE INCOME HAS DECLINED DURING THE PAST
YEAR DUE TO THE RESTRUCTURING OF THE PORTFOLIO, INVESTORS SHOULD EXPECT A
REDUCTION IN THE FUND'S MONTHLY DIVIDEND LEVEL IN THE COMING YEAR. We have
been relying on the fund's undistributed net investment income (dividend
reserve) to maintain the current monthly
4
<PAGE>
AMERICAN GOVERNMENT INCOME PORTFOLIO
PREMIUM VS. DISCOUNT
The underlying value of a fund's securities and other assets, minus its
liabilities, is the fund's "net asset value." Closed-end funds may trade in
the market at a price that is equal to, above, or below this net asset value.
Shares are trading at a "premium" when investors purchase or sell shares in
the market at a price that is greater than the shares' net asset value.
Conversely, when investors purchase or sell shares in the market at a price
that is lower than the shares' net asset value, they are said to be trading
at a "discount."
dividend of 8 cents per share. Because of reduced earnings and a declining
dividend reserve, the fund's Dividend Committee will begin making gradual
changes to the monthly dividend to bring it in line with the fund's monthly
earnings. As of October 31, the fund's monthly earning rate, based on a
three-month average, was 4.54 cents per share and its dividend reserve was
approximately 39 cents per share. In October, the fund paid the first of four
special income dividends of 2.5 cents per share in order to lower the fund's
dividend reserve. This will help reduce the amount of excise tax the fund
must pay for 1995. Tax laws require that a fund distribute to shareholders at
least 98% of the income and capital gains it earns during each calendar year.
If the fund does not distribute this amount, it must pay a 4% excise tax on
any undistributed income and capital gains. Keep in mind that the dividend
reserve is reflected in the fund's net asset value and any reduction in this
amount will reduce the fund's net asset value penny for penny.
WHILE REDUCING THE FUND'S VOLATILITY WAS OUR MAIN GOAL DURING THE PAST YEAR,
WE ALSO EXPERIENCED AN INCREASED NET ASSET VALUE. Even though the fund's net
asset value did increase rather quickly during the first half of the year -
from $6.45 on December 31, 1994, to $7.17 on June 30, 1995 - it's important
to realize that the fund has been changed substantially and investors should
not expect dramatic increases in the future. Going forward, however, our
efforts to make the fund less volatile should reduce the impact that any
future interest rate changes would have on the fund's net asset value.
5
<PAGE>
AMERICAN GOVERNMENT INCOME PORTFOLIO
EFFECTIVE DURATION
Effective duration estimates the interest rate risk of a security, in other
words how much the value of the security is expected to change with a given
change in interest rates. The longer a security's effective duration, the
more sensitive its price is to changes in interest rates. For example, if
interest rates were to increase by 1%, the market value of a bond with an
effective duration of five years would decrease by about 5%, with all other
factors being constant.
It is important to understand that, while a valuable measure, effective
duration is based upon certain assumptions and has several limitations. It is
most effective as a measure of interest rate risk when interest rate changes
are small, rapid and occur equally across all the different points of the
yield curve.
In addition, effective duration is difficult to calculate precisely for bonds
with prepayment options, such as mortgage-backed securities, because the
calculation requires assumptions about prepayment rates. For example, when
interest rates go down, homeowners may prepay their mortgages at a higher
rate than assumed in the initial effective duration calculation, thereby
shortening the effective duration of the fund's mortgage-backed securities.
Conversely, if rates increase, prepayments may decrease to a greater extent
than assumed, extending the effective duration of such securities. For these
reasons, the effective durations of funds that invest a significant portion
of their assets in mortgage-backed securities can be greatly affected by
changes in interest rates.
WE BELIEVE THE FUND'S CURRENT STRUCTURE SHOULD ENABLE US TO PROVIDE A FUND
WITH LOWER VOLATILITY AND MORE CONSISTENT RETURNS. However, because we intend
to maintain a smaller position of mortgage-backed derivative securities (such
as inverse floaters, interest-only, principal-only and inverse interest-only
securities) than we have in the past, it's unlikely the fund will experience
either the dramatic growth it achieved in previous years or the poor
performance of 1994. Ultimately, we feel this new structure will provide
investors with attractive long-term total return benefits.
YOUR CONTINUED SUPPORT THROUGHOUT THE PREVIOUS YEAR IS APPRECIATED, AND WE
ARE PLEASED THAT 1995 HAS BEEN A MORE FAVORABLE YEAR FOR INVESTORS. We remain
committed to providing you with quality service and look forward to helping
you achieve your financial goals.
Sincerely,
/s/ Worth Bruntjen
Worth Bruntjen
Portfolio Manager
6
<PAGE>
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FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1995
<TABLE>
<S> <C>
ASSETS:
Investments in securities at market value* (note 2)
(including a repurchase agreement of $1,559,000) ....... $ 173,343,789
Cash in bank on demand deposit ........................... 101,107
Receivable for investment securities sold ................ 6,418,921
Accrued interest receivable .............................. 1,511,065
----------------
Total assets ......................................... 181,374,882
----------------
LIABILITIES:
Payable for investment securities purchased .............. 7,481,250
Payable for fund shares retired .......................... 49,350
Accrued investment management fee ........................ 88,451
Accrued administrative fee ............................... 29,484
----------------
Total liabilities .................................... 7,648,535
----------------
Net assets applicable to outstanding capital stock ....... $ 173,726,347
----------------
----------------
REPRESENTED BY:
Capital stock - authorized 1 billion shares of $0.01 par
value; outstanding, 24,538,577 shares ................ $ 245,386
Additional paid-in capital ............................... 225,851,900
Undistributed net investment income ...................... 9,525,599
Accumulated net realized loss on investments ............. (56,588,199)
Unrealized depreciation of investments ................... (5,308,339)
----------------
Total - representing net assets applicable to
outstanding capital stock ........................ $ 173,726,347
----------------
----------------
Net asset value per share of outstanding capital stock ... $ 7.08
----------------
----------------
* Investments in securities at identified cost ........... $ 178,652,128
----------------
----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
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FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1995
<TABLE>
<S> <C>
INCOME:
Interest ............................................... $ 15,436,557
Fee income (note 2) ...................................... 271,472
----------------
Total investment income .............................. 15,708,029
----------------
EXPENSES (NOTE 3):
Investment management fee ................................ 1,008,881
Administrative fee ....................................... 336,293
Custodian, accounting and transfer agent fees ............ 225,932
Reports to shareholders .................................. 65,542
Directors' fees .......................................... 11,100
Audit and legal fees ..................................... 37,721
Federal excise taxes (note 2) ............................ 637,551
Other expenses ........................................... 53,757
----------------
Total expenses ....................................... 2,376,777
Less expenses paid indirectly ............................ (4,193)
----------------
Total net expenses ................................... 2,372,584
----------------
Net investment income ................................ 13,335,445
----------------
NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized loss on investments (note 4) ................ (25,907,303)
Net change in unrealized appreciation or depreciation of
investments ............................................ 45,260,530
----------------
Net gain on investments ................................ 19,353,227
----------------
Net increase in net assets resulting from
operations ....................................... $ 32,688,672
----------------
----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
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FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended Year Ended
10/31/95 10/31/94
---------------- ----------------
<S> <C> <C>
OPERATIONS:
Net investment income .................................. $ 13,335,445 22,329,410
Net realized loss on investments ......................... (25,907,303) (21,690,701)
Net change in unrealized appreciation or depreciation of
investments ............................................ 45,260,530 (63,985,983)
---------------- ----------------
Net increase (decrease) in net assets resulting from
operations ........................................... 32,688,672 (63,347,274)
---------------- ----------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ............................... (26,743,397) (34,045,815)
In excess of net realized gains .......................... -- (3,482,402)
---------------- ----------------
Total distributions .................................... (26,743,397) (37,528,217)
---------------- ----------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from issuance of 354,188 and 699,201 shares for
the dividend reinvestment plan, respectively ........... 2,442,217 6,860,985
Payments for retirement of 273,300 shares ................ (1,769,013) --
---------------- ----------------
Increase in net assets from capital share
transactions ......................................... 673,204 6,860,985
---------------- ----------------
Total increase (decrease) in net assets .............. 6,618,479 (94,014,506)
Net assets at beginning of year ............................ 167,107,868 261,122,374
---------------- ----------------
Net assets at end of year ................................ $ 173,726,347 167,107,868
---------------- ----------------
---------------- ----------------
Undistributed net investment income ...................... $ 9,525,599 17,815,824
---------------- ----------------
---------------- ----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
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NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION
American Government Income Portfolio Inc. (the fund) is
registered under the Investment Company Act of 1940 (as amended)
as a non-diversified, closed-end management investment company.
Shares of the fund are listed on the New York Stock Exchange
under the symbol AAF.
(2) SUMMARY OF
SIGNIFICANT
ACCOUNTING
POLICIES
INVESTMENTS IN SECURITIES
The values of fixed income securities are determined using
pricing services or prices quoted by independent brokers.
Exchange-listed options are valued at the last sale price, and
open financial futures are valued at the last settlement price.
When market quotations are not readily available, securities are
valued at fair value according to methods selected in good faith
by the board of directors. Short-term securities with maturities
of 60 days or less are valued at amortized cost which
approximates market value.
Securities transactions are accounted for on the date the
securities are purchased or sold. Realized gains and losses are
calculated on the identified-cost basis. Interest income,
including amortization of bond discount and premium computed on
a level-yield basis, is accrued daily.
OPTIONS TRANSACTIONS
For hedging purposes, the fund may buy and sell put and call
options, write covered call options on fund securities, and
write cash-secured puts. The risk in writing a call option is
the fund gives up the opportunity of profit if the market price
of the security increases. The risk in writing a put option is
the fund may incur a loss if the market price for the security
decreases and the option is exercised. The risk in buying an
option is that the fund pays a premium whether or not the option
is exercised. The fund also has the additional risk of not being
able to enter into a closing transaction if a liquid secondary
market does not exist. The fund also may write over-the-counter
options where the completion of the obligation is dependent upon
the credit standing of the other party.
Option contracts are valued daily and unrealized appreciation or
depreciation is recorded. The fund will realize a gain or loss
upon expiration or closing of the option transaction. When an
option is exercised, the proceeds on the sale of a written call
option, the
10
<PAGE>
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NOTES TO FINANCIAL STATEMENTS
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 (variation margin) are made or received by the fund
each day. The variation margin payments are equal to the daily
changes in the contract value and are recorded as unrealized
gains and losses. The fund recognizes a realized gain or loss
when the contract is closed or expires.
INTEREST RATE TRANSACTIONS
To preserve a return or spread on a particular investment or
portion of its portfolio or for other non-speculative purposes,
the fund may enter into various hedging transactions, such as
interest rate swaps and the purchase of interest rate caps and
floors. Interest rate swaps involve the exchange of commitments
to pay or receive interest, e.g., an exchange of floating rate
payments for fixed rate payments. The purchase of an interest
rate cap entitles the purchaser, to the extent that a specified
index exceeds a predetermined interest rate, to receive payments
of interest on a contractually based notional principal amount
from the party selling the interest rate cap. The purchase of an
interest rate floor entitles the purchaser, to the extent that a
specified index falls below a predetermined interest rate, to
receive payments of interest on a contractually based notional
principal amount from the party selling the interest rate floor.
If forecasts of interest rates and other market factors are
incorrect, investment performance will diminish compared to what
performance would have been if these investment techniques were
11
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
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 maintains, in a segregated account
with its custodian, assets with a market value equal to the
amount of its purchase commitments. The purchase of securities
on a when-issued or forward-commitment basis may increase the
volatility of the fund's NAV to the extent the fund makes such
purchases while remaining substantially fully invested. As of
October 31, 1995 the fund had no outstanding when-issued or
forward commitments.
In connection with its ability to purchase securities on a
when-issued or forward-commitment basis, the fund may enter into
mortgage "dollar rolls" in which the fund sells securities for
delivery in the current month and simultaneously contracts with
the same counterparty to repurchase similar (same type, coupon
and maturity) but not identical securities on a specified future
date. As an inducement to "roll over" its purchase commitments,
the fund receives negotiated fees. For the year ended October
31, 1995, such fees earned by the fund amounted to $271,472.
FEDERAL TAXES
The fund intends to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and
not
12
<PAGE>
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NOTES TO FINANCIAL STATEMENTS
be subject to federal income tax. Therefore, no income tax
provision is required. However, the fund incurred federal excise
taxes of $637,551 or $0.026 per share on income retained by the
fund during the excise tax year ended December 31, 1994. On
November 30, 1995, the fund made a determination to retain a
portion of its taxable income for the 1995 excise tax year and
pay an excise tax on the undistributed amount.
Net investment income and net realized gains (losses) may differ
for financial statement and tax purposes primarily because of
the non-deductibility of excise tax payments for purposes of
computing taxable income, differences in amortization policies
for notional principal contracts, recognition of losses deferred
due to "wash sale" transactions and the timing of recognition of
income on certain interest-only and principal-only securities.
The character of distributions made during the year from net
investment income or net realized gains may also differ from
their ultimate characterization for federal income tax purposes.
In addition, due to the timing of dividend distributions, the
fiscal year in which amounts are distributed may differ from the
year that the income or realized gains (losses) were recorded by
the fund. The effect on dividend distributions of certain
book-to-tax differences is presented as an "excess distribution"
in the statement of changes in net assets.
On the statement of assets and liabilities, as a result of
permanent book-to-tax differences, a reclassification adjustment
has been made to increase undistributed net investment income by
$5,117,727, increase accumulated net realized loss on
investments by $4,480,176 and decrease additional paid-in
capital by $637,551.
DISTRIBUTIONS
The fund pays monthly distributions from net investment income.
Realized capital gains, if any, will be distributed on an annual
basis. These distributions are recorded as of the close of
business on the ex-dividend date. Such distributions are payable
in cash, or pursuant to the fund's dividend reinvestment plan,
reinvested in additional shares of the fund's capital stock.
Under the plan, fund shares will be purchased in the open
market. However, if the current market price exceeds the net
asset value by 10% or more, the fund will issue new shares at a
discount of up to 5% from the current market price.
13
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NOTES TO FINANCIAL STATEMENTS
REPURCHASE AGREEMENTS
For repurchase agreements entered into with certain
broker-dealers, the fund, along with other affiliated registered
investment companies, may transfer uninvested cash balances into
a joint trading account, the daily aggregate of which is
invested in repurchase agreements secured by U.S. government and
agency obligations. Securities pledged as collateral for all
individual and joint repurchase agreements are held by the
fund's custodian bank until maturity of the repurchase
agreement. Provisions for all agreements ensure that the daily
market value of the collateral is in excess of the repurchase
amount in the event of default.
(3) EXPENSES
The fund has entered into the following agreements with Piper
Capital Management Incorporated (the adviser and the
administrator):
The investment advisory agreement provides the adviser with a
monthly investment management fee in an amount equal to the sum
of 0.025% of the average weekly net assets of the fund during
the month (approximately 0.30% on an annual basis) and 5.25% of
the daily gross income (i.e., investment income, including
amortization of discount and premium, other than gains from the
sale of securities or gains received from options and futures
contracts less interest on money borrowed by the fund) accrued
by the fund during the month. The monthly 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 will provide
investment advice and, in general, conduct the management and
investment of the fund.
The administration agreement provides the administrator with a
monthly fee in an amount equal to an annualized rate of 0.20% of
the fund's average weekly net assets. For its fee, the
administrator will provide certain reporting, regulatory and
record-keeping services for the fund.
In addition to the investment management fee and the
administrative fee, the fund is responsible for paying most
other operating expenses including outside directors' fees and
expenses, custodian fees,
14
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
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 cash balances maintained with the custodian by
the fund.
(4) SECURITIES
TRANSACTIONS
Cost of purchases and proceeds from sales of securities (other
than short-term securities) aggregated $349,644,180 and
$361,272,721, respectively, for the year ended October 31, 1995.
During the year ended October 31, 1995, the fund paid no
brokerage commissions to Piper Jaffray Inc., an affiliated
broker.
(5) CAPITAL LOSS
CARRYOVER
For federal income tax purposes, the fund had capital loss
carryovers of $56,588,199 on October 31, 1995, which, if not
offset by subsequent capital gains, will expire in 2002 and
2003. 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 funds' board of directors has approved a plan to repurchase
shares of the funds in the open market and retire those shares.
Repurchases may only be made when the previous day's closing
market price was at a discount from net asset value. Daily
repurchases are limited to 25% of the previous four weeks
average daily trading volume on the New York Stock Exchange.
Under the current plan, cumulative repurchases in each fund
cannot exceed 3% of the total shares originally issued. The
board of directors will review the plan every quarter and may
change the amount which may be repurchased. The plan was last
reviewed and reapproved by the board of directors on August 18,
1995. Pursuant to the plan, the fund cumulatively repurchased
and retired 273,300 shares as of October 31, 1995, which
represents 1.27% of the shares originally issued.
15
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(7) FINANCIAL
HIGHLIGHTS
Per-share data for a share of capital stock outstanding
throughout each period and selected information for each period
are as follows:
<TABLE>
<CAPTION>
Fiscal year ended October 31,
1995 1994 1993 1992 1991
------ -------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period ............................. $ 6.83 10.99 11.00 10.02 8.73
------ -------- ------ ------ ------
Operations:
Net investment income ................ 0.54 0.90 1.90 1.37 1.05
Net realized and unrealized gains
(losses)
on investments ..................... 0.80 (3.50) (0.04) 0.71 1.24
------ -------- ------ ------ ------
Total from operations .............. 1.34 (2.60) 1.86 2.08 2.29
------ -------- ------ ------ ------
Distributions to shareholders:
From net investment income ........... (1.09) (1.41) (1.27) (1.04) (1.00)
From net realized gains .............. -- -- (0.60) (0.06) --
In excess of net realized gains ...... -- (0.15) -- -- --
------ -------- ------ ------ ------
Total distributions to
shareholders ..................... (1.09) (1.56) (1.87) (1.10) (1.00)
------ -------- ------ ------ ------
Net asset value, end of period ....... $ 7.08 6.83 10.99 11.00 10.02
------ -------- ------ ------ ------
------ -------- ------ ------ ------
Per-share market value, end of
period ............................. $ 7.00 7.25 12.00 11.00 10.13
------ -------- ------ ------ ------
------ -------- ------ ------ ------
Total return, net asset value* ......... 21.40% (25.93%) 18.66% 21.86% 27.65%
Total return, market value** ........... 13.46% (29.14%) 28.18% 20.15% 26.36%
Net assets at end of period (in
millions) .......................... $ 174 167 261 257 234
Ratio of total expenses to average
weekly
net assets+ .......................... 1.41% 1.28% 0.95% 1.25% 1.01%
Ratio of net investment income to
average weekly net assets ............ 7.93% 10.84% 17.42% 13.12% 11.25%
Portfolio turnover rate (excluding
short-term securities) ............... 206% 106% 79% 100% 94%
Amount of borrowings outstanding at end
of period (in millions)*** ......... $ -- -- 97 95 61
Per-share amount of borrowings
outstanding at end of period ....... $ -- -- 4.06 4.07 2.61
Per-share amount of net assets,
excluding borrowings, at end of
period ............................. $ -- -- 15.05 15.07 12.63
Asset coverage ratio++ ................. -- -- 370% 370% 484%
</TABLE>
* BASED ON THE CHANGE IN NET ASSET VALUE OF A SHARE DURING THE PERIOD AND
ASSUMES REINVESTMENT OF DISTRIBUTIONS AT NET ASSET VALUE.
** 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.
*** SECURITIES PURCHASED ON A WHEN-ISSUED BASIS FOR WHICH LIQUID, HIGH-GRADE
DEBT OBLIGATIONS ARE MAINTAINED IN A SEGREGATED ACCOUNT ARE NOT CONSIDERED
BORROWINGS. SEE FOOTNOTE 2 IN THE NOTES TO FINANCIAL STATEMENTS.
+ INCLUDES 0.38%, 0.30% AND 0.26% FROM FEDERAL EXCISE TAXES IN FISCAL YEARS
1995, 1994 AND 1992, RESPECTIVELY. BEGINNING IN FISCAL 1995, THE EXPENSE
RATIO REFLECTS THE EFFECT OF GROSS EXPENSES PAID INDIRECTLY BY THE FUND.
PRIOR PERIOD EXPENSE RATIOS HAVE NOT BEEN ADJUSTED.
++ REPRESENTS THE FUND'S NET ASSETS, EXCLUDING BORROWINGS, DIVIDED BY
BORROWINGS OUTSTANDING AT THE END OF THE PERIOD.
16
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(8) 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 District of Minnesota 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 associated individuals. The
complaint alleges, among other things, violations of federal and
state securities and other laws. Damages are being sought in an
unspecified amount. The Fund intends to defend this lawsuit
vigorously. Although it is impossible to predict the outcome,
management believes, based on the facts currently available,
that there will be no material adverse effect on the financial
results of the fund.
(9) QUARTERLY DATA (UNAUDITED)
DOLLAR AMOUNTS
<TABLE>
<CAPTION>
Net Increase
in Net
Net Realized Assets Distributions
Total Net and Unrealized Resulting from Net
Investment Investment Gains (Losses) from Investment
Income Income on Investments Operations Income
----------- ----------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
January 31, 1995 $ 3,802,585 2,791,954 (1,555,555) 1,236,399 (8,349,341)
April 30, 1995 4,034,603 3,590,336 7,324,261 10,914,597 (5,949,231)
July 31, 1995 4,045,497 3,605,171 10,754,181 14,359,352 (5,918,395)
October 31, 1995 3,825,344 3,347,984 2,830,340 6,178,324 (6,526,430)
----------- ----------- -------------- ------------ ------------
$ 15,708,029 13,335,445 19,353,227 32,688,672 (26,743,397)
----------- ----------- -------------- ------------ ------------
----------- ----------- -------------- ------------ ------------
</TABLE>
PER-SHARE AMOUNTS
<TABLE>
<CAPTION>
Net Realized and Net Increase in Distributions
Net Unrealized Net Assets from Net Quarter End
Investment Gains (Losses) Resulting from Investment Net Asset
Income on Investments Operations Income Value
------------- ----------------- ----------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
January 31, 1995 $ 0.11 (0.05) 0.06 (0.34) 6.55
April 30, 1995 0.14 0.30 0.44 (0.24) 6.75
July 31, 1995 0.15 0.43 0.58 (0.24) 7.09
October 31, 1995 0.14 0.12 0.26 (0.27) 7.08
--- ----- --- -----
$ 0.54 0.80 1.34 (1.09)
--- ----- --- -----
--- ----- --- -----
</TABLE>
17
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
AMERICAN GOVERNMENT INCOME PORTFOLIO
OCTOBER 31, 1995
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- --------------------------------------------------------- ---------- -----------
<S> <C> <C>
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS)
U.S. GOVERNMENT SECURITIES (4.3%):
U.S. Treasury Notes, 5.75%, 8/15/03
(cost: $7,388,672) ................................ $ 7,500,000 7,396,275
-----------
MORTGAGE-BACKED SECURITIES (93.3%):
U.S. AGENCY FIXED RATE MORTGAGES (70.7%):
7.00%, FHLMC, 9/1/10 ................................. 4,885,026 4,926,158
7.50%, FHLMC, 8/1/25 ................................. 10,000,000 10,115,500
7.00%, FHLMC, 9/1/10 ................................. 2,930,972 2,955,651
7.00%, FHLMC, 10/1/10 ................................ 6,000,000 6,050,520
7.00%, FNMA, 1/1/08 .................................. 904,890 913,649
7.00%, FNMA, 5/1/09 .................................. 2,775,682 2,797,332
7.50%, FNMA, 11/1/01 ................................. 937,111 955,254
7.50%, FNMA, 11/1/01 ................................. 912,008 929,664
7.50%, FNMA, 10/1/01 ................................. 2,807,207 2,861,554
7.50%, FNMA, 10/1/01 ................................. 1,881,754 1,918,185
7.50%, FNMA, 12/1/01 ................................. 4,586,092 4,674,878
7.50%, FNMA, 1/1/02 .................................. 9,308,116 9,488,321
9.00%, GNMA, 5/20/22 ................................. 3,382,585 3,528,408
8.50%, GNMA, 2/20/25 ................................. 10,261,088 10,629,666
9.00%, GNMA, 1/20/25 ................................. 3,919,301 4,088,263
9.00%, GNMA, 4/20/25 ................................. 1,847,538 1,927,185
8.00%, GNMA, 6/20/25 ................................. 5,647,293 5,784,861
9.00%, GNMA, 7/20/25 ................................. 8,020,078 8,365,823
6.50%, GNMA, 10/15/10 ................................ 2,475,000 2,406,164
9.00%, GNMA II, 3/20/25 .............................. 3,640,192 3,797,120
8.50%, GNMA II, 6/20/25 .............................. 2,574,157 2,666,621
9.00%, GNMA II, 6/20/25 .............................. 12,395,787 12,930,169
9.00%, GNMA II, 5/20/25 .............................. 1,985,741 2,071,346
8.00%, GNMA II, 7/20/25 .............................. 3,222,483 3,300,983
8.00%, GNMA II, 9/20/25 .............................. 7,494,918 7,677,496
8.00%, GNMA II, 10/20/25 ............................. 5,000,000 5,121,800
-----------
122,882,571
-----------
COLLATERALIZED MORTGAGE OBLIGATIONS (B) (22.6%):
U.S. AGENCY FLOATING RATE (2.6%):
7.66%, FNMA, Series 1993-246, Class F, LIBOR,
10/25/23 ............................................ 5,756,416 4,547,568
-----------
U.S. AGENCY INVERSE INTEREST-ONLY (4.1%):
46.03%, FHLMC, Series 1382, Class LD, LIBOR,
11/15/18 ............................................ -- 1,562,028
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
18
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
AMERICAN GOVERNMENT INCOME PORTFOLIO
(CONTINUED)
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- --------------------------------------------------------- ---------- -----------
<S> <C> <C>
37.19%, FHLMC, Series 1421, Class I, LIBOR,
11/15/22 .......................................... $ -- 619,621
12.76%, FHLMC, Series 1669, Class JB, LIBOR,
7/15/20 ............................................. -- 342,354
9.39%, FHLMC, Series 1684, Class JB, LIBOR,
9/15/21 ............................................. -- 1,196,294
15.02%, FHLMC, Series 1695, Class AD, LIBOR,
1/15/24 ............................................. -- 1,343,042
67.71%, FNMA, Series G 1992-64, Class S, LIBOR,
12/25/18 ............................................ -- 413,241
21.78%, FNMA, Series G 1993-17, Class S, LIBOR,
4/25/23 ............................................. -- 1,640,196
-----------
7,116,776
-----------
PRIVATE INVERSE INTEREST-ONLY (C) (0.3%):
0.00%, Citicorp Mortgage Securities, Series 1993-4,
Class A2, LIBOR, 3/25/22 ............................ -- 401,926
0.00%, FBS Mortgage Corporation, Series 1992-DF, Class
F4, LIBOR, 4/25/08 .................................. -- 21,818
0.00%, Residential Funding Corporation, Series
1992-S34, Class A5, LIBOR, 12/25/15 ................. -- 1,419
0.00%, Sears Mortgage Securities, Series 1992-14,
Class S1, LIBOR, 5/25/21 ............................ -- 28,708
-----------
453,871
-----------
U.S. AGENCY INVERSE FLOATER (7.1%):
6.09%, FHLMC, Series 1487, Class IB, Treasury,
3/15/23 ............................................. 2,252,490 1,915,765
7.17%, FHLMC, Series 1606, Class S, COFI, 5/15/08 .... 4,460,086 3,284,719
6.97%, FHLMC, Series 1655, Class SB, COFI,
12/15/08 ............................................ 922,514 716,157
7.01%, FHLMC, Series 1704, Class S, COFI, 3/15/09 .... 1,907,641 1,521,725
9.19%, FNMA, Series G-50, Class SB, LIBOR,
12/25/21 ............................................ 5,146,868 4,930,648
-----------
12,369,014
-----------
PRIVATE INVERSE FLOATER (0.9%):
9.00%, Capstead Securities Corporation, Series
1993-2E2, Class E2K, COFI, 10/25/23 ................. 1,988,196 1,511,029
-----------
U.S. AGENCY Z-TRANCHE (7.6%):
9.45%, FNMA, Series 1988-9, Class Z, 4/25/18 ......... 8,496,552 9,069,985
7.00%, FNMA, Series 1994-52, Class Z, 4/25/07 ........ 4,212,615 4,210,635
-----------
13,280,620
-----------
Total Mortgage-Backed Securities
(cost: $168,150,851) .............................. 162,161,449
-----------
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
19
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
AMERICAN GOVERNMENT INCOME PORTFOLIO
(CONTINUED)
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- --------------------------------------------------------- ---------- -----------
<S> <C> <C>
INTEREST RATE CONTRACTS (1.3%):
Interest rate cap with Goldman Sachs, $20,000,000
notional principal on one-month LIBOR (5.81% on
10/31/95), 4.50%, 9/10/97 ......................... $ -- 460,000
Interest rate cap with Merrill Lynch, $20,000,000
notional principal on one-month LIBOR (5.81% on
10/31/95), 4.50%, 9/10/97 ........................... -- 460,000
Interest rate cap with Morgan Stanley, $15,000,000
notional principal on one-month LIBOR (5.81% on
10/31/95), 6.00%, 1/25/98 ........................... -- 124,850
Interest rate cap with Morgan Stanley, $15,000,000
notional principal on one-month LIBOR (5.81% on
10/31/95), 6.00%, 2/2/98 ............................ -- 127,215
Interest rate cap with Morgan Stanley, $20,000,000
notional principal on one-month LIBOR (5.81% on
10/31/95), 4.50%, 9/10/97 ........................... -- 460,000
Interest rate contract with JP Morgan, $70,000,000
notional principal on one-month LIBOR (5.81% on
10/31/95), 6.00%, 2/15/98 ........................... -- 595,000
-----------
Total Interest Rate Contracts
(cost: $1,553,605) ................................ 2,227,065
-----------
SHORT-TERM SECURITIES (0.9%):
Repurchase agreement with Goldman Sachs in a joint
trading account, collateralized by U.S. government
agency securities, acquired on 10/31/95, accrued
interest at repurchase date of $254, 5.87%, 11/1/95
(cost: $1,559,000) .................................. 1,559,000 1,559,000
-----------
Total Investments in Securities
(cost: $178,652,128) (d) ......................... $ 173,343,789
-----------
-----------
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
20
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
NOTES TO INVESTMENTS IN SECURITIES:
(A) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO
THE FINANCIAL STATEMENTS.
(B) DESCRIPTIONS OF CERTAIN COLLATERALIZED MORTGAGE OBLIGATIONS ARE AS FOLLOWS:
LIBOR - LONDON INTERBANK OFFERED RATE.
COFI (11TH DISTRICT) - COST OF FUNDS INDEX OF THE FEDERAL RESERVE'S 11TH
DISTRICT.
INVERSE FLOATER - REPRESENTS SECURITIES THAT PAY INTEREST AT RATES THAT
INCREASE (DECREASE) WITH A DECLINE (INCREASE) IN THE SPECIFIED INDEX. THE
INTEREST RATE PAID BY THE INVERSE FLOATER WILL GENERALLY CHANGE AT A
MULTIPLE OF ANY CHANGE IN THE INDEX. INTEREST RATES DISCLOSED ARE IN
EFFECT ON OCTOBER 31, 1995.
INTEREST-ONLY - REPRESENTS SECURITIES THAT ENTITLE HOLDERS TO RECEIVE ONLY
INTEREST PAYMENTS ON THE UNDERLYING MORTGAGES. THE YIELD TO MATURITY OF
AN INTEREST-ONLY IS EXTREMELY SENSITIVE TO THE RATE OF PRINCIPAL PAYMENTS
ON THE UNDERLYING MORTGAGE ASSETS. A RAPID (SLOW) RATE OF PRINCIPAL
REPAYMENTS MAY HAVE AN ADVERSE (POSITIVE) EFFECT ON YIELD TO MATURITY.
INTEREST RATES DISCLOSED REPRESENT CURRENT YIELDS BASED UPON THE CURRENT
COST BASIS AND ESTIMATED TIMING AND AMOUNT OF FUTURE CASH FLOWS.
INVERSE INTEREST-ONLY - REPRESENTS SECURITIES THAT ENTITLE HOLDERS TO
RECEIVE ONLY INTEREST PAYMENTS ON THE UNDERLYING MORTGAGES. INTEREST IS
PAID AT A RATE THAT INCREASES (DECREASES) WITH A DECLINE (INCREASE) IN
THE SPECIFIED INDEX. THE YIELD TO MATURITY OF AN INVERSE INTEREST-ONLY IS
EXTREMELY SENSITIVE TO THE RATE OF PRINCIPAL PAYMENTS ON THE UNDERLYING
MORTGAGE ASSETS. A RAPID (SLOW) RATE OF PRINCIPAL REPAYMENTS MAY HAVE AN
ADVERSE (POSITIVE) EFFECT ON YIELD TO MATURITY. INTEREST RATES DISCLOSED
REPRESENT CURRENT YIELDS BASED UPON THE CURRENT COST BASIS AND ESTIMATED
TIMING AND AMOUNT OF FUTURE CASH FLOWS.
Z-TRANCHE - REPRESENTS SECURITIES THAT PAY NO INTEREST OR PRINCIPAL DURING
THEIR INITIAL ACCRUAL PERIODS, BUT ACCRUE ADDITIONAL PRINCIPAL AT
SPECIFIED RATES. INTEREST RATE DISCLOSED REPRESENTS CURRENT YIELD BASED
UPON THE CURRENT COST BASIS AND ESTIMATED TIMING OF FUTURE CASH FLOWS.
(C) BASED UPON ESTIMATED TIMING AND AMOUNT OF FUTURE CASH FLOWS, INCOME IS
CURRENTLY NOT BEING RECOGNIZED ON CERTAIN INVERSE INTEREST-ONLY SECURITIES
WITH AN AGGREGATE MARKET VALUE OF $453,871.
(D) ON OCTOBER 31, 1995, FOR FEDERAL INCOME TAX PURPOSES, THE COST OF
INVESTMENTS WAS $177,920,778. THE AGGREGATE GROSS UNREALIZED APPRECIATION
AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED ON THIS COST WERE AS
FOLLOWS:
<TABLE>
<S> <C>
GROSS UNREALIZED APPRECIATION .... $ 3,922,979
GROSS UNREALIZED DEPRECIATION ...... (8,499,968)
----------
NET UNREALIZED DEPRECIATION .... $ (4,576,989)
----------
----------
</TABLE>
21
<PAGE>
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS
AMERICAN GOVERNMENT INCOME PORTFOLIO INC.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments in securities, of American Government Income
Portfolio Inc. as of October 31, 1995 and the related statement of operations
for the year then ended, the statements of changes in net assets for each of the
years in the two-year period ended October 31, 1995 and the financial highlights
for each of the years in the five-year period ended October 31, 1995. 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 or sold but not received or delivered, 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 Portfolio Inc. as of October 31, 1995 and the results
of its operations for the year then ended, changes in its net assets for each of
the years in the two-year period ended October 31, 1995 and the financial
highlights for each of the years in the five-year period ended October 31, 1995,
in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
December 8, 1995
22
<PAGE>
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX INFORMATION
Fiscal Year Ended October 31, 1995
Distributions shown below are taxable as dividend
income. None qualify for the corporate dividends
received deduction. In February 1996, you will receive a
breakdown of income earned by investment category for
calendar year 1995.
Information for federal income tax purposes is presented
as an aid to you in reporting the distributions. Please
consult a tax adviser on how to report these
distributions at the state and local levels.
<TABLE>
<CAPTION>
Payable Date Per Share
- ----------------------------------------------- -------------
<S> <C>
November 23, 1994 ........................... $ 0.08
December 28, 1994 ............................. 0.18
January 13, 1995 .............................. 0.08
February 22, 1995 ............................. 0.08
March 29, 1995 ................................ 0.08
April 26, 1995 ................................ 0.08
May 24, 1995 .................................. 0.08
June 28, 1995 ................................. 0.08
July 26, 1995 ................................. 0.08
August 23, 1995 ............................... 0.08
September 27, 1995 ............................ 0.08
October 25, 1995 .............................. 0.11
---
$ 1.09
---
---
</TABLE>
23
<PAGE>
- --------------------------------------------------------------------------------
SHAREHOLDER UPDATE
ANNUAL MEETING RESULTS
An annual meeting of the fund's shareholders was held on August 17, 1995. 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 six directors:
<TABLE>
<CAPTION>
Shares Shares Withholding
Voted "For" Authority to Vote
------------ ------------------
<S> <C> <C>
David T. Bennett............................. 20,821,364 681,797
Jaye F. Dyer................................. 20,822,745 680,416
William H. Ellis............................. 20,821,364 681,797
Karol D. Emmerich............................ 20,822,745 680,416
Luella G. Goldberg........................... 20,821,489 681,672
George Latimer............................... 20,820,864 682,297
</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, 1995. The following votes were cast regarding this
matter:
<TABLE>
<CAPTION>
Shares Shares Voted Broker
Voted "For" "Against" Abstentions Non-votes
- ------------ ------------ ----------- ---------
<S> <C> <C> <C>
20,886,133 265,386 351,641 --
</TABLE>
SHARE REPURCHASE PROGRAM
Your fund's board of directors has reapproved the fund's share repurchase
program, which enables the fund to 'buy back' shares of its common stock in the
open market. Repurchases may only be made when the previous day's closing market
price per share was at a discount from net asset value. Repurchases cannot
exceed 3% of the fund's originally issued shares.
WHAT EFFECT WILL THIS PROGRAM HAVE ON SHAREHOLDERS?
- - We do not expect any adverse impact on the adviser's ability to manage the
fund.
- - Because repurchases will be at a price below net asset value, remaining shares
outstanding may experience a slight increase in net asset value.
- - Although the effect of share repurchases on market price is less certain, the
board of directors believes the program may have a favorable effect on the
market price of fund shares.
- - We do not anticipate any material increase in the fund's expense ratio.
24
<PAGE>
- --------------------------------------------------------------------------------
SHAREHOLDER UPDATE
WHEN WILL SHARES BE REPURCHASED?
Share repurchases may be made from time to time and may be discontinued at any
time. Share repurchases are not mandatory when fund shares are trading at a
discount from net asset value; all repurchases will be at the discretion of the
fund's investment adviser. The board of directors will consider whether to
continue the share repurchase program on at least a semiannual basis and will
notify shareholders of its determination in the next semiannual or annual
report.
HOW WILL SHARES BE REPURCHASED?
We expect to finance the repurchase of shares by liquidating portfolio
securities or using current cash balances. We do not anticipate borrowing in
order to finance share repurchases.
TERMS AND CONDITIONS OF THE DIVIDEND REINVESTMENT PLAN
As a shareholder, you may choose to participate in the Dividend Reinvestment
Plan. It is 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.
ELIGIBILITY/PARTICIPATION
You may join the plan at any time. Reinvestment of distributions will begin with
the next distribution paid, provided your enrollment card 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 gain 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
Fund shares to cover reinvestments will generally be purchased by IFTC in the
open market. However, if fund shares are trading at a 10% or greater premium
over net asset value, and in certain other circumstances, the fund may issue new
shares to cover such reinvestments at a discount of up to 5% of the market price
without brokerage commissions.
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SHAREHOLDER UPDATE
Beginning no more than five business days before the dividend payment date, IFTC
may purchase fund shares on behalf of participants in the plan to satisfy
dividend reinvestments. Such purchases are made on the New York Stock Exchange
(the Exchange) or elsewhere at any time when the price of the fund's common
stock on the Exchange is at less than a 10% premium over the fund's most
recently calculated net asset value 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 requirements - either because
the fund's shares have been trading at a greater than 10% premium over net asset
value or because IFTC, for any other reason, has not been able to purchase a
sufficient number of shares - IFTC will accept payment of the dividend, or the
remaining portion therefore, in authorized but unissued shares of the fund. Such
shares will be issued at a price per share equal to the higher of (1) the net
asset value per share as of the close of business on the payment date, or (2)
95% of the closing market price per share on the payment date. The number of
shares allocated to you will be determined by dividing the amount of the
dividend or distribution by the applicable price per share.
There is no direct charge to you for reinvestment of dividends and capital
gains, since IFTC fees are paid by the fund. However, if fund shares are
purchased in the open market, each participant in the plan pays a pro rata
portion of the brokerage commissions. Brokerage charges are expected to be lower
than those for individual transactions because the plan purchases shares for all
participants in blocks. Distributions paid on the shares in your plan account
will also be reinvested as long as you continue to participate in the plan.
IFTC maintains accounts for plan participants holding shares in certificate form
and will furnish written confirmation of all transactions, including information
you need for tax records. Reinvested shares in your account will be held by IFTC
in non-certificated form in your name.
TAX INFORMATION
Distributions reinvested in shares purchased in the open market are subject to
income tax, the same as if such distributions were received as 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 a Form 1099 information return 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
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SHAREHOLDER UPDATE
brokerage firm's name, you may terminate your participation via verbal or
written 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 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 funds reserve the right to amend or terminate the plan. Should the plan be
terminated, participants will be notified in writing at least 90 days before the
record date for the next 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 questions 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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DIRECTORS AND OFFICERS
<TABLE>
<S> <C>
DIRECTORS David T. Bennett, CHAIRMAN, HIGHLAND HOMES, INC., USL
PRODUCTS INC., KIEFER BUILT, INC. OF COUNSEL, GRAY,
PLANT, MOOTY, MOOTY, & BENNETT, P.A.
Jaye F. Dyer, PRESIDENT, DYER MANAGEMENT COMPANY
William H. Ellis, PRESIDENT, PIPER CAPITAL MANAGEMENT
INCORPORATED, PIPER JAFFRAY COMPANIES INC.
Karol D. Emmerich, PRESIDENT, THE PARACLETE GROUP
Luella G. Goldberg, DIRECTOR, TCF FINANCIAL,
RELIASTAR FINANCIAL CORP., HORMEL FOODS CORP.
George Latimer, CHIEF EXECUTIVE OFFICER, NATIONAL EQUITY
FUNDS
OFFICERS William H. Ellis, CHAIRMAN OF THE BOARD
Worth Bruntjen, PRESIDENT
Marijo Goldstein, SENIOR VICE PRESIDENT
Robert H. Nelson, SENIOR VICE PRESIDENT AND TREASURER
Amy K. Johnson, VICE PRESIDENT
David E. Rosedahl, SECRETARY
INVESTMENT Piper Capital Management Incorporated
ADVISER 222 SOUTH 9TH STREET, MINNEAPOLIS, MN 55402-3804
CUSTODIAN AND Investors Fiduciary Trust Company
TRANSFER AGENT 127 WEST 10TH STREET, KANSAS CITY, MO 64105-1716
LEGAL COUNSEL Dorsey & Whitney P.L.L.P.
220 SOUTH SIXTH STREET, MINNEAPOLIS, MN 55402
INDEPENDENT KPMG Peat Marwick LLP
AUDITORS 4200 NORWEST CENTER, MINNEAPOLIS, MN 55402
</TABLE>
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PIPER CAPITAL ---------------------
MANAGEMENT Bulk Rate
U.S. Postage
PIPER CAPITAL MANAGEMENT INCORPORATED PAID
222 SOUTH NINTH STREET Permit No. 3008
MINNEAPOLIS, MN 55402-3804 Mpls., MN
----------------------
[LOGO] PIPER JAFFRAY INC., FUND SPONSOR AND NASD MEMBER.
THIS DOCUMENT IS PRINTED ON PAPER MADE FROM
1OO% TOTAL RECOVERED FIBER, INCLUDING 15% POST-CONSUMER WASTE.
035-96 AAF-01 12/95
STAPLES
