<PAGE>
1997 Annual Report
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[LOGO]
AMERICAN
GOVERNMENT
INCOME PORTFOLIO
AAF
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American Government Income Portfolio - 1997 Annual Report
<PAGE>
CONTENTS
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Average Annualized Total Returns . . . . . . . . . . . . . . . . . . . . . . .1
Portfolio Managers' Letter . . . . . . . . . . . . . . . . . . . . . . . . . .2
Financial Statements and Notes . . . . . . . . . . . . . . . . . . . . . . . .5
Investments in Securities. . . . . . . . . . . . . . . . . . . . . . . . . . 16
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . 19
Federal Income Tax Information . . . . . . . . . . . . . . . . . . . . . . . 20
Shareholder Update . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Glossary*** . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
*** This report includes a glossary to help you understand financial terms used
in the portfolio managers' letter. When you see this symbol, it indicates a word
that is defined in the glossary.
[LOGO]
AMERICAN GOVERNMENT INCOME PORTFOLIO
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PRIMARY INVESTMENTS
Obligations issued or guaranteed by the U.S. government, its agencies and
instrumentalities, including mortgage-backed derivative securities. The fund may
purchase securities through the dollar-roll program and enter into reverse
repurchase agreements. Investments in certain mortgage-backed derivative
securities, the purchase of securities through the dollar-roll program and the
use of reverse repurchase agreements may cause the fund's net asset value to
fluctuate to a greater extent than would be expected from interest rate
movements alone.
FUND OBJECTIVE
High current income consistent with preservation of capital. As with other
investment companies, there can be no assurance this fund will achieve
its objective.
<PAGE>
AVERAGE ANNUALIZED TOTAL RETURNS
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BASED ON NET ASSET VALUE FOR THE PERIODS ENDED OCTOBER 31, 1997
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[GRAPH]
Since Inception
One Year Five Year 9/29/88
-------- --------- ---------------
AMERICAN GOVERNMENT INCOME PORTFOLIO 8.87 4.37 9.67
Lehman Brothers U.S. Mortgage Index 9.12 7.28 9.14
American Government Income Portfolio's average annualized total returns are
based on the change in its net asset value (NAV), assume all distributions were
reinvested and do not reflect sales charges. NAV-based performance is used to
measure investment management results.
Average annualized total returns based on the change in market price for the
one-year, five-year and since inception periods ended October 31, 1997, were
16.93%, 3.06%, and 7.90%, respectively. These returns assume reinvestment of all
distributions and reflect sales charges on those distributions described in the
fund's dividend reinvestment plan, but not on initial purchases.
PLEASE REMEMBER, YOU COULD LOSE MONEY WITH THIS INVESTMENT. NEITHER SAFETY OF
PRINCIPAL NOR STABILITY OF INCOME IS GUARANTEED. PAST PERFORMANCE DOES NOT
GUARANTEE FUTURE RESULTS. The investment return and principal value of an
investment will fluctuate so that fund shares, when sold, may be worth more or
less than their original cost. Closed-end funds, such as this fund, often trade
at discounts to net asset value. Therefore, you may be unable to realize the
full net asset value of your shares when you sell.
The Lehman Brothers U.S. Mortgage Index is an unmanaged index that represents
the total return, with distributions reinvested, of U.S. government agency
mortgage-backed securities with up to 30 years to maturity. The index does not
reflect expenses or transaction costs. The since inception number for the Lehman
index is calculated from the month end following the fund's inception through
October 31, 1997.
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1997 Annual Report 1 American Government Income Portfolio
<PAGE>
PORTFOLIO MANAGERS' LETTER
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DECEMBER 12, 1997
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[PHOTO]
WORTH BRUNTJEN shares responsibility for the management of American Government
Income Portfolio. Bruntjen will be leaving Piper Capital Management on
January 1, 1998, and will no longer be part of the fund's management team.
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DEAR SHAREHOLDERS:
FOR THE ONE-YEAR PERIOD ENDED OCTOBER 31, 1997, AMERICAN GOVERNMENT INCOME
PORTFOLIO HAD A NET ASSET VALUE TOTAL RETURN OF 8.87%. This compares to a 9.12%
gain for the fund's benchmark,*** the Lehman Brothers U.S. Mortgage Index. The
fund's one-year total return based on market price was 16.93%.*
THE FUND SLIGHTLY UNDERPERFORMED ITS BENCHMARK BECAUSE ITS EFFECTIVE DURATION***
WAS LONGER THAN THAT OF ITS BENCHMARK DURING A PERIOD OF RISING RATES EARLY IN
THE YEAR. The fund will typically have a duration that is longer than that of
its benchmark, as a means of maintaining a higher level of income. A long
effective duration generally means that the fund is more sensitive to changes in
interest rates.
* All returns assume reinvestment of distributions and do not reflect sales
charges, except the fund's total return based on market price, which does
reflect sales charges on those distributions described in the fund's dividend
reinvestment plan, but not on initial purchases. Past performance does not
guarantee future results. The investment return and principal value of an
investment will fluctuate so that fund shares, when sold, may be worth more or
less than their original cost.
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PORTFOLIO COMPOSITION
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As a percentage of total assets on October 31, 1997
[CHART]
U.S. Agency Fixed Rate Mortgage-Backed Securities 63%
U.S. Agency Adjustable Rate Mortgage-Backed Securities 2%
U.S. Treasury Securities 18%
U.S. Agency Z-Bond Securities 5%
U.S. Agency CMOs - Fixed Rate 6%
Other Assets 4%
Short-Term 2%
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1997 Annual Report 2 American Government Income Portfolio
<PAGE>
PORTFOLIO MANAGERS' LETTER (continued)
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[PHOTO]
BRUCE SALVOG shares responsibility for the management of American Government
Income Portfolio. He has 27 years of financial experience.
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WHILE THE LONGER EFFECTIVE DURATION DETRACTED FROM THE FUND'S TOTAL PERFORMANCE,
SEVERAL OF OUR DURATION DECISIONS DID BENEFIT THE FUND DURING THE YEAR. In late
April, we extended duration in anticipation of lower interest rates, which
helped position the fund for a bond market rally that lasted through July. We
extended duration by slightly increasing the amount of mortgage-backed
securities in the fund's dollar-roll program*** and by adding a combination of
three-year and 20-year maturity U.S. Treasury securities to the fund's
portfolio. In late July, we shortened duration before strong economic reports in
August caused rates to edge higher. This strategy helped the fund's performance
and helped protect shareholder capital. As of October 31, 1997, the fund's
effective duration was 3.8 years, compared to 2.6 years for the Lehman Brothers
U.S. Mortgage Index.
THE FUND BENEFITED FROM ITS WEIGHTING IN MORTGAGE-BACKED SECURITIES IN THE FIRST
HALF OF THE YEAR, WHILE ITS HOLDINGS IN U.S. TREASURIES PERFORMED WELL DURING
THE LATTER PART OF THE YEAR. Early in the period, rising interest rates caused
mortgage-backed securities to outperform other sectors of the bond market due to
their higher yields, an easing of refinancing fears and slightly shorter
effective durations in comparison to other fixed income securities of comparable
maturities. As rates moved downward, we held more Treasury securities than is
typical for this fund. This had a favorable impact, as Treasuries usually
outperform mortgage-backed securities during periods of falling interest rates
when borrowers are refinancing and prepaying their mortgages.
SETTLEMENT OF THE CLASS ACTION LAWSUIT AGAINST THE FUND AND SEVEN OTHER
CLOSED-END MANAGEMENT COMPANIES MANAGED BY PIPER CAPITAL MANAGEMENT BECAME
EFFECTIVE IN SEPTEMBER, AND THE FUND COMPLETED A SHARE REPURCHASE. The
settlement included payments by Piper Jaffray Companies totaling $15.5 million
over a four-year period. It also included an agreement by the fund to repurchase
up to 25% of its outstanding shares. Proceeds of this repurchase, which
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1997 Annual Report 3 American Government Income Portfolio
<PAGE>
PORTFOLIO MANAGERS' LETTER (continued)
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[PHOTO]
TOM MCGLINCH, CFA shares responsibility for the management of American
Government Income Portfolio. He has 16 years of financial experience.
- --------------------------------------------------------------------------------
was funded by liquidating the fund's lower yielding Treasury securities, were
paid out on December 5. Finally, the settlement included an agreement that the
fund's board would submit a proposal to convert the fund to an open-end format
if the discount between net asset value and market price does not decrease to 5%
or less within approximately two years after the effective date of the
settlement, unless the board determines that it would not be in fund
shareholders' best interest to do so.
AS THE ECONOMY CONTINUES TO SHOW ROBUST GROWTH, THE INFLATION OUTLOOK REMAINS
STABLE, WHICH BODES WELL FOR THE BOND MARKET. In this environment, we intend to
maintain the fund's effective duration, which is now near that of its benchmark.
Should yields move higher, we may extend duration to enhance the fund's
long-term income-producing potential.
Thank you for your investment in American Government Income Portfolio. We
appreciate the opportunity to manage your assets and help you reach your
investment goals.
Sincerely,
/s/ Worth Bruntjen
Worth Bruntjen
Portfolio Manager
/s/ Bruce Salvog
Bruce Salvog
Portfolio Manager
/s/ Tom McGlinch
Tom McGlinch
Portfolio Manager
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1997 Annual Report 4 American Government Income Portfolio
<PAGE>
Financial Statements
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STATEMENT OF ASSETS AND LIABILITIES October 31, 1997
................................................................................
<TABLE>
<S> <C>
ASSETS:
Investments in securities at market value* (note 2)
(including a repurchase agreement of $3,388,000) ......... $197,878,519
Cash in bank on demand deposit ............................. 6,683,960
Principal receivable on mortgage securities ................ 51,756
Accrued interest receivable ................................ 1,194,231
------------------
Total assets ............................................. 205,808,466
------------------
LIABILITIES:
Payable for investment securities purchased on a when-issued
basis (note 2) ........................................... 21,166,406
Reverse repurchase agreements payable ...................... 14,500,000
Accrued investment management fee .......................... 85,865
Accrued administrative fee ................................. 28,622
Accrued interest ........................................... 118,863
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Total liabilities ........................................ 35,899,756
------------------
Net assets applicable to outstanding capital stock ....... $169,908,710
------------------
------------------
COMPOSITION OF NET ASSETS:
Capital stock and additional paid-in capital ............... $225,535,729
Undistributed net investment income ........................ 546,188
Accumulated net realized loss on investments ............... (61,197,539)
Unrealized appreciation of investments ..................... 5,024,332
------------------
Total - representing net assets applicable to capital
stock .................................................. $169,908,710
------------------
------------------
* Investments in securities at identified cost ............. $192,854,187
------------------
------------------
NET ASSET VALUE AND MARKET PRICE:
Net assets ................................................. $169,908,710
Shares outstanding (authorized 1 billion shares of $0.01 par
value) ................................................... 24,469,677
Net asset value ............................................ $ 6.94
Market price ............................................... $ 6.56
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
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1997 Annual Report 5 American Government Income Portfolio
<PAGE>
Financial Statements (continued)
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STATEMENT OF OPERATIONS For the Year Ended October 31, 1997
................................................................................
<TABLE>
<S> <C>
INCOME:
Interest (net of interest expense of $805,486) ............. $ 11,677,006
Fee income (note 2) ........................................ 208,410
------------------
Total investment income .................................. 11,885,416
------------------
EXPENSES (NOTE 3):
Investment management fee .................................. 994,849
Administrative fee ......................................... 331,616
Custodian and accounting fees .............................. 119,001
Transfer agent fees ........................................ 16,517
Reports to shareholders .................................... 55,395
Directors' fees ............................................ 13,585
Audit and legal fees ....................................... 51,359
Other expenses ............................................. 48,419
------------------
Total expenses ........................................... 1,630,741
Less expenses paid indirectly .......................... (646)
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Total net expenses ....................................... 1,630,095
------------------
Net investment income .................................... 10,255,321
------------------
NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized gain on investments (note 4) .................. 669,869
Net realized loss on closed futures contracts .............. (559,985)
------------------
Net realized gain on investments ......................... 109,884
Net change in unrealized appreciation or depreciation of
investments .............................................. 3,811,323
------------------
Net gain on investments .................................. 3,921,207
------------------
Net increase in net assets resulting from operations ... $ 14,176,528
------------------
------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
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1997 Annual Report 6 American Government Income Portfolio
<PAGE>
Financial Statements (continued)
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STATEMENT OF CASH FLOWS For the Year Ended October 31, 1997
................................................................................
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest and fee income .................................... $ 11,885,416
Net expenses ............................................... (1,630,095)
-------------------
Net investment income .................................... 10,255,321
-------------------
Adjustments to reconcile net investment income to net cash
provided by operating activities:
Change in accrued interest receivable and principal
receivable on mortgage securities ...................... 48,034
Net amortization of bond discount and premium ............ (143,801)
Change in accrued fees and expenses ...................... 76,208
-------------------
Total adjustments ...................................... (19,559)
-------------------
Net cash provided by operating activities .............. 10,235,762
-------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments ......................... 117,402,298
Purchases of investments ................................... (109,535,540)
Net purchases of short-term securities ..................... (1,193,000)
Net variation margin received from futures contracts ....... 26,187
-------------------
Net cash provided by investing activities .............. 6,699,945
-------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions paid to shareholders ......................... (10,277,265)
-------------------
Net cash used by financing activities .................. (10,277,265)
-------------------
Net increase in cash ....................................... 6,658,442
Cash at beginning of year .................................. 25,518
-------------------
Cash at end of year .................................... $ 6,683,960
-------------------
-------------------
Supplemental disclosure of cash flow information:
Cash paid for interest on reverse repurchase
agreements ............................................. $ 726,828
-------------------
-------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
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1997 Annual Report 7 American Government Income Portfolio
<PAGE>
Financial Statements (continued)
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STATEMENTS OF CHANGES IN NET ASSETS
................................................................................
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
10/31/97 10/31/96
------------------ ------------------
<S> <C> <C>
OPERATIONS:
Net investment income ...................................... $ 10,255,321 $ 10,372,155
Net realized gain (loss) on investments .................... 109,884 (5,659,302)
Net change in unrealized appreciation or depreciation of
investments .............................................. 3,811,323 6,521,348
------------------ ------------------
Net increase in net assets resulting from operations ..... 14,176,528 11,234,201
------------------ ------------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ................................. (10,277,265) (18,494,993)
------------------ ------------------
CAPITAL SHARE TRANSACTIONS (NOTE 6):
Decrease in net assets from capital share transactions ..... -- (456,108)
------------------ ------------------
Total increase (decrease) in net assets .................. 3,899,263 (7,716,900)
Net assets at beginning of year ............................ 166,009,447 173,726,347
------------------ ------------------
Net assets at end of year .................................. $169,908,710 $166,009,447
------------------ ------------------
------------------ ------------------
Undistributed net investment income ........................ $ 546,188 $ 568,132
------------------ ------------------
------------------ ------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
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1997 Annual Report 8 American Government Income Portfolio
<PAGE>
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.
The fund invests primarily in obligations issued or guaranteed by
the U.S. government, its agencies and instrumentalities,
including mortgage-backed securities. The fund may purchase
securities through the 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
AAF.
(2) SUMMARY OF
SIGNIFICANT
ACCOUNTING
POLICIES
................................
INVESTMENTS IN SECURITIES
Portfolio securities for which market quotations are readily
available are valued at current market value. If market
quotations or valuations are not available, or if such quotations
or valuations are believed to be inaccurate, unreliable or not
reflective of market value, portfolio securities are valued
according to procedures adopted by the fund's board of directors
in good faith at "fair value", that is, a price that the fund
might reasonably expect to receive for the security or other
asset upon its current sale.
The current market value of certain fixed income securities is
provided by an independent pricing service. Fixed income
securities for which prices are not available from an independent
pricing service but where an active market exists are valued
using market quotations obtained from one or more dealers that
make markets in the securities or from a widely-used quotation
system. Short-term securities with maturites of 60 days or less
are valued at amortized cost, which approximates market value.
Exchange-traded options are valued at the last sales price on the
exchange prior to the time when assets are valued. If no sales
were reported that day, the options will be valued at the mean
between the current closing bid and asked prices.
Over-the-counter options are valued using market quotations
obtained from broker-dealers. Financial futures are valued at the
last settlement price established each day by the board of trade
or exchange on which they are traded.
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1997 Annual Report 9 American Government Income Portfolio
<PAGE>
Notes to Financial Statements (continued)
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Securities transactions are accounted for on the date securities
are purchased or sold. Realized gains and losses are calculated
on the identified-cost basis. Interest income, including
amortization of bond discount and premium, is recorded on an
accrual basis.
FUTURES TRANSACTIONS
In order to gain exposure to or protect against changes in the
market, the fund may buy and sell financial futures contracts and
related options. Risks of entering into futures contracts and
related options include the possibility there may be an illiquid
market and that a change in the value of the contract or option
may not correlate with changes in the value of the underlying
securities.
Upon entering into a futures contract, the fund is required to
deposit either cash or securities in an amount (initial margin)
equal to a certain percentage of the contract value. Subsequent
payments (variation margin) are made or received by the fund each
day. The variation margin payments are equal to the daily changes
in the contract value and are recorded as unrealized gains and
losses. The fund recognizes a realized gain or loss when the
contract is closed or expires.
SECURITIES PURCHASED ON A WHEN-ISSUED BASIS
Delivery and payment for securities that have been purchased by
the fund on a when-issued or forward-commitment basis can take
place a month or more after the transaction date. During this
period, such securities do not earn interest, are subject to
market fluctuation and may increase or decrease in value prior to
their delivery. The fund segregates, with its custodian, assets
with a market value equal to the amount of its purchase
commitments. The purchase of securities on a when-issued or
forward-commitment basis may increase the volatility of the
fund's net asset value if the fund makes such purchases while
remaining substantially fully invested. As of October 31, 1997,
the fund had entered into outstanding when-issued or forward
commitments of $21,166,406.
In connection with its ability to purchase securities on a when-
issued or forward-commitment basis, the fund may enter into
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1997 Annual Report 10 American Government Income Portfolio
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
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, 1997, such fees earned by the fund amounted to
$208,410.
FEDERAL TAXES
The fund intends to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and not
be subject to federal income tax. Therefore, no income tax
provision is required. The fund also intends to distribute its
taxable net investment income and realized gains, if any, to
avoid the payment of any federal excise taxes.
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 and losses were recorded by the
fund.
DISTRIBUTIONS TO SHAREHOLDERS
Distributions from net investment income are made monthly and
realized capital gains, if any, will be distributed at least
annually. These distributions are recorded as of the close of
business on the ex-dividend date. Such distributions are payable
in cash or, pursuant to the fund's dividend reinvestment plan,
reinvested in additional shares of the fund's capital stock.
Under the plan, fund shares will be purchased in the open market
unless the market price plus commissions exceeds the net asset
value by 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.
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1997 Annual Report 11 American Government Income Portfolio
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
For repurchase agreements entered into with certain
broker-dealers, the fund, along with other affiliated registered
investment companies, may transfer uninvested cash balances into
a joint trading account, the daily aggregate of which is invested
in repurchase agreements secured by U.S. government or agency
obligations. Securities pledged as collateral for all individual
and joint repurchase agreements are held by the fund's custodian
bank until maturity of the repurchase agreement. Provisions for
all agreements ensure that the daily market value of the
collateral is in excess of the repurchase amount, including
accrued interest, to protect the fund in the event of a default.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
in the financial statements. Actual results could differ from
these estimates.
(3) EXPENSES
................................
INVESTMENT MANAGEMENT AND ADMINISTRATIVE FEES
The fund has entered into the following agreements with Piper
Capital Management Incorporated (the advisor and administrator):
The investment advisory agreement provides the advisor with a
monthly investment management fee in an amount equal to an
annualized rate of 0.30% of the fund's average weekly net assets
and 5.25% of the daily gross income (i.e., investment income,
including amortization of discount and premium, other than gains
from the sale of securities or gains from options and futures
contracts less interest on money borrowed by the fund) accrued by
the fund during the month. The monthly investment management fee
shall not exceed in the aggregate 1/12th of 0.60% of the fund's
average weekly net assets during the month (approximately 0.60%
on an annual basis). For the year ended October 31, 1997, the
effective investment management fee incurred by the fund was
0.60%. For its fee, the advisor provides investment advice and
conducts the management and investment activities of the fund.
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1997 Annual Report 12 American Government Income Portfolio
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
The administration agreement provides the administrator with a
monthly fee in an amount equal to an annualized rate of 0.20% of
the fund's average weekly net assets. For its fee, the
administrator provides reporting, regulatory and record-keeping
services for the fund.
OTHER FEES AND EXPENSES
In addition to the investment management and administrative fees,
the fund is responsible for paying most other operating expenses
including: outside directors' fees and expenses; custodian fees;
registration fees; printing and shareholder reports; transfer
agent fees and expenses; legal, auditing and accounting services;
insurance; interest; taxes and other miscellaneous expenses.
Expenses paid indirectly represent a reduction of custodian fees
for earnings on miscellaneous cash balances maintained by the
fund.
(4) INVESTMENT
SECURITY
TRANSACTIONS
................................
Cost of purchases and proceeds from sales of securities, other
than temporary investments in short-term securities and dollar
roll transactions, for the year ended October 31, 1997,
aggregated $121,868,247 and $117,402,298, respectively. Including
dollar rolls, such purchases and sales aggregated $192,381,809
and $187,915,860, respectively.
(5) CAPITAL LOSS
CARRYOVER
................................
For federal income tax purposes, the fund had capital loss
carryovers at October 31, 1997, which, if not offset by
subsequent capital gains, will expire on the fund's fiscal
year-ends as indicated below. It is unlikely the board of
directors will authorize a distribution of any net realized
capital gains until the available capital loss carryovers have
been offset or expire.
<TABLE>
<CAPTION>
CAPITAL LOSS
CARRYOVER EXPIRATION
------------- ---------------
<S> <C> <C>
$ 26,037,491 2002
30,440,824 2003
4,719,224 2004
-------------
$ 61,197,539
-------------
-------------
</TABLE>
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1997 Annual Report 13 American Government Income Portfolio
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
(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 repurchased and retired 68,900 shares during the
year ended October 31, 1996. Cumulatively, the fund has
repurchased and retired 342,200 shares, which represents 1.6% of
the shares originally issued.
(7) SUBSEQUENT
EVENT -
REPURCHASE
OFFER
................................
The fund's board of directors concluded that an offer to
repurchase up to 25% of the fund's outstanding shares would be in
the best interests of shareholders. Accordingly, the board
authorized such an offer as part of a settlement agreement
reached in connection with class action litigation involving the
fund and seven other closed-end investment companies managed by
Piper Capital Management Incorporated.
The repurchase offer was sent to shareholders in October 1997,
and the deadline for submitting shares for repurchase was 5 p.m.
Central Time on November 17, 1997. The repurchase price was
determined on December 1, 1997 at the close of regular trading on
the New York Stock Exchange (4 p.m. Eastern Time). The percentage
of outstanding shares tendered, the number of shares tendered,
the repurchase price per share and proceeds paid by the fund were
as follows:
<TABLE>
<CAPTION>
PERCENTAGE SHARES REPURCHASE
TENDERED TENDERED PRICE PROCEEDS PAID
---------- ------------ ----------- --------------
<S> <C> <C> <C> <C>
25% 6,111,766 $6.91 $ 42,232,303
</TABLE>
The settlement agreement also provides that if the discount
between net asset value and market price of the fund does not
decrease to 5 percent or less within approximately two years
after the effective date of the settlement, the fund's board will
submit a shareholder proposal to convert the fund to an open-end
format unless the board determines at that time that it would not
be in fund shareholders' best interests to do so.
- ---------------------------------------------------------------------
1997 Annual Report 14 American Government Income Portfolio
<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>
Year Ended October 31,
---------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period ... $ 6.78 $ 7.08 $ 6.83 $ 10.99 $ 11.00
--------- --------- --------- --------- ---------
Operations:
Net investment income ................ 0.42 0.42 0.54 0.90 1.90
Net realized and unrealized gains
(losses) on investments ............ 0.16 0.04 0.80 (3.50) (0.04)
--------- --------- --------- --------- ---------
Total from operations .............. 0.58 0.46 1.34 (2.60) 1.86
--------- --------- --------- --------- ---------
Distributions to shareholders:
From net investment income ........... (0.42) (0.76) (1.09) (1.41) (1.27)
From net realized gains .............. -- -- -- -- (0.60)
In excess of net realized gains ...... -- -- -- (0.15) --
--------- --------- --------- --------- ---------
Total distributions to
shareholders ..................... (0.42) (0.76) (1.09) (1.56) (1.87)
--------- --------- --------- --------- ---------
Net asset value, end of period ......... $ 6.94 $ 6.78 $ 7.08 $ 6.83 $ 10.99
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Market value, end of period ............ $ 6.56 $ 6.00 $ 7.00 $ 7.25 $ 12.00
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
SELECTED INFORMATION
Total return, net asset value (a) ...... 8.87% 6.90% 21.40% (25.93)% 18.66%
Total return, market value (b) ......... 16.93% (3.48)% 13.46% (29.14)% 28.18%
Net assets at end of period (in
millions) ............................ $ 170 $ 166 $ 174 $ 167 $ 261
Ratio of expenses to average weekly net
assets excluding interest expense
(c) .................................. 0.98% 1.06% 1.41% 1.28% 0.95%
Ratio of expenses to average weekly net
assets including interest expense
(c) .................................. 1.47% 1.31% 1.41% 2.46% 2.34%
Ratio of net investment income to
average weekly net assets ............ 6.19% 6.26% 7.93% 10.84% 17.42%
Portfolio turnover rate (excluding
short-term securities and dollar roll
transactions) ........................ 63% 132% 206% 106% 79%
Amount of borrowings outstanding at end
of period (in millions) (d) .......... $ 15 $ 15 -- -- $ 97
Per-share amount of borrowings
outstanding at end of period ......... $ 0.59 $ 0.59 -- -- $ 4.06
Per-share amount of net assets,
excluding borrowings, at end of
period ............................... $ 7.53 $ 7.37 -- -- $ 15.05
Asset coverage ratio (e) ............... 1272% 1245% -- -- 370%
</TABLE>
(a) ASSUMES REINVESTMENT OF DISTRIBUTIONS AT NET ASSET VALUE AND DOES NOT
REFLECT A SALES CHARGE.
(b) ASSUMES REINVESTMENT OF DISTRIBUTIONS AT ACTUAL PRICES PURSUANT TO THE
FUND'S DIVIDEND REINVESTMENT PLAN.
(c) INCLUDES 0.06%, 0.38%, AND 0.30% FROM FEDERAL EXCISE TAXES IN FISCAL YEARS
1996, 1995 AND 1994, RESPECTIVELY.
(d) SECURITIES PURCHASED ON A WHEN-ISSUED BASIS FOR WHICH LIQUID SECURITIES ARE
SEGREGATED ARE NOT CONSIDERED BORROWINGS. SEE NOTE 2 IN THE NOTES TO
FINANCIAL STATEMENTS.
(e) REPRESENTS NET ASSETS, EXCLUDING BORROWINGS, AT END OF PERIOD DIVIDED BY
BORROWINGS OUTSTANDING AT END OF PERIOD.
- ---------------------------------------------------------------------
1997 Annual Report 15 American Government Income Portfolio
<PAGE>
Investments in Securities
- ---------------------------------------------------------------------
<TABLE>
<CAPTION>
AMERICAN GOVERNMENT INCOME PORTFOLIO October 31, 1997
.......................................................................................
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 (114.5%):
U.S. AGENCY MORTGAGE-BACKED SECURITIES (b) (92.6%):
ADJUSTABLE RATE (2.6%):
6.58%, FHLMC, COFI, 10/1/19 ....................... $ 4,454,261 $ 4,461,745
------------
FIXED RATE (84.0%):
7.00%, FHLMC, 9/1/10 .............................. 4,173,734 4,238,927
6.50%, FHLMC, 2/1/26 .............................. 3,669,113 3,619,433
6.00%, FHLMC, 9/1/09 .............................. 5,755,024 5,721,299
6.50%, FHLMC, 11/1/25 ............................. 2,308,783 2,282,325
6.50%, FHLMC, 5/1/26 .............................. 5,128,282 5,058,845
9.00%, FHLMC, 3/1/21 .............................. 1,884,269 2,019,107
9.50%, FHLMC, 6/1/21 .............................. 2,281,361 2,482,394
10.00%, FHLMC, 12/1/19 ............................ 2,622,895 2,873,697
7.00%, FHLMC, 9/1/10 .............................. 2,277,299 2,316,445
6.00%, FHLMC, 5/1/03 .............................. 2,651,517 2,634,945
6.00%, FHLMC, Series 1699, Class TD, 3/15/24 ...... 4,000,000 3,695,280
7.00%, FNMA, 1/1/08 ............................... 666,330 680,283
7.00%, FNMA, 5/1/09 ............................... 2,145,246 2,185,469
7.00%, FNMA, 10/1/25 .............................. 3,219,658 3,237,753
7.00%, FNMA, 5/1/26 ............................... 4,624,974 4,643,197
6.50%, FNMA, 5/1/11 ............................... 4,466,731 4,472,181
6.50%, FNMA, 5/1/04 ............................... 6,828,817 6,841,656
6.50%, FNMA, 4/1/11 ............................... 2,639,594 2,642,814
7.00%, FNMA, 4/1/26 ............................... 9,504,159 9,541,605
6.50%, FNMA, 4/1/11 ............................... 2,112,757 2,115,334
6.50%, FNMA, 7/1/26 ............................... 5,369,039 5,287,967
7.50%, FNMA, 10/1/26 .............................. 5,813,629 5,946,238
7.50%, FNMA, 10/1/26 .............................. 4,899,882 5,011,648
6.50%, FNMA, 4/1/04 ............................... 5,000,000(c) 5,009,350
7.00%, FNMA, 1/1/08 ............................... 9,000,000(c) 9,120,870
6.50%, FNMA, Series 1992-169, Class J, 3/25/21 .... 4,000,000 3,901,120
6.50%, FNMA, Series 1997-1, Class B, 2/18/04 ...... 4,500,000 4,525,875
8.00%, GNMA, 7/15/26 .............................. 1,170,434 1,216,151
8.00%, GNMA, 7/15/26 .............................. 4,716,940 4,901,183
9.00%, GNMA, 11/15/21 ............................. 3,950,572 4,262,904
6.50%, GNMA, 10/15/10 ............................. 1,992,430 2,012,792
7.00%, GNMA, 12/15/10 ............................. 3,094,499 3,165,085
9.00%, GNMA, 4/15/21 .............................. 4,529,348 4,924,262
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
- ---------------------------------------------------------------------
1997 Annual Report 16 American Government Income Portfolio
<PAGE>
Investments in Securities (continued)
- ---------------------------------------------------------------------
AMERICAN GOVERNMENT INCOME PORTFOLIO
(CONTINUED)
<TABLE>
<CAPTION>
Principal Market
Description of Security Amount Value (a)
- --------------------------------------------------------- ----------- ------------
<S> <C> <C>
9.00%, GNMA, 10/15/22 ............................. $ 2,801,923 $ 3,025,208
7.50%, GNMA, 1/1/23 ............................... 7,000,000(c) 7,157,500
------------
142,771,142
------------
Z-BOND (6.0%):
8.17%, FHLMC, Series 1870, Class Z, 1/15/24 ....... 6,506,425 5,915,511
8.22%, Vendee Mortgage Trust, Series 1996-1,Class
1Z, 2/15/26 ..................................... 4,500,049 4,166,281
------------
10,081,792
------------
Total U.S. Agency Mortgage-Backed Securities ... 157,314,679
------------
U.S. GOVERNMENT SECURITIES (21.9%):
6.13%, U. S. Treasury Note, 9/30/00 ............... 13,000,000(d) 13,145,600
5.63%, U. S. Treasury Note, 11/30/00 .............. 11,000,000(d) 10,973,820
6.00%, U. S. Treasury Note, 9/30/98 ............... 13,000,000 13,056,420
------------
37,175,840
------------
Total U.S. Government and Agency Securities
(cost: $189,466,187) ......................... 194,490,519
------------
SHORT-TERM SECURITIES (2.0%):
Repurchase agreement with Goldman Sachs, acquired
on 10/31/97, interest of $1,618, 5.73%, 11/3/97
(cost: $3,388,000) .............................. 3,388,000(e) 3,388,000
------------
Total Investments in Securities
(cost: $192,854,187)(f) ...................... $197,878,519
------------
------------
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
- ---------------------------------------------------------------------
1997 Annual Report 17 American Government Income Portfolio
<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:
COFI (11TH DISTRICT) - COST OF FUNDS INDEX OF THE FEDERAL RESERVE'S
11TH DISTRICT.
ADJUSTABLE - REPRESENTS SECURITIES THAT PAY INTEREST AT RATES THAT
INCREASE (DECREASE) WITH AN INCREASE (DECREASE) IN THE SPECIFIED
INDEX. INTEREST RATES DISCLOSED ARE IN EFFECT ON OCTOBER 31, 1997.
Z-BOND - REPRESENTS SECURITIES THAT PAY NO INTEREST OR PRINCIPAL DURING
THEIR INITIAL ACCRUAL PERIODS, BUT ACCRUE ADDITIONAL PRINCIPAL AT
SPECIFIED RATES. INTEREST RATE DISCLOSED REPRESENTS CURRENT YIELD
BASED UPON THE COST BASIS AND ESTIMATED TIMING OF FUTURE CASH FLOWS.
VENDEE - SECURITIES ISSUED THROUGH THE VENDEE LOAN PROGRAM,
ADMINISTERED AND GUARANTEED AS TO PAYMENT OF PRINCIPAL BY THE VETERANS
ADMINISTRATION (VA). THE VA GUARANTEE IS BACKED BY THE FULL FAITH AND
CREDIT OF THE UNITED STATES GOVERNMENT.
(c) ON OCTOBER 31, 1997, THE TOTAL COST OF INVESTMENTS PURCHASED ON A
WHEN-ISSUED BASIS WAS $21,166,406.
(d) ON OCTOBER 31, 1997, SECURITIES VALUED AT $14,593,916 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>
$ 8,000,000 9/3/97 5.55% 12/2/97 $ 72,767 (1)
6,500,000 9/16/97 5.55% 12/16/97 46,096 (2)
- ------------ ---------
$ 14,500,000 $ 118,863
- ------------ ---------
- ------------ ---------
</TABLE>
* INTEREST RATE AS OF OCTOBER 31, 1997. 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, $3,580,000 PAR
U.S. TREASURY NOTE, 5.63%, 11/30/00, $4,400,000 PAR
(2) MORGAN STANLEY; U.S. TREASURY NOTE, 5.63%, 11/30/00, $6,600,000 PAR
(E) REPURCHASE AGREEMENT IN A JOINT TRADING ACCOUNT WHICH IS COLLATERALIZED BY
U.S. GOVERNMENT AGENCY SECURITIES. ACCRUED INTEREST SHOWN REPRESENTS
INTEREST DUE AT MATURITY OF THE REPURCHASE AGREEMENT.
(F) ON OCTOBER 31, 1997, THE COST OF INVESTMENTS IN SECURITIES FOR FEDERAL
INCOME TAX PURPOSES WAS $192,854,187. THE AGGREGATE GROSS UNREALIZED
APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED ON THIS
COST WERE AS FOLLOWS:
<TABLE>
<S> <C>
GROSS UNREALIZED APPRECIATION ...... $ 5,056,411
GROSS UNREALIZED DEPRECIATION ...... (32,079)
------------
NET UNREALIZED APPRECIATION ...... $ 5,024,332
------------
------------
</TABLE>
- ---------------------------------------------------------------------
1997 Annual Report 18 American Government Income Portfolio
<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, 1997, 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-year 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 Portfolio Inc. as of October 31, 1997, and the
results of its operations and cash flows, the changes in its net assets and the
financial highlights for the periods stated in the first paragraph above, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
December 12, 1997
- ---------------------------------------------------------------------
1997 Annual Report 19 American Government Income Portfolio
<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 advisor 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 27,1996 ....................... $0.0350
December 18, 1996 ...................... 0.0350
January 10, 1997 ....................... 0.0350
February 26, 1997 ...................... 0.0350
March 26, 1997 ......................... 0.0350
April 23, 1997 ......................... 0.0350
May 28, 1997 ........................... 0.0350
June 25, 1997 .......................... 0.0350
July 23, 1997 .......................... 0.0350
August 27, 1997 ........................ 0.0350
September 24, 1997 ..................... 0.0350
October 15, 1997 ....................... 0.0350
-------
Total .............................. $0.4200
-------
-------
</TABLE>
- ---------------------------------------------------------------------
1997 Annual Report 20 American Government Income Portfolio
<PAGE>
Shareholder Update
- --------------------------------------------------------------------------------
ANNUAL MEETING RESULTS
An annual meeting of the fund's shareholders was held on August
20, 1997. Each matter voted upon at that meeting, as well as the
number of votes cast for, against or withheld, the number of
abstentions, and the number of broker non-votes with respect to
such matters, are set forth below.
1. The fund's shareholders elected the following directors:
<TABLE>
<CAPTION>
SHARES SHARES WITHHOLDING
VOTED "FOR" AUTHORITY TO VOTE
------------- ------------------
<S> <C> <C>
David T. Bennett ....................... 17,304,343 264,507
Jaye F. Dyer ........................... 17,303,895 264,955
William H. Ellis ....................... 17,304,227 264,623
Karol D. Emmerich ...................... 17,307,604 261,246
Luella G. Goldberg ..................... 17,304,451 264,399
David A. Hughey ........................ 17,306,767 262,083
George Latimer ......................... 17,301,116 267,734
</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, 1997. The following votes were cast regarding this
matter:
<TABLE>
<CAPTION>
SHARES
VOTED SHARES BROKER
"FOR" VOTED "AGAINST" ABSTENTIONS NON-VOTES
---------- ----------------- ----------- ---------
<S> <C> <C> <C>
17,354,342 82,046 132,462 --
</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.
- ---------------------------------------------------------------------
1997 Annual Report 21 American Government Income Portfolio
<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
- ---------------------------------------------------------------------
1997 Annual Report 22 American Government Income Portfolio
<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 an 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 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
noncertified form in your name.
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
- ---------------------------------------------------------------------
1997 Annual Report 23 American Government Income Portfolio
<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.
- ---------------------------------------------------------------------
1997 Annual Report 24 American Government Income Portfolio
<PAGE>
THIS PAGE WAS INTENTIONALLY LEFT BLANK.
- -------------------------------------------------------------------------------
1997 Annual Report 25 American Government Income Portfolio
<PAGE>
THIS PAGE WAS INTENTIONALLY LEFT BLANK.
- -------------------------------------------------------------------------------
1997 Annual Report 26 American Government Income Portfolio
<PAGE>
THIS PAGE WAS INTENTIONALLY LEFT BLANK.
- -------------------------------------------------------------------------------
1997 Annual Report 27 American Government Income Portfolio
<PAGE>
GLOSSARY OF TERMS***
- -------------------------------------------------------------------------------
BENCHMARK
A benchmark is an established basis of comparison for an investment's
performance. A benchmark may be an unmanaged market index or a group of
similar investments.
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 amount of assets exposed to market and
interest rate risk, and therefore may, to the extent a fund remains fully
invested, increase its net asset value volatility.
EFFECTIVE DURATION
Effective duration estimates how much the value of a security is expected
to change with a given change in interest rates. Longer effective durations
indicate more sensitivity to changes in interest rates. For example, if
interest rates were to increase by 1%, the market value of a bond with an
effective duration of five years would decrease by about 5%, with all other
factors being constant. It is important to remember that effective duration
is based on certain assumptions and has several limitations. It is most
effective as a measure when interest rate changes are small, rapid and
occur equally across all the different points of the yield curve. In
addition, effective duration is difficult to calculate precisely for bonds
with prepayment options, such as mortgage-backed securities, and can be
greatly affected by interest rate changes.
If a fund has an AGGRESSIVE EFFECTIVE DURATION, it means its managers have
set a longer duration posture in comparison to the fund's benchmark. A fund
with a long effective duration is more sensitive to changing interest
rates.
If a fund has a DEFENSIVE EFFECTIVE DURATION, it means its managers have
set a shorter duration posture in comparison to the fund's benchmark, to
make the fund less sensitive to changing interest rates.
If a fund has a NEUTRAL EFFECTIVE DURATION, the duration is approximately
the same as that of its benchmark.
- ---------------------------------------------------------------------------
1997 Annual Report 28 American Government Income Portfolio
<PAGE>
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, Retired 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 ADVISOR
- --------------------------------------------------------------------------------
PIPER CAPITAL MANAGEMENT INCORPORATED
222 South Ninth Street, Minneapolis, MN 55402-3804
CUSTODIAN, ACCOUNTING AND TRANSFER AGENT
- --------------------------------------------------------------------------------
INVESTORS FIDUCIARY TRUST COMPANY
801 Pennsylvania, 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
FOR MORE INFORMATION
- --------------------------------------------------------------------------------
BY PHONE [GRAPHIC]
- --------------------------------------------------------------------------------
800 866-7778
FOR GENERAL INFORMATION
- --------------------------------------------------------------------------------
press 5, our Mutual Fund Services representatives are ready to answer your
questions.
TO ORDER LITERATURE
press 5, ask a service representative to mail you additional literature,
including a Quarterly Update. You can also request to be put on a mailing
list to receive this information automatically each quarter.
BY MAIL [GRAPHIC]
- --------------------------------------------------------------------------------
Piper Capital Management
Attn: Mutual Fund Services
222 South Ninth Street
Minneapolis, MN 55402-3804
In an effort to reduce costs to our shareholders, we have implemented a process
to reduce duplicate mailings of the fund's shareholder reports. This
householding process should allow us to mail one report to each address where
one or more registered shareholders with the same last name reside. If you would
like to have additional reports mailed to your address, please call our Mutual
Fund Services area at 800 866-7778, or mail a request to us.
ON-LINE [GRAPHIC]
- --------------------------------------------------------------------------------
http://www.piperjaffray.com/
<PAGE>
[LOGO]
---------------
Bulk Rate
PIPER CAPITAL MANAGEMENT INCORPRATED U.S. Postage
222 SOUTH NINTH STREET PAID
MINNEAPOLIS, MN 55402-3804 Permit No. 3008
Mpls., MN
---------------
[GRAPHIC]
THIS DOCUMENT IS PRINTED ON PAPER MADE FROM
100% TOTAL RECOVERED FIBER, INCLUDING 15%
POST-CONSUMER WASTE.
#11120 12/1997 038-98
