<PAGE>
Financial Statements
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS For the Period Ended August 28, 1998*
................................................................................
<TABLE>
<S> <C>
INCOME:
Interest (net of interest expense of $332,603) ............. $ 7,440,980
Fee income (note 2) ........................................ 107,115
-----------------
Total investment income .................................. 7,548,095
-----------------
EXPENSES (NOTE 3):
Investment management fee .................................. 658,977
Administrative fee ......................................... 219,659
Custodian and accounting fees .............................. 87,065
Transfer agent fees ........................................ 15,229
Registration fees .......................................... 24,260
Reports to shareholders .................................... 111,451
Directors' fees ............................................ 12,091
Audit and legal fees ....................................... 49,171
Other expenses ............................................. 6,581
-----------------
Total expenses ........................................... 1,184,484
Less expenses paid indirectly .......................... (2,208)
-----------------
Total net expenses ....................................... 1,182,276
-----------------
Net investment income .................................... 6,365,819
-----------------
NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized gain on investments (note 4) .................. 1,674,703
Net realized loss on closed futures contracts .............. (48,307)
-----------------
Net realized gain on investments ......................... 1,626,396
Net change in unrealized appreciation or depreciation of
investments .............................................. (188,797)
-----------------
Net gain on investments .................................. 1,437,599
-----------------
Net increase in net assets resulting from operations ... $ 7,803,418
-----------------
-----------------
</TABLE>
*DATE FUND DISCONTINUED OPERATIONS DUE TO MERGER. SEE NOTE 1 IN THE NOTES TO
FINANCIAL STATEMENTS.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
- ---------------------------------------------------------------------
1998 Annual Report 1 American Government Income Portfolio
<PAGE>
Financial Statements (continued)
- ---------------------------------------------------------------------
STATEMENT OF CASH FLOWS For the Period Ended August 28, 1998*
................................................................................
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest and fee income .................................... $ 7,548,095
Net expenses ............................................... (1,182,276)
-----------------
Net investment income .................................... 6,365,819
-----------------
Adjustments to reconcile net investment income to net cash
provided by operating activities:
Change in accrued interest receivable and principal
receivable on mortgage securities ...................... 251,908
Net amortization of bond discount and premium ............ (65,324)
Change in accrued fees and expenses ...................... (233,350)
-----------------
Total adjustments ...................................... (46,766)
-----------------
Net cash provided by operating activities .............. 6,319,053
-----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments ......................... 92,709,383
Purchases of investments ................................... (37,828,798)
Net purchases of short-term securities ..................... (4,022,000)
Net variation margin paid for futures contracts ............ (48,307)
-----------------
Net cash provided by investing activities .............. 50,810,278
-----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments for reverse repurchase agreements ............. (14,500,000)
Retirement of fund shares tendered (note 7) ................ (42,232,303)
Distributions paid to shareholders ......................... (7,088,949)
-----------------
Net cash used by financing activities .................. (63,821,252)
-----------------
Cash overdraft transferred in conjunction with merger (note
1) ....................................................... 7,961
Net decrease in cash ....................................... (6,683,960)
Cash at beginning of period ................................ 6,683,960
-----------------
Cash at end of period .................................. $ --
-----------------
-----------------
Supplemental disclosure of cash flow information:
Cash paid for interest on reverse repurchase
agreements ............................................. $ 451,466
-----------------
-----------------
</TABLE>
*DATE FUND DISCONTINUED OPERATIONS DUE TO MERGER. SEE NOTE 1 IN THE NOTES TO
FINANCIAL STATEMENTS.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
- ---------------------------------------------------------------------
1998 Annual Report 2 American Government Income Portfolio
<PAGE>
Financial Statements (continued)
- ---------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
................................................................................
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED
8/28/98* 10/31/97
----------------- -----------------
<S> <C> <C>
OPERATIONS:
Net investment income ...................................... $ 6,365,819 $10,255,321
Net realized gain on investments ........................... 1,626,396 109,884
Net change in unrealized appreciation or depreciation of
investments .............................................. (188,797) 3,811,323
----------------- -----------------
Net increase in net assets resulting from operations ..... 7,803,418 14,176,528
----------------- -----------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ................................. (6,912,007) (10,277,265)
Tax return of capital ...................................... (176,942) --
----------------- -----------------
Total distributions ...................................... (7,088,949) (10,277,265)
----------------- -----------------
CAPITAL SHARE TRANSACTIONS:
Decrease in net assets from capital share transactions (note
6) ....................................................... (170,623,179) --
----------------- -----------------
Total increase (decrease) in net assets .................. (169,908,710) 3,899,263
Net assets at beginning of period .......................... 169,908,710 166,009,447
----------------- -----------------
Net assets at end of period ................................ $ -- $169,908,710
----------------- -----------------
----------------- -----------------
Undistributed net investment income ........................ $ -- $ 546,188
----------------- -----------------
----------------- -----------------
</TABLE>
*DATE FUND DISCONTINUED OPERATIONS DUE TO MERGER. SEE NOTE 1 IN THE NOTES TO
FINANCIAL STATEMENTS.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
- ---------------------------------------------------------------------
1998 Annual Report 3 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 primarily invested in obligations issued or guaranteed
by the U.S. government, its agencies and instrumentalities,
including mortgage-backed securities. The fund entered into
dollar roll transactions. In addition, the fund borrowed through
the use of reverse repurchase agreements. Fund shares were listed
on the New York Stock Exchange under the symbol AAF.
On May 1, 1998, Piper Jaffray Companies Inc., the parent company
of the fund's investment advisor, was acquired by U.S. Bancorp.
U.S. Bancorp is a multi-state bank holding company headquartered
in Minneapolis, Minnesota with a geographic service area spanning
17 states. As of June 30, 1998, U.S. Bancorp was the 14th largest
U.S. commercial bank holding company, with assets of nearly $73.8
billion. U.S. Bank National Association ("U.S. Bank"), a wholly
owned subsidiary of U.S. Bancorp, currently acts as the
investment advisor to 32 mutual funds (the "First American
Funds"). As of June 30, 1998, U.S. Bank, acting through its First
American Asset Management group, managed more than $77.5 billion
in assets, including approximately $28.4 billion in assets of the
First American Funds.
As discussed in note 8, all of the fund's assets were acquired by
First American Investment Funds, Inc. - Fixed Income Fund
effective at the close of business on August 28, 1998. It is
anticipated that the fund will be dissolved under Minnesota law
as soon as practicable.
(2) SUMMARY OF
SIGNIFICANT
ACCOUNTING
POLICIES
................................
INVESTMENTS IN SECURITIES
Portfolio securities for which market quotations were readily
available were valued at current market value. If market
quotations or valuations were not readily available, or if such
quotations or valuations were believed to be inaccurate,
unreliable or not reflective of market value, portfolio
securities were valued according to procedures adopted by the
fund's board of directors in
- ---------------------------------------------------------------------
1998 Annual Report 4 American Government Income Portfolio
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
good faith at "fair value", that is, a price that the fund might
have reasonably expected to receive for the security or other
asset upon its current sale.
The current market value of certain fixed income securities was
provided by an independent pricing service. Fixed income
securities for which prices were not available from an
independent pricing service but where an active market exists
were valued using market quotations obtained from one or more
dealers that make markets in the securities or from a widely-used
quotation system. Short-term securities with maturities of 60
days or less were valued at amortized cost, which approximated
market value.
Financial futures were valued at the last settlement price
established each day by the board of trade or exchange on which
they were traded.
Securities transactions were accounted for on the date securities
were purchased or sold. Realized gains and losses were calculated
on the identified-cost basis. Interest income, including
amortization of bond discount and premium, was recorded on an
accrual basis.
FUTURES TRANSACTIONS
In order to gain exposure to or protect against changes in the
market, the fund could buy and sell financial futures contracts
and related options. Risks of entering into futures contracts and
related options included the possibility there may have been an
illiquid market and that a change in the value of the contract or
option may not have correlated with changes in the value of the
underlying securities.
Upon entering into a futures contract, the fund deposited either
cash or securities in an amount (initial margin) equal to a
certain percentage of the contract value. Subsequent payments
(variation margin) were made or received by the fund each day.
The variation margin payments were equal to the daily changes in
the contract
- ---------------------------------------------------------------------
1998 Annual Report 5 American Government Income Portfolio
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
value and were recorded as unrealized gains and losses. The fund
recognized a realized gain or loss when the contract was closed
or expired.
SECURITIES PURCHASED ON A WHEN-ISSUED BASIS
Delivery and payment for securities that were purchased by the
fund on a when-issued or forward-commitment basis could take
place a month or more after the transaction date. During this
period, such securities did not earn interest, were subject to
market fluctuation and may have increased or decreased in value
prior to their delivery. The fund segregated, 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 have increased the volatility of the
fund's net asset value if the fund made such purchases while
remaining substantially fully invested.
In connection with its ability to purchase securities on a when-
issued or forward-commitment basis, the fund entered into
mortgage dollar rolls in which the fund sold securities purchased
on a forward commitment basis and simultaneously contracted 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 received negotiated fees. For the period ended August
28, 1998, such fees earned by the fund amounted to $107,115.
FEDERAL TAXES
Prior to the merger, the fund complied with the requirements of
the Internal Revenue Code applicable to regulated investment
companies and was not subject to federal income tax. Therefore,
no income tax provision was required. The fund also distributed
its taxable net investment income and realized gains 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 have differed from
- ---------------------------------------------------------------------
1998 Annual Report 6 American Government Income Portfolio
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
their ultimate characterization for federal income tax purposes.
Distributions that exceeded the net investment income or net
realized gains recorded on a tax basis are presented as a "tax
return of capital" in the statements of changes in net assets and
the financial highlights. In addition, due to the timing of
dividend distributions, the fiscal year in which amounts were
distributed may have differed from the year that the income or
realized gains or losses were recorded by the fund.
DISTRIBUTIONS TO SHAREHOLDERS
Distributions from net investment income were made monthly and
realized capital gains, if any, were distributed at least
annually. These distributions were recorded as of the close of
business on the ex-dividend date. Such distributions were 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 were purchased in the open market
unless the market price plus commissions exceeded 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
were insufficient to satisfy the dividend reinvestment
requirement, the fund issued new shares at a discount of up to 5%
from the current market price.
REPURCHASE AGREEMENTS
For repurchase agreements entered into with certain
broker-dealers, the fund, along with other affiliated registered
investment companies, transfered uninvested cash balances into a
joint trading account, the daily aggregate of which was invested
in repurchase agreements secured by U.S. government or agency
obligations. Securities pledged as collateral for all individual
and joint repurchase agreements were held by the fund's custodian
bank until maturity of the repurchase agreement. Provisions for
all agreements ensured that the daily market value of the
collateral was in excess of the repurchase amount, including
accrued interest, to protect the fund in the event of a default.
- ---------------------------------------------------------------------
1998 Annual Report 7 American Government Income Portfolio
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles required management to
make estimates and assumptions that affected the reported amounts
in the financial statements. Actual results could have differed
from these estimates.
(3) EXPENSES
................................
INVESTMENT MANAGEMENT AND ADMINISTRATIVE FEES
The fund entered into an investment advisory agreement with Piper
Capital Management Incorporated (Piper Capital). In addition,
Piper Capital provided services under an administration agreement
through April 30, 1998. Effective May 1, 1998, the fund entered
into an administration agreement with U.S. Bank, an affiliate of
the advisor.
The investment advisory agreement provided 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 could 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 period ended August 28, 1998,
the effective investment management fee incurred by the fund was
0.60%. For its fee, the advisor provided investment advice and
conducted the management and investment activities of the fund.
The administration agreement provided 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 provided reporting, regulatory and record-keeping
services for the fund.
- ---------------------------------------------------------------------
1998 Annual Report 8 American Government Income Portfolio
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
OTHER FEES AND EXPENSES
In addition to the investment management and administrative fees,
the fund was 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 period ended August 28, 1998,
aggregated $30,745,529 and $92,709,383, respectively. Including
dollar rolls, such purchases and sales aggregated $115,119,865
and $177,083,719, respectively.
(5) CAPITAL LOSS
CARRYOVER
................................
For federal income tax purposes, the fund had capital loss
carryovers at August 28, 1998, which, if not offset by subsequent
capital gains, will expire on the fund's fiscal year-ends as
indicated below. As a result of the acquisition of the fund's net
assets by First American Investment Funds, Inc. - Fixed Income
Fund, these capital loss carryovers will be available to Fixed
Income Fund, subject to certain limitations. It is unlikely the
board of Fixed Income Fund will authorize a distribution of any
net realized capital gains by such fund until the available
capital loss carryovers have been offset or expire. Utilization
of these capital loss
- ---------------------------------------------------------------------
1998 Annual Report 9 American Government Income Portfolio
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
carryovers by Fixed Income Fund in the year ended September 30,
1998 is limited to $541,597. In subsequent years, utilization of
these capital loss carryovers is limited to $6,589,431 per year.
<TABLE>
<CAPTION>
CAPITAL LOSS
CARRYOVER EXPIRATION
------------- ----------
<S> <C> <C>
$ 24,335,799 2002
30,440,824 2003
4,719,224 2004
-------------
$ 59,495,847
-------------
-------------
</TABLE>
(6) CAPITAL SHARE
TRANSACTIONS
................................
Capital share transactions for the fund were as follows:
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 1, 1997 YEAR ENDED
TO AUGUST 28, 1998 OCTOBER 31, 1997
------------------- -----------------
<S> <C> <C>
Shares tendered (6,111,766 and 0 shares,
respectively) (note 7) ............... $ 42,232,303 $ --
Merger into First American Fixed Income
Fund (18,357,911 and 0 shares,
respectively) (note 8) ............... 128,390,876 --
------------------- ------
$170,623,179 $ --
------------------- ------
------------------- ------
</TABLE>
(7) REPURCHASE
OFFER
................................
The fund's board of directors concluded that an offer to
repurchase up to 25% of the fund's outstanding shares would be in
the best interests of shareholders. Accordingly, the board
authorized such an offer as part of a settlement agreement
reached in connection with class action litigation involving the
fund and seven other closed-end investment companies managed by
Piper Capital Management Incorporated.
The repurchase offer was sent to shareholders in October 1997,
and the deadline for submitting shares for repurchase was 5 p.m.
Central Time on November 17, 1997. The repurchase price was
determined on December 1, 1997 at the close of regular trading on
the New York Stock Exchange (4 p.m. Eastern Time). The
- ---------------------------------------------------------------------
1998 Annual Report 10 American Government Income Portfolio
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
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 PROCEEDS
TENDERED TENDERED PRICE PAID
---------- ------------- ----------- --------------
<S> <C> <C> <C> <C>
25% 6,111,766 $6.91 $ 42,232,303
</TABLE>
(8) MERGER
................................
At a special meeting held August 10, 1998, shareholders of
American Government Income Portfolio, Inc. approved a plan under
which the fund's assets were acquired by Fixed Income Fund, a
diversified series of an open-end investment management company,
in exchange for Class A shares of Fixed Income Fund. This
tax-free reorganization was effective August 28, 1998.
The following table presents the composition of the net assets of
American Government Income Portfolio, Inc. immediately prior to
the merger.
<TABLE>
<CAPTION>
Capital stock and additional paid-in
capital .............................. $183,126,484
<S> <C>
Accumulated net realized loss on
investments .......................... (59,571,143)
Unrealized appreciation of
investments .......................... 4,835,535
------------
Total - representing net assets
applicable to capital stock ........ $128,390,876
------------
------------
Shares outstanding ..................... 18,357,911
Net asset value ........................ $ 6.994
</TABLE>
- ---------------------------------------------------------------------
1998 Annual Report 11 American Government Income Portfolio
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
(9) FINANCIAL
HIGHLIGHTS
................................
Per-share data for a share of capital stock outstanding
throughout each period and selected information for each period
are as follows:
AMERICAN GOVERNMENT INCOME PORTFOLIO
<TABLE>
<CAPTION>
Period Ended Year Ended October 31,
August 28, ---------------------------------------------------------
1998(g) 1997 1996 1995 1994 1993
------------ --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period ... $ 6.94 $ 6.78 $ 7.08 $ 6.83 $ 10.99 $ 11.00
------------ --------- --------- --------- --------- ---------
Operations:
Net investment income ................ 0.34 0.42 0.42 0.54 0.90 1.90
Net realized and unrealized gains
(losses) on investments ............ 0.08 0.16 0.04 0.80 (3.50) (0.04)
------------ --------- --------- --------- --------- ---------
Total from operations .............. 0.42 0.58 0.46 1.34 (2.60) 1.86
------------ --------- --------- --------- --------- ---------
Distributions to shareholders:
From net investment income ........... (0.36) (0.42) (0.76) (1.09) (1.41) (1.27)
From net realized gains .............. -- -- -- -- -- (0.60)
In excess of net realized gains ...... -- -- -- -- (0.15) --
Tax return of capital ................ (0.01) -- -- -- -- --
------------ --------- --------- --------- --------- ---------
Total distributions to
shareholders ..................... (0.37) (0.42) (0.76) (1.09) (1.56) (1.87)
------------ --------- --------- --------- --------- ---------
Net asset value, date of merger
(8/28/98) (6.99) -- -- -- -- --
------------ --------- --------- --------- --------- ---------
Net asset value, end of period ......... $ -- $ 6.94 $ 6.78 $ 7.08 $ 6.83 $ 10.99
------------ --------- --------- --------- --------- ---------
------------ --------- --------- --------- --------- ---------
Market value, end of period ............ $ --(h) $ 6.56 $ 6.00 $ 7.00 $ 7.25 $ 12.00
------------ --------- --------- --------- --------- ---------
------------ --------- --------- --------- --------- ---------
SELECTED INFORMATION
Total return, net asset value (a) ...... 6.26% 8.87% 6.90% 21.40% (25.93)% 18.66%
Total return, market value (b) ......... 12.60% 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) .................................. 1.08%(f) 0.98% 1.06% 1.41% 1.28% 0.95%
Ratio of expenses to average weekly net
assets including interest expense
(c) .................................. 1.38%(f) 1.47% 1.31% 1.41% 2.46% 2.34%
Ratio of net investment income to
average weekly net assets ............ 5.80%(f) 6.19% 6.26% 7.93% 10.84% 17.42%
Portfolio turnover rate (excluding
short-term securities and dollar roll
transactions) ........................ 21% %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. FOR PURPOSES OF THE FISCAL 1998
COMPUTATION, THE AUGUST 28, 1998 NET ASSET VALUE IS USED AS THE END OF
PERIOD VALUE. SEE NOTE 1 REGARDING THE MERGER ON AUGUST 28, 1998.
(c) INCLUDES 0.06%, 0.38%, AND 0.30% FROM FEDERAL EXCISE TAXES IN FISCAL YEARS
1996, 1995 AND 1994, RESPECTIVELY.
(d) SECURITIES PURCHASED ON A WHEN-ISSUED BASIS FOR WHICH LIQUID SECURITIES ARE
SEGREGATED ARE NOT CONSIDERED BORROWINGS. SEE NOTE 2 IN THE NOTES TO
FINANCIAL STATEMENTS.
(e) REPRESENTS NET ASSETS, EXCLUDING BORROWINGS, AT END OF PERIOD DIVIDED BY
BORROWINGS OUTSTANDING AT END OF PERIOD.
(f) ANNUALIZED.
(g) DATE THE FUND DISCONTINUED OPERATIONS DUE TO MERGER. SEE NOTE 1 IN THE
NOTES TO FINANCIAL STATEMENTS.
(h) SHARES STOPPED TRADING ON THE NEW YORK STOCK EXCHANGE ON AUGUST 24, 1998.
- ---------------------------------------------------------------------
1998 Annual Report 12 American Government Income Portfolio
<PAGE>
Independent Auditors' Report
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS AND SHAREHOLDERS
AMERICAN GOVERNMENT INCOME PORTFOLIO INC.:
We have audited the statements of operations and cash flows of American
Government Income Portfolio, Inc. for the period from November 1, 1997 to August
28, 1998 (date of fund merger), the statements of changes in net assets for the
period from November 1, 1997 to August 28, 1998 and the year ended October 31,
1997, and the financial highlights presented in note 9 to the financial
statements. 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. 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 referred to above present fairly, in
all material respects, for American Government Income Portfolio, Inc., 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.
As described in note 1 to the financial statements, American Government Income
Portfolio, Inc. merged into Fixed Income Fund (a series of First American
Investments Funds, Inc.) effective August 28, 1998.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
October 9, 1998
- ---------------------------------------------------------------------
1998 Annual Report 13 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
(97.5% TAXABLE AS ORDINARY DIVIDENDS, 2.5% TAX RETURN OF
CAPITAL, NONE QUALIFYING FOR DEDUCTION BY CORPORATIONS)
<TABLE>
<CAPTION>
PAYABLE DATE AMOUNT
- ---------------------------------------- -------
<S> <C>
November 24, 1997 ...................... $0.0350
December 22, 1997 ...................... 0.0350
January 12, 1998 ....................... 0.0350
February 25, 1998 ...................... 0.0350
March 25, 1998 ......................... 0.0350
April 22, 1998 ......................... 0.0350
May 27, 1998 ........................... 0.0350
June 24, 1998 .......................... 0.0350
July 29, 1998 .......................... 0.0350
August 21, 1998 ........................ 0.0595
-------
Total .............................. $0.3745
-------
-------
</TABLE>
- ---------------------------------------------------------------------
1998 Annual Report 14 American Government Income Portfolio
<PAGE>
Shareholder Update
- --------------------------------------------------------------------------------
SPECIAL MEETING RESULTS
A special meeting of the fund's shareholders was held on August
10, 1998. 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. PROPOSAL TO RATIFY AND APPROVE AN INTERIM ADVISORY AGREEMENT
between the fund and Piper Capital Management Incorporated
("Piper Capital"), and the receipt of investment advisory
fees by Piper Capital under such agreement.
<TABLE>
<CAPTION>
SHARES VOTED
------------
<S> <C>
For .................................... 16,409,213
Against ................................ 201,131
Abstain ................................ 224,389
------------
Total ................................ 16,834,733
</TABLE>
2. PROPOSAL TO APPROVE AN AGREEMENT AND PLAN OF REORGANIZATION
providing for the transfer of the assets and liabilities of
American Government Income Portfolio, Inc. to Fixed Income
Fund, an open-end fund of First American Investment Funds,
Inc., in exchange for Class A Shares of Fixed Income Fund.
<TABLE>
<CAPTION>
SHARES VOTED
------------
<S> <C>
For .................................... 10,046,269
Against ................................ 159,986
Abstain ................................ 212,119
Broker Non-Vote ........................ 6,416,359
------------
Total ................................ 16,834,733
</TABLE>
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1998 Annual Report 15 American Government Income Portfolio
