<PAGE>
MINNESOTA MUNICIPAL
INCOME PORTFOLIO
* * *
[PHOTOS]
ANNUAL REPORT
1995
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TABLE OF CONTENTS
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MINNESOTA MUNICIPAL INCOME PORTFOLIO
Minnesota Municipal Income Portfolio is a non-diversified, closed-end municipal
bond fund. The fund's investment objective is to provide high current income
exempt from regular federal and Minnesota state personal income tax while
preserving investors' capital. To realize this objective, the fund invests in a
wide range of Minnesota municipal securities rated investment grade or of
comparable quality when purchased. These securities may include municipal
derivatives which may be more volatile than traditional municipal securities in
certain market conditions. As with other mutual funds, there can be no assurance
this fund will achieve its investment objective. Since Minnesota Municipal
Income Portfolio's inception on June 25, 1993, the fund has been rated Af by
Standard & Poor's Corporation (S&P).* Fund shares trade on the American Stock
Exchange and the Chicago Stock Exchange under the symbol MXA.
*THIS FUND IS RATED Af, WHICH MEANS INVESTMENTS IN THIS FUND HAVE AN OVERALL
CREDIT QUALITY OF A. CREDIT QUALITIES ARE ASSESSED BY STANDARD & POOR'S MUTUAL
FUNDS RATING GROUP. S&P DOES NOT EVALUATE THE MARKET RISK OF AN INVESTMENT WHEN
ASSIGNING A CREDIT RATING. SEE STANDARD & POOR'S CORPORATE AND MUNICIPAL RATING
DEFINITIONS FOR AN EXPLANATION OF A.
THE FUND ALSO HAS BEEN GIVEN A MARKET RISK RATING BY S&P, WHICH WE CANNOT
PUBLISH DUE TO NASD REGULATIONS. RISK RATINGS EVALUATE VARIOUS INVESTMENT RISKS
THAT CAN AFFECT THE PERFORMANCE OF A BOND FUND AND INDICATE THE FUND'S OVERALL
STABILITY AND SENSITIVITY TO CHANGING MARKET CONDITIONS. THIS RATING IS
AVAILABLE BY CALLING S&P AT 1-800-424-FUND.
LETTER TO SHAREHOLDERS.............1
FINANCIAL STATEMENTS AND NOTES.....6
INVESTMENTS IN SECURITIES.........16
INDEPENDENT AUDITORS' REPORT......20
FEDERAL TAX INFORMATION...........21
SHAREHOLDER UPDATE................22
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MINNESOTA MUNICIPAL INCOME PORTFOLIO
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March 15, 1995
Dear Shareholders:
THE PAST YEAR HAS BEEN EXTREMELY CHALLENGING FOR THE BOND MARKET. Like the rest
of the fixed income market, the municipal bond market suffered its worst year of
performance in decades. Minnesota Municipal Income Portfolio had a net asset
value total return of -12.69%* for the year ended January 31, 1995. The fund
underperformed the Lipper Closed-End Minnesota Municipal Bond Fund Average,
which showed a return of -9.00% for the same period. The fund was able to
maintain its common stock distribution yield of 5.55%,** as short-term,
tax-exempt interest rates rose less than their taxable counterparts in 1994.
TOTAL RETURN PERFORMANCE
YEAR ENDED JANUARY 31, 1995
[CHART]
MINNESOTA MUNICIPAL INCOME PORTFOLIO'S TOTAL RETURN IS BASED ON CHANGES IN NET
ASSET VALUE (NAV), ASSUMES ALL DISTRIBUTIONS WERE REINVESTED AND DOES NOT
REFLECT SALES CHARGES. NAV-BASED PERFORMANCE IS USED TO MEASURE INVESTMENT
MANAGEMENT RESULTS.
TOTAL RETURN, BASED ON THE CHANGE IN MARKET PRICE RATHER THAN NAV FOR THE YEAR
ENDED JANUARY 31, 1995, WAS -18.11%. THIS FIGURE ASSUMES REINVESTMENT OF
DISTRIBUTIONS AND DOES NOT REFLECT SALES CHARGES.
*FIGURES SHOWN REFLECT PAST PERFORMANCE AND DO NOT GUARANTEE FUTURE RESULTS. THE
RETURN AND MARKET VALUE OF AN INVESTMENT IN THE FUND WILL FLUCTUATE AND SHARES,
WHEN SOLD, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
**THIS FIGURE REPRESENTS AN ANNUALIZED YIELD FOR THE YEAR ENDED JANUARY 31,
1995, BASED ON THE INITIAL OFFERING PRICE OF $15 PER SHARE. ACTUAL YIELD MAY
DIFFER, DEPENDING ON THE INDIVIDUAL SHAREHOLDER'S COST BASIS. THIS YIELD FIGURE
REPRESENTS PAST PERFORMANCE AND DOES NOT GUARANTEE FUTURE RESULTS. YIELDS ON
FUND SHARES WILL FLUCTUATE.
THE FUND'S PERFORMANCE DURING CALENDAR YEAR 1994 WAS DRAMATICALLY IMPACTED
BY THE VOLATILITY IN FIXED INCOME MARKETS THROUGHOUT THE YEAR. As the Federal
Reserve moved to tighten credit by raising taxable short-term interest rates six
times in 1994 and again in February 1995, the prices of bonds in general, and
municipal securities in particular, fell rapidly. This volatility caused the
municipal bond market to generally underperform the taxable bond markets through
November 1994, as investors responded by selling their longer-term
1
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MINNESOTA MUNICIPAL INCOME PORTFOLIO
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municipal holdings in favor of short-term investments. This excess selling
caused longer-term municipal bonds to become underpriced, creating a buying
opportunity. As a result, the municipal bond market has been outperforming the
taxable bond markets since December 1994.
[PHOTO]
[PHOTO]
Doug White, (above)
IS PRIMARILY RESPONSIBLE FOR THE DAY-TO-DAY MANAGEMENT OF THE MINNESOTA
MUNICIPAL INCOME PORTFOLIO. HE HAS 12 YEARS OF INVESTMENT EXPERIENCE.
Ron Reuss, (below)
ASSISTS WITH THE MANAGEMENT OF THE MINNESOTA MUNICIPAL INCOME PORTFOLIO. HE HAS
26 YEARS OF INVESTMENT EXPERIENCE.
IN ADDITION TO MAINTAINING COMMON STOCK DISTRIBUTIONS IN THE MINNESOTA MUNICIPAL
INCOME PORTFOLIO, WE ALSO HAVE BEEN REGULARLY ADDING TO THE FUND'S UNDISTRIBUTED
NET INVESTMENT INCOME (DIVIDEND RESERVE). This dividend reserve, which is
reflected in the fund's net asset value and will fluctuate, is available to help
maintain common stock distributions in times when the fund may be paying higher
rates on the preferred stock it has issued. Rates paid on the preferred stock
(approximately 3.65% as of March 15, 1995) are reset every seven days and are
based on short-term, tax-exempt interest rates. Preferred shareholders accept
these short-term rates in exchange for low credit risk (shares of preferred
stock are rated AAA by Moody's and S&P), high liquidity and low price volatility
(shares of preferred stock trade at par and are remarketed every seven days).
The proceeds from the sale of preferred stock are invested at long-term rates.
Because these long-term rates are normally higher than the short-term rates paid
on the preferred stock, common shareholders benefit by receiving higher
dividends and/or an increase to the dividend reserve as the additional assets
from the sale of preferred stock are invested for their benefit. Because this is
a form of leverage, it can also increase the volatility of the fund. For
example, if short-term interest rates rise higher than long-
2
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MINNESOTA MUNICIPAL INCOME PORTFOLIO
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term rates, the rate the fund has to pay on its preferred stock dividend
could be higher than the rate it earns on the proceeds of the sale of
preferred stock. In that case, common shareholders would receive a lower rate
of return than if their fund did not have any preferred stock outstanding.
While this type of economic environment is unusual and historically has been
short-term in nature, it is a risk of investing in a leveraged portfolio.
THE FUND'S RELATIVELY LONG DURATION CAUSED GREATER PRICE DECLINES AS INTEREST
RATES ROSE IN 1994. In general, fixed income portfolios with long durations tend
to outperform in bull bond markets (i.e., when interest rates are falling and
bond prices are rising), and tend to underperform in bear bond markets. For most
of 1994 we experienced a bear market, causing the fund to underperform
comparable funds with shorter durations. However, it's important to remember
that the fund is managed as a long-term investment, and we believe that a longer
relative duration will, over time, benefit shareholders as it may provide higher
tax-free income. However, this characteristic will also increase the portfolio's
volatility.
PORTFOLIO COMPOSITION
JANUARY 31, 1995
[CHART]
INVESTMENT CATEGORIES REFLECT PERCENTAGE OF TOTAL ASSETS.
THE PORTFOLIO IS INVESTED IN INVERSE FLOATING RATE AND INVERSE INTEREST-ONLY
MUNICIPAL DERIVATIVE SECURITIES TO A LIMITED EXTENT. These securities currently
represent 7% of the fund's total assets.
3
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MINNESOTA MUNICIPAL INCOME PORTFOLIO
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The interest rates paid on these securities generally vary inversely to the
rate paid on a related floating rate security. The relationship of the
floating rate to the inverse rate can be one-to-one or a multiple thereof.
Although the municipal derivatives significantly underperformed more
traditional municipal bonds due to the rapidly rising interest rate
environment of calendar 1994, we believe their long-term total return
potential outweighs their short-term volatility.
BECAUSE MINNESOTA ENJOYS A DIVERSE ECONOMY, THE LACK OF GEOGRAPHIC
DIVERSIFICATION IS LESS OF A CONCERN THAN FOR OTHER STATE-SPECIFIC FUNDS. No
single company or industry dominates in Minnesota; seven industries each account
for 8% to 20% of the state's economy. As a result, Minnesota usually experiences
cycles of expansion and recession that are less severe than most other states
and even the United States as a whole. The state's unemployment rate is
typically one or two percentage points less than the national average.
THE ECONOMY IS SHOWING SOME SIGNS OF SLOWING IN 1995. The U.S. Gross Domestic
Product grew by an estimated 4% in 1994 -- a rate that we believe is not
sustainable over the long term. This could trigger the Federal Reserve to
continue to raise short-term interest rates to curb inflation. However,
inflation remains low with the Consumer Price Index rising just 2.7% for the 12
months ended December 31, 1994. If the economy slows as predicted, further
action from the Fed could be precluded.
GOING FORWARD, WE BELIEVE FUNDAMENTAL SUPPLY AND DEMAND PRESSURES MAKE THE
MINNESOTA MUNICIPAL BOND MARKET ESPECIALLY ATTRACTIVE. The supply of new issues
in Minnesota decreased by 60% in 1994 compared to 1993 and is expected to be
down again slightly in 1995 compared to 1994 levels. Furthermore, when you take
into account all the prerefunded bonds issued in 1985 with 10-year calls that
are now due to mature in 1995, other called bonds, and natural maturities, the
national municipal bond market is
4
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MINNESOTA MUNICIPAL INCOME PORTFOLIO
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expected to shrink by slightly less than 1% in 1995. On the demand side, high
federal tax brackets coupled with high Minnesota income taxes are expected to
generate continued demand for bonds that are tax-exempt from both federal and
state taxes for Minnesota residents. As a holder of municipal bonds, this
fund will benefit from limited supply coupled with strong demand. Such
pressures tend to support prices and an active secondary market for the
fund's bonds.
DESPITE THE VOLATILITY OF 1994, WE BELIEVE THE CURRENT MARKET ENVIRONMENT
SHOULD PROVIDE MUNICIPAL BOND INVESTORS WITH ATTRACTIVE AFTER-TAX RETURNS.
For example, a 6% tax-exempt yield for someone in the 41.4% combined federal
and state of Minnesota tax bracket represents the equivalent of a 10.24%
taxable yield.* At that rate, you are earning slightly over 7.5% above the
inflation rate of 2.7% -- an appealing after-tax return. Historically, low
inflation combined with high short-term interest rates have created a
situation where municipal investments outperform their taxable counterparts.
Thank you for your investment in the Minnesota Municipal Income Portfolio. We
consider it a privilege to manage your money and to serve your investment
needs.
Sincerely,
/s/ Doug White
Doug White
Manager
/s/ Ron Reuss
Ron Reuss
Co-manager
* THIS YIELD IS USED FOR ILLUSTRATIVE PURPOSES ONLY AND IS NOT INDICATIVE OF AN
INVESTMENT IN THE FUND.
5
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-----------------
PIPER CAPITAL Bulk Rate
MANAGEMENT U.S. Postage
PAID
PIPER CAPITAL MANAGEMENT INCORPORATED Permit No. 3008
222 SOUTH 9TH STREET Mpls., MN
MINNEAPOLIS, MN 55402-3804 -----------------
PIPER JAFFRAY INC., FUND SPONSOR AND NASD MEMBER.
[LOGO] THIS DOCUMENT IS PRINTED ON PAPER MADE FROM
100% TOTAL RECOVERED FIBER, INCLUDING 15% POST-CONSUMER WASTE.
134-95 MXA-01
STAPLES
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FINANCIAL STATEMENTS
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STATEMENT OF ASSETS AND LIABILITIES
JANUARY 31, 1995
<TABLE>
<S> <C>
ASSETS:
Investments in securities at market value* (note 2) .... $ 78,784,560
Cash in bank on demand deposit ........................... 163,733
Accrued interest receivable .............................. 1,901,275
----------------
Total assets ......................................... 80,849,568
----------------
LIABILITIES:
Preferred stock dividends payable (note 3) ............... 11,311
Accrued investment management fee ........................ 23,362
Accrued remarketing agent fee ............................ 4,967
Accrued administrative fee ............................... 10,012
Other accrued expenses ................................... 5,223
----------------
Total liabilities .................................... 54,875
----------------
Net assets applicable to outstanding capital stock ....... $ 80,794,693
----------------
----------------
REPRESENTED BY:
Preferred stock - authorized 1 million shares of $25,000
liquidation preference per share; outstanding, 1,244
shares (note 3) ........................................ 31,100,000
----------------
Common stock - authorized 200 million shares of $0.01 par
value; outstanding, 4,156,243 shares ................... 41,562
Additional paid-in capital ............................... 58,122,982
Undistributed net investment income ...................... 388,627
Accumulated net realized loss on investments ............. (3,056,001)
Unrealized depreciation of investments ................... (5,802,477)
----------------
Total - representing net assets applicable to
outstanding common stock ........................... 49,694,693
----------------
Total net assets ................................... $ 80,794,693
----------------
----------------
Net asset value per share of outstanding common stock (net
assets divided by 4,156,243 shares of common stock
outstanding) ........................................... $ 11.96
----------------
----------------
* Investments in securities at identified cost ........... $ 84,587,037
----------------
----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
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FINANCIAL STATEMENTS
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STATEMENT OF OPERATIONS
FOR THE YEAR ENDED
JANUARY 31, 1995
<TABLE>
<S> <C>
INCOME:
Interest ............................................... $ 5,202,706
----------------
EXPENSES (NOTE 5):
Investment management fee ................................ 287,373
Administrative fee ....................................... 123,160
Remarketing agent fee .................................... 78,830
Custodian, accounting and transfer agent fees ............ 64,530
Reports to shareholders .................................. 32,154
Directors' fees .......................................... 11,733
Audit and legal fees ..................................... 33,450
Other expenses ........................................... 21,337
----------------
Total expenses ....................................... 652,567
----------------
Net investment income ................................ 4,550,139
----------------
NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized loss on investments (note 4) ................ (2,864,350)
Net change in unrealized appreciation or depreciation of
investments ............................................ (8,556,148)
----------------
Net loss on investments ................................ (11,420,498)
----------------
Net decrease in net assets resulting from
operations ....................................... $ (6,870,359)
----------------
----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
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FINANCIAL STATEMENTS
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STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the
Period from
Year Ended 6/25/93* to
1/31/95 1/31/94
---------------- ----------------
<S> <C> <C>
OPERATIONS:
Net investment income .................................. $ 4,550,139 2,293,061
Net realized loss on investments ......................... (2,864,350) (194,266)
Net change in unrealized appreciation or depreciation of
investments ............................................ (8,556,148) 2,753,671
---------------- ----------------
Net increase (decrease) in net assets resulting from
operations ........................................... (6,870,359) 4,852,466
---------------- ----------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income:
Common stock dividends ................................. (3,463,696) (1,726,050)
Preferred stock dividends .............................. (942,614) (319,598)
---------------- ----------------
Total distributions .................................. (4,406,310) (2,045,648)
---------------- ----------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from initial public offering of 3,600,000 shares
of common stock ........................................ -- 54,000,000
Proceeds from issuance of 540,000 shares in connection
with exercising of over-allotment options granted to
underwriters of the initial public offering ............ -- 8,100,000
Underwriting discounts and offering expenses associated
with the issuance of common stock ...................... -- (3,600,300)
Proceeds from initial public offering of 1,244 shares of
preferred stock, net of underwriting discounts and
offering expenses of $591,500 .......................... -- 30,508,500
Proceeds from issuance of 19,576 common shares for the
dividend reinvestment plan (note 2) .................... 262,726 --
Payments for retirement of 10,000 common shares (note
7) ..................................................... (106,387) --
---------------- ----------------
Increase in net assets from capital share
transactions ......................................... 156,339 89,008,200
---------------- ----------------
Total increase (decrease) in net assets .............. (11,120,330) 91,815,018
Net assets at beginning of period (note 1) ................. 91,915,023 100,005
---------------- ----------------
Net assets at end of period .............................. $ 80,794,693 91,915,023
---------------- ----------------
---------------- ----------------
Undistributed net investment income ...................... $ 388,627 247,413
---------------- ----------------
---------------- ----------------
</TABLE>
* COMMENCEMENT OF OPERATIONS.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
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NOTES TO FINANCIAL STATEMENTS
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(1) ORGANIZATION Minnesota Municipal Income Portfolio (the fund) is registered
under the Investment Company Act of 1940 (as amended) as a non-
diversified, closed-end management investment company.
Minnesota Municipal Income Portfolio commenced operations on
June 25, 1993, upon completion of its initial public offering
of common stock. The only transaction of Minnesota Municipal
Income Portfolio prior to June 25, 1993, was the sale to Piper
Jaffray Inc. of 6,667 shares of common stock for $100,005 on
June 14, 1993. Shares of the fund are listed on the American
Stock Exchange and the Chicago Stock Exchange.
(2) SIGNIFICANT INVESTMENTS IN SECURITIES
ACCOUNTING The values of fixed income securities are determined using
POLICIES pricing services or prices quoted by independent brokers. Open
financial futures contracts are valued at the last settlement
price. When market quotations are not readily available,
securities are valued at fair value according to methods
selected in good faith by the board of directors. Short-term
securities with maturities of 60 days or less are valued at
amortized cost which approximates market value.
Securities transactions are accounted for on the date the
securities are purchased or sold. Realized gains and losses are
calculated on the identified-cost basis. Interest income,
including level-yield amortization of premium and discount, is
accrued daily.
The fund concentrates its investments in Minnesota and,
therefore, may have more credit risks related to the economic
conditions of Minnesota than a portfolio with a broader
geographical diversification.
FUTURES TRANSACTIONS
To gain exposure to or protect against changes in the market,
the fund may buy and sell interest rate 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
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NOTES TO FINANCIAL STATEMENTS
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(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 forward-commitment or when-issued basis can take
place a month or more after the transaction date. During this
period, such securities do not earn interest, are subject to
market fluctuations and may increase or decrease in value prior
to their delivery. The fund maintains, in segregated accounts
with its custodian, assets with a market value equal to the
amount of its purchase commitments. The purchase of securities
on a when-issued or forward-commitment basis may increase the
volatility of the fund's NAV to the extent the fund makes such
purchases while remaining substantially fully invested.
FEDERAL TAXES
The fund intends to comply with the requirements of the
Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to
shareholders. Therefore, no income tax provision is required.
In addition, on a calendar-year basis, the fund will
distribute substantially all of its taxable net
investment income and realized gains, if any, to avoid payment
of any federal excise taxes.
Net investment income and net realized gains (losses) may
differ for financial statement and tax purposes primarily
because of market discount amortization and losses deferred
due to "wash sale" transactions. The character of distributions
made during the year from net investment income or net realized
gains may therefore differ from their ultimate characterization
for federal income tax purposes. In addition, due to the timing
of dividend distributions, the fiscal year in which amounts are
distributed may differ from the year that the income or
realized gains (losses) were recorded by the fund.
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NOTES TO FINANCIAL STATEMENTS
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On the statement of assets and liabilities, as a result of
permanent book-to-tax differences, reclassification adjustments
have been made to decrease undistributed net investment income
and accumulated net realized loss on investments by $2,615.
DISTRIBUTIONS TO SHAREHOLDERS
Distributions from net investment income are made on a monthly
basis for common shareholders and a weekly basis for preferred
shareholders. Common stock distributions are recorded as of the
close of business on the ex-dividend date, and preferred stock
dividends are accrued daily. Realized capital gains, if any,
will be distributed on an annual basis. Distributions are
payable in cash or, for common shareholders, pursuant to the
fund's dividend reinvestment plan, reinvested in additional
shares of the fund's common stock. Under the plan, common
shares will be purchased in the open market.
Prior to amendment of this plan, effective November 23, 1994,
the fund could issue new shares for reinvestment of
distributions under certain circumstances.
(3) REMARKETED Minnesota Municipal Income Portfolio has issued and, as of
PREFERRED January 31, 1995, has outstanding 1,244 shares of remarketed
STOCK preferred stock (622 shares in class "M" and 622 shares in
class "W") ("RP-Registered Trademark-") with a liquidation
preference of $25,000 per share. The dividend rate on the
RP-Registered Trademark- is adjusted every seven days (on
Mondays for class "M" and on Wednesdays for class "W") as
determined by the remarketing agent. On January 31, 1995, the
dividend rates were 3.75% and 3.80% for class "M" and "W",
respectively.
The fund's board of directors approved a 2:1 stock split for
the RP-Registered Trademark- effective as of the close of
business on July 11, 1994, and July 13, 1994, for class "M" and
"W", respectively. Prior to the stock split, outstanding shares
were 311 each for class "M" and "W", with a liquidation
preference of $50,000 per share for each class.
(4) INVESTMENT Purchases of securities and proceeds from sales, other than
SECURITY temporary investments in short-term securities, for the year
TRANSACTIONS ended January 31, 1995 were $39,608,195 and $38,983,850,
respectively.
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NOTES TO FINANCIAL STATEMENTS
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(5) FEES AND The fund has entered into the following agreements with
EXPENSES Piper Capital Management Incorporated (the adviser and
administrator):
The investment advisory agreement provides the adviser with a
monthly investment management fee calculated at the annualized
rate of 0.35% of the fund's average weekly net assets (computed
by subtracting liabilities, which exclude preferred stock, from
the value of the total assets of the fund). For its fee, the
adviser will provide investment advice and, in general, conduct
the management and investment activity of the fund.
The administration agreement provides the administrator with a
monthly fee in an amount equal to an annualized rate of 0.15%
of the fund's average weekly net assets (computed by
subtracting liabilities, which exclude preferred stock, from
the value of the total assets of the fund). For its fee, the
administrator will provide reporting, regulatory, and
record-keeping services for the fund.
The fund has entered into a remarketing agent agreement with
Merrill Lynch, Pierce, Fenner & Smith (the remarketing agent).
The remarketing agreement provides the remarketing agent with a
monthly fee in an amount equal to an annualized rate of 0.25%
of the fund's average amount of RP-Registered Trademark-
outstanding. For its fee, the remarketing agent will remarket
shares of RP-Registered Trademark- tendered to it, on behalf
of shareholders thereof, and will determine the applicable
dividend rate for each seven-day dividend period.
In addition to the advisory, administrative and the remarketing
agent fees, the fund is responsible for paying most other
operational expenses including outside directors' fees and
expenses; custodian and registration fees; printing and
shareholder reports; transfer agent fees and expenses; legal,
auditing and accounting services; insurance, interest and other
miscellaneous expenses.
(6) CAPITAL For federal income tax purposes, Minnesota Municipal Income
LOSS Portfolio had a capital loss carryover of $3,056,001 as of
CARRYOVER January 31, 1995, which if not offset by subsequent capital
gains, will expire in the years 2003 and 2004. It is unlikely
the board of directors will authorize a distribution of any net
realized capital gains until the available capital loss
carryover has been offset or expires.
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NOTES TO FINANCIAL STATEMENTS
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(7) RETIREMENT The fund's board of directors has approved a plan to repurchase
OF FUND shares of the fund in the open market and retire those shares.
SHARES Repurchases may only be made when the previous day's closing
market price was trading at a discount from net asset value.
Daily repurchases are limited to 25% of the previous four weeks
average daily trading volume on the American Stock Exchange.
Under the current plan, cumulative repurchases in the fund
cannot exceed 3% of the total shares originally issued. The
board of directors will review the plan every six months and
may change the amount which may be repurchased. The plan was
last reviewed and reapproved by the board of directors on
November 29, 1994. Pursuant to the plan, the fund has
cummulatively repurchased and retired 10,000 shares as of
January 31, 1995, which represents 2.4% of the shares
originally issued.
<PAGE>
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NOTES TO FINANCIAL STATEMENTS
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(8) FINANCIAL Per-share data for a share of common stock outstanding
HIGHLIGHTS throughout each period and selected information for each period
are as follows:
MINNESOTA MUNICIPAL INCOME PORTFOLIO
<TABLE>
<CAPTION>
Year Ended Period from
January 31, 6/25/93* to
1995 1/31/94
------------- -------------
<S> <C> <C>
Net asset value, beginning of period ......................... $ 14.67 14.13
------ ------
Operations:
Net investment income ........................................ 1.09 0.55
Net realized and unrealized gains (losses) on investments .... (2.74) 0.63
------ ------
Total from operations ...................................... (1.65) 1.18
------ ------
Distributions to shareholders from net investment income
Paid to common shareholders ................................ (0.83) (0.42)
Paid to preferred shareholders ............................. (0.23) (0.08)
------ ------
Total distributions to shareholders ...................... (1.06) (0.50)
------ ------
Offering costs and underwriting discounts associated with the
remarketed preferred stock ................................... -- (0.14)
------ ------
Net asset value per share of common stock, end of period ..... $ 11.96 14.67
------ ------
------ ------
Market value per share of common stock, end of period ........ $ 11.88 15.50
------ ------
------ ------
Total investment return, common stock, market value** .......... (18.11)% 6.18%
Total investment return, common stock, net asset value+ ........ (12.69)% 6.86%
Net assets at end of period (in millions) .................... $ 81 92
Ratio of expenses to average weekly net assets ................. 0.79% 0.69%++
Ratio of net investment income to average weekly net assets .... 5.54% 4.66%++
Portfolio turnover rate (excluding short-term securities) ...... 49% 55%
Remarketed preferred stock, liquidation preference of $25,000
for each of 1,244 shares outstanding (in millions) ......... $ 31 31
Asset coverage for remarketed preferred stock+++ ............... 260% 296%
</TABLE>
* COMMENCEMENT OF OPERATIONS.
** TOTAL INVESTMENT RETURN, MARKET VALUE, IS BASED ON THE CHANGE IN MARKET
PRICE OF A COMMON SHARE DURING THE PERIOD AND ASSUMES REINVESTMENT OF
DISTRIBUTIONS AT ACTUAL PRICES PURSUANT TO THE FUND'S DIVIDEND REINVESTMENT
PLAN. THE PERCENTAGE FOR THE PERIOD FROM 6/25/93 TO 1/31/94 HAS NOT BEEN
ANNUALIZED.
+ TOTAL INVESTMENT RETURN, NET ASSET VALUE, IS BASED ON THE CHANGE IN NET
ASSET VALUE OF A COMMON SHARE DURING THE PERIOD AND ASSUMES REINVESTMENT OF
DISTRIBUTIONS AT NET ASSET VALUE. THE PERCENTAGE FOR THE PERIOD FROM 6/25/93
TO 1/31/94 HAS NOT BEEN ANNUALIZED.
++ ADJUSTED TO AN ANNUAL BASIS.
+++ REPRESENTS TOTAL NET ASSETS DIVIDED BY REMARKETED PREFERRED STOCK.
<PAGE>
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(9) QUARTERLY DATA (UNAUDITED)
MINNESOTA MUNICIPAL INCOME PORTFOLIO
DOLLAR AMOUNTS
<TABLE>
<CAPTION>
Net Increase
(Decrease)
in Net
Net Realized Assets Distributions
Net and Unrealized Resulting from Net
Investment Investment Gains (Losses) from Investment
Income Income on Investments Operations Income
----------- ----------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
4/30/94 $ 1,237,370 1,070,293 (9,569,254) (8,498,961) (1,038,295)
7/31/94 1,308,622 1,131,678 1,452,977 2,584,655 (1,085,373)
10/31/94 1,317,128 1,155,631 (5,888,608) (4,732,977) (1,109,107)
1/31/95 1,339,586 1,192,537 2,584,387 3,776,924 (1,173,535)
----------- ----------- -------------- ------------ ------------
$ 5,202,706 4,550,139 (11,420,498) (6,870,359) (4,406,310)
----------- ----------- -------------- ------------ ------------
----------- ----------- -------------- ------------ ------------
</TABLE>
PER-SHARE AMOUNTS
<TABLE>
<CAPTION>
Net Increase
Net Realized and (Decrease) Distributions
Net Unrealized in Net Assets from Net Quarter-End
Investment (Gains) Losses Resulting from Investment Net Asset
Income on Investments Operations Income Value
------------- ----------------- ----------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
4/30/94 $ 0.26 (2.30) (2.04) (0.25) 12.38
7/31/94 0.27 0.35 0.62 (0.26) 12.74
10/31/94 0.28 (1.41) (1.13) (0.27) 11.34
1/31/95 0.28 0.62 0.90 (0.28) 11.96
--- ----- ----- -----
$ 1.09 (2.74) (1.65) (1.06)
--- ----- ----- -----
--- ----- ----- -----
</TABLE>
<PAGE>
--------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
--------------------------------------------------------------------------------
MINNESOTA MUNICIPAL INCOME PORTFOLIO
JANUARY 31, 1995
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
--------------------------------------------------------- --------- ----------
<S> <C> <C>
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS)
MUNICIPAL LONG-TERM SECURITIES (97.5%):
MUNICIPAL BONDS (90.5%)
EDUCATION REVENUE (6.0%):
Higher Education Facility - St. Mary's College,
6.10%-6.15%, 10/1/16-10/1/23 ....................... $ 1,400,000 1,290,827
Higher Education Facility - University of St. Thomas,
5.50%-5.60%, 9/1/08-10/1/15 .......................... 680,000 616,876
Minnesota State Higher Education, 5.75%, 11/1/12 ...... 2,000,000 1,922,420
Minnesota State Higher Education Series 3-W,
6.20%-6.38%, 3/1/14-3/1/20 ........................... 1,050,000 993,919
----------
4,824,042
----------
ELECTRIC REVENUE (8.1%):
Northern Municipal Power Revenue, 5.50%, 1/1/18 ....... 400,000 365,504
Owatonna Public Utility Revenue, 6.75%, 1/1/16 ........ 725,000 765,520
Southern Municipal Power Agency Supply, 4.75%-5.75%,
1/1/12-1/1/18 ........................................ 6,205,000 5,385,248
----------
6,516,272
----------
GENERAL OBLIGATIONS (26.9%):
Albany Minnesota Independent School District, 6.00%,
2/1/16 ............................................... 2,000,000 1,951,080
Anoka County, 6.10%, 6/1/13 ........................... 500,000 481,805
Carver County, 5.88%, 2/1/14 .......................... 1,300,000 1,226,927
Chaska Minnesota Independent School District, 6.00%,
2/1/15 ............................................... 2,200,000 2,152,414
Elk River Minnesota Independent School District, 5.20%,
2/1/17 ............................................... 2,500,000 2,196,550
Milaca Independant School District, 4.50%, 2/1/16 ..... 1,735,000 1,564,536
Minnesota State General Obligation, 5.40%, 8/1/12 ..... 7,000,000 6,421,030
Richfield School District, 5.35%, 2/1/15 .............. 4,000,000 3,558,920
Roseville Minnesota Independent School District, 5.85%,
2/1/24 ............................................... 500,000 481,450
St. Paul Port Authority, 5.13%, 3/1/24 ................ 2,000,000 1,669,780
----------
21,704,492
----------
HEALTH SERVICE/HMO (3.7%):
Brainerd Minnesota Health Care Facility Revenue, 6.00%,
2/15/12 .............................................. 1,060,000 1,041,121
Duluth Clinic Health Care Facilities, 6.30%,
11/1/22 .............................................. 1,000,000 1,003,480
Duluth Minnesota Economic Development Authority Health
Care Facility Revenue, 6.00%, 2/15/12 ................ 1,000,000 980,130
----------
3,024,731
----------
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
<PAGE>
--------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
--------------------------------------------------------------------------------
MINNESOTA MUNICIPAL INCOME PORTFOLIO
(CONTINUED)
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
--------------------------------------------------------- --------- ----------
<S> <C> <C>
HOSPITAL REVENUE (15.3%):
Duluth Health Facility - Benedictine Health Systems,
6.00%, 2/15/12 ..................................... $ 1,800,000 1,764,234
Fergus Falls Minnesota Health Care - Lake Region
Hospital, 6.50%, 9/1/18 .............................. 1,000,000 926,350
Minneapolis Health Care Facility Revenue, 5.25%,
11/15/13 ............................................. 500,000 442,095
Minneapolis Minnesota Health Care Facilities Revenue,
5.25%, 11/15/19 ...................................... 1,750,000 1,501,325
Red Wing Health Care Facility - River Region, 6.50%,
9/1/22 ............................................... 1,000,000 909,870
Robbinsdale Minnesota Hospital Revenue, 5.55%,
5/15/19 .............................................. 1,500,000 1,350,554
St. Paul Housing Redevelopment Authority - Healtheast
Project, 6.63%, 11/1/17 .............................. 6,000,000 5,506,380
----------
12,400,808
----------
HOUSING REVENUE (15.9%):
Brooklyn Center, Ponds Family Housing Project, 5.90%,
1/1/20 ............................................... 1,050,000 932,631
Burnsville, Summit Park Apartments, 5.75%, 7/1/11 ..... 1,000,000 931,600
Coon Rapids Multifamily Development-Woodland Apts.,
5.63%, 12/1/09 ....................................... 3,895,000 3,597,695
Minneapolis and St. Paul Minnesota Housing &
Redevelopment Authority Health Care Systems, 4.75%,
11/15/18 ............................................. 1,500,000 1,178,115
Minnesota State Finance Housing Agency, 5.95%,
1/1/17 ............................................... 3,495,000 3,244,898
Minnesota State Housing Finance Agency, 5.70%-6.10%,
8/1/07-8/1/22 ........................................ 2,370,000 2,225,122
Minnesota State Housing Finance Authority -
Single-Family Series F, 6.30%, 7/1/25 ................ 750,000 722,483
----------
12,832,544
----------
IDR - MISCELLANEOUS PROJECTS (0.3%):
Duluth Seaway Port Authority, 5.75%, 12/1/16 .......... 300,000(e) 261,945
----------
LEASING REVENUE (1.3%):
Waconia Housing Redevelopment Authority - Public
Project, 5.70%-5.75%, 1/1/10-1/1/15 .................. 1,240,000 1,031,545
----------
MULTIPLE UTILITY REVENUE (5.0%):
Owatonna Public Utility Revenue, 5.45%, 1/1/16 ........ 4,400,000 4,035,152
----------
NURSING HOME REVENUE (3.4%):
Red Wing Elderly Housing - River Region, 6.50%,
9/1/22 ............................................... 1,500,000 1,364,805
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
<PAGE>
--------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
--------------------------------------------------------------------------------
MINNESOTA MUNICIPAL INCOME PORTFOLIO
(CONTINUED)
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
--------------------------------------------------------- --------- ----------
<S> <C> <C>
Waconia Housing Redevelopment Authority Revenue -
Evangelical Lutheran, 6.00%, 6/1/14 ................ $ 1,500,000 1,374,810
----------
2,739,615
----------
SALES TAX REVENUE (2.3%):
Minneapolis Convention Center Facilities, 5.40%,
4/1/12 ............................................... 2,000,000 1,840,140
----------
WATER/POLLUTION CONTROL REVENUE (2.3%):
Bass Brook Power and Light, 6.00%, 7/1/22 ............. 2,000,000 1,877,500
----------
Total Municipal Bonds
(cost: $78,244,792) ................................. 73,088,786
----------
MUNICIPAL DERIVATIVE SECURITIES (7.0%) (E):
Minneapolis General Obligation Floating Rate Trust
Certificates, 3.95%, 3/1/13 .......................... 400,000(d) 400,000
Minneapolis General Obligation Residual Trust
Certificates - Series A-5-144A, inverse interest-only,
15.95%, 3/1/13 ....................................... --(b) 762,795
Osseo Minnesota Independent School District #279,
inverse floater, 7.92%-7.93%, 2/1/13-2/1/14 .......... 1,515,000(c) 1,203,919
Breckenridge Minnesota Health Care Series J-2, inverse
floater, 6.91%, 11/15/13 ............................. 1,525,000(c) 1,020,500
Duluth Minnesota Health Care Series E-2, inverse
floater, 8.94%, 2/15/12 .............................. 925,000(c) 846,810
Rochester Minnesota Health Care, inverse floater,
8.67%, 11/15/10 ...................................... 740,000(c) 694,320
Minnesota Single-Family Housing Finance Agency, inverse
interest-only, 2.30%, 2/1/15 ......................... --(b) 767,430
----------
Total Municipal Derivative Securities
(cost: $6,342,245) .................................. 5,695,774
----------
Total Municipal Long-Term Securities
(cost: $84,587,037) (f) ........................... $ 78,784,560
----------
----------
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
<PAGE>
--------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
--------------------------------------------------------------------------------
NOTES TO INVESTMENTS IN SECURITIES:
(A) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO
THE FINANCIAL STATEMENTS.
(B) INVERSE INTEREST-ONLY--REPRESENTS SECURITIES THAT ENTITLE HOLDERS TO
RECEIVE ONLY INTEREST PAYMENTS. INTEREST IS PAID AT A RATE THAT INCREASES
(DECREASES) WITH A DECLINE (INCREASE) IN THE MARKET RATE PAID ON A
RELATED, FLOATING RATE SECURITY. INTEREST RATES DISCLOSED REPRESENT
CURRENT YIELDS BASED UPON THE ORIGINAL COST BASIS AND ESTIMATED TIMING AND
AMOUNT OF FUTURE CASH FLOWS.
(C) INVERSE FLOATER--REPRESENTS SECURITIES THAT PAY INTEREST AT RATES THAT
INCREASE (DECREASE) IN THE SAME MAGNITUDE AS, OR IN A MULTIPLE OF, A
DECLINE (INCREASE) IN THE MARKET RATE PAID ON A RELATED, FLOATING RATE
SECURITY. INTEREST RATES DISCLOSED ARE IN EFFECT ON JANUARY 31, 1995.
(D) VARIABLE RATE NOTE. INTEREST RATE VARIES TO REFLECT CURRENT MARKET
CONDITIONS; RATE SHOWN IS THE EFFECTIVE RATE ON JANUARY 31, 1995.
(E) SECURITIES SOLD WITHIN TERMS OF A PRIVATE PLACEMENT MEMORANDUM AND MAY BE
SOLD ONLY TO DEALERS IN THAT PROGRAM OR OTHER ACCREDITED INVESTORS.
(F) ON JANUARY 31, 1995, FOR FEDERAL INCOME TAX PURPOSES, THE COST OF
INVESTMENTS WAS $84,537,090. THE AGGREGATE GROSS UNREALIZED APPRECIATION
AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED ON THIS COST WERE AS
FOLLOWS:
<TABLE>
<S> <C>
GROSS UNREALIZED APPRECIATION .... $ 268,301
GROSS UNREALIZED DEPRECIATION ...... (6,020,831)
----------
NET UNREALIZED DEPRECIATION .... $ (5,752,530)
----------
----------
</TABLE>
<PAGE>
---------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
---------------------------------------------------------------------
THE BOARD OF DIRECTORS AND SHAREHOLDERS
MINNESOTA MUNICIPAL INCOME PORTFOLIO INC.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments in securities, of Minnesota Municipal Income
Portfolio Inc. as of January 31, 1995, the related statement of operations for
the year then ended and the statements of changes in net assets and the
financial highlights for the year ended January 31, 1995 and for the period from
June 25, 1993 (commencement of operations) to January 31, 1994. 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. 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 provides 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
Minnesota Municipal Income Portfolio Inc. as of January 31, 1995, the results of
its operations for the year then ended and the changes in its net assets and the
financial highlights for the year ended January 31, 1995 and for the period from
June 25, 1993 to January 31, 1994, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
March 3, 1995
<PAGE>
--------------------------------------------------------------------------------
FEDERAL TAX INFORMATION
--------------------------------------------------------------------------------
Fiscal Year Ended January 31, 1995
Federal tax information is presented as an aid to you in
reporting distributions. Please consult a tax adviser on
how to report these distributions at the state and local
levels.
SOURCE OF DISTRIBUTIONS
During the year ended January 31, 1995, 100% of
Minnesota Municipal Income Portfolio's distributions
were derived from interest on municipal securities and
qualify as exempt-interest dividends for federal and
state tax purposes.
FEDERAL TAXATION
Exempt-interest dividends are exempt from federal income
taxes and should not be included in your gross income,
but need to be reported on your income tax return for
informational purposes.
Minnesota Municipal Income Portfolio
<TABLE>
<CAPTION>
COMMON STOCK
Payable Date Per Share
------------------------------------------------ -----------
<S> <C>
February 23, 1994 ............................ $ 0.0694
March 23, 1994 ................................. 0.0694
April 27, 1994 ................................. 0.0694
May 25, 1994 ................................... 0.0694
June 22, 1994 .................................. 0.0694
July 27, 1994 .................................. 0.0694
August 24, 1994 ................................ 0.0694
September 28, 1994 ............................. 0.0694
October 26, 1994 ............................... 0.0694
November 23, 1994 .............................. 0.0694
December 28, 1994 .............................. 0.0694
January 13, 1995 ............................... 0.0694
-----------
$ 0.8328
-----------
-----------
<CAPTION>
PREFERRED STOCK
(at $25,000/share) Per Share
------------------------------------------------ -----------
<S> <C>
Total class "M" .............................. $ 751.26
-----------
-----------
Total class "W" .............................. $ 764.20
-----------
-----------
</TABLE>
<PAGE>
--------------------------------------------------------------------------------
SHAREHOLDER UPDATE
--------------------------------------------------------------------------------
ANNUAL MEETING RESULTS
An annual meeting of the fund's shareholders was held on August 22, 1994. Each
matter voted upon at the meeting, as well as the number of votes cast for,
against or withheld, and the number of abstentions with respect to such matter,
are set forth below. All numbers have been adjusted to reflect the 2:1 preferred
stock split.
1. The fund's preferred shareholders elected the following two directors:
<TABLE>
<CAPTION>
Shares Voted Shares Withholding
"For" Authority to Vote
------------- ------------------
<S> <C> <C>
David T. Bennett 824 6
William H. Ellis 824 6
</TABLE>
2. The fund's preferred and common shareholders, voting as a class, elected
the following six directors:
<TABLE>
<CAPTION>
Shares Voted Shares Withholding
"For" Authority to Vote
------------ ------------------
<S> <C> <C>
Jaye F. Dyer 2,273,518 55,525
Karol D. Emmerich 2,272,868 56,175
Luella G. Goldberg 2,269,394 59,649
John T. Golle 2,266,583 62,459
Edward J. Kohler* 2,268,111 60,932
George Latimer 2,268,669 60,374
</TABLE>
-----------------------------------------------------------------------------
* Mr. Kohler resigned as a director of the fund, effective November 30, 1994.
3. The fund's preferred and common shareholders, voting as a class, 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 January 31, 1995. The
following votes were cast regarding this matter:
<TABLE>
<CAPTION>
Shares Voted Shares Voted
"For" "Against" Abstentions
------------ ------------- -----------
<S> <C> <C>
2,250,548 12,642 65,853
</TABLE>
<PAGE>
--------------------------------------------------------------------------------
SHAREHOLDER UPDATE
--------------------------------------------------------------------------------
4. The fund's preferred and common shareholders, voting as a class, approved
the Investment Advisory and Management Agreement dated June 18, 1993, between
the fund and Piper Capital Management. The following votes were cast regarding
this matter:
<TABLE>
<CAPTION>
Shares Voted Shares Voted
"For" "Against" Abstentions
------------ ------------- -----------
<S> <C> <C>
2,085,631 70,711 172,700
</TABLE>
5. The fund's preferred and common shareholders, voting as a class, approved
the Administration Agreement dated June 18, 1993, between the fund and Piper
Capital Management. The following votes were cast regarding this matter:
<TABLE>
<CAPTION>
Shares Voted Shares Voted
"For" "Against" Abstentions
------------ ------------- -----------
<S> <C> <C>
2,087,915 70,627 170,501
</TABLE>
SHARE REPURCHASE PROGRAM
Your fund's board of directors has reapproved the share repurchase program,
which enables the fund to 'buy back' shares of its common stock in the open
market. Repurchases may only be made when the previous day's closing market
price per share is at a discount from net asset value, and repurchases cannot
exceed 3% of the total shares outstanding.
WHAT EFFECT WILL THIS PROGRAM HAVE ON SHAREHOLDERS?
- We do not expect any adverse impact on the adviser's ability to manage the
fund.
- Because repurchases will be at a price below net asset value, shares
outstanding may experience a slight increase in net asset value.
- Although the effect of share repurchases on market price is less certain, the
board of directors believes the program may have a favorable effect on the
market price of fund shares.
- We do not anticipate any material increase in the fund's expense ratio.
WHEN WILL SHARES BE REPURCHASED?
Share repurchases may be made from time to time over the next six months and may
be discontinued at any time. We will notify you if the board decides to continue
the
<PAGE>
--------------------------------------------------------------------------------
SHAREHOLDER UPDATE
--------------------------------------------------------------------------------
program beyond the next six months. Share repurchases are not mandatory when
fund shares are trading at a discount from net asset value; all repurchases will
be at the discretion of the fund's investment adviser.
HOW WILL SHARES BE REPURCHASED?
We expect to finance the repurchase of shares by liquidating portfolio
securities or using current cash balances. We do not anticipate borrowing in
order to finance share repurchases.
TERMS AND CONDITIONS OF THE DIVIDEND REINVESTMENT PLAN
As a shareholder, you may choose to participate in your fund's Dividend
Reinvestment Plan. It is a convenient and economical way to buy additional
shares of the fund by automatically reinvesting dividends and capital gains. The
plan is administered by Investors Fiduciary Trust Company (IFTC), the plan
agent.
ELIGIBILITY/PARTICIPATION
You may join the plan at any time. Reinvestment of distributions will begin with
the next distribution paid, provided your enrollment card is received at least
10 days before the record date for that distribution.
If your shares are in certificate form, you may join the plan directly and have
your distributions reinvested in additional shares of the fund. To enroll in
this plan, call IFTC at 1-800-543-1627. If your shares are registered in your
brokerage firm's name or another name, ask the holder of your shares how you may
participate.
Banks, brokers or nominees, on behalf of their beneficial owners who wish to
reinvest dividend and capital gain distributions, may participate in the plan by
informing IFTC at least 10 days before each share's dividend and/or capital
gains distribution.
PLAN ADMINISTRATION
Beginning no more than five business days before the dividend payment date, IFTC
will buy shares of the fund on the American Stock Exchange or elsewhere on the
open market.
The fund will not issue any new shares in connection with the plan. All
reinvestments will be at a market price plus a pro rata share of any brokerage
commissions, which may be more or less than the fund's net asset value per
share. The number of shares allocated to you is determined by dividing the
amount of the dividend or distribution by the applicable price per share.
<PAGE>
--------------------------------------------------------------------------------
SHAREHOLDER UPDATE
--------------------------------------------------------------------------------
There is no direct charge for reinvestment of dividends and capital gains, since
IFTC fees are paid for by the fund. However, each participant pays a pro rata
portion of the brokerage commissions. Brokerage charges are expected to be lower
than those for individual transactions because shares are purchased for all
participants in blocks. As long as you continue to participate in the plan,
distributions paid on the shares in your account will be reinvested.
IFTC maintains accounts for plan participants holding shares in certificate
form. You will receive a monthly statement detailing total dividend and capital
gain distributions, date of investment, shares acquired, price per share, and
total shares held in your account, both certificate-form shares and unissued
shares acquired through the plan.
TAX INFORMATION
Distributions reinvested in additional shares of the fund are subject to income
tax, just as they would be if received in cash. In general, the tax basis of
such shares will equal the price paid by IFTC plus the pro rata share of any
commission. Each January, you will receive IRS 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 instructions to your investment
professional. Written instructions should include your name and address as they
appear on the certificate or account.
If notice is received at least 10 days before the record date, all future
distributions will be paid directly to the shareholder of record.
If your shares are in certificate form and you discontinue your participation in
the plan, you (or your nominee) will receive an additional certificate for all
full shares and a check for any fractional shares in your account.
PLAN AMENDMENT/TERMINATION
The fund reserves the right to amend or terminate the plan. Should the plan be
terminated, participants will be notified in writing at least 90 days before the
record date for the next dividend or distribution. The plan may also be amended
or terminated by IFTC with at least 90 days' written notice to participants in
the plan.
Any questions about the plan should be directed to your investment professional
or to Investors Fiduciary Trust Company, P.O. Box 419432, Kansas City, Missouri
64141, 1-800-543-1627.
<PAGE>
--------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
--------------------------------------------------------------------------------
DIRECTORS David T. Bennett, OF COUNSEL, GRAY, PLANT, MOOTY, MOOTY, &
BENNETT, P.A.
Jaye F. Dyer, PRESIDENT, DYER MANAGEMENT COMPANY
William H. Ellis, PRESIDENT, PIPER JAFFRAY COMPANIES INC.,
PIPER CAPITAL MANAGEMENT INCORPORATED
Karol D. Emmerich, PRESIDENT, THE PARACLETE GROUP
Luella G. Goldberg, DIRECTOR, TCF FINANCIAL,
NWNL COMPANIES, HORMEL FOODS CORP.
John T. Golle, PRESIDENT AND DIRECTOR, EDUCATION ALTERNATIVES
George Latimer, SPECIALIST CONSULTANT,
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
OFFICERS William H. Ellis, CHAIRMAN OF THE BOARD
Douglas J. White, PRESIDENT
Ronald R. Reuss, EXECUTIVE VICE PRESIDENT
Robert H. Nelson, VICE PRESIDENT
Molly J. Destro, VICE PRESIDENT
David E. Rosedahl, SECRETARY
Charles N. Hayssen, TREASURER
INVESTMENT Piper Capital Management Incorporated
ADVISER 222 SOUTH NINTH STREET, MINNEAPOLIS, MN 55402
CUSTODIAN AND Investors Fiduciary Trust Company
TRANSFER AGENT 127 WEST 10TH STREET, KANSAS CITY, MO 64105-1716
INDEPENDENT KPMG Peat Marwick LLP
AUDITORS 4200 NORWEST CENTER, MINNEAPOLIS, MN 55402
LEGAL COUNSEL Dorsey & Whitney P.L.L.P.
220 SOUTH SIXTH STREET, MINNEAPOLIS, MN 55402
