<PAGE>
MINNESOTA
MUNICIPAL
INCOME
PORTFOLIO
* * *
ANNUAL REPORT
1996
<PAGE>
TABLE OF CONTENTS
AVERAGE ANNUAL TOTAL RETURNS . . . . . . . . . . . .1
LETTER TO SHAREHOLDERS . . . . . . . . . . . . . . .2
TAX REFORM PROPOSALS . . . . . . . . . . . . . . . .7
FINANCIAL STATEMENTS AND NOTES . . . . . . . . . . .8
INVESTMENTS IN SECURITIES. . . . . . . . . . . . . 17
INDEPENDENT AUDITORS' REPORT . . . . . . . . . . . 21
FEDERAL TAX INFORMATION. . . . . . . . . . . . . . 22
SHAREHOLDER UPDATE . . . . . . . . . . . . . . . . 23
MINNESOTA MUNICIPAL INCOME PORTFOLIO
Minnesota Municipal Income Portfolio is a non-diversified, closed-end
investment company. The fund's investment objective is to provide high
current income exempt from both regular federal income tax and state of
Minnesota personal income tax, consistent with preservation of 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 derivative securities, such
as inverse floating rate and inverse interest-only municipal securities,
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 its inception on June 25,
1993, the fund has been rated Af by Standard & Poor's Mutual Funds Rating
Group (S&P).* Fund shares trade on the American Stock Exchange and the
Chicago Stock Exchange under the symbol MXA.
*THE FUND IS RATED Af, WHICH MEANS THE FUND'S INVESTMENTS 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. THESE
RATINGS ARE AVAILABLE BY CALLING S&P AT 1 800 424-FUND.
CALL TO RECEIVE QUARTERLY UPDATES
If you would like to be put on our mailing list to receive quarterly fund
updates for Minnesota Municipal Income Portfolio (MXA), call our Shareholder
Services Department at 1 800 866-7778. Please identify which fund update you
would like to receive.
<PAGE>
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JANUARY 31, 1996
[GRAPH]
Average annual total return figures are through January 31, 1996, and are
based on the change in net asset value (NAV) and reflect the reinvestment of
distributions but do not reflect sales charges. NAV-based performance is used
to measure investment management results.
Average annual total return figures based on the change in market price for
the one-year and since inception periods ended January 31, 1996, were 15.74%
and 0.25%. These figures also assume reinvested distributions and do not
reflect sales charges.
The Lipper General Municipal Bond Funds: Leveraged Average represents the
average total return, with distributions reinvested, of similar funds as
characterized by Lipper Analytical Services.
Past performance does not guarantee future results. The investment return and
market value of an investment will fluctuate so that fund shares, when sold,
may be worth more or less than their original cost.
1
<PAGE>
MINNESOTA MUNICIPAL INCOME PORTFOLIO
[PHOTO]
[PHOTO]
DOUG WHITE, CFA, (ABOVE)
SHARES RESPONSIBILITY FOR THE MANAGEMENT OF MINNESOTA MUNICIPAL INCOME
PORTFOLIO. HE HAS 13 YEARS OF FINANCIAL EXPERIENCE.
RON REUSS, (BELOW)
SHARES RESPONSIBILITY FOR THE MANAGEMENT OF MINNESOTA MUNICIPAL INCOME
PORTFOLIO. HE HAS 27 YEARS OF FINANCIAL EXPERIENCE.
March 15, 1996
Dear Shareholders:
THE NET ASSET VALUE TOTAL RETURN FOR MINNESOTA MUNICIPAL INCOME PORTFOLIO FOR
THE ONE-YEAR PERIOD ENDED JANUARY 31, 1996, WAS 27.27%.* This assumes
distributions were reinvested and does not include sales charges. In
comparison, the Lipper General Municipal Bond Funds: Leveraged Average had a
return of 18.55% during the same one-year period. The fund's higher return
was primarily due to its longer effective duration which resulted from its
holdings of inverse floating rate and inverse interest-only municipal
securities, which are discussed further on page 3. This longer effective
duration resulted in greater price volatility which proved beneficial in last
year's declining interest rate environment. Based on market price, the fund's
total return for the one-year period ended January 31 was 15.74%, which
assumes distributions were reinvested and does not include sales charges.
THE FUND'S NET ASSET VALUE INCREASED FROM $11.96 ON JANUARY 31, 1995, TO
$14.32 ON JANUARY 31, 1996. The fund, along with other municipal bond
investments, was well-rewarded during the year due to decreasing interest
rates and declining supplies of both new municipal bond issues and
outstanding municipal bonds. Municipal investors enjoyed strong returns
despite competition from a robust stock market and ongoing concerns about
proposed tax reforms (see page 7 for more information). Although these
factors caused the municipal bond market to slightly lag the Treasury bond
market, on an after-tax basis most
* PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. THE INVESTMENT RETURN
AND MARKET VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT FUND SHARES, WHEN
SOLD, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
2
<PAGE>
MINNESOTA MUNICIPAL INCOME PORTFOLIO
PORTFOLIO COMPOSITION
JANUARY 31, 1996
[GRAPH]
municipal investors likely found their tax-exempt yields to be higher than
the yields of their taxable counterparts. Although we expect to see further
market volatility in 1996 - due to the ongoing tax-reform debate - we believe
the municipal market will benefit this year from a declining supply of
outstanding bonds and a strong demand for municipal issues.
DUE TO A REDUCTION IN THE FUND'S NET INVESTMENT INCOME, THE FUND'S COMMON
MONTHLY DISTRIBUTION WAS REDUCED FROM 6.9375 CENTS PER SHARE TO 6.3125 CENTS
PER SHARE BEGINNING IN DECEMBER. The fund had been paying out to common and
preferred shareholders more than it was earning; therefore, we had been
drawing from the fund's dividend reserve to help maintain the common stock
dividend. As a result, the fund's Dividend Committee lowered the common stock
dividend to bring it in line with the fund's actual earnings. Since December
when the dividend was reduced, we have been earning the 6.3125 cents per
share dividend.
THE DROP IN THE FUND'S INCOME WAS LARGELY BECAUSE WE PURCHASED A 3% POSITION
IN FLOATING RATE MUNICIPAL SECURITIES TO OFFSET THE PRICE VOLATILITY OF A
PORTION OF THE FUND'S INVERSE FLOATING RATE MUNICIPAL SECURITIES. Both the
inverse floating rate and inverse interest-only securities, which represented
approximately 8% of
3
<PAGE>
MINNESOTA MUNICIPAL INCOME PORTFOLIO
PREFERRED STOCK
Preferred stock pays dividends at a specified
rate and has preference over common stock in
the payments of dividends and the liquidation
of assets. Rates paid on preferred stock 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) and high liquidity (shares of preferred
stock trade at par and are remarketed every
seven days). The proceeds from the sale of
preferred stock are invested at intermediate-
and long-term tax-exempt rates. Because these
intermediate- and long-term rates are normally
higher than the short-term rates paid on
preferred stock, common shareholders benefit by
receiving higher dividends and/or an increase
to the dividend reserve. However, the risk of
having preferred stock is that if short-term
rates rise higher than intermediate- and
long-term rates, creating an inverted yield
curve, common shareholders may receive a lower
rate of return than if their fund did not have
any preferred stock outstanding. This type of
economic environment is unusual and
historically has been short term in nature.
Investors should also be aware that the
issuance of preferred stock results in the
leveraging of common stock which increases the
volatility of both the net asset value of the
fund and the market value of shares of common
stock.
total assets on January 31, assist the fund in achieving its objective of
earning high current income. However, these securities also have a
disproportionate impact on the fluctuations in the fund's net asset value and
income level. When interest rates rise, the value of and income from these
securities could decline to a greater extent than traditional municipal
securities. However, as rates fall, as they did in 1995, the increased
volatility of these securities can have a disproportionately positive impact on
the fund's net asset value and income. While the purchase of the floating rate
securities lessened the fund's volatility, it also reduced the income generated
by the inverse floating rate securities.
IN ADDITION, OVER THE PAST 12 MONTHS THE FUND'S ISSUANCE OF PREFERRED STOCK HAS
ADDED SLIGHTLY LESS INCOME THAN IN THE PAST; HOWEVER, IT IS STILL ALLOWING US TO
PAY A HIGHER DIVIDEND TO COMMON STOCK SHAREHOLDERS THAN IF THE FUND DID NOT HAVE
PREFERRED STOCK OUTSTANDING. While long-term interest rates have remained higher
than short-term rates, income in the fund has decreased because long-term tax-
exempt rates have fallen to a greater extent than short-term tax-exempt rates,
creating somewhat of a flatter yield curve. This had the effect of keeping the
cost of the fund's preferred stock relatively high and reducing the income
available for common shareholders. Typically, the money raised by the issuance
of preferred stock is reinvested by the fund at long-term rates that are higher
than
4
<PAGE>
MINNESOTA MUNICIPAL INCOME PORTFOLIO
EFFECTIVE DURATION
Effective duration estimates the interest rate
risk of a security, in other words, how much
the value of the security is expected to change
with a given change in interest rates. The
longer a security's effective duration, the
more sensitive its price is to changes in
interest rates. For example, if interest rates
increased by 1%, the market value of a bond
with an effective duration of five years would
decrease by about 5%, with all other factors
being constant.
It is important to understand that, while a
valuable measure, effective duration is based
on certain assumptions and has several
limitations. It is more effective as a measure
of interest rate risk when interest rate
changes are small, rapid and occur equally
across all the different points of the yield
curve. In addition, effective duration is
difficult to calculate precisely especially in
the case of a bond that is callable prior to
maturity.
the short-term rates paid to preferred shareholders. (The average rate paid on
the fund's preferred stock was 3.00% on March 15.) In the past, this has allowed
the fund to earn higher income than the monthly common stock dividend it paid
out and to build up a dividend reserve. However, as the difference between
short-term and long-term rates has narrowed, the additional income provided by
the preferred stock decreased.
MINNESOTA CONTINUES TO ENJOY A DIVERSE ECONOMY, WHICH LESSENS THE CONCERN OF
GEOGRAPHIC DIVERSIFICATION THAT MANY OTHER STATE-SPECIFIC FUNDS EXPERIENCE. 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 has less
severe cycles of expansion and recession than most other states and even the
United States as a whole. The state's unemployment rate is typically lower than
the national average. Also, the credit quality of many Minnesota school district
issues has been raised by a program that allows school districts to apply for
state guarantees. This enables the school districts to receive the state's AA
credit rating and reduces the school districts' cost of borrowing.
OUR PROPRIETARY CREDIT ANALYSIS ON THE FUND'S HOLDINGS HAS HELPED THE FUND AVOID
ANY PAYMENT DEFAULTS. We continue to manage credit risk, or the risk of failure
of an issuer to make payment, through extensive due diligence and credit
analysis prior to purchasing bonds as well as while the bonds are held in the
portfolio. This research, which goes beyond the ratings given by Moody's or
5
<PAGE>
MINNESOTA MUNICIPAL INCOME PORTFOLIO
S&P, helps ensure we maintain the quality of the portfolio. While we have not
experienced any problems associated with payment defaults so far, this fund,
and any fund investing in municipal securities, continues to have credit
risk, and the failure of an issuer to make payments could result in a
decrease in net asset value and a decrease in the income earned by the fund.
WE DON'T EXPECT TO MAKE ANY MAJOR CHANGES TO THE FUND IN THE NEXT FEW MONTHS.
We believe the fund's current structure along with the current market
environment should continue to provide municipal bond investors with
attractive opportunities.
Thank you for investing in Minnesota Municipal Income Portfolio. We will
continue to dedicate our efforts to helping you achieve your financial goals.
Sincerely,
/s/ Douglas J. White
Douglas J. White
Portfolio Manager
/s/ Ronald R. Reuss
Ronald R. Reuss
Portfolio Manager
6
<PAGE>
TAX REFORM PROPOSALS
Tossing out the current U.S. tax code and replacing it with a simpler tax
system continues to be a hot issue among politicians in 1996. One proposal in
particular - the flat tax - has been the most popular among congressional
leaders and presidential candidates.
While there are many varying flat tax proposals, they all share some common
elements of which municipal bond investors should be aware. Many flat tax
proposals would only tax income from wages and salary and would exempt from
tax the interest, dividends and capital gains earned on investments and real
estate. Proponents of a flat tax argue that this would encourage more people
to save money and would be good for investments. However, opponents of a flat
tax say it would hurt tax-exempt municipal bond investors because municipal
bonds currently have interest yields that are lower than taxable interest
yields since the interest paid on municipal bonds is free from federal income
tax. If all interest income were free of taxes, the advantage of investing in
municipal securities would be eliminated and their prices would likely fall
because municipal bonds pay lower interest yields than taxable bonds with
similar maturities and credit quality.
Most flat tax proposals would also do away with current deductions,
exemptions and credits such as interest on home mortgage loans, charitable
contributions, state and local taxes, and medical expenses.
In spite of tax reform's increased popularity, many outspoken critics of a
flat tax have emerged. These include Jerry Brown, the former governor of
California, who was one of the first proponents of the flat tax. He stated
that the flat tax by itself would not balance the budget, which is one
benefit flat tax proponents are touting. The budget could only possibly be
balanced with an additional wealth tax, Brown said.
Other critics agree that the flat tax proposal is unfair. The U.S. tax system
has always been based on a graduated system, where those with more money pay
more taxes because of their ability to do so. Homeowners and municipal bond
investors and issuers, among others, have also begun to realize that they
have too much to lose not to challenge this issue.
We anticipate that the flat tax debate will continue during 1996 but will
subside after the November elections. In the meantime, we will continue to
closely monitor this issue. We encourage you to keep an eye on the tax reform
debate as well, but strongly suggest you continue to take advantage of the
tax-free income that can be earned by investing in municipal bonds.
7
<PAGE>
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FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
JANUARY 31, 1996
<TABLE>
<S> <C>
ASSETS:
Investments in securities at market value* (note 2) .... $ 88,534,850
Cash in bank on demand deposit ........................... 98,988
Accrued interest receivable .............................. 1,892,349
----------------
Total assets ......................................... 90,526,187
----------------
LIABILITIES:
Preferred stock dividends payable (note 3) ............... 12,636
Accrued investment management fee ........................ 26,769
Accrued administrative fee ............................... 11,472
Accrued remarketing agent fee ............................ 5,182
Other accrued expenses ................................... 9,114
----------------
Total liabilities .................................... 65,173
----------------
Net assets applicable to outstanding capital stock ....... $ 90,461,014
----------------
----------------
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 4,146,743 shares .................... 41,467
Additional paid-in capital ............................... 58,005,239
Undistributed net investment income ...................... 201,746
Accumulated net realized loss on investments ............. (3,107,759)
Unrealized appreciation of investments ................... 4,220,321
----------------
Total - representing net assets applicable to
outstanding common stock ........................... 59,361,014
----------------
Total net assets ................................... $ 90,461,014
----------------
----------------
Net asset value per share of outstanding common stock (total
net assets divided by 4,146,743 shares of common stock
outstanding) ........................................... $ 14.32
----------------
----------------
* Investments in securities at identified cost ........... $ 84,314,529
----------------
----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
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FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY 31, 1996
<TABLE>
<S> <C>
INCOME:
Interest ........................................... $ 5,082,553
----------------
EXPENSES (NOTE 5):
Investment management fee ................................ 302,667
Administrative fee ....................................... 129,715
Remarketing agent fee .................................... 78,829
Custodian, accounting and transfer agent fees ............ 87,155
Reports to shareholders .................................. 22,996
Directors' fees .......................................... 10,956
Audit and legal fees ..................................... 44,207
Other expenses ........................................... 32,654
----------------
Total expenses ....................................... 709,179
Less expenses paid indirectly ............................ (6,227)
----------------
Total net expenses ................................... 702,952
----------------
Net investment income ................................ 4,379,601
----------------
NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized loss on investments (note 4) ................ (55,046)
Net change in unrealized appreciation or depreciation of
investments ............................................ 10,022,798
----------------
Net gain on investments ................................ 9,967,752
----------------
Net increase in net assets resulting from
operations ....................................... $ 14,347,353
----------------
----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
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FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended Year Ended
1/31/96 1/31/95
---------------- ----------------
<S> <C> <C>
OPERATIONS:
Net investment income .................................. $ 4,379,601 4,550,139
Net realized loss on investments ......................... (55,046) (2,864,350)
Net change in unrealized appreciation or depreciation of
investments ............................................ 10,022,798 (8,556,148)
---------------- ----------------
Net increase (decrease) in net assets resulting from
operations ........................................... 14,347,353 (6,870,359)
---------------- ----------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income:
Common stock dividends ................................. (3,404,195) (3,463,696)
Preferred stock dividends .............................. (1,158,999) (942,614)
---------------- ----------------
Total distributions .................................. (4,563,194) (4,406,310)
---------------- ----------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from issuance of 19,576 shares for the dividend
reinvestment plan ...................................... -- 262,726
Payments for retirement of 9,500 and 10,000 shares,
respectively (note 7) .................................. (117,838) (106,387)
---------------- ----------------
Increase (decrease) in net assets from capital share
transactions ......................................... (117,838) 156,339
---------------- ----------------
Total increase (decrease) in net assets .............. 9,666,321 (11,120,330)
Net assets at beginning of year ............................ 80,794,693 91,915,023
---------------- ----------------
Net assets at end of year ................................ $ 90,461,014 80,794,693
---------------- ----------------
---------------- ----------------
Undistributed net investment income ...................... $ 201,746 388,627
---------------- ----------------
---------------- ----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
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NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION
Minnesota Municipal Income Portfolio Inc. (the fund) is
registered under the Investment Company Act of 1940 (as amended)
as a non-diversified, closed-end management investment company.
Shares of the fund are listed on the American Stock Exchange and
the Chicago Stock Exchange. The fund will seek to achieve its
investment objective by investing in Minnesota municipal
obligations rated investment grade or of comparable quality when
purchased.
(2) SIGNIFICANT
ACCOUNTING
POLICIES
INVESTMENTS IN SECURITIES
The values of fixed income securities are determined using
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 amortization of bond discount and premium computed on
a level-yield basis, 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
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
11
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NOTES TO FINANCIAL STATEMENTS
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 a segregated account
with its custodian, assets with a market value equal to the
amount of its purchase commitments. The purchase of securities
on a when-issued or forward-commitment basis may increase the
volatility of the fund's NAV to the extent the fund makes such
purchases while remaining substantially fully invested. As of
January 31, 1996, the fund had no outstanding when-issued or
forward committments.
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 the deferral of "wash sale"
transactions. The character of distributions made during the
year from net investment income or net realized gains may also
differ from their ultimate characterization for federal income
tax purposes. In addition, due to the timing of dividend
distributions, the fiscal year in which amounts are distributed
may differ from the year that the income or realized gains
(losses) were recorded by the fund.
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 $3,288.
12
<PAGE>
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NOTES TO FINANCIAL STATEMENTS
DISTRIBUTIONS TO SHAREHOLDERS
Distributions from net investment income are made on a monthly
basis for common shareholders and a weekly basis for preferred
stock 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.
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
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported results of operations during the reporting period.
Actual results could differ from those estimates.
(3) REMARKETED
PREFERRED STOCK
The fund has issued and, as of January 31, 1996, has outstanding
1,244 shares of remarketed 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, 1996, the
dividend rates were 3.28% and 3.30% for class "M" and "W",
respectively.
(4) SECURITIES
TRANSACTIONS
Purchases of securities and proceeds from sales, other than
temporary investments in short-term securities, for the year
ended January 31, 1996, were $11,115,903 and $11,433,365,
respectively.
13
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NOTES TO FINANCIAL STATEMENTS
(5) FEES AND
EXPENSES
The fund has entered into the following agreements with Piper
Capital Management Incorporated (the adviser and administrator):
The investment advisory agreement provides the adviser with a
monthly investment management fee 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 certain 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 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 LOSS
CARRYOVER
For federal income tax purposes, the fund had a capital loss
carryover of $3,107,759 as of January 31, 1996, which if not
offset by subsequent capital gains, will expire in the years
2002 through 2004. It is unlikely the board of directors will
authorize a distribution of any net realized capital gains until
the available capital loss carryover has been offset or expires.
14
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NOTES TO FINANCIAL STATEMENTS
(7) RETIREMENT OF
FUND SHARES
The fund's board of directors voted to discontinue the share
repurchase program effective February 6, 1996. Under this
program, repurchases could only be made when the previous day's
closing market price was trading at a discount from net asset
value. Daily repurchases were limited to 25% of the previous
four weeks average daily trading volume on the American Stock
Exchange. Under the plan, cumulative repurchases in the fund
could not exceed 3% of the total shares originally issued.
Pursuant to the plan, the fund had cumulatively repurchased and
retired 19,500 shares as of January 13, 1996, which represents
0.5% of the shares originally issued.
15
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(8) FINANCIAL
HIGHLIGHTS
Per share data for a share of common stock outstanding
throughout each period and selected information for each period
are as follows:
<TABLE>
<CAPTION>
Year Ended January 31, Period from
6/25/93(a)
------------------------- to
1996 1995 1/31/94
----------- ----------- -----------
<S> <C> <C> <C>
Net asset value, common stock, beginning of
period ....................................... $ 11.96 14.67 14.13
----------- ----------- -----------
Operations:
Net investment income .......................... 1.06 1.09 0.55
Net realized and unrealized gains (losses) on
investments .................................. 2.40 (2.74) 0.63
----------- ----------- -----------
Total from operations ........................ 3.46 (1.65) 1.18
----------- ----------- -----------
Distributions to shareholders from net investment
income:
Paid to common shareholders .................... (0.82) (0.83) (0.42)
Paid to preferred shareholders ................. (0.28) (0.23) (0.08)
----------- ----------- -----------
Total distributions to shareholders .......... (1.10) (1.06) (0.50)
----------- ----------- -----------
Offering costs and underwriting discounts
associated with the remarketed preferred
stock .......................................... -- -- (0.14)
----------- ----------- -----------
Net asset value, common stock, end of period ... $ 14.32 11.96 14.67
----------- ----------- -----------
----------- ----------- -----------
Market value, common stock, end of period ...... $ 12.88 11.88 15.50
----------- ----------- -----------
----------- ----------- -----------
Total return, common stock, market value(b) ...... 15.74% (18.11)% 6.18%
Total return, common stock, net asset value(c) ... 27.27% (12.69)% 6.86%
Net assets at end of period (in millions) ...... $ 90 81 92
Ratio of expenses to average weekly net
assets(d) ...................................... 0.82% 0.79% 0.69%(e)
Ratio of net investment income to average weekly
net assets . 5.06% 5.54% 4.66%(e)
Portfolio turnover rate (excluding short-term
securities) .................................... 13% 49% 55%
Remarketed preferred stock, outstanding (in
millions) .................................... $ 31 31 31
Asset coverage ratio(f) .......................... 291% 260% 296%
</TABLE>
(A) COMMENCEMENT OF OPERATIONS.
(B) TOTAL 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.
(C) TOTAL 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.
(D) BEGINNING IN FISCAL 1995, THE EXPENSE RATIO REFLECTS THE EFFECT OF GROSS
EXPENSES PAID INDIRECTLY BY THE FUND. PRIOR PERIOD EXPENSE RATIOS HAVE NOT
BEEN ADJUSTED.
(E) ADJUSTED TO AN ANNUAL BASIS.
(F) REPRESENTS TOTAL NET ASSETS DIVIDED BY REMARKETED PREFERRED STOCK.
16
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
MINNESOTA MUNICIPAL INCOME PORTFOLIO
JANUARY 31, 1996
<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 (97.8%):
MUNICIPAL BONDS (86.8%):
EDUCATION REVENUE (6.1%):
State Higher Education Facility - Carleton College,
5.75%, 11/1/12 ..................................... $ 2,000,000 2,082,340
State Higher Education Facility - Macalester College,
5.50%-5.55%, 3/1/12-3/1/16 ........................... 500,000 504,505
State Higher Education Facility - St. Benedict College,
6.20%-6.38%, 3/1/14-3/1/20 ........................... 1,050,000 1,079,474
State Higher Education Facility - St. Mary's College,
6.10%-6.15%, 10/1/16-10/1/23 ......................... 1,400,000 1,430,786
State Higher Education Facility - St. Thomas
University, 5.50%-5.60%, 9/1/08-9/1/14 ............... 430,000 434,782
----------
5,531,887
----------
ELECTRIC REVENUE (7.2%):
Northern Municipal Power Revenue, 5.50%, 1/1/18 . 400,000 400,400
Southern Municipal Power Agency Supply, 4.75%-5.75%,
1/1/12-1/1/18 ........................................ 6,205,000 6,097,633
----------
6,498,033
----------
GENERAL OBLIGATIONS (31.3%):
Anoka County, 6.10%, 6/1/13 ........................... 500,000 519,960
Chaska Independent School District, 6.00%, 2/1/15 . 2,200,000 2,338,534
Elk River Independent School District, 5.20%,
2/1/17 ............................................... 2,500,000 2,445,325
Milaca Independent School District, 5.45%, 2/1/16 ..... 1,735,000 1,754,604
Minneapolis General Obligation, 5.20%, 3/1/13 ......... 1,500,000 1,410,976
North Branch Independent School District, 5.63%,
2/1/17 ............................................... 2,000,000 2,031,040
Richfield School District, 5.35%, 2/1/15 .............. 4,000,000 3,995,240
Rosemont General Obligation, 5.75%, 4/1/13 ............ 1,000,000 1,048,160
Roseville Independent School District, 5.85%-6.00%,
2/1/19-2/1/24 ........................................ 1,500,000 1,573,250
St. Paul Port Authority, 5.13%, 3/1/24 ................ 2,000,000 1,941,960
State General Obligation, 5.40%, 8/1/12 ............... 7,000,000 7,162,330
----------
28,272,319
----------
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
17
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
MINNESOTA MUNICIPAL INCOME PORTFOLIO
(CONTINUED)
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- --------------------------------------------------------- ---------------- ----------
<S> <C> <C>
HEALTH SERVICE/HMO'S (1.9%):
Brainerd Health Care Facility Revenue, 6.00%,
2/15/12 ............................................ $ 1,060,000 1,119,731
Duluth Clinic Health Care Facilities,
6.30%, 11/1/22 ....................................... 500,000 542,767
----------
1,662,498
----------
HOSPITAL REVENUE (14.5%):
Duluth Health Facility - Benedictine Health System,
6.00%, 2/15/12 ....................................... 2,800,000 2,953,794
Fergus Falls Health Care - Lake Region Hospital, 6.50%,
9/1/18 ............................................... 1,000,000 1,017,030
Minneapolis Health Care - Fairview Hospital, 5.25%,
11/15/13-11/15/19 .................................... 1,050,000 1,033,274
Red Wing Health Care Facility - River Region, 6.50%,
9/1/22 ............................................... 1,000,000 1,033,770
Robbinsdale Hospital Revenue, 5.55%, 5/15/19 .......... 1,000,000 1,000,990
St. Paul Housing Redevelopment Authority - Healtheast
Project, 6.63%, 11/1/17 .............................. 6,000,000 6,113,460
----------
13,152,318
----------
HOUSING REVENUE (16.2%):
Brooklyn Center, Ponds Family Housing Project, 5.90%,
1/1/20 ............................................... 1,050,000 1,031,468
Burnsville, Summit Park Apartments, 5.75%, 7/1/11 1,000,000 1,011,540
Coon Rapids, Multi-Family Development - Woodland Apts.,
5.63%, 12/1/09 ....................................... 3,520,000 3,571,990
Minneapolis and St. Paul Housing and Redevelopment
Authority Health Care Systems, 4.75%, 11/15/18 ....... 1,500,000 1,377,540
New Hope, Multi-Family Housing Project, 6.05%,
1/1/17 ............................................... 450,000 460,332
St. Louis Park, Multi-Family Housing Project, 6.15%,
12/1/16 .............................................. 500,000 508,785
State Housing and Finance Agency, 5.70%-6.30%,
8/1/07-7/1/25 ........................................ 3,120,000 3,177,641
State Housing and Finance Agency - Single Family,
5.95%, 1/1/17 ........................................ 3,455,000 3,507,032
----------
14,646,328
----------
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
18
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
MINNESOTA MUNICIPAL INCOME PORTFOLIO
(CONTINUED)
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- --------------------------------------------------------- ---------------- ----------
<S> <C> <C>
IDR - MISCELLANEOUS PROJECTS (0.3%):
Duluth Seaway Port Authority, 5.75%, 12/1/16 ........ $ 300,000(e) 302,913
----------
LEASING REVENUE (2.4%):
Benton County Jail Facility, 5.70%, 2/1/13-2/1/16 ..... 900,000 925,714
Waconia Housing Redevelopment Authority - Public
Project, 5.70%-5.75%, 1/1/10-1/1/15 .................. 1,240,000 1,254,479
----------
2,180,193
----------
MULTIPLE UTILITY REVENUE (3.5%):
Owatonna Public Utility Revenue, 5.45%, 1/1/16 ........ 3,100,000 3,144,609
----------
NURSING HOME REVENUE (3.4%):
Red Wing Elderly Housing - River Region, 6.50%,
9/1/22 ............................................... 1,500,000 1,539,675
Waconia Housing Redevelopment Authority Revenue, 6.00%,
6/1/14 ............................................... 1,500,000 1,528,275
----------
3,067,950
----------
Total Municipal Bonds
(cost: $78,011,682) ................................ 78,011,682
----------
MUNICIPAL DERIVATIVE SECURITIES (11.0%):
Breckenridge Health Care Series J-2, inverse floater,
7.76%, 11/15/13 ...................................... 1,525,000(c)(f) 1,465,525
Duluth Health Facility - Benedictine Health System
Series E-2, inverse floater, 9.79%, 2/15/12 .......... 925,000(c)(f) 1,029,451
Minneapolis General Obligation Residual Trust Series
A-5, inverse interest-only, 16.15%, 3/1/13 ........... --(b)(f) 1,616,450
Minneapolis Municipal Trust 1993-A, Floating Rate Trust
Certificates 3.45%, 3/1/13 ........................... 2,900,000(d) 2,900,000
Osseo Independent School District, inverse floater,
8.78%-8.79%, 2/1/13-2/1/14 ........................... 1,515,000(c)(f) 1,587,584
Rochester Health Care, inverse floater, 9.52%,
11/15/10 ............................................. 740,000(c)(f) 904,265
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
19
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
MINNESOTA MUNICIPAL INCOME PORTFOLIO
(CONTINUED)
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- --------------------------------------------------------- ---------------- ----------
<S> <C> <C>
State Housing and Finance Agency, inverse interest-
only, 0.00%, 2/1/15 .................................. --(b)(f) 472,527
----------
Total Municipal Derivative Securities
(cost: $6,202,847) ................................. 9,975,802
----------
Total Municipal Long-Term Securities
(cost: $84,214,529) ................................ 88,434,850
----------
MUNICIPAL SHORT-TERM SECURITIES (0.1%):
Minneapolis International Center, 2.55%, 9/1/13
(cost: $100,000) ................................... $ 100,000(e) 100,000
----------
Total Investments in Securities
(cost: $84,314,529)(g) ............................ $ 88,534,850
----------
----------
</TABLE>
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 RATE REPRESENTS YIELD BASED UPON CURRENT
INCOME AND COST BASIS.
(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, 1996.
(D) VARIABLE RATE NOTE. INTEREST RATE VARIES TO REFLECT CURRENT MARKET
CONDITIONS; RATE SHOWN IS THE EFFECTIVE RATE ON JANUARY 31, 1996.
(E) VARIABLE RATE DEMAND NOTE. INTEREST RATE VARIES TO REFLECT CURRENT MARKET
CONDITIONS; RATE SHOWN IS THE EFFECTIVE RATE ON JANUARY 31, 1996. THE
MATURITY DATE SHOWN REPRESENTS FINAL MATURITY.
(F) SECURITIES SOLD WITHIN THE TERMS OF A PRIVATE PLACEMENT MEMORANDUM AND MAY
BE SOLD ONLY TO DEALERS IN THAT PROGRAM OR OTHER ACCREDITED INVESTORS.
(G) ON JANUARY 31, 1996, FOR FEDERAL INCOME TAX PURPOSES, THE COST OF
INVESTMENTS WAS $84,209,084. THE AGGREGATE GROSS UNREALIZED APPRECIATION
AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED ON THIS COST WERE AS
FOLLOWS:
<TABLE>
<S> <C>
GROSS UNREALIZED APPRECIATION .... $ 4,528,337
GROSS UNREALIZED DEPRECIATION ...... (202,571)
----------
NET UNREALIZED APPRECIATION .... $ 4,325,766
----------
----------
</TABLE>
20
<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, 1996, and the related statement of operations
for the year then ended, the statements of changes in net assets for each of the
years in the two-year period ended January 31, 1996, and the financial
highlights for the periods presented in note 8 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. 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 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
Minnesota Municipal Income Portfolio Inc. as of January 31, 1996, and the
results of its operations for the year then ended, the changes in its net assets
for each of the years in the two-year period ended January 31, 1996, and the
financial highlights for the periods presented in note 8 to the financial
statements, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
March 8, 1996
21
<PAGE>
- --------------------------------------------------------------------------------
FEDERAL TAX INFORMATION
Fiscal Year Ended January 31, 1996
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, 1996, 100% of the
fund'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 22, 1995 ............................ $ 0.0694
March 29, 1995 ................................. 0.0694
April 26, 1995 ................................. 0.0694
May 24, 1995 ................................... 0.0694
June 28, 1995 .................................. 0.0694
July 26, 1995 .................................. 0.0694
August 23, 1995 ................................ 0.0694
September 27, 1995 ............................. 0.0694
October 25, 1995 ............................... 0.0694
November 22, 1995 .............................. 0.0694
December 27, 1995 .............................. 0.0631
January 11, 1996 ............................... 0.0631
-----------
$ 0.8202
-----------
-----------
<CAPTION>
PREFERRED STOCK
(at $25,000/share) Per Share
- ------------------------------------------------ -----------
<S> <C>
Total class "M" .............................. $ 926.80
-----------
-----------
Total class "W" .............................. $ 936.55
-----------
-----------
</TABLE>
22
<PAGE>
- --------------------------------------------------------------------------------
SHAREHOLDER UPDATE
ANNUAL MEETING RESULTS
An annual meeting of the fund's shareholders was held on August 17, 1995. Each
matter voted upon at the meeting, as well as the number of votes cast for,
against or withheld, and the number of abstentions with respect to such matter,
are set forth below.
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 668 --
William H. Ellis 668 --
</TABLE>
2. The fund's preferred and common shareholders, voting as a class, elected
the following four directors:
<TABLE>
<CAPTION>
Shares Voted Shares Withholding
"For" Authority to Vote
------------ ------------------
<S> <C> <C>
Jaye F. Dyer 3,847,104 84,784
Karol D. Emmerich 3,847,104 84,784
Luella G. Goldberg 3,847,104 84,784
George Latimer 3,847,102 84,786
</TABLE>
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, 1996. The following votes were cast
regarding this matter:
<TABLE>
<CAPTION>
Shares Voted Shares Voted
"For" "Against" Abstentions
- ------------ ------------- -----------
<S> <C> <C>
3,852,681 28,058 51,149
</TABLE>
23
<PAGE>
- --------------------------------------------------------------------------------
SHAREHOLDER UPDATE
SHARE REPURCHASE PROGRAM
Your fund's board of directors has voted to discontinue the share repurchase
program, effective February 6, 1996. The program had enabled the fund to 'buy
back' shares of its common stock in the open market.
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.
There is no direct charge for reinvestment of dividends and capital gains since
IFTC fees are paid 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
24
<PAGE>
- --------------------------------------------------------------------------------
SHAREHOLDER UPDATE
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 term trust 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.
25
<PAGE>
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
DIRECTORS David T. Bennett, CHAIRMAN, HIGHLAND HOMES, INC., USL
PRODUCTS INC., KIEFER BUILT, INC., OF COUNSEL, GRAY,
PLANT, MOOTY, MOOTY & BENNETT, P.A.
Jaye F. Dyer, PRESIDENT, DYER MANAGEMENT COMPANY
William H. Ellis, PRESIDENT, PIPER JAFFRAY COMPANIES INC.,
PIPER CAPITAL MANAGEMENT INCORPORATED
Karol D. Emmerich, PRESIDENT, THE PARACLETE GROUP
Luella G. Goldberg, DIRECTOR, TCF FINANCIAL, RELIASTAR
FINANCIAL CORP., HORMEL FOODS CORP.
George Latimer, CHIEF EXECUTIVE OFFICER, NATIONAL EQUITY
FUND, INC.
OFFICERS William H. Ellis, CHAIRMAN OF THE BOARD
Douglas J. White, PRESIDENT
Ronald R. Reuss, EXECUTIVE VICE PRESIDENT
Robert H. Nelson, SENIOR VICE PRESIDENT AND TREASURER
Molly J. Destro, VICE PRESIDENT
Susan S. Miley, SECRETARY
INVESTMENT ADVISER Piper Capital Management Incorporated
222 SOUTH NINTH STREET MINNEAPOLIS, MN 55402-3804
CUSTODIAN AND Investors Fiduciary Trust Company
TRANSFER AGENT 127 WEST 10TH STREET, KANSAS CITY, MO 64105-1716
LEGAL COUNSEL Dorsey & Whitney LLP
220 SOUTH SIXTH STREET, MINNEAPOLIS, MN 55402
INDEPENDENT KPMG Peat Marwick LLP
AUDITORS 4200 Norwest Center, Minneapolis, MN 55402
26
<PAGE>
PIPER CAPITAL
MANAGEMENT ---------------
Bulk Rate
U.S. Postage
PIPER CAPITAL MANAGEMENT INCORPORATED PAID
222 SOUTH NINTH STREET Permit No. 3008
MINNEAPOLIS, MN 55402-3804 Mpls., MN
---------------
PIPER JAFFREY INC., NASD MEMBER
[LOGO] THIS DOCUMENT IS PRINTED ON PAPER MADE FROM
100% TOTAL RECOVERED FIBER, INCLUDING 15% POST-CONSUMER WASTE.
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
Shareholder Services area at 1 800 866-7778, or mail
your request to:
Corporate Communications
Piper Capital Management
222 South Ninth Street
Minneapolis, MN 55402-3804
098-96 MXA O1 03/96
