<PAGE>
AMERICAN
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. . . . . . . . . . . . . 16
INDEPENDENT AUDITORS' REPORT . . . . . . . . . . . 20
FEDERAL TAX INFORMATION. . . . . . . . . . . . . . 21
SHAREHOLDER UPDATE . . . . . . . . . . . . . . . . 22
AMERICAN MUNICIPAL INCOME PORTFOLIO
American Municipal Income Portfolio is a diversified, closed-end investment
company. The fund's investment objective is to provide high current income
exempt from regular federal income tax, consistent with preservation of
capital. To realize this objective, the fund invests in a diverse range of
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 New York Stock Exchange and the
Chicago Stock Exchange under the symbol XAA.
*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 American Municipal Income Portfolio (XAA), 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 15.21%
and -0.40%. 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>
AMERICAN MUNICIPAL INCOME PORTFOLIO
[PHOTO]
[PHOTO]
DOUG WHITE, CFA, (ABOVE)
SHARES RESPONSIBILITY FOR THE MANAGEMENT OF AMERICAN MUNICIPAL INCOME PORTFOLIO.
HE HAS 13 YEARS OF FINANCIAL EXPERIENCE.
RON REUSS, (BELOW)
SHARES RESPONSIBILITY FOR THE MANAGEMENT OF AMERICAN MUNICIPAL INCOME PORTFOLIO.
HE HAS 27 YEARS OF FINANCIAL EXPERIENCE.
March 15, 1996
Dear Shareholders:
THE NET ASSET VALUE TOTAL RETURN FOR AMERICAN MUNICIPAL INCOME PORTFOLIO FOR THE
ONE-YEAR PERIOD ENDED JANUARY 31, 1996, WAS 28.31%.* 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 resulting 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 15.21%, which assumes distributions were reinvested and does not
include sales charges.
THE FUND'S NET ASSET VALUE INCREASED FROM $11.97 ON JANUARY 31, 1995, TO
$14.42 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 municipal investors likely found their
tax-exempt
* 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>
AMERICAN MUNICIPAL INCOME PORTFOLIO
PORTFOLIO COMPOSITION
JANUARY 31, 1996
[GRAPH]
yields to be higher than the yields of their taxable counterparts. Even
though 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 7.25 CENTS PER SHARE TO 6.275 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 earnings. Since January, we have
been earning the 6.275 cents per share dividend.
THE DROP IN THE FUND'S INCOME WAS LARGELY DUE TO THE FUND'S REDUCED EXPOSURE
TO INVERSE FLOATING RATE AND INVERSE INTEREST-ONLY SECURITIES. These
securities, which represented approximately 5% of total assets on January 31,
assist the fund in achieving its objective of earning high current income.
However, they 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
3
<PAGE>
AMERICAN 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.
these securities can have a disproportionately positive impact on the fund's
net asset value and income level. In November, we recombined the fund's
floating rate municipal securities with some of the corresponding inverse
floating rate municipal securities to recreate the original, less volatile
municipal bonds. This combination allowed us to position the fund slightly
more defensively by lowering its effective duration; however, this also
lowered the fund's income.
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 a somewhat 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 from the issuance of preferred stock is reinvested by the
fund at long-term rates that are higher than the short-term rates paid to
preferred shareholders. (The average rate paid on the fund's preferred stock
was 3.36% 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
4
<PAGE>
AMERICAN MUNICIPAL INCOME PORTFOLIO
GEOGRAPHICAL DISTRIBUTION
JANUARY 31, 1996
[MAP]
INVESTMENT CATEGORIES REFLECT PERCENTAGES OF
TOTAL ASSETS. OTHER ASSETS EQUAL 1%.
difference between short-term and long-term rates narrowed, the additional
income provided by the preferred stock decreased.
THE FUND REMAINS WELL-DIVERSIFIED ACROSS THE UNITED STATES. Its geographic
focus continues to be on the central, southeastern and southwestern United
States with Indiana, Texas, Georgia, Illinois and New Mexico representing the
largest state concentrations. We're also looking at portions of the Southeast
and West - for example, South Carolina, Arizona and Nevada - which have
recently shown substantial economic growth. We still view the California
municipal market cautiously; however, the fund does own one California
security which represents approximately 1% of the fund's total assets and is
backed by U.S. government obligations.
5
<PAGE>
AMERICAN 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.
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 S&P, helps ensure we maintain the quality of the portfolio. While
we have not experienced any problems with payment defaults so far, this fund,
and any fund investing in municipal securities, does have credit risk, and
the failure of an issuer to make payments could result in a decrease in net
asset value and 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 structure along with the current market environ-ment
should provide municipal bond investors with attractive opportunities.
Thank you for investing in American 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>
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
JANUARY 31, 1996
<TABLE>
<S> <C>
ASSETS:
Investments in securities at market value* (note 2) .... $ 124,879,467
Cash in bank on demand deposit ........................... 97,898
Accrued interest receivable .............................. 1,615,008
----------------
Total assets ......................................... 126,592,373
----------------
LIABILITIES:
Preferred stock dividends payable (note 3) ............... 14,236
Accrued investment management fee ........................ 37,318
Accrued remarketing agent fee ............................ 7,248
Accrued administrative fee ............................... 15,994
Other accrued expenses ................................... 6,012
----------------
Total liabilities .................................... 80,808
----------------
Net assets applicable to outstanding capital stock ....... $ 126,511,565
----------------
----------------
REPRESENTED BY:
Preferred stock - authorized 1 million shares of $25,000
liquidation preference per share; outstanding, 1,740
shares (note 3) ...................................... $ 43,500,000
----------------
Common stock - authorized 200 million shares of $0.01 par
value; outstanding, 5,756,267 shares ................... 57,563
Additional paid-in capital ............................... 80,473,458
Undistributed net investment income ...................... 180,801
Accumulated net realized loss on investments ............. (4,759,806)
Unrealized appreciation of investments ................... 7,059,549
----------------
Total - representing net assets applicable to
outstanding common stock ........................... 83,011,565
----------------
Total net assets ................................... $ 126,511,565
----------------
----------------
Net asset value per share of outstanding common stock (net
ssets divided by 5,756,267 shares of common stock
outstanding) ........................................... $ 14.42
----------------
----------------
* Investments in securities at identified cost ........... $ 117,819,918
----------------
----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY 31, 1996
<TABLE>
<S> <C>
INCOME:
Interest ............................................... $ 7,106,383
----------------
EXPENSES (NOTE 5):
Investment management fee .............................. 422,223
Administrative fee ..................................... 180,953
Remarketing agent fee .................................. 110,259
Custodian, accounting and transfer agent fees .......... 87,732
Reports to shareholders ................................ 21,987
Directors' fees ........................................ 10,956
Audit and legal fees ................................... 43,719
Other expenses ......................................... 53,061
----------------
Total expenses ....................................... 930,890
Less expenses paid indirectly .......................... (9,347)
----------------
Total net expenses ................................... 921,543
----------------
Net investment income ................................ 6,184,840
----------------
NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized loss on investments (note 4) .............. (786,229)
Net change in unrealized appreciation or depreciation of
investments .......................................... 15,305,285
----------------
Net gain on investments ................................ 14,519,056
----------------
Net increase in net assets resulting from
operations ....................................... $ 20,703,896
----------------
----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
- --------------------------------------------------------------------------------
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 .................................. $ 6,184,840 6,553,490
Net realized loss on investments ......................... (786,229) (4,011,796)
Net change in unrealized appreciation or depreciation of
investments ............................................ 15,305,285 (12,831,288)
---------------- ----------------
Net increase (decrease) in net assets resulting from
operations ........................................... 20,703,896 (10,289,594)
---------------- ----------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income:
Common stock dividends ................................. (4,895,706) (5,008,184)
Preferred stock dividends .............................. (1,686,276) (1,326,993)
From net realized gains:
Common stock dividends ................................. -- (134,130)
Preferred stock dividends .............................. -- (25,020)
---------------- ----------------
Total distributions .................................. (6,581,982) (6,494,327)
---------------- ----------------
CAPITAL SHARE TRANSACTIONS:
Payments for retirement of 400 common shares (note 7) .... -- (4,720)
---------------- ----------------
Total increase (decrease) in net assets .............. 14,121,914 (16,788,641)
Net assets at beginning of year ............................ 112,389,651 129,178,292
---------------- ----------------
Net assets at end of year ................................ $ 126,511,565 112,389,651
---------------- ----------------
---------------- ----------------
Undistributed net investment income ...................... $ 180,801 601,265
---------------- ----------------
---------------- ----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION
American Municipal Income Portfolio Inc. (the fund) is
registered under the Investment Company Act of 1940 (as amended)
as a diversified closed-end management investment company.
Shares of the fund are listed on the New York Stock Exchange and
Chicago Stock Exchange. The fund will seek to achieve its
investment objective by investing in a diversified portfolio of
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.
FUTURES TRANSACTIONS
In order to gain exposure to or protect against changes in the
market, the fund may buy and sell financial futures contracts
and related options. Risks of entering into futures contracts
and related options include the possibility there may be an
illiquid market and that a change in the value of the contract
or option may not correlate with changes in the value of the
underlying securities.
Upon entering into a futures contract, the fund is required to
deposit either cash or securities in an amount (initial margin)
equal to a certain percentage of the contract value. Subsequent
payments (variation margin) are made or received by the fund
each day. The variation margin payments are equal to the daily
changes in the contract value and are recorded as unrealized
gains and losses. The fund recognizes a realized gain or loss
when the contract is closed or expires.
11
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
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 commitments.
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 the 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
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 $23,322.
DISTRIBUTIONS TO SHAREHOLDERS
Distributions from net investment income are made on a monthly
basis for common shareholders and on a weekly basis for
preferred
12
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
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.
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
1,740 shares of remarketed preferred stock (870 shares in class
"T" and 870 shares in class "TH") ("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 Tuesdays for class "T" and on Thursdays for class
"TH"), as determined by the remarketing agent. On January 31,
1996, the dividend rates were 3.49% and 3.40% for class "T" and
"TH", 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 $63,780,468 and $65,799,916,
respectively.
(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, will
conduct the management and investment activity of the fund.
13
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
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 funds). 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 fee, 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 $4,759,806, as of January 31, 1996, 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.
(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 New York 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 400 shares as of January 31, 1996, which represents
0.01% of the shares originally issued.
14
<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>
Period from
Year Ended 6/25/93(a)
------------------------- to
1/31/96 1/31/95 1/31/94
----------- ----------- -----------
<S> <C> <C> <C>
Net asset value, common stock, beginning of
period ....................................... $ 11.97 14.88 14.13
----------- ----------- -----------
Operations:
Net investment income .......................... 1.07 1.14 0.58
Net realized and unrealized gains (losses)
on investments ............................... 2.52 (2.92) 0.83
----------- ----------- -----------
Total from operations ........................ 3.59 (1.78) 1.41
----------- ----------- -----------
Distributions to shareholders:
From net investment income:
Paid to common shareholders .................. (0.85) (0.87) (0.44)
Paid to preferred shareholders ............... (0.29) (0.23) (0.08)
From net realized gains:
Paid to common shareholders .................. -- (.02) --
Paid to preferred shareholders ............... -- (.01) --
----------- ----------- -----------
Total distributions to shareholders .......... (1.14) (1.13) (0.52)
----------- ----------- -----------
Offering costs and underwriting discounts
associated with the remarketed preferred
stock .......................................... -- -- (0.14)
----------- ----------- -----------
Net asset value, common stock, end of period ... $ 14.42 11.97 14.88
----------- ----------- -----------
----------- ----------- -----------
Market value, common stock, end of period ...... $ 12.50 11.63 14.63
----------- ----------- -----------
----------- ----------- -----------
Total return, common stock, market value (b) ..... 15.21% (14.44)% 0.40%
Total return, common stock, net asset value
(c) ............................................ 28.31% (13.46)% 8.49%
Net assets at end of period (in millions) ...... $ 127 112 129
Ratio of expenses to average weekly net assets
(d) ............................................ 0.77% 0.74% 0.70%(e)
Ratio of net investment income to average weekly
net assets ..................................... 5.13% 5.72% 4.88%(e)
Portfolio turnover rate (excluding short-term
securities) .................................... 54% 52% 31%
Remarketed preferred stock, outstanding (in
millions) .................................... $ 44 44 44
Asset coverage ratio (f) ......................... 291% 258% 297%
</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.
15
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
AMERICAN 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 (98.0%):
MUNICIPAL BONDS (93.2%):
ALABAMA (1.4%):
DCH Health Care Authority, 5.70%, 6/1/15 ............ $ 1,750,000 1,720,687
----------
ARIZONA (4.8%):
Pima County United School District, 8.38%, 7/1/13 ..... 3,000,000 4,183,230
Salt River Agricultural Project, 5.00%, 1/1/16 ........ 2,000,000 1,930,220
----------
6,113,450
----------
DISTRICT OF COLUMBIA (0.8%):
General Obligation, 5.75%, 12/1/05 .................... 1,000,000 987,370
----------
GEORGIA (10.8%):
Municipal Electrical Authority, 6.46%, 1/1/12 ......... 10,000,000 11,602,500
Savannah Hospital Authority-St. Joseph's, 6.13%,
7/1/12 ............................................... 2,000,000 2,087,080
----------
13,689,580
----------
HAWAII (2.1%):
State Department of Budget and Finance, 6.40%,
7/1/13 ............................................... 2,415,000 2,649,279
----------
ILLINOIS (8.9%):
Chicago General Obligation, 5.13%, 1/1/22 ............. 3,000,000 2,907,840
Chicago State University Revenue, 6.00%, 12/1/12 ...... 1,000,000 1,060,860
Health Facility Authority-Alexian Brothers Project,
6.80%, 1/1/22 ........................................ 1,000,000 1,052,010
Health Facility Authority-Lutheran General Hospital,
6.00%-7.00%, 4/1/08-4/1/18 ........................... 4,205,000 4,493,904
Kane County School District, 5.75%, 2/1/15 ............ 1,000,000 1,031,520
Rochelle Electric Systems, 5.20%, 5/1/16 .............. 750,000 729,352
----------
11,275,486
----------
INDIANA (16.2%):
Brownsburg School Building Corporation, 5.95%,
8/1/10 ............................................... 2,000,000 2,144,400
Hamilton School Building Corporation, 6.00%, 7/1/10 ... 1,575,000 1,657,798
Health Facility Authority-Anderson Project, 6.00%,
1/1/23 ............................................... 1,500,000 1,473,390
Health Facility Authority-Columbus Hospital, 7.00%,
8/15/15 .............................................. 2,670,000 3,245,866
IPS School Building Corporation, 6.15%, 1/15/16 ....... 2,800,000 2,956,156
Municipal Bond Bank, 6.00%, 2/1/16 .................... 1,000,000 1,028,000
Terre Haute School Building Corporation, 5.80%,
7/1/13 ............................................... 2,150,000 2,211,920
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
16
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
AMERICAN MUNICIPAL INCOME PORTFOLIO
(CONTINUED)
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- --------------------------------------------------------- --------- ----------
<S> <C> <C>
Tippecanoe County School Building Corporation,
5.95%-6.00%, 7/15/12-7/15/13 ....................... $ 3,920,000 4,143,341
Valparaiso-Porter County Public Library, 6.25%,
1/1/16 ............................................... 1,500,000 1,614,735
----------
20,475,606
----------
IOWA (2.2%):
Sheldon Health Care Facilities, 6.15%, 3/1/16 ......... 1,000,000 1,036,160
Sioux City Hospital Revenue, 5.25%, 8/15/15 ........... 1,775,000 1,735,719
----------
2,771,879
----------
KANSAS (2.6%):
Kansas City Utility System Revenue, 6.25%, 9/1/14 ..... 3,000,000 3,264,150
----------
LOUISIANA (5.4%):
DeSoto Parish Pollution Control, 7.56%, 1/1/19 ........ 6,000,000 6,816,420
----------
MICHIGAN (3.8%):
Comstock Park Public Schools, 7.88%, 5/1/11 ........... 2,000,000 2,564,120
Hospital Financing Authority-Metropolitan Hospital,
5.10%-5.40%, 7/1/00-7/1/03 ........................... 2,245,000 2,215,994
----------
4,780,114
----------
NEVADA (2.5%):
Washoe County School District, 5.75%, 6/1/12 .......... 3,000,000 3,149,490
----------
NEW MEXICO (8.3%):
Mortgage Finance Authority, 6.40%-6.88%,
7/1/15-7/1/25 ........................................ 9,575,000 10,488,806
----------
NORTH DAKOTA (2.9%):
Mercer County Pollution Control Revenue 7.20%,
6/30/13 .............................................. 3,000,000 3,731,220
----------
SOUTH DAKOTA (1.2%):
Housing and Development Authority, 5.80%, 5/1/14 ...... 1,500,000 1,505,595
----------
TEXAS (11.7%):
Arlington Independent School District, 6.00%,
2/15/15 .............................................. 2,275,000 2,407,405
Brazos County Health Facilities-St. Joseph Hospital,
6.00%, 1/1/19 ........................................ 1,000,000 999,320
Cypress-Fairbanks Independent School District, 5.75%,
2/15/16 .............................................. 1,000,000 1,020,920
Fort Bend Independent School District, 5.00%-5.25%,
2/15/12-2/15/13 ...................................... 1,950,000 1,939,197
Houston Water Conveyance System Contract, 7.50%,
12/15/16 ............................................. 745,000 957,653
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
17
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
AMERICAN MUNICIPAL INCOME PORTFOLIO
(CONTINUED)
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- --------------------------------------------------------- --------- ----------
<S> <C> <C>
Round Rock Independent School District, 6.10%-6.15%,
8/1/10-6/1/14 ...................................... $ 3,020,000 3,259,937
Spring Independent School District, 5.80%,
8/15/12-8/15/13 ...................................... 2,425,000 2,555,878
State Department of Housing-National Center Project,
5.70%, 7/1/14 ........................................ 1,700,000 1,690,327
----------
14,830,637
----------
UTAH (3.6%):
Municipal Power-San Juan Project, 6.25%, 6/1/14 ....... 1,300,000 1,402,011
NEBO County School District, 5.75%, 6/15/14 ........... 3,000,000 3,117,870
----------
4,519,881
----------
WASHINGTON (2.3%):
Chelan County Public Utilities, 5.90%, 7/1/13 ......... 1,830,000 1,874,359
Douglas County Public Utility District, 6.00%,
1/1/15 ............................................... 1,000,000 1,056,130
----------
2,930,489
----------
WISCONSIN (1.7%):
Health and Education Facilities-Beloit Hospital,
5.80%-5.90%, 7/1/09-7/1/11 ........................... 1,180,000 1,208,703
Health and Education Facilities-Waukesha Hospital,
5.50%, 8/15/15 ....................................... 1,000,000 998,190
----------
2,206,893
----------
Total Municipal Bonds
(cost: $111,480,840) ................................ 117,907,032
----------
MUNICIPAL DERIVATIVE SECURITIES (4.8%) (E):
Comstock Park, Michigan, Public Schools, inverse
interest-only, 8.76%, 5/1/11 ......................... --(b) 322,959
Duarte, California, Redevelopment Agency, inverse
interest-only, 8.83%, 11/1/11 ........................ --(b) 1,685,927
Duluth, Minnesota, Health Care Trust Certificate Series
F2, inverse floater, 10.02%, 5/1/18 .................. 1,110,000(c) 1,297,500
Kent, Michigan, Hospital Finance Authority, inverse
interest-only, 10.92%, 1/15/13 ....................... --(b) 877,320
Minneapolis, Minnesota, SSD #1 Trust certificates
Series 1-2, inverse floater, 7.45%, 2/1/15 ........... 1,345,000(c) 1,344,449
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
18
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
AMERICAN MUNICIPAL INCOME PORTFOLIO
(CONTINUED)
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- --------------------------------------------------------- --------- ----------
<S> <C> <C>
Desoto Parish, Louisiana, Municipal Security Trust
93-B, inverse interest-only, 4.16%, 1/1/19 ......... $ --(b) 544,280
----------
Total Municipal Derivative Securites
(cost: $5,439,078) .................................. 6,072,435
----------
Total Municipal Long-Term Securities
(cost: $116,919,918) ................................ 123,979,467
----------
MUNICIPAL SHORT-TERM SECURITIES (0.7%):
ILLINOIS (0.7%):
Health Facility Authority-Palacios Hospital, 3.70%,
2/1/15
(cost: $900,000) ..................................... 900,000(d) 900,000
----------
Total Investments in Securities
(cost: $117,819,918)(f) ........................... $ 124,879,467
----------
----------
</TABLE>
NOTES TO INVESTMENTS IN SECURITIES:
(A) SECURITES 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 DEMAND RATE 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.
(E) SECURITIES SOLD WITHIN THE TERMS OF A PRIVATE PLACEMENT MEMORANDUM AND MAY
BE SOLD ONLY TO DEALERS IN THAT PROGRAM OR OTHER ACCREDITED INVESTORS.
(F) ON JANUARY 31, 1996, FOR FEDERAL INCOME TAX PURPOSES, THE COST OF
INVESTMENTS WAS $117,730,128. THE AGGREGATE GROSS UNREALIZED APPRECIATION
AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED ON THIS COST WERE AS
FOLLOWS:
<TABLE>
<S> <C>
GROSS UNREALIZED APPRECIATION .... $ 7,160,530
GROSS UNREALIZED DEPRECIATION ...... (11,191)
----------
NET UNREALIZED APPRECIATION .... $ 7,149,339
----------
----------
</TABLE>
19
<PAGE>
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS
AMERICAN MUNICIPAL INCOME PORTFOLIO INC.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments in securities, of American 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
American 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
20
<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, all of the
fund's distributions were derived from interest on
municipal securities and qualify as exempt-interest
dividends for federal 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.
AMERICAN MUNICIPAL INCOME PORTFOLIO
<TABLE>
<CAPTION>
COMMON STOCK
Payable Date Per Share
- ----------------------------------------------- -----------
<S> <C>
February 22, 1995 ........................... $ 0.07250
March 29, 1995 ................................ 0.07250
April 26, 1995 ................................ 0.07250
May 24, 1995 .................................. 0.07250
June 28, 1995 ................................. 0.07250
July 26, 1995 ................................. 0.07250
August 23, 1995 ............................... 0.07250
September 27, 1995 ............................ 0.07250
October 25, 1995 .............................. 0.07250
November 22, 1995 ............................. 0.07250
December 27, 1995 ............................. 0.06275
January 11, 1996 .............................. 0.06275
-----------
$ 0.85050
-----------
-----------
<CAPTION>
PREFERRED STOCK
(at $25,000/share) Per Share
- ----------------------------------------------- -----------
<S> <C>
Total class "T" ............................. $ 970.33
-----------
-----------
Total class "TH" ............................ $ 967.91
-----------
-----------
</TABLE>
21
<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 891 40
William H. Ellis 891 40
</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 5,315,964 104,764
Karol D. Emmerich 5,315,964 104,764
Luella G. Goldberg 5,315,964 104,764
George Latimer 5,315,964 104,764
</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>
5,322,332 22,308 76,088
</TABLE>
22
<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 New York 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
23
<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.
24
<PAGE>
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
<TABLE>
<S> <C>
DIRECTORS David T. Bennett, CHAIRMAN, HIGHLAND HOMES, INC., USL
PRODUCTS INC., KIEFER BUILT, INC., OF COUNSEL, GRAY,
PLANT, MOOTY, MOOTY, & BENNETT, P.A.
Jaye F. Dyer, PRESIDENT, DYER MANAGEMENT COMPANY
William H. Ellis, PRESIDENT, PIPER 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 Piper Capital Management Incorporated
ADVISER 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
</TABLE>
25
<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
097-96 XAA O1 03/96
