-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KzJeEr31ckZG5ZtIaNwj7uieVGytL/nAyzaCTMIpi2h5h9y7gvz87RISj08w4SFo T4pp5vNwullRgx1RG3jR6w== 0000912057-95-011520.txt : 19951226 0000912057-95-011520.hdr.sgml : 19951226 ACCESSION NUMBER: 0000912057-95-011520 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19951031 FILED AS OF DATE: 19951222 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN GOVERNMENT INCOME FUND INC CENTRAL INDEX KEY: 0000829344 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 411608092 STATE OF INCORPORATION: MN FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-05470 FILM NUMBER: 95604130 BUSINESS ADDRESS: STREET 1: 222 S NINTH ST CITY: MINNEAPOLIS STATE: MN ZIP: 55402 BUSINESS PHONE: 6123426231 MAIL ADDRESS: STREET 2: 222 S 9TH STREET CITY: MINNEAPOLIS STATE: MN ZIP: 55402 N-30D 1 N-30D AMERICAN GOVERNMENT INCOME FUND [PHOTO] * * * ANNUAL REPORT 1995 TABLE OF CONTENTS AVERAGE ANNUALIZED TOTAL RETURNS .... 1 LETTER TO SHAREHOLDERS .............. 2 FINANCIAL STATEMENTS AND NOTES ...... 7 INVESTMENTS IN SECURITIES ........... 18 INDEPENDENT AUDITORS' REPORT ........ 22 FEDERAL TAX INFORMATION ............. 23 SHAREHOLDER UPDATE .................. 24 AMERICAN GOVERNMENT INCOME FUND This fund seeks to obtain high current income consistent with preservation of capital. To realize its objective, the fund invests principally in obligations of the U.S. government, its agencies and instrumentalities, including mortgage-backed derivative securities. The fund may purchase securities through the sale-forward (dollar-roll) program. Investments in mortgage-backed derivative securities and the purchase of securities through the sale-forward program may cause the fund's net asset value to fluctuate to a greater extent than would be expected from interest rate movements alone. As with other mutual funds, there can be no assurance the fund will achieve its objective. Since its inception on April 28, 1988, the fund has been rated AAf by Standard & Poor's Corporation (S&P).* Fund shares trade on the New York Stock Exchange under the symbol AGF. * THE FUND IS RATED AAf, WHICH MEANS INVESTMENTS IN THE FUND HAVE AN OVERALL CREDIT QUALITY OF AA. 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 AA. THE FUND HAS ALSO 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. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF YOUR INVESTMENT WILL FLUCTUATE SO THAT FUND SHARES, WHEN SOLD, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. AVERAGE ANNUALIZED TOTAL RETURNS PERIODS ENDED OCTOBER 31, 1995 [GRAPH] AMERICAN GOVERNMENT INCOME FUND'S AVERAGE ANNUALIZED TOTAL RETURN FIGURES ARE BASED ON THE CHANGE IN ITS NET ASSET VALUE (NAV), ASSUME ALL DISTRIBUTIONS WERE REINVESTED AND DO NOT REFLECT SALES CHARGES. NAV-BASED PERFORMANCE IS USED TO MEASURE INVESTMENT MANAGEMENT RESULTS. AVERAGE ANNUALIZED TOTAL RETURNS BASED ON THE CHANGE IN MARKET PRICE FOR THE ONE-YEAR, FIVE-YEAR AND SINCE INCEPTION PERIODS ENDED OCTOBER 31, 1995, WERE 10.96%, 8.02% AND 7.93%, RESPECTIVELY. THESE FIGURES ALSO ASSUME DISTRIBUTIONS WERE REINVESTED AND DO NOT REFLECT SALES CHARGES. THE SALOMON BROTHERS MORTGAGE INDEX IS AN UNMANAGED INDEX OF MORTGAGE SECURITIES WHICH HAVE AN AVERAGE LIFE OF ONE YEAR OR MORE, ARE RATED BBB- OR HIGHER BY STANDARD & POOR'S OR BAA3 OR HIGHER BY MOODY'S, AND HAVE A PRINCIPAL AMOUNT OF AT LEAST $1 BILLION. 1 AMERICAN GOVERNMENT INCOME FUND [PHOTO] WORTH BRUNTJEN IS PRIMARILY RESPONSIBLE FOR THE MANAGEMENT OF AMERICAN GOVERNMENT INCOME FUND. HE HAS 28 YEARS OF FINANCIAL EXPERIENCE. [PHOTO] MARIJO GOLDSTEIN ASSISTS WITH THE MANAGEMENT OF AMERICAN GOVERNMENT INCOME FUND. SHE HAS 10 YEARS OF FINANCIAL EXPERIENCE. December 15, 1995 Dear Shareholders: FOR THE ONE-YEAR PERIOD ENDED OCTOBER 31, 1995, AMERICAN GOVERNMENT INCOME FUND SHOWED A NET ASSET VALUE TOTAL RETURN OF 22.31%, WHICH INCLUDES REINVESTED DISTRIBUTIONS BUT NOT SALES CHARGES.* The fund's return compares to a 14.54% return for the Salomon Brothers Mortgage Index during this same period. While the fund's shares continue to trade at a discount to net asset value, we are pleased that its market price has improved as the fund's net asset value has stabilized. (See page 5 for information on premium vs. discount.) As of October 31, the fund's market price was $5.75. For the one-year period ended October 31, 1995, the fund's total return based on market price was 10.96%, including reinvested distributions but not sales charges. THE MARKET ENVIRONMENT DURING THE PAST YEAR PLAYED A MAJOR ROLE IN THE FUND'S STRONG ONE-YEAR PERFORMANCE. Interest rates have declined since the beginning of 1995 as reports indicated slowing economic growth. As a result, bond prices in general appreciated. The fund's performance during the past year was further strengthened by its holdings of certain mortgage-backed derivative securities, such as principal-only, inverse interest-only and inverse floating rate securities, which rallied from the lows they experienced in 1994. Because of their relatively long effective durations, * PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT FUND SHARES, WHEN SOLD, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. 2 AMERICAN GOVERNMENT INCOME FUND PORTFOLIO COMPOSITION OCTOBER 31, 1995 [GRAPH] these mortgage-backed derivatives performed well in 1995's declining interest rate environment. Remember, however, securities with longer effective durations generally are more volatile and will underperform securities with shorter effective durations in a rising interest rate environment. In addition, the fund's holdings of mortgage-backed derivatives account for the fund's outperformance when compared to the Salomon index, which does not contain such securities. As discussed below, we have taken advantage of the current market environment by selling some of the fund's mortgage-backed derivative securities during the past several months. As a result of these sales, the fund's effective duration has been reduced to 3.81 years as of October 31, 1995. This compares to an effective duration of 3.4 years for the Salomon index. (See page 6 for information on effective duration.) AS MENTIONED ABOVE, DURING THE PAST SEVERAL MONTHS WE HAVE REDUCED THE FUND'S NET ASSET VALUE VOLATILITY BY SELLING SOME OF THESE MORTGAGE-BACKED DERIVATIVE SECURITIES AS ATTRACTIVE MARKET OPPORTUNITIES APPEARED. As interest rates fell, the fund benefited from the appreciation of these securities as they increased in value following their lows in 1994. As of October 31, 1995, we had sold all of the fund's interest-only and principal-only securities and had reduced the fund's position in Z-tranches, inverse 3 AMERICAN GOVERNMENT INCOME FUND DISTRIBUTION HISTORY PER SHARE SINCE INCEPTION (APRIL 1988) THROUGH OCTOBER 31, 1995 Monthly Income Dividends Paid ......................... 89 Total Monthly Income Dividends .................... $6.37 Capital Gains Distributions Paid ...................... 4 Total Capital Gains Distributions ................. $0.47 TOTAL DISTRIBUTIONS ................. $6.84 NET ASSET VALUE SUMMARY PER SHARE Initial Offering Price (4/28/88) ... $8.00 Initial Offering and Underwriting Expenses .............. -$0.56 Accumulated Realized Losses at 10/31/95 ................. -$1.63 Subtotal ........................... $5.81 Undistributed Net Investment Income/Dividend Reserve at 10/31/95 ......................... $0.25 Unrealized Depreciation on Investments at 10/31/95 ......... -$0.15 NET ASSET VALUE ON 10/31/95 ......... $5.91 interest-only and inverse floating rate securities to 20% of total assets. On October 31, 1994, these types of securities represented 47% of total assets. While we are comfortable with the current level of volatility in the fund, we may sell additional mortgage-backed derivative securities in the fund should attractive opportunities appear. IN OUR EFFORTS TO DEVELOP A PORTFOLIO STRUCTURE THAT IS LESS VOLATILE, WE REPLACED THE MORTGAGE-BACKED DERIVATIVES WITH FIXED RATE MORTGAGE-BACKED SECURITIES. These fixed rate mortgages represented 67% of the fund's total assets at the end of October. Given current market conditions, we believe this increased exposure to mortgage-backed securities is compatible with our goal of providing more consistent returns with less volatility. AS STATED IN THE APRIL SEMIANNUAL REPORT, WE SUSPENDED THE USE OF THE SALE-FORWARD PROGRAM TO FURTHER REDUCE VOLATILITY IN THE FUND. However, having substantially lowered the fund's volatility by reducing its exposure to mortgage-backed derivative securities, we have begun to re-evaluate the sale-forward program. Because this program has historically provided a strong level of income in the fund, we will consider reinstating it in the future. 4 AMERICAN GOVERNMENT INCOME FUND PREMIUM VS. DISCOUNT The underlying value of a fund's securities and other assets, minus its liabilities, is the fund's "net asset value." Closed-end funds may trade in the market at a price that is equal to, above, or below this net asset value. Shares are trading at a "premium" when investors purchase or sell shares in the market at a price that is greater than the shares' net asset value. Conversely, when investors purchase or sell shares in the market at a price that is lower than the shares' net asset value, they are said to be trading at a "discount." BECAUSE THE FUND'S ABILITY TO GENERATE INCOME HAS DECLINED DURING THE PAST YEAR DUE TO THE RESTRUCTURING OF THE PORTFOLIO, INVESTORS SHOULD EXPECT A REDUCTION IN THE FUND'S MONTHLY DIVIDEND LEVEL IN THE COMING YEAR. We have been relying on the fund's undistributed net investment income (dividend reserve) to maintain the current monthly dividend of 6.4 cents per share; however, due to the fund's reduced earnings and a declining dividend reserve, the fund's Dividend Committee will begin making gradual changes to the monthly dividend to bring it in line with the fund's monthly earnings. As of October 31, the fund's monthly earning rate, based on a three-month average, was 3.72 cents per share and its dividend reserve was approximately 25 cents per share. Keep in mind that the dividend reserve is reflected in the fund's net asset value and any reduction in this amount will reduce the fund's net asset value penny for penny. WHILE REDUCING THE FUND'S VOLATILITY WAS OUR MAIN GOAL DURING THE PAST YEAR, WE ALSO EXPERIENCED AN INCREASED NET ASSET VALUE. Even though the fund's net asset value did increase rather quickly during the first half of the year - from $5.30 on December 31, 1994, to $5.95 on June 30, 1995 - it's important to realize that the fund has been changed substantially and investors should not expect dramatic increases in the future. Going forward, however, our efforts to 5 AMERICAN GOVERNMENT INCOME FUND 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 were to increase by 1%, the market value of a bond with an effective duration of five years would decrease by about 5%, with all other factors being constant. It is important to understand that, while a valuable measure, effective duration is based upon certain assumptions and has several limitations. It is most 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 for bonds with prepayment options, such as mortgage-backed securities, because the calculation requires assumptions about prepayment rates. For example, when interest rates go down, homeowners may prepay their mortgages at a higher rate than assumed in the initial effective duration calculation, thereby shortening the effective duration of the fund's mortgage-backed securities. Conversely, if rates increase, prepayments may decrease to a greater extent than assumed, extending the effective duration of such securities. For these reasons, the effective durations of funds that invest a significant portion of their assets in mortgage-backed securities can be greatly affected by changes in interest rates. make the fund less volatile should reduce the impact that future interest rate changes would have on the fund's net asset value. WE BELIEVE THE FUND'S CURRENT STRUCTURE SHOULD ENABLE US TO PROVIDE A FUND WITH LOWER VOLATILITY AND MORE CONSISTENT RETURNS. However, because we intend to maintain a smaller position of mortgage-backed derivative securities (such as inverse floaters, interest-only, principal-only and inverse interest-only securities) than we have in the past, it's unlikely the fund will experience either the dramatic growth it achieved in previous years or the poor performance of 1994. Ultimately, we feel this new structure will provide investors with attractive long-term total return benefits. YOUR CONTINUED SUPPORT THROUGHOUT THE PREVIOUS YEAR IS APPRECIATED, AND WE ARE PLEASED THAT 1995 HAS BEEN A MORE FAVORABLE YEAR FOR INVESTORS. We remain committed to providing you with quality service and look forward to helping you achieve your financial goals. Sincerely, /s/ Worth Bruntjen Worth Bruntjen Portfolio Manager 6 - -------------------------------------------------------------------------------- FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES OCTOBER 31, 1995 ASSETS: Investments in securities at market value* (note 2) (including a repurchase agreement of $1,937,000) ..... $ 128,065,683 Cash in bank on demand deposit ........................... 100,675 Receivable for investment securities sold ................ 3,287,059 Accrued interest receivable .............................. 1,008,792 ----------------- Total assets ......................................... 132,462,209 ----------------- LIABILITIES: Payable for investment securities purchased .............. 4,987,500 Payable for fund shares retired .......................... 40,600 Accrued investment management fee ........................ 64,778 Accrued administrative fee ............................... 21,592 ----------------- Total liabilities .................................... 5,114,470 ----------------- Net assets applicable to outstanding capital stock ....... $ 127,347,739 ----------------- ----------------- REPRESENTED BY: Capital stock - authorized 1 billion shares of $0.01 par value; outstanding, 21,562,549 shares ................ $ 215,625 Additional paid-in capital ............................... 159,091,635 Undistributed net investment income ...................... 5,454,621 Accumulated net realized loss on investments ............. (34,162,074) Unrealized depreciation of investments ................... (3,252,068) ----------------- Total - representing net assets applicable to outstanding capital stock ........................ $ 127,347,739 ----------------- ----------------- Net asset value per share of outstanding capital stock ... $ 5.91 ----------------- ----------------- * Investments in securities at identified cost ........... $ 131,317,751 ----------------- -----------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 7 - -------------------------------------------------------------------------------- FINANCIAL STATEMENTS STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 1995 INCOME: Interest ............................................... $ 11,024,230 Fee income (note 2) ...................................... 292,216 ----------------- Total investment income .............................. 11,316,446 ----------------- EXPENSES (NOTE 3): Investment management fee ................................ 733,911 Administrative fee ....................................... 244,637 Custodian, accounting and transfer agent fees ............ 184,330 Reports to shareholders .................................. 50,825 Directors' fees .......................................... 11,100 Audit and legal fees ..................................... 38,479 Federal excise taxes (note 2) ............................ 392,413 Other expenses ........................................... 51,533 ----------------- Total expenses ....................................... 1,707,228 Less expenses paid indirectly ............................ (4,049) ----------------- Total net expenses ................................... 1,703,179 ----------------- Net investment income ................................ 9,613,267 ----------------- NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS: Net realized loss on investments (note 4) ................ (16,073,551) Net change in unrealized appreciation or depreciation of investments ............................................ 31,048,915 ----------------- Net gain on investments .............................. 14,975,364 ----------------- Net increase in net assets resulting from operations ....................................... $ 24,588,631 ----------------- -----------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 8 - -------------------------------------------------------------------------------- FINANCIAL STATEMENTS STATEMENTS OF CHANGES IN NET ASSETS
Year Ended Year Ended 10/31/95 10/31/94 ----------------- ----------------- OPERATIONS: Net investment income .................................. $ 9,613,267 14,053,234 Net realized loss on investments ......................... (16,073,551) (11,432,538) Net change in unrealized appreciation or depreciation of investments ............................................ 31,048,915 (49,287,501) ----------------- ----------------- Net increase (decrease) in net assets resulting from operations ........................................... 24,588,631 (46,666,805) ----------------- ----------------- DISTRIBUTIONS TO SHAREHOLDERS: From net investment income ............................... (17,728,689) (18,004,244) From net realized gains .................................. -- (138,574) In excess of net realized gains (note 2) ................. -- (4,673,317) ----------------- ----------------- Total distributions .................................... (17,728,689) (22,816,135) ----------------- ----------------- CAPITAL SHARE TRANSACTIONS: Proceeds from issuance of 188,042 and 408,320 shares for the dividend reinvestment plan, respectively ........... 1,071,839 3,149,271 Payments for retirement of 227,500 shares ................ (1,216,789) -- ----------------- ----------------- Increase (decrease) in net assets from capital share transactions ......................................... (144,950) 3,149,271 ----------------- ----------------- Total increase (decrease) in net assets .............. 6,714,992 (66,333,669) Net assets at beginning of year ............................ 120,632,747 186,966,416 ----------------- ----------------- Net assets at end of year ................................ $ 127,347,739 120,632,747 ----------------- ----------------- ----------------- ----------------- Undistributed net investment income ...................... $ 5,454,621 11,796,465 ----------------- ----------------- ----------------- -----------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 9 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (1) ORGANIZATION American Government Income Fund 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 New York Stock Exchange under the symbol AGF. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES INVESTMENTS IN SECURITIES The values of fixed income securities are determined using pricing services or prices quoted by independent brokers. Exchange-listed options are valued at the last sales price, and 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. OPTIONS TRANSACTIONS For hedging purposes, the fund may buy and sell put and call options, write covered call options on portfolio securities, and write cash-secured puts. The risk in writing a call option is that the fund gives up the opportunity for profit if the market price of the security increases. The risk in writing a put option is that the fund may incur a loss if the market price of the security decreases and the option is exercised. The risk in buying an option is that the fund pays a premium whether or not the option is exercised. The fund also has the additional risk of not being able to enter into a closing transaction if a liquid secondary market does not exist. The fund also may write over-the-counter options where the completion of the obligation is dependent upon the credit standing of the other party. Option contracts are valued daily and unrealized appreciation or depreciation is recorded. The fund will realize a gain or loss upon expiration or closing of the option transaction. When an option is exercised, the proceeds on the sale of a written call option, the 10 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS purchase cost for a written put option, or the cost of a security for purchased put and call options is adjusted by the amount of premium received or paid. 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. INTEREST RATE TRANSACTIONS To preserve a return or spread on a particular investment or portion of its portfolio or for other non-speculative purposes, the fund may enter into various hedging transactions, such as interest rate swaps and the purchase of interest rate caps and floors. Interest rate swaps involve the exchange of commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments. The purchase of an interest rate cap entitles the purchaser, to the extent that a specified index exceeds a predetermined interest rate, to receive payments of interest on a contractually based notional principal amount from the party selling the interest rate cap. The purchase of an interest rate floor entitles the purchaser, to the extent that a specified index falls below a predetermined interest rate, to receive payments of interest on a contractually based notional principal amount from the party selling the interest rate floor. If forecasts of interest rates and other market factors are incorrect, investment performance will diminish compared to what performance would have been if these investment techniques were 11 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS not used. Even if the forecasts are correct, there is risk that the positions may correlate imperfectly with the asset or liability being hedged. Other risks of entering into these transactions are that a liquid secondary market may not always exist, or that the other party to the transaction may not perform. For interest rate swaps, caps and floors, the fund accrues weekly, as an increase or decrease to interest income, the current net amount due to or owed by the fund. Interest rate swaps, caps and floors are valued from prices quoted by independent brokers. These valuations represent the present value of all future cash settlement amounts based upon implied forward interest rates. 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 fluctuation 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 October 31, 1995, the fund had no outstanding when-issued or forward commitments. In connection with its ability to purchase securities on a when-issued or forward-commitment basis, the fund may enter into mortgage "dollar rolls" in which the fund sells securities for delivery in the current month and simultaneously contracts with the same counterparty to repurchase similar (same type, coupon and maturity) but not identical securities on a specified future date. As an inducement to "roll over" its purchase commitments, the fund receives negotiated fees. For the year ended October 31, 1995, such fees earned by the fund amounted to $292,216. FEDERAL TAXES The fund intends to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and not 12 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS be subject to federal income tax. Therefore, no income tax provision is required. However, the fund incurred federal excise taxes of $392,413 or $0.018 per share on income retained by the fund during the excise tax year ended December 31, 1994. On November 30, 1995, the fund made a determination to retain a portion of its taxable income for the 1995 excise tax year and pay an excise tax on the undistributed amount. Net investment income and net realized gains (losses) may differ for financial statement and tax purposes primarily because of the non-deductibility of excise tax payments for purposes of computing taxable income, differences in amortization policies for notional principal contracts, recognition of losses deferred due to "wash sale" transactions and the timing of recognition of income on certain interest-only and principal-only securities. 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. The effect on dividend distributions of certain book-to-tax differences is presented as an "excess distribution" in the statement of changes in net assets. On the statement of assets and liabilities, as a result of permanent book-to-tax differences, a reclassification adjustment has been made to increase undistributed net investment income by $1,773,578, increase accumulated net realized losses on investments by $1,381,165 and decrease additional paid-in capital by $392,413. DISTRIBUTIONS The fund pays monthly distributions from net investment income. Realized capital gains, if any, will be distributed on an annual basis. These distributions are recorded as of the close of business on the ex-dividend date. Such distributions are payable in cash, or pursuant to the fund's dividend reinvestment plan, reinvested in additional shares of the fund's capital stock. Under the plan, fund shares will be purchased in the open market. However, if the market price exceeds the net asset value by 10% or more, the fund will issue new shares at a discount of up to 5% from the current market price. 13 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS REPURCHASE AGREEMENTS For repurchase agreements entered into with certain broker-dealers, the fund, along with other affiliated registered investment companies, may transfer uninvested cash balances into a joint trading account, the daily aggregate of which is invested in repurchase agreements secured by U.S. government and agency obligations. Securities pledged as collateral for all individual and joint repurchase agreements are held by the fund's custodian bank until maturity of the repurchase agreement. Provisions for all agreements ensure that the daily market value of the collateral is in excess of the repurchase amount in the event of default. (3) EXPENSES The fund has entered into the following agreements with Piper Capital Management Incorporated (the adviser and the administrator): The investment advisory agreement provides the adviser with a monthly investment management fee in an amount equal to the sum of 0.025% of the average weekly net assets of the fund during the month (approximately 0.30% on an annual basis) and 5.25% of the daily gross income (i.e., investment income, including amortization of discount and premium, other than gains from the sale of securities or gains from options and futures contracts less interest on money borrowed by the fund) accrued by the fund during the month. The monthly investment management fee shall not exceed in the aggregate 1/12th of 0.60% of the fund's average weekly net assets during the month (approximately 0.60% on an annual basis). For its fee, the adviser provides investment advice and, in general, will 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 0.20% of the fund's average weekly net assets. For its fee, the administrator will provide certain reporting, regulatory and record-keeping services for the fund. In addition to the investment management fee and the administrative fee, the fund is responsible for paying most other operating expenses including outside directors' fees and expenses, custodian fees, 14 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS registration fees, printing and shareholder reports, transfer agent fees and expenses, legal, auditing and accounting services, insurance, interest, taxes and other miscellaneous expenses. Expenses paid indirectly represent a reduction of custodian fees for earnings on cash balances maintained with the custodian by the fund. (4) SECURITIES TRANSACTIONS Cost of purchases and proceeds from sales of securities (other than short-term securities) aggregated $183,789,113 and $192,106,613, respectively, for the year ended October 31, 1995. During the year ended October 31, 1995, the fund paid no brokerage commissions to Piper Jaffray Inc., an affiliated broker. (5) CAPITAL LOSS CARRYOVER For federal income tax purposes, the fund had capital loss carryovers of $34,162,074 on October 31, 1995, which, if not offset by subsequent capital gains, will expire in 2002 and 2003. It is unlikely the board of directors will authorize a distribution of any net realized capital gains until the available capital loss carryover has been offset or expires. (6) RETIREMENT OF FUND SHARES The fund's board of directors has approved a plan to repurchase shares of the fund in the open market and retire those shares. Repurchases may only be made when the previous day's closing market price was at a discount from net asset value. Daily repurchases are limited to 25% of the previous four weeks average daily trading volume on the New York Stock Exchange. Under the current plan, cumulative repurchases in the fund cannot exceed 3% of the total shares originally issued. The board of directors will review the plan every quarter and may change the amount which may be repurchased. The plan was last reviewed and reapproved by the board of directors on August 18, 1995. Pursuant to the plan, the fund has cumulatively repurchased and retired 227,500 shares as of October 31, 1995, which represents 1.20% of the shares originally issued. 15 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (7) FINANCIAL HIGHLIGHTS Per share data for a share of capital stock outstanding throughout each period and selected information for each period are as follows:
FISCAL YEAR ENDED OCTOBER 31, 1995 1994 1993 1992 1991 ----------- ----------- ----------- ----------- ----------- Net asset value, beginning of period.................$ 5.58 8.82 8.39 7.68 6.76 ----------- ----------- ----------- ----------- ----------- Operations: Net investment income .............................. 0.44 0.64 1.27 1.00 0.77 Net realized and unrealized gains (losses) on investments ...................................... 0.71 (2.81) 0.39 0.53 0.95 ----------- ----------- ----------- ----------- ----------- Total from operations ............................ 1.15 (2.17) 1.66 1.53 1.72 ----------- ----------- ----------- ----------- ----------- Distributions to shareholders: From net investment income ......................... (0.82) (0.84) (0.93) (0.82) (0.77) In excess of net investment income ................. -- -- -- -- (0.03) From net realized gains ............................ -- (0.01) (0.30) -- -- In excess of net realized gains .................... -- (0.22) -- -- -- ----------- ----------- ----------- ----------- ----------- Total distributions to shareholders .............. (0.82) (1.07) (1.23) (0.82) (0.80) ----------- ----------- ----------- ----------- ----------- Net asset value, end of period.......................$ 5.91 5.58 8.82 8.39 7.68 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Per-share market value, end of period................$ 5.75 6.00 9.38 8.75 8.13 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total return, net asset value* ....................... 22.31% (26.43%) 21.34% 20.88% 26.71% Total return, market value TRIANGLE ................. 10.96% (26.54%) 22.64% 18.52% 24.16% Net assets at end of period (in millions)............$ 127 121 187 175 159 Ratio of total expenses to average weekly net assets** ........................................... 1.40% 1.32% 0.99% 1.25% 1.02% Ratio of net investment income to average weekly net assets ............................................. 7.86% 9.44% 14.87% 12.48% 10.63% Portfolio turnover rate (excluding short-term securities) ........................................ 149% 199% 93% 123% 111% Amount of borrowings outstanding at end of period (in millions)+.........................................$ -- -- 69 54 36 Per-share amount of borrowings outstanding at end of period.............................................$ -- -- 3.27 2.60 1.73 Per-share amount of net assets, excluding borrowings, at end of period ................................... -- -- 12.09 10.99 9.41 Asset coverage ratio TRIANGLE TRIANGLE ............. -- -- 370% 423% 544%
* BASED ON THE CHANGE IN NET ASSET VALUE OF A SHARE DURING THE PERIOD AND ASSUMES REINVESTMENT OF DISTRIBUTIONS AT NET ASSET VALUE. ** INCLUDES 0.32%, 0.31% AND 0.21% FROM FEDERAL EXCISE TAXES IN FISCAL YEARS 1995, 1994 AND 1992, RESPECTIVELY. BEGINNING IN FISCAL 1995, THE EXPENSE RATIOS REFLECT THE EFFECT OF GROSS EXPENSES PAID INDIRECTLY BY THE FUNDS. PRIOR PERIOD EXPENSE RATIOS HAVE NOT BEEN ADJUSTED. TRIANGLE BASED ON THE CHANGE IN MARKET PRICE OF A SHARE DURING THE PERIOD AND ASSUMES REINVESTMENT OF DISTRIBUTIONS AT ACTUAL PRICES PURSUANT TO THE FUND'S DIVIDEND REINVESTMENT PLAN. TRIANGLE TRIANGLE REPRESENTS NET ASSETS, EXCLUDING BORROWINGS, AT END OF PERIOD DIVIDED BY BORROWINGS OUTSTANDING AT END OF PERIOD. + SECURITIES PURCHASED ON A WHEN-ISSUED BASIS FOR WHICH LIQUID, HIGH-GRADE DEBT OBLIGATIONS ARE MAINTAINED IN A SEGREGATED ACCOUNT ARE NOT CONSIDERED BORROWINGS. SEE FOOTNOTE 2 IN THE NOTES TO FINANCIAL STATEMENTS. 16 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (8) PENDING LITIGATION An amended complaint purporting to be a class action was filed on September 7, 1995, in the United States District Court for the District of Minnesota against the fund, seven other closed-end investment companies for which Piper Capital Management Incorporated acts as investment adviser, Piper Jaffray Companies Inc., Piper Jaffray Inc., Piper Capital Management Incorporated and certain associated individuals. The complaint alleges, among other things, violations of federal and state securities and other laws. Damages are being sought in an unspecified amount. The Fund intends to defend this lawsuit vigorously. Although it is impossible to predict the outcome, management believes, based on the facts currently available, that there will be no material adverse effect on the financial results of the fund. (9) QUARTERLY DATA (UNAUDITED) DOLLAR AMOUNTS
Net Increase Net Realized in Net Assets Distributions Total Net and Unrealized Resulting from Net Investment Investment Gains (Losses) from Investment Income Income on Investments Operations Income ------------ ----------- --------------- ------------- ------------- January 31, 1995 $ 2,770,760 2,104,739 (1,159,066) 945,673 (5,235,413) April 30, 1995 2,846,144 2,514,249 6,194,378 8,708,627 (4,181,328) July 31, 1995 2,906,486 2,582,621 7,429,096 10,011,717 (4,159,005) October 31, 1995 2,793,056 2,411,658 2,510,956 4,922,614 (4,152,943) ------------ ----------- --------------- ------------- ------------- $ 11,316,446 9,613,267 14,975,364 24,588,631 (17,728,689) ------------ ----------- --------------- ------------- ------------- ------------ ----------- --------------- ------------- -------------
PER-SHARE AMOUNTS
Net Realized and Net Increase Distributions Unrealized in Net Assets from Net Quarter End Net Investment Gains (Losses) Resulting from Investment Net Asset Income on Investments Operations Income Value --------------- ----------------- ------------------- --------------- ------------- January 31, 1995 $ 0.10 (0.05) 0.05 (0.24) 5.39 April 30, 1995 0.11 0.30 0.41 (0.20) 5.60 July 31, 1995 0.12 0.34 0.46 (0.19) 5.87 October 31, 1995 0.11 0.12 0.23 (0.19) 5.91 ----- ------ ----- ------ $ 0.44 0.71 1.15 (0.82) ----- ------ ----- ------ ----- ------ ----- ------
17 - -------------------------------------------------------------------------------- INVESTMENTS IN SECURITIES AMERICAN GOVERNMENT INCOME FUND OCTOBER 31, 1995
Principal Market Name of Issuer Amount Value (a) - --------------------------------------------------------- ---------- ----------- (PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS) U.S. GOVERNMENT SECURITIES (3.9%): U.S. Treasury Notes, 5.75%, 8/15/03 (cost: $4,925,781) ................................ $ 5,000,000 4,930,850 ----------- MORTGAGE-BACKED SECURITIES (93.9%): U.S. AGENCY FIXED RATE MORTGAGES (69.5%): 7.00%, FHLMC, 8/1/10 ................................. 2,892,847 2,917,205 7.50%, FHLMC, 8/1/25 ................................. 10,000,000 10,115,500 7.00%, FHLMC, 9/1/10 ................................. 4,884,953 4,926,084 7.50%, FNMA, 12/1/01 ................................. 3,210,264 3,272,415 7.50%, FNMA, 1/1/02 .................................. 12,560,246 12,803,412 6.50%, GNMA, 10/15/10 ................................ 4,950,000 4,812,328 9.00%, GNMA II, 3/20/25 .............................. 2,540,061 2,649,563 8.50%, GNMA II, 6/20/25 .............................. 14,719,512 15,248,237 9.00%, GNMA II, 6/20/25 .............................. 12,558,576 13,099,976 8.00%, GNMA II, 7/20/25 .............................. 2,230,950 2,285,296 8.00%, GNMA II, 9/20/25 .............................. 11,021,560 11,290,045 8.00%, GNMA II, 10/20/25 ............................. 5,000,000 5,121,800 ----------- 88,541,861 ----------- COLLATERALIZED MORTGAGE OBLIGATIONS (B) (24.4%): U.S. AGENCY FLOATING RATE (3.1%): 7.66%, FNMA, Series 1993-246, Class F, LIBOR, 10/25/23 ............................................ 4,934,071 3,897,916 ----------- U.S. AGENCY INVERSE INTEREST-ONLY (5.3%): 46.03%, FHLMC, Series 1382, Class LD, LIBOR, 11/15/18 ............................................ -- 695,546 12.76%, FHLMC, Series 1669, Class JB, LIBOR, 7/15/20 ............................................. -- 855,885 9.39%, FHLMC, Series 1684, Class JB, LIBOR, 9/15/21 ............................................. -- 797,529 15.02%, FHLMC, Series 1695, Class AD, LIBOR, 1/15/24 ............................................. -- 1,343,042 67.71%, FNMA, Series G 1992-64, Class S, LIBOR, 12/25/18 ............................................ -- 1,397,382 21.78%, FNMA, Series G 1993-17, Class S, LIBOR, 4/25/23 ............................................. -- 1,640,196 ----------- 6,729,580 ----------- PRIVATE INVERSE INTEREST-ONLY (C) (0.3%): 0.00%, Citicorp Mortgage Securities, Series 1993-4, Class A2, LIBOR, 3/25/22 ............................ -- 259,984 0.00%, Residential Funding Corporation, Series 1992-S41, Class A6, LIBOR, 12/25/07 ................. -- 7,613 0.00%, Sears Mortgage Securities, Series 1992-14, Class S1, LIBOR, 5/25/21 ............................ -- 28,707
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES. 18 - -------------------------------------------------------------------------------- INVESTMENTS IN SECURITIES AMERICAN GOVERNMENT INCOME FUND (CONTINUED)
Principal Market Name of Issuer Amount Value (a) - --------------------------------------------------------- ---------- ----------- 0.00%, Sears Mortgage Securities, Series 1993-1, Class S, LIBOR, 6/25/19 ................................. $ -- 23,453 ----------- 319,757 ----------- U.S. AGENCY INVERSE FLOATER (6.3%): 13.12%, FHLMC, Series 1041, Class F, LIBOR, 2/15/21 ............................................. 352,187 375,622 8.16%, FHLMC, Series 1512, Class NB, COFI, 5/15/08 ... 2,146,182 1,836,315 7.84%, FHLMC, Series 1563, Class S, COFI, 10/15/07 ... 1,558,125 1,239,971 7.17%, FHLMC, Series 1606, Class S, COFI, 5/15/08 .... 1,341,984 988,331 6.97%, FHLMC, Series 1655, Class SB, COFI, 12/15/08 ............................................ 919,551 713,857 7.01%, FHLMC, Series 1704, Class S, COFI, 3/15/09 .... 1,907,641 1,521,725 6.67%, FNMA, Series 1993-119, Class SH, Treasury, 7/25/23 ............................................. 1,936,607 1,354,618 ----------- 8,030,439 ----------- PRIVATE INVERSE FLOATER (0.9%): 9.00%, Capstead Securities Corporation, Series 1993-2E2, Class E2K, COFI, 10/25/23 ................. 1,576,873 1,198,424 ----------- U.S. AGENCY Z-TRANCHE (8.5%): 7.00%, FHLMC, Series 1388, Class L, 10/15/07 ......... 2,480,235 2,414,459 7.00%, FNMA, Series 1994-52, Class Z, 4/25/07 ........ 8,425,230 8,421,270 ----------- 10,835,729 ----------- Total Mortgage-Backed Securities (cost: $123,303,127) .............................. 119,553,706 ----------- INTEREST RATE CONTRACTS (1.3%): Interest rate cap with Goldman Sachs, $10,000,000 notional principal on one-month LIBOR (5.81% on 10/31/95), 4.50%, 9/10/97 ........................... -- 230,000 Interest rate cap with Merrill Lynch, $15,000,000 notional principal on one-month LIBOR (5.81% on 10/31/95), 4.50%, 9/10/97 ........................... -- 345,000 Interest rate cap with Morgan Stanley, $10,000,000 notional principal on one-month LIBOR (5.81% on 10/31/95), 6.00%, 2/2/98 ............................ -- 83,233 Interest rate cap with Morgan Stanley, $15,000,000 notional principal on one-month LIBOR (5.81% on 10/31/95), 4.50%, 9/10/97 ........................... -- 345,000
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES. 19 - -------------------------------------------------------------------------------- INVESTMENTS IN SECURITIES AMERICAN GOVERNMENT INCOME FUND (CONTINUED)
Principal Market Name of Issuer Amount Value (a) - --------------------------------------------------------- ---------- ----------- Interest rate cap with Morgan Stanley, $20,000,000 notional principal on one-month LIBOR (5.81% on 10/31/95), 6.00%, 1/25/98 ......................... $ -- 166,466 Interest rate cap with Morgan Stanley, $57,000,000 notional principal on one-month LIBOR (5.81% on 10/31/95), 6.00%, 2/7/98 ............................ -- 474,428 ----------- Total Interest Rate Contracts (cost: $1,151,843) ................................ 1,644,127 ----------- SHORT-TERM SECURITIES (1.5%): Repurchase agreement with Goldman Sachs in a joint trading account, collateralized by U.S. government agency securities, acquired on 10/31/95, accrued interest at repurchase date of $316, 5.87%, 11/1/95 (cost: $1,937,000) .................................. 1,937,000 1,937,000 ----------- Total Investments in Securities (cost: $131,317,751) (d) ......................... $ 128,065,683 ----------- -----------
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES. 20 - -------------------------------------------------------------------------------- INVESTMENTS IN SECURITIES NOTES TO INVESTMENTS IN SECURITIES: (A) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO THE FINANCIAL STATEMENTS. (B) DESCRIPTIONS OF CERTAIN COLLATERALIZED MORTGAGE OBLIGATIONS ARE AS FOLLOWS: LIBOR - LONDON INTERBANK OFFERED RATE. COFI (11TH DISTRICT) - COST OF FUNDS INDEX OF THE FEDERAL RESERVE'S 11TH DISTRICT. INVERSE FLOATER - REPRESENTS SECURITIES THAT PAY INTEREST AT RATES THAT INCREASE (DECREASE) WITH A DECLINE (INCREASE) IN THE SPECIFIED INDEX. THE INTEREST RATE PAID BY THE INVERSE FLOATER WILL GENERALLY CHANGE AT A MULTIPLE OF ANY CHANGE IN THE INDEX. INTEREST RATES DISCLOSED ARE IN EFFECT ON OCTOBER 31, 1995. INVERSE INTEREST-ONLY - REPRESENTS SECURITIES THAT ENTITLE HOLDERS TO RECEIVE ONLY INTEREST PAYMENTS ON THE UNDERLYING MORTGAGES. INTEREST IS PAID AT A RATE THAT INCREASES (DECREASES) WITH A DECLINE (INCREASE) IN THE SPECIFIED INDEX. THE YIELD TO MATURITY OF AN INVERSE INTEREST-ONLY IS EXTREMELY SENSITIVE TO THE RATE OF PRINCIPAL PAYMENTS ON THE UNDERLYING MORTGAGE ASSETS. A RAPID (SLOW) RATE OF PRINCIPAL REPAYMENTS MAY HAVE AN ADVERSE (POSITIVE) EFFECT ON YIELD TO MATURITY. INTEREST RATES DISCLOSED REPRESENT CURRENT YIELDS BASED UPON THE CURRENT COST BASIS AND ESTIMATED TIMING AND AMOUNT OF FUTURE CASH FLOWS. Z-TRANCHE - REPRESENTS SECURITIES THAT PAY NO INTEREST OR PRINCIPAL DURING THEIR INITIAL ACCRUAL PERIODS, BUT ACCRUE ADDITIONAL PRINCIPAL AT SPECIFIED RATES. INTEREST RATE DISCLOSED REPRESENTS CURRENT YIELD BASED UPON THE CURRENT COST BASIS AND ESTIMATED TIMING OF FUTURE CASH FLOWS. (C) BASED UPON ESTIMATED TIMING AND AMOUNT OF FUTURE CASH FLOWS, INCOME IS CURRENTLY NOT BEING RECOGNIZED ON CERTAIN INVERSE INTEREST-ONLY SECURITIES WITH AN AGGREGATE MARKET VALUE OF $319,757. (D) ON OCTOBER 31, 1995, FOR FEDERAL INCOME TAX PURPOSES, THE COST OF INVESTMENTS WAS $131,046,063. THE AGGREGATE GROSS UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED ON THIS COST WERE AS FOLLOWS: GROSS UNREALIZED APPRECIATION .... $ 2,412,050 GROSS UNREALIZED DEPRECIATION ...... (5,392,430) ---------- NET UNREALIZED DEPRECIATION .... $ (2,980,380) ---------- ----------
21 - -------------------------------------------------------------------------------- INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS AND SHAREHOLDERS AMERICAN GOVERNMENT INCOME FUND INC.: We have audited the accompanying statement of assets and liabilities, including the schedule of investments in securities, of American Government Income Fund Inc. as of October 31, 1995 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 October 31, 1995 and the financial highlights for each of the years in the five-year period ended October 31, 1995. These financial statements and the financial highlights are the responsibility of the fund's management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Investment securities held in custody are confirmed to us by the custodian. As to securities purchased or sold but not received or delivered, we request confirmations from brokers, and where replies are not received, we carry out other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and the financial highlights referred to above present fairly, in all material respects, the financial position of American Government Income Fund Inc. as of October 31, 1995 and the results of its operations for the year then ended, changes in its net assets for each of the years in the two-year period ended October 31, 1995 and the financial highlights for each of the years in the five-year period ended October 31, 1995, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Minneapolis, Minnesota December 8, 1995 22 - -------------------------------------------------------------------------------- FEDERAL INCOME TAX INFORMATION Fiscal Year Ended October 31, 1995 Distributions shown below are taxable as dividend income. None qualify for the corporate dividends received deduction. In February 1996, you will receive a breakdown of income earned by investment category for calendar year 1995. Information for federal income tax purposes is presented as an aid to you in reporting the distributions. Please consult a tax adviser on how to report these distributions at the state and local levels.
Payable Date Per Share - ------------------------------------------------ ----------- November 23, 1994 ............................ $ 0.0640 December 28, 1994 .............................. 0.1140 January 13, 1995 ............................... 0.0640 February 22, 1995 .............................. 0.0640 March 29, 1995 ................................. 0.0640 April 26, 1995 ................................. 0.0640 May 24, 1995 ................................... 0.0640 June 28, 1995 .................................. 0.0640 July 26, 1995 .................................. 0.0640 August 23, 1995 ................................ 0.0640 September 27, 1995 ............................. 0.0640 October 25, 1995 ............................... 0.0640 ----------- $ 0.8180 ----------- -----------
23 - -------------------------------------------------------------------------------- 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, the number of abstentions, and the number of broker non-votes with respect to such matters, are set forth below. 1. The fund's shareholders elected the following six directors:
Shares Shares Withholding Voted "For" Authority to Vote ----------- ------------------ David T. Bennett 17,845,670 576,213 Jaye F. Dyer 17,845,670 576,213 William H. Ellis 17,845,670 576,213 Karol D. Emmerich 17,845,670 576,213 Luella G. Goldberg 17,845,670 576,213 George Latimer 17,845,670 576,213
2. The fund's shareholders ratified the selection by a majority of the independent members of the fund's Board of Directors of KPMG Peat Marwick LLP as the independent public accountants for the fund for the fiscal year ending October 31, 1995. The following votes were cast regarding this matter:
Shares Shares Voted Broker Voted "For" "Against" Abstentions Non-votes - ----------- ------------- ----------- --------------- 17,851,732 272,142 289,008 --
SHARE REPURCHASE PROGRAM Your fund's board of directors has reapproved the fund's share repurchase program, which enables the fund to 'buy back' shares of its common stock in the open market. Repurchases may only be made when the previous day's closing market price per share was at a discount from net asset value. Repurchases cannot exceed 3% of the fund's originally issued shares. WHAT EFFECT WILL THIS PROGRAM HAVE ON SHAREHOLDERS? - - We do not expect any adverse impact on the adviser's ability to manage the fund. - - Because repurchases will be at a price below net asset value, remaining shares outstanding may experience a slight increase in net asset value. - - Although the effect of share repurchases on market price is less certain, the board of directors believes the program may have a favorable effect on the market price of fund shares. - - We do not anticipate any material increase in the fund's expense ratio. 24 - -------------------------------------------------------------------------------- SHAREHOLDER UPDATE WHEN WILL SHARES BE REPURCHASED? Share repurchases may be made from time to time and may be discontinued at any time. Share repurchases are not mandatory when fund shares are trading at a discount from net asset value; all repurchases will be at the discretion of the fund's investment adviser. The board of directors will consider whether to continue the share repurchase program on at least a semiannual basis and will notify shareholders of its determination in the next semiannual or annual report. HOW WILL SHARES BE REPURCHASED? We expect to finance the repurchase of shares by liquidating portfolio securities or using current cash balances. We do not anticipate borrowing in order to finance share repurchases. TERMS AND CONDITIONS OF THE DIVIDEND REINVESTMENT PLAN As a shareholder, you may choose to participate in the 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 Fund shares to cover reinvestments will generally be purchased by IFTC in the open market. However, if fund shares are trading at a 10% or greater premium over net asset value, and in certain other circumstances, the fund may issue new shares to cover such reinvestments at a discount of up to 5% of the market price without brokerage commissions. 25 - -------------------------------------------------------------------------------- SHAREHOLDER UPDATE Beginning no more than five business days before the dividend payment date, IFTC may purchase fund shares on behalf of participants in the plan to satisfy dividend reinvestments. Such purchases are made on the New York Stock Exchange (the Exchange) or elsewhere at any time when the price of the fund's common stock on the Exchange is at less than a 10% premium over the fund's most recently calculated net asset value per share. If, at the close of business on the dividend payment date, the shares purchased in the open market are insufficient to satisfy the dividend reinvestment requirements - either because the fund's shares have been trading at a greater than 10% premium over net asset value or because IFTC, for any other reason, has not been able to purchase a sufficient number of shares - IFTC will accept payment of the dividend, or the remaining portion therefore, in authorized but unissued shares of the fund. Such shares will be issued at a price per share equal to the higher of (1) the net asset value per share as of the close of business on the payment date, or (2) 95% of the closing market price per share on the payment date. The number of shares allocated to you will be determined by dividing the amount of the dividend or distribution by the applicable price per share. There is no direct charge to you for reinvestment of dividends and capital gains, since IFTC fees are paid by the fund. However, if fund shares are purchased in the open market, each participant in the plan pays a pro rata portion of the brokerage commissions. Brokerage charges are expected to be lower than those for individual transactions because the plan purchases shares for all participants in blocks. Distributions paid on the shares in your plan account will also be reinvested as long as you continue to participate in the plan. IFTC maintains accounts for plan participants holding shares in certificate form and will furnish written confirmation of all transactions, including information you need for tax records. Reinvested shares in your account will be held by IFTC in non-certificated form in your name. TAX INFORMATION Distributions reinvested in shares purchased in the open market are subject to income tax, the same as if such distributions were received as cash. When shares are issued by the fund at a discount from market value, shareholders will be treated as having received distributions of an amount equal to the full market value of those shares. Shareholders, as required by the Internal Revenue Service, will receive a Form 1099 information return regarding the federal tax status of the prior year's distributions. 26 - -------------------------------------------------------------------------------- SHAREHOLDER UPDATE 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 funds reserve 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. 27 - -------------------------------------------------------------------------------- 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 CAPITAL MANAGEMENT INCORPORATED, PIPER JAFFRAY COMPANIES INC. 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 FUNDS OFFICERS William H. Ellis, CHAIRMAN OF THE BOARD Worth Bruntjen, PRESIDENT Marijo Goldstein, SENIOR VICE PRESIDENT Robert H. Nelson, SENIOR VICE PRESIDENT AND TREASURER Amy K. Johnson, VICE PRESIDENT David E. Rosedahl, SECRETARY INVESTMENT Piper Capital Management Incorporated ADVISER 222 SOUTH 9TH 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 P.L.L.P. 220 SOUTH SIXTH STREET, MINNEAPOLIS, MN 55402 INDEPENDENT KPMG Peat Marwick LLP AUDITORS 4200 NORWEST CENTER, MINNEAPOLIS, MN 55402
28 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 -------------------- [LOGO] PIPER JAFFRAY INC., FUND SPONSOR AND NASD MEMBER. THIS DOCUMENT IS PRINTED ON PAPER MADE FROM 100% TOTAL RECOVERED FIBER, INCLUDING 15% POST-CONSUMER WASTE. 034-96 AGF-01 12/95 STAPLES -----END PRIVACY-ENHANCED MESSAGE-----