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AMERICAN
EXPRESS
Financial
Direct
Strategist Income Fund, Inc.
May 31, 1996
Strategist Government Income Fund
Strategist Quality Income Fund
Strategist High Yield Fund
This wrapper includes a prospectus that describes in detail the
Funds' objectives, investment policies, risks, sales charges, fees
and other matters of interest. Please read the prospectus
carefully before you invest or send money.
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American Express Financial Direct
American Express Financial Direct is a complete resource for all
your financial services needs. We offer convenient access to a
broad range of carefully selected investment products -- including
no-load mutual funds, discount brokerage services, money market
funds and more. We also provide the exceptional service you've
come to expect from American Express. For more information about
our investment products, please call one of our licensed Financial
Consultants.
1-800-AXP-8800
This page is not part of the prospectus.
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Strategist Income Fund, Inc.
Prospectus
May 31, 1996
This prospectus describes three diversified, no-load mutual funds.
Strategist Income Fund, Inc. is a series mutual fund with three
series of capital stock representing interests in Strategist
Government Income Fund, Strategist Quality Income Fund and
Strategist High Yield Fund. Each Fund has its own goals and
investment policies.
The goals of Strategist Government Income Fund are to provide
shareholders with a high level of current income and safety of
principal consistent with investment in U.S. government and
government agency securities.
The goals of Strategist Quality Income Fund are current income and
the preservation of capital by investing in investment-grade bonds.
The primary goal of Strategist High Yield Fund is to provide high
current income. Capital growth is a secondary goal.
Strategist High Yield Fund invests primarily, and may invest all of
its assets, in long-term corporate bonds in the lower-rating
categories, commonly known as junk bonds. These securities
generally have greater price fluctuations than higher-rated
securities and are more likely to experience a default. Investors
should carefully consider these risks before investing. See the
prospectus sections entitled "Goals and types of Fund investments
and their risks" and "Facts about investments and their risks."
Each Fund has chosen to participate in a master/feeder structure.
Unlike most funds that invest directly in securities, each Fund
seeks to achieve its objective by investing all of its assets in a
corresponding Portfolio of Income Trust, which is a separate
investment company. This arrangement is commonly known as a
master/feeder structure. The Portfolio in which each Fund invests
has the same investment objectives, policies and restrictions as
that Fund.
This prospectus contains facts that can help you decide if one or
more of the Funds is the right investment for you. Read it before
you invest and keep it for future reference.
Additional facts about the Funds are in a Statement of Additional
Information (SAI), filed with the Securities and Exchange
Commission. The SAI, dated May 31, 1996, is incorporated here by
reference. For a free copy, contact American Express Financial
Direct.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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American Express Financial Direct
P.O. Box 59196
Minneapolis, MN 55459-0196
1-800-AXP-SERV
TTY: 1-800-710-5260
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Table of contents
The Funds in brief
Goals and types of Fund investments and their risks
Manager and distributor
Portfolio managers
Fund expenses
Performance
Total returns
Yield
Investment policies and risks
Facts about investments and their risks
Special considerations regarding master/feeder structure
Valuing Fund shares
How to purchase, exchange or redeem shares
How to purchase shares
How to exchange shares
How to redeem shares
Systematic purchase plans
Other important information
Special shareholder services
Services
Quick telephone reference
Distributions and taxes
Dividend and capital gain distributions
Reinvestments
Taxes
How to determine the correct TIN
How the Funds and Portfolios are organized
Shares
Voting rights
Shareholder meetings
Board members and officers
Investment manager
Administrator and transfer agent
Distributor
About the Advisor
Appendices
Description of corporate bond ratings
Descriptions of derivative instruments
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The Funds in brief
Strategist Income Fund, Inc. (the Company) is a series mutual fund
with three series of capital stock representing interests in
Strategist Government Income Fund (Government Income Fund),
Strategist Quality Income Fund (Quality Income Fund) and Strategist
High Yield Fund (High Yield Fund) (the Funds). Each Fund is a
diversified mutual fund with its own goals and investment policies.
Each of the Funds seeks to achieve its goals by investing all of
its assets in a corresponding series (the Portfolio) of Income
Trust (the Trust) rather than by directly investing in and managing
its own portfolio of securities.
Goals and types of Fund investments and their risks
Government Income Fund seeks to provide shareholders with a high
level of current income and safety of principal consistent with
investment in U.S. government and government agency securities. It
does so by investing all of its assets in Government Income
Portfolio, a Portfolio of the Trust with the same investment
objective as Government Income Fund. Government Income Portfolio
is a diversified mutual fund that invests at least 65% of its total
assets in securities issued or guaranteed as to principal and
interest by the U.S. government and its agencies. Most investments
are in pools of mortgage loans. Government Income Portfolio also
may invest in non-governmental debt securities, derivative
instruments and money market instruments.
Quality Income Fund seeks to provide shareholders with current
income and preservation of capital. It does so by investing all of
its assets in Quality Income Portfolio, a Portfolio of the Trust
with the same investment objective as Quality Income Fund. Quality
Income Portfolio is a diversified mutual fund that invests at least
90% of its net assets in the four highest investment grades of
corporate debt securities, certain unrated debt securities the
portfolio manager believes have the same investment qualities,
government securities, derivative instruments and money market
securities. Other investments may include common and preferred
stocks and convertible securities. The investments are both U.S.
and foreign.
High Yield Fund seeks to provide shareholders with high current
income as its primary goal and, as its secondary goal, capital
growth. It does so by investing all of its assets in High Yield
Portfolio, a Portfolio of the Trust with the same investment
objective as High Yield Fund. High Yield Portfolio is a
diversified mutual fund that invests primarily in long-term, high-
yielding, high risk debt securities below investment grade issued
by U.S. and foreign corporations. These securities are commonly
known as junk bonds. They generally involve greater volatility of
price and risk of principal and income than higher rated
securities. High Yield Portfolio also invests in government
securities, investment-grade bonds, convertible securities, common
and preferred stocks, derivative instruments and money market
instruments.
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Because investments involve risk, a Fund cannot guarantee achieving
its goals. Some of the Portfolios' investments may be considered
speculative and involve additional investment risks.
The foregoing investment goals are fundamental policies of each
Fund and Portfolio, which may not be changed unless authorized by a
majority of the outstanding voting securities of the Fund or of the
Portfolio, as the case may be. However, any Fund may withdraw its
assets from the corresponding Portfolio at any time if the board of
directors of the Company determines that it is in the best
interests of the Fund to do so. In such event, the Company would
consider what action should be taken, including whether to retain
an investment advisor to manage the Fund's assets directly or to
reinvest all of the Fund's assets in another pooled investment
entity.
Manager and distributor
Each Portfolio is managed by American Express Financial Corporation
(the Advisor), a provider of financial services since 1894. The
Advisor currently manages more than $132 billion in assets. Shares
of the Funds are sold through American Express Service Corporation
(the Distributor), an affiliated company of the Advisor.
Portfolio managers
Government Income Portfolio
Jim Snyder joined the Advisor in 1989 as an investment analyst and
currently serves as senior portfolio manager. He has managed the
assets of the predecessor of Government Income Portfolio since 1993
after having served as associate portfolio manager from 1992 to
1993. He also serves as portfolio manager of IDS Life Series Fund,
Government Securities Portfolio, another fund managed by the
Advisor.
Quality Income Portfolio
Ray Goodner joined the Advisor in 1977 and serves as vice president
and senior portfolio manager. He has managed the assets of the
predecessor of Quality Income Portfolio since 1985. He also
manages the assets of World Income Portfolio, a separate portfolio
in the Preferred Master Trust Group since 1989, and IDS Life Global
Yield Fund since 1996.
High Yield Portfolio
Jack Utter joined the Advisor in 1962 and serves as vice president
and senior portfolio manager. He has managed the assets of the
predecessor of High Yield Portfolio since 1985. He also became
manager of IDS Life Income Advantage Fund in 1996.
Fund expenses
The purpose of the following table and example is to summarize the
aggregate expenses of each Fund and its corresponding Portfolio and
to assist investors in understanding the various costs and expenses
that investors in the Fund may bear directly or indirectly. The<PAGE>
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Company's board believes that, over time, the aggregate per share
expenses of a Fund and its corresponding Portfolio should be
approximately equal to (and may be less than) the per share
expenses a Fund would have if the Company retained its own
investment advisor and the assets of each Fund were
invested directly in the type of securities held by the
corresponding Portfolio. The percentages indicated as "Management
fee" and "Other expenses" are based on both the Fund's and
Portfolio's projected fees and expenses for the current fiscal year
ending May 31, 1997. For additional information concerning Fund
and Portfolio expenses, see "How the Funds and Portfolios are
Organized."
Shareholder transaction expenses
Maximum sales charge on purchases*
(as a percentage of offering price)
Government Quality High Yield
Income Fund Income Fund Fund
0% 0% 0%
Annual Fund and allocated Portfolio operating expenses
(% of average daily net assets):
Government Quality High Yield
Income Fund Income Fund Fund
Management fee** 0.51% 0.51% 0.58%
12b-1 fee 0.25 0.25 0.25
Other expenses*** 0.34 0.34 0.37
Total (after
reimbursement) 1.10 1.10 1.20
*There are no sales loads; however High Yield Fund imposes a 0.50%
redemption fee for shares redeemed or exchanged within 180 days of
their purchase date. This fee reimburses the Fund for brokerage
fees and other costs incurred. This fee also helps assure that
long-term shareholders are not unfairly bearing the costs
associated with frequent traders. Government Income and Quality
Income Funds reserve the right upon 60 days' advance notice to
shareholders to impose a redemption fee of up to 1% on shares
redeemed within one year of purchase.
**The management fee is paid by the Trust on behalf of each
Portfolio.
***Other expenses include an administrative services fee, a
transfer agency fee and other nonadvisory expenses.
The Advisor and the Distributor have agreed to waive certain fees
and to absorb certain other Fund expenses until May 31, 1997.
Under this agreement, Government Income and Quality Income Fund's
total expenses will not exceed 1.1% and High Yield Fund's total
expenses will not exceed 1.2%. Without this agreement, the
estimated Other expenses and Total fund operating expense would
have been: for Government Income Fund, 0.82% and 1.58%; for
Quality Income Fund, 0.97% and 1.73% and for High Yield Fund, 0.97%
and 1.80%.
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Example: Suppose for each year for the next 10 years, Fund
expenses are as above and annual return is 5%. If you sold your
shares at the end of the following years, for each $1,000 invested,
you would pay total expenses of:
Government Quality High Yield
Income Fund Income Fund Fund
1 year $11 $11 $12
3 years $35 $35 $38
5 years $61 $61 $66
10 years $134 $134 $146
The table and example do not represent actual expenses, past or
future. Actual expenses may be higher or lower than those shown.
Because the Funds pay annual distribution (12b-1) fees, long-term
shareholders may indirectly pay an equivalent of more than a 7.25%
sales charge, the maximum permitted by the National Association of
Securities Dealers.
Performance
Total return is the sum of all of your returns for a given period,
assuming you reinvest all distributions. It is calculated by
taking the total value of shares you own at the end of the period
(including shares acquired by reinvestment), less the price of
shares you purchased at the beginning of the period.
Average annual total return is the annually compounded rate of
return over a given time period (usually two or more years). It is
the total return for the period converted to an equivalent annual
figure.
Total returns
Average annual total returns as of Dec. 31, 1995
Purchase 1 year 5 years 10 years
made ago ago ago
Government Income
Fund +13.90% +7.31% +8.05%
Lehman Treasury
Bond Index +18.35 +9.36 +9.38
Quality Income Fund +21.22 +10.84 +10.10
High Yield Fund +21.63 +17.57 +9.86
Lehman Aggregate
Bond Index +18.14 +9.41 +9.60
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Cumulative total returns as of Dec. 31, 1995
Purchase 1 year 5 years 10 years
made ago ago ago
Government Income
Fund +13.90% +42.30% +116.89%
Lehman Treasury
Bond Index +18.35 +56.43 +145.02
Quality Income Fund +21.22 +67.29 +161.74
High Yield Fund +21.63 +124.64 +156.09
Lehman Aggregate
Bond Index +18.14 +56.80 +150.13
In June 1996, IDS Federal Income Fund, IDS Selective Fund and IDS
Extra Income Fund (the IDS Funds) transferred all of their assets
to Government Income Portfolio, Quality Income Portfolio and High
Yield Portfolio, respectively. The performance information in the
foregoing tables represents performance of the corresponding IDS
Funds prior to March 20, 1995 and of Class A shares of the
corresponding IDS Funds from March 20, 1995 through Dec. 1995, in
each case adjusted to reflect the absence of sales charges on
shares of the Funds sold through this prospectus.
The historical performance has not been adjusted for any difference
between the estimated aggregate fees and expenses of the Funds and
historical fees and expenses of the IDS Funds.
These examples show total returns from hypothetical investments in
each Fund. These returns are compared to those of popular indexes
for the same periods.
For purposes of calculation, information about each Fund makes no
adjustments for taxes an investor may have paid on the reinvested
income and capital gains, and covers a period of widely fluctuating
securities prices. Returns shown should not be considered a
representation of a Fund's future performance.
Lehman Treasury Bond Index is made up of an unmanaged
representative list of government bonds that include all publicly
issued obligations of the U.S. Treasury. Lehman Aggregate Bond
Index is made up of an unmanaged representative list of government
and corporate bonds as well as asset-backed securities and
mortgage-backed securities. The indexes are frequently used as
general measures of bond market performance. However, the
securities used to create the indexes may not be representative of
the debt securities held in the Portfolios.
The indexes reflect reinvestment of all distributions and changes
in market prices, but exclude brokerage commissions or other fees.
Yield
Yield is the net investment income earned per share for a specified
time period, divided by the net asset value at the end of the
period. From time to time the Funds may advertise their 30-day <PAGE>
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annualized yields. The Funds calculate this 30-day annualized
yield by dividing:
o net investment income per share deemed earned during a 30-day
period by
o the net asset value per share on the last day of the period,
and
o converting the result to a yearly equivalent figure.
A Fund's yield varies from day to day, mainly because share values
(which are calculated daily) vary in response to changes in
interest rates. Net investment income normally changes much less
in the short run. Thus, when interest rates rise and share values
fall, yield tends to rise. When interest rates fall, yield tends
to follow. Past yields should not be considered an indicator of
future yields.
Investment policies and risks
Unlike mutual funds which directly acquire and manage their own
portfolio of securities, each of the Funds seeks to achieve its
investment objective by investing all of its assets in a
corresponding Portfolio of the Trust, which is a separate
investment company. The Portfolio in which each Fund invests has
the same investment objectives, policies and restrictions as that
Fund. The board of directors of the Company believes that by
investing all of its assets in the corresponding Portfolio, each
Fund will be in a position to realize directly or indirectly
certain economies of scale inherent in managing a larger asset
base, although there is no assurance that this will occur. The
policies described below apply both to the Fund and its
corresponding Portfolio.
Government Income Portfolio - Government Income Portfolio invests
primarily in securities issued or guaranteed as to principal and
interest by the U.S. government, its agencies and
instrumentalities. Under normal market conditions, at least 65% of
Government Income Portfolio's total assets will be invested in such
securities. Although Government Income Portfolio may invest in any
U.S. government securities, it is anticipated that most of the
Portfolio will consist of government securities representing part
ownership of pools of mortgage loans.
Quality Income Portfolio - Quality Income Portfolio invests in the
four highest investment grades of marketable corporate debt
securities, certain unrated debt securities the portfolio manager
believes have the same investment qualities, government securities,
derivative instruments and money market instruments. The
investments are both U.S. and foreign. Under normal market
conditions, at least 90% of Quality Income Portfolio's net assets
will be in these investments. The remaining 10% of Quality Income
Portfolio's net assets may be invested in common and preferred
stocks and convertible securities. Quality Income Portfolio may
invest up to 25% of its total assets in foreign investments.
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High Yield Portfolio - High Yield Portfolio primarily invests in
debt securities below investment grade issued by U.S. and foreign
corporations. Most of these will be rated BBB, BB, or B by
Standard & Poor's Corporation (S&P) or the Moody's Investors
Services, Inc. (Moody's) equivalent. However, High Yield Portfolio
may invest in debt securities with lower ratings, including those
in default. High Yield Portfolio may invest up to 10% of its total
assets in common stocks, preferred stocks that do not pay dividends
and warrants to purchase common stocks. Other investments include
investment grade bonds, convertible securities, stocks, derivative
instruments and money market instruments. High Yield Portfolio may
invest up to 25% of its total assets in foreign investments.
The various types of investments described above that the portfolio
managers use to achieve investment performance are explained in
more detail in the next section and in the SAI.
Facts about investments and their risks
Debt securities: The price of bonds generally falls as interest
rates increase, and rises as interest rates decrease. The price of
bonds also fluctuates if the credit rating is upgraded or
downgraded. The price of bonds below investment grade may react
more to the ability of a company to pay interest and principal when
due than to changes in interest rates. They have greater price
fluctuations, are more likely to experience a default, and
sometimes are referred to as junk bonds. Reduced market liquidity
for these bonds may occasionally make it more difficult to value
them. In valuing bonds, a Portfolio relies both on independent
rating agencies and the investment manager's credit analysis.
Securities that are subsequently downgraded in quality may continue
to be held by a Portfolio and will be sold only when the investment
manager believes it is advantageous to do so.
<TABLE><CAPTION>
Rated securities
Bond ratings and holdings for the calendar year
ending Dec. 31, 1995
S&P Rating Protection of
(or Moody's principal and Percent of
equivalent) interest net assets
Government Quality
Income Income High Yield
Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C>
AAA Highest quality 99.56% 51.65% 1.93%
AA High quality - 7.58 0.50
A Upper medium grade - 19.26 -
BBB Medium grade - 15.87 0.35
BB Moderately speculative - - 22.46
B Speculative - - 50.33
CCC Highly speculative - - 6.56
CC Poor quality - - 0.91
C Lowest quality - - -
D In default - - -
Unrated Unrated securities - 0.25 8.74
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Unrated securities
Bond ratings and holdings for the calendar year
ending Dec. 31, 1995
Percent of net assets in unrated securities
S&P Rating Protection of assessed by the Advisor to be of comparable
(or Moody's principal and quality
equivalent) interest
Government Quality
Income Income High Yield
Portfolio Portfolio Portfolio
AAA Highest quality - % 0.25% - %
AA High quality - - -
A Upper medium grade - - -
BBB Medium grade - - 0.20
BB Moderately speculative - - -
B Speculative - - 3.79
CCC Highly speculative - - 3.44
CC Poor quality - - -
C Lowest quality - - -
D In default - - -
Unrated Unrated securities - - 1.31
</TABLE>
(The information in the tables above relates to IDS Federal Income
Fund, IDS Selective Fund and IDS Extra Income Fund, funds that
transferred their assets to Government Income Portfolio, Quality
Income Portfolio and High Yield Portfolio, respectively, in June
1996. See Appendix to this prospectus describing corporate bond
ratings for further information.)
Government Income and Quality Income Portfolios do not invest in
securities below investment grade.
Debt securities sold at a deep discount: Some bonds are sold at
deep discounts because they do not pay interest until maturity.
They include zero coupon bonds and PIK (pay-in-kind) bonds. To
comply with tax laws, a Portfolio has to recognize a computed
amount of interest income and pay dividends to unitholders even
though no cash has been received. In some instances, a Portfolio
may have to sell securities to have sufficient cash to pay the
dividend.
Government securities: U.S. Treasury bonds, notes and bills, and
securities including mortgage pass through certificates of the
Government National Mortgage Association (GNMA), are guaranteed by
the United States. Other U.S. government securities are issued or
guaranteed by federal agencies or government-sponsored enterprises
but are not direct obligations of the United States. These include
securities supported by the right of the issuer to borrow from the
Treasury, such as obligations of Federal Home Loan Mortgage
Corporation (FHLMC) and Federal National Mortgage Association
(FNMA) bonds. Because the U.S. government is not obligated to
provide financial support to its instrumentalities, Government
Income Portfolio will invest only in securities issued by those
instrumentalities where the investment manager is satisfied the
credit risk is minimal.
Mortgage-backed securities: A mortgage pass-through certificate
represents an interest in a pool, or group, of mortgage loans <PAGE>
PAGE 14
assembled by GNMA, FNMA, or FHLMC or non-governmental entities. In
pass-through certificates, both principal and interest payments,
including prepayments, are passed through to the holder of the
certificate. Prepayments on underlying mortgages result in a loss
of anticipated interest, and the actual yield (or total return) to
a Portfolio, which is influenced by both stated interest rates and
market conditions, may be different than the quoted yield on the
certificates. A Portfolio may also invest in non-governmental
mortgage-related securities and debt securities, such as bonds,
debentures and collateralized mortgage obligations secured by
mortgages on commercial real estate or residential rental
properties, provided such securities are rated A or better by
Moody's or S&P or, if not rated, are of equivalent investment
quality as determined by the Portfolio's investment manager. Some
U.S. government securities may be purchased on a when-issued basis,
which means that it may take as long as 45 days after the purchase
before the securities are delivered to the Portfolio.
Each Portfolio may invest in stripped mortgage-backed securities.
Generally, there are two classes of stripped mortgage-backed
securities: Interest Only (IO) and Principal Only (PO). IOs
entitle the holder to receive distributions consisting of all or a
portion of the interest on the underlying pool of mortgage loans or
mortgage-backed securities. POs entitle the holder to receive
distributions consisting of all or a portion of the principal of
the underlying pool of mortgage loans or mortgage-backed
securities. The cash flows and yields on IOs and POs are extremely
sensitive to the rate of principal payments (including prepayments)
on the underlying mortgage loans or mortgage-backed securities. A
rapid rate of principal payments may adversely affect the yield to
maturity of IOs. A slow rate of principal payments may adversely
affect the yield to maturity of POs. If prepayments of principal
are greater than anticipated, an investor in IOs may incur
substantial losses. If prepayments of principal are slower than
anticipated, the yield on a PO will be affected more severely than
would be the case with a traditional mortgage-backed security.
The Portfolios may purchase mortgage-backed security (MBS) put
spread options and write covered MBS call spread options. MBS
spread options are based upon the changes in the price spread
between a specified mortgage-backed security and a like-duration
Treasury security. MBS spread options are traded in the OTC market
and are of short duration, typically one to two months. A
Portfolio would buy or sell covered MBS call spread options in
situations where mortgage-backed securities are expected to under
perform like-duration Treasury securities.
Common stocks: Stock prices are subject to market fluctuations.
Stocks of larger, established companies that pay dividends may be
less volatile than the stock market as a whole. Stocks of smaller
companies may be subject to more abrupt or erratic price movements
than stocks of larger, established companies or the stock market as
a whole.
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Preferred stocks: If a company earns a profit, it generally must
pay its preferred stockholders a dividend at a pre-established
rate.
Convertible securities: These securities generally are preferred
stocks or bonds that can be exchanged for other securities, usually
common stock, at prestated prices. When the trading price of the
common stock makes the exchange likely, the convertible securities
trade more like common stock.
Foreign investments: Securities of foreign companies and
governments may be traded in the United States, but often they are
traded only on foreign markets. Frequently, there is less
information about foreign companies and less government supervision
of foreign markets. Foreign investments are subject to political
and economic risks of the countries in which the investments are
made, including the possibility of seizure or nationalization of
companies, imposition of withholding taxes on income, establishment
of exchange controls or adoption of other restrictions that might
affect an investment adversely. If an investment is made in a
foreign market, the local currency may be purchased using a forward
contract in which the price of the foreign currency in U.S. dollars
is established on the date the trade is made, but delivery of the
currency is not made until the securities are received. As long as
a Portfolio holds foreign currencies or securities valued in
foreign currencies, the value of those assets will be affected by
changes in the value of the currencies relative to the U.S. dollar.
Because of the limited trading volume in some foreign markets,
efforts to buy or sell a security may change the price of the
security, and it may be difficult to complete the transaction.
Derivative instruments: A portfolio manager may use derivative
instruments in addition to securities to achieve investment
performance. Derivative instruments include futures, options and
forward contracts. Such instruments may be used to maintain cash
reserves while remaining fully invested, to offset anticipated
declines in values of investments, to facilitate trading, to reduce
transaction costs or to pursue higher investment returns.
Derivative instruments are characterized by requiring little or no
initial payment and a daily change in price based on or derived
from a security, a currency, a group of securities or currencies,
or an index. A number of strategies or combination of instruments
can be used to achieve the desired investment performance
characteristics. A small change in the value of the underlying
security, currency or index will cause a sizable gain or loss in
the price of the derivative instrument. Derivative instruments
allow the portfolio manager to change the investment performance
characteristics very quickly and at lower costs. Risks include
losses of premiums, rapid changes in prices, defaults by other
parties and inability to close such instruments. A Portfolio will
use derivative instruments only to achieve the same investment
performance characteristics it could achieve by directly holding
those securities and currencies permitted under the investment
policies. The Portfolios will designate cash or appropriate liquid
assets to cover portfolio obligations. No more than 5% of each <PAGE>
PAGE 16
Portfolio's net assets can be used at any one time for good faith
deposits on futures and premiums for options on futures that do not
offset existing investment positions. Certain of the investments
previously discussed, including mortgage-backed securities, are
also generally regarded as derivatives. The Portfolios are not
limited as to the percentage of their assets that may be invested
in permissible investments, including derivatives, except as
otherwise explicitly provided in this prospectus or the SAI. For
descriptions of these and other types of derivative instruments,
see the Appendix to this prospectus and the SAI.
Securities and derivative instruments that are illiquid: A
security or derivative instrument is illiquid if it cannot be sold
quickly in the normal course of business. Some investments cannot
be resold to the U.S. public because of their terms or government
regulations. All securities and derivative instruments, however,
can be sold in private sales, and many may be sold to other
institutions and qualified buyers or on foreign markets. Each
portfolio manager will follow guidelines established by the board
and consider relevant factors such as the nature of the security
and the number of likely buyers when determining whether a security
is illiquid.
No more than 10% of a Portfolio's net assets will be held in
securities and derivative instruments that are illiquid.
Money market instruments: Short-term debt securities rated in the
top two grades or the equivalent are used to meet daily cash needs
and at various times to hold assets until better investment
opportunities arise. Generally less than 25% of a Portfolio's
total assets are in these money market instruments. However, for
temporary defensive purposes these investments could exceed that
amount for a limited period of time.
The investment policies described above may be changed by the
board.
Lending portfolio securities: Each Portfolio may lend its
securities to earn income so long as borrowers provide collateral
equal to the market value of the loans. The risks are that
borrowers will not provide collateral when required or return
securities when due. Unless holders of a majority of the
outstanding voting securities approve otherwise, loans may not
exceed 30% of a Portfolio's net assets.
Special considerations regarding master/feeder structure
An investor in a Fund should be aware that a Fund, unlike mutual
funds which directly acquire and manage their own portfolios of
securities, seeks to achieve its investment objective by investing
its assets in the Portfolio of the Trust with an identical
investment objective. This arrangement is commonly known as a
master/feeder structure. The Trust is a separate investment <PAGE>
PAGE 17
company. Therefore, a Fund's interest in securities owned by the
Portfolio is indirect. The board has considered the advantages and
disadvantages of investing the assets of each Fund in the
corresponding Portfolio and believes that this approach will be in
the best interests of the Funds and their shareholders by
positioning the Funds to realize certain economies of scale
inherent in managing a larger asset base. Until recently, the
Advisor sponsored and advised only traditionally structured funds
that invest directly in a portfolio of securities and retain their
own investment manager. Funds that invest all their assets in
interests in a separate investment company are a relatively new
development in the mutual fund industry and may be subject to
additional regulations and risks.
The investment objectives, policies and restrictions of the
Portfolios are described under the captions "Goals and types of
Fund investments and their risks" and "Investment policies and
risks." Additional information on investment policies may be found
in the SAI.
In addition to selling an interest to a Fund, a Portfolio may sell
interests to other affiliated and non-affiliated mutual funds and
to institutional investors. Such investors will invest in the
Portfolio on the same terms and conditions and will pay a
proportionate share of the Portfolio's expenses. However, the
other investors investing in a Portfolio are not required to sell
their shares at the same price as a Fund due to variations in sales
commissions and other operating expenses. Therefore, investors in
a Fund should be aware that these differences may result in
differences in returns experienced by investors in the different
funds that invest in the same Portfolio. Information regarding
other funds or pooled investment entities that invest in Portfolios
of the Trust may be obtained by contacting a service representative
at 1-800-437-3133.
A Fund may withdraw (completely redeem) all its assets from a
Portfolio at any time if the board determines that it is in the
best interest of the Fund to do so. In the event a Fund withdraws
all of its assets from a Portfolio, the board would consider what
action might be taken, including investing all assets of the Fund
in another pooled investment entity or retaining an investment
advisor to manage the Fund's assets in accordance with its
investment objective. The investment objective of each Fund and
its corresponding Portfolio can only be changed with the approval
of holders of outstanding voting securities. If the objective of a
Portfolio changes and shareholders of the corresponding Fund do not
approve a parallel change in the Fund's investment objective, the
Company would seek an alternative investment vehicle for that Fund
or retain an investment advisor on its behalf.
Investors in a Fund should be aware that smaller funds investing in
a Portfolio may be adversely affected by the actions of larger
funds investing in the Portfolio. For example, if a large fund
withdraws from a Portfolio, the remaining funds may experience
higher prorated operating expenses, thereby producing lower <PAGE>
PAGE 18
returns. Additionally, the Portfolio may become less diverse,
resulting in increased portfolio risk, and experience decreasing
economies of scale. Institutional investors in a Portfolio that
have a greater pro rata ownership than a Fund could have effective
voting control over the operation of the Portfolio. Certain
changes in the Portfolio's fundamental objectives, policies and
restrictions could require a Fund to redeem its interest in a
Portfolio. Any such withdrawal could result in a distribution of
in-kind portfolio securities (as opposed to cash distribution). If
securities are distributed, the Fund could incur brokerage, tax or
other charges in converting the securities to cash. In addition, a
distribution in kind may result in a less diversified portfolio of
investments or adversely affect the liquidity of a Fund.
Wherever a Fund as an investor in a Portfolio is requested to vote
on matters pertaining to the Portfolio, the Fund will hold a
meeting of Fund shareholders and will vote its interests in the
Portfolio for or against such matters proportionately to the
instructions to vote for or against such matters received from Fund
shareholders. A Fund will vote shares for which it receives no
voting instructions in the same proportion as the shares for which
it receives voting instructions. See "Fund expenses" for a
complete description of the management and other expenses
associated with a Fund's investment in a corresponding Portfolio.
Valuing Fund shares
The net asset value (NAV) is the value of a single Fund share. It
is the total value of a Fund's investments in the corresponding
Portfolio and other assets, less any liabilities, divided by the
number of shares outstanding. The NAV is the price at which you
purchase Fund shares and the price you receive when you sell your
shares. It usually changes from day to day, and is calculated at
the close of business, normally 3 p.m. Central time, each business
day (any day the New York Stock Exchange is open). NAV generally
declines as interest rates increase and rises as interest rates
decline.
To establish the net assets, all securities are valued as of the
close of each business day. In valuing assets:
o Securities (except bonds) and assets with available market
values are valued on that basis.
o Securities maturing in 60 days or less are valued at
amortized cost.
o Bonds and assets without readily available market values are
valued according to methods selected in good faith by the
board of trustees.
<PAGE>
PAGE 19
How to purchase, exchange or redeem shares
How to purchase shares
You may purchase shares of the Funds through an Investment
Management Account (IMA) maintained with American Express Service
Corporation (the Distributor). There is no fee to open an IMA
account. Payment for shares must be made directly to the
Distributor.
If you already have an IMA account, you may buy shares in the Funds
as described below and need not open a new account.
If you do not have an IMA account, complete an IMA Account
Application (available by calling 1-800-AXP-SERV) and mail the
application to American Express Financial Direct, P.O. Box 59196,
Minneapolis, MN 55459-0196. Corporations and other organizations
should contact the Distributor to determine which additional forms
may be necessary to open an IMA account.
You may deposit money into your IMA account by check, wire or many
other forms of electronic funds transfer (securities may also be
deposited). All deposit checks should be made payable to the
Distributor. If you would like to wire funds into your existing
IMA account, please contact the Distributor at 1-800-AXP-SERV for
instructions.
Minimum Fund investment requirements. Your initial investment in a
Fund may be as low as $2,000 ($1,000 for custodial accounts,
Individual Retirement Accounts and certain other retirement plans).
The minimum subsequent investment is $100. These requirements may
be reduced or waived as described in the SAI.
When and at what price shares will be purchased. You must have
money available in your IMA account in order to purchase Fund
shares. If your request and payment (including money transmitted
by wire) are received and accepted by the Distributor before 2 p.m.
Central time, your money will be invested at the net asset value
determined as of the close of business (normally 3 p.m. Central
time) that day. If your request and payment are received after
that time, your request will not be accepted or your payment
invested until the next business day. (See "Valuing Fund shares.")
Methods of purchasing shares. There are three convenient ways to
purchase shares of the Funds. You may choose the one that works
best for you. The Distributor will send you confirmation of your
purchase request.
By phone:
You may use money in your IMA account to make initial and
subsequent purchases. To place your order, call 1-800-AXP-
SERV.
<PAGE>
PAGE 20
By mail:
Written purchase requests (along with any checks) should be
mailed to American Express Financial Direct, P.O. Box 59196,
Minneapolis, MN 55459-0196, and should contain the following
information:
o your IMA account number (or an IMA Account Application)
o the name of the Fund(s) and the dollar amount of shares
you would like purchased
Your check should be made out to the Distributor. It will be
deposited into your IMA account and used, as necessary, to
cover your purchase request.
By systematic purchase:
Once you have opened an IMA account, you may authorize the
Distributor to automatically purchase shares on your behalf
at intervals and in amounts selected by you. (See
"Systematic Purchase Plans")
Other purchase information. Each Fund reserves the right, in its
sole discretion and without prior notice to shareholders, to
withdraw or suspend all or any part of the offering made by this
prospectus, to reject purchase requests or to change the minimum
investment requirements. All requests to purchase shares of the
Fund are subject to acceptance by the Funds and the Distributor and
are not binding until confirmed or accepted in writing. The
Distributor will charge a $15 service fee against an investor's IMA
account if his or her investment check is returned because of
insufficient or uncollected funds or a stop payment order.
How to exchange shares
The exchange privilege allows you to exchange your investment in a
Fund at no charge for shares of other funds in the Strategist Fund
Group available in your state. For complete information, including
fees and expenses, read the prospectus carefully before exchanging
into a new fund. Any exchange will involve the redemption of Fund
shares and the purchase of shares in another fund on the basis of
the net asset value per share of each fund. An exchange may result
in a gain or loss and is a taxable event for federal income tax
purposes. When exchanging into another fund you must meet that
fund's minimum investment requirements. Each Fund reserves the
right to modify, terminate or limit the exchange privilege. The
current limit is four exchanges per calendar year. The Distributor
and the Funds reserve the right to reject any exchange, limit the
amount or modify or discontinue the exchange privilege, to prevent
abuse or adverse effects on the Funds and their shareholders.
<PAGE>
PAGE 21
How to redeem shares
The price at which shares will be redeemed. Shares will be
redeemed at the net asset value per share next determined after
receipt by the Distributor of proper redemption instructions, as
described below.
High Yield Fund imposes a 0.50% redemption fee for shares redeemed
or exchanged within 180 days of their purchase date. This fee
reimburses the Fund for brokerage fees and other costs incurred.
This fee also helps assure that long-term shareholders are not
unfairly bearing the costs associated with frequent traders.
Payment of redemption proceeds. Normally, payment for redeemed
shares will be credited directly to your IMA account on the next
business day. However, the Fund may delay payment, but not later
than seven days after the Distributor receives your redemption
instructions in proper form. Redemption proceeds will be held
there or mailed to you depending on the account standing
instructions you selected.
If you recently purchased shares by check, your redemption proceeds
may be held in your IMA account until your check clears (which may
take up to 10 days from the purchase date) before a check is mailed
to you.
A redemption is a taxable transaction. If your proceeds from your
redemption are more or less than the cost of your shares, you will
have a gain or loss, which can affect your tax liability.
Redeeming shares held in an IRA or qualified retirement account may
subject you to certain federal taxes, penalties and reporting
requirements. Consult your tax advisor.
Methods of exchanging or redeeming shares
By phone:
You may exchange between any of the Strategist Funds or redeem your
shares by calling 1-800-AXP-SERV. Telephone exchanges or
redemptions may be difficult to implement during periods of drastic
economic or market changes. If you experience difficulties in
exchanging or redeeming shares by telephone, you can mail your
exchange or redemption requests as described below.
To properly process your telephone exchange or redemption request
we will need the following information:
o your IMA account number and your name (for exchanges, both
funds must be registered in the same ownership)
o the name of the fund from which you wish to exchange or
redeem shares
o the dollar amount or number of shares you want to exchange or
redeem
o the name of the fund into which shares are to be exchanged,
if applicable
<PAGE>
PAGE 22
Telephone exchange or redemption requests received before 2 p.m.
(Central time) on any business day, once the caller's identity and
account ownership have been verified by the Distributor, will be
processed at the net asset value determined as of the close of
business (normally 3 p.m. Central time) that day.
By mail:
You may also request an exchange or redemption by writing to
American Express Financial Direct, P.O. Box 59196, Minneapolis, MN
55459-0196. Once an exchange or redemption request is mailed it is
irrevocable and cannot be modified or canceled.
To properly process your mailed exchange or redemption request, we
will need a letter from you that contains the following
information:
o your IMA account number
o the name of the fund from which you wish to exchange or
redeem shares
o the dollar amount or number of shares you want to exchange or
redeem
o the name of the fund into which shares are to be exchanged,
if applicable, and
o a signature of at least one of the IMA account holders in the
exact form specified on the account
Telephone transactions. You may make purchase, redemption and
exchange requests by mail or by calling 1-800-AXP-SERV where
trained representatives are available to answer questions about the
Funds and your account. The privilege to initiate transactions by
telephone is automatically available through your IMA account.
Each Fund will honor any telephone transaction believed to be
authentic and will use reasonable procedures to confirm that
instructions communicated by telephone are genuine. This includes
asking identifying questions and tape recording calls. If these
procedures are not followed, a Fund may be liable for losses due to
unauthorized or fraudulent instructions. Telephone privileges may
be modified or discontinued at any time.
Systematic purchase plans
The Distributor offers a Systematic Purchase Plan (SPP) that allows
you to make periodic investments in Strategist Funds automatically
and conveniently. A SPP can be used as a dollar cost averaging
program and saves you time and expense associated with writing
checks or wiring funds.
Investment minimums: You can make automatic investments in any
amount, from $100 to $50,000.
<PAGE>
PAGE 23
Investment methods: Automatic investments are made from your IMA
account and you may select from several different investment
methods to make automatic investment(s):
a) Using uninvested cash in your IMA account: If you elect to
use this option to make your automatic investments,
uninvested cash in your IMA account will be used to make the
investment and, if necessary, shares of your Money Market
Fund will be redeemed to cover the balance of the purchase.
b) Using bank authorization on direct deposit: Bank
authorizations (transfers from a bank checking or savings
account) and direct deposit (automatic deposit of all or a
portion of a payroll or government check) are two of the
investment method options that are available through SPP.
Money is transferred into your IMA account and automatic
investments can be made using these amounts.
If you elect to use bank authorizations and/or direct deposit for
your automatic investments, you will select two dates: a transfer
date (when the money is transferred into your IMA account) and your
investment date. The automatic investment date selected may be the
same day of your bank authorization or direct deposit. Your
investment date should be on or close to the transfer/deposit date
in order to minimize uninvested cash in your IMA account.
If you make changes to your bank authorization or direct deposit
date, it may also be necessary to change your automatic investment
date to coincide with the new transfer/deposit date.
Investment frequency: You can select the frequency of your
automatic investments (twice monthly, monthly or quarterly) and
choose either the 5th or the 20th of the month for your automatic
investment dates. Quarterly investments are made on the date
selected in the first month of each quarter (January, April, July
and October).
Changing instructions to an already established plan: If you want
to change the fund(s) selected for your SPP you may do so by
calling 1-800-AXP-SERV, or by sending written instructions clearly
outlining the changes to American Express Financial Direct, P.O.
Box 59196, Minneapolis, MN 55459-0196. Written notification must
include the following:
o The funds with SPP that you want to cancel
o The newly selected fund(s) in which you want to begin
making automatic investments and the amount to be
invested in each fund
o The investment frequency and investment dates for your
new automatic investments
Information on changing bank authorization and direct deposit
instructions is included in the Systematic Purchase Plan Terms and
Conditions brochure which you will receive after enrolling in SPP.
<PAGE>
PAGE 24
Terminating your SPP. If you wish to terminate your SPP, you may
call 1-800-AXP-SERV, or send written instructions to American
Express Financial Direct, P.O. Box 59196, Minneapolis, MN 55459-
0196.
Terminating bank authorizations and direct deposit. If you wish to
terminate your bank authorizations, you may do so at any time by
notifying American Express Financial Direct in writing. You must
notify your employer or government agency to cancel direct deposit.
Your bank authorization and/or direct deposit will not
automatically terminate when you cancel your SPP.
IMPORTANT: If you are canceling your bank authorizations and/or
direct deposit and you wish to cancel your SPP, you must also
provide instructions stating that the Distributor should cancel
your SPP. You may notify the Distributor by sending written
instructions to the address above or telephoning 1-800-AXP-SERV.
Your systematic investments will continue using IMA account assets
if the Distributor does not receive notification to terminate your
systematic investments as well.
To avoid procedural difficulties, the Distributor should receive
instructions to change or terminate your SPP or bank authorizations
at least 10 days prior to your scheduled investment date.
Additional information. This information is only a summary of the
Systematic Purchase Plan Terms and Conditions brochure that you
will receive if you choose to enroll in SPP. Please read it
carefully and keep it for future reference.
Other important information
Minimum balance and account requirements. Each Fund reserves the
right to redeem your shares if, as a result of redemptions, the
aggregate value of your holdings in the Fund drops below $1,000
($500 in the case of custodial accounts, IRAs and other retirement
plans). You will be notified in writing 30 days before the Fund
takes such action to allow you to increase your holdings to the
minimum level. If you close your IMA account, the Fund will
automatically redeem your shares.
Wire transfers to your bank. Funds can be wired from your IMA
account to your bank account. Call the Distributor for additional
information on wire transfers. A $15 service fee will be charged
against your IMA account for each wire sent.
No person has been authorized to give any information or to make
any representations not contained in this prospectus in connection
with the offering being made by this prospectus and, if given or
made, such information or representation must not be relied upon as
having been authorized by the Funds or their Distributor. This
prospectus does not constitute an offering by the Funds or by the
Distributor in any jurisdiction in which such offering may not be
lawfully made.
<PAGE>
PAGE 25
Special shareholder services
Services
To help you track and evaluate the performance of your investments,
you will receive these services:
Quarterly statements listing all of your holdings and transactions
during the previous three months.
Yearly tax statements featuring average-cost-basis reporting of
capital gains or losses if you redeem your shares along with
distribution information - which simplifies tax calculations.
Quick telephone reference
American Express Financial Direct Team
Fund performance, objectives and account inquiries, redemptions and
exchanges, dividend payments or reinvestments and automatic payment
arrangements
1-800-AXP-SERV
TTY Service
For the hearing impaired
1-800-710-5260
Distributions and taxes
As a shareholder you are entitled to your share of a Fund's net
income and any net gains realized on its investments. Each Fund
distributes dividends and capital gain distributions to qualify as
a regulated investment company and to avoid paying corporate income
and excise taxes. Dividend and capital gain distributions will
have tax consequences you should know about.
Dividend and capital gain distributions
Investment income is allocated to a Fund by its corresponding
Portfolio, less direct and allocated expenses. Each Fund's net
realized capital gains or losses, if any, consist of the net
realized capital gains or losses allocated to the Fund from its
corresponding Portfolio. A Fund's net investment income from
dividends and interest is distributed to you monthly as dividends.
Short-term capital gains are distributed at the end of the calendar
year and are included in net investment income. A Fund will offset
any net realized capital gains by any available capital loss
carryovers. The net realized capital gains, if any, are
distributed at the end of the calendar year as capital gain
distributions. Before they're distributed, net long-term capital
gains are included in the value of each share. After they're
distributed, the value of each share drops by the per-share amount
of the distribution. (If your distributions are reinvested, the
total value of your holdings will not change.)
<PAGE>
PAGE 26
Reinvestments
Dividends and capital gain distributions are automatically
reinvested in additional shares of a Fund, unless you request the
Fund in writing or by phone to pay distributions to you in cash.
The reinvestment price is the net asset value at close of business
on the day the distribution is paid. (Your quarterly statement
will confirm the amount invested and the number of shares
purchased.)
If you choose cash distributions, you will receive only those
declared after your request has been processed.
Taxes
The Funds have received a Private Letter Ruling from the Internal
Revenue Service stating that, for purposes of the Internal Revenue
Code, each Fund will be regarded as directly holding its allocable
share of the income and gain realized by the Portfolio.
Distributions are subject to federal income tax. In certain
states, Fund distributions, to the extent they consist of interest
from securities of the U.S. government and certain of its agencies
or instrumentalities, may be exempt from state and local taxes.
Interest from obligations which are merely guaranteed by the U.S.
government or one of its agencies, such as GNMA certificates, is
generally not entitled to this exemption. Distributions are
taxable in the year the Fund declares them regardless of whether
you take them in cash or reinvest them.
Each January, you will receive a tax statement showing the kinds
and total amount of all distributions you received during the
previous year. You must report distributions on your tax returns,
even if they are reinvested in additional shares.
Buying a dividend creates a tax liability. This means buying
shares shortly before a capital gain distribution. You pay the
full pre-distribution price for the shares, then receive a portion
of your investment back as a distribution, which is taxable.
Redemptions and exchanges subject you to a tax on any capital gain.
If you sell shares for more than their cost, the difference is a
capital gain. Your gain may be either short term (for shares held
for one year or less) or long term (for shares held for more than
one year).
<PAGE>
PAGE 27
Your Taxpayer Identification Number (TIN) is important. As with
any financial account you open, you must list your current and
correct Taxpayer Identification Number (TIN) -- either your Social
Security or Employer Identification number. The TIN must be
certified under penalties of perjury on your application when you
open an account.
If you don't provide the TIN, or the TIN you report is incorrect,
you could be subject to backup withholding of 31% of taxable
distributions and proceeds from certain sales and exchanges. You
also could be subject to further penalties, such as:
o a $50 penalty for each failure to supply your correct TIN
o a civil penalty of $500 if you make a false statement that
results in no backup withholding
o criminal penalties for falsifying information
You also could be subject to backup withholding because you failed
to report interest or dividends on your tax return as required.
How to determine the correct TIN
Use the Social Security or
For this type of account: Employer Identification number
of:
Individual or joint account The individual or individuals
listed on the account
Custodian account of a minor The minor
(Uniform Gifts/Transfers to Minors
Act)
A living trust The grantor-trustee (the person
who puts the money into the
trust)
An irrevocable trust, pension The legal entity (not the
trust or estate personal representative or
trustee, unless no legal entity
is designated in the account
title)
Sole proprietorship The owner
Partnership The partnership
Corporate The corporation
Association, club or The organization
tax-exempt organization
For details on TIN requirements, call 1-800-AXP-SERV for federal
Form W-9, "Request for Taxpayer Identification Number and
Certification."<PAGE>
PAGE 28
Important: This information is a brief and selective summary of
certain federal tax rules that apply to each Fund. Tax matters are
highly individual and complex, and you should consult a qualified
tax advisor about your personal situation.
How the Funds and Portfolios are organized
Each Fund is a series of Strategist Income Fund, Inc., an open-end
management investment company, as defined in the Investment Company
Act of 1940. The Company was incorporated on May 25, 1995 in
Minnesota. The Company's headquarters are at IDS Tower 10,
Minneapolis, MN 55440-0010.
Shares
The Company currently is composed of three Funds, each issuing its
own series of capital stock. Each Fund is owned by its
shareholders. All shares issued by a Fund are of the same class --
capital stock. Par value is 1 cent per share. Both full and
fractional shares can be issued.
The shares of each Fund making up the Company represent an interest
in that Fund's assets only (and profits or losses), and, in the
event of liquidation, each share of a Fund would have the same
rights to dividends and assets as every other share of that Fund.
Voting rights
As a shareholder, you have voting rights over the Fund's management
and fundamental policies. You are entitled to one vote for each
share you own. Shares of the Funds have cumulative voting rights.
Shareholder meetings
The Company does not hold annual shareholder meetings. However,
the board members may call meetings at their discretion, or on
demand by holders of 10% or more of the Company's outstanding
shares, to elect or remove board members.
Board members and officers
Shareholders of the Company elect a board that oversees the
operations of the Funds and chooses the Company's officers. The
Company's officers are responsible for day-to-day business
decisions based on policies set by the board. Information about
the board members and officers of both the Company and the Trust is
found in the SAI under the caption "Board Members and Officers."
Investment manager
The Trust, on behalf of each Portfolio, pays the Advisor for
managing the assets of each Portfolio. Under its Investment
Management Services Agreement, the Advisor determines which
securities will be purchased, held or sold by each Portfolio
(subject to the direction and control of the board of trustees). <PAGE>
PAGE 29
The Advisor is paid a fee for these services based on the average
daily net assets of each Portfolio, as follows:
<TABLE><CAPTION>
Government Income Portfolio
High Yield Portfolio Quality Income Portfolio
Assets Annual rate at Assets Annual rate at
(billions) each asset level (billions) each asset level
<S> <C> <C> <C>
First $1.0 0.590% First $1.0 0.520%
Next 1.0 0.565 Next 1.0 0.495
Next 1.0 0.540 Next 1.0 0.470
Next 3.0 0.515 Next 3.0 0.445
Next 3.0 0.490 Next 3.0 0.420
Next 9.0 0.465 Over 9.0 0.395
</TABLE>
Under the agreement, each Portfolio also pays taxes, brokerage
commissions and nonadvisory expenses.
Administrator and transfer agent
Under an Administrative Services Agreement, each Fund pays the
Advisor for administration and accounting services at an annual
rate of 0.05% decreasing in gradual percentages to 0.025% as assets
increase.
In addition, under a separate Transfer Agency Agreement, the
Advisor maintains shareholder accounts and records for the Funds.
Each Fund pays an annual fee of $25 per shareholder account for
this service.
Distributor
The Funds sell shares through the Distributor under a Distribution
Agreement. The Distributor is located at IDS Tower 10,
Minneapolis, MN 55440-0010 and is a wholly owned subsidiary of
Travel Related Services, Inc., a wholly owned subsidiary of
American Express Company, a financial services company with
headquarters at American Express Tower, World Financial Center, New
York, NY 10285. Financial consultants representing the
Distributor provide information to investors about individual
investment programs, the Funds and their operations, new account
applications, exchange and redemption requests. The Funds reserve
the right to sell shares through other financial intermediaries or
broker/dealers. In that event, the account terms would also be
governed by rules that the intermediary may establish.
To help defray costs, including costs for marketing, sales
administration, training, overhead, advertising and related
functions, the Funds pay the Distributor a distribution fee, also
known as a 12b-1 fee. This fee is paid under a Plan and Agreement
of Distribution that follows the terms of Rule 12b-1 of the
Investment Company Act of 1940. Under this Agreement, each Fund
pays a distribution fee at an annual rate of 0.25% of the Fund's
average daily net assets for distribution-related services. This
fee will not cover all of the costs incurred by the Distributor.
Total fees and expenses (excluding taxes and brokerage commissions)
cannot exceed the most restrictive applicable state expense
limitation.<PAGE>
PAGE 30
About the Advisor
The Advisor is located at IDS Tower 10, Minneapolis, MN 55440-0010.
It is a wholly owned subsidiary of American Express Company. The
Portfolios may pay brokerage commissions to broker-dealer
affiliates of the Advisor.
<PAGE>
PAGE 31
Appendix A
Description of corporate bond ratings
Bond ratings concern the quality of the issuing corporation. They
are not an opinion of the market value of the security. Such
ratings are opinions on whether the principal and interest will be
repaid when due. A security's rating may change, which could
affect its price. Ratings by Moody's Investors Service, Inc. are
Aaa, Aa, A, Baa, Ba, B, Caa, Ca and C. Ratings by Standard &
Poor's Corporation are AAA, AA, A, BBB, BB, B, CCC, CC, C and D.
The following is a compilation of the two agencies' rating
descriptions. For further information, see the SAI.
Aaa/AAA - Judged to be of the best quality and carry the smallest
degree of investment risk. Interest and principal are secure.
Aa/AA - Judged to be high-grade although margins of protection for
interest and principal may not be quite as good as Aaa or AAA rated
securities.
A - Considered upper-medium grade. Protection for interest and
principal is deemed adequate but may be susceptible to future
impairment.
Baa/BBB - Considered medium-grade obligations. Protection for
interest and principal is adequate over the short-term; however,
these obligations may have certain speculative characteristics.
Ba/BB - Considered to have speculative elements. The protection of
interest and principal payments may be very moderate.
B - Lack characteristics of more desirable investments. There may
be small assurance over any long period of time of the payment of
interest and principal.
Caa/CCC - Are of poor standing. Such issues may be in default or
there may be risk with respect to principal or interest.
Ca/CC - Represent obligations that are highly speculative. Such
issues are often in default or have other marked shortcomings.
C - Are obligations with a higher degree of speculation. These
securities have major risk exposures to default.
D - Are in payment default. The D rating is used when interest
payments or principal payments are not made on the due date.
Non-rated securities will be considered for investment when they
possess a risk comparable to that of rated securities consistent
with the Portfolio's objectives and policies. When assessing the
risk involved in each non-rated security, the Portfolio will
consider the financial condition of the issuer or the protection
afforded by the terms of the security.<PAGE>
PAGE 32
Definitions of zero-coupon and pay-in-kind securities
A zero-coupon security is a security that is sold at a deep
discount from its face value and makes no periodic interest
payments. The buyer of such a security receives a rate of return
by gradual appreciation of the security, which is redeemed at face
value on the maturity date.
A pay-in-kind security is a security in which the issuer has the
option to make interest payments in cash or in additional
securities. The securities issued as interest usually have the
same terms, including maturity date, as the pay-in-kind securities.
<PAGE>
PAGE 33
Appendix B
Descriptions of derivative instruments
What follows are brief descriptions of derivative instruments a
Portfolio may use. At various times a Portfolio may use some or
all of these instruments and is not limited to these instruments.
It may use other similar types of instruments if they are
consistent with the Portfolio's investment goal and policies. For
more information on these instruments, see the SAI.
Options and futures contracts. An option is an agreement to buy or
sell an instrument at a set price during a certain period of time.
A futures contract is an agreement to buy and sell an instrument
for a set price on a future date. A Portfolio may buy and sell
options and futures contracts to manage its exposure to changing
interest rates, security prices and currency exchange rates.
Options and futures may be used to hedge a Portfolio's investments
against price fluctuations or to increase market exposure.
Asset-backed and mortgage-backed securities. Asset-backed
securities include interests in pools of assets such as motor
vehicle installment sale contracts, installment loan contracts,
leases on various types of real and personal property, receivables
from revolving credit (credit card) agreements or other categories
of receivables. Mortgage-backed securities include collateralized
mortgage obligations and stripped mortgage-backed securities.
Interest and principal payments depend on payment of the underlying
loans or mortgages. The value of these securities may also be
affected by changes in interest rates, the market's perception of
the issuers and the creditworthiness of the parties involved. The
non-mortgage related asset-backed securities do not have the
benefit of a security interest in the related collateral. Stripped
mortgage-backed securities include interest only (IO) and principal
only (PO) securities. Cash flows and yields on IOs and POs are
extremely sensitive to the rate of principal payments on the
underlying mortgage loans or mortgage-backed securities.
Indexed securities. The value of indexed securities is linked to
currencies, interest rates, commodities, indexes or other financial
indicators. Most indexed securities are short- to intermediate-
term fixed income securities whose values at maturity or interest
rates rise or fall according to the change in one or more specified
underlying instruments. Indexed securities may be more volatile
than the underlying instrument itself.
Inverse floaters. Inverse floaters are created by underwriters
using the interest payment on securities. A portion of the
interest received is paid to holders of instruments based on
current interest rates for short-term securities. The remainder,
minus a servicing fee, is paid to holders of inverse floaters. As
interest rates go down, the holders of the inverse floaters receive
more income and an increase in the price for the inverse floaters.
As interest rates go up, the holders of the inverse floaters
receive less income and a decrease in the price for the inverse
floaters.
<PAGE>
PAGE 34
Structured products. Structured products are over-the-counter
financial instruments created specifically to meet the needs of one
or a small number of investors. The instrument may consist of a
warrant, an option or a forward contract embedded in a note or any
of a wide variety of debt, equity and/or currency combinations.
Risks of structured products include the inability to close such
instruments, rapid changes in the market and defaults by other
parties.
<PAGE>
PAGE 35
American Express Service Corporation, Distributor
<PAGE>
PAGE 36
STATEMENT OF ADDITIONAL INFORMATION
FOR
STRATEGIST INCOME FUND, INC.
May 31, 1996
This Statement of Additional Information (SAI) is not a prospectus.
It should be read together with the Funds' prospectus, which may be
obtained by calling American Express Financial Direct,
1-800-AXP-SERV (TTY: 1-800-710-5260) or by writing to P.O. Box
59196, Minneapolis, MN 55459-0196.
This SAI is dated May 31, 1996, and it is to be used with the
Funds' prospectus dated May 31, 1996.
<PAGE>
PAGE 37
TABLE OF CONTENTS
Goals and Investment Policies........................See Prospectus
Additional Investment Policies................................p. 3
Portfolio Transactions........................................p. 13
Brokerage Commissions Paid to Brokers Affiliated
with the Advisor..............................................p. 15
Performance Information.......................................p. 16
Valuing Fund Shares...........................................p. 18
Investing in the Funds........................................p. 19
Redeeming Shares..............................................p. 20
Pay-out Plans.................................................p. 21
Taxes.........................................................p. 22
Agreements....................................................p. 23
Board Members and Officers....................................p. 25
Custodian.....................................................p. 29
Independent Auditors..........................................p. 30
Prospectus....................................................p. 30
Appendix A: Description of Bond Ratings......................p. 31
Appendix B: Description of Commercial Paper Ratings..........p. 34
Appendix C: Foreign Currency Transactions....................p. 35
Appendix D: Options and Interest Rate Futures Contracts......p. 40
Appendix E: Mortgage-Backed Securities.......................p. 46
Appendix F: Dollar-Cost Averaging............................p. 47
Financial Statements..........................................p. 48
<PAGE>
PAGE 38
ADDITIONAL INVESTMENT POLICIES
Strategist Income Fund, Inc. (the Company) is a series mutual fund
with three series of capital stock representing interests in
Strategist Government Income Fund (Government Income Fund),
Strategist Quality Income Fund (Quality Income Fund) and Strategist
High Yield Fund (High Yield Fund). (Government Income Fund,
Quality Income Fund, and High Yield Fund are collectively referred
to herein as the Funds.) Each Fund is a diversified mutual fund
with its own goals and investment policies. Each of the Funds
seeks to achieve its goals by investing all of its assets in a
corresponding series (each a Portfolio) of Income Trust (the
Trust), a separate investment company, rather than by directly
investing in and managing its own portfolio of securities.
Fundamental investment policies adopted by a Fund or Portfolio
cannot be changed without the approval of a majority of the
outstanding voting securities of the Fund or Portfolio, as defined
in the Investment Company Act of 1940. Whenever a Fund is
requested to vote on a change in the investment policies of the
corresponding Portfolio, the Company will hold a meeting of Fund
shareholders and will cast the Fund's vote as instructed by the
shareholders.
Notwithstanding any of the Fund's other investment policies, a Fund
may invest its assets in an open-end management investment company
having substantially the same investment objectives, policies and
restrictions as the Fund for the purpose of having those assets
managed as part of a combined pool.
Investment Policies applicable to Government Income Portfolio:
These are investment policies in addition to those presented in the
prospectus. The policies below are fundamental policies that apply
both to the Fund and its corresponding Portfolio and may be changed
only with shareholder/unitholder approval. Unless holders of a
majority of the outstanding voting securities agree to make the
change, the Portfolio will not:
'Act as an underwriter (sell securities for others). However,
under the securities laws, the Portfolio may be deemed to be an
underwriter when it purchases securities directly from the issuer
and later resells them.
'Borrow money or property, except as a temporary measure for
extraordinary or emergency purposes, in an amount not exceeding
one-third of the market value of its total assets (including
borrowings) less liabilities (other than borrowings) immediately
after the borrowing. The Portfolio has not borrowed in the past
and has no present intention to borrow.
'Make cash loans if the total commitment amount exceeds 5% of the
Portfolio's total assets.
<PAGE>
PAGE 39
'Purchase more than 10% of the outstanding voting securities of an
issuer.
'Invest more than 5% of its total assets in securities of any one
company, government or political subdivision thereof, except the
limitation will not apply to investments in securities issued by
the U.S. government, its agencies or instrumentalities, and except
that up to 25% of the Portfolio's total assets may be invested
without regard to this 5% limitation.
'Buy or sell real estate, unless acquired as a result of ownership
of securities or other instruments, except this shall not prevent
the Portfolio from investing in securities or other instruments
backed by real estate or securities of companies engaged in the
real estate business or real estate investment trusts. For
purposes of this policy, real estate includes real estate limited
partnerships.
'Buy or sell physical commodities unless acquired as a result of
ownership of securities or other instruments, except this shall not
prevent the Portfolio from buying or selling options and futures
contracts or from investing in securities or other instruments
backed by, or whose value is derived from, physical commodities.
'Make a loan of any part of its assets to American Express
Financial Corporation (the Advisor), to the board members and
officers of the Advisor or to its own board members and officers.
'Purchase securities of an issuer if the board members and officers
of the Fund, the Portfolio and the Advisor hold more than a certain
percentage of the issuer's outstanding securities. If the holdings
of all board members and officers of the Fund, the Portfolio and
the Advisor who own more than 0.5% of an issuer's securities are
added together and if in total they own more than 5%, the Portfolio
will not purchase securities of that issuer.
'Lend Portfolio securities in excess of 30% of its net assets. The
current policy of the board is to make these loans, either long- or
short-term, to broker-dealers. In making such loans, the Portfolio
gets the market price in cash, U.S. government securities, letters
of credit or such other collateral as may be permitted by
regulatory agencies and approved by the board. If the market price
of the loaned securities goes up, the Portfolio will get additional
collateral on a daily basis. The risks are that the borrower may
not provide additional collateral when required or return the
securities when due. During the existence of the loan, the
Portfolio receives cash payments equivalent to all interest or
other distributions paid on the loaned securities. A loan will not
be made unless the Advisor believes the opportunity for additional
income outweighs the risks.
'Issue senior securities, except this restriction shall not be
deemed to prohibit the Portfolio from borrowing from banks, using
options or futures contracts, lending its securities or entering
into repurchase agreements.<PAGE>
PAGE 40
'Buy any property or security (other than securities issued by the
Portfolio) from any board member or officer of the Advisor or the
Portfolio, nor will the Portfolio sell any property or security to
them.
'Concentrate in any one industry. According to the present
interpretation by the Securities and Exchange Commission (SEC),
this means no more than 25% of the Portfolio's total assets, based
on current market value at the time of purchase, can be invested in
any one industry.
The policies below are non-fundamental that apply both to the Fund
and its corresponding Portfolio and may be changed without
shareholder/unitholder approval. Unless changed by the board, the
Portfolio will not:
'Buy on margin or sell short, except it may enter into interest
rate futures contracts.
'Pledge or mortgage its assets beyond 15% of total assets. If the
Portfolio were ever to do so, valuation of the pledged or mortgaged
assets would be based on market values. For purposes of this
restriction, collateral arrangements for margin deposits on futures
contracts are not deemed to be a pledge of assets.
'Invest more than 5% of its total assets in securities of
companies, including any predecessors, that have a record of less
than three years continuous operations.
'Invest more than 5% of its net assets in warrants. Under one
state's law no more than 2% of the Portfolio's net assets may be
invested in warrants not listed on the New York or American Stock
Exchange.
'Invest more than 10% of its total assets in securities of
investment companies. The Portfolio has no current intention to
invest in securities of the investment companies.
'Invest in a company to control or manage it.
'Invest in exploration or development programs, such as oil, gas or
mineral leases.
'Invest more than 10% of its net assets in securities and
derivative instruments that are illiquid. For purposes of this
policy illiquid securities include some privately placed
securities, public securities and Rule 144A securities that for one
reason or another may no longer have a readily available market,
repurchase agreements with maturities greater than seven days, non-
negotiable fixed-time deposits and over-the-counter options.
In determining the liquidity of Rule 144A securities, which are
unregistered securities offered to qualified institutional buyers,
and interest-only and principal-only fixed mortgage-backed
securities (IOs and POs) issued by the U.S. government or its<PAGE>
PAGE 41
agencies and instrumentalities, the Advisor to the Portfolio, under
guidelines established by the board, will consider any relevant
factors including the frequency of trades, the number of dealers
willing to purchase or sell the security and the nature of
marketplace trades.
In determining the liquidity of commercial paper issued in
transactions not involving a public offering under Section 4(2) of
the Securities Act of 1933, the Advisor to the Portfolio, under
guidelines established by the board, will evaluate relevant factors
such as the issuer and the size and nature of its commercial paper
programs, the willingness and ability of the issuer or dealer to
repurchase the paper, and the nature of the clearance and
settlement procedures for the paper.
The Portfolio may make contracts to purchase securities for a fixed
price at a future date beyond normal settlement time (when-issued
securities or forward commitments). The Portfolio does not pay for
the securities or receive dividends or interest on them until the
contractual settlement date. The Portfolio will designate cash or
liquid high-grade debt securities at least equal in value to its
commitments to purchase the securities. When-issued securities or
forward commitments are subject to market fluctuations and they may
affect the Portfolio's total assets the same as owned securities.
The Portfolio may maintain a portion of its assets in cash and
cash-equivalent investments. The cash-equivalent investments the
Portfolio may use are short-term U.S. and Canadian government
securities and negotiable certificates of deposit, non-negotiable
fixed-time deposits, bankers' acceptances and letters of credit of
banks or savings and loan associations having capital, surplus and
undivided profits (as of the date of its most recently published
annual financial statements) in excess of $100 million (or the
equivalent in the instance of a foreign branch of a U.S. bank) at
the date of investment. The Portfolio also may purchase short-term
commercial paper rated P-2 or better by Moody's Investor Service,
Inc. (Moody's) or A-2 or better by Standard & Poor's Corporation
(S&P) or the equivalent and may use repurchase agreements with
broker-dealers registered under the Securities Exchange Act of 1934
and with commercial banks. A risk of a repurchase agreement is
that if the seller seeks the protection of the bankruptcy laws, the
Portfolio's ability to liquidate the security involved could be
impaired.
Investment Policies applicable to Quality Income Portfolio:
These are investment policies in addition to those presented in the
prospectus. The policies below are fundamental policies that apply
both to the Fund and its corresponding Portfolio and may be changed
only with shareholder/unitholder approval. Unless holders of a
majority of the outstanding voting securities agree to make the
change, the Portfolio will not:
'Act as an underwriter (sell securities for others). However,
under the securities laws, the Portfolio may be deemed to be an <PAGE>
PAGE 42
underwriter when it purchases securities directly from the issuer
and later resells them.
'Borrow money or property, except as a temporary measure for
extraordinary or emergency purposes, in an amount not exceeding
one-third of the market value of its total assets (including
borrowings) less liabilities (other than borrowings) immediately
after the borrowing. The Portfolio has not borrowed in the past
and has no present intention to borrow.
'Make cash loans if the total commitment amount exceeds 5% of the
Portfolio's total assets.
'Concentrate in any one industry. According to the present
interpretation by the SEC, this means no more than 25% of the
Portfolio's total assets, based on current market value at time of
purchase, can be invested in any one industry.
'Purchase more than 10% of the outstanding voting securities of an
issuer.
'Invest more than 5% of its total assets in securities of any one
company, government or political subdivision thereof, except the
limitation will not apply to investments in securities issued by
the U.S. government, its agencies or instrumentalities, and except
that up to 25% of the Portfolio's total assets may be invested
without regard to this 5% limitation.
'Buy or sell real estate, unless acquired as a result of ownership
of securities or other instruments, except this shall not prevent
the Portfolio from investing in securities or other instruments
backed by real estate or securities of companies engaged in the
real estate business or real estate investment trusts. For
purposes of this policy, real estate includes real estate limited
partnerships.
'Buy or sell physical commodities unless acquired as a result of
ownership of securities or other instruments, except this shall not
prevent the Portfolio from buying or selling options and futures
contracts or from investing in securities or other instruments
backed by, or whose value is derived from, physical commodities.
'Make a loan of any part of its assets to the Advisor, to the board
members and officers of the Advisor or to its own board members and
officers.
'Purchase securities of an issuer if the board members and officers
of the Fund, the Portfolio and the Advisor hold more than a certain
percentage of the issuer's outstanding securities. If the holdings
of all board members and officers of the Fund, the Portfolio, and
the Advisor who own more than 0.5% of an issuer's securities are
added together and if in total they own more than 5%, the Portfolio
will not purchase securities of that issuer.<PAGE>
PAGE 43
'Lend Portfolio securities in excess of 30% of its net assets. The
current policy of the board is to make these loans, either long- or
short-term, to broker-dealers. In making such loans, the Portfolio
gets the market price in cash, U.S. government securities, letters
of credit or such other collateral as may be permitted by
regulatory agencies and approved by the board. If the market price
of the loaned securities goes up, the Portfolio will get additional
collateral on a daily basis. The risks are that the borrower may
not provide additional collateral when required or return the
securities when due. During the existence of the loan, the
Portfolio receives cash payments equivalent to all interest or
other distributions paid on the loaned securities. A loan will not
be made unless the Advisor believes the opportunity for additional
income outweighs the risks.
'Issue senior securities, except this restriction shall not be
deemed to prohibit the Portfolio from borrowing from banks, using
options or futures contracts, lending its securities or entering
into repurchase agreements.
The policies below are non-fundamental policies that apply both to
the Fund and its corresponding Portfolio and may be changed without
shareholder/unitholder approval. Unless changed by the board, the
fund will not:
'Buy on margin or sell short, except it may enter into interest
rate futures contracts.
'Pledge or mortgage its assets beyond 15% of total assets. If the
Portfolio were ever to do so, valuation of the pledged or mortgaged
assets would be based on market values. For purposes of this
restriction, collateral arrangements for margin deposits on futures
contracts are not deemed to be a pledge of assets.
'Invest more than 5% of its total assets in securities of
companies, including any predecessors, that have a record of less
than three years continuous operations.
'Invest more than 10% of its total assets in securities of
investment companies. The Portfolio has no current intention to
invest in securities of the investment companies.
'Invest in a company to control or manage it.
'Invest in exploration or development programs, such as oil, gas or
mineral leases.
'Invest more than 5% of its net assets in warrants. Under one
state's law no more than 2% of the Portfolio's net assets may be
invested in warrants not listed on the New York or American Stock
Exchange.
'Invest more than 10% of its net assets in securities and
derivative instruments that are illiquid. For purposes of this
policy illiquid securities include some privately placed <PAGE>
PAGE 44
securities, public securities and Rule 144A securities that for one
reason or another may no longer have a readily available market,
repurchase agreements with maturities greater than seven days, non-
negotiable fixed-time deposits, and over-the-counter options.
In determining the liquidity of Rule 144A securities, which are
unregistered securities offered to qualified institutional buyers,
and interest-only and principal-only fixed mortgage-backed
securities (IOs and POs) issued by the U.S. government or its
agencies and instrumentalities, the Advisor to the Portfolio, under
guidelines established by the board, will consider any relevant
factors including the frequency of trades, the number of dealers
willing to purchase or sell the security and the nature of
marketplace trades.
In determining the liquidity of commercial paper issued in
transactions not involving a public offering under Section 4(2) of
the Securities Act of 1933, the Advisor to the Portfolio, under
guidelines established by the board, will evaluate relevant
factors, such as the issuer and the size and nature of its
commercial paper programs, the willingness and ability of the
issuer or dealer to repurchase the paper, and the nature of the
clearance and settlement procedures for the paper.
The Portfolio may make contracts to purchase securities for a fixed
price at a future date beyond normal settlement time (when-issued
securities or forward commitments). Under normal market
conditions, the Portfolio does not intend to commit more than 5% of
its total assets to these practices. The Portfolio does not pay
for the securities or receive dividends or interest on them until
the contractual settlement date. The Portfolio will designate cash
or liquid high-grade debt securities at least equal in value to its
commitments to purchase the securities. When-issued securities or
forward commitments are subject to market fluctuations and they may
affect the Portfolio's total assets the same as owned securities.
The Portfolio may maintain a portion of its assets in cash and
cash-equivalent investments. The cash-equivalent investments the
Portfolio may use are short-term U.S. and Canadian government
securities and negotiable certificates of deposit, non-negotiable
fixed-time deposits, bankers' acceptances and letters of credit of
banks or savings and loan associations having capital, surplus and
undivided profits (as of the date of its most recently published
annual financial statements) in excess of $100 million (or the
equivalent in the instance of a foreign branch of a U.S. bank) at
the date of investment. Any cash-equivalent investments in foreign
securities will be subject to limitations on foreign investments
described in the prospectus. The Portfolio also may purchase
short-term corporate notes and obligations rated in the top two
classifications by Moody's or S&P or the equivalent and may use
repurchase agreements with broker-dealers registered under the
Securities Exchange Act of 1934 and with commercial banks. A risk
of a repurchase agreement is that if the seller seeks the
protection of the bankruptcy laws, the Portfolio's ability to
liquidate the security involved could be impaired.<PAGE>
PAGE 45
Investment Policies applicable to High Yield Portfolio
These are investment policies in addition to those presented in the
prospectus. The policies below are fundamental policies that apply
both to the Fund and its corresponding Portfolio and may be changed
only with shareholder/unitholder approval. Unless holders of a
majority of the outstanding voting securities agree to make the
change, the Portfolio will not:
'Act as an underwriter (sell securities for others). However,
under the securities laws, the Portfolio may be deemed to be an
underwriter when it purchases securities directly from the issuer
and later resells them.
'Borrow money or property, except as a temporary measure for
extraordinary or emergency purposes, in an amount not exceeding
one-third of the market value of its total assets (including
borrowings) less liabilities (other than borrowings) immediately
after the borrowing. The Portfolio has not borrowed in the past
and has no present intention to borrow.
'Make cash loans if the total commitment amount exceeds 5% of the
Portfolio's total assets.
'Purchase more than 10% of the outstanding voting securities of an
issuer.
'Invest more than 5% of its total assets in securities of any one
company, government or political subdivision thereof, except the
limitation will not apply to investments in securities issued by
the U.S. government, its agencies or instrumentalities, and except
that up to 25% of the Portfolio's total assets may be invested
without regard to this 5% limitation.
'Buy or sell real estate, unless acquired as a result of ownership
of securities or other instruments, except this shall not prevent
the Portfolio from investing in securities or other instruments
backed by real estate or securities of companies engaged in the
real estate business or real estate investment trusts. For
purposes of this policy, real estate includes real estate limited
partnerships.
'Buy or sell physical commodities unless acquired as a result of
ownership of securities or other instruments, except this shall not
prevent the Portfolio from buying or selling options and futures
contracts or from investing in securities or other instruments
backed by, or whose value is derived from, physical commodities.
'Lend Portfolio securities in excess of 30% of its net assets. The
current policy of the board is to make these loans, either long- or
short-term, to broker-dealers. In making such loans, the Portfolio
gets the market price in cash, U.S. government securities, letters
of credit or such other collateral as may be permitted by
regulatory agencies and approved by the board. If the market price
of the loaned securities goes up, the Portfolio will get <PAGE>
PAGE 46
additional collateral on a daily basis. The risks are that the
borrower may not provide additional collateral when required or
return the securities when due. During the existence of the loan,
the Portfolio receives cash payments equivalent to all interest or
other distributions paid on the loaned securities. A loan will not
be made unless the Advisor believes the opportunity for additional
income outweighs the risks.
'Issue senior securities, except this restriction shall not be
deemed to prohibit the Portfolio from borrowing from banks, using
options and futures contracts, lending its securities, or entering
into repurchase agreements.
'Concentrate in any one industry. According to the present
interpretation by the SEC, this means no more than 25% of the
Portfolio's total assets, based on current market value at the time
of purchase, can be invested in any one industry.
The policies below are non-fundamental policies that apply both to
the Fund and its corresponding Portfolio and may be changed without
shareholder/unitholder approval. Unless changed by the board, the
Portfolio will not:
'Pledge or mortgage its assets beyond 15% of total assets. If the
Portfolio were ever to do so, valuation of the pledged or mortgaged
assets would be based on market values. For purposes of this
restriction, collateral arrangements for margin deposits on futures
contracts are not deemed to be a pledge of assets.
'Invest more than 10% of its total assets in securities of
investment companies. The Portfolio has no current intention to
invest in securities of other investment companies.
'Invest in exploration or development programs, such as oil, gas or
mineral leases.
'Invest more than 5% of its total assets in securities of
companies, including any predecessors, that have a record of less
than three years continuous operations.
'Invest in a company to control or manage it.
'Buy on margin or sell short, except they may enter into interest
rate future contracts.
'Purchase securities of an issuer if the board members and officers
of the Fund, the Portfolio and the Advisor hold more than a certain
percentage of the issuer's outstanding securities. If the holdings
of all board members and officers of the Fund, the Portfolio and
the Advisor who own more than 0.5% of an issuer's securities are
added together, and if in total they own more than 5%, the
Portfolio will not purchase securities of that issuer.
'Invest more than 5% of its net assets in warrants. Under one
state's law no more than 2% of the Portfolio's net assets may be <PAGE>
PAGE 47
invested in warrants not listed on the New York or American Stock
Exchange.
'Invest more than 10% of its net assets in securities and
derivative instruments that are illiquid. For purposes of this
policy illiquid securities include some privately placed
securities, public securities and Rule 144A securities that for one
reason or another may no longer have a readily available market,
loans and loan participations, repurchase agreements with
maturities greater than seven days, non-negotiable fixed-time
deposits and over-the-counter options.
'In determining the liquidity of Rule 144A securities, which are
unregistered securities offered to qualified institutional buyers,
and interest-only and principal-only fixed mortgage-backed
securities (IOs and POs) issued by the U.S. government or its
agencies and instrumentalities, the Advisor to the Portfolio, under
guidelines established by the board, will consider any relevant
factors including the frequency of trades, the number of dealers
willing to purchase or sell the security and the nature of
marketplace trades.
'In determining the liquidity of commercial paper issued in
transactions not involving a public offering under Section 4(2) of
the Securities Act of 1933, the Advisor to the Portfolio, under
guidelines established by the board, will evaluate relevant factors
such as the issuer and the size and nature of its commercial paper
programs, the willingness and ability of the issuer or dealer to
repurchase the paper, and the nature of the clearance and
settlement procedures for the paper.
Loans, loan participations and interests in securitized loan pools
are interests in amounts owed by a corporate, governmental or other
borrower to a lender or consortium of lenders (typically banks,
insurance companies, investment banks, government agencies or
international agencies). Loans involve a risk of loss in case of
default or insolvency of the borrower and may offer less legal
protection to the fund in the event of fraud or misrepresentation.
In addition, loan participations involve a risk of insolvency of
the lender or other financial intermediary.
The Portfolio may make contracts to purchase securities for a fixed
price at a future date beyond normal settlement time (when-issued
securities or forward commitments). Under normal market
conditions, the Portfolio does not intend to commit more than 5% of
its total assets to these practices. The Portfolio does not pay
for the securities or receive dividends or interest on them until
the contractual settlement date. The Portfolio will designate cash
or liquid high-grade debt securities at least equal in value to its
commitments to purchase the securities. When-issued securities or
forward commitments are subject to market fluctuations and they may
affect the fund's total assets the same as owned securities.
The Portfolio may maintain a portion of its assets in cash and
cash-equivalent investments. The cash-equivalent investments the <PAGE>
PAGE 48
Portfolio may use are short-term U.S. and Canadian government
securities and negotiable certificates of deposit, non-negotiable
fixed-time deposits, bankers' acceptances and letters of credit of
banks or savings and loan associations having capital, surplus and
undivided profits (as of the date of its most recently published
annual financial statements) in excess of $100 million (or the
equivalent in the instance of a foreign branch of a U.S. bank) at
the date of investment. Any cash-equivalent investments in foreign
securities will be subject to the limitations on foreign
investments described in the prospectus. The Portfolio also may
purchase short-term corporate notes and obligations rated in the
top two classifications by Moody's or S&P or the equivalent and may
use repurchase agreements with broker-dealers registered under the
Securities Exchange Act of 1934 and with commercial banks. A risk
of a repurchase agreement is that if the seller seeks the
protection of the bankruptcy laws, the Portfolio's ability to
liquidate the security involved could be impaired.
For a description of bond ratings, see Appendix A. For a
description of commercial paper rating, see Appendix B. For a
discussion on foreign currency transactions, see Appendix C. For a
discussion on options and interest rate futures contracts, see
Appendix D. For a discussion of mortgage-backed securities, see
Appendix E. For a discussion on dollar-cost averaging, see
Appendix F.
PORTFOLIO TRANSACTIONS
Subject to policies set by the board, the Advisor is authorized to
determine, consistent with each Portfolio's investment goal and
policies, which securities will be purchased, held or sold. In
determining where the buy and sell orders are to be placed, the
Advisor has been directed to use its best efforts to obtain the
best available price and most favorable execution except where
otherwise authorized by the board.
The Advisor has a strict Code of Ethics that prohibits its
affiliated personnel from engaging in personal investment
activities that compete with or attempt to take advantage of
planned portfolio transactions for any of the Trusts in the
Preferred Master Trust Group. The Advisor carefully monitors
compliance with its Code of Ethics.
Normally, a Portfolio's securities are traded on a principal rather
than an agency basis. In other words, the Advisor will trade
directly with the issuer or with a dealer who buys or sells for its
own account, rather than acting on behalf of another client. The
Advisor does not pay the dealer commissions. Instead, the dealer's
profit, if any, is the difference, or spread, between the dealer's
purchase and sale price for the security.
On occasion, it may be desirable to compensate a broker for
research services or for brokerage services by paying a commission
that might not otherwise be charged or a commission in excess of
the amount another broker might charge. The board has adopted a <PAGE>
PAGE 49
policy authorizing the Advisor to do so to the extent authorized by
law, if the Advisor determines, in good faith, that such commission
is reasonable in relation to the value of the brokerage or research
services provided by a broker or dealer, viewed either in the light
of that transaction or the Advisor's overall responsibilities to
the portfolios advised by the Advisor.
Research provided by brokers supplements the Advisor's own research
activities. Such services include economic data on, and analysis
of, U.S. and foreign economies; information on specific industries;
information about specific companies, including earnings estimates;
purchase recommendations for stocks and bonds; portfolio strategy
services; political, economic, business and industry trend
assessments; historical statistical information; market data
services providing information on specific issues and prices; and
technical analysis of various aspects of the securities markets,
including technical charts. Research services may take the form of
written reports, computer software or personal contact by telephone
or at seminars or other meetings. The Advisor has obtained, and in
the future may obtain, computer hardware from brokers, including
but not limited to personal computers that will be used exclusively
for investment decision-making purposes, which include the
research, portfolio management and trading functions and other
services to the extent permitted under an interpretation by the
SEC.
When paying a commission that might not otherwise be charged or a
commission in excess of the amount another broker might charge, the
Advisor must follow procedures authorized by the board. To date,
three procedures have been authorized. One procedure permits the
Advisor to direct an order to buy or sell a security traded on a
national securities exchange to a specific broker for research
services it has provided. The second procedure permits the
Advisor, in order to obtain research, to direct an order on an
agency basis to buy or sell a security traded in the over-the-
counter market to a firm that does not make a market in that
security. The commission paid generally includes compensation for
research services. The third procedure permits the Advisor, in
order to obtain research and brokerage services, to cause the
Portfolio to pay a commission in excess of the amount another
broker might have charged. The Advisor has advised the Trust it is
necessary to do business with a number of brokerage firms on a
continuing basis to obtain such services as the handling of large
orders, the willingness of a broker to risk its own money by taking
a position in a security, and the specialized handling of a
particular group of securities that only certain brokers may be
able to offer. As a result of this arrangement, some Portfolio
transactions may not be effected at the lowest commission, but the
Advisor believes it may obtain better overall execution. The
Advisor has assured the Trust that under all three procedures the
amount of commission paid will be reasonable and competitive in
relation to the value of the brokerage services performed or
research provided.<PAGE>
PAGE 50
All other transactions shall be placed on the basis of obtaining
the best available price and the most favorable execution. In so
doing, if, in the professional opinion of the person responsible
for selecting the broker or dealer, several firms can execute the
transaction on the same basis, consideration will be given by such
person to those firms offering research services. Such services
may be used by the Advisor in providing advice to the Trusts in the
Preferred Master Trust Group, their corresponding Funds and other
accounts advised by the Advisor, even though it is not possible to
relate the benefits to any particular fund, portfolio or account.
Each investment decision made for a Portfolio is made independently
from any decision made for other portfolios or accounts advised by
the Advisor or any of its subsidiaries. When a Portfolio buys or
sells the same security as another portfolio or account, the
Advisor carries out the purchase or sale in a way the Trust agrees
in advance is fair. Although sharing in large transactions may
adversely affect the price or volume purchased or sold by a
Portfolio, a Portfolio hopes to gain an overall advantage in
execution. The Advisor has assured the Trust it will continue to
seek ways to reduce brokerage costs.
On a periodic basis, the Advisor makes a comprehensive review of
the broker-dealers it uses and the overall reasonableness of their
commissions. The review evaluates execution, operational
efficiency and research services.
BROKERAGE COMMISSIONS PAID TO BROKERS AFFILIATED WITH THE ADVISOR
Affiliates of American Express Company (American Express) (of which
the Advisor is a wholly owned subsidiary) may engage in brokerage
and other securities transactions on behalf of a Portfolio
according to procedures adopted by the board and to the extent
consistent with applicable provisions of the federal securities
laws. The Advisor will use an American Express affiliate only if
(i) the Advisor determines that the Portfolio will receive prices
and executions at least as favorable as those
offered by qualified independent brokers performing similar
brokerage and other services for the Portfolio and (ii) the
affiliate charges the Portfolio commission rates consistent with
those the affiliate charges comparable unaffiliated customers in
similar transactions and if such use is consistent with terms of
the Investment Management Services Agreement.
The Advisor may direct brokerage to compensate an affiliate. The
Advisor will receive research on South Africa from New Africa
Advisors, a wholly-owned subsidiary of Sloan Financial Group. The
Advisor owns 100% of IDS Capital Holdings Inc. which in turn owns
40% of Sloan Financial Group. New Africa Advisors will send
research to the Advisor and in turn the Advisor will direct trades
to a particular broker. The broker will have an agreement to pay
New Africa Advisors. All transactions will be on a best execution
basis. Compensation received will be reasonable for the services
rendered.<PAGE>
PAGE 51
PERFORMANCE INFORMATION
Each Fund may quote various performance figures to illustrate past
performance. Average annual total return and current yield
quotations used by the Funds are based on standardized methods of
computing performance as required by the SEC.
Average annual total return
A Fund may calculate average annual total return for certain
periods by finding the average annual compounded rates of return
over the period that would equate the initial amount invested to
the ending redeemable value, according to the following formula:
P(1+T)n = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment, made at the beginning of a period, at the
end of the period (or fractional portion thereof)
Aggregate total return
A Fund may calculate aggregate total return for certain periods
representing the cumulative change in the value of an investment in
each Fund over a specified period of time according to the
following formula:
ERV - P
P
where: P = a hypothetical initial payment of $1,000
ERV = ending redeemable value of a hypothetical $1,000
payment, made at the beginning of a period, at the
end of the period (or fractional portion thereof)
Annualized yield
A Fund may calculate an annualized yield by dividing the net
investment income per share deemed earned during a period by the
net asset value per share on the last day of the period and
annualizing the results.
Yield is calculated according to the following formula:
Yield = 2[(a-b + 1)6 - 1]
cd
where: a = dividends and interest earned during the period
b = aggregate expenses accrued for the period (net of
reimbursements)<PAGE>
PAGE 52
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends
d = the maximum offering price per share on the last
day of the period
A Fund's yield, calculated as described above according to the
formula prescribed by the SEC, is a hypothetical return based on
market value yield to maturity for each corresponding Portfolio's
securities. It is not necessarily indicative of the amount which
was or may be paid to a Fund's shareholders. Actual amounts paid
to a Fund's shareholders are reflected in the distribution yield.
Distribution yield
Distribution yield is calculated according to the following
formula:
D divided by POP F equals DY
30 30
where: D = sum of dividends for 30-day period
POP = sum of public offering price for 30-day period
F = annualizing factor
DY = distribution yield
In its sales material and other communications, a Fund may quote,
compare or refer to rankings, yields or returns as published by
independent statistical services or publishers and publications
such as The Bank Rate Monitor National Index, Barron's, Business
Week, Donoghue's Money Market Fund Report, Financial Services Week,
Financial Times, Financial World, Forbes, Fortune, Global Investor,
Institutional Investor, Investor's Daily, Kiplinger's Personal
Finance, Lipper Analytical Services, Money, Mutual Fund Forecaster,
Newsweek, The New York Times, Personal Investor, Stanger Report,
Sylvia Porter's Personal Finance, USA Today, U.S. News and World
Report, The Wall Street Journal and Wiesenberger Investment
Companies Service.
In June 1996, IDS Federal Income Fund, IDS Selective Fund and IDS
Extra Income Fund (individually, the IDS Fund; collectively, the
IDS Funds), three open-end investment companies managed by the
Advisor, transferred all of their respective assets, to Government
Income Portfolio, Quality Income Portfolio and High Yield
Portfolio, respectively, of the Trust in exchange for units
therein. Also in June 1996, Government Income Fund, Quality
Income Fund and High Yield Fund transferred all of their respective
assets to the corresponding Portfolio of the Trust in connection
with the commencement of their operations.
On March 20, 1995, the IDS Funds converted to a multiple class
structure pursuant to which three classes of shares are offered:
Class A, Class B and Class Y. Class A shares are sold with a 5%
sales charge, a 0.175% service fee and no 12b-1 fee.<PAGE>
PAGE 53
Performance quoted by the Funds is based on the performance and
yield of the corresponding IDS Fund prior to March 20, 1995 and to
Class A shares of the corresponding IDS Fund from March 20, 1995
through Dec. 31, 1995, adjusted for differences in sales charge.
The historical performance has not been adjusted for any difference
between the estimated aggregate fees and expenses of the Funds and
historical fees and expenses of the IDS Funds.
Portfolio turnover rates:
1995 1994
Government Income Portfolio 213% 304%
Quality Income Portfolio 26 30
High Yield Portfolio 70 74
For periods prior to the Funds' commencement of operations,
turnover rates are based on the turnover rates of the corresponding
IDS Funds, which transferred all of their assets to the Portfolios
in June 1996. A high turnover rate (in excess of 100%) results in
higher fees and expenses.
VALUING FUND SHARES
The value of an individual share is determined by using the net
asset value before shareholder transactions for the day and
dividing that figure by the number of shares outstanding at the end
of the previous day.
In determining net assets before shareholder transactions, the
securities held by a Fund's corresponding Portfolio are valued as
follows as of the close of business of the New York Stock Exchange
(the Exchange):
'Securities, except bonds other than convertibles, traded on a
securities exchange for which a last-quoted sales price is readily
available are valued at the last-quoted sales price on the exchange
where such security is primarily traded.
'Securities traded on a securities exchange for which a last-quoted
sales price is not readily available are valued at the mean of the
closing bid and asked prices, looking first to the bid and asked
prices on the exchange where the security is primarily traded and,
if none exist, to the over-the-counter market.
'Securities included in the NASDAQ National Market System are
valued at the last-quoted sales price in this market.
'Securities included in the NASDAQ National Market System for which
a last-quoted sales price is not readily available, and other
securities traded over-the-counter but not included in the NASDAQ
National Market System are valued at the mean of the closing bid
and asked prices.
<PAGE>
PAGE 54
'Futures and options traded on major exchanges are valued at the
last-quoted sales price on their primary exchange.
'Foreign securities traded outside the United States are generally
valued as of the time their trading is complete, which is usually
different from the close of the Exchange. Foreign securities
quoted in foreign currencies are translated into U.S. dollars at
the current rate of exchange. Occasionally, events affecting the
value of such securities may occur between such times and the close
of the Exchange that will not be reflected in the computation of a
Portfolio's net asset value. If events materially affecting the
value of such securities occur during such period, these securities
will be valued at their fair value according to procedures decided
upon in good faith by the board.
'Short-term securities maturing more than 60 days from the
valuation date are valued at the readily available market price or
approximate market value based on current interest rates. Short-
term securities maturing in 60 days or less that originally had
maturities of more than 60 days at acquisition date are valued at
amortized cost using the market value on the 61st day before
maturity. Short-term securities maturing in 60 days or less at
acquisition date are valued at amortized cost. Amortized cost is
an approximation of market value determined by systematically
increasing the carrying value of a security if acquired at a
discount, or reducing the carrying value if acquired at a premium,
so that the carrying value is equal to maturity value on the
maturity date.
'Securities without a readily available market price, bonds other
than convertibles and other assets are valued at fair value as
determined in good faith by the board. The board is responsible
for selecting methods it believes provide fair value. When
possible, bonds are valued by a pricing service independent from
the Trust. If a valuation of a bond is not available from a
pricing service, the bond will be valued by a dealer knowledgeable
about the bond if such a dealer is available.
The Exchange, American Express Service Corporation (AESC) and each
of the Funds will be closed on the following holidays: New Year's
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day.
INVESTING IN THE FUNDS
A Fund's minimum initial investment requirement is $2,000 ($1,000
for Custodial Accounts, Individual Retirement Accounts and certain
other retirement plans). Subsequent investments of $100 or more
may be made. These minimum investment requirements may be changed
at any time and are not applicable to certain types of investors.
The Securities Investor Protection Corporation (SIPC) will provide
account protection, in an amount up to $500,000, for securities,
including Fund shares (up to $100,000 protection for cash), held in
an Investment Management Account maintained with AESC. Of course, <PAGE>
PAGE 55
SIPC account protection does not protect shareholders from share
price fluctuations.
REDEEMING SHARES
You have a right to redeem your shares at any time. For an
explanation of redemption procedures, please see the prospectus.
During an emergency, the board can suspend the computation of net
asset value, stop accepting payments for purchase of shares or
suspend the duty of the Funds to redeem shares for more than seven
days. Such emergency situations would occur if:
'The Exchange closes for reasons other than the usual weekend and
holiday closings or trading on the Exchange is restricted, or
'Disposal of the Fund's securities is not reasonably practicable or
it is not reasonably practicable for a Fund to determine the fair
value of its net assets, or
'The SEC, under the provisions of the Investment Company Act of
1940 (the 1940 Act), as amended, declares a period of emergency to
exist.
Should a Fund stop selling shares, the board members may make a
deduction from the value of the assets held by the Fund to cover
the cost of future liquidations of the assets so as to distribute
fairly these costs among all shareholders.
Redemptions by a Fund
A Fund reserves the right to redeem, involuntarily, the shares of
any shareholder whose account has a value of less than a minimum
amount but only where the value of such account has been reduced by
voluntary redemption of shares. Until further notice, it is the
policy of a Fund not to exercise this right with respect to any
shareholder whose account has a value of $1,000 or more. In any
event, before a Fund redeems such shares and sends the proceeds to
the shareholder, it will notify the shareholder that the value of
the shares in the account is less than the minimum amount and allow
the shareholder 30 days to make an additional investment in an
amount which will increase the value of the accounts to at least
$1,000.
Redemptions in Kind
The Company has elected to be governed by Rule 18f-1 under the 1940
Act, which obligates a Fund to redeem shares in cash, with respect
to any one shareholder during any 90-day period, up to the lesser
of $250,000 or 1% of the net assets of a Fund at the beginning of
such period. Although redemptions in excess of this limitation
would normally be paid in cash, a Fund reserves the right to make
payments in whole or in part in securities or other assets in case
of an emergency, or if the payment of redemption in cash would be
detrimental to the existing shareholders of a Fund as determined <PAGE>
PAGE 56
by the board. In such circumstances, the securities distributed
would be valued as set forth in the Prospectus. Should a Fund
distribute securities, a shareholder may incur brokerage fees or
other transaction costs in converting the securities to cash.
PAY-OUT PLANS
You can use any of several pay-out plans to redeem your investment
in regular installments at no extra cost. While the plans differ
on how the pay-out is figured, they all are based on the redemption
of your investment. Net investment income dividends and any
capital gain distributions will automatically be reinvested, unless
you elect to receive them in cash. If you are redeeming a tax-
qualified plan account for which American Express Trust Company
acts as custodian, you can elect to receive your dividends and
other distributions in cash when permitted by law. If you redeem
an IRA or a qualified retirement account, certain restrictions,
federal tax penalties and special federal income tax reporting
requirements may apply. You should consult your tax advisor about
this complex area of the tax law.
To start any of these plans, please submit an authorization form
supplied by American Express Financial Direct. For a copy, write
or call American Express Financial Direct, 1-800-AXP-SERV (TTY: 1-
800-710-5260), P.O. Box 59196, Minneapolis, MN 55459-0196. Your
authorization must be received in the Minneapolis headquarters at
least five days before the date you want your payments to begin.
The initial payment must be at least $50. Payments will be made on
a monthly, bimonthly, quarterly, semiannual or annual basis. Your
choice is effective until you change or cancel it.
The following pay-out plans are designed to take care of the needs
of most shareholders. If you need a more irregular schedule of
payments, it may be necessary for you to make a series of
individual redemptions, in which case you will have to send in a
separate redemption request for each pay-out. The Funds reserve
the right to change or stop any pay-out plan and to stop making
such plans available.
Plan #1: Pay-out for a fixed period of time
If you choose this plan, a varying number of shares will be
redeemed at net asset value at regular intervals during the time
period you choose. This plan is designed to end in complete re-
demption of all shares in your account with the Fund by the end of
the fixed period.
Plan #2: Redemption of a fixed number of shares
If you choose this plan, a fixed number of shares will be redeemed
at net asset value for each payment and that amount will be sent to
you. The length of time these payments continue is based on the
number of shares in your account with the Fund. <PAGE>
PAGE 57
Plan #3: Redemption of a fixed dollar amount
If you decide on a fixed dollar amount, whatever number of shares
is necessary to make the payment will be redeemed in regular
installments until your account with the Fund is closed.
Plan #4: Redemption of a percentage of net asset value
Payments are made based on a fixed percentage of the net asset
value of the shares in the account computed on the day of each
payment. Percentages range from 0.25% to 0.75%. For example, if
you are on this plan and arrange to take 0.5% each month, you will
get $50 if the value of your account with the Fund is $10,000 on
the payment date.
TAXES
Dividends received should be treated as dividend income for federal
income tax purposes. Corporate shareholders are generally entitled
to a deduction equal to 70% of that portion of a Fund's dividend
that is attributable to dividends the Fund received from domestic
(U.S.) securities.
Capital gain distributions, if any, received by individual and
corporate shareholders, should be treated as long-term capital
gains regardless of how long they owned their shares. Short-term
capital gains earned by a Fund are paid to shareholders as part of
their ordinary income dividend and are taxable as ordinary income,
not capital gain.
You may be able to defer taxes on current income from a Fund by
investing through an IRA, 401(k) plan account or other qualified
retirement account. If you move all or part of a non-qualified
investment in a Fund to a qualified account, this type of exchange
is considered a sale of shares. You pay no sales charge, but the
exchange may result in a gain or loss for tax purposes, or excess
contributions under IRA or qualified plan regulations.
Under federal tax law, by the end of a calendar year a Fund must
declare and pay dividends representing 98% of ordinary income for
that calendar year and 98% of net capital gains (both long-term and
short-term) for the 12-month period ending Oct. 31 of that calendar
year. A Fund is subject to an excise tax equal to 4% of the
excess, if any, of the amount required to be distributed over the
amount actually distributed. A Fund intends to comply with federal
tax law and avoid any excise tax.
Quality Income Fund and High Yield Fund may be subject to U.S.
taxes resulting from holdings in a passive foreign investment
company (PFIC). A foreign corporation is a PFIC when 75% or more
of its gross income for the taxable year is passive income or if
50% or more of the average value of its assets consists of assets
that produce or could produce passive income.<PAGE>
PAGE 58
This is a brief summary that relates to federal income taxation
only. Shareholders should consult their tax advisor as to the
application of federal, state and local income tax laws to Fund
distributions.
AGREEMENTS
Investment Management Services Agreement
The Trust, on behalf of each Portfolio, has an Investment
Management Services Agreement with the Advisor. For its services,
the Advisor is paid a fee from the assets of each Portfolio, based
upon the following schedule:
<TABLE><CAPTION>
Government Income Portfolio
High Yield Portfolio Quality Income Portfolio
Assets Annual rate at Assets Annual rate at
(billions) each asset level (billions) each asset level
<S> <C> <C> <C>
First $1.0 0.590% First $1.0 0.520%
Next 1.0 0.565 Next 1.0 0.495
Next 1.0 0.540 Next 1.0 0.470
Next 3.0 0.515 Next 3.0 0.445
Next 3.0 0.490 Next 3.0 0.420
Over 9.0 0.465 Over 9.0 0.395
</TABLE>
The fee is calculated for each calendar day on the basis of net
assets at the close of business two days prior to the day for which
the calculation is made. The management fee is paid monthly.
Under the Agreement, each Portfolio also pays taxes, brokerage
commissions and nonadvisory expenses, which include custodian fees;
audit and certain legal fees; fidelity bond premiums; registration
fees for units; Portfolio office expenses; consultants' fees;
compensation of board members, officers and employees; corporate
filing fees; organizational expenses; expenses incurred in
connection with lending portfolio securities; and expenses properly
payable by the Portfolios, approved by the board.
Administrative Services Agreement
The Company, on behalf of each Fund, has an Administrative Services
Agreement with the Advisor. Under this agreement, each Fund pays
the Advisor for providing administration and accounting services.
The fee is payable from the assets of each Fund and is calculated
as follows:
High Yield Fund
Government Income Fund
Quality Income Fund
Fund assets Annual rate at
(billions) each asset level
First $1 0.050%
Next 1 0.045%<PAGE>
PAGE 59
Next 1 0.040%
Next 3 0.035%
Next 3 0.030%
Next 9 0.025%
Under the agreement, each Fund also pays taxes; audit and certain
legal fees; registration fees for shares; office expenses;
consultant's fees; compensation of board members, officers and
employees; corporate filing fees; organizational expenses; and
expenses properly payable by each Fund approved by the board of
directors.
Transfer Agency Agreement
The Company, on behalf of each Fund, has a Transfer Agency
Agreement with the Advisor. This agreement governs the
responsibility for administering and/or performing transfer agent
functions, for acting as service agent in connection with dividend
and distribution functions and for performing shareholder account
administration agent functions in connection with the issuance,
exchange and redemption or repurchase of the Fund's shares. The
fee is determined by multiplying the number of shareholder accounts
at the end of the day by a rate of $25 per year and dividing by the
number of days in the year.
Placement Agency Agreement
Pursuant to a Placement Agency Agreement, the Distributor acts as
placement agent of the units of the Trust.
Plan and Agreement of Distribution/Distribution Agreement
To help the Distributor defray the costs of distribution and
servicing, the Company and the Distributor have entered into a Plan
and Agreement of Distribution (Plan). These costs cover almost all
aspects of distributing Fund shares. Under the Plan, the
Distributor is paid a fee at an annual rate of 0.25% of the Fund's
average daily net assets.
The Plan must be approved annually by the board, including a
majority of the disinterested board members, if it is to continue
for more than a year. At least quarterly, the board must review
written reports concerning the amounts expended under the Plan and
the purposes for which the expenditures were made. The Plan and
any agreement related to it may be terminated at any time with
respect to a Fund by vote of a majority of board members who are
not interested persons of the Company and have no direct or
indirect financial interest in the operation of the Plan or in any
agreement related to the Plan, by vote of a majority of the
outstanding voting securities of the Fund or by the Distributor.
The Plan (or any agreement related to it) shall terminate in the
event of its assignment, as that term is defined in the Investment
Company Act of 1940, as amended. The Plan may not be amended to
increase the amount to be spent for distribution without
shareholder approval, and all material amendments to the Plan must <PAGE>
PAGE 60
be approved by a majority of the board members, including a
majority of the board members who are not interested persons of the
Company and who do not have a financial interest in the operation
of the Plan or any agreement related to it. The selection and
nomination of such disinterested board members is the
responsibility of such disinterested board members. No board
member who is not an interested person has any direct or indirect
financial interest in the operation of the Plan or any related
agreement.
Total fees and expenses
Total combined fees and nonadvisory expenses of both the master
fund and this feeder fund cannot exceed the most restrictive
applicable state limitation. Currently, the most restrictive
applicable state expense limitation, subject to exclusion of
certain expenses, is 2.5% of the first $30 million of each Fund's
average daily net assets, 2% of the next $70 million and 1.5% of
average daily net assets over $100 million, on an annual basis. At
the end of each month, if the fees and expenses of a Fund exceed
this limitation for each Fund's fiscal year in progress, the
Advisor will assume all expenses in excess of the limitation. The
Advisor then may bill each Fund for such expenses in subsequent
months up to the end of that fiscal year, but not after that date.
No interest charges are assessed by the Advisor for expenses it
assumes.
BOARD MEMBERS AND OFFICERS
The following is a list of the Company's board members and
officers, who also are board members and officers of all other
funds in the Strategist Fund Group. All shares of the Funds have
cumulative voting rights with respect to the election of board
members and officers.
Directors and officers
Rodney P. Burwell
Born in 1939
Xerxes Corporation
7901 Xerxes Ave. S.
Minneapolis, MN
Chairman, Xerxes Corporation (fiberglass storage tanks). Director,
Children's Broadcasting Network, Vaughn Communications, Sunbelt
Nursery Group, Fairview Corporation.
William Heron Jr.
Born in 1941
American Express Company
World Financial Center
New York, NY
Vice president of all funds in the Strategist Fund Group.
President of American Express Financial Direct since 1995. Chief <PAGE>
PAGE 61
Executive Officer, Swig Investment Company from 1993 to 1995.
Group Executive, Citicorp/Citibank from 1985 to 1993.
Jean B. Keffeler
Born in 1945
The Keffeler Company
3033 Excelsior Blvd.
Minneapolis, MN
President, The Keffeler Company (management advisory services).
Director, National Computer Systems, American Paging Systems, Inc.
Thomas R. McBurney
Born in 1938
McBurney Management Advisors
1800 International Centre
900 2nd Ave. S.
Minneapolis, MN
President, McBurney Management Advisors. Director, the Valspar
Corporation (paints), Wenger Corporation, Security American
Financial Enterprises, Allina, Space Center Enterprises,
Greenspring Corporation.
James A. Mitchell
Born in 1941
2900 IDS Tower
Minneapolis, MN
President of all the funds in the Strategist Fund Group. Executive
vice president and director of AEFC. Chairman of the board and
chief executive officer of IDS Life Insurance Company. Director,
IDS Life Funds.
The following is a list of the Trust's board members and officers,
who are also board members and officers of all other Trusts in the
Preferred Master Trust Group and all funds in the IDS MUTUAL FUND
GROUP. All units have cumulative voting rights with respect to the
election of board members and officers.
Trustees and officers
Lynne V. Cheney'
Born in 1941.
American Enterprise Institute
for Public Policy Research (AEI)
1150 17th St., N.W.
Washington, D.C.
Distinguished Fellow AEI. Former Chair of National Endowment of
the Humanities. Director, The Reader's Digest Association Inc.,
Lockheed-Martin, the Interpublic Group of Companies, Inc.
(advertising) and FPL Group, Inc. (holding company for Florida
Power and Light).<PAGE>
PAGE 62
William H. Dudley**
Born in 1932.
2900 IDS Tower
Minneapolis, MN
Executive vice president and director of AEFC.
Robert F. Froehlke+
Born in 1922.
1201 Yale Place
Minneapolis, MN
Former president of all funds in the IDS MUTUAL FUND GROUP.
Director, the ICI Mutual Insurance Co., Institute for Defense
Analyses, Marshall Erdman and Associates, Inc. (architectural
engineering) and Public Oversight Board of the American Institute
of Certified Public Accountants.
David R. Hubers+**
Born in 1943.
2900 IDS Tower
Minneapolis, MN
President, chief executive officer and director of AEFC.
Previously, senior vice president, finance and chief financial
officer of AEFC.
Heinz F. Hutter+'
Born in 1929.
P.O. Box 5724
Minneapolis, MN
President and chief operating officer, Cargill, Incorporated
(commodity merchants and processors) from February 1991 to
September 1994. Executive vice president from 1981 to February
1991.
Anne P. Jones
Born in 1935.
5716 Bent Branch Rd.
Bethesda, MD
Attorney and telecommunications consultant. Former partner, law
firm of Sutherland, Asbill & Brennan. Director, Motorola, Inc. and
C-Cor Electronics, Inc.
Melvin R. Laird
Born in 1922.
Reader's Digest Association, Inc.
1730 Rhode Island Ave., N.W.
Washington, D.C.
Senior counsellor for national and international affairs, The
Reader's Digest Association, Inc. Chairman of the board, COMSAT
Corporation, former nine-term congressman, secretary of defense <PAGE>
PAGE 63
and presidential counsellor. Director, Martin Marietta Corp.,
Metropolitan Life Insurance Co., The Reader's Digest Association,
Inc., Science Applications International Corp., Wallace Reader's
Digest Funds and Public Oversight Board (SEC Practice Section,
American Institute of Certified Public Accountants).
William R. Pearce+*
Born in 1927.
901 S. Marquette Ave.
Minneapolis, MN
President of all Trusts in the Preferred Master Trust Group since
April 1996 and president of all funds in the IDS MUTUAL FUND GROUP
since June 1993. Former vice chairman of the board, Cargill,
Incorporated (commodity merchants and processors).
Edson W. Spencer+
Born in 1926.
4900 IDS Center
80 S. 8th St.
Minneapolis, MN
President, Spencer Associates Inc. (consulting). Chairman of the
board, Mayo Foundation (healthcare). Former chairman of the board
and chief executive officer, Honeywell Inc. Director, Boise
Cascade Corporation (forest products) and CBS Inc. Member of
International Advisory Councils, Robert Bosch (Germany) and NEC
(Japan).
John R. Thomas**
Born in 1937.
2900 IDS Tower
Minneapolis, MN
Senior vice president and director of AEFC.
Wheelock Whitney+
Born in 1926.
1900 Foshay Tower
821 Marquette Ave.
Minneapolis, MN
Chairman, Whitney Management Company (manages family assets).
C. Angus Wurtele'
Born in 1934.
Valspar Corporation
Suite 1700
Foshay Tower
Minneapolis, MN
Chairman of the board and chief executive officer, The Valspar
Corporation (paints). Director, Bemis Corporation (packaging),
Donaldson Company (air cleaners & mufflers) and General Mills, Inc.
(consumer foods).<PAGE>
PAGE 64
+ Member of executive committee.
' Member of joint audit committee.
* Interested person of the Trust by reason of being an officer and
employee of the Trust.
**Interested person of the Trust by reason of being an officer,
board member, employee and/or shareholder of AEFC or American
Express.
The board also has appointed officers who are responsible for day-
to-day business decisions based on policies it has established.
In addition to Mr. Pearce, who is president, the Trust's other
officers are:
Leslie L. Ogg
Born in 1938.
901 S. Marquette Ave.
Minneapolis, MN
Vice president, general counsel and secretary of all Trusts in the
Preferred Master Trust Group and of all funds in the IDS MUTUAL
FUND GROUP.
Officers who also are officers and/or employees of AEFC:
Peter J. Anderson
Born in 1942.
IDS Tower 10
Minneapolis, MN
Vice president-investments of all Trusts in the Preferred Master
Trust Group and all funds in the IDS MUTUAL FUND GROUP. Director
and senior vice president-investments of AEFC.
Melinda S. Urion
Born in 1953.
IDS Tower 10
Minneapolis, MN
Treasurer of all Trusts in the Preferred Master Trust Group and all
funds in the IDS MUTUAL FUND GROUP. Director, Senior vice
president and chief financial officer of AEFC. Director and
executive vice president and controller of IDS Life Insurance
Company.
CUSTODIAN
The Trust's securities and cash are held by American Express Trust
Company, 1200 Northstar Center West, 625 Marquette Ave.,
Minneapolis, MN 55402-2307, through a custodian agreement. Each
Fund also retains the custodian pursuant to a custodian agreement.
The custodian is permitted to deposit some or all of its securities
in central depository systems as allowed by federal law. For its
services, the Portfolios pay the custodian a maintenance charge per
portfolio and a charge per transaction in addition to reimbursing <PAGE>
PAGE 65
the custodian's out-of-pocket expenses.
INDEPENDENT AUDITORS
The Funds' and corresponding Portfolios' financial statements to be
contained in its Annual Report to shareholders at the end of the
fiscal year will be audited by independent auditors, KPMG Peat
Marwick LLP, 4200 Norwest Center, 90 S. Seventh St., Minneapolis,
MN 55402-3900. The independent auditors also provide other
accounting and tax-related services as requested by the Funds.
PROSPECTUS
The prospectus dated May 31, 1996, is hereby incorporated in this
SAI by reference.
<PAGE>
PAGE 66
APPENDIX A
DESCRIPTION OF BOND RATINGS FOR QUALITY INCOME PORTFOLIO
These ratings concern the quality of the issuing corporation. They
are not an opinion of the market value of the security. Such
ratings are opinions on whether the principal and interest will be
repaid when due. A security's rating may change which could affect
its price.
Ratings by Moody's Investors Service, Inc. are Aaa, Aa, A, Baa, Ba,
B, Caa, Ca, and C.
Bonds rated:
Aaa are judged to be of the best quality. They carry the smallest
degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the fundamentally
strong position of such issues.
Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risk
appear somewhat larger than the Aaa securities.
A possess many favorable investment attributes and are to be
considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to
impairment some time in the future.
Baa are considered as medium-grade obligations (i.e., they are
neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba are judged to have speculative elements; their future cannot be
considered as well-assured. Often the protection of interest and
principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be
small.<PAGE>
PAGE 67
Caa are of poor standing. Such issues may be in default or there
may be present elements of danger with respect to principal or
interest.
Ca represent obligations which are speculative in a high degree.
Such issues are often in default or have other marked shortcomings.
C are the lowest rated class of bonds, and issues so rated can be
regarded as having extremely poor prospects of ever attaining any
real investment standing.
Ratings by Standard & Poor's Corporation are AAA, AA, A, BBB, BB,
B, CCC, CC, C and D.
AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA has a very strong capacity to pay interest and repay principal
and differs from the highest rated issues only in small degree.
A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in
higher-rated categories.
BBB is regarded as having adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than in higher-rated
categories.
BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties
or exposure to adverse business, financial, or economic conditions
which could lead to inadequate capacity to meet timely interest and
principal payments. The BB rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied
BBB- rating.
B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely
impair capacity or willingness to pay interest and repay principal.
The B rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied BB or BB- rating.
CCC has a currently identifiable vulnerability to default, and is
dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of
principal. In the event of adverse business, financial, or
economic conditions, it is not likely to have the capacity to pay
interest and repay principal. The CCC rating category is also used
for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.<PAGE>
PAGE 68
CC typically is applied to debt subordinated to senior debt that is
assigned an actual or implied CCC rating.
C typically is applied to debt subordinated to senior debt that is
assigned an actual or implied CCC- rating. The C rating may be
used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the due
date, even if the applicable grace period has not expired, unless
S&P believes that such payments will be made during such grace
period. The D rating also will be used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
Non-rated securities will be considered for investment when they
possess a risk comparable to that of rated securities consistent
with the Fund's objectives and policies. When assessing the risk
involved in each non-rated security, the Fund will consider the
financial condition of the issuer or the protection afforded by the
terms of the security.
<PAGE>
PAGE 69
APPENDIX B
DESCRIPTION OF COMMERCIAL PAPER RATINGS FOR GOVERNMENT INCOME
PORTFOLIO
Commercial paper rated Prime-1 (P-1) by Moody's or A-1 by S&P
indicates that the degree of safety regarding timely repayment is
either overwhelming or very strong.
Commercial paper rated P-2 or A-2 indicates that capacity for
timely payment on issues with this designation is strong.
<PAGE>
PAGE 70
APPENDIX C
FOREIGN CURRENCY TRANSACTIONS
Since investments in foreign countries usually involve currencies
of foreign countries, and since Quality Income and High Yield
Portfolio may hold cash and cash-equivalent investments in foreign
currencies, the value of a Portfolio's assets as measured in U.S.
dollars may be affected favorably or unfavorably by changes in
currency exchange rates and exchange control regulations. Also, a
Portfolio may incur costs in connection with conversions between
various currencies.
Spot Rates and Forward Contracts. A Portfolio conducts its foreign
currency exchange transactions either at the spot (cash) rate
prevailing in the foreign currency exchange market or by entering
into forward currency exchange contracts (forward contracts) as a
hedge against fluctuations in future foreign exchange rates. A
forward contract involves an obligation to buy or sell a specific
currency at a future date, which may be any fixed number of days
from the contract date, at a price set at the time of the contract.
These contracts are traded in the interbank market conducted
directly between currency traders (usually large commercial banks)
and their customers. A forward contract generally has no deposit
requirements. No commissions are charged at any stage for trades.
A Portfolio may enter into forward contracts to settle a security
transaction or handle dividend and interest collection. When a
Portfolio enters into a contract for the purchase or sale of a
security denominated in a foreign currency or has been notified of
a dividend or interest payment, it may desire to lock in the price
of the security or the amount of the payment in dollars. By
entering into a forward contract, a Portfolio will be able to
protect itself against a possible loss resulting from an adverse
change in the relationship between different currencies from the
date the security is purchased or sold to the date on which payment
is made or received or when the dividend or interest is actually
received.
A Portfolio also may enter into forward contracts when management
of a Portfolio believes the currency of a particular foreign
country may suffer a substantial decline against another currency.
It may enter into a forward contract to sell, for a fixed amount of
dollars, the amount of foreign currency approximating the value of
some or all of a Portfolio's securities denominated in such foreign
currency. The precise matching of forward contract amounts and the
value of securities involved generally will not be possible since
the future value of such securities in foreign currencies more than
likely will change between the date the forward contract is entered
into and the date it matures. The projection of short-term
currency market movements is extremely difficult and successful
execution of a short-term hedging strategy is highly uncertain. A
Portfolio will not enter into such forward contracts or maintain a
net exposure to such contracts when consummating the contracts
would obligate a Portfolio to deliver an amount of foreign currency<PAGE>
PAGE 71
in excess of the value of a Portfolio's securities or other assets
denominated in that currency.
A Portfolio will designate cash or securities in an amount equal to
the value of a Portfolio's total assets committed to consummating
forward contracts entered into under the second circumstance set
forth above. If the value of the securities declines, additional
cash or securities will be designated on a daily basis so that the
value of the cash or securities will equal the amount of a
Portfolio's commitments on such contracts.
At maturity of a forward contract, a Portfolio may either sell the
security and make delivery of the foreign currency or retain the
security and terminate its contractual obligation to deliver the
foreign currency by purchasing an offsetting contract with the same
currency trader obligating it to buy, on the same maturity date,
the same amount of foreign currency.
If a Portfolio retains a security and engages in an offsetting
transaction, a Portfolio will incur a gain or a loss (as described
below) to the extent there has been movement in forward contract
prices. If a Portfolio engages in an offsetting transaction, it
may subsequently enter into a new forward contract to sell the
foreign currency. Should forward prices decline between the date a
Portfolio enters into a forward contract for selling foreign
currency and the date it enters into an offsetting contract for
purchasing the foreign currency, a Portfolio will realize a gain to
the extent that the price of the currency it has agreed to sell
exceeds the price of the currency it has agreed to buy. Should
forward prices increase, a Portfolio will suffer a loss to the
extent the price of the currency it has agreed to buy exceeds the
price of the currency it has agreed to sell.
It is impossible to forecast what the market value of securities
will be at the expiration of a contract. Accordingly, it may be
necessary for a Portfolio to buy additional foreign currency on the
spot market (and bear the expense of such purchase) if the market
value of the security is less than the amount of foreign currency a
Portfolio is obligated to deliver and a decision is made to sell
the security and make delivery of the foreign currency.
Conversely, it may be necessary to sell on the spot market some of
the foreign currency received on the sale of the security if its
market value exceeds the amount of foreign currency a Portfolio is
obligated to deliver.
A Portfolio's dealing in forward contracts will be limited to the
transactions described above. This method of protecting the value
of securities against a decline in the value of a currency does not
eliminate fluctuations in the underlying prices of the securities.
It simply establishes a rate of exchange that can be achieved at
some point in time. Although such forward contracts tend to
minimize the risk of loss due to a decline in value of hedged
currency, they tend to limit any potential gain that might result
should the value of such currency increase.
<PAGE>
PAGE 72
Although a Portfolio values its assets each business day in terms
of U.S. dollars, it does not intend to convert its foreign
currencies into U.S. dollars on a daily basis. It will do so from
time to time, and unitholders should be aware of currency
conversion costs. Although foreign exchange dealers do not charge
a fee for conversion, they do realize a profit based on the
difference (spread) between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a
foreign currency to a Portfolio at one rate, while offering a
lesser rate of exchange should a Portfolio desire to resell that
currency to the dealer.
Options on Foreign Currencies. A Portfolio may buy put and write
covered call options on foreign currencies for hedging purposes.
For example, a decline in the dollar value of a foreign currency in
which securities are denominated will reduce the dollar value of
such securities, even if their value in the foreign currency
remains constant. In order to protect against such diminutions in
the value of securities, a Portfolio may buy put options on the
foreign currency. If the value of the currency does decline, a
Portfolio will have the right to sell such currency for a fixed
amount in dollars and will thereby offset, in whole or in part, the
adverse effect on a Portfolio which otherwise would have resulted.
As in the case of other types of options, however, the benefit to a
Portfolio derived from purchases of foreign currency options will
be reduced by the amount of the premium and related transaction
costs. In addition, where currency exchange rates do not move in
the direction or to the extent anticipated, a Portfolio could
sustain losses on transactions in foreign currency options which
would require it to forego a portion or all of the benefits of
advantageous changes in such rates.
A Portfolio may write options on foreign currencies for the same
types of hedging purposes. For example, when a Portfolio
anticipates a decline in the dollar value of foreign-denominated
securities due to adverse fluctuations in exchange rates, it could,
instead of purchasing a put option, write a call option on the
relevant currency. If the expected decline occurs, the option will
most likely not be exercised and the diminution in value of
securities will be fully or partially offset by the amount of the
premium received.
As in the case of other types of options, however, the writing of a
foreign currency option will constitute only a partial hedge up to
the amount of the premium, and only if rates move in the expected
direction. If this does not occur, the option may be exercised and
a Portfolio would be required to buy or sell the underlying
currency at a loss which may not be offset by the amount of the
premium. Through the writing of options on foreign currencies, a
Portfolio also may be required to forego all or a portion of the
benefits which might otherwise have been obtained from favorable
movements on exchange rates.<PAGE>
PAGE 73
All options written on foreign currencies will be covered. An
option written on foreign currencies is covered if a Portfolio
holds currency sufficient to cover the option or has an absolute
and immediate right to acquire that currency without additional
cash consideration upon conversion of assets denominated in that
currency or exchange of other currency held in a Portfolio. An
option writer could lose amounts substantially in excess of its
initial investments, due to the margin and collateral requirements
associated with such positions.
Options on foreign currencies are traded through financial
institutions acting as market-makers, although foreign currency
options also are traded on certain national securities exchanges,
such as the Philadelphia Stock Exchange and the Chicago Board
Options Exchange, subject to SEC regulation. In an over-the-
counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there
are no daily price fluctuation limits, and adverse market movements
could therefore continue to an unlimited extent over a period of
time. Although the purchaser of an option cannot lose more than
the amount of the premium plus related transaction costs, this
entire amount could be lost.
Foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the Options
Clearing Corporation (OCC), thereby reducing the risk of
counterparty default. Further, a liquid secondary market in
options traded on a national securities exchange may be more
readily available than in the over-the-counter market, potentially
permitting a Portfolio to liquidate open positions at a profit
prior to exercise or expiration, or to limit losses in the event of
adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of availability of a liquid
secondary market described above, as well as the risks regarding
adverse market movements, margining of options written, the nature
of the foreign currency market, possible intervention by
governmental authorities and the effects of other political and
economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-
counter market. For example, exercise and settlement of such
options must be made exclusively through the OCC, which has
established banking relationships in certain foreign countries for
the purpose. As a result, the OCC may, if it determines that
foreign governmental restrictions or taxes would prevent the
orderly settlement of foreign currency option exercises, or would
result in undue burdens on OCC or its clearing member, impose
special procedures on exercise and settlement, such as technical
changes in the mechanics of delivery of currency, the fixing of
dollar settlement prices or prohibitions on exercise.
Foreign Currency Futures and Related Options. A Portfolio may
enter into currency futures contracts to sell currencies. It also
may buy put options and write covered call options on currency<PAGE>
PAGE 74
futures. Currency futures contracts are similar to currency
forward contracts, except that they are traded on exchanges (and
have margin requirements) and are standardized as to contract size
and delivery date. Most currency futures call for payment of
delivery in U.S. dollars. A Portfolio may use currency futures for
the same purposes as currency forward contracts, subject to
Commodity Futures Trading Commission (CFTC) limitations. All
futures contracts are aggregated for purposes of the percentage
limitations.
Currency futures and options on futures values can be expected to
correlate with exchange rates, but will not reflect other factors
that may affect the values of a Portfolio's investments. A
currency hedge, for example, should protect a Yen-denominated bond
against a decline in the Yen, but will not protect a Portfolio
against price decline if the issuer's creditworthiness
deteriorates. Because the value of a Portfolio's investments
denominated in foreign currency will change in response to many
factors other than exchange rates, it may not be possible to match
the amount of a forward contract to the value of a Portfolio's
investments denominated in that currency over time.
A Portfolio will hold securities or other options or futures
positions whose values are expected to offset its obligations. A
Portfolio will not enter into an option or futures position that
exposes a Portfolio to an obligation to another party unless it
owns either (i) an offsetting position in securities or (ii) cash,
receivables and short-term debt securities with a value sufficient
to cover its potential obligations.
<PAGE>
PAGE 75
APPENDIX D
OPTIONS AND INTEREST RATE FUTURES CONTRACTS FOR GOVERNMENT INCOME
PORTFOLIO, QUALITY INCOME PORTFOLIO AND HIGH YIELD PORTFOLIO
A Portfolio may buy or write options traded on any U.S. or foreign
exchange or in the over-the-counter market. A Portfolio may enter
into interest rate futures contracts traded on any U.S. or foreign
exchange. A Portfolio also may buy or write put and call options
on these futures. Options in the over-the-counter market will be
purchased only when the investment manager believes a liquid
secondary market exists for the options and only from dealers and
institutions the investment manager believes present a minimal
credit risk. Some options are exercisable only on a specific date.
In that case, or if a liquid secondary market does not exist, a
Portfolio could be required to buy or sell securities at
disadvantageous prices, thereby incurring losses.
OPTIONS. An option is a contract. A person who buys a call option
for a security has the right to buy the security at a set price for
the length of the contract. A person who sells a call option is
called a writer. The writer of a call option agrees to sell the
security at the set price when the buyer wants to exercise the
option, no matter what the market price of the security is at that
time. A person who buys a put option has the right to sell a
security at a set price for the length of the contract. A person
who writes a put option agrees to buy the security at the set price
if the purchaser wants to exercise the option, no matter what the
market price of the security is at that time. An option is covered
if the writer owns the security (in the case of a call) or sets
aside the cash (in the case of a put) that would be required upon
exercise.
The price paid by the buyer for an option is called a premium. In
addition the buyer generally pays a broker a commission. The
writer receives a premium, less a commission, at the time the
option is written. The cash received is retained by the writer
whether or not the option is exercised. A writer of a call option
may have to sell the security for a below-market price if the
market price rises above the exercise price. A writer of a put
option may have to pay an above-market price for the security if
its market price decreases below the exercise price.
Options can be used to produce incremental earnings, protect gains
and facilitate buying and selling securities for investment
purposes. The use of options and futures contracts may benefit a
Portfolio and its unitholders by improving a Portfolio's liquidity
and by helping to stabilize the value of its net assets.
Buying options. Put and call options may be used as a trading
technique to facilitate buying and selling securities for
investment reasons. Options are used as a trading technique to
take advantage of any disparity between the price of the underlying
security in the securities market and its price on the options
market. It is anticipated the trading technique will be utilized<PAGE>
PAGE 76
only to effect a transaction when the price of the security plus
the option price will be as good or better than the price at which
the security could be bought or sold directly. When the option is
purchased, a Portfolio pays a premium and a commission. It then
pays a second commission on the purchase or sale of the underlying
security when the option is exercised. For record keeping and tax
purposes, the price obtained on the purchase of the underlying
security will be the combination of the exercise price, the premium
and both commissions. When using options as a trading technique,
commissions on the option will be set as if only the underlying
securities were traded.
Put and call options also may be held by a Portfolio for investment
purposes. Options permit a Portfolio to experience the change in
the value of a security with a relatively small initial cash
investment. The risk a Portfolio assumes when it buys an option is
the loss of the premium. To be beneficial to a Portfolio, the
price of the underlying security must change within the time set by
the option contract. Furthermore, the change must be sufficient to
cover the premium paid, the commissions paid both in the
acquisition of the option and in a closing transaction or in the
exercise of the option and subsequent sale (in the case of a call)
or purchase (in the case of a put) of the underlying security.
Even then the price change in the underlying security does not
ensure a profit since prices in the option market may not reflect
such a change.
Writing covered options. A Portfolio will write covered options
when it feels it is appropriate and will follow these guidelines:
'Underlying securities will continue to be bought or sold solely on
the basis of investment considerations consistent with a
Portfolio's goal.
'All options written by a Portfolio will be covered. For covered
call options if a decision is made to sell the security, a
Portfolio will attempt to terminate the option contract through a
closing purchase transaction.
'A Portfolio will write options only as permitted under federal or
state laws or regulations, such as those that limit the amount of
total assets subject to the options. While no limit has been set
by a Portfolio, it will conform to the requirements of certain
states. For example, California limits the writing of options to
50% of the assets of a Portfolio.
Net premiums on call options closed or premiums on expired call
options are treated as short-term capital gains. Since a Portfolio
is taxed as a regulated investment company under the Internal
Revenue Code, any gains on options and other securities held less
than three months must be limited to less than 30% of its annual
gross income.
If a covered call option is exercised, the security is sold by the
Portfolio. A Portfolio will recognize a capital gain or loss <PAGE>
PAGE 77
based upon the difference between the proceeds and the security's
basis.
Options on many securities are listed on options exchanges. If a
Portfolio writes listed options, it will follow the rules of the
options exchange. Options are valued at the close of the New York
Stock Exchange. An option listed on a national exchange, CBOE or
NASDAQ will be valued at the last quoted sales price or, if such a
price is not readily available, at the mean of the last bid and
asked prices.
Options on Government National Mortgage Association (GNMA)
certificates and certain other securities are not actively traded
on any exchange, but may be entered into directly with a dealer.
When a Portfolio writes such an option, the Custodian will
segregate assets as appropriate to cover the option. However,
since the remaining principal balance of GNMA certificates declines
each month as a result of mortgage payments, a Portfolio may find
that the GNMA certificates it holds as cover no longer have a
sufficient remaining principal balance for this purpose. A GNMA
certificate held by a Portfolio also may cease to represent cover
for the option if the GNMA coupon rate at which new pools are
originated under the FHA/VA loan ceiling in effect at any given
time is reduced. If either event should occur, a Portfolio will
either enter into a closing purchase transaction or replace
certificates with certificates that represent cover. When a
Portfolio closes its position or replaces certificates, it may
realize an unanticipated loss and incur transaction costs.
FUTURES CONTRACTS. A futures contract is an agreement between two
parties to buy and sell a security for a set price on a future
date. They have been established by boards of trade which have
been designated contracts markets by the CFTC. Futures contracts
trade on these markets in a manner similar to the way a stock
trades on a stock exchange, and the boards of trade, through their
clearing corporations, guarantee performance of the contracts.
Currently, there are futures contracts based on such debt
securities as long-term U.S. Treasury bonds, Treasury notes, GNMA
modified pass-through mortgage-backed securities, three-month U.S.
Treasury bills and bank certificates of deposit. While futures
contracts based on debt securities do provide for the delivery and
acceptance of securities, such deliveries and acceptances are very
seldom made. Generally, the futures contract is terminated by
entering into an offsetting transaction. An offsetting transaction
for a futures contract sale is effected by a Portfolio entering
into a futures contract purchase for the same aggregate amount of
the specific type of financial instrument and same delivery date.
If the price in the sale exceeds the price in the offsetting
purchase, a Portfolio immediately is paid the difference and
realizes a gain. If the offsetting purchase price exceeds the sale
price, a Portfolio pays the difference and realizes a loss.
Similarly, closing out a futures contract purchase is effected by a
Portfolio entering into a futures contract sale. If the offsetting
sale price exceeds the purchase price, a Portfolio realizes a <PAGE>
PAGE 78
gain, and if the offsetting sale price is less than the purchase
price, a Portfolio realizes a loss. At the time a futures contract
is made, a good-faith deposit called initial margin is set up
within a segregated account at the fund's custodian bank. The
initial margin deposit is approximately 1.5% of a contract's face
value. Daily thereafter, the futures contract is valued and the
payment of variation margin is required so that each day a
Portfolio would pay out cash in an amount equal to any decline in
the contract's value or receive cash equal to any increase. At the
time a futures contract is closed out, a nominal commission is
paid, which is generally lower than the commission on a comparable
transaction in the cash markets.
The purpose of a futures contract, in the case of a Portfolio
holding long-term debt securities, is to gain the benefit of
changes in interest rates without actually buying or selling long-
term debt securities. For example, if a Portfolio owned long-term
bonds and interest rates were expected to increase, it might enter
into futures contracts to sell securities which would have much the
same effect as selling some of the long-term bonds it owned.
Futures contracts are based on types of debt securities referred to
above, which have historically reacted to an increase or decline in
interest rates in a fashion similar to the debt securities the fund
owns. If interest rates did increase, the value of the debt
securities in the Portfolio would decline, but the value of a
Portfolio's futures contracts would increase at approximately the
same rate, thereby keeping the net asset value of a Portfolio from
declining as much as it otherwise would have. If, on the other
hand, a Portfolio held cash reserves and interest rates were
expected to decline, a Portfolio might enter into interest rate
futures contracts for the purchase of securities. If short-term
rates were higher than long-term rates, the ability to continue
holding these cash reserves would have a very beneficial impact on
a Portfolio's earnings. Even if short-term rates were not higher,
a Portfolio would still benefit from the income earned by holding
these short-term investments. At the same time, by entering into
futures contracts for the purchase of securities, a Portfolio could
take advantage of the anticipated rise in the value of long-term
bonds without actually buying them until the market had stabilized.
At that time, the futures contracts could be liquidated and a
Portfolio's cash reserves could then be used to buy long-term bonds
on the cash market. A Portfolio could accomplish similar results
by selling bonds with long maturities and investing in bonds with
short maturities when interest rates are expected to increase or by
buying bonds with long maturities and selling bonds with short
maturities when interest rates are expected to decline. But by
using futures contracts as an investment tool, given the greater
liquidity in the futures market than in the cash market, it might
be possible to accomplish the same result more easily and more
quickly. Successful use of futures contracts depends on the
investment manager's ability to predict the future direction of
interest rates. If the investment manager's prediction is
incorrect, a Portfolio would have been better off had it not
entered into futures contracts.<PAGE>
PAGE 79
OPTIONS ON FUTURES CONTRACTS. Options give the holder a right to
buy or sell futures contracts in the future. Unlike a futures
contract, which requires the parties to the contract to buy and
sell a security on a set date, an option on a futures contract
merely entitles its holder to decide on or before a future date
(within nine months of the date of issue) whether to enter into
such a contract. If the holder decides not to enter into the
contract, all that is lost is the amount (premium) paid for the
option. Furthermore, because the value of the option is fixed at
the point of sale, there are no daily payments of cash to reflect
the change in the value of the underlying contract. However, since
an option gives the buyer the right to enter into a contract at a
set price for a fixed period of time, its value does change daily
and that change is reflected in the net asset value of a Portfolio.
RISKS. There are risks in engaging in each of the management tools
described above. The risk a Portfolio assumes when it buys an
option is the loss of the premium paid for the option. Purchasing
options also limits the use of monies that might otherwise be
available for long-term investments.
The risk involved in writing options on futures contracts or on
securities held in a Portfolio, is that there could be an increase
in the market value of such contracts or securities. If that
occurred, the option would be exercised and the asset sold at a
lower price than the cash market price. To some extent, the risk
of not realizing a gain could be reduced by entering into a closing
transaction. A Portfolio could enter into a closing transaction by
purchasing an option with the same terms as the one it had
previously sold. The cost to close the option and terminate a
Portfolio's obligation, however, might be more or less than the
premium received when it originally wrote the option. Furthermore,
a Portfolio might not be able to close the option because of
insufficient activity in the options market.
A risk in employing futures contracts to protect against the price
volatility of Portfolio securities is that the prices of securities
subject to futures contracts may not correlate perfectly with the
behavior of the cash prices of a Portfolio's securities. The
correlation may be distorted because the futures market is
dominated by short-term traders seeking to profit from the
difference between a contract or security price and their cost of
borrowed funds. Such distortions are generally minor and would
diminish as the contract approached maturity.
Another risk is that a Portfolio's investment manager could be
incorrect in anticipating as to the direction or extent of various
interest rate movements or the time span within which the movements
take place. For example, if a Portfolio sold futures contracts for
the sale of securities in anticipation of an increase in interest
rates, and interest rates declined instead, a Portfolio would lose
money on the sale.
TAX TREATMENT. As permitted under federal income tax laws, each
Portfolio intends to identify futures contracts as mixed straddles <PAGE>
PAGE 80
and not mark them to market, that is, not treat them as having been
sold at the end of the year at market value. Such an election may
result in a Portfolio being required to defer recognizing losses
incurred by entering into futures contracts and losses on
underlying securities identified as being hedged against.
Federal income tax treatment of gains or losses from transactions
in options on futures contracts and indexes will depend on whether
such option is a section 1256 contract. If the option is a non-
equity option contract, the Portfolio will either make a 1256(d)
election and treat the option as a mixed straddle or mark to market
the option at fiscal year end and treat the gain/loss as 40% short
term and 60% long term. Certain provisions of the Internal Revenue
Code may also limit a Portfolio's ability to engage in futures
contracts and related options transactions. For example, at the
close of each quarter of a Portfolio's taxable year, at least 50%
of the value of its assets must consist of cash, government
securities and other securities, subject to certain diversification
requirements. Less than 30% of its gross income must be derived
from sales of securities held less than three months.
The IRS has ruled publicly that an exchange-traded call option is a
security for purposes of the 50%-of-assets test and that its issuer
is the issuer of the underlying security, not the writer of the
option, for purposes of the diversification requirements. In order
to avoid realizing a gain within the three-month period, a
Portfolio may be required to defer closing out a contract beyond
the time when it might otherwise be advantageous to do so. A
Portfolio also may be restricted in purchasing put options for the
purpose of hedging underlying securities because of applying the
short sale holding period rules with respect to such underlying
securities.
Accounting for futures contracts will be according to generally
accepted accounting principles. Initial margin deposits will be
recognized as assets due from a broker (a Portfolio's agent in
acquiring the futures position). During the period the futures
contract is open, changes in value of the contract will be
recognized as unrealized gains or losses by marking to market on a
daily basis to reflect the market value of the contract at the end
of each day's trading. Variation margin payments will be made or
received depending upon whether gains or losses are incurred. All
contracts and options will be valued at the last-quoted sales price
on their primary exchange.<PAGE>
PAGE 81
APPENDIX E
MORTGAGE-BACKED SECURITIES FOR GOVERNMENT INCOME PORTFOLIO, QUALITY
INCOME PORTFOLIO AND HIGH YIELD PORTFOLIO
A mortgage pass-through certificate is one that represents an
interest in a pool, or group, of mortgage loans assembled by the
Government National Mortgage Association (GNMA), Federal Home Loan
Mortgage Corporation (FHLMC), Federal National Mortgage Association
(FNMA) or non-governmental entities. In pass-through certificates,
both principal and interest payments, including prepayments, are
passed through to the holder of the certificate. Prepayments on
underlying mortgages result in a loss of anticipated interest, and
the actual yield (or total return) to the Fund, which is influenced
by both stated interest rates and market conditions, may be
different than the quoted yield on certificates. Some U.S.
government securities may be purchased on a when-issued basis,
which means that it may take as long as 45 days after the purchase
before the securities are delivered to the Fund.
Stripped Mortgage-Backed Securities. The Fund may invest in
stripped mortgage-backed securities. Generally, there are two
classes of stripped mortgage-backed securities: Interest Only (IO)
and Principal Only (PO). IOs entitle the holder to receive
distributions consisting of all or a portion of the interest on the
underlying pool of mortgage loans or mortgage-backed securities.
POs entitle the holder to receive distributions consisting of all
or a portion of the principal of the underlying pool of mortgage
loans or mortgage-backed securities. The cash flows and yields on
IOs and POs are extremely sensitive to the rate of principal
payments (including prepayments) on the underlying mortgage loans
or mortgage-backed securities. A rapid rate of principal payments
may adversely affect the yield to maturity of IOs. A slow rate of
principal payments may adversely affect the yield to maturity of
POs. On an IO, if prepayments of principal are greater than
anticipated, an investor may incur substantial losses. If
prepayments of principal are slower than anticipated, the yield on
a PO will be affected more severely than would be the case with a
traditional mortgage-backed security.
Mortgage-Backed Security Spread Options. The Fund may purchase
mortgage-backed security (MBS) put spread options and write covered
MBS call spread options. MBS spread options are based upon the
changes in the price spread between a specified mortgage-backed
security and a like-duration Treasury security. MBS spread options
are traded in the OTC market and are of short duration, typically
one to two months. The Fund would buy or sell covered MBS call
spread options in situations where mortgage-backed securities are
expected to underperform like-duration Treasury securities.
<PAGE>
PAGE 82
APPENDIX F
DOLLAR-COST AVERAGING
A technique that works well for many investors is one that
eliminates random buy and sell decisions. One such system is
dollar-cost averaging. Dollar-cost averaging involves building a
portfolio through the investment of fixed amounts of money on a
regular basis regardless of the price or market condition. This
may enable an investor to smooth out the effects of the volatility
of the financial markets. By using this strategy, more shares will
be purchased when the price is low and less when the price is high.
As the accompanying chart illustrates, dollar-cost averaging tends
to keep the average price paid for the shares lower than the
average market price of shares purchased, although there is no
guarantee.
While this does not ensure a profit and does not protect against a
loss if the market declines, it is an effective way for many
shareholders who can continue investing through changing market
conditions to accumulate shares in a fund to meet long-term goals.
Dollar-cost averaging
___________________________________________________________________
Regular Market Price Shares
Investment of a Share Acquired
$100 $6.00 16.7
100 4.00 25.0
100 4.00 25.0
100 6.00 16.7
100 5.00 20.0
$500 $25.00 103.4
Average market price of a share over 5 periods:
$5.00 ($25.00 divided by 5).
The average price you paid for each share:
$4.84 ($500 divided by 103.4).
<PAGE>
PAGE 83
STRATEGIST GOVERNMENT INCOME FUND
(a series within Strategist Income Fund, Inc.)
Statement of Assets and Liabilities
April 15, 1996
Assets:
Investment in Government Income Portfolio $40,000
Organizational costs (note 5) 13,907
Total assets 53,907
Liabilities:
Payable to adviser (note 5) 13,907
Net assets applicable to outstanding capital stock $40,000
Represented by:
Capital stock - authorized 3 billion shares of $.01
par value; outstanding 4,000 shares $ 40
Additional paid-in capital 39,960
Total - representing net assets applicable to
outstanding capital stock $40,000
Net asset value per share of outstanding capital stock $ 10.00
See accompanying notes to financial statement.
<PAGE>
PAGE 84
Independent Auditors' Report
The Board of Directors and Shareholder
Strategist Income Fund, Inc.:
We have audited the statement of assets and liabilities of
Strategist Government Income Fund (a series within Strategist
Income Fund, Inc.) as of April 15, 1996. This financial statement
is the responsibility of Fund management. Our responsibility is to
express an opinion on this financial statement based on our audit.
We conducted our audit 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 statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statement. Our procedures
included verification of the investment in Government Income
Portfolio by examination of the underlying Portfolio. 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 audit
provides a reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to
above presents fairly, in all material respects, the financial
position of Strategist Government Income Fund at April 15, 1996, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
April 16, 1996
<PAGE>
PAGE 85
STRATEGIST GOVERNMENT INCOME FUND
(a series within Strategist Income Fund, Inc.)
Notes to Statement of Assets and Liabilities
April 15, 1996
1. Organization
The Fund is a series of Strategist Income Fund, Inc. and is
registered under the Investment Company Act of 1940 as a
diversified, open-end management investment company. Strategist
Government Income Fund seeks to provide shareholders with a high
level of current income and safety of principal consistent with
investment in U.S. government and government agency securities.
The Fund invests substantially all of its assets in the Government
Income Portfolio (Portfolio), a series of Income Trust, an open-end
investment company which has the same investment objectives as the
Fund. The financial statements of the Portfolio are included
elsewhere in this report and should be read in conjunction with the
Fund's financial statements. The percentage of the Portfolio owned
by the Fund at April 15, 1996 was 100%.
The only transactions of the Fund since inception has been the
initial sale on April 15, 1996 of 4,000 shares of the Fund to
American Express Financial Corporation (AEFC), and the investment
of the proceeds in the underlying Portfolio.
2. Valuation of Investments
The Fund records its investment in the Portfolio at market value.
3. Investment Income and Expenses
The Fund records daily its pro rata share of the Portfolio's
income, expenses and realized and unrealized gains and losses. In
addition, the Fund accrues its own expenses as follows:
Under an Administrative Services Agreement, the Fund pays AEFC for
administration and accounting services at a percentage of the
Fund's average daily net assets in reducing percentages from 0.05%
to 0.025% annually. Under this agreement, the Fund also pays taxes;
audit and certain legal fees; registration fees for shares; office
expenses; consultant's fees; compensation of board members,
corporate filing fees; organizational expenses; and any other
expenses properly payable by the Fund approved by the board.
Under a separate Transfer Agency Agreement, AEFC maintains
shareholder accounts and records. The Fund pays AEFC an annual fee
per shareholder account of $25.
Under a Plan and Agreement of Distribution, the Fund pays American
Express Service Corporation a distribution fee at an annual rate of
0.25% of the Fund's average daily net assets.
<PAGE>
PAGE 86
4. Federal Taxes
The Fund intends to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to
distribute taxable income to the shareholders in amounts that will
avoid federal income and excise taxes.
5. Organizational Costs
The Fund expects to incur organizational expenses in connection
with the start-up and initial registration of the Fund. These costs
will be amortized over 60 months on a straight-line basis beginning
with the commencement of operations. If any or all of the shares
held by AEFC representing initial capital of the Fund are redeemed
during the amortization period, the redemption proceeds will be
reduced by the pro rata portion of the unamortized organizational
cost balance.
<PAGE>
PAGE 87
STRATEGIST HIGH YIELD FUND
(a series within Strategist Income Fund, Inc.)
Statement of Assets and Liabilities
April 15, 1996
Assets:
Investment in High Yield Portfolio $30,000
Organizational costs (note 5) 13,907
Total assets 43,907
Liabilities:
Payable to adviser (note 5) 13,907
Net assets applicable to outstanding capital stock $30,000
Represented by:
Capital stock - authorized 3 billion shares of $.01
par value; outstanding 3,000 shares $ 30
Additional paid-in capital 29,970
Total - representing net assets applicable to
outstanding capital stock $30,000
Net asset value per share of outstanding capital stock $ 10.00
See accompanying notes to financial statement.
<PAGE>
PAGE 88
Independent Auditors' Report
The Board of Directors and Shareholder
Strategist Income Fund, Inc.:
We have audited the statement of assets and liabilities of
Strategist High Yield Fund (a series within Strategist Income Fund,
Inc.) as of April 15, 1996. This financial statement is the
responsibility of Fund management. Our responsibility is to express
an opinion on this financial statement based on our audit.
We conducted our audit 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 statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statement. Our procedures
included verification of the investment in High Yield Portfolio by
examination of the underlying Portfolio. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to
above presents fairly, in all material respects, the financial
position of Strategist High Yield Fund at April 15, 1996, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
April 16, 1996
<PAGE>
PAGE 89
STRATEGIST HIGH YIELD FUND
(a series within Strategist Income Fund, Inc.)
Notes to Statement of Assets and Liabilities
April 15, 1996
1. Organization
The Fund is a series of Strategist Income Fund, Inc. and is
registered under the Investment Company Act of 1940 as a
diversified, open-end management investment company. The Fund
seeks to provide shareholders with a high current income with a
secondary goal of capital growth. The Fund invests substantially
all of its assets in the High Yield Portfolio (Portfolio), a series
of Income Trust, an open-end investment company which has the same
investment objectives as the Fund. The financial statements of the
Portfolio are included elsewhere in this report and should be read
in conjunction with the Fund's financial statements. The percentage
of the Portfolio owned by the Fund at April 15, 1996 was 100%.
The only transactions of the Fund since inception has been the
initial sale on April 15, 1996 of 3,000 shares of the Fund to
American Express Financial Corporation (AEFC), and the investment
of the proceeds in the underlying Portfolio.
2. Valuation of Investments
The Fund records its investment in the Portfolio at market value.
3. Investment Income and Expenses
The Fund records daily its pro rata share of the Portfolio's
income, expenses and realized and unrealized gains and losses. In
addition, the Fund accrues its own expenses as follows:
Under an Administrative Services Agreement, the Fund pays AEFC for
administration and accounting services at a percentage of the
Fund's average daily net assets in reducing percentages from 0.05%
to 0.025% annually. Under this agreement, the Fund also pays taxes;
audit and certain legal fees; registration fees for shares; office
expenses; consultant's fees; compensation of board members,
corporate filing fees; organizational expenses; and any other
expenses properly payable by the Fund approved by the board.
Under a separate Transfer Agency Agreement, AEFC maintains
shareholder accounts and records. The Fund pays AEFC an annual fee
per shareholder account of $25.
Under a Plan and Agreement of Distribution, the Fund pays American
Express Service Corporation a distribution fee at an annual rate of
0.25% of the Fund's average daily net assets.
A redemption fee of 0.5% is applied and retained by the Fund, if
shares are redeemed or exchanged within 180 days of purchase.<PAGE>
PAGE 90
4. Federal Taxes
The Fund intends to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to
distribute taxable income to the shareholders in amounts that will
avoid federal income and excise taxes.
5. Organizational Costs
The Fund expects to incur organizational expenses in connection
with the start-up and initial registration of the Fund. These costs
will be amortized over 60 months on a straight-line basis beginning
with the commencement of operations. If any or all of the shares
held by AEFC representing initial capital of the Fund are redeemed
during the amortization period, the redemption proceeds will be
reduced by the pro rata portion of the unamortized organizational
cost balance.
<PAGE>
PAGE 91
STRATEGIST QUALITY INCOME FUND
(a series within Strategist Income Fund, Inc.)
Statement of Assets and Liabilities
April 15, 1996
Assets:
Investment in Quality Income Portfolio $30,000
Organizational costs (note 5) 13,907
Total assets 43,907
Liabilities:
Payable to adviser (note 5) 13,907
Net assets applicable to outstanding capital stock $30,000
Represented by:
Capital stock - authorized 3 billion shares of $.01
par value; outstanding 3,000 shares $ 30
Additional paid-in capital 29,970
Total - representing net assets applicable to
outstanding capital stock $30,000
Net asset value per share of outstanding capital stock $ 10.00
See accompanying notes to financial statement.
<PAGE>
PAGE 92
Independent Auditors' Report
The Board of Directors and Shareholder
Strategist Income Fund, Inc.:
We have audited the statement of assets and liabilities of
Strategist Quality Income Fund (a series within Strategist Income
Fund, Inc.) as of April 15, 1996. This financial statement is the
responsibility of Fund management. Our responsibility is to express
an opinion on this financial statement based on our audit.
We conducted our audit 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 statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statement. Our procedures
included verification of the investment in Quality Income Portfolio
by examination of the underlying Portfolio. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to
above presents fairly, in all material respects, the financial
position of Strategist Quality Income Fund at April 15, 1996, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
April 16, 1996
<PAGE>
PAGE 93
STRATEGIST QUALITY INCOME FUND
(a series within Strategist Income Fund, Inc.)
Notes to Statement of Assets and Liabilities
April 15, 1996
1. Organization
The Fund is a series of Strategist Income Fund, Inc. and is
registered under the Investment Company Act of 1940 as a
diversified, open-end management investment company. Strategist
Quality Income Fund seeks to provide shareholders with current
income and preservation of capital. The Fund invests substantially
all of its assets in the Quality Income Portfolio (Portfolio), a
series of Income Trust, an open-end investment company which has
the same investment objectives as the Fund. The financial
statements of the Portfolio are included elsewhere in this report
and should be read in conjunction with the Fund's financial
statements. The percentage of the Portfolio owned by the Fund at
April 15, 1996 was 100%.
The only transactions of the Fund since inception has been the
initial sale on April 15, 1996 of 3,000 shares of the Fund to
American Express Financial Corporation (AEFC), and the investment
of the proceeds in the underlying Portfolio.
2. Valuation of Investments
The Fund records its investment in the Portfolio at market value.
3. Investment Income and Expenses
The Fund records daily its pro rata share of the Portfolio's
income, expenses and realized and unrealized gains and losses. In
addition, the Fund accrues its own expenses as follows:
Under an Administrative Services Agreement, the Fund pays AEFC for
administration and accounting services at a percentage of the
Fund's average daily net assets in reducing percentages from 0.05%
to 0.025% annually. Under this agreement, the Fund also pays taxes;
audit and certain legal fees; registration fees for shares; office
expenses; consultant's fees; compensation of board members,
corporate filing fees; organizational expenses; and any other
expenses properly payable by the Fund approved by the board.
Under a separate Transfer Agency Agreement, AEFC maintains
shareholder accounts and records. The Fund pays AEFC an annual fee
per shareholder account of $25.
Under a Plan and Agreement of Distribution, the Fund pays American
Express Service Corporation a distribution fee at an annual rate of
0.25% of the Fund's average daily net assets.<PAGE>
PAGE 94
4. Federal Taxes
The Fund intends to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to
distribute taxable income to the shareholders in amounts that will
avoid federal income and excise taxes.
5. Organizational Costs
The Fund expects to incur organizational expenses in connection
with the start-up and initial registration of the Fund. These costs
will be amortized over 60 months on a straight-line basis beginning
with the commencement of operations. If any or all of the shares
held by AEFC representing initial capital of the Fund are redeemed
during the amortization period, the redemption proceeds will be
reduced by the pro rata portion of the unamortized organizational
cost balance.
<PAGE>
PAGE 95
Statement of Differences
Difference Description
1) On cover page of prospectus, 1) FDIC disclosure has been
FDIC disclosure has been deleted since the fund(s)
deleted. are not being sold through
banks.
2) In performance section of 2) Disclosure stating the
prospectus, disclosure is comparative index(es) are
added to reflect comparative unmanaged is added due to
index(es) are unmanaged. an SEC comment.
3) A Dollar-Cost Averaging 3) The Appendix has been added
Appendix has been added to to the group of SAI
the SAI. Appendices.
4) In the Board Members and 4) Minor revisions are made to
Officers section of the SAI, update the board members'
minor revisions are made to biographies.
the biographies of William
Heron and James Mitchell.
