<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. _____ (File No. 33-60323)
Post-Effective Amendment No. 2
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 4 (File No. 811-7305)
STRATEGIST INCOME FUND, INC.
(formerly Express Direct Income Fund, Inc.)
IDS Tower 10, Minneapolis, Minnesota 55440-0010
Eileen J. Newhouse - IDS Tower 10,
Minneapolis, Minnesota 55440-0010
(612) 671-2772
Approximate Date of Proposed Public Offering: May 31, 1996
It is proposed that this filing will become effective (check
appropriate box)
_____immediately upon filing pursuant to paragraph (b)
X on July 30, 1997 pursuant to paragraph (b)
_____60 days after filing pursuant to paragraph (a)(i)
_____on (date) pursuant to paragraph (a)(i)
_____75 days after filing pursuant to paragraph (a)(ii)
_____on (date) pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
_____this post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
The Registrant has registered an indefinite number or amount of
securities under the Securities Act of 1933 pursuant to Rule 24f of
the Investment Company Act of 1940.
Strategist Government Income Fund, Strategist High Yield Fund and
Strategist Quality Income Fund, series of the Registrant, are a
part of a master/feeder operating structure. This Post-Effective
Amendment includes a signature page for Income Trust, the master
fund.
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<TABLE>
<CAPTION>
Cross reference sheet for the Fund showing the location in its prospectus and the Statement of Additional Information of the
information called for by the items enumerated in Parts A and B of Form N-1A.
Negative answers omitted from prospectus are so indicated.
PART A PART B
Section Section in
Item No. in Prospectus Item No. Statement of Additional Information
<S> <C> <C> <C>
1 Cover page of prospectus 10 Cover page of SAI
2(a) The Funds in brief; Fund expenses 11 Table of Contents
(b) The Funds in brief; Fund expenses 12 NA
(c) The Funds in brief; Fund expenses 13(a) Additional Investment Policies; all
appendices except Dollar-Cost Averaging
(b) Additional Investment Policies
3(a) NA (c) Additional Investment Policies
(b) NA (d) Security Transactions
(c) Performance
(d) NA 14(a) Board Members and Officers
(b) Board Members and Officers
4(a) The Funds in brief; Investment policies (c) Board Members and Officers
and risks; How the Funds and Portfolios
are organized 15(a) NA
(b) Investment policies and risks (b) NA
(c) Investment policies and risks (c) Board Members and Officers
5(a) Board members and officers 16(a)(i) How the Funds and Portfolios are organized*;
About the Advisor
(b)(i) Investment manager; About the Advisor (a)(ii) Agreements: Investment Management Services
(b)(ii) Investment manager; Administrator and Agreement, Plan and Agreement of
transfer agent Distribution/Distribution Agreement
(b)(iii) Investment manager (a)(iii) NA
(c) Portfolio managers (b) NA
(d) Administrator and transfer agent (c) NA
(e) Administrator and transfer agent (d) Agreements: Administrative Services Agreement
(f) Investment manager; Administrator and (e) NA
transfer agent; Distributor (f) Agreements: Plan and Agreement of
(g) About the Advisor Distribution/Distribution Agreement
(g) NA
5A(a) NA (h) Custodian; Independent Auditors
(b) NA (i) Agreements: Transfer Agency Agreement; Custodian
6(a) Shares; Voting rights 17(a) NA
(b) NA (b) Brokerage Commissions Paid to Brokers Affiliated
(c) NA with the Advisor
(d) NA (c) Security Transactions
(e) Cover page; Special shareholder services (d) Security Transactions
(f) Dividend and capital gains distributions; (e) Security Transactions
Reinvestments
(g) Taxes 18(a) Shares; Voting rights*
(h) Special considerations regarding master/ (b) NA
feeder structure
7(a) Distributor 19(a) Investing in the Fund
(b) Valuing Fund shares (b) Valuing Fund shares*; Investing in the Funds;
(c) NA Redeeming Shares
(d) How to purchase shares (c) Redeeming Shares
(e) NA
(f) Distributor 20 Taxes
8(a) How to redeem shares; Special considerations 21(a) Agreements: Plan and Agreement of
regarding master/feeder structure Distribution/Distribution Agreement, Placement
(b) NA Agency Agreement
(c) How to purchase, exchange or redeem shares:
Other important information (b) Agreements: Plan and Agreement of
(d) How to purchase, exchange or redeem shares: Distribution/Distribution Agreement, Placement
How to redeem shares Agency Agreement
9 None 22(a) NA
(b) Performance Information (for all funds except
money market funds)
23 Financial Statements
</TABLE>
*Designates page number in prospectus
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Strategist Income Fund, Inc.
Prospectus
July 30, 1997
This prospectus describes three diversified, no-load mutual funds.
Strategist Income Fund, Inc. is a mutual fund with three series of
capital stock representing interests in Strategist Government
Income Fund, Strategist High Yield Fund, and Strategist Quality
Income 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 primary goal of Strategist High Yield Fund is to provide high
current income. Capital growth is a secondary goal. The Portfolio
that Strategist High Yield Fund invests in primarily invests in,
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."
The goals of Strategist Quality Income Fund are current income and
the preservation of capital by investing in investment-grade bonds.
Each Fund has chosen to participate in a master/feeder structure.
Each Fund seeks to achieve its goal by investing all of its assets
in a corresponding Portfolio of Income Trust. Each Portfolio is
managed by American Express Financial Corporation and has the same
goal as the corresponding Fund. This arrangement is commonly known
as a master/feeder structure.
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 (SEC) and available for reference, along with other
related materials, on the SEC Internet web site
(http://www.sec.gov). The SAI is incorporated here by reference.
For a free copy, contact American Express Financial Direct.
Like all mutual funds, 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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Please note that these Funds:
o are not bank deposits
o are not federally insured
o are not endorsed by any bank or government agency
o are not guaranteed to achieve their goals
American Express Financial Direct
P.O. Box 59196
Minneapolis, MN
55459-0196
800-AXP-SERV
TTY: 800-710-5260
http://www.americanexpress.com/direct
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Table of contents
The Funds in brief
Goals and types of Fund investments and their risks
Structure of the Funds
Manager and distributor
Portfolio managers
Fund expenses
Performance
Financial highlights
Total returns
Yield
Investment policies and risks
Facts about investments and their risks
Valuing Fund shares
How to purchase, exchange or redeem shares
How to purchase shares
How to exchange shares
How to redeem shares
Methods of exchanging or redeeming 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
Special considerations regarding master/feeder structure
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 mutual fund with
three series of capital stock representing interests in Strategist
Government Income Fund (Government Income Fund), Strategist High
Yield Fund (High Yield Fund) and Strategist Quality Income Fund
(Quality Income Fund) (collectively referred to 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 (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 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.
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 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.
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 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.
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.
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Structure of the Funds
Each Fund uses what is commonly known as a master/feeder structure.
This means that the Fund (the feeder fund) invests all of its
assets in the Portfolio (the master fund). The Portfolio actually
invests in and manages the securities and has the same goals and
investment policies as the Fund. This structure is described in
more detail in the section captioned "Special considerations
regarding master/feeder structure." Here is an illustration of the
structure:
Investors
buy shares in
the Fund
The Fund
invests in
the Portfolio
The Portfolio invests in
securities, such as stocks
or bonds
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 $158 billion in assets. These
assets are managed by a team of highly skilled, experienced
professionals, backed by one of the nation's largest investment
departments. Our team of professionals includes portfolio
managers, senior economists and supporting staff, stock and bond
analysts including Chartered Financial Analysts, and investment
managers and researchers based in London and Hong Kong who add a
global dimension to our expertise. These professionals evaluate
thousands of securities.
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 Government Income Portfolio and its predecessor fund
since 1993 after having served as associate portfolio manager from
1992 to 1993.
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 High
Yield Portfolio and its predecessor fund since 1985. He also is
manager of IDS Life Income Advantage Fund.
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PAGE 8
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 Quality
Income Portfolio and its predecessor fund since 1985. He also
manages the assets of World Income Portfolio, IDS Global Balanced
Fund and IDS Life Global Yield Fund.
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 each Fund may bear directly or indirectly. The
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. For additional information concerning Fund and
Portfolio expenses, see "How the Funds and Portfolios are
organized."
Shareholder transaction expenses(a)
Maximum sales charge on purchases(b)
(as a percentage of offering price)
Government High Yield Quality
Income Fund Fund Income Fund
0% 0% 0%
Annual Fund and allocated Portfolio operating expenses
(as a percentage of average daily net assets):
Government High Yield Quality
Income Fund Fund Income Fund
Management fee(c) 0.52% 0.58% 0.52%
12b-1 fee 0.25% 0.25% 0.25%
Other expenses(d) 0.33% 0.36% 0.33%
Total (after
reimbursement) 1.10% 1.19% 1.10%
(a)A wire redemption charge, currently $15, is deducted from the
shareholder's Investment Management Account for wire redemptions
made at the request of the shareholder.
(b)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.
(c)The management fee is paid by the Trust on behalf of each
Portfolio.<PAGE>
PAGE 9
(d)Other expenses include an administrative services fee, a
transfer agency fee and other nonadvisory expenses.
The Advisor and the Distributor agreed to waive certain fees and to
absorb certain other Fund expenses until May 31, 1997. Under this
agreement, total expenses would not exceed 1.10% for Government
Income Fund and Quality Income Fund and 1.20% for High Yield.
Without this agreement, the ratio of expenses to average daily net
assets would have been: 25.68% for Government Income Fund, 11.48%
for High Yield Fund, and 13.34% for Quality Income Fund.
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 High Yield Quality
Income Fund Fund Income Fund
1 year $ 11 $ 12 $ 11
3 years $ 35 $ 38 $ 35
5 years $ 61 $ 66 $ 61
10 years $134 $145 $134
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.
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Performance
Financial highlights
Government High Quality
Income Yield Income
Fiscal period ended May 31, 1997 Fund(a) Fund(a) Fund(a)
Per share income and capital changes(b)
Net asset value, beginning of period $4.91 $4.31 $8.95
Income from investment operations:
Net investment income .30 .38 .55
Net gains (both realized and unrealized) .06 .09 .18
Total from investment operations .36 .47 .73
Less distributions:
Distributions from net investment income (.30) (.37) (.53)
Distributions from gains (.04) -- --
Total distributions (.34) (.37) (.53)
Net asset value, end of period $4.93 $4.41 $9.15
Ratios/supplemental data
Net assets, end of period (in thousands) $548 $960 $575
Ratio of expenses to average daily
net assets 1.10%c,d 1.19%c,d 1.10%c,d
Ratio of net income to average daily
net assets 6.48%(d) 8.90%(d) 6.33%(d)
Total return 7.6% 11.4% 8.3%
Portfolio turnover rate
(excluding short-term securities) 146% 92% 31%
(a) Inception date was June 10, 1996.
(b) For a share outstanding throughout the period. Rounded to the
nearest cent.
(c) The Advisor and Distributor voluntarily limited total operating
expenses to 1.10% (1.20% for High Yield Fund) of average daily net
assets. Without this agreement, the ratio of expenses to average
daily net assets would have been 25.68% for Government Income
Fund, 11.48% for High Yield Fund and 13.34% for Quality Income
Fund.
(d) Adjusted to an annual basis.
The information in this table has been audited by KPMG Peat Marwick
LLP, independent auditors. The independent auditors' report and
additional information about the performance of the Funds are
contained in the Funds' annual report which, if not included with
this prospectus, may be obtained without charge.
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Total returns
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.
Average annual total returns as of May 31, 1997
Purchase 1 year 5 years 10 years
made ago ago ago
Government Income Fund + 7.59% + 6.16% + 7.65%
Merrill Lynch 1 to 5
year Government Index + 6.78% + 6.01% + 7.65%
Quality Income Fund +11.40% +11.18% + 9.80%
High Yield Fund + 8.31% + 7.88% + 8.84%
Lehman Aggregate
Bond Index + 8.32% + 7.16% + 8.84%
Cumulative total returns as of May 31, 1997
Purchase 1 year 5 years 10 years
made ago ago ago
Government Income Fund + 7.59% +35.22% +109.67%
Merrill Lynch 1 to 5
year Government Index + 6.78% +33.87% +109.09%
Quality Income Fund +11.40% +71.17% +156.73%
High Yield Fund + 8.31% +46.93% +134.68%
Lehman Aggregate
Bond Index + 8.32% +41.28% +133.25%
On June 10, 1996, IDS Federal Income Fund, IDS Selective Fund and
IDS Extra Income Fund (the predecessor funds) converted to a
master/feeder structure and 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
predecessor funds prior to March 20, 1995 and of Class A shares of
the corresponding predecessor funds from March 20, 1995 through
June 10, 1996, 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 predecessor 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.
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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.
Merrill Lynch 1 to 5 year Government Index is made up of an
unmanaged representative list of government bonds. 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. The annualized yield for the 30-day period ended May 31,
1997, was 7.44% for Government Income Fund, 7.85% for High Yield
Fund, and 6.84% for Quality Income Fund. 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
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
The policies described below apply both to the Fund and the
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.
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High Yield Portfolio - High Yield Portfolio invests primarily 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.
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.
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.
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PAGE 14
Rated securities
Bond ratings and holdings for the fiscal year
ending May 31, 1997
S&P Rating Protection of
(or Moody's principal and Percent of
equivalent) interest net assets
High Yield
Portfolio
AAA Highest quality 0.96%
AA High quality 0.02
A Upper medium grade 0.07
BBB Medium grade 1.00
BB Moderately speculative 23.95
B Speculative 52.52
CCC Highly speculative 4.36
CC Poor quality 0.17
C Lowest quality 0.02
D In default --
Unrated Unrated securities 11.68
Unrated securities
Bond ratings and holdings for the fiscal year
ending May 31, 1997
S&P Rating Protection of Percent of net assets in unrated
(or Moody's principal and securities assessed by the
equivalent interest Advisor to be of comparable
quality
High Yield
Portfolio
AAA Highest quality 0.30%
AA High quality --
A Upper medium grade --
BBB Medium grade 0.05
BB Moderately speculative 0.79
B Speculative 2.09
CCC Highly speculative 3.65
CC Poor quality --
C Lowest quality --
D In default --
Unrated Unrated securities 4.80
For the period from June 1, 1996 to June 9, 1996 the information in
the tables above relates to IDS Selective Fund and IDS Extra Income
Fund, funds that transferred their assets to Quality Income
Portfolio and High Yield Portfolio, respectively, on June 10, 1996.
See Appendix A to this prospectus describing corporate bond ratings
for further information
Government Income Portfolio does not invest in securities below
investment grade.
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PAGE 15
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
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 <PAGE>
PAGE 16
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.
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 exchange likely, 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.
<PAGE>
PAGE 17
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
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. This does not, however,
limit the portion of a Portfolio's assets at risk to 5%. 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 other instruments that are illiquid: A security or
other 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.
Securities and 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 other
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.<PAGE>
PAGE 18
The investment policies described above may be changed by the
boards.
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.
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 held by a Portfolio 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
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.
Complete an IMA Account Application (available by calling 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.
If you already have an IMA account, you may buy shares in the Funds
as described below and need not open a new account.
<PAGE>
PAGE 19
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 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 800-AXP-SERV.
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")
<PAGE>
PAGE 20
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 Fund 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, on any
other fund, read that fund's prospectus carefully. 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.
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 no 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.
<PAGE>
PAGE 21
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 or redeem your shares by calling 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
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
o a signature of at least one of the IMA account holders in the
exact form specified on the account
<PAGE>
PAGE 22
Telephone transactions. You may make purchase, redemption and
exchange requests by mail or by calling 800-AXP-SERV. 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 the Funds automatically and
conveniently. A SPP can be used as a dollar cost averaging program
and saves you the 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.
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 authorizations: If you elect to use this option to
make your automatic investments, money is transferred from
your bank checking or savings account into your IMA account
and is then used to make automatic investments.
If you elect to use bank authorizations for your automatic
investments, you will select a transfer date (when the money is
transferred into your IMA account).
If you make changes to your bank authorization transfer date, it
may also be necessary to change your automatic investment date to
coincide with the new transfer date.
Investment frequency: You can select the frequency of your
automatic investments (example: twice monthly, monthly or
quarterly). 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 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:<PAGE>
PAGE 23
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
Terminating your SPP. If you wish to terminate your SPP, you may
call 800-AXP-SERV, or send written instructions to American Express
Financial Direct, P.O. Box 59196, Minneapolis, MN 55459-0196.
Terminating bank authorizations. If you wish to terminate your
bank authorizations, you may do so at any time by notifying
American Express Financial Direct in writing or by calling 800-AXP-
SERV. Your bank authorization will not automatically terminate
when you cancel your SPP.
IMPORTANT: If you are canceling your bank authorizations 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 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.
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 24
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
800-AXP-SERV
TTY Service
For the hearing impaired
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
A Portfolio allocates investment income from dividends and interest
and net realized capital gains or losses, if any, to a Fund. A
Fund deducts direct and allocated expenses from the investment
income. A Fund's net investment income 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. Long-term capital gains are realized whenever a security
held for more than one year is sold for a higher price than was
paid for it. A Fund will offset any net realized capital gains by
any available capital loss carryovers. Net realized long-term
capital gains, if any, are distributed at the end of the calendar
year as capital gain distributions. Before they are distributed,
net long-term capital gains are included in the value of each
share. After they are 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 25
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 respective 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).
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.
<PAGE>
PAGE 26
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 800-AXP-SERV for federal Form
W-9, "Request for Taxpayer Identification Number and
Certification."
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.
<PAGE>
PAGE 27
How the Funds and Portfolios are organized
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.
Special considerations regarding master/feeder structure
Each Fund pursues its goals by investing its assets in a master
fund called a Portfolio. This means that a Fund does not invest
directly in securities; rather the respective Portfolio invests in
and manages its portfolio of securities. The goals and investment
policies of each Portfolio are described under the captions
"Investment policies and risks" and "Facts about investments and
their risks." Additional information on investment policies may be
found in the SAI.
Board considerations: The board considered the advantages and
disadvantages of investing each Fund's assets in the respective
Portfolio. The board believes that the master/feeder structure
will be in the best interest of each Fund and its shareholders
since it offers the opportunity for economies of scale. A Fund may
redeem all of its assets from the corresponding Portfolio at any
time. Should the board determine that it is in the best interest
of a Fund and its shareholders to terminate its investment in the
Portfolio, it would consider hiring an investment advisor to manage
the Fund's assets, or other appropriate options. A Fund would
terminate its investment if the Portfolio changed its goals,
investment policies or restrictions without the same change being
approved by the Fund.
Other feeders: Each Portfolio sells securities to other affiliated
mutual funds and may sell securities to non-affiliated investment
companies and institutional accounts (known as feeders). These <PAGE>
PAGE 28
feeders buy the Portfolio's securities on the same terms and
conditions as the Fund and pay their proportionate share of the
Portfolio's expenses. However, their operating costs and sales
charges are different from those of the Fund. Therefore, the
investment returns for other feeders are different from the returns
of a Fund. Information about other feeders may be obtained by
calling a service representative at 800-437-3133.
Each feeder that invests in a Portfolio is different and activities
of its investors may adversely affect all other feeders, including
the Fund. For example, if one feeder decides to terminate its
investment in a Portfolio, that Portfolio may elect to redeem in
cash or in kind. If cash is used, the Portfolio will incur
brokerage, taxes and other costs in selling securities to raise the
cash. This may result in less investment diversification if entire
investment positions are sold, and it also may result in less
liquidity among the remaining assets. If in-kind distribution is
made, a smaller pool of assets remains that may affect brokerage
rates and investment options. In both cases, expenses may rise
since there are fewer assets to cover the costs of managing those
assets.
Shareholder meetings: Whenever a Portfolio proposes to change a
fundamental investment policy or to take any other action requiring
approval of its security holders, the Fund will hold a shareholder
meeting. The Fund will vote for or against the Portfolio's
proposals in proportion to the vote it receives for or against the
same proposals from its shareholders.
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
Each Portfolio pays the Advisor for managing its assets. Each Fund
pays its proportionate share of the fee. Under the Investment
Management Services Agreement, the Advisor is paid a fee for these
services based on the average daily net assets of each Portfolio,
as follows:
Government Income Portfolio and
Quality Income Portfolio
Assets Annual rate at
(billions) each asset level
First $1.0 0.520%
Next 1.0 0.495
Next 1.0 0.470
Next 3.0 0.445
Next 3.0 0.420
Over 9.0 0.395
<PAGE>
PAGE 29
High Yield Portfolio
Assets Annual rate at
(billions) each asset level
First $1.0 0.590%
Next 1.0 0.565
Next 1.0 0.540
Next 3.0 0.515
Next 3.0 0.490
Over 9.0 0.465
For the fiscal year ended May 31, 1997, each Portfolio paid the
Advisor total investment management fees of 0.52% of its average
daily net assets for Government Income Portfolio, 0.58% for High
Yield Portfolio, and 0.52% for Quality Income Portfolio. Under the
agreement, each Portfolio also pays taxes, brokerage commissions
and nonadvisory expenses.
Administrator and transfer agent
The Fund pays the Advisor for shareholder accounting and transfer
agent services under two agreements. The first agreement, the
Administrative Services Agreement, has a declining annual rate that
decreases as assets increase. For each Fund, the fee ranges from
0.05% to 0.025%. The second agreement, the Transfer Agency
Agreement, has an annual fee of $25 per shareholder account.
Distributor
The Funds sell shares through the Distributor under a Distribution
Agreement. The Distributor is located at P.O. Box 59196,
Minneapolis, MN 55459-0196 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, direct marketing programs,
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 that Fund's average daily net assets for distribution-
related services. This fee will not cover all of the costs
incurred by the Distributor.
Total expenses paid by each Fund for the fiscal year ended May 31,
1997, were 1.10% for Government Income Fund, 1.20% for High Yield
Fund and 1.10% for Quality Income Fund,
<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 or 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
STATEMENT OF ADDITIONAL INFORMATION
FOR
STRATEGIST INCOME FUND, INC.
July 30, 1997
This Statement of Additional Information (SAI) is not a prospectus.
It should be read together with the Funds' prospectus and the
financial statements contained in the Annual Report which may be
obtained by calling American Express Financial Direct, 800-AXP-SERV
(TTY: 800-710-5260) or by writing to P.O. Box 59196, Minneapolis,
MN 55459-0196.
This SAI is dated July 30, 1997, and it is to be used with the
Funds' prospectus dated July 30, 1997, and the Annual Report for
the fiscal year ended May 31, 1997.
<PAGE>
PAGE 36
TABLE OF CONTENTS
Goals and Investment Policies......................See Prospectus
Additional Investment Policies...............................p. 3
Security Transactions........................................p. 13
Brokerage Commissions Paid to
Brokers Affiliated with the Advisor..........................p. 16
Performance Information......................................p. 17
Valuing Fund Shares..........................................p. 19
Investing in the Funds.......................................p. 20
Redeeming Shares.............................................p. 21
Capital Loss Carryover.......................................p. 22
Taxes........................................................p. 22
Agreements...................................................p. 23
Organizational Information...................................p. 26
Board Members and Officers...................................p. 26
Principal Holders of Securities..............................p. 33
Independent Auditors.........................................p. 33
Financial Statements.........................................p. 33
Prospectus...................................................p. 33
Appendix A: Description of Commercial Paper Ratings.........p. 34
Appendix B: Foreign Currency Transactions...................p. 35
Appendix C: Options and Interest Rate Futures Contracts.....p. 40
Appendix D: Mortgage-Backed Securities......................p. 46
Appendix E: Mortgage Pass-Through Certificates..............p. 47
Appendix F: Dollar-Cost Averaging...........................p. 50
<PAGE>
PAGE 37
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 High Yield Fund (High Yield Fund) and Strategist Quality
Income Fund (Quality Income Fund). (Government Income Fund, High
Yield Fund and Quality Income Fund are collectively the Funds, and
individually a Fund.) 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,
respectively, as defined in the Investment Company Act of 1940 (the
1940 Act). 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 Funds' other investment policies, each
Fund may invest its assets in an open-end management investment
company having the same investment objectives, policies and
restrictions as that 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.
'Purchase more than 10% of the outstanding voting securities of an
issuer.<PAGE>
PAGE 38
'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 39
'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 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:
'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
policy, 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.
'Invest more than 10% of its total assets in securities of
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 other
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
agencies and instrumentalities, the Advisor, 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.
<PAGE>
PAGE 40
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, 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 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
<PAGE>
PAGE 41
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 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.
'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.
<PAGE>
PAGE 42
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
policy, 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.
'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.
'Invest more than 10% of its net assets in securities and other
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, 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.
<PAGE>
PAGE 43
'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, 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 Portfolio 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 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 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.
The Portfolio may invest in foreign securities that are traded in
the form of American Depositary Receipts (ADRs). ADRs are receipts
typically issued by a U.S. bank or trust company evidencing
ownership of the underlying securities of foreign issuers.
European Depositary Receipts (EDRs) and Global Depositary Receipts<PAGE>
PAGE 44
(GDRs) are receipts typically issued by foreign banks or trust
companies, evidencing ownership of underlying securities issued by
either a foreign or U.S. issuer. Generally Depositary Receipts in
registered form are designed for use in the U.S. securities market
and Depositary Receipts in bearer form are designed for use in
securities markets outside the U.S. Depositary Receipts may not
necessarily be denominated in the same currency as the underlying
securities into which they may be converted. Depositary Receipts
also involve the risks of other investments in foreign securities.
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
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.<PAGE>
PAGE 45
'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.
'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
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
policy, 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.
<PAGE>
PAGE 46
'Invest more than 10% of its total assets in securities of
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.
'Invest more than 10% of its net assets in securities and other
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
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<PAGE>
PAGE 47
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. The Portfolio
may invest in foreign securities that are traded in the form of
American Depositary Receipts (ADRs). ADRs are receipts typically
issued by a U.S. bank or trust company evidencing ownership of the
underlying securities of foreign issuers. European Depositary
Receipts (EDRs) and Global Depositary Receipts (GDRs) are receipts
typically issued by foreign banks or trust companies, evidencing
ownership of underlying securities issued by either a foreign or
U.S. issuer. Generally Depositary Receipts in registered form are
designed for use in the U.S. securities market and Depositary
Receipts in bearer form are designed for use in securities markets
outside the U.S. Depositary Receipts may not necessarily be
denominated in the same currency as the underlying securities into
which they may be converted. Depositary Receipts also involve the
risks of other investments in foreign securities.
For a description of commercial paper rating, see Appendix A. For
a discussion on foreign currency transactions, see Appendix B. For
a discussion on options and interest rate futures contracts, see
Appendix C. For a discussion on mortgage-backed securities, see
Appendix D. For a discussion on mortgage pass-through
certificates, see Appendix E. For a discussion on dollar-cost
averaging, see Appendix F.
SECURITY TRANSACTIONS
Subject to policies set by the board, the Advisor is authorized to
determine, consistent with each Fund's and 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 fund or trust for which it
acts as investment manager. The Advisor carefully monitors
compliance with its Code of Ethics.
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 48
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.
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.
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 <PAGE>
PAGE 49
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.
All other transactions shall be placed on the basis of obtaining
the best available price and 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 all 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, funds or other
accounts advised by the Advisor or any of its subsidiaries. When a
Portfolio buys or sells the same security as another portfolio,
fund 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.
Government Income Portfolio, High Yield Portfolio and Quality
Income Portfolio paid total brokerage commissions of $-0-, $90,680,
and $75,832, respectively for the fiscal period ended May 31, 1997.
The Portfolios began operations on June 10, 1996. Substantially
all firms through whom transactions were executed provide research
services.
No transactions were directed to brokers because of research
services they provided to a Portfolio.
As of the fiscal year ended May 31, 1997, Government Income
Portfolio held no securities of its regular brokers or dealers or
of the parents of those brokers or dealers that derived more than
15% of gross revenue from securities-related activities.
As of the fiscal year ended May 31, 1997, the Portfolios listed
held securities of its regular brokers or dealers or of the parents
of those brokers or dealers that derived more than 15% of gross
revenue from securities-related activities as presented below:
<PAGE>
PAGE 50
Value of Securities
Owned at End of
Name of Issuer Fiscal Year
High Yield Portfolio
Merrill Lynch $ 8,751,958
Quality Income Portfolio
Bank of America $27,933,462
First Chicago 16,446,728
JP Morgan 9,034,437
Salomon Brothers 14,108,050
For the fiscal years 1997 and 1996, the portfolio turnover rates
were 146% and 115% for Government Income Portfolio, 92% and 61% for
High Yield Portfolio and 31% and 18% for Quality Income Portfolio.
Higher turnover rates may result in higher brokerage expenses. For
periods prior to the commencement of operations of Government
Income Portfolio, High Yield Portfolio and Quality Income
Portfolio, turnover rates are based on the turnover rates of the
corresponding IDS funds, which transferred all of their assets to
the Portfolios on June 10, 1996. A high turnover rate (in excess
of 100%) results in higher fees and expenses.
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 a Portfolio will receive prices and
executions at least as favorable as those offered by qualified
independent brokers performing similar brokerage and other services
for a Portfolio and (ii) the affiliate charges a 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.
No brokerage commissions were paid to brokers affiliated with the
Advisor for the fiscal year ended May 31, 1997.
<PAGE>
PAGE 51
PERFORMANCE INFORMATION
The Funds 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. An explanation of
the methods used by the Funds to compute performance follows below.
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)
c = the average daily number of shares outstanding
during the period that were entitled to receive<PAGE>
PAGE 52
dividends
d = the maximum offering price per share on the last
day of the period
The Funds annualized yields were 7.44% for Government Income Fund,
7.85% for High Yield Fund, and 6.84% for Quality Income Fund.
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
The Funds distribution yields were 6.81% for Government Income
Fund, 9.32% for High Yield Fund, and 7.18% for Quality Income Fund.
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, Morningstar, 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.
On June 10, 1996, IDS Federal Income Fund, IDS Selective Fund and
IDS Extra Income Fund (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, in exchange for
units of the Portfolios. Also on June 10, 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. Performance<PAGE>
PAGE 53
quoted by Government Income Fund, High Yield Fund and Quality
Income Fund 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
June 10, 1996, adjusted for differences in sales charge. The
historical performance for these periods 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.
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.
On June 2, 1997, the first business day following the end of the
fiscal year, the computations looked like this:
<TABLE>
<CAPTION>
Net assets before Shares outstanding Net asset value
Fund shareholder transactions at the end of previous day of one share
<S> <C> <C> <C>
Government Income $547,836 divided by 111,123 equals $4.93
High Yield 961,266 217,481 4.42
Quality Income 574,959 62,837 9.15
</TABLE>
In determining net assets before shareholder transactions, the
securities held by each 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.
'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<PAGE>
PAGE 54
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
each 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 Portfolio. 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, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
INVESTING IN THE FUNDS
Each 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,
SIPC account protection does not protect shareholders from share
price fluctuations.
<PAGE>
PAGE 55
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 (or a Fund) 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 each Portfolio's securities is not reasonably
practicable or it is not reasonably practicable for each Funds to
determine the fair value of its net assets, or
'The SEC, under the provisions of the 1940 Act, as amended,
declares a period of emergency to exist.
Should each 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 each Fund
Each 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 each Fund not to exercise this right with respect to any
shareholder whose account has a value of $1,000 or more ($500 in
the case of Custodial accounts, IRA's and other retirement plans).
In any event, before each 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 each 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 each Fund at the
beginning of such period. Although redemptions in excess of this
limitation would normally be paid in cash, each 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 such
redemption in cash would be detrimental to the existing
shareholders of each Fund as determined by the board. In such
circumstances, the securities distributed would be valued as set
forth in the Prospectus. Should each Fund distribute securities, a<PAGE>
PAGE 56
shareholder may incur brokerage fees or other transaction costs in
converting the securities to cash.
CAPITAL LOSS CARRYOVER
For federal income tax purposes, Government Income Fund, and High
Yield Fund had total capital loss carryovers of $851, and $8,417,
respectively, at May 31, 1997, that if not offset by subsequent
capital gains will expire as set out below:
Portfolio 2005 2006
Government Income $ -- $ 851
High Yield 1,684 6,733
It is unlikely that the board will authorize a distribution of any
net realized capital gains until the available capital loss
carryover has been offset or has expired except as required by
Internal Revenue Service rules.
Note: If this section does not apply, (CAPITAL LOSS CARRYOVER)
please delete this section AND the reference to it in the table of
contents.
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 each Fund received from domestic
(U.S.) securities. For the fiscal year ended May 31, 1997, none of
Government Income Fund's net investment income dividends, 7.38% of
High Yield Fund's net investment income dividends and 0.58% of
Quality Income Fund's net investment income dividends qualified for
the corporate deduction.
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<PAGE>
PAGE 57
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.
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 managing the
assets of the Portfolios, the Advisor is paid a fee based upon the
following schedule:
Government Income Portfolio and
High Yield Portfolio Quality Income Portfolio
Assets Annual rate at Assets Annual rate at
(billions) each asset level (billions) each asset level
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
On May 31, 1997, the daily rates applied to the Portfolio's net
assets on an annual basis were equal to 0.504% for Government
Income Portfolio, 0.562% for High Yield Portfolio and 0.510% for
Quality Income Portfolio. 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. For the fiscal year ended May
31, 1997, the total amount paid was $9,425,898 for Government
Income Portfolio, $15,502,709 for High Yield Portfolio and
$8,395,071 for Quality Income Portfolio. The amounts are allocated
among the Funds investing in the Portfolios.
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; office expenses; consultants' fees; compensation of
board members, officers and employees; corporate filing fees;
organizational expenses; expenses incurred in connection with <PAGE>
PAGE 58
lending portfolio securities; and expenses properly payable by each
Portfolio, approved by the board. Under the agreement, Government
Income Portfolio and Government Income Fund, High Yield Portfolio
and High Yield Fund, and Quality Income Portfolio and Quality
Income Fund paid nonadvisory expenses of $218,943 and $1,168,
$127,018 and $1,402 and $200,428 and $1,209 respectively, for the
year ended May 31, 1997 and for the fiscal period from June 10,
1996 to Nov. 30, 1996.
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:
Government Income Fund,
High Yield Fund and
Quality Income Fund
Assets Annual rate at
(billions) each asset level
First $1 0.050%
Next 1 0.045
Next 1 0.040
Next 3 0.035
Next 3 0.030
Over 9 0.025
On May 31, 1997, the daily rates applied to the Funds' net assets
on an annual basis were equal to 0.050% for Government Income Fund,
0.050% for High Yield Fund and 0.050% for Quality Income Fund. The
fee is calculated for each calendar day on the basis of net assets
as of the close of business two business days prior to the day for
which the calculation is made. For the fiscal year ended May 31,
1997, the Funds paid fees of $237 for Government Income Fund, $286
for High Yield Fund and $241 for Quality Income Fund.
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.
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
<PAGE>
PAGE 59
at the end of the day by a rate of $25 per year and dividing by the
number of days in the year. The fees paid to the Advisor may be
changed from time to time upon agreement of the parties without
shareholder approval. For the fiscal year ended May 31, 1997, the
Funds paid fees of $105 for Government Income Fund, $319 for High
Yield Fund and $104 for Quality Income Fund.
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 shares of the Funds. Under the Plan, the
Distributor is paid a fee at an annual rate of 0.25% of each 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 a Fund or by the Distributor. The
Plan (or any agreement related to it) will terminate in the event
of its assignment, as that term is defined in the 1940 Act, 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 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. For the fiscal year ended May 31, 1997,
the Funds paid fees of $1,185 for Government Income Fund, $1,428
for High Yield Fund and $1,206 for Quality Income Fund.
Custodian Agreement
The Trust's securities and cash for Government Income Fund are held
by American Express Trust Company, 1200 Northstar Center West, 625
Marquette Ave., Minneapolis, MN 55402-2307, through a custodian
agreement. The Trust's securities and cash for High Yield Fund and
Quality Income Fund are held by First Bank National Association, <PAGE>
PAGE 60
180 E. Fifth St., St. Paul, MN 55101-1631. 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 Trust pays the custodian a maintenance charge per Portfolio and
a charge per transaction in addition to reimbursing the custodian's
out-of-pocket expenses.
Total fees and expenses
For the fiscal year ended May 31, 1997, the Funds paid total fees
and nonadvisory expenses of $5,438 for Government Income Fund,
$6,803 for High Yield Fund and $5,325 for Quality Income Fund. The
Funds began operations on June 10, 1996. 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%.
ORGANIZATIONAL INFORMATION
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.
BOARD MEMBERS AND OFFICERS
The following is a list of the Company's board members who are
board members of all 15 funds in the Strategist Fund Group. All
shares of the Funds have cumulative voting rights with respect to
the election of board members.
Directors of Strategist Fund Group
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.
Jean B. Keffeler
Born in 1945
3424 Zenith Avenue South
Minneapolis, MN
Business and management consultant, Director, National Computer
Systems, American Paging Systems, Inc.
<PAGE>
PAGE 61
Thomas R. McBurney
Born in 1938
McBurney Management Advisors
1710 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 funds in the Strategist Fund Group. Executive
vice president and director of the Advisor. Chairman of the board
and chief executive officer of IDS Life Insurance Company.
Director, IDS Life Funds.
*Interested person of the Company by reason of being an officer,
board member, employee and/or shareholder of the Advisor or
American Express.
In addition to Mr. Mitchell, who is president, the Funds' other
officers are:
Eileen J. Newhouse
Born in 1955
IDS Tower 10
Minneapolis, MN
Secretary of all funds in the Strategist Fund Group. Counsel of
the Advisor.
Melinda S. Urion
Born in 1953
IDS Tower 10
Minneapolis, MN
Treasurer of all funds in the Strategist Fund Group. Director,
senior vice president and chief financial officer of the Advisor.
Director and executive vice president and controller of IDS Life
Insurance Company.
Compensation for the Fund Board Members
Once the assets of a Fund reach $20 million, members of that Fund's
board who are not officers of the Advisor or an affiliate receive
an annual fee of $1,000. Once the assets of all funds in the
Strategist Fund Group reach $100 million, members of the board who
are not officers of the Advisor or an affiliate also will receive a
fee of $1,000 for attendance at board meetings. Board members <PAGE>
PAGE 62
serving more than one fund will receive an aggregate of $1,000
whether attending one or more meetings held on the same day. The
cost of the fee will be shared by the funds served by the director.
During the fiscal year ended May 31, 1997, the members of the board
received no compensation from the Funds'. On May 31, 1997, the
Funds' board members and officers as a group owned less than 1% of
the outstanding shares of each Fund.
The following is a list of the Trust's board members. They serve
15 Master Trust portfolios and 47 IDS and IDS Life funds (except
for William H. Dudley who does not serve the nine IDS Life funds).
All units have cumulative voting rights with respect to the
election of board members.
Trustees of the Preferred Master Trust Group
H. Brewster Atwater, Jr.
Born in 1941
4900 IDS Tower
Minneapolis, MN
Former Chairman and chief executive officer, General Mills, Inc.
Director, Merck & Co., Inc. and Darden Restaurants, Inc.
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, Union Pacific Resources and FPL Group, Inc.
(holding company for Florida Power and Light).
William H. Dudley**
Born in 1932
2900 IDS Tower
Minneapolis, MN
Senior advisor to the chief executive officer of the Advisor.
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.
<PAGE>
PAGE 63
David R. Hubers+**
Born in 1943
2900 IDS Tower
Minneapolis, MN
President, chief executive officer and director of the Advisor.
Previously, senior vice president, finance and chief financial
officer of the Advisor.
Heinz F. Hutter+'
Born in 1929
P.O. Box 2187
Minneapolis, MN
Former president and chief operating officer, Cargill, Incorporated
(commodity merchants and processors).
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. Former nine-term U.S.
Congressman, U.S. Secretary of Defense and Presidential Counsellor.
Director, 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
Chairman of the board, Board Services Corporation (provides
administrative services to boards). Director, trustee and officer
of registered investment companies whose boards are served by the
company. Former vice chairman of the board, Cargill, Incorporated
(commodity merchants and processors).
<PAGE>
PAGE 64
Alan K. Simpson
Born in 1931
1201 Sunshine Ave.
Cody, WY
Former three-term United States Senator for Wyoming. Former
Assistant Republican Leader, U.S. Senate. Director, PacifiCorp
(electric power).
Edson W. Spencer+
Born in 1926
4900 IDS Center
80 S. 8th St.
Minneapolis, MN
President, Spencer Associates Inc. (consulting). Former chairman
of the board and chief executive officer, Honeywell Inc. Director,
Boise Cascade Corporation (forest products). Member of
International Advisory Council of NEC (Japan).
John R. Thomas**
Born in 1937
2900 IDS Tower
Minneapolis, MN
Senior vice president and director of the Advisor.
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 retired chief executive officer, The
Valspar Corporation (paints). Director, Bemis Corporation
(packaging), Donaldson Company (air cleaners & mufflers) and
General Mills, Inc. (consumer foods).
+ 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 the Advisor or
American Express.
<PAGE>
PAGE 65
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, treasurer and corporate secretary of Board Services
Corporation. Vice president, general counsel and secretary for the
Trust.
Officers who are also officers and/or employees of the Advisor:
Peter J. Anderson
Born in 1942
IDS Tower 10
Minneapolis, MN
Director and senior vice president-investments of the Advisor.
Vice president-investments for the Trust.
Melinda S. Urion
Born in 1953
IDS Tower 10
Minneapolis, MN
Director, senior vice president and chief financial officer of the
Advisor. Director, executive vice president and controller of IDS
Life Insurance Company. Treasurer for the Trust.
Compensation for the Portfolio Board Members
Once the assets of a Portfolio reach $20 million, members of that
Portfolio's board who are not officers of a Portfolio or of the
Advisor receive an annual fee of $900 for Government Income
Portfolio, $1,400 for High Yield Portfolio and $900 for Quality
Income Portfolio. They also receive attendance and other fees.
These fees include for each day in attendance at meetings of the
board, $50; for meeting of the Contracts and Investment Review
Committees, $50; for meetings of the Audit committee, $25; for
travelling out-of-state, $9 for Government Income Portfolio, $14
for High Yield Portfolio and $9 for Quality Income Portfolio; and
as Chair of the Contracts, $86. Expenses for attending meetings
are reimbursed.
<PAGE>
PAGE 66
During the fiscal year ended May 31, 1997, the members of the
board, for attending up to 31 meetings, received the following
compensation, in total, from all Portfolios in the Preferred Master
Trust Group:
<TABLE>
<CAPTION>
Compensation Table
for Government Income Portfolio
Pension or Estimated Total cash
Aggregate Retirement annual compensation from
compensation benefits benefit the Preferred Master
from the accrued as upon Trust Group and IDS
Board member Portfolio Portfolio expenses retirement MUTUAL FUND GROUP
<S> <C> <C> <C> <C>
H. Brewster Atwater, Jr. $1,084 $0 $0 $ 61,900
(part of year)
Lynne V. Cheney 1,584 0 0 92,800
Robert F. Froehlke 1,716 0 0 100,600
Heinz F. Hutter 1,669 0 0 97,800
Anne P. Jones 1,851 0 0 108,500
Melvin R. Laird 1,612 0 0 94,600
Alan K. Simpson 736 0 0 42,100
(part of year)
Edson W. Spencer 2,072 0 0 121,400
Wheelock Whitney 1,811 0 0 106,000
C. Angus Wurtele 1,754 0 0 102,700
Compensation Table
for High Yield Portfolio
Pension or Estimated Total cash
Aggregate Retirement annual compensation from
compensation benefits benefit the Preferred Master
from the accrued as upon Trust Group and IDS
Board member Portfolio Portfolio expenses retirement MUTUAL FUND GROUP
H. Brewster Atwater, Jr. $1,347 $0 $0 $ 61,900
(part of year)
Lynne V. Cheney 1,920 0 0 92,800
Robert F. Froehlke 2,038 0 0 100,600
Heinz F. Hutter 1,991 0 0 97,800
Anne P. Jones 2,198 0 0 108,500
Melvin R. Laird 1,948 0 0 94,600
Alan K. Simpson 964 0 0 42,100
(part of year)
Edson W. Spencer 2,394 0 0 121,400
Wheelock Whitney 2,133 0 0 106,000
C. Angus Wurtele 2,076 0 0 102,700
Compensation Table
for Quality Income Portfolio
Pension or Estimated Total cash
Aggregate Retirement annual compensation from
compensation benefits benefit the Preferred Master
from the accrued as upon Trust Group and IDS
Board member Portfolio Portfolio expenses retirement MUTUAL FUND GROUP
H. Brewster Atwater, Jr. $1,084 $0 $0 $ 61,900
(part of year)
Lynne V. Cheney 1,567 0 0 92,800
Robert F. Froehlke 1,699 0 0 100,600
Heinz F. Hutter 1,652 0 0 97,800
Anne P. Jones 1,835 0 0 108,500
Melvin R. Laird 1,595 0 0 94,600
Alan K. Simpson 736 0 0 42,100
(part of year)
Edson W. Spencer 2,055 0 0 121,400
Wheelock Whitney 1,794 0 0 106,000
C. Angus Wurtele 1,737 0 0 102,700
</TABLE>
During the fiscal year ended May 31, 1997, no board member or
officer earned more than $60,000 from the Government Income
Portfolio, High Yield Portfolio and Quality Income Portfolio, <PAGE>
PAGE 67
respectively. All board members and officers as a group earned
$9,522 from Government Income Portfolio, $11,103 from High Yield
Portfolio and $18,503 from Quality Income Portfolio.
PRINCIPAL HOLDERS OF SECURITIES
As of May 30, 1997, Frank U. Beck and Jane P. Beck and Dr. Steven
Alan Milman, respectively held 6.48% and 6.44% of Strategist High
Yield Fund shares. Additional information on principal holders of
securities may be obtained by writing to American Express Financial
Direct, P.O. Box 59196, Minneapolis, MN 55459-0196.
INDEPENDENT AUDITORS
The Funds' and corresponding Portfolios' financial statements
contained in the Annual Report to shareholders for the fiscal year
ended May 31, 1997 were 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.
FINANCIAL STATEMENTS
The Independent Auditor's Report and the Financial Statements,
including Notes to the Financial Statements and the Schedule of
Investments in Securities, contained in the 1997 Annual Report to
shareholders, pursuant to Section 30(d) of the 1940 Act, as
amended, are hereby incorporated in this SAI by reference. No
other portion of the Annual Report, however, is incorporated by
reference.
PROSPECTUS
The prospectus dated July 30, 1997, is hereby incorporated in this
SAI by reference.
<PAGE>
PAGE 68
APPENDIX A
DESCRIPTION OF COMMERCIAL PAPER RATINGS
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 69
APPENDIX B
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 <PAGE>
PAGE 70
would obligate a Portfolio to deliver an amount of foreign currency
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 71
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 72
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
futures. Currency futures contracts are similar to currency <PAGE>
PAGE 73
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>
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APPENDIX C
OPTIONS AND INTEREST RATE FUTURES CONTRACTS
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 75
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.
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 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 <PAGE>
PAGE 76
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 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
<PAGE>
PAGE 77
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.
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 <PAGE>
PAGE 78
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
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<PAGE>
PAGE 79
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 80
APPENDIX D
MORTGAGE-BACKED SECURITIES
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 a Portfolio, 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 a Portfolio.
Stripped Mortgage-Backed Securities. A 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. 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. A Portfolio 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 underperform like-duration Treasury securities.
<PAGE>
PAGE 81
APPENDIX E
MORTGAGE PASS-THROUGH CERTIFICATES
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 on a monthly basis.
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,
but may be different than the quoted yield on certificates.
GNMA, a wholly-owned U.S. government corporation within the
Department of Housing and Urban Development (HUD). GNMA pass-
though certificates are guaranteed by the full faith and credit of
the United States as to the timely payment of principal and
interest. FHLMC and FNMA are government-sponsored entities. These
government-sponsored entities are not backed by the full faith and
credit of the United States for repayment of mortgage-backed
securities, but do have the right to borrow from the Treasury.
While GNMA and FNMA guarantee the timely payment of both interest
and principal, FHLMC only guarantees the timely payment of interest
and the eventual payment of principal. Each certificate issued by
GNMA or FNMA evidences an interest in a specific pool of mortgage
loans insured by the Farmers Home Administration (FHA) or
guaranteed by the Veterans Administration (VA). GNMA and FNMA were
developed to support the FHA and VA mortgage market while FHLMC was
created by Congress to provide additional support for conventional
mortgages not insured by the FHA or VA.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market
issuers also create pass-through pools of mortgage loans. Pools
created by such non-governmental issuers generally offer a higher
rate of interest than U.S. government and government-related pools
because there are no direct or indirect U.S. government guarantees
of payments. Timely payment of interest and principal of these
pools is supported by various forms of insurance or guarantees,
including individual loan, title, pool and hazard insurance. The
insurance and guarantees are issued by U.S. government entities,
private insurers and the mortgage poolers.
Underlying Mortgages of the Pool. Pools consist of whole mortgage
loans or participations in loans. The majority of these loans are
made to purchasers of 1-4 family homes. The terms and
characteristics of the mortgage instruments generally are uniform
within a pool but may vary among pools. For example, in addition
to fixed-rate fixed-term mortgages, the Portfolio may purchase
pools of variable rate mortgages, growing equity mortgages,
graduated payment mortgages and other types.
<PAGE>
PAGE 82
All servicers apply standards for qualification to local lending
institutions which originate mortgages for the pools. Servicers
also establish credit standards and underwriting criteria for
individual mortgages included in the pools. In addition, many
mortgages included in pools are insured through private mortgage
insurance companies.
Average Life of Certificates. The average life of certificates
varies with the maturities of the underlying mortgage instruments
which have maximum maturities of 30 years. The average life is
likely to be substantially less than the original maturity of the
mortgage pools underlying the securities as the result of
prepayments or refinancing of such mortgages. Such prepayments are
passed through to the registered holder with the regular monthly
payments of principal and interest.
As prepayment rates vary widely, it is not possible to accurately
predict the average life of a particular pool. It is customary in
the mortgage industry in quoting yields on a pool of 30-year
mortgages to compute the yield as if the pool were a single loan
that is amortized according to a 30-year schedule and that is
prepaid in full at the end of the 12th year. For this reason, it
is standard practice to treat GNMA certificates as 30-year
mortgage-backed securities which prepay fully in the 12th year.
In contrast to mortgage loans backing GNMA pass-throughs, which can
be assumed by the buyer, conventional loans backing FHLMC and FNMA
pass-through certificates are due on sale. The prepayment rate is
higher for these types of conventional loans because of the non-
assumability of FHLMC and FNMA mortgages.
Calculation of Yields. Yields on pass-through securities are
typically quoted based on the maturity of the underlying
instruments and the associated average life assumption.
Actual pre-payment experience may cause the yield to differ from
the assumed average life yield. When mortgage rates drop, pre-
payments will increase, thus reducing the yield. Reinvestment of
pre-payments may occur at higher or lower interest rates than the
original investment, thus affecting the yield of the Portfolio.
The compounding effect from reinvestments of monthly payments
received by the Portfolio will increase the yield to shareholders
compared to bonds that pay interest semi-annually. The yield also
may be affected if the certificate was issued at a premium or
discount, rather than at par. This also applies after issuance to
certificates trading in the secondary market at a premium or
discount.
"When-Issued" 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 Portfolio. Payment and interest terms, however,
are fixed at the time the purchaser enters into the commitment.
However, the yield on a comparable certificate when the transaction
<PAGE>
PAGE 83
is consummated may vary from the yield on the certificate at the
time that the when-issued transaction was made. The Portfolio does
not pay for the securities or start earning interest on them until
the contractual settlement date. When-issued securities are
subject to market fluctuations and they may affect the Portfolio's
gross assets the same as owned securities.
Market for Certificates. Since the inception of the mortgage
market in the 1970's, the amount of certificates outstanding has
grown rapidly. The size of the market and the active participation
in the secondary market by securities dealers and many types of
investors make the certificates a highly liquid instrument. Prices
of certificates are readily available from securities dealers and
depend on, among other things, the level of market interest rates,
the certificate's coupon rate and the prepayment experience of the
pool of mortgages underlying each certificate.
<PAGE>
PAGE 84
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 technique 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 on a regular basis
through changing market conditions, including times when the price
of their shares falls or the market declines, 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>
Independent auditors' report
The board and shareholders
Strategist Income Fund, Inc.:
We have audited the accompanying statements of assets and liabilities of
Strategist Government Income Fund, Strategist High Yield Fund and Strategist
Quality Income Fund (series within Strategist Income Fund, Inc.) as of May 31,
1997, and the related statements of operations, changes in net assets and the
financial highlights for the period from June 10, 1996 (commencement of
operations) to May 31, 1997. These financial statements and financial highlights
are the responsibility of fund management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
mistatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Strategist Government Income
Fund, Strategist High Yield Fund and Strategist Quality Income Fund at May 31,
1997, and the results of their operations, the changes in their net assets and
the financial highlights for the period from June 10, 1996 (commencement of
operations) to May 31, 1997, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
July 3, 1997
<PAGE>
Strategist Income Fund, Inc.
Financial statements
Statements of assets and liabilities
Strategist Income Fund, Inc.
May 31, 1997
Strategist Strategist Strategist
Government High Quality
Income Fund Yield Fund Income Fund
Assets
Investment in corresponding
Portfolio (Note 1) $621,195 $977,652 $593,041
Expense receivable from AEFC 213 55 6
Organizational costs (Note 1) 2,104 2,095 2,198
- --------------------------------------------------------------------------------
Total assets 623,512 979,802 595,245
- --------------------------------------------------------------------------------
Liabilities
Dividends payable to shareholders 100 240 230
Accrued distribution fee 4 7 4
Other accrued expenses 75,552 19,683 20,211
- --------------------------------------------------------------------------------
Total liabilities 75,656 19,930 20,445
- --------------------------------------------------------------------------------
Net assets applicable to
outstanding capital stock $547,856 $959,872 $574,800
- --------------------------------------------------------------------------------
Represented by
Capital stock -- authorized 3,000,000,000 shares
per Fund of $.01 par value: outstanding
111,123; 217,481 and 62,837 shares$ 1,111 $ 2,175 $ 628
Additional paid-in capital 542,329 941,499 560,747
Undistributed net investment income 1,417 1,143 1,692
Accumulated net realized gain (loss)
(Notes 1 and 4) (1,510) (8,388) 2,431
Unrealized appreciation 4,509 23,443 9,302
- --------------------------------------------------------------------------------
Total -- representing net assets applicable
to outstanding capital stock $547,856 $959,872 $574,800
- --------------------------------------------------------------------------------
Net asset value per share of
outstanding capital stock $ 4.93 $ 4.41 $ 9.15
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
<PAGE>
Statements of operations
Strategist Income Fund, Inc.
For the period from June 10, 1996
(commencement of operations) to May 31, 1997
Strategist Strategist Strategist
Government High Quality
Income Fund Yield Fund Income Fund
Investment income
Income:
Dividends $ -- $ 3,813 $ 193
Interest 36,193 53,906 35,714
- --------------------------------------------------------------------------------
Total income 36,193 57,719 35,907
- --------------------------------------------------------------------------------
Expenses (Note 2):
Distribution fee 1,185 1,428 1,206
Transfer agency fee 105 319 104
Administrative services fees and expenses 237 286 241
Postage 1,736 7,972 1,657
Registration fees 103,976 41,420 51,301
Reports to shareholders 1,334 3,162 898
Audit fees 9,525 2,641 3,000
Other 1,266 5,083 3,521
- --------------------------------------------------------------------------------
Total feeder expenses 119,364 62,311 61,928
Expenses, including investment
management services fee, allocated
from corresponding Portfolio 2,530 3,368 2,565
- --------------------------------------------------------------------------------
Total expenses 121,894 65,679 64,493
Less expenses reimbursed by AEFC (116,669) (58,876) (59,168)
- --------------------------------------------------------------------------------
Total net expenses 5,225 6,803 5,325
- --------------------------------------------------------------------------------
Investment income-- net 30,968 50,916 30,582
- --------------------------------------------------------------------------------
Realized and unrealized gain (loss) -- net
Net realized gain (loss) on security and
foreign currency transactions 4,229 (8,388) 4,207
Net realized loss on futures contracts (7,047) -- (2,331)
Net realized gain on option contracts
written 5,821 -- 635
- --------------------------------------------------------------------------------
Net realized gain (loss) on investments 3,003 (8,388) 2,511
Net change in unrealized appreciation or
depreciation on investments 4,509 23,443 9,302
- --------------------------------------------------------------------------------
Net gain on investments 7,512 15,055 11,813
- --------------------------------------------------------------------------------
Net increase in net assets resulting
from operation $38,480 $65,971 $42,395
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
<PAGE>
Strategist Income Fund, Inc.
Statements of changes in net assets
Strategist Income Fund, Inc.
For the period from June 10, 1996
(commencement of operations) to May 31, 1997
Strategist Strategist Strategist
Government High Quality
Income Fund Yield Fund Income Fund
Operations and distributions
Investment income-- net $ 30,968 $ 50,916 $ 30,582
Net gain (loss) on investments 3,003 (8,388) 2,511
Net change in unrealized
appreciation or depreciation 4,509 23,443 9,302
- --------------------------------------------------------------------------------
Net increase in net assets
resulting from operations 38,480 65,971 42,395
Distributions to shareholders from:
Net investment income (30,279) (50,495) (29,382)
Net realized gain (4,513) -- --
- --------------------------------------------------------------------------------
Total distributions (34,792) (50,495) (29,382)
- --------------------------------------------------------------------------------
Capital share transactions (Note 3)
Proceeds from sales 485,789 884,081 511,382
Reinvestment of distributions
at net asset value 34,648 50,255 29,123
Payment for redemptions (16,269) (19,940) (8,718)
- --------------------------------------------------------------------------------
Increase in net assets from
capital share transactions 504,168 914,396 531,787
Total increase in net assets 507,856 929,872 544,800
Net assets at beginning of
period (Note 1) 40,000 30,000 30,000
- --------------------------------------------------------------------------------
Net assets at end of period
(including undistributed net
investment income of $1,417,
$1,143, and $1,692) $547,856 $959,872 $574,800
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
<PAGE>
Notes to financial statements
Strategist Income Fund, Inc.
1. Summary of significant accounting policies
Strategist Government Income Fund (Government Income Fund), Strategist High
Yield Fund (High Yield Fund), and Strategist Quality Income Fund (Quality Income
Fund) are series of capital stock within Strategist Income Fund, Inc. Each Fund
is registered under the Investment Company Act of 1940 (as amended) as a
diversified, open-end management investment company. On April 15, 1996, American
Express Financial Corporation (AEFC) invested $40,000 in Government Income Fund,
$30,000 in High Yield Fund, and $30,000 in Quality Income Fund which represented
8,147 shares for Strategist Government Income Fund, 6,961 shares for Strategist
High Yield Fund, and 3,352 shares for Strategist Quality Income Fund. Operations
did not formally commence until June 10, 1996.
Investments in Portfolios
Each of the Funds seeks to achieve its investment objectives by investing all of
its net investable assets in a corresponding series (the Portfolio) of Income
Trust (the Trust).
Government Income Fund invests all of its assets in the Government Income
Portfolio, an open-end investment company that has the same objectives as the
Fund. Government Income Portfolio invests primarily in U.S. government and
government agency securities.
High Yield Fund invests all of its assets in the High Yield Portfolio, an
open-end investment company that has the same objectives as the Fund. High Yield
Portfolio invests primarily in long-term corporate bonds in the lower ranking
categories, commonly known as junk bonds.
Quality Income Fund invests all of its assets in the Quality Income Portfolio,
an open-end investment company that has the same objectives as the Fund. Quality
Income Portfolio invests primarily in investment-grade bonds.
Each Fund records daily its share of the corresponding Portfolio's income,
expenses and realized and unrealized gains and losses. The financial statements
of the Portfolios are included elsewhere in this report and should be read in
conjunction with the Funds' financial statements. Each Fund records its
investment in the corresponding Portfolio at value that is equal to the Fund's
proportionate ownership interest in the net assets of the Portfolio. As of May
31, 1997, the percentages of the corresponding Portfolio owned by Government
Income Fund, High Yield Fund, and Quality Income Fund were 0.03%, 0.03%, and
0.04%, respectively. Valuation of securities held by the Portfolios is discussed
in Note 1 of the Portfolios' "Notes to financial statements," which are included
elsewhere in this report.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of increase and decrease in net assets from operations
during the period. Actual results could differ from those estimates.
Organizational costs
Each Fund incurred 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.
Federal taxes
Since each Fund's policy is to comply with all sections of the Internal Revenue
Code applicable to regulated investment companies and to distribute all of its
taxable income to the shareholders, no provision for income or excise taxes is
required.
Net investment income (loss) and net realized gains (losses) allocated from the
Portfolios may differ for financial statement and tax purposes primarily because
of the deferral of losses on certain futures contracts, the recognition of
certain foreign currency gains (losses) as ordinary income (loss) for tax
purposes, and losses deferred due to "wash sale" transactions. The character of
distributions made during the year from net investment income or net realized
gains may differ from their ultimate characterization for federal income tax
purposes. Also, due to the timing of dividend distributions, the fiscal year in
which amounts are distributed may differ from the year that the income or
realized gains (losses) were recorded by the Funds.
On the statement of assets and liabilities, due to permanent book-to-tax
differences, undistributed net investment income and accumulated net realized
gain (loss) have been increased (decreased), resulting in net reclassification
adjustments to additional paid-in capital as follows:
Government High Quality
Income Yield Income
Fund Fund Fund
- --------------------------------------------------------------------------------
Undistributed net
investment income $728 $722 $492
Accumulated net
realized loss -- -- (80)
- --------------------------------------------------------------------------------
Additional paid-in
capital reduction $728 $722 $412
- --------------------------------------------------------------------------------
Dividends to shareholders
Dividends from net investment income, declared daily and paid monthly for
Government Income Fund, High Yield Fund, and Quality Income Fund, are reinvested
in additional shares of the Funds at net asset value or payable in cash. Capital
gains, when available, are distributed along with the last income dividend of
the calendar year.
Other
At May 31, 1997, AEFC owned 109,108 shares of Government Income Fund, 118,325
shares of High Yield Fund, and 59,180 shares of Quality Income Fund.
2. Expenses and sales charges
In addition to the expenses allocated from the Portfolio, each Fund accrues its
own expenses as follows:
Each Fund entered into agreements with AEFC for providing administrative
services and serving as transfer agent.
Under its Administrative Services Agreement, each 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, each Fund also pays taxes, audit and certain legal fees,
registration fees for shares, office expenses, consultants' fees, compensation
of board members, corporate filing fees, organizational expenses, and any other
expenses properly payable by the Funds and approved by the board.
Under a separate Transfer Agency Agreement, AEFC maintains shareholder accounts
and records. Each Fund pays AEFC an annual fee per shareholder account of $25.
Under a Plan and Agreement of Distribution, each Fund pays American Express
Service Corporation (the Distributor) a distribution fee at an annual rate of
0.25% of the Fund's average daily net assets for distribution related services.
A redemption fee of 0.50% is applied and retained by High Yield Fund if shares
are redeemed or exchanged within 180 days of purchase.
AEFC and the Distributor have agreed to waive certain fees and to absorb certain
other of Fund expenses until May 31, 1997. Under this agreement, each Fund's
total expenses will not exceed 1.10% (1.20% for Strategist High Yield Fund) of
each of the Fund's average daily net assets.
3. Capital share transactions
Transactions in shares of capital stock for the period indicated are as follows:
Period ended May 31, 1997
Government High Quality
Income Yield Income
Fund* Fund* Fund*
- --------------------------------------------------------------------------------
Sold 99,299 203,619 57,264
Reinvested dividends 6,996 11,458 3,164
Redemptions (3,319) (4,557) (943)
- --------------------------------------------------------------------------------
Net increase 102,976 210,520 59,485
- --------------------------------------------------------------------------------
*Inception date was June 10, 1996.
4. For federal income tax purposes, Government Income Fund and High Yield Fund
had capital loss carryovers at May 31, 1997 of $851 and $8,417 respectively,
that if not offset by subsequent capital gains, will expire in 2005 and 2006. It
is unlikely the board will authorize a distribution of any net realized gains
for a fund until its available capital loss carryover has been offset or
expires.
5. Financial highlights
The table below shows certain important information for evaluating each Fund's
results.
Government High Quality
Income Yield Income
Fiscal period ended May 31, 1997 Fund(a) Fund(a) Fund(a)
Per share income and capital changes(b)
Net asset value, beginning of period $4.91 $4.31 $8.95
Income from investment operations:
Net investment income .30 .38 .55
Net gains (both realized and unrealized) .06 .09 .18
Total from investment operations .36 .47 .73
Less distributions:
Distributions from net investment income (.30) (.37) (.53)
Distributions from gains (.04) -- --
Total distributions (.34) (.37) (.53)
Net asset value, end of period $4.93 $4.41 $9.15
Ratios/supplemental data
Net assets, end of period (in thousands) $548 $960 $575
Ratio of expenses to average daily
net assets 1.10%c,d 1.19%c,d 1.10%c,d
Ratio of net income to average daily
net assets 6.48%d 8.90%d 6.33%d
Total return 7.6% 11.4% 8.3%
Portfolio turnover rate
(excluding short-term securities) 146% 92% 31%
(a) Inception date was June 10, 1996.
(b) For a share outstanding throughout the period. Rounded to the nearest cent.
(c) The Advisor and Distributor voluntarily limited total operating expenses to
1.10% (1.20% for High Yield Fund) of average daily net assets. Without this
agreement, the ratio of expenses to average daily net assets would have been
25.68% for Government Income Fund, 11.48% for High Yield Fund and 13.34% for
Quality Income Fund.
(d)Adjusted to an annual basis.
<PAGE>
Independent auditors' report
The board of trustees and unitholders Income Trust:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments in securities, of Government Income
Portfolio (a series of Income Trust) as of May 31, 1997, and the related
statements of operations and changes in net assets for the period from
June 10, 1996 (commencement of operations) to May 31, 1997. These
financial statements are the responsibility of portfolio management. Our
responsibility is to express an opinion on these financial statements
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 statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. Investment securities held in custody are confirmed to us by
the custodian. As to securities purchased and sold but not received or
delivered, and securities on loan, we request confirmations from brokers,
and where replies are not received, we carry out other appropriate
auditing procedures. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Government Income
Portfolio at May 31, 1997, and the results of its operations and the
changes in its net assets for the period from June 10, 1996 (commencement
of operations) to May 31, 1997, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
July 3, 1997
<PAGE>
<TABLE>
<CAPTION>
Financial statements
Statement of assets and liabilities
Government Income Portfolio
May 31, 1997
Assets
<S> <C>
Investments in securities, at value (Note 1)
(identified cost $2,635,844,599) $2,653,909,225
Accrued interest receivable 22,036,753
Receivable for investment securities sold 7,238,555
U.S. government securities held as collateral (Note 5) 41,230,707
- ----------
Total assets 2,724,415,240
-------------
Liabilities
Disbursements in excess of cash on demand deposit 10,779,886
Payable for investment securities purchased 145,986,279
Payable upon return of securities loaned (Note 5) 351,697,582
Accrued investment management services fee 30,473
Other accrued expenses 72,728
Option contracts written, at value (premium received $10,165,924) (Note 6) 11,865,322
----------
Total liabilities 520,432,270
-----------
Net assets $2,203,982,970
==============
See accompanying notes to financial statements.
<PAGE>
Financial statements
Statement of operations
Government Income Portfolio
For the period from June 10, 1996
(commencement of operations) to May 31, 1997
Investment income
Income:
Interest $134,618,837
------------
Expenses (Note 2):
Investment management services fee 9,425,898
Compensation of board members 8,427
Compensation of officers 1,095
Custodian fees 180,413
Audit fees 29,500
Other 4,207
-----
Total expenses 9,649,540
Earnings credits on cash balances (Note 2) (4,699)
- ------
Total net expenses 9,644,841
---------
Investment income -- net 124,973,996
-----------
Realized and unrealized gain (loss) -- net
Net realized gain on security transactions (Note 3) 6,039,157
Net realized loss on financial futures contracts (23,335,737)
Net realized gain on option contracts written (Note 6) 17,075,369
- ----------
Net realized loss on investments (221,211)
Net change in unrealized appreciation or depreciation 22,413,297
----------
Net gain on investments 22,192,086
----------
Net increase in net assets resulting from operations $147,166,082
============
See accompanying notes to financial statements.
<PAGE>
Statement of changes in net assets
Government Income Portfolio For the
period from June 10, 1996
(commencement of operations) to May 31, 1997
Operations
Investment income-- net $ 124,973,996
Net realized loss on investments (221,211)
Net change in unrealized appreciation or depreciation 22,413,297
----------
Net increase in net assets resulting from operations 147,166,082
Net contributions 2,056,776,888
-------------
Total increase in net assets 2,203,942,970
Net assets at beginning of period (Note 1) 40,000
------
Net assets at end of period $2,203,982,970
==============
See accompanying notes to financial statements.
</TABLE>
<PAGE>
Notes to financial statements
Government Income Portfolio
1
Summary of
significant
accounting policies
Government Income Portfolio (the Portfolio) is a series of Income Trust
(the Trust) and is registered under the Investment Company Act of 1940 (as
amended) as a diversified, open-end management investment company.
Government Income Portfolio seeks to provide a high level of current
income and safety of principal consistent with investment in U.S.
government and government agency securities. The Declaration of Trust
permits the Trustees to issue non-transferable interests in the Portfolio.
On April 15, 1996, American Express Financial Corporation (AEFC)
contributed $40,000 to the Portfolio. Operations did not formally commence
until June 10, 1996, at which time an existing fund transferred its assets
to the Portfolio in return for an ownership percentage of the Portfolio.
Significant accounting polices followed by the Portfolio are summarized
below:
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of increase and decrease in
net assets from operations during the period. Actual results could differ
from those estimates.
Valuation of securities
All securities are valued at the close of each business day. Securities
traded on national securities exchanges or included in national market
systems are valued at the last quoted sales price; securities for which
market quotations are not readily available are valued at fair value
according to methods selected in good faith by the board. Determination of
fair value involves, among other things, reference to market indexes,
matrixes and data from independent brokers. Short-term securities maturing
in more than 60 days from the valuation date are valued at the market
price or approximate market value based on current interest rates; those
maturing in 60 days or less are valued at amortized cost.
Option transactions
In order to produce incremental earnings, protect gains and facilitate
buying and selling of securities for investment purposes, the Fund may buy
and sell put and call options and write covered call options on portfolio
securities and may write cash-secured put and call options on U.S.
government securities. The Fund also 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.
The risk in writing a call option is that the Fund gives up the
opportunity of profit if the market price of the security increases. The
risk in writing a put option is that the Fund may incur a loss if the
market price of the security decreases and the option is exercised. The
risk in buying an option is that the Fund pays a premium whether or not
the option is exercised. The Fund also has the additional risk of not
being able to enter into a closing transaction if a liquid secondary
market does not exist. The Fund also may write over-the-counter options
where the completion of the obligation is dependent upon the credit
standing of the other party.
Option contracts are valued daily at the closing prices on their primary
exchanges and unrealized appreciation or depreciation is recorded. The
Fund will realize a gain or loss upon expiration or closing of the option
transaction. When options on debt securities or futures are exercised, the
Fund will realize a gain or loss. When other options are exercised, the
proceeds on sales for a written call option, the purchase cost for a
written put option or the cost of a security for a purchased put or call
option is adjusted by the amount of premium received or paid.
Futures transactions
In order to gain exposure to or protect itself from changes in the market,
the Portfolio may buy and sell financial futures contracts. Risks of
entering into futures contracts and related options include the
possibility that there may be an illiquid market and that a change in the
value of the contract or option may not correlate with changes in the
value of the underlying securities.
Upon entering into a futures contract, the Portfolio is required to
deposit either cash or securities in an amount (initial margin) equal to a
certain percentage of the contract value. Subsequent payments (variation
margin) are made or received by the Portfolio each day. The variation
margin payments are equal to the daily changes in the contract value and
are recorded as unrealized gains and losses. The Portfolio recognizes a
realized gain or loss when the contract is closed or expires.
Securities purchased on a when-issued basis
Delivery and payment for securities that have been purchased by the
Portfolio on a forward-commitment or when-issued basis can take place one
month or more after the transaction date. During this period, such
securities are subject to market fluctuations, and they may affect the
Portfolio's gross assets the same as owned securities. The Portfolio
designates cash or liquid high-grade short-term debt securities at least
equal to the amount of its commitment. As of May 31, 1997, the Portfolio
had entered into outstanding when-issued or forward commitments of
$138,312,913.
Federal taxes
For federal income tax purposes the Portfolio qualifies as a partnership
and each investor in the Portfolio is treated as the owner of its
proportionate share of the net assets, income, expenses and realized and
unrealized gains and losses of the Portfolio. Accordingly, as a
"pass-through" entity, the Portfolio does not pay any income dividends or
capital gain distributions.
Other
Security transactions are accounted for on the date securities are
purchased or sold. Interest income, including level-yield amortization of
premium and discount, is accrued daily.
2
Fees and
expenses
The Trust, on behalf of the Portfolio, has entered into an Investment
Management Services Agreement with (AEFC) for managing its portfolio.
Under this agreement, AEFC determines which securities will be purchased,
held or sold. The management fee is a percentage of the Portfolio's
average daily net assets in reducing percentages from 0.52% to 0.395%
annually.
Under the agreement, the Trust also pays taxes, brokerage commissions and
nonadvisory expenses, which include custodian fees, audit and certain
legal fees, fidelity bond premiums, registration fees for units, office
expenses, consultants' fees, compensation of trustees, corporate filing
fees, expenses incurred in connection with lending securities of the
Portfolio, and any other expenses properly payable by the Trust or
Portfolio and approved by the board.
The Portfolio also pays custodian fees to American Express Trust Company,
an affiliate of AEFC.
During the period ended May 31, 1997, the Portfolio's custodian fees were
reduced by $4,699 as a result of earnings credits from overnight cash
balances.
Pursuant to a Placement Agency Agreement, American Express Financial
Advisors Inc. acts as placement agent of the units of the Trust.
3
Securities
transactions
Cost of purchases and proceeds from sales of securities (other than
short-term obligations) aggregated $3,440,407,787 and $2,804,659,245
respectively, for the period from June 10, 1996 to May 31, 1997. For the
same period, the portfolio turnover rate was 146%. Realized gains and
losses are determined on an identified cost basis.
4
Interest rate
futures contracts
At May 31, 1997, investments in securities included securities valued at
$39,834,040 that were pledged as collateral to cover initial margin
deposits on 1,460 open purchase contracts and 4,791 open sale contracts.
The market value of the open purchase contracts at May 31, 1997 was
$155,892,642 with a net unrealized gain of $1,361,764. The market value of
the open sale contracts at May 31, 1997 was $515,982,626 with a net
unrealized loss of $1,339,876. See Summary of significant accounting
policies.
5
Lending of
portfolio securities
At May 31, 1997, securities valued at $343,284,175 were on loan to
brokers. For collateral, the Portfolio received $310,466,875 in cash and
U.S. government securities valued at $41,230,707. Income from securities
lending amounted to $242,147 for the period ended May 31, 1997. The risks
to the Portfolio of securities lending are that the borrower may not
provide additional collateral when required or return the securities when
due.
6
Option contracts
written
The number of contracts and premium amounts associated with option
contracts written (see summary of significant accounting policies) is as
follows:
<TABLE>
<CAPTION>
Period ended May 31, 1997
<S> <C> <C> <C> <C> <C> <C>
Puts Calls MBS Puts and Calls
Contracts Premium Contracts Premium Contracts Premium
- -----------------------------------------------------------------------------------------------
Balance June 10, 1996 --$ -- 4,096 $ 5,250,764 16,575 $1,003,390
Opened 10,000 11,623,569 15,799 22,038,902 70,385 63,750,403
Closed (7,145) (8,526,635) (10,007) (13,652,986) (62,910)(63,292,929)
Exercised (128) (49,361) (4,830) (5,890,830) (3,400) (154,062)
Expired (518) (449,521) (991) (935,594) (7,650) (549,186)
- -----------------------------------------------------------------------------------------------
Balance May 31, 1997 2,209 $2,598,052 4,067 $ 6,810,256 13,000 $ 757,616
<PAGE>
<CAPTION>
Investments in securities
Government Income Portfolio
May 31, 1997
(Percentages represent
value of investments
<S> <C> <C> <C> <C>
compared to net assets)
Bonds (108.9%)
Issuer Coupon Maturity Principal Value(a)
rate year amount
U.S. government obligations (53.4%)
U.S. Treasury 5.00 % 1998-99 $ 14,000,000 $ 13,853,580
5.125 1998 28,000,000 27,862,520
5.375 1998 10,000,000 9,954,600
5.625 1997-98 18,000,000 17,979,800
5.75 1998-03 39,000,000 38,519,080
5.875 1998-99 124,500,000(h) 124,128,210
6.00 1997-99 57,000,000(e,f) 56,822,770
6.25 1999-01 49,600,000(h) 49,661,214
6.375 1999-00 131,100,000(h) 131,325,808
6.50 2005 25,500,000(h) 25,261,350
6.625 2002 8,500,000(h) 8,536,295
6.75 1999-00 122,000,000(e,f) 123,264,125
6.875 1999 33,500,000 33,927,125
7.125 1999 17,000,000 17,315,520
7.375 1997 26,800,000 27,007,700
7.50 1999 17,000,000 17,452,540
7.75 1999-01 126,750,000(h) 131,335,027
8.125 2019-21 45,250,000 50,976,015
8.50 2000 22,000,000 23,165,560
8.75 2020 20,250,000 24,267,600
8.875 2019 10,000,000 12,074,900
9.875 2015 4,000,000 5,200,960
10.75 2003-05 19,750,000 23,924,627
11.875 2003 66,000,000 84,090,600
12.375 2004 7,000,000 9,220,050
TIPS 3.375 2007 757,853(j) 745,295
Zero Coupon 6.01 1999 7,650,000(b) 6,903,666
6.18 2000 8,100,000(b) 6,846,120
6.54 1999 7,800,000(b) 6,925,854
Collateralized Mtge Securities Corp 13.45 2020 3,750,000 4,050,000
Resolution Funding Corp 8.125 2019 8,000,000 8,920,960
Zero Coupon 6.15 2002 11,170,000(b) 8,199,785
6.36 2003 16,000,000(b) 10,599,840
7.18 2009 16,000,000(b) 6,790,720
7.28 2017 111,700,000(b) 26,122,320
7.87 2018 7,500,000(b) 1,607,175
8.04 2012 8,400,000(b) 2,828,028
Total 1,177,667,339
Mortgage-backed securities (55.5%)
Federal Home Loan Mortgage Corporation (13.8%)
4.07 2027 6,439,492 4,682,718
6.00 2026 20,168,249 18,668,134
6.50 2003-24 8,495,295 8,357,226
7.00 2010 19,950,870 19,882,239
7.50 2024 8,196,479 8,218,200
8.00 2023-25 70,283,750 71,877,072
8.50 2025-27 22,326,149 23,174,598
9.00 2025-26 46,304,141 48,981,446
14.23 2027 199,625,260(b) 2,994,439
Collateralized Mtge Obligation 4.00 2023 12,833,889 11,860,311
6.75 2022 22,000,000 21,939,280
8.25 2024 31,993,375 31,609,454
8.50 2022 9,150,000 9,676,125
9.00 2020 11,666,000 12,722,123
Interest Only 10.00 2020 311,688(c) 99,214
Inverse Floater 6.50 2024 11,609,678(d) 8,933,415
Principal Only 2.87 2027 2,356,107(g) 1,522,634
Total 305,198,628
Federal National Mortgage Association (41.0%)
3.00 2019 11,250,000 9,947,700
4.50 2010 8,204,208 6,885,710
6.00 2023 27,006,444 24,399,807
6.50 2023-25 155,520,684(e,f) 147,904,982
7.00 2003-27 33,255,593 32,513,511
7.50 2025 104,600,000(k) 104,077,000
7.50 2025-26 75,457,357 75,291,042
8.00 2025 34,000,000(k) 34,552,500
8.00 2021-26 71,848,289 73,196,834
8.50 2007-26 241,428,503 239,060,634
9.00 2023-26 27,076,562 28,648,631
Collateralized Mtge Obligation 4.70 2022 9,920,343 9,790,784
5.00 2024 6,663,083 5,986,647
5.50 2008 12,039,867 11,557,791
6.00 2008 7,592,696 7,484,879
6.50 2017 1,189,667 1,186,809
7.00 2012 6,912,893 6,881,232
8.50 2021 12,350,000 12,871,469
Zero Coupon 6.13 2023 8,265,432(b) 7,117,446
11.94 2020 8,974,115(b) 8,414,617
Interest Only 9.50 2018-22 16,958,918(c) 5,308,851
10.00 2018-22 53,061,227(c) 17,262,331
10.50 2021 13,362,229(c) 4,459,626
Inverse Floater 6.45 2023 6,052,314(d) 4,638,130
7.58 2024 5,166,329(d) 4,043,531
7.93 2023 3,456,299(d) 2,610,128
Principal Only 4.95 2023 9,558,975(g) 4,244,281
7.76 2024 17,902,421(g) 12,161,651
7.68 2021 713,007(g) 533,263
Total 903,031,817
Government National Mortgage Association (0.7%)
7.50 2025 14,613,294 14,593,274
11.00 2019 351,854 389,713
Total 14,982,987
Total bonds
(Cost: $2,383,309,103) $2,400,880,771
Options purchased (0.1%)
Issuer Number Exercise Expiration Value(a)
of contracts price date
Put
MBS 4,500 $ 100 July 1997 $ 52,735
U.S. Treasury Bonds Aug. 97 5,000 97 Aug. 1997 359,375
U.S. Treasury Bonds Sept. 97 170 110 Aug. 1997 329,375
Call
U.S. Treasury Bonds Aug. 97 5,950 $ 95 June 1997 $1,282,969
Total options purchased
(Cost: $1,681,788) $2,024,454
Short-term securities (11.4%)
Issuer Annualized Amount Value(a)
yield on payable at
date of maturity
purchase
U.S. government agencies (5.4%)
Federal Home Loan Bank Disc Nts
06-12-97 5.43% $ 1,000,000 $ 998,197
06-12-97 5.49 40,700,000 40,625,790
06-26-97 5.43 500,000 498,046
Federal Home Loan Mtge Corp Disc Nts
06-12-97 5.52 41,300,000 41,224,283
06-19-97 5.39 6,800,000 6,780,692
06-20-97 5.39 5,500,000 5,483,561
Federal Natl Mtge Assn Disc Nt
06-12-97 5.46 23,100,000 23,058,112
Total 118,668,681
Certificates of deposit (4.6%)
ABN Yankee
04-17-98 6.27 25,000,000 25,079,935
Canadian Imperial Bank Yankee
03-23-98 6.00 25,000,000 25,000,000
Societe Generale Yankee
03-20-98 5.98 41,400,000 41,427,837
04-15-98 6.25 10,000,000 10,029,936
Total 101,537,708
Commercial paper (1.4%)
Albertson's
06-17-97 5.57 10,522,000 10,494,424
Ameritech Capital Funding
06-09-97 5.57 12,930,000(i) 12,918,018
CAFCO
06-13-97 5.60 7,400,000(i) 7,385,169
Total 30,797,611
Total short-term securities
(Cost: $250,853,708) $ 251,004,000
Total investment in securities
(Cost: $2,635,844,599) (l) $2,653,909,225
</TABLE>
<PAGE>
Notes to investments in securities
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) For zero coupon bonds, the interest rate disclosed represents the annualized
effective yield on the date of acquisition.
(c) Interest-only represents securities that entitle holders to receive only
interest payments on the underlying mortgages. The yield to maturity of an
interest-only is extremely sensitive to the rate of principal payments on the
underlying mortgage assets. A rapid (slow) rate of principal repayments may have
an adverse (positive) effect on yield to maturity. The principal amount shown is
the notional amount of the underlying mortgages.
(d) Inverse floaters represent securities that pay interest at a rate that
increases (decreases) in the same magnitude as, or in a multiple of, a decline
(increase) in the LIBOR (London InterBank Offering Rate) Index. Interest rate
disclosed is the rate in effect on May 31, 1997.
(e) Partially pledged as initial deposit on the following open interest rate
futures contracts (see Note 4 to the financial statements):
Type of security Notional amount
Purchase contracts
U.S. Treasury Note June 97, 5-year notes $82,300,000
U.S. Treasury Note Sept. 97, 5-year notes 17,900,000
U.S. Treasury Note June 97, 10-year notes 4,200,000
U.S. Treasury Bonds June 97 2,300,000
U.S. Treasury Bonds Sept. 97 39,300,000
Sale contracts
U.S. Treasury Note June 97, 2-year notes 10,000,000
U.S. Treasury Note June 97, 10-year notes 373,000,000
U.S. Treasury Note Sept. 97, 10-year notes 36,500,000
U.S. Treasury Bonds June 97 46,700,000
U.S. Treasury Bonds Sept. 97 12,900,000
(f) At May 31, 1997, securities valued at $39,834,040 were held to cover open
call options written as follows:
Issuer Number of Exercise Expiration Value(a)
contracts price date
U.S. Treasury Bonds Sept. 97 595 $112 Aug. 1997 $ 483,437
U.S. Treasury Bonds Sept. 97 818 110 Aug. 1997 1,278,125
U.S. Treasury Bonds Sept. 97 2,654 108 Aug. 1997 7,132,625
Mortgage-Backed Security
(MBS) Spread 8,500 95 June 1997 1,593,750
Mortgage-Backed Security
(MBS) Spread 4,500 100 July 1997 98,438
At May 31, 1997, cash or short-term securities were designated to cover open put
options written as follows:
Issuer Number of Exercise Expiration Value (a)
contracts price date
U.S. Treasury Bonds Sept. 97 978 $104 Aug. 1997 $244,500
U.S. Treasury Bonds Sept. 97 551 106 Aug. 1997 301,325
U.S. Treasury Bonds Sept. 97 680 108 Aug. 1997 733,122
(g) Principal only represents securities that entitle holders to receive only
principal payments on the underlying mortgages. The yield to maturity of a
principal only is sensitive to the rate of principal payments on the underlying
mortgage assets. A slow (rapid) rate of principal repayments may have an adverse
(positive) effect on yield to maturity. Interest rate disclosed represents
current yield based upon the current cost basis and estimated timing of the
future cash flows.
(h) Security is partially or fully on loan. See Note 5 to the financial
statements.
(i) Commercial paper sold within terms of a private placement memorandum, exempt
from registration under Section 4(2) of the Securities Act of 1993, as amended,
and may be sold only to dealers in that program or other "accredited investors."
This security has been determined to be liquid under guidelines established by
the board.
(j) U.S. Treasury inflation-protection securities (TIPS) are securities in which
the principal amount is adjusted for inflation and the semi-annual interest
payments equal a fixed percentage of the inflation-adjusted principal amount.
(k) At May 31, 1997, the cost of securities purchased on a when-issued basis was
$138,312,913.
(l) At May 31, 1997, the cost of securities for federal income tax purposes was
$2,636,826,903 and the aggregate gross unrealized appreciation and depreciation
based on that cost was:
Unrealized appreciation..........................................$28,070,741
Unrealized depreciation..........................................(10,988,419)
Net unrealized appreciation......................................$17,082,322
<PAGE>
Independent auditors' report
The board of trustees and unitholders Income Trust:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments in securities, of High Yield
Portfolio (a series of Income Trust) as of May 31, 1997, and the related
statements of operations and changes in net assets for the period from
June 10, 1996 (commencement of operations) to May 31, 1997. These
financial statements are the responsibility of portfolio management. Our
responsibility is to express an opinion on these financial statements
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 statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. Investment securities held in custody are confirmed to us by
the custodian. As to securities purchased and sold but not received or
delivered, we request confirmations from brokers, and where replies are
not received, we carry out other appropriate auditing procedures. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of High Yield Portfolio
at May 31, 1997, and the results of its operations and the changes in its
net assets for the period from June 10, 1996 (commencement of operations)
to May 31, 1997, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
July 3, 1997
<PAGE>
<TABLE>
Financial statements
Statement of assets and liabilities
High Yield Portfolio
May 31, 1997
Assets
<S> <C>
Investments in securities, at value (Note 1)
(identified cost $3,070,000,308) $3,178,553,781
Dividends and accrued interest receivable 67,487,609
Receivable for investment securities sold 24,792,925
----------
Total assets 3,270,834,315
-------------
Liabilities
Disbursements in excess of cash on demand deposit 886,187
Payable for investment securities purchased 70,789,519
Accrued investment management services fee 49,248
Other accrued expenses 44,987
------
Total liabilities 71,769,941
----------
Net assets $3,199,064,374
==============
See accompanying notes to financial statements.
<PAGE>
Statement of operations
High Yield Portfolio
For the period from June 10, 1996
(commencement of operations) to May 31, 1997
Investment income
Income:
Dividends $ 18,180,667
Interest 252,458,755
-----------
Total income 270,639,422
-----------
Expenses (Note 2):
Investment management services fee 15,502,709
Compensation of board members 11,103
Custodian fees 119,564
Audit fees 30,500
Administrative service fees and expenses 28,165
Other 3,134
-----
Total expenses 15,695,175
Earnings credits on cash balances (Note 2) (65,448)
- -------
Total net expenses 15,629,727
----------
Investment income -- net 255,009,695
-----------
Realized and unrealized gain -- net
Net realized gain on security transactions
(including loss of $6,609,151 on sale of affiliated issuers) (Note 3) 11,905,305
Net change in unrealized appreciation or depreciation of investments 42,485,867
----------
Net gain on investments 54,391,172
----------
Net increase in net assets resulting from operations $309,400,867
============
See accompanying notes to financial statements.
<PAGE>
Statement of changes in net assets
High Yield Portfolio
For the period from June 10, 1996
(commencement of operations) to May 31, 1997
Operations
Investment income-- net $ 255,009,695
Net realized gain on investments 11,905,305
Net change in unrealized appreciation or depreciation of investments 42,485,867
----------
Net increase in net assets resulting from operations 309,400,867
-----------
Net contributions 2,889,633,507
-------------
Total increase in net assets 3,199,034,374
Net assets at beginning of period (Note 1) 30,000
- ------
Net assets at end of period $3,199,064,374
==============
See accompanying notes to financial statements.
</TABLE>
<PAGE>
Notes to financial statements
High Yield Portfolio
1
Summary of
significant
accounting policies
The High Yield Portfolio (the Portfolio) is a series of Income Trust (the
Trust) and is registered under the Investment Company Act of 1940 (as
amended) as a diversified, open-end management investment company. High
Yield Portfolio invests primarily in long-term corporate bonds in the
lower-rating categories, commonly known as junk bonds. The Declaration of
Trust permits the Trustees to issue non-transferable interests in the
Portfolio. On April 15, 1996, American Express Financial Corporation
(AEFC) contributed $30,000 to the Portfolio. Operations did not formally
commence until June 10, 1996, at which time, an existing fund transferred
its assets to the Portfolio in return for an ownership percentage of the
Portfolio.
Significant accounting polices followed by the Portfolio are summarized
below:
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of increase and decrease in
net assets from operations during the period. Actual results could differ
from those estimates.
Valuation of securities
All securities are valued at the close of each business day. Securities
traded on national securities exchanges or included in national market
systems are valued at the last quoted sales price; securities for which
market quotations are not readily available, including illiquid
securities, are valued at fair value according to methods selected in good
faith by the board. Determination of fair value involves, among other
things, reference to market indexes, matrixes and data from independent
brokers. Short-term securities maturing in more than 60 days from the
valuation date are valued at the market price or approximate market value
based on current interest rates; those maturing in 60 days or less are
valued at amortized cost.
Option transactions
In order to produce incremental earnings, protect gains and facilitate
buying and selling of securities for investment purposes, the Portfolio
may buy and write options traded on any U.S. or foreign exchange or in the
over-the-counter market where the completion of the obligation is
dependent upon the credit standing of the other party. The Portfolio also
may buy and sell put and call options and write covered call options on
portfolio securities and may write cash-secured put options. The risk in
writing a call option is that the Portfolio gives up the opportunity of
profit if the market price of the security increases. The risk in writing
a put option is that the Portfolio may incur a loss if the market price of
the security decreases and the option is exercised. The risk in buying an
option is that the Portfolio pays a premium whether or not the option is
exercised. The Portfolio also has the additional risk of not being able to
enter into a closing transaction if a liquid secondary market does not
exist.
Option contracts are valued daily at the closing prices on their primary
exchanges and unrealized appreciation or depreciation is recorded. The
Portfolio will realize a gain or loss upon expiration or closing of the
option transaction. When an option is exercised, the proceeds on sales for
a written call option, the purchase cost for a written put option or the
cost of a security for a purchased put or call option is adjusted by the
amount of premium received or paid.
Futures transactions
In order to gain exposure to or protect itself from changes in the market,
the Portfolio may buy and sell financial futures contracts traded on any
U.S. or foreign exchange. The Portfolio also may buy and write put and
call options on these futures contracts. Risks of entering into futures
contracts and related options include the possibility that there may be an
illiquid market and that a change in the value of the contract or option
may not correlate with changes in the value of the underlying securities.
Upon entering into a futures contract, the Portfolio is required to
deposit either cash or securities in an amount (initial margin) equal to a
certain percentage of the contract value. Subsequent payments (variation
margin) are made or received by the Portfolio each day. The variation
margin payments are equal to the daily changes in the contract value and
are recorded as unrealized gains and losses. The Portfolio recognizes a
realized gain or loss when the contract is closed or expires.
Foreign currency translations and
foreign currency contracts
Securities and other assets and liabilities denominated in foreign
currencies are translated daily into U.S. dollars at the closing rate of
exchange. Foreign currency amounts related to the purchase or sale of
securities and income and expenses are translated at the exchange rate on
the transaction date. The effect of changes in foreign exchange rates on
realized and unrealized security gains or losses is reflected as a
component of such gains or losses. In the statement of operations, net
realized gains or losses from foreign currency transactions may arise from
sales of foreign currency, closed forward contracts, exchange gains or
losses realized between the trade date and settlement dates on securities
transactions, and other translation gains or losses on dividends, interest
income and foreign withholding taxes.
The Portfolio may enter into forward foreign currency exchange contracts
for operational purposes and to protect against adverse exchange rate
fluctuation. The net U.S. dollar value of foreign currency underlying all
contractual commitments held by the Portfolio and the resulting unrealized
appreciation or depreciation are determined using foreign currency
exchange rates from an independent pricing service. The Portfolio is
subject to the credit risk that the other party will not complete the
obligations of the contract.
Illiquid securities
Investments in securities include issues that are illiquid. The Portfolio
currently limits investments in illiquid securities to 10% of the net
assets, at market value, at the time of purchase. The aggregate value of
such securities at May 31, 1997 was $76,061,799 representing 2.38% of the
net assets. Pursuant to guidelines adopted by the board, certain
unregistered securities are determined to be liquid and are not included
within the 10% limitation specified above.
Securities purchased on a when-issued basis
Delivery and payment for securities that have been purchased by the
Portfolio on a forward-commitment or when-issued basis can take place one
month or more after the transaction date. During this period, such
securities are subject to market fluctuations, and they may affect the
Portfolio's net assets the same as owned securities. The Portfolio
designates cash or liquid high-grade debt securities at least equal to the
amount of its commitment. As of May 31, 1997, the Portfolio had entered
into outstanding when-issued or forward commitments of $9,800,000.
Federal taxes
For federal income tax purposes the Portfolio qualifies as a partnership
and each investor in the Portfolio is treated as the owner of its
proportionate share of the net assets, income, expenses and realized and
unrealized gains and losses of the Portfolio. Accordingly, as a
"pass-through" entity, the Portfolio does not pay any income dividends or
capital gain distributions.
Other
Security transactions are accounted for on the date securities are
purchased or sold. Dividend income is recognized on the ex-dividend date.
For U.S. dollar denominated bonds, interest income includes level-yield
amortization of premium and discount. For foreign bonds, except for
original issue discount, the Fund does not amortize premium and discount.
Interest income, including level-yield amortization of premium and
discount, is accrued daily.
2
Fees and
expenses
The Trust, on behalf of the Portfolio, has entered into an Investment
Management Services Agreement with American Express Financial Corporation
(AEFC) for managing its portfolio. Under this agreement, AEFC determines
which securities will be purchased, held or sold. The management fee is a
percentage of the Portfolio's average daily net assets in reducing
percentages from 0.59% to 0.465% annually.
Under the agreement, the Trust also pays taxes, brokerage commissions and
nonadvisory expenses, which include custodian fees, audit and certain
legal fees, fidelity bond premiums, registration fees for units, office
expenses, consultants' fees, compensation of trustees, corporate filing
fees, expenses incurred in connection with lending securities of the
Portfolio, and any other expenses properly payable by the Trust or
Portfolio and approved by the board.
During the period from June 10, 1996 to May 31, 1997, the Portfolio's
custodian fees were reduced by $65,448 as a result of earnings credits
from overnight cash balances.
Pursuant to a Placement Agency Agreement, American Express Financial
Advisors Inc. acts as placement agent of the units of the Trust.
3
Securities
transactions
Cost of purchases and proceeds from sales of securities (other than
short-term obligations) aggregated $3,114,014,271 and $2,406,649,102,
respectively, for the period from June 10, 1996 to May 31, 1997. For the
same period, the portfolio turnover rate was 92%. Realized gains and
losses are determined on an identified cost basis.
Income from securities lending amounted to $31,770 for the period from
June 10, 1996 to May 31, 1997.
<PAGE>
<TABLE>
<CAPTION>
Investments in securities
High Yield Portfolio
May 31, 1997
(Percentages represent value of
investments compared to net assets)
Bonds (88.3%)
<S> <C> <C> <C> <C>
Issuer Coupon Maturity Principal Value(a)
rate year amount
Mortgage-backed securities (0.4%)
Federal Home Loan Mtge Corp 7.625% 2017 $ 5,668(b) $ 5,906
Inverse Floater 7.93 2023 4,407,829(k) 3,328,705
Merrill Lynch Mtge Investors 7.98 2021 8,919,193 8,751,958
Total 12,086,569
Aerospace & defense (1.9%)
Alliant Techsystems
Sr Sub Nts 11.75 2003 9,250,000 10,221,250
K&F Inds
Sr Sub Nts 10.375 2004 4,900,000 5,169,500
L-3 Communications
Sr Sub Nts 10.375 2007 5,145,000(c) 5,415,113
Sequa 9.625 1999 3,000,000 3,090,000
Sr Sub Nts 9.375 2003 20,750,000 21,139,062
TransDigm
Sr Secured Nts 13.10 2000 14,030,000(e) 15,029,637
Total 60,064,562
Banks and savings & loans (0.8%)
First Nationwide Bank
Sr Sub Nts 10.625 2003 11,000,000 11,935,000
Greenpoint Capital Trust 9.10 2027 5,000,000(c) 4,992,900
Wilshire Financial Services 13.00 2004 10,000,000 9,950,000
Total 26,877,900
Beverages & tobacco (0.5%)
Stroh Brewery
Sr Sub Nts 11.10 2006 14,887,000 15,538,306
Building materials & construction (1.0%)
Foamex-JPS
Zero Coupon Sr Disc Nts Series B 5.36 1999 10,000,000(g) 8,825,000
Johns Manville Intl
Sr Nts 10.875 2004 15,000,000 16,668,750
Southdown
Sr Sub Nts 10.00 2006 4,700,000 5,029,000
Total 30,522,750
Chemicals (0.8%)
ISP Holdings
Sr Nts 9.75 2002 22,215,000 23,325,750
NL Inds
Sr Nts 11.75 2003 2,000,000 2,205,000
Total 25,530,750
Communications equipment & services (12.9%)
CCPR Services 10.00 2007 18,850,000(c) 18,567,250
Celcaribe
Zero Coupon 10.42 1998 3,800,000(c,g) 4,902,000
Zero Coupon 13.44 1998 7,350,000(g) 6,357,750
Cencall Communications
Zero Coupon Sr Nts 20.74 1999 26,500,000(g) 20,206,250
Comcast Cellular
Sr Nts 9.50 2007 20,000,000(c) 20,050,000
Communications & Power Inds
Sr Sub Nts 12.00 2005 10,000,000 11,000,000
Geotek Communications
Cv 12.00 2001 4,630,000(e) 3,935,500
Zero Coupon 17.41 2000 23,250,000(g) 14,647,500
Globalstar
with Warrants 11.375 2004 13,500,000(c) 13,635,000
GST Equipment Funding
Sr Nts 13.25 2007 6,750,000(c) 6,986,250
GST Telecommunications
Zero Coupon Cv 5.81 2000 2,320,000(g) 1,415,200
Impsat 12.125 2003 10,000,000 10,600,000
Intermedia Communications of Florida
Sr Nts 13.50 2005 15,000,000 16,950,000
Intl Wireless Communication
Zero Coupon Sr Nts 14.00 2001 14,750,000(f) 7,965,000
ITC Deltacom
Sr Nts 11.00 2007 8,550,000(c) 8,721,000
Metrocall
Sr Sub Nts 10.375 2007 9,500,000 8,550,000
Nextlink Communications
Sr Nts 12.50 2006 15,000,000 15,843,750
Norcal Waste Systems 13.25 2005 20,300,000 22,736,000
Omnipoint
Sr Nts 11.625 2006 15,000,000 13,275,000
Sr Nts Series A 11.625 2006 2,000,000 1,770,000
Optel
with Common Stock 13.00 2005 15,000,000(c) 14,400,000
Outsourcing Solutions
Sr Sub Nts 11.00 2006 5,500,000(c) 5,885,000
Pagemart Nationwide
Zero Coupon Sr Nts 15.80 2000 23,000,000(g) 16,330,000
Peoples Telephone
Sr Nts 12.25 2002 7,000,000 7,437,500
Phonetel Technologies
Sr Nts 12.00 2006 16,500,000 16,541,250
Pierce Leahy
Sr Sub Nts 11.125 2006 8,750,000(c) 9,625,000
Pricellular Wireless
Zero Coupon Sr Disc Nts 10.85 1998 18,250,000(g) 17,246,250
Sr Nts 10.75 2004 6,500,000 6,841,250
Pronet
Sr Sub Nts 11.875 2005 12,600,000 12,127,500
RSL Communications
with Warrants 12.25 2001 9,500,000 9,808,750
SC Intl Services
Sr Sub Nts 13.00 2005 21,500,000 24,402,500
Teleport Communications
Zero Coupon Sr Nts 11.12 2001 22,000,000(g) 15,482,500
Unifi Communications
with Warrants 14.00 2004 10,000,000(c) 9,850,000
Winstar Communications
Zero Coupon Sr Sub Disc 14.50 2000 10,000,000(c,g) 5,950,000
Winstar Equipment 12.50 2004 13,500,000(c) 13,196,250
Total 413,237,200
Computers & office equipment (1.3%)
Anacomp
Sr Sub Nts 10.875 2004 13,000,000(c) 13,195,000
Softkey Intl
Cv 5.50 2000 2,500,000 1,837,500
Unisys
Sr Nts 11.75 2004 15,500,000 16,701,250
Sr Nts 12.00 2003 8,000,000 8,620,000
Total 40,353,750
Electronics (0.9%)
Advanced Micro Devices
Sr Nts 11.00 2003 26,750,000 29,826,250
Energy (4.0%)
Bellwether Exploration
Sr Sub Nts 10.875 2007 9,000,000 9,540,000
Chesapeake Energy
Sr Nts 8.50 2012 5,500,000(c) 5,390,000
Costilla Energy
Sr Nts 10.25 2006 10,000,000 10,350,000
Empire Gas
Sr Nts 7.00 2004 11,350,000(i) 10,186,625
Energy Corp of America
Sr Sub Nts 9.50 2007 9,000,000(c) 9,045,000
Forcenergy
Sr Sub Nts 8.50 2007 4,500,000(c) 4,381,875
Sr Sub Nts 9.50 2006 5,000,000 5,162,500
Harcor Energy
Sr Nts Series B 14.875 2002 10,615,000 12,738,000
HS Resources
Sr Sub Nts 9.25 2006 4,250,000 4,228,750
Sr Sub Nts 9.875 2003 9,700,000 9,845,500
Statia Terminals
1st Mtge 11.75 2003 8,050,000 8,613,500
Transamerican Refining 16.50 2002 9,700,000(c,i) 10,767,000
Zero Coupon 1st Mtge 8.35 1998 9,250,000(c,g) 9,134,375
Transtexas Gas
Sr Nts 11.50 2002 15,000,000 16,725,000
Total 126,108,125
Energy equipment & services (0.6%)
Noble Drilling
Sr Nts 9.125 2006 6,500,000 6,987,500
Pride Petroleum Services
Sr Nts 9.375 2007 6,600,000 6,847,500
Veritas DGC
Sr Nts 9.75 2003 5,500,000 5,720,000
Total 19,555,000
Financial services (1.8%)
Arcadia Financial
with Warrants 11.50 2007 21,000,000 20,895,000
GPA Delaware 8.75 1998 10,000,000 10,150,000
Gemini 13.50 2001 13,500,000(e,i) 13,500,000
Homeside
Sr Nts 11.25 2003 9,247,000 10,657,167
Malan Realty Investors REIT
Cv Sub Deb 9.50 2004 1,040,000 1,075,100
Total 56,277,267
Food (1.9%)
Chiquita Brands Intl 9.625 2004 8,500,000 8,840,000
Gorges/Quik to Fix Food
Sr Sub Nts Series B 11.50 2006 14,250,000 14,820,000
MBW Foods
Sr Sub Nts 9.875 2007 6,000,000(c) 6,060,000
Pilgrim's Pride
Sr Sub Nts 10.875 2003 3,970,000 4,138,725
Specialty Foods
Sr Nts 10.25 2001 26,500,000 25,572,500
Total 59,431,225
Furniture & appliances (0.2%)
Lifestyle Furnishings 10.875 2006 6,500,000 7,020,000
Health care (0.4%)
Dade Intl
Sr Sub Nts 11.125 2006 5,850,000 6,522,750
Maxxim Medical
Sr Sub Nts 10.50 2006 6,600,000 6,880,500
Total 13,403,250
Health care services (3.1%)
Integrated Health
Sr Sub Nts 9.50 2007 4,000,000(c) 4,120,000
Magellan Health Services
Sr Sub Nts Cl A 11.25 2004 13,500,000 15,018,750
Merit Behavioral 11.50 2005 9,376,000 10,137,800
Paracelsus Healthcare
Sr Sub Nts 10.00 2006 22,000,000 21,835,000
Regency Health Services 12.25 2003 5,000,000 5,400,000
Tenet Healthcare
Sr Sub Nts 8.625 2007 20,000,000 20,263,400
Sr Sub Nts 10.125 2005 20,000,000 21,850,000
Total 98,624,950
Household products (1.5%)
Coty
Sr Sub Nts 10.25 2005 7,000,000 7,455,000
Rayovac
Sr Sub Nts 10.25 2006 7,175,000 7,533,750
Revlon Worldwide
Zero Coupon Sr Disc Nts 11.52 2001 20,000,000(c,f) 13,500,000
Syratech
Sr Nts 11.00 2007 7,500,000 7,968,750
Twin Laboratories 10.25 2006 12,250,000 12,770,625
Total 49,228,125
Industrial equipment & services (2.8%)
ACF Inds 11.60 2000 1,460,000 1,458,175
Borg-Warner Security
Sr Sub Nts 9.125 2003 10,000,000 9,962,500
Sr Sub Nts 9.625 2007 6,600,000(c) 6,600,000
Clark Materials Handling
Sr Nts 10.75 2006 6,500,000 6,873,750
Continental Global Group
Sr Nts 11.00 2007 5,500,000(c) 5,692,500
Goss Graphic Systems
Sr Sub Nts 12.00 2006 10,000,000 10,825,000
Molten Metal Tehcnology
Cv Sub Nts 5.50 2006 1,500,000(c) 652,500
Motors and Gears
Sr Nts 10.75 2006 11,000,000 11,398,750
Prime Succession
Sr Sub Nts 10.75 2004 10,000,000 10,825,000
Specialty Equipment
Sr Sub Nts 11.375 2003 23,300,000 25,076,625
Total 89,364,800
Insurance (1.8%)
Americo Life
Sr Sub Nts 9.25 2005 15,000,000 15,000,000
Integon Capital 10.75 2027 10,000,000(c) 9,975,000
Life Partners
Sr Sub Nts 12.75 2002 10,000,000 10,550,000
Reliance Group Holdings 9.75 2003 15,000,000 15,712,500
Zurich Capital 8.38 2037 7,500,000(c) 7,618,725
Total 58,856,225
Leisure time & entertainment (7.5%)
Affinity Group
Sr Nts 11.00 2007 9,000,000(c) 9,427,500
Alliance Gaming
Sr Nts 12.875 2003 13,850,000 15,200,375
AMC Entertainment
Sr Sub Nts 9.50 2009 4,500,000(c) 4,590,000
Boomtown
1st Mtge 11.50 2003 10,000,000 10,825,000
Coast Hotels & Casino
1st Mtge 13.00 2002 19,800,000 22,077,000
Cobblestone Holdings
Zero Coupon Sr Nts 11.69 1999 7,350,000(f) 3,270,750
Coleman Escrow-1
Zero Coupon Sr Disc Nts 11.12 2001 12,500,000(c,f) 8,125,000
Coleman Escrow-2
Zero Coupon Sr Disc Nts 12.87 2001 5,750,000(c,f) 3,493,125
Icon Fitness
Zero Coupon Sr Disc Nts 14.00 2001 15,000,000(g) 7,875,000
Icon Health & Fitness
Sr Sub Nts 13.00 2002 2,500,000 2,787,500
Lady Luck Gaming
1st Mtge 11.875 2001 2,500,000 2,512,500
Lodgenet Entertainment
Sr Nts with Rights 10.25 2006 15,000,000 15,018,750
Plitt Theatres 10.875 2004 27,850,000 29,033,625
PRT Funding
Sr Nts 11.625 2004 8,000,000 6,160,000
Stratosphere
1st Mtge 8.68 2002 14,250,000(d) 11,613,750
Trump Atlantic City Funding
1st Mtge 11.25 2006 26,945,000 26,406,100
Trump Holdings
Sr Nts 15.50 2005 28,050,000 32,047,125
United Artists
Sr Nts 11.50 2002 6,000,000 6,292,500
United Artists Theatre
Pass Thru Certificates 9.30 2015 13,764,068 12,834,993
Waterford Gaming
Sr Nts 12.75 2003 10,000,000(c) 11,000,000
Total 240,590,593
Media (10.0%)
Ackerley Communications
Sr Secured Nts 10.75 2003 13,500,000 14,377,500
Adams Outdoor Advertising
Sr Nts 10.75 2006 15,300,000 16,371,000
Adelphia Communications
Pay-in-Kind 9.50 2004 26,311,956(l) 24,075,440
Sr Deb 11.875 2004 5,000,000 5,262,500
American Telecasting
Zero Coupon 8.66 1999 10,000,000(g) 3,050,000
Zero Coupon Sr Disc Nts 7.72 2000 10,000,000(g) 3,050,000
Benedek Broadcasting
Sr Nts 11.875 2005 2,500,000 2,750,000
Benedek Communications
Zero Coupon Sr Disc Nts 13.25 2001 9,500,000(g) 5,462,500
CS Wireless Systems
Zero Coupon with Warrants 12.79 2001 11,500,000(g) 2,875,000
Echostar Satellite Broadcasting 8.25 2001 14,250,000 13,680,000
Zero Coupon 12.84 2000 30,500,000(g) 20,892,500
Heritage Media Services
Sr Sub Nts 8.75 2006 19,300,000 19,927,250
Jacor Communications 9.75 2006 19,000,000 19,855,000
Lamar Advertising 9.625 2006 4,000,000 4,090,000
Lenfest Communications
Sr Nts 8.375 2005 15,850,000 15,453,750
Neodata Services
Sr Nts 12.00 2003 10,234,000 10,950,380
Outdoor Systems 11.81 2007 9,800,000(e,n) 9,800,000
Sr Nts 9.375 2006 10,000,000 10,087,500
Paxson Communications
Sr Sub Nts 11.625 2002 7,000,000 7,525,000
Pegasus Media & Communications
Cl B 12.50 2005 11,150,000 12,209,250
People's Choice TV
Zero Coupon with Warrants 13.25 2000 25,500,000(g) 9,307,500
Petersen Publishing
Sr Sub Nts 11.125 2006 6,500,000 7,166,250
Spanish Broadcasting
Sr Nts with Rights 11.00 2004 3,150,000(c) 3,291,750
Sr Nts 7.50 2002 4,000,000 4,360,000
TKR Cable
Deb 10.50 2007 9,525,000 10,449,401
United Intl Holdings
Zero Coupon Disc Nts 11.55 1999 15,000,000(f) 11,400,000
Zero Coupon Disc Nts 12.00 1999 7,600,000(f) 5,776,000
Universal Outdoor
Sr Sub Nts 9.75 2006 20,000,000 20,700,000
Viacom Intl
Sub Deb 8.00 2006 8,000,000 7,780,000
Sub Deb 7.00 2003 15,000,000 14,080,400
Wireless One
with Warrants 13.00 2003 5,000,000 3,150,000
Total 319,205,871
Metals (3.0%)
Bar Technologies 13.50 2001 10,000,000(c) 9,700,000
Carbide/Graphite Group
Sr Nts 11.50 2003 9,091,000 9,909,190
EnviroSource
Sr Nts 9.75 2003 21,510,000 20,864,700
Maxxam Group Holdings
Sr Nts Series B 12.00 2003 12,000,000 12,390,000
Zero Coupon Sr Disc Nts 7.00 1998 2,600,000(g) 2,392,000
NS Group 13.50 2003 14,000,000 16,030,000
Ryerson Tull 9.125 2006 9,000,000 9,405,000
WCI Steel
Sr Nts 10.00 2004 15,500,000 16,081,250
Total 96,772,140
Multi-industry conglomerates (1.8%)
Poindexter (JB) 12.50 2004 9,250,000 9,226,875
Jordan Inds
Sr Nts 10.375 2003 19,370,000 19,466,850
Zero Coupon Sr Sub Debs 11.75 2002 17,692,251(c,g) 9,996,122
Tally Mfg & Technology
Sr Nts 10.75 2003 18,500,000 19,332,500
Total 58,022,347
Paper & packaging (5.5%)
BPC Holding
Sr Nts Pay-in-Kind 12.50 2006 9,750,000(l) 10,456,875
Bway
Sr Sub Nts 10.25 2007 5,500,000(c) 5,843,750
Crown Paper
Sr Sub Nts 11.00 2005 15,000,000 15,075,000
Florida Coast Paper
1st Mtge 12.75 2003 13,800,000 14,007,000
Gaylord Container
Sr Sub Disc Deb 12.75 2005 28,000,000 30,730,000
Repap Wisconsin
Sr Nts 9.25 2002 10,000,000 10,050,000
Sr Nts 9.875 2006 10,000,000 9,850,000
Riverwood Intl 10.875 2008 15,000,000 14,925,000
Silgan
Sr Sub Nts 11.75 2002 10,350,000(c) 10,996,875
Stone Container
1st Mtge 10.75 2002 20,000,000 21,000,000
Sr Nts 12.625 1998 4,500,000 4,725,000
Sweetheart Cup
Sr Sub Nts 10.50 2003 10,000,000 10,075,000
Warren (SD)
Sr Nts 12.00 2004 16,500,000 18,397,500
Total 176,132,000
Restaurants & lodging (0.8%)
Hammons (John Q) Hotels
1st Mtge 8.875 2004 12,000,000 12,060,000
Prime Hospitality
Sr Sub Nts 9.75 2007 11,900,000 12,286,750
Total 24,346,750
Retail (5.3%)
Dairy Mart Convenience Stores
Sr Sub Nts Series A 10.25 2004 18,700,000 18,232,500
Sr Sub Nts Series B 10.25 2004 6,250,000 6,093,750
Di Giorgio
Sr Nts 12.00 2003 16,000,000 17,120,000
Finlay Enterprises
Zero Coupon Debs 6.01 1998 15,500,000(g) 14,763,750
Food-4-Less
Sr Sub Debs Pay-in-Kind 13.625 2007 10,000,000(l) 11,700,000
Zero Coupon Debs 8.66 2000 5,000,000(g) 3,850,000
Grand Union
Sr Nts 12.00 2004 11,000,000 8,580,000
Jitney-Jungle Stores
Sr Nts 12.00 2006 10,000,000 11,100,000
Pathmark Stores
Sub Nts 11.625 2002 8,000,000 7,980,000
Zero Coupon Sub Nts 10.75 1999 12,500,000(g) 8,093,750
Penn Traffic
Sr Nts 8.625 2003 10,000,000 8,300,000
Pueblo Xtra Intl
Sr Nts 9.50 2003 16,210,000(c) 15,602,125
Ralphs Grocery
Sr Nts 10.45 2004 10,000,000 10,962,500
Specialty Retailers 11.00 2003 6,750,000 7,357,500
Stater Brothers Holdings 11.00 2001 14,500,000 15,732,500
White Rose Foods
Zero Coupon 12.75 1998 5,000,000(f) 4,450,000
Total 169,918,375
Textiles & apparel (0.8%)
Anvil Knitwear
Sr Nts 10.875 2007 14,000,000(c) 14,035,000
Hat Brand Holdings 12.625 2002 5,000,000(d,e) 1,500,000
Hosiery Corp of America 13.75 2002 10,000,000 10,950,000
Total 26,485,000
Utilities -- electric (1.9%)
California Energy
Sr Nts 9.50 2006 8,000,000 8,460,000
Sr Secured Nts 9.875 2003 9,000,000 9,562,500
First Palo Verde Funding 10.15 2016 3,193,000 3,444,449
Midland Funding II 11.75 2005 5,000,000 5,675,000
13.25 2006 12,500,000 15,125,000
Niagara Mohawk Power
1st Mtge 9.75 2005 9,000,000 9,737,820
Texas-New Mexico Power
Secured Deb 10.75 2003 7,000,000 7,612,500
Total 59,617,269
Miscellaneous (0.6%)
Darling-Delaware
Sr Sub Nts 11.00 2000 9,932,000 9,907,170
ECM Funding 11.92 2002 2,029,428(e) 2,232,371
XCL
with Warrants 13.50 2004 8,000,000(c) 8,000,000
Total 20,139,541
Foreign (12.5%)
APP Intl Finance
(U.S. Dollar) 11.75 2005 4,500,000 4,871,250
Australis Holdings
(U.S. Dollar) Zero Coupon
with Warrants 14.99 2000 13,400,000(g) 8,442,000
Australis Media
(U.S. Dollar) Zero Coupon
with Warrants 14.92 2000 12,750,000(g) 7,936,875
Cable Systems
(U.S. Dollar) 10.75 1999 2,399,136(e) 2,393,138
CEI Citicorp Holdings
(U.S. Dollar) 8.50 2002 3,000,000(c) 2,996,250
(Argentine Peso) 11.25 2007 5,000,000(c) 4,837,500
Cia Latino Americana
(U.S. Dollar) 11.625 2004 3,500,000(c) 3,622,500
City of Moscow
(U.S. Dollar) 9.50 2000 10,000,000(c) 10,050,000
Colt Telecommunications Group
(U.S. Dollar) Zero Coupon 12.00 2006 8,500,000(g) 5,440,000
DGS Intl Finance
(U.S. Dollar) 10.00 2007 7,500,000(c) 7,593,750
Doman Inds
(U.S. Dollar) 8.75 2004 10,500,000 10,027,500
Dominion Textiles
(U.S. Dollar) Sr Nts 8.875 2003 5,000,000 5,125,000
Fresh Del Monte Produce
(U.S. Dollar) 10.00 2003 22,000,000 22,440,000
FSW Intl
(U.S. Dollar) Sr Nts 12.50 2006 6,000,000 6,015,000
Globo Communicacoes
(U.S. Dollar) 10.50 2006 4,250,000(c) 4,425,312
Govt of Algeria
(U.S. Dollar) 7.06 2006 5,750,000 4,930,625
Grupo Industrial Durango
(U.S. Dollar) 12.625 2003 5,000,000 5,587,500
Grupo Televisa
(U.S. Dollar) Sr Nts 11.875 2006 3,250,000 3,656,250
(U.S. Dollar) Zero Coupon Sr Nts 13.25 2001 12,500,000(g) 8,796,875
Guangdong Enterprises
(U.S. Dollar) Sr Nts 8.875 2007 3,600,000(c) 3,626,928
Gulf Canada Resources
(U.S. Dollar) 9.25 2004 13,500,000 14,124,375
Hyundai Semiconductor
(U.S. Dollar) 8.625 2007 15,000,000(c) 14,954,250
Imexsa Export Trust
(U.S. Dollar) 10.125 2003 10,000,000(c) 10,475,000
Intl Cabletel
(U.S. Dollar) Zero Coupon 11.48 2001 40,000,000(g) 27,250,000
Ionica
(U.S. Dollar) Zero Coupon 14.99 2002 25,500,000(g) 13,068,750
MDC Communications
(U.S. Dollar) Sr Sub Nts 10.50 2006 12,100,000 12,826,000
Newsquest Capital
(U.S. Dollar) Sr Sub Nts 11.00 2006 5,000,000 5,387,500
(U.S. Dollar) Series B 11.00 2006 7,750,000 8,350,625
Philippine Long Distance Telephone
(U.S. Dollar) 7.85 2007 7,500,000(c) 7,196,250
(U.S. Dollar) 8.35 2017 7,500,000(c) 7,020,375
PLD Telekom
(U.S. Dollar) Zero Coupon
with Warrants 14.42 2001 4,000,000(g) 3,450,000
Polysindo Intl Fin
(U.S. Dollar) 11.375 2006 7,500,000 8,212,500
Repap New Brunswick
(U.S. Dollar) Sr Nts 9.875 2000 25,450,000 25,513,625
(U.S. Dollar) Sr Nts 10.625 2005 10,000,000 9,450,000
Rogers Cablesystems
(U.S. Dollar) Sr Secured Nts 9.625 2002 9,000,000 9,382,500
Rogers Cantel
(U.S. Dollar) Sr Sub Nts 11.125 2002 10,000,000 10,425,000
Scandinavian Broadcasting
Cv Sub Deb 7.25 2005 2,430,000 2,262,938
Stone Container
(U.S. Dollar) 11.50 2006 6,000,000(c) 6,090,000
Tarkett Intl
(U.S. Dollar) 9.00 2002 10,000,000 10,275,000
Telewest
(U.S. Dollar) Zero Coupon 11.00 2000 20,000,000(g) 13,950,000
Tjiwi Kimia
(U.S. Dollar) 13.25 2001 7,000,000 7,962,500
Transport Maritima Mex
(U.S. Dollar) Sr Nts 10.00 2006 7,600,000 7,533,500
Veninfotel
(U.S. Dollar) Cv Pay-in-Kind 10.00 2002 8,000,000(e,l) 8,140,000
Veritas Holdings
(U.S. Dollar) 9.625 2003 23,470,000(c) 24,056,750
Total 400,171,691
Total bonds
(Cost: $2,720,481,951) $2,823,308,581
Common stocks & other (8.1%)(j)
Issuer Shares Value(a)
Advanced Micro Devices
Common 100,000(d) $ 4,000,000
Alliance Gaming
15% Pay-in-Kind Preferred 79,558(c,l) 8,134,806
American Communication Services
Warrants 17,200 516,000
American Radio Systems
11.375% Pay-in-Kind Preferred 92,133(l) 9,789,131
American Telecasting
Warrants 85,225 10,653
APP Intl Finance
12% Preferred 10,000 10,000,000
Australis Holdings
Warrants 13,400 402
Bar Technologies
Warrants 10,000 400,000
Benedek Communications
15% Preferred 70,000(d) 7,280,000
Warrants 70,000 140,000
Cablevision Systems
11.125% Pay-in-Kind Preferred 322,572(l) 30,402,411
11.75% Pay-in-Kind Preferred 119,203(l) 11,652,093
Celcaribe
Common 1,195,110(d) 2,390,220
Clearnet Communications
Warrants 35,640 106,920
Communications & Power Inds
14% Preferred 63,375(d) 6,982,234
Common 3,500 525,000
Crown Packaging
Warrants 10,000 1,250
CS Wireless Systems
Common 3,163(m) --
Dairy Mart Convenience Stores
Warrants 311,333(e) 622,666
Earthwatch
12% Preferred Cv 700,000(c) 7,000,000
First Nationwide Bank
11.5% Preferred 166,500 18,710,437
Foodmaker
Warrants 7,000 283,500
Gaylord Container
Common 437,500(c,d) 3,582,031
Warrants 562,500 4,570,312
Geotek Communications
Warrants 872,500 872,500
Globalstar Telecommunications
Common 80,000 2,260,000
GPA Financial
8% Preferred Cv 48,026(e) 4,862,633
HarCor Energy
Common 100,000(d) 606,250
Warrants 110,000 330,000
Hat Brand Holdings
Warrants 90,346(m) --
Hemmeter Enterprises
Warrants 36,000(m) --
Hosiery Corp of America
Warrants 10,000 70,000
Houlihan's Restaurant
Warrants 5,886 30,136
IFINT Diversified Holdings
Common 42,418(e) 678,688
Intermedia Communications
13.5% Pay-in-Kind Preferred 90,000(c,l) 9,360,000
Warrants 22,750 625,625
Intl Wireless Communication
Warrants 14,750 148
Jitney-Jungle Stores
15% Preferred 85,000 11,687,500
K-III Communications
10% Preferred 1(l) 86
Lady Luck Gaming
Common 200,000(d) 375,000
National Australia Bank
7.875% Preferred 220,000 5,940,000
Nextel Communications
Warrants 18,902 189
Ocwen Asset Investment
Common 95,000(d) 1,721,875
Pagemart Nationwide
Common 50,750(d) 203,000
Panamsat
12.75% Pay-in-Kind Preferred 11(d,l) 13,750
Pantry Pride
14.875% Preferred 100,000 10,262,500
Paxson Communications
12.5% Pay-in-Kind Preferred 106,940(l) 10,426,650
Pegasus Communications
Common 16,923(d) 175,576
12.75% Preferred 42,000 4,116,000
Riggs Natl
Series B Preferred 72,825 2,057,306
SDW Holdings
15% Preferred 274,350(d,e) 9,739,425
Sinclair Capital
11.625% Preferred 140,000(c) 14,700,000
Silgan Holdings
13.25% Pay-in-Kind Preferred 5,502(l) 5,914,650
Specialty Foods Acquisition
Common 300,000(d) 112,500
Supermarket General
$3.52 Pay-in-Kind Cv Preferred 275,000(d,l) 6,600,000
Time Warner
10.25% Pay-in-Kind Preferred 15,042(l) 16,583,805
TransDigm
Warrants 11,195(e) 3,078,527
Triangle Wire & Cable
Common 548,889(d,e) 548,889
Warren (SD)
14% Preferred 200,000(d) 8,000,000
Webcraft Technology
Common 32,502(d,e) 325
Wireless One
Common 25,000(d) 73,438
Warrants 23,250 23,250
Total common stocks & other
(Cost: $253,423,099) $259,150,287
Short-term securities (3.0%)
Issuer Annualized Amount Value(a)
yield on payable at
date of maturity
purchase
Commercial paper (2.8%)
Ameritech Capital Funding
06-19-97 5.57% $ 6,500,000(h) $ 6,480,995
07-18-97 5.57 600,000(h) 595,576
ABB Treasury Center USA
06-16-97 5.57 5,200,000(h) 5,187,173
Avco Financial Services
06-17-97 5.56 6,000,000 5,984,303
Bell Atlantic
06-05-97 5.53 6,600,000 6,594,949
Cargill Global
06-16-97 5.60 1,900,000(h) 1,894,969
Ciesco LP
06-16-97 5.55 5,500,000(h) 5,486,507
Commerzbank U.S. Finance
06-09-97 5.55 13,000,000 12,981,963
Duke Power
06-12-97 5.54 3,400,000 3,393,744
Gateway Fuel
06-13-97 5.56 3,300,000 3,293,410
General Electric Capital
06-18-97 5.60 5,100,000 5,085,822
Kredietbank North America Finance
06-20-97 5.58 6,000,000 5,981,500
Metlife Funding
06-04-97 5.53 2,700,000 2,698,347
Novartis Finance
06-16-97 5.56 7,000,000 6,982,764
06-18-97 5.55 5,500,000 5,484,792
UBS Finance (Delaware)
06-13-97 5.56 4,200,000 4,191,598
06-23-97 5.54 4,800,000 4,783,072
Unilever Capital
06-03-97 5.56 1,000,000(h) 999,540
Total 88,101,024
Letter of credit (0.2%)
Federal Home Loan Bank-
Western Financial Services
06-05-97 5.50 8,000,000 7,993,889
Total short-term securities
(Cost: $96,095,258) $ 96,094,913
Total investment in securities
(Cost: $3,070,000,308)(o) $3,178,553,781
See accompanying notes to investments in securities.
</TABLE>
<PAGE>
Notes to investments in securities
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) Adjustable rate mortgage; interest rate varies to reflect current market
conditions; rate shown is the effective rate on May 31, 1997.
(c) Represents a security sold under Rule 144A, which is exempt from
registration under the Secruities Act of 1933, as amended. This security has
been determined to be liquid under guidelines established by the board.
(d) Non-income producing. For long-term debt securities, item identified is in
default as to payment of interest and/or principal.
(e) Identifies issues considered to be illiquid (see Note 1 to the financial
statements). Information concerning such security holdings at May 31, 1997 is as
follows:
Security Acquisition Cost
dates
Cable Systems
(U.S. Dollar) 02-02-96 $ 2,340,305
Dairy Mart Convenience Stores
Warrants 11-28-95 thru 10-27-96 239,401
ECM Funding 04-13-92 2,029,428
Gemini 11-01-96 13,500,000
Geotek Communications
Cv 03-04-96 4,630,000
GPA Financial
8% Preferred Cv 12-23-96 4,774,987
Hat Brand Holdings
Zero Coupon 2002 09-03-96 5,000,000
IFINT Diversified Holdings
Common 08-18-94 --
Outdoor Systems 05-02-97 9,800,000
SDW Holding
15% Preferred 03-04-97 thru 03-11-97 9,776,925
TransDigm
Sr Secured Nts 09-29-93 thru 04-24-96 13,095,679
Warrants 09-29-93 thru 04-24-96 1,027,805
Triangle Wire & Cable
Common 01-13-92 13,000,117
Veninfotel
(U.S. Dollar) Cv Pay-in-Kind 03-05-97 8,000,000
Webcraft Technology
Common 12-22-86 16,875
*Represents a security sold under Rule 144A, which is exempt from registration
under the Securities Act of 1933, as amended.
(f) For zero coupon bonds, the interest rate disclosed represents the annualized
effective yield on the date of acquisition.
(g) For those zero coupon bonds that become coupon paying at a future date, the
interest rate disclosed represents the annualized effective yield from the date
of acquisition to interest reset date disclosed.
(h) Commercial paper sold within terms of a private placement memorandum, exempt
from registration under Section 4(2) of the Securities Act of 1933, as amended,
and may be sold only to dealers in that program or other "accredited investors."
This security has been determined to be liquid under guidelines established by
the board.
(i) Interest rate varies either based on a predetermined schedule or to reflect
current market conditions; rate shown is the effective rate on May 31, 1997.
(j) Transactions with companies that were affiliates (investments representing
5% or more of the outstanding voting securities of the issuer) during the year
ended May 31, 1997 are:
Issuer Beginning Purchase Sales Ending Dividend
cost cost cost cost income
Kash n` Karry Food Stores $19,815,725 $-- $19,815,725 $-- $--
Envirodyne Inds 11,146,875 -- 11,146,875 -- --
Total $30,962,600 $-- $30,962,600 $-- $--
(k) Inverse floaters represent securities that pay interest at a rate that
increases (decreases) in the same magnitude as, or in a multiple of, a decline
(increase) in the LIBOR (London InterBank Offering Rate) Index. Interest rate
disclosed is the rate in effect on May 31, 1997. Inverse floaters in the
aggregate represent 0.1% of the Portfolio's net assets as of May 31, 1997.
(l) Pay-in-kind securities are securities in which the issuer has the options to
make interest or dividend payments in cash or in additional securities. These
securities issued as interest or dividends, usually have the same terms,
including maturity date, as the pay-in-kind securities.
(m) Negligible market value.
(n) At May 31, 1997, the cost of securities purchased, including interest
purchased, on a when-issued basis was $9,800,000.
(o) At May 31, 1997, the cost of securities for federal income tax purpose was
$3,069,825,743 and the aggregate gross unrealized appreciation and depreciation
based on that cost was:
Unrealized appreciation........................................$161,231,407
Unrealized depreciation.........................................(52,503,369)
-----------
Net unrealized appreciation....................................$108,728,038
<PAGE>
Independent auditors' report
The board of trustees and unitholders Income Trust:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments in securities, of Quality Income
Portfolio (a series of Income Trust) as of May 31, 1997, and the related
statements of operations and changes in net assets for the period from
June 10, 1996 (commencement of operations) to May 31, 1997. These
financial statements are the responsibility of portfolio management. Our
responsibility is to express an opinion on these financial statements
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 statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. Investment securities held in custody are confirmed to us by
the custodian. As to securities purchased and sold but not received or
delivered, and securities on loan, we request confirmations from brokers,
and where replies are not received, we carry out other appropriate
auditing procedures. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Quality Income
Portfolio at May 31, 1997, and the results of its operations and the
changes in its net assets for the period from June 10, 1996 (commencement
of operations) to May 31, 1997, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
July 3, 1997
<PAGE>
<TABLE>
<CAPTION>
Financial statements
Statement of assets and liabilities
Quality Income Portfolio
May 31, 1997
Assets
<S> <C>
Investments in securities, at value (Note 1)
(identified cost $1,688,560,923) $1,718,321,998
Dividends and accrued interest receivable 21,866,316
Receivable for investment securities sold 5,712,652
U.S. government securities held as collateral (Note 4) 39,006,077
----------
Total assets 1,784,907,043
-------------
Liabilities
Disbursements in excess of cash on demand deposit 1,082,909
Payable for investment securities purchased 41,408,277
Payable upon return of securities loaned (Note 4) 126,654,827
Accrued investment management services fee 22,494
Other accrued expenses 84,467
------
Total liabilities 169,252,974
-----------
Net assets $1,615,654,069
==============
See accompany notes to financial statements.
<PAGE>
Financial statements
Statement of operations
Quality Income Portfolio
For the period from June 10, 1996
(commencement of operations) to May 31, 1997
Investment income
Income:
Dividends $ 598,893
Interest 120,249,224
-----------
Total income 120,848,117
-----------
Expenses (Note 2):
Investment management services fee 8,395,071
Compensation of board members 7,450
Compensation of officers 11,053
Custodian fees 138,497
Audit fees 29,500
Other 13,928
------
Total expenses 8,595,499
---------
Investment income -- net 112,252,618
-----------
Realized and unrealized gain (loss) -- net
Net realized gain on security and foreign currency transactions
(including gain of $1,093,741 from foreign currency
transactions) (Note 3) 13,637,267
Net realized loss on financial futures contracts (6,340,145)
Net realized gain on option contracts written (Note 5) 2,098,502
---------
Net realized gain on investments and foreign currencies 9,395,624
Net change in unrealized appreciation or
depreciation of investments and on translation
of assets and liabilities in foreign currencies 20,434,131
----------
Net gain on investments and foreign currencies 29,829,755
----------
Net increase in net assets resulting from operations $142,082,373
============
See accompanying notes to financial statements.
<PAGE>
Statement of changes in net assets
Quality Income Portfolio
For the period from June 10, 1996
(commencement of operations) to May 31, 1997
Operations
Investment income-- net $ 112,252,618
Net realized gain on investments and foreign currencies 9,395,624
Net change in unrealized appreciation or
depreciation of investments and on translation
of assets and liabilities in foreign currencies 20,434,131
----------
Net increase in net assets resulting from operations 142,082,373
Net contributions 1,473,541,696
-------------
Total increase in net assets 1,615,624,069
Net assets at beginning of period (Note 1) 30,000
------
Net assets at end of period $1,615,654,069
==============
See accompanying notes to financial statements.
</TABLE>
<PAGE>
Notes to financial statements
Quality Income Portfolio
1
Summary of
significant
accounting policies
Quality Income Portfolio (the Portfolio) is a series of Income Trust (the
Trust) and is registered under the Investment Company Act of 1940 (as
amended) as a diversified, open-end management investment company. Quality
Income Portfolio invests primarily in investment-grade bonds. The
Declaration of Trust permits the Trustees to issue non-transferable
interests in the Portfolio. On April 15, 1996, American Express Financial
Corporation (AEFC) contributed $30,000 to the Portfolio. Operations did
not formally commence until June 10, 1996, at which time an existing fund
transferred its assets to the Portfolio in return for an ownership
percentage of the Portfolio.
Significant accounting polices followed by the Portfolio are summarized
below:
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of increase and decrease in
net assets from operations during the period. Actual results could differ
from those estimates.
Valuation of securities
All securities are valued at the close of each business day. Securities
traded on national securities exchanges or included in national market
systems are valued at the last quoted sales price; securities for which
market quotations are not readily available, including illiquid
securities, are valued at fair value according to methods selected in good
faith by the board. Determination of fair value involves, among other
things, reference to market indexes, matrixes and data from independent
brokers. Short-term securities maturing in more than 60 days from the
valuation date are valued at the market price or approximate market value
based on current interest rates; those maturing in 60 days or less are
valued at amortized cost.
Option transactions
In order to produce incremental earnings, protect gains and facilitate
buying and selling of securities for investment purposes, the Portfolio
may buy and write options traded on any U.S. or foreign exchange or in the
over-the-counter market where the completion of the obligation is
dependent upon the credit standing of the other party. The Portfolio also
may buy and sell put and call options and write covered call options on
portfolio securities and may write cash-secured put options. The risk in
writing a call option is that the Portfolio gives up the opportunity of
profit if the market price of the security increases. The risk in writing
a put option is that the Portfolio may incur a loss if the market price of
the security decreases and the option is exercised. The risk in buying an
option is that the Portfolio pays a premium whether or not the option is
exercised. The Portfolio also has the additional risk of not being able to
enter into a closing transaction if a liquid secondary market does not
exist.
Option contracts are valued daily at the closing prices on their primary
exchanges and unrealized appreciation or depreciation is recorded. The
Portfolio will realize a gain or loss upon expiration or closing of the
option transaction. When options on debt securities or futures are
exercised, the Portfolio will realize a gain or loss. When other options
are exercised, the proceeds on sales for a written call option, the
purchase cost for a written put option or the cost of a security for a
purchased put or call option is adjusted by the amount of premium received
or paid.
Futures transactions
In order to gain exposure to or protect itself from changes in the market,
the Portfolio may buy and sell financial futures contracts traded on any
U.S. or foreign exchange. The Portfolio also may buy and write put and
call options on these futures contracts. Risks of entering into futures
contracts and related options include the possibility that there may be an
illiquid market and that a change in the value of the contract or option
may not correlate with changes in the value of the underlying securities.
Upon entering into a futures contract, the Portfolio is required to
deposit either cash or securities in an amount (initial margin) equal to a
certain percentage of the contract value. Subsequent payments (variation
margin) are made or received by the Portfolio each day. The variation
margin payments are equal to the daily changes in the contract value and
are recorded as unrealized gains and losses. The Portfolio recognizes a
realized gain or loss when the contract is closed or expires.
Foreign currency translations
and foreign currency contracts
Securities and other assets and liabilities denominated in foreign
currencies are translated daily into U.S. dollars at the closing rate of
exchange. Foreign currency amounts related to the purchase or sale of
securities and income and expenses are translated at the exchange rate on
the transaction date. The effect of changes in foreign exchange rates on
realized and unrealized security gains or losses is reflected as a
component of such gains or losses. In the statement of operations, net
realized gains or losses from foreign currency transactions may arise from
sales of foreign currency, closed forward contracts, exchange gains or
losses realized between the trade date and settlement dates on securities
transactions, and other translation gains or losses on dividends, interest
income and foreign withholding taxes.
The Portfolio may enter into forward foreign currency exchange contracts
for operational purposes and to protect against adverse exchange rate
fluctuation. The net U.S. dollar value of foreign currency underlying all
contractual commitments held by the Portfolio and the resulting unrealized
appreciation or depreciation are determined using foreign currency
exchange rates from an independent pricing service. The Portfolio is
subject to the credit risk that the other party will not complete the
obligations of the contract.
Illiquid securities
At May 31, 1997, investments in securities included issues that are
illiquid. The Portfolio currently limits investments in illiquid
securities to 10% of the net assets, at market value, at the time of
purchase. The aggregate value of such securities at May 31, 1997 was
$4,481,904 representing 0.3% of the net assets. Pursuant to guidelines
adopted by the board, certain unregistered securities are determined to be
liquid and are not included within the 10% limitation specified above.
Securities purchased on a when-issued basis
Delivery and payment for securities that have been purchased by the
Portfolio on a forward-commitment or when-issued basis can take place one
month or more after the transaction date. During this period, such
securities are subject to market fluctuations, and they may affect the
Portfolio's gross assets the same as owned securities. The Portfolio
designates cash or liquid high-grade short-term debt securities at least
equal to the amount of its commitment. As of May 31, 1997, the Portfolio
had entered into outstanding when-issued or forward-commitments of
$19,850,000.
Federal taxes
For federal income tax purposes the Portfolio qualifies as a partnership
and each investor in the Portfolio is treated as the owner of its
proportionate share of the net assets, income, expenses and realized and
unrealized gains and losses of the Portfolio. Accordingly, as a
"pass-through" entity, the Portfolio does not pay any income dividends or
capital gain distributions.
Other
Security transactions are accounted for on the date securities are
purchased or sold. Dividend income is recognized on the ex-dividend date.
For U.S. dollar denominated bonds, interest income includes level-yield
amortization of premium and discount. For foreign bonds, except for
original issue discount, the Portfolio does not amortize premium and
discount. Interest income, including level-yield amortization of premium
and discount, is accrued daily.
2
Fees and
expenses
The Trust, on behalf of the Portfolio, has entered into an Investment
Management Services Agreement with AEFC for managing its portfolio. Under
this agreement, AEFC determines which securities will be purchased, held
or sold. The management fee is a percentage of the Portfolio's average
daily net assets in reducing percentages from 0.52% to 0.395% annually.
Under the agreement, the Trust also pays taxes, brokerage commissions and
nonadvisory expenses, which include custodian fees, audit and certain
legal fees, fidelity bond premiums, registration fees for units, office
expenses, consultants' fees, compensation of trustees, corporate filing
fees, expenses incurred in connection with lending securities of the
Portfolio, and any other expenses properly payable by the Trust or
Portfolio and approved by the board.
Pursuant to a Placement Agency Agreement, American Express Financial
Advisors Inc. acts as placement agent of the units of the Trust.
3
Securities
transactions
Cost of purchases and proceeds from sales of securities (other than
short-term obligations) aggregated $433,654,306 and $524,514,884,
respectively, for the period from June 10, 1996 to May 31, 1997. For the
same period, the portfolio turnover rate was 31%. Realized gains and
losses are determined on an identified cost basis.
4
Lending of
portfolio securities
At May 31, 1997, securities valued at $122,850,988 were on loan to
brokers. For collateral, the Portfolio received $87,648,750 in cash and
U.S. government securities valued at $39,006,077. Income from securities
lending amounted to $99,979 for the period from June 10, 1996 to May 31,
1997. The risks to the Portfolio of securities lending are that the
borrower may not provide additional collateral when required or return the
securities when due.
5
Option contracts
written
The number of contracts and premium amounts associated with option
contracts written (see Summary of significant accounting policies) is as
follows:
Period ended May 31, 1997
Calls Puts
- --------------------------------------------------------------------------------
Contracts Premium Contracts Premium
- --------------------------------------------------------------------------------
Balance June 10, 1996 -- $ -- -- $ --
Opened 1,250 2,207,036 400 451,126
Closed (750) (1,330,628) (400) (451,126)
Exercised (311) (655,867) -- --
Expired (189) (220,541) -- --
- --------------------------------------------------------------------------------
Balance May 31, 1997 -- $ -- -- $ --
- --------------------------------------------------------------------------------
6
Interest rate
futures contracts
At May 31, 1997, investments in securities included securities valued at
$11,149,700 that were pledged as collateral to cover initial margin
deposits on 1,200 open sales contracts. The market value of the open
contracts at May 31, 1997, was $131,941,625 with a net unrealized loss of
$1,295,469. See Summary of significant accounting policies.
<PAGE>
<TABLE>
<CAPTION>
Investments in securities
Quality Income Portfolio
May 31, 1997
(Percentages represent value of
investments compared to net assets)
<S> <C> <C> <C> <C> <C>
Bonds (92.7%)
Issuer Coupon Maturity Principal Value(a)
rate year amount
U.S. government obligations (31.0%)
U.S. Treasury 5.875% 2000-04 $33,000,000(b) $ 32,415,780
6.875 1999 60,000,000 60,765,000
7.25 2004 51,800,000 53,687,658
7.50 2001 99,000,000 102,808,530
7.50 2016 80,000,000(b) 84,386,400
8.00 2021 15,000,000(k) 16,724,550
8.625 1997 50,745,000(b) 51,099,708
Resolution Funding Corp
Zero Coupon 7.61 2017 39,000,000(c) 9,329,190
7.98 2016 47,000,000(b,c) 12,104,380
8.19 2014 48,000,000(c) 14,767,200
8.27 2014 10,000,000(c) 2,969,300
8.94 2006 25,000,000(c) 13,978,000
8.95 2006 68,000,000(c) 36,112,080
Overseas Private Investment 6.99 2009 10,000,000 9,812,500
Total 500,960,276
Mortgage-backed securities (15.6%)
Federal Home Loan Mtge Corp 7.50 2024 16,648,575 16,677,044
8.00 2016-25 10,569,627 10,795,089
8.50 2017-26 23,155,242 24,061,366
9.00 2020-21 5,553,606 5,881,578
Collateralized Mtge Obligation 8.50 2019 390,904 390,806
Federal Housing Admin 7.43 2024 9,089,707 8,550,279
Federal Natl Mtge Assn 6.50 2023 12,044,089 11,510,295
7.50 2025 20,000,000(l) 19,900,000
7.50 2027 14,920,921 14,869,593
8.00 2026 14,236,093 14,487,360
10.00 2002 124 130
Principal Only 9.50 2018 1,170,264(e) 895,938
Collateralized Mtge Obligation
8.00 2021 11,794,373 11,958,394
8.50 2019 1,448,659 1,562,344
Principal Only 9.89 2020 2,194,500(e) 1,935,487
Trust Series Z 6.00 2024 20,650,251(d) 15,209,529
Govt Natl Mtge Assn 7.50 2026 20,282,237 20,254,451
Collateralized Mtge Obligation Trust 7.75 2012 870,282 879,327
8.00 2022-26 41,512,792 42,451,220
8.50 2026 18,999,763 19,704,464
9.00 2024-25 5,942,163 6,304,255
Prudential Bache
Collateralized Mtge Obligation 7.965 2019 3,510,938 3,570,408
Total 251,849,357
Automotive & related (2.8%)
Daimler-Benz North America
Medium-term Nts 7.375 2006 14,000,000 14,189,840
General Motors 8.875 2003 7,050,000 7,690,704
General Motors Acceptance
Medium-term Nts 5.95 1998 8,000,000 8,002,720
7.00 2000 14,300,000 14,432,132
Total 44,315,396
Banks and savings & loans (4.4%)
BankAmerica
Sub Nts 7.70 2026 5,000,000(g) 4,776,150
BankBoston Capital Trust 8.25 2026 5,000,000 5,016,300
Boatmen's Bancshares
Sub Nts 9.25 2001 8,950,000 9,722,653
First Bank System 6.875 2007 8,550,000 8,289,054
First Chicago
Sr Nts 9.00 1999 7,900,000 8,268,219
Firstar Capital Trust 8.32 2026 10,000,000 10,021,400
Morgan (JP) 6.50 2012 9,350,000(i) 9,034,437
NCNB
Sub Nts 9.125 2001 10,000,000 10,805,200
Washington Mutual Capital 8.375 2027 5,800,000(g) 5,789,328
Total 71,722,741
Building materials & construction (0.6%)
Georgia-Pacific
Credit Sensitive Nt 9.85 1997 10,000,000 10,010,600
Chemicals (0.7%)
Dow Chemical 8.85 2021 10,000,000 11,264,900
Communications equipment & services (1.3%)
AT&T 8.35 2025 5,000,000 5,204,350
BellSouth Telecommunications 7.00 2095 10,000,000 9,346,100
GTE 10.25 2020 6,050,00 6,809,941
Total 21,360,391
Electronics (0.3%)
Harris 10.375 2018 3,900,000 4,267,185
Energy (2.4%)
PDV America 7.875 2003 16,500,000 16,493,235
Texaco Capital
Gtd Deb 7.50 2043 12,000,000 11,622,600
USX 9.375 2022 9,200,000 10,491,128
Total 38,606,963
Energy equipment & services (0.4%)
Foster Wheeler 6.75 2005 5,850,000 5,613,894
Financial services (2.2%)
Aristar
Sr Deb 8.875 1998 10,520,000 10,836,968
Beneficial 9.125 1998 10,000,000 10,222,400
Greyhound Financial
Medium-term Nts 7.95 1999 9,600,000 9,861,888
Salomon 7.75 2000 5,000,000 5,119,300
Total 36,040,556
Health care (0.8%)
Lilly (Eli) 6.77 2036 13,300,000 12,034,106
Industrial equipment & services (1.2%)
Browning-Ferris Inds 9.25 2021 7,000,000 8,133,930
Deere & Co 8.95 2019 10,000,000 11,053,800
Total 19,187,730
Insurance (3.3%)
American United Life 7.75 2026 4,800,000(g, m) 4,481,904
Arkwright Trust 9.625 2026 4,000,000(g) 4,375,240
Berkley (WR) 8.70 2022 10,000,000 10,634,300
Conseco Financing Trust 8.70 2026 6,600,000 6,634,386
Equitable Life Assurance 7.70 2015 5,000,000(g) 4,951,400
Nationwide Trust 9.875 2025 11,500,000(g) 12,504,870
SunAmerica 9.95 2012 8,000,000 9,643,120
Total 53,225,220
Media (0.7%)
Time Warner Entertainment 8.375 2033 12,000,000 11,991,360
Retail (1.8%)
Dayton Hudson 7.875 2023 18,850,000 17,866,218
Wal-Mart Stores 7.00 2006 11,653,588(g) 11,642,401
Total 29,508,619
Transportation (1.3%)
Burlington Northern Santa Fe 7.00 2025 10,000,000 8,974,900
Railcar Leasing 7.125 2013 12,150,000(g) 12,048,548
Total 21,023,448
Utilities -- electric (6.8%)
Arizona Public Service
1st Mtge
Sale Lease-Backed Obligation 8.00 2015 9,000,000 9,158,940
Cajun Electric Power Cooperation
Mtge Trust 8.92 2019 4,960,000 5,372,722
Commonwealth Edison 6.50 2000 9,000,000 8,945,910
Long Island Lighting 8.625 2004 3,000,000 3,106,650
9.625 2024 7,000,000 7,337,400
RGS Funding
Sale Lease-Backed Obligation 9.82 2022 9,939,219 11,771,117
Salton Sea Cl C 7.84 2010 10,000,000(g) 10,032,100
San Diego Gas & Electric 9.625 2020 9,950,000 11,038,629
1st Mtge
Southern California Edison 8.875 2023 21,000,000 21,816,690
1st Mtge
Texas Utilities Electric 9.75 2021 13,000,000 14,692,210
1st Mtge
Wisconsin Electric Power 6.875 2095 8,000,000 7,265,920
Total 110,538,288
Utilities -- telephone (1.4%)
New York Telephone 9.375 2031 7,000,000 7,711,060
Pacific Bell 8.50 2031 15,000,000 15,353,250
Total 23,064,310
Foreign (13.7%)(h)
ABN Amro Bank
(U.S. Dollar) 7.75 2023 12,000,000 11,971,200
Alcan Aluminum
(U.S. Dollar) 8.875 2022 9,600,000 10,240,992
BAA PLC
(British Pound) 9.363 2006 1,500,000 2,613,582
Bank of China
(U.S. Dollar) 8.25 2014 7,100,000 7,084,451
Bayerische Landesbank
(U.S. Dollar) 5.625 2001 13,750,000 13,293,637
Dao Heng Bank
(U.S. Dollar) 7.75 2007 7,000,000(g) 6,915,090
Deutsche Bank Finance
(U.S. Dollar) Zero Coupon 4.50 2017 6,510,000(c,g) 2,880,675
Guangdong Enterprises
(U.S. Dollar) 8.875 2007 5,800,000(g) 5,843,384
Hyundai Semiconductor
(U.S. Dollar) 8.625 2007 10,800,000(g) 10,767,060
Israel Electric
(U.S. Dollar) 7.875 2026 9,000,000(g) 8,865,000
Japan Finance
(U.S. Dollar) 9.25 1998 25,950,000 26,973,468
KFW Intl Finance
(U.S. Dollar)
Medium-term Nts 8.50 1999 10,000,000 10,487,600
Korea Electric Power
(U.S. Dollar) 8.00 2002 9,000,000 9,320,040
Korea Electric Power
(U.S. Dollar) Zero Coupon 10.07 2016 35,000,000(f) 6,303,850
People's Republic of China
(U.S. Dollar) 9.00 2096 10,000,000 10,711,100
Petronas
(U.S. Dollar) 7.75 2015 10,000,000(g) 10,134,900
Ras Laffan Gas
(U.S. Dollar) 8.294 2014 10,000,000 10,341,900
Republic of Austria Euro
(U.S. Dollar) 10.00 1998 5,000,000 5,187,500
Republic of Italy
(U.S. Dollar) 6.875 2023 23,200,000 21,541,664
Rodamco NV
(U.S. Dollar) 7.30 2005 10,000,000 10,107,200
State of Israel
(U.S. Dollar) 6.375 2005 10,800,000 10,179,324
Telekom Malaysia
(U.S. Dollar) 7.875 2025 10,000,000(g) 10,151,000
Total 221,914,617
Total bonds
(Cost: $1,469,226,517) $1,498,499,957
Preferred stock (0.6%)
Issuer Shares Value(a)
Salomon Income Financing Trust
9.50% 340,000 $8,988,750
Total preferred stock
(Cost: $8,500,000) $8,988,750
Short-term securities (13.0%)
Issuer Annualized Amount Value(a)
yield on payable at
date of maturity
purchase
U.S. government agencies (2.9%)
Federal Home Loan Bank Disc Nt
06-12-97 5.43% $45,500,000 $45,417,948
Federal Home Loan Mtge Corp Disc Nt
06-09-97 5.44 1,100,000 1,098,509
Total 46,516,457
Bankers acceptance (0.5%)
First Bank Minneapolis
06-05-97 5.54 8,000,000 7,993,867
Commercial paper (8.2%)
Ameritech Capital Funding
06-11-97 5.54 6,000,000 5,989,898
07-18-97 5.58 2,300,000(j) 2,283,041
AT&T
06-02-97 5.54 10,000,000 9,996,944
Bell Atlantic
06-06-97 5.54 5,200,000 5,195,216
BOC Group
06-05-97 5.53 4,600,000(j) 4,596,480
Ciesco LP
06-11-97 5.56 7,700,000 7,686,966
06-19-97 5.55 4,500,000 4,486,890
06-25-97 5.52 9,600,000 9,563,333
Clorox
06-10-97 5.54 5,600,000 5,591,413
First Chicago NBD
06-17-97 5.57 8,200,000 8,178,509
Fleet Funding
06-11-97 5.55 10,000,000(j) 9,983,103
Harris Trust & Savings
06-27-97 5.55 7,500,000 7,500,000
Lincoln Natl
06-18-97 5.56 4,000,000(j) 3,988,940
Mobil Australia Funding (Delaware)
06-20-97 5.59 12,000,000(j) 11,963,000
07-28-97 5.58 7,500,000(j) 7,432,065
Novartis Finance
06-16-97 5.57 13,300,000 13,267,193
Paccar Financial
07-01-97 5.54 1,000,000 995,247
SBC Communications Capital
06-13-97 5.55 8,500,000(j) 8,483,057
06-17-97 5.56 6,000,000(j) 5,984,360
Total 133,165,655
Letter of credit (1.4%)
Bank of America-
AES Barbers Point
06-12-97 5.52 23,200,000 23,157,312
Total short-term securities
(Cost: $210,834,406) $ 210,833,291
Total investment in securities
(Cost: $1,688,560,923)(n) $1,718,321,998
See accompanying notes to investments in securities.
</TABLE>
<PAGE>
Notes to investments in securities
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) Security is partially or fully on loan. See Note 4 to the financial
statements.
(c) For zero coupon bonds, the interest rate disclosed represents the annualized
effective yield on the date of acquisition.
(d) This security is a collateralized mortgage obligation that pays no interest
or principal during its initial accrual period until payment of previous series
within the trust have been paid off. Interest is accrued at an effective yield;
similar to a zero coupon bond.
(e) Principal only represents securities that entitle holders to receive only
principal payments on the underlying mortgages. The yield to maturity of a
principal only is sensitive to the rate of principal payments on the underlying
mortgage assets. A slow (rapid) rate of principal repayments may have an adverse
(positive) effect on yield to maturity. Interest rate disclosed represents
current yield based upon the current cost basis and estimated timing of future
cash flows.
(f) For those zero coupon bonds that become coupon paying at a future date, the
interest rate disclosed represents the annualized effective yield from the date
of acquisition to interest rate reset date disclosed.
(g) Represents a security sold under Rule 144A, which is exempt from
registration under the Securities Act of 1933, as amended. This security has
been determined to be liquid under guidelines established by the board.
(h) Foreign security values are stated in U.S. dollars. For debt securities,
principal amounts are denominated in the currency indicated.
(i) Interest rate varies either based on a predetermined schedule or to reflect
current market conditions; rate shown is the effective rate on May 31, 1997.
(j) Commercial paper sold within terms of a private placement memorandum, exempt
from registration under Section 4(2) of the Securities Act of 1933, as amended,
and may be sold only to dealers in that program or other "accredited investors."
This security has been determined to be liquid under guidelines established by
the board.
(k) Partially pledged as initial margin deposit on the following open interest
rate futures contracts (see Note 6 to the financial statements):
Type of security Notional amount
Sales contracts
U.S Treasury Bonds June 97 $96,400,000
U.S Treasury Bonds Sept. 97 $23,600,000
(l) At May 31, 1997, the cost of securities purchased on a when-issued basis was
$19,850,000.
(m) Identifies issues considered to be illiquid as to their marketability (see
Note 1 to the financial statements). Information concerning such security
holdings at May 31, 1997, is as follows:
Security Aquisition Cost
date
American United Life*
7.75% 2026 02-13-96 $4,800,000
*Represents a security sold under Rule 144A, which is exempt from registration
under the securities Act of 1933, as amended.
(n) At May 31, 1997, the cost of securities for federal income tax purposes was
$1,688,560,923 and the aggregate gross unrealized appreciation and depreciation
based on that cost was:
Unrealized appreciation........................................$ 45,542,614
Unrealized depreciation.........................................(15,781,539)
- --------------------------------------------------------------------------------
Net unrealized appreciation....................................$ 29,761,075
- --------------------------------------------------------------------------------
<PAGE>
PAGE 85
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) FINANCIAL STATEMENTS:
List of financial statements filed as part of this Post-Effective
Amendment to the Registration Statement:
Strategist Income Fund Inc.
o Independent auditors' report dated July 3, 1997
o Statements of assets and liabilities, May 31, 1997
o Statements of operations, for the period from June 10, 1996
(commencement of operations) to May 31, 1997
o Statements of change in net assets, for the period from June
10, 1996 (commencement of operations) to May 31, 1997
o Notes to financial statements
Government Income Portfolio
o Independent auditors' report dated July 3, 1997
o Statement of assets and liabilities, May 31, 1997
o Statement of operations for the period from June 10, 1996
(commencement of operations) to May 31, 1997
o Statement of changes in net assets, for the period from June
10, 1996 (commencement of operations) to May 31, 1997
o Notes to financial statements
o Investments in securities, May 31, 1997
o Notes to investments in securities
Quality Income Portfolio
o Independent auditors' report dated July 3, 1997
o Statement of assets and liabilities, May 31, 1997
o Statement of operations for the period from June 10, 1996
(commencement of operations) to May 31, 1997
o Statement of changes in net assets, for the period from June
10, 1996 (commencement of operations) to May 31, 1997
o Notes to financial statements
o Investments in securities, May 31, 1997
o Notes to investments in securities
High Yield Portfolio
o Independent auditors' report dated July 3, 1997
o Statement of assets and liabilities, May 31, 1997
o Statement of operations for the period from June 10, 1996
(commencement of operations) to May 31, 1997
o Statement of changes in net assets, for the period from June
10, 1996 (commencement of operations) to May 31, 1997
o Notes to financial statements
o Investments in securities, May 31, 1997
o Notes to investments in securities
<PAGE>
PAGE 86
(b) EXHIBITS:
1(a). Articles of Incorporation, dated May 24, 1995, filed
electronically on or about September 1, 1995 as Exhibit 1 to
Registration Statement No. 33-60323, are incorporated herein
by reference.
1(b). Articles of Amendment dated April 4, 1996, filed as Exhibit
1(b) to Pre-Effective Amendment 2, is incorporated herein by
reference.
2. Copy of By-laws filed electronically on or about April 18,
1996 as Exhibit 2, is incorporated herein as reference.
3. Not Applicable.
4. Not Applicable.
5. Not Applicable.
6. Copy of Distribution Agreement between Strategist Income
Fund, Inc. on behalf of its underlying series funds and
American Express Service Corporation, filed electronically
on or about January 29, 1997 as Exhibit 6 to Registrant's
Post-Effective Amendment No. 1, is incorporated herein by
reference.
7. Not Applicable.
8(a). Copy of Custodian Agreement between Strategist Income Fund
Inc. on behalf of its underlying series funds and American
Express Trust Company filed electronically on or about
January 29, 1997 as Exhibit 8(a) to Registrant's Post-
Effective Amendment No. 1, is incorporated herein by
reference.
8(b). Copy of Addendum to Custodian, dated June 10, 1996 between
Strategist Income Fund, Inc., American Express Trust Company
and American Express Financial Corporation filed
electronically on or about January 29, 1997 as Exhibit
8(b)to Registrant's Post-Effective Amendment No. 1, is
incorporated herein by reference..
9(a). Copy of Transfer Agency Agreement between Strategist Income
Fund, Inc. on behalf of its underlying series funds and
American Express Financial Corporation filed electronically
on or about January 29, 1997 as Exhibit 9(a) to Registrant's
Post-Effective Amendment No. 1, is incorporated herein by
reference.
9(b). Copy of Administrative Services Agreement between Strategist
Income Fund, Inc. on behalf of its underlying series funds
and American Express Financial Corporation filed
electronically on or about January 29, 1997 as Exhibit 9(b)
to Registrant's Post-Effective Amendment No. 1, is
incorporated herein by reference.
<PAGE>
PAGE 87
9(c). Copy of Agreement and Declaration of Unitholders between
Strategist Government Income Fund and IDS Federal Income
Fund, Inc. filed electronically on or about January 29, 1997
as Exhibit 9(c) to Registrant's Post-Effective Amendment No.
1, is incorporated herein by reference.
9(d). Copy of Agreement and Declaration of Unitholders between
Strategist High Yield Fund and IDS Extra Income Fund, Inc.
filed electronically on or about January 29, 1997 as Exhibit
9(d) to Registrant's Post-Effective Amendment No. 1, is
incorporated herein by reference.
9(e). Copy of Agreement and Declaration of Unitholders, between
Strategist Quality Income fund and IDS Selective Fund, Inc.
filed electronically on or about January 29, 1997 as Exhibit
9(e) to Registrant's Post-Effective Amendment No. 1, is
incorporated herein by reference.
10. An opinion and consent of counsel as to the legality of
securities being registered is filed with Registrant's most
recent 24f-2 notice.
11. The Independent Auditor's Consent, is filed electronically
herewith as Exhibit 11.
12. Not Applicable.
13. Copy of the Share Purchase Agreement between Strategist
Income Fund, Inc. and American Express Financial Corporation
filed as Exhibit 13 to Pre-Effective Amendment 2, is
incorporated herein by reference.
14. Not Applicable.
15. Copy of Plan and Agreement of Distribution between
Strategist Income Fund, Inc. on behalf of its underlying
series funds and American Express Service Corporation filed
electronically on or about January 29, 1997 as Exhibit 15 to
Registrant's Post-Effective Amendment No. 1, is incorporated
herein by reference.
16. Schedule for computation of each performance quotation
provided in the Registration Statement in response to Item
22(b) filed on or about April 19, 1996 as Exhibit 16 to
Registrant's Pre-Effective Amendment No. 2 is incorporated
herein by reference.
17. Financial data schedules, are filed electronically herewith.
18. Not Applicable.
19(a). Trustees Power of Attorney to sign Amendments to
Registration Statement, dated January 8, 1997, filed
electronically on or about January 29, 1997 as Exhibit 19(a)
to Registrant's Post-Effective Amendment No. 1, is
incorporated herein by reference.
<PAGE>
PAGE 88
19(b ).
Officers' Power of Attorney to sign Amendments to
Registration Statement, dated April 11, 1996, filed
electronically as Exhibit 19(b) to Registrant's Pre-
Effective Amendment No. 2, is incorporated herein by
reference.
19(c). Directors' Power of Attorney to sign Amendments to this
Registration Statement, dated April 24, 1996, filed
electronically as Exhibit 19(c) to Registrant's Post-
Effective Amendment No. 1, is incorporated herein by
reference.
19(d). Officers' Power of Attorney to sign Amendments to this
Registration Statement, dated April 24, 1996, filed
electronically as Exhibit 19(d) to Registrant's Post-
Effective Amendment No. 1, is incorporated herein by
reference.
Item 25. Persons Controlled by or Under Common Control with
Registrant
None.
Item 26. Number of Holders of Securities
(1) (2)
Number of Record
Holders as of
Title of Class July 15, 1997
Common Stock
$.01 par value
Strategist Government Income Fund 6
Strategist High Yield Fund 39
Strategist Quality Income Fund 8
Item 27. Indemnification
The Articles of Incorporation of the Registrant provide that the
Fund shall indemnify any person who was or is a party or is
threatened to be made a party, by reason of the fact that she or he
is or was a director, officer, employee or agent of the Fund, or is
or was serving at the request of the Fund as a director, officer,
employee or agent of another company, partnership, joint venture,
trust or other enterprise, to any threatened, pending or completed
action, suit or proceeding, wherever brought, and the Fund may
purchase liability insurance and advance legal expenses, all to the
fullest extent permitted by the laws of the State of Minnesota, as
now existing or hereafter amended. The By-laws of the Registrant
provided that present or former directors or officers of the Fund
made or threatened to be made a party to or involved (including as
a witness) in an actual or threatened action, suit or proceeding
shall be indemnified by the Fund to the full extent authorized by
the Minnesota Business Corporation Act, all as more fully set forth
in the By-laws filed as an exhibit to this registration statement.
<PAGE>
PAGE 89
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnificatioin is against public policy as expressed in the Act
and is, therefore unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense
of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to a court or appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
Any indemnification hereunder shall not be exclusive of any other
rights of indemnification to which the directors, officers,
employees or agents might otherwise be entitled. No
indemnification shall be made in violation of the Investment
Company Act of 1940.
<PAGE>
PAGE 90
<PAGE>
PAGE 1
American Express Financial Corporation is the investment advisor of
the Portfolios of the Trust.
<PAGE>
Item 29(c). Not applicable.
Item 30. Location of Accounts and Records
American Express Financial Corporation
IDS Tower 10
Minneapolis, MN 55440
Item 31. Management Services
Not Applicable.
Item 32. Undertakings
(a) Not Applicable.
(b) Not Applicable.
(c) The Registrant undertakes to furnish each person
to whom a prospectus is delivered with a copy of
the Registrant's latest annual report to
shareholders, upon request and without charge.
<PAGE>
PAGE 91
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, Strategist Income
Fund, Inc., certifies that it meets the requirements for the
effectiveness of this Amendment to its Registration Statement
pursuant to Rule 485(b) under the Securities Act of 1933 and has
duly caused this Amendment to its Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Minneapolis and State of Minnesota on the 30th day
of July, 1997.
STRATEGIST INCOME FUND, INC.
By /s/ James A. Mitchell*
James A. Mitchell, President
By /s/ Melinda S. Urion
Melinda S. Urion, Treasurer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to its Registration Statement has been signed below by
the following persons in the capacities indicated on the 30th day
of July, 1997.
Signature Title
By /s/ Rodney P. Burwell** Director
Rodney P. Burwell
By /s/ Jean B. Keffeler** Director
Jean B. Keffeler
By /s/ Thomas R. McBurney** Director
Thomas R. McBurney
By /s/ James A. Mitchell** Director
James A. Mitchell
* Signed pursuant to Officer's Power of Attorney dated April 24,
1996, filed electronically to Registrant's Pre-Effective Amendment
No. 2 by:
____________________________
Eileen J. Newhouse
** Signed pursuant to Director's Power of Attorney dated April 24,
1996 filed electronically to Registrant's Pre-Effective Amendment
No. 2 by:
____________________________
Eileen J. Newhouse<PAGE>
PAGE 92
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, INCOME TRUST consents to the filing
of this Amendment to the Registration Statement signed on its
behalf by the undersigned, thereunto duly authorized, in the City
of Minneapolis and State of Minnesota on the 30th day of July,
1997.
INCOME TRUST
By /s/ William R. Pearce**
William R. Pearce
President
By /s/ Melinda S. Urion
Melinda S. Urion
Treasurer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed below by
the following persons in the capacities indicated on the 30th day
of July, 1997.
Signatures Capacity
/s/ William R. Pearce* Trustee
William R. Pearce
/s/ H. Brewster Atwater Jr.* Trustee
H. Brewster Atwater Jr.
/s/ Lynne V. Cheney* Trustee
Lynne V. Cheney
/s/ William H. Dudley* Trustee
William H. Dudley
/s/ Robert F. Froehlke* Trustee
Robert F. Froehlke
/s/ David R. Hubers* Trustee
David R. Hubers
/s/ Heinz F. Hutter* Trustee
Heinz F. Hutter
/s/ Anne P. Jones* Trustee
Anne P. Jones
/s/ Melvin R. Laird* Trustee
Melvin R. Laird
/s/ Alan K. Simpson* Trustee
Alan K. Simpson
<PAGE>
PAGE 93
Signatures Capacity
/s/ Edson W. Spenser* Trustee
Edson W. Spencer
/s/ John R. Thomas* Trustee
John R. Thomas
/s/ Wheelock Whitney* Trustee
Wheelock Whitney
/s/ C. Angus Wurtele* Trustee
C. Angus Wurtele
* Signed pursuant to Trustees Power of Attorney dated January 8,
1997, filed electronically as Exhibit 19(a) to Registrant's Post-
Effective Amendment No. 1, is incorporated herein by reference, by:
___________________________________
William R. Pearce
** Signed pursuant to Officers' Power of Attorney dated April 11,
1996, filed electronically as Exhibit 19(b)to Registrant's Pre-
Effective Amendment No. 2, by:
___________________________________
William R. Pearce
<PAGE>
PAGE 94
CONTENTS OF THIS POST-EFFECTIVE AMENDMENT NO. 2 TO REGISTRATION
STATEMENT NO. 33-60323
This Amendment to the Registration Statement comprises the
following papers and documents:
The facing sheet.
Cross reference sheet.
Part A.
The prospectus.
Part B.
Statement of Additional Information.
Financial Statements.
Part C.
Other Information.
The signatures.
<PAGE>
PAGE 1
STRATEGIST INCOME FUND, INC.
Registration Number 33-60323/811-7305
EXHIBIT INDEX
Exhibit 11: Independent Auditors' Consent.
Exhibit 17: Financial data schedules.
<PAGE>
PAGE 1
Independent auditors' consent
The board and shareholders
Strategist Income Fund, Inc.:
Strategist Government Income Fund
Strategist High Yield Fund
Strategist Quality Income Fund
We consent to the use of our reports incorporated herein by
reference and to the references to our Firm under the headings
"Financial highlights" in Part A and "INDEPENDENT AUDITORS" in Part
B of the Registration Statement.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
July 30, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> STRATEGIST GOVERNMENT INCOME FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> MAY-31-1997
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 213
<ASSETS-OTHER> 621195
<OTHER-ITEMS-ASSETS> 2104
<TOTAL-ASSETS> 623512
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 75656
<TOTAL-LIABILITIES> 75656
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 543440
<SHARES-COMMON-STOCK> 111123
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 1417
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1510)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4509
<NET-ASSETS> 547856
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 36193
<OTHER-INCOME> 0
<EXPENSES-NET> 5225
<NET-INVESTMENT-INCOME> 30968
<REALIZED-GAINS-CURRENT> 3003
<APPREC-INCREASE-CURRENT> 4509
<NET-CHANGE-FROM-OPS> 38480
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 34792
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 99299
<NUMBER-OF-SHARES-REDEEMED> 3319
<SHARES-REINVESTED> 6996
<NET-CHANGE-IN-ASSETS> 507856
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 121894
<AVERAGE-NET-ASSETS> 489497
<PER-SHARE-NAV-BEGIN> 4.91
<PER-SHARE-NII> .30
<PER-SHARE-GAIN-APPREC> .06<PAGE>
<PER-SHARE-DIVIDEND> .30
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 4.93
<EXPENSE-RATIO> 1.10
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> STRATEGIST QUALITY INCOME FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> MAY-31-1997
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 595245
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 595245
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 20445
<TOTAL-LIABILITIES> 20445
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 561375
<SHARES-COMMON-STOCK> 62837
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 1692
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2431
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 9302
<NET-ASSETS> 574800
<DIVIDEND-INCOME> 193
<INTEREST-INCOME> 35714
<OTHER-INCOME> 0
<EXPENSES-NET> 5325
<NET-INVESTMENT-INCOME> 30582
<REALIZED-GAINS-CURRENT> 2511
<APPREC-INCREASE-CURRENT> 9302
<NET-CHANGE-FROM-OPS> 42395
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 29382
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 57264
<NUMBER-OF-SHARES-REDEEMED> 943
<SHARES-REINVESTED> 3164
<NET-CHANGE-IN-ASSETS> 544800
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2565
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 64493
<AVERAGE-NET-ASSETS> 498330
<PER-SHARE-NAV-BEGIN> 8.95
<PER-SHARE-NII> .55
<PAGE>
<PER-SHARE-GAIN-APPREC> .18
<PER-SHARE-DIVIDEND> .53
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.15
<EXPENSE-RATIO> 1.10
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> IDS STRATEGIST HIGH YIELD FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> MAY-31-1997
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 979802
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 979802
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 19930
<TOTAL-LIABILITIES> 19930
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 943674
<SHARES-COMMON-STOCK> 217481
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 1143
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 8388
<ACCUM-APPREC-OR-DEPREC> 23443
<NET-ASSETS> 959872
<DIVIDEND-INCOME> 3813
<INTEREST-INCOME> 53906
<OTHER-INCOME> 0
<EXPENSES-NET> 6803
<NET-INVESTMENT-INCOME> 50916
<REALIZED-GAINS-CURRENT> (8388)
<APPREC-INCREASE-CURRENT> 23443
<NET-CHANGE-FROM-OPS> 65971
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (50495)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 203619
<NUMBER-OF-SHARES-REDEEMED> (4557)
<SHARES-REINVESTED> 11458
<NET-CHANGE-IN-ASSETS> 929872
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 65679
<AVERAGE-NET-ASSETS> 590005
<PER-SHARE-NAV-BEGIN> 4.31
<PER-SHARE-NII> .38
<PAGE>
<PER-SHARE-GAIN-APPREC> .09
<PER-SHARE-DIVIDEND> (.37)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 4.41
<EXPENSE-RATIO> 1.19
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
