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. 3 [x]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 5 (File No. 811-7305) [x]
--------
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:
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[x] on July 30, 1998 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.
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.
<PAGE>
Cross reference sheet showing the location in the prospectus and Statement of
Additional Information of the information called for by items enumerated in
Parts A and B of Form N-1A.
Negative answers omitted are so indicated.
PART A
Item No. Section in Prospectus
1 Cover page of prospectus
2 (a) Fund expenses
(b) The Funds in brief
(c) The Funds in brief
3 (a) Financial highlights
(b) NA
(c) Performance
(d) Financial highlights
4 (a) The Funds in brief; Investment policies and risks; How the Funds
and Portfolios are organized
(b) Investment policies and risks
(c) Investment policies and risks
5 (a) Board members and officers
(b)(i) Investment manager; About the Advisor
(b)(ii) Investment manager; Administrator and transfer agent
(b)(iii) Investment manager
(c) Portfolio managers
(d) Administrator and transfer agent
(e) Administrator and transfer agent
(f) Investment manager; Administrator and transfer agent; Distributor
(g) About the Advisor
5A (a) *
(b) *
6 (a) Shares; Voting rights
(b) NA
(c) NA
(d) NA
(e) Cover page; Special shareholder services
(f) Dividend and capital gain distributions; Reinvestments
(g) Taxes
(h) Special considerations regarding master/feeder structure
7 (a) Distributor
(b) Valuing Fund shares
(c) NA
(d) How to purchase shares
(e) NA
(f) Distributor
(g) NA
8 (a) How to redeem shares
(b) NA
(c) How to purchase, exchange or redeem shares: Other important
information
(d) How to purchase, exchange or redeem shares: How to redeem shares
9 None
PART B
Item No. Section in Statement of Additional Information
10 Cover page of SAI
11 Table of Contents
12 NA
13 (a) Additional Investment Policies; all appendices except Dollar-Cost
Averaging
(b) Additional Investment Policies
(c) Additional Investment Policies
(d) Security Transactions
14 (a) Board Members and Officers
(b) Board Members and Officers
(c) Board Members and Officers
15 (a) NA
(b) Principal Holders of Securities, if applicable
(c) Board Members and Officers
16 (a)(i) How the Funds and Portfolios are organized; About the Advisor**
(a)(ii) Agreements: Investment Management Services Agreement, Plan and
Agreement of Distribution / Distribution Agreement
(a)(iii) Agreements: Investment Management Services Agreement
(b) Agreements: Investment Management Services Agreement
(c) NA
(d) Agreements: Administrative Services Agreement
(e) NA
(f) Agreements: Plan and Agreement of Distribution / Distribution
Agreement
(g) NA
(h) Custodian Agreement; Independent Auditors
(i) Agreements: Transfer Agency Agreement; Custodian Agreement
17 (a) Security Transactions
(b) Brokerage Commissions Paid to Brokers Affiliated with the Advisor
(c) Security Transactions
(d) Security Transactions
(e) Security Transactions
18 (a) Shares; Voting rights**
(b) NA
19(a) Investing in the Funds
(b) Valuing Fund Shares; Investing in the Funds
(c) Redeeming Shares
20 Taxes
21 (a) Agreements: Distribution Agreement
(b) NA
(c) NA
22 (a) NA
(b) Performance Information
23 Financial Statements
* Designates information is located in annual report.
** Designates location in prospectus.
<PAGE>
Strategist Income Fund, Inc.
Prospectus
July 30, 1998
This prospectus describes three 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 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.
<PAGE>
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
Web site address: http://www.americanexpress.com/direct
<PAGE>
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
<PAGE>
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
Year 2000
Appendix A: Description of corporate bond ratings
Appendix B: Descriptions of derivative instruments
<PAGE>
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 investment 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.
<PAGE>
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 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 $195 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,
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.
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 vice president and 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.
<PAGE>
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.
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):
<TABLE>
<CAPTION>
Government Income Fund High Quality
Yield Fund Income Fund
- ------------------------------------ ----------------------- ----------------------- -----------------------
<S> <C> <C> <C>
Management fee(c) 0.50% 0.56% 0.51%
12b-1 fee 0.25 0.25 0.25
Other expenses(d) 0.35 0.39 0.34
Total (after reimbursement) 1.10 1.20 1.10
</TABLE>
<PAGE>
(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 the Portfolios.
(d) Other expenses include an administrative services fee, a transfer agency fee
and other nonadvisory expenses.
The Advisor and the Distributor have agreed to waive certain fees and to absorb
certain other Fund expenses until Dec. 31, 1998. Under this agreement, total
expenses will not exceed 1.10% for Government Income Fund and Quality Income
Fund's average daily net assets and 1.20% for High Yield Fund's average daily
net assets. Without this agreement, the ratio of expenses to average daily net
assets would have been: 1.57% for Government Income Fund, 2.15% for High Yield
Fund and 1.48% 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:
<TABLE>
<CAPTION>
Government High Quality
Income Fund Yield Fund Income Fund
- --------------------------- -------------------------- -------------------------- --------------------------
<S> <C> <C> <C>
1 year $11 $12 $11
3 years $35 $38 $35
5 years $61 $66 $61
10 years $134 $146 $134
</TABLE>
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.
<PAGE>
<TABLE>
<CAPTION>
Performance
Financial highlights
The tables below show certain important information for evaluating each Fund's
results.
Government Income Fund
Fiscal period ended May 31, 1998 1997b
Per share income and capital changesa
<S> <C> <C>
Net asset value, beginning of period $4.93 $4.91
Income from investment operations:
Net investment income (loss) .32 .30
Net gains (losses) (both realized and unrealized) .11 .06
Total from investment operations .43 .36
Less distributions:
Dividends from net investment income (.33) (.30)
Distributions from realized gains (.05) (.04)
Total distributions (.38) (.34)
Net asset value, end of period $4.98 $4.93
Ratios/supplemental data
Net assets, end of period (in thousands) $658 $548
Ratio of expenses to average daily net assetsc 1.09% 1.10%d
Ratio of net income (loss) to average daily net assets 6.44% 6.48%d
Portfolio turnover rate (excluding short-term securities) 159% 146%
Total return 9.0% 7.6%
a For a share outstanding throughout the period. Rounded to the nearest cent.
b Inception date was June 10, 1996.
c The Advisor and Distributor voluntarily limited total operating expenses.
Without this agreement, the ratio of expenses to average daily net assets would
have been 1.57% and 25.68% for the periods ended May 31, 1998 and 1997,
respectively.
d Adjusted to an annual basis.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
High Yield Fund
Fiscal period ended May 31, 1998 1997b
Per share income and capital changesa
<S> <C> <C>
Net asset value, beginning of period $4.41 $4.31
Income from investment operations:
Net investment income (loss) .43 .38
Net gains (losses) (both realized and unrealized) .17 .09
Total from investment operations .60 .47
Less distributions:
Dividends from net investment income (.40) (.37)
Net asset value, end of period $4.61 $4.41
Ratios/supplemental data
Net assets, end of period (in thousands) $1,137 $960
Ratio of expenses to average daily net assetsc .72% 1.19%d
Ratio of net income (loss) to average daily net assets 9.28% 8.90%d
Portfolio turnover rate (excluding short-term securities) 81% 92%
Total return 14.0% 11.4%
a For a share outstanding throughout the period. Rounded to the nearest cent.
b Inception date was June 10, 1996.
c The Advisor and Distributor voluntarily limited total operating expenses.
Without this agreement, the ratio of expenses to average daily net assets would
have been 2.15% and 11.48% for the periods ended 1998 and 1997 respectively.
d Adjusted to an annual basis.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Quality Income Fund
Fiscal period ended May 31, 1998 1997b
Per share income and capital changesa
<S> <C> <C>
Net asset value, beginning of period $9.15 $8.95
Income from investment operations:
Net investment income (loss) .58 .55
Net gains (losses) (both realized and unrealized) .34 .18
Total from investment operations .92 .73
Less distributions:
Dividends from net investment income (.61) (.53)
Dividends from realized gains (.06) --
Total distributions (.67) (.53)
Net asset value, end of period $9.40 $9.15
Ratios/supplemental data
Net assets, end of period (in thousands) $673 $575
Ratio of expenses to average daily net assetsc .97% 1.10%d
Ratio of net income (loss) to average daily net assets 6.22% 6.33%d
Portfolio turnover rate (excluding short-term securities) 20% 31%
Total return 10.3% 8.3%
a For a share outstanding throughout the period. Rounded to the nearest cent.
b Inception date was June 10, 1996.
c The Advisor and Distributor voluntarily limited total operating expenses.
Without this agreement, the ratio of expenses to average daily net assets would
have been 1.48% and 13.34% for the periods ended May 31, 1998 and 1997,
respectively.
d Adjusted to an annual basis.
</TABLE>
The information in these tables have 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.
<PAGE>
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.
<TABLE>
<CAPTION>
Average annual total returns as of May 31, 1998
Purchase 1 year 5 years 10 years
made ago ago ago
- ---------------------------------------- ---------------------- --------------------- ----------------------
<S> <C> <C> <C>
Government Income Fund +9.04% +6.30% +7.67%
Merrill Lynch 1 to 5 year Government +7.71% +5.86% +7.73%
Index
High Yield Fund +14.02% +10.86% +10.81%
Merrill Lynch High Yield Bond Index +12.94% +11.03% +12.01%
Quality Income Fund +10.30% +7.25% +9.32%
Lehman Aggregate Bond Index +10.92% +7.02% +9.20%
Cumulative total returns as of May 31, 1998
Purchase 1 year 5 years 10 years
made ago ago ago
- ---------------------------------------- ---------------------- --------------------- ----------------------
Government Income Fund +9.04% +35.75% +109.30%
Merrill Lynch 1 to 5 year Government +7.71% +32.94% +110.58%
Index
High Yield Fund +14.02% +67.43% +179.24%
Merrill Lynch High Yield Bond Index +12.94% +68.75% +210.85%
Quality Income Fund +10.30% +41.89% +143.81%
Lehman Aggregate Bond Index +10.92% +40.38% +141.09%
</TABLE>
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,
prior to June 10, 1996, in the foregoing tables represents performance of the
corresponding predecessor funds prior to
<PAGE>
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.
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. Merrill Lynch High Yield
Bond Index provides a broad-based measure of performance of the non-investment
grade U.S. domestic bond market. 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 29, 1998 was 6.53% for Government Income Fund,
13.39% for High Yield Fund and 5.60% 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.
<PAGE>
Investment policies and risks
The policies described below apply both to the Fund and the corresponding
Portfolio.
Government Income Portfolio - Government Income Portfolio invests primarily in
securities issued or guaranteed as to principal and interest by the U.S.
government, its agencies and instrumentalities. Under normal market conditions,
at least 65% of Government Income Portfolio's total assets will be invested in
such securities. Although Government Income Portfolio may invest in any U.S.
government securities, it is anticipated that most of the Portfolio will consist
of government securities representing part ownership of pools of mortgage loans.
Under federal law, the interest income earned from U.S. Treasury securities is
exempt from state and local taxes. All states allow mutual funds to pass such
exemptions to their shareholders, although there are conditions to this
treatment in some states.
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 investment 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 investment 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
<PAGE>
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. A portfolio consisting primarily of
debt securities will also react in this manner. Generally, the longer the
maturity of a debt security, the higher its yield and the greater its
sensitivity 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 on the investment manager's credit analysis.
Securities that are subsequently downgraded in quality may continue to be held
by a Portfolio and will be sold only when the investment manager believes it is
advantageous to do so.
<TABLE>
<CAPTION>
High Yield Portfolio
Bond ratings and holdings for the fiscal year
ending May 31, 1998
S&P rating (or Percent of net assets in
Percent of Moody's equivalent) Protection of unrated securities assessed
net assets principal and interest by the Advisor
- ---------------------- -------------------- ---------------------------------- --------------------------------------
<S> <C> <C> <C>
0.18% AAA Highest quality 0.09%
- AA High quality -
0.10 A Upper medium grade -
0.77 BBB Medium grade -
16.90 BB Moderately speculative 0.07
60.85 B Speculative 2.19
5.50 CCC Highly speculative 4.52
- CC Poor quality -
- C Lowest quality -
0.29 D In default -
12.22 Unrated Unrated securities 5.35
</TABLE>
See the Appendix to this prospectus describing corporate bond ratings for
further information.
Government Income Portfolio does not invest in securities below investment
grade.
Debt securities sold at a deep discount: Some bonds are sold at deep discounts
because they do not pay interest until maturity. They include zero coupon bonds
and PIK (pay-in-kind) bonds. Because such securities do not pay current cash
income the market value of these securities may be subject to greater volatility
than other debt securities. To comply with tax laws, a Portfolio has to
recognize a computed amount of interest income and pay
<PAGE>
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 dividends.
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 which receive
differing proportions of the interest and principal payments from the underlying
assets. Generally, there are two classes of stripped mortgage-backed securities:
Interest Only (IO) and Principal Only (PO). IOs entitle the holder to receive
distributions consisting of all or a portion of the interest on the underlying
pool of mortgage loans or mortgage-backed securities. POs entitle the holder to
receive distributions consisting of all or a portion of the principal of the
underlying pool of mortgage loans or mortgage-backed securities. The cash flows
and yields on IOs and POs are extremely sensitive to the rate of principal
payments (including prepayments) on the underlying mortgage loans or
mortgage-backed securities. A rapid rate of principal payments may adversely
affect the yield to maturity of IOs. A slow rate of principal payments may
adversely affect the yield to maturity of POs. If prepayments of principal are
greater than anticipated, an investor in IOs may incur substantial losses. If
prepayments of principal are slower than anticipated, the yield on a PO will be
affected more severely than would be the case with a traditional mortgage-backed
security.
<PAGE>
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.
The yield characteristics of mortgage-backed securities differ from those of
other debt securities. Among the differences are that interest and principal
payments are made more frequently on mortgage-backed securities, usually
monthly, and principal may be repaid at any time. These factors may reduce the
expected yield.
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. There are risks when investing in
securities of foreign companies and governments in addition to those assumed
when investing in domestic securities. These risks are classified as country
risk, currency risk, and custody risk. Each can adversely affect the value of an
investment. Country risk includes the political, economic, and other conditions
of a country. These conditions include lack of publicly available information,
less government oversight, the possibility of government-imposed restrictions,
even the nationalization of assets. Currency risk results from the constantly
changing exchange rate between local currency and the U.S. dollar. Whenever the
Portfolio holds securities valued in local currency or holds the currency,
changes in the exchange rate add or subtract from the asset value of the
Portfolio. Custody risk refers to the process of clearing and settling trades.
It also covers holding securities with local agents and depositories. Low
trading volume and volatile prices in less developed markets make trades harder
to complete and settle. Local agents are held only to the standard of care of
the local market. Government or trade groups may compel local agents to hold
securities in designated depositories that are not subject to independent
evaluation. The less developed a country's securities market is, the greater the
likelihood of problems
<PAGE>
occurring. The risks of foreign investments are managed carefully but the
Portfolio cannot guarantee against losses that might result from them.
Derivative instruments: The investment 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 investment 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. The investment 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.
<PAGE>
Money market instruments: Short-term debt securities rated in the top two grades
or the equivalent are used to meet daily cash needs and at various times to hold
assets until better investment opportunities arise. Generally, less than 25% of
a Portfolio's total assets are in these money market instruments. However, for
temporary defensive purposes these investments could exceed that amount for a
limited period of time.
The investment policies described above may be changed by the 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 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 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 the Distributor. There is no fee to open an IMA account.
Payment for shares must be made directly to the Distributor.
<PAGE>
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.
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
<PAGE>
Your check should be made out to the Distributor. It will be deposited
into your IMA account and used, as necessary, to cover your purchase
request.
By systematic purchase:
Once you have opened an IMA account, you may authorize the Distributor
to automatically purchase shares on your behalf at intervals and in
amounts selected by you. See "Systematic purchase plans."
Other purchase information. Each Fund reserves the right, in its sole discretion
and without prior notice to shareholders, to withdraw or suspend all or any part
of the offering made by this prospectus, to reject purchase requests or to
change the minimum investment requirements. All requests to purchase shares of
the Fund are subject to acceptance by the 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.
<PAGE>
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.
A redemption is a taxable transaction. If the 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. 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.
<PAGE>
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
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 followed, a Fund will not 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 change your bank authorization date, it may also be necessary to change your
automatic investment date to coincide with the new transfer date.
<PAGE>
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:
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
<PAGE>
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.
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
<PAGE>
excise taxes. Dividend and capital gain distributions will have tax consequences
that 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. Capital gains are realized when a
security is sold for a higher price than was paid for it. 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 when a security is held
for more than one year. 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.
These long-term capital gains will be subject to differing tax rates depending
on the holding period of the underlying investments. 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.)
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 cash only for distributions
declared after your request has been processed.
If the U.S. Postal Service cannot deliver the checks for the cash distributions,
we will reinvest the checks into your account at the then-current net asset
value and make future distributions in the form of additional shares. Prior to
reinvestment no interest will accrue on amounts represented by uncashed
distribution or redemption checks.
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.
<PAGE>
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 short term (for shares held for one year or less) or long term (for shares
held for more than one year). Long-term capital gains will be taxed at rates
that vary depending upon the holding period. Long-term capital gains are divided
into two holding periods: (1) shares held more than one year but not more than
18 months and (2) shares held more than 18 months.
Your Taxpayer Identification Number (TIN) is important. As with any financial
account you open, you must list your current and correct Taxpayer Identification
Number (TIN) -- either your Social Security or Employer Identification number.
The TIN must be certified under penalties of perjury on your application when
you open an account.
If you don't provide the TIN, or the TIN you report is incorrect, you could be
subject to backup withholding of 31% of taxable distributions and proceeds from
certain sales and exchanges. You also could be subject to further penalties,
such as:
o a $50 penalty for each failure to supply your correct TIN
o a civil penalty of $500 if you make a false statement that results in no
backup withholding
o criminal penalties for falsifying information
You also could be subject to backup withholding because you failed to report
interest or dividends on your tax return as required.
<PAGE>
<TABLE>
<CAPTION>
How to determine the correct TIN
Use the Social Security or
For this type of account: Employer Identification number of:
<S> <C>
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
</TABLE>
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.
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.
<PAGE>
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 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.
<PAGE>
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 corresponding 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>
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, 1998, the Advisor received investment
management fees of .50% of its average daily net assets for Government Income
Portfolio, .56% for High Yield Portfolio and .51% for Quality Income Portfolio.
Under the agreement, each Portfolio also pays taxes, brokerage commissions and
nonadvisory expenses.
Administrator and transfer agent
Under an Administrative Services Agreement, each Fund pays the Advisor for
administration and accounting services at an annual rate that decreases as
assets increase. For each Fund, the fee ranges from 0.05% to 0.025%.
Under a separate Transfer Agency Agreement, American Express Client Service
Corporation (AECSC) maintains shareholder accounts and records. Each fund pays
AECSC an annual fee for each Fund 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. Under a Plan and Agreement of Distribution, 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.
<PAGE>
Total expenses paid by each Fund for the fiscal year ended May 31, 1998, were
1.09% of average daily net assets for Government Income Fund, .72% for High
Yield Fund and .97% for Quality Income Fund.
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.
Year 2000
The Year 2000 issue is the result of computer programs having been written using
two digits rather than four to define a year. Any programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than 2000. This could result in the failure of major systems or miscalculations,
which would have a material impact on the operations of the Funds. The Funds
have no computer systems of its own but is dependent upon the systems maintained
by the Advisor and certain other third parties.
A comprehensive review of the Advisor's computer systems and business processes
has been conducted to identify the major systems that could be affected by the
Year 2000 issue. Steps are being taken to resolve any potential problems
including modification of existing software and the purchase of new software.
These measures are scheduled to be completed and tested on a timely basis. The
Advisor's goal is to complete internal remediation and testing of each of its
critical systems by the end of 1998 and to continue compliance efforts through
1999. The Year 2000 readiness of other third parties whose system failures could
have an impact on the Funds' operations currently is being evaluated. The
companies or governments in which the Portfolio invests also may be adversely
affected by Year 2000 issues. This may affect the value of the Portfolio
investments. The potential materiality of any impact is not known at this time.
<PAGE>
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.
<PAGE>
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.
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>
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 goals 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>
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>
STATEMENT OF ADDITIONAL INFORMATION
FOR
STRATEGIST INCOME FUND, INC.
July 30, 1998
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, 1998, and it is to be used with the Funds' prospectus
dated July 30, 1998, and the Annual Report for the fiscal year ended May 31,
1998.
<PAGE>
TABLE OF CONTENTS
Goals and Investment Policies.....................................See Prospectus
Additional Investment Policies..............................................p. 4
Security Transactions......................................................p. 14
Brokerage Commissions Paid to Brokers Affiliated with the Advisor..........p. 17
Performance Information....................................................p. 18
Valuing Fund Shares........................................................p. 21
Investing in the Funds.....................................................p. 22
Redeeming Shares...........................................................p. 23
Taxes......................................................................p. 24
Agreements.................................................................p. 25
Organizational Information.................................................p. 28
Board Members and Officers.................................................p. 28
Compensation for the Fund and Portfolio Board Members......................p. 30
Independent Auditors.......................................................p. 35
Financial Statements...........................................See Annual Report
Prospectus.................................................................p. 36
Appendix A: Description of Commercial Paper Ratings........................p. 37
Appendix B: Foreign Currency Transactions..................................p. 38
Appendix C: Investing in Foreign Securities................................p. 43
Appendix D: Options and Interest Rate Futures Contracts....................p. 44
<PAGE>
Appendix E: Mortgage-Backed Securities.....................................p. 50
Appendix F: Mortgage Pass-Through Certificates.............................p. 51
Appendix G: Dollar-Cost Averaging..........................................p. 54
<PAGE>
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 referred to as 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 as amended (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 and Fund have not borrowed in the
past and have no present intention to borrow.
`Make cash loans if the total commitment amount exceeds 5% of the Portfolio's
total assets.
<PAGE>
`Purchase more than 10% of the outstanding voting securities of an issuer.
`Invest more than 5% of its total assets in securities of any one company,
government or political subdivision thereof, except the limitation will not
apply to investments in securities issued by the U.S. government, its agencies
or instrumentalities, and except that up to 25% of the Portfolio's total assets
may be invested without regard to this 5% limitation.
`Buy or sell real estate, unless acquired as a result of ownership of securities
or other instruments, except this shall not prevent the Portfolio from investing
in securities or other instruments backed by real estate or securities of
companies engaged in the real estate business or real estate investment trusts.
For purposes of this policy, real estate includes real estate limited
partnerships.
`Buy or sell physical commodities unless acquired as a result of ownership of
securities or other instruments, except this shall not prevent the Portfolio
from buying or selling options and futures contracts or from investing in
securities or other instruments backed by, or whose value is derived from,
physical commodities.
`Make a loan of any part of its assets to American Express Financial Corporation
(the Advisor), to the board members and officers of the Advisor or to its own
board members and officers.
`Purchase securities of an issuer if the board members and officers of the Fund,
the Portfolio and the Advisor hold more than a certain percentage of the
issuer's outstanding securities. If the holdings of all board members and
officers of the Fund, the Portfolio and the Advisor who own more than 0.5% of an
issuer's securities are added together, and if in total they own more than 5%,
the Portfolio will not purchase securities of that issuer.
`Lend Portfolio securities in excess of 30% of its net assets. The current
policy of the Portfolio's board is to make these loans, either long- or
short-term, to broker-dealers. In making loans, the Portfolio receives 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>
`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 the Portfolio 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 a futures contract 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.
The Portfolio has no current intention to invest in securities of other
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 the Portfolio's net assets in securities and derivative
instruments that are illiquid. For purposes of this policy illiquid securities
include some privately placed securities, public securities and Rule 144A
securities that for one reason or another may no longer have a readily available
market, repurchase agreements with maturities greater than seven days,
non-negotiable fixed-time deposits and over-the-counter options.
In determining the liquidity of Rule 144A securities, which are unregistered
securities offered to qualified institutional buyers, and interest-only and
principal-only fixed mortgage-backed securities (IOs and POs) issued by the U.S.
government or its agencies and instrumentalities, the Advisor, under guidelines
established by the board, will
<PAGE>
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, under guidelines established by the board, will evaluate relevant
factors such as the issuer and the size and nature of its commercial paper
programs, the willingness and ability of the issuer or dealer to repurchase the
paper, and the nature of the clearance and settlement procedures for the paper.
The Portfolio may make contracts to purchase securities for a fixed price at a
future date beyond normal settlement time (when-issued securities or forward
commitments). Under normal market conditions, the Portfolio does not intend to
commit more than 5% of its total assets to these practices. The Portfolio does
not pay for the securities or receive dividends or interest on them until the
contractual settlement date. The Portfolio will designate cash or liquid
high-grade debt securities at least equal in value to its commitments to
purchase the securities. When-issued securities or forward commitments are
subject to market fluctuations and they may affect the Portfolio's total assets
the same as owned securities.
The Portfolio may maintain a portion of its assets in cash and cash-equivalent
investments. The cash-equivalent investments the Portfolio may use are
short-term U.S. and Canadian government securities and negotiable certificates
of deposit, non-negotiable fixed-time deposits, bankers' acceptances and letters
of credit of banks or savings and loan associations having capital, surplus and
undivided profits (as of the date of its most recently published annual
financial statements) in excess of $100 million (or the equivalent in the
instance of a foreign branch of a U.S. bank) at the date of investment. The
Portfolio also may purchase short-term commercial paper rated P-2 or better by
Moody's Investors 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:
<PAGE>
`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 and Fund have not borrowed in the
past and have 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 Portfolio's board is to make these loans, either long- or
short-term, to broker-dealers. In making loans, the Portfolio receives 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.
<PAGE>
`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 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 the Portfolio may enter into interest rate
future 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 a futures contract are not deemed to be a pledge of assets.
`Invest more than 10% of its total assets in securities of investment companies.
The Portfolio has no current intention to invest in securities of other
investment companies.
`Invest in exploration or development programs, such as oil, gas or mineral
leases.
`Invest more than 5% of its total assets in securities of companies, including
any predecessors, that have a record of less than three years continuous
operations.
`Invest in a company to control or manage it.
`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 the Portfolio's net assets in securities and derivative
instruments that are illiquid. For purposes of this policy illiquid securities
include some privately placed securities, public securities and Rule 144A
securities that for one reason or another may no longer have a readily available
market, loans and loan participations, repurchase agreements with maturities
greater than seven days, non-negotiable fixed-time deposits and over-the-counter
options.
<PAGE>
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.
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
<PAGE>
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.
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 and Fund have not borrowed in the
past and have 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
<PAGE>
up to 25% of the Portfolio's total assets may be invested without regard to this
5% limitation.
`Buy or sell real estate, unless acquired as a result of ownership of securities
or other instruments, except this shall not prevent the Portfolio from investing
in securities or other instruments backed by real estate or securities of
companies engaged in the real estate business or real estate investment trusts.
For purposes of this policy, real estate includes real estate limited
partnerships.
`Buy or sell physical commodities unless acquired as a result of ownership of
securities or other instruments, except this shall not prevent the Portfolio
from buying or selling options and futures contracts or from investing in
securities or other instruments backed by, or whose value is derived from,
physical commodities.
`Make a loan of any part of its assets to the Advisor, to the board members and
officers of the Advisor or to its own board members and officers.
`Purchase securities of an issuer if the board members and officers of the Fund,
the Portfolio and the Advisor hold more than a certain percentage of the
issuer's outstanding securities. If the holdings of all board members and
officers of the Fund, the Portfolio and the Advisor who own more than 0.5% of an
issuer's securities are added together and if in total they own more than 5%,
the Portfolio will not purchase securities of that issuer.
`Lend Portfolio securities in excess of 30% of its net assets. The current
policy of the Portfolio's board is to make these loans, either long- or
short-term, to broker-dealers. In making loans, the Portfolio receives 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 the Portfolio may enter into interest rate
futures contracts.
<PAGE>
`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 a futures contract are not deemed to be a pledge of assets.
`Invest more than 5% of its total assets in securities of companies, including
any predecessors, that have a record of less than three years continuous
operations.
`Invest more than 10% of its total assets in securities of investment companies.
The Portfolio has no current intention to invest in securities of other
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 the Portfolio's net assets in securities and derivative
instruments that are illiquid. For purposes of this policy illiquid securities
include some privately placed securities, public securities and Rule 144A
securities that for one reason or another may no longer have a readily available
market, repurchase agreements with maturities greater than seven days,
non-negotiable fixed-time deposits and over-the-counter options.
In determining the liquidity of Rule 144A securities, which are unregistered
securities offered to qualified institutional buyers, and interest-only and
principal-only fixed mortgage-backed securities (IOs and POs) issued by the U.S.
government or its 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
<PAGE>
are subject to market fluctuations and they may affect the Portfolio's total
assets the same as owned securities.
The Portfolio may maintain a portion of its assets in cash and cash-equivalent
investments. The cash-equivalent investments the Portfolio may use are
short-term U.S. and Canadian government securities and negotiable certificates
of deposit, non-negotiable fixed-time deposits, bankers' acceptances and letters
of credit of banks or savings and loan associations having capital, surplus and
undivided profits (as of the date of its most recently published annual
financial statements) in excess of $100 million (or the equivalent in the
instance of a foreign branch of a U.S. bank) at the date of investment. Any
cash-equivalent investments in foreign securities will be subject to limitations
on foreign investments described in the prospectus. The Portfolio also may
purchase short-term corporate notes and obligations rated in the top two
classifications by Moody's or S&P or the equivalent and may use repurchase
agreements with broker-dealers registered under the Securities Exchange Act of
1934 and with commercial banks. A risk of a repurchase agreement is that if the
seller seeks the protection of the bankruptcy laws, the Portfolio's ability to
liquidate the security involved could be impaired.
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 investing
in foreign securities, see Appendix C. For a discussion on options and interest
rate futures contracts, see Appendix D. For a discussion on mortgage-backed
securities, see Appendix E. For a discussion on mortgage pass-through
certificates, see Appendix F. For a discussion on dollar-cost averaging, see
Appendix G.
SECURITY TRANSACTIONS
Subject to policies set by the board, the Advisor is authorized to determine,
consistent with each Fund's and Portfolio's investment goals 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.
<PAGE>
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 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
<PAGE>
necessary to do business with a number of brokerage firms on a continuing basis
to obtain such services as the handling of large orders, the willingness of a
broker to risk its own money by taking a position in a security, and the
specialized handling of a particular group of securities that only certain
brokers may be able to offer. As a result of this arrangement, some portfolio
transactions may not be effected at the lowest commission, but the Advisor
believes it may obtain better overall execution. The Advisor has represented
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 $1,514,430, $49,511 and $61,088 for the
fiscal year ended May 31, 1998 and $-0-, $90,680 and $75,832 for fiscal year
1997, respectively. The Portfolios began operations on June 10, 1996.
Substantially all firms through whom transactions were executed provide research
services.
<PAGE>
No transactions were directed to brokers because of research services they
provided to a Portfolio.
As of the fiscal year ended May 31, 1998, Government Income and High Yield
Portfolios 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, 1998, Quality Income Portfolio 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:
Name of Issuer Value of Securities Owned
at End of Fiscal Year
Quality Income Portfolio
Bank of America $ 5,219,650
Equitable Securities Corp. 5,456,300
First Chicago Capital Markets Inc. 8,131,312
Morgan (J.P.) Securities Inc. 8,698,305
NationsBank 9,785,483
Salomon Brothers Inc. 14,453,100
For the fiscal years 1998 and 1997, the portfolio turnover rates were 159% and
146% for Government Income Portfolio, 81% and 92% for High Yield Portfolio and
20% and 31% for Quality Income Portfolio. Higher turnover rates may result in
higher brokerage expenses. A high turnover rate (in excess of 100%) results in
higher fees and 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.
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.
<PAGE>
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, 1998.
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)
<PAGE>
Aggregate total return
A Fund may calculate aggregate total return for certain periods representing the
cumulative change in the value of an investment in a 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 dividends
d = the maximum offering price per share on the last day of
the period
The Fund's annualized yield was 6.53% for Government Income Fund, 13.39% for
High Yield Fund and 5.60% for Quality Income Fund for the 30-day period ended
May 29, 1998.
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.
<PAGE>
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 Fund's distribution yield was 6.27% for Government Income Fund, 14.47% for
High Yield Fund and 6.48% for Quality Income Fund for the 30-day period ended
May 29, 1998.
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 for periods prior to June 10, 1996 is based on the
performance of the corresponding IDS Fund adjusted for differences in sales
charges. For the period from March 20, 1995 to June 10, 1996, performance is
based on the performance of Class A shares of the corresponding IDS Fund. 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.
<PAGE>
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 1, 1998, the first business day following the end of the fiscal year,
the computations looked like this:
<TABLE>
<CAPTION>
Net assets Shares
before outstanding at Net asset value
Fund shareholder divided by the end of equals of one share
transactions previous day
- -------------------- ----------------- --------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Government Income $ 658,366 132,197 $4.98
High Yield 1,138,057 246,867 4.61
Quality Income 673,826 71,602 9.41
</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 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 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
<PAGE>
computation of a Fund'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 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 (the Distributor) 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 the Distributor. Of course, SIPC account protection does not
protect shareholders from share price fluctuations.
<PAGE>
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 a Portfolio's securities is not reasonably practicable or it is not
reasonably practicable for a Fund to determine the fair value of its net assets,
or
`The SEC, under the provisions of the 1940 Act, 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 a 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, IRAs and other retirement plans).
In any event, before a Fund redeems such shares and sends the proceeds to the
shareholder, it will notify the shareholder that the value of the shares in the
account is less than the minimum amount and allow the shareholder 30 days to
make an additional investment in an amount which will increase the value of the
accounts to at least $1,000.
Redemptions in Kind
The Company has elected to be governed by Rule 18f-1 under the 1940 Act, which
obligates 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 that 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 the Fund as
<PAGE>
determined by the board. In such circumstances, the securities distributed would
be valued as set forth in the Prospectus. Should a Fund distribute securities, a
shareholder may incur brokerage fees or other transaction costs in converting
the securities to cash.
TAXES
Dividends received should be treated as dividend income for federal income tax
purposes. Corporate shareholders are generally entitled to a deduction equal to
70% of that portion of a Fund's dividend that is attributable to dividends the
Fund has received from domestic (U.S.) securities. For the fiscal year ended May
31, 1998, none of Government Income Fund's net investment income dividends,
7.10% of High Yield Fund's net investment income dividends and 0.80% of Quality
Income Fund's net investment income dividends qualified for the corporate
deduction.
Capital gain distributions, if any, received by corporate shareholders should be
treated as long-term capital gains regardless of how long they owned their
shares. Capital gain distributions, if any, received by individuals should be
treated as long-term if held for more than one year; however, recent tax laws
have divided long-term capital gains into two holding periods: (1) shares held
more than one year but not more than 18 months and (2) shares held more than 18
months. 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 redemption of shares. You pay no
sales charge, but the exchange may result in a gain or loss for tax purposes, or
excess contributions under IRA or qualified plan regulations.
Under federal tax law, by the end of a calendar year a Fund must declare and pay
dividends representing 98% of ordinary income for that calendar year and 98% of
net capital gains (both long-term and short-term) for the 12-month period ending
Oct. 31 of that calendar year. A Fund is subject to an excise tax equal to 4% of
the excess, if any, of the amount required to be distributed over the amount
actually distributed. A Fund intends to comply with federal tax law and avoid
any excise tax.
Quality Income Fund and High Yield Fund may be subject to U.S. taxes resulting
from holdings in a passive foreign investment company (PFIC). A foreign
corporation is a PFIC when 75% or more of its gross income for the taxable year
is passive income or if 50% or more of the average value of its assets consists
of assets that produce or could produce passive income.
<PAGE>
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. Each Fund pays its
proportionate share of the fee.
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C>
First $1.0 0.590% First $1.0 0.520%
Next 1.0 0.565 Next 1.0 0.495
Next 1.0 0.540 Next 1.0 0.470
Next 3.0 0.515 Next 3.0 0.445
Next 3.0 0.490 Next 3.0 0.420
Over 9.0 0.465 Over 9.0 0.395
</TABLE>
On May 31, 1998, the daily rates applied to the Portfolio's net assets on an
annual basis were equal to 0.499% for Government Income Portfolio, 0.551% for
High Yield Portfolio and 0.511% 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, 1998, the
total amount paid was $11,996,865 for Government Income Portfolio, $20,715,160
for High Yield Portfolio and $8,256,904 for Quality Income Portfolio; for fiscal
year 1997, the total amount paid was $9,593,937 for Government Income Portfolio,
$15,766,458 for High Yield Portfolio and $8,563,732 for Quality Income
Portfolio; for fiscal year 1996, the total amount paid was $7,421,829 for
Government Income Portfolio, $9,170,111 for High Yield Portfolio and $4,416,446
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 lending portfolio
<PAGE>
securities; and expenses properly payable by each Portfolio, approved by the
board. For the fiscal year ended May 31, 1998, Government Income Portfolio and
Government Income Fund paid nonadvisory expenses of $296,069, High Yield
Portfolio and High Yield Fund paid nonadvisory expenses of $205,439 and Quality
Income Portfolio and Quality Income Fund paid nonadvisory expenses of $183,238;
for fiscal year 1997, Government Income Portfolio and Government Income Fund
paid nonadvisory expenses of $218,943, High Yield Portfolio and High Yield Fund
paid nonadvisory expenses of $127,018 and Quality Income Portfolio and Quality
Income Fund paid nonadvisory expenses of $200,428; for fiscal year 1996,
Government Income Portfolio and Government Income Fund paid nonadvisory expenses
of $1,168, High Yield Portfolio and High Yield Fund paid nonadvisory expenses of
$1,402 and Quality Income Portfolio and Quality Income Fund paid nonadvisory
expenses of $1,209.
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, 1998, the daily rates applied to the Funds' net assets on an annual
basis were equal to 0.05% for Government Income Fund, 0.05% for High Yield Fund
and 0.05% 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,
1998, the Funds paid fees of $294 for Government Income Fund, $527 for High
Yield Fund and $308 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.
<PAGE>
Transfer Agency Agreement
The Company, on behalf of each Fund, has a Transfer Agency Agreement with
American Express Client Service Corporation (AECSC). 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
Funds' shares. The fee is determined by multiplying the number of shareholder
accounts at the end of the day by a rate of $25 per year and dividing by the
number of days in the year. The fees paid to AECSC may be changed from time to
time upon agreement of the parties without shareholder approval. For the fiscal
year ended May 31, 1998, the Funds paid fees of $202 for Government Income Fund,
$1,088 for High Yield Fund and $220 for Quality Income Fund.
Plan and Agreement of Distribution/Distribution Agreement
To help American Express Service Corporation (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
disinterested board members is the responsibility of other 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, 1998, the Funds paid fees of $1,685
for Government Income Fund, $2,637 for High Yield Fund and $1,533 for Quality
Income Fund.
<PAGE>
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 U.S.
Bank National Association, 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, 1998, the Funds paid total fees and
nonadvisory expenses, net of reimbursements and earnings credits, of $6,403 for
Government Income Fund, $7,555 for High Yield Fund and $5,972 for Quality Income
Fund. The Advisor and the Distributor have agreed to waive certain fees and to
absorb certain other Fund expenses until Dec. 31, 1998. Under this agreement,
Government Income Fund and Quality Income Fund 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 1940 Act. 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
Directors of Strategist Fund Group
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.
Rodney P. Burwell
Born in 1939
Xerxes Corporation
7901 Xerxes Ave. S.
Minneapolis, MN
Chairman, Xerxes Corporation (fiberglass storage tanks). Director, Vaughn
Communications, Sunbelt Nursery Group and Fairview Corporation.
<PAGE>
Jean B. Keffeler
Born in 1945
3424 Zenith Avenue South
Minneapolis, MN
Business and management consultant. Director, National Computer Systems.
Brian Kleinberg
Born in 1957
American Express Company
World Financial Center
New York, NY
Vice president of all funds in the Strategist Fund Group. Executive vice
president of American Express Financial Direct since 1997. Previously, executive
vice president and general manager in the American Express Consumer Card
Services Group from October 1995 to August 1997, senior vice president of
marketing and business development from August 1995 to October 1995 and senior
vice president of consumer lending marketing from October 1991 to August 1995.
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, Allina, Space Center Enterprises and 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.
<PAGE>
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. Vice president and group
counsel of the Advisor.
Matthew N. Karstetter
Born in 1961
IDS Tower 10
Minneapolis, MN
Treasurer of all funds in the Strategist Fund Group. Vice president of
Investment Accounting for the Advisor since 1996. Prior to joining the Advisor,
he served as vice president of State Street Bank's mutual fund service operation
from 1991 to 1996.
Compensation for Fund Board Members
Once the assets of a Fund reach $20 million, members of the Fund's board who are
not officers of the Advisor or an affiliate receive an annual fee of $1,000 for
Government Income Fund, $1,000 for High Yield Fund and $1,000 for Quality Income
Fund. 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 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, 1998, the independent members of the board
received $1,750. On May 31, 1998, the Funds' board members and officers as a
group owned less than 1% of the outstanding shares of a Fund.
Trustees of the Preferred Master Trust Group
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.
<PAGE>
H. Brewster Atwater, Jr.
Born in 1931
4900 IDS Tower
Minneapolis, MN
Retired 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, and Union
Pacific Resources.
William H. Dudley**
Born in 1932
2900 IDS Tower
Minneapolis, MN
Senior advisor to the chief executive officer of the Advisor.
David R. Hubers+**
Born in 1943
2900 IDS Tower
Minneapolis, MN
President, chief executive officer and director of the Advisor.
Heinz F. Hutter+'
Born in 1929
P.O. Box 2187
Minneapolis, MN
Retired president and chief operating officer, Cargill, Incorporated (commodity
merchants and processors).
<PAGE>
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. (electronics), C-Cor
Electronics, Inc., and Amnex, Inc. (communications).
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. Retired vice chairman of the
board, Cargill, Incorporated (commodity merchants and processors).
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) and Biogen
(pharmaceuticals).
Edson W. Spencer+
Born in 1926
4900 IDS Center
80 S. 8th St.
Minneapolis, MN
President, Spencer Associates Inc. (consulting). Retired 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 of the Advisor.
<PAGE>
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.
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 chairman of the board, and Mr. Thomas who is
president, the Trust's other officers are:
Leslie L. Ogg
Born in 1938
901 S. Marquette Ave.
Minneapolis, MN
President of Board Services Corporation. Vice president, general counsel and
secretary for the Trust.
<PAGE>
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.
Frederick C. Quirsfeld
Born in 1947
IDS Tower 10
Minneapolis, MN
Vice president - taxable mutual fund investments of the Advisor. Vice president
- - fixed income investments for the Trust.
Matthew N. Karstetter
Born in 1961
IDS Tower 10
Minneapolis, MN
Vice President of Investment Accounting for the Advisor since 1996. Treasurer
for the Trust. Prior to joining the Advisor, he served as vice president of
State Street Bank's mutual fund service operation from 1991 to 1996.
Compensation for Portfolio Board Members
Once the assets of the Portfolio reach $20 million, members of the Portfolio
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
meetings of the Contracts and Investment Review Committees, $50; meetings of the
Audit Committee, $25; for traveling from 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 Committee, $86. Expenses for attending meetings are
reimbursed.
During the fiscal year ended May 31, 1998, the independent members of the board
for Government Income Portfolio, High Yield Portfolio and Quality Income
Portfolio, for attending up to 27 meetings, received the following compensation:
<PAGE>
<TABLE>
<CAPTION>
Compensation Table
for Government Income Portfolio
Aggregate Pensions or Estimated annual Total cash compensation
compensation Retirement benefits benefit upon from the Preferred
Board Member from the accrued as retirement Master Trust Group
Portfolio Portfolio expenses
<S> <C> <C> <C> <C>
H. Brewster Atwater, Jr. $1,750 0 0 $101,100
Lynne V. Cheney 1,604 0 0 92,200
Robert F. Froehlke 850 0 0 49,000
Heinz F. Hutter 1,750 0 0 101,100
Anne P. Jones 1,654 0 0 95,200
Melvin R. Laird 643 0 0 36,800
Alan K. Simpson 1,470 0 0 84,200
Edson W. Spencer 1,975 0 0 114,600
Wheelock Whitney 1,775 0 0 102,700
C. Angus Wurtele 1,900 0 0 110,100
Compensation Table
for High Yield Portfolio
Aggregate Pensions or Estimated annual Total cash compensation
compensation Retirement benefits benefit upon from the Preferred
Board Member from the accrued as retirement Master Trust Group
Portfolio Portfolio expenses
H. Brewster Atwater, $2,250 0 0 $101,100
Jr.
Lynne V. Cheney 2,134 0 0 92,200
Robert F. Froehlke 1,100 0 0 49,000
Heinz F. Hutter 2,250 0 0 101,100
Anne P. Jones 2,184 0 0 95,200
Melvin R. Laird 861 0 0 36,800
Alan K. Simpson 1,995 0 0 84,200
Edson W. Spencer 2,475 0 0 114,600
Wheelock Whitney 2,275 0 0 102,700
C. Angus Wurtele 2,400 0 0 110,100
Compensation Table
for Quality Income Portfolio
Aggregate Pensions or Estimated annual Total cash compensation
compensation Retirement benefits benefit upon from the Preferred
Board Member from the accrued as retirement Master Trust Group
Portfolio Portfolio expenses
H. Brewster Atwater, $1,625 0 0 $101,100
Jr.
Lynne V. Cheney 1,470 0 0 92,200
Robert F. Froehlke 850 0 0 49,000
Heinz F. Hutter 1,625 0 0 101,100
Anne P. Jones 1,517 0 0 95,200
Melvin R. Laird 643 0 0 36,800
Alan K. Simpson 1,336 0 0 84,200
Edson W. Spencer 1,850 0 0 114,600
Wheelock Whitney 1,650 0 0 102,700
C. Angus Wurtele 1,775 0 0 110,100
</TABLE>
INDEPENDENT AUDITORS
The Funds' and corresponding Portfolios' financial statements contained in the
Annual Report to shareholders for the fiscal year ended May 31, 1998 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.
<PAGE>
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 1998 Annual Report to shareholders, pursuant to Section 30(d)
of the 1940 Act, 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, 1998, is hereby incorporated in this SAI by
reference.
<PAGE>
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>
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 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.
<PAGE>
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.
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
<PAGE>
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.
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.
<PAGE>
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 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
<PAGE>
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>
APPENDIX C
INVESTING IN FOREIGN SECURITIES
Investors should recognize that investing in foreign securities
involves certain special considerations, including those set forth below and
those described in the prospectus, which are not typically associated with
investing in United States securities. Foreign companies are not generally
subject to uniform accounting and auditing and financial reporting standards
comparable to those applicable to domestic companies. Additionally, many foreign
stock markets, while growing in volume of trading activity, have substantially
less volume than the New York Stock Exchange, and securities of some foreign
companies are less liquid and more volatile than securities of domestic
companies. Similarly, volume and liquidity in most foreign bond markets are less
than the volume and liquidity in the United States and at times, volatility of
price can be greater than in the United States. Further, foreign markets have
different clearance, settlement, registration and communication procedures and
in certain markets there have been times when settlements have been unable to
keep pace with the volume of securities transactions making it difficult to
conduct such transactions. Delays in such procedures could result in temporary
periods when assets of a Portfolio are uninvested and no return is earned
thereon. The inability of a Portfolio to make intended security purchases due to
such problems could cause that Portfolio to miss attractive investment
opportunities. Payment for securities without delivery may be required in
certain foreign markets and, when participating in new issues, some foreign
countries require payment to be made in advance of issuance (at the time of
issuance, the market value of the security may be more or less than the purchase
price). Some foreign markets also have compulsory depositories (i.e., a
portfolio does not have a choice as to where the securities are held). Fixed
commissions on some foreign stock exchanges are generally higher than negotiated
commissions on U.S. exchanges, although a Portfolio will endeavor to achieve the
most favorable net results on their portfolio transactions. Further, a Portfolio
may encounter difficulties or be unable to pursue legal remedies and obtain
judgments in foreign courts. There is generally less government supervision and
regulation of business and industry practices, stock exchanges, brokers and
listed companies than in the United States. It may be more difficult for a
Portfolio's agents to keep currently informed about corporate actions such as
stock dividends or other matters which may affect the prices of portfolio
securities. Communications between the United States and foreign countries may
be less reliable than within the United States, thus increasing the risk of
delays or loss of certificates for portfolio securities. In addition, with
respect to certain foreign countries, there is the possibility of
nationalization, expropriation, the imposition of withholding or confiscatory
taxes, political, social or economic instability, diplomatic developments which
could affect United States investments in those countries, or other unforeseen
actions by regulatory bodies (such as changes to settlement or custody
procedures). Investments in foreign securities may also entail certain risks,
such as possible currency blockages or transfer restrictions, and the difficulty
of enforcing rights in other countries.
<PAGE>
APPENDIX D
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 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
<PAGE>
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.
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 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
<PAGE>
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 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 market.
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
<PAGE>
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 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.
<PAGE>
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 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.
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.
<PAGE>
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>
APPENDIX E
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>
APPENDIX F
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>
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
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
<PAGE>
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>
APPENDIX G
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.
<TABLE>
<CAPTION>
Dollar-cost averaging
- ------------------------------------ ----------------------------------- -----------------------------------
Regular Investment Market Price of a Share Shares Acquired
- ------------------------------------ ----------------------------------- -----------------------------------
<S> <C> <C> <C>
$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).
</TABLE>
<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 (a series of Strategist Income Fund, Inc.) as of May 31,
1998, and the related statements of operations, for the year then ended and the
statements of changes in net assets and the financial highlights for the year
ended May 31, 1998, and 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 audits 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. 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,
1998, and the results of their operations, the changes in their net assets and
the financial highlights for the periods stated in the first paragraph above, in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Minneapolis, Minnesota
July 2, 1998
<PAGE>
<TABLE>
<CAPTION>
Financial statements
Statements of assets and liabilities
Strategist Income Fund, Inc.
May 31, 1998
Strategist Strategist Strategist
Government High Yield Quality
Income Fund Fund Income Fund
Assets
Investment in corresponding
<S> <C> <C> <C>
Portfolio (Note 1) $719,324 $1,153,702 $679,879
Other receivables -- -- 600
Organizational costs (Note 1) 1,583 1,578 1,655
----- ----- -----
Total assets 720,907 1,155,280 682,134
------- --------- -------
Liabilities
Dividends payable to shareholders 115 282 230
Accrued distribution fee 4 8 5
Accrued transfer agency fee 1 3 1
Accrued administrative services fee 1 1 1
Other accrued expenses 62,834 17,861 9,189
------ ------ -----
Total liabilities 62,955 18,155 9,426
------ ------ -----
Net assets applicable to
outstanding capital stock $657,952 $1,137,125 $672,708
-------- ---------- --------
Represented by
Capital stock-- $.01 par value (Note 1) $ 1,322 $ 2,469 $ 716
Additional paid-in capital 646,406 1,074,632 641,840
Undistributed net investment income 602 8,088 537
Accumulated net realized gain (loss) (8,008) 18,726 (2,588)
Unrealized appreciation (depreciation)
on investments 17,630 33,210 32,203
------ ------ ------
Total -- representing net assets applicable
to outstanding capital stock $657,952 $1,137,125 $672,708
-------- ---------- --------
Shares outstanding 132,197 246,867 71,602
------- ------- ------
Net asset value per share of
outstanding capital stock $ 4.98 $ 4.61 $ 9.40
-------- ---------- --------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statements of operations
Strategist Income Fund, Inc.
Year ended May 31, 1998
Strategist Strategist Strategist
Government High Yield Quality
Income Fund Fund Income Fund
Investment income
Income:
<S> <C> <C> <C>
Dividends $ -- $ 8,302 $ 310
Interest 44,290 97,129 43,783
------ ------ ------
Total income 44,290 105,431 44,093
------ ------- ------
Expenses (Note 2):
Expenses allocated from corresponding Portfolio 3,388 6,076 3,280
Distribution fee 1,685 2,637 1,533
Transfer agency fee 202 1,088 220
Administrative services fees and expenses 294 527 308
Registration fees 1 8,718 --
Audit fees 3,200 3,200 3,200
Other 521 517 543
--- --- ---
Total expenses 9,291 22,763 9,084
Less expenses reimbursed by AEFC (2,888) (15,208) (3,112)
------ ------- ------
Total net expenses 6,403 7,555 5,972
----- ----- -----
Investment income (loss)-- net 37,887 97,876 38,121
------ ------ ------
Realized and unrealized gain (loss) -- net Net realized gain (loss) on:
Security transactions 11,238 28,256 2,786
Financial futures contracts (16,291) -- (4,027)
Foreign currency transactions -- 19 7
Options contracts written 4,612 -- 22
----- --
Net realized gain (loss) on investments (441) 28,275 (1,212)
Net change in unrealized appreciation
(depreciation) on investments 13,121 9,767 22,901
------ ----- ------
Net gain (loss) on investments 12,680 38,042 21,689
------ ------ ------
Net increase (decrease) in net assets resulting
from operations $50,567 $135,918 $59,810
------- -------- -------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statements of changes in net assets
Strategist Income Fund, Inc.
Strategist Government Income Fund
May 31, 1998 For the period
Year ended from June 10, 1996*
to May 31, 1997
Operations and distributions
<S> <C> <C>
Investment income (loss)-- net $ 37,887 $ 30,968
Net realized gain (loss) on investments (441) 3,003
Net change in unrealized appreciation
(depreciation) on investments 13,121 4,509
------ -----
Net increase (decrease) in net assets
resulting from operations 50,567 38,480
------ ------
Distributions to shareholders from:
Net investment income (39,031) (30,279)
Net realized gain (6,249) (4,513)
------ ------
Total distributions (45,280) (34,792)
------- -------
Capital share transactions (Note 3)
Proceeds from sales 64,649 485,789
Reinvestment of distributions at net asset value 45,256 34,648
Payments for redemptions (5,096) (16,269)
------ -------
Increase (decrease) in net assets from
capital share transactions 104,809 504,168
------- -------
Total increase (decrease) in net assets 110,096 507,856
Net assets at beginning of period (Note 1) 547,856 40,000
------- ------
Net assets at end of period $657,952 $547,856
-------- --------
Undistributed net investment income $ 602 $ 1,417
-------- --------
*Commencement of operations.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statements of changes in net assets
Strategist Income Fund, Inc.
Strategist High Yield Fund
May 31, 1998 For the period
Year ended from June 10, 1996*
to May 31, 1997
Operations and distributions
<S> <C> <C>
Investment income (loss)-- net $ 97,876 $ 50,916
Net realized gain (loss) on investments 28,275 (8,388)
Net change in unrealized appreciation
(depreciation) on investments 9,767 23,443
----- ------
Net increase (decrease) in net assets
resulting from operations 135,918 65,971
------- ------
Distributions to shareholders from:
Net investment income (91,467) (50,495)
Net realized gain (1,142) --
------ ------
Total distributions (92,609) (50,495)
------- -------
Capital share transactions (Note 3)
Proceeds from sales 329,677 884,081
Reinvestment of distributions at net asset value 90,463 50,255
Payments for redemptions (286,196) (19,940)
-------- -------
Increase (decrease) in net assets from
capital share transactions 133,944 914,396
------- -------
Total increase (decrease) in net assets 177,253 929,872
Net assets at beginning of period (Note 1) 959,872 30,000
------- ------
Net assets at end of period $1,137,125 $959,872
---------- --------
Undistributed net investment income $ 8,088 $ 1,143
---------- --------
*Commencement of operations.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statements of changes in net assets
Strategist Income Fund, Inc.
Strategist Quality Income Fund
May 31, 1998 For the period
Year ended from June 10, 1996*
to May 31, 1997
Operations and distributions
<S> <C> <C>
Investment income (loss)-- net $ 38,121 $ 30,582
Net realized gain (loss) on investments (1,212) 2,511
Net change in unrealized appreciation
(depreciation) on investments 22,901 9,302
------ -----
Net increase (decrease) in net assets
resulting from operations 59,810 42,395
------ ------
Distributions to shareholders from:
Net investment income (39,821) (29,382)
Net realized gain (3,805) --
------ ------
Total distributions (43,626) (29,382)
------- -------
Capital share transactions (Note 3)
Proceeds from sales 77,358 511,382
Reinvestment of distributions at net asset value 43,595 29,123
Payments for redemptions (39,229) (8,718)
------- ------
Increase (decrease) in net assets from
capital share transactions 81,724 531,787
------ -------
Total increase (decrease) in net assets 97,908 544,800
Net assets at beginning of period (Note 1) 574,800 30,000
------- ------
Net assets at end of period $672,708 $574,800
-------- --------
Undistributed net investment income $ 537 $ 1,692
-------- --------
*Commencement of operations.
See accompanying notes to financial statements.
</TABLE>
<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. Each Fund has 3 billion authorized shares of capital stock.
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 High Yield 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, 1998, 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 a net reclassification
adjustment to additional paid-in capital as follows:
Government High Quality
Income Yield Income
Fund Fund Fund
Undistributed net
investment income $329 $536 $545
Accumulated net
realized loss 192 (19) (2)
Additional paid-in
capital reduction $521 $517 $543
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, 1998, AEFC owned 117,783 shares of Government Income Fund, 137,331
shares of High Yield Fund and 63,538 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 an agreement with AEFC for providing administrative
services. 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 a separate Transfer Agency Agreement, American Express Client Service
Corporation (AECSC) maintains shareholder accounts and records. Each Fund pays
AECSC 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 Dec. 31, 1998. Under this agreement, each Fund's
total expenses will not exceed 1.10% (1.20% for High Yield Fund) of each of the
Fund's average daily net assets. In addition, for the year ended May 31, 1998,
AEFC futher voluntarily agreed to waive certain fees and expenses to 1.09% for
Government Income Fund, .72% for High Yield Fund and .97% for Quality Income
Fund.
3. Capital share transactions
Transactions in shares of capital stock for the periods indicated are as
follows:
Year ended May 31, 1998
Government High Quality
Income Yield Income
Fund Fund Fund
Sold 12,987 72,018 8,274
Reinvested dividends 9,111 19,661 4,670
Redemptions (1,024) (62,293) (4,179)
------ ------- ------
Net increase (decrease) 21,074 29,386 8,765
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 (decrease) 102,976 210,520 59,485
*Inception date was June 10, 1996.
<PAGE>
<TABLE>
<CAPTION>
4. Financial highlights
The tables below show certain important information for evaluating each Fund's
results.
Government Income Fund
Fiscal period ended May 31, 1998 1997b
Per share income and capital changesa
<S> <C> <C>
Net asset value, beginning of period $4.93 $4.91
Income from investment operations:
Net investment income (loss) .32 .30
Net gains (losses) (both realized and unrealized) .11 .06
Total from investment operations .43 .36
Less distributions:
Dividends from net investment income (.33) (.30)
Distributions from realized gains (.05) (.04)
Total distributions (.38) (.34)
Net asset value, end of period $4.98 $4.93
Ratios/supplemental data
Net assets, end of period (in thousands) $658 $548
Ratio of expenses to average daily net assetsc 1.09% 1.10%d
Ratio of net income (loss) to average daily net assets 6.44% 6.48%d
Portfolio turnover rate (excluding short-term securities) 159% 146%
Total return 9.0% 7.6%
a For a share outstanding throughout the period. Rounded to the nearest cent.
b Inception date was June 10, 1996.
c The Advisor and Distributor voluntarily limited total operating expenses.
Without this agreement, the ratio of expenses to average daily net assets would
have been 1.57% and 25.68% for the periods ended May 31, 1998 and 1997,
respectively.
d Adjusted to an annual basis.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
High Yield Fund
Fiscal period ended May 31, 1998 1997b
Per share income and capital changesa
<S> <C> <C>
Net asset value, beginning of period $4.41 $4.31
Income from investment operations:
Net investment income (loss) .43 .38
Net gains (losses) (both realized and unrealized) .17 .09
Total from investment operations .60 .47
Less distributions:
Dividends from net investment income (.40) (.37)
Net asset value, end of period $4.61 $4.41
Ratios/supplemental data
Net assets, end of period (in thousands) $1,137 $960
Ratio of expenses to average daily net assetsc .72% 1.19%d
Ratio of net income (loss) to average daily net assets 9.28% 8.90%d
Portfolio turnover rate (excluding short-term securities) 81% 92%
Total return 14.0% 11.4%
a For a share outstanding throughout the period. Rounded to the nearest cent.
b Inception date was June 10, 1996.
c The Advisor and Distributor voluntarily limited total operating expenses.
Without this agreement, the ratio of expenses to average daily net assets would
have been 2.15% and 11.48% for the periods ended 1998 and 1997 respectively.
d Adjusted to an annual basis.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Quality Income Fund
Fiscal period ended May 31, 1998 1997b
Per share income and capital changesa
<S> <C> <C>
Net asset value, beginning of period $9.15 $8.95
Income from investment operations:
Net investment income (loss) .58 .55
Net gains (losses) (both realized and unrealized) .34 .18
Total from investment operations .92 .73
Less distributions:
Dividends from net investment income (.61) (.53)
Dividends from realized gains (.06) --
Total distributions (.67) (.53)
Net asset value, end of period $9.40 $9.15
Ratios/supplemental data
Net assets, end of period (in thousands) $673 $575
Ratio of expenses to average daily net assetsc .97% 1.10%d
Ratio of net income (loss) to average daily net assets 6.22% 6.33%d
Portfolio turnover rate (excluding short-term securities) 20% 31%
Total return 10.3% 8.3%
a For a share outstanding throughout the period. Rounded to the nearest cent.
b Inception date was June 10, 1996.
c The Advisor and Distributor voluntarily limited total operating expenses.
Without this agreement, the ratio of expenses to average daily net assets would
have been 1.48% and 13.34% for the periods ended May 31, 1998 and 1997,
respectively.
d Adjusted to an annual basis.
</TABLE>
<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, 1998, and the related statement of
operations for the year then ended and the statements of changes in net assets
for the year ended May 31, 1998 and 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 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
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
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 Government Income Portfolio at
May 31, 1998, and the results of its operations and the changes in its net
assets for the periods stated in the first paragraph above, in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Minneapolis, Minnesota
July 2, 1998
<PAGE>
<TABLE>
<CAPTION>
Financial statements
Statement of assets and liabilities
Government Income Portfolio
May 31, 1998
Assets
Investments in securities, at value (Note 1)
<S> <C>
(identified cost $2,905,160,601) $2,971,345,554
Cash in bank on demand deposit 283,564
Accrued interest receivable 30,390,354
Receivable for investment securities sold 266,533,508
U.S. government securities held as collateral (Note 5) 91,754,767
----------
Total assets 3,360,307,747
-------------
Liabilities
Payable for investment securities purchased 323,766,128
Payable upon return of securities loaned (Note 5) 335,234,142
Accrued investment management services fee 35,135
Option contracts written, at value
(premium received $131,602,834) (Note 6) 132,001,181
-----------
Total liabilities 791,036,586
-----------
Net assets $2,569,271,161
--------------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statement of operations
Government Income Portfolio
Year ended May 31, 1998
Investment income
Income:
<S> <C>
Interest $160,738,262
------------
Expenses (Note 2):
Investment management services fee 11,996,865
Compensation of board members 15,370
Custodian fees 178,990
Audit fees 31,500
Other 73,558
------
Total expenses 12,296,283
Earnings credits on cash balances (Note 2) (4,183)
------
Total net expenses 12,292,100
----------
Investment income (loss) -- net 148,446,162
-----------
Realized and unrealized gain (loss) -- net Net realized gain (loss) on:
Security transactions (Note 3) 40,926,986
Financial futures contracts (59,299,211)
Options contracts written (Note 6) 16,870,558
----------
Net realized gain (loss) on investments (1,501,667)
Net change in unrealized appreciation (depreciation)
on investments 47,320,048
----------
Net gain (loss) on investments 45,818,381
----------
Net increase (decrease) in net assets resulting from operations $194,264,543
------------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statements of changes in net assets
Government Income Portfolio
May 31, 1998 For the period
Year ended from June 10, 1996*
to May 31, 1997
Operations
<S> <C> <C>
Investment income (loss)-- net $ 148,446,162 $ 124,973,996
Net realized gain (loss) on investments (1,501,667) (221,211)
Net change in unrealized appreciation
(depreciation) on investments 47,320,048 22,413,297
---------- ----------
Net increase (decrease) in net assets
resulting from operations 194,264,543 147,166,082
Net contributions (withdrawals) from partners 171,023,648 2,056,776,888
----------- -------------
Total increase (decrease) in net assets 365,288,191 2,203,942,970
Net assets at beginning of period (Note 1) 2,203,982,970 40,000
------------- ------
Net assets at end of period $2,569,271,161 $2,203,982,970
-------------- --------------
*Commencement of operations.
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 policies 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. Debt securities are generally traded in
the over-the-counter market and are valued at a price deemed best to reflect
fair value as quoted by dealers who make markets in these securities or by an
independant pricing service. Securities for which market quotations are not
readily available are valued at fair value according to methods selected in good
faith by the board. 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
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 Portfolio 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 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. The Portfolio 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 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. 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, 1998,
the Portfolio had entered into outstanding when-issued or forward-commitments of
$105,575,128.
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 year ended May 31, 1998, the Portfolio's custodian fees were reduced
by $4,183 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 $4,706,904,123 and $4,263,884,740, respectively, for the
year ended May 31, 1998. For the same period, the portfolio turnover rate was
159%. Realized gains and losses are determined on an identified cost basis.
4. Interest rate futures contracts
At May 31, 1998, investments in securities included securities valued at
$48,415,728 that were pledged as collateral to cover initial margin deposits on
2,749 open purchase contracts and 6,950 open sale contracts. The market value of
the open purchase contracts at May 31, 1998, was $363,272,344 with a net
unrealized gain of $1,031,162. The market value of the open sale contracts at
May 31, 1998, was $827,499,125 with a net unrealized loss of $3,110,604. See
"Summary of significant accounting policies."
5. Lending of portfolio securities
At May 31, 1998, securities valued at $333,428,860 were on loan to brokers. For
collateral, the Portfolio received $243,479,375 in cash and U.S. government
securities valued at $91,754,767. Income from securities lending amounted to
$1,519,994 for the year ended May 31, 1998. 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.
<PAGE>
<TABLE>
<CAPTION>
6. Options contracts written
The number of contracts and premium amounts associated with option contracts
written is as follows:
Year ended May 31, 1998
Puts Calls MBS Puts and Calls
Contracts Premium Contracts Premium Contracts Premium
Balance
<S> <C> <C> <C> <C> <C> <C>
May 31, 1997 2,209 $ 2,598,052 4,067 $ 6,810,256 13,000 $ 757,616
Opened 26,614 36,259,579 33,092 49,334,853 98,150 645,410,751
Closed (22,209) (29,719,060) (24,395) (38,998,661) (76,200) (521,887,073)
Exercised (2,676) (3,870,443) (7,157) (10,019,171) (18,700) (441,484)
Expired (1,792) (1,250,480) (3,227) (3,315,496) (4,250) (66,405)
Balance
May 31, 1998 2,146 $ 4,017,648 2,380 $ 3,811,781 12,000 $123,773,405
See "Summary of significant accounting policies."
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Investments in securities
Government Income Portfolio
May 31, 1998
(Percentages represent value of investments compared to net assets)
Bonds (114.5%)
Issuer Coupon Principal Value(a)
rate amount
U.S. government obligations (46.1%)
U.S. Treasury
<S> <C> <C> <C>
01-31-00 5.375% $8,500,000 $8,478,580
02-15-00 8.50 5,000,000(f) 5,237,000
02-29-00 5.50 16,000,000 15,987,840
02-29-00 7.125 4,000,000 4,104,200
04-30-00 6.75 9,250,000 9,448,320
08-15-00 6.00 111,000,000 112,034,520
08-31-00 6.25 10,000,000 10,145,000
11-15-00 5.75 34,000,000 34,153,000
02-15-01 5.375 76,500,000(h) 76,161,105
02-15-01 7.75 30,750,000(f,g) 32,424,030
03-31-01 6.375 22,000,000 22,456,060
04-30-01 6.25 82,100,000(f,g) 83,599,146
06-30-01 6.625 40,000,000 41,165,600
07-31-01 6.625 17,000,000 17,512,380
08-31-01 6.50 8,500,000 8,726,015
11-30-01 5.875 6,000,000 6,053,580
04-30-02 6.625 10,000,000 10,351,600
09-30-02 5.875 4,250,000 4,293,987
02-15-03 10.75 15,000,000 18,140,550
03-31-03 5.50 35,000,000(h) 34,894,300
08-15-03 5.75 18,500,000 18,646,890
05-15-04 12.375 7,000,000 9,360,680
08-15-05 6.50 5,000,000(g,h) 5,254,200
08-15-05 10.75 4,750,000(f,g) 6,163,600
02-15-06 5.625 12,750,000 12,736,867
07-15-06 7.00 23,000,000 24,982,600
10-15-06 6.50 36,100,000(h) 38,072,143
08-15-19 8.125 36,000,000(f) 45,614,520
08-15-20 8.75 11,000,000 14,850,880
08-15-27 6.375 138,250,000(h) 148,541,330
11-15-27 6.125 29,000,000(f,h) 30,322,110
TIPS
07-15-02 3.625 10,000,000(i) 10,002,491
Zero Coupon
11-15-04 5.65 33,000,000(b) 23,073,930
Collateralized Mtge Acceptance Corp
12-15-30 6.50 14,655,101 14,849,739
Collateralized Mtge Securities Corp
12-20-20 13.51 3,750,000 3,834,375
Resolution Funding Corp
10-15-19 8.125 8,000,000 9,941,760
Zero Coupon
04-15-02 6.15 11,170,000(b) 9,002,238
10-15-03 6.36 16,000,000(b) 11,854,880
04-15-05 5.65 62,300,000(b) 42,169,624
01-15-06 5.66 65,371,000(b) 42,434,931
04-15-06 5.74 4,803,000(b) 3,073,968
04-15-08 5.88 21,250,000(b) 12,061,075
07-15-08 6.13 48,500,000(b) 27,109,075
07-15-09 5.91 32,646,000(b) 17,116,951
10-15-12 8.04 8,400,000(b) 3,566,556
04-15-17 7.28 37,700,000(b) 12,085,866
07-15-17 7.28 6,650,000(b) 2,100,003
01-15-18 7.20 8,000,000(b) 2,446,640
10-15-18 7.87 7,500,000(b) 2,191,325
01-15-19 7.01 84,500,000(b) 24,296,285
-----------
Total 1,183,124,345
Mortgage-backed securities (66.4%)
Federal Home Loan Mtge Corp (18.1%)
08-01-00 7.50 13,642,699 13,770,122
07-01-03 6.50 113,103 113,829
09-01-09 6.50 6,131,656 6,198,737
10-01-10 7.00 16,210,348 16,545,416
01-01-13 6.00 12,510,541 12,369,673
11-01-23 8.00 18,388,746 19,244,926
05-01-24 7.50 6,909,970 7,139,312
07-01-24 8.00 12,020,280 12,516,838
01-01-25 9.00 10,024,861 10,657,630
06-01-25 8.00 17,626,160 18,335,613
08-01-25 8.00 3,644,993 3,792,616
11-18-25 6.50 12,750,000 12,873,968
02-01-26 6.00 18,936,086 18,492,224
05-01-26 9.00 23,604,850 25,094,789
12-01-27 6.00 152,404,406 148,330,636
01-01-28 6.00 2,967,092 2,883,450
02-01-28 6.00 18,158,079 17,650,142
Collateralized Mtge Obligation
04-15-22 8.50 9,150,000 10,128,135
07-15-22 6.75 6,483,264 6,483,264
11-15-22 4.00 44,310,000 39,414,675
11-15-23 4.00 10,441,718 9,940,516
Interest Only
01-01-20 10.00 246,054(c) 70,382
Principal Only
09-15-03 6.46 12,111,272(d) 10,642,066
10-15-07 8.47 5,453,317(d) 4,690,705
05-15-08 8.13 9,163,227(d) 7,677,066
05-15-08 7.14 8,328,020(d) 6,403,467
03-15-09 7.38 5,979,874(d) 4,926,856
11-15-23 7.86 7,408,863(d) 6,315,196
Trust Series Z
04-25-24 8.25 34,972,153(k) 37,861,552
----------
Total 490,563,801
Federal Natl Mtge Assn (47.8%)
12-01-99 7.00 8,262,160 8,346,186
03-15-01 5.625 71,600,000 71,418,852
09-01-07 8.50 4,458,981 4,620,798
02-15-08 5.75 132,875,000(h) 131,438,621
05-01-13 6.00 59,500,000 58,785,405
11-01-21 8.00 3,548,621 3,711,644
05-01-22 8.50 6,766,434 7,120,793
03-01-23 9.00 2,551,556 2,734,145
04-01-23 8.50 9,088,299 9,601,242
08-01-23 8.50 21,277,163 22,391,448
08-25-23 6.00 14,400,000 13,996,613
09-01-23 6.50 48,606,274(f,g) 48,609,190
09-01-23 8.50 33,807,946 35,610,248
11-01-23 6.00 11,512,298 11,223,800
12-01-23 7.00 17,433,686 17,812,868
01-01-24 6.50 18,863,934 18,865,067
06-01-24 9.00 7,746,843 8,301,207
01-01-25 8.50 1,253,833 1,314,795
03-01-25 6.50 106,250,000(j) 105,520,062
05-01-25 8.50 509,196 534,432
06-01-25 8.50 3,395,935 3,561,045
09-01-25 6.50 21,121,726 21,070,189
09-01-25 6.50 3,523,901(f,g) 3,515,302
10-01-25 8.50 238,923 250,540
11-01-25 6.50 25,648,576 25,585,993
12-01-25 7.50 7,317,073 7,539,292
12-01-25 8.50 7,408,560 7,768,765
02-01-26 6.00 587,838 573,471
02-01-26 8.00 3,409,888 3,546,488
04-01-26 6.00 332,470 323,929
05-01-26 7.50 22,883,432 23,578,402
02-01-27 6.00 2,596,458 2,525,445
04-01-27 6.00 5,966,298 5,803,120
04-01-27 6.50 16,091,146 16,025,173
04-01-27 7.00 12,788,377 12,984,935
08-01-27 7.00 11,729,330 11,909,609
09-01-27 7.00 94,194,656 95,642,427
03-01-28 6.00 6,923,366 6,722,895
04-01-28 6.00 89,092,455 86,436,845
Collateralized Mtge Obligation
06-25-05 6.10 52,240,000 52,182,862
08-25-08 6.00 4,371,201 4,345,935
09-25-08 4.50 38,000,000 34,805,302
11-25-08 5.50 9,061,594 8,853,721
10-25-10 4.50 8,204,208 7,912,712
07-25-12 7.00 4,746,448 4,788,540
01-25-19 3.00 11,250,000 10,512,000
03-25-19 5.75 40,000,000 39,795,312
07-18-19 5.50 13,976,000 13,729,463
10-25-20 9.00 11,666,000 12,583,298
03-25-21 8.50 12,350,000 13,370,221
01-25-22 5.75 10,000,000 9,744,410
01-25-24 5.00 4,711,261 4,618,166
05-18-26 5.00 17,000,000 15,523,125
Interest Only
07-01-18 10.00 3,826,486(c) 1,034,835
08-01-18 9.50 85,388(c) 22,256
01-15-20 10.00 3,938,909(c) 1,106,912
09-25-20 9.50 1,256,566(c) 322,351
01-25-21 10.50 9,948,821(c) 3,036,868
11-25-21 9.50 3,314,119(c) 893,387
02-25-22 9.50 626,123(c) 157,093
02-25-22 10.00 23,702,833(c) 6,335,293
05-25-22 10.00 7,904,149(c) 2,153,367
07-25-22 8.50 13,074,008(c) 3,157,464
07-25-22 9.50 6,787,674(c) 1,745,790
Inverse Floater
08-25-23 6.53 6,052,314(e) 5,591,612
03-25-24 7.68 4,479,964(e) 4,417,410
Principal Only
02-25-08 7.13 7,000,000(d) 5,399,844
12-25-20 6.12 2,036,330(d) 2,003,885
06-25-21 12.57 521,383(d) 420,599
05-25-23 6.24 10,788,439(d) 7,031,028
10-25-23 9.52 3,300,512(d) 3,226,910
10-25-23 4.95 9,558,975(d) 5,950,462
-----------
Total 1,204,093,714
Govt Natl Mtge Assn (0.5%)
08-20-19 11.00 256,749 286,195
08-15-25 7.50 12,448,975 12,852,322
-----------
Total 13,138,517
Other (2.0%)
California Infrastructure
San Diego Gas & Electric
03-25-03 6.07 7,500,000 7,536,675
09-25-05 6.19 6,000,000 6,070,080
Southern California Edison
09-25-08 6.38 12,000,000 12,205,920
Citibank Credit Card Master Trust I
Series 1998-2 Cl A
01-15-08 6.05 15,000,000 14,990,250
GMAC Commercial Mtge Securities
Series 1997-C2 Cl A1
12-15-04 6.45 9,808,580 9,897,838
-----------
Total 50,700,763
Total bonds
(Cost: $2,875,366,802) $2,941,621,140
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Options purchased (--%)
Issuer Number of Exercise Expiration Value(a)
contracts price date
Put
U.S. Treasury Note
<S> <C> <C> <C> <C>
Sept. 98 510 $109 Aug. 1998 $278,904
U.S. Treasury Note
Sept. 98 85 112 Aug. 1998 46,484
Total options purchased
(Cost: $394,773) $325,388
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Short-term securities (1.1%)
Issuer Annualized Amount Value(a)
yield on date payable at
of purchase maturity
Federal Home Loan Mtge Corp Disc Nts
<S> <C> <C> <C>
06-05-98 5.44% $400,000 $399,639
06-10-98 5.43 5,200,000 5,191,404
06-26-98 5.44 5,800,000 5,776,466
06-26-98 5.46 15,400,000 15,337,168
06-29-98 5.44 300,000 298,645
Federal Natl Mtge Assn Disc Nt
06-11-98 5.39 2,400,000 2,395,704
Total short-term securities
(Cost: $29,399,026) $29,399,026
Total investments in securities
(Cost: $2,905,160,601)(l) $2,971,345,554
</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) 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.
(e) 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, 1998. Inverse floaters in the
aggregate represent 0.4% of the Portfolio's net assets as of May 31, 1998.
(f) 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 Bonds June 1998 $ 10,500,000
U.S. Treasury Note June 1998, 2-year notes 62,400,000
U.S. Treasury Note June 1998, 5-year notes 202,000,000
Sale contracts
U.S. Treasury Bonds Sept. 1998 492,900,000
U.S. Treasury Note Sept. 1998, 10-year notes 202,100,000
<PAGE>
<TABLE>
<CAPTION>
(g) At May 31, 1998, securities valued at $48,415,728 were held to cover open call options written as follows:
Issuer Number of Exercise Expiration Value(a)
contracts price data
<S> <C> <C> <C> <C>
U.S. Treasury Bonds Sept. 98 510 $110 Aug. 1998 $ 270,939
U.S. Treasury Bonds Sept. 98 170 118 Aug. 1998 690,625
U.S. Treasury Bonds Sept. 98 17,000 120 Aug. 1998 4,515,625
Mortgage-Backed Security
(MBS Spread) 10,500 103 June 1998 109,003,125
Mortgage-Backed Security
(MBS Spread) 1,500 101 June 1998 15,210,938
-----------
Total $129,691,252
At May 31, 1998, cash or short-term securities were designated to cover open put
options written as follows:
Issuer Number of Exercise Expiration Value(a)
contracts price data
U.S. Treasury Bonds Sept. 98 276 $120 July 1998 $ 90,561
U.S. Treasury Bonds Sept. 98 552 118 Aug. 1998 327,750
U.S. Treasury Bonds Sept. 98 935 120 Aug. 1998 1,095,698
U.S. Treasury Bonds Sept. 98 383 122 Aug. 1998 795,920
-----------
Total $2,309,929
</TABLE>
<PAGE>
(h) Security is partially or fully on loan. See Note 5 to the financial
statements.
(i) U.S. Treasury inflation-protection securities (TIPS) are securities in which
the principal amount is adjusted for inflation and the semiannual interest
payments equal a fixed percentage of the inflation-adjusted principal amount.
(j) At May 31, 1998, the cost of securities purchased, including interest
purchased, on a when-issued basis was $105,575,128.
(k) This security is a collateralized mortgage obligation that pays no interest
or principal during its initial accrual period until payment of a previous
series within the trust have been paid off. Interest is accrued at an effective
yield; similar to a zero coupon bond.
(l) At May 31, 1998, the cost of securities for federal income tax purposes was
$2,906,183,090 and the aggregate gross unrealized appreciation and depreciation
based on that cost was:
Unrealized appreciation $74,822,871
Unrealized depreciation (9,660,407)
----------
Net unrealized appreciation $65,162.464
<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, 1998, and the related statement of operations for
the year then ended and the statements of changes in net assets for the year
ended May 31, 1998 and 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 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
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 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 High Yield Portfolio at May 31,
1998, and the results of its operations and the changes in its net assets for
the periods stated in the first paragraph above, in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Minneapolis, Minnesota
July 2, 1998
<PAGE>
<TABLE>
<CAPTION>
Financial statements
Statement of assets and liabilities
High Yield Portfolio
May 31, 1998
Assets
Investments in securities, at value (Note 1)
<S> <C>
(identified cost $3,989,298,915) $4,106,636,021
Accrued interest and dividends receivable 83,199,988
Receivable for investment securities sold 10,871,787
----------
Total assets 4,200,707,796
-------------
Liabilities
Payable for investment securities purchased 35,744,905
Disbursements in excess of cash on demand deposit 861,975
Accrued investment management services fee 62,943
Other accrued expenses 37,008
------
Total liabilities 36,706,831
----------
Net assets $4,164,000,965
--------------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statement of operations
High Yield Portfolio
Year ended May 31, 1998
Investment income
Income:
<S> <C>
Dividend $ 28,691,205
Interest 335,488,917
-----------
Total income 364,180,122
-----------
Expenses (Note 2):
Investment management services fee 20,715,160
Compensation of board members 19,923
Custodian fees 219,723
Audit fees 33,000
Other 45,122
------
Total expenses 21,032,928
Earnings credits on cash balances (Note 2) (109,556)
--------
Total net expenses 20,923,372
----------
Investment income (loss) -- net 343,256,750
-----------
Realized and unrealized gain (loss) -- net Net realized gain (loss) on:
Security transactions (Note 3) 107,244,523
Financial futures contracts 75,820
------
Net realized gain (loss) on investments 107,320,343
Net change in unrealized appreciation
(depreciation) on investments 8,772,357
---------
Net gain (loss) on investments 116,092,700
-----------
Net increase (decrease) in net assets resulting
from operations $459,349,450
------------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statements of changes in net assets
High Yield Portfolio
May 31, 1998 For the period
Year ended from June 10, 1996*
to May 31, 1997
Operations
<S> <C> <C>
Investment income (loss)-- net $ 343,256,750 $ 255,009,695
Net realized gain (loss) on investments 107,320,343 11,905,305
Net change in unrealized appreciation
(depreciation) on investments 8,772,357 42,485,867
--------- ----------
Net increase (decrease) in net assets
resulting from operations 459,349,450 309,400,867
Net contributions (withdrawals) from partners 505,587,141 2,889,633,507
----------- -------------
Total increase (decrease) in net assets 964,936,591 3,199,034,374
Net assets at beginning of period (Note 1) 3,199,064,374 30,000
------------- ------
Net assets at end of period $4,164,000,965 $3,199,064,374
-------------- --------------
*Commencement of operations.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
Notes to financial statements
High Yield Portfolio
1. Summary of significant accounting policies
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 policies 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. Debt securities are generally traded in
the over-the-counter market and are valued at a price deemed best to reflect
fair value as quoted by dealers who make markets in these securities or by an
independent pricing service. Securities for which market quotations are not
readily available are valued at fair value according to methods selected in good
faith by the board. 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, 1998, investments in securities included issues that are illiquid.
The Portfolio currently limits investments in illiquid securities to 10% of net
assets, at market value, at the time of purchase. The aggregate value of such
securities at May 31, 1998, was $96,293,369 representing 2.31% of 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.
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 0.59% 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 year ended May 31, 1998, the Portfolio's custodian fees were reduced
by $109,556 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 $3,868,258,459 and $2,944,741,962, respectively, for the
year ended May 31, 1998. For the same period, the portfolio turnover rate was
81%. Realized gains and losses are determined on an identified cost basis.
<PAGE>
<TABLE>
<CAPTION>
Investments in securities
High Yield Portfolio
May 31, 1998
(Percentages represent value of investments compared to net assets)
Bonds (86.8%)
Issuer Coupon Principal Value(a)
rate amount
Mortgage-backed securities (0.2%)
Federal Home Loan Mtge Corp
<S> <C> <C> <C>
08-01-17 7.50% $4,644(b) $4,865
Merrill Lynch Mtge Investors
06-15-21 8.17 6,426,277 6,426,277
-----------
Total 6,431,142
Aerospace & defense (1.1%)
Compass Aerospace
Sr Sub Nts
04-15-05 10.125 8,075,000(c) 8,256,688
K&F Inds
Sr Sub Nts Series B
10-15-07 9.25 4,500,000 4,646,250
L-3 Communications
Sr Sub Nts Series B
05-01-07 10.375 10,645,000 11,762,725
Sequa
Sr Sub Nts
12-15-03 9.375 20,750,000 21,683,750
-----------
Total 46,349,413
Automotive & related (0.9%)
Hayes Lemmerz Intl
Company Guaranty Series B
07-15-07 9.125 10,000,000 10,500,000
Oxford Automotive
Company Guaranty
06-15-07 10.125 20,120,000 21,377,500
Sr Sub Nts
06-15-07 10.125 5,000,000(c) 5,312,500
-----------
Total 37,190,000
Banks and savings & loans (0.8%)
First Nationwide Holdings
Sr Sub Nts
10-01-03 10.625 11,000,000 12,265,000
Wilshire Financial Services
01-01-04 13.00 11,500,000 12,477,500
Series B
08-15-04 13.00 8,500,000 9,222,500
-----------
Total 33,965,000
Communications equipment & services (13.8%)
21st Century Telecom Group
Zero Coupon Sr Disc Nts
02-15-03 12.35 15,500,000(c,g) 8,680,000
American Cellular
Sr Nts
05-15-08 10.50 21,000,000(c) 20,790,000
CCPR Services
Company Guaranty
02-01-07 10.00 26,850,000 27,185,625
Celcaribe
Sr Nts
03-15-04 13.50 7,350,000 7,460,250
Units
03-15-04 13.50 3,800,000(c) 7,011,000
Comcast Cellular Holdings
Sr Nts Series B
05-01-07 9.50 20,000,000 20,700,000
Facilicom Intl
Sr Nts
01-15-08 10.50 5,000,000 5,000,000
Geotek Communications
Cv Sr Sub Nts
02-15-01 12.00 4,135,000(e) 2,811,800
Zero Coupon Sr Disc Nts Series B
07-15-00 18.23 20,983,000(g) 10,491,500
Globalstar LP/Capital
Sr Nts
02-15-04 11.375 13,500,000 13,398,750
06-15-04 11.25 7,500,000 7,425,000
06-01-05 11.50 6,000,000(c) 5,940,000
GST Equipment Funding
Sr Nts
05-01-07 13.25 6,750,000 7,897,500
GST Telecom/GST Network Funding
Zero Coupon Sr Disc Nts
05-01-03 10.50 15,000,000(c,g) 8,962,500
GST Telecommunications
Sr Sub Nts
11-15-07 12.75 6,750,000 8,032,500
Intermedia Communications
Sr Nts Series B
11-01-07 8.875 11,025,000 11,355,750
Zero Coupon Sr Disc Nts Series B
07-15-02 11.34 18,375,000(g) 13,505,625
Intl Wireless Communications
Zero Coupon Sr Disc Nts
08-15-01 14.00 14,750,000(f) 5,457,500
Iridium LLC/Capital
Company Guaranty Series A
07-15-05 13.00 10,000,000 10,825,000
Company Guaranty Series D
07-15-05 10.875 15,200,000 15,238,000
Sr Nts
07-15-05 11.25 4,000,000(c) 4,055,000
ITC Deltacom
Sr Nts
06-01-07 11.00 9,457,000 10,639,125
03-01-08 8.875 16,250,000(c) 16,595,313
IXC Communications
Sr Sub Nts
04-15-08 9.00 8,000,000(c) 8,000,000
Jordan Telecommunications Products
Sr Nts Series B
08-01-07 9.875 25,950,000 26,598,750
Zero Coupon Sr Disc Nts Series B
08-01-00 6.98 18,000,000(g) 14,940,000
Metrocall
Sr Sub Nts
10-01-07 10.375 13,750,000 14,231,250
Nextel Communications
Zero Coupon Sr Disc Nts
01-15-99 11.50 20,500,000(g) 19,987,500
08-15-99 2.86 4,500,000(g) 4,348,124
NEXTLINK Communications
Sr Nts
04-15-06 12.50 15,000,000 17,418,750
NTL
Zero Coupon Sr Nts Series B
02-01-06 11.48 40,000,000(g) 32,300,000
Omnipoint
Sr Nts
08-15-06 11.625 24,100,000 25,606,250
Sr Nts Series A
08-15-06 11.625 4,450,000 4,728,125
Pagemart Nationwide
Zero Coupon Sr Disc Nts
02-01-05 16.43 23,000,000(g) 20,700,000
Peoples Telephone
Sr Nts
07-15-02 12.25 14,250,000 15,069,375
PhoneTel Technologies
Sr Nts
12-15-06 12.00 23,500,000 20,680,000
Price Comm Cellular Holdings
Zero Coupon Company Guaranty Series B
08-01-07 11.18 12,000,000(g) 8,400,000
PriCellular Wireless
Sr Disc Nts Series B
11-15-01 14.00 10,000,000 11,487,500
Zero Coupon Sr Disc Nts
10-01-98 14.00 18,250,000(g) 19,322,187
Pronet
Sr Sub Nts
06-15-05 11.875 19,350,000 20,898,000
RCN
Zero Coupon Sr Disc Nts
02-15-03 9.88 12,000,000(c,g) 7,575,000
Unisite
Zero Coupon Sub Nts
12-15-00 13.00 9,000,000(e,g) 9,000,000
Verio
Sr Nts
04-01-05 10.375 7,000,000(c) 7,280,000
Vialog
Company Guaranty
11-15-01 12.75 17,600,000 18,172,000
-----------
Total 576,200,549
Computers & office equipment (2.2%)
Anacomp
Sr Sub Nts Series B
04-01-04 10.875 13,000,000 13,910,000
Bell Technology Group
Sr Nts
05-01-05 13.00 17,075,000(c) 17,629,938
Concentric Network
Sr Nts
12-15-07 12.75 5,600,000 6,160,000
Cooperative Computing
Sr Sub Nts
02-01-08 9.00% $20,250,000(c) $19,085,625
Decisionone Holdings
Zero Coupon
08-01-08 4.18 11,875,000(f) 7,065,625
Learning
Cv Sr Nts
11-01-00 5.50 2,500,000 2,375,000
Psinet
Sr Nts
02-15-05 10.00 7,025,000(c) 7,147,938
Read-Rite
Sub Nts
09-01-04 6.50 4,375,000 2,914,844
Unisys
04-15-03 12.00 8,000,000 9,080,000
Sr Nts
10-15-04 11.75 7,500,000 8,681,250
-----------
Total 94,050,220
Electronics (--%)
Amkor Technologies
Cv Sub Nts
05-01-03 5.75 1,750,000 1,745,625
Energy (2.7%)
Belco Oil & Gas
Sr Sub Nts Series B
09-15-07 8.875 5,800,000 5,756,500
Chesapeake Energy
Sr Nts
05-01-05 9.625 5,450,000(c) 5,463,625
Clark R&M
Sr Sub Nts
11-15-07 8.875 11,000,000 11,013,750
Costilla Energy
Sr Nts
10-01-06 10.25 16,250,000 16,412,500
Energy Corp of America
Sr Sub Nts Series A
05-15-07 9.50 9,000,000 8,932,500
Forcenergy
Sr Sub Nts
11-01-06 9.50 5,000,000 5,118,750
Sr Sub Nts Series B
02-15-07 8.50 2,250,000 2,193,750
Houston Exploration
Sr Sub Nts
01-01-08 8.625 11,750,000(c) 11,779,374
HS Resources
Company Guaranty
11-15-06 9.25 4,250,000 4,345,625
Sr Sub Nts
12-01-03 9.875 9,700,000 10,039,500
Rayovac
Sr Sub Nts Series B
11-01-06 10.25 7,664,000 8,497,460
Transamerica Energy
06-15-02 11.50 13,960,000 13,366,700
Zero Coupon
06-15-99 17.58 9,600,000(g) 7,968,000
-----------
Total 110,888,034
Energy equipment & services (1.0%)
Dailey Intl
Sr Nts
02-15-08 9.50 9,000,000 9,045,000
DI Inds
Sr Nts
07-01-07 8.875 6,000,000 6,060,000
Plains Resources
Company Guaranty Series D
03-15-06 10.25 9,000,000 9,630,000
Pride Intl
Sr Nts
05-01-07 9.375 6,600,000 7,062,000
Seven Seas Petroleum
Sr Nts
05-15-05 12.50 8,000,000(c) 8,090,000
-----------
Total 39,887,000
Financial services (0.7%)
Arcadia Financial
Sr Nts
03-15-07 11.50 13,805,000 13,718,719
Gemini Inds
12-23-01 13.50 13,500,000(e,i) 13,500,000
-----------
Total 27,218,719
Food (2.4%)
Ameriserve Food Distributions
Company Guaranty
07-15-07 10.125 8,400,000 9,072,000
Aurora Foods
Sr Sub Nts Series B
02-15-07 9.875 6,000,000 6,435,000
Sr Sub Nts Series D
02-15-07 9.875 10,000,000 10,725,000
CFP Holdings
Sr Nts Series B
01-15-04 11.625 10,675,000 10,621,625
Chiquita Brands Intl
Sr Nts
01-15-04 9.625 8,500,000 9,010,000
Fine Host
Cv Sub Nts
11-01-04 5.00 2,000,000(c) 1,442,500
Gorges/Quik to Fix Food
Sr Sub Nts Series B
12-01-06 11.50 14,250,000 15,087,188
Specialty Foods
Sr Nts Series B
08-15-01 10.25 15,000,000 15,037,500
Stroh Brewery
Sr Sub Nts
07-01-06 11.10 14,887,000 10,123,159
Twin Laboratories
Sr Sub Nts Company Guaranty
05-15-06 10.25 13,813,000 15,263,365
-----------
Total 102,817,337
Foreign (15.7%)(d)
Alfa-Russia Finance
(U.S. Dollar) Medium-term Nts Bank Guaranty
07-28-00 10.375 5,000,000 4,069,000
APP Intl Finance
(U.S. Dollar)
10-01-05 11.75 4,500,000 3,937,500
Argentina Govt Natl
(U.S. Dollar)
09-19-27 9.75 7,000,000 6,501,250
Australis Holdings
(U.S. Dollar) Zero Coupon Sr Disc Nts
11-01-00 14.99 17,900,000(g) 1,790,000
Australis Media
(U.S. Dollar)
11-01-00 14.00 5,587,791 4,062,592
(U.S. Dollar) Zero Coupon
05-15-00 15.75 43,969,560(g) 4,396,956
Autopistas Del Sol
(U.S. Dollar) Sr Nts
08-01-09 10.25 13,500,000(c) 13,128,750
Bestel
(U.S. Dollar) Zero Coupon Sr Disc Nts
05-15-05 12.75 11,400,000(c,g) 7,794,750
Canadian Forest Oil
(U.S. Dollar) Company Guaranty
09-15-07 8.75 8,500,000 8,542,500
CEI Citicorp Holdings
(Argentine Peso)
02-14-07 11.25 5,000,000(c) 4,292,800
(U.S. Dollar)
02-14-02 8.50 3,000,000 2,996,250
Centaur Mining & Exploration
(U.S. Dollar) Company Guaranty
12-01-07 11.00 11,500,000(c) 12,003,125
Central Euro Media
(U.S. Dollar) Sr Nts
08-15-04 9.375 12,175,000 11,820,099
City of Moscow
(U.S. Dollar) Zero Coupon
07-01-98 9.50 3,345,945(f) 3,306,128
12-31-98 10.96 3,691,890(f) 3,740,623
Colt Telecommunications Group
(U.S. Dollar) Zero Coupon
12-15-01 12.00 8,500,000(g) 7,480,000
CTI Holdings
(U.S. Dollar) Zero Coupon Sr Nts
04-15-03 11.50 9,450,000(c,g) 5,575,500
Daya Guna
(U.S. Dollar) Company Guaranty
06-01-07 10.00 10,325,000(c) 8,156,750
Doman Inds
(U.S. Dollar)
03-15-04 8.75 10,500,000 10,395,000
(U.S. Dollar) Sr Nts Series B
11-15-07 9.25 3,500,000 3,521,875
Enterprises Shipholding
(U.S Dollar) Sr Nts
05-01-08 8.875 16,250,000(c) 16,209,375
Espirito Santo Centrais
(U.S. Dollar) Sr Nts
07-15-07 10.00 9,000,000(c) 8,159,580
Esprit Telecom Group
(U.S. Dollar) Sr Nts
12-15-07 11.50 11,000,000 11,852,500
Globo Communicacoes Participacoes
(U.S. Dollar) Sr Nts
12-05-08 10.625 15,000,000(c) 14,584,650
Govt of Algeria
(U.S. Dollar)
09-04-06 7.06 5,227,273 3,998,864
Great Central Mines
(U.S. Dollar) Sr Nts
04-01-08 8.875 10,000,000(c) 9,962,500
Greater Beijing
(U.S. Dollar) Sr Nts
06-15-04 9.25 3,500,000(c) 2,450,000
06-15-07 9.50 5,000,000(c) 3,400,000
Grupo Industrial Durango
(U.S. Dollar)
08-01-03 12.625 5,000,000 5,579,450
Grupo Iusacell
(U.S. Dollar)
07-15-04 10.00 4,550,000 4,618,250
Grupo Televisa
(U.S. Dollar) Sr Nts
05-15-06 11.875 3,250,000 3,647,118
Hurricane Hydrocarbons
(U.S. Dollar) Sr Nts
11-01-04 11.75 15,750,000(c) 15,316,875
Hyundai Semiconductor
(U.S. Dollar) Sr Nts
05-15-07 8.625 15,000,000(c) 12,210,450
Imexsa Export Trust
(U.S. Dollar)
05-31-03 10.125 10,000,000(c) 10,300,000
Lodestar Holdings
(U.S. Dollar) Sr Nts
05-15-05 11.50 7,750,000(c) 7,808,125
MDC Communications
(U.S. Dollar) Sr Sub Nts
12-01-06 10.50 12,100,000 13,098,250
MetroNet Communications
(U.S. Dollar) Sr Nts
08-15-07 12.00 8,750,000 10,084,375
(U.S. Dollar) Zero Coupon Sr Disc Nts
11-01-02 10.74 12,800,000(g) 8,640,000
Mexican Cetes
(Mexican Peso) Zero Coupon
06-04-98 20.65 85,160,000(f) 9,635,002
Microcell Telecommunications
(U.S. Dollar) Zero Coupon Sr Disc Nts Series B
12-01-01 11.10 9,000,000(g) 6,671,250
(U.S. Dollar) Zero Coupon Sr Disc Nts Series B
10-15-02 8.76 12,140,000(g) 5,319,214
Netia Holdings
(U.S. Dollar) Company Guaranty
11-01-07 10.25 17,750,000(c) 18,282,500
Northern Offshore ASA
(U.S. Dollar) Company Guaranty
05-15-05 10.00 21,000,000(c) 20,842,500
NTEX
(U.S. Dollar) Sr Nts
06-01-06 11.50 8,450,000(c) 8,450,000
Panda Global Energy
(U.S. Dollar) Company Guaranty
04-15-04 12.50 24,500,000(c) 23,581,250
Philippine Long Distance Telephone
(U.S. Dollar) Medium-term Nts Series E
03-06-07 7.85 7,500,000(c) 6,794,850
03-06-17 8.35 7,500,000(c) 6,613,950
PLD Telekom
(U.S. Dollar) Zero Coupon
06-01-04 14.00 4,000,000(g) 3,720,000
Plitt Theatres
(U.S. Dollar) Sr Sub Nts
06-15-04 10.875 22,850,000 24,820,812
Poland Telecom Finance
(U.S. Dollar)
12-01-07 14.00 16,500,000(c) 18,562,500
Polysindo Intl Finance
(U.S. Dollar) Company Guaranty
06-15-01 13.00 2,000,000 1,030,000
06-15-06 11.375 7,900,000 3,989,500
Pratama Datakom Asia
(U.S. Dollar) Company Guaranty
07-15-05 12.75 5,600,000(c) 2,352,000
Repap New Brunswick
(U.S. Dollar) Sr Nts
07-15-00 9.875 15,450,000 16,299,750
06-01-04 9.00 9,900,000(c) 9,900,000
04-15-05 10.625 28,500,000 29,497,500
Republic of Korea
(U.S. Dollar)
04-15-08 8.875 8,450,000 7,879,625
Rogers Cablesystems
(U.S. Dollar) Nts
08-01-02 9.625 9,000,000 9,630,000
Roil
(U.S. Dollar)
12-05-02 12.78 10,000,000(e) 9,770,000
RSL Communications
(U.S. Dollar) Company Guaranty
11-15-06 12.25 10,167,000 11,577,671
Russia Federal Loan Bond
(Russian Ruble) Series 25018
09-27-00 14.00 30,008,878 2,430,088
Satelites Mexicanos
(U.S. Dollar) Company Guaranty Sr Nts
06-30-04 9.44 4,247,000(c) 4,247,000
(U.S. Dollar) Sr Nts
11-01-04 10.125 10,000,000(c) 9,962,500
Tarkett Intl
(U.S. Dollar) Sr Sub Nts
03-01-02 9.00 10,000,000 10,150,000
Tatneft Finance
(U.S. Dollar) Company Guaranty
10-29-02 9.00 3,800,000(c) 3,181,968
Telewest Communications
(U.S. Dollar) Zero Coupon
10-01-00 11.00 10,000,000(g) 8,075,000
Tjiwi Kimia Finance Mauritius
(U.S. Dollar) Company Guaranty
08-01-04 10.00 10,000,000 7,200,000
Tjiwi Kimia Intl
(U.S. Dollar) Company Guaranty
08-01-01 13.25 7,000,000 5,740,000
Tri Polyta Finance BV
(U.S. Dollar) Company Guaranty
12-01-03 11.375 20,000,000 10,800,000
United Mexican States
(U.S. Dollar)
05-15-26 11.50 5,000,000 5,818,750
Veninfotel
(U.S. Dollar) Cv Pay-in-kind
03-01-02 10.00 9,000,000(e,j) 13,500,000
Veritas Holdings
(U.S. Dollar) Sr Nts
12-15-03 9.625 15,256,000 16,285,780
Versatel Telecom
(U.S. Dollar) Sr Nts
05-15-08 13.25 11,000,000(c) 11,330,000
-----------
Total 653,372,770
Furniture & appliances (0.2%)
Lifestyle Furnishings
Company Guaranty
08-01-06 10.875 6,500,000 7,280,000
Health care (0.2%)
Maxxim Medical
Company Guaranty
08-01-06 10.50 6,600,000 7,284,750
Health care services (1.8%)
Abbey Healthcare Group
Sr Sub Nts
11-01-02 9.50 4,800,000 4,812,000
Fountain View
Sr Sub Nts
04-15-08 11.25 8,600,000(c) 8,815,000
Magellan Health Services
Sr Sub Nts
02-15-08 9.00 15,000,000(c) 14,887,500
Oxford Health Plans
Sr Nts
05-15-05 11.00 6,650,000(c) 6,799,625
Paracelsus Healthcare
Sr Sub Nts
08-15-06 10.00 21,450,000 22,039,875
Physician Sales & Service
Company Guaranty
10-01-07 8.50 15,250,000 15,631,250
-----------
Total 72,985,250
Household products (0.4%)
Revlon Worldwide
Zero Coupon Sr Disc Nts Series B
03-15-01 11.52 20,000,000(f) 15,550,000
Industrial equipment & services (2.2%)
Borg-Warner Security
03-15-07 9.625 4,100,000 4,335,750
Sr Sub Nts
05-01-03 9.125 10,000,000 10,250,000
Clark Materials Handling
Company Guaranty
11-15-06 10.75 11,000,000 11,880,000
Goss Graphic Systems
Sr Sub Nts
10-15-06 12.00 14,000,000 15,715,000
Motor & Gears
Sr Nts Series D
11-15-06 10.75 25,000,000 27,000,000
Purina Mills
Sr Sub Nts
03-15-10 9.00 5,825,000(c) 5,999,750
Thermadyne Holdings
Zero Coupon
06-01-03 12.49 12,000,000(c,g) 6,630,000
Thermadyne Mfg LLC/Capital
Sr Sub Nts
06-01-08 9.875 8,000,000(c) 8,040,000
-----------
Total 89,850,500
Insurance (0.4%)
Americo Life
Sr Sub Nts
06-01-05 9.25 15,000,000 15,393,750
Leisure time & entertainment (5.6%)
Affinity Group Holding
Sr Nts
04-01-07 11.00 9,000,000 9,618,750
AMC Entertainment
Sr Sub Nts
03-15-09 9.50 4,500,000 4,657,500
Coast Hotels & Casino
Company Guaranty Series B
12-15-02 13.00 19,800,000 22,522,500
Hammons (JQ) Hotels
1st Mtge
02-15-04 8.875 12,000,000 12,120,000
Hollywood Theaters
Company Guaranty
08-01-07 10.625 5,950,000 6,433,438
Icon Health & Fitness
Sr Sub Nts Series B
07-15-02 13.00 7,500,000 8,006,250
Zero Coupon Sr Disc Nts Series B
11-15-01 13.37 21,750,000(g) 11,310,000
IHF Holdings
Zero Coupon Sr Disc Nts Series B
11-15-99 2.04 7,275,000(g) 6,201,938
Lodgenet Entertainment
Sr Nts
12-15-06 10.25 15,000,000 15,600,000
Premier Parks
Sr Nts
04-01-06 9.25 8,300,000 8,424,500
Riviera Holdings
Company Guaranty
08-15-04 10.00 11,000,000 11,000,000
Trump Atlantic City Assn/Funding
1st Mtge Company Guaranty
05-01-06 11.25 26,945,000 26,473,462
Trump Holdings & Funding
Sr Nts
06-15-05 15.50 28,050,000 31,836,750
United Artists Theatre
Series 1995A
07-01-15 9.30 13,505,649 13,877,054
Sr Sub Nts
04-15-08 9.75 10,000,000(e) 10,100,000
Venetian Casino/LV Sands
Mtge
11-15-04 12.25 15,105,000(c) 15,671,437
Sr Sub Nts
11-15-05 10.00 6,000,000(c) 5,670,000
Waterford Gaming/LLC
Sr Nts
11-15-03 12.75 12,771,000 14,143,883
-----------
Total 233,667,462
Media (7.5%)
Adelphia Communications
Sr Deb
09-15-04 11.875 5,000,000 5,525,000
Sr Nts Series B
02-01-08 8.375 27,500,000 27,259,375
Benedek Broadcasting
Sr Nts
03-01-05 11.875 2,500,000 2,825,000
Benedek Communications
Zero Coupon Sr Disc Nts
05-15-06 13.25 9,500,000(g) 7,600,000
Big Flower Press
Sr Sub Nts
07-01-07 8.875 8,000,000 8,260,000
Cable Systems USA
06-30-99 10.75 2,287,647(e) 2,276,208
Capstar Broadcasting
Zero Coupon Sr Disc Nts
02-01-02 7.49 8,000,000(c,g) 6,030,000
Chancellor Media
Sr Sub Nts
10-01-04 9.375 3,500,000 3,675,000
12-15-07 8.125 19,750,000(c) 19,898,125
EchoStar Communications
Zero Coupon Sr Sec Disc Nts
06-01-99 7.95 12,000,000(g) 11,640,000
EchoStar Satellite Broadcasting
Zero Coupon Sr Disc Nts
03-15-00 11.81 30,500,000(g) 28,060,000
Garden State Newspapers
Sr Sub Nts Series B
10-01-09 8.75 9,000,000 9,236,250
Jacor Communications
Company Guaranty
12-15-06 9.75 19,000,000 20,662,500
Zero Coupon Cv
02-09-18 8.75 5,500,000(f) 2,330,625
James Cable Partners LP
Sr Nts Series B
08-15-04 10.75 17,000,000 17,977,500
Liberty Group
Sr Sub Nts
02-01-08 9.375 7,500,000 7,715,625
OpTel
Sr Nts Series B
02-15-05 13.00 17,000,000 19,082,500
Outdoor Systems
Company Guaranty
10-15-06 9.375 10,000,000 10,600,000
06-15-07 8.875 30,000,000 31,200,000
Paxson Communications
Sr Sub Nts
10-01-02 11.625 7,000,000 7,560,000
Pegasus Media & Communications
Sr Nts Series B
10-15-05 9.625 6,500,000 6,743,750
Series B
07-01-05 12.50 15,400,000 17,594,500
Price Communications Wireless
Sr Sub Nts
07-15-07 11.75 10,000,000 11,200,000
Spanish Broadcasting System
Sr Nts Series B
03-15-04 11.00 3,150,000 3,457,125
Sr Nts
06-15-02 12.50 4,000,000 4,560,000
Transwestern Publishing/TWP Capital
Sr Sub Nts
11-15-07 9.625 4,500,000 4,668,750
Viacom Intl
07-01-03 7.00 15,000,000 14,998,350
-----------
Total 312,636,183
Metals (1.5%)
Bar Technologies
Company Guaranty
04-01-01 13.50 10,000,000(c) 10,750,000
EnviroSource
Sr Nts
06-15-03 9.75 21,510,000 21,993,975
Maxxam Group Holdings
Sr Nts Series B
08-01-03 12.00 12,000,000 13,080,000
NSM Steel
Company Guaranty
02-01-06 12.00 16,350,000 14,878,500
-----------
Total 60,702,475
Miscellaneous (13.4%)
Adams Outdoor Advertising
Sr Nts
03-15-06 10.75 15,300,000 16,677,000
Advance Holding
Zero Coupon
04-15-03 12.98 3,300,000(c,g) 1,914,000
Advance Stores
Sr Sub Nts
04-15-08 10.25 5,500,000(c) 5,692,500
American Architectural
Sr Nts
12-01-07 11.75% $10,000,000(c) $10,500,000
American Mobile/AMSC ACQ
04-01-08 12.25 8,000,000 8,000,000
Anker Coal Group
Sr Nts Series B
10-01-07 9.75 11,000,000 10,422,500
Big City Radio
Zero Coupon Sr Disc Nts
03-15-01 11.40 10,000,000(c,g) 7,400,000
Bistro Trust
Sub Nts
12-31-02 9.50 10,000,000(c) 10,072,000
Booth Creek Ski Holdings
Sr Nts Series B
03-15-07 12.50 6,250,000 6,593,750
BTI Telecommunications
Sr Nts
09-15-07 10.50 7,875,000 8,268,750
Cex Holdings
Sr Sub Nts
06-01-08 9.625 10,000,000(c) 10,225,000
Comforce Operating
Sr Nts Series B
12-01-07 12.00 9,000,000 9,765,000
Coty
Sr Sub Nts
05-01-05 10.25 7,000,000 7,455,000
Crown Castle Intl
Zero Coupon Sr Disc Nts
11-15-02 8.88 14,750,000(c,g) 10,140,625
ECM Funding LP
06-10-02 11.92 1,661,844(e) 1,661,844
Grant Geophysical
Sr Nts
02-15-08 9.75 7,250,000 7,231,875
Great Lakes Acquisition
Zero Coupon
05-15-03 13.23 8,000,000(c,g) 4,340,000
Great Lakes Carbon
Sr Sub Nts
05-15-08 10.25 8,875,000(c) 9,096,875
Grove Holdings LLC
Zero Coupon
05-01-03 11.625 4,000,000(g) 2,365,000
Grove Inds LLC
05-01-10 14.50 2,700,000(c) 2,713,500
Hyperion Telecommunications
Sr Nts Series B
09-01-04 12.25 14,000,000 15,400,000
Isle of Capri/Capital
1st Mtge Series B
08-31-04 13.00 16,250,000 16,798,437
JTM Inds
Sr Sub Nts
04-15-08 10.00 17,445,000(c) 17,619,450
Knology Holdings
Zero Coupon Sr Disc Nts
10-15-02 12.24 11,000,000(g) 6,435,000
Level 3 Communications
Sr Nts
05-01-08 9.125 22,400,000(c) 21,784,000
Michael Petroleum
Sr Nts
04-01-05 11.50 6,000,000(c) 6,067,500
MJD Communications
05-01-08 9.50 4,300,000(c) 4,380,625
Morris Materials Handling
Sr Nts
04-01-08 9.50 15,000,000(c) 14,700,000
MSX Intl
Sr Sub Nts
01-15-08 11.375 10,410,000 10,722,300
Nationwide Credit
Sr Nts
01-15-08 10.25 8,750,000(c) 8,925,000
Norcal Waste Systems
Company Guaranty Series B
11-15-05 13.50 20,300,000 23,598,750
NSM Steel
02-01-08 12.25 11,700,000 10,939,500
Omnipoint Communications
Sr Nts
02-17-06 8.875 22,500,000(c) 22,500,000
Outsourcing Solutions
Sr Sub Nts Series B
11-01-06 11.00 37,395,000 40,760,550
Park-Ohio Inds
Sr Sub Nts
12-01-07 9.25 15,000,000 15,487,500
Pathnet
04-15-08 12.25 14,250,000(c) 15,817,500
Pierce Leahy Command
Company Guaranty
05-15-08 8.125 25,150,000(c) 24,395,500
Premier Cruises
Sr Nts
03-15-08 11.00 11,000,000(c) 11,027,500
RAB Enterprises
Sr Nts
05-01-05 10.50 9,600,000(c) 9,696,000
Resource America
Sr Nts
08-01-04 12.00 9,000,000 9,630,000
SC Intl
09-01-07 9.25 22,750,000 23,773,750
SFX Entertainment
Sr Sub Nts
02-01-08 9.125 9,700,000 9,506,000
Sheffield Steel
1st Mtge Series B
12-01-05 11.50 10,200,000 10,633,500
Steel Heddle Group
Zero Coupon
06-01-03 13.75 6,200,000(c,g) 3,224,000
Steel Heddle Mfg
Sr Sub Nts
06-01-08 10.625 6,600,000(c) 6,666,000
Stellex Inds
Sr Sub Nts Series B
11-01-07 9.50 13,700,000 14,008,250
Talton Holdings
Company Guaranty Sr Nts Series B
06-30-07 11.00 7,600,000 8,227,000
Triton Communications
Zero Coupon Sr Disc Nts
05-01-03 10.86 22,000,000(c,g) 12,980,000
Wesco Intl
Zero Coupon Sr Disc Nts
06-01-03 11.21 6,800,000(c,g) 3,945,427
XCL
05-01-04 13.50 8,000,000(c) 9,200,000
-----------
Total 559,384,258
Multi-industry conglomerates (0.9%)
Communications & Power Inds
Sr Sub Nts Series B
08-01-05 12.00 10,000,000 11,175,000
Jordan Inds
Zero Coupon Sr Sub Deb Series B
04-01-02 11.75 17,692,251(g) 10,792,273
Pierce Leahy
Sr Sub Nts
07-15-06 11.125 5,433,000 6,139,290
Prime Succession
Sr Sub Nts
08-15-04 10.75 10,000,000 11,000,000
-----------
Total 39,106,563
Paper & packaging (4.0%)
Bear Island LLC/Finance
Sr Nts Series B
12-01-07 10.00 12,500,000 12,875,000
BPC Holding
Sr Nts Series B
06-15-06 12.50 11,750,000 12,983,750
Crown Paper
Sr Sub Nts
09-01-05 11.00 20,000,000 22,100,000
Gaylord Container
Sr Nts
06-15-07 9.75 15,000,000 15,450,000
02-15-08 9.875 29,250,000 29,542,500
Graham Packaging Capital
Zero Coupon Sr Disc Nts
01-15-03 10.84 5,000,000(c,g) 3,125,000
Riverwood Intl
Company Guaranty
04-01-06 10.25 15,000,000 15,525,000
08-01-07 10.625 5,500,000 5,775,000
04-01-08 10.875 10,000,000 10,200,000
Silgan Holdings
06-01-09 9.00 8,250,000 8,631,563
Pay-in-kind
07-15-06 13.25 5,621,000(j) 6,295,520
Stone Container
1st Mtge
10-01-02 10.75 10,000,000 10,700,000
Sr Nts
12-01-98 11.875 4,500,000 4,635,000
08-01-16 12.58 9,000,000 9,945,000
-----------
Total 167,783,333
Restaurants & lodging (0.5%)
American Restaurant Group
Sr Nts
02-15-03 11.50 9,000,000(c) 9,292,500
Prime Hospitality
Sr Sub Nts Series B
04-01-07 9.75 11,900,000 12,733,000
-----------
Total 22,025,500
Retail (2.8%)
Amazon.com
Zero Coupon Sr Disc Nts
05-01-03 10.00 24,250,000(c,g) 14,368,125
Dairy Mart Convenience Stores
Sr Sub Nts Series A
03-15-04 10.25 18,700,000 18,559,750
Sr Sub Nts Series B
03-15-04 10.25 6,250,000 6,203,125
Maxim Group
Company Guaranty Series B
10-15-07 9.25 12,500,000 12,718,750
Musicland Group
Company Guaranty Sr Sub Nts
03-15-08 9.875 13,250,000(c) 13,250,000
Pathmark Stores
Sr Sub Nts
05-01-03 9.625 8,500,000 8,691,250
Sub Nts
06-15-02 11.625 8,000,000 8,080,000
Zero Coupon Sub Nts
11-01-99 10.75 12,500,000(g) 10,375,000
Pueblo Xtra Intl
Sr Nts
08-01-03 9.50 3,660,000 3,605,100
Sr Nts Series C
08-01-03 9.50 5,750,000 5,663,750
Stater Brothers Holdings
Sr Nts
03-01-01 11.00 14,500,000 15,913,750
-----------
Total 117,428,600
Textiles & apparel (1.5%)
Anvil Knitwear
Sr Nts Series B
03-15-07 10.875 14,000,000 14,525,000
Galey & Lord
Sr Sub Nts
03-01-08 9.125 8,000,000(c) 7,940,000
GFSI Holdings
Sr Sub Nts Series B
03-01-07 9.625 9,000,000(c) 9,528,750
Zero Coupon Sr Disc Nts Series B
09-15-04 10.77 11,700,000(g) 13,104,000
Hosiery Corp of America
Sr Sub Nts
08-01-02 13.75 10,000,000 11,050,000
Pillowtex
Company Guaranty Sr Sub Nts Series B
12-15-07 9.00 5,000,000 5,225,000
-----------
Total 61,372,750
Transportation (0.4%)
Global Ocean Carriers
Sr Nts
07-15-07 10.25 13,500,000 12,420,000
Trico Marine Services
Company Guaranty Sr Nts Series F
08-01-05 8.50 5,000,000 5,012,500
-----------
Total 17,432,500
Utilities -- electric (0.8%)
AES
Sr Sub Nts
11-01-07 8.50 12,800,000 13,088,000
Midland Funding
Series A
07-23-05 11.75 5,000,000 5,950,000
Series B
07-23-06 13.25 12,500,000 15,718,750
-----------
Total 34,756,750
Utilities -- gas (0.5%)
Bellwether Exploration
Sr Nts
04-01-07 10.875 9,000,000 9,495,000
Empire Gas
Sr Nts
07-15-04 7.00 11,350,000 10,498,750
-----------
Total 19,993,750
Utilities -- telephone (0.7%)
McLeod USA
Sr Nts
03-15-08 8.375 7,680,000(c) 7,699,200
Primus Telecommunications Group
Sr Nts
08-01-04 11.75 11,550,000 12,416,249
05-15-08 9.875 10,000,000(c) 9,975,000
-----------
Total 30,090,449
Total bonds
(Cost: $3,511,627,007) $3,614,840,632
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Common stocks (0.8%)
Issuer Shares Value(a)
<S> <C> <C>
Arena Brands 111,111(e) $2,388,887
Celcaribe 1,195,110 4,780,440
Communications &
Power Inds 3,500 525,000
Concentric Network 100,000 2,212,500
Core Capital 222,223(e) 4,444,460
EchoStar Satellite Broadcasting 150,000 3,815,625
Gaylord Container Cl A 1,000,000 8,375,000
Global TeleSystems Group 107,700 4,126,256
IFINT Diversified Holdings 42,418(e) 233,299
Nextel Communications Cl A 41,056 967,382
OpTel 17,000 68,000
Pagemart Nationwide 50,750 253,750
Pegasus Communications 16,923 412,498
Specialty Foods 300,000 6,000
Wireless One 25,000 32,813
Total common stocks
(Cost: $28,755,581) $32,641,910
Preferred stocks & other (10.0%)
Issuer Shares Value(a)
21st Century Telecom Group
13.75% Pay-in-kind 2,600(j) $2,840,500
Allegiance Telecommunications
Warrants 30,450 16,747,500
American Radio Systems
11.375% Pay-in-kind Series B 94,753(j) 11,180,854
American Restaurant Group
12.00% Pay-in-kind 3,500(j) 3,570,000
American Telecasting
Warrants 85,225 852
APP Finance II Mauritius Cl B
12.00% 22,600 16,498,000
Australis Holdings
Warrants 13,400 134
Bar Technologies
Warrants 10,000 550,000
Benedek Communications
Warrants 70,000 210,000
California Federal Bank
11.50% 166,500 18,460,688
Chesapeake Energy
Cv 33,300 1,519,313
Clearnet Communications
Warrants 42,240 422,400
Communications & Power Inds
14.00% Pay-in-kind Series B 173,823(j) 19,033,620
Concentric Network
Warrants 5,600 728,000
Core Capital
10.00% Cv Series A/I 222,223(e) 5,640,020
Crown Packaging
Warrants 10,000 2,500
CSC Holdings
11.75% Pay-in-kind Series H 133,837(j) 15,692,388
11.125% Pay-in-kind Series M 359,982(j) 41,487,926
Dairy Mart
Warrants 311,333(c) 155,668
Day Intl Group
Pay-in-kind 8,000(j) 8,260,000
Earthwatch
12% Cv Series C 700,000(c) 1,050,000
EchoStar Communications
12.125% Pay-in-kind Series B 11,008(j) 12,411,520
Fairfield Mfg
11.25% Pay-in-kind 12,880(j) 13,459,600
Foodmaker
Warrants 7,000 349,125
Geotek Communications
Warrants 872,500(k) --
Globalstar Telecommunications
Warrants 13,500(c) 1,451,250
HarCor Energy
Warrants 110,000 55,000
Hemmeter Enterprises
Warrants 36,000(k) --
Hosiery Corp of America
Warrants 10,000 50,000
Houlihan's Restaurant
Warrants 5,886(k) --
Hyperion Telecommunications
12.875% Pay-in-kind Series B 4,804(j) 5,236,360
Intermedia Communications
13.50% Pay-in-kind Series B 122,400(j) 14,688,000
Warrants 22,750 3,071,250
Intl Wireless Communications
Warrants 14,750 148
Iridium World Communications
Warrants 17,150 3,858,750
IXC Communications
12.50% Pay-in-kind Series B 4,927(j) 5,666,050
Jitney-Jungle Stores of America 64,000 10,368,000
KMC Telecommunications Holdings
Warrants 12,000 7,110,000
Knology Holdings
Warrants 11,000 11,000
Liberty Group Publishing
14.75% 449,000 11,674,000
Martin Media
14.00% Unit Cv 115,000(e) 11,500,000
MetroNet Communications
Warrants 8,750 420,000
Nebco Evans Holding
11.25% Pay-in-kind 95,000(j) 9,642,500
Nextel Communications
11.125% Pay-in-kind 6,688(j) 6,888,640
Warrants 18,902(k) --
NTL
13.00% Pay-in-kind Series B 22,744(j) 26,951,640
Paxson Communications
12.50% Pay-in-kind
Exchangeable 204,320(j) 20,942,800
Pegasus Communications
12.75% Pay-in-kind 62,500(j) 7,546,875
12.75% Pay-in-kind Series A 1,976(j) 2,321,800
Price Communications
Warrants 41,280 433,440
Primus Telecommunications
Warrants 11,550 265,650
RSL Communications
Warrants 9,500 931,000
SFX Broadcasting
12.625% Pay-in-kind Series E 114,235(j) 13,479,730
SGW Holding
12.50% Pay-in-kind Series B 116,626(c,j) 1,995,471
Cv Series A 87,091(c) 899,941
Warrants 2,750(c) 870,650
Sinclair Capital
11.625% 140,000 15,517,600
Time Warner
10.25% Pay-in-kind Series M 6,227(j) 7,067,645
Transdigm
Warrants 11,195(e) 6,716,785
Unifi Communications
Warrants 10,000 $100
Unisite
Cl C 5,938(e) 2,750,066
Warrants 4,504(e,k) --
Vialog
Warrants 17,600 1,056,000
Warren (SD)
14.00% Series B 477,430 23,871,500
Wireless One
Warrants 23,250 233
Total preferred stocks & other
(Cost: $405,343,330) $415,580,482
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Short-term securities (1.0%)
Issuer Annualized Amount Value(a)
yield on date payable at
of purchase maturity
U.S. government agencies (0.2%)
Federal Home Loan Mtge Corp Disc Nt
<S> <C> <C> <C>
06-29-98 5.45% $3,300,000 $3,285,068
Federal Natl Mtge Assn Disc Nt
06-12-98 5.42 5,800,000 5,788,690
-----------
Total 9,073,758
Commercial paper (0.8%)
Ciesco LP
07-10-98 5.55 7,500,000(h) 7,452,935
Glaxo Wellcome
06-08-98 5.53 3,500,000(h) 3,495,179
GTE Funding
06-17-98 5.54 5,000,000 4,986,225
06-17-98 5.53 2,900,000 2,892,010
Kredietbank North America Finance
06-11-98 5.52 12,100,000 12,077,817
SBC Communications Capital
06-08-98 5.50 3,600,000(h) 3,595,073
-----------
Total 34,499,239
Total short-term securities
(Cost: $43,572,997) $43,572,997
Total investments in securities
(Cost: $3,989,298,915)(l) $4,106,636,021
</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, 1998.
(c) 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.
(d) Foreign security values are stated in U.S. dollars. For debt securities,
principal amounts are denominated in the currency indicated.
(e) 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, 1998, is as follows:
Security Acquisition Cost
dates
Arena Brands
Common 06-20-97 $5,888,888
Cable Systems USA
10.75% 1999 02-02-96 2,203,622
Core Capital
Common 10-30-97 4,444,460
Preferred 10.00% Cv Series A/I 10-30-97 5,555,575
ECM Funding LP
11.92% 2002 04-13-92 1,661,844
Gemini Inds
13.50% 2001 11-01-96 13,500,000
Geotek Communications
Cv Sr Sub Nts 12.00% 2001 03-04-96 4,135,000
IFINT Diversified Holdings
Common 08-18-94 --
Martin Media
Preferred 14.00% Unit Cv 12-22-97 11,500,000
Roil
(U.S. Dollar) 12.78% 2002 04-30-98 9,700,000
Transdigm
Warrants 09-29-93 thru 04-24-96 1,027,805
Unisite
Preferred Cl C 12-17-97 2,750,066
Warrants 12-17-97 --
Zero Coupon Sub Nts 13.00% 2000* 12-18-97 9,000,000
United Artist Theatres
Sr Sub Nts 9.75% 2008* 04-15-98 10,000,000
Veninfotel
(U.S. Dollar) Cv Pay-in-kind
10.00% 2002 03-05-97 thru 07-23-97 9,000,000
*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, 1998.
(j) Pay-in-kind securities are securities in which the issuer has the option to
make interest or dividend payments in cash or in additional securities. The
securities issued as interest or dividends usually have the same terms,
including maturity date, as the pay-in-kind securities.
(k) Negligible market value.
(l) At May 31, 1998, the cost of securities for federal income tax purposes was
$3,989,705,805 and the aggregate gross unrealized appreciation and depreciation
based on that cost was:
Unrealized appreciation $225,306,326
Unrealized depreciation (108,376,110)
------------
Net unrealized appreciation $116,930,216
<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, 1998, and the related statement of operations for
the year then ended and the statements of changes in net assets for the year
ended May 31, 1998 and 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 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
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 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 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 Quality Income Portfolio at May
31, 1998, and the results of its operations and the changes in its net assets
for the periods stated in the first paragraph above, in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Minneapolis, Minnesota
July 2, 1998
<PAGE>
<TABLE>
<CAPTION>
Financial statements
Statement of assets and liabilities
Quality Income Portfolio
May 31, 1998
Assets
Investments in securities, at value (Note 1)
<S> <C>
(identified cost $1,495,915,577) $1,583,548,708
Cash in bank on demand deposit 186,666
Dividends and accrued interest receivable 23,256,430
U.S. government securities held as collateral (Note 4) 69,084,112
----------
Total assets 1,676,075,916
-------------
Liabilities
Payable upon return of securities loaned (Note 4) 69,084,112
Accrued investment management services fee 22,499
Other accrued expenses 52,865
------
Total liabilities 69,159,476
----------
Net assets $1,606,916,440
--------------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statement of operations
Quality Income Portfolio
Year ended May 31, 1998
Investment income
Income:
<S> <C>
Dividends $ 807,500
Interest 112,711,954
-----------
Total income 113,519,454
-----------
Expenses (Note 2):
Investment management services fee 8,256,904
Compensation of board members 14,340
Custodian fees 120,916
Audit fees 29,500
Other 25,008
------
Total expenses 8,446,668
Earnings credits on cash balances (Note 2) (7,157)
- ------
Total net expenses 8,439,511
---------
Investment income (loss) -- net 105,079,943
-----------
Realized and unrealized gain (loss) -- net Net realized gain (loss) on:
Security transactions (Note 3) 7,991,478
Financial futures contracts (10,631,544)
Foreign currency transactions 43,619
Option contacts written 61,015
------
Net realized gain (loss) on investments (2,535,432)
Net change in unrealized appreciation (depreciation)
on investments and on translation of assets and
liabilities in foreign currencies 59,167,525
----------
Net gain (loss) on investments and foreign currencies 56,632,093
----------
Net increase (decrease) in net assets
resulting from operations $161,712,036
------------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statements of changes in net assets
Quality Income Portfolio
May 31, 1998 For the period
Year ended from June 10, 1996*
to May 31, 1997
Operations
<S> <C> <C>
Investment income (loss)-- net $ 105,079,943 $ 112,252,618
Net realized gain (loss) on investments (2,535,432) 9,395,624
Net change in unrealized appreciation
(depreciation) on investments and on
translation of assets and liabilities
in foreign currencies 59,167,525 20,434,131
---------- ----------
Net increase (decrease) in net
assets resulting from operations 161,712,036 142,082,373
Net contributions (withdrawals) from partners (170,449,665) 1,473,541,696
------------ -------------
Total increase (decrease) in net assets (8,737,629) 1,615,624,069
Net assets at beginning of period (Note 1) 1,615,654,069 30,000
------------- ------
Net assets at end of period $1,606,916,440 $1,615,654,069
-------------- --------------
*Commencement of operations.
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 policies 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. Debt securities are generally traded in
the over-the-counter market and are valued at a price deemed best to reflect
fair value as quoted by dealers who make markets in these securities or by an
independent pricing service. Securities for which market quotations are not
readily available are valued at fair value according to methods selected in good
faith by the board. 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, 1998, investments in securities included issues that are illiquid.
The Portfolio currently limits investments in illiquid securities to 10% of net
assets, at market value, at the time of purchase. The aggregate value of such
securities at May 31, 1998 was $5,019,504 representing 0.31% of 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.
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.
During the year ended May 31, 1998, the Portfolio's custodian fees were reduced
by $7,157 as a result of earnings credit 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 $309,613,276 and $328,105,980, respectively, for the
year ended May 31, 1998. For the same period, the portfolio turnover rate was
20%. Realized gains and losses are determined on an identified cost basis.
4. Lending of portfolio securities
At May 31, 1998, securities valued at $68,199,205 were on loan to brokers. For
collateral, the Portfolio received in U.S. government securities valued at
$69,084,112. Income from securities lending amounted to $80,491 for the year
ended May 31, 1998. 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.
<PAGE>
<TABLE>
<CAPTION>
Investments in securities
Quality Income Portfolio
May 31, 1998
(Percentages represent value of investments compared to net assets)
Bonds (96.2%)
Issuer Coupon Principal Value(a)
rate amount
U.S. government obligations (31.8%)
Overseas Private Investment
U.S. Govt Guaranty Series 1996A
<S> <C> <C> <C>
01-15-09 6.99% $10,000,000 $10,399,300
Resolution Funding Corp
Zero Coupon
01-15-06 8.94 25,000,000(g) 16,228,500
10-15-06 8.95 68,000,000(g) 42,235,480
01-15-14 8.21 48,000,000(g) 18,802,560
07-15-14 8.27 10,000,000(g) 3,801,400
04-15-16 8.05 47,000,000(g) 15,974,830
U.S. Treasury
07-31-99 6.875 60,000,000 60,879,600
02-15-00 5.875 25,000,000 25,132,000
08-15-00 6.00 11,400,000 11,506,248
11-15-01 7.50 99,000,000(d) 104,862,780
02-15-04 5.875 8,000,000 8,117,040
05-15-04 7.25 25,000,000 27,063,500
08-15-04 7.25 26,800,000 29,087,916
11-15-16 7.50 92,545,000(d) 109,288,241
11-15-21 8.00 15,000,000 18,973,200
TIPS
01-15-07 3.375 8,050,000(i) 7,990,049
-----------
Total 510,342,644
Mortgage-backed securities (13.4%)
Federal Home Loan Mtge Corp
07-01-16 8.00 444 462
01-01-17 8.00 6,325 6,588
03-01-17 8.50 169,420 177,626
06-01-17 8.50 129,722 135,924
04-01-20 9.00 2,806,470 2,978,366
04-01-21 9.00 1,490,329 1,596,977
03-01-22 8.50 3,609,957 3,797,891
08-01-22 8.50 3,261,490 3,428,218
06-01-24 7.50 13,590,795 14,041,873
02-01-25 8.00 7,277,207 7,576,009
Collateralized Mtge Obligation
09-01-19 8.50 210,526 220,130
Federal Housing Admin
01-01-24 7.43 8,917,296 9,106,789
Federal Natl Mtge Assn
11-01-02 10.00 106 111
10-01-23 6.50 10,692,695 10,693,337
11-01-26 8.00 10,840,285 11,265,766
04-01-27 7.50 12,516,195 12,872,156
06-01-27 7.50 16,376,755 16,858,886
07-01-27 8.00 11,711,885 12,156,703
08-01-27 7.50 4,747,545 4,887,313
Collateralized Mtge Obligation
10-25-19 8.50 1,448,659 1,596,710
01-25-21 8.00 4,980,113 5,015,671
Principal Only
01-25-20 9.89 1,255,556(j) 1,179,215
09-01-18 9.50 857,123(j) 692,398
Trust Series Z
02-25-24 6.00 21,923,913(e) 19,532,453
Govt Natl Mtge Assn
01-15-22 8.00 1,503,673 1,567,429
02-15-23 8.00 2,699,205 2,813,651
07-15-24 8.00 11,339,976 11,817,162
08-15-24 8.00% $9,894,672 $10,311,040
10-15-24 9.00 4,083,307 4,387,840
02-15-25 9.00 508,373 545,972
05-15-26 7.50 18,272,918 18,847,784
09-15-26 8.50 13,037,833 13,769,907
10-15-26 8.00 7,748,720 8,060,296
Prudential Bache
Collateralized Mtge Obligation
04-01-19 7.97 3,021,754 3,128,096
-----------
Total 215,066,749
Automotive & related (1.4%)
Daimler-Benz North America
Company Guaranty Medium-term Nts Series A
09-15-06 7.375 14,000,000 15,088,780
General Motors
05-15-03 8.875 7,050,000 7,855,603
-----------
Total 22,944,383
Banks and savings & loans (6.1%)
BankAmerica
Sub Nts Series B
12-31-26 7.70 5,000,000(f) 5,219,650
BankBoston Capital
Company Guaranty Series B
12-15-26 8.25 5,000,000 5,546,850
Cullen/Frost Capital
Series A
02-01-27 8.42 10,000,000 10,752,810
US Bancorp
Sub Nts
09-15-07 6.875 8,550,000 8,890,461
First Chicago
Sr Sub Nts
06-15-99 9.00 7,900,000 8,131,312
Firstar Capital
Company Guaranty Series B
12-15-26 8.32 10,000,000 11,086,400
Morgan (JP)
Medium-term Sr Sub Nts Series A
02-15-12 4.00 9,350,000(k) 8,698,305
NationsBank
Sub Nts
11-01-01 9.25 8,950,000 9,785,483
NCNB
Sub Nts
10-15-01 9.125 10,000,000 10,932,200
Swiss Bank
Sub Deb
09-01-26 7.75 11,369,000 12,871,868
Washington Mutual Capital
Company Guaranty
06-01-27 8.375 5,800,000(f) 6,441,132
-----------
Total 98,356,471
Chemicals (1.5%)
Dow Chemical
09-15-21 8.85 10,000,000 12,377,400
USA Waste Services
Sr Nts
10-01-07 7.125 11,900,000 12,480,363
-----------
Total 24,857,763
Communications equipment & services (0.7%)
BellSouth Telecommunications
12-01-95 7.00 10,000,000 10,685,600
Computers & office equipment (0.3%)
Hewlett-Packard
Zero Coupon Cv Sub Nts
10-15-17 3.125 10,000,000(f,g) 5,325,000
Electronics (0.3%)
Harris
12-01-18 10.375 3,900,000 4,176,549
Energy (3.1%)
PDV America
Sr Nts
08-01-03 7.875 16,500,000 16,931,970
Phillips Petroleum
03-15-28 7.125 8,700,000 8,812,143
Texaco Capital
Gtd Deb
03-01-43 7.50 12,000,000 13,263,000
USX-Marathon Group
05-15-22 9.375 9,200,000 11,580,132
-----------
Total 50,587,245
Energy equipment & services (0.4%)
Foster Wheeler
11-15-05 6.75 5,850,000 5,993,852
Financial services (3.8%)
GMAC
03-01-00 7.00 14,300,000 14,541,098
Medium-term Nts
07-16-98 5.95 8,000,000 8,001,920
Greyhound Financial
Medium-term Nts Series A
07-02-99 7.95 9,600,000 9,788,256
Railcar Leasing
Sr Nts
01-15-13 7.125 12,150,000(f) 12,825,419
Salomon
Sr Nts
05-15-00 7.75 5,000,000 5,166,850
Washington Mutual
Sr Sub Nts
08-15-98 8.875 10,520,000 10,571,863
-----------
Total 60,895,406
Foreign (12.0%)(b)
ABN-Amro Bank
(U.S. Dollar) Sub Nts Series B
05-15-23 7.75 12,000,000 13,375,200
Alcan Aluminum
(U.S. Dollar)
01-15-22 8.875 9,600,000 10,498,464
Banco General
(U.S. Dollar)
08-01-02 7.70 6,400,000(f) 6,316,608
Bank of China
(U.S. Dollar)
03-15-14 8.25 7,100,000 6,809,965
Bayerische Landesbank
(U.S. Dollar) Deposit Nts
02-26-01 5.625 13,750,000 13,677,950
Dao Heng Bank
(U.S. Dollar) Sub Nts
01-24-07 7.75 7,000,000(f) 6,195,000
Gruma
(U.S. Dollar) Sr Nts
10-15-07 7.625 2,000,000 1,959,900
Hutchison Whampo Finance
(U.S. Dollar) Company Guaranty
08-01-27 7.50 14,025,000(f) 12,100,630
Hyundai Semiconductor
(U.S. Dollar) Sr Nts
05-15-07 8.625 10,800,000(f) 8,791,524
Israel Electric
(U.S. Dollar) Sr Nts
12-15-26 7.875 9,000,000(f) 9,388,890
Japan Finance
(U.S. Dollar)
09-21-98 9.25 25,950,000 26,217,544
Jasmine Submarine Telecom
(U.S. Dollar) Sr Nts
05-30-11 8.48 3,086,055(f) 2,597,625
KFW Intl Finance
(U.S. Dollar) Medium-term Nts
12-15-99 8.50 10,000,000 10,382,900
Korea Development Bank
(U.S. Dollar)
05-15-06 10.07 4,600,000 3,852,638
Korea Electric Power
(U.S. Dollar)
07-01-02 8.00 9,000,000 8,156,700
(U.S. Dollar) Zero Coupon
04-01-16 7.95 35,000,000(h) 3,578,750
People's Republic of China
(U.S. Dollar)
01-15-96 9.00 10,000,000 11,424,800
Perez Companc
(U.S. Dollar)
07-15-07 8.125 5,000,000(f) 4,673,300
Petronas
(U.S. Dollar)
08-15-15 7.75 10,000,000(f) 9,041,000
Republic of Austria Euro
(U.S. Dollar)
07-01-98 10.00 3,150,000 3,161,875
Telecom Corp of New Zealand
(New Zealand Dollar)
02-10-03 6.25 13,000,000(f) 12,936,157
Telekom Malaysia
(U.S. Dollar)
08-01-25 7.875 10,000,000(f) 8,002,900
-----------
Total 193,140,320
Health care (1.6%)
Baxter Intl
02-15-28 6.625 12,000,000 11,944,320
Lilly (Eli)
01-01-36 6.77 13,300,000 13,917,519
-----------
Total 25,861,839
Health care services (1.0%)
Service Corp Intl
03-15-08 6.50 15,350,000 15,402,958
Industrial equipment & services (1.3%)
Browning-Ferris Inds
05-01-21 9.25 7,000,000 8,879,360
Deere & Co
06-15-19 8.95 10,000,000 12,155,200
-----------
Total 21,034,560
Insurance (4.7%)
American United Life Insurance
03-30-26 7.75 4,800,000(c) 5,019,504
Arkwright CSN Trust
08-15-26 9.625 4,000,000(f) 4,891,160
Berkley (WR)
01-01-22 8.70 10,000,000 12,027,300
Conseco Financing Trust
Company Guaranty
11-15-26 8.70 6,600,000 7,457,208
Equitable Life Assurance
12-01-15 7.70 5,000,000(f) 5,456,300
Nationwide CSN Trust
02-15-25 9.875 11,500,000(f) 13,964,220
SAFECO Capital
Company Guaranty
07-15-37 8.07 15,000,000 16,037,700
SunAmerica
02-01-12 9.95 8,000,000 10,395,280
-----------
Total 75,248,672
Media (0.9%)
Time Warner Entertainment
Sr Nts
07-15-33 8.375 12,000,000 14,181,120
Retail (2.3%)
Dayton Hudson
06-15-23 7.875 18,850,000 20,177,983
Rite Aid
Cv Sub Nts
09-15-02 5.25 5,000,000(f) 6,000,000
Wal-Mart CRAVE Trust
07-17-06 7.00 10,753,807(f) 11,045,772
-----------
Total 37,223,755
Transportation (1.3%)
Burlington Northern Santa Fe
12-15-25 7.00 10,000,000 10,361,600
Enterprise Rent-A-Car USA Finance
02-15-08 6.80 10,000,000(f) 10,041,000
-----------
Total 20,402,600
Utilities -- electric (4.0%)
AEP Generating
Sale Lease-backed Obligation Series F
12-07-22 9.82 4,968,844 5,860,901
Arizona Public Service
1st Mtge Sale Lease-backed Obligation
12-30-15 8.00 9,000,000 9,974,520
Cajun Electric Power
Mtge Trust Series A9
03-15-19 8.92 4,960,000 5,313,549
Commonwealth Edison
1st Mtge Series 90
04-15-00 6.50 9,000,000 9,079,020
Indiana & Michigan Power
Sale Lease-backed Obligation Series F
12-07-22 9.82 4,968,839 5,860,894
Long Island Lighting
Gen Ref Mtge
04-15-04 8.625% $3,000,000 $3,000,000
07-01-24 9.625 7,000,000 7,037,660
Salton Sea Funding
Series C
05-30-10 7.84 10,000,000 10,675,700
Wisconsin Electric Power
12-01-95 6.875 8,000,000 8,245,360
-----------
Total 65,047,604
Utilities -- telephone (4.3%)
AT&T
01-15-25 8.35 5,000,000 5,573,650
12-01-31 8.625 10,000,000 11,105,500
Bell Atlantic
07-15-31 9.375 14,000,000 16,133,180
GTE
11-01-20 10.25 6,050,000 6,767,348
GTE Florida
02-01-28 6.86 12,450,000 12,785,030
SBC Communications
08-15-31 8.50 15,000,000 16,823,550
-----------
Total 69,188,258
Total bonds
(Cost: $1,459,116,467) $1,545,963,348
Preferred stock (0.6%)
Issuer Shares Value(a)
Salomon Income Financing Trust
2.375% 2026 340,000 $9,286,250
Total preferred stock
(Cost: $8,500,000) $9,286,250
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Short-term securities (1.8%)
Issuer Annualized Amount Value(a)
yield on date payable at
of purchase maturity
U.S. government agency (0.5%)
Federal Home Loan Mtge Corp Disc Nts
<S> <C> <C> <C>
06-05-98 5.44% $2,100,000 $2,098,105
06-16-98 5.42 5,000,000 4,987,250
06-16-98 5.45 1,300,000 1,296,666
-----------
Total 8,382,021
Commercial paper (1.3%)
Bell Atlantic Finance
06-05-98 5.54 1,000,000 999,080
Fleet Funding
07-08-98 5.56 7,400,000(l) 7,355,748
Glaxo Wellcome
06-26-98 5.54 1,600,000(l) 1,593,388
Paccar Financial
06-09-98 5.54 3,500,000 3,494,624
Toyota Motor Credit
06-25-98 5.56 5,300,000 5,278,832
Xerox
06-24-98 5.52 1,200,000 1,195,417
-----------
Total 19,917,089
Total short-term securities
(Cost: $28,299,110) $28,299,110
Total investments in securities
(Cost: $1,495,915,577)(m) $1,583,548,708
</TABLE>
<PAGE>
Notes to investments in securities
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) Foreign security values are stated in U.S. dollars. For debt securities,
principal amounts are denominated in the currency indicated.
(c) 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, 1998, is as follows:
Security Acquisition Cost
date
American United Life Insurance*
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.
(d) Security is partially or fully on loan. See Note 4 to the financial
statements.
(e) This security is a collateralized mortgage obligation that pays no interest
or principal during its initial accrual period until payment of a previous
series within the trust have been paid off. Interest is accrued at an effective
yield; similar to a zero coupon bond.
(f) 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.
(g) For zero coupon bonds, the interest rate disclosed represents the annualized
effective yield on the date of acquisition.
(h) 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.
(i) U.S. Treasury inflation-protection securities (TIPS) are securities in which
the principal amount is adjusted for inflation and the semiannual interest
payments equal a fixed percentage of the inflation-adjusted principal amount.
(j) 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.
(k) Interest rate varies either based on a predetermined schedule or to reflect
current market conditions; rate shown is the effective rate on May 31, 1998.
(l) 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.
(m) At May 31, 1998, the cost of securities for federal income tax purposes was
$1,495,915,577 and the aggregate gross unrealized appreciation and depreciation
based on that cost was:
Unrealized appreciation $100,101,139
Unrealized depreciation (12,468,008)
-----------
Net unrealized appreciation $ 87,633,131
See accompanying notes to investments in securities.
<PAGE>
American Express Service Corporation, Distributor
S-6148 C (7/98)
<PAGE>
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 2, 1998
o Statements of assets and liabilities, May 31, 1998
o Statements of operations for the year ended May 31, 1998
o Statements of change in net assets for the year ended May 31, 1998 and 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 2, 1998
o Statements of assets and liabilities, May 31, 1998
o Statements of operations for the year ended May 31, 1998
o Statements of change in net assets for the year ended May 31, 1998 and 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, 1998
o Notes to investments in securities
High Yield Portfolio
o Independent auditors' report dated July 2, 1998
o Statements of assets and liabilities, May 31, 1998
o Statements of operations for the year ended May 31, 1998
o Statements of change in net assets for the year ended May 31, 1998 and 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 2, 1998
o Statements of assets and liabilities, May 31, 1998
o Statements of operations for the year ended May 31, 1998
o Statements of change in net assets for the year ended May 31, 1998 and 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, 1998
o Notes to investments in securities
<PAGE>
(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.
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.
<PAGE>
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 electronically herewith.
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 7, 1998 is filed electronically herewith.
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 November 20, 1997 is filed electronically herewith.
19(d). Officers' Power of Attorney to sign Amendments to this Registration
Statement, dated November 21, 1997 is filed electronically herewith.
<PAGE>
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, 1998
Common Stock
$.01 par value
Strategist Government Income Fund 21
Strategist High Yield Fund 45
Strategist Quality Income Fund 15
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.
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 indemnification 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>
American Express Financial Corporation is the investment advisor of the
Portfolios of the Trust.
<TABLE>
<CAPTION>
Item 28. Business and Other Connections of Investment Adviser (American Express Financial Corporation)
Directors and officers of American Express Financial Corporation who are directors and/or officers of one or more
other companies:
<S> <C> <C> <C>
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Name and Title Other company(s) Address Title within other
company(s)
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Ronald G. Abrahamson, American Express Client IDS Tower 10 Director and Vice President
Vice President Service Corporation Minneapolis, MN 55440
American Express Financial Vice President
Advisors Inc.
North Dakota Public Director and Vice President
Employee Payment Company
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Douglas A. Alger, American Express Financial IDS Tower 10 Senior Vice President
Senior Vice President Advisors Inc. Minneapolis, MN 55440
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Peter J. Anderson, Advisory Capital Strategies IDS Tower 10 Director
Director and Senior Vice Group Inc. Minneapolis, MN 55440
President
American Express Asset Director and Chairman of
Management Group Inc. the Board
American Express Asset Director, Chairman of the
Management International, Board and Executive Vice
Inc. President
American Express Financial Senior Vice President
Advisors Inc.
IDS Capital Holdings Inc. Director and President
IDS Futures Corporation Director
NCM Capital Management 2 Mutual Plaza Director
Group, Inc. 501 Willard Street
Durham, NC 27701
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Ward D. Armstrong, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
American Express Service Vice President
Corporation
American Express Trust Director and Chairman of
Company the Board
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
John M. Baker, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
American Express Trust Senior Vice President
Company
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Joseph M. Barsky III, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Timothy V. Bechtold, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
IDS Life Insurance Company Executive Vice President
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
John C. Boeder, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
IDS Life Insurance Company Box 5144 Director
of New York Albany, NY 12205
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Douglas W. Brewers, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Karl J. Breyer, American Express Financial IDS Tower 10 Senior Vice President
Director, Senior Vice Advisors Inc. Minneapolis, MN 55440
President
American Express Minnesota Director
Foundation
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Daniel J. Candura, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Cynthia M. Carlson, American Enterprise IDS Tower 10 Director, President and
Vice President Investment Services Inc. Minneapolis, MN 55440 Chief Executive Officer
American Express Financial Vice President
Advisors Inc.
American Express Service Vice President
Corporation
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Mark W. Carter, American Express Financial IDS Tower 10 Senior Vice President and
Senior Vice President and Advisors Inc. Minneapolis, MN 55440 Chief Marketing Officer
Chief Marketing Officer
IDS Life Insurance Company Executive Vice President
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
James E. Choat, American Enterprise Life IDS Tower 10 Director, President and
Senior Vice President Insurance Company Minneapolis, MN 55440 Chief Executive Officer
American Express Financial Senior Vice President
Advisors Inc.
American Express Insurance Vice President
Agency of Idaho Inc.
American Express Insurance Vice President
Agency of Nevada Inc.
American Express Insurance Vice President
Agency of Oregon Inc.
American Express Property Vice President
Casualty Insurance Agency
of Kentucky Inc.
American Express Property Vice President
Casualty Insurance Agency
of Maryland Inc.
American Express Property Vice President
Casualty Insurance Agency
of Pennsylvania Inc.
IDS Insurance Agency of Vice President
Alabama Inc.
IDS Insurance Agency of Vice President
Arkansas Inc.
IDS Insurance Agency of Vice President
Massachusetts Inc.
IDS Insurance Agency of New Vice President
Mexico Inc.
IDS Insurance Agency of Vice President
North Carolina Inc.
IDS Insurance Agency of Vice President
Ohio Inc.
IDS Insurance Agency of Vice President
Wyoming Inc.
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Kenneth J. Ciak, AMEX Assurance Company IDS Tower 10 Director and President
Vice President and General Minneapolis, MN 55440
Manager
American Express Financial Vice President and General
Advisors Inc. Manager
IDS Property Casualty 1 WEG Blvd. Director and President
Insurance Company DePere, WI 54115
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Paul A. Connolly, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Colleen Curran, American Express Financial IDS Tower 10 Vice President and
Vice President and Advisors Inc. Minneapolis, MN 55440 Assistant General Counsel
Assistant General Counsel
American Express Service Vice President and Chief
Corporation Legal Counsel
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Regenia David, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Luz Maria Davis American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Gordon L. Eid, American Express Financial IDS Tower 10 Senior Vice President,
Director, Senior Vice Advisors Inc. Minneapolis, MN 55440 General Counsel and Chief
President, Deputy General Compliance Officer
Counsel and Chief
Compliance Officer
American Express Insurance Director and Vice President
Agency of Arizona Inc.
American Express Insurance Director and Vice President
Agency of Idaho Inc.
American Express Insurance Director and Vice President
Agency of Nevada Inc.
American Express Insurance Director and Vice President
Agency of Oregon Inc.
American Express Property Director and Vice President
Casualty Insurance Agency
of Kentucky Inc.
American Express Property Director and Vice President
Casualty Insurance Agency
of Maryland Inc.
American Express Property Director and Vice President
Casualty Insurance Agency
of Pennsylvania Inc.
IDS Insurance Agency of Director and Vice President
Alabama Inc.
IDS Insurance Agency of Director and Vice President
Arkansas Inc.
IDS Insurance Agency of Director and Vice President
Massachusetts Inc.
IDS Insurance Agency of New Director and Vice President
Mexico Inc.
IDS Insurance Agency of Director and Vice President
North Carolina Inc.
IDS Insurance Agency of Director and Vice President
Ohio Inc.
IDS Insurance Agency of Director and Vice President
Wyoming Inc.
IDS Real Estate Services, Vice President
Inc.
Investors Syndicate Director
Development Corp.
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Robert M. Elconin, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
IDS Life Insurance Company Vice President
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Gordon M. Fines, American Express Asset IDS Tower 10 Executive Vice President
Vice President Management Group Inc. Minneapolis, MN 55440
American Express Financial Vice President
Advisors Inc.
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Douglas L. Forsberg, American Centurion Life IDS Tower 10 Director
Vice President Assurance Company Minneapolis, MN 55440
American Express Financial Vice President
Advisors Inc.
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Jeffrey P. Fox, American Enterprise Life IDS Tower 10 Vice President and
Vice President and Insurance Company Minneapolis, MN 55440 Controller
Corporate Controller
American Express Financial Vice President and
Advisors Inc. Corporate Controller
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Harvey Golub, American Express Company American Express Tower Chairman and Chief
Director World Financial Center Executive Officer
New York, NY 10285
American Express Travel Chairman and Chief
Related Services Company, Executive Officer
Inc.
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
David A. Hammer, American Express Financial IDS Tower 10 Vice President and
Vice President and Advisors Inc. Minneapolis, MN 55440 Marketing Controller
Marketing Controller
IDS Plan Services of Director and Vice President
California, Inc.
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Lorraine R. Hart, AMEX Assurance Company IDS Tower 10 Vice President
Vice President Minneapolis, MN 55440
American Enterprise Life Vice President
Insurance Company
American Express Financial Vice President
Advisors Inc.
American Partners Life Director and Vice
Insurance Company President
IDS Certificate Company Vice President
IDS Life Insurance Company Vice President
IDS Life Series Fund, Inc. Vice President
IDS Life Variable Annuity Vice President
Funds A and B
Investors Syndicate Director and Vice
Development Corp. President
IDS Life Insurance Company P.O. Box 5144 Investment Officer
of New York Albany, NY 12205
IDS Property Casualty 1 WEG Blvd. Vice President
Insurance Company DePere, WI 54115
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Scott A. Hawkinson, American Centurion Life IDS Tower 10 Chief Actuary
Vice President Assurance Company Minneapolis, MN 55440
American Express Financial Vice President
Advisors Inc.
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Janis K. Heaney, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
James G. Hirsh, American Express Financial IDS Tower 10 Vice President and
Vice President and Advisors Inc. Minneapolis, MN 55440 Assistant General Counsel
Assistant General Counsel
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Darryl G. Horsman, American Express Trust IDS Tower 10 Director and President
Vice President Company Minneapolis, MN 55440
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Jeffrey S. Horton, AMEX Assurance Company IDS Tower 10 Vice President, Treasurer
Vice President and Minneapolis, MN 55440 and Assistant Secretary
Corporate Treasurer
American Centurion Life Vice President and
Assurance Company Treasurer
American Enterprise Vice President and
Investment Services Inc. Treasurer
American Enterprise Life Vice President and
Insurance Company Treasurer
American Express Asset Vice President and
Management Group Inc. Treasurer
American Express Asset Vice President and
Management International Treasurer
Inc.
American Express Client Vice President and
Service Corporation Treasurer
American Express Corporation Vice President and
Treasurer
American Express Financial Vice President and
Advisors Inc. Treasurer
American Express Insurance Vice President and
Agency of Arizona Inc. Treasurer
American Express Insurance Vice President and
Agency of Idaho Inc. Treasurer
American Express Insurance Vice President and
Agency of Nevada Inc. Treasurer
American Express Minnesota Vice President and
Foundation Treasurer
American Express Property Vice President and
Casualty Insurance Agency Treasurer
of Kentucky Inc.
American Express Property Vice President and
Casualty Insurance Agency Treasurer
of Maryland Inc.
American Express Property Vice President and
Casualty Insurance Agency Treasurer
of Pennsylvania Inc.
American Express Partners Vice President and
Life Insurance Company Treasurer
IDS Cable Corporation Director, Vice President
and Treasurer
IDS Cable II Corporation Director, Vice President
and Treasurer
IDS Capital Holdings Inc. Vice President, Treasurer
and Assistant Secretary
IDS Certificate Company Vice President and
Treasurer
IDS Insurance Agency of Vice President and
Alabama Inc. Treasurer
IDS Insurance Agency of Vice President and
Arkansas Inc. Treasurer
IDS Insurance Agency of Vice President and
Massachusetts Inc. Treasurer
IDS Insurance Agency of New Vice President and
Mexico Inc. Treasurer
IDS Insurance Agency of Vice President and
North Carolina Inc. Treasurer
IDS Insurance Agency of Vice President and
Ohio Inc. Treasurer
IDS Insurance Agency of Vice President and
Wyoming Inc. Treasurer
IDS Life Insurance Company Vice President, Treasurer
and Assistant Secretary
IDS Life Series Fund Inc. Vice President and
Treasurer
IDS Life Variable Annuity Vice President and
Funds A & B Treasurer
IDS Management Corporation Director, Vice President
and Treasurer
IDS Partnership Services Vice President and
Corporation Treasurer
IDS Plan Services of Vice President and
California, Inc. Treasurer
IDS Real Estate Services, Vice President and
Inc. Treasurer
IDS Realty Corporation Vice President and
Treasurer
IDS Sales Support Inc. Vice President and
Treasurer
IDS Securities Corporation Vice President and
Treasurer
Investors Syndicate Vice President and
Development Corp. Treasurer
IDS Property Casualty 1 WEG Blvd. Vice President, Treasurer
Insurance Company DePere, WI 54115 and Assistant Secretary
North Dakota Public Vice President and
Employee Payment Company Treasurer
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
David R. Hubers, AMEX Assurance Company IDS Tower 10 Director
Director, President and Minneapolis, MN 55440
Chief Executive Officer
American Express Financial Chairman, President and
Advisors Inc. Chief Executive Officer
American Express Service Director and President
Corporation
IDS Certificate Company Director
IDS Life Insurance Company Director
IDS Plan Services of Director and President
California, Inc.
IDS Property Casualty 1 WEG Blvd. Director
Insurance Company DePere, WI 54115
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Martin G. Hurwitz, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
James M. Jensen, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
IDS Life Insurance Company Vice President
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Marietta L. Johns, American Express Financial IDS Tower 10 Senior Vice President
Director and Senior Vice Advisors Inc. Minneapolis, MN 55440
President
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Nancy E. Jones, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
American Express Service Vice President
Corporation
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
James E. Kaarre, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Matthew N. Karstetter, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Linda B. Keene, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
G. Michael Kennedy, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Susan D. Kinder, American Express Financial IDS Tower 10 Senior Vice President
Director and Senior Vice Advisors Inc. Minneapolis, MN 55440
President
IDS Securities Corporation Director
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Brian C. Kleinberg, American Enterprise IDS Tower 10 Senior Vice President
Executive Vice President Investment Services Inc. Minneapolis, MN 55440
American Express Financial Executive Vice President
Advisors Inc.
American Express Service Director
Corporation
AMEX Assurance Company Director and Chairman of
the Board
American Partners Life Executive Vice President
Insurance Company
IDS Property Casualty 1 WEG Blvd. Director and Chairman of
Insurance Company DePere, WI 54115 the Board
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Richard W. Kling, AMEX Assurance Company IDS Tower 10 Director
Director and Senior Vice Minneapolis, MN 55440
President
American Centurion Life Director
Assurance Company
American Enterprise Life Director and Chairman of
Insurance Company the Board
American Express Corporation Director and President
American Express Financial Senior Vice President
Advisors Inc.
American Express Insurance Director and President
Agency of Arizona Inc.
American Express Insurance Director and President
Agency of Idaho Inc.
American Express Insurance Director and President
Agency of Nevada Inc.
American Express Insurance Director and President
Agency of Oregon Inc.
American Express Property Director and President
Casualty Insurance Agency
of Kentucky Inc.
American Express Property Director and President
Casualty Insurance Agency
of Maryland Inc.
American Express Property Director and President
Casualty Insurance Agency
of Pennsylvania Inc.
American Express Service Vice President
Corporation
American Partners Life Director and Chairman of
Insurance Company the Board
IDS Certificate Company Director and Chairman of
the Board
IDS Insurance Agency of Director and President
Alabama Inc.
IDS Insurance Agency of Director and President
Arkansas Inc.
IDS Insurance Agency of Director and President
Massachusetts Inc.
IDS Insurance Agency of New Director and President
Mexico Inc.
IDS Insurance Agency of Director and President
North Carolina Inc.
IDS Insurance Agency of Director and President
Ohio Inc.
IDS Insurance Agency of Director and President
Wyoming Inc.
IDS Life Insurance Company Director and President
IDS Life Series Fund, Inc. Director and President
IDS Life Variable Annuity Manager, Chairman of the
Funds A and B Board and President
IDS Property Casualty 1 WEG Blvd. Director
Insurance Company DePere, WI 54115
IDS Life Insurance Company P.O. Box 5144 Director, Chairman of the
of New York Albany, NY 12205 Board and President
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Paul F. Kolkman, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
IDS Life Insurance Company Director and Executive
Vice President
IDS Life Series Fund, Inc. Vice President and Chief
Actuary
IDS Property Casualty 1 WEG Blvd. Director
Insurance Company DePere, WI 54115
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Claire Kolmodin, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Steve C. Kumagai, American Express Financial IDS Tower 10 Director and Senior Vice
Director and Senior Vice Advisors Inc. Minneapolis, MN 55440 President
President
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Edward Labenski, Jr., American Express Asset IDS Tower 10 Senior Vice President
Vice President Management Group Inc. Minneapolis, MN 55440
American Express Financial Vice President
Advisors Inc.
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Kurt A Larson, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Lori J. Larson, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
IDS Futures Corporation Director
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Daniel E. Laufenberg, American Express Financial IDS Tower 10 Vice President and Chief
Vice President and Chief Advisors Inc. Minneapolis, MN 55440 U.S. Economist
U.S. Economist
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Peter A. Lefferts, American Express Financial IDS Tower 10 Senior Vice President
Director and Senior Vice Advisors Inc. Minneapolis, MN 55440
President
American Express Trust Director
Company
IDS Plan Services of Director
California, Inc.
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Douglas A. Lennick, American Express Financial IDS Tower 10 Director and Executive
Director and Executive Vice Advisors Inc. Minneapolis, MN 55440 Vice President
President
IDS Securities Corporation Director, President and
Chief Executive Officer
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Mary J. Malevich, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Fred A. Mandell, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Thomas W. Medcalf, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Paula R. Meyer, American Enterprise Life IDS Tower 10 Vice President
Vice President Insurance Company Minneapolis, MN 55440
American Express Financial Vice President
Advisors Inc.
American Partners Life Director and President
Insurance Company
IDS Certificate Company Director and President
IDS Life Insurance Company Director and Executive
Vice President
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
James A. Mitchell, AMEX Assurance Company IDS Tower 10 Director
Director and Executive Vice Minneapolis, MN 55440
President
American Enterprise Director
Investment Services Inc.
American Express Financial Executive Vice President
Advisors Inc.
American Express Service Director and Senior Vice
Corporation President
American Express Tax and Director
Business Services Inc.
IDS Certificate Company Director
IDS Life Insurance Company Director, Chairman of the
Board and Chief Executive
Officer
IDS Plan Services of Director
California, Inc.
IDS Property Casualty 1 WEG Blvd. Director
Insurance Company DePere, WI 54115
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
William P. Miller, Advisory Capital Strategies IDS Tower 10 Vice President
Vice President and Senior Group Inc. Minneapolis, MN 55440
Portfolio Manager
American Express Asset Senior Vice President
Management Group Inc.
American Express Financial Vice President and Senior
Advisors Inc. Portfolio Manager
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Pamela J. Moret, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
American Express Trust Vice President
Company
IDS Life Insurance Company Executive Vice President
IDS Life Insurance Company P.O. Box 5144 Vice President
of New York Albany, NY 12205
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Barry J. Murphy, American Express Client IDS Tower 10 Director and President
Director and Senior Vice Service Corporation Minneapolis, MN 55440
President
American Express Financial Senior Vice President
Advisors Inc.
IDS Life Insurance Company Director and Executive
Vice President
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Mary Owens Neal, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Michael J. O'Keefe, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
James R. Palmer, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
IDS Life Insurance Company Vice President
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Carla P. Pavone, American Express Client IDS Tower 10 Director and Vice President
Vice President Service Corporation Minneapolis, MN 55440
American Express Financial Vice President
Advisors Inc.
North Dakota Public Director and President
Employee Payment Company
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Thomas P. Perrine, American Express Financial IDS Tower 10 Senior Vice President
Senior Vice President Advisors Inc. Minneapolis, MN 55440
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Susan B. Plimpton, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Ronald W. Powell, American Express Financial IDS Tower 10 Vice President and
Vice President and Advisors Inc. Minneapolis, MN 55440 Assistant General Counsel
Assistant General Counsel
IDS Cable Corporation Vice President and
Assistant Secretary
IDS Cable II Corporation Vice President and
Assistant Secretary
IDS Management Corporation Vice President and
Assistant Secretary
IDS Partnership Services Vice President and
Corporation Assistant Secretary
IDS Plan Services of Vice President and
California, Inc. Assistant Secretary
IDS Realty Corporation Vice President and
Assistant Secretary
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
James M. Punch, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Frederick C. Quirsfeld, American Express Asset IDS Tower 10 Vice President
Senior Vice President Management Group Inc. Minneapolis, MN 55440
American Express Financial Senior Vice President
Advisors Inc.
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
ReBecca K. Roloff, American Express Financial IDS Tower 10 Senior Vice President
Senior Vice President Advisors Inc. Minneapolis, MN 55440
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Stephen W. Roszell, Advisory Capital Strategies IDS Tower 10 Director
Senior Vice President Group Inc. Minneapolis, MN 55440
American Express Asset Director, President and
Management Group Inc. Chief Executive Officer
American Express Asset Director
Management International,
Inc.
American Express Asset Director
Management Ltd.
American Express Financial Senior Vice President
Advisors Inc.
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
John P. Ryan, American Express Financial IDS Tower 10 Vice President and General
Vice President and General Advisors Inc. Minneapolis, MN 55440 Auditor
Auditor
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Erven A. Samsel, American Express Financial IDS Tower 10 Senior Vice President
Director and Senior Vice Advisors Inc. Minneapolis, MN 55440
President
American Express Insurance Vice President
Agency of Idaho Inc.
American Express Insurance Vice President
Agency of Nevada Inc.
American Express Insurance Vice President
Agency of Oregon Inc.
American Express Property Vice President
Casualty Insurance Agency
of Kentucky Inc.
American Express Property Vice President
Casualty Insurance Agency
of Maryland Inc.
American Express Property Vice President
Casualty Insurance Agency
of Pennsylvania Inc.
IDS Insurance Agency of Vice President
Alabama Inc.
IDS Insurance Agency of Vice President
Arkansas Inc.
IDS Insurance Agency of Vice President
Massachusetts Inc.
IDS Insurance Agency of New Vice President
Mexico Inc.
IDS Insurance Agency of Vice President
North Carolina Inc.
IDS Insurance Agency of Vice President
Ohio Inc.
IDS Insurance Agency of Vice President
Wyoming Inc.
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Stuart A. Sedlacek, American Centurion Life IDS Tower 10 Director, Chairman and
Senior Vice President and Assurance Company Minneapolis, MN 55440 President
Chief Financial Officer
American Enterprise Life Executive Vice President
Insurance Company
American Express Financial Senior Vice President and
Advisors Inc. Chief Financial Officer
American Express Trust Director
Company
American Partners Life Director and Vice President
Insurance Agency
IDS Certificate Company Director and President
IDS Life Insurance Company Executive Vice President
and Controller
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Donald K. Shanks, AMEX Assurance Company IDS Tower 10 Senior Vice President
Vice President Minneapolis, MN 55440
American Express Financial Vice President
Advisors Inc.
IDS Property Casualty 1 WEG Blvd. Senior Vice President
Insurance Company DePere, WI 54115
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
F. Dale Simmons, AMEX Assurance Company IDS Tower 10 Vice President
Vice President Minneapolis, MN 55440
American Enterprise Life Vice President
Insurance
American Express Financial Vice President
Advisors Inc.
American Partners Life Vice President
Insurance Company
IDS Certificate Company Vice President
IDS Life Insurance Company Vice President
IDS Partnership Services Director and Vice President
Corporation
IDS Real Estate Services Director and Vice President
Inc.
IDS Realty Corporation Director and Vice President
IDS Life Insurance Company Box 5144 Vice President and
of New York Albany, NY 12205 Assistant Treasurer
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Judy P. Skoglund, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
William A. Smith, American Express Financial IDS Tower 10 Vice President and
Vice President and Advisors Inc. Minneapolis, MN 55440 Controller
Controller
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Bridget Sperl, American Express Client IDS Tower 10 Vice President
Vice President Service Corporation Minneapolis, MN 55440
American Express Financial Vice President
Advisors Inc.
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Lisa A. Steffes, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
William A. Stoltzmann, American Enterprise Life IDS Tower 10 Director, Vice President,
Vice President and Insurance Company Minneapolis, MN 55440 General Counsel and
Assistant General Counsel Secretary
American Express Corporation Director, Vice President
and Secretary
American Express Financial Vice President and
Advisors Inc. Assistant General Counsel
American Partners Life Director, Vice President,
Insurance Company General Counsel and
Secretary
IDS Life Insurance Company Vice President, General
Counsel and Secretary
IDS Life Series Fund Inc. General Counsel and
Assistant Secretary
IDS Life Variable Annuity General Counsel and
Funds A & B Assistant Secretary
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
James J. Strauss, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Jeffrey J. Stremcha, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Barbara Stroup Stewart, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Wesley W. Wadman, American Express Asset IDS Tower 10 Executive Vice President
Vice President Management Group Inc. Minneapolis, MN 55440
American Express Asset Director and Senior Vice
Management International, President
Inc.
American Express Asset Director and Vice Chairman
Management Ltd.
American Express Financial Vice President
Advisors Inc.
IDS Fund Management Limited Director and Vice Chairman
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Norman Weaver Jr., American Express Financial IDS Tower 10 Senior Vice President
Director and Senior Vice Advisors Inc. Minneapolis, MN 55440
President
American Express Insurance Vice President
Agency of Arizona Inc.
American Express Insurance Vice President
Agency of Idaho Inc.
American Express Insurance Vice President
Agency of Nevada Inc.
American Express Insurance Vice President
Agency of Oregon Inc.
American Express Property Vice President
Casualty Insurance Agency
of Kentucky Inc.
American Express Property Vice President
Casualty Insurance Agency
of Maryland Inc.
American Express Property Vice President
Casualty Insurance Agency
of Pennsylvania Inc.
IDS Insurance Agency of Vice President
Alabama Inc.
IDS Insurance Agency of Vice President
Arkansas Inc.
IDS Insurance Agency of Vice President
Massachusetts Inc.
IDS Insurance Agency of New Vice President
Mexico Inc.
IDS Insurance Agency of Vice President
North Carolina Inc.
IDS Insurance Agency of Vice President
Ohio Inc.
IDS Insurance Agency of Vice President
Wyoming Inc.
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Michael L. Weiner, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
IDS Capital Holdings Inc. Vice President
IDS Futures Brokerage Group Vice President
IDS Futures Corporation Vice President, Treasurer
and Secretary
IDS Sales Support Inc. Director, Vice President
and Assistant Treasurer
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Lawrence J. Welte, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Jeffrey F. Welter, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Edwin M. Wistrand, American Express Financial IDS Tower 10 Vice President and
Vice President and Advisors Inc. Minneapolis, MN 55440 Assistant General Counsel
Assistant General Counsel
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Michael D. Wolf, American Express Asset IDS Tower 10 Executive Vice President
Vice President Management Group Inc. Minneapolis, MN 55440
American Express Financial Vice President
Advisors Inc.
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Michael R. Woodward, American Express Financial IDS Tower 10 Senior Vice President
Director and Senior Vice Advisors Inc. Minneapolis, MN 55440
President
American Express Insurance Vice President
Agency of Idaho Inc.
American Express Insurance Vice President
Agency of Nevada Inc.
American Express Insurance Vice President
Agency of Oregon Inc.
American Express Property Vice President
Casualty Insurance Agency
of Kentucky Inc.
American Express Property Vice President
Casualty Insurance Agency
of Maryland Inc.
American Express Property Vice President
Casualty Insurance Agency
of Pennsylvania Inc.
IDS Insurance Agency of Vice President
Alabama Inc.
IDS Insurance Agency of Vice President
Arkansas Inc.
IDS Insurance Agency of Vice President
Massachusetts Inc.
IDS Insurance Agency of New Vice President
Mexico Inc.
IDS Insurance Agency of Vice President
North Carolina Inc.
IDS Insurance Agency of Vice President
Ohio Inc.
IDS Insurance Agency of Vice President
Wyoming Inc.
IDS Life Insurance Company Box 5144 Director
of New York Albany, NY 12205
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
</TABLE>
<TABLE>
<CAPTION>
Item 29. Principal Underwriters.
(a) American Express Service Corporation acts as principal underwriter for
the following investment companies:
Strategist Income Fund, Inc.; Strategist Growth Fund, Inc.; Strategist
Growth and Income Fund, Inc.; Strategist World Fund, Inc.; Strategist
Tax-Free Income Fund, Inc., APL Variable Annuity Account 1, ACL
Variable Annuity Account 1 and IDS Certificate Company.
(b) As to each director, officer or partner of the principal underwriter:
<S> <C> <C>
Name and Principal Business Address Position and Offices with Offices with Registrant
Underwriter
- ----------------------------------------- --------------------------------- ---------------------------------
Ward D. Armstrong Vice President - Workplace None
IDS Tower 10 Financial Services
Minneapolis, MN 55440
Ann M. Buffie Vice President and Chief None
IDS Tower 10 Compliance Officer
Minneapolis, MN 55440
Cynthia M. Carlson Vice President None
IDS Tower 10
Minneapolis, MN 55440
John Cattau Vice President None
IDS Tower 10
Minneapolis, MN 55440
Colleen Curran Vice President and Chief Legal None
IDS Tower 10 Counsel
Minneapolis, MN 55440
David R. Hubers Director and President None
IDS Tower 10
Minneapolis, MN 55440
James A. Jacobs Vice President-Sales and Service None
IDS Tower 10
Minneapolis, MN 55440
Nancy E. Jones Vice President - Business None
IDS Tower 10 Development
Minneapolis, MN 55440
Verna J. Kaufman Vice President None
IDS Tower 10
Minneapolis, MN 55440
Brian C. Kleinberg Director None
IDS Tower 10
Minneapolis, MN 55440
Richard W. Kling Vice President None
IDS Tower 10
Minneapolis, MN 55440
Timothy S. Meehan Secretary None
IDS Tower 10
Minneapolis, MN 55440
James A. Mitchell Director and Senior Vice Board member and President
IDS Tower 10 President
Minneapolis, MN 55440
Julia K. Morton Vice President and Chief None
IDS Tower 10 Financial Officer
Minneapolis, MN 55440
Richard L. Solseth Vice President and Treasurer None
IDS Tower 10
Minneapolis, MN 55440
</TABLE>
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>
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 29th day of July, 1998.
STRATEGIST INCOME FUND, INC.
By /s/ James A. Mitchell*
James A. Mitchell, President
By /s/ Matthew N. Karstetter
Matthew N. Karstetter, 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 29th day of July, 1998.
Signature Title
By /s/ Rodney P. Burwell** Director
Rodney P. Burwell
By /s/ Jean B. Keffeler** Director
Jean B. Keffeler
By Director
Brian Kleinberg
By /s/ Thomas R. McBurney** Director
Thomas R. McBurney
By /s/ James A. Mitchell** Director
James A. Mitchell
<PAGE>
*Signed pursuant to Officer's Power of Attorney dated November 21, 1997 is filed
electronically herewith as Exhibit 19(d):
/s/ Eileen J. Newhouse
- ----------------------------
Eileen J. Newhouse
**Signed pursuant to Director's Power of Attorney dated November 20, 1997 is
filed electronically herewith as Exhibit 19(c):
/s/ Eileen J. Newhouse
- ----------------------------
Eileen J. Newhouse
<PAGE>
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 29th
day of July, 1998.
INCOME TRUST
By /s/ William R. Pearce**
William R. Pearce
Chief Executive Officer
By /s/ Matthew N. Karstetter
Matthew N. Karstetter
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 29th day of July, 1998.
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/ David R. Hubers* Trustee
David R. Hubers
/s/ Heinz F. Hutter* Trustee
Heinz F. Hutter
/s/ Anne P. Jones* Trustee
Anne P. Jones
<PAGE>
Signatures Capacity
/s/ Alan K. Simpson* Trustee
Alan K. Simpson
/s/ Edson W. Spencer* 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 7, 1998, filed
electronically herewith as Exhibit 19(a), by:
/s/ Leslie L. Ogg
- -----------------------------------
Leslie L. Ogg
**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:
/s/ Leslie L. Ogg
- -----------------------------------
Leslie L. Ogg
<PAGE>
CONTENTS OF THIS POST-EFFECTIVE AMENDMENT NO. 3 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.
Exhibit Index
10. Opinion and consent of counsel
11. Independent Auditor's Consent
17. Financial Data Schedule
19.(a) Trustees Power of Attorney, dated January 7, 1998
19.(c) Directors' Power of Attorney, dated November 20, 1997
19.(d) Officers' Power of Attorney, dated November 21, 1997
July 29, 1998
Strategist Income Fund, Inc.
IDS Tower 10
Minneapolis, Minnesota 55440-0010
Gentlemen:
I have examined the Articles of Incorporation and the By-Laws of the Company and
all necessary certificates, permits, minute books, documents and records of the
Company, and the applicable statutes of the State of Minnesota, and it is my
opinion:
(a) That the Company is a corporation duly organized and existing under the
laws of the State of Minnesota with an authorized capital stock of
20,000,000,000 shares, all of $.01 par value, and that such shares may
be issued as full or fractional shares;
(b) That all such authorized shares are, under the laws of the State of
Minnesota, redeemable as provided in the Articles of Incorporation of
the Company and upon redemption shall have the status of authorized
shares and unissued shares;
(c) That the Company registered on June 16, 1996 an indefinite number of
shares pursuant to Rule 24f-2; and
(d) That shares which were sold at not less than their par value and in
accordance with applicable federal and state securities laws were
legally issued, fully paid an nonassessable.
I hereby consent that the foregoing opinion may be used in connection with this
Post-Effective Amendment.
Very truly yours,
/s/ Eileen J. Newhouse
Eileen J. Newhouse
Secretary
EJN/KW/dm
Independent auditors' consent
- ------------------------------------------------------------------------------
The board and shareholders
Strategist Income Fund, Inc.:
Strategist Government Income Fund
Strategist High Yield Fund
Strategist Quality Income Fund
The board of trustees and unitholders
Income Trust:
Government Income Portfolio
High Yield Portfolio
Quality Income Portfolio
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.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Minneapolis, Minnesota
July 29, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> STRATEGIST GOVERNMENT INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-END> MAY-31-1998
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 720907
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 720907
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 62955
<TOTAL-LIABILITIES> 62955
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 647728
<SHARES-COMMON-STOCK> 132197
<SHARES-COMMON-PRIOR> 111123
<ACCUMULATED-NII-CURRENT> 602
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 8008
<ACCUM-APPREC-OR-DEPREC> 17630
<NET-ASSETS> 657952
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 44290
<OTHER-INCOME> 0
<EXPENSES-NET> 6403
<NET-INVESTMENT-INCOME> 37887
<REALIZED-GAINS-CURRENT> (441)
<APPREC-INCREASE-CURRENT> 13121
<NET-CHANGE-FROM-OPS> 50567
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 39031
<DISTRIBUTIONS-OF-GAINS> 6249
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 12987
<NUMBER-OF-SHARES-REDEEMED> 1024
<SHARES-REINVESTED> 9111
<NET-CHANGE-IN-ASSETS> 110096
<ACCUMULATED-NII-PRIOR> 1417
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 1510
<GROSS-ADVISORY-FEES> 3388
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 9291
<AVERAGE-NET-ASSETS> 590324
<PER-SHARE-NAV-BEGIN> 4.93
<PER-SHARE-NII> .32
<PER-SHARE-GAIN-APPREC> .11
<PER-SHARE-DIVIDEND> .33
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 4.98
<EXPENSE-RATIO> 1.09
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> STRATEGIST HIGH YIELD FUND
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-END> MAY-31-1998
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 1155280
<TOTAL-ASSETS> 1155280
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 18155
<TOTAL-LIABILITIES> 18155
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1077618
<SHARES-COMMON-STOCK> 246867
<SHARES-COMMON-PRIOR> 217481
<ACCUMULATED-NII-CURRENT> 7552
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 18745
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 1137125
<DIVIDEND-INCOME> 8302
<INTEREST-INCOME> 97129
<OTHER-INCOME> 0
<EXPENSES-NET> 7555
<NET-INVESTMENT-INCOME> 97876
<REALIZED-GAINS-CURRENT> 28275
<APPREC-INCREASE-CURRENT> 9767
<NET-CHANGE-FROM-OPS> 135918
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 91467
<DISTRIBUTIONS-OF-GAINS> 1142
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 72018
<NUMBER-OF-SHARES-REDEEMED> 62293
<SHARES-REINVESTED> 19661
<NET-CHANGE-IN-ASSETS> 177253
<ACCUMULATED-NII-PRIOR> 1143
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 8388
<GROSS-ADVISORY-FEES> 6076
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 22763
<AVERAGE-NET-ASSETS> 1057700
<PER-SHARE-NAV-BEGIN> 4.58
<PER-SHARE-NII> 0.43
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0.40
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 4.61
<EXPENSE-RATIO> 0.72
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> STRATEGIST QUALITY INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-END> MAY-31-1998
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 600
<ASSETS-OTHER> 681534
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 682134
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
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<NUMBER> 4
<NAME> GOVERNMENT INCOME PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-END> MAY-31-1998
<INVESTMENTS-AT-COST> 2905160601
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<TABLE> <S> <C>
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<NUMBER> 5
<NAME>HIGH YIELD PORTFOLIO
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-END> MAY-31-1998
<INVESTMENTS-AT-COST> 3989298915
<INVESTMENTS-AT-VALUE> 4106636021
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<NUMBER> 6
<NAME> QUALITY INCOME PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-END> MAY-31-1998
<INVESTMENTS-AT-COST> 1495915577
<INVESTMENTS-AT-VALUE> 1583548708
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<OTHER-ITEMS-ASSETS> 0
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<PAYABLE-FOR-SECURITIES> 0
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<TOTAL-LIABILITIES> 69159476
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<REALIZED-GAINS-CURRENT> (2535432)
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<SHARES-REINVESTED> 0
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<GROSS-EXPENSE> 8446668
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</TABLE>
TRUSTEES POWER OF ATTORNEY
City of Minneapolis
State of Minnesota
Each of the undersigned, as trustees of the below listed open-end,
diversified investment companies that previously have filed registration
statements and amendments thereto pursuant to the requirements of the Investment
Company Act of 1940 with the Securities and Exchange Commission:
1940 Act
Reg. Number
Growth Trust 811-07395
Growth and Income Trust 811-07393
Income Trust 811-07307
Tax-Free Income Trust 811-07397
World Trust 811-07399
hereby constitutes and appoints William R. Pearce and Leslie L. Ogg or either
one of them, as her or his attorney-in-fact and agent, to sign for her or him in
her or his name, place and stead any and all further amendments to said
registration statements filed pursuant to said Act and any rules and regulations
thereunder, and to file such amendments with all exhibits thereto and other
documents in connection therewith with the Securities and Exchange Commission,
granting to either of them the full power and authority to do and perform each
and every act required and necessary to be done in connection therewith.
Dated the 7th day of January, 1998.
/s/ H. Brewster Atwater, Jr. /s/ William R. Pearce
H. Brewster Atwater, Jr. William R. Pearce
/s/ Lynne V. Cheney /s/ Alan K. Simpson
Lynne V. Cheney Alan K. Simpson
/s/ William H. Dudley /s/ Edson W. Spencer
William H. Dudley Edson W. Spencer
/s/ David R. Hubers /s/ John R. Thomas
David R. Hubers John R. Thomas
/s/ Heinz F. Hutter /s/ Wheelock Whitney
Heinz F. Hutter Wheelock Whitney
/s/ Anne P. Jones /s/ C. Angus Wurtele
Anne P. Jones C. Angus Wurtele
DIRECTORS POWER OF ATTORNEY
City of Minneapolis
State of Minnesota
Each of the undersigned, as directors of the below listed open-end management
investment companies that previously have filed registration statements and
amendments thereto pursuant to the requirements of the Securities Act of 1933
and the Investment Company Act of 1940 with the Securities and Exchange
Commission:
1933 Act 1940 Act
Reg. Number Reg. Number
Strategist Growth Fund, Inc. 33-63905 811-7401
Strategist Growth and Income Fund, Inc. 33-63907 811-7403
Strategist Income Fund, Inc. 33-60323 811-7305
Strategist Tax-Free Fund, Inc. 33-63909 811-7407
Strategist World Fund, Inc. 33-63951 811-7405
hereby constitutes and appoints James A. Mitchell, Eileen J. Newhouse, Colin M.
Lancaster, or Sherilyn K. Beck as her or his attorney-in-fact and agent, to sign
for her or him in her or his name, place and stead any and all further
amendments to said registration statements filed pursuant to said Acts and any
rules and regulations thereunder, and to file such amendments with all exhibits
thereto and other documents in connection therewith with the Securities and
Exchange Commission, granting to either of them the full power and authority to
do and perform each and every act required and necessary to be done in
connection therewith.
Dated this 20th day of November, 1997.
/s/ Rodney P. Burwell /s/ Thomas R. McBurney
Rodney P. Burwell Thomas R. McBurney
/s/ Jean B. Keffeler /s/ James A. Mitchell
Jean B. Keffeler James A. Mitchell
/s/ Brian Kleinberg
Brian Kleinberg
OFFICERS POWER OF ATTORNEY
City of Minneapolis
State of Minnesota
Each of the undersigned, as officers of the below listed open-end management
investment companies that previously have filed registration statements and
amendments thereto pursuant to the requirements of the Securities Act of 1933
and the Investment Company Act of 1940 with the Securities and Exchange
Commission:
1933 Act 1940 Act
Reg. Number Reg. Number
Strategist Growth Fund, Inc. 33-63905 811-7401
Strategist Growth and Income Fund, Inc. 33-63907 811-7403
Strategist Income Fund, Inc. 33-60323 811-7305
Strategist Tax-Free Fund, Inc. 33-63909 811-7407
Strategist World Fund, Inc. 33-63951 811-7405
hereby constitutes and appoints James A. Mitchell, Eileen J. Newhouse, Colin M.
Lancaster, or Sherilyn K. Beck as his attorney-in-fact and agent, to sign for
him in his name, place and stead any and all further amendments to said
registration statements filed pursuant to said Acts and any rules and
regulations thereunder, and to file such amendments with all exhibits thereto
and other documents in connection therewith with the Securities and Exchange
Commission, granting to either of them the full power and authority to do and
perform each and every act required and necessary to be done in connection
therewith.
Dated this 21st day of November, 1997.
/s/ James A. Mitchell
James A. Mitchell
/s/ Matthew N. Karstetter
Matthew N. Karstetter
