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. 5 [x]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 7 (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, 1999 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) 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>
Strategist Income Fund, Inc.
Prospectus/July 30, 1999
Strategist Government Income Fund
Strategist High Yield Fund
Strategist Quality Income Fund
Please note that each Fund:
* is not a bank deposit
* is not federally insured
* is not endorsed by any bank or government agency
* is not guaranteed to achieve its goals
Like all mutual funds, the Securities and Exchange Commission has not approved
or disapproved these securities or passed upon the adequacy of this prospectus.
Any representation to the contrary is a criminal offense.
<PAGE>
Table of Contents
TAKE A CLOSER LOOK AT:
Strategist Government Income Fund 2p
Goal 2p
Investment Strategy 2p
Risks 3p
Past Performance 4p
Fees and Expenses 6p
Management 7p
Strategist High Yield Fund 8p
Goal 8p
Investment Strategy 8p
Risks 9p
Past Performance 10p
Fees and Expenses 12p
Management 13p
Strategist Quality Income Fund 14p
Goal 14p
Investment Strategy 14p
Risks 15p
Past Performance 16p
Fees and Expenses 17p
Management 18p
Buying and Selling Shares 19p
Valuing Fund Shares 19p
Purchasing Shares 19p
Exchanging/Selling Shares 23p
Distributions and Taxes 26p
Personalized Shareholder Information 27p
Quick Telephone Reference 28p
Master/Feeder Structure 29p
Business Structure 30p
Financial Highlights 32p
<PAGE>
Strategist Government Income Fund
GOAL
The Fund seeks to provide shareholders with a high level of current income and
safety of principal consistent with an investment in U.S. government and
government agency securities. Because any investment involves risk, achieving
this goal cannot be guaranteed.
INVESTMENT STRATEGY
The Fund's assets primarily are invested in debt obligations. Under normal
market conditions, at least 65% of the Fund's assets are invested in securities
issued or guaranteed as to principal and interest by the U.S. government, its
agencies or instrumentalities. Although the Fund may invest in any U.S.
government securities, it is anticipated that U.S. government securities
representing part ownership in pools of mortgage loans (mortgage-backed
securities) will comprise a large percentage of the Fund's investments.
Additionally, the Fund will aggressively utilize derivative instruments and
when-issued securities to produce incremental earnings, to hedge existing
positions, and to increase flexibility. The Fund's potential losses from the use
of these instruments could extend beyond its initial investment.
The selection of debt obligations is the primary decision in building the
investment portfolio.
In pursuit of the Fund's goal, American Express Financial Corporation (AEFC),
the Fund's investment manager, chooses investments by:
* Reviewing credit characteristics and the interest rate outlook.
* Identifying and buying securities that:
- -- are high quality, or have similar qualities, in AEFC's opinion, even though
they are not rated or have been given a lower rating by a rating agency,
and
- -- have short or intermediate-term maturities.
In evaluating whether to sell a security, AEFC considers, among other factors,
whether:
- -- the interest rate or economic outlook changes,
- -- the security is overvalued,
- -- AEFC wishes to lock-in profits,
- -- AEFC identifies a more attractive opportunity, and
- -- the issuer or the security continues to meet the other standards described
above.
<PAGE>
Although not a primary investment strategy, the Fund also may invest in other
instruments, such as money market securities, and investment grade
non-governmental debt obligations.
During weak or declining markets, the Fund may invest more of its assets in
money market securities. Although the Fund primarily will invest in these
securities to avoid losses, this type of investing also could cause the Fund to
lose the opportunity to participate in market improvement. During these times,
AEFC may make frequent securities trades that could result in increased fees,
expenses, and taxes. Additionally, the Fund's portfolio turnover rate may be
affected by short-term investment strategies. High portfolio turnovers could
result in increases in transaction costs and may result in realized capital
gains that would be taxable distributions to shareholders.
For more information on strategies and holdings, see the Fund's Statement of
Additional Information (SAI) and the annual/semiannual reports.
RISKS
Please remember that with any mutual fund investment you may lose money.
Principal risks associated with an investment in the Fund include:
Market Risk
Correlation Risk
Interest Rate Risk
Call/Prepayment Risk
Market Risk
The market may drop and you may lose money. Market risk may affect a single
issuer, sector of the economy, industry, or the market as a whole. The market
value of all securities may move up and down, sometimes rapidly and
unpredictably.
Correlation Risk
The risk that a given transaction may fail to achieve its objective due to an
imperfect relationship between markets. Certain investments may react more
negatively than others in response to changing market conditions.
Interest Rate Risk
The risk of losses attributable to changes in interest rates. This term is
generally associated with bond prices (when interest rates rise, bond prices
fall). In general, the longer the
<PAGE>
maturity of a debt obligation, the higher its yield and the greater the
sensitivity to changes in interest rates.
Call/Prepayment Risk
The risk that a bond or other security might be called (or otherwise converted,
prepaid, or redeemed) before maturity.
PAST PERFORMANCE
The following bar chart and table show the risks and variability of investing in
the Fund by showing:
* how the Fund's performance has varied for each full calendar year, and
* how its average annual total returns compare to other recognized indexes.
How the Fund has performed in the past does not indicate how the Fund will
perform in the future.
<TABLE>
<CAPTION>
Strategist Government Income Fund Performance (based on calendar years)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
+10.59% +9.95% +11.00% +6.47% +6.00% -0.26% +13.90% +3.13% +8.56% +7.15%
1989 1990 1991 1992 1993 1994 1995 1996* 1997 1998
</TABLE>
During the period shown in the bar chart, the highest return for a calendar
quarter was +4.44% (quarter ending June 1989) and the lowest return for a
calendar quarter was -1.51% (quarter ending March 1994).
The Fund's year to date return as of March 31, 1999 was +0.76%.
* On June 10, 1996, AXP Federal Income Fund (the predecessor fund) converted to
a master/feeder structure and transferred all of its assets to Government Income
Portfolio. The performance information in this and the following table
represents performance of the predecessor fund prior to June 10, 1996 and of
Class A shares of the predecessor fund from March 20, 1995 through June 10, 1996
adjusted to reflect the absence of sales charges on shares of the Fund. The
historical performance has not been adjusted for any difference between the fees
and expenses of the Fund and the fees and expenses of the predecessor fund.
<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Returns (as of Dec. 31, 1998)
1 year 5 years 10 years
<S> <C> <C> <C>
Strategist Government Income Fund +7.15% +6.38% +7.58%
Lehman Brothers Aggregate Bond Index +7.44% +6.97% +9.10%
Merrill Lynch 1-5 Year Government Index +7.68% +6.28% +7.95%
</TABLE>
This table shows total returns from a hypothetical investment in the Fund. These
returns are compared to the indexes shown for the same periods. For purposes of
this calculation, information about the Fund assumes no adjustments for taxes an
investor may have paid on the reinvested income and capital gains.
Lehman Brothers Aggregate Bond Index is an unmanaged index, made up of a
representative list of government, corporate, asset-backed and mortgage-backed
securities. The index is frequently used as a general measure of bond market
performance. The index reflects reinvestment of all distributions and changes in
market prices, but exclude brokerage commissions or other fees. However, the
securities used to create the index may not be representative of the bonds held
in the Fund.
Merrill Lynch 1-5 Year Government Index is an unmanaged index made up of a
representative list of government bonds. The index is frequently used as a
general measure of government bond performance. However, the securities used to
create the index may not be representative of the bonds held in the Fund.
<PAGE>
FEES AND EXPENSES
Fund investors pay various expenses. The table below describes the fees and
expenses that you may pay if you buy and hold shares of the Fund.
Shareholder Fees (fees paid directly from your investment)a Maximum sales
charge (load) imposed on purchasesb (as a percentage of offering price) 0%
Annual Fund operating expensesc (expenses that are deducted from Fund assets)
As a percentage of average daily net assets:
Management fees 0.50%
Distribution (12b-1) fees 0.25%
Other expensesd 0.66%
Totale 1.41%
a A wire transfer charge, currently $15, is deducted from your brokerage
account for wire transfers made at your request.
b There are no sales loads; however, Government Income Fund reserves the
right upon 60 days' advance written notice to shareholders to impose a
redemption fee of up to 1% on shares redeemed within one year of purchase.
c Both in this table and the following example, Fund operating expenses
include expenses charged by both the Fund and the Portfolio.
d Other expenses include an administrative services fee, a transfer agency
and other nonadvisory expenses.
e The Advisor and the Distributor have agreed to waive certain fees and to
absorb certain other Fund expenses until Dec. 31, 1999. Under this
agreement, total expenses will not exceed 1.10%. For the most recent fiscal
year actual total expenses with fee waivers and expense reimbursements were
1.09%.
The Fund has adopted a plan under Rule 12b-1 of the Investment Company Act of
1940 (the 1940 Act) that allows it to pay distributions fees. Because these fees
are paid out of Fund assets on an ongoing basis, the fees may cost long-term
shareholders more than paying other types of sales charges imposed by some
mutual funds.
<PAGE>
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
Assume you invest $10,000 and the Fund earns a 5% annual return. The operating
expenses remain the same each year. If you sell your shares at the end of the
years shown, your costs would be:
1 year 3 years 5 years 10 years
$144 $447 $772 $1,696
This example does not represent actual expenses, past or future. Actual expenses
may be higher or lower than those shown.
MANAGEMENT
The Fund's assets are invested in Government Income Portfolio (the Portfolio),
which is managed by AEFC. Jim Snyder, vice president and senior portfolio
manager, joined AEFC in 1989 as an investment analyst. He has managed the assets
of the Portfolio and its predecessor fund since 1993 after having served as
associate portfolio manager of the fund from 1992 to 1993.
<PAGE>
Strategist High Yield Fund
GOAL
The Fund seeks to provide shareholders with high current income as its primary
goal and, as its secondary goal, capital growth. Because any investment involves
risk, achieving this goal cannot be guaranteed.
INVESTMENT STRATEGY
The Fund invests primarily, and may invest all of its assets, in high-yielding,
high risk corporate bonds (junk bonds). These bonds may be issued by U.S. and
foreign companies and governments.
The selection of debt obligations is the primary decision in building the
investment portfolio.
In pursuit of the Fund's goal, AEFC, the Fund's investment manager, chooses
investments by:
* Reviewing interest rate and economic forecasts.
* Identifying securities and /or companies that:
-- have medium and low quality ratings,
-- have similar qualities, in AEFC's opinion, even though they are not rated
or have been given a different rating by a rating agency,
-- have growth potential,
-- have the potential to increase in value as their credit ratings improve.
* Buying securities that are expected to outperform other securities. In this
analysis, AEFC will take risk factors into account (for example, whether money
has been set aside to cover the cost of principal and interest payments). AEFC
believes that credit selection is a primary concern and aggressively manages the
Fund to earn a high total return.
In evaluating whether to sell a security, AEFC considers, among other factors,
whether:
- -- the interest rate or economic outlook changes,
- -- a sector or industry is experiencing change,
- -- a security's rating is changed,
- -- the security is overvalued,
- -- the company does not meet AEFC's performance expectations,
- -- AEFC wishes to lock-in profits,
<PAGE>
- -- AEFC identifies a more attractive opportunity, and
- -- the issuer or the security continues to meet the other standards described
above.
Although not a primary investment strategy, the Fund also may invest in other
instruments, such as: money market securities, convertible securities, preferred
stocks, and common stocks.
During weak or declining markets, the Fund may invest more of its assets in
money market securities. Although the Fund primarily will invest in these
securities to avoid losses, this type of investing also could cause the Fund to
lose the opportunity to participate in market improvement. During these times,
AEFC may make frequent securities trades that could result in increased fees,
expenses, and taxes.
For more information on strategies and holdings, see the Fund's Statement of
Additional Information (SAI) and the annual/semiannual reports.
RISKS
This Fund is designed for long-term investors with above-average risk tolerance.
The Fund has a higher potential for volatility and loss of principal. Please
remember that with any mutual fund investment you may lose money.
Principal risks associated with an investment in the Fund include:
Market Risk
Interest Rate Risk
Credit Risk
Market Risk
The market may drop and you may lose money. Market risk may affect a single
issuer, sector of the economy, industry, or the market as a whole. The market
value of all securities may move up and down, sometimes rapidly and
unpredictably.
Interest Rate Risk
The risk of losses attributable to changes in interest rates. This term is
generally associated with bond prices (when interest rates rise, bond prices
fall). In general, the longer the maturity of a debt obligation, the higher its
yield and the greater the sensitivity to changes in interest rates.
Credit Risk
The risk that the issuer of a security, or the counterparty to a contract, will
default or otherwise become unable to honor a financial obligation (such as
payments due on a bond or a note). The price of junk bonds may react more to the
ability of the issuing company to pay interest
<PAGE>
and principal when due than to changes in interest rates. They have greater
price fluctuations and are more likely to experience a default.
PAST PERFORMANCE
The following bar chart and table show the risks and variability of investing in
the Fund by showing: * how the Fund's performance has varied for each full
calendar year, and * how its average annual total returns compare to other
recognized indexes.
How the Fund has performed in the past does not indicate how the Fund will
perform in the future.
<TABLE>
<CAPTION>
Strategist High Yield Fund Performance (based on calendar years)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -3.78% -10.69% +38.45% +19.82% +20.68 -7.70% +21.63% +14.93% +13.09% -4.85%
1989 1990 1991 1992 1993 1994 1995 1996* 1997 1998
</TABLE>
During the period shown in the bar chart, the highest return for a calendar
quarter was +12.96% (quarter ending March 1991) and the lowest return for a
calendar quarter was -9.81% (quarter ending September 1998).
The Fund's year to date return as of March 31, 1999 was +5.40%.
* On June 10, 1996, AXP Extra Income Fund (the predecessor fund) converted to a
master/feeder structure and transferred all of its assets to High Yield
Portfolio. The performance information in this and the following table
represents performance of the predecessor fund prior to June 10, 1996 and of
Class A shares of the predecessor fund from March 20, 1995 through June 10, 1996
adjusted to reflect the absence of sales charges on shares of the Fund. The
historical performance has not been adjusted for any difference between the fees
and expenses of the Fund and the fees and expenses of the predecessor fund.
<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Returns (as of Dec. 31, 1998)
1 year 5 years 10 years
<S> <C> <C> <C>
Strategist High Yield Fund -4.85% +6.78% +9.08%
Lehman Brothers Aggregate Bond Index +7.44% +6.97% +9.10%
Merrill Lynch High Yield Bond Index +3.66% +9.01% +11.08%
</TABLE>
This table shows total returns from a hypothetical investment in the Fund. These
returns are compared to the indexes shown for the same periods. For purposes of
this calculation, information about the Fund assumes no adjustments for taxes an
investor may have paid on the reinvested income and capital gains.
Lehman Brothers Aggregate Bond Index is an unmanaged index, made up of a
representative list of government, corporate, asset-backed and mortgage-backed
securities. The index is frequently used as a general measure of bond market
performance. The indexes reflect reinvestment of all distributions and changes
in market prices, but exclude brokerage commissions or other fees. However, the
securities used to create the index may not be representative of the bonds held
in the Fund.
Merrill Lynch High Yield Bond Index provides a broad-based measure of
performance of the non-investment grade U.S. domestic bond market. The index
currently captures close to $200 billion of the outstanding debt of domestic
market issuers rated below investment grade but not in default. The index is
"rule based," which means there is a defined list of criteria that a bond must
meet in order to qualify for inclusion in the index.
<PAGE>
FEES AND EXPENSES
Fund investors pay various expenses. The table below describes the fees and
expenses that you may pay if you buy and hold shares of the Fund.
Shareholder Fees (fees paid directly from your investment)a Maximum sales
charge (load) imposed on purchasesb (as a percentage of offering price) 0%
Annual Fund operating expensesc (expenses that are deducted from Fund assets)
As a percentage of average daily net assets:
Management fees 0.56%
Distribution (12b-1) fees 0.25%
Other expensesd 1.04%
Totale 1.85%
a A wire transfer charge, currently $15, is deducted from your brokerage
account for wire transfers made at your request.
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.
c Both in this table and the following example, Fund operating expenses
include expenses charged by both the Fund and the Portfolio.
d Other expenses include an administrative services fee, a transfer agency
and other nonadvisory expenses.
e The Advisor and the Distributor have agreed to waive certain fees and to
absorb certain other Fund expenses until Dec. 31, 1999. Under this
agreement, total expenses will not exceed 1.20%. For the most recent fiscal
year actual total expenses with fee waivers and expense reimbursements were
1.19%.
The Fund has adopted a plan under Rule 12b-1 of the Investment Company Act of
1940 (the 1940 Act) that allows it to pay distributions fees. Because these fees
are paid out of Fund assets on an ongoing basis, the fees may cost long-term
shareholders more than paying other types of sales charges imposed by some
mutual funds.
<PAGE>
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
Assume you invest $10,000 and the Fund earns a 5% annual return. The operating
expenses remain the same each year. If you sell your shares at the end of the
years shown, your costs would be:
1 year 3 years 5 years 10 years
$188 $582 $1,002 $2,174
This example does not represent actual expenses, past or future. Actual expenses
may be higher or lower than those shown.
MANAGEMENT
The Fund's assets are invested in High Yield Portfolio (the Portfolio), which is
managed by AEFC. Jack Utter, vice president and senior portfolio manager, joined
AEFC in 1962. He is co-portfolio manager and has managed the assets of the
Portfolio and its predecessor fund since 1985. He also is co-portfolio manager
of IDS Life Income Advantage Fund. Scott Schroepfer, senior portfolio manager,
joined AEFC in 1990. He is co-portfolio manager and has managed the assets of
the Portfolio since March 1999. He also is portfolio manager of IDS Life Income
Advantage Fund, and has served as portfolio manager of IDS Life Series Fund --
Managed Portfolio since 1995 and as associate portfolio manager since 1994.
<PAGE>
Strategist Quality Income Fund
GOAL
The Fund seeks to provide shareholders with current income and preservation of
capital by investing in investment-grade bonds. Because any investment involves
risk, achieving this goal cannot be guaranteed.
INVESTMENT STRATEGY
The Fund's assets primarily are invested in debt obligations. Under normal
market conditions, the Fund will invest at least 90% of its net assets in (1)
investment grade corporate bonds, (2) certain unrated debt obligations that are
believed to be of investment grade quality, (3) government securities (including
asset-backed securities), (4) derivative instruments, and (5) money market
instruments. At this time, the use of derivative instruments is not considered a
principal strategy of the Fund and the Fund intends to purchase such instruments
only to hedge against risk.
The selection of debt obligations is the primary decision in building the
investment portfolio.
In pursuit of the Fund's goal, AEFC, the Fund's investment manager, chooses
investments by:
* Reviewing the stage and direction of economic business cycles. Depending on
the stage of the business cycle, AEFC will choose debt obligations from the
following market sectors: government securities, corporate securities, and
asset-backed securities.
* Reviewing credit characteristics and interest rate outlook.
* Identifying and buying securities that:
-- are medium and high quality,
-- have maturities that complement AEFC's expectations for long-term and
short-term interest rates, and
-- are expected to outperform other market sectors. In this analysis,
AEFC will take risk factors into account (for example, whether money
has been set aside to cover the cost of principal and interest
payments).
In evaluating whether to sell a security, AEFC considers, among other factors,
whether:
- -- the interest rate or economic outlook changes,
- -- a sector or industry is experiencing change,
- -- a security's rating is changed or is vulnerable to a change,
<PAGE>
- -- the security is overvalued, and
- -- AEFC identifies a more attractive opportunity.
Although not a primary investment strategy, the Fund also may invest in other
instruments, such as convertible securities, and preferred stocks.
Although the Fund will generally invest less than 25% of its total assets in
money market instruments, during weak or declining markets, the Fund may invest
more of its assets in money market securities. Although the Fund primarily will
invest in these securities to avoid losses, this type of investing also could
cause the Fund to lose the opportunity to participate in market improvements.
During these times, AEFC may make frequent securities trades that could result
in increased fees, expenses, and taxes.
For more information on strategies and holdings, see the Fund's Statement of
Additional Information (SAI) and the annual/semiannual reports.
RISKS
Please remember that with any mutual fund investment you may lose money.
Principal risks associated with an investment in the Fund include:
Market Risk
Interest Rate Risk
Credit Risk
Market Risk
The market may drop and you may lose money. Market risk may affect a single
issuer, sector of the economy, industry, or the market as a whole. The market
value of all securities may move up and down, sometimes rapidly and
unpredictably.
Interest Rate Risk
The risk of losses attributable to changes in interest rates. This term is
generally associated with bond prices (when interest rates rise, bond prices
fall). In general, the longer the maturity of a debt obligation, the higher its
yield and the greater the sensitivity to changes in interest rates.
Credit Risk
The risk that the issuer of a security, or the counterparty to a contract, will
default or otherwise become unable to honor a financial obligation (such as
payments due on a bond or a note). The price of junk bonds may react more to the
ability of the issuing company to pay
<PAGE>
interest and principal when due than to changes in interest rates. They have
greater price fluctuations and are more likely to experience a default.
PAST PERFORMANCE
The following bar chart and table show the risks and variability of investing in
the Fund by showing:
* how the Fund's performance has varied for each full calendar year, and
* how its average annual total returns compare to a recognized index.
How the Fund has performed in the past does not indicate how the Fund will
perform in the future.
<TABLE>
<CAPTION>
Strategist Quality Income Fund Performance (based on calendar years)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
+12.26% +6.61% +17.07% +8.98% +13.13% -4.38% +21.22% +2.31% +8.65% +8.11%
1989 1990 1991 1992 1993 1994 1995 1996* 1997 1998
</TABLE>
During the period shown in the bar chart, the highest return for a calendar
quarter was +7.43% (quarter ending June 1995) and the lowest return for a
calendar quarter was -3.70% (quarter ending March 1994).
The Fund's year to date return as of March 31, 1999 was -0.44%.
* On June 10, 1996, AXP Selective Fund (the predecessor fund) converted to a
master/feeder structure and transferred all of its assets to Quality Income
Portfolio. The performance information in this and the following table
represents performance of the predecessor fund prior to June 10, 1996 and of
Class A shares of the predecessor fund from March 20, 1995 through June 10, 1996
adjusted to reflect the absence of sales charges on shares of the Fund. The
historical performance has not been adjusted for any difference between the fees
and expenses of the Fund and the fees and expenses of the predecessor fund.
<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Returns (as of Dec. 31, 1998)
1 year 5 years 10 years
<S> <C> <C> <C>
Strategist Quality Income Fund +8.11% +6.86% +9.18%
Lehman Brothers Aggregate Bond Index +7.44% +6.97% +9.10%
</TABLE>
This table shows total returns from a hypothetical investment in the Fund. These
returns are compared to the index shown for the same periods. For purposes of
this calculation, information about the Fund assumes no adjustments for taxes an
investor may have paid on the reinvested income and capital gains.
Lehman Brothers Aggregate Bond Index is an unmanaged index, made up of a
representative list of government, corporate, asset-backed and mortgage-backed
securities. The index is frequently used as a general measure of bond market
performance. The index reflects reinvestment of all distributions and changes in
market prices, but excludes brokerage commissions or other fees. However, the
securities used to create the index may not be representative of the bonds held
by the Fund.
FEES AND EXPENSES
Fund investors pay various expenses. The table below describes the fees and
expenses that you may pay if you buy and hold shares of the Fund.
Shareholder Fees (fees paid directly from your investment)a Maximum sales
charge (load) imposed on purchasesb (as a percentage of offering price) 0%
Annual Fund operating expensesc (expenses that are deducted from Fund assets)
As a percentage of average daily net assets:
Management fees 0.52%
Distribution (12b-1) fees 0.25%
Other expensesd 2.81%
Totale 3.58%
a A wire transfer charge, currently $15, is deducted from your brokerage
account for wire transfers made at your request.
b There are no sales loads; however, Quality Income Fund reserves the right
upon 60 days' advance written notice to shareholders to impose a redemption
fee of up to 1% on shares redeemed within one year of purchase.
c Both in this table and the following example, Fund operating expenses
include expenses charged by both the Fund and the Portfolio.
d Other expenses include an administrative services fee, a transfer agency
and other nonadvisory expenses.
e The Advisor and the Distributor have agreed to waive certain fees and to
absorb certain other Fund expenses until Dec. 31, 1999. Under this
agreement, total expenses will not exceed 1.10%. For the most recent fiscal
year actual total expenses with fee waivers and expense reimbursements were
1.09%.
<PAGE>
The Fund has adopted a plan under Rule 12b-1 of the Investment Company Act of
1940 (the 1940 Act) that allows it to pay distributions fees. Because these fees
are paid out of Fund assets on an ongoing basis, the fees may cost long-term
shareholders more than paying other types of sales charges imposed by some
mutual funds.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
Assume you invest $10,000 and the Fund earns a 5% annual return. The operating
expenses remain the same each year. If you sell your shares at the end of the
years shown, your costs would be:
1 year 3 years 5 years 10 years
$361 $1,097 $1,855 $3,847
This example does not represent actual expenses, past or future. Actual expenses
may be higher or lower than those shown.
MANAGEMENT
The Fund's assets are invested in Quality Income Portfolio (the Portfolio),
which is managed by American Express Financial Corporation (AEFC). Ray Goodner,
vice president and senior portfolio manager, joined AEFC in 1977. He has managed
the assets of the Portfolio and its predecessor fund since 1985. He also serves
as portfolio manager of World Income Portfolio.
<PAGE>
Buying and Selling Shares
References to "Fund" throughout the remainder of this prospectus refer to
Strategist Government Income Fund, Strategist High Yield Fund, and Strategist
Quality Income Fund, singularly or collectively as the context requires.
VALUING FUND SHARES
The public offering price for a single Fund share is the net asset value (NAV).
The NAV is the value of a single Fund share. The NAV usually changes daily, and
is calculated at the close of business of the New York Stock Exchange, normally
3 p.m. Central Standard Time (CST), each business day (any day the New York
Stock Exchange is open).
The Fund's investments are valued based on market quotations, or where market
quotations are not readily available, based on methods selected in good faith by
the board. If the Fund's investment policies permit it to invest in securities
that are listed on foreign stock exchanges that trade on weekends or other days
when the Fund does not price its shares, the value of the Fund's underlying
investments may change on days when you could not buy or sell shares of the
Fund. Please see the SAI for further information.
PURCHASING SHARES
You may purchase shares of the Fund through a brokerage account maintained with
American Express Service Corporation (AESC), the Fund's distributor. There is no
fee to open a brokerage account. Payment for shares must be made directly to
AESC.
Complete a brokerage account application (available by calling 800-297-7378) and
mail the application to American Express Financial Direct, P.O. Box 59196,
Minneapolis, MN 55459-0196. Corporations and other organizations should contact
AESC at 800-297-7378 to determine what additional forms may be necessary to open
a brokerage account.
Important: When you open an account, you must provide your correct taxpayer
Identification Number (TIN), which is either your Social Security or Employer
Identification number.
<PAGE>
If you do not provide the correct TIN, 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:
* a $50 penalty for each failure to supply your correct TIN,
* a civil penalty of $500 for a false statement that results in no backup
withholding, and
* criminal penalties for falsifying information.
You also could be subject to backup withholding for failure to report interest
or dividends on your tax return. For details on TIN requirements, call
800-297-7378 to obtain a copy of federal Form W-9, "Request for Taxpayer
Identification Number and Certification."
Deposits into your brokerage account
You may deposit money into your brokerage account by check, wire or many other
forms of electronic funds transfer (securities also may be deposited). All
deposit checks should be made payable to AESC. If you would like to wire funds
into your existing brokerage account or add to your account by electronic
transfer, please contact AESC at 800-297-7378 for instructions.
Minimum Fund investment requirements
Your initial investment in the 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 brokerage account in order to purchase
Fund shares. If your request and payment (including money transmitted by wire)
are received and accepted by AESC before 2 p.m. CST, your order will be priced
at the next calculated NAV. See "Valuing Fund Shares."
<PAGE>
Methods of purchasing shares
You may purchase shares of the Fund in three ways.
1 By telephone:
You may use money in your brokerage account to make initial and subsequent
purchases. To place your order, call 800-297-7378.
2 By mail:
Mail written purchase requests (along with any checks) to American Express
Financial Direct, P.O. Box 59196, Minneapolis, MN 55459-0196. These requests
should include:
* your brokerage account number (or a brokerage account application), and
* the name of the Fund and the dollar amount of shares you would like purchased.
Your check should be made payable to AESC. It will be deposited into your
brokerage account and used to cover your purchase request.
3 By systematic purchase:
Once you have opened a brokerage account, you may authorize AESC to
automatically purchase shares on your behalf at intervals and in amounts
selected by you as described below.
Systematic Purchase Plan
AESC offers a Systematic Purchase Plan (SPP) that allows you to make periodic
investments in the Fund automatically and conveniently. Participating in the SPP
will save you the time and expense associated with writing checks or wiring
money.
Investment minimums
You can make automatic investments in any amount, from $100 to $50,000.
Investment methods
There are two ways to make automatic investments in your brokerage account:
<PAGE>
(1) Using uninvested cash in your brokerage account: If you elect this option,
uninvested cash in your brokerage account will be used to make the investment
and, if necessary, shares of your Money Market Fund will be sold to cover the
balance of the purchase.
(2) Using bank authorizations: If you elect this option, money is transferred
from your bank checking or savings account into your brokerage account for
automatic investments.
You will need to select a transfer date (when the money is transferred into your
brokerage 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.
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 call
800-297-7378, or send written instructions clearly outlining the changes to
American Express Financial Direct, P.O. Box 59196, Minneapolis, MN 55459-0196.
These instructions must include:
* The funds with SPP that you want to cancel,
* The newly selected fund(s) in which you want to begin making automatic
investments and the amount to be invested in each fund, and
* The investment frequency and investment dates for your new automatic
investments.
Terminating your SPP
If you wish to terminate your SPP, you may call 800-297-7378, 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
800-297-7378. Your bank authorization will not automatically terminate when you
cancel your SPP.
<PAGE>
If you are canceling your bank authorizations and you wish to cancel your SPP,
you must also provide instructions stating that AESC should cancel your SPP. You
may notify AESC by sending written instructions to American Express Financial
Direct, P.O. Box 59196, Minneapolis, MN 55459-0196 or telephoning 800-297-7378.
Your systematic investments will continue using brokerage account assets if AESC
does not receive notification to terminate your systematic investments as well.
To avoid procedural difficulties, AESC must receive instructions to change or
terminate your SPP or bank authorizations at least 10 days prior to your
scheduled investment date.
Minimum balance and account requirements
The Fund reserves the right to sell your shares if, as a result of sales, the
aggregate value of your holdings in the Fund drops below $1,000 ($500 in the
case of custodial accounts, IRAs and other retirement plans). You will be
notified in writing 30 days before the Fund takes such action to allow you to
increase your holdings to the minimum level. If you close your brokerage
account, the Fund will automatically sell your shares and mail the proceeds to
you.
Wire transfers to your bank
Funds can be wired from your brokerage account to your bank account. Call AESC
at 800-297-7378 for additional information on wire transfers. A $15 service fee
will be charged against your brokerage account for each wire sent.
Exchanging/Selling Shares
Exchanging Shares
You may exchange your shares of the Fund for shares of other funds in the
Strategist Fund Group at any time. For complete information on the other funds,
including fees and expenses, read that fund's prospectus carefully. Your
exchange will be priced at the next NAV calculated after it is accepted by that
fund. When exchanging into another fund you must meet that fund's minimum
investment requirements. You may make up to four exchanges per calendar year.
AESC and the Fund 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 Fund and its shareholders. For example, if exchanges are too numerous or
too large, they may disrupt a Fund's investment strategies or increase its
costs.
<PAGE>
Selling Shares
You may sell your shares at any time. Your sale price will be the next NAV
calculated after receipt by AESC of proper sale instructions, as described
below.
High Yield Fund imposes a 0.50% fee for shares sold 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.
Normally, payment for shares sold will be credited directly to your brokerage
account on the next business day. However, the Fund may delay payment, but no
later than seven days after AESC receives your selling instructions in proper
form. Sale proceeds will be held in your brokerage account or mailed to you
according to your account instructions.
If you recently purchased shares by check, your sale proceeds may be held in
your brokerage account until your check clears (which may take up to 10 days
from the purchase date) before a check is mailed to you.
The Fund reserves the right to redeem in kind.
Two ways to request an exchange or sale of shares:
1 By telephone:
You may exchange or sell your shares by calling 800-297-7378. Alternatively, you
can mail your exchange or sale requests as described below.
To properly process your telephone exchange or sale request we will need the
following information:
* your brokerage account number and your name (for exchanges, both funds must be
registered in the same ownership),
* the name of the fund from which you wish to exchange or sell shares,
* the dollar amount or number of shares you want to exchange or sell, and
* the name of the fund into which shares are to be exchanged, if applicable.
Telephone exchange or sale requests received before 2 p.m. CST on any business
day, once the caller's identity and account ownership have been verified by
AESC, will be processed at the next calculated NAV. See "Valuing Fund Shares."
<PAGE>
2 By mail:
You also may request an exchange or sale by writing to American Express
Financial Direct, P.O. Box 59196, Minneapolis, MN 55459-0196. Once an exchange
or sale request is mailed it is irrevocable and cannot be modified or canceled.
To properly process your mailed exchange or sale request, we will need a letter
from you that contains the following information:
* your brokerage account number,
* the name of the fund from which you wish to exchange or sell shares,
* the dollar amount or number of shares you want to exchange or sell,
* the name of the fund into which shares are to be exchanged, if applicable,
and
* a signature of at least one of the brokerage account holders in the exact form
specified on the account.
Telephone transactions
The privilege to initiate transactions by telephone is automatically available
through your brokerage account. The Fund will honor any telephone transaction
believed to be authentic and will use reasonable procedures to confirm that
instructions communicated by telephone are genuine. The Fund may modify or
discontinue telephone privileges at any time.
<PAGE>
Distributions and Taxes
As a shareholder you are entitled to your share of the Fund's net income and net
gains. The Fund distributes dividends and capital gains to qualify as a
regulated investment company and to avoid paying corporate income and excise
taxes.
Dividends and Capital Gain Distribution
The Fund's net investment income is distributed to you as dividends. Capital
gains are realized when a security is sold for a higher price than was paid for
it. Net short-term capital gains are included in net investment income.
Long-term capital gains are realized when a security is held for more than one
year. The Fund offsets any net realized capital gains by any available capital
loss carryovers. Net realized long-term capital gains, if any, are distributed
by the end of the calendar year as capital gain distributions.
Reinvestments
Dividends and capital gain distributions are automatically reinvested in
additional shares of the Fund unless you request distributions in cash. We
reinvest the distributions for you at the next calculated NAV after the
distribution is paid. If you choose cash distributions, you will receive cash
only for distributions declared after your request has been processed.
Taxes
Distributions are subject to federal income tax and may be subject to state and
local taxes in the year they are declared. You must report distributions on your
tax returns, even if they are reinvested in additional shares.
Income received by the Fund may be subject to foreign tax and withholding. Tax
conventions between certain countries and the U.S. may reduce or eliminate these
taxes. You may be entitled to claim foreign tax credits or deductions subject to
provisions and limitations of the Internal Revenue Code. If so, the Fund will
notify you.
<PAGE>
If you buy shares shortly before the record date of a distribution you will pay
taxes on money earned by the Fund before you were a shareholder. You will pay
the full pre-distribution price for the shares, then receive a portion of your
investment back as a distribution, which is taxable.
For tax purposes, an exchange is considered a sale and purchase, and may result
in a gain or loss. A sale is a taxable transaction. 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). If you sell shares for less than their cost, the difference is a
capital loss.
Selling shares held in an IRA or qualified retirement account may subject you to
federal taxes, penalties and reporting requirements. Please consult your tax
advisor.
Important: This information is a brief and selective summary of some of the tax
rules that apply to the Fund. Because tax matters are highly individual and
complex, you should consult a qualified tax advisor.
Personalized Shareholder Information
To help you track and evaluate the performance of your investments, you will
receive these individualized reports:
Quarterly statements
List all of your holdings and transactions during the previous three months.
Yearly tax statements
Feature average-cost-basis reporting of capital gains or losses if you sell your
shares along with distribution information to simplify tax calculations.
<PAGE>
Quick Telephone Reference
American Express Financial Direct Team:
Call the Financial Consultants
Fund performance, objectives and account inquiries, sales and exchanges,
dividend payments or reinvestments and automatic payment arrangements:
800-297-7378
TTY Service
For the hearing impaired: 800-710-5260
<PAGE>
Master/Feeder Structure
The Fund uses a master/feeder structure. This means that the Fund (a feeder
fund) invests all of its assets in a Portfolio, (the master fund). Other feeder
funds also invest in the Portfolio. The master/feeder structure offers the
potential for reduced costs because it spreads fixed costs of portfolio
management over a larger pool of assets. The Fund may withdraw its assets from
the corresponding Portfolio at any time if the Fund's board determines that it
is best. In that event, the board would consider what action should be taken,
including whether to hire an investment advisor to manage the Fund's assets
directly or to invest all of the Fund's assets in another pooled investment
entity. Here is an illustration of the structure:
Investors buy shares in the Fund
The Fund buys units in the Portfolio
The Portfolio invest in securities, such as stocks or bonds
Other feeders may include mutual funds and institutional accounts. 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 the Fund. Information about other feeders may be obtained by calling
American Express Financial Direct at 800-437-3133.
<PAGE>
<TABLE>
<CAPTION>
Business Structure
<S> <C> <C> <C>
--------------------
Shareholders
--------------------
- ----------------------- --------------------- -------------------- --------------------
Transfer Agent: Administrative Distributor:
American Express Services Agent: AESC
Client Service American Express
Corporation Financial Markets and
Corporation <- The Fund -> distributes
Maintains shareholder shares; receives
accounts and records Provides The Fund distribution fee.
for the Fund; administrative and invests its
receives a fee based accounting services assets in
on the number of for the Fund; the
accounts it services. receives a fee Portfolio.
based on assets. The Fund
and/or
- ----------------------- --------------------- -------------------- --------------------
the
Portfolio
--------------------- -------------------- --------------------
Investment Manager: have Custodian:
American Express contracts American Express
Financial with Trust Company
Corporation certain
service Provides
Manages the providers. safekeeping of
Portfolio's The Portfolio -> assets; receives a
investments and <- fee that varies
receives a fee based on the
based on average number of
daily net assets*. securities held.
--------------------- -------------------- --------------------
* Each Portfolio pays AEFC a fee for managing its assets. Each Fund pays its proportionate share of the fee. Under
the Investment Management Services Agreement, the fee for the most recent fiscal year was 0.50% of average daily
net assets for Government Income Portfolio, 0.56% for High Yield Portfolio, and 0.52% for Quality Income
Portfolio. Under the Agreement, each Portfolio also pays taxes, brokerage commissions and nonadvisory expenses.
Shareholders
</TABLE>
<PAGE>
About American Express Financial Corporation
American Express Financial Corporation, the Investment Manager, has been a
provider of financial services since 1894, and as of the most recent fiscal year
end manages more than $223 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. This team of professionals includes portfolio
managers, economists and supporting staff, stock and bond analysts including
Chartered Financial Analysts. Some of the professionals are based in London and
Hong Kong and add a global dimension to the teams expertise.
AEFC, located at IDS Tower 10, Minneapolis, MN 55440-0010, is 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.
Year 2000
The Fund could be adversely affected if the computer systems used by AEFC and
the Fund's other service providers do not properly process and calculate
date-related information from and after January 1, 2000. While Year 2000-related
computer problems could have a negative effect on the Fund, AEFC is working to
avoid such problems and to obtain assurances from service providers that they
are taking similar steps.
The companies, governments or international markets in which each Portfolio
invests also may be adversely affected by Year 2000 issues. To the extent a
portfolio holding is adversely affected by a Year 2000 processing issue, the
Fund's return could be adversely affected.
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights
Government Income Fund
Fiscal period ended May 31,
Per share income and capital changesa
1999 1998 1997b
<S> <C> <C> <C>
Net asset value, beginning of period $4.98 $4.93 $4.91
Income from investment operations:
Net investment income (loss) .28 .32 .30
Net gains (losses) (both realized and unrealized) (.07) .11 .06
Total from investment operations .21 .43 .36
Less distributions:
Dividends from net investment income (.28) (.33) (.30)
Distributions from realized gains (.09) (.05) (.04)
Total distributions (.37) (.38) (.34)
Net asset value, end of period $4.82 $4.98 $4.93
Ratios/supplemental data
Net assets, end of period (in thousands) $899 $658 $548
Ratio of expenses to average daily net assetsc 1.09% 1.09% 1.10%d
Ratio of net investment income (loss)
to average daily net assets 5.57% 6.44% 6.48%d
Portfolio turnover rate
(excluding short-term securities) 278% 159% 146%
Total return 4.19% 9.04% 7.59%
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 1.41%, 1.57% and 25.68% for the periods ended 1999, 1998
and 1997, respectively.
d Adjusted to an annual basis.
<PAGE>
High Yield Fund
Fiscal period ended May 31,
Per share income and capital changesa
1999 1998 1997b
Net asset value, beginning of period $4.61 $4.41 $4.31
Income from investment operations:
Net investment income (loss) .39 .43 .38
Net gains (losses) (both realized and unrealized) (.58) .17 .09
Total from investment operations (.19) .60 .47
Less distributions:
Dividends from net investment income (.42) (.40) (.37)
Distributions from realized gains (.04) -- --
Total distributions (.46) (.40) (.37)
Net asset value, end of period $3.96 $4.61 $4.41
Ratios/supplemental data
Net assets, end of period (in thousands) $1,674 $1,137 $960
Ratio of expenses to average daily net assetsc 1.19% .72% 1.19%d
Ratio of net investment income (loss)
to average daily net assets 9.73% 9.28% 8.90%d
Portfolio turnover rate
(excluding short-term securities) 47% 81% 92%
Total return (3.94%) 14.02% 11.40%
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 1.85%, 2.15% and 11.48% for the periods ended 1999, 1998
and 1997, respectively.
d Adjusted to an annual basis.
<PAGE>
Quality Income Fund
Fiscal period ended May 31,
Per share income and capital changesa
1999 1998 1997b
Net asset value, beginning of period $9.40 $9.15 $8.95
Income from investment operations:
Net investment income (loss) .53 .58 .55
Net gains (losses) (both realized and unrealized) (.21) .34 .18
Total from investment operations .32 .92 .73
Less distributions:
Dividends from net investment income (.54) (.61) (.53)
Distributions from realized gains (.06) (.06) --
Total distributions (.60) (.67) (.53)
Net asset value, end of period $9.12 $9.40 $9.15
Ratios/supplemental data
Net assets, end of period (in thousands) $757 $673 $575
Ratio of expenses to average daily net assetsc 1.09% .97% 1.10%d
Ratio of net investment income (loss)
to average daily net assets 5.68% 6.22% 6.33%d
Portfolio turnover rate
(excluding short-term securities) 30% 20% 31%
Total return 3.38% 10.30% 8.31%
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 3.58%, 1.48% and 13.34% for the periods ended 1999, 1998
and 1997, respectively.
d Adjusted to an annual basis.
The information in these tables has been audited by KPMG LLP, independent
auditors. The independent auditors' report and additional information about the
performance of the Fund are contained in the Fund's annual report which, if not
included with this prospectus, may be obtained without charge.
</TABLE>
<PAGE>
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<PAGE>
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<PAGE>
The Fund, along with the other funds in the Strategist Fund Group, is
distributed by AESC.
Additional information about the Fund and its investments is available in the
Fund's Statement of Additional Information (SAI), annual and semiannual reports
to shareholders. In the Fund's annual report, you will find a discussion of
market conditions and investment strategies that significantly affected the Fund
during the last fiscal year. The SAI is incorporated by reference in this
prospectus. For a free copy of the SAI, annual or semiannual report, contact
American Express Financial Direct.
American Express Financial Direct
P.O. Box 59196, Minneapolis, MN 55459-0196
800-297-7378 TTY: 800-710-5620
Web site address:
http://www.americanexpress.com/direct
You may review and copy information about the Fund, including its SAI, at the
Securities and Exchange Commission's (Commission) Public Reference Room in
Washington, D.C. (for information about the public reference room call
1-800-SEC-0330). Reports and other information about the Fund are available on
the Commission's Internet site at http://www.sec.gov. Copies of this information
may be obtained by writing and paying a duplicating fee to the Public Reference
Section of the Commission, Washington, D.C. 20549-6009. Investment Company Act
File 811-7305 S-6124 E (7/99)
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
FOR
STRATEGIST INCOME FUND, INC.
STRATEGIST GOVERNMENT INCOME FUND
STRATEGIST HIGH YIELD FUND
STRATEGIST QUALITY INCOME FUND
(singularly and collectively with the corresponding portfolio(s) of
Income Trust (the Trust) and the Trust, where the context
requires, referred to as the "Fund")
July 30, 1999
This Statement of Additional Information (SAI) is not a prospectus. It should be
read together with the prospectus and the financial statements contained in the
most recent Annual Report to shareholders (Annual Report) that 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.
The Independent Auditors' Report and the Financial Statements, including Notes
to the Financial Statements and the Schedule of Investments in Securities,
contained in the Annual Report are incorporated in this SAI by reference. No
other portion of the Annual Report, however, is incorporated by reference. The
prospectus for the Fund, dated the same date as this SAI, also is incorporated
in this SAI by reference.
<PAGE>
TABLE OF CONTENTS
Mutual Fund Checklist..................................................p. 3
Fundamental Investment Policies........................................p. 5
Investment Strategies and Types of Investments.........................p. 8
Information Regarding Risks and Investment Strategies.................p. 11
Security Transactions.................................................p. 33
Brokerage Commissions Paid to Brokers Affiliated with the Adviser.....p. 35
Performance Information...............................................p. 36
Valuing Fund Shares...................................................p. 38
Selling Shares........................................................p. 39
Capital Loss Carryover................................................p. 40
Taxes.................................................................p. 40
Agreements............................................................p. 42
Organizational Information............................................p. 44
Board Members and Officers............................................p. 45
Compensation for Board Members........................................p. 49
Principal Holders of Securities.......................................p. 51
Independent Auditors..................................................p. 51
Appendix: Description of Ratings.....................................p. 52
<PAGE>
MUTUAL FUND CHECKLIST
|X| Mutual funds are NOT guaranteed or insured by any bank or
government agency. You can lose money.
|X| Mutual funds ALWAYS carry investment risks. Some types carry
more risk than others.
|X| A higher rate of return typically involves a higher risk of
loss.
|X| Past performance is not a reliable indicator of future
performance.
|X| ALL mutual funds have costs that lower investment return.
|X| Shop around. Compare a mutual fund with others of the same
type before you buy.
OTHER IDEAS FOR SUCCESSFUL MUTUAL FUND INVESTING:
Develop a Financial Plan
Have a plan - even a simple plan can help you take control of your financial
future.
Dollar-Cost Averaging
An investment technique that works well for many investors is one that
eliminates random buy and sell decisions. One such system is dollar-cost
averaging. Dollar-cost averaging involves building a portfolio through the
investment of fixed amounts of money on a regular basis regardless of the price
or market condition. This may enable an investor to smooth out the effects of
the volatility of the financial markets. By using this strategy, more shares
will be purchased when the price is low and less when the price is high. As the
accompanying chart illustrates, dollar-cost averaging tends to keep the average
price paid for the shares lower than the average market price of shares
purchased, although there is no guarantee.
While this does not ensure a profit and does not protect against a loss if the
market declines, it is an effective way for many shareholders who can continue
investing through changing market conditions to accumulate shares to meet
long-term goals.
<PAGE>
Dollar-cost averaging:
- -------------------------------------------------------------
Regular Market Price Shares
Investment of a Share Acquired
- -------------------------------------------------------------
$100 $6.00 16.7
100 4.00 25.0
100 4.00 25.0
100 6.00 16.7
100 5.00 20.0
----- -------- ------
$500 $25.00 103.4
Average market price of a share over 5 periods: $5.00 ($25.00 divided by 5)
The average price you paid for each share: $4.84 ($500 divided by 103.4)
Diversify
Diversify your portfolio. By investing in different asset classes and different
economic environments you help protect against poor performance in one type of
investment while including investments most likely to help you achieve your
important goals.
Understand Your Investment
Know what you are buying. Make sure you understand the potential risks, rewards,
costs, and expenses associated with each of your investments.
<PAGE>
FUNDAMENTAL INVESTMENT POLICIES
The Fund pursues its investment objective by investing all of its assets in a
portfolio of the Trust, a separate investment company, rather than by directly
investing in and managing its own portfolio of securities. The Portfolio has the
same investment objectives, policies, and restrictions as the Fund.
Fundamental investment policies adopted by the Fund cannot be changed without
the approval of a majority of the outstanding voting securities of the Fund as
defined in the Investment Company Act of 1940, as amended (the 1940 Act).
Notwithstanding any of the Fund's other investment policies, the Fund may invest
its assets in an open-end management investment company having substantially the
same investment objectives, policies, and restrictions as the Fund for the
purpose of having those assets managed as part of a combined pool.
These are investment policies in addition to those presented in the prospectus.
The policies below are fundamental policies that apply to the Fund and may be
changed only with shareholder approval. Unless holders of a majority of the
outstanding voting securities agree to make the change, the Fund will not:
Strategist Government Income Fund
o Act as an underwriter (sell securities for others). However, under the
securities laws, the Fund may be deemed to be an underwriter when it
purchases securities directly from the issuer and later resells them.
o 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.
o Make cash loans if the total commitment amount exceeds 5% of the Fund's
total assets.
o Purchase more than 10% of the outstanding voting securities of an issuer.
o 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 Fund's
total assets may be invested without regard to this 5% limitation.
o Buy or sell real estate, unless acquired as a result of ownership of
securities or other instruments, except this shall not prevent the Fund
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.
o Buy or sell physical commodities unless acquired as a result of ownership
of securities or other instruments, except this shall not prevent the Fund
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.
o 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.
<PAGE>
o Lend Fund securities in excess of 30% of its net assets.
o Issue senior securities, except as permitted under the 1940 Act.
o 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 Fund's total assets, based on current market value at the time of
purchase, can be invested in any one industry.
Strategist High Yield Fund
o Act as an underwriter (sell securities for others). However, under the
securities laws, the Fund may be deemed to be an underwriter when it
purchases securities directly from the issuer and later resells them.
o 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.
o Make cash loans if the total commitment amount exceeds 5% of the Fund's
total assets.
o Purchase more than 10% of the outstanding voting securities of an issuer.
o 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 Fund's
total assets may be invested without regard to this 5% limitation.
o Buy or sell real estate, unless acquired as a result of ownership of
securities or other instruments, except this shall not prevent the Fund
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.
o Buy or sell physical commodities unless acquired as a result of ownership
of securities or other instruments, except this shall not prevent the Fund
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.
o Lend Fund securities in excess of 30% of its net assets.
o Issue senior securities, except as permitted under the 1940 Act.
<PAGE>
o Concentrate in any one industry. According to the present interpretation by
the SEC, this means no more than 25% of the Fund's total assets, based on
current market value at the time of purchase, can be invested in any one
industry.
Strategist Quality Income Fund
o Act as an underwriter (sell securities for others). However, under the
securities laws, the Fund may be deemed to be an underwriter when it
purchases securities directly from the issuer and later resells them.
o 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.
o Make cash loans if the total commitment amount exceeds 5% of the Fund's
total assets.
o Concentrate in any one industry. According to the present interpretation by
the SEC, this means no more than 25% of the Fund's total assets, based on
current market value at time of purchase, can be invested in any one
industry.
o Purchase more than 10% of the outstanding voting securities of an issuer.
o 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 Fund's
total assets may be invested without regard to this 5% limitation.
o Buy or sell real estate, unless acquired as a result of ownership of
securities or other instruments, except this shall not prevent the Fund
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.
o Buy or sell physical commodities unless acquired as a result of ownership
of securities or other instruments, except this shall not prevent the Fund
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.
o 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.
o Lend Fund securities in excess of 30% of its net assets.
o Issue senior securities, except as permitted under the 1940 Act.
Except for the fundamental investment policies listed above, the other
investment policies described in the prospectus and in this SAI are not
fundamental and may be changed by the board at any time.
<PAGE>
INVESTMENT STRATEGIES AND TYPES OF INVESTMENTS
This table shows various investment strategies and investments that many funds
are allowed to engage in and purchase. It also lists certain percentage
guidelines that are generally followed by the Fund's investment manager. This
table is intended to show the breadth of investments that the investment manager
may make on behalf of the Fund. For a description of principal risks, please see
the prospectus. Notwithstanding the Fund's ability to utilize these strategies
and techniques, the investment manager is not obligated to use them at any
particular time. For example, even though the investment manager is authorized
to hedge against certain types of risk, these practices are left to the
investment manager's sole discretion.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------- ---------------------------------------
Investment strategies & types of investments: Allowable for
the Fund?
Strategist Strategist
Government Strategist Quality
Income High Yield Income
<S> <C> <C> <C>
Agency and Government Securities yes yes yes
Borrowing yes yes yes
Cash/Money Market Instruments yes yes yes
Collateralized Bond Obligations yes yes yes
Commercial Paper yes yes yes
Common Stock no yes yes
Convertible Securities no yes yes
Corporate Bonds yes yes yes
Debt Obligations yes yes yes
Depositary Receipts no yes yes
Derivative Instruments yes yes yes
Foreign Currency Transactions no yes yes
Foreign Securities yes yes yes
High-Yield (High-Risk) Securities (Junk Bonds) no yes no
Illiquid and Restricted Securities yes yes yes
Indexed Securities yes yes yes
Inverse Floaters yes yes yes
Investment Companies yes yes yes
Lending of Portfolio Securities yes yes yes
Loan Participations yes yes yes
Mortgage- and Asset-Backed Securities yes yes yes
Mortgage Dollar Rolls yes yes yes
Municipal Obligations yes yes yes
Preferred Stock no yes yes
Real Estate Investment Trusts yes yes yes
Repurchase Agreements yes yes yes
Reverse Repurchase Agreements yes yes yes
Short Sales no no no
Sovereign Debt yes yes yes
Structured Products yes yes yes
Variable- or Floating-Rate Securities yes yes yes
Warrants yes yes yes
When-Issued Securities yes yes yes
Zero-Coupon, Step-Coupon, and Pay-in-Kind Securities yes yes yes
- -------------------------------------------------------------------- ------------ ------------- ------------
</TABLE>
<PAGE>
The following are guidelines that may be changed by the board at any time:
For Strategist Government Income:
o Under normal market conditions, at least 65% of the Fund's total assets
will be invested in securities issued or guaranteed as to principal and
interest by the U.S. government, its agencies and instrumentalities.
o No more than 5% of the Fund'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.
o No more than 10% of the Fund's net assets will be held in securities and
other instruments that are illiquid.
o Ordinarily, less than 25% of the Fund's total assets are invested in money
market instruments.
o The Fund will not buy on margin or sell short, except the Fund may enter
into interest rate futures contracts.
o The Fund will not invest more than 10% of its total assets in securities of
investment companies.
o The Fund will not invest in a company to control or manage it.
For Strategist High Yield:
o The Fund 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.
o The Fund may invest up to 25% of its total assets in foreign investments.
o No more than 5% of the Fund'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.
o No more than 10% of the Fund's net assets will be held in securities and
other instruments that are illiquid.
o Ordinarily, less than 25% of the Fund's total assets are invested in money
market instruments.
o The Fund will not buy on margin or sell short, except the Fund may enter
into interest rate future contracts.
o The Fund will not invest more than 10% of its total assets in securities of
investment companies.
o The Fund will not invest in a company to control or manage it.
o Under normal market conditions, the Fund does not intend to commit more
than 5% of its total assets to when-issued securities or forward
commitments.
<PAGE>
For Strategist Quality Income:
o Under normal market conditions, the Fund will invest at least 90% of its
asset in investment grade bonds, certain unrated debt obligations that are
believed to be of investment grade quality, government securities
(including asset-backed securities), derivative instruments, and money
market instruments.
o The Fund may not purchase debt securities rated below investment grade.
o The Fund may invest up to 25% of its total assets in foreign investments.
o No more than 5% of the Fund'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.
o No more than 10% of the Fund's net assets will be held in securities and
other instruments that are illiquid.
o Ordinarily, less than 25% of the Fund's total assets are invested in money
market instruments.
o The Fund will not buy on margin or sell short, except the Fund may enter
into interest rate futures contracts.
o The Fund will not invest more than 10% of its total assets in securities of
investment companies.
o The Fund will not invest in a company to control or manage it.
<PAGE>
INFORMATION REGARDING RISKS AND INVESTMENT STRATEGIES
RISKS
The following is a summary of common risk characteristics. Following this
summary is a description of certain investments and investment strategies and
the risks most commonly associated with them (including certain risks not
described below and, in some cases, a more comprehensive discussion of how the
risks apply to a particular investment or investment strategy). Please remember
that a mutual fund's risk profile is largely defined by the fund's primary
securities and investment strategies. However, most mutual funds are allowed to
use certain other strategies and investments that may have different risk
characteristics. Accordingly, one or more of the following types of risk will be
associated with the Fund at any time (for a description of principal risks,
please see the prospectus):
Call/Prepayment Risk
The risk that a bond or other security might be called (or otherwise converted,
prepaid, or redeemed) before maturity. This type of risk is closely related to
"reinvestment risk."
Correlation Risk
The risk that a given transaction may fail to achieve its objective due to an
imperfect relationship between markets. Certain investments may react more
negatively than others in response to changing market conditions.
Credit Risk
The risk that the issuer of a security, or the counterparty to a contract, will
default or otherwise become unable to honor a financial obligation (such as
payments due on a bond or a note). The price of junk bonds may react more to the
ability of the issuing company to pay interest and principal when due than to
changes in interest rates. They have greater price fluctuations and are more
likely to experience a default.
Event Risk
Occasionally, the value of a security may be seriously and unexpectedly changed
by a natural or industrial accident or occurrence.
Foreign/Emerging Markets Risk
The following are all components of foreign/emerging markets risk:
Country risk includes the political, economic, and other conditions of
a country. These conditions include lack of publicly available information, less
government oversight (including lack of accounting, auditing, and financial
reporting standards), the possibility of government-imposed restrictions, and
even the nationalization of assets.
Currency risk results from the constantly changing exchange rate
between local currency and the U.S. dollar. Whenever the Fund holds securities
valued in a foreign currency or holds the currency, changes in the exchange rate
add or subtract from the value of the investment.
<PAGE>
Custody risk refers to the process of clearing and settling trades. It
also covers holding securities with local agents and depositories. Low trading
volumes 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. Governments 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 occurring.
Emerging markets risk includes the dramatic pace of change (economic,
social, and political) in emerging market countries as well as the other
considerations listed above. These markets are in early stages of development
and are extremely volatile. They can be marked by extreme inflation, devaluation
of currencies, dependence on trade partners, and hostile relations with
neighboring countries.
Inflation Risk
Also known as purchasing power risk, inflation risk measures the effects of
continually rising prices on investments. If an investment's yield is lower than
the rate of inflation, your money will have less purchasing power as time goes
on.
Interest Rate Risk
The risk of losses attributable to changes in interest rates. This term is
generally associated with bond prices (when interest rates rise, bond prices
fall). In general, the longer the maturity of a debt obligation, the higher its
yield and the greater the sensitivity to changes in interest rates.
Issuer Risk
The risk that an issuer, or the value of its stocks or bonds, will perform
poorly. Poor performance may be caused by poor management decisions, competitive
pressures, breakthroughs in technology, reliance on suppliers, labor problems or
shortages, corporate restructurings, fraudulent disclosures, or other factors.
Legal/Legislative Risk
Congress and other governmental units have the power to change existing laws
affecting securities. A change in law might affect an investment adversely.
Leverage Risk
Some derivative investments (such as options, futures, or options on futures)
require little or no initial payment and base their price on a security, a
currency, or an index. A small change in the value of the underlying security,
currency, or index may cause a sizable gain or loss in the price of the
instrument.
Liquidity Risk
Securities may be difficult or impossible to sell at the time that the Fund
would like. The Fund may have to lower the selling price, sell other
investments, or forego an investment opportunity.
Management Risk
The risk that a strategy or selection method utilized by the investment manager
may fail to produce the intended result. When all other factors have been
accounted for and the investment manager chooses an investment, there is always
the possibility that the choice will be a poor one.
<PAGE>
Market Risk
The market may drop and you may lose money. Market risk may affect a single
issuer, sector of the economy, industry, or the market as a whole. The market
value of all securities may move up and down, sometimes rapidly and
unpredictably.
Reinvestment Risk
The risk that an investor will not be able to reinvest their income or principal
at the same rate as it currently is earning.
Sector/Concentration Risk
Investments that are concentrated in a particular issuer, geographic region, or
industry will be more susceptible to changes in price (the more you diversify,
the more you spread risk).
Small Company Risk
Investments in small and medium companies often involve greater risks than
investments in larger, more established companies because small and medium
companies may lack the management experience, financial resources, product
diversification, and competitive strengths of larger companies. In addition, in
many instances the securities of small and medium companies are traded only
over-the-counter or on regional securities exchanges and the frequency and
volume of their trading is substantially less than is typical of larger
companies.
<PAGE>
INVESTMENT STRATEGIES
The following information supplements the discussion of the Fund's investment
objectives, policies, and strategies that are described in the prospectus and in
this SAI. The following describes many strategies that many mutual funds use and
types of securities that they purchase. Please refer to the section entitled
Investment Strategies and Types of Investments to see which are applicable to
the Fund.
Agency and Government Securities
The U.S. government and its agencies issue many different types of 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 U.S. government. Other U.S. government securities are issued
or guaranteed by federal agencies or government-sponsored enterprises but are
not guaranteed by the U.S. government. This may increase the credit risk
associated with these investments.
Government-sponsored entities issuing securities include privately owned,
publicly chartered entities created to reduce borrowing costs for certain
sectors of the economy, such as farmers, homeowners, and students. They include
the Federal Farm Credit Bank System, Farm Credit Financial Assistance
Corporation, Federal Home Loan Bank, FHLMC, FNMA, Student Loan Marketing
Association (SLMA), and Resolution Trust Corporation (RTC). Government-sponsored
entities may issue discount notes (with maturities ranging from overnight to 360
days) and bonds. Agency and government securities are subject to the same
concerns as other debt obligations. (See also Debt Obligations and Mortgage- and
Asset-Backed Securities.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with agency and government securities include:
Call/Prepayment Risk, Inflation Risk, Interest Rate Risk, Management Risk, and
Reinvestment Risk.
Borrowing
The Fund may borrow money from banks for temporary or emergency purposes and
make other investments or engage in other transactions permissible under the
1940 Act that may be considered a borrowing (such as derivative instruments).
Borrowings are subject to costs (in addition to any interest that may be paid)
and typically reduce the Fund's total return. Except as qualified above,
however, the Fund will not buy securities on margin.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with borrowing include: Inflation Risk and Management
Risk.
Cash/Money Market Instruments
The Fund may maintain a portion of its assets in cash and cash-equivalent
investments. Cash-equivalent investments include 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 Fund also may purchase short-term
notes and obligations of U.S. and foreign banks and corporations and may use
repurchase agreements with broker-dealers registered under the Securities
Exchange Act of 1934 and with commercial banks. (See also Commercial Paper, Debt
Obligations, Repurchase Agreements, and Variable- or Floating-Rate Securities.)
These types of instruments generally offer low rates of return and subject the
Fund to certain costs and expenses.
See the appendix for a discussion of securities ratings.
<PAGE>
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with cash/money market instruments include: Credit
Risk, Inflation Risk, and Management Risk.
Collateralized Bond Obligations
Collateralized bond obligations (CBOs) are investment grade bonds backed by a
pool of junk bonds. CBOs are similar in concept to collateralized mortgage
obligations (CMOs), but differ in that CBOs represent different degrees of
credit quality rather than different maturities. (See also Mortgage- and
Asset-Backed Securities.) Underwriters of CBOs package a large and diversified
pool of high-risk, high-yield junk bonds, which is then separated into "tiers."
Typically, the first tier represents the higher quality collateral and pays the
lowest interest rate; the second tier is backed by riskier bonds and pays a
higher rate; the third tier represents the lowest credit quality and instead of
receiving a fixed interest rate receives the residual interest payments--money
that is left over after the higher tiers have been paid. CBOs, like CMOs, are
substantially overcollateralized and this, plus the diversification of the pool
backing them, earns them investment-grade bond ratings. Holders of third-tier
CBOs stand to earn high yields or less money depending on the rate of defaults
in the collateral pool. (See also High-Yield (High-Risk) Securities.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with CBOs include: Call/Prepayment Risk, Credit Risk,
Interest Rate Risk, and Management Risk.
Commercial Paper
Commercial paper is a short-term debt obligation with a maturity ranging from 2
to 270 days issued by banks, corporations, and other borrowers. It is sold to
investors with temporary idle cash as a way to increase returns on a short-term
basis. These instruments are generally unsecured, which increases the credit
risk associated with this type of investment. (See also Debt Obligations and
Illiquid and Restricted Securities.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with commercial paper include: Credit Risk, Liquidity
Risk, and Management Risk.
Common Stock
Common stock represents units of ownership in a corporation. Owners typically
are entitled to vote on the selection of directors and other important matters
as well as to receive dividends on their holdings. In the event that a
corporation is liquidated, the claims of secured and unsecured creditors and
owners of bonds and preferred stock take precedence over the claims of those who
own common stock.
The price of common stock is generally determined by corporate earnings, type of
products or services offered, projected growth rates, experience of management,
liquidity, and general market conditions for the markets on which the stock
trades.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with common stock include: Issuer Risk, Management
Risk, Market Risk, and Small Company Risk.
Convertible Securities
Convertible securities are bonds, debentures, notes, preferred stocks, or other
securities that may be converted into common stock of the same or a different
issuer within a particular period of time at a specified price. Some convertible
securities, such as preferred equity-redemption cumulative stock (PERCs), have
mandatory conversion features. Others are voluntary. A convertible security
entitles the holder to receive interest normally paid or accrued on debt or the
dividend paid on preferred stock until the convertible security matures or is
redeemed, converted, or exchanged. Convertible securities have unique
<PAGE>
investment characteristics in that they generally (i) have higher yields than
common stocks but lower yields than comparable non-convertible securities, (ii)
are less subject to fluctuation in value than the underlying stock since they
have fixed income characteristics, and (iii) provide the potential for capital
appreciation if the market price of the underlying common stock increases.
The value of a convertible security is a function of its "investment value"
(determined by its yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying common stock). The investment value of a convertible security is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline. The credit
standing of the issuer and other factors also may have an effect on the
convertible security's investment value. The conversion value of a convertible
security is determined by the market price of the underlying common stock. If
the conversion value is low relative to the investment value, the price of the
convertible security is governed principally by its investment value. Generally,
the conversion value decreases as the convertible security approaches maturity.
To the extent the market price of the underlying common stock approaches or
exceeds the conversion price, the price of the convertible security will be
increasingly influenced by its conversion value. A convertible security
generally will sell at a premium over its conversion value by the extent to
which investors place value on the right to acquire the underlying common stock
while holding a fixed income security.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with convertible securities include: Call/Prepayment
Risk, Interest Rate Risk, Issuer Risk, Management Risk, Market Risk, and
Reinvestment Risk.
Corporate Bonds
Corporate bonds are debt obligations issued by private corporations, as distinct
from bonds issued by a government agency or a municipality. Corporate bonds
typically have four distinguishing features: (1) they are taxable; (2) they have
a par value of $1,000; (3) they have a term maturity, which means they come due
all at once; and (4) many are traded on major exchanges. Corporate bonds are
subject to the same concerns as other debt obligations. (See also Debt
Obligations and High-Yield (High-Risk) Securities.)
Corporate bonds may be either secured or unsecured. Unsecured corporate bonds
are generally referred to as "debentures." See the appendix for a discussion of
securities ratings.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with corporate bonds include: Call/Prepayment Risk,
Credit Risk, Interest Rate Risk, Issuer Risk, Management Risk, and Reinvestment
Risk.
Debt Obligations
Many different types of debt obligations exist (for example, bills, bonds, or
notes). Issuers of debt obligations have a contractual obligation to pay
interest at a specified rate on specified dates and to repay principal on a
specified maturity date. Certain debt obligations (usually intermediate- and
long-term bonds) have provisions that allow the issuer to redeem or "call" a
bond before its maturity. Issuers are most likely to call these securities
during periods of falling interest rates. When this happens, an investor may
have to replace these securities with lower yielding securities, which could
result in a lower return.
The market value of debt obligations is affected primarily by changes in
prevailing interest rates and the issuers perceived ability to repay the debt.
The market value of a debt obligation generally reacts inversely to interest
rate changes. When prevailing interest rates decline, the price usually rises,
and when prevailing interest rates rise, the price usually declines.
<PAGE>
In general, the longer the maturity of a debt obligation, the higher its yield
and the greater the sensitivity to changes in interest rates. Conversely, the
shorter the maturity, the lower the yield but the greater the price stability.
As noted, the values of debt obligations also may be affected by changes in the
credit rating or financial condition of their issuers. Generally, the lower the
quality rating of a security, the higher the degree of risk as to the payment of
interest and return of principal. To compensate investors for taking on such
increased risk, those issuers deemed to be less creditworthy generally must
offer their investors higher interest rates than do issuers with better credit
ratings. (See also Agency and Government Securities, Corporate Bonds, and
High-Yield (High-Risk) Securities.)
All ratings limitations are applied at the time of purchase. Subsequent to
purchase, a debt security may cease to be rated or its rating may be reduced
below the minimum required for purchase by the Fund. Neither event will require
the sale of such a security, but it will be a factor in considering whether to
continue to hold the security. To the extent that ratings change as a result of
changes in a rating organization or their rating systems, the Fund will attempt
to use comparable ratings as standards for selecting investments.
See the appendix for a discussion of securities ratings.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with debt obligations include: Call/Prepayment Risk,
Credit Risk, Interest Rate Risk, Issuer Risk, Management Risk, and Reinvestment
Risk.
Depositary Receipts
Some foreign securities 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. 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 involve the risks of other investments in foreign
securities. In addition, ADR holders may not have all the legal rights of
shareholders and may experience difficulty in receiving shareholder
communications. (See also Common Stock and Foreign Securities.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with depositary receipts include: Foreign/Emerging
Markets Risk, Issuer Risk, Management Risk, and Market Risk.
Derivative Instruments
Derivative instruments are commonly defined to include securities or contracts
whose values depend, in whole or in part, on (or "derive" from) the value of one
or more other assets, such as securities, currencies, or commodities.
A derivative instrument generally consists of, is based upon, or exhibits
characteristics similar to options or 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. Their
value changes daily based on a security, a currency, a group of securities or
currencies, or
<PAGE>
an index. A small change in the value of the underlying security, currency, or
index can cause a sizable gain or loss in the price of the derivative
instrument.
Options and forward contracts are considered to be the basic "building blocks"
of derivatives. For example, forward-based derivatives include forward
contracts, swap contracts, and exchange-traded futures. Forward-based
derivatives are sometimes referred to generically as "futures contracts."
Option-based derivatives include privately negotiated, over-the-counter (OTC)
options (including caps, floors, collars, and options on futures) and
exchange-traded options on futures. Diverse types of derivatives may be created
by combining options or futures in different ways, and by applying these
structures to a wide range of underlying assets.
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 for the length of the contract 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 during the length of the contract, 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 or securities of equivalent value (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 to
the premium, the buyer generally pays a broker a commission. The writer receives
a premium, less another commission, at the time the option is written. The
premium received by the writer is retained 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.
When an option is purchased, the buyer pays a premium and a commission. It then
pays a second commission on the purchase or sale of the underlying security when
the option is exercised. For record keeping and tax purposes, the price obtained
on the sale of the underlying security is the combination of the exercise price,
the premium, and both commissions.
One of the risks an investor assumes when it buys an option is the loss of the
premium. To be beneficial to the investor, 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 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.
Options on many securities are listed on options exchanges. If the Fund 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
ask prices.
Options on certain securities are not actively traded on any exchange, but may
be entered into directly with a dealer. These options may be more difficult to
close. If an investor is unable to effect a closing purchase transaction, it
will not be able to sell the underlying security until the call written by the
investor expires or is exercised.
<PAGE>
Futures Contracts. A futures contract is a sales contract between a buyer
(holding the "long" position) and a seller (holding the "short" position) for an
asset with delivery deferred until a future date. The buyer agrees to pay a
fixed price at the agreed future date and the seller agrees to deliver the
asset. The seller hopes that the market price on the delivery date is less than
the agreed upon price, while the buyer hopes for the contrary. Many futures
contracts trade in a manner similar to the way a stock trades on a stock
exchange and the commodity exchanges.
Generally, a futures contract is terminated by entering into an offsetting
transaction. An offsetting transaction is effected by an investor taking an
opposite position. At the time a futures contract is made, a good faith deposit
called initial margin is set up. Daily thereafter, the futures contract is
valued and the payment of variation margin is required so that each day an
investor 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.
Futures contracts may be based on various securities indices (such as the S&P
500 Index), foreign currencies and other financial instruments and indices.
Options on Futures Contracts. Options on futures contracts 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 (some futures are settled in cash), 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 a contract. If the
holder decides not to enter into the contract, all that is lost is the amount
(premium) paid for the option. Further, 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.
One of the risks in buying an option on a futures contract is the loss of the
premium paid for the option. The risk involved in writing options on futures
contracts an investor owns, or on securities held in its portfolio, is that
there could be an increase in the market value of these 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. An investor could
enter into a closing transaction by purchasing an option with the same terms as
the one previously sold. The cost to close the option and terminate the
investor's obligation, however, might still result in a loss. Further, the
investor might not be able to close the option because of insufficient activity
in the options market. Purchasing options also limits the use of monies that
might otherwise be available for long-term investments.
Options on Stock Indexes. Options on stock indexes are securities traded
on national securities exchanges. An option on a stock index is similar to an
option on a futures contract except all settlements are in cash. A fund
exercising a put, for example, would receive the difference between the exercise
price and the current index level.
Tax Treatment. As permitted under federal income tax laws and to the
extent the Fund is allowed to invest in futures contacts, the Fund 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 the Fund being required to defer recognizing
losses incurred on futures contracts and on underlying securities identified as
hedged positions.
Federal income tax treatment of gains or losses from transactions in options on
futures contracts and indexes will depend on whether the option is a section
1256 contract. If the option is a non-equity option, the Fund 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.
<PAGE>
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.
Accounting for futures contracts will be according to generally accepted
accounting principles. Initial margin deposits will be recognized as assets due
from a broker (the Fund'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.
Other Risks of Derivatives.
Derivatives are risky investments.
The primary risk of derivatives is the same as the risk of the underlying asset,
namely that the value of the underlying asset may go up or down. Adverse
movements in the value of an underlying asset can expose an investor to losses.
Derivative instruments may include elements of leverage and, accordingly, the
fluctuation of the value of the derivative instrument in relation to the
underlying asset may be magnified. The successful use of derivative instruments
depends upon a variety of factors, particularly the investment manager's ability
to predict movements of the securities, currencies, and commodity markets, which
requires different skills than predicting changes in the prices of individual
securities. There can be no assurance that any particular strategy will succeed.
Another risk is the risk that a loss may be sustained as a result of the failure
of a counterparty to comply with the terms of a derivative instrument. The
counterparty risk for exchange-traded derivative instruments is generally less
than for privately-negotiated or OTC derivative instruments, since generally a
clearing agency, which is the issuer or counterparty to each exchange-traded
instrument, provides a guarantee of performance. For privately-negotiated
instruments, there is no similar clearing agency guarantee. In all transactions,
an investor will bear the risk that the counterparty will default, and this
could result in a loss of the expected benefit of the derivative transaction and
possibly other losses.
When a derivative transaction is used to completely hedge another position,
changes in the market value of the combined position (the derivative instrument
plus the position being hedged) result from an imperfect correlation between the
price movements of the two instruments. With a perfect hedge, the value of the
combined position remains unchanged for any change in the price of the
underlying asset. With an imperfect hedge, the values of the derivative
instrument and its hedge are not perfectly correlated. For example, if the value
of a derivative instrument used in a short hedge (such as writing a call option,
buying a put option, or selling a futures contract) increased by less than the
decline in value of the hedged investment, the hedge would not be perfectly
correlated. Such a lack of correlation might occur due to factors unrelated to
the value of the investments being hedged, such as speculative or other
pressures on the markets in which these instruments are traded.
Derivatives also are subject to the risk that they cannot be sold, closed out,
or replaced quickly at or very close to their fundamental value. Generally,
exchange contracts are very liquid because the exchange clearinghouse is the
counterparty of every contract. OTC transactions are less liquid than
exchange-traded derivatives since they often can only be closed out with the
other party to the transaction.
<PAGE>
Another risk is caused by the legal unenforcibility of a party's obligations
under the derivative. A counterparty that has lost money in a derivative
transaction may try to avoid payment by exploiting various legal uncertainties
about certain derivative products.
(See also Foreign Currency Transactions.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with derivative instruments include: Leverage Risk,
Liquidity Risk, and Management Risk.
Foreign Currency Transactions
Since investments in foreign countries usually involve currencies of foreign
countries, the value of the Fund'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, the Fund may incur costs in connection with
conversions between various currencies. Currency exchange rates may fluctuate
significantly over short periods of time causing the Fund's NAV to fluctuate.
Currency exchange rates are generally determined by the forces of supply and
demand in the foreign exchange markets, actual or anticipated changes in
interest rates, and other complex factors. Currency exchange rates also can be
affected by the intervention of U.S. or foreign governments or central banks, or
the failure to intervene, or by currency controls or political developments.
Spot Rates and Derivative Instruments. The Fund 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. (See also Derivative Instruments). These contracts are traded in the
interbank market conducted directly between currency traders (usually large
commercial banks) and their customers. Because foreign currency transactions
occurring in the interbank market might involve substantially larger amounts
than those involved in the use of such derivative instruments, the Fund could be
disadvantaged by having to deal in the odd lot market for the underlying foreign
currencies at prices that are less favorable than for round lots.
The Fund may enter into forward contracts to settle a security transaction or
handle dividend and interest collection. When the Fund 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, the Fund 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.
The Fund also may enter into forward contracts when management of the Fund
believes the currency of a particular foreign country may change in relationship
to another currency. The precise matching of forward contract amounts and the
value of securities involved generally will not be possible since the future
value of 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. The
Fund will not enter into such forward contracts or maintain a net exposure to
such contracts when consummating the contracts would obligate the Fund to
deliver an amount of foreign currency in excess of the value of the Fund's
securities or other assets denominated in that currency.
The Fund will designate cash or securities in an amount equal to the value of
the Fund'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 the Fund's
commitments on such contracts.
<PAGE>
At maturity of a forward contract, the Fund 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 the Fund retains the security and engages in an offsetting transaction, the
Fund will incur a gain or loss (as described below) to the extent there has been
movement in forward contract prices. If the Fund 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 the Fund enters
into a forward contract for selling foreign currency and the date it enters into
an offsetting contract for purchasing the foreign currency, the Fund 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, the Fund 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 the Fund to buy
additional foreign currency on the spot market (and bear the expense of that
purchase) if the market value of the security is less than the amount of foreign
currency the Fund 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 portfolio security if its market value exceeds the amount of
foreign currency the Fund is obligated to deliver.
The Fund's dealing in forward contracts will be limited to the transactions
described above. This method of protecting the value of the Fund's 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 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 the Fund 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 shareholders should be aware
of currency conversion costs. Although foreign exchange dealers do not charge a
fee for conversion, they do realize a profit based on the difference (spread)
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to the Fund at one rate,
while offering a lesser rate of exchange should the Fund desire to resell that
currency to the dealer.
Options on Foreign Currencies. The Fund may buy 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 the diminutions in the value of securities, the Fund
may buy options on the foreign currency. If the value of the currency does
decline, the Fund will have the right to sell the currency for a fixed amount in
dollars and will offset, in whole or in part, the adverse effect on its
portfolio that otherwise would have resulted.
As in the case of other types of options, however, the benefit to the Fund
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, the
Fund could sustain losses on transactions in foreign currency options that would
require it to forego a portion or all of the benefits of advantageous changes in
rates.
<PAGE>
The Fund may write options on foreign currencies for the same types of hedging
purposes. For example, when the Fund 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 the Fund would be required to buy or sell
the underlying currency at a loss that may not be offset by the amount of the
premium. Through the writing of options on foreign currencies, the Fund also may
be required to forego all or a portion of the benefits that 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 the Fund 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 its portfolio. An option writer
could lose amounts substantially in excess of its initial investments, due to
the margin and collateral requirements associated with such positions.
Options on foreign currencies are traded through financial institutions acting
as market-makers, although foreign currency options also are traded on certain
national securities exchanges, such as the Philadelphia Stock Exchange and the
Chicago Board Options Exchange, subject to SEC regulation. In an
over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchaser of an
option cannot lose more than the amount of the premium plus related transaction
costs, this entire amount could be lost.
Foreign currency option positions entered into on a national securities exchange
are cleared and guaranteed by the Options Clearing Corporation (OCC), thereby
reducing the risk of counterparty default. Further, a liquid secondary market in
options traded on a national securities exchange may be more readily available
than in the over-the-counter market, potentially permitting the Fund 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 that 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. The Fund 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. The
Fund may use currency futures for the same purposes as currency forward
contracts, subject to Commodity Futures Trading Commission (CFTC) limitations.
<PAGE>
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 value of
the Fund's investments. A currency hedge, for example, should protect a
Yen-denominated bond against a decline in the Yen, but will not protect the Fund
against price decline if the issuer's creditworthiness deteriorates. Because the
value of the Fund'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 the Fund's investments
denominated in that currency over time.
The Fund will hold securities or other options or futures positions whose values
are expected to offset its obligations. The Fund will not enter into an option
or futures position that exposes the Fund 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.
(See also Derivative Instruments and Foreign Securities.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with foreign currency transactions include: Correlation
Risk, Interest Rate Risk, Leverage Risk, Liquidity Risk, and Management Risk.
Foreign Securities and Domestic Companies with Foreign Operations
Foreign securities, foreign currencies, and securities issued by U.S. entities
with substantial foreign operations involve special risks, including those set
forth below, which are not typically associated with investing in U.S.
securities. Foreign companies are not generally subject to uniform accounting,
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 U.S. and, at times, volatility of price can be greater than in the U.S.
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 are uninvested and no
return is earned on them. The inability of an investor to make intended security
purchases due to such problems could cause the investor 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.,
an investor 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. Further, an investor 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
U.S. It may be more difficult for an investor's agents to keep currently
informed about corporate actions such as stock dividends or other matters that
may affect the prices of portfolio securities. Communications between the U.S.
and foreign countries may be less reliable than within the U.S., 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 additional withholding or
confiscatory taxes, political, social, or economic instability, diplomatic
developments that could affect investments in those countries, or other
unforeseen actions by regulatory bodies (such as changes to settlement or
custody procedures).
The risks of foreign investing may be magnified for investments in emerging
markets, which may have relatively unstable governments, economies based on only
a few industries, and securities markets that trade a small number of
securities.
<PAGE>
The introduction of a single currency, the euro, on January 1, 1999 for
participating European nations in the Economic and Monetary Union ("EU")
presents unique uncertainties, including whether the payment and operational
systems of banks and other financial institutions will be ready by the scheduled
launch date; the creation of suitable clearing and settlement payment systems
for the new currency; the legal treatment of certain outstanding financial
contracts after January 1, 1999 that refer to existing currencies rather than
the euro; the establishment and maintenance of exchange rates; the fluctuation
of the euro relative to non-euro currencies during the transition period from
January 1, 1999 to December 31, 2000 and beyond; whether the interest rate, tax
or labor regimes of European countries participating in the euro will converge
over time; and whether the conversion of the currencies of other EU countries
such as the United Kingdom, Denmark, and Greece into the euro and the admission
of other non-EU countries such as Poland, Latvia, and Lithuania as members of
the EU may have an impact on the euro.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with foreign securities include: Foreign/Emerging
Markets Risk, Issuer Risk, and Management Risk.
High-Yield (High-Risk) Securities (Junk Bonds)
High yield (high-risk) securities are sometimes referred to as "junk bonds."
They are non-investment grade (lower quality) securities that have speculative
characteristics. Lower quality securities, while generally offering higher
yields than investment grade securities with similar maturities, involve greater
risks, including the possibility of default or bankruptcy. They are regarded as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal. The special risk considerations in connection with
investments in these securities are discussed below.
See the appendix for a discussion of securities ratings. (See also Debt
Obligations.)
The lower-quality and comparable unrated security market is relatively new and
its growth has paralleled a long economic expansion. As a result, it is not
clear how this market may withstand a prolonged recession or economic downturn.
Such conditions could severely disrupt the market for and adversely affect the
value of such securities.
All interest-bearing securities typically experience appreciation when interest
rates decline and depreciation when interest rates rise. The market values of
lower-quality and comparable unrated securities tend to reflect individual
corporate developments to a greater extent than do higher rated securities,
which react primarily to fluctuations in the general level of interest rates.
Lower-quality and comparable unrated securities also tend to be more sensitive
to economic conditions than are higher-rated securities. As a result, they
generally involve more credit risks than securities in the higher-rated
categories. During an economic downturn or a sustained period of rising interest
rates, highly leveraged issuers of lower-quality securities may experience
financial stress and may not have sufficient revenues to meet their payment
obligations. The issuer's ability to service its debt obligations also may be
adversely affected by specific corporate developments, the issuer's inability to
meet specific projected business forecast, or the unavailability of additional
financing. The risk of loss due to default by an issuer of these securities is
significantly greater than issuers of higher-rated securities because such
securities are generally unsecured and are often subordinated to other
creditors. Further, if the issuer of a lower quality security defaulted, an
investor might incur additional expenses to seek recovery.
Credit ratings issued by credit rating agencies are designed to evaluate the
safety of principal and interest payments of rated securities. They do not,
however, evaluate the market value risk of lower-quality securities and,
therefore, may not fully reflect the true risks of an investment. In addition,
credit rating agencies may or may not make timely changes in a rating to reflect
changes in the economy or in the condition of the issuer that affect the market
value of the securities. Consequently, credit ratings are used only as a
preliminary indicator of investment quality.
<PAGE>
An investor may have difficulty disposing of certain lower-quality and
comparable unrated securities because there may be a thin trading market for
such securities. Because not all dealers maintain markets in all lower quality
and comparable unrated securities, there is no established retail secondary
market for many of these securities. To the extent a secondary trading market
does exist, it is generally not as liquid as the secondary market for
higher-rated securities. The lack of a liquid secondary market may have an
adverse impact on the market price of the security. The lack of a liquid
secondary market for certain securities also may make it more difficult for an
investor to obtain accurate market quotations. Market quotations are generally
available on many lower-quality and comparable unrated issues only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales.
Legislation may be adopted from time to time designed to limit the use of
certain lower quality and comparable unrated securities by certain issuers.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with high-yield (high-risk) securities include:
Call/Prepayment Risk, Credit Risk, Currency Risk, Interest Rate Risk, and
Management Risk.
Illiquid and Restricted Securities
The Fund may invest in illiquid securities (i.e., securities that are not
readily marketable). These securities may include, but are not limited to,
certain securities that are subject to legal or contractual restrictions on
resale, certain repurchase agreements, and derivative instruments.
To the extent the Fund invests in illiquid or restricted securities, it may
encounter difficulty in determining a market value for such securities.
Disposing of illiquid or restricted securities may involve time-consuming
negotiations and legal expense, and it may be difficult or impossible for the
Fund to sell such an investment promptly and at an acceptable price.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with illiquid and restricted securities include:
Liquidity Risk and Management Risk.
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 and they may be less liquid than the securities
represented by the index. (See also Derivative Instruments.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with indexed securities include: Liquidity Risk,
Management Risk, and Market Risk.
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. (See also Derivative Instruments.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with inverse floaters include: Interest Rate Risk and
Management Risk.
<PAGE>
Investment Companies
The Fund may invest in securities issued by registered and unregistered
investment companies. These investments may involve the duplication of advisory
fees and certain other expenses.
Although one or more of the other risks described in this SAI may apply, the
largest risk associated with the securities of other investment companies
includes: Management Risk and Market Risk.
Lending of Portfolio Securities
The Fund may lend certain of its portfolio securities to broker-dealers. The
current policy of the Fund's board is to make these loans, either long- or
short-term, to broker-dealers. In making loans, the Fund 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 Fund 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 Fund receives cash payments equivalent to
all interest or other distributions paid on the loaned securities. The Fund may
pay reasonable administrative and custodial fees in connection with a loan and
may pay a negotiated portion of the interest earned on the cash or money market
instruments held as collateral to the borrower or placing broker. The Fund will
receive reasonable interest on the loan or a flat fee from the borrower and
amounts equivalent to any dividends, interest, or other distributions on the
securities loaned.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with the lending of portfolio securities include:
Credit Risk and Management Risk.
Loan Participations
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 an investor in the event of fraud or misrepresentation.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with loan participations include: Credit Risk and
Management Risk.
Mortgage- and Asset-Backed Securities
Mortgage-backed securities represent direct or indirect participations in, or
are secured by and payable from, mortgage loans secured by real property, and
include single- and multi-class pass-through securities and Collateralized
Mortgage Obligations (CMOs). These securities may be issued or guaranteed by
U.S. government agencies or instrumentalities (see also Agency and Government
Securities), or by private issuers, generally originators and investors in
mortgage loans, including savings associations, mortgage bankers, commercial
banks, investment bankers, and special purpose entities. Mortgage-backed
securities issued by private lenders may be supported by pools of mortgage loans
or other mortgage-backed securities that are guaranteed, directly or indirectly,
by the U.S. government or one of its agencies or instrumentalities, or they may
be issued without any governmental guarantee of the underlying mortgage assets
but with some form of non-governmental credit enhancement.
<PAGE>
Stripped mortgage-backed securities are a type of mortgage-backed security that
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.
CMOs are hybrid mortgage-related instruments secured by pools of mortgage loans
or other mortgage-related securities, such as mortgage pass through securities
or stripped mortgage-backed securities. CMOs may be structured into multiple
classes, often referred to as "tranches," with each class bearing a different
stated maturity and entitled to a different schedule for payments of principal
and interest, including prepayments. Principal prepayments on collateral
underlying a CMO may cause it to be retired substantially earlier than its
stated maturity.
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.
Asset-backed securities have structural characteristics similar to
mortgage-backed securities. Asset-backed debt obligations represent direct or
indirect participation in, or secured by and payable from, assets such as motor
vehicle installment sales contracts, other installment loan contracts, home
equity loans, leases of various types of property, and receivables from credit
card or other revolving credit arrangements. The credit quality of most
asset-backed securities depends primarily on the credit quality of the assets
underlying such securities, how well the entity issuing the security is
insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit enhancement of the
securities. Payments or distributions of principal and interest on asset-backed
debt obligations may be supported by non-governmental credit enhancements
including letters of credit, reserve funds, overcollateralization, and
guarantees by third parties. The market for privately issued asset-backed debt
obligations is smaller and less liquid than the market for government sponsored
mortgage-backed securities. (See also Derivative Instruments.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with mortgage- and asset-backed securities include:
Call/Prepayment Risk, Credit Risk, Interest Rate Risk, Liquidity Risk, and
Management Risk.
Mortgage Dollar Rolls
Mortgage dollar rolls are investments whereby an investor would sell
mortgage-backed securities for delivery in the current month and simultaneously
contract to purchase substantially similar securities on a specified future
date. While an investor would forego principal and interest paid on the
mortgage-backed securities during the roll period, the investor would be
compensated by the difference between the current sales price and the lower
price for the future purchase as well as by any interest earned on the proceeds
of the initial sale. The investor also could be compensated through the receipt
of fee income equivalent to a lower forward price.
<PAGE>
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with mortgage dollar rolls include: Credit Risk,
Interest Rate Risk, and Management Risk.
Municipal Obligations
Municipal obligations include debt obligations issued by or on behalf of states,
territories, possessions, or sovereign nations within the territorial boundaries
of the United States (including the District of Columbia). The interest on these
obligations is generally exempt from federal income tax. Municipal obligations
are generally classified as either "general obligations" or "revenue
obligations."
General obligation bonds are secured by the issuer's pledge of its full faith,
credit, and taxing power for the payment of interest and principal. Revenue
bonds are payable only from the revenues derived from a project or facility or
from the proceeds of a specified revenue source. Industrial development bonds
are generally revenue bonds secured by payments from and the credit of private
users. Municipal notes are issued to meet the short-term funding requirements of
state, regional, and local governments. Municipal notes include tax anticipation
notes, bond anticipation notes, revenue anticipation notes, tax and revenue
anticipation notes, construction loan notes, short-term discount notes,
tax-exempt commercial paper, demand notes, and similar instruments.
Municipal lease obligations may take the form of a lease, an installment
purchase, or a conditional sales contract. They are issued by state and local
governments and authorities to acquire land, equipment, and facilities. An
investor may purchase these obligations directly, or it may purchase
participation interests in such obligations. Municipal leases may be subject to
greater risks than general obligation or revenue bonds. State constitutions and
statutes set forth requirements that states or municipalities must meet in order
to issue municipal obligations. Municipal leases may contain a covenant by the
state or municipality to budget for and make payments due under the obligation.
Certain municipal leases may, however, provide that the issuer is not obligated
to make payments on the obligation in future years unless funds have been
appropriated for this purpose each year.
Yields on municipal bonds and notes depend on a variety of factors, including
money market conditions, municipal bond market conditions, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. The municipal bond market has a large number of different issuers, many
having smaller sized bond issues, and a wide choice of different maturities
within each issue. For these reasons, most municipal bonds do not trade on a
daily basis and many trade only rarely. Because many of these bonds trade
infrequently, the spread between the bid and offer may be wider and the time
needed to develop a bid or an offer may be longer than other security markets.
See the appendix for a discussion of securities ratings. (See also Debt
Obligations.)
Taxable Municipal Obligations. There is another type of municipal obligation
which is subject to federal income tax for a variety of reasons. These municipal
obligations do not qualify for the federal income exemption because (a) they did
not receive necessary authorization for tax-exempt treatment from state or local
government authorities, (b) they exceed certain regulatory limitations on the
cost of issuance for tax-exempt financing or (c) they finance public or private
activities that do not qualify for the federal income tax exemption. These
non-qualifying activities might include, for example, certain types of
multi-family housing, certain professional and local sports facilities,
refinancing of certain municipal debt, and borrowing to replenish a
municipality's underfunded pension plan.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with municipal obligations include: Credit Risk, Event
Risk, Inflation Risk, Interest Rate Risk, Legal/Legislative Risk, and Market
Risk.
<PAGE>
Preferred Stock
Preferred stock is a type of stock that pays dividends at a specified rate and
that has preference over common stock in the payment of dividends and the
liquidation of assets. Preferred stock does not ordinarily carry voting rights.
The price of a preferred stock is generally determined by earnings, type of
products or services, projected growth rates, experience of management,
liquidity, and general market conditions of the markets on which the stock
trades.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with preferred stock include: Issuer Risk, Management
Risk, and Market Risk.
Real Estate Investment Trusts
Real estate investment trusts (REITs) are entities that manage a portfolio of
real estate to earn profits for their shareholders. REITs can make investments
in real estate such as shopping centers, nursing homes, office buildings,
apartment complexes, and hotels. REITs can be subject to extreme volatility due
to fluctuations in the demand for real estate, changes in interest rates, and
adverse economic conditions. Additionally, the failure of a REIT to continue to
qualify as a REIT for tax purposes can materially affect its value.
Although one or more of the other risks described in this SAI may apply, the
largest associated with REITs include: Issuer Risk, Management Risk, and Market
Risk.
Repurchase Agreements
The Fund may enter into repurchase agreements with certain banks or non-bank
dealers. In a repurchase agreement, the Fund buys a security at one price, and
at the time of sale, the seller agrees to repurchase the obligation at a
mutually agreed upon time and price (usually within seven days). The repurchase
agreement thereby determines the yield during the purchaser's holding period,
while the seller's obligation to repurchase is secured by the value of the
underlying security. Repurchase agreements could involve certain risks in the
event of a default or insolvency of the other party to the agreement, including
possible delays or restrictions upon the Fund's ability to dispose of the
underlying securities.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with repurchase agreements include: Credit Risk and
Management Risk.
Reverse Repurchase Agreements
In a reverse repurchase agreement, the investor would sell a security and enter
into an agreement to repurchase the security at a specified future date and
price. The investor generally retains the right to interest and principal
payments on the security. Since the investor receives cash upon entering into a
reverse repurchase agreement, it may be considered a borrowing. (See also
Derivative Instruments.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with reverse repurchase agreements include: Credit
Risk, Interest Rate Risk, and Management Risk.
<PAGE>
Short Sales
With short sales, an investor sells a security that it does not own in
anticipation of a decline in the market value of the security. To complete the
transaction, the investor must borrow the security to make delivery to the
buyer. The investor is obligated to replace the security that was borrowed by
purchasing it at the market price on the replacement date. The price at such
time may be more or less than the price at which the investor sold the security.
A fund that is allowed to utilize short sales will designate cash or liquid
securities to cover its open short positions. Those funds also may engage in
"short sales against the box," a form of short-selling that involves selling a
security that an investor owns (or has an unconditioned right to purchase) for
delivery at a specified date in the future. This technique allows an investor to
hedge protectively against anticipated declines in the market of its securities.
If the value of the securities sold short increased prior to the scheduled
delivery date, the investor loses the opportunity to participate in the gain.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with short sales include: Management Risk and Market
Risk.
Sovereign Debt
A sovereign debtor's willingness or ability to repay principal and pay interest
in a timely manner may be affected by a variety of factors, including its cash
flow situation, the extent of its reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole, the sovereign debtor's policy toward
international lenders, and the political constraints to which a sovereign debtor
may be subject. (See also Foreign Securities.)
With respect to sovereign debt of emerging market issuers, investors should be
aware that certain emerging market countries are among the largest debtors to
commercial banks and foreign governments. At times, certain emerging market
countries have declared moratoria on the payment of principal and interest on
external debt.
Certain emerging market countries have experienced difficulty in servicing their
sovereign debt on a timely basis that led to defaults and the restructuring of
certain indebtedness.
Sovereign debt includes Brady Bonds, which are securities issued under the
framework of the Brady Plan, an initiative announced by former U.S. Treasury
Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to
restructure their outstanding external commercial bank indebtedness.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with sovereign debt include: Credit Risk,
Foreign/Emerging Markets Risk, and Management Risk.
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. (See
also Derivative Instruments.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with structured products include: Credit Risk,
Liquidity Risk, and Management Risk.
<PAGE>
Variable- or Floating-Rate Securities
The Fund may invest in securities that offer a variable- or floating-rate of
interest. Variable-rate securities provide for automatic establishment of a new
interest rate at fixed intervals (e.g., daily, monthly, semi-annually, etc.).
Floating-rate securities generally provide for automatic adjustment of the
interest rate whenever some specified interest rate index changes.
Variable- or floating-rate securities frequently include a demand feature
enabling the holder to sell the securities to the issuer at par. In many cases,
the demand feature can be exercised at any time. Some securities that do not
have variable or floating interest rates may be accompanied by puts producing
similar results and price characteristics.
Variable-rate demand notes include master demand notes that are obligations that
permit the Fund to invest fluctuating amounts, which may change daily without
penalty, pursuant to direct arrangements between the Fund as lender, and the
borrower. The interest rates on these notes fluctuate from time to time. The
issuer of such obligations normally has a corresponding right, after a given
period, to prepay in its discretion the outstanding principal amount of the
obligations plus accrued interest upon a specified number of days' notice to the
holders of such obligations. Because these obligations are direct lending
arrangements between the lender and borrower, it is not contemplated that such
instruments generally will be traded. There generally is not an established
secondary market for these obligations. Accordingly, where these obligations are
not secured by letters of credit or other credit support arrangements, the
Fund's right to redeem is dependent on the ability of the borrower to pay
principal and interest on demand. Such obligations frequently are not rated by
credit rating agencies and may involve heightened risk of default by the issuer.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with variable- or floating-rate securities include:
Credit Risk and Management Risk.
Warrants
Warrants are securities giving the holder the right, but not the obligation, to
buy the stock of an issuer at a given price (generally higher than the value of
the stock at the time of issuance) during a specified period or perpetually.
Warrants may be acquired separately or in connection with the acquisition of
securities. Warrants do not carry with them the right to dividends or voting
rights and they do not represent any rights in the assets of the issuer.
Warrants may be considered to have more speculative characteristics than certain
other types of investments. In addition, the value of a warrant does not
necessarily change with the value of the underlying securities, and a warrant
ceases to have value if it is not exercised prior to its expiration date.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with warrants include: Management Risk and Market Risk.
When-Issued Securities
These instruments are contracts to purchase securities for a fixed price at a
future date beyond normal settlement time (when-issued securities or forward
commitments). The price of debt obligations purchased on a when-issued basis,
which may be expressed in yield terms, generally is fixed at the time the
commitment to purchase is made, but delivery and payment for the securities take
place at a later date. Normally, the settlement date occurs within 45 days of
the purchase although in some cases settlement may take longer. The investor
does not pay for the securities or receive dividends or interest on them until
the contractual settlement date. Such instruments involve a risk of loss if the
value of the security to be purchased declines prior to the settlement date,
which risk is in addition to the risk of decline in value of the investor's
other assets. In addition, when the Fund engages in forward commitment and
when-issued transactions, it relies on the counterparty to consummate the
transaction. The failure of the counterparty to consummate the transaction may
result in the Fund's losing the opportunity to obtain a price and yield
considered to be advantageous.
<PAGE>
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with when-issued securities include: Credit Risk and
Management Risk.
Zero-Coupon, Step-Coupon, and Pay-in-Kind Securities
These securities are debt obligations that do not make regular cash interest
payments (see also Debt Obligations). Zero-coupon and step-coupon securities are
sold at a deep discount to their face value because they do not pay interest
until maturity. Pay-in-kind securities pay interest through the issuance of
additional securities. Because these securities do not pay current cash income,
the price of these securities can be extremely volatile when interest rates
fluctuate. See the appendix for a discussion of securities ratings.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with zero-coupon, step-coupon, and pay-in-kind
securities include: Credit Risk, Interest Rate Risk, and Management Risk.
SECURITY TRANSACTIONS
Subject to policies set by the board, the Advisor is authorized to determine,
consistent with the Fund's investment goal and policies, which securities will
be purchased, held, or sold. In determining where the buy and sell orders are to
be placed, the Advisor has been directed to use its best efforts to obtain the
best available price and the most favorable execution except where otherwise
authorized by the board.
The Advisor has a strict Code of Ethics that prohibits its affiliated personnel
from engaging in personal investment activities that compete with or attempt to
take advantage of planned portfolio transactions for any fund or trust for which
it acts as investment manager. The Advisor carefully monitors compliance with
its Code of Ethics.
On occasion, it may be desirable to compensate a broker for research services or
for brokerage services by paying a commission that might not otherwise be
charged or a commission in excess of the amount another broker might charge. The
board has adopted a 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 Fund'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.
<PAGE>
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 Fund to pay a commission in excess
of the amount another broker might have charged. The Advisor has advised the
Fund that it is necessary to do business with a number of brokerage firms on a
continuing basis to obtain such services as the handling of large orders, the
willingness of a broker to risk its own money by taking a position in a
security, and the specialized handling of a particular group of securities that
only certain brokers may be able to offer. As a result of this arrangement, some
portfolio transactions may not be effected at the lowest commission, but the
Advisor believes it may obtain better overall execution. The Advisor has
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 will be placed on the basis of obtaining the best
available price and the most favorable execution. In so doing, if in the
professional opinion of the person responsible for selecting the broker or
dealer, several firms can execute the transaction on the same basis,
consideration will be given by such person to those firms offering research
services. Such services may be used by the Advisor in providing advice to 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 the Fund is made independently from any
decision made for another portfolio, fund, or other account advised by the
Advisor or any of its subsidiaries. When the Fund 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 the Fund, the Fund 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.
For fiscal years noted below, each Fund paid the following total brokerage
commissions. Substantially all firms through whom transactions were executed
provide research services.
<TABLE>
<CAPTION>
May 31, Government Income High Yield Portfolio Quality Income Portfolio
Portfolio
- ----------------------------
<S> <C> <C> <C>
1999 $2,478,231 $630,708 $35,050
- ----------------------------
1998 1,514,430 49,511 61,088
- ----------------------------
1997 -0- 90,680 75,832
</TABLE>
No transactions were directed to brokers because of research services they
provided to each Fund.
<PAGE>
As of the end of the most recent fiscal year, Government Income Portfolio held
no securities of its regular brokers or dealers or of the parent of those
brokers or dealers that derived more than 15% of gross revenue from
securities-related activities.
As of the end of the most recent fiscal year, each Fund held securities of its
regular brokers or dealers of the parent of those brokers or dealers that
derived more than 15% of gross revenue from securities-related activities as
presented below:
<TABLE>
<CAPTION>
Value of Securities
Fund Name of Issuer owned at End of Fiscal Year
<S> <C>
High Yield Portfolio Bank of America $2,196,458
Merrill Lynch 4,586,594
Quality Income Portfolio Bank of America $9,239,460
Equitable Life Assurance 5,127,113
First Chicago 7,909,919
Fleet Funding 10,983,867
Morgan (JP) 8,296,723
NationsBank 9,578,644
Salomon 14,182,782
</TABLE>
The portfolio turnover rates for the two most recent fiscal years were as
follows:
<TABLE>
<CAPTION>
May 31, Government Income High Yield Portfolio Quality Income Portfolio
Portfolio
<S> <C> <C> <C>
1999 278% 47% 30%
- ----------------------------
1998 159 81 20
</TABLE>
Higher turnover rates may result in higher brokerage expenses. The turnover rate
for Strategist Government Income Fund was relatively high in 1999, in part due
to the hedging strategies employed by the Fund. An increased level of volatility
in both mortgage spreads and interest rates in general resulted in a higher
level of turnover in connection with these strategies.
BROKERAGE COMMISSIONS PAID TO BROKERS AFFILIATED WITH THE ADVISOR
Affiliates of American Express Company (of which the Advisor is a wholly owned
subsidiary) may engage in brokerage and other securities transactions on behalf
of the Fund according to procedures adopted by the board and to the extent
consistent with applicable provisions of the federal securities laws. The
Advisor will use an American Express affiliate only if (i) the Advisor
determines that the Fund will receive prices and executions at least as
favorable as those offered by qualified independent brokers performing similar
brokerage and other services for the Fund and (ii) the affiliate charges the
Fund 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.
No brokerage commissions were paid to brokers affiliated with the Advisor for
the three most recent fiscal years.
<PAGE>
PERFORMANCE INFORMATION
The Fund may quote various performance figures to illustrate past performance.
Average annual total return and current yield quotations, if applicable, used by
the Fund are based on standardized methods of computing performance as required
by the SEC. An explanation of the methods used by the Fund to compute
performance follows below.
Average annual total return
The Fund may calculate average annual total return for certain periods by
finding the average annual compounded rates of return over the period that would
equate the initial amount invested to the ending redeemable value, according to
the following formula:
P(1+T)n = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment, made at the beginning of a period, at the end of
the period (or fractional portion thereof)
Aggregate total return
The Fund may calculate aggregate total return for certain periods representing
the cumulative change in the value of an investment in the 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)
<PAGE>
Annualized yield
The Fund may calculate an annualized yield by dividing the net investment income
per share deemed earned during a 30-day 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 = 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 5.20% for Government Income Fund, 9.25% for High
Yield Fund and 5.54% for Quality Income Fund for the 30-day period ended May 28,
1999.
The 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 the Fund's securities. It is not necessarily indicative of the
amount which was or may be paid to the Fund's shareholders. Actual amounts paid
to Fund shareholders are reflected in the distribution yield.
Distribution yield
Distribution yield is calculated according to the following formula:
D divided by POPF 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 5.63% for Government Income Fund, 9.56% for
High Yield Fund and 5.79% for Quality Income Fund for the 30-day period ended
May 28, 1999.
On June 10, 1996, AXP Federal Income Fund, AXP Selective Fund and AXP Extra
Income Fund (the American Express 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.
<PAGE>
On March 20, 1995, the American Express funds converted to a multiple class
structure pursuant to which three classes of shares are offered: Class A, Class
B and Class Y. Prior to July 1, 1999, Class A shares were sold with a 5% sales
charge, a 0.175% service fee and no 12b-1 fee. Effective July 1, 1999, Class A
shares are sold with a 5% sales charge and a 12b-1 fee of up to 0.25%.
Performance for periods prior to June 10, 1996 is based on the performance of
the corresponding American Express 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 American Express
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 American Express funds.
In its sales material and other communications, the 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, CDA Technologies, Donoghue's Money Market Fund
Report, Financial Services Week, Financial Times, Financial World, Forbes,
Fortune, Global Investor, Institutional Investor, Investor's Business Daily,
Kiplinger's Personal Finance, Lipper Analytical Services, Money, Morningstar,
Mutual Fund Forecaster, Newsweek, The New York Times, Personal Investor,
Shearson Lehman Aggregate Bond Index, Stanger Report, Sylvia Porter's Personal
Finance, USA Today, U.S. News and World Report, The Wall Street Journal, and
Wiesenberger Investment Companies Service. The Fund also may compare its
performance to a wide variety of indexes or averages. There are similarities and
differences between the investments that the Fund may purchase and the
investments measured by the indexes or averages and the composition of the
indexes or averages will differ from that of the Fund.
VALUING FUND SHARES
In determining net assets before shareholder transactions, the Fund's securities
are valued as follows as of the close of business of the New York Stock Exchange
(the Exchange):
<TABLE>
<CAPTION>
On the first business day following the end of the fiscal year, the computations
looked like this:
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 $895,608 186,585 $4.80
High Yield 1,674,339 422,813 3.96
Quality Income 751,627 82,961 9.06
</TABLE>
In determining net assets before shareholder transactions, the securities held
by the Fund's securities are valued as follows as of the close of business of
the New York Stock Exchange (the Exchange):
o 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.
o 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.
o Securities included in the NASDAQ National Market System are valued at the
last-quoted sales price in this market.
o Securities included in the NASDAQ National Market System for which a
last-quoted sales price is not readily available, and other securities
traded over-the-counter but not included in the NASDAQ National Market
System are valued at the mean of the closing bid and asked prices.
<PAGE>
o Futures and options traded on major exchanges are valued at the last-quoted
sales price on their primary exchange.
o Foreign securities traded outside the United States are generally valued as
of the time their trading is complete, which is usually different from the
close of the Exchange. Foreign securities quoted in foreign currencies are
translated into U.S. dollars at the current rate of exchange. Occasionally,
events affecting the value of such securities may occur between such times
and the close of the Exchange that will not be reflected in the computation
of the 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.
o 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.
o 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.
SELLING SHARES
You have a right to sell your shares at any time. For an explanation of sales
procedures, please see the prospectus.
During an emergency, the board can suspend the computation of net asset value,
stop accepting payments for purchase of shares or suspend the duty of the Funds
to redeem shares for more than seven days. Such emergency situations would occur
if:
o The Exchange closes for reasons other than the usual weekend and holiday
closings or trading on the Exchange is restricted, or
o Disposal of the Fund's securities is not reasonably practicable or it is
not reasonably practicable for the Fund to determine the fair value of its
net assets, or
o The SEC, under the provisions of the 1940 Act, declares a period of
emergency to exist.
Should the 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.
<PAGE>
The 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 the 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 the 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.
The Fund has elected to be governed by Rule 18f-1 under the 1940 Act, which
obligates the 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, the 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 determined by the board. In such
circumstances, the securities distributed would be valued as set forth in the
Prospectus. Should the Fund distribute securities, a shareholder may incur
brokerage fees or other transaction costs in converting the securities to cash.
Rejection of Business
The Fund reserves the right to reject any business, in its sole discretion.
CAPITAL LOSS CARRYOVER
For federal income tax purposes, High Yield Fund had total capital loss
carryovers of $66,068 at the end of the most recent fiscal year, that if not
offset by subsequent capital gains will expire as follows:
2007 2008
---- ----
$12,980 $53,088
It is unlikely that the board will authorize a distribution of any net realized
capital gains until the available capital loss carryover has been offset or has
expired except as required by Internal Revenue Service rules.
TAXES
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.
Net investment income 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 the Fund's dividend that is
attributable to dividends the Fund received from domestic (U.S.) securities. For
the most recent fiscal year, the following percentage of the Fund's net
investment income dividends qualified for the corporate deduction:
Government Income 0%
High Yield 2.22%
Quality Income 0.84%
<PAGE>
The 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 50% or more
of the average value of its assets consists of assets that produce or could
produce passive income.
Income earned by the Fund may have had foreign taxes imposed and withheld on it
in foreign countries. Tax conventions between certain countries and the U.S. may
reduce or eliminate such taxes. If more than 50% of the Fund's total assets at
the close of its fiscal year consists of securities of foreign corporations, the
Fund will be eligible to file an election with the Internal Revenue Service
under which shareholders of the Fund would be required to include their pro rata
portions of foreign taxes withheld by foreign countries as gross income in their
federal income tax returns. These pro rata portions of foreign taxes withheld
may be taken as a credit or deduction in computing federal income taxes. If the
election is filed, the Fund will report to its shareholders the per share amount
of such foreign taxes withheld and the amount of foreign tax credit or deduction
available for federal income tax purposes.
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. Short-term capital gains
earned by the Fund are paid to shareholders as part of their ordinary income
dividend and are taxable. A special 28% rate on capital gains applies to sales
of precious metals owned directly by the Fund. A special 25% rate on capital
gains may apply to investments in REITs.
Under the Internal Revenue Code of 1986 (the Code), gains or losses attributable
to fluctuations in exchange rates that occur between the time the Fund accrues
interest or other receivables, or accrues expenses or other liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables or pays such liabilities generally are treated as ordinary income or
ordinary loss. Similarly, gains or losses on disposition of debt securities
denominated in a foreign currency attributable to fluctuations in the value of
the foreign currency between the date of acquisition of the security and the
date of disposition also are treated as ordinary gains or losses. These gains or
losses, referred to under the Code as "section 988" gains or losses, may
increase or decrease the amount of the Fund's investment company taxable income
to be distributed to its shareholders as ordinary income. If the Fund incurs a
loss, a portion of the dividends distributed to shareholders may be considered a
return of capital.
Under federal tax law, by the end of a calendar year the 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. The 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. The Fund intends to comply with federal tax law and
avoid any excise tax.
For purposes of the excise tax distributions, "section 988" ordinary gains and
losses are distributable based on an Oct. 31 year end. This is an exception to
the general rule that ordinary income is paid based on a calendar year end.
If a mutual fund is the holder of record of any share of stock on the record
date for any dividend payable with respect to such stock, such dividend shall be
included in gross income by the Fund as of the later of (1) the date such share
became ex-dividend or (2) the date the Fund acquired such share. Because the
dividends on some foreign equity investments may be received some time after the
stock goes ex-dividend, and in certain rare cases may never be received by the
Fund, this rule may cause the Fund to take into income dividend income that it
has not received and pay such income to its shareholders. To the extent that the
dividend is never received, the Fund will take a loss at the time that a
determination is made that the dividend will not be received.
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.
<PAGE>
AGREEMENTS
Investment Management Services Agreement
AEFC, a wholly-owned subsidiary of American Express Company, is the investment
manager for the Fund. Under the Investment Management Services Agreement, the
Advisor, subject to the policies set by the board, provides investment
management services.
For its services, the Advisor is paid a fee based on the following schedule. The
Fund pays its proportionate share of the fee.
<TABLE>
<CAPTION>
Government Income and
High Yield Quality Income
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 the last day of the most recent fiscal year, the daily rates applied to the
Fund's net assets on an annual basis were equal to 0.489% for Government Income,
0.554% for High Yield and 0.511% for Quality Income. 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. AEFC has agreed to certain
fee waivers and expense reimbursements as discussed in the Fund's prospectus.
The management fee is paid monthly. For fiscal year 1999, the total amount paid
was $14,751,038 for Government Income, $21,505,599 for High Yield and $8,295,239
for Quality Income; for fiscal year 1998, the total amount paid was $11,996,865
for Government Income, $20,715,160 for High Yield and $8,256,904 for Quality
Income; for fiscal year 1997, the total amount paid was $9,593,937 for
Government Income, $15,766,458 for High Yield and $8,563,732 for Quality Income.
The amounts are allocated among the Funds.
Under the Agreement, each Fund 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 securities; and expenses properly payable by each Fund, approved by
the board. For fiscal year 1999, Government Income paid nonadvisory expenses of
$458,403, High Yield paid nonadvisory expenses of $46,136 and Quality Income
paid nonadvisory expenses of $123,636; for fiscal year 1998, Government Income
paid nonadvisory expenses of $296,069, High Yield paid nonadvisory expenses of
$205,439 and Quality Income paid nonadvisory expenses of $183,238; for fiscal
year 1997, Government Income paid nonadvisory expenses of $218,943, High Yield
paid nonadvisory expenses of $127,018 and Quality Income paid nonadvisory
expenses of $200,428. All fees are net of earnings credits.
<PAGE>
Administrative Services Agreement
The 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 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 the last day of the most recent fiscal year, the daily rates applied to the
Funds' net assets on an annual basis were:
<TABLE>
<CAPTION>
Fees Paid During Fees Paid During
- --------------------------- ------------------------ ------------------------- ------------------------
Fund Daily Rates Fiscal Year 1999 Fiscal Year 1998
<S> <C> <C> <C>
Government Income 0.05% $395 $294
- ----------------------------
High Yield 0.05% $871 $527
- ----------------------------
Quality Income 0.05% $368 $308
</TABLE>
Under the agreement, each Fund also pays taxes; audit and certain legal fees;
registration fees for shares; office expenses; consultant's fees; compensation
of board members, officers and employees; corporate filing fees; organizational
expenses; and expenses properly payable by each Fund approved by the board.
Transfer Agency Agreement
The 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 Fund's shares. The fee is
determined by multiplying the number of shareholder accounts at the end of the
day by a rate of $25 per year and dividing by the number of days in the year.
The fees paid to AECSC may be changed by the board without shareholder approval.
Distribution Agreement/Plan and Agreement of Distribution
AESC (Distributor) is the Fund's principal underwriter. The Fund's shares are
offered on a continuous basis.
To help AESC defray the costs of distribution and servicing, the Fund and AESC
have entered into a Plan and Agreement of Distribution (Plan) pursuant to Rule
12b-1 under the 1940 Act. These costs cover almost all aspects of distributing
the Fund's shares (such as advertising). A substantial portion of the costs are
not specifically identified to any one fund. Under the Plan, AESC is paid a fee
at an annual rate of up to 0.25% of the Fund's average daily net assets.
<PAGE>
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 by vote of a
majority of board members who are not interested persons of the Fund and have no
direct or indirect financial interest in the operation of the Plan or in any
agreement related to the Plan, by vote of a majority of the outstanding voting
securities of the Fund, or by AESC. 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. 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 Fund 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 an related agreement. For the most recent fiscal year,
the fees paid were $1,976 for Government Income Fund, $4,353 for High Yield
Fund, and $1,839 for Quality Income Fund. The fee is not allocated to any one
service (such as advertising, payments to underwriters, or other uses). However,
a significant portion of the fee is generally used for sales and promotional
expenses.
Custodian Agreement
The Fund'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 Fund's securities
and cash for High Yield Fund and Quality Income Fund are held by U.S. National
Association, 180 E. Fifth St., St. Paul, MN 55101-1631. 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 Fund pays the custodian a
maintenance charge and a charge per transaction in addition to reimbursing the
custodian's out-of-pocket expenses.
ORGANIZATIONAL INFORMATION
The Fund is an open-end management investment company. The Fund headquarters are
at P.O. Box 59196, Minneapolis, MN 55459-0196.
SHARES
The shares of the Fund represent an interest in that fund's assets only (and
profits or losses), and, in the event of liquidation, each share of the Fund
would have the same rights to dividends and assets as every other share of that
Fund.
VOTING RIGHTS
As a shareholder in the Fund, you have voting rights over the Fund's management
and fundamental policies. You are entitled to one vote for each share you own.
Each class, if applicable, has exclusive voting rights with respect to matters
for which separate class voting is appropriate under applicable law. All shares
have cumulative voting rights with respect to the election of board members.
This means that you have as many votes as the number of shares you own,
including fractional shares, multiplied by the number of members to be elected.
<PAGE>
Dividend Rights
Dividends paid by the Fund, if any, with respect to each class of shares, if
applicable, will be calculated in the same manner, at the same time, on the same
day, and will be in the same amount, except for differences resulting from
differences in fee structures.
<TABLE>
<CAPTION>
Fund History Table for All Publicly Offered Funds in the Strategist Fund Group
Date of Form of Inception State of Fiscal Diversified
Organization Organization Date Organization Year End
- --------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C>
Strategist Growth Fund, Inc. 9/1/95 Corporation MN
Strategist Growth Fund 5/13/96 7/31 Yes
Strategist Growth Trends Fund 5/13/96 7/31 Yes
Strategist Special Growth Fund 8/19/96 7/31 Yes
- --------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Strategist Growth & Income Fund, Inc. 9/1/95 Corporation MN
Strategist Balanced Fund 5/13/96 9/30 Yes
Strategist Equity Fund 5/13/96 9/30 Yes
Strategist Equity Income Fund 5/13/96 9/30 Yes
Strategist Total Return Fund 5/13/96 9/30 Yes
- --------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Strategist Income Fund, Inc. 5/25/95 Corporation MN
Strategist Government Income Fund 6/10/96 5/31 Yes
Strategist High Yield Fund 6/10/96 5/31 Yes
Strategist Quality Income Fund 6/10/96 5/31 Yes
- --------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Strategist Tax-Free Income Fund, Inc. 9/1/95 Corporation MN
Strategist Tax-Free High Yield Fund 5/13/96 11/30 Yes
- --------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Strategist World Fund, Inc. 9/1/95 Corporation MN
Strategist Emerging Markets Fund 11/13/96 10/31 Yes
Strategist World Growth Fund 5/13/96 10/31 Yes
Strategist World Income Fund 5/13/96 10/31 No
- --------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
BOARD MEMBERS AND OFFICERS
Directors of Strategist Fund Group
Shareholders elect a board that oversees the Fund's operations. The board
appoints officers who are responsible for day-to-day business decisions based on
policies set by the board.
The following is a list of the Fund's board members who are board members of all
15 funds in the Strategist Fund Group.
Rodney P. Burwell
Born in 1939
Xerxes Corporation
7901 Xerxes Ave. S.
Minneapolis, MN
Chairman, Xerxes Corporation (fiberglass storage tanks). Director, Fairview
Corporation.
Jean B. Keffeler
Born in 1945
3424 Zenith Avenue South
Minneapolis, MN
Independent management consultant. Director, National Computer Systems.
<PAGE>
Thomas R. McBurney
Born in 1938
McBurney Management Advisors
1700 Foshay Tower
821 Marquette Ave.
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. Chairman of the board, IDS
Life Insurance Company.
John R. Thomas*
Born in 1937
2900 Ids Tower
Minneapolis, MN
Vice President of all funds in the Strategist Fund Group. President and board
member of the American Express funds. Senior vice president of the Advisor.
*Interested person of the Company by reason of being an officer, board member,
employee and/or shareholder of the Advisor or American Express.
In addition to Mr. Mitchell, who is president, and Mr. Thomas, who is vice
president, the Funds' other officers are:
John M. Knight
Born in 1952
IDS Tower 10
Minneapolis, MN
Treasurer of all funds in the Strategist Fund Group. Vice president - investment
accounting of the Advisor.
Eileen J. Newhouse
Born in 1955
IDS Tower 10
Minneapolis, MN
Secretary of all funds in the Strategist Fund Group. Counsel of the Advisor.
<PAGE>
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 48 American Express funds.
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.
Arne H. Carlson+'*
Born in 1934
901 S. Marquette Ave.
Minneapolis, MN
Chairman and chief executive officer of the Trust. Chairman, Board Services
Corporation (provides administrative services to boards). Former Governor of
Minnesota.
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
2050 One Financial Plaza
Minneapolis, MN
RII Weyerhaeuser World Timberfund, L.P. (develops timber resources) - management
committee. Retired vice chairman of the board, Cargill, Incorporated (commodity
merchants and processors). Former Chairman, Board Services Corporation.
Alan K. Simpson+
Born in 1931
1201 Sunshine Ave.
Cody, WY
Director of The Institute of Politics, Harvard University. Former three-term
United States Senator for Wyoming. Former Assistant Republican Leader, U.S.
Senate. Director, PacifiCorp (electric power) and Biogen (bio-pharmaceuticals).
John R. Thomas+'**
Born in 1937
2900 IDS Tower
Minneapolis, MN
Senior vice president of the Advisor.
C. Angus Wurtele+'
Born in 1934
Valspar Corporation
Suite 1700
Foshay Tower
Minneapolis, MN
Retired chairman of the board and retired chief executive officer, The Valspar
Corporation (paints). Director, Valspar, Bemis Corporation (packaging) and
General Mills, Inc. (consumer foods).
+ Member of executive committee.
' Member of investment review committee.
* Interested person by reason of being an officer and employee of the Trust.
**Interested person by reason of being an officer, board member, employee and/or
shareholder of the Advisor or American Express.
<PAGE>
The board has appointed officers who are responsible for day-to-day business
decisions based on policies it has established. In addition to Mr. Carlson, 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.
Officers who also are officers and 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.
John M. Knight
Born in 1952
IDS Tower 10
Minneapolis, MN
Vice president - investment accounting of the Advisor. Treasurer for the Trust.
COMPENSATION FOR BOARD MEMBERS
Compensation for Fund Board Members
During the most recent fiscal year, the independent members of the Fund board,
for attending up to 4 meetings, received the following compensation:
<TABLE>
<CAPTION>
Compensation Table
for Government Income Fund
Aggregate Total cash compensation from the
Board member ---------------------------------- Strategist Fund Group
compensation from the Fund
<S> <C> <C>
Rodney P. Burwell $133 $12,000
- -------------------------------------
Jean B. Keffeler 133 12,000
- -------------------------------------
Thomas R. McBurney 133 12,000
<PAGE>
Compensation Table
for High Yield Fund
Aggregate Total cash compensation from the
Board member ---------------------------------- Strategist Fund Group
Compensation from the Fund
Rodney P. Burwell $133 $12,000
- -------------------------------------
Jean B. Keffeler 133 12,000
- -------------------------------------
Thomas R. McBurney 133 12,000
Compensation Table
for Quality Income Fund
Aggregate Total cash compensation from the
Board member ---------------------------------- Strategist Fund Group
Compensation from the Fund
Rodney P. Burwell $133 $12,000
- -------------------------------------
Jean B. Keffeler 133 12,000
- -------------------------------------
Thomas R. McBurney 133 12,000
As of 30 days prior to the date of this SAI, the Fund's board members and
officers as a group owned less than 1% of the outstanding shares of the Fund.
Compensation for Portfolio Board Members
During the most recent fiscal year, 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:
Compensation Table
for Government Income Portfolio
Total cash compensation from the
---------------------------------- Preferred Master Trust Group and
Board member Aggregate IDS MUTUAL FUND GROUP
compensation from the Portfolio
H. Brewster Atwater, Jr. $1,992 $113,400
- -------------------------------------
Lynne V. Cheney 1,724 96,900
- -------------------------------------
Heinz F. Hutter 1,767 99,900
- -------------------------------------
Anne P. Jones 1,983 112,400
- -------------------------------------
William R. Pearce 317 17,400
- -------------------------------------
Alan K. Simpson 1,724 96,900
- -------------------------------------
C. Angus Wurtele 2,058 117,400
Compensation Table
for High Yield Portfolio
Total cash compensation from the
---------------------------------- Preferred Master Trust Group and
Board member Aggregate IDS MUTUAL FUND GROUP
compensation from the Portfolio
H. Brewster Atwater, Jr. $2,408 $113,400
- -------------------------------------
Lynne V. Cheney 2,164 96,900
- -------------------------------------
Heinz F. Hutter 2,183 99,900
- -------------------------------------
Anne P. Jones 2,428 112,400
- -------------------------------------
William R. Pearce 367 17,400
- -------------------------------------
Alan K. Simpson 2,164 96,900
- -------------------------------------
C. Angus Wurtele 2,475 117,400
<PAGE>
Compensation Table
for Quality Income Portfolio
Total cash compensation from the
---------------------------------- Preferred Master Trust Group and
Board member Aggregate IDS MUTUAL FUND GROUP
Compensation from the Portfolio
H. Brewster Atwater, Jr. $1,650 $113,400
- -------------------------------------
Lynne V. Cheney 1,361 96,900
- -------------------------------------
Heinz F. Hutter 1,425 99,900
- -------------------------------------
Anne P. Jones 1,617 112,400
- -------------------------------------
William R. Pearce 250 17,400
- -------------------------------------
Alan K. Simpson 1,361 96,900
- -------------------------------------
C. Angus Wurtele 1,717 117,400
</TABLE>
PRINCIPAL HOLDERS OF SECURITIES
As of 30 days prior to the date of this SAI, American Latvian Assocation held
29.01% of Strategist High Yield Fund shares; Latvijas Brivibas Fonds LTD held
23.0% of Strategist High Yield Fund shares.
INDEPENDENT AUDITORS
The financial statements contained in the Annual Report were audited by
independent auditors, KPMG 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 Fund.
<PAGE>
APPENDIX
DESCRIPTION OF RATINGS
Standard & Poor's Debt Ratings
A Standard & Poor's corporate or municipal debt rating is a current assessment
of the creditworthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration obligors such as guarantors,
insurers, or lessees.
The debt rating is not a recommendation to purchase, sell, or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer or obtained
by S&P from other sources it considers reliable. S&P does not perform an audit
in connection with any rating and may, on occasion, rely on unaudited financial
information. The ratings may be changed, suspended, or withdrawn as a result of
changes in, or unavailability of such information or based on other
circumstances.
The ratings are based, in varying degrees, on the following considerations:
o Likelihood of default capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation.
o Nature of and provisions of the obligation.
o Protection afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization, or other arrangement
under the laws of bankruptcy and other laws affecting creditors'
rights.
Investment Grade
Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity to
pay interest and repay principal is extremely strong.
Debt rated AA has a very strong capacity to pay interest and repay principal and
differs from the highest rated issues only in a small degree.
Debt rated A has a strong capacity to pay interest and repay principal, although
it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
Debt rated BBB is regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than in higher-rated categories.
<PAGE>
Speculative grade
Debt rated BB, B, CCC, CC, and C is regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
Debt rated BB has less near-term vulnerability to default than other speculative
issues. However, it faces major ongoing uncertainies or exposure to adverse
business, financial, or economic conditions that could lead to inadequate
capacity to meet timely interest and principal payments. The BB rating category
also is used for debt subordinated to senior debt that is assigned an actual or
implied BBB- rating.
Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category also is used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
Debt rated CCC has a currently identifiable vulnerability to default and is
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category also is
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
Debt rated CC typically is applied to debt subordinated to senior debt that is
assigned an actual or implied CCC rating.
Debt rated C typically is applied to debt subordinated to senior debt that is
assigned an actual or implied CCC rating. The C rating may be used to cover a
situation where a bankruptcy petition has been filed, but debt service payments
are continued.
The rating CI is reserved for income bonds on which no interest is being paid.
Debt rated D is in payment default. The D rating category is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Moody's Long-Term Debt Ratings
Aaa - Bonds that are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa - Bonds that are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present that make the
long-term risk appear somewhat larger than in Aaa securities.
A - Bonds that are rated A possess many favorable investment attributes and are
to be considered as upper-medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present that
suggest a susceptibility to impairment some time in the future.
<PAGE>
Baa - Bonds that are rated Baa are considered as medium-grade obligations (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds that are rated Ba are judged to have speculative elements--their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds that are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or maintenance of other
terms of the contract over any long period of time may be small.
Caa - Bonds that are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds that are rated Ca represent obligations that are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C - Bonds that are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
SHORT-TERM RATINGS
Standard & Poor's Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market.
Ratings are graded into several categories, ranging from A-1 for the highest
quality obligations to D for the lowest. These categories are as follows:
A-1 This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to
possess extremely strong safety characteristics are denoted
with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as
high as for issues designated A-1.
A-3 Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the
adverse effects of changes in circumstances than obligations
carrying the higher designations.
B Issues are regarded as having only speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with
doubtful capacity for payment.
D Debt rated D is in payment default. The D rating category is
used when interest payments or principal payments are not made
on the date due, even if the applicable grace period has not
expired, unless S&P believes that such payments will be made
during such grace period.
<PAGE>
Standard & Poor's Note Ratings
An S&P note rating reflects the liquidity factors and market-access risks unique
to notes. Notes maturing in three years or less will likely receive a note
rating. Notes maturing beyond three years will most likely receive a long-term
debt rating.
Note rating symbols and definitions are as follows:
SP-1 Strong capacity to pay principal and interest. Issues
determined to possess very strong characteristics are given a
plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over
the term of the notes.
SP-3 Speculative capacity to pay principal and interest.
Moody's Short-Term Ratings
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
Issuers rated Prime-l (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-l
repayment ability will often be evidenced by many of the following
characteristics: (i) leading market positions in well-established
industries, (ii) high rates of return on funds employed, (iii)
conservative capitalization structure with moderate reliance on debt
and ample asset protection, (iv) broad margins in earnings coverage of
fixed financial charges and high internal cash generation, and (v) well
established access to a range of financial markets and assured sources
of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above, but
to a lesser degree. Earnings trends and coverage ratios, while sound,
may be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require
relatively high financial leverage.
Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
<PAGE>
Moody's & S&P's
Short-Term Muni Bonds and Notes
Short-term municipal bonds and notes are rated by Moody's and by S&P. The
ratings reflect the liquidity concerns and market access risks unique to notes.
Moody's MIG 1/VMIG 1 indicates the best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
Moody's MIG 2/VMIG 2 indicates high quality. Margins of protection are ample
although not so large as in the preceding group.
Moody's MIG 3/VMIG 3 indicates favorable quality. All security elements are
accounted for but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
Moody' s MIG 4/VMIG 4 indicates adequate quality. Protection commonly regarded
as required of an investment security is present and although not distinctly or
predominantly speculative, there is specific risk.
Standard & Poor's rating SP-1 indicates very strong or strong capacity to pay
principal and interest. Those issues determined to possess overwhelming safety
characteristics will be given a plus (+) designation.
Standard & Poor's rating SP-2 indicates satisfactory capacity to pay principal
and interest.
Standard & Poor's rating SP-3 indicates speculative capacity to pay principal
and interest.
<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,
1999, and the related statements of operations for the year then ended and the
statements of changes in net assets for each of the years in the two-year period
ended May 31, 1999 and the financial highlights for the two-year period ended
May 31, 1999, 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 as of May
31, 1999, 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 LLP
KPMG LLP
Minneapolis, Minnesota
July 2, 1999
<PAGE>
<TABLE>
<CAPTION>
Financial Statements
Statements of assets and liabilities
Strategist Income Fund, Inc.
May 31, 1999 Strategist Strategist Strategist
Government High Yield Quality
Income Fund Fund Income Fund
Assets
<S> <C> <C> <C>
Investments in corresponding Portfolio (Note 1) $895,221 $1,672,738 $763,835
Other receivables 470 38 274
Expense receivable from AEFC 2,872 6,852 --
Organizational costs (Note 1) 1,063 -- --
----- ------- -----
Total assets 899,626 1,679,628 764,109
------- --------- -------
Liabilities
Dividends payable to shareholders 135 470 119
Accrued distribution fee 6 12 5
Accrued transfer agency fee 2 3 1
Accrued administrative services fee 1 2 1
Other accrued expenses 363 5,209 7,048
--- ----- -----
Total liabilities 507 5,696 7,174
--- ----- -----
Net assets applicable to outstanding capital stock $899,119 $1,673,932 $756,935
======== ========== ========
Represented by
Capital stock-- $.01 par value (Note 1) $ 1,866 $ 4,228 $ 830
Additional paid-in capital 913,848 1,887,770 748,195
Undistributed net investment income 1,080 911 650
Accumulated net realized gain (loss) 73 (66,331) 6,615
Unrealized appreciation (depreciation) on investments (17,748) (152,646) 645
------- -------- ---
Total -- representing net assets applicable to
outstanding capital stock $899,119 $1,673,932 $756,935
======== ========== ========
Shares outstanding 186,585 422,813 82,961
------- ------- ------
Net asset value per share of outstanding capital stock $ 4.82 $ 3.96 $ 9.12
-------- ---------- --------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statements of operations
Strategist Income Fund, Inc.
Year ended May 31, 1999 Strategist Strategist Strategist
Government High Yield Quality
Income Fund Fund Income Fund
Investment income
Income:
<S> <C> <C> <C>
Dividends $ -- $ 18,034 $ 363
Interest 52,663 172,044 49,487
------ ------- ------
Total income 52,663 190,078 49,850
------ ------- ------
Expenses (Note 2):
Expenses allocated from corresponding Portfolio 4,304 9,792 3,845
Distribution fee 1,976 4,353 1,839
Transfer agency fee 590 1,164 358
Administrative services fees and expenses 395 871 368
Compensation of board members 352 746 548
Registration fees 81 5,622 8,397
Audit fees 3,500 3,500 3,500
Printing and postage -- 15 6
Other -- 6,071 7,565
----- ----- -----
Total expenses 11,198 32,134 26,426
Less expenses reimbursed by AEFC (2,558) (11,465) (18,375)
------ ------- -------
Total net expenses 8,640 20,669 8,051
----- ------ -----
Investment income (loss)-- net 44,023 169,409 41,799
------ ------- ------
Realized and unrealized gain (loss) -- net
Net realized gain (loss) on:
Security transactions 14,638 (66,302) 13,132
Financial futures contracts (18,000) -- 385
Foreign currency transactions -- (104) --
Options contracts written 25,609 -- 716
------ ---- ---
Net realized gain (loss) on investments 22,247 (66,406) 14,233
Net change in unrealized appreciation
(depreciation) on investments (35,378) (185,856) (31,558)
------- -------- -------
Net gain (loss) on investments (13,131) (252,262) (17,325)
------- -------- -------
Net increase (decrease) in net assets
resulting from operations $30,892 $(82,853) $24,474
======= ======== =======
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statements of changes in net assets
Strategist Income Fund, Inc.
Strategist Government
Income Fund
Year ended May 31, 1999 1998
Operations and distributions
<S> <C> <C>
Investment income (loss)-- net $ 44,023 $ 37,887
Net realized gain (loss) on investments 22,247 (441)
Net change in unrealized appreciation
(depreciation) on investments (35,378) 13,121
------- ------
Net increase (decrease) in net assets resulting from operations 30,892 50,567
------ ------
Distributions to shareholders from:
Net investment income (44,231) (39,031)
Net realized gain (14,001) (6,249)
------- ------
Total distributions (58,232) (45,280)
------- -------
Capital share transactions (Note 3)
Proceeds from sales 273,402 64,649
Reinvestment of distributions at net asset value 58,028 45,256
Payments for redemptions (62,923) (5,096)
------- ------
Increase (decrease) in net assets from capital share transactions 268,507 104,809
------- -------
Total increase (decrease) in net assets 241,167 110,096
Net assets at beginning of year 657,952 547,856
------- -------
Net assets at end of year $899,119 $657,952
======== ========
Undistributed net investment income $ 1,080 $ 602
-------- --------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statements of changes in net assets
Strategist Income Fund, Inc.
Strategist
High Yield Fund
Year ended May 31, 1999 1998
Operations and distributions
<S> <C> <C>
Investment income (loss)-- net $ 169,409 $ 97,876
Net realized gain (loss) on investments (66,406) 28,275
Net change in unrealized appreciation
(depreciation) on investments (185,856) 9,767
-------- -----
Net increase (decrease) in net assets resulting from operations (82,853) 135,918
------- -------
Distributions to shareholders from:
Net investment income (176,522) (91,467)
Net realized gain (18,715) (1,142)
------- ------
Total distributions (195,237) (92,609)
-------- -------
Capital share transactions (Note 3)
Proceeds from sales 1,140,763 329,677
Reinvestment of distributions at net asset value 140,321 90,463
Payments for redemptions (466,187) (286,196)
-------- --------
Increase (decrease) in net assets from capital share transactions 814,897 133,944
------- -------
Total increase (decrease) in net assets 536,807 177,253
Net assets at beginning of year 1,137,125 959,872
--------- -------
Net assets at end of year $1,673,932 $1,137,125
========== ==========
Undistributed net investment income $ 911 $ 8,088
---------- ----------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statements of changes in net assets
Strategist Income Fund, Inc.
Strategist Quality
Income Fund
Year ended May 31, 1999 1998
Operations and distributions
<S> <C> <C>
Investment income (loss)-- net $ 41,799 $ 38,121
Net realized gain (loss) on investments 14,233 (1,212)
Net change in unrealized appreciation
(depreciation) on investments (31,558) 22,901
------- ------
Net increase (decrease) in net assets resulting from operations 24,474 59,810
------ ------
Distributions to shareholders from:
Net investment income (41,686) (39,821)
Net realized gain (5,030) (3,805)
------ ------
Total distributions (46,716) (43,626)
------- -------
Capital share transactions (Note 3)
Proceeds from sales 116,122 77,358
Reinvested distributions at net asset value 46,716 43,595
Payments for redemptions (56,369) (39,229)
------- -------
Increase (decrease) in net assets from capital share transactions 106,469 81,724
------- ------
Total increase (decrease) in net assets 84,227 97,908
Net assets at beginning of year 672,708 574,800
------- -------
Net assets at end of year $756,935 $672,708
======== ========
Undistributed net investment income $ 650 $ 537
-------- --------
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.
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 the value that is equal to the
Fund's proportionate ownership interest in the Portfolios' net assets. As of May
31, 1999, the percentages of the corresponding Portfolio owned by Government
Income Fund, High Yield Fund and Quality Income Fund were 0.03%, 0.04% and
0.05%, respectively. Valuation of securities held by the Portfolios is discussed
in Note 1 of the Portfolios' "Notes to financial statements" (included elsewhere
in this report).
Use of estimates
Preparing financial statements that conform to generally accepted accounting
principles requires management to make estimates (e.g., on assets and
liabilities) that could differ from actual results.
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 American Express Financial Corporation (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
The Fund's policy is to comply with all sections of the Internal Revenue Code
that apply to regulated investment companies and to distribute all of its
taxable income to the shareholders. No provision for income or excise taxes is
thus required.
Net investment income (loss) and net realized gains (losses) may differ for
financial statement and tax purposes primarily because of deferred 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, as a result of 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 by the following:
Government High Quality
Income Yield Income
Fund Fund Fund
Undistributed net investment income $686 $(64) $--
Accumulated net realized gain (loss) (165) 64 $--
---- --- ---
Additional paid-in capital reductions (increase) $521 $ -- $--
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
As of May 31, 1999, AEFC owned 126,794 shares of Government Income Fund, 153,576
shares of High Yield Fund and 67,699 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 has an agreement with AEFC to provide administrative services. Under
its Administrative Services Agreement, each Fund pays AEFC a fee 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 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, 1999. 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, 1999,
AEFC further voluntarily agreed to waive certain fees and expenses to 1.09% for
Government Income Fund and 1.19% for High Yield Fund and 1.09% for Quality
Income Fund.
3. CAPITAL SHARE TRANSACTIONS
Transactions in shares of capital stock for the years indicated are as follows:
Year ended May 31, 1999
Government High Quality
Income Yield Income
Fund Fund Fund
Sold 55,436 254,861 12,360
Issued for reinvested distributions 11,755 34,590 4,993
Redeemed (12,803) (113,505) (5,994)
------- -------- ------
Net increase (decrease) 54,388 175,946 11,359
Year ended May 31, 1998
Government High Quality
Income Yield Income
Fund Fund Fund
Sold 12,987 72,018 8,274
Issued for reinvested distributions 9,111 19,661 4,670
Redeemed (1,024) (62,293) (4,179)
------ ------- ------
Net increase (decrease) 21,074 29,386 8,765
4. CAPITAL LOSS CARRYOVER
For federal income tax purposes, High Yield Fund had a capital loss carryover as
of May 31, 1999 of $66,068 that if not offset by subsequent capital gains, will
expire in 2008. It is unlikely the board will authorize a distribution of any
net realized capital gains for a fund until its available capital loss carryover
has been offset or expires.
<PAGE>
<TABLE>
<CAPTION>
5. FINANCIAL HIGHLIGHTS
The tables below show certain important financial information for evaluating
each Fund's results.
Government Income Fund
Fiscal period ended May 31,
Per share income and capital changesa
1999 1998 1997b
<S> <C> <C> <C>
Net asset value, beginning of period $4.98 $4.93 $4.91
Income from investment operations:
Net investment income (loss) .28 .32 .30
Net gains (losses) (both realized and unrealized) (.07) .11 .06
Total from investment operations .21 .43 .36
Less distributions:
Dividends from net investment income (.28) (.33) (.30)
Distributions from realized gains (.09) (.05) (.04)
Total distributions (.37) (.38) (.34)
Net asset value, end of period $4.82 $4.98 $4.93
Ratios/supplemental data
Net assets, end of period (in thousands) $899 $658 $548
Ratio of expenses to average daily net assetsc 1.09% 1.09% 1.10%d
Ratio of net investment income (loss)
to average daily net assets 5.57% 6.44% 6.48%d
Portfolio turnover rate
(excluding short-term securities) 278% 159% 146%
Total return 4.19% 9.04% 7.59%
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 1.41%, 1.57% and 25.68% for the periods ended 1999, 1998 and 1997,
respectively.
d Adjusted to an annual basis.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STRATEGIST INCOME FUND, INC.
High Yield Fund
Fiscal period ended May 31,
Per share income and capital changesa
1999 1998 1997b
<S> <C> <C> <C>
Net asset value, beginning of period $4.61 $4.41 $4.31
Income from investment operations:
Net investment income (loss) .39 .43 .38
Net gains (losses) (both realized and unrealized) (.58) .17 .09
Total from investment operations (.19) .60 .47
Less distributions:
Dividends from net investment income (.42) (.40) (.37)
Distributions from realized gains (.04) -- --
Total distributions (.46) (.40) (.37)
Net asset value, end of period $3.96 $4.61 $4.41
Ratios/supplemental data
Net assets, end of period (in thousands) $1,674 $1,137 $960
Ratio of expenses to average daily net assetsc 1.19% .72% 1.19%d
Ratio of net investment income (loss)
to average daily net assets 9.73% 9.28% 8.90%d
Portfolio turnover rate
(excluding short-term securities) 47% 81% 92%
Total return (3.94%) 14.02% 11.40%
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 1.85%, 2.15% and 11.48% for the periods ended 1999, 1998 and 1997,
respectively.
d Adjusted to an annual basis.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Quality Income Fund
Fiscal period ended May 31,
Per share income and capital changesa
1999 1998 1997b
<S> <C> <C> <C>
Net asset value, beginning of period $9.40 $9.15 $8.95
Income from investment operations:
Net investment income (loss) .53 .58 .55
Net gains (losses) (both realized and unrealized) (.21) .34 .18
Total from investment operations .32 .92 .73
Less distributions:
Dividends from net investment income (.54) (.61) (.53)
Distributions from realized gains (.06) (.06) --
Total distributions (.60) (.67) (.53)
Net asset value, end of period $9.12 $9.40 $9.15
Ratios/supplemental data
Net assets, end of period (in thousands) $757 $673 $575
Ratio of expenses to average daily net assetsc 1.09% .97% 1.10%d
Ratio of net investment income (loss)
to average daily net assets 5.68% 6.22% 6.33%d
Portfolio turnover rate
(excluding short-term securities) 30% 20% 31%
Total return 3.38% 10.30% 8.31%
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 3.58%, 1.48% and 13.34% for the periods ended 1999, 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, 1999, and the related statement of
operations for the year then ended and the statements of changes in net assets
for each of the years in the two-year period ended May 31, 1999. 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 as
of May 31, 1999, 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 LLP
KPMG LLP
Minneapolis, Minnesota
July 2, 1999
<PAGE>
<TABLE>
<CAPTION>
Financial Statements
Statement of assets and liabilities
Government Income Portfolio
May 31, 1999
Assets
Investments in securities, at value (Note 1)
<S> <C>
(identified cost $5,095,569,960) $5,027,646,170
Accrued interest receivable 23,441,624
Receivable for investment securities sold 108,023,551
U.S. government securities held as collateral (Note 5) 186,274,424
-----------
Total assets 5,345,385,769
-------------
Liabilities
Disbursements in excess of cash on demand deposit 1,339,205
Payable for investment securities purchased 2,045,438
Payable for securities purchased on a when-issued basis (Note 1) 1,711,037,270
Payable upon return of securities loaned (Note 5) 200,611,924
Accrued investment management services fee 45,897
Other accrued expenses 45,778
Options contracts written, at value (premium received $18,857,180) (Note 6) 15,811,823
----------
Total liabilities 1,930,937,335
-------------
Net assets $3,414,448,434
==============
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statement of operations
Government Income Portfolio
Year ended May 31, 1999
Investment income
Income:
<S> <C>
Interest $185,904,454
------------
Expenses (Note 2):
Investment management services fee 14,751,038
Compensation of board members 14,863
Custodian fees 326,745
Audit fees 31,875
Other 103,176
-------
Total expenses 15,227,697
Earnings credits on cash balances (Note 2) (19,631)
-------
Total net expenses 15,208,066
----------
Investment income (loss) -- net 170,696,388
-----------
Realized and unrealized gain (loss) -- net
Net realized gain (loss) on:
Security transactions (Note 3) 48,862,091
Financial futures contracts (62,123,351)
Options contracts written (Note 6) 90,784,558
----------
Net realized gain (loss) on investments 77,523,298
Net change in unrealized appreciation (depreciation) on investments (129,475,710)
------------
Net gain (loss) on investments (51,952,412)
-----------
Net increase (decrease) in net assets resulting from operations $118,743,976
============
See accompanying notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
<PAGE>
Statements of changes in net assets
Government Income Portfolio
Year ended May 31, 1999 1998
Operations
<S> <C> <C>
Investment income (loss) -- net $ 170,696,388 $ 148,446,162
Net realized gain (loss) on investments 77,523,298 (1,501,667)
Net change in unrealized appreciation (depreciation) on investments (129,475,710) 47,320,048
------------ ----------
Net increase (decrease) in net assets resulting from operations 118,743,976 194,264,543
Net contributions (withdrawals) from partners 726,433,297 171,023,648
----------- -----------
Total increase (decrease) in net assets 845,177,273 365,288,191
Net assets at beginning of year 2,569,271,161 2,203,982,970
------------- -------------
Net assets at end of year $3,414,448,434 $2,569,271,161
============== ==============
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.
The Portfolio's significant accounting policies are summarized below:
Use of estimates
Preparing financial statements that conform to generally accepted accounting
principles requires management to make estimates (e.g., on assets and
liabilities) that could differ from actual results.
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 that reflects fair value
as quoted by dealers 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
To produce incremental earnings, protect gains and facilitate buying and selling
of securities for investments, the Portfolio may buy and sell put and call
options and write covered call options on portfolio securities as well as 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 for 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 being unable to enter into a closing transaction if a liquid secondary
market does not exist. The Portfolio also may write over-the-counter options
where completing the obligation depends 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 when the option transaction expires or closes. 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
To gain exposure to or protect itself from market changes, the Portfolio may buy
and sell financial futures contracts. Risks of entering into futures contracts
and related options include the possibility of 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, 1999,
the Portfolio had entered into outstanding when-issued or forward-commitments of
$1,711,037,270.
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. As a "pass-through" entity, the Portfolio therefore
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 an Investment Management Services
Agreement with AEFC to manage 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, 1999, the Portfolio's custodian fees were reduced
by $19,631 as a result of earnings credits from overnight cash balances. The
Portfolio also pays custodian fees to American Express Trust Company, an
affiliate of AEFC.
According to a Placement Agency Agreement, American Express Financial Advisors
Inc. acts as placement agent of the Trust's units.
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities (other than short-term
obligations) aggregated $11,029,645,153 and $9,820,804,319 respectively, for the
year ended May 31, 1999. For the same period, the portfolio turnover rate was
278%. Realized gains and losses are determined on an identified cost basis.
4. INTEREST RATE FUTURES CONTRACTS
As of May 31, 1999, investments in securities included securities valued at
$87,169,209 that were pledged as collateral to cover initial margin deposits on
2,878 open purchase contracts and 9,255 open sale contracts. The market value of
the open purchase contracts as of May 31, 1999, was $402,249,875 with a net
unrealized loss of $7,008,641. The market value of the open sale contracts as of
May 31, 1999, was $1,095,733,821 with a net unrealized gain of $6,118,521. See
"Summary of significant accounting policies."
5. LENDING OF PORTFOLIO SECURITIES
As of May 31, 1999, securities valued at $191,194,646 were on loan to brokers.
For collateral, the Portfolio received $14,337,500 in cash and U.S. government
securities valued at $186,274,424. Income from securities lending amounted to
$864,977 for the year ended May 31, 1999. 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
Contracts and premium amounts associated with options contracts written are as
follows:
Year ended May 31, 1999
Puts Calls MBS Puts and Calls
Contracts Premium Contracts Premium Contracts Premium
<S> <C> <C> <C> <C> <C> <C>
Balance May 31, 1998 2,146 $ 4,017,648 2,380 $ 3,811,781 12,000 $123,773,405
Opened 65,972 70,254,481 72,544 88,414,568 81,280 4,288,906
Closed (40,008) (45,046,480) (35,770) (55,445,390) (27,800) (124,673,718)
Exercised (4,831) (7,585,873) (2,263) (3,418,658) (14,800) (585,233)
Expired (20,928) (18,477,583) (23,502) (19,735,111) (30,940) (735,563)
------- ----------- ------- ----------- ------- --------
Balance May 31, 1999 2,351 $ 3,162,193 13,389 $13,627,190 19,740 $ 2,067,797
See "Summary of significant accounting policies."
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Investments in Securities
Government Income Portfolio
May 31, 1999
(Percentages represent value of investments compared to net assets)
Bonds (119.2%)
Issuer Coupon Principal Value(a)
rate amount
Mortgage-backed securities (87.2%)
Federal Home Loan Mtge Corp
<S> <C> <C> <C>
08-01-00 7.50% $2,402,813 $2,422,245
07-01-03 6.50 30,230 29,980
09-01-09 6.50 4,596,267 4,589,372
10-01-10 7.00 10,975,844 11,165,177
01-01-13 6.00 11,246,575 11,008,532
11-01-23 8.00 12,150,272 12,675,286
05-01-24 7.50 4,670,818 4,775,771
07-01-24 8.00 6,747,197 7,010,892
01-01-25 9.00 5,810,305 6,167,348
03-01-25 7.00 25,500,000(b) 25,547,813
06-01-25 8.00 8,985,281 9,334,180
08-01-25 8.00 2,295,929 2,384,369
02-01-26 6.00 16,885,292 16,072,096
05-01-26 9.00 14,259,569 15,135,820
12-01-27 6.00 138,867,943 132,468,458
01-01-28 6.00 2,823,368 2,685,644
02-01-28 6.00 17,616,102 16,761,647
08-01-28 6.00 34,431,532 32,751,962
09-01-28 6.00 141,061,014 134,187,793
10-01-28 6.00 13,431,661 12,776,464
Collateralized Mtge Obligation
08-15-03 6.50 13,311,588 13,378,521
12-07-07 5.50 42,640,000 41,826,250
04-15-12 6.25 39,000,000 37,889,280
04-15-22 8.50 9,150,000 9,487,361
11-15-22 4.00 44,310,000 39,699,150
11-15-23 4.00 7,217,867 7,009,271
11-18-25 6.50 12,750,000 12,719,018
Interest Only
01-01-20 10.00 170,225(c) 41,151
Principal Only
09-15-03 6.46 6,541,013(d) 5,916,008
10-15-07 8.47 45,128(d) 44,747
05-15-08 7.14 6,164,239(d) 5,264,645
05-15-08 8.13 5,881,409(d) 5,331,864
03-15-09 7.38 3,892,176(d) 3,566,814
11-15-23 7.86 2,110,513(d) 1,888,523
Federal Natl Mtge Assn
12-01-99 7.00 3,850,254 3,871,712
09-01-07 8.50 2,878,324 2,970,804
01-15-09 5.25 5,000,000(e,g) 4,642,121
03-01-10 5.50 244,500,000(b) 233,497,500
03-01-10 6.00 321,000,000(b,g) 313,175,624
03-01-10 6.50 376,310,000(b,g) 374,663,643
05-01-13 6.00 59,530,371 58,111,354
06-01-13 6.00 48,677,285 47,516,972
08-01-13 6.00 77,900,561 76,104,174
09-01-13 6.00 17,778,506 17,354,722
11-01-21 8.00 2,277,398 2,373,664
03-01-23 9.00 1,631,201 1,744,178
04-01-23 8.50 6,009,717 6,338,870
08-25-23 6.00 14,400,000 13,442,478
09-01-23 6.50 40,879,813(g) 40,030,739
09-01-23 8.50 21,293,819 22,473,496
11-01-23 6.00 10,220,142 9,743,985
12-01-23 7.00 13,454,082 13,488,390
01-01-24 6.50 14,964,779 14,653,961
06-01-24 9.00 5,027,855 5,379,251
03-01-25 6.00 73,625,000(b) 70,012,773
03-01-25 6.50 321,950,000(b) 314,605,515
03-01-25 7.00 175,500,000(b) 175,609,688
09-01-25 6.50 19,837,557 19,394,643
11-01-25 6.50 20,417,672 19,961,746
02-01-26 6.00 543,921 517,220
02-01-26 8.00 2,234,176 2,319,543
04-01-26 6.00 299,236 284,451
05-01-26 7.50 14,605,072 14,914,992
02-01-27 6.00 2,411,048 2,291,918
04-01-27 6.00 5,585,733 5,309,742
04-01-27 6.50 12,899,750 12,611,699
04-01-27 7.00 8,270,128 8,280,879
09-01-27 7.00 6,483,062 6,491,490
03-01-28 6.00 21,967,152 20,885,902
04-01-28 6.00 9,647,509(f) 9,176,094
04-01-28 6.00 46,838,068 44,520,711
05-01-28 6.00 9,475,472 9,008,171
05-01-28 6.50 20,789,939 20,323,483
07-01-28 6.00 9,786,569 9,303,926
09-01-28 6.00 94,785,090 90,091,994
10-01-28 6.00 17,021,092 16,174,803
10-01-28 6.50 49,747,473 48,659,247
Collateralized Mtge Obligation
09-25-08 4.50 38,000,000 34,674,886
11-25-08 5.50 2,395,610 2,330,896
10-25-10 4.50 8,204,208 8,090,005
07-25-12 7.00 2,550,729 2,573,062
01-25-19 3.00 8,130,627 8,006,228
07-18-19 5.50 13,976,000 13,700,561
10-25-20 9.00 10,426,768 10,876,371
03-25-21 8.50 12,350,000 12,936,248
01-25-22 5.75 10,000,000 9,570,622
08-25-23 6.50 15,000,000 14,849,850
05-18-26 5.00 17,000,000 15,184,917
Interest Only
07-01-18 10.00 2,672,761(c) 663,251
08-01-18 9.50 54,430(c) 12,224
01-15-20 10.00 2,645,058(c) 736,913
09-25-20 9.50 811,365(c) 188,165
01-25-21 10.50 6,593,752(c) 1,614,234
11-25-21 9.50 2,132,183(c) 517,280
02-25-22 9.50 417,323(c) 103,850
02-25-22 10.00 15,589,974(c) 4,032,444
05-25-22 10.00 5,037,341(c) 1,211,326
07-25-22 8.50 8,946,781(c) 2,246,099
07-25-22 9.50 4,497,893(c) 1,112,652
Inverse Floater
08-25-23 8.48 1,399,506(h) 1,293,186
03-25-24 10.12 1,781,337(h) 1,756,258
Principal Only
06-25-21 12.57 341,438(d) 283,524
Govt Natl Mtge Assn
08-20-19 11.00 160,230 179,452
Total 2,975,086,224
U.S. government obligations (29.9%)
Collateralized Mtge Acceptance Corp
12-15-30 6.50 13,792,405 13,807,852
Resolution Funding Corp
10-15-19 8.13 8,000,000(g) 9,661,542
Zero Coupon
04-15-02 6.15 11,170,000(i,g) 9,481,018
10-15-03 6.36 16,000,000(i,g) 12,424,042
04-15-06 5.74 4,803,000(i,g) 3,188,771
04-15-08 5.88 21,250,000(i,g) 12,404,702
07-15-08 6.13 48,500,000(i,g) 27,861,058
01-15-09 5.76 24,173,000(i,g) 13,463,370
07-15-09 5.91 32,646,000(i,g) 17,578,800
10-15-12 8.04 8,400,000(i,g) 3,617,623
04-15-17 7.28 37,700,000(i,g) 12,123,528
07-15-17 7.28 6,650,000(i,g) 2,104,785
01-15-18 7.20 8,000,000(i,g) 2,453,032
10-15-18 7.87 7,500,000(i,g) 2,180,360
U.S. Treasury
05-31-01 5.25 69,600,000(b,g) 69,387,720
08-31-01 6.50 8,500,000(f,g) 8,685,468
10-31-01 6.25 22,000,000(g) 22,381,707
11-30-01 5.88 6,000,000(f,g) 6,053,215
04-30-02 6.63 10,000,000(g) 10,279,460
02-15-03 10.75 15,000,000(g) 17,474,957
08-15-03 5.75 18,500,000(e,g) 18,539,203
05-15-04 12.38 7,000,000(g) 8,970,695
08-15-05 6.50 5,000,000(g) 5,177,087
08-15-05 10.75 4,750,000(f,g) 5,954,582
07-15-06 7.00 35,750,000 38,199,161
10-15-06 6.50 36,100,000(g) 37,551,357
11-15-08 4.75 10,100,000(e,g) 9,389,849
11-15-15 9.88 74,000,000(g) 102,655,582
05-15-16 7.25 19,500,000(g) 21,803,894
08-15-19 8.13 104,000,000(f,g) 127,839,566
08-15-20 8.75 55,000,000(e,f,g) 71,965,707
05-15-21 8.13 95,250,000(g) 118,142,880
08-15-21 8.13 124,700,000(e,g) 154,355,281
Zero Coupon
11-15-04 5.65 33,000,000(f,g,i) 24,210,998
Total 1,021,368,852
Other (2.1%)
California Infrastructure-
Pacific Gas & Electric Series 1997-1
09-25-05 6.32 20,400,000 20,538,312
San Diego Gas & Electric
03-25-03 6.07 7,500,000 7,535,550
09-25-05 6.19 6,000,000 6,005,460
Southern California Edison
03-25-03 6.17 13,895,000 13,980,037
Citibank Credit Card Master Trust I
Series 1998-2 Cl A
01-15-08 6.05 15,000,000 14,577,000
GMAC Commercial Mtge Securities
Series 1997-C2 Cl A1
12-15-04 6.45 9,332,196 9,319,878
Total 71,956,237
Total bonds
(Cost: $4,136,297,586) $4,068,411,313
See accompanying notes to investments in securities.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Options purchased (0.7%)
Issuer Shares Exercise Expiration Value(a)
price date
Calls
<S> <C> <C> <C> <C>
Sept. U.S. Treasury Bond Futures 81,000 $120 July 1999 $173,509
Sept. U.S. Treasury Note Futures, 10-year 47,900 114 Sept. 1999 209,563
Puts
U.S. Treasury Bonds 2,920,000 98 Aug. 1999 22,082,500
Total options purchased
(Cost: $22,337,237) $22,465,572
See accompanying notes to investments in securities.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Short-term securities (27.4%)(g)
Issuer Annualized Amount Value(a)
yield on date payable at
of purchase maturity
U.S. government agencies (25.4%)
Federal Home Loan Bank Disc Nts
<S> <C> <C> <C>
06-11-99 4.72% $8,000,000 $7,986,451
06-25-99 4.71 50,000,000 49,824,499
06-30-99 4.73 11,600,000 11,548,634
07-02-99 4.75 16,900,000 16,824,664
07-09-99 4.74 46,100,000 45,839,076
Federal Home Loan Mtge Corp Disc Nts
06-04-99 4.71 7,600,000 7,594,059
06-04-99 4.78 24,200,000 24,180,862
06-08-99 4.72 5,500,000 5,492,804
06-11-99 4.71 11,000,000 10,981,370
06-15-99 4.77 5,900,000 5,884,125
06-16-99 4.76 25,700,000 25,627,099
06-17-99 4.74 7,900,000 7,880,320
06-18-99 4.74 7,300,000 7,280,858
06-18-99 4.75 30,100,000 30,005,985
06-21-99 4.72 1,800,000 1,793,945
06-21-99 4.74 45,000,000 44,842,179
06-22-99 4.71 1,000,000 996,507
06-22-99 4.72 17,800,000 17,744,345
06-24-99 4.75 25,900,000 25,811,710
06-29-99 4.74 26,700,000 26,591,709
06-30-99 4.75 3,600,000 3,584,896
06-30-99 4.76 25,100,000 24,994,468
07-08-99 4.77 45,600,000 45,359,840
07-09-99 4.75 17,600,000 17,505,390
07-13-99 4.80 11,200,000 11,133,220
07-14-99 4.75 13,100,000 13,014,945
07-14-99 4.79 35,200,000 34,985,906
07-16-99 4.76 5,900,000 5,862,791
07-22-99 4.83 7,500,000 7,446,000
07-23-99 4.81 45,100,000 44,748,659
08-13-99 4.83 50,000,000 49,465,278
Federal Natl Mtge Assn Disc Nts
06-04-99 4.80 8,300,000 8,291,833
06-08-99 4.71 13,000,000 12,983,064
06-10-99 4.73 42,900,000 42,832,647
06-14-99 4.73 44,300,000 44,207,462
06-17-99 4.73 9,700,000 9,673,219
06-24-99 4.72 39,900,000 39,764,850
07-16-99 4.76 45,000,000 44,696,532
07-19-99 4.80 8,000,000 7,945,940
08-06-99 4.86 23,700,000 23,469,583
Total 866,697,724
Commercial paper (2.0%)
ABB Treasury Center USA
06-01-99 4.93 10,000,000(j) 9,995,892
Associates First Capital
06-01-99 4.92 12,600,000 12,594,834
General Electric Capital
06-01-99 4.93 15,200,000 15,193,755
GTE Funding
06-01-99 4.80 32,300,000 32,287,080
Total 70,071,561
Total short-term securities
(Cost: $936,935,137) $936,769,285
Total investments in securities
(Cost: $5,095,569,960)(k) $5,027,646,170
See accompanying notes to investments in securities.
</TABLE>
<PAGE>
Notes to investments in securities
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) At May 31, 1999, the cost of securities purchased, including interest
purchased, on a when-issued basis was $1,711,037,270.
(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) Security is partially or fully on loan. See Note 5 to the financial
statements.
(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
Eurodollar March 2000, 90-day $34,750,000
Eurodollar June 2000, 90-day 34,750,000
Eurodollar Sept. 2000, 90-day 45,250,000
Eurodollar Dec. 2000, 90-day 34,750,000
U.S. Treasury Bonds June 1999 116,400,000
U.S. Treasury Notes Sept. 1999, 10-year 111,600,000
Sale contracts
U.S. Treasury Bonds Sept. 1999 648,400,000
U.S. Treasury Notes June 1999, 2-year 52,000,000
U.S. Treasury Notes June 1999, 5-year 122,200,000
U.S. Treasury Notes June 1999, 10-year 126,200,000
U.S. Treasury Notes Sept. 1999, 5-year 1,200,000
<PAGE>
<TABLE>
<CAPTION>
(g) At May 31, 1999, securities valued at $1,734,155,920 were held to cover open
call options written as follows:
Issuer Principal Exercise Expiration Value(a)
price date
<S> <C> <C> <C> <C>
Mortgage-Backed Security (MBS Spread) 1,974,000 $99 July 1999 $1,665,563
U.S. Treasury Bond Futures July 1999 322,000 119 July 1999 130,813
U.S. Treasury Bond Futures Sept. 1999 828,000 118 Sept. 1999 1,384,308
U.S. Treasury Bond Futures Sept. 1999 2,480,000 120 Sept. 1999 2,363,738
U.S. Treasury Bond Futures Sept. 1999 261,000 122 Sept. 1999 130,500
U.S. Treasury Bond Futures Sept. 1999 870,000 128 Sept. 1999 54,375
U.S. Treasury Note Futures Sept. 1999, 5-year 3,917,000 110 Sept. 1999 2,642,870
U.S. Treasury Note Futures Sept. 1999, 10-year 4,711,000 113 Sept. 1999 3,322,579
Total $11,694,746
At May 31, 1999, cash or short-term securities were designated to cover open put
options written as follows:
Issuer Principal Exercise Expiration Value(a)
price date
U.S. Treasury Bond Futures Sept. 1999 435,000 $114 Sept. 1999 $305,857
U.S. Treasury Bond Futures Sept. 1999 44,000 118 Sept. 1999 96,937
U.S. Treasury Bond Futures Sept. 1999 435,000 120 Sept. 1999 1,502,107
U.S. Treasury Note Futures Sept. 1999, 10-year 88,000 110 Sept. 1999 64,274
U.S. Treasury Note Futures Sept. 1999, 10-year 435,000 111 Sept. 1999 462,188
U.S. Treasury Note Futures Sept. 1999, 10-year 479,000 112 Sept. 1999 740,951
U.S. Treasury Note Futures Sept. 1999, 10-year 435,000 113 Sept. 1999 944,763
Total $4,117,077
(h) 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, 1999. Inverse floaters in the
aggregate represent 0.09% of the Portfolio's net assets as of May 31, 1999.
(i) For zero coupon bonds, the interest rate disclosed represents the annualized
effective yield on the date of acquisition.
(j) Commercial paper sold within terms of a private placement memorandum, exempt
from registration under Section 4(2) of the Securities Act of 1933, as amended,
and may be sold only to dealers in that program or other "accredited investors."
This security has been determined to be liquid under guidelines established by
the board.
(k) At May 31, 1999, the cost of securities for federal income tax purposes was
$5,098,614,583 and the aggregate gross unrealized appreciation and depreciation
based on that cost was:
Unrealized appreciation $24,603,781
Unrealized depreciation (95,572,194)
-----------
Net unrealized depreciation $(70,968,413)
</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 High Yield Portfolio (a series of
Income Trust) as of May 31, 1999, and the related statement of operations for
the year then ended and the statements of changes in net assets for each of the
years in the two-year period ended May 31, 1999. 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 as of May
31, 1999, 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 LLP
KPMG LLP
Minneapolis, Minnesota
July 2, 1999
<PAGE>
Financial Statements
Statement of assets and liabilities
High Yield Portfolio
May 31, 1999
Assets
Investments in securities, at value (Note 1)
(identified cost $4,115,507,606) $3,818,901,721
Accrued interest and dividends receivable 89,453,347
Receivable for investment securities sold 751,623
-------
Total assets 3,909,106,691
-------------
Liabilities
Disbursements in excess of cash on demand deposit 2,890,083
Payable for investment securities purchased 11,553,625
Accrued investment management services fee 59,493
Other accrued expenses 6,600
-----
Total liabilities 14,509,801
----------
Net assets $3,894,596,890
==============
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
Statement of operations
High Yield Portfolio
Year ended May 31, 1999
Investment income
Income:
<S> <C>
Dividend $ 40,002,427
Interest 376,534,651
-----------
Total income 416,537,078
-----------
Expenses (Note 2):
Investment management services fee 21,505,599
Compensation of board members 18,323
Custodian fees 218,991
Audit fees 34,125
Other 91,552
------
Total expenses 21,868,590
Earnings credits on cash balances (Note 2) (321,344)
--------
Total net expenses 21,547,246
----------
Investment income (loss) -- net 394,989,832
-----------
Realized and unrealized gain (loss) -- net
Net realized gain (loss) on:
Security transactions (Note 3) (127,712,172)
Foreign currency transactions (198,038)
--------
Net realized gain (loss) on investments (127,910,210)
Net change in unrealized appreciation (depreciation) on investments (413,949,530)
------------
Net gain (loss) on investments (541,859,740)
------------
Net increase (decrease) in net assets resulting from operations $(146,869,908)
=============
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statements of changes in net assets
High Yield Portfolio
Year ended May 31, 1999 1998
Operations
<S> <C> <C>
Investment income (loss)-- net $ 394,989,832 $ 343,256,750
Net realized gain (loss) on investments (127,910,210) 107,320,343
Net change in unrealized appreciation
(depreciation) on investments (413,949,530) 8,772,357
------------ ---------
Net increase (decrease) in net assets resulting
from operations (146,869,908) 459,349,450
Net contributions (withdrawals) from partners (122,534,167) 505,587,141
------------ -----------
Total increase (decrease) in net assets (269,404,075) 964,936,591
Net assets at beginning of year 4,164,000,965 3,199,064,374
------------- -------------
Net assets at end of year $3,894,596,890 $4,164,000,965
============== ==============
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.
The Portfolio's significant accounting policies are summarized below:
Use of estimates
Preparing financial statements that conform to generally accepted accounting
principles requires management to make estimates (e.g., on assets and
liabilities) that could differ from actual results.
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 that reflects fair value
as quoted by dealers 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
To produce incremental earnings, protect gains and facilitate buying and selling
of securities for investments, the Portfolio may buy and write options traded on
any U.S. or foreign exchange or in the over-the-counter market where completing
the obligation depends 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 as well as write cash-secured put options. The
risk in writing a call option is that the Portfolio gives up the opportunity for
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 being unable 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 when the option transaction expires or closes. 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
To gain exposure to or protect itself from market changes, 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 of 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,
if any, may arise from sales of foreign currency, closed forward contracts,
exchange gains or losses realized between the trade date and settlement date 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 its contract obligations.
Illiquid securities
As of May 31, 1999, investments in securities included issues that are illiquid
which the Portfolio currently limits to 10% of net assets, at market value, at
the time of purchase. The aggregate value of such securities as of May 31, 1999
was $48,850,315 representing 1.3% of net assets. According to board guidelines,
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. As a "pass-through" entity, the Portfolio therefore
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 an Investment Management Services
Agreement with AEFC to manage 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, 1999, the Portfolio's custodian fees were reduced
by $321,344 as a result of earnings credits from overnight cash balances. The
Portfolio also pays custodian fees to American Express Trust Company, an
affiliate of AEFC.
According to a Placement Agency Agreement, American Express Financial Advisors
Inc. acts as placement agent of the Trust's units.
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities (other than short-term
obligations) aggregated $2,047,615,608 and $1,773,458,227, respectively, for the
year ended May 31, 1999. For the same period, the portfolio turnover rate was
47%. Realized gains and losses are determined on an identified cost basis.
<PAGE>
<TABLE>
<CAPTION>
Investments in Securities
High Yield Portfolio
May 31, 1999
(Percentages represent value of investments compared to net assets)
Bonds (85.8%)
Issuer Coupon Principal Value(a)
rate amount
Government obligations (--%)
Govt of Algeria
(U.S. Dollar)
<S> <C> <C> <C>
03-04-00 7.06% $1,045,455(c) $961,818
Govt of Russia
(Russian Ruble)
09-27-00 14.00 30,008,878(c) 34,098
Total 995,916
Mortgage-backed securities (0.1%)
Federal Home Loan Mtge Corp
08-01-17 7.50 3,376(e) 3,432
Merrill Lynch Mtge Investors
06-15-21 7.77 4,990,514(d) 4,586,594
Total 4,590,026
Aerospace & defense (1.5%)
Compass Aerospace
Sr Sub Nts
04-15-05 10.13 15,160,000(d) 14,591,500
Fairchild
Company Guaranty
04-15-09 10.75 15,300,000(d) 15,280,875
L-3 Communications
Sr Sub Nts Series B
05-01-07 10.38 6,145,000 6,767,181
Sequa
Sr Sub Nts
12-15-03 9.38 20,750,000 21,398,438
Total 58,037,994
Automotive & related (2.8%)
EV Intl
Company Guaranty Series A
03-15-07 11.00 10,500,000 8,163,750
French (JL) Auto Casting
Sr Sub Nts
06-01-09 11.50 12,900,000(d) 12,980,625
Hayes Lemmerz Intl
Company Guaranty Series B
07-15-07 9.13 10,000,000 10,287,500
Lear
Sr Nts
05-15-09 8.11 30,000,000(d) 29,550,000
MSX Intl
Company Guaranty
01-15-08 11.38 13,110,000 12,831,413
Oxford Automotive
Company Guaranty Series B
06-15-07 10.13 25,120,000 26,093,400
Penda
Sr Nts Series B
03-01-04 10.75 4,500,000 4,573,125
Venture Holdings Trust
Sr Nts Series B
07-01-05 9.50 4,000,000 3,855,000
Total 108,334,813
Banks and savings & loans (0.2%)
CEI Citicorp Holdings
(Argentine Peso)
02-14-07 11.25 5,000,000(c,d) 3,212,500
Wilshire Financial Services
01-01-04 13.00 14,700,000(b) 2,205,000
Series B
08-15-04 13.00 8,500,000(b) 1,275,000
Total 6,692,500
Beverages & tobacco (0.3%)
Canandaigua Brands
Company Guaranty
03-01-09 8.50 12,500,000 12,546,875
Building materials & construction (0.4%)
Formica
Sr Sub Nts
03-01-09 10.88 15,000,000(d) 14,850,000
Chemicals (0.9%)
Allied Waste North America
Company Guaranty Series B
01-01-09 7.88 18,675,000 17,531,156
Lyondell Chemical
05-01-07 9.88 9,500,000(d) 9,630,625
Sr Sub Nts
05-01-09 10.88 8,800,000(d) 8,998,000
Total 36,159,781
Commercial finance (0.4%)
Advance Holding
Zero Coupon Series B
04-15-03 12.45 8,800,000(g) 5,225,000
Netia Holdings
(U.S. Dollar) Company Guaranty Series B
11-01-07 10.25 12,750,000(c) 12,192,188
Total 17,417,188
Communications equipment & services (10.6%)
21st Century Telecom Group
Zero Coupon Sr Disc Nts
02-15-03 12.25 15,500,000(g) 6,975,000
Bestel
(U.S. Dollar) Zero Coupon
05-15-01 12.75 6,400,000(c,g) 3,936,000
Birch Telecom
Sr Nts
06-15-08 14.00 14,000,000 13,387,500
Caprock Communications
Sr Nts Series B
07-15-08 12.00 17,000,000 17,212,500
Celcaribe
Sr Nts
03-15-04 13.50 11,150,000 9,003,625
Crown Castle Intl
Zero Coupon Sr Disc Nts
11-15-02 10.15 14,750,000(g) 10,306,563
Dobson/Sygnet Communications
Sr Nts
12-15-08 12.25 16,000,000(d) 17,040,000
EchoStar DBS
Sr Nts
02-01-09 9.38 41,015,000(d) 41,220,074
Esprit Telecom Group
(U.S. Dollar) Sr Nts
12-15-07 11.50 14,500,000(c) 15,732,500
06-15-08 10.88 17,000,000(c) 18,190,000
GST Equipment Funding
Sr Nts
05-01-07 13.25 6,750,000 7,399,688
GST Telecom/GST Network Funding
Zero Coupon Sr Disc Nts
05-01-03 10.50 15,000,000(d,g) 8,400,000
GST Telecommunications
Sr Sub Nts
11-15-07 12.75 6,750,000 7,315,313
Jordan Telecommunications Products
Sr Nts Series B
08-01-07 9.88 25,950,000 26,079,749
Zero Coupon Sr Disc Nts Series B
08-01-00 10.04 21,900,000(g) 18,697,125
KMC Telecom Holdings
Sr Nts
05-15-09 13.50 12,000,000(d) 12,015,000
Zero Coupon Sr Disc Nts
02-15-03 12.68 12,000,000(g) 6,690,000
MJD Communications
Sr Sub Nts Series B
05-01-08 9.50 5,525,000 5,580,250
NTL
Zero Coupon Sr Nts Series B
02-01-01 11.40 40,000,000(g) 34,199,999
PhoneTel Technologies
Sr Nts
12-15-06 12.00 23,500,000(b) 8,577,500
Poland Telecom
(U.S. Dollar) Company Guaranty
06-01-04 14.00 4,000,000(c) 2,080,000
Price Communications Cellular Holdings
Pay-in-kind Sr Nts
08-15-08 11.25 9,000,000(k) 9,292,500
RCN
Zero Coupon Sr Disc Nts Series B
02-15-03 9.80 7,500,000(g) 4,621,875
Rhythms Net Connections
Sr Nts
04-15-09 12.75 12,500,000(d) 11,687,500
Satelites Mexicanos
(U.S. Dollar) Sr Nts Series B
11-01-04 10.13 10,000,000(c) 8,000,000
Spectrasite Holdings
Zero Coupon Sr Disc Nts
04-15-04 11.25 17,200,000(d,g) 9,997,500
Talton Holdings
Company Guaranty Sr Nts Series B
06-30-07 11.00 3,650,000 3,426,438
Tele1 Europe
(U.S. Dollar)
05-15-09 13.00 8,000,000(c,d) 8,080,000
Telehub Communications
Zero Coupon Company Guaranty
07-31-01 13.88 12,000,000(g) 9,135,000
Triton Communications
Zero Coupon Company Guaranty
05-01-03 10.86 22,000,000(g) 13,282,500
Unisite
Zero Coupon Sub Nts
12-15-00 13.00 9,000,000(d,g,j) 10,769,310
Versatel Telecom
(U.S. Dollar) Sr Nts
05-15-08 13.25 16,600,000(c) 17,596,000
Vialog
Company Guaranty
11-15-01 12.75 22,600,000 18,362,500
Total 414,289,509
Computers & office equipment (2.2%)
Anacomp
Sr Sub Nts Series B
04-01-04 10.88 8,500,000 8,914,375
Concentric Network
Sr Nts
12-15-07 12.75 5,600,000 5,901,000
Cooperative Computing
Sr Sub Nts
02-01-08 9.00 20,250,000 17,744,063
Decisionone Holdings
Zero Coupon
08-01-02 9.89 8,450,000(b,g) 21,125
Globix
Sr Nts
05-01-05 13.00 17,825,000 17,112,000
PSINet
Sr Nts
11-01-08 11.50 6,500,000 6,825,000
Sr Nts Series B
02-15-05 10.00 11,025,000 11,025,000
Verio
Sr Nts
04-01-05 10.38 7,000,000 7,140,000
12-01-08 11.25 11,000,000(d) 11,701,250
Total 86,383,813
Electronics (0.7%)
Hyundai Semiconductor
(U.S. Dollar) Sr Nts
05-15-07 8.63 15,000,000(c,d) 12,817,715
Metromedia Fiber Network
Sr Nts
11-15-08 10.00 13,750,000(d) 14,368,750
Total 27,186,465
Energy (3.9%)
Belco Oil & Gas
Sr Sub Nts Series B
09-15-07 8.88 11,000,000 10,780,000
Canadian Forest Oil
(U.S. Dollar) Company Guaranty
09-15-07 8.75 14,500,000(c) 13,901,875
Clark R&M
Sr Sub Nts
11-15-07 8.88 10,100,000 8,900,625
Energy Corp of America
Sr Sub Nts Series A
05-15-07 9.50 9,000,000 8,448,750
Houston Exploration
Sr Sub Nts Series B
01-01-08 8.63 6,450,000 6,296,813
HS Resources
Company Guaranty
11-15-06 9.25 4,250,000 4,234,063
Sr Sub Nts
12-01-03 9.88 9,700,000 9,724,250
Sr Sub Nts Series B
11-15-06 9.25 8,000,000 7,970,000
Hurricane Hydrocarbons
(U.S. Dollar) Sr Nts
11-01-04 11.75 15,750,000(b,c,d) 3,150,000
Lodestar Holdings
Company Guaranty
05-15-05 11.50 18,350,000 14,496,499
Michael Petroleum
Sr Nts Series B
04-01-05 11.50 6,000,000 3,600,000
Nuevo Energy
Company Guaranty Series B
06-01-08 8.88 12,000,000 11,595,000
Ocean Energy
Company Guaranty Series B
07-01-08 8.38 14,000,000 13,930,000
Rayovac
Sr Sub Nts Series B
11-01-06 10.25 11,814,000 12,877,260
Roil
(U.S. Dollar)
12-05-02 12.78 8,240,000(c,d) 2,884,000
Tesoro Petroleum
Company Guaranty Series B
07-01-08 9.00 14,250,000 14,089,688
XCL
05-01-04 13.50 8,000,000(d) 4,240,000
Total 151,118,823
Energy equipment & services (1.0%)
Dailey Intl
Company Guaranty Series B
02-15-08 9.50 9,000,000 5,850,000
DI Inds
Sr Nts
07-01-07 8.88 6,000,000 5,280,000
Grey Wolf
Company Guaranty Series C
07-01-07 8.88 1,750,000 1,540,000
Northern Offshore
(U.S. Dollar) Company Guaranty Series B
05-15-05 10.00 21,000,000(c) 10,710,000
Plains Resources
Company Guaranty Series D
03-15-06 10.25 9,000,000 9,348,750
Seven Seas Petroleum
Sr Nts Series B
05-15-05 12.50 8,000,000 4,550,000
Total 37,278,750
Financial services (2.0%)
AOA Holdings LLC
Sr Nts
06-01-06 10.38 15,500,000(d) 15,519,375
Arcadia Financial
Sr Nts
03-15-07 11.50 30,165,000 25,337,044
Gemini Inds
12-23-01 13.50 13,500,000(j) 10,800,000
Ono Finance
(U.S. Dollar)
05-01-09 13.00 6,100,000(c,d) 6,199,797
RBF Finance
Company Guaranty
03-15-09 11.38 12,375,000(d) 12,483,281
Tjiwi Kimia Finance Mauritius
(U.S. Dollar) Company Guaranty
08-01-04 10.00 10,000,000(c) 6,450,000
Total 76,789,497
Food (1.5%)
Ameriserve Food Distributions
07-15-07 10.13 12,225,000 10,742,719
Aurora Foods
Sr Sub Nts Series D
02-15-07 9.88 10,000,000 10,512,500
Chiquita Brands Intl
Sr Nts
01-15-04 9.63 8,500,000 8,744,375
Daya Guna
(U.S. Dollar) Company Guaranty
06-01-07 10.00 10,325,000(c,d) 7,021,000
RAB Enterprises
Company Guaranty
05-01-05 10.50 9,600,000 5,472,000
Specialty Foods
Sr Nts Series B
08-15-01 10.25 15,000,000 14,381,250
Total 56,873,844
Health care (0.6%)
Alaris Medical
Zero Coupon Sr Disc Nts
08-01-03 11.12 16,000,000(g) 9,420,000
Alaris Medical Systems
Company Guaranty
12-01-06 9.75 14,000,000 14,297,500
Total 23,717,500
Health care services (3.0%)
Abbey Healthcare Group
Sr Sub Nts
11-01-02 9.50 25,750,000 26,007,499
Fountain View
Company Guaranty Series B
04-15-08 11.25 8,600,000 7,535,750
Genesis Health Ventures
Sr Sub Nts
10-01-06 9.25 5,800,000 4,835,750
Magellan Health Services
Sr Sub Nts
02-15-08 9.00 15,000,000 12,731,250
Oxford Health Plans
Sr Nts
05-15-05 11.00 13,000,000(d) 13,455,000
Paracelsus Healthcare
Sr Sub Nts
08-15-06 10.00 17,600,000 13,728,000
Physician Sales & Service
Company Guaranty
10-01-07 8.50 15,250,000 15,478,750
Tenet Healthcare
Sr Sub Nts
12-01-08 8.13 17,050,000(d) 16,510,124
Triad Hospitals Holdings
Sr Sub Nts
05-15-09 11.00 6,050,000(d) 6,193,688
Total 116,475,811
Household products (0.5%)
Revlon Worldwide
Zero Coupon Sr Disc Nts Series B
03-15-01 10.94 14,000,000(f) 10,220,000
Scotts
Sr Sub Nts
01-15-09 8.63 10,385,000(d) 10,385,000
Total 20,605,000
Industrial equipment & services (1.8%)
Clark Materials Handling
Sr Nts Series D
11-15-06 10.75 2,650,000 2,318,750
Fairfield Mfg
Sr Sub Nts
10-15-08 9.63 13,600,000(d) 13,583,000
Grove Holdings/Capital
Zero Coupon
05-01-03 11.63 4,000,000(g) 1,520,000
Grove Inds
05-01-10 14.50 3,114,730(d) 2,055,722
Motor & Gears
Sr Nts Series D
11-15-06 10.75 30,500,000 31,376,875
Park-Ohio Inds
Sr Sub Nts
12-01-07 9.25 15,000,000 15,056,250
Thermadyne Holdings
Zero Coupon
06-01-03 12.49 12,000,000(g) 6,000,000
Total 71,910,597
Insurance (0.8%)
Americo Life
Sr Sub Nts
06-01-05 9.25 15,000,000 15,318,750
Veritas Holdings
(U.S. Dollar) Sr Nts
12-15-03 9.63 16,894,000(c) 17,189,645
Total 32,508,395
Leisure time & entertainment (6.3%)
Coast Hotels & Casino
Sr Sub Nts
04-01-09 9.50 9,235,000(d) 9,177,281
Hammons (JQ) Hotels
1st Mtge
02-15-04 8.88 12,000,000 11,190,000
HMH Properties
Sr Nts Series C
12-01-08 8.45 10,000,000 9,587,500
Hollywood Park
Company Guaranty Series B
02-15-07 9.25 10,000,000 10,100,000
Horseshoe Gaming Holdings
Sr Sub Nts
05-15-09 8.63 16,550,000(d) 16,156,938
Icon Health & Fitness
Sr Sub Nts Series B
07-15-02 13.00 12,500,000(b) 8,625,000
Intl Game Technology
Sr Nts
05-15-09 8.38 16,400,000(d) 16,236,000
Isle of Capri Casinos/Capital
1st Mtge Series B
08-31-04 13.00 16,250,000 18,057,813
Lodgenet Entertainment
Sr Nts
12-15-06 10.25 15,000,000 15,281,250
Mohegan Tribal Gaming
Sr Sub Nts
01-01-09 8.75 2,400,000(d) 2,421,000
Premier Cruises
Sr Nts
03-15-08 11.00 11,000,000(b,d) 2,750,000
Premier Parks
Sr Nts
04-01-06 9.25 8,300,000 8,424,500
Regal Cinemas
Sr Sub Nts
06-01-08 9.50 8,000,000 7,660,000
12-15-10 8.88 12,000,000 10,935,000
Riviera Holdings
Company Guaranty
08-15-04 10.00 4,700,000 4,470,875
Trump Atlantic City Assn/Funding
1st Mtge Company Guaranty
05-01-06 11.25 26,945,000 23,812,644
Trump Holdings & Funding
Sr Nts
06-15-05 15.50 28,050,000 28,260,374
United Artists Theatres
Series 1995A
07-01-15 9.30 13,222,657 11,707,737
Sr Sub Nts Series B
04-15-08 9.75 10,000,000 7,950,000
Venetian Casino/LV Sands
Company Guaranty
11-15-04 12.25 15,105,000 15,595,913
Zero Coupon
11-15-99 10.00 6,000,000(g) 5,910,000
Total 244,309,825
Media (10.4%)
Adelphia Communications
Sr Deb
09-15-04 11.88 5,000,000 5,306,250
Sr Nts Series B
02-01-08 8.38 19,500,000 19,524,375
Australis Holdings
(U.S. Dollar) Zero Coupon Sr Disc Nts
11-01-00 13.35 17,900,000(b,c,g) 179,000
Australis Media
(U.S. Dollar)
11-01-00 14.00 2,419,998(b,c) 2,030,523
(U.S. Dollar) Zero Coupon
05-15-00 12.32 43,500,000(b,c,g) 4,350
(U.S. Dollar) Zero Coupon Sr Disc Nts
05-15-00 13.83 469,560(b,c,g) 2,348
Benedek Communications
Zero Coupon Sr Disc Nts
05-15-01 13.89 13,500,000(g) 11,188,125
Big City Radio
Zero Coupon Company Guaranty
03-15-01 11.25 10,000,000(g) 7,162,500
Bresnan Communications
Sr Nts
02-01-09 8.00 4,800,000(d) 4,824,000
Cable Systems USA
06-30-99 10.75 12,088(j) 12,088
Capstar Broadcasting
Zero Coupon Sr Disc Nts
02-01-02 7.49 8,000,000(g) 6,750,000
CBS Radio
Pay-in-kind Sub Deb
01-15-09 11.38 9,475,300(k) 10,801,842
Central Euro Media
(U.S. Dollar) Sr Nts
08-15-04 9.38 12,175,000(c) 10,227,000
Chancellor Media
Sr Nts
11-01-08 8.00 50,000,000(d) 49,687,499
Sr Sub Nts
10-01-04 9.38 3,500,000 3,644,375
Coaxial Communications/Phoenix
Company Guaranty
08-15-06 10.00 10,000,000 10,512,500
Emmis Communications
Sr Sub Nts
03-15-09 8.13 11,525,000(d) 11,280,094
Globo Communicacoes Participacoes
(U.S. Dollar) Sr Nts
12-05-08 10.63 15,000,000(c,d) 10,462,500
Golden Sky Systems
Company Guaranty Series B
08-01-06 12.38 17,000,000 19,125,000
Jacor Communications
Company Guaranty
12-15-06 9.75 19,000,000 20,804,999
MDC Communications
(U.S. Dollar) Sr Sub Nts
12-01-06 10.50 16,350,000(c) 16,493,063
Outdoor Systems
Company Guaranty
10-15-06 9.38 10,000,000 10,662,500
06-15-07 8.88 20,755,000 21,766,805
Paxson Communications
Sr Sub Nts
10-01-02 11.63 13,000,000 13,633,750
Pegasus Media & Communications
Series B
07-01-05 12.50 15,400,000 17,017,000
Sr Nts Series B
10-15-05 9.63 6,500,000 6,662,500
Price Communications Wireless
Company Guaranty Series B
12-15-06 9.13 15,000,000 15,262,500
Sr Sub Nts
07-15-07 11.75 10,000,000 11,000,000
Radio Unica
Zero Coupon Company Guaranty
08-01-02 11.74 13,000,000(g) 7,556,250
Regional Independent Medical
(U.S. Dollar) Sr Nts
07-01-08 10.50 15,200,000(c) 15,599,000
Sinclair Broadcast Group
Sr Sub Nts
12-15-07 8.75 1,800,000 1,759,500
Spanish Broadcasting System
Sr Nts
06-15-02 12.50 4,000,000 4,460,000
Sr Nts Series B
03-15-04 11.00 3,150,000 3,437,438
Susquehanna Media
Sr Sub Nts
05-15-09 8.50 6,395,000(d) 6,402,994
Telemundo Holdings
Zero Coupon Sr Disc Nts Series B
08-15-03 11.50 17,000,000(g) 9,010,000
TeleWest Communications
(U.S. Dollar) Sr Nts
11-01-08 11.25 8,000,000(c) 9,060,000
(U.S. Dollar) Zero Coupon
10-01-00 10.90 7,000,000(c,g) 6,212,500
(U.S. Dollar) Zero Coupon Sr Disc Nts
04-15-04 9.25 13,725,000(c,d,g) 9,024,188
Veninfotel
(U.S. Dollar) Cv Pay-in-kind
03-01-02 10.00 9,450,000(c,j,k) 14,175,000
Total 402,724,356
Metals (2.7%)
AK Steel
Sr Nts
02-15-09 7.88 15,000,000(d) 14,737,500
Bar Technologies
Company Guaranty
04-01-01 13.50 10,000,000 10,300,000
EnviroSource
Sr Nts
06-15-03 9.75 26,648,000 16,821,550
Imexsa Export Trust
(U.S. Dollar)
05-31-03 10.13 8,798,020(c,d) 8,446,099
Maxxam Group Holdings
Sr Nts Series B
08-01-03 12.00 12,000,000 12,465,000
Natl Steel
1st Mtge
03-01-09 9.88 11,000,000(d) 11,261,250
Neenah
Sr Sub Nts
05-01-07 11.13 3,700,000(d) 3,663,000
Ormet
Company Guaranty
08-15-08 11.00 17,000,000(d) 16,936,250
Sheffield Steel
1st Mtge Series B
12-01-05 11.50 10,200,000 9,996,000
Total 104,626,649
Miscellaneous (8.8%)
Adams Outdoor Advertising
Sr Nts
03-15-06 10.75 10,800,000 11,731,500
Advance Stores
Company Guaranty Series B
04-15-08 10.25 5,500,000 5,500,000
Advanced Glassfiber Yarn
Sr Sub Nts
01-15-09 9.88 17,720,000(d) 16,634,650
AMSC Acquisition
Company Guaranty Series B
04-01-08 12.25 8,000,000 5,560,000
Argo-Tech
Company Guaranty
10-01-07 8.63 5,750,000 5,491,250
Sr Sub Nts
10-01-07 8.63 13,000,000(d) 12,415,000
Bistro Trust
Sub Nts
12-31-02 9.50 10,000,000(d) 9,503,000
Booth Creek Ski Holdings
Sr Nts Series B
03-15-07 12.50 4,500,000 4,185,000
Centaur Mining & Exploration
(U.S. Dollar) Company Guaranty
12-01-07 11.00 11,500,000(c) 10,925,000
Comforce Operating
Sr Nts Series B
12-01-07 12.00 4,750,000 4,708,438
CTI Holdings
(U.S. Dollar) Zero Coupon Sr Nts
04-15-03 11.50 9,450,000(c,g) 4,772,250
Dura Operating
Sr Sub Nts
05-01-09 9.00 9,000,000(d) 8,898,750
ECM Funding LP
06-10-02 11.92 1,277,510(j) 1,277,510
Grant Geophysical
Company Guaranty Series B
02-15-08 9.75 7,250,000 3,625,000
Great Central Mines
(U.S. Dollar) Sr Nts
04-01-08 8.88 10,000,000(c) 9,575,000
ISG Resources
04-15-08 10.00 17,445,000 17,902,931
Knology Holdings
Zero Coupon Sr Disc Nts
10-15-02 12.14 11,000,000(g) 6,668,750
Nebco Evans Holding
Zero Coupon Sr Disc Nts
07-15-02 34.18 8,500,000(g) 4,250,000
Nextel Partners
Zero Coupon Sr Disc Nts
02-01-04 13.78 47,900,000(d,g) 25,865,999
Norcal Waste Systems
Company Guaranty Series B
11-15-05 13.50 20,300,000 22,507,625
NSM Steel
Company Guaranty
02-01-06 12.00 10,375,000(b,d) 2,075,000
02-01-08 12.25 11,700,000(b,d) 585,000
NTEX
(U.S. Dollar) Sr Nts
06-01-06 11.50 6,900,000(c) 6,348,000
Omnipoint Communications
Sr Nts
02-17-06 8.25 16,823,654(d) 15,477,762
Outsourcing Solutions
Sr Sub Nts Series B
11-01-06 11.00 37,395,000 37,067,793
Pierce Leahy Command
Company Guaranty
05-15-08 8.13 25,150,000 24,615,563
Poland Telecom Finance
(U.S. Dollar) Company Guaranty Series B
12-01-07 14.00 16,500,000(c) 15,015,000
Riviera Black Hawk
1st Mtge
06-01-05 13.00 10,425,000(d) 10,581,375
SC Intl
09-01-07 9.25 17,650,000 18,775,188
Stellex Inds
Sr Sub Nts Series B
11-01-07 9.50 11,450,000 10,405,188
Transamerica Energy
06-15-02 11.50 13,960,000(b) 1,675,200
Zero Coupon
06-15-99 17.14 9,600,000(g) 1,032,000
United Inds
Sr Sub Nts
04-01-09 9.88 7,195,000(d) 7,257,956
Total 342,908,678
Multi-industry conglomerates (1.1%)
Communications & Power Inds
08-01-05 12.00 10,000,000 10,487,500
Jordan Inds
Sr Nts Series C
08-01-07 10.38 10,410,000(d) 10,410,000
Zero Coupon Sr Sub Debs Series B
04-01-02 11.75 17,692,251(g) 11,477,848
Prime Succession
Sr Sub Nts
08-15-04 10.75 13,475,000 9,702,000
Total 42,077,348
Paper & packaging (5.6%)
APP Intl Finance
(U.S. Dollar)
10-01-05 11.75 4,500,000(c) 3,330,000
Bear Island LLC/Finance
Sr Nts Series B
12-01-07 10.00 8,675,000 8,599,094
Berry Plastics
Sr Sub Nts
04-15-04 12.25 3,250,000(d) 3,420,625
BPC Holding
Sr Nts Series B
06-15-06 12.50 11,750,000 12,410,938
Crown Paper
Sr Sub Nts
09-01-05 11.00 20,000,000 14,800,000
Doman Inds
(U.S. Dollar)
03-15-04 8.75 10,500,000(c) 7,376,250
(U.S. Dollar) Sr Nts Series B
11-15-07 9.25 3,500,000(c) 2,310,000
Gaylord Container
Sr Nts
06-15-07 9.75 6,000,000 5,782,500
02-15-08 9.88 32,500,000 28,559,374
Sr Nts Series B
06-15-07 9.38 8,000,000 7,510,000
Graham Packaging/GPC Capital
Zero Coupon Sr Disc Nts Series B
01-15-03 10.76 5,000,000(g) 3,425,000
Grupo Industrial Durango
(U.S. Dollar)
08-01-03 12.63 5,000,000(c) 4,825,000
Packaging Corp of America
Sr Sub Nts
04-01-09 9.63 9,905,000(d) 10,078,338
Repap New Brunswick
(U.S. Dollar)
06-01-04 11.50 7,500,000(c,d) 7,556,250
(U.S. Dollar) Sr Nts
06-01-04 9.00 5,450,000(c) 5,177,500
04-15-05 10.63 33,000,000(c) 28,132,500
Riverwood Intl
Company Guaranty
08-01-07 10.63 5,500,000 5,671,875
04-01-08 10.88 10,000,000 9,812,500
Company Guaranty Sr Nts
04-01-06 10.25 15,000,000 15,281,250
Silgan Holdings
06-01-09 9.00 13,250,000 13,581,250
Pay-in-kind
07-15-06 13.25 5,621,000(k) 6,295,520
Stone Container
Sr Nts
08-01-16 12.58 9,000,000 9,337,500
Tjiwi Kimia Intl
(U.S. Dollar) Company Guaranty
08-01-01 13.25 7,000,000(c) 5,460,000
Total 218,733,264
Restaurants & lodging (1.4%)
American Restaurant Group
Company Guaranty Series B
02-15-03 11.50 9,000,000 8,122,500
Domino's
Sr Sub Nts
01-15-09 10.38 16,325,000(d) 16,712,719
Florida Panthers Holdings
Sr Sub Nts
04-15-09 9.88 11,000,000(d) 10,697,500
Prime Hospitality
Sr Sub Nts Series B
04-01-07 9.75 18,700,000 19,471,375
Total 55,004,094
Retail (2.7%)
Amazon.com
Zero Coupon Sr Disc Nts
05-01-03 10.00 15,750,000(g) 11,025,000
Dairy Mart Convenience Stores
Sr Sub Nts
03-15-04 10.25 17,675,000 16,592,406
Sr Sub Nts Series B
03-15-04 10.25 6,250,000 5,867,188
Maxim Group
Company Guaranty Series B
10-15-07 9.25 12,500,000 12,515,625
Musicland Group
Company Guaranty Series B
03-15-08 9.88 16,750,000 16,896,563
Pathmark Stores
Sr Sub Nts
05-01-03 9.63 8,500,000 8,712,500
Sub Nts
06-15-02 11.63 18,000,000 18,472,499
Stater Brothers Holdings
Sr Nts
03-01-01 11.00 14,500,000 14,935,000
Total 105,016,781
Textiles & apparel (1.3%)
Anvil Knitwear
Sr Nts Series B
03-15-07 10.88 14,000,000 8,960,000
Galey & Lord
Company Guaranty
03-01-08 9.13 9,700,000 6,353,500
GFSI
Sr Sub Nts Series B
03-01-07 9.63 13,000,000 11,960,000
GFSI Holdings
Zero Coupon Sr Disc Nts Series B
09-15-04 10.77 17,300,000(g) 12,110,000
Hosiery Corp of America
Sr Sub Nts
08-01-02 13.75 8,000,000 8,600,000
Steel Heddle Group
Zero Coupon Series B
06-01-03 13.74 6,200,000(g) 992,000
Steel Heddle Mfg
Company Guaranty Series B
06-01-08 10.63 4,600,000 2,754,250
Total 51,729,750
Transportation (1.5%)
American Architectural
Company Guaranty
12-01-07 11.75 10,000,000 7,975,000
Autopistas Del Sol
(U.S. Dollar) Sr Nts
08-01-09 10.25 13,500,000(c,d) 10,260,000
Enterprises Shipholding
(U.S. Dollar) Sr Nts
05-01-08 8.88 22,370,000(c) 14,540,500
Global Ocean Carriers
Sr Nts
07-15-07 10.25 13,500,000 6,783,750
Greater Beijing First Expressways
(U.S. Dollar) Sr Nts
06-15-04 9.25 3,500,000(c) 1,925,000
06-15-07 9.50 5,000,000(c) 2,600,000
Hermes Europe RailTel
(U.S. Dollar) Sr Nts
01-15-09 10.38 10,500,000(c) 10,762,500
Trico Marine Services
Company Guaranty Series G
08-01-05 8.50 5,000,000 4,500,000
Total 59,346,750
Utilities -- electric (0.3%)
Midland Funding
Series B
07-23-06 13.25 10,500,000 12,678,750
Utilities -- gas (0.6%)
Bellwether Exploration
Sr Nts
04-01-07 10.88 9,000,000 8,381,250
Empire Gas
Zero Coupon Sr Nts
07-15-99 7.00 11,350,000(h) 5,675,000
Leviathan Gas
Sr Sub Nts
06-01-09 10.38 8,400,000(d) 8,452,500
Total 22,508,750
Utilities -- telephone (7.9%)
Allegiance Telecom
Sr Nts
05-15-08 12.88 2,000,000 2,162,500
Zero Coupon Sr Disc Nts Series B
02-15-03 11.99 30,450,000(g) 18,574,499
CCPR Services
Company Guaranty
02-01-07 10.00 10,000,000 11,087,500
Colt Telecommunications Group
(U.S. Dollar) Zero Coupon
12-15-01 12.00 8,500,000(c,g) 7,055,000
Covad Communications Group
02-15-09 12.50 14,000,000(d) 13,405,000
Geotek Communications
Cv Sr Sub Nts
02-15-01 12.00 4,135,000(b) 5,169
Hyperion Telecommunications
09-01-04 12.25 14,000,000 14,700,000
Intermedia Communications
Sr Nts Series B
11-01-07 8.88 11,025,000 10,570,219
06-01-08 8.60 2,400,000 2,274,000
Zero Coupon Sr Disc Nts Series B
07-15-02 10.65 22,375,000(g) 16,165,938
ITC Deltacom
Sr Nts
06-01-07 11.00 9,457,000 10,331,773
03-01-08 8.88 17,250,000 17,250,000
11-15-08 9.75 4,500,000 4,680,000
McLeod USA
Sr Nts
03-15-08 8.38 7,680,000 7,392,000
02-15-09 8.13 13,000,000(d) 12,122,500
Metrocall
Sr Sub Nts
10-01-07 10.38 5,700,000 4,389,000
MetroNet Communications
(U.S. Dollar) Sr Nts
08-15-07 12.00 8,750,000(c) 10,346,875
11-01-08 10.63 6,950,000(c,d) 8,018,563
(U.S. Dollar) Zero Coupon Sr Disc Nts
11-01-02 10.74 8,300,000(c,g) 6,671,125
06-15-03 9.96 16,000,000(c,g) 11,860,000
NEXTLINK Communications
Sr Nts
04-15-06 12.50 15,000,000 16,556,250
11-15-08 10.75 8,750,000(d) 8,771,875
Omnipoint Communications
Sr Nts
08-15-06 11.63 24,100,000 22,141,874
Paging Network
Sr Sub Nts
08-01-07 10.13 6,950,000 4,656,500
Panamsat Intl Systems
Pay-in-kind
04-15-05 12.75 4,000(k) 4,555
Primus Telecommunications Group
Sr Nts
08-01-04 11.75 11,550,000 11,781,000
Sr Nts Series B
05-15-08 9.88 10,000,000 9,600,000
Pronet
Sr Sub Nts
06-15-05 11.88 19,350,000 17,414,999
RSL Communications
(U.S. Dollar) Company Guaranty
11-15-06 12.25 10,167,000(c) 10,916,816
11-15-08 10.50 16,250,000(c) 16,128,125
Total 307,033,655
Total bonds
(Cost: $3,638,943,412) $3,343,461,747
See accompanying notes to investments in securities.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Common stocks (1.2%)
Issuer Shares Value(a)
<S> <C> <C>
Arena Brands 111,111(b,j) $2,444,442
Celcaribe 1,812,990(b) 3,625,980
Communications & Power Inds 3,500(b) 525,000
Concentric Network 100,000(b) 3,231,250
Earthwatch 308,812(b,d) 386,015
EchoStar Communications CI A 25,000(b) 2,868,750
Foodmaker 21,000(b) 567,000
Gaylord Container Cl A 1,000,000(b) 8,375,000
Global TeleSystems Group 107,700(b) 8,185,199
Intermedia Communications 301,376(b) 7,628,580
Nextel Communications Cl A 41,056(b) 1,513,940
OpTel 17,000(b,d) 51,000
Pagemart Nationwide 50,750(b) 190,313
Pegasus Communications 16,923(b) 799,612
Primus Telecommunications Group 300,000(b) 4,987,500
Specialty Foods 300,000(b) 6,000
Wilshire Real Estate Investment Trust 140,000 595,000
Wireless One 25,000(b) 77,344
Total common stocks
(Cost: $35,919,026) $46,057,925
Preferred stocks & other (10.4%)
Issuer Shares Value(a)
21st Century Telecom Group
13.75% Pay-in-kind 2,983(l) $1,372,180
Warrants 2,600 52,000
Allegiance Telecom
Warrants 30,450 1,735,650
American Mobile Satellite
Warrants 8,000 200,000
American Restaurant Group
12.00% Pay-in-kind Series B 3,920(l) 3,920,000
Warrants 3,500 35
American Telecasting
Warrants 85,225 852
APP Finance II Mauritius Cl B
12.00% 22,600(b,c) 13,786,000
Australis Holdings
Warrants 13,400(c) 134
Bar Technologies
Warrants 10,000 200,000
Belco Oil & Gas
6.50% Cv 210,000 3,622,500
Bell Technology
Warrants 19,525 1,464,375
Benedek Communications
11.50% Pay-in-kind 7,000(b,l) 5,250,000
Warrants 70,000(j) 140,000
Bestel
Warrants 10,400 104,000
Birch Telecom
Warrants 14,000 70,000
Capstar Broadcasting
12.00% Pay-in-kind Exchangeable 47,700(l) 5,777,663
Capstar Communications
12.63% Pay-in-kind Series E 64,555(l) 8,012,889
Century Maintenance
13.25% Pay-in-kind Series C 127,640(l) 14,024,445
Chesapeake Energy
7.00% Cv 33,300(d) 666,000
Clark Materials Handling
13.00% 7,148(b) 6,183,020
Clearnet Communications
Warrants 42,240 337,920
Communications & Power Inds
14.00% Pay-in-kind Series B 199,425(l) 21,537,901
Concentric Network
13.50% Pay-in-kind Series B 12,670(l) 12,606,650
Crown Packaging
Warrants 10,000(i) --
CSC Holdings
11.13% Pay-in-kind Series M 330,067(l) 38,081,479
11.75% Pay-in-kind Series H 150,267(l) 17,261,922
Dairy Mart
Warrants 311,333(d) 112,080
Dobson Communications
13.00% Pay-in-kind 8,500(b,d,l) 8,415,000
Fairfield Mfg
11.25% Pay-in-kind 6,580(b,l) 6,769,174
Geotek Communications
Warrants 872,500 1
HarCor Energy
Warrants 110,000 55,000
Hemmeter Enterprises
Warrants 36,000(i) --
Hosiery Corp of America
Warrants 10,000 400,000
Hyperion Telecommunications
12.88% Pay-in-kind Series B 5,453(l) 5,071,290
Intermedia Communications
7.00% Cv Series F 240,000 5,130,000
13.50% Pay-in-kind Series B 18,631(l) 19,562,550
Warrants 22,750 2,184,000
Intl Wireless Communications
Warrants 14,750 148
Iridium World Communications
Warrants 17,150 17,150
IXC Communications
12.50% Pay-in-kind Series B 4,452(l) 4,318,440
Jitney-Jungle Stores of America Cl A
15.00% 109,500 7,117,500
Kelley Oil & Gas
2.63% Cv 153,165 775,398
KMC Telecom Holdings
Warrants 12,000 30,000
Knology Holdings
Warrants 11,000 27,500
Lady Luck Gaming
Pay-in-kind 50,000(b,j,l) 2,000,000
Liberty Group Publishing
14.75% Cv 499,487(b) 12,487,175
MetroNet Communications
Warrants 8,750 860,732
Nakornthai Strip Mill
Warrants 7,407,184 7
Nebco Evans Holdings
11.25% Pay-in-kind 129,891(l) 5,260,586
Nextel Communications
11.13% Pay-in-kind Series E 7,462(l) 7,462,000
13.00% Pay-in-kind Series D 20,500(l) 22,293,750
North Atlantic Trading
12.00% Pay-in-kind 1(b,d,l) 22
NTL
13.00% Pay-in-kind Series B 25,848(d,l) 28,432,800
Packaging Corp of America
12.38% Pay-in-kind 42,500(b,d,l) 4,462,500
Paxson Communications
12.50% Pay-in-kind Exchangeable 230,660(b,l) 20,990,060
Pegasus Communications
12.75% Pay-in-kind 62,500(b,l) 7,328,125
12.75% Pay-in-kind Series A 3,059(b,l) 3,403,138
Poland Telecom
Warrants 20,500 990,800
Price Communications
Warrants 41,280 3,663,600
Primus Telecommunications
Warrants 11,550 173,250
R&B Falcon
13.88% Pay-in-kind 12,000(b,d,l) 12,360,000
RSL Communications
Warrants 9,500 902,500
SGW Holding
12.50% Pay-in-kind Series B 136,145(b,j,l) 2,314,465
Cv Series A 87,091(b,j) 899,940
Warrants 2,750(j) 870,375
Sinclair Capital
11.63% 140,000 15,260,000
Telehub Communications
Warrants 12,000 600,000
Unifi Communications
Warrants 10,000 100
Unisite
Cl C 5,938(b,j) 3,147,140
Warrants 4,504(j) 45
Versatel
Warrants 16,600 996,000
Vialog
Warrants 22,600 1,130,000
Warren (SD)
14.00% Series B 597,430(b) 31,365,075
Wireless One
Warrants 23,250 233
Total preferred stocks & other
(Cost: $417,308,679) $406,047,264
See accompanying notes to investments in securities.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Short-term securities (0.6%)
Issuer Annualized Amount Value(a)
yield on date payable at
of purchase maturity
U.S. government agencies (0.4%)
Federal Home Loan Bank Disc Nt
<S> <C> <C> <C>
06-30-99 4.73% $4,000,000 $3,982,287
Federal Home Loan Mtge Corp Disc Nts
06-24-99 4.75 8,400,000 8,371,365
06-30-99 4.75 1,600,000 1,593,287
Federal Natl Mtge Assn Disc Nts
06-04-99 4.80 3,100,000 3,096,950
06-17-99 4.73 400,000 398,896
Total 17,442,785
Commercial paper (0.1%)
GTE Funding
06-07-99 4.84 3,700,000 3,695,542
Letter of credit (0.1%)
Bank of America-
AES Hawaii
06-10-99 4.84 2,200,000 2,196,458
Total short-term securities
(Cost: $23,336,489) $23,334,785
Total investments in securities
(Cost: $4,115,507,606)(m) $3,818,901,721
See accompanying notes to investments in securities.
</TABLE>
<PAGE>
Notes to investments in securities
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) Non-income producing. For long-term debt securities, item identified is in
default as to payment of interest and/or principal.
(c) Foreign security values are stated in U.S. dollars. For debt securities,
principal amounts are denominated in the currency indicated. As of May 31, 1999,
the value of foreign securities represented 13.13% of net assets.
(d) 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.
(e) Adjustable rate mortgage; interest rate varies to reflect current market
conditions; rate shown is the effective rate on May 31, 1999.
(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) Interest rate varies either based on a predetermined schedule or to reflect
current market conditions; rate shown is the effective rate on May 31, 1999.
(i) Negligible market value.
<PAGE>
<TABLE>
<CAPTION>
(j) 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, 1999, is as follows:
Security Acquisition Cost
dates
Arena Brands
<S> <C> <C>
Common 09-03-92 $5,888,888
Benedek Communications
Warrants 05-10-96 482,759
Cable Systems USA
10.75% 1999 02-02-96 11,644
ECM Funding LP
11.92% 2002 04-13-92 1,277,510
Gemini Inds
13.50% 2001 12-23-96 13,500,000
Lady Luck Gambling
Pay-in-kind Preferred 11-19-98 1,750,000
SGW Holdings
12.50% Pay-in-kind Series B Preferred 08-12-97 thru 04-15-99 2,328,107
Cv Series A Preferred 08-12-97 899,998
Warrants 08-12-97 867,900
Unisite
Cl C Preferred 12-17-97 2,750,066
Warrants 12-17-97 --
13.00% Zero Coupon Sub Nts 2000* 12-18-97 9,000,000
Veninfotel
(U.S. Dollar) 10.00% Cv Pay-in-kind 2002 03-05-97 thru 09-01-98 9,450,000
*Represents a security sold under Rule 144A, which is exempt from registration
under the Securities Act of 1933, as amended.
(k) 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.
(l) Pay-in-kind securities are securities in which the issuer makes interest or
dividend payments in cash or in additional securities. The securities usually
have the same terms as the original holdings.
(m) At May 31, 1999, the cost of securities for federal income tax purposes was
$4,115,990,015 and the aggregate gross unrealized appreciation and depreciation
based on that cost was:
Unrealized appreciation $138,215,711
Unrealized depreciation (435,304,005)
------------
Net unrealized depreciation $(297,088,294)
</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 Quality Income Portfolio (a series
of Income Trust) as of May 31, 1999, and the related statement of operations for
the year then ended and the statements of changes in net assets for each of the
years in the two-year period ended May 31, 1999. 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 Quality Income Portfolio as of
May 31, 1999, 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 LLP
KPMG LLP
Minneapolis, Minnesota
July 2, 1999
<PAGE>
Financial Statements
Statement of assets and liabilities
Quality Income Portfolio
May 31, 1999
Assets
Investments in securities, at value (Note 1)
(identified cost $1,598,017,782) $1,607,768,002
Dividends and accrued interest receivable 22,690,992
Receivable for investment securities sold 137,025
-------
Total assets 1,630,596,019
-------------
Liabilities
Disbursements in excess of cash on demand deposit 1,137,513
Payable for investment securities purchased 51,552,200
Accrued investment management services fee 22,194
Other accrued expenses 45,552
------
Total liabilities 52,757,459
----------
Net assets $1,577,838,560
==============
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
Statement of operations
Quality Income Portfolio
Year ended May 31, 1999
Investment income
Income:
<S> <C>
Dividends $ 807,500
Interest 108,515,933
-----------
Total income 109,323,433
-----------
Expenses (Note 2):
Investment management services fee 8,295,239
Compensation of board members 11,997
Custodian fees 67,459
Audit fees 30,000
Other 26,830
------
Total expenses 8,431,525
Earnings credits on cash balances (Note 2) (14,291)
-------
Total net expenses 8,417,234
---------
Investment income (loss) -- net 100,906,199
-----------
Realized and unrealized gain (loss) -- net
Net realized gain (loss) on:
Security transactions (Note 3) 35,863,093
Financial futures contracts 3,857,938
Options contacts written 1,942,225
---------
Net realized gain (loss) on investments 41,663,256
Net change in unrealized appreciation (depreciation) on investments
and on translation of assets and liabilities in foreign currencies (78,170,119)
-----------
Net gain (loss) on investments and foreign currencies (36,506,863)
-----------
Net increase (decrease) in net assets resulting from operations $ 64,399,336
=============
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statements of changes in net assets
Quality Income Portfolio
Year ended May 31, 1999 1998
Operations
<S> <C> <C>
Investment income (loss) -- net $ 100,906,199 $ 105,079,943
Net realized gain (loss) on investments 41,663,256 (2,535,432)
Net change in unrealized appreciation (depreciation) on investments
and on translation of assets and liabilities in foreign currencies (78,170,119) 59,167,525
----------- ----------
Net increase (decrease) in net assets resulting from operations 64,399,336 161,712,036
Net contributions (withdrawals) from partners (93,477,216) (170,449,665)
----------- ------------
Total increase (decrease) in net assets (29,077,880) (8,737,629)
Net assets at beginning of year 1,606,916,440 1,615,654,069
------------- -------------
Net assets at end of year $1,577,838,560 $1,606,916,440
============== ==============
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.
The Portfolio's significant accounting policies are summarized below:
Use of estimates
Preparing financial statements that conform to generally accepted accounting
principles requires management to make estimates (e.g., on assets and
liabilities) that could differ from actual results.
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 that reflects fair value
as quoted by dealers 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
To produce incremental earnings, protect gains and facilitate buying and selling
of securities for investments, the Portfolio may buy and write options traded on
any U.S. or foreign exchange or in the over-the-counter market where completing
the obligation depends 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 as well as write cash-secured put options. The
risk in writing a call option is that the Portfolio gives up the opportunity for
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 being unable 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 when the option transaction expires or closes. 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
To gain exposure to or protect itself from market changes, 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 of 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,
if any, may arise from sales of foreign currency, closed forward contracts,
exchange gains or losses realized between the trade date and settlement date 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 its contract obligations.
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, 1999,
the Portfolio had entered into outstanding when-issued or forward-commitments of
$38,097,667.
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. As a "pass-through" entity, the Portfolio therefore
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 an Investment Management Services
Agreement with AEFC to manage 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, 1999, the Portfolio's custodian fees were reduced
by $14,291 as a result of earnings credits from overnight cash balances. The
Portfolio also pays custodian fees to American Express Trust Company, an
affiliate of AEFC.
According to a Placement Agency Agreement, American Express Financial Advisors
Inc. acts as placement agent of the Trust's units.
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities (other than short-term
obligations) aggregated $455,791,875 and $497,118,788, respectively, for the
year ended May 31, 1999. For the same period, the portfolio turnover rate was
30%. Realized gains and losses are determined on an identified cost basis.
Income from securities lending amounted to $30,661 for the year ended May 31,
1999. 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.
4. OPTIONS CONTRACTS WRITTEN
Contracts and premium amounts associated with options contracts written are as
follows:
Year ended May 31, 1999
Calls
Contracts Premium
Balance May 31, 1998 -- $ --
Opened 2,000 3,540,802
Expired (250) (342,500)
Closed (1,750) (3,198,302)
------ ----------
Balance May 31, 1999 -- $ --
See "Summary of significant accounting policies."
5. INTEREST RATE FUTURES CONTRACTS
As of May 31, 1999, investment is securities included securities valued at
$13,746,434 that were pledged as collateral to cover initial margin deposit on
1,100 open sales contracts. The market value of the open sales contracts as of
May 31, 1999, was $129,215,625 with a net unrealized loss of $287,208. See
"Summary of significant accounting policies."
<PAGE>
<TABLE>
<CAPTION>
Investments in Securities
Quality Income Portfolio
May 31, 1999
(Percentages represent value of investments compared to net assets)
Bonds (92.7%)
Issuer Coupon Principal Value(a)
rate amount
Government obligations (29.4%)
Overseas Private Investment
U.S. Govt Guaranty Series 1996A
<S> <C> <C> <C>
01-15-09 6.99% $10,000,000 $10,189,600
People's Republic of China
(U.S. Dollar)
01-15-96 9.00 10,000,000(b) 9,572,671
Resolution Funding Corp
Zero Coupon
10-15-06 8.95 28,000,000(c) 18,056,643
04-15-16 8.05 47,000,000(c) 15,999,087
U.S. Treasury
07-31-99 6.88 60,000,000 60,205,992
02-15-00 5.88 25,000,000 25,160,063
08-15-00 6.00 11,400,000 11,500,339
11-15-01 7.50 109,000,000 113,961,636
02-15-04 5.88 8,000,000 8,062,850
05-15-04 7.25 25,000,000 26,628,893
08-15-04 7.25 26,800,000 28,596,096
11-15-08 4.75 18,000,000 16,734,384
11-15-16 7.50 95,370,000(j) 109,249,787
TIPS
01-15-07 3.38 8,050,000(i) 8,119,717
Total 462,037,758
Mortgage-backed securities (15.9%)
Federal Home Loan Mtge Corp
07-01-16 8.00 428 445
01-01-17 8.00 3,621 3,780
03-01-17 8.50 107,746 113,546
06-01-17 8.50 62,407 65,884
04-01-20 9.00 1,382,555 1,473,555
04-01-21 9.00 954,776 1,020,608
03-01-22 8.50 2,248,518 2,370,973
08-01-22 8.50 2,113,071 2,226,817
06-01-24 7.50 8,615,127 8,808,709
02-01-25 8.00 3,822,073 3,970,484
Collateralized Mtge Obligation
09-01-19 8.50 137,983 145,238
Federal Housing Admin
01-01-24 7.43 8,747,684 9,077,086
Federal Natl Mtge Assn
11-01-02 10.00 86 90
03-01-10 6.50 15,000,000(k) 14,934,375
04-01-14 6.50 18,921,793 18,857,838
10-01-23 6.50 8,672,627 8,492,497
03-01-25 7.00 22,800,000(k) 22,814,249
11-01-26 8.00 6,322,224 6,563,796
04-01-27 7.50 7,794,632 7,957,618
06-01-27 7.50 8,565,440 8,744,543
07-01-27 8.00 6,946,871 7,212,601
01-01-28 6.50 3,039,825 2,971,946
05-01-28 6.50 19,168,111 18,740,087
09-01-28 6.00 14,588,477 13,863,138
12-01-28 6.50 18,882,642 18,454,950
02-01-29 6.50 19,783,765 19,335,663
03-01-29 6.50 14,965,278 14,627,974
Collateralized Mtge Obligation
10-25-19 8.50 1,448,659 1,538,799
Principal Only
09-01-18 9.50 533,091(f) 438,955
01-25-20 9.89 355,325(f) 347,098
Trust Series Z
02-25-24 6.00 23,276,132(h) 20,236,501
Govt Natl Mtge Assn
05-15-26 7.50 11,847,044 12,130,189
Prudential Bache
Collateralized Mtge Obligation
04-01-19 7.97 2,182,191 2,240,860
Total 249,780,892
Automotive & related (2.6%)
Daimler-Benz North America
Company Guaranty Medium-term Nts Series A
09-15-06 7.38 18,745,000 19,571,698
General Motors
05-15-03 8.88 7,050,000 7,584,159
GMAC
Medium-term Nts
03-01-00 7.00 14,300,000 14,485,042
Total 41,640,899
Banks and savings & loans (8.0%)
ABN-Amro Bank
(U.S. Dollar) Sub Nts Series B
05-15-23 7.75 12,000,000(b) 12,634,219
Banco General
(U.S. Dollar)
08-01-02 7.70 6,400,000(b,d) 6,045,725
BankAmerica
Sub Nts Series B
12-31-26 7.70 5,000,000(d) 4,954,367
Bayerische Landesbank
(U.S. Dollar) Deposit Nts
02-26-01 5.63 13,750,000(b) 13,689,478
Cullen/Frost Capital
Series A
02-01-27 8.42 10,000,000 10,036,620
First Chicago
Sr Sub Nts
06-15-99 9.00 7,900,000 7,909,919
Firstar Capital
Company Guaranty Series B
12-15-26 8.32 10,000,000 10,151,803
Greenpoint Bank
Sr Nts
07-15-02 6.70 15,000,000 14,958,450
Morgan (JP)
Sr Sub Medium-term Nts Series A
02-15-12 4.00 9,350,000(l) 8,296,723
NationsBank
Sub Nts
11-01-01 9.25 8,950,000 9,578,644
NCNB
Sub Nts
10-15-01 9.13 10,000,000 10,699,175
Swiss Bank
Sub Deb
09-01-26 7.75 11,369,000 11,189,638
Washington Mutual Capital
Company Guaranty
06-01-27 8.38 5,800,000 5,955,954
Total 126,100,715
Building materials & construction (1.4%)
Foster Wheeler
11-15-05 6.75 5,850,000 5,545,729
Tyco Intl Group
(U.S. Dollar) Company Guaranty
06-15-05 6.38 17,000,000(b) 16,785,617
Total 22,331,346
Chemicals (1.5%)
Dow Chemical
01-15-09 5.97 12,755,000 12,011,384
USA Waste Services
Sr Nts
10-01-07 7.13 11,900,000 12,088,417
Total 24,099,801
Communications equipment & services (1.8%)
BellSouth Telecommunications
12-01-95 7.00 10,000,000 9,817,816
TCI Telecommunications
Sr Nts
02-15-28 7.13 10,000,000 9,923,710
Telekom Malaysia
(U.S. Dollar)
08-01-25 7.88 10,000,000(b,d) 9,085,678
Total 28,827,204
Electronics (0.8%)
Harris
12-01-18 10.38 3,900,000 4,110,873
Hyundai Semiconductor
(U.S. Dollar) Sr Nts
05-15-07 8.63 10,800,000(b,d) 9,228,754
Total 13,339,627
Energy (3.6%)
PDV America
Sr Nts
08-01-03 7.88 16,500,000 14,795,681
Petronas
(U.S. Dollar)
08-15-15 7.75 10,000,000(b,d) 8,981,785
Phillips Petroleum
03-15-28 7.13 12,000,000 11,362,358
Texaco Capital
Gtd Deb
03-01-43 7.50 12,000,000 12,106,355
USX-Marathon Group
05-15-22 9.38 9,200,000 10,115,510
Total 57,361,689
Financial services (3.0%)
Greyhound Financial
Medium-term Nts Series A
07-02-99 7.95 9,600,000 9,619,683
KFW Intl Finance
(U.S. Dollar) Medium-term Nts
12-15-99 8.50 10,000,000(b) 10,171,053
Marlin Water Trust
Sr Nts
12-15-01 7.09 10,000,000 9,929,163
Railcar Leasing
01-15-13 7.13 12,150,000(d) 12,451,043
Salomon
Sr Nts
05-15-00 7.75 5,000,000 5,109,032
Total 47,279,974
Health care (1.5%)
Baxter Intl
02-15-28 6.63 12,000,000 11,152,172
Lilly (Eli)
01-01-36 6.77 13,300,000 13,139,310
Total 24,291,482
Health care services (2.7%)
AETNA Services
08-15-03 6.38 13,650,000 13,429,490
HEALTHSOUTH
Sr Nts
06-15-08 7.00 15,000,000 14,004,900
Service Corp Intl
03-15-08 6.50 15,350,000 14,438,756
Total 41,873,146
Industrial equipment & services (1.6%)
ARAMARK Services
08-01-04 6.75 15,000,000 14,713,860
Deere & Co
06-15-19 8.95 10,000,000 11,298,847
Total 26,012,707
Insurance (4.1%)
Arkwright CSN Trust
08-15-26 9.63 11,000,000(d) 11,953,662
Conseco Financing Trust
Company Guaranty
11-15-26 8.70 6,600,000 6,129,211
Equitable Life Assurance
12-01-15 7.70 5,000,000(d) 5,127,113
Nationwide CSN Trust
02-15-25 9.88 11,500,000(d) 13,098,547
SAFECO Capital
Company Guaranty
07-15-37 8.07 15,000,000 14,553,901
SunAmerica
08-01-08 9.95 11,000,000 13,590,940
Total 64,453,374
Media (0.9%)
Time Warner Entertainment
Sr Nts
07-15-33 8.38 12,000,000 13,679,599
Metals (0.7%)
Alcan Aluminum
(U.S. Dollar)
01-15-22 8.88 9,600,000(b) 10,290,355
Miscellaneous (0.7%)
Jasmine Submarine Telecom
(U.S. Dollar) Sr Nts
05-30-11 8.48 1,477,508(b,d) 1,175,130
Provident Companies
Sr Nts
03-15-28 7.25 10,027,000 9,870,691
Total 11,045,821
Multi-industry conglomerates (0.8%)
Hutchison Whampoa Finance
(U.S. Dollar) Company Guaranty
08-01-27 7.50 14,025,000(b,d) 12,224,640
Paper & packaging (0.7%)
Caraustar Inds
06-01-09 7.38 11,775,000 11,656,433
Retail (1.8%)
Dayton Hudson
06-15-23 7.88 18,850,000 19,124,897
Wal-Mart CRAVE Trust
07-17-06 7.00 9,789,938(d) 9,788,861
Total 28,913,758
Transportation (1.3%)
Burlington Northern Santa Fe
12-15-25 7.00 10,000,000 9,729,816
Enterprise Rent-A-Car USA Finance
02-15-08 6.80 10,000,000(d) 9,687,000
Zhuhai Highway
(U.S. Dollar) Sr Nts
07-01-06 9.13 2,850,000(b) 1,738,500
Total 21,155,316
Utilities -- electric (4.1%)
Arizona Public Service
1st Mtge Sale Lease-backed Obligation
12-30-15 8.00 9,000,000 9,617,522
Cajun Electric Power
Mtge Trust
03-15-19 8.92 4,842,837 5,068,126
Commonwealth Edison
1st Mtge Series 90
04-15-00 6.50 9,000,000 9,055,472
Israel Electric
(U.S. Dollar) Sr Nts
12-15-26 7.88 9,000,000(b,d) 8,329,860
Korea Electric Power
(U.S. Dollar)
07-01-02 8.00 9,000,000(b) 9,042,654
(U.S. Dollar) Zero Coupon
04-01-16 10.07 35,000,000 (b,e) 5,751,116
Salton Sea Funding
Series C
05-30-10 7.84 10,000,000 10,289,091
Wisconsin Electric Power
12-01-95 6.88 8,000,000 7,714,164
Total 64,868,005
Utilities -- telephone (3.8%)
AT&T
01-15-25 8.35 5,000,000 5,401,823
12-01-31 8.63 14,000,000 15,216,060
GTE Florida
02-01-28 6.86 12,450,000 12,114,175
New York Telephone
07-15-31 9.38 14,000,000 15,456,296
WorldCom
Sr Nts
08-15-28 6.95 12,000,000 11,535,660
Total 59,724,014
Total bonds
(Cost: $1,453,788,404) $1,462,988,555
Preferred stock (0.6%)
Issuer Shares Value(a)
Salomon Income Financing Trust
2.38% 340,000 $9,073,750
Total preferred stock
(Cost: $8,500,000) $9,073,750
Short-term securities (8.6%)
Issuer Annualized Amount Value(a)
yield on date payable at
of purchase maturity
U.S. government agencies (5.3%)
Federal Home Loan Bank Disc Nt
07-16-99 4.79% $2,400,000 $2,384,768
Federal Home Loan Mtge Corp Disc Nts
06-15-99 4.77 5,300,000 5,288,087
06-16-99 4.76 12,200,000 12,165,393
06-24-99 4.78 15,700,000 15,646,027
07-14-99 4.79 5,700,000 5,665,331
07-16-99 4.76 5,200,000 5,167,205
08-13-99 4.83 7,500,000 7,419,792
Federal Natl Mtge Assn Disc Nts
06-17-99 4.73 13,300,000 13,263,279
08-06-99 4.86 16,300,000 16,141,527
Total 83,141,409
Commercial paper (3.0%)
ALCOA
08-04-99 4.90 1,400,000 1,386,778
BBV Finance (Delaware)
07-26-99 4.89 2,500,000 2,479,730
CAFCO
06-01-99 4.84 500,000(g) 499,800
Ciesco LP
07-08-99 4.84 1,100,000 1,094,042
Corporate Receivables
06-16-99 4.85 800,000(g) 798,072
Delaware Funding
06-17-99 4.83 5,100,000(g) 5,087,080
Falcon Asset
06-25-99 4.83 2,500,000(g) 2,491,000
Fleet Funding
06-09-99 4.82 11,000,000(g) 10,983,867
General Electric Capital
06-01-99 4.93 800,000 799,671
Sheffield Receivables
06-14-99 4.85 16,400,000 (g) 16,364,795
Thames Asset Global
06-10-99 4.84 600,000(g) 599,036
U S WEST Communications
06-03-99 4.82 4,400,000 4,397,061
06-08-99 4.83 1,300,000 1,298,263
Total 48,279,195
Letter of credit (0.3%)
Bank of America-
AES Hawaii
06-24-99 4.82 4,300,000 4,285,093
Total short-term securities
(Cost: $135,729,378) $135,705,697
Total investments in securities
(Cost: $1,598,017,782)(m) $1,607,768,002
See accompanying notes to investments in securities.
</TABLE>
<PAGE>
Notes to investments in securities
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) Foreign security values are stated in U.S. dollars. For debt securities,
principal amounts are denominated in the currency indicated. As of May 31, 1999,
the value of foreign securities represented 9.17% of net assets.
(c) For zero coupon bonds, the interest rate disclosed represents the annualized
effective yield on the date of acquisition.
(d) 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.
(e) 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.
(f) 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.
(g) 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.
(h) This security is a collateralized mortgage obligation that pays no interest
or principal during its initial accrual period until previous series within the
trust have been paid off. Interest is accrued at an effective yield; similar to
a zero coupon bond.
(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) Partially pledged as initial deposit on the following open interest rate
futures contracts (see Note 5 to the financial statements):
Type of security Notional amount
Sale contracts
U.S. Treasury Bonds, Sept. 1999 $1,100,000
(k) At May 31, 1999, the cost of securities purchased, including interest
purchased, on a when-issued basis was $38,097,667.
(l) Interest rate varies either based on a predetermined schedule or to reflect
current market conditions; rate shown is the effective rate on May 31, 1999.
(m) At May 31, 1999, the cost of securities for federal income tax purposes was
$1,598,147,925 and the aggregate gross unrealized appreciation and depreciation
based on that cost was:
Unrealized appreciation $36,773,244
Unrealized depreciation (27,153,167)
-----------
Net unrealized appreciation $9,620,077
<PAGE>
PART C. OTHER INFORMATION
Item 23. Exhibits
(a)(1) 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 by reference.
(a)(2) Articles of Amendment dated April 4, 1996, filed as Exhibit 1(b) to
Pre-Effective Amendment 2, are incorporated by reference.
(b) By-laws effective April 24, 1996 filed electronically on or about
April 18, 1996 as Exhibit 2, are incorporated by reference.
(c) Instruments Defining Rights of Security Holders: Not Applicable.
(d) Investment Advisory Contracts: Not Applicable.
(e) Distribution Agreement between Strategist Income Fund, Inc. on behalf
of its underlying series funds and American Express Service
Corporation, dated June 10, 1996, filed electronically on or about
January 29, 1997 as Exhibit 6 to Registrant's Post-Effective Amendment
No. 1, is incorporated by reference.
(f) Bonus or Profit Sharing Contracts: Not Applicable.
(g)(1) Custodian Agreement between Strategist Income Fund, Inc. on behalf of
its underlying series funds and American Express Trust Company dated
June 10, 1996 filed electronically on or about January 29, 1997 as
Exhibit 8(a) to Registrant's Post-Effective Amendment No. 1, is
incorporated by reference.
(g)(2) Addendum to the Custodian Agreement, 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 by reference.
(h)(1) Administrative Services Agreement between Strategist Income Fund, Inc.
on behalf of its underlying series funds and American Express
Financial Corporation dated June 10, 1996 filed electronically on or
about January 29, 1997 as Exhibit 9(b) to Registrant's Post-Effective
Amendment No. 1, is incorporated by reference.
(h)(2) Agreement and Declaration of Unitholders between Strategist Government
Income Fund and IDS Federal Income Fund, Inc. dated June 10, 1996
filed electronically on or about January 29, 1997 as Exhibit 9(c) to
Registrant's Post-Effective Amendment No. 1, is incorporated by
reference.
(h)(3) Agreement and Declaration of Unitholders between Strategist High Yield
Fund and IDS Extra Income Fund, Inc. dated June 10, 1996 filed
electronically on or about January 29, 1997 as Exhibit 9(d) to
Registrant's Post-Effective Amendment No. 1, is incorporated by
reference.
(h)(4) Agreement and Declaration of Unitholders, between Strategist Quality
Income fund and IDS Selective Fund, Inc. dated June 10, 1996 filed
electronically on or about January 29, 1997 as Exhibit 9(e) to
Registrant's Post-Effective Amendment No. 1, is incorporated by
reference.
<PAGE>
(h)(5) Transfer Agency Agreement between Strategist Income Fund, Inc. on
behalf of its underlying series funds and American Express Client
Service Corporation dated as of January 1, 1998 filed electronically
on or about May 27, 1999 as Exhibit (h)(5) to Registrant's
post-Effective Amendment no. 5, is incorporated by reference.
(i) An opinion and consent of counsel as to the legality of securities
being registered filed electronically on or about May 27, 1999 as
Exhibit (I) to Registrant's Post-Effective Amendment No. 5, is
incorporated by reference.
(j) The Independent Auditor's Consent is filed electronically herewith.
(k) Omitted Financial Statements: Not Applicable.
(l) Share Purchase Agreement between Strategist Income Fund, Inc. and
American Express Financial Corporation dated April 16, 1996 filed as
Exhibit 13 to Pre-Effective Amendment 2, is incorporated by reference.
(m) Plan and Agreement of Distribution between Strategist Income Fund,
Inc. on behalf of its underlying series funds and American Express
Service Corporation dated June 10, 1996 filed electronically on or
about January 29, 1997 as Exhibit 15 to Registrant's Post-Effective
Amendment No. 1, is incorporated by reference.
(n) Financial data schedules. Not applicable.
(o) Rule 18f-3 Plan: Not Applicable.
(p)(1) Directors' Power of Attorney to sign Amendments to this Registration
Statement, dated April 19, 1999 is filed electronically herewith.
(p)(2) Officers' Power of Attorney to sign Amendments to this Registration
Statement, dated April 20, 1999 filed electronically as Exhibit (p)(2)
to Registrant's post-Effective Amendment No. 4, is incorporated by
reference.
(p)(3) Trustees Power of Attorney, dated January 14, 1999 filed
electronically as Exhibit (p)(3) to Registrant's post-Effective
Amendment No. 4, is incorporated by reference.
(p)(4) Officers' Power of Attorney, dated March 1, 1999 filed electronically
as Exhibit (p)(4) to Registrant's Post-Effective Amendment No. 4, is
incorporated by reference.
(p)(5) Form of Directors Power of Attorney to sign Amendments to this
Registration Statement is filed electronically herewith.
(p)(6) Form of Officers Power of Attorney to sign amendments to this
Registration Statement is filed electronically herewith.
(p)(7) Form of Trustees' power of Attorney to sign amendments to this
Registration Statement is filed electronically herewith.
(p)(8) Form of Officers' Power of Attorney to sign amendments to this
Registration Statement is filed electronically herewith.
Item 24. Persons Controlled by or Under Common Control with Registrant
None.
<PAGE>
Item 25. 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.
American Express Financial Corporation is the investment advisor of the
Portfolios of the Trust.
<TABLE>
<CAPTION>
Item 26. 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:
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Name and Title Other company(s) Address Title within other
company(s)
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C>
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.
Public Employee Payment Director and Vice President
Company
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Douglas A. Alger, American Express Financial IDS Tower 10 Senior Vice President
Director and Senior Vice Advisors Inc. Minneapolis, MN 55440
President
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Peter J. Anderson, Advisory Capital IDS Tower 10 Director
Director and Senior Vice Strategies 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 Centurion Life IDS Tower 10 Director and President
Vice President Assurance Company Minneapolis, MN 55440
American Express Financial Vice President
Advisors Inc.
IDS Life Insurance Company Executive Vice President
IDS Life Insurance Company P.O. Box 5144 Director and President
of New York Albany, NY 12205
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
John C. Boeder, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
IDS Life Insurance Company P.O. 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, Corporate Senior Advisors Inc. Minneapolis, MN 55440
Vice President
American Express Financial Director
Advisors Japan Inc.
American Express Minnesota Director
Foundation
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
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
Director, Senior Vice Advisors Inc. Minneapolis, MN 55440 Chief Marketing Officer
President and Chief Marketing
Officer
IDS Life Insurance Company Executive Vice President
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
James E. Choat, American Centurion Life IDS Tower 10 Executive Vice President
Director and Senior Vice Assurance Company Minneapolis, MN 55440
President
American Enterprise Life Director, President and
Insurance Company 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 Vice President
New 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 P.O. Box 5144 Executive Vice President
of New York Albany, NY 12205
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
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 Assistant Advisors Inc. Minneapolis, MN 55440 Assistant General Counsel
General Counsel
American Express Service Vice President and Chief
Corporation Legal Counsel
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Luz Maria Davis American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Douglas K. Dunning, 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, General Counsel Compliance Officer
and Chief Compliance Officer
American Express Financial Vice President and Chief
Advisors Japan Inc. 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 Director and Vice President
New 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 Senior Vice President and
Vice President Management Group Inc. Minneapolis, MN 55440 Chief Investment Officer
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.
American Express Financial Director, President and
Advisors Japan Inc. Chief Executive Officer
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Jeffrey P. Fox, American Enterprise Life IDS Tower 10 Vice President and
Vice President and Corporate Insurance Company Minneapolis, MN 55440 Controller
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 Marketing Advisors Inc. Minneapolis, MN 55440 Marketing Controller
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 Centurion Life Vice President
Assurance Company
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 Vice President
of New York Albany, NY 12205
IDS Property Casualty 1 WEG Blvd. Vice President
Insurance Company DePere, WI 54115
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Scott A. Hawkinson, American Express Financial IDS Tower 10 Vice President and
Vice President and Controller Advisors Inc. Minneapolis, MN 55440 Controller
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Janis K. Heaney, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
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 Corporate Minneapolis, MN 55440 and Assistant Secretary
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 Vice President and
Corporation Treasurer
American Express Financial Vice President and
Advisors Inc. Treasurer
American Express Financial Vice President and
Advisors Japan 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 Insurance Vice President and
Agency of Oregon 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 Partners Life Vice President and
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 Vice President and
New 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 Insurance Company P.O. Box 5144 Vice President and
of New York Albany, NY 12205 Treasurer
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
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
Public Employee Payment Vice President and
Company Treasurer
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
David R. Hubers, AMEX Assurance Company IDS Tower 10 Director
Director, President and Chief Minneapolis, MN 55440
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
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Debra A. Hutchinson 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
IDS Life Series Fund, Inc. Director
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
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
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Ora J. Kaine, 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
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Richard W. Kling, AMEX Assurance Company IDS Tower 10 Director
Director and Senior Vice Minneapolis, MN 55440
President
American Centurion Life Director and Chairman of
Assurance Company the Board
American Enterprise Life Director and Chairman of
Insurance Company the Board
American Express Director and President
Corporation
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 Director and President
New 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 and Chairman of
of New York Albany, NY 12205 the Board
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
John M. Knight American Express Financial IDS Tower 10 Vice President
Advisors Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
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
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
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Daniel E. Laufenberg, American Express Financial IDS Tower 10 Vice President and Chief
Vice President and Chief U.S. Advisors Inc. Minneapolis, MN 55440 U.S. Economist
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
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
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
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Timothy J. Masek American Express Financial IDS Tower 10 Vice President and
Vice President and Director Advisors Inc. Minneapolis, MN 55440 Director of Global Research
of Global Research
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Sarah A. Mealey, 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 Director
Corporation
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
Investors Syndicate Director, Chairman of the
Development Corporation Board and President
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
William P. Miller, Advisory Capital IDS Tower 10 Vice President
Vice President and Senior Strategies Group Inc. Minneapolis, MN 55440
Portfolio Manager
American Express Asset Senior Vice President and
Management Group Inc. Chief Investment Officer
American Express Financial Vice President and Senior
Advisors Inc. Portfolio Manager
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Shashank B. Modak American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
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
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
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 Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
Public Employee Payment Director and President
Company
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Thomas P. Perrine, American Express Financial IDS Tower 10 Senior Vice President
Director and Senior Vice Advisors Inc. Minneapolis, MN 55440
President
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
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 Assistant Advisors Inc. Minneapolis, MN 55440 Assistant General Counsel
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 and Project
Vice President and Project Advisors Inc. Minneapolis, MN 55440 Manager
Manager
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Frederick C. Quirsfeld, American Express Asset IDS Tower 10 Senior Vice President and
Director and Senior Vice Management Group Inc. Minneapolis, MN 55440 Senior Portfolio Manager
President
American Express Financial Senior Vice President
Advisors Inc.
Rollyn C. Renstrom, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
ReBecca K. Roloff, American Express Financial IDS Tower 10 Senior Vice President
Director and Senior Vice Advisors Inc. Minneapolis, MN 55440
President
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Stephen W. Roszell, Advisory Capital IDS Tower 10 Director
Director and Senior Vice Strategies Group Inc. Minneapolis, MN 55440
President
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.
American Express Trust Director
Company
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
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 Vice President
New 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.
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Theresa M. Sapp American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Stuart A. Sedlacek, AMEX Assurance Company IDS Tower 10 Director
Director, Senior Vice Minneapolis, MN 55440
President and 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
IDS Property Casualty 1 WEG Blvd. Director
Insurance Company DePere, WI 54115
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
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 Centurion Life Vice President
Assurance Company
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 Chairman of the Board and
Inc. President
IDS Realty Corporation Director and Vice President
IDS Life Insurance Company P.O. Box 5144 Vice President
of New York Albany, NY 12205
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Judy P. Skoglund, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Bridget Sperl, American Express Client IDS Tower 10 Vice President
Vice President Service Corporation Minneapolis, MN 55440
American Express Financial Vice President
Advisors Inc.
Public Employee Payment Director and President
Company
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
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 Assistant Insurance Company Minneapolis, MN 55440 General Counsel and
General Counsel Secretary
American Express Director, Vice President
Corporation 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 and General Advisors Inc. Minneapolis, MN 55440
Auditor
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
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
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Keith N. Tufte American Express Financial IDS Tower 10 Vice President and
Vice President and Director Advisors Inc. Minneapolis, MN 55440 Director of Equity Research
of Equity Research
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
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 Vice President
New 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
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Jeffry 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 Assistant Advisors Inc. Minneapolis, MN 55440 Assistant General Counsel
General Counsel
American Express Financial Vice President and Chief
Advisors Japan Inc. Legal Officer
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Michael D. Wolf, American Express Asset IDS Tower 10 Executive Vice President
Vice President Management Group Inc. Minneapolis, MN 55440 and Senior Portfolio
Manager
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 Vice President
New 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 P.O. Box 5144 Director
of New York Albany, NY 12205
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
</TABLE>
<TABLE>
<CAPTION>
Item 27. 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:
Name and Principal Business Address Position and Offices with Offices with Registrant
Underwriter
- -------------------------------------- ----------------------------------- -----------------------------------
<S> <C> <C>
Ward D. Armstrong Vice President None
IDS Tower 10
Minneapolis, MN 55440
John C. Boeder Vice President None
IDS Tower 10
Minneapolis, MN 55440
Cynthia M. Carlson Vice President None
IDS Tower 10
Minneapolis, MN 55440
John R. Cattau Vice President None
American Express Tower
World Financial Center
New York, NY 10285
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 None
IDS Tower 10
Minneapolis, MN 55440
Nancy E. Jones Vice President None
IDS Tower 10
Minneapolis, MN 55440
Verna J. Kaufman Vice President 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
Julia K. Morton Vice President and Chief None
IDS Tower 10 Financial Officer
Minneapolis, MN 55440
Ann M. Richter Vice President and Chief None
IDS Tower 10 Compliance Officer
Minneapolis, MN 55440
</TABLE>
Item 27(c). Not applicable.
Item 28. Location of Accounts and Records
American Express Financial Corporation
IDS Tower 10
Minneapolis, MN 55440
Item 29. Management Services
Not Applicable.
Item 30. Undertakings
Not Applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act and the Investment Company
Act, the Registrant, Strategist Income Fund, Inc., certifies that it meets the
requirements for the effectiveness of this Amendment to its Registration
Statement under 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 27th day of July, 1999.
STRATEGIST INCOME FUND, INC.
By /s/ James A. Mitchell**
James A. Mitchell, President
By /s/ John Knight
John Knight, 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 27th day of July, 1999.
Signature Title
/s/ Rodney P. Burwell* Director
Rodney P. Burwell
/s/ Jean B. Keffeler* Director
Jean B. Keffeler
/s/ Thomas R. McBurney* Director
Thomas R. McBurney
/s/ James A. Mitchell* Director
James A. Mitchell
*Signed pursuant to Director's Power of Attorney dated April 19, 1999 filed
electronically herewith as Exhibit (p)(1), by:
/s/ Eileen J. Newhouse
- ----------------------------
Eileen J. Newhouse
**Signed pursuant to Officer's Power of Attorney dated April 20, 1999 filed
electronically herewith as Exhibit (p)(2) to Registrant's Post-Effective
Amendment No. 4 to Registration Statement No. 33-60323, by:
/s/ Eileen J. Newhouse
- ----------------------------
Eileen J. Newhouse
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act and the Investment Company
Act, 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 27th day of July, 1999.
INCOME TRUST
By /s/ Arne H. Carlson****
Arne H. Carlson
Chief Executive Officer
By /s/ John Knight
John Knight
Treasurer
Pursuant to the requirements of the Securities Act, this Amendment to the
Registration Statement has been signed below by the following persons in the
capacities indicated on the 27th day of July, 1999.
Signatures Capacity
/s/ H. Brewster Atwater Jr.*** Trustee
H. Brewster Atwater Jr.
/s/ Arne H. Carlson*** Chairman of the Board
Arne H. Carlson
/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
/s/ William R. Pearce*** Trustee
William R. Pearce
<PAGE>
Signatures Capacity
/s/ Alan K. Simpson*** Trustee
Alan K. Simpson
/s/ John R. Thomas*** Trustee
John R. Thomas
/s/ C. Angus Wurtele*** Trustee
C. Angus Wurtele
***Signed pursuant to Trustees Power of Attorney dated January 14, 1999 filed
electronically as Exhibit (p)(3) to Registrant's Post-Effective Amendment No. 4
to Registration Statement No. 33-60323, by:
/s/ Leslie L. Ogg
- -----------------------------------
Leslie L. Ogg
****Signed pursuant to Officers' Power of Attorney dated March 1, 1999 filed
electronically as Exhibit (p)(4) to Registrant's Post-Effective Amendment No. 4
to Registration Statement No. 33-60323, by:
/s/ Leslie L. Ogg
- -----------------------------------
Leslie L. Ogg
<PAGE>
CONTENTS OF THIS POST-EFFECTIVE AMENDMENT NO. 5 TO REGISTRATION STATEMENT NO.
33-60323
This Amendment to the Registration Statement comprises the following papers and
documents:
The facing sheet.
Part A.
The prospectus.
Part B.
Statement of Additional Information.
Part C.
Other Information.
The signatures.
Exhibit Index
(j) Independent Auditor's Consent
(p)(1) Director's Power of Attorney
(p)(5) Form of Director's Power of Attorney
(p)(6) Form of Officer's Power of Attorney
(p)(7) Form of Trustees' Power of Attorney
(p)(8) Form of Officers' Power of Attorney
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 LLP
KPMG LLP
Minneapolis, Minnesota
July 27, 1999
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, or Heidi
S. Brommer as her or his attorney-in-fact and agent, to sign for 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 19th day of April, 1999.
/s/ Rodney P. Burwell
Rodney P. Burwell
/s/ Jean B. Keffeler
Jean B. Keffeler
/s/ Thomas R. McBurney
Thomas R. McBurney
/s/ James A. Mitchell
James A. Mitchell
/s/ John R. Thomas
John R. Thomas
FORM OF
DIRECTORS 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 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
[Company name] [number] [number]
hereby constitutes and appoints [Name] and [Name] 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 and 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 [date] day of [month], [year].
RESOLVED, That the President, any Vice President, the Treasurer or any Assistant
Treasurer, the Secretary or any Assistant Secretary, may sign an document,
including, but not limited to, a consent; a power of attorney; an assignment; or
a contract when, in the judgment of the officer, there appears appropriate
authority to do so; and further,
RESOLVED, That each officer may give a power of attorney to one or more other
officers for the purpose of signing the registration statement and any other
filing as deemed appropriate by the officer; and those other officers may
exercise the authority granted by the power of attorney by signing the documents
as permitted by Rule 483(b) of the securities Act of 1933.
FORM OF
OFFICERS POWER OF ATTORNEY
City of Minneapolis
State of Minnesota
Each of the undersigned, as officers of the below listed open-end,
diversified 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
[Company name] [number] [number]
hereby constitutes and appoints [name] and [name] or either one of them, as her
or his attorney-in-fact and agent, to sign for her or him or his name, place and
stead, as an officer, any and all further amendments to said registration
statements filed pursuant to said Acts and any rules and regulations thereunder,
and to filed 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 [date] day of [month], [year].
Resolution Authorizing POA pursuant to Rule 483(b) under the 33 Act
RESOLVED, That the President, any Vice President, the Treasurer or any Assistant
Treasurer, the Secretary or any Assistant Secretary, may sign any document;
including, but not limited to, a consent; a power of attorney; an assignment; or
a contract when, in the judgment of the officer, there appears appropriate
authority to do so; and further,
RESOLVED, That each officer may give a power of attorney to one or more other
officers for the purpose of signing the registration statement and any other
filing as deemed appropriate by the officer; and those other officers may
exercise the authority granted by the power of attorney by signing the documents
as permitted by Rule 483(b) of the Securities Act of 1933.
FORM OF
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
[Company Name] [Number]
hereby constitutes and appoints [Name] and [Name] 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 [date] day of [month], [year].
RESOLVED, That the Chair of the Board, the President, an Vice President, the
Treasurer or any Assistant treasurer, and the Secretary or any Assistant
Secretary may sign any document; including, but not limited to, a consent; a
power of attorney; as assignment; or a contract when, in the judgment of the
officer, there appears appropriate authority to do so; and further,
RESOLVED, That each member of the Board and each officer may give a power of
attorney to one or more officers for the purpose of signing the registration
statement of this Portfolio, any amendment to such registration statement, any
related registration statement and any other filing as deemed appropriate by
such officers, and such officers may exercise the authority granted by the power
of attorney by signing the documents as permitted by rule 483(b) of the
Securities Act of 1933.
FORM OF
OFFICERS' POWER OF ATTORNEY
City of Minneapolis
State of Minnesota
Each of the undersigned, as officers 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
[Company Name] [Number]
hereby constitutes and appoints [Name] and [Name] 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, as an officer, 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 [date] day of [month], [year].
Resolution Authorizing POA pursuant to Rule 483(b) under the 33 Act
RESOLVED, That the Chair of the Board, the President, any Vice President, the
Treasurer or any Assistant Treasurer, and the Secretary or any Assistant
Secretary may sign any document; including, but not limited to, a consent; a
power of attorney; an assignment; or a contract when, in the judgment of the
officer, there appears appropriate authority to do so; and further,
RESOLVED, That each member of the Board and each Officer may give a power of
attorney to one or more officers for the purpose of signing the registration
statement and any other filing as deemed appropriate by such officers, and such
officers may exercise the authority granted by the power of attorney by signing
the documents as permitted by Rule 483(b) of the Securities Act of 1933.
