<PAGE>
IDS
Tax-Exempt
Bond Fund
1998 ANNUAL REPORT
(PROSPECTUS ENCLOSED)
(icon of) padlock
The goal of IDS Tax-Exempt Bond Fund is to provide shareholders with as much
current income exempt from federal income taxes as possible with only modest
risk to the shareholder's investments.
(This annual report includes a prospectus that describes in detail the Fund's
objective, investment strategies, risks, sales charges, fees and other matters
of interest. Please read the prospectus carefully before you invest or send
money.)
Distributed by American Express Financial Advisors Inc.
AMERICAN EXPRESS Financial Advisors
<PAGE>
Double-Barreled Benefit
Most of the public facilities that we take for granted -- schools, water and
sewer systems, highways, government buildings -- are, in effect, largely funded
by loans from citizens. These loans take the form of state and local government
bonds (called "municipals"), which are bought by investors, including Tax-Exempt
Bond Fund. The government gets the funding it needs, while the bond-buyers,
including Fund shareholders, get ongoing interest income. But there's another,
bigger benefit with municipals: Investors pay no federal taxes on the income
they generate and potentially no state taxes.
IDS TAX-EXEMPT BOND FUND (This annual report is not part of the prospectus.)
<PAGE>
Table of Contents
1998 ANNUAL REPORT
The purpose of this annual report is to tell investors how the Fund performed.
From the Chairman 4
From the Portfolio Manager 4
Fund Facts 6
The 10 Largest Holdings 7
Making the Most of the Fund 8
The Fund's Long-term Performance 9
Independent Auditors' Report 10
Financial Statements 11
Notes to Financial Statements 14
Investments in Securities 20
Federal Income Tax Information 38
1999 PROSPECTUS
The prospectus, which is bound into the middle of this annual report, describes
the Fund in detail.
The Fund 3p
Goal 3p
Investment Strategy 3p
Risks 4p
Past Performance 5p
Fees and Expenses 7p
Management 8p
Buying and Selling Shares 8p
Valuing Fund Shares 8p
Investment Options 9p
Purchasing Shares 10p
Sales Charges 13p
Exchanging/Selling Shares 17p
Distributions and Taxes 21p
Personalized Shareholder Information 23p
About the Company 24p
Quick Telephone Reference 26p
Financial Highlights 27p
Appendix 29p
(This annual report is not part of the prospectus.) ANNUAL REPORT -- 1998
<PAGE>
From the Chairman
(picture of) William R. Pearce
William R. Pearce
Chairman of the board
If you're an experienced investor, you know that the past 12 months was a highly
volatile period in many financial markets. But history tells us that substantial
market moves are nothing new. Though they're often unpredictable, declines --
whether they're brief or long-lasting, moderate or substantial -- are always a
possibility.
The potential for such volatility reinforces the need for investors to review
periodically their long-term goals and examine whether their investment program
remains on track to achieving them. Your quarterly investment statements are one
part of that monitoring process. The other is a meeting with your American
Express financial advisor. That becomes even more important if there's a major
change in your financial situation or in the financial markets.
William R. Pearce
From the Portfolio Manager
(picture of) Terry L. Seierstad
Terry L. Seierstad
Portfolio manager
A largely positive bond environment led to a productive 12 months for IDS
Tax-Exempt Bond Fund. Investors in the Fund's Class A shares realized a total
return (net asset value change and dividends) of 6.96% for the fiscal year --
December 1997 through November 1998. The bulk of the return came in the form of
tax-free dividends.
The period got off to a good start, as interest rates declined through early
January, boosting bond values along the way. The rate drop was initially spawned
by a meltdown in Asian financial markets, a far-reaching phenomenon that caused
investors to anticipate slower economic growth in the U.S. and, ultimately,
downward pressure on domestic inflation. In addition, global investors quickly
began moving money out of smaller foreign markets as a whole in favor of the
perceived safe haven offered by the U.S. bond market.
IDS TAX-EXEMPT BOND FUND (This annual report is not part of the prospectus.)
<PAGE>
Soon, though, investors reassessed the situation and decided that the U.S.
economy might actually experience little ill effect from the "Asian flu" and, in
fact, might be growing rapidly enough to light a fire under inflation and prompt
the Federal Reserve to raise interest rates. Investors wrestled with that
possibility over the ensuing months, which kept the bond market off balance
through spring.
It was then that the bond market got another boost, as the Asian flu struck
again, this time in Russia and Latin America. As before, investors sought out
the perceived safety of U.S. bonds, and their buying drove interest rates down
and bond prices up. The market reversed direction in the final weeks of the
fiscal year, though, as rates rose.
PRICIES RESTRAINED
As for municipal bonds in particular, their performance was restrained by a
heavy supply of new issues and weak cash flow into the municipal market, the
latter largely a result of the more attractive returns being generated by the
stock market. In addition, the "flight to quality" on the part of foreign
investors was confined almost exclusively to U.S. Treasury bonds, whose
perceived safety and liquidity were the key lures. Still, municipals did
experience some price appreciation.
I made only minor changes to the portfolio during the 12 months. They included
lengthening the duration a bit last spring and gradually upgrading the overall
credit quality. (Duration is a function of the average maturity of the
portfolio's investments that determines how sensitive the Fund's net asset value
is to changes in interest rates. The longer the duration, the greater the
sensitivity.) Overall, the longer duration enhanced performance modestly. On the
other hand, performance suffered somewhat (a loss of well under 1%) because of
one default among the portfolio's 160 bond holdings. As I have for some time, I
also maintained a moderate exposure (about 15% of assets) to zero-coupon bonds
with call protection -- a beneficial feature during periods of falling interest
rates.
I think the environment continues to look good for municipal bonds as we begin
the new fiscal year. If inflation stays low, which I expect, interest rates are
likely to hold reasonably steady, if not decline. But in any event, municipals
should still provide a return comfortably ahead of inflation.
Terry L. Seierstad
(This annual report is not part of the prospectus.) ANNUAL REPORT -- 1998
<PAGE>
Fund Facts
Class A -- 12-month performance
(All figures per share)
Net asset value (NAV)
Nov. 30, 1998.........................................................$ 4.18
Nov. 30, 1997.........................................................$ 4.11
Increase..............................................................$ 0.07
Distributions -- Dec. 1, 1997 - Nov. 30, 1998
From income...........................................................$ 0.21
From capital gains....................................................$ --
Total distribution....................................................$ 0.21
Total return*......................................................... +6.96%**
Class B -- 12-month performance
(All figures per share)
Net asset value (NAV)
Nov. 30, 1998.........................................................$ 4.18
Nov. 30, 1997.........................................................$ 4.11
Increase..............................................................$ 0.07
Distributions -- Dec. 1, 1997 - Nov. 30, 1998
From income...........................................................$ 0.18
From capital gains....................................................$ --
Total distribution....................................................$ 0.18
Total return*......................................................... +6.18%**
Class Y -- 12-month performance
(All figures per share)
Net asset value (NAV)
Nov. 30, 1998.........................................................$ 4.18
Nov. 30, 1997.........................................................$ 4.11
Increase..............................................................$ 0.07
Distributions -- Dec. 1, 1997 - Nov. 30, 1998
From income...........................................................$ 0.21
From capital gains....................................................$ --
Total distribution....................................................$ 0.21
Total return*......................................................... +7.06%**
*The prospectus discusses the effect of sales charges, if any, on the various
classes.
**The total return is a hypothetical investment in the Fund with all
distributions reinvested.
IDS TAX-EXEMPT BOND FUND (This annual report is not part of the prospectus.)
<PAGE>
<TABLE>
<CAPTION>
The 10 Largest Holdings
Percent Value
(of net assets) (as of Nov. 30, 1998)
San Antonio Texas Water Refunding Revenue Bonds
<S> <C> <C>
6.40% 2007 2.69% $27,414,999
San Antonio Texas Electric & Gas SystemsPre-refunded
Revenue Bonds Series 1989A
6.50% 2012 2.63 26,776,417
Delaware County Pennsylvania Industrial Development
Authority Pollution Control Refunding Revenue Bonds
Philadelphia Electric Series 1991A
7.38% 2021 2.48 25,272,779
Chicago Illinois Public Building CommissionBuilding
Revenue Bonds Chicago Board of Education
Series 1990A Escrowed to Maturity
6.50% 2018 2.38 24,244,011
New York State Urban Development Correctional Capital
Facilities Revenue Bonds 4th Series 1993
5.38% 2023 2.37 24,156,744
Georgia Municipal Electric Authority Special Obligation
Bonds Project 1 4th Crossover Series 1997X
6.50% 2020 2.31 23,574,172
New York State Dormitory Authority State Courts Facilities
Lease Revenue Bonds Series 1993A
5.25% 2021 1.97 20,119,200
Eastern North Carolina Municipal Power Agency
Power System Refunding Revenue Bonds Series 1989A
6.50% 2024 1.97 20,028,800
Issaquah Washington School District 411 King County
Unlimited Tax General Obligation Bonds Series 1992
6.38% 2008 1.91 19,419,704
Phoenix Arizona Industrial Development Authority
Single Family Mortgage Revenue Capital Appreciation
Bonds Zero Coupon Escrowed to Maturity
6.69% 2014 1.77 18,001,229
For further detail about these holdings, please refer to the section entitled
"Investments in securities" herein.
(icon of) pie chart The 10 holdings listed here
make up 22.48% of net assets
(This annual report is not part of the prospectus.) ANNUAL REPORT -- 1998
</TABLE>
<PAGE>
Making the Most of the Fund
BUILD YOUR ASSETS SYSTEMATICALLY
One of the best ways to invest in the Fund is by dollar-cost averaging -- a
time-tested strategy that can make market fluctuations work for you. To
dollar-cost average, simply invest a fixed amount of money regularly. You'll
automatically buy more shares when the Fund's share price is low, fewer shares
when it is high. The chart below shows how dollar-cost averaging works. In these
three hypothetical scenarios, you will see six months of share price
fluctuations.
This strategy does not ensure a profit or avoid a loss if the market declines.
But, if you can continue to invest regularly through changing market conditions
even when the price of your shares fall or the market declines, it can be an
effective way to accumulate shares to meet your long-term goals.
How dollar-cost averaging works
Jan Feb Mar Apr May Jun
$15 $16 $18 $20
$10 $10 $12 $14
$ 5
Accumulated shares* Average market Your average
price per share cost per share
42.25 $15 $14.20
- -------------------------------------------------------------------------------
Jan Feb Mar Apr May Jun
$15
$10 $10 $8 $8 $10
$ 5 $5 $5
Accumulated shares* Average market Your average
price per share cost per share
85.0 $7.66 $7.05
- -------------------------------------------------------------------------------
Jan Feb Mar Apr May Jun
$15
$10 $10 $8 $6 $7
$ 5 $4 $4
Accumulated shares* Average market Your average
price per share cost per share
103.5 $6.50 $5.80
- -------------------------------------------------------------------------------
$100 invested per month. Total invested: $600
*Shares purchased is determined by dividing the amount invested per month by the
current share price.
THREE WAYS TO BENEFIT FROM A MUTUAL FUND:
o your shares increase in value when the Fund's investments do well
o you receive capital gains when the gains on investments sold by the Fund
exceed losses
o you receive income when the Fund's stock dividends, interest and short-term
gains exceed its expenses.
All three make up your total return. You potentially can increase your
investment if, like most investors, you reinvest your dividends and capital gain
distributions to buy additional shares of the Fund or another fund.
IDS TAX-EXEMPT BOND FUND (This annual report is not part of the prospectus.)
<PAGE>
The Fund's Long-term Performance
How $10,000 has grown in IDS Tax-Exempt Bond Fund
$20,000
$19,762
IDS Tax-Exempt
Bond Fund Class A
Lehman Brothers
$10,000 Municipal Bond Index
$9,500
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Average annual total return (as of Nov. 30, 1998)
1 year Since inception* 5 years 10 years
Class A +1.61% --% +4.81% +7.05%
Class B +2.18% +6.10% --% --%
Class Y +7.06% +7.71% --% --%
* Inception date was March 20, 1995.
Assumes: Holding period from 12/1/88 to 11/30/98. Returns do not reflect taxes
payable on distributions. Reinvestment of all income and capital gain
distributions for the Fund, with a value of $9,684. Also see "Past Performance"
in the Fund's current prospectus.
On the graph above you can see how the Fund's total return compared to a widely
cited performance measure, Lehman Brothers Municipal Bond Index. In comparing
Tax-Exempt Bond Fund (Class A) to the index, you should take into account the
fact that the Fund's performance reflects the maximum sales charge of 5%, while
such charges are not reflected in the performance of the index.
Your investment and return values fluctuate so that your shares, when redeemed,
may be worth more or less than the original cost. Average annual total return
figures reflect the impact of the applicable sales charge up to a maximum of 5%.
This was a period of widely fluctuating security prices. Past performance is no
guarantee of future results.
Lehman Brothers Municipal Bond Index is an unmanaged index made up of a
representative list of general obligation,revenue, insured and pre-refunded
bonds. The index is frequently used as a general measure of tax-exempt bond
market performance. However, the securities used to create the index may not be
representative of the bonds held in Tax-Exempt Bond Fund. The index reflects
reinvestment of all distributions and changes in market prices, but excludes
brokerage commissions or other fees.
(This annual report is not part of the prospectus.) ANNUAL REPORT -- 1998
<PAGE>
The financial statements contained in Post-Effective Amendment #45 to
Registration Statement No. 2-57328 filed on or about January 27, 1999, are
incorporated herein by reference.
<PAGE>
Federal Income Tax Information
The Fund is required by the Internal Revenue Code of 1986 to tell its
shareholders about the tax treatment of the dividends it pays during its fiscal
year. The dividends listed below were reported to you on your year-end
statement.
IDS Tax-Exempt Bond FundFiscal year ended Nov. 30, 1998
Class A
Exempt-interest dividends -- taxable status explained below.
Payable date Per share
Dec. 26, 1997 $ 0.01732
Jan. 28, 1998 0.01839
Feb. 26, 1998 0.01651
March 26, 1998 0.01621
April 28, 1998 0.01893
May 27, 1998 0.01671
June 25, 1998 0.01664
July 27, 1998 0.01801
Aug. 26, 1998 0.01666
Sept. 24, 1998 0.01657
Oct. 26, 1998 0.01760
Nov. 24, 1998 0.01632
Total 0.20587
Taxable dividend -- income distribution.
Payable date Per share
Dec. 26, 1997 $0.00052
Total distributions $0.20639
IDS TAX-EXEMPT BOND FUND (This annual report is not part of the prospectus.)
<PAGE>
Class B
Exempt-interest dividends -- taxable status explained below.
Payable date Per share
Dec. 26, 1997 $0.01467
Jan. 28, 1998 0.01555
Feb. 26, 1998 0.01401
March 26, 1998 0.01381
April 28, 1998 0.01611
May 27, 1998 0.01425
June 25, 1998 0.01416
July 27, 1998 0.01527
Aug. 26, 1998 0.01410
Sept. 24, 1998 0.01407
Oct. 26, 1998 0.01481
Nov. 24, 1998 0.01383
Total $0.17464
Taxable dividend -- income distribution.
Payable date Per share
Dec. 26, 1997 $0.00052
Total distributions $0.17516
(This annual report is not part of the prospectus.) ANNUAL REPORT - 1998
<PAGE>
Class Y
Exempt-interest dividends -- taxable status explained below.
Payable date Per share
Dec. 26, 1997 $0.01755
Jan. 28, 1998 0.01865
Feb. 26, 1998 0.01675
March 26, 1998 0.01643
April 28, 1998 0.01919
May 27, 1998 0.01693
June 25, 1998 0.01686
July 27, 1998 0.01827
Aug. 26, 1998 0.01688
Sept. 24, 1998 0.01681
Oct. 26, 1998 0.01786
Nov. 24, 1998 0.01656
Total $0.20874
Taxable dividend -- income distribution.
Payable date Per share
Dec. 26, 1997 $0.00052
Total distributions $0.20926
Federal taxation
Exempt-interest dividends are exempt from federal income taxes and should not be
included in shareholders' gross income.
Other taxation
Exempt-interest dividends may be subject to state and local taxes. Each
shareholder should consult a tax advisor about reporting this income for state
and local tax purposes.
IDS TAX-EXEMPT BOND FUND (This annual report is not part of the prospectus.)
<PAGE>
Source of income by state
Percentages of income from municipal securities earned by the Fund from various
states during the year ended Nov. 30, 1998 are listed below.
Alabama 0.405%
Alaska 0.767
Arizona 3.676
California 8.727
Colorado 1.934
Connecticut 0.889
Delaware 0.219
Florida 3.630
Georgia 3.369
Hawaii 0.646
Idaho 0.401
Illinois 9.254
Indiana 2.755
Iowa 0.397
Kentucky 0.800
Louisiana 2.247
Maryland 2.825
Massachusetts 1.962
Michigan 3.079
Minnesota 3.109
Mississippi 0.229
Missouri 1.290
Nevada 0.510
New Hampshire 0.110
New Jersey 1.797
New Mexico 0.087
New York 10.739
North Carolina 4.206
North Dakota 0.473
Ohio 1.082
Oklahoma 0.393
Pennsylvania 4.245
Rhode Island 0.172
South Carolina 0.460
Tennessee 0.187
Texas 13.381
Utah 0.049
Virginia 0.655
Washington 4.969
Washington, DC 2.362
West Virginia 1.047
Wisconsin 0.006
Wyoming 0.460
(This annual report is not part of the prospectus.) ANNUAL REPORT -- 1998
<PAGE>
This page left blank intentionally
<PAGE>
This page left blank intentionally
<PAGE>
This page left blank intentionally
<PAGE>
This page left blank intentionally
<PAGE>
This page left blank intentionally
<PAGE>
This page left blank intentionally
<PAGE>
S-6310 N (1/99)
AMERICAN EXPRESS
Financial
Advisors
IDS Tax-Exempt Bond Fund
IDS Tower 10
Minneapolis, MN 55440-0010
<PAGE>
STATEMENT OF DIFFERENCES
Difference Description
1) The layout is different 1) Some of the layout in the
throughout the annual report. annual report to
shareholders is in two
columns.
2) There are pictures, icons 2) Each picture, icon and
and graphs throughout the graph is described in
annual report. parentheses.
