<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. _____
Post-Effective Amendment No. 35 (File No. 2-63552) X
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 36 (File No. 811-2901) X
IDS HIGH YIELD TAX-EXEMPT FUND, INC.
IDS Tower 10, Minneapolis, MN 55440
Leslie L. Ogg
901 S. Marquette Avenue, Suite 2810
Minneapolis, MN 55402-3268
(612) 330-9283
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 January 29, 1998 pursuant to paragraph (b) of rule 485
60 days after filing pursuant to paragraph (a)(i)
on (date) pursuant to paragraph (a)(i)of rule 485
75 days after filing pursuant to paragraph (a)(ii)
on (date)pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
This Post-Effective Amendment designates a new effective date for a
previously filed Post-Effective Amendment.
Tax-Free Income Trust has also executed this Amendment to the Registration
Statement.
<PAGE>
Cross reference sheet showing the location in the prospectus and Statement of
Additional Information of the information called for by items enumerated in
Parts A and B of Form N-1A.
Negative answers omitted are so indicated.
PART A
Item No. Section in Prospectus
1 Cover page of prospectus
2 (a) Sales charge and Fund expenses
(b) The Fund in brief
(c) The Fund in brief
3 (a) Financial highlights
(b) NA
(c) Performance
(d) Financial highlights
4 (a) The Fund in brief; Investment policies and risks; How the
Fund and Portfolio are organized
(b) Investment policies and risks
(c) Investment policies and risks
5 (a) Board members and officers
(b)(i) Investment manager; About American Express Financial
Corporation - General information
(b)(ii) Investment manager
(b)(iii) Investment manager
(c) Portfolio manager
(d) Administrator and transfer agent
(e) Administrator and transfer agent
(f) Distributor
(g) Investment manager; About American Express Financial
Corporation - General information
5A(a) *
(b) *
6 (a) Shares; Voting rights
(b) NA
(c) NA
(d) Voting rights
(e) Cover page; Special shareholder services
(f) Dividend and capital gain distributions; Reinvestments
(g) Taxes
(h) Alternative purchase arrangements; Special considerations
regarding master/feeder structure
7 (a) Distributor
(b) Valuing Fund shares
(c) How to purchase, exchange or redeem shares
(d) How to purchase shares
(e) NA
(f) Distributor
(g) Alternative purchase arrangements; Reductions and waivers of
the sales charge
8 (a) How to redeem shares
(b) NA
(c) How to purchase shares: Three ways to invest
(d) How to purchase, exchange or redeem shares: Redemption
policies - "Important..."
9 None
PART B
Item No. Section in Statement of Additional Information
10 Cover page of SAI
11 Table of Contents
12 NA
13 (a) Additional Investment Policies; all appendices except
Dollar-Cost Averaging
(b) Additional Investment Policies
(c) Additional Investment Policies
(d) Security Transactions
14 (a) Board members and officers**; Board Members and Officers
(b) Board Members and Officers
(c) Board Members and Officers
15 (a) NA
(b) Principal Holders of Securities, if applicable
(c) Board Members and Officers
16 (a)(i) How the Fund and Portfolio are organized; About American Express
Financial Corporation**
(a)(ii) Agreements: Investment Management Services Agreement,
Plan and Agreement of Distribution
(a)(iii) Agreements: Investment Management Services Agreement
(b) Agreements: Investment Management Services Agreement
(c) NA
(d) Agreements: Administrative Services Agreement, Shareholder
Service Agreement
(e) NA
(f) Agreements: Distribution Agreement
(g) NA
(h) Custodian Agreement; Independent Auditors
(i) Agreements: Transfer Agency Agreement; Custodian Agreement
17 (a) Security Transactions
(b) Brokerage Commissions Paid to Brokers Affiliated with American
Express Financial Corporation
(c) Security Transactions
(d) Security Transactions
(e) Security Transactions
18 (a) Shares; Voting rights**
(b) NA
19(a) Investing in the Fund
(b) Valuing Fund Shares; Investing in the Fund
(c) Redeeming Shares
20 Taxes
21 (a) Agreements: Distribution Agreement
(b) NA
(c) NA
22 (a) Performance Information (for money market funds only)
(b) Performance Information (for all funds except money market funds)
23 Financial Statements
* Designates information is located in annual report.
** Designates location in prospectus.
<PAGE>
IDS High Yield Tax-Exempt Fund
Prospectus
Jan. 29, 1998
The goal of IDS High Yield Tax-Exempt Fund, Inc. is to provide high yield
generally exempt from federal income taxes.
The Fund seeks to achieve its goal by investing all of its assets in Tax-Free
High Yield Portfolio of Tax-Free Income Trust. The Portfolio is managed by
American Express Financial Corporation and has the same goal as the Fund. This
arrangement is commonly known as a master/feeder structure.
This prospectus contains facts that can help you decide if the Fund is the right
investment for you. Read it before you invest and keep it for future reference.
Additional facts about the Fund are in a Statement of Additional Information
(SAI), filed with the Securities and Exchange Commission (SEC) and available for
reference, along with other related materials, on the SEC Internet web site
(http://www.sec.gov). The SAI is incorporated by reference. For a free copy,
contact American Express Shareholder Service.
Like all mutual fund shares, these securities have not been approved or
disapproved by the Securities and Exchange Commission or any state securities
commission, nor has the Securities and Exchange Commission or any state
securities commission passed upon the accuracy or adequacy of this prospectus.
Any representation to the contrary is a criminal offense.
Please note that the Fund:
o is not a bank deposit
o is not federally insured
o is not endorsed by any bank or government agency
o is not guaranteed to achieve its goal
American Express Shareholder Service
P.O. Box 534
Minneapolis, MN
55440-0534
800-862-7919
TTY: 800-846-4852
Web site address: http://www.americanexpress.com/advisors
<PAGE>
Table of contents
The Fund in brief
Goal
Investment policies and risks
Structure of the Fund
Manager and distributor
Portfolio manager
Alternative purchase arrangements
Sales charge and Fund expenses
Performance
Financial highlights
Total returns
Yield
Investment policies and risks
Facts about investments and their risks
Valuing Fund shares
How to purchase, exchange or redeem shares
Alternative purchase arrangements
How to purchase shares
How to exchange shares
How to redeem shares
Reductions and waivers of the sales charge
Special shareholder services
Services
Quick telephone reference
Distributions and taxes
Dividend and capital gain distributions
Reinvestments
Taxes
How to determine the correct TIN
<PAGE>
How the Fund and Portfolio are organized
Shares
Voting rights
Shareholder meetings
Special considerations regarding master/feeder structure
Board members and officers
Investment manager
Administrator and transfer agent
Distributor
About American Express Financial Corporation
General information
Appendices
Description of bond ratings
Tax-exempt vs. taxable income
Descriptions of derivative instruments
<PAGE>
The Fund in brief
Goal
IDS High Yield Tax-Exempt Fund (the Fund) seeks to provide shareholders with a
high yield generally exempt from federal income taxes. It does so by investing
all of its assets in Tax-Free High Yield Portfolio (the Portfolio) of Tax-Free
Income Trust (the Trust) rather than by directly investing in and managing its
own portfolio of securities. Both the Fund and the Portfolio are diversified
investment companies that have the same goal. Because any investment involves
risk, achieving this goal cannot be guaranteed. The goal can be changed only by
holders of a majority of outstanding securities.
The Fund may withdraw its assets from the Portfolio at any time if the board
determines that it is in the best interests of the Fund to do so. In that event,
the Fund would consider what action should be taken, including whether to retain
an investment advisor to manage the Fund's assets directly or to reinvest all of
the Fund's assets in another pooled investment entity.
Investment policies and risks
Both the Fund and the Portfolio have the same investment policies. Accordingly,
the Portfolio usually invests in medium- and lower-quality bonds and notes
issued by or on behalf of state and local governmental units whose interest
generally is exempt from federal income tax. The Portfolio also may invest in
derivative instruments and money market instruments. Some of the Portfolio's
investments may be considered speculative and involve additional investment
risks. For further information, refer to the later section in the prospectus
titled "Investment policies and risks."
Structure of the Fund
This Fund uses what is commonly known as a master/feeder structure. This means
that the Fund (the feeder fund) invests all of its assets in the Portfolio (the
master fund). The Portfolio invests in and manages the securities and has the
same goal and investment policies as the Fund. This structure is described in
more detail in the section captioned "Special considerations regarding
master/feeder structure." Here is an illustration of the structure:
Investors buy
shares in the Fund
<PAGE>
The Fund invests
in the Portfolio
The Portfolio invests
in securities, such
as stocks or bonds
Manager and distributor
The Portfolio is managed by American Express Financial Corporation (AEFC), a
provider of financial services since 1894. AEFC currently manages more than $70
billion in assets for the IDS MUTUAL FUND GROUP. Shares of the Fund are sold
through American Express Financial Advisors Inc. (AEFA), a wholly-owned
subsidiary of AEFC.
Portfolio manager
Kurt Larson joined AEFC in 1961 and serves as vice president and senior
portfolio manager. He has managed the assets of the Fund since 1979 and serves
as portfolio manager of the Portfolio.
Alternative purchase arrangements
The Fund offers its shares in three classes. Class A shares are subject to a
sales charge at the time of purchase. Class B shares are subject to a contingent
deferred sales charge (CDSC) on redemptions made within six years of purchase
and an annual distribution (12b-1) fee. Class Y shares are sold without a sales
charge to qualifying institutional investors.
Sales charge and Fund expenses
Shareholder transaction expenses are incurred directly by an investor on the
purchase or redemption of Fund shares. Fund operating expenses are paid out of
Fund assets for each class of shares and include expenses charged by both the
Fund and the Portfolio. Operating expenses are reflected in the Fund's daily
share price and dividends, and are not charged directly to shareholder accounts.
Shareholder transaction expenses
Class A Class B Class Y
Maximum sales charge on purchases*
(as a percentage of offering price) 5% 0% 0%
Maximum deferred sales charge
imposed on redemptions (as a
percentage of original purchase price) 0% 5% 0%
<PAGE>
Annual Fund and allocated Portfolio operating expenses (as a percentage of
average daily net assets):
Class A Class B Class Y
Management fee** 0.44% 0.44% 0.44%
12b-1 fee 0.00% 0.75% 0.00%
Other expenses*** 0.26% 0.27% 0.19%
Total**** 0.70% 1.46% 0.63%
*This charge may be reduced depending on your total investments in IDS funds.
See "Reductions of the sales charge." **The management fee is paid by the Trust
on behalf of the Portfolio. ***Other expenses include an administrative services
fee, a shareholder services fee, a transfer agency fee and other nonadvisory
expenses. Class Y expenses have been restated to reflect the 0.10% shareholder
services fee effective May 9, 1997. ****The Fund changed to a master/feeder
structure on May 13, 1996. The board considered whether the aggregate expenses
of the Fund and the Portfolio would be more or less than if the Fund invested
directly in the type of securities being held by the Portfolio. AEFC agreed to
pay the small additional costs required to use a master/feeder structure to
manage the investment portfolio during the first year of its operation and half
of such costs in the second year. These additional costs may be more than offset
in subsequent years if the assets being managed increase.
Example: Suppose for each year for the next 10 years, Fund expenses are as above
and annual return is 5%. If you sold your shares at the end of the following
years, for each $1,000 invested, you would pay total expenses of:
1 year 3 years 5 years 10 years
Class A $57 $71 $ 87 $133
Class B $65 $86 $100 $154**
Class B* $15 $46 $ 80 $154**
Class Y $ 6 $20 $ 35 $ 79
*Assuming Class B shares are not redeemed at the end of the period.
**Based on conversion of Class B shares to Class A shares after eight years.
This example does not represent actual expenses, past or future. Actual expenses
may be higher or lower than those shown. Because Class B pays annual
distribution (12b-1) fees, long-term shareholders of Class B may indirectly pay
an equivalent of more than a 6.25% sales charge, the maximum permitted by the
National Association of Securities Dealers.
<PAGE>
Performance
Financial highlights
<TABLE>
<CAPTION>
Fiscal period ended Nov. 30,
Per share income and capital changesa
Class A
1997 1996 1995 1994 1993 1992 1991b 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, $4.56 $4.66 $4.18 $4.76 $4.65 $4.55 $4.44 $4.57 $4.4 $4.34 $4.69
beginning of period
Income from investment operations:
Net investment income .27 .27 .28 .30 .30 .31 .30 .34 .34 .34 .35
Net gains (losses) .08 (.10) .48 (.56) .13 .12 .11 (.12) .15 .08 (.34)
(both realized
and unrealized)
Total from investment .35 .17 .76 (.26) .43 .43 .41 .22 .49 .42 .01
operations
Less distributions:
Dividends from net (.27) (.27) (.28) (.30) (.30) (.32) (.30) (.34) (.34) (.34) (.35)
investment income
Distributions from -- -- -- (.02) (.02) (.01) -- (.01) -- -- (.01)
realized gains
Total distributions (.27) (.27) (.28) (.32) (.32) (.33) (.30) (.35) (.34) (.34) (.36)
Net asset value, $4.64 $4.56 $4.66 $4.18 $4.76 $4.65 $4.55 $4.44 $4.57 $4.42 $4.34
end of period
Ratios/supplemental data
Class A
1997 1996 1995 1994 1993 1992 1991b 1990 1989 1988 1987
Net assets, end of $5,785 $6,001 $6,316 $5,769 $6,733 $6,036 $5,291 $4,750 $4,594 $4,070 $3,740
period (in millions)
Ratio of expenses to .70% .70% .68% .59% .61% .62% .60%d .60% .60% .59% .60%
average daily net assetsc
Ratio of net income (loss) 5.85% 6.02% 6.31% 6.50% 6.32% 6.86% 7.26%d 7.62% 7.50% 7.66% 7.80%
to average
daily net assets
Portfolio turnover rate 4% 9% 14% 17% 10% 12% 10% 22% 7% 13% 15%
(excluding short-term
securities)
Total returne 7.9% 4.0% 18.6% (5.8%) 9.6% 9.7% 10.1%d 5.5% 11.7% 11.2% (1.8%)
aFor a share outstanding throughout the period. Rounded to the nearest cent.
bThe Fund's fiscal year-end was changed from Dec. 31 to Nov. 30, effective 1991.
cEffective fiscal year 1996, expense ratio is based on total expenses of the
Fund before reduction of earnings credits on cash balances.
dAdjusted to an annual basis.
eTotal return does not reflect payment of a sales charge.
</TABLE>
Fiscal period ended Nov. 30,
Per share income and capital changesa
Class B Class Y
1997 1996 1995b 1997 1996 1995b
Net asset value, $4.56 $4.66 $4.46 $4.56 $4.66 $4.46
beginning of period
Income from investment operations:
Net investment income (loss) .23 .24 .19 .27 .28 .22
Net gains (losses) .08 (.10) .20 .08 (.10) .20
(both realized
and unrealized)
Total from investment .31 .14 .39 .35 .18 .42
operations
Less distributions:
Dividends from net (.23) (.24) (.19) (.27) (.28) (.22)
investment income
Net asset value, $4.64 $4.56 $4.66 $4.64 $4.56 $4.66
end of period
Ratios/supplemental data
Class B Class Y
1997 1996 1995b 1997 1996 1995b
Net assets, end of $190 $138 $71 $9 $21 $25
period (in millions)
Ratio of expenses to 1.46% 1.46% 1.48%d .61% .53% .54%d
average daily net assetsc
Ratio of net income 5.06% 5.29% 5.36%d 5.88% 6.15% 6.32%d
(loss) to average
daily net assets
Portfolio turnover rate 4% 9% 14% 4% 9% 14%
(excluding short-term
securities)
Total returne 7.1% 3.2% 8.9% 8.0% 4.2% 9.5%
aFor a share outstanding throughout the period. Rounded to the nearest cent.
bInception date was March 20, 1995.
cEffective fiscal year 1996, expense ratio is based on total expenses of the
Fund before reduction of earnings credits on cash balances.
dAdjusted to an annual basis.
eTotal return does not reflect payment of a sales charge.
The information in these tables has been audited by KPMG Peat Marwick 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.
Total returns
Total return is the sum of all of your returns for a given period, assuming you
reinvest all distributions. It is calculated by taking the total value of shares
you own at the end of the period (including shares acquired by reinvestment),
less the price of shares you purchased at the beginning of the period.
Average annual total return is the annually compounded rate of return over a
given time period (usually two or more years). It is the total return for the
period converted to an equivalent annual figure.
Average annual total returns as of Nov. 30, 1997
Purchase 1 year Since 5 years 10 years
made ago inception ago ago
- -------------------------- ----------------- -------------------- ------------
IDS High Yield Tax-Exempt
Class A +2.47% -- +5.47% +7.52%
Class B +3.08% +5.83%* -- --
Class Y +7.96% +8.10%* -- --
Lehman Brothers
Municipal Bond Index
+7.18% +7.40%** +6.87% +8.21%
*Inception date was March 20, 1995.
**Measurement period started April 1, 1995.
<PAGE>
Cumulative total returns as of Nov. 30, 1997
Purchase 1 year Since 5 years 10 years
made ago inception ago ago
- -------------------------- ----------------- -------------------- -------------
IDS High Yield Tax-Exempt
Class A +2.47% -- +30.54% +106.64%
Class B +3.08% +16.55%* -- --
Class Y +7.96% +23.42%* -- --
Lehman Brothers
Municipal Bond Index
+7.18% +21.07%** +39.43% +120.18%
*Inception date was March 20, 1995.
**Measurement period started April 1, 1995.
These examples show total returns from hypothetical investments in Class A,
Class B and Class Y shares of the Fund. These returns are compared to those of a
popular index for the same periods. The performance of Class B and Class Y will
vary from the performance of Class A based on differences in sales charges and
fees. Past performance for Class Y for the periods prior to March 20, 1995 may
be calculated based on the performance of Class A, adjusted to reflect
differences in sales charges although not for other differences in expenses.
For purposes of calculation, information about the Fund assumes:
o a sales charge of 5% for Class A shares
o redemption at the end of the period and deduction of the applicable
contingent deferred sales
charge for Class B shares
o no sales charge for Class Y shares
o no adjustments for taxes an investor may have paid on the reinvested
income and capital gains
o a period of widely fluctuating securities prices. Returns shown should
not be considered a representation of the Fund's future performance.
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 the Fund. The index reflects reinvestment of
all distributions and changes in market prices, but excludes brokerage
commissions or other fees.
<PAGE>
Yield
Yield is the net investment income earned per share for a specified time period,
divided by the offering price at the end of the period. The Fund's SEC
standardized yield for the 30-day period ended Nov. 28, 1997, was 4.51% for
Class A, 3.99% for Class B and 4.82% for Class Y. The Fund calculates this
30-day SEC standardized yield by dividing:
o net investment income per share deemed earned during a 30-day period by
o the public offering price per share on the last day of the period, and
o converting the result to a yearly equivalent figure
The Fund also may calculate a tax equivalent yield by dividing the tax-exempt
portion of its yield by one minus a stated income tax rate. A tax equivalent
yield demonstrates the taxable yield necessary to produce an after-tax yield
equivalent to that of a fund that invests in exempt obligations.
These yield calculations do not include any contingent deferred sales charge,
ranging from 5% to 0% on Class B shares, which would reduce the yields quoted.
The Fund's yield varies from day to day, mainly because share values and
offering prices (which are calculated daily) vary in response to changes in
interest rates. Net investment income normally changes much less in the short
run. Thus, when interest rates rise and share values fall, yield tends to rise.
When interest rates fall, yield tends to follow.
Past yields should not be considered an indicator of future yields.
Investment policies and risks
The policies described below apply both to the Fund and the Portfolio. Under
normal market conditions, the Portfolio will invest at least 80% of its net
assets in bonds and notes issued by or on behalf of state and local governmental
units whose interest, in the opinion of counsel for the issuer, is exempt from
federal income tax and is not subject to the alternative minimum tax. This
policy cannot be changed without approval of a majority of outstanding voting
securities. Other investments include derivative instruments, money market
instruments and bonds subject to the alternative minimum tax computation.
The various types of investments the investment manager uses to achieve
investment performance are described in more detail in the next section and in
the SAI.
<PAGE>
Facts about investments and their risks
Bonds and notes exempt from federal income taxes: The Portfolio usually invests
in medium- and lower-quality notes rated A, BBB or BB by Standard & Poor's
Corporation, Moody's Investors Service, Inc. or Fitch Investors Services, Inc.,
or in securities the investment manager believes have similar qualities even
though they are not rated or have been given a lower rating by a rating agency.
The Portfolio invests in higher-quality bonds and notes when the difference in
yield between higher- and lower-quality securities does not warrant the increase
in risk or there is not an adequate supply of lower-quality securities.
Securities that are subsequently downgraded in quality may continue to be held
by the Portfolio and will be sold only when the investment manager believes it
is advantageous to do so.
The price of bonds generally falls as interest rates increase, and rises as
interest rates decrease. The price of bonds or notes also fluctuates if the
credit rating is upgraded or downgraded. The price of bonds or notes below
investment grade may react more to the ability of the issuing company to pay
interest or principal when due than to changes in interest rates. They have
greater price fluctuations, are more likely to experience a default and
sometimes are referred to as junk bonds. Reduced market liquidity for these
bonds may occasionally make it more difficult to value them.
Bond ratings and holdings for fiscal 1997
Percent of
S&P rating Protection of net assets
Percent of (or Moody's principal and in unrated securities
net assets equivalent) interest assessed by AEFC
21.38% AAA Highest quality 3.40%
5.77 AA High quality --
14.72 A Upper medium grade 0.22
27.36 BBB Medium grade 2.12
5.52 BB Moderately speculative 9.75
0.95 B Speculative 3.51
-- CCC Highly speculative 0.35
-- CC Poor quality 0.03
-- C Lowest quality --
-- D In default 0.73
20.33 Unrated Unrated securities 0.22
(See the Appendix to this prospectus describing bond ratings for further
information.)
<PAGE>
Bonds sold at a deep discount: Some bonds are sold at deep discounts because
they do not pay interest until maturity. They include zero coupon bonds and PIK
(pay-in-kind) bonds. Because such securities do not pay current cash income, the
market value of these securities may be subject to greater volatility than other
debt securities. To comply with tax laws, the Portfolio has to recognize a
computed amount of interest income and pay dividends to shareholders even though
no cash has been received. In some instances, the Portfolio may have to sell
securities to have sufficient cash to pay the dividends.
Concentration: The Portfolio may invest more than 25% of its total assets in
industrial revenue bonds, but it does not intend to invest more than 25% of its
total assets in industrial revenue bonds issued for companies in the same
industry or state. As the similarity in issuers increases, the potential for
fluctuation in the net asset value of the Portfolio's shares also increases.
Derivative instruments: The investment manager may use derivative instruments in
addition to securities to achieve investment performance. Derivative instruments
include futures, options and forward contracts. Such instruments may be used to
maintain cash reserves while remaining fully invested, to offset anticipated
declines in values of investments, to facilitate trading, to reduce transaction
costs or to pursue higher investment returns. Derivative instruments are
characterized by requiring little or no initial payment and a daily change in
price based on or derived from a security, a currency, a group of securities or
currencies, or an index. A number of strategies or combination of instruments
can be used to achieve the desired investment performance characteristics. A
small change in the value of the underlying security, currency or index will
cause a sizable gain or loss in the price of the derivative instrument.
Derivative instruments allow the investment manager to change the investment
performance characteristics very quickly and at lower costs. Risks include
losses of premiums, rapid changes in prices, defaults by other parties and
inability to close such instruments. The Portfolio will use derivative
instruments only to achieve the same investment performance characteristics it
could achieve by directly holding those securities and currencies permitted
under the investment policies. The Portfolio will designate cash or appropriate
liquid assets to cover its portfolio obligations. The use of derivative
instruments may produce taxable income. No more than 5% of the Portfolio's net
assets can be used at any one time for good faith deposits on futures and
premiums for options on futures that do not offset existing investment
positions. This does not, however, limit the portion of the Portfolio's assets
at risk to 5%. The Portfolio is not limited as to the percentage of its assets
that may be invested in permissible investments, including derivatives, except
as otherwise explicitly provided in this prospectus or the SAI. For descriptions
of these and other types of derivative instruments, see the Appendix to this
prospectus and the SAI.
<PAGE>
Securities and other instruments that are illiquid: A security or other
instrument is illiquid if it cannot be sold quickly in the normal course of
business. Some investments cannot be resold to the U.S. public because of their
terms or government regulations. Securities and instruments, however, can be
sold in private sales, and many may be sold to other institutions and qualified
buyers or on foreign markets. The investment manager will follow guidelines
established by the board and consider relevant factors such as the nature of the
security and the number of likely buyers when determining whether a security is
illiquid. No more than 10% of the Portfolio's net assets will be held in
securities and other instruments that are illiquid.
Money market instruments: Short-term tax-exempt debt securities rated in the top
two grades or the equivalent are used to meet daily cash needs and at various
times to hold assets until better investment opportunities arise. Under
extraordinary conditions where, in the opinion of the investment manager,
appropriate short-term tax-exempt securities are not available, the Portfolio is
authorized to make certain taxable investments as described in the SAI.
The investment policies described above may be changed by the boards.
Lending portfolio securities: The Portfolio may lend its securities to earn
income so long as borrowers provide collateral equal to the market value of the
loans. The risks are that borrowers will not provide collateral when required or
return securities when due. Unless a majority of the outstanding voting
securities approve otherwise, loans may not exceed 30% of the Portfolio's net
assets.
Valuing Fund shares
The public offering price is the net asset value (NAV) adjusted for the sales
charge for Class A. It is the NAV for Class B and Class Y.
The NAV is the value of a single Fund share. The NAV usually changes daily, and
is calculated at the close of business, normally 3 p.m. Central time, each
business day (any day the New York Stock Exchange is open). NAV generally
declines as interest rates increase and rises as interest rates decline.
To establish the net assets, all securities held by the Portfolio are valued as
of the close of each business day. In valuing assets:
o Securities and assets with available market values are valued on that basis
o Securities maturing in 60 days or less are valued at amortized cost
<PAGE>
o Assets without readily available market values are valued according t
methods selected in good faith by the board
How to purchase, exchange or redeem shares
Alternative purchase arrangements
<TABLE>
<CAPTION>
The Fund offers three different classes of shares - Class A, Class B and Class
Y. The primary differences among the classes are in the sales charge structures
and in their ongoing expenses. These differences are summarized in the table
below. You may choose the class that best suits your circumstances and
objectives.
<S> <C> <C> <C>
Sales charge and
distribution
(12b-1) fee Service fee Other information
Class A Maximum initial sales 0.175% of average daily net Initial sales charge waived
charge of 5%; no 12b-1 fee assets or reduced for certain
purchases
Class B No initial sales charge; 0.175% of average daily net Shares convert to Class A
maximum CDSC of 5% assets in the ninth year of
declines to 0% after six ownership; CDSC waived in
years; 12b-1 fee of 0.75% certain circumstances
of average daily net
assets
Class Y None 0.10% of average daily net Available only to certain
assets qualifying institutional
investors
</TABLE>
Conversion of Class B shares to Class A shares - During the ninth calendar year
of owning your Class B shares, Class B shares will convert to Class A shares and
will no longer be subject to a distribution fee. Class B shares that convert to
Class A shares are not subject to a sales charge. Class B shares purchased
through reinvested dividends and distributions also will convert to Class A
shares in the same proportion as the other Class B shares. This means more of
your money will be put to work for you.
Considerations in determining whether to purchase Class A or Class B shares -
You should consider the information below in determining whether to purchase
Class A or Class B shares. The distribution fee (included in "Ongoing expenses")
and sales charges
<PAGE>
are structured so that you will have approximately the same total return at the
end of eight years regardless of which class you chose.
<TABLE>
<CAPTION>
Sales charges on purchase or redemption
<S> <C>
If you purchase Class A shares If you purchase Class B shares
o You will not have all of your purchase o All of your money is invested in
price invested. Part of your purchase price shares of stock. However, you will
will go to pay the sales charge. You will pay a sales charge if you redeem
not pay a sales charge when you redeem your your shares within six years of purchase.
shares.
o You will be able to take advantage o No reductions of the sales charge
of reductions in the sales charge. are available for large purchases.
If your investments in IDS funds that are subject to a sales charge total
$250,000 or more, you are better off paying the reduced sales charge in Class A
than paying the higher fees in Class B. If you qualify for a waiver of the sales
charge, you should purchase Class A shares.
Ongoing expenses
If you purchase Class A shares If you purchase Class B shares
o Your shares will have a lower o The distribution and transfer
expense ratio than Class B shares agency fees for Class B will
because Class A does not pay a cause your shares to have a
distribution fee and the transfer higher expense ratio and to pay
agency fee for Class A is lower than lower dividends than Class A
the fee for Class B. As a result, Class shares. In the ninth year of
A shares will pay higher dividends than ownership, Class B shares will
Class B shares. convert to Class A shares and
you will no longer be subject
to higher fees.
</TABLE>
You should consider how long you plan to hold your shares and whether the
accumulated higher fees and CDSC on Class B shares prior to conversion would be
less than the initial sales charge on Class A shares. Also consider to what
extent the difference would be offset by the lower expenses on Class A shares.
To help you in this analysis, the example in the "Sales charge and Fund
expenses" section of the prospectus illustrates the charges applicable to each
class of shares.
Class Y shares - Class Y shares are offered to certain institutional investors.
Class Y shares are sold without a front-end sales charge or a CDSC and are not
subject to a distribution fee. The following investors are eligible to purchase
Class Y shares:
<PAGE>
o Qualified employee benefit plans* if the plan:
- uses a daily transfer recordkeeping service offering participants
daily access to IDS funds and has
- at least $10 million in plan assets or
- 500 or more participants; or
- does not use daily transfer recordkeeping and has
- at least $3 million invested in funds of the IDS MUTUAL FUND GROUP or
- 500 or more participants.
o Trust companies or similar institutions, and charitable organizations that
meet the definition in Section 501(c)(3) of the Internal Revenue Code.*
These must have at least $10 million invested in funds of the IDS MUTUAL
FUND GROUP.
o Nonqualified deferred compensation plans* whose participants are included
in a qualified employee benefit plan described above.
* Eligibility must be determined in advance by AEFA. To do so, contact you
financial advisor.
How to purchase shares
If you are investing in this Fund for the first time, you will need to set up an
account. Your financial advisor will help you fill out and submit an
application. Once your account is set up, you can choose among several
convenient ways to invest.
Important: When opening an account, you must provide your correct Taxpayer
Identification Number (Social Security or Employer Identification number).
See "Distributions and taxes."
When you purchase shares for a new or existing account, the price you pay per
share is determined at the close of business on the day your investment is
received and accepted at the Minneapolis headquarters.
Purchase policies:
o Investments must be received and accepted in the Minneapolis
headquarters on a business day before 3 p.m. Central time to be
included in your account that day and to receive that day's share
price. Otherwise, your purchase will be processed the next business day
and you will pay the next day's share price.
o The minimums allowed for investment may change from time to time.
o Wire orders can be accepted only on days when your bank, AEFC, the Fund
and Norwest Bank Minneapolis are open for business.
<PAGE>
o Wire purchases are completed when wired payment is received and the
Fund accepts the purchase.
o AEFC and the Fund are not responsible for any delays that occur in
wiring funds, including delays in processing by the bank.
o You must pay any fee the bank charges for wiring.
o The Fund reserves the right to reject any application for any reason.
o If your application does not specify which class of shares you are
purchasing, it will be assumed that you are investing in Class A
shares.
<TABLE>
<CAPTION>
Three ways to invest
<S> <C> <C>
1
By regular account Send your check and application (or your name Minimum amounts
and account number if you have an established Initial investment: $2,000
account) to: Additional
investments: $ 100
American Express Financial Advisors Inc. Account balances: $ 300*
P.O. Box 74
Minneapolis, MN 55440-0074
Your financial advisor will help you
with this process.
2
By scheduled investment Contact your financial advisor to set up one Minimum amounts
plan of the following scheduled plans: Initial investment: $ 100
Additional
o automatic payroll deduction investments: $ 100/
each payment
o bank authorization Account balances: none
(on active plans of
o direct deposit of Social Security check monthly payments)
o other plan approved by the Fund If account balance is below $2,000,
frequency of payments must be at least
monthly.
3
By wire If you have an established account, you may If this information is not
wire money to: included, the order may be
rejected and all money
Norwest Bank Minneapolis received by the Fund, less any
Routing No. 091000019 costs the Fund or AEFC incurs,
Minneapolis, MN will be returned promptly.
Attn: Domestic Wire Dept.
Minimum amounts
Give these instructions: Each wire investment:$1,000
Credit IDS Account #00-30-015 for personal
account # (your account number) for (your
name).
</TABLE>
*If your account balance falls below $300, you will be asked in writing to bring
it up to $300 or establish a scheduled investment plan. If you do not do so
within 30 days, your shares can be redeemed and the proceeds mailed to you. If
you are in a "wrap-fee" program sponsored by AEFA and your wrap program balance
falls below the required program minimum or is terminated, your shares will be
redeemed and the proceeds mailed to you.
<PAGE>
How to exchange shares
You can exchange your shares of the Fund at no charge for shares of the same
class of any other publicly offered fund in the IDS MUTUAL FUND GROUP available
in your state. Exchanges into IDS Tax-Free Money Fund must be made from Class A
shares. For complete information on any other fund, including fees and expenses,
read that fund's prospectus carefully.
If your exchange request arrives at the Minneapolis headquarters before the
close of business, your shares will be redeemed at the net asset value set for
that day. The proceeds will be used to purchase new fund shares the same day.
Otherwise, your exchange will take place the next business day at that day's net
asset value.
For tax purposes, an exchange represents a redemption and purchase and may
result in a gain or loss. However, you cannot use the sales charge imposed on
the purchase of Class A shares to create or increase a tax loss (or reduce a
taxable gain) by exchanging from the Fund within 91 days of your purchase. For
further explanation, see the SAI.
How to redeem shares
You can redeem your shares at any time. American Express Shareholder Service
will mail payment within seven days after receiving your request.
When you redeem shares, the amount you receive may be more or less than the
amount you invested. Your shares will be redeemed at net asset value, minus any
applicable sales charge, at the close of business on the day your request is
accepted at the Minneapolis headquarters. If your request arrives after the
close of business, the price per share will be the net asset value, minus any
applicable sales charge, at the close of business on the next business day.
A redemption is a taxable transaction. If the proceeds from your redemption are
more or less than the cost of your shares, you will have a gain or loss, which
can affect your tax liability.
Two ways to request an exchange or redemption of shares
1
By letter Include in your letter:
o the name of the fund (s)
o the class of shares to be exchanged or redeemed
o your account number(s) (for exchanges, both
funds must be registered in the same
ownership)
o your Taxpayer Identification Number (TIN)
o the dollar amount or number of shares you want
to exchange or redeem
o signature of all registered account owners
o for redemptions, indicate how you want your
money delivered to you
o any paper certificates of shares you hold
Regular mail:
American Express Shareholder Service
Attn: Redemptions
P.O. Box 534
Minneapolis, MN 55440-0534
Express mail:
American Express Shareholder Service
Attn: Redemptions
733 Marquette Ave.
Minneapolis, MN 55402
2
By phone
American Express o The Fund and AEFC will honor any telephone exchange
Financial Advisors or redemption request believed to be authentic
Telephone Transaction and will use reasonable procedures to confirm that
Service: they are. This includes asking identifying
800-437-3133 or questions and tape recording calls. If reasonable
612-671-3800 procedures are followed, the Fund or AEFC will not
be liable for any loss resulting from fraudulent
requests.
o Phone exchange and redemption privileges
automatically apply to all accounts except
custodial, corporate or qualified retirement
accounts unless you request these privileges
NOT apply by writing American Express
Shareholder Service. Each registered owner
must sign the request.
o AEFC answers phone requests promptly, but you
may experience delays when call volume is high.
If you are unable to get through, use mail
procedure as an alternative.
o Acting on your instructions, your financial advisor
may conduct telephone transactions on your behalf.
o Phone privileges may be modified or discontinued
at any time.
Minimum amount
Redemption: $ 100
Maximum amount
Redemption: $50,000
<PAGE>
Exchange policies:
o You may make up to three exchanges within any 30-day period, with each
limited to $300,000. These limits do not apply to scheduled exchange
programs and certain employee benefit plans or other arrangements
through which one shareholder represents the interests of several.
Exceptions may be allowed with pre-approval of the Fund.
o Exchanges must be made into the same class of shares of the new fund.
o If your exchange creates a new account, it must satisfy the minimum
investment amount for new purchases.
o Once we receive your exchange request, you cannot cancel it.
o Shares of the new fund may not be used on the same day for anothe
exchange.
o If your shares are pledged as collateral, the exchange will be delayed
until written approval is obtained from the secured party.
o AEFC 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 the Fund's
investment strategies or increase its costs.
Redemption policies:
o A "change of mind" option allows you to change your mind after requesting
a redemption and to use all or part of the proceeds to purchase new shares
in the same account from which you redeemed. If you reinvest in Class
A, you will purchase the new shares at net asset value rather than the
offering price on the date of a new purchase. If you reinvest in Class B
any CDSC you paid on the amount you are reinvesting also will be
reinvested. To take advantage of this option, send a written request
within 30 days of the date your redemption request was received. Includ
your account number and mention this option. This privilege may be limited
or withdrawn at any time, and it may have tax consequences.
o A telephone redemption request will not be allowed within 30 days of
phoned-in address change.
Important: If you request a redemption of shares you recently purchased by a
check or money order that is not guaranteed, the Fund will wait for your check
to clear. It may take up to 10 days from the date of purchase before a check is
mailed to you. (A check may be mailed earlier if your bank provides evidence
satisfactory to the Fund and AEFC that your check has cleared.)
<PAGE>
Three ways to receive payment when you redeem shares
1 o Mailed to the address on record
By regular or o Payable to names listed on the account
express mail NOTE: You will be charged a fee if you request
express mail delivery.
2 o Minimum wire redemption: $1,000
By wire o Request that money be wired to your bank
o Bank account must be in the same ownership as
the IDS fund account NOTE: Pre-authorization
required. For instructions, contact your
financial advisor or American Express
Shareholder Service.
3 o Minimum payment: $50
By scheduled o Contact your financial advisor or American
payout plan Express Shareholder Service to set up regular
payments to you on a monthly, bimonthly,
quarterly,semiannual or annual basis
o Purchasing new shares while under a payout
plan may be disadvantageous because of the
sales charges
Reductions and waivers of the sales charge
Class A - initial sales charge alternative
On purchases of Class A shares, you pay a 5% sales charge on the first $50,000
of your total investment and less on investments after the first $50,000:
Total investment Sales charge as a
percentage of:*
Public Net
offering amount
price invested
Up to $50,000 5.0% 5.26%
Next $50,000 4.5 4.71
Next $400,000 3.8 3.95
Next $500,000 2.0 2.04
$1,000,000 or more 0.0 0.00
* To calculate the actual sales charge on an investment greater than $50,000 and
less than $1,000,000, amounts for each applicable increment must be totaled. See
the SAI.
<PAGE>
Reductions of the sales charge on Class A shares
Your sales charge may be reduced, depending on the totals of:
o the amount you are investing in this Fund now;
o the amount of your existing investment in this Fund, if any; and
o the amount you and your primary household group are investing or have in other
funds in the IDS MUTUAL FUND GROUP that carry a sales charge. (The primary
household group consists of accounts in any ownership for spouses or domestic
partners and their unmarried children under 21. Domestic partners are
individuals who maintain a shared primary residence and have joint property or
other insurable interests.)
Other policies that affect your sales charge:
o IDS Tax-Free Money Fund and Class A shares of IDS Cash Management Fund do not
carry sales charges. However, you may count investments in these funds if you
acquired shares in them by exchanging shares from IDS funds that carry sales
charges.
o Employee benefit plan purchases made through a payroll deduction plan or
through a plan sponsored by an employer, association of employers, employee
organization or other similar entity, may be added together to reduce sales
charges for all shares purchased through that plan.
o If you intend to invest $1 million over a period of 13 months, you can reduce
the sales charges in Class A by filing a letter of intent.
For more details, see the SAI.
Waivers of the sales charge for Class A shares Sales charges do not apply to:
o Current or retired board members, officers or employees of the Fund or AEFC or
its subsidiaries, their spouses and unmarried children under 21.
o Current or retired American Express financial advisors, their spouses and
unmarried children under 21.
o Investors who have a business relationship with a newly associated financial
advisor who joined AEFA from another investment firm provided that (1) the
purchase is made within six months of the advisor's appointment date with AEFA,
(2) the purchase is made with proceeds of a redemption of shares that were
sponsored by the financial advisor's previous broker-dealer, and (3) the
proceeds must be the result of a redemption of an equal or greater value where a
sales load was previously assessed.
<PAGE>
o Qualified employee benefit plans* using a daily transfer recordkeeping system
offering participants daily access to IDS funds.
(Participants in certain qualified plans for which the initial sales charge is
waived may be subject to a deferred sales charge of up to 4% on certain
redemptions. For more information, see the SAI.)
o Shareholders who have at least $1 million invested in funds of the IDS MUTUAL
FUND GROUP. If the investment is redeemed in the first year after purchase, a
CDSC of 1% will be charged on the redemption. The CDSC will be waived only in
the circumstances described for waivers for Class B shares.
o Purchases made within 30 days after a redemption of shares (up to the
amount redeemed): - of a product distributed by AEFA in a qualified plan
subject to a deferred sales charge or - a qualified plan where American
Express Trust Company has a recordkeeping, trustee, investment
management or investment servicing relationship.
Send the Fund a written request along with your payment, indicating the amount
of the redemption and the date on which it occurred.
o Purchases made with dividend or capital gain distributions from the same class
of another fund in the IDS MUTUAL FUND GROUP that has a sales charge.
o Purchases made through or under a "wrap fee" product sponsored by AEFA (total
amount of all investments must be $50,000); or a segregated separate account
offered by Nationwide Life Insurance Company or Nationwide Life and Annuity
Insurance Company.
o Purchases made with the proceeds from IDS Life Real Estate Variable Annuity
surrenders.
* Eligibility must be determined in advance by AEFA. To do so, contact your
financial advisor.
Class B - contingent deferred sales charge alternative
Where a CDSC is imposed on a redemption, it is based on the amount of the
redemption and the number of calendar years, including the year of purchase,
between purchase and
<PAGE>
redemption. The following table shows the declining scale of percentages that
apply to redemptions during each year after a purchase:
If a redemption is The percentage rate
made during the for the CDSC is:
First year 5%
Second year 4%
Third year 4%
Fourth year 3%
Fifth year 2%
Sixth year 1%
Seventh year 0%
If the amount you are redeeming reduces the current net asset value of your
investment in Class B shares below the total dollar amount of all your purchase
payments during the last six years (including the year in which your redemption
is made), the CDSC is based on the lower of the redeemed purchase payments or
market value.
The following example illustrates how the CDSC is applied. Assume you had
invested $10,000 in Class B shares and that your investment had appreciated in
value to $12,000 after 15 months, including reinvested dividend and capital gain
distributions. You could redeem any amount up to $2,000 without paying a CDSC
($12,000 current value less $10,000 purchase amount). If you redeemed $2,500,
the CDSC would apply only to the $500 that represented part of your original
purchase price. The CDSC rate would be 4% because a redemption after 15 months
would take place during the second year after purchase.
Because the CDSC is imposed only on redemptions that reduce the total of your
purchase payments, you never have to pay a CDSC on any amount you redeem that
represents appreciation in the value of your shares, income earned by your
shares or capital gains. In addition, when determining the rate of any CDSC,
your redemption will be made from the oldest purchase payment you made. Of
course, once a purchase payment is considered to have been redeemed, the next
amount redeemed is the next oldest purchase payment. By redeeming the oldest
purchase payments first, lower CDSCs are imposed than would otherwise be the
case.
Waivers of the contingent deferred sales charge The CDSC on Class B shares will
be waived on redemptions of shares:
o In the event of the shareholder's death,
o Purchased by any board member, officer or employee of a fund or AEFC or
its subsidiaries,
<PAGE>
o Held in a trusteed employee benefit plan,
o Held in IRAs or certain qualified plans for which American Express
Trust Company acts as custodian, such as Keogh plans, tax-sheltered
custodial accounts or corporate pension plans, provided that the
shareholder is:
- at least 59-1/2 years old, and
- taking a retirement distribution (if the redemption is part of a
transfer to an IRA or qualified plan in a product distributed by AEFA,
or a custodian-to-custodian transfer to a product not distributed by
AEFA, the CDSC will not be waived), or
- redeeming under an approved substantially equal periodic payment
arrangement.
Special shareholder services
Services
To help you track and evaluate the performance of your investments, AEFC
provides these services:
Quarterly statements listing all of your holdings and transactions during the
previous three months.
Yearly tax statements featuring average-cost-basis reporting of capital gains or
losses if you redeem your shares along with distribution information which
simplifies tax calculations.
A personalized mutual fund progress report detailing returns on your initial
investment and cash-flow activity in your account. It calculates a total return
to reflect your individual history in owning Fund shares. This report is
available from your financial advisor.
Quick telephone reference
American Express Financial Advisors Telephone Transaction Service
Redemptions and exchanges, dividend payments or reinvestments and automatic
payment arrangements
National/Minnesota: 800-437-3133
Mpls./St. Paul area: 671-3800
TTY Service
For the hearing impaired
800-846-4852
American Express Financial Advisors Easy Access Line
Automated account information (TouchToneR phones only), including current Fund
prices and performance, account values and recent account transactions
800-862-7919
<PAGE>
Distributions and taxes
As a shareholder you are entitled to your share of the Fund's net income and any
net gains realized on its investments. The Fund distributes dividends and
capital gain distributions to qualify as a regulated investment company and to
avoid paying corporate income and excise taxes. Dividend and capital gain
distributions will have tax consequences you should know about.
Dividend and capital gain distributions
The Portfolio allocates investment income from dividends and interest and net
realized capital gains or losses, if any, to the Fund. The Fund deducts direct
and allocated expenses from the investment income. The Fund's net investment
income is distributed to you monthly as dividends. Capital gains are realized
when a security is sold for a higher price than was paid for it. Short-term
capital gains are distributed at the end of the calendar year and are included
in net investment income. Long-term capital gains are realized when a security
is held for more than one year. The Fund will offset any net realized capital
gains by any available capital loss carryovers. Net realized long-term capital
gains, if any, are distributed at the end of the calendar year as capital gain
distributions. These long-term capital gains will be subject to differing tax
rates depending on the holding period of the underlying investments. Before they
are distributed, net long-term capital gains are included in the value of each
share. After they are distributed, the value of each share drops by the
per-share amount of the distribution. (If your distributions are reinvested, the
total value of your holdings will not change.)
Dividends for each class will be calculated at the same time, in the same manner
and will be the same amount prior to deduction of expenses. Expenses
attributable solely to a class of shares will be paid exclusively by that class.
Reinvestments
Dividends and capital gain distributions are automatically reinvested in
additional shares in the same class of the Fund, unless:
o you request the Fund in writing or by phone to pay distributions to
you in cash, or
o you direct the Fund to invest your distributions in the same class of
another publicly available IDS fund for which you have previously
opened an account.
The reinvestment price is the net asset value at close of business on the day
the distribution is paid. (Your quarterly statement will confirm the amount
invested and the number of shares purchased.)
If you choose cash distributions, you will receive only those declared after
your request has been processed.
<PAGE>
If the U.S. Postal Service cannot deliver the checks for the cash distributions,
we will reinvest the checks into your account at the then-current net asset
value and make future distributions in the form of additional shares. Prior to
reinvestment, no interest will accrue on amounts represented by uncashed
distribution or redemption checks.
Taxes
The Fund has received a Private Letter Ruling from the Internal Revenue Service
stating that, for purposes of the Internal Revenue Code, the Fund will be
regarded as directly holding its allocable share of the income and gain realized
by the Portfolio.
Dividends distributed from interest earned on tax-exempt securities
(exempt-interest dividends) are exempt from federal income taxes but may be
subject to state and local taxes. Dividends distributed from other income earned
and capital gain distributions are not exempt from federal income taxes.
Distributions are taxable in the year the Fund declares them regardless of
whether you take them in cash or reinvest them.
Interest on certain private activity bonds is a preference item for purposes of
the individual and corporate alternative minimum taxes. To the extent the Fund
earns such income, it will flow through to its shareholders and may be taxable
to those shareholders who are subject to the alternative minimum tax.
Because interest on municipal bonds and notes is tax-exempt for federal income
tax purposes, any interest on borrowed money used directly or indirectly to
purchase Fund shares is not deductible on your federal income tax return. You
should consult a tax advisor regarding its deductibility for state and local
income tax purposes.
Each January, you will receive a tax statement showing the kinds and total
amount of all distributions you received during the previous year. You must
report distributions on your tax returns, even if they are reinvested in
additional shares.
Buying a dividend creates a tax liability. This means buying shares shortly
before a capital gain distribution. You pay the full pre-distribution price for
the shares, then receive a portion of your investment back as a distribution,
which is taxable.
Redemptions and exchanges subject you to a tax on any capital gain. If you sell
shares for more than their cost, the difference is a capital gain. Your gain may
be short term (for shares held for one year or less) or long term (for shares
held for more than one year). Long-term capital gains will be taxed at rates
that vary depending upon the holding period. Long-term capital gains are divided
into two holding periods: (1) shares held more than one year but not more than
18 months and (2) shares held more than 18 months.
<PAGE>
Your Taxpayer Identification Number (TIN) is important. As with any financial
account you open, you must list your current and correct Taxpayer Identification
Number (TIN) -- either your Social Security or Employer Identification number.
The TIN must be certified under penalties of perjury on your application when
you open an account.
If you do not provide the TIN, or the TIN you report is incorrect, you could be
subject to backup withholding of 31% of taxable distributions and proceeds from
certain sales and exchanges. You also could be subject to further penalties,
such as:
o a $50 penalty for each failure to supply your correct TIN
o a civil penalty of $500 if you make a false statement that results in
no backup withholding
o criminal penalties for falsifying information
You also could be subject to backup withholding because you failed to report
interest or dividends on your tax return as required.
How to determine the correct TIN
Use the Social Security or
For this type of account: Employer Identification number of:
Individual or joint account The individual or individuals listed
on the account
Custodian account of a minor (Uniform The minor
Gifts/Transfers to Minors Act)
A living trust The grantor-trustee (the person who
puts the money into the trust)
An irrevocable trust, The legal entity (not the personal
pension trust or estate representative or trustee, unless no
legal entity is designated in the
account title)
Sole proprietorship The owner
Partnership The partnership
Corporate The corporation
Association, club or tax-exempt The organization
organization
<PAGE>
For details on TIN requirements, ask your financial advisor or local American
Express Financial Advisors office for federal Form W-9, "Request for Taxpayer
Identification Number and Certification."
Important: This information is a brief and selective summary of certain federal
tax rules that apply to this Fund. Tax matters are highly individual and
complex, and you should consult a qualified tax advisor about your personal
situation.
How the Fund and Portfolio are organized
Shares
The Fund is owned by its shareholders. The Fund issues shares in three classes -
Class A, Class B and Class Y. Each class has different sales arrangements and
bears different expenses. Each class represents interests in the assets of the
Fund. Par value is one cent per share. Both full and fractional shares can be
issued.
The Fund no longer issues stock certificates.
Voting rights
As a shareholder, you have voting rights over the Fund's management and
fundamental policies. You are entitled to one vote for each share you own.
Shares of the Fund have cumulative voting rights. Each class has exclusive
voting rights with respect to the provisions of the Fund's distribution plan
that pertain to a particular class and other matters for which separate class
voting is appropriate under applicable law.
Shareholder meetings
The Fund does not hold annual shareholder meetings. However, the board members
may call meetings at their discretion, or on demand by holders of 10% or more of
the outstanding shares, to elect or remove board members.
Special considerations regarding master/feeder structure
The Fund pursues its goal by investing its assets in a master fund called the
Portfolio. This means that the Fund does not invest directly in securities;
rather the Portfolio invests in and manages its portfolio of securities. The
Portfolio is a separate investment company, but it has the same goal and
investment policies as the Fund. The goal and investment policies of the
Portfolio are described under the captions "Investment policies and risks" and
"Facts about investments and their risks." Additional information on investment
policies may be found in the SAI.
<PAGE>
Board considerations: The board considered the advantages and disadvantages of
investing the Fund's assets in the Portfolio. The board believes that the
master/feeder structure can be in the best interest of the Fund and its
shareholders since it offers the opportunity for economies of scale. The Fund
may redeem all of its assets from the Portfolio at any time. Should the board
determine that it is in the best interest of the Fund and its shareholders to
terminate its investment in the Portfolio, it would consider hiring an
investment advisor to manage the Fund's assets, or other appropriate options.
The Fund would terminate its investment if the Portfolio changed its goal,
investment policies or restrictions without the same change being approved by
the Fund.
Other feeders: The Portfolio sells securities to other affiliated mutual funds
and may sell securities to non-affiliated investment companies and institutional
accounts (known as feeders). These feeders buy the Portfolio's securities on the
same terms and conditions as the Fund and pay their proportionate share of the
Portfolio's expenses. However, their operating costs and sales charges are
different from those of the Fund. Therefore, the investment returns for other
feeders are different from the returns of the Fund. Information about other
feeders may be obtained by calling American Express Financial Advisors at
1-800-AXP-SERV.
Each feeder that invests in the Portfolio is different and activities of its
investors may adversely affect all other feeders, including the Fund. For
example, if one feeder decides to terminate its investment in the Portfolio, the
Portfolio may elect to redeem in cash or in kind. If cash is used, the Portfolio
will incur brokerage, taxes and other costs in selling securities to raise the
cash. This may result in less investment diversification if entire investment
positions are sold, and it also may result in less liquidity among the remaining
assets. If in-kind distribution is made, a smaller pool of assets remains that
may affect brokerage rates and investment options. In both cases, expenses may
rise since there are fewer assets to cover the costs of managing those assets.
Shareholder meetings: Whenever the Portfolio proposes to change a fundamental
investment policy or to take any other action requiring approval of its security
holders, the Fund will hold a shareholder meeting. The Fund will vote for or
against the Portfolio's proposals in proportion to the vote it receives for or
against the same proposals from its shareholders.
Board members and officers
Shareholders elect a board that oversees the operations of the Fund and chooses
its officers. Its officers are responsible for day-to-day business decisions
based on policies set by the board. The board has named an executive committee
that has authority to act on its behalf between meetings. Board members and
officers serve 47 IDS and IDS Life funds and 15 Master Trust portfolios, except
for William H. Dudley, who does not serve the nine IDS Life funds. The board
members also serve as members of the board of the Trust which manages the
investments of the Portfolio and other accounts. Should any
<PAGE>
conflict of interest arise between the interests of the shareholders of the Fund
and those of the other accounts, the board will follow written procedures to
address the conflict.
Independent board members and officers
Chairman of the board
William R. Pearce*
Chairman of the board, Board Services Corporation (provides administrative
services to boards including the boards of the IDS and IDS Life funds and Master
Trust portfolios).
H. Brewster Atwater, Jr.
Former chairman and chief executive officer, General Mills, Inc.
Lynne V. Cheney
Distinguished fellow, American Enterprise Institute for Public Policy Research.
Heinz F. Hutter
Former president and chief operating officer, Cargill, Inc.
Anne P. Jones
Attorney and telecommunications consultant.
Alan K. Simpson
Former United States senator for Wyoming.
Edson W. Spencer
Former chairman and chief executive officer, Honeywell, Inc.
Wheelock Whitney
Chairman, Whitney Management Company.
C. Angus Wurtele
Chairman of the board, The Valspar Corporation.
Officer
Vice president, general counsel and secretary
Leslie L. Ogg*
President, treasurer and corporate secretary of Board Services Corporation.
<PAGE>
Board members and officers associated with AEFC
President
John R. Thomas*
Senior vice president, AEFC.
William H. Dudley*
Senior advisor to the chief executive officer, AEFC.
David R. Hubers*
President and chief executive officer, AEFC.
Officers associated with AEFC
Vice president
Peter J. Anderson*
Senior vice president, AEFC.
Treasurer
Matthew N. Karstetter*
Vice president, AEFC.
Refer to the SAI for the board members' and officers' biographies.
* Interested person as defined by the Investment Company Act of 1940.
Investment manager
The Portfolio pays AEFC for managing its assets. The Fund pays its proportionate
share of the fee. Under the Investment Management Services Agreement, AEFC is
paid a fee for these services based on the average daily net assets of the
Portfolio, as follows:
Assets Annual rate
(billions) at each asset level
First $1.0 0.490%
Next 1.0 0.465
Next 1.0 0.440
Next 3.0 0.415
Next 3.0 0.390
Over 9.0 0.360
<PAGE>
For the fiscal year ended Nov 30, 1997, the Portfolio paid AEFC a total
investment management fee of 0.44% of its average daily net assets. Under the
Agreement, the Portfolio also pays taxes, brokerage commissions and nonadvisory
expenses.
Administrator and transfer agent
Under an Administrative Services Agreement, the Fund pays AEFC for
administration and accounting services at an annual rate of 0.04% decreasing in
gradual percentages to 0.02% as assets increase.
Under a separate Transfer Agency Agreement, American Express Client Service
Corporation (AECSC) maintains shareholder accounts and records. The Fund pays
AECSC an annual fee per shareholder account for this service as follows:
o Class A $15.50
o Class B $16.50
o Class Y $15.50
Distributor
The Fund has an exclusive distribution agreement with American Express Financial
Advisors, a wholly-owned subsidiary of AEFC. Financial advisors representing
AEFA provide information to investors about individual investment programs, the
Fund and its operations, new account applications, and exchange and redemption
requests. The cost of these services is paid partially by the Fund's sales
charges.
Persons who buy Class A shares pay a sales charge at the time of purchase.
Persons who buy Class B shares are subject to a contingent deferred sales charge
on a redemption in the first six years and pay an asset-based sales charge (also
known as a 12b-1 fee) of 0.75% of the Fund's average daily net assets. Class Y
shares are sold without a sales charge and without an asset-based sales charge.
Financial advisors may receive different compensation for selling Class A, Class
B and Class Y shares. Portions of the sales charge also may be paid to
securities dealers who have sold the Fund's shares or to banks and other
financial institutions. The amounts of those payments range from 0.8% to 4% of
the Fund's offering price depending on the monthly sales volume.
Under a Shareholder Service Agreement, the Fund also pays a fee for service
provided to shareholders by financial advisors and other servicing agents. The
fee is calculated at a rate of 0.175% of average daily net assets for Class A
and Class B shares and 0.10% for Class Y shares.
<PAGE>
Total expenses paid by the Fund's Class A shares for the fiscal year ended Nov.
30, 1997, were 0.70% of its average daily net assets. Expenses for Class B and
Class Y were 1.46% and 0.61%, respectively.
About American Express Financial Corporation
General information
The AEFC family of companies offers not only mutual funds but also insurance,
annuities, investment certificates and a broad range of financial management
services.
Besides managing investments for all funds in the IDS MUTUAL FUND GROUP, AEFC
also manages investments for itself and its subsidiaries, IDS Certificate
Company and IDS Life Insurance Company. Total assets under management on Nov.
30, 1997 were more than $172 billion.
AEFA serves individuals and businesses through its nationwide network of more
than 175 offices and more than 8,700 advisors.
Other AEFC subsidiaries provide investment management and related services for
pension, profit sharing, employee savings and endowment funds of businesses and
institutions.
AEFC is located at IDS Tower 10, Minneapolis, MN 55440-0010. It is a
wholly-owned subsidiary of American Express Company (American Express), a
financial services company with headquarters at American Express Tower, World
Financial Center, New York, NY 10285. The Portfolio may pay brokerage
commissions to broker-dealer affiliates of AEFC.
<PAGE>
Appendix A
Description of bond ratings
Bond ratings concern the quality of the issuing state or local governmental
unit. They are not an opinion of the market value of the security. Such ratings
are opinions on whether the principal and interest will be repaid when due. A
security's rating may change, which could affect its price. Ratings by Moody's
Investors Service, Inc. are Aaa, Aa, A, Baa, Ba, B, Caa, Ca and C. Ratings by
Standard & Poor's Corporation are AAA, AA, A, BBB, BB, B, CCC, CC, C and D. The
following is a compilation of the two agencies' rating descriptions. For further
information, see the SAI.
Aaa/AAA - Judged to be of the best quality and carry the smallest degree of
investment risk. Interest and principal are secure.
Aa/AA - Judged to be high-grade although margins of protection for interest and
principal may not be quite as good as Aaa or AAA rated securities.
A - Considered upper-medium grade. Protection for interest and principal is
deemed adequate but may be susceptible to future impairment.
Baa/BBB - Considered medium-grade obligations. Protection for interest and
principal is adequate over the short-term; however, these obligations may have
certain speculative characteristics.
Ba/BB - Considered to have speculative elements. The protection of interest and
principal payments may be very moderate.
B - Lack characteristics of more desirable investments. There may be small
assurance over any long period of time of the payment of interest and principal.
Caa/CCC - Are of poor standing. Such issues may be in default or there may be
risk with respect to principal or interest.
Ca/CC - Represent obligations that are highly speculative. Such issues are often
in default or have other marked shortcomings.
C - Are obligations with a higher degree of speculation. These securities have
major risk exposures to default.
D - Are in payment default. The D rating is used when interest payments or
principal payments are not made on the due date.
<PAGE>
Non-rated securities will be considered for investment when they possess a risk
comparable to that of rated securities consistent with the Portfolio's
objectives and policies. When assessing the risk involved in each non-rated
security, the Portfolio will consider the financial condition of the issuer or
the protection afforded by the terms of the security.
Definitions of zero-coupon and pay-in-kind securities
A zero-coupon security is a security that is sold at a deep discount from its
face value and makes no periodic interest payments. The buyer of such a security
receives a rate of return by gradual appreciation of the security, which is
redeemed at face value on the maturity date.
A pay-in-kind security is a security in which the issuer has the option to make
interest payments in cash or in additional securities. The securities issued as
interest usually have the same terms, including maturity date, as the
pay-in-kind securities.
<PAGE>
Appendix B
1998 federal tax-exempt and taxable equivalent yield calculation
These tables will help you determine your federal taxable yield equivalents for
given rates of tax-exempt income.
Step 1: Calculating your marginal tax rate.
Using your Taxable Income and Adjusted Gross Income figures as guides, you can
locate your Marginal Tax Rate in the table below.
First locate your Taxable Income in a filing status and income range in the
left-hand column. Then, locate your Adjusted Gross Income at the top of the
chart. At the point where your Taxable Income line meets your Adjusted Gross
Income column the percentage indicated is an approximation of your federal
Marginal Tax Rate. For example: Let's assume you are married filing jointly,
your taxable income is $138,000 and your adjustable gross income is $175,000.
Under Taxable Income married filing jointly status, $138,000 is in the
$102,300-$155,950 range. Under Adjusted Gross Income, $175,000 is in the
$124,500 to $186,800 column. The Taxable income line and Adjusted Gross Income
column meet at 31.93%. This is the rate you'll use in Step 2.
<TABLE>
<CAPTION>
Adjusted gross income*
<S> <C> <C> <C> <C>
- ---------------------------- ------------------- ------------------- ------------------- -------------------
Taxable income** $0 $124,500 $ 186,800 over
to to to
$124,500(1) $186,800(2) $309,300(3) $309,300(2)
- ---------------------------- ------------------- ------------------- ------------------- -------------------
Married Filing Jointly
$ 0-$42,350 15.00%
42,350-102,300 28.00 28.84%
102,300-155,950 31.00 31.93 33.27%
155,950-278,450 36.00 37.08 38.64 37.08%
278,450+ 39.60 42.50*** 40.79
<PAGE>
Adjusted gross income*
- ---------------------------- ------------------- ------------------- ---------------------------------------
Taxable income $0 $124,500 over
to to
$124,500(1) $247,000(3) $247,000(2)
- ---------------------------- ------------------- ------------------- ---------------------------------------
Single
$ 0-$ 25,350 15.00%
25,350- 61,400 28.00
61,400- 128,100 31.00 32.60%
128,100- 278,450 36.00 37.86 37.08%
278,450+ 39.60 40.79
- ---------------------------- ------------------- ------------------- ---------------------------------------
</TABLE>
* Gross income with certain adjustments before taking itemized deductions and
personal exemptions.
** Amount subject to federal income tax after itemized deductions or standard
deduction and personal exemptions.
***This rate is applicable only in the limited case where your adjusted gross
income is less than $309,300 and your taxable income exceeds $278,450.
(1)No Phase-out--Assumes no phase-out of itemized deductions or personal
exemptions.
(2)Itemized Deductions Phase-out--Assumes a phase-out of itemized deductions and
no current phase-out of personal exemptions.
(3)Itemized Deductions and Personal Exemption Phase-outs--Assumes a single
taxpayer has one personal exemption, joint taxpayers have two personal
exemptions, personal exemptions phase-out and itemized deductions continue to
phase-out.
If these assumptions do not apply to you, it will be necessary to construct your
own personalized tax equivalency table.
<PAGE>
STEP 2: Determining your federal taxable yield equivalents.
Using 31.93%, you may determine that a tax-exempt yield of 4% is equivalent to
earning a taxable 5.88% yield.
<TABLE>
<CAPTION>
For these Tax-Exempt Rates:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
3.00% 3.50% 4.00% 4.50% 5.00% 5.50% 6.00% 6.50%
-------------------------------------------------------------------------------------------------
Marginal
Tax Rates Equal the Taxable Rates shown below
15.00% 3.53 4.12 4.71 5.29 5.88 6.47 7.06 7.65
28.00% 4.17 4.86 5.56 6.25 6.94 7.64 8.33 9.03
28.84% 4.22 4.92 5.62 6.32 7.03 7.73 8.43 9.13
31.00% 4.35 5.07 5.80 6.52 7.25 7.97 8.70 9.42
31.93% 4.41 5.14 5.88 6.61 7.35 8.08 8.81 9.55
32.60% 4.45 5.19 5.93 6.68 7.42 8.16 8.90 9.64
33.27% 4.50 5.25 5.99 6.74 7.49 8.24 8.99 9.74
36.00% 4.69 5.47 6.25 7.03 7.81 8.59 9.38 10.16
37.08% 4.77 5.56 6.36 7.15 7.95 8.74 9.54 10.33
37.86% 4.83 5.63 6.44 7.24 8.05 8.85 9.66 10.46
38.64% 4.89 5.70 6.52 7.33 8.15 8.96 9.78 10.59
39.60% 4.97 5.79 6.62 7.45 8.28 9.11 9.93 10.76
40.79% 5.07 5.91 6.76 7.60 8.44 9.29 10.13 10.98
42.50% 5.22 6.09 6.96 7.83 8.70 9.57 10.43 11.30
</TABLE>
<PAGE>
Appendix C
Descriptions of derivative instruments
What follows are brief descriptions of derivative instruments the Portfolio may
use. At various times the Portfolio may use some or all of these instruments and
is not limited to these instruments. It may use other similar types of
instruments if they are consistent with the Portfolio's investment goal and
policies. For more information on these instruments, see the SAI.
Options and futures contracts - An option is an agreement to buy or sell an
instrument at a set price during a certain period of time. A futures contract is
an agreement to buy or sell an instrument for a set price on a future date. The
Portfolio may buy and sell options and futures contracts to manage its exposure
to changing interest rates, security prices and currency exchange rates. Options
and futures may be used to hedge the Portfolio's investments against price
fluctuations or to increase market exposure.
Asset-backed and mortgage-backed securities - Asset-backed securities include
interests in pools of assets such as motor vehicle installment sale contracts,
installment loan contracts, leases on various types of real and personal
property, receivables from revolving credit (credit card) agreements or other
categories of receivables. Mortgage-backed securities include collateralized
mortgage obligations and stripped mortgage-backed securities. Interest and
principal payments depend on payment of the underlying loans or mortgages. The
value of these securities may also be affected by changes in interest rates, the
market's perception of the issuers and the creditworthiness of the parties
involved. The non-mortgage related asset-backed securities do not have the
benefit of a security interest in the related collateral. Stripped
mortgage-backed securities include interest only (IO) and principal only (PO)
securities. Cash flows and yields on IOs and POs are extremely sensitive to the
rate of principal payments on the underlying mortgage loans or mortgage-backed
securities.
Indexed securities - The value of indexed securities is linked to currencies,
interest rates, commodities, indexes or other financial indicators. Most indexed
securities are short- to intermediate-term fixed income securities whose values
at maturity or interest rates rise or fall according to the change in one or
more specified underlying instruments. Indexed securities may be more volatile
than the underlying instrument itself.
Inverse floaters - Inverse floaters are created by underwriters using the
interest payment on securities. A portion of the interest received is paid to
holders of instruments based on current interest rates for short-term
securities. The remainder, minus a servicing fee, is paid to holders of inverse
floaters. As interest rates go down, the holders of the inverse floaters receive
more income and an increase in the price for the inverse floaters. As interest
rates go up, the holders of the inverse floaters receive less income and a
decrease in the price for the inverse floaters.
<PAGE>
Structured products - Structured products are over-the-counter financial
instruments created specifically to meet the needs of one or a small number of
investors. The instrument may consist of a warrant, an option or a forward
contract embedded in a note or any of a wide variety of debt, equity and/or
currency combinations. Risks of structured products include the inability to
close such instruments, rapid changes in the market and defaults by other
parties.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
FOR
IDS HIGH YIELD TAX-EXEMPT FUND
Jan. 29, 1998
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
Annual Report which may be obtained from your American Express financial advisor
or by writing to American Express Shareholder Service, P.O. Box 534,
Minneapolis, MN 55440-0534.
This SAI is dated Jan. 29, 1998, and it is to be used with the prospectus dated
Jan. 29, 1998, and the Annual Report for the fiscal year ended Nov. 30, 1997.
<PAGE>
TABLE OF CONTENTS
Goal and Investment Policies.....................................See Prospectus
Additional Investment Policies............................................p. 4
Security Transactions.....................................................p. 7
Brokerage Commissions Paid to Brokers Affiliated with
American Express Financial Corporation.....................................p.10
Performance Information....................................................p.10
Valuing Fund Shares........................................................p.13
Investing in the Fund......................................................p.14
Redeeming Shares...........................................................p.18
Pay-out Plans..............................................................p.19
Capital Loss Carryover.....................................................p.20
Taxes......................................................................p.20
Agreements.................................................................p.22
Organizational Information.................................................p.25
Board Members and Officers.................................................p.25
Compensation for Fund and Portfolio Board Members..........................p.28
Independent Auditors.......................................................p.29
Financial Statements..........................................See Annual Report
Prospectus.................................................................p.30
<PAGE>
Appendix A: Description of Short-Term Securities..........................p.31
Appendix B: Options and Interest Rate Futures Contracts...................p.33
Appendix C: Dollar-Cost Averaging.........................................p.39
<PAGE>
ADDITIONAL INVESTMENT POLICIES
IDS High Yield Tax-Exempt Fund, Inc. (the Fund) pursues its goals by investing
all of its assets in Tax-Free High Yield Portfolio (the Portfolio) of Tax-Free
Income Trust (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 or Portfolio cannot be
changed without the approval of a majority of the outstanding voting securities
of the Fund or Portfolio, respectively, as defined in the Investment Company Act
of 1940, as amended (the 1940 Act). Whenever the Fund is requested to vote on a
change in the investment policies of the corresponding Portfolio, the Fund will
hold a meeting of Fund shareholders and will cast the Fund's vote as instructed
by the shareholders.
Notwithstanding any of the Fund's other investment policies, 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 both the Fund and the
Portfolio and may be changed only with shareholder/unitholder approval. Unless
holders of a majority of the outstanding voting securities agree to make the
change, the Fund and Portfolio will not:
`Act as an underwriter (sell securities for others). However, under the
securities laws, the Portfolio may be deemed to be an underwriter when it
purchases securities directly from the issuer and later resells them.
`Borrow money or property, except as a temporary measure for extraordinary or
emergency purposes, in an amount not exceeding one-third of the market value of
its total assets (including borrowings) less liabilities (other than borrowings)
immediately after the borrowing. The Portfolio and Fund have not borrowed in the
past and have no present intention to borrow.
`Make cash loans if the total commitment amount exceeds 5% of the Portfolio's
total assets.
`Invest more than 5% of its total assets in securities of any one company,
government or political subdivision thereof, except the limitation will not
apply to investments in securities issued by the U.S. government, its agencies
or instrumentalities, and except that up to 25% of the Portfolio's total assets
may be invested without regard to this 5% limitation. For purposes of this
policy, the terms of a municipal security determine the issuer.
<PAGE>
`Buy or sell real estate, unless acquired as a result of ownership of securities
or other instruments, except this shall not prevent the Portfolio from investing
in securities or other instruments backed by real estate or securities of
companies engaged in the real estate business or real estate investment trusts.
For purposes of this policy, real estate includes real estate limited
partnerships.
`Buy or sell physical commodities unless acquired as a result of ownership of
securities or other instruments, except this shall not prevent the Portfolio
from buying or selling options and futures contracts or from investing in
securities or other instruments backed by, or whose value is derived from,
physical commodities.
`Lend Portfolio securities in excess of 30% of its net assets. The current
policy of the Portfolio's board is to make these loans, either long- or
short-term, to broker-dealers. In making loans, the Portfolio receives the
market price in cash, U.S. government securities, letters of credit or such
other collateral as may be permitted by regulatory agencies and approved by the
board. If the market price of the loaned securities goes up, the Portfolio will
get additional collateral on a daily basis. The risks are that the borrower may
not provide additional collateral when required or return the securities when
due. During the existence of the loan, the Portfolio receives cash payments
equivalent to all interest or other distributions paid on the loaned securities.
A loan will not be made unless the investment manager believes the opportunity
for additional income outweighs the risks.
Unless changed by the board, the Fund and Portfolio will not:
`Buy on margin or sell short, except the Portfolio may enter into interest rate
futures contracts.
`Pledge or mortgage its assets beyond 15% of total assets. If the Portfolio were
ever to do so, valuation of the pledged or mortgaged assets would be based on
market values. For purposes of this policy, collateral arrangements for margin
deposits on a futures contract are not deemed to be a pledge of assets.
`Invest more than 5% of its total assets in securities whose issuer or guarantor
of principal and interest has been in operation for less than three years.
`Invest in voting securities, securities of investment companies or exploration
or development programs, such as oil, gas or mineral leases.
`Purchase securities of an issuer if the board members and officers of the Fund,
the Portfolio and of American Express Financial Corporation (AEFC) hold more
than a certain percentage of the issuer's outstanding securities. If the
holdings of all board members and officers of the Fund, the Portfolio and AEFC
who own more than 0.5% of an issuer's securities are added together, and if in
total they own more than 5%, the Portfolio will not purchase securities of that
issuer.
<PAGE>
`Invest more than 5% of its net assets in warrants.
`Invest more than 10% of the Portfolio's net assets in securities and derivative
instruments that are illiquid. For purposes of this policy illiquid securities
include some privately placed securities, public securities and Rule 144A
securities that for one reason or another may no longer have a readily available
market, loans and loan participations, repurchase agreements with maturities
greater than seven days, non-negotiable fixed-time deposits and over-the-counter
options. In determining the liquidity of municipal lease obligations, the
investment manager, under guidelines established by the board, will consider the
essential nature of the leased property, the likelihood that the municipality
will continue appropriating funding for the leased property, and other relevant
factors related to the general credit quality of the municipality and the
marketability of the municipal lease obligation.
In determining the liquidity of Rule 144A securities, which are unregistered
securities offered to qualified institutional buyers, and interest-only and
principal-only fixed mortgage-backed securities (IOs and POs) issued by the U.S.
government or its agencies and instrumentalities, the investment manager, under
guidelines established by the board, will consider any relevant factors
including the frequency of trades, the number of dealers willing to purchase or
sell the security and the nature of marketplace trades.
The Portfolio may invest in commercial paper issued in transactions not
involving a public offering under Section 4(2) of the Securities Act of 1933
(4(2) paper). In determining the liquidity of 4(2) paper, the investment
manager, under guidelines established by the board, will evaluate relevant
factors such as the issuer and the size and nature of its commercial paper
programs, the willingness and ability of the issuer or dealer to repurchase the
paper, and the nature of the clearance and settlement procedures for the paper.
The Portfolio may make contracts to purchase securities for a fixed price at a
future date beyond normal settlement time (when-issued securities or forward
commitments). Under normal market conditions, the Portfolio does not intend to
commit more than 5% of its total assets to these practices. The Portfolio does
not pay for the securities or receive dividends or interest on them until the
contractual settlement date. The Portfolio will designate cash or liquid
high-grade debt securities at least equal in value to its commitments to
purchase the securities. When-issued securities or forward commitments are
subject to market fluctuations and they may affect the Portfolio's total assets
the same as owned securities.
The Portfolio may invest up to 20% of its net assets in certain taxable
investments for temporary defensive purposes. It may purchase short-term U.S.
and Canadian government securities. It may invest in bank obligations including
negotiable certificates of deposit, non-negotiable fixed time deposits, bankers'
acceptances and letters of credit. The issuing bank or savings and loan
generally must have capital, surplus and undivided profits (as of the date of
its most recently published annual financial statements) in excess
<PAGE>
of $100 million (or the equivalent in the instance of a foreign branch of a
U.S. bank) at the date of investment.
The Portfolio may purchase short-term corporate notes and obligations rated in
the top two classifications by Moody's Investors Service, Inc. (Moody's) or
Standard & Poor's Corporation (S&P) or the equivalent. It also may use
repurchase agreements with broker-dealers registered under the Securities
Exchange Act of 1934 and with commercial banks. Repurchase agreements involve
investments in debt securities where the seller (broker-dealer or bank) agrees
to repurchase the securities from the Portfolio at cost plus an agreed-to
interest rate within a specified time. A risk of a repurchase agreement is that
if the seller seeks the protection of the bankruptcy laws, the Portfolio's
ability to liquidate the security involved could be impaired, and it might
subsequently incur a loss if the value of the security declines or if the other
party to a repurchase agreement defaults on its obligation.
The term "municipal obligation" as used in the prospectus includes debt
obligations issued by or on behalf of states, territories or possessions of the
United States, the District of Columbia and their political subdivisions,
agencies and instrumentalities, the interest on which is generally exempt from
federal income tax. Municipal obligations are classified as principally as
either "general obligations" or "revenue obligations". General obligation bonds
are secured by the municipality's pledge of its credit and taxing power for the
payment of principal and interest. Revenue obligations are generally payable
only from the revenue derived from a particular facility or class of facilities,
or in some cases from the proceeds of a special excise tax or other special
revenue source.
For a description of short-term securities, see Appendix A. For a discussion on
options and interest rate futures contracts, see Appendix B.
SECURITY TRANSACTIONS
Subject to policies set by the board, AEFC is authorized to determine,
consistent with the Fund's and Portfolio's investment goal and policies, which
securities will be purchased, held or sold. In determining where the buy and
sell orders are to be placed, AEFC has been directed to use its best efforts to
obtain the best available price and most favorable execution except where
otherwise authorized by the board.
AEFC 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. AEFC carefully monitors compliance with its Code of
Ethics.
Normally, the Portfolio's securities are traded on a principal rather than an
agency basis. In other words, AEFC 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. AEFC does not
<PAGE>
pay the dealer commissions. Instead, the dealer's profit, if any, is the
difference, or spread, between the dealer's purchase and sale price for the
security.
On occasion, it may be desirable to compensate a broker for research services or
for brokerage services by paying a commission that might not otherwise be
charged or a commission in excess of the amount another broker might charge. The
board has adopted a policy authorizing AEFC to do so to the extent authorized by
law, if AEFC 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 AEFC's overall
responsibilities with respect to the Fund and other funds and trusts in the IDS
MUTUAL FUND GROUP for which it acts as investment advisor.
Research provided by brokers supplements AEFC'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. AEFC 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
Securities and Exchange Commission (SEC).
When paying a commission that might not otherwise be charged or a commission in
excess of the amount another broker might charge, AEFC must follow procedures
authorized by the board. To date, three procedures have been authorized. One
procedure permits AEFC 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 AEFC, 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 AEFC, in order to obtain research and brokerage
services, to cause the Portfolio to pay a commission in excess of the amount
another broker might have charged. AEFC has advised the Portfolio 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 AEFC believes it
may obtain better overall execution. AEFC has represented that under all three
procedures the
<PAGE>
amount of commission paid will be reasonable and competitive in relation to the
value of the brokerage services performed or research provided.
All other transactions shall be placed on the basis of obtaining the best
available price and 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 AEFC in providing advice to all the funds
in the IDS MUTUAL FUND GROUP even though it is not possible to relate the
benefits to any particular fund or account.
Each investment decision made for the Portfolio is made independently from any
decision made for another portfolio, fund or other account advised by AEFC or
any of its subsidiaries. When the Portfolio buys or sells the same security as
another portfolio, fund or account, AEFC carries out the purchase or sale in a
way the Portfolio agrees in advance is fair. Although sharing in large
transactions may adversely affect the price or volume purchased or sold by the
Portfolio, the Portfolio hopes to gain an overall advantage in execution. AEFC
has assured the Fund it will continue to seek ways to reduce brokerage costs.
On a periodic basis, AEFC makes a comprehensive review of the broker-dealers and
the overall reasonableness of their commissions. The review evaluates execution,
operational efficiency and research services.
The Portfolio paid total brokerage commissions of $-0- for the fiscal year ended
Nov. 30, 1997, $150,492 for the fiscal year ended 1996, and $-0- for the fiscal
year ended 1995. Substantially all firms through whom transactions were executed
provide research services.
No transactions were directed to brokers because of research services they
provided to the Portfolio.
As of the fiscal year ended Nov. 30, 1997, the Portfolio held no securities of
its regular brokers or dealers or of the parents of those brokers or dealers
that derived more than 15% of gross revenue from securities-related activities.
The portfolio turnover rate was 4% in the fiscal year ended Nov. 30, 1997, and
9% in fiscal year 1996.
BROKERAGE COMMISSIONS PAID TO BROKERS AFFILIATED WITH AMERICAN EXPRESS FINANCIAL
CORPORATION
Affiliates of American Express Company (American Express) (of which AEFC is a
wholly-owned subsidiary) may engage in brokerage and other securities
transactions on behalf of the Portfolio according to procedures adopted by the
board and to the extent consistent with applicable provisions of the federal
securities laws. AEFC will use an American Express affiliate only if (i) AEFC
determines that the Portfolio will receive prices and executions at least as
favorable as those offered by qualified independent brokers performing similar
brokerage and other services for the Portfolio and (ii) the affiliate charges
the Portfolio commission rates consistent with those the affiliate charges
comparable unaffiliated customers in similar transactions and if such use is
consistent with terms of the Investment Management Services Agreement.
AEFC may direct brokerage to compensate an affiliate. AEFC will receive research
on South Africa from New Africa Advisors, a wholly-owned subsidiary of Sloan
Financial Group. AEFC owns 100% of IDS Capital Holdings Inc. which in turn owns
40% of Sloan Financial Group. New Africa Advisors will send research to AEFC and
in turn AEFC will direct trades to a particular broker. The broker will have an
agreement to pay New Africa Advisors. All transactions will be on a best
execution basis. Compensation received will be reasonable for the services
rendered.
No brokerage commissions were paid to brokers affiliated with AEFC for the three
most recent fiscal years.
PERFORMANCE INFORMATION
The Fund may quote various performance figures to illustrate past performance.
Average annual total return and current yield quotations 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 a class 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 a class 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)
Annualized yield
The Fund may calculate an annualized yield for a class by dividing the net
investment income per share deemed earned during a 30-day period by the public
offering price per share (including the maximum sales charge) 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 4.51% for Class A, 3.99% for Class B, and 4.82%
for Class Y for the 30-day period ended Nov. 28, 1997.
<PAGE>
Distribution yield
Distribution yield is calculated according to the following formula:
D divided by POP F equals DY
30 30
where: D = sum of dividends for 30-day period
POP = sum of public offering price for 30-day period
F = annualizing factor
DY = distribution yield
The Fund's distribution yield was 5.39% for Class A, 4.93% for Class B, and
5.75% for Class Y for the 30-day period ended Nov. 28, 1997.
Tax-Equivalent Yield
Tax-equivalent yield is calculated by dividing that portion of the yield (as
calculated above) which is tax-exempt by one minus a stated income tax rate and
adding the result to that portion, if any, of the yield that is not tax-exempt.
The following table shows the fund's tax equivalent yield, based on federal but
not state tax rates, for the 30-day period ended Nov. 28, 1997.
Marginal
Income Tax Tax-Equivalent Yield
Bracket Distribution Annualized
Class A
15.0% 6.34% 5.31%
28.0% 7.49% 6.26%
33.0% 8.04% 6.73%
Class B
15.0% 5.80% 4.69%
28.0% 6.85% 5.54%
33.0% 7.36% 5.96%
Class Y
15.0% 6.76% 5.67%
28.0% 7.99% 6.69%
33.0% 8.58% 7.19%
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
<PAGE>
Week, Donoghue's Money Market Fund Report, Financial Services Week, Financial
Times, Financial World, Forbes, Fortune, Global Investor, Institutional
Investor, Investor's Daily, Kiplinger's Personal Finance, Lipper Analytical
Services, Money, Morningstar, Mutual Fund Forecaster, Newsweek, The New York
Times, Personal Investor, Stanger Report, Sylvia Porter's Personal Finance, USA
Today, U.S. News and World Report, The Wall Street Journal and Wiesenberger
Investment Companies Service.
VALUING FUND SHARES
The value of an individual share for each class is determined by using the net
asset value before shareholder transactions for the day. On Dec. 1, 1997, the
first business day following the end of the fiscal year, the computation looked
like this:
Net assets Shares
before outstanding Net asset
shareholder at the end of value of one
transactions previous day share
----------------- ---------------- --------------- ------- ------------
Class A $5,787,315,633 divided by 1,246,460,399 equals $4.643
Class B 190,548,776 41,040,012 4.643
Class Y 8,640,168 1,860,902 4.643
In determining net assets before shareholder transactions, the Portfolio's
securities are valued as follows as of the close of business of the New York
Stock Exchange (the Exchange):
`Securities traded on a securities exchange for which a last-quoted sales price
is readily available are valued at the last-quoted sales price on the exchange
where such security is primarily traded.
`Securities traded on a securities exchange for which a last-quoted sales price
is not readily available are valued at the mean of the closing bid and asked
prices, looking first to the bid and asked prices on the exchange where the
security is primarily traded and, if none exist, to the over-the-counter market.
`Securities included in the NASDAQ National Market System are valued at the
last-quoted sales price in this market.
`Securities included in the NASDAQ National Market System for which a
last-quoted sales price is not readily available, and other securities traded
over-the-counter but not included in the NASDAQ National Market System are
valued at the mean of the closing bid and asked prices.
`Futures and options traded on major exchanges are valued at the last-quoted
sales price on their primary exchange.
<PAGE>
`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.
`Short-term securities maturing more than 60 days from the valuation date are
valued at the readily available market price or approximate market value based
on current interest rates. Short-term securities maturing in 60 days or less
that originally had maturities of more than 60 days at acquisition date are
valued at amortized cost using the market value on the 61st day before maturity.
Short-term securities maturing in 60 days or less at acquisition date are valued
at amortized cost. Amortized cost is an approximation of market value determined
by systematically increasing the carrying value of a security if acquired at a
discount, or reducing the carrying value if acquired at a premium, so that the
carrying value is equal to maturity value on the maturity date.
`Securities without a readily available market price and other assets are valued
at fair value as determined in good faith by the board. The board is responsible
for selecting methods it believes provide fair value. When possible, bonds are
valued by a pricing service independent from the Portfolio. If a valuation of a
bond is not available from a pricing service, the bond will be valued by a
dealer knowledgeable about the bond if such a dealer is available.
The Exchange, AEFC and the Fund will be closed on the following holidays: New
Year's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
INVESTING IN THE FUND
Sales Charge
Shares of the Fund are sold at the public offering price determined at the close
of business on the day an application is accepted. The public offering price is
the net asset value of one share adjusted for the sales charge for Class A. For
Class B and Class Y, there is no initial sales charge so the public offering
price is the same as the net asset value. For Class A, the public offering price
for an investment of less than $50,000, made Dec. 1, 1997, was determined by
dividing the net asset value of one share, $4.643, by 0.95 (1.00-0.05 for a
maximum 5% sales charge) for a public offering price of $4.89. The sales charge
is paid to American Express Financial Advisors Inc. (AEFA) by the person buying
the shares.
<PAGE>
Class A - Calculation of the Sales Charge
Sales charges are determined as follows:
Within each increment,
sales charge as a percentage of:
Public Net
Amount of Investment Offering Price Amount invested
First $ 50,000 5.0% 5.26%
Next 50,000 4.5 4.71
Next 400,000 3.8 3.95
Next 500,000 2.0 2.04
$1,000,000 or more 0.0 0.00
Sales charges on an investment greater than $50,000 and less than $1,000,000 are
calculated for each increment separately and then totaled. The resulting total
sales charge, expressed as a percentage of the public offering price and of the
net amount invested, will vary depending on the proportion of the investment at
different sales charge levels.
For example, compare an investment of $60,000 with an investment of $85,000. The
$60,000 investment is composed of $50,000 that incurs a sales charge of $2,500
(5.0% x $50,000) and $10,000 that incurs a sales charge of $450 (4.5% x
$10,000). The total sales charge of $2,950 is 4.92% of the public offering price
and 5.17% of the net amount invested.
In the case of the $85,000 investment, the first $50,000 also incurs a sales
charge of $2,500 (5.0% x $50,000) and $35,000 incurs a sales charge of $1,575
(4.5% x $35,000). The total sales charge of $4,075 is 4.79% of the public
offering price and 5.04% of the net amount invested.
The following table shows the range of sales charges as a percentage of the
public offering price and of the net amount invested on total investments at
each applicable level.
On total investment, sales
charge as a percentage of:
Public Net
Offering Price Amount Invested
Amount of Investment ranges from:
First $ 50,000 5.00% 5.26%
Next 50,000 to 100,000 5.00-4.50 5.26-4.71
Next 100,000 to 500,000 4.50-3.80 4.71-3.95
Next 500,000 to 999,999 3.80-2.00 3.95-2.04
$1,000,000 or more 0.00 0.00
<PAGE>
Class A - Reducing the Sales Charge
Sales charges are based on the total amount of your investments in the Fund. The
amount of all prior investments plus any new purchase is referred to as your
"total amount invested." For example, suppose you have made an investment of
$20,000 and later decide to invest $40,000 more. Your total amount invested
would be $60,000. As a result, $10,000 of your $40,000 investment qualifies for
the lower 4.5% sales charge that applies to investments of more than $50,000 and
up to $100,000.
The total amount invested includes any shares held in the Fund in the name of a
member of your primary household group. (The primary household group consists of
accounts in any ownership for spouses or domestic partners and their unmarried
children under 21. Domestic partners are individuals who maintain a shared
primary residence and have joint property or other insurable interests.) For
instance, if your spouse already has invested $20,000 and you want to invest
$40,000, your total amount invested will be $60,000 and therefore you will pay
the lower charge of 4.5% on $10,000 of the $40,000.
Until a spouse remarries, the sales charge is waived for spouses and unmarried
children under 21 of deceased board members, officers or employees of the Fund
or AEFC or its subsidiaries and deceased advisors.
The total amount invested also includes any investment you or your immediate
family already have in the other publicly offered funds in the IDS MUTUAL FUND
GROUP where the investment is subject to a sales charge. For example, suppose
you already have an investment of $30,000 in another IDS Fund. If you invest
$40,000 more in this fund, your total amount invested in the funds will be
$70,000 and therefore $20,000 of your $40,000 investment will incur a 4.5% sales
charge.
Class A - Letter of Intent (LOI)
If you intend to invest $1 million over a period of 13 months, you can reduce
the sales charges in Class A by filing a LOI. The agreement can start at any
time and will remain in effect for 13 months. Your investment will be charged
normal sales charges until you have invested $1 million. At that time, your
account will be credited with the sales charges previously paid. Class A
investments made prior to signing an LOI may be used to reach the $1 million
total, excluding Cash Management Fund and Tax-Free Money Fund. However, we will
not adjust for sales charges on investments made prior to the signing of the
LOI. If you do not invest $1 million by the end of 13 months, there is no
penalty, you'll just miss out on the sales charge adjustment. A LOI is not an
option (absolute right) to buy shares.
Here's an example. You file a LOI to invest $1 million and make an investment of
$100,000 at that time. You pay the normal 5% sales charge on the first $50,000
and 4.5% sales charge on the next $50,000 of this investment. Let's say you make
a second investment of $900,000 (bringing the total up to $1 million) one month
before the 13-
<PAGE>
month period is up. On the date that you bring your total to $1 million, AEFC
makes an adjustment to your account. The adjustment is made by crediting your
account with additional shares, in an amount equivalent to the sales charge
previously paid.
Systematic Investment Programs
After you make your investment of $2,000 or more, you can arrange to make
additional payments of $100 or more on a regular basis. These minimums do not
apply to all systematic investment programs. You decide how often you want to
make payments - monthly, quarterly, or semiannually. You are not obligated to
make any payments. You can omit payments or discontinue the investment program
altogether. The Fund also can change the program or end it at any time. If there
is no obligation, why do it? Putting money aside is an important part of
financial planning. With a systematic investment program, you have a goal to
work for.
How does this work? Your regular investment amount will purchase more shares
when the net asset value per share decreases, and fewer shares when the net
asset value per share increases. Each purchase is a separate transaction. After
each purchase your new shares will be added to your account. Shares bought
through these programs are exactly the same as any other fund shares. They can
be bought and sold at any time. A systematic investment program is not an option
or an absolute right to buy shares.
The systematic investment program itself cannot ensure a profit, nor can it
protect against a loss in a declining market. If you decide to discontinue the
program and redeem your shares when their net asset value is less than what you
paid for them, you will incur a loss.
For a discussion on dollar-cost averaging, see Appendix C.
Automatic Directed Dividends
Dividends, including capital gain distributions, paid by another fund in the IDS
MUTUAL FUND GROUP subject to a sales charge, may be used to automatically
purchase shares in the same class of this Fund without paying a sales charge.
Dividends may be directed to existing accounts only. Dividends declared by a
fund are exchanged to this Fund the following day. Dividends can be exchanged
into the same class of another fund in the IDS MUTUAL FUND GROUP but cannot be
split to make purchases in two or more funds. Automatic directed dividends are
available between accounts of any ownership except:
Between a non-custodial account and an IRA, or 401(k) plan account or other
qualified retirement account of which American Express Trust Company acts as
custodian;
<PAGE>
Between two American Express Trust Company custodial accounts with different
owners (for example, you may not exchange dividends from your IRA to the IRA of
your spouse);
Between different kinds of custodial accounts with the same ownership (for
example, you may not exchange dividends from your IRA to your 401(k) plan
account, although you may exchange dividends from one IRA to another IRA).
Dividends may be directed from accounts established under the Uniform Gifts to
Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) only into other UGMA
or UTMA accounts with identical ownership.
The Fund's investment goal is described in its prospectus along with other
information, including fees and expense ratios. Before exchanging dividends into
another fund, you should read that fund's prospectus. You will receive a
confirmation that the automatic directed dividend service has been set up for
your account.
REDEEMING SHARES
You have a right to redeem your shares at any time. For an explanation of
redemption procedures, please see the prospectus.
During an emergency, the board can suspend the computation of net asset value,
stop accepting payments for purchase of shares or suspend the duty of the Fund
to redeem shares for more than seven days. Such emergency situations would occur
if:
`The Exchange closes for reasons other than the usual weekend and holiday
closings or trading on the Exchange is restricted, or
`Disposal of the Portfolio's securities is not reasonably practicable or it is
not reasonably practicable for the Portfolio to determine the fair value of its
net assets, or
`The SEC, under the provisions of the 1940 Act, declares a period of emergency
to exist.
Should the Fund stop selling shares, the board 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.
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 the Fund at the beginning of the period. Although redemptions in excess of
this limitation would normally be paid in cash, the Fund reserves the right to
make these payments in whole or in part in securities or other assets in case of
an emergency, or if the payment of a redemption in cash would be detrimental to
the existing shareholders of the Fund as determined by the
<PAGE>
board. In these 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.
PAY-OUT PLANS
You can use any of several pay-out plans to redeem your investment in regular
installments. If you redeem Class B shares you may be subject to a contingent
deferred sales charge as discussed in the prospectus. While the plans differ on
how the pay-out is figured, they all are based on the redemption of your
investment. Net investment income dividends and any capital gain distributions
will automatically be reinvested, unless you elect to receive them in cash.
Applications for a systematic investment in a class of any fund subject to a
sales charge normally will not be accepted while a pay-out plan for any of those
funds is in effect. Occasional investments, however, may be accepted.
To start any of these plans, please write American Express Shareholder Service,
P.O. Box 534, Minneapolis, MN 55440-0534, or call American Express Financial
Advisors Telephone Transaction Service at 800-437-3133 (National/Minnesota) or
612-671-3800 (Mpls./St. Paul). Your authorization must be received in the
Minneapolis headquarters at least five days before the date you want your
payments to begin. The initial payment must be at least $50. Payments will be
made on a monthly, bimonthly, quarterly, semiannual or annual basis. Your choice
is effective until you change or cancel it.
The following pay-out plans are designed to take care of the needs of most
shareholders in a way AEFC can handle efficiently and at a reasonable cost. If
you need a more irregular schedule of payments, it may be necessary for you to
make a series of individual redemptions, in which case you'll have to send in a
separate redemption request for each pay-out. The Fund reserves the right to
change or stop any pay-out plan and to stop making such plans available.
Plan #1: Pay-out for a fixed period of time
If you choose this plan, a varying number of shares will be redeemed at regular
intervals during the time period you choose. This plan is designed to end in
complete redemption of all shares in your account by the end of the fixed
period.
Plan #2: Redemption of a fixed number of shares
If you choose this plan, a fixed number of shares will be redeemed for each
payment and that amount will be sent to you. The length of time these payments
continue is based on the number of shares in the account.
<PAGE>
Plan #3: Redemption of a fixed dollar amount
If you decide on a fixed dollar amount, whatever number of shares is necessary
to make the payment will be redeemed in regular installments until the account
is closed.
Plan #4: Redemption of a percentage of net asset value
Payments are made based on a fixed percentage of the net asset value of the
shares in your account computed on the day of each payment. Percentages range
from 0.25% to 0.75%. For example, if you are on this plan and arrange to take
0.5% each month, you will get $50 if the value of your account is $10,000 on the
payment date.
CAPITAL LOSS CARRYOVER
For federal income tax purposes, the Fund had total capital loss carryovers of
$47,336,011 at Nov. 30, 1997, that if not offset by subsequent capital gains
will expire as follows:
2002 2005
$39,549,643 $7,786,368
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
If you buy shares in one of the funds and then exchange into another fund, it is
considered a redemption and subsequent purchase of shares. Under tax laws, if
this exchange is done within 91 days, any sales charge waived on Class A shares
on a subsequent purchase of shares applies to the new shares acquired in the
exchange. Therefore, you cannot create a tax loss or reduce a tax gain
attributable to the sales charge when exchanging shares within 91 days.
All distributions of net investment income during the year will have the same
percentage designated as tax-exempt. This annual percentage is expected to be
substantially the same as the percentage of tax-exempt income actually earned
during any particular distribution period. For the fiscal year ended Nov. 30,
1997, 99.97% of the income distribution was designated as exempt from federal
income taxes.
<PAGE>
Capital gain distributions, if any, received by corporate shareholders, should
be treated as long-term capital gains regardless of how long they owned their
shares. Capital gain distributions, if any, received by individuals should be
treated as long-term if held for more than one year; however, recent tax laws
have divided long-term capital gains into two holding periods: (1) shares held
more than one year but not more than 18 months and (2) shares held more than 18
months. Short-term capital gains earned by the Fund are paid to shareholders as
part of their ordinary income dividend and are taxable.
The Fund may purchase tax-exempt securities at a discount from the price at
which they were originally issued, especially during periods of rising interest
rates. For federal income tax purposes, some or all of this market discount will
be included in the Fund's ordinary income and will be taxable income when it is
distributed to you.
If you are a "substantial user" (or related person) of facilities financed by
industrial development bonds, you should consult your tax advisor before
investing. The income from such bonds may not be tax-exempt for you.
Interest on private activity bonds generally issued after August 1986 is a
preference item for purposes of the individual and corporate alternative minimum
taxes. "Private-activity" (non-governmental purpose) municipal bonds include
industrial revenue bonds, student-loan bonds and multi- and single-family
housing bonds. An exception is made for private-activity bonds issued for
qualified--501(c)(3)--organizations, including non-profit colleges, universities
and hospitals. These bonds will continue to be tax-exempt and will not be
subject to the alternative minimum tax for individuals. To the extent a fund
earns income subject to the alternative minimum tax, it will flow through to
that fund's shareholders and may subject some shareholders, depending on their
tax status, to the alternative minimum tax. The Fund reports the percentage of
its income earned from these bonds to shareholders with their other tax
information.
State law determines whether interest income on a particular municipal bond is
tax-exempt for state tax purposes. It also determines the tax treatment of those
bonds when earned by a mutual fund and paid to the Fund's shareholders. The Fund
will tell you the percentage of interest income from municipal bonds it received
during the year on a state-by-state basis. Your tax advisor should help you
report this income for state tax purposes.
Under federal tax law and an election made by the Fund under federal tax rules,
by the end of a calendar year the fund must declare and pay dividends
representing 98% of ordinary income through Dec. 31 and 98% of net capital gains
(both long-term and short-term) for the 12-month period ending Nov. 30 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.
<PAGE>
This is a brief summary that relates to federal income taxation only.
Shareholders should consult their tax advisor for more complete information as
to the application of federal, state and local income tax laws to Fund
distributions.
AGREEMENTS
Investment Management Services Agreement
The Trust, on behalf of the Portfolio, has an Investment Management Services
Agreement with AEFC. For its services, AEFC is paid a fee based on the following
schedule. The Fund pays its proportionate share of the fee.
Assets Annual rate at
(billions) each asset level
First $1.0 0.490%
Next 1.0 0.465
Next 1.0 0.440
Next 3.0 0.415
Next 3.0 0.390
Over 9.0 0.360
On Nov. 30, 1997, the daily rate applied to the Portfolio's net assets was equal
to 0.44% on an annual basis. The fee is calculated for each calendar day on the
basis of net assets as of the close of business two business days prior to the
day for which the calculation is made.
The management fee is paid monthly. Under the agreement, the total amount paid
was $26,174,871 for the fiscal year ended Nov. 30, 1997, $27,125,069 for fiscal
year 1996, and $27,955,627 for fiscal year 1995.
Under the agreement, the Portfolio also pays taxes, brokerage commissions and
nonadvisory expenses, which include custodian fees; audit and certain legal
fees; fidelity bond premiums; registration fees for shares; office expenses;
consultants' fees; compensation of board members, Portfolio officers and
employees; corporate filing fees; organizational expenses; expenses incurred in
connection with lending securities of the Portfolio; and expenses properly
payable by the Portfolio, approved by the board. Under the agreement,
nonadvisory expenses paid by the Fund and Portfolio were $126,648 for the fiscal
year ended Nov. 30, 1997, $1,295,944 for fiscal year 1996, and $1,286,967 for
fiscal year 1995.
In this section, prior to May 13, 1996, the fees and expenses described were
paid directly by the Fund. After that date, the management fees were paid by the
Portfolio.
<PAGE>
Administrative Services Agreement
The Fund has an Administrative Services Agreement with AEFC. Under this
agreement, the Fund pays AEFC for providing administration and accounting
services. The fee is calculated as follows:
Assets Annual rate
(billions) each asset level
First $1.0 0.040%
Next 1.0 0.035
Next 1.0 0.030
Next 3.0 0.025
Next 3.0 0.020
Over 9.0 0.020
On Nov. 30, 1997, the daily rate applied to the Fund's net assets was equal to
0.03% on an annual basis. The fee is calculated for each calendar day on the
basis of net assets as of the close of business two business days prior to the
day for which the calculation is made. Under the agreement, the Fund paid fees
of $1,803,799 for the fiscal year ended Nov. 30, 1997.
Transfer Agency Agreement
The Fund has a Transfer Agency Agreement with American Express Client Service
Corporation (AECSC). This agreement governs AECSC's 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. Under the
agreement, AECSC will earn a fee from the Fund determined by multiplying the
number of shareholder accounts at the end of the day by a rate determined for
each class per year and dividing by the number of days in the year. The rate for
Class A and Class Y is $15.50 per year and for Class B is $16.50 per year. The
fees paid to AECSC may be changed from time to time upon agreement of the
parties without shareholder approval. Under the agreement, the Fund paid fees of
$2,550,975 for the fiscal year ended Nov. 30, 1997.
Distribution Agreement
Under a Distribution Agreement, sales charges deducted for distributing Fund
shares are paid to AEFA daily. These charges amounted to $8,673,516 for the
fiscal year ended Nov. 30, 1997. After paying commissions to personal financial
advisors, and other expenses, the amount retained was $1,506,603. The amounts
were $10,631,633 and $1,834,508 for fiscal year 1996, and $10,983,283 and
$2,241,689 for fiscal year 1995.
<PAGE>
Shareholder Service Agreement
The Fund pays a fee for service provided to shareholders by financial advisors
and other servicing agents. The fee is calculated at a rate of 0.175% of average
daily net assets for Class A and Class B and 0.10% for Class Y.
Plan and Agreement of Distribution
For Class B shares, to help AEFA defray the cost of distribution and servicing,
not covered by the sales charges received under the Distribution Agreement, the
Fund and AEFA entered into a Plan and Agreement of Distribution (Plan). These
costs cover almost all aspects of distributing the Fund's shares except
compensation to the sales force. A substantial portion of the costs are not
specifically identified to any one fund in the IDS MUTUAL FUND GROUP. Under the
Plan, AEFA is paid a fee at an annual rate of 0.75% of the Fund's average daily
net assets attributable to Class B shares.
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 such 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, or by vote of a majority of the outstanding
voting securities of the Fund's Class B shares or by AEFA. 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 the other disinterested
board members. No board member who is not an interested person, has any direct
or indirect financial interest in the operation of the Plan or any related
agreement. For the fiscal year ended Nov. 30, 1997, under the agreement, the
Fund paid fees of $1,209,613.
Custodian Agreement
The Trust's securities and cash are held by First Bank National Association, 180
E. Fifth St., St. Paul, MN 55101-1631, through a custodian agreement. The Fund
also retains the custodian pursuant to a custodian agreement. The custodian is
permitted to deposit some or all of its securities in central depository systems
as allowed by federal law. For its services, the Portfolio pays the custodian a
maintenance charge and a charge per transaction in addition to reimbursing the
custodian's out-of-pocket expenses.
<PAGE>
Total fees and expenses
The Fund paid total fees and nonadvisory expenses, net of earnings credits of
$42,089,648 for the fiscal year ended Nov. 30, 1997.
ORGANIZATIONAL INFORMATION
The Fund is a diversified, open-end management investment company, as defined in
the 1940 Act. Originally incorporated on Dec. 21, 1978 in Nevada, the Fund
changed its state of incorporation on June 13, 1986 by merging into a Minnesota
corporation incorporated on April 7, 1986. The Fund headquarters are at 901 S.
Marquette Ave., Suite 2810, Minneapolis, MN 55402-3268.
BOARD MEMBERS AND OFFICERS
The following is a list of the Fund's board members. They serve 15 Master Trust
portfolios and 47 IDS and IDS Life funds except for William H. Dudley, who does
not serve on the nine IDS Life fund boards. All shares have cumulative voting
rights with respect to the election of board members.
H. Brewster Atwater, Jr.
Born in 1931
4900 IDS Tower
Minneapolis, MN
Former chairman and chief executive officer, General Mills, Inc. Director, Merck
& Co., Inc. and Darden Restaurants, Inc.
Lynne V. Cheney'
Born in 1941
American Enterprise Institute
for Public Policy Research (AEI)
1150 17th St., N.W.
Washington, D.C.
Distinguished Fellow AEI. Former Chair of National Endowment of the Humanities.
Director, The Reader's Digest Association Inc., Lockheed-Martin, Union Pacific
Resources and FPL Group, Inc. (holding company for Florida Power and Light).
William H. Dudley**
Born in 1932
2900 IDS Tower
Minneapolis, MN
Senior advisor to the chief executive officer of AEFC.
<PAGE>
David R. Hubers+**
Born in 1943
2900 IDS Tower
Minneapolis, MN
President and chief executive officer of AEFC since August 1993, and director of
AEFC. Previously, senior vice president, finance and chief financial officer of
AEFC.
Heinz F. Hutter+'
Born in 1929
P.O. Box 2187
Minneapolis, MN
Former president and chief operating officer, Cargill, Incorporated (commodity
merchants and processors).
Anne P. Jones
Born in 1935
5716 Bent Branch Rd.
Bethesda, MD
Attorney and telecommunications consultant. Former partner, law firm of
Sutherland, Asbill & Brennan. Director, Motorola, Inc. and C-Cor Electronics,
Inc.
William R. Pearce+*
Born in 1927
901 S. Marquette Ave.
Minneapolis, MN
Chairman of the board, Board Services Corporation (provides administrative
services to boards). Director, trustee and officer of registered investment
companies whose boards are served by the company. Former vice chairman of the
board, Cargill, Incorporated (commodity merchants and processors).
Alan K. Simpson'
Born in 1931
1201 Sunshine Ave.
Cody, WY
Former three-term United States Senator for Wyoming. Former Assistant Republican
Leader, U.S. Senate. Director, PacifiCorp (electric power).
<PAGE>
Edson W. Spencer+
Born in 1926
4900 IDS Center
80 S. 8th St.
Minneapolis, MN
President, Spencer Associates Inc. (consulting). Former chairman of the board
and chief executive officer, Honeywell Inc. Director, Boise Cascade Corporation
(forest products). Member of International Advisory Council of NEC (Japan).
John R. Thomas**
Born in 1937
2900 IDS Tower
Minneapolis, MN
Senior vice president of AEFC.
Wheelock Whitney+
Born in 1926
1900 Foshay Tower
821 Marquette Ave.
Minneapolis, MN
Chairman, Whitney Management Company (manages family assets).
C. Angus Wurtele'
Born in 1934
Valspar Corporation
Suite 1700
Foshay Tower
Minneapolis, MN
Chairman of the board and retired chief executive officer, The Valspar
Corporation (paints). Director, Bemis Corporation (packaging), Donaldson Company
(air cleaners & mufflers) and General Mills, Inc.
(consumer foods).
+ Member of executive committee.
' Member of joint audit committee.
* Interested person by reason of being an officer and employee of the Fund.
**Interested person by reason of being an officer, board member, employee and/or
shareholder of AEFC or American Express.
<PAGE>
The board also has appointed officers who are responsible for day-to-day
business decisions based on policies it has established.
In addition to Mr. Pearce, who is chairman of the board and Mr. Thomas, who is
president, the Fund's other officers are:
Leslie L. Ogg
Born in 1938
901 S. Marquette Ave.
Minneapolis, MN
President, treasurer and corporate secretary of Board Services Corporation. Vice
president, general counsel and secretary for the Fund.
Officers who also are officers and/or employees of AEFC
Peter J. Anderson
Born in 1942
IDS Tower 10
Minneapolis, MN
Director and senior vice president-investments of AEFC. Vice
president-investments for the Fund.
Matthew N. Karstetter
Born in 1961
IDS Tower 10
Minneapolis, MN
Vice president of Investment Accounting for AEFC since 1996. Prior to joining
AEFC, he served as vice president of State Street Bank's mutual fund service
operation from 1991-1996. Treasurer for the Fund.
COMPENSATION FOR FUND AND PORTFOLIO BOARD MEMBERS
Members of the Fund board who are not officers of the Fund or AEFC receive an
annual fee of $1,000 and the chair of the Contracts Committee receives an
additional fee of $86. Board members receive a $50 per day attendance fee for
board meetings. The attendance fee for meetings of the Contracts and Investment
Review Committees is $50; for meetings of the Audit Committee and Personnel
Committee $25 and for traveling from out-of-state $10. Expenses for attending
meetings are reimbursed.
Members of the Portfolio board who are not officers of the Portfolio or of AEFC
receive an annual fee of $3,200 and the chair of the Contracts Committee
receives an additional fee of $86. Board members receive a $50 per day
attendance fee for board meetings. The
<PAGE>
attendance fee for meetings of the Contracts and Investment Review Committees is
$50; for meetings of the Audit and Personnel Committee, $25 and for traveling
from out-of-state, $32. Expenses for attending meetings are reimbursed.
During the fiscal year ended Nov. 30, 1997, the independent members of the Fund
and Portfolio boards, for attending up to 30 meetings, received the following
compensation:
<TABLE>
<CAPTION>
Compensation Table
<S> <C> <C> <C> <C> <C>
Total cash
Pension or compensation
Retirement from the IDS
benefits MUTUAL FUND
Aggregate Aggregate accrued as Estimated GROUP and
compensation compensation Fund or annual benefit Preferred
Board member from the Fund from the Portfolio upon retirement Master Trust
Portfolio expenses Group
- ---------------------- ---------------- ----------------- ---------------- ---------------- ----------------
H. Brewster Atwater, $1,877 $4,115 $0 $0 $100,900
Jr.
Lynne V. Cheney 1,786 4,156 0 0 95,200
Robert F. Froehlke 1,902 4,140 0 0 102,700
(Retired 11/13/97)
Heinz F. Hutter 1,927 4,165 0 0 103,800
Anne P. Jones 1,946 4,337 0 0 104,500
Melvin R. Laird 1,693 3,857 0 0 90,500
(Retired 10/9/97
Alan K. Simpson 1,551 3,699 0 0 83,000
(part of year)
Edson W. Spencer 2,363 4,601 0 0 129,800
Wheelock Whitney 2,027 4,265 0 0 109,900
C. Angus Wurtele 1,977 4,215 0 0 106,700
</TABLE>
On Nov. 30, 1997, the Fund's board members and officers as a group owned less
than 1% of the outstanding shares of any class.
INDEPENDENT AUDITORS
The Fund's and corresponding Portfolio's financial statements contained in the
Annual Report to shareholders for the fiscal year ended Nov. 30, 1997, were
audited by independent auditors, KPMG Peat Marwick LLP, 4200 Norwest Center, 90
S. Seventh St., Minneapolis, MN 55402-3900. The independent auditors also
provide other accounting and tax-related services as requested by the Fund.
FINANCIAL STATEMENTS
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 to shareholders for the fiscal year ended 1997,
pursuant to Section 30(d) of the 1940 Act, are hereby incorporated in this SAI
by reference. No other portion of the Annual Report, however, is incorporated by
reference.
<PAGE>
PROSPECTUS
The prospectus for IDS High Yield Tax-Exempt Fund, dated Jan. 29, 1998, is
hereby incorporated in this SAI by reference.
<PAGE>
APPENDIX A
DESCRIPTION OF SHORT-TERM SECURITIES
Short-term Tax-exempt Securities
A portion of the Portfolio's assets are in cash and short-term securities for
day-to-day operating purposes. The investments will usually be in short-term
municipal bonds and notes. These include:
(1) Tax anticipation notes sold to finance working capital needs of
municipalities in anticipation of receiving taxes on a future date.
(2) Bond anticipation notes sold on an interim basis in anticipation of a
municipality issuing a longer term bond in the future.
(3) Revenue anticipation notes issued in anticipation of revenues from sources
other than taxes, such as federal revenues available under the Federal Revenue
Sharing Program.
(4) Tax and revenue anticipation notes issued in anticipation of revenues from
taxes and other sources of revenue, except bond placements.
(5) Construction loan notes insured by the Federal Housing Administration which
remain outstanding until permanent financing by the Federal National Mortgage
Association (FNMA) or the Government National Mortgage Association (GNMA) at the
end of the project construction period.
(6) Tax-exempt commercial paper with a stated maturity of 365 days or less
issued by agencies of state and local governments to finance seasonal working
capital needs or as short-term financing in anticipation of longer-term
financing.
(7) Project notes issued by local housing authorities to finance urban renewal
and public housing projects. These notes are guaranteed by the full faith and
credit of the U.S. government.
(8) Variable rate demand notes, on which the yield is adjusted at periodic
intervals not exceeding 31 days and on which the principal may be repaid after
not more than seven days' notice, are considered short-term regardless of the
stated maturity.
<PAGE>
Short-term Taxable Securities and Repurchase Agreements
Depending on market conditions, a portion of the Portfolio's investments may be
in short-term taxable securities. These include:
(1) Obligations of the U.S. government, its agencies and instrumentalities
resulting principally from lending programs of the U.S. government;
(2) U.S. Treasury bills with maturities up to one year. The difference between
the purchase price and the maturity value or resale price is the interest income
to the Fund;
(3) Certificates of deposit or receipts with fixed interest rates issued by
banks in exchange for deposit of funds;
(4) Bankers' acceptances arising from short-term credit arrangements designed to
enable business to obtain funds to finance commercial transactions;
(5) Letters of credit which are short-term notes issued in bearer form with a
bank letter of credit obligating the bank to pay the bearer the amount of the
note;
(6) Commercial paper rated in the two highest grades by Standard & Poor's or
Moody's. Commercial paper is generally defined as unsecured short-term notes
issued in bearer form by large well-known corporations and finance companies.
These ratings reflect a review of management, economic evaluation of the
industry competition, liquidity, long-term debt and ten-year earning trends;
Standard & Poor's rating A-1 indicates that the degree of safety regarding
timely payment is either overwhelming or very strong.
Standard & Poor's rating A-2 indicates that capacity for timely payment on
issues with this designation is strong.
Moody's rating Prime-1 (P-1) indicates a superior capacity for repayment of
short-term promissory obligations.
Moody's rating Prime-2 (P-2) indicates a strong capacity for repayment of
short-term promissory obligations.
(7) Repurchase agreements involving acquisition of securities by the Portfolio
with a concurrent agreement by the seller, usually a bank or securities dealer,
to reacquire the securities at cost plus interest within a specified time. From
this investment, the Portfolio receives a fixed rate of return that is insulated
from market rate changes while it holds the security.
<PAGE>
APPENDIX B
OPTIONS AND INTEREST RATE FUTURES CONTRACTS
The Portfolio may buy or write options traded on any U.S. or foreign exchange or
in the over-the-counter market. The Portfolio may enter into interest rate
futures contracts traded on any U.S. or foreign exchange. The Portfolio also may
buy or write put and call options on these futures. Options in the
over-the-counter market will be purchased only when the investment manager
believes a liquid secondary market exists for the options and only from dealers
and institutions the investment manager believes present a minimal credit risk.
Some options are exercisable only on a specific date. In that case, or if a
liquid secondary market does not exist, the Portfolio could be required to buy
or sell securities at disadvantageous prices, thereby incurring losses.
OPTIONS. An option is a contract. A person who buys a call option for a security
has the right to buy the security at a set price for the length of the contract.
A person who sells a call option is called a writer. The writer of a call option
agrees to sell the security at the set price when the buyer wants to exercise
the option, no matter what the market price of the security is at that time. A
person who buys a put option has the right to sell a security at a set price for
the length of the contract. A person who writes a put option agrees to buy the
security at the set price if the purchaser wants to exercise the option, no
matter what the market price of the security is at that time. An option is
covered if the writer owns the security (in the case of a call) or sets aside
the cash (in the case of a put) that would be required upon exercise.
The price paid by the buyer for an option is called a premium. In addition the
buyer generally pays a broker a commission. The writer receives a premium, less
a commission, at the time the option is written. The cash received is retained
by the writer whether or not the option is exercised. A writer of a call option
may have to sell the security for a below-market price if the market price rises
above the exercise price. A writer of a put option may have to pay an
above-market price for the security if its market price decreases below the
exercise price.
Options can be used to produce incremental earnings, protect gains and
facilitate buying and selling securities for investment purposes. The use of
options and futures contracts may benefit the Portfolio and its shareholders by
improving the Portfolio's liquidity and by helping to stabilize the value of its
net assets.
Buying options. Put and call options may be used as a trading technique to
facilitate buying and selling securities for investment reasons. Options are
used as a trading technique to take advantage of any disparity between the price
of the underlying security in the securities market and its price on the options
market. It is anticipated the trading technique will be utilized only to effect
a transaction when the price of the security plus the option price will be as
good or better than the price at which the security could be bought or sold
directly. When the option is purchased, the Portfolio pays a premium and a
<PAGE>
commission. It then pays a second commission on the purchase or sale of the
underlying security when the option is exercised. For record-keeping and tax
purposes, the price obtained on the purchase of the underlying security will be
the combination of the exercise price, the premium and both commissions. When
using options as a trading technique, commissions on the option will be set as
if only the underlying securities were traded.
Put and call options also may be held by the Portfolio for investment purposes.
Options permit the Portfolio to experience the change in the value of a security
with a relatively small initial cash investment. The risk the Portfolio assumes
when it buys an option is the loss of the premium. To be beneficial to the
Portfolio, the price of the underlying security must change within the time set
by the option contract. Furthermore, the change must be sufficient to cover the
premium paid, the commissions paid both in the acquisition of the option and in
a closing transaction or in the exercise of the option and subsequent sale (in
the case of a call) or purchase (in the case of a put) of the underlying
security. Even then the price change in the underlying security does not ensure
a profit since prices in the option market may not reflect such a change.
Writing covered options. The Portfolio will write covered options when it feels
it is appropriate and will follow these guidelines:
`Underlying securities will continue to be bought or sold solely on the basis of
investment considerations consistent with the Fund's goal.
`All options written by the Portfolio will be covered. For covered call options
if a decision is made to sell the security, the Portfolio will attempt to
terminate the option contract through a closing purchase transaction.
Net premiums on call options closed or premiums on expired call options are
treated as short-term capital gains.
If a covered call option is exercised, the security is sold by the Portfolio.
The Portfolio will recognize a capital gain or loss based upon the difference
between the proceeds and the security's basis.
Options on many securities are listed on options exchanges. If the Portfolio
writes listed options, it will follow the rules of the options exchange. Options
are valued at the close of the New York Stock Exchange. An option listed on a
national exchange, Chicago Board Options Exchange (CBOE) or NASDAQ will be
valued at the last-quoted sales price or, if such a price is not readily
available, at the mean of the last bid and asked prices.
<PAGE>
FUTURES CONTRACTS. A futures contract is an agreement between two parties to buy
and sell a security for a set price on a future date. They have been established
by boards of trade which have been designated contracts markets by the Commodity
Futures Trading Commission (CFTC). Futures contracts trade on these markets in a
manner similar to the way a stock trades on a stock exchange, and the boards of
trade, through their clearing corporations, guarantee performance of the
contracts. Currently, there are futures contracts based on such debt securities
as long-term U.S. Treasury bonds, Treasury notes, GNMA modified pass-through
mortgage-backed securities, three-month U.S. Treasury bills and bank
certificates of deposit. While futures contracts based on debt securities do
provide for the delivery and acceptance of securities, such deliveries and
acceptances are very seldom made. Generally, the futures contract is terminated
by entering into an offsetting transaction. An offsetting transaction for a
futures contract sale is effected by the Portfolio entering into a futures
contract purchase for the same aggregate amount of the specific type of
financial instrument and same delivery date. If the price in the sale exceeds
the price in the offsetting purchase, the Portfolio immediately is paid the
difference and realizes a gain. If the offsetting purchase price exceeds the
sale price, the Portfolio pays the difference and realizes a loss. Similarly,
closing out a futures contract purchase is effected by the Portfolio entering
into a futures contract sale. If the offsetting sale price exceeds the purchase
price, the Portfolio realizes a gain, and if the offsetting sale price is less
than the purchase price, the Portfolio realizes a loss. At the time a futures
contract is made, a good-faith deposit called initial margin is set up within a
segregated account at the Portfolio's custodian bank. The initial margin deposit
is approximately 1.5% of a contract's face value. Daily thereafter, the futures
contract is valued and the payment of variation margin is required so that each
day the Portfolio would pay out cash in an amount equal to any decline in the
contract's value or receive cash equal to any increase. At the time a futures
contract is closed out, a nominal commission is paid, which is generally lower
than the commission on a comparable transaction in the cash markets.
The purpose of a futures contract, in the case of a portfolio holding long-term
debt securities, is to gain the benefit of changes in interest rates without
actually buying or selling long-term debt securities. For example, if the
Portfolio owned long-term bonds and interest rates were expected to increase, it
might enter into futures contracts to sell securities which would have much the
same effect as selling some of the long-term bonds it owned.
Futures contracts are based on types of debt securities referred to above, which
have historically reacted to an increase or decline in interest rates in a
fashion similar to the debt securities the Portfolio owns. If interest rates did
increase, the value of the debt securities in the portfolio would decline, but
the value of the Portfolio's futures contracts would increase at approximately
the same rate, thereby keeping the net asset value of the Fund from declining as
much as it otherwise would have. If, on the other hand, the Portfolio held cash
reserves and interest rates were expected to decline, the Portfolio might enter
into interest rate futures contracts for the purchase of securities. If
short-term rates were higher than long-term rates, the ability to continue
holding these cash reserves
<PAGE>
would have a very beneficial impact on the Portfolio's earnings. Even if
short-term rates were not higher, the Portfolio would still benefit from the
income earned by holding these short-term investments. At the same time, by
entering into futures contracts for the purchase of securities, the Portfolio
could take advantage of the anticipated rise in the value of long-term bonds
without actually buying them until the market had stabilized. At that time, the
futures contracts could be liquidated and the Portfolio's cash reserves could
then be used to buy long-term bonds on the cash market. The Portfolio could
accomplish similar results by selling bonds with long maturities and investing
in bonds with short maturities when interest rates are expected to increase or
by buying bonds with long maturities and selling bonds with short maturities
when interest rates are expected to decline. But by using futures contracts as
an investment tool, given the greater liquidity in the futures market than in
the cash market, it might be possible to accomplish the same result more easily
and more quickly. Successful use of futures contracts depends on the investment
manager's ability to predict the future direction of interest rates. If the
investment manager's prediction is incorrect, the Portfolio would have been
better off had it not entered into futures contracts.
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, an option on a futures contract merely entitles its holder to decide on or
before a future date (within nine months of the date of issue) whether to enter
into such a contract. If the holder decides not to enter into the contract, all
that is lost is the amount (premium) paid for the option. Furthermore, because
the value of the option is fixed at the point of sale, there are no daily
payments of cash to reflect the change in the value of the underlying contract.
However, since an option gives the buyer the right to enter into a contract at a
set price for a fixed period of time, its value does change daily and that
change is reflected in the net asset value of the Fund.
RISKS. There are risks in engaging in each of the management tools described
above. The risk the Portfolio assumes when it buys an option is the loss of the
premium paid for the option. Purchasing options also limits the use of monies
that might otherwise be available for long-term investments.
The risk involved in writing options on futures contracts the Portfolio owns, or
on securities held in its portfolio, is that there could be an increase in the
market value of such contracts or securities.
If that occurred, the option would be exercised and the asset sold at a lower
price than the cash market price. To some extent, the risk of not realizing a
gain could be reduced by entering into a closing transaction. The Portfolio
could enter into a closing transaction by purchasing an option with the same
terms as the one it had previously sold. The cost to close the option and
terminate the Portfolio's obligation, however, might be more or less than the
premium received when it originally wrote the option. Furthermore, the Portfolio
<PAGE>
might not be able to close the option because of insufficient activity in the
options market.
A risk in employing futures contracts to protect against the price volatility of
portfolio securities is that the prices of securities subject to futures
contracts may not correlate perfectly with the behavior of the cash prices of
the Portfolio's securities. The correlation may be distorted because the futures
market is dominated by short-term traders seeking to profit from the difference
between a contract or security price and their cost of borrowed funds. Such
distortions are generally minor and would diminish as the contract approached
maturity.
Another risk is that the Portfolio's investment manager could be incorrect in
anticipating as to the direction or extent of various interest rate movements or
the time span within which the movements take place. For example, if the
Portfolio sold futures contracts for the sale of securities in anticipation of
an increase in interest rates, and interest rates declined instead, the
Portfolio would lose money on the sale.
TAX TREATMENT. As permitted under federal income tax laws, the Portfolio intends
to identify futures contracts as mixed straddles and not mark them to market,
that is, not treat them as having been sold at the end of the year at market
value. Such an election may result in the Portfolio being required to defer
recognizing losses incurred by entering into futures contracts and losses on
underlying securities identified as being hedged against.
Federal income tax treatment of gains or losses from transactions in options on
futures contracts and indexes will depend on whether such option is a section
1256 contract . If the option is a non-equity option, the Portfolio will either
make a 1256(d) election and treat the option as a mixed straddle or mark to
market the option at fiscal year end and treat the gain/loss as 40% short-term
and 60% long-term. Certain provisions of the Internal Revenue Code may also
limit the Portfolio's ability to engage in futures contracts and related options
transactions. For example, at the close of each quarter of the Fund's taxable
year, at least 50% of the value of its assets must consist of cash, government
securities and other securities, subject to certain diversification
requirements.
The IRS has ruled publicly that an exchange-traded call option is a security for
purposes of the 50%-of-assets test and that its issuer is the issuer of the
underlying security, not the writer of the option, for purposes of the
diversification requirements.
<PAGE>
Accounting for futures contracts will be according to generally accepted
accounting principles. Initial margin deposits will be recognized as assets due
from a broker (the Portfolio's agent in acquiring the futures position). During
the period the futures contract is open, changes in value of the contract will
be recognized as unrealized gains or losses by marking to market on a daily
basis to reflect the market value of the contract at the end of each day's
trading. Variation margin payments will be made or received depending upon
whether gains or losses are incurred. All contracts and options will be valued
at the last-quoted sales price on their primary exchange.
<PAGE>
APPENDIX C
DOLLAR-COST AVERAGING
A technique that works well for many investors is one that eliminates random buy
and sell decisions. One such system is dollar-cost averaging. Dollar-cost
averaging involves building a portfolio through the investment of fixed amounts
of money on a regular basis regardless of the price or market condition. This
may enable an investor to smooth out the effects of the volatility of the
financial markets. By using this strategy, more shares will be purchased when
the price is low and less when the price is high. As the accompanying chart
illustrates, dollar-cost averaging tends to keep the average price paid for the
shares lower than the average market price of shares purchased, although there
is no guarantee.
While this technique does not ensure a profit and does not protect against a
loss if the market declines, it is an effective way for many shareholders who
can continue investing on a regular basis through changing market conditions,
including times when the price of their shares falls or the market declines, to
accumulate shares in a fund to meet long-term goals.
Dollar-cost averaging
- ------------- -------------------- -------------------
Regular Market Price Shares
Investment of a Share Acquired
- ------------ --------------------- -------------------
$100 $6.00 16.7
100 4.00 25.0
100 4.00 25.0
100 6.00 16.7
100 5.00 20.0
$500 $25.00 103.4
Average market price of a share over 5 periods:
$5.00 ($25.00 divided by 5).
The average price you paid for each share:
$4.84 ($500 divided by 103.4).
<PAGE>
Independent auditors' report
The board and shareholders
IDS High Yield Tax-Exempt Fund, Inc.:
We have audited the accompanying statement of assets and liabilities of
IDS High Yield Tax-Exempt Fund, Inc. as of November 30, 1997, 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 November 30, 1997, and the financial highlights for each of the
years in the six-year period ended November 30, 1997, the eleven months
ended November 30, 1991, and for each of the years in the four-year period
ended December 31, 1990. These financial statements and the financial
highlights are the responsibility of fund management. Our responsibility
is to express an opinion on these financial statements and the financial
highlights 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 and the
financial highlights 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 IDS High Yield
Tax-Exempt Fund, Inc. at November 30, 1997, and the results of its
operations, changes in its net assets and the financial highlights for the
periods stated in the first paragraph above, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 2, 1998
<PAGE>
<TABLE>
<CAPTION>
Financial statements
Statement of assets and liabilities
IDS High Yield Tax-Exempt Fund, Inc.
Nov. 30, 1997
Assets
<S> <C>
Investment in Tax-Free High Yield Portfolio (Note 1) $5,987,623,846
Total assets 5,987,623,846
-------------
Liabilities
Dividends payable to shareholders 2,856,615
Accrued distribution fee 7,797
Accrued service fee 57,356
Accrued transfer agency fee 13,461
Accrued administrative services fee 9,843
Other accrued expenses 250,101
-------
Total liabilities 3,195,173
---------
Net assets applicable to outstanding capital stock $5,984,428,673
==============
Represented by
Capital stock-- $.01 par value (Note 1) $ 12,893,613
Additional paid-in capital 5,523,836,458
Undistributed net investment income 488,411
Accumulated net realized gain (loss) (Note 4) (109,821,230)
Unrealized appreciation (depreciation) on investments 557,031,421
Total-- representing net assets applicable to outstanding capital stock $5,984,428,673
==============
Net assets applicable to outstanding shares: Class A $5,785,320,536
Class B $ 190,472,392
Class Y $ 8,635,745
Net asset value per share of outstanding capital stock: Class A shares 1,246,460,399 $ 4.64
Class B shares 41,040,012 $ 4.64
Class Y shares 1,860,902 $ 4.64
See accompanying notes to financial statements.
(This annual report is not part of the prospectus.)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statement of operations
IDS High Yield Tax-Exempt Fund, Inc.
Year ended Nov. 30, 1997
Investment income
Income:
<S> <C>
Interest $388,129,939
------------
Expenses (Note 2):
Expenses allocated from Tax-Free High Yield Portfolio 26,567,572
Distribution fee-- Class B 1,209,613
Transfer agency fee 2,543,719
Incremental transfer agency fee-- Class B 7,256
Service fee
Class A 9,942,229
Class B 280,290
Class Y 4,305
Administrative services fees and expenses 1,803,799
Compensation of board members 19,387
Postage 331,014
Registration fees 98,463
Reports to shareholders 40,473
Audit fees 11,500
Other 8,660
-----
Total expenses 42,868,280
Earnings credits on cash balances (Note 2) (778,632)
--------
Total net expenses 42,089,648
----------
Investment income (loss) -- net 346,040,291
-----------
Realized and unrealized gain (loss) -- net
Net realized gain (loss) on:
Security transactions (637,880)
Financial futures contracts (33,562,062)
-----------
Net realized gain (loss) on investments (34,199,942)
Net change in unrealized appreciation (depreciation) on investments 137,305,411
-----------
Net gain (loss) on investments 103,105,469
-----------
Net increase (decrease) in net assets resulting from operations $449,145,760
============
See accompanying notes to financial statements.
(This annual report is not part of the prospectus.)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Financial statements
Statements of changes in net assets
IDS High Yield Tax Exempt Fund, Inc.
Year ended Nov. 30,
Operations and distributions 1997 1996
<S> <C> <C>
Investment income (loss)-- net $ 346,040,291 $ 371,842,086
Net realized gain (loss) on investments (34,199,942) 11,886,874
Net change in unrealized appreciation (depreciation) on investments 137,305,411 (145,844,561)
----------- ------------
Net increase (decrease) in net assets resulting from operations 449,145,760 237,884,399
----------- -----------
Distributions to shareholders from:
Net investment income
Class A (337,662,833) (365,006,934)
Class B (8,167,910) (5,770,964)
Class Y (311,325) (1,079,080)
-------- ----------
Total distributions (346,142,068) (371,856,978)
------------ ------------
Capital share transactions (Note 3)
Proceeds from sales
Class A shares (Note 2) 1,249,451,657 855,424,526
Class B shares 72,253,356 83,366,808
Class Y shares 29,199,158 121,815,373
Reinvestment of distributions at net asset value
Class A shares 231,303,569 251,992,769
Class B shares 6,572,876 4,761,379
Class Y shares 687 668
Payments for redemptions
Class A shares (1,795,576,283) (1,290,646,498)
Class B shares (Note 2) (30,024,379) (19,766,686)
Class Y shares (41,363,058) (125,565,667)
----------- ------------
Increase (decrease) in net assets from capital share transactions (278,182,417) (118,617,328)
------------ ------------
Total increase (decrease) in net assets (175,178,725) (252,589,907)
Net assets at beginning of year 6,159,607,398 6,412,197,305
------------- -------------
Net assets at end of year $5,984,428,673 $6,159,607,398
============== ==============
Undistributed net investment income $ 488,411 $ 91,536
-------------- --------------
See accompanying notes to financial statements.
(This annual report is not part of the prospectus.)
</TABLE>
<PAGE>
Notes to financial statements
IDS High Yield Tax-Exempt Fund, Inc.
1
Summary of
significant
accounting policies
The Fund is registered under the Investment Company Act of 1940 (as
amended) as a diversified, open-end management investment company. The
Fund has 10 billion authorized shares of capital stock. The Fund offers
Class A, Class B and Class Y shares. Class A shares are sold with a
front-end sales charge. Class B shares may be subject to a contingent
deferred sales charge and such shares automatically convert to Class A
shares during the ninth calendar year of ownership. Class Y shares have no
sales charge and are offered only to qualifying institutional investors.
All classes of shares have identical voting, dividend, liquidation and
other rights, and the same terms and conditions, except that the level of
distribution fee, transfer agency fee and service fee (class specific
expenses) differs among classes. Income, expenses (other than class
specific expenses) and realized and unrealized gains or losses on
investments are allocated to each class of shares based upon its relative
net assets.
Investment in Tax-Free High Yield Portfolio
Effective May 13, 1996, the Fund began investing all of its assets in the
Tax-Free High Yield Portfolio (the Portfolio), a series of Tax-Free Income
Trust, an open-end investment company that has the same objectives as the
Fund. This was accomplished by transferring the Fund's assets to the
Portfolio in return for a proportionate ownership interest in the
Portfolio. Tax-Free High Yield Portfolio invests primarily in medium- and
lower-quality bonds and notes issued by or on behalf of state and local
governmental units whose interest generally is exempt from federal income
tax. The Portfolio also may invest in derivative instruments and money
market instruments.
The Fund records daily its share of the Portfolio's income, expenses and
realized and unrealized gains and losses. The financial statements of the
Portfolio are included elsewhere in this report and should be read in
conjunction with the Fund's financial statements.
The Fund records its investment in the Portfolio at the value that is
equal to the Fund's proportionate ownership interest in the net assets of
the Portfolio. The percentage of the Portfolio owned by the Fund at Nov.
30, 1997 was 99.99%. Valuation of securities held by the Portfolio is
discussed in Note 1 of the Portfolio's "Notes to financial statements,"
which are included elsewhere in this report.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of increase and decrease in
net assets from operations during the period. Actual results could differ
from those estimates.
Federal taxes
Since the Fund's policy is to comply with all sections of the Internal
Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders, no provision for
income or excise taxes is required.
Net investment income (loss) and net realized gains (losses) allocated
from the Portfolio may differ for financial statement and tax purposes
primarily because of the deferral of losses on certain futures contracts
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 Fund.
On the statement of assets and liabilities, as a result of permanent
book-to-tax differences, undistributed net investment income has been
increased by $498,652 and accumulated net realized loss has been increased
by $503,096 resulting in a net reclassification adjustment to increase
paid-in capital by $4,444.
Dividends to shareholders
Dividends from net investment income, declared daily and payable monthly,
are reinvested in additional shares of the Fund at net asset value or
payable in cash. Capital gains, when available, are distributed along with
the last income dividend of the calendar year.
2
Expenses and
sales charges
In addition to the expenses allocated from the Portfolio, the Fund accrues
its own expenses as follows:
Effective March 20, 1995, the Fund entered into agreements with American
Express Financial Corporation (AEFC) for providing administrative services
and serving as transfer agent. Under its Administrative Services
Agreement, the 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 0.04% to 0.02% annually. Additional
administrative service expenses paid by the Fund are office expenses,
consultants' fees and compensation of officers and employees. Under this
agreement, the Fund also pays taxes, audit and certain legal fees,
registration fees for shares, compensation of board members, corporate
filing fees, organizational expenses and any other expenses properly
payable by the Fund and approved by the board.
Under a separate Transfer Agency Agreement, American Express Client
Service Corporation (AECSC) maintains shareholder accounts and records.
The Fund pays AECSC an annual fee per shareholder account for this service
as follows:
oClass A $15.50
oClass B $16.50
oClass Y $15.50
Also effective March 20, 1995, the Fund entered into agreements with
American Express Financial Advisors Inc. for distribution and shareholder
servicing-related services. Under a Plan and Agreement of Distribution,
the Fund pays a distribution fee at an annual rate of 0.75% of the Fund's
average daily net assets attributable to Class B shares for
distribution-related services.
Under a Shareholder Service Agreement, the Fund pays a fee for service
provided to shareholders by financial advisors and other servicing agents.
The fee is calculated at a rate of 0.175% of the Fund's average daily net
assets attributable to Class A and Class B shares and commencing on May 9,
1997, the fee is calculated at a rate of 0.10% of the Fund's average daily
net assets attributable to Class Y shares.
Sales charges received by American Express Financial Advisors Inc. for
distributing Fund shares were $8,418,979 for Class A and $254,537 for
Class B for the year ended Nov. 30, 1997.
During the year ended Nov. 30, 1997, the Fund's transfer agency fees were
reduced by $778,632 as a result of earnings credits from overnight cash
balances.
3
Capital share
transactions
Transactions in shares of capital stock for the years indicated are as
follows:
Year ended Nov. 30, 1997
Class A Class B Class Y
Sold 273,106,758 15,867,346 6,431,214
Issued for reinvested 50,812,160 1,442,620 151
distributions
Redeemed (393,208,181) (6,596,087) (9,080,510)
------------ ---------- ----------
Net increase (decrease)(69,289,263) 10,713,879 (2,649,145)
Year ended Nov. 30, 1996
Class A Class B Class Y
Sold 188,524,098 18,316,021 26,775,493
Issued for reinvested 55,519,480 1,051,408 148
distributions
Redeemed (284,669,153) (4,377,692) (27,609,256)
------------ ---------- -----------
Net increase (decrease)(40,625,575) 14,989,737 (833,615)
4
Capital loss
carryover
For federal income tax purposes, the Fund has a capital loss carryover of
$47,336,011 at Nov. 30, 1997 that will expire in 2002 through 2005 if not
offset by subsequent capital gains. It is unlikely the board will
authorize a distribution of any net realized capital gains until the
available capital loss carryover has been offset or expires.
5
Financial
highlights
"Financial highlights" showing per share data and selected information is
presented on pages 8 and 9 of the prospectus.
(This annual report is not part of the prospectus.)
<PAGE>
Independent auditors' report
The board of trustees and unitholders Tax Free Income Trust:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments in securities, of Tax-Free High
Yield Portfolio (a series of Tax-Free Income Trust) as of November 30,
1997, the related statement of operations for the year then ended and the
statements of changes in net assets for the year ended November 30, 1997
and for the period from May 13, 1996 (commencement of operations) to
November 30, 1996. 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 Tax-Free High Yield
Portfolio at November 30, 1997, 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.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 2, 1998
<PAGE>
<TABLE>
<CAPTION>
Financial statements
Statement of assets and liabilities
Tax-Free High Yield Portfolio
Nov. 30, 1997
Assets
Investments in securities, at value (Note 1)
<S> <C>
(identified cost $5,300,390,986) $5,863,084,228
Accrued interest receivable 111,433,801
Receivable for investment securities sold 21,275,695
----------
Total assets 5,995,793,724
-------------
Liabilities
Disbursements in excess of cash on demand deposit 1,536,388
Payable for investment securities purchased 5,627,528
Accrued investment management services fee 144,396
Other accrued expenses 85,917
------
Total liabilities 7,394,229
---------
Net assets $5,988,399,495
==============
See accompanying notes to financial statements.
(This annual report is not part of the prospectus.)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Financial statements
Statement of operations
Tax-Free High Yield Portfolio
Year ended Nov. 30, 1997
Investment income
Income:
<S> <C>
Interest $388,169,902
------------
Expenses (Note 2):
Investment management services fee 26,174,871
Compensation of board members 41,397
Custodian fees 259,025
Audit fees 35,000
Other 88,467
------
Total expenses 26,598,760
Earnings credits on cash balances (Note 2) (28,106)
-------
Total net expenses 26,570,654
----------
Investment income (loss) -- net 361,599,248
-----------
Realized and unrealized gain (loss) -- net
Net realized gain (loss) on:
Security transactions (Note 3) (640,186)
Financial futures contracts (33,565,567)
-----------
Net realized gain (loss) on investments (34,205,753)
Net change in unrealized appreciation (depreciation) on investments 137,325,053
-----------
Net gain (loss) on investments 103,119,300
-----------
Net increase (decrease) in net assets resulting from operations $464,718,548
============
See accompanying notes to financial statements.
(This annual report is not part of the prospectus.)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statements of changes in net assets
Tax-Free High Yield Portfolio
Operations
Year ended For the period from
Nov. 30, 1997 May 13, 1996*
to Nov. 30, 1996
<S> <C> <C>
Investment income (loss)-- net $ 361,599,248 $ 214,101,176
Net realized gain (loss) on investments (34,205,753) 2,001,114
Net change in unrealized appreciation (depreciation) on investments 137,325,053 142,421,758
----------- -----------
Net increase (decrease) in net assets resulting from operations 464,718,548 358,524,048
Net contributions (withdrawals) from partners (640,111,208) 5,805,168,107
------------ -------------
Total increase (decrease) in net assets (175,392,660) 6,163,692,155
Net assets at beginning of period (Note 1) 6,163,792,155 100,000
------------- -------
Net assets at end of period $5,988,399,495 $6,163,792,155
-------------- --------------
*Commencement of operations.
See accompanying notes to financial statements.
(This annual report is not part of the prospectus.)
</TABLE>
<PAGE>
Notes to financial statements
Tax-Free High Yield Portfolio
1
Summary of
significant
accounting policies
Tax-Free High Yield Portfolio (the Portfolio) is a series of Tax-Free
Income Trust (the Trust) and is registered under the Investment Company
Act of 1940 (as amended) as a diversified, open-end management investment
company. Tax-Free High Yield Portfolio invests primarily in medium- and
lower-quality bonds and notes issued by or on behalf of state and local
governmental units whose interest generally is exempt from federal income
tax. The Declaration of Trust permits the Trustees to issue
non-transferable interests in the Portfolio. On April 15, 1996, American
Express Financial Corporation (AEFC) contributed $100,000 to the
Portfolio. Operations did not formally commence until May 13, 1996, at
which time, an existing fund transferred its assets to the Portfolio in
return for an ownership percentage of the Portfolio.
Significant accounting polices followed by the Portfolio are summarized
below:
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of increase and decrease in
net assets from operations during the period. Actual results could differ
from those estimates.
Valuation of securities
All securities are valued at the close of each business day. Securities
traded on national securities exchanges or included in national market
systems are valued at the last quoted sales price. Debt securities are
generally traded in the over-the-counter market and are valued at a price
deemed best to reflect fair value as quoted by dealers who make markets in
these securities or by an independent pricing service. Securities for
which market quotations are not readily available are valued at fair value
according to methods selected in good faith by the board. Short-term
securities maturing in more than 60 days from the valuation date are
valued at the market price or approximate market value based on current
interest rates; those maturing in 60 days or less are valued at amortized
cost.
Option transactions
In order to produce incremental earnings, protect gains and facilitate
buying and selling of securities for investment purposes, the Portfolio
may buy and sell put and call options and write covered call options on
portfolio securities and may write cash-secured put options. The risk in
writing a call option is that the Portfolio gives up the opportunity of
profit if the market price of the security increases. The risk in writing
a put option is that the Portfolio may incur a loss if the market price of
the security decreases and the option is exercised. The risk in buying an
option is that the Portfolio pays a premium whether or not the option is
exercised. The Portfolio also has the additional risk of not being able to
enter into a closing transaction if a liquid secondary market does not
exist. The Portfolio may write over-the-counter options where the
completion of the obligation is dependent upon the credit standing of the
other party.
Option contracts are valued daily at the closing prices on their primary
exchanges and unrealized appreciation or depreciation is recorded. The
Portfolio will realize a gain or loss upon expiration or closing of the
option transaction. When options on debt securities or futures are
exercised, the Portfolio will realize a gain or loss. When other options
are exercised, the proceeds on sales for a written call option, the
purchase cost for a written put option or the cost of a security for a
purchased put or call option is adjusted by the amount of premium received
or paid.
Futures transactions
In order to gain exposure to or protect itself from changes in the market,
the Portfolio may buy and sell financial futures contracts. Risks of
entering into futures contracts and related options include the
possibility that there may be an illiquid market and that a change in the
value of the contract or option may not correlate with changes in the
value of the underlying securities.
Upon entering into a futures contract, the Portfolio is required to
deposit either cash or securities in an amount (initial margin) equal to a
certain percentage of the contract value. Subsequent payments (variation
margin) are made or received by the Portfolio each day. The variation
margin payments are equal to the daily changes in the contract value and
are recorded as unrealized gains and losses. The Portfolio recognizes a
realized gain or loss when the contract is closed or expires.
Illiquid securities
At Nov. 30, 1997, investments in securities included issues that are
illiquid. The Portfolio currently limits investments in illiquid
securities to 10% of the net assets, at market value, at the time of
purchase. The aggregate value of such securities at Nov. 30, 1997 was
$1,506,740 representing 0.03% of the net assets. Pursuant to guidelines
adopted by the board, certain unregistered securities are determined to be
liquid and are not included within the 10% limitation specified above.
Federal taxes
For federal income tax purposes the Portfolio qualifies as a partnership
and each investor in the Portfolio is treated as the owner of its
proportionate share of the net assets, income, expenses and realized and
unrealized gains and losses of the Portfolio. Accordingly, as a
"pass-through" entity, the Portfolio does not pay any income dividends or
capital gain distributions.
Other
Security transactions are accounted for on the date securities are
purchased or sold. Interest income, including level-yield amortization of
premium and discount, is accrued daily.
2
Fees and
expenses
The Trust, on behalf of the Portfolio, has entered into an Investment
Management Services Agreement with AEFC for managing its portfolio. Under
this agreement, AEFC determines which securities will be purchased, held
or sold. The management fee is a percentage of the Portfolio's average
daily net assets in reducing percentages from 0.49% to 0.36% 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 and any other expenses properly payable by the Trust or Portfolio and
approved by the board.
During the year ended Nov. 30, 1997, the Portfolio's custodian fees were
reduced by $28,106 as a result of earnings credits from overnight cash
balances.
Pursuant to a Placement Agency Agreement, American Express Financial
Advisors Inc. acts as placement agent of the units of the Trust.
3
Securities
transactions
Cost of purchases and proceeds from sales of securities (other than
short-term obligations) aggregated $225,875,994 and $632,283,656,
respectively, for the year ended Nov. 30, 1997. For the same year, the
portfolio turnover rate was 4%. Realized gains and losses are determined
on an identified cost basis.
4
Interest rate
futures contracts
At Nov. 30, 1997, investments in securities included securities valued at
$31,605,000 that were pledged as collateral to cover initial margin
deposits on 1,500 sale contracts. The market value of the open sale
contracts at Nov. 30, 1997 was $183,421,875 with a net unrealized loss of
$5,624,031. See Summary of significant accounting policies.
(This annual report is not part of the prospectus.)
<PAGE>
<TABLE>
<CAPTION>
Investments in securities
Tax-Free High Yield Portfolio (Percentages represent
Nov. 30, 1997 value of investments
compared to net assets)
Municipal bonds (95.5%)
Name of issuer and Coupon Maturity Principal Value(a)
title of issue (b,c,j) rate year amount
Alabama (0.5%)
Baldwin County Eastern Shore Health Care Authority
<S> <C> <C> <C> <C>
Hospital Revenue Bonds Thomas Hospital Series 1991 8.50 % 2016 $ 4,765,000 $ 5,455,163
Camden Industrial Development Board Solid Waste Disposal
Revenue Bonds MacMillan Bloedel Series 1991A A.M.T. 7.75 2019 8,500,000 9,273,585
Marengo County Limited Obligation Capital Outlay
Warrants Series 1988 8.50 2018 3,000,000 3,183,000
Mobile Industrial Development Board Solid Waste
Refunding Revenue Bonds Mobile Energy Services 6.95 2020 11,250,000 12,335,062
Total 30,246,810
Alaska (0.2%)
North Slope Borough General Obligation Bonds
Series 1984B Zero Coupon (CGIC Insured) 7.05 2004 7,000,000 (f)5,150,880
North Slope Borough General Obligation Bonds
Series 1984B Zero Coupon (CGIC Insured) 7.15 2005 7,000,000 (f)4,880,260
Total 10,031,140
Arizona (1.0%)
Chandler Industrial Development Authority
Beverly Enterprises Series 1994 7.625 2008 2,750,000 2,876,225
Maricopa County Hospital System Revenue Bonds
Samaritan Health Services Series 1981 12.00 2008 255,000 401,837
Maricopa County Industrial Development Authority
Multi-family Housing Revenue Bonds Series B 7.375 2026 2,320,000 2,385,842
Maricopa County Industrial Development Authority
Senior Living Facilities Revenue Bonds Series 1997A 7.875 2027 15,000,000 15,623,550
Maricopa County Pollution Control Refunding
Revenue Bonds Palo Verde Public Service 6.375 2023 3,500,000 3,658,760
Navajo Industrial Development Authority Revenue Bonds
Stone Container Corporation Series 1997 A.M.T. 7.20 2027 3,000,000 3,300,690
Phoenix Civic Improvement Waste Water System
Lease Refunding Revenue Bonds 5.00 2018 5,000,000 4,831,350
Phoenix Industrial Development Authority
Refunding Revenue Bonds Christian Care Apartments 6.50 2026 9,525,000 10,085,165
Pima County Industrial Development Authority
Multi-family Housing Revenue Bonds
Las Villas De Kino Apartments Series 1997 A.M.T. 6.90 2029 7,000,000 7,054,880
Pima County Industrial Development Authority
Revenue Bonds LaPosada Park Centre Series 1996A 7.00 2027 5,750,000 5,971,662
Scottsdale Industrial Development Authority
Beverly Enterprises Series 1994 7.625 2008 3,035,000 3,174,306
Total 59,364,267
Arkansas (0.1%)
Pope County Solid Waste Disposal Revenue Bonds
Arkansas Power & Light Series 1991 A.M.T. 8.00 2021 3,250,000 3,578,023
California (8.3%)
ABAG Financial Authority for Nonprofit Corporations
International Schools Certificate of Participation
Series 1996 7.375 2026 8,000,000 8,195,120
Community Development Authority Health Facilities
Unihealth America Certificate of Participation
Series 1993 Inverse Floater (AMBAC Insured) 7.47 2011 22,400,000(d)25,452,000
East Bay Municipal Utility District Water Revenue Bonds
Series 1993 Inverse Floater (MBIA Insured) 6.22 2008 15,500,000(d)16,313,750
Foothill Eastern Transportation Corridor Agency
Toll Road Revenue Bonds Series 1995A 5.00 2035 41,070,000 37,652,155
Fresno Health Facility Refunding Revenue Bonds
Holy Cross Health System (MBIA Insured) 5.625 2013 3,000,000 3,106,470
Irwindale Redevelopment Agency Subordinate Lein
Tax Allocation Bonds 7.05 2026 5,750,000 6,321,838
Lake Elsinore Public Financing Authority
Local Agency Revenue Bonds Series 1997F 7.10 2020 12,000,000 12,802,440
Los Angeles County Certificate of Participation 6.71 2015 20,000,000 21,132,000
Los Angeles International Airport Regional Airports
Improvement Corporation Refunding Revenue Bonds
Delta Airlines 6.35 2025 13,000,000 14,023,490
Los Angeles International Airport Regional Airports
Improvement Corporation Refunding Revenue Bonds
United Airlines Series 1984 8.80 2021 11,650,000 13,158,325
Los Angeles Water & Power Electric Plant
Refunding Revenue Bonds Series 1992 6.375 2020 10,000,000 10,744,800
Millbrae Residential Facility Revenue Bonds
Magnolia of Millbrae Series 1997A A.M.T. 7.375 2027 2,500,000 2,512,100
Modesto Santa Clara Redding Public Power Bonds
San Juan Series C (AMBAC Insured) 5.50 2021 4,500,000 4,500,000
Northern California Power Agency Geothermal 3
Revenue Bonds 5.00 2009 49,635,000 49,417,102
Novato Community Facility District 1 Vintage Oaks
Public Improvement Special Tax Refunding Bonds 7.25 2021 5,000,000 5,426,600
Oceanside Certificate of Participation Refunding Bonds
Oceanside Civic Center (MBIA Insured) 5.25 2019 7,000,000 6,883,800
Orange County Special Tax Community Facilities Bonds
Aliso Veijo District 88-1 Series 1992A 7.35 2018 6,000,000 6,901,560
Pleasanton Joint Powers Financing Authority Reassessment
Revenue Bonds Series 1993A 6.15 2012 4,640,000 4,927,216
Regional Airports Improvement Facilities Sublease
Revenue Bonds Continental Airlines Los Angeles
International Airport Series 1988 A.M.T. 9.00 2008-17 12,100,000 12,628,261
Sacramento Cogeneration Authority Revenue Bonds
Proctor & Gamble Series 1995 6.50 2014-21 11,800,000 12,753,178
Sacramento Municipal Utility District Electric
Refunding Revenue Bonds Series 1993D
Inverse Floater (FSA Insured) 6.47 2005 15,800,000(d)17,241,750
Sacramento Municipal Utility District Electric
Refunding Revenue Bonds Series 1993D
Inverse Floater (FSA Insured) 6.67 2006 16,400,000(d)17,896,500
Sacramento Municipal Utility District Electric
Refunding Revenue Bonds Series 1993D
Inverse Floater (MBIA Insured) 7.12 2015 15,000,000(d)15,600,000
Sacramento Power Authority Cogeneration Revenue Bonds
Campbell Soup Series 1995 6.00 2022 25,000,000 26,032,750
San Joaquin Hills Orange County Transportation
Corridor Agency Senior Lien Toll Road Revenue Bonds 6.75 2032 14,785,000 16,605,181
San Joaquin Hills Transportation Corridor Agency
Capital Appreciation Toll Road Refunding Revenue Bonds
Zero Coupon Series 1997A (MBIA Insured) 5.63 2024-25 54,375,000(f)12,773,681
San Joaquin Hills Transportation Corridor Agency
Capital Appreciation Toll Road Refunding Revenue Bonds
Zero Coupon Series 1997A (MBIA Insured) 5.65 2026-27 36,670,000(f) 7,979,860
San Joaquin Hills Transportation Corridor Agency
Capital Appreciation Toll Road Refunding Revenue Bonds
Zero Coupon Series 1997A (MBIA Insured) 5.67 2028 7,000,000(f) 1,379,840
San Joaquin Hills Transportation Corridor Agency
Senior Lien Toll Road Revenue Bonds Zero Coupon
Escrowed to Maturity 5.35 2017 34,860,000(f)12,817,325
San Jose Redevelopment Agency Merged Area Tax
Allocation Bonds Series 1993 Inverse Floater
(MBIA Insured) 6.61 2014 33,600,000(d)34,062,000
San Marcos Public Facility Authority
Refunding Revenue Bonds
Civic Center Public Improvement Series A 6.20 2022 12,300,000 12,608,853
Sierra Unified School District Fresno County
Certificate of Participation Capital Financing
Refunding Bonds Series 1993 6.125 2018 6,470,000 6,652,713
Southern California Public Power Authority
Power Revenue Bonds Palo Verde
Series 1993 Inverse Floater (FGIC Insured) 6.62 2017 20,000,000(d)20,625,000
South Tahoe Joint Power Financing Authority
Refunding Revenue Bonds South Tahoe Area 1
Series 1995B 6.00 2028 9,900,000 10,188,090
Ukiah Unified School District Mendocino County
Certificate of Participation Series 1993 6.00 2010 5,000,000 5,190,400
University of California Refunding Revenue Bonds
Multiple Purpose Project (AMBAC Insured) 5.25 2016 6,000,000 6,003,300
Total 498,509,448
Colorado (6.6%)
Arapahoe County Capital Improvement Trust Fund
E-470 Highway Revenue Bonds 7.00 2026 22,000,000 26,064,500
Arapahoe County Industrial Development Revenue Bonds
Dillion Real Estate-Kroger 8.00 2009 4,000,000 4,566,360
Aurora Centretech Metropolitan District
Arapahoe County Series 1987B 6.00 2023 5,699,785 4,907,743
Bowles Metropolitan District General Obligation Bonds
Series 1995 7.75 2015 16,000,000 16,896,640
Briargate Public Building Authority
Landowner Assessment Lien Bonds Series 1985A 10.25 2000 4,333,690 (e) 3,683,636
Castle Rock Ranch Public Facility Improvement
Revenue Bonds Series 1996 6.25 2017 10,000,000 11,229,300
Colorado Health Facility Authority Hospital Improvement
Refunding Revenue Bonds
Parkview Episcopal Medical Center Series 1995 6.125 2025 7,000,000 7,246,050
Colorado Health Facility Authority Revenue Bonds
Liberty Heights Zero Coupon Escrowed to Maturity 7.50 2022 81,465,000(f)21,511,648
Colorado Springs Hospital Revenue Bonds
Memorial Hospital Series 1990 7.875 2010 5,000,000 5,524,800
Colorado Springs Stetson Hills Public Building Authority
Landowner Assessment Lien Bonds Series 1988A 9.75 2008 2,869,110(e) 86,073
Colorado Springs Utilities System
Refunding Revenue Bonds Series 1991C 6.50 2015 24,895,000 27,101,195
Colorado Springs Utilities System
Refunding Revenue Bonds Series 1991C 6.75 2021 30,000,000 33,121,747
Colorado Springs Utilities System
Pre-Refunded Revenue Bonds Series 1991C 6.50 2015 1,505,000 1,655,109
Denver City & County Airport Systems Revenue Bonds
Series 1991A A.M.T. 8.75 2023 10,000,000 11,619,200
Denver City & County Airport Systems Revenue Bonds
Series 1991D A.M.T. 7.75 2021 8,650,000 9,707,636
Denver City & County Airport Systems Revenue Bonds
Series 1992A 7.25 2025 20,975,000 24,002,741
Denver City & County Airport Systems Revenue Bonds
Series 1992B A.M.T. 7.25 2023 20,500,000 22,835,360
Denver City & County Airport Systems Revenue Bonds
Series 1994A 7.50 2012 5,000,000 5,777,050
Denver City & County Airport Systems Revenue Bonds
Series 1994A A.M.T. 7.50 2023 19,340,000 22,316,233
Denver City & County GVR Metropolitan District
General Obligation Refunding Bonds Series 1991 8.00 2006 1,385,000 1,729,103
Denver City & County GVR Metropolitan District
General Obligation Refunding Bonds Series 1995B 11.00 2006 730,000 711,750
Denver Special Facility Airport Revenue Bonds
United Air Lines Series A A.M.T. 6.875 2032 25,400,000 27,674,316
Denver Urban Renewal Authority Tax Increment
Revenue Bonds Downtown Denver Redevelopment
Adams Mark Hotel Series 1989 A.M.T. 8.00 2015-17 20,000,000 22,336,000
Denver Urban Renewal Authority Tax Increment
Revenue Bonds South Broadway Montgomery Ward
Urban Renewal Series 1992 8.50 2016 14,015,000 15,518,810
Denver West Metropolitan District
General Obligation Bonds Series 1996 6.50 2016 2,560,000 2,690,637
Denver West Metropolitan District General Obligation
Refunding Improvement Bonds Series 1995 7.00 2014 4,230,000 4,609,431
Hotchkiss Industrial Development Revenue Bonds
Dillion Real Estate-Kroger 8.00 2009 1,500,000 1,712,385
Housing Finance Authority Single Family Program
Senior Bonds Series 1991B (FGIC Insured) 7.25 2011 2,580,000 2,723,654
Housing Finance Authority Single Family Program
Senior Bonds Series 1991B (FGIC Insured) 7.30 2018 2,340,000 2,459,714
Lowry Economic Redevelopment Authority
Revenue Bonds Series 1996 7.50 2010 19,000,000 19,659,490
Saddle Rock Metropolitan District Limited Tax
General Obligation Bonds Series 1997 7.63 2016 5,590,000 5,841,662
Superior Metropolitan District 2 Limited Tax
General Obligation Refunding Bonds
MDC Holdings Series 1994B 7.50 1998 1,900,000 1,944,612
Superior Metropolitan District 2 Limited Tax
General Obligation Refunding Bonds
MDC Holdings Series 1994B 8.25 2013 2,580,000 2,872,056
Superior Metropolitan District 2 Limited Tax
General Obligation Refunding Bonds
MDC Holdings Series 1994B 8.50 2013 12,000,000 13,417,320
Thornton Industrial Development Revenue Bonds
Dillion Real Estate-Kroger 8.00 2009 4,500,000(h) 4,500,000
Westminster Industrial Development Revenue Bonds
Dillion Real Estate-Kroger 8.00 2009 3,500,000 3,995,565
Total 394,249,526
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
District of Columbia (0.7%)
General Obligation Refunding Bonds Series 1994A
<S> <C> <C> <C> <C>
(MBIA Insured) 6.00 2010 27,875,000 29,727,851
General Obligation Refunding Bonds Series 1994A
(MBIA Insured) 6.10 2011 7,580,000 8,109,766
Housing Finance Agency Multi-family Mortgage
Revenue Bonds Temple Courts Section 8
Series 1985 (FHA Insured) 12.00 2022 1,315,000 1,574,384
Total 39,412,001
Florida (4.1%)
Arbor Greene Community Development District
Special Assesment Revenue Bonds Series 1996 7.60 2018 5,000,000 5,364,500
Broward County Airport System Revenue Bonds
Series 1989B A.M.T. 7.625 2013 15,000,000 15,761,700
Charlotte County Development Authority 1st Mortgage
Refunding Revenue Bonds
Royal Palm Retirement Centre Series 1991 9.50 2014 4,050,000 4,362,012
Crossings at Fleming Island Community Development
District Special Assessment Bonds Series 1995 8.25 2016 10,200,000 11,188,074
Crossings at Fleming Island Community Development
District Utility Revenue Bonds Series 1994 7.375 2019 13,535,000 14,243,557
Department of Transportation Turnpike Revenue Bonds
Series 1991A (AMBAC Insured) 6.25 2020 20,000,000 21,202,200
Gateway Centre Development District Pinellas County
Special Assessment Revenue Bonds Series 1988 9.125 2009 1,350,000 1,395,832
Grand Haven Community Development District
Special Assessment Bonds Flagler County
Series 1997A 6.30 2002 5,600,000 5,722,864
Grand Haven Community Development District
Special Assessment Revenue Bonds Series 1997B 6.90 2019 1,000,000 1,024,350
Hillsborough County Utility Refunding Revenue Bonds
Series 1991A 7.00 2014 24,000,000 26,146,680
Hillsborough County Utility Refunding Revenue Bonds
Series 1991A (MBIA Insured) 6.50 2016 24,760,000 26,838,602
Jacksonville Electric Authority St. John's River Power
Park System Revenue Bonds Series 1989 6.00 2015 10,300,000 10,547,406
Jacksonville Health Facilities Authority Hospital
Refunding Revenue Bonds Riverside Hospital
Series 1989 7.625 2013 1,600,000 1,729,232
Lakewood Ranch Community Development District 1
Special Assessment Bonds Series 1994 8.25 2014 5,190,000 5,636,548
Lee County Industrial Development Authority
Industrial Development Revenue Bonds Gulf Utility
Series 1988A A.M.T. 9.625 2018 5,545,000 5,933,760
Lee County Industrial Development Authority
Industrial Development Revenue Bonds Gulf Utility
Series 1988B A.M.T. 9.50 2020 3,915,000 4,415,533
Miami Health Facility Authorization Revenue Bonds
Inverse Floater (AMBAC Insured) 6.57 2015 3,500,000(d) 3,473,750
North Springs Improvement Special Assessment
District Revenue Bonds Heron Bay Series 1997 7.00 2019 3,000,000 3,036,510
North Springs Improvement Special Assessment
District Revenue Bonds Parkland Isles Series 1997B 6.25 2005 3,000,000 3,015,000
Palm Beach County Health Facilities Authority Hospital
Revenue Bonds Good Samaritan Health Series 1993 6.30 2022 3,750,000 3,982,800
Polk County Industrial Development Authority 1st Mortgage
Refunding Revenue Bonds Spring Haven II 8.75 2014 6,115,000 6,672,015
Port Everglades Port Authority Revenue Bonds Junior Lien 5.00 2016 18,635,000 18,299,943
Riverwood Community Development District
Charlotte County Special Assessment Revenue Bonds 8.50 2012 5,850,000(f) 6,301,503
Zero Coupon Series 1992A-B
Sumter County Industrial Development Authority
Industrial Development Reveue Bonds
Little Sumter Utility Company
Series 1997 A.M.T. 7.25 2027 4,200,000 4,232,424
Sumter County Village Community Development
District 1 Capital Improvement Revenue Bonds
Series 1992 8.40 2012 1,360,000 1,458,872
Sunrise Utility System Refunding & Improvement
Revenue Bonds 10.75 2018 5,000,000 5,868,100
Village Center Community Development District 2
Lake County Recreational Revenue Bonds
Anticipation Notes Series 1996 6.50 2000 6,155,000 6,189,530
Village Center Community District Recreational
Revenue Bonds Series 1996B 8.25 2017 2,885,000 3,116,002
Village Community Development District 2
Special Assessment District Revenue Bonds
Series 1996 7.625 2017 5,875,000 6,237,017
Volusia County Industrial Development Authority
1st Mortgage Refunding Revenue Bonds Series 1996 7.625 2026 10,925,000 11,490,697
Total 244,887,013
Georgia (2.0%)
Atlanta Special Purpose Facility Revenue Bonds
Delta Air Lines Series 1989B A.M.T. 6.25 2019 8,685,000 8,800,597
Atlanta Special Purpose Facility Revenue Bonds
Delta Air Lines Series 1989B A.M.T. 7.90 2018 13,500,000 14,513,310
Colquitt County Development Authority Revenue Bonds
Zero Coupon Escrowed to Maturity 6.87 2021 46,350,000(f)12,657,722
Effingham County Pollution Control Revenue Bonds
Fort Howard Series 1988 7.90 2005 19,850,000 21,368,128
Fulco Hospital Authority Revenue Anticipation Certificate
Georgia Baptist Health Care Systems Series 1992A 6.375 2022 20,300,000 22,360,450
Municipal Electric Authority Power Refunding Bonds
Series 1989R 6.00 2014 9,130,000 9,190,623
Municipal Electric Authority Power Revenue Bonds
Series L 5.00 2020 1,150,000 1,086,761
Rockdale County Development Authority Solid Waste
Disposal Revenue Bonds Visy Paper Series 1993 A.M.T. 7.50 2026 10,000,000 10,794,600
Savannah Georgia Economic Development Authority
Revenue Bonds Zero Coupon Escrowed to Maturity 6.87 2021 64,220,000(f)17,537,840
Total 118,310,031
Hawaii (0.4%)
City & County of Honolulu Refunding & Improvement
General Obligation Bonds Series 1993B Inverse Floater 6.48 2006 10,000,000(d)10,912,500
City & County of Honolulu Refunding & Improvement
General Obligation Bonds Series 1993B Inverse Floater 6.78 2008 10,000,000(d)11,062,500
Total 21,975,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Illinois (7.6%)
Bradley Kankakee County Tax Increment
<S> <C> <C> <C> <C>
Refunding Revenue Bonds Series 1993 8.40 2012 5,800,000 6,558,060
Broadview Cook County Senior Lien Tax Increment
Revenue Bonds Series 1993 8.25 2013 11,705,000 13,239,526
Chicago General Obligation Refunding Bonds
Series 1995A (AMBAC Insured) 5.50 2018 20,000,000 20,539,800
Chicago General Obligation Bonds Series 1991
(AMBAC Insured) 6.00 2016 6,170,000 6,463,877
Chicago General Obligation Bonds Series 1994A
(AMBAC Insured) 5.875 2022 17,850,000 18,452,437
Chicago O'Hare International Airport General Airport
Revenue Bonds Series 1990A A.M.T. 6.00 2018 29,000,000 29,523,160
Chicago O'Hare International Airport General Airport
Revenue Bonds Series 1990A A.M.T. 7.50 2016 21,000,000 22,590,750
Chicago O'Hare International Airport General Airport
Refunding Revenue Bonds Series 1993A 5.00 2016 14,450,000 13,900,033
Chicago O'Hare International Airport
Special Revenue Facility Bonds Delta Airlines
Series 1992 6.45 2018 10,000,000 10,541,000
Chicago O'Hare International Airport
Special Revenue Facility Bonds United Airlines
Series C 8.20 2018 22,780,000 24,498,979
Chicago O'Hare International Airport Terminal
Special Revenue Bonds A.M.T. 7.50 2017 32,250,000 34,525,238
Chicago O'Hare International Airport Terminal
Special Revenue Bonds (FGIC Insured) A.M.T. 7.875 2025 17,750,000 19,474,767
Chicago Ridge Special Service Area 1 Unlimited
Ad Valorem Tax Bonds Series 1990 9.00 2008 2,700,000 2,946,321
Chicago Wastewater Transmission Revenue Bonds
Series 1994 (MBIA Insured) 6.375 2024 22,500,000 24,505,650
Cook County Bedford Park Senior Lien Tax Increment
Revenue Bonds Mark IV Series 1992 9.75 2012 1,740,000 2,130,334
Cook County Bedford Park Senior Lien Tax Increment
Revenue Bonds 7.00 2006 1,175,000 1,247,392
Cook County Bedford Park Senior Lien Tax Increment
Revenue Bonds 7.375 2012 1,700,000 1,798,413
Development Finance Authority Lifecare Revenue Bonds
Presbyterian Homes Series 1996B 6.40 2031 6,700,000 7,257,708
Development Finance Authority Pollution Control
Refunding Revenue Bonds Central Illinois
Public Service Series 1993B-2 5.90 2028 2,500,000 2,582,525
Development Finance Authority Pollution Control
Refunding Revenue Bonds Commonwealth Edison
Series 1994 5.70 2009 2,000,000 2,134,120
Development Finance Authority Pollution Control
Refunding Revenue Bonds Commonwealth Edison
Series 1994 5.85 2014 4,500,000 4,788,990
Development Finance Authority Pollution Control
Refunding Revenue Bonds Illinois Power
Series 1991A 7.375 2021 19,250,000 22,183,508
Development Finance Authority Retirement Housing
Revenue Bonds Zero Coupon Escrowed to Maturity 7.75 2020 68,000,000(f)19,841,720
DuPage County Tax Increment Revenue Bonds
Series 1997 7.875 2017 4,690,000 5,085,461
Educational Facilities Authority Refunding Revenue Bonds
Loyola University of Chicago Series 1993
Inverse Floater (FGIC Insured) 7.22 2012 11,000,000(d)11,893,750
Educational Facilities Authority Refunding Revenue Bonds
Lewis University Series 1996 6.125 2026 8,780,000 9,070,706
Granite City Madison County Hospital
Refunding Revenue Bonds St. Elizabeth Medical Center
Series 1989A 8.125 2008 3,315,000 3,487,712
Health Facilities Authority Refunding Revenue Bonds
Edwards Hospital Series 1993A 6.00 2019 6,350,000 6,493,827
Health Facilities Authority Refunding Revenue Bonds
Morris Hospital 6.125 2023 3,005,000 3,092,025
Health Facilities Authority Refunding Revenue Bonds
Masonic Medical Center Series 1993 5.50 2019 2,000,000 1,979,780
Health Facilities Authority Refunding Revenue Bonds
University of Chicago Series 1993 Inverse Floater
(MBIA Insured) 7.37 2014 10,000,000(d)10,700,000
Health Facilities Authority Revenue Bonds
Sarah Bush Lincoln Health Center Series 1996B 5.75 2022 2,915,000 2,926,660
Health Facility Authority Revenue Bonds
Delnore Community Hospital Series 1989 8.00 2019 7,000,000 7,523,110
Health Facility Authority Revenue Bonds
Sarah Bush Lincoln Health Center Series 1992 7.25 2012-22 4,000,000 4,533,720
Health Facility Authority Revenue Bonds
South Suburban Hospital Series 1992 7.00 2009-18 9,000,000 10,409,610
Hodgkins General Obligation Tax Increment Bonds
Series 1991 9.50 2009 12,200,000 14,785,674
Hodgkins General Tax Increment Bonds
Series 1995A 7.625 2013 9,000,000 9,865,710
Lakemoor Special Tax Revenue Bonds Series 1997 7.80 2027 9,000,000 9,487,890
Lansing Tax Increment Refunding Revenue Bonds
Landings Redevelopment Area Limited Sales
Tax Pledge Series 1992 7.00 2008 10,000,000 11,129,600
Marion General Obligation Hospital Alternate
Revenue Source Bonds Series 1991 7.50 2016 3,800,000 4,304,412
Metropolitan Pier & Exposition Authority
Dedicated State Tax Refunding Revenue Bonds
McCormick Place Zero Coupon (FGIC Insured) 6.37 2019 6,000,000(f) 1,891,440
Metropolitan Pier & Exposition Authority
Dedicated State Tax Refunding Revenue Bonds
McCormick Place Zero Coupon (MBIA Insured) 6.61 2017 11,210,000(f) 3,948,610
Metropolitan Pier & Exposition Authority
Sales Tax & Miscellaneous Tax Revenue
Capital Appreciation Refunding Bonds
Zero Coupon Series 1996A (MBIA Insured) 6.05 2022 16,225,000(f) 4,261,009
Regional Transportation Authority General
Obligation Bonds Counties of Cook, Dupage, Kane, Lake
McHenry & Will Series 1992A (AMBAC Insured) 6.125 2022 7,200,000 7,502,688
Tinley Park Cook & Will Counties Limited Sales Tax
Revenue Bonds Series 1988 10.25 1999 895,000(e) 340,100
Tinley Park Cook & Will Counties Unlimited Ad Valorem
Tax Bonds of Special Service 10.65 1997-07 1,275,000 1,134,750
Total 457,572,552
Indiana (2.0%)
Brazil 1st Mortgage Revenue Bonds Hoosier Care II
Series 1990 10.375 2020 4,165,000 4,507,113
Carmel Retirement Rental Housing Refunding
Revenue Bonds Beverly Enterprises Series 1992 8.75 2008 6,785,000 7,702,536
Development Finance Authority Environmental
Improvement Refunding Revenue Bonds USX Corporation
Series 1996 6.25 2030 2,000,000 2,109,840
East Chicago Elementary School Building Lake County
1st Mortgage Refunding Bonds Series 1996 6.25 2016 8,000,000 8,691,440
Hanover 1st Mortgage Revenue Bonds Hoosier Care II
Series 1990 10.375 2020 6,815,000 7,374,784
Health Facility Authority Hospital Revenue Bonds
Community Hospital of Anderson Series 1993 6.00 2023 10,000,000 10,195,700
Health Facility Authority Hospital Revenue Bonds
Union Hospital Series 1993 (MBIA Insured) 5.125 2018 10,000,000 9,634,200
Health Facility Finance Authority Hospital Revenue Bonds
Hancock Memorial Series 1996 6.125 2017 2,295,000 2,377,941
Kokomo Hospital Authority Hospital Refunding
Revenue Bonds St. Joseph's Hospital Series 1988A 8.75 2013 5,000,000 5,264,950
La Porte County Hospital Authority Hospital Refunding
Revenue Bonds La Porte Hospital Series 1993 6.00 2023 2,990,000 3,056,647
La Porte County Hospital Authority Hospital Refunding
Revenue Bonds La Porte Hospital Series 1993 6.25 2012 5,070,000 5,273,003
Lawrenceburg Pollution Control Refunding Revenue Bonds
Methodist Hospital Series 1989 6.50 2008-13 19,670,000 21,666,789
Municipal Power Agency Power Supply System
Refunding Revenue Bonds 5.75 2018 6,470,000 6,472,717
Rockport Pollution Control Refunding Revenue Bonds
Indiana Michigan Electric Series B 7.60 2016 5,500,000 6,001,600
St. Joseph County Hospital Facility Revenue Bonds
Memorial Hospital of South Bend 9.40 2010 1,930,000 2,499,755
Vincennes Economic Development
Revenue Bonds Southwest Indiana
Regional Youth Village Facility Series 1993 8.50 2024 16,575,000 17,705,581
Total 120,534,596
Iowa (0.7%)
Iowa City Refunding Revenue Bonds Mercy Hospital
Series 1986 6.00 2012 6,300,000 6,324,633
Keokuk Hospital Facilities Refunding Revenue Bonds
Keokuk Area Hospital Series 1991 7.625 2021 5,350,000 5,805,820
Muscatine Electric Refunding Revenue Bonds Series 1986 5.00 2007-08 7,350,000 7,349,786
Muscatine Electric Refunding Revenue Bonds Series 1986 6.00 2005-06 22,175,000 22,202,053
Total 41,682,292
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Kentucky (1.3%)
Development Finance Authority Hospital Facility
<S> <C> <C> <C> <C>
Revenue Bonds St. Luke Hospital Series 1989B 6.00 2019 22,695,000 23,073,326
Development Finance Authority Medical Center
Refunding Revenue Improvement Bonds
Ashland Hospital Series 1987 9.75 2011 4,000,000 4,117,784
Economic Development Finance Authority Hospital
Refunding Revenue & Improvement Bonds
Appalachian Regional Hospital Series 1997 5.875 2022 2,000,000 2,014,660
Louisville Airport Lease Revenue Bonds
Series 1989A A.M.T. 7.875 2019 4,000,000 4,282,200
Louisville & Jefferson County Riverport Authority
Mortgage Revenue Bonds Series 1986 A.M.T. 7.875 2016 7,185,000 7,391,425
McCracken County Revenue Bonds Lourdes Hospital 6.00 2012 8,300,000 8,320,916
Muhlenberg County Hospital Refunding Revenue Bonds
Muhlenberg Community Hospital Series 1988 9.50 2010 3,920,000 4,138,854
Muhlenberg County Hospital Refunding Revenue Bonds
Muhlenberg Community Hospital Series 1996 6.75 2010 9,565,000 9,937,461
Turnpike Authority Economic Road Development
Refunding Revenue Bonds Series 1993 Inverse Floater
(AMBAC Insured) 7.189 2012 15,000,000(d)15,993,750
Total 79,270,376
Louisiana (3.2%)
Calcasieu Parish Industrial Development Pollution Control
Refunding Revenue Bonds Gulf State Utilities
Series 1992 6.75 2012 10,500,000 11,243,715
Energy & Power Authority Refunding Revenue Bonds
Rodemacher Unit 2 Series 1991 (FGIC Insured) 6.00 2013 28,000,000 28,678,720
Hodge Village Combined Utility System Revenue Bonds
Stone Container Series 1990 A.M.T. 9.00 2010 23,000,000 25,051,370
New Orleans Audubon Park Commission Aquarium
Revenue Bonds Series 1992A 8.00 2012 7,100,000 8,220,167
Public Facilities Authority Revenue Bonds
Glen Retirement Systems Series 1995 6.50 2015 1,000,000 1,061,160
Public Facilities Authority Revenue Bonds
Glen Retirement Systems Series 1995 6.70 2025 1,500,000 1,608,465
Public Facilities Authority Revenue Bonds
Windsor Multi-family Housing Foundation
Series 1996A 6.25 2026 9,570,000 8,265,035
St. Charles Parish Pollution Control Revenue Bonds
Louisiana Power & Light Series 1984 8.25 2014 28,600,000 30,841,954
St. Charles Parish Pollution Control Revenue Bonds
Louisiana Power & Light Series 1991 A.M.T. 7.50 2021 20,700,000 22,738,122
St. Charles Parish Pollution Control Revenue Bonds
Louisiana Power & Light 2nd Series 1984 8.00 2014 29,155,000 31,756,209
Southern Louisiana Port Commission Terminal
Refunding Revenue Bonds Gatx Terminal Series 1993 7.00 2023 13,180,000 14,321,124
West Feliciana Parish Demand Pollution Control
Revenue Bonds Gulf State Utilities Series 1985B 9.00 2015 6,000,000 6,717,480
Total 190,503,521
Maine (0.1%)
Finance Authority Multi-family Housing Revenue
Obligation Securities Huntington Common
Series 1997A 7.50 2027 5,000,000 4,993,200
Health & Higher Educational Facilities Authority
Revenue Bonds St. Mary's Hospital Series 1989 8.625 2022 3,500,000 3,802,540
Total 8,795,740
Maryland (0.7%)
Frederick County Economic Refunding Revenue Bonds
Alumax Series 1992 7.25 2017 9,880,000 10,648,368
Harford County Industrial Development Revenue Bonds
Dorsey 8.00 2005 500,000 502,460
Prince George's County Hospital Revenue Bonds
Dimensions Health Series 1992 7.00 2022 7,000,000 7,888,440
Prince George's County Hospital Revenue Bonds
Dimensions Health Series 1992 7.25 2017 11,400,000 12,964,422
State Transportation Authority Facility Revenue Bonds
Zero Coupon Series 1992 Capital Appreciation
(FGIC Insured) 6.33 2010-11 9,700,000(f) 4,999,532
State Transportation Authority Facility Revenue Bonds
Zero Coupon Series 1992 (FGIC Insured) 6.35 2012 5,000,000(f) 2,391,100
Total 39,394,322
Massachusetts (2.6%)
Bay Transportation Authority Refunding Revenue Bonds
Series 1994A (MBIA Insured) 6.00 2012 8,000,000 8,471,280
Greater Lawrence Sanitary District North Andover
General Obligation Bonds 8.50 2005 3,255,000 3,371,757
Health & Educational Facilities Authority Revenue Bonds
Berkshire Health Systems Series C 5.90 2011 2,000,000 2,032,720
Health & Educational Facilities Authority Revenue Bonds
Berkshire Health Systems Series C 6.00 2020 4,000,000 4,078,440
Health & Educational Facilities Authority Revenue Bonds
Beverly Hospital Inverse Floater (MBIA Insured) 7.37 2020 8,000,000(d) 8,360,000
Health & Educational Facilities Authority Revenue Bonds
Charlton Memorial Hospital Series B 7.25 2013 6,455,000 7,088,558
Industrial Finance Agency Pollution Control Refunding
Revenue Bonds Eastern Edison Series 1993 5.875 2008 4,250,000 4,336,318
Industrial Finance Agency Resource Recovery
Revenue Bonds SEMASS Series 1991A 9.00 2015 18,885,000 21,285,472
Industrial Finance Agency Resource Recovery
Revenue Bonds SEMASS Series 1991B A.M.T. 9.25 2015 24,900,000 28,064,541
Municipal Wholesale Electric Power Supply System
Revenue Bonds Series 1992B 6.75 2017 10,130,000 11,320,275
Municipal Wholesale Electric Power Supply System
Revenue Bonds Series 1993A Inverse Floater
(AMBAC Insured) 7.02 2018 6,500,000(d) 6,418,750
State Health & Educational Facilities Authority
Revenue Bonds Holyoke Hospital Series 1994B 6.50 2015 500,000 522,700
State Industrial Finance Agency Assisted Living
Facility Revenue Bonds Newton Group Properties LLC
Series 1997 A.M.T. 8.00 2027 4,300,000 4,338,485
Water Resources Authority General
Refunding Revenue Bonds Series 1992B 5.50 2015 22,175,000 22,351,513
Water Resources Authority General Revenue Bonds
Series 1992A 6.50 2019 3,500,000 4,086,460
Water Resources Authority General Revenue Bonds
Series 1993B-95B (MBIA Insured) 5.00 2022-25 19,000,000 18,121,930
Total 154,249,199
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Michigan (3.9%)
Crawford County Economic Development Corporation
Environmental Improvement Revenue Bonds
<S> <C> <C> <C> <C>
Weyerhaeuser Series 1991A 7.125 2007 10,800,000 12,466,656
Detroit Unlimited Tax General Obligation Bonds
Series 1993 6.35 2014 5,930,000 6,289,299
Detroit Unlimited Tax General Obligation Bonds
Series 1995A 6.80 2015 1,375,000 1,580,672
Lincoln Consolidated School District Unlimited Tax
General Obligation Refunding Bonds (FGIC Insured) 5.85 2018 6,455,000 6,751,414
Midland County Economic Development Corporation
Pollution Control Limited Obligation
Refunding Revenue Bonds Midland Cogeneration
Series 1990B A.M.T. 9.50 2009 35,200,000 38,926,624
Midland County Economic Development Corporation
Pollution Control Limited Obligation
Refunding Revenue Bonds Midland Cogeneration
Series 1990C 8.50 2009 18,900,000 20,482,308
Monroe County Pollution Control
Revenue Bonds Detroit Edison A.M.T. 7.75 2019 40,250,000(h)43,639,855
State Hospital Finance Authority Hospital
Refunding Revenue Bonds Detroit Medical Center
Series 1993A 6.50 2018 10,000,000 10,784,700
State Hospital Finance Authority Hospital
Refunding Revenue Bonds
Sinai Hospital Greater Detroit Series 1995 6.625 2016 2,750,000 3,017,355
State Hospital Finance Authority Hospital
Refunding Revenue Bonds
Sinai Hospital Greater Detroit Series 1995 6.70 2026 3,000,000 3,295,890
State Hospital Finance Authority Hospital
Revenue Bonds Central Michigan Community Hospital 6.25 2016 2,095,000 2,169,896
State Hospital Finance Authority Hospital
Revenue Bonds McLaren Obligated Group
Series 1991A 7.50 2021 7,500,000 8,467,950
State Job Development Authority Pollution Control
Revenue Bonds Chrysler 5.70 1999 4,350,000 4,469,538
Strategic Fund Environmental Improvement Limited
Obligation Refunding Revenue Bonds
Crown Paper Company Series 1997B 6.25 2012 1,100,000 1,113,981
Strategic Fund Limited Obligation Refunding
Revenue Bonds Detroit Edison
Series 1995AA (MBIA Insured) 6.40 2025 12,000,000 13,223,760
Strategic Fund Limited Obligation Refunding
Revenue Bonds Ford Motor Series 1991A 7.10 2006 16,400,000 19,249,008
Strategic Fund Limited Obligation Refunding
Revenue Bonds Great Lakes Pulp & Fibre
Series 1994 A.M.T. 10.25 2016 35,000,000(e)19,425,000
Troy City Downtown Development Authority
Revenue Bonds Oakland County Series 1995A 6.375 2018 1,000,000 1,092,890
Van Buren County Downtown Development Authority
Tax Increment Revenue Bonds Series 1994 8.40 2016 3,990,000 4,573,657
Wayne County Special Airport Facilities Refunding
Revenue Bonds Northwest Airlines Series 1995 6.75 2015 11,295,000 12,348,146
Total 233,368,599
Minnesota (3.9%)
Becker Solid Waste Disposal Facility Revenue Bonds
Liberty Paper Series 1994B A.M.T. 9.00 2015 18,000,000 19,136,160
Bloomington Community Development
Refunding Revenue Note 24th Avenue Motel 8.50 2005 1,499,244(k) 1,506,740
Bloomington Health Care Facility Revenue Bonds
Friendship Village of Bloomington Series 1992 8.50 2002 3,680,000 3,985,035
Brainerd Economic Development Authority Health Care
Facility Revenue Bonds Benedictine Health System
St. Joseph Medical Center Series 1990 8.375 2020 4,670,000 5,172,165
Duluth Economic Development Authority Health Care
Facility Revenue Bonds Benedictine Health System
St. Mary's Medical Center Series 1990 8.375 2020 8,300,000 9,192,499
Duluth Housing & Redevelopment Authority
1st Mortgage Revenue Bonds
Lakeshore Lutheran Home 8.00 2000 110,000 110,211
Duluth Housing & Redevelopment Authority
1st Mortgage Revenue Bonds
Lakeshore Lutheran Home 8.25 2009 750,000 751,590
Fergus Falls Health Care Facilities Revenue Bonds
Series 1995 6.50 2025 1,530,000 1,634,407
International Falls Solid Waste Disposal
Revenue Bonds Boise Cascade
Series 1990 A.M.T. 7.75 2015 10,000,000 10,517,800
Mahtomedi Multi-family Housing Revenue Bonds
Briarcliff Series 1996 A.M.T. 7.35 2036 2,000,000 2,067,980
Maplewood Elder Care Facility Revenue Bonds
Care Institute Series 1994 7.75 2024 8,000,000 8,491,120
Maplewood Multi-family Housing Refunding
Revenue Bonds Carefree Cottages Series 1995 A.M.T. 7.20 2032 5,000,000 5,088,450
Mille Lacs Capital Improvement Authority Infrastructure
Revenue Bonds Series 1992A 9.25 2012 4,455,000 5,565,097
Minneapolis Housing & Healthcare Facility
Revenue Bonds Augustana Chapel View Homes
Series 1997 6.75 2027 2,640,000 2,681,395
Richfield Multi-family Housing
Refunding Revenue Bonds
Village Shores Apartments Series 1996 7.625 2031 4,985,000 5,122,935
Robbinsdale Multi-family Housing Revenue Bonds
Copperfield Hill Series A 7.35 2031 3,500,000 3,547,355
St. Louis Park Health Care Facilities Revenue Bonds
Healthsystem Minnesota Obligated Group
Series 1993 Inverse Floater (AMBAC Insured) 4.925 2005 10,200,000(d)10,047,000
St. Louis Park Health Care Facilities Revenue Bonds
Healthsystem Minnesota Obligated Group
Series 1993 Inverse Floater (AMBAC Insured) 5.925 2013 18,000,000(d)17,865,000
St. Louis Park Health Care Park Nicollet
Medical Center Facility Revenue Bonds Series 1990A 9.25 2020 6,000,000 6,718,440
St. Louis Park Multi-family Housing Refunding
Revenue Bonds Park Boulevard Towers Series 1996A 7.00 2031 11,585,000 11,918,185
St. Paul Housing & Redevelopment Authority
Health Care Facility Revenue Bonds
Lyngblomsten Care Center Series 1993A 7.125 2017 4,535,000 4,768,552
St. Paul Housing & Redevelopment Authority
Health Care Facility Revenue Bonds Lyngblomsten
Multi-family Rental Housing Series 1993B 7.00 2024 2,780,000 2,807,300
St. Paul Port Authority Redevelopment Multi-family
Refunding Revenue Bonds Burlington Apartments
Series A (GNMA Insured) 5.75 2031 14,355,000 14,533,863
St. Paul Port Authority Redevelopment Multi-family
Subordinate Refunding Revenue Bonds
Burlington Apartments Series A 8.625 2031 3,770,000 3,811,545
Southern Minnesota Municipal Power Agency
Power Supply System Refunding Revenue Bonds
Series 1992 5.75 2018 32,210,000 32,656,753
Southern Minnesota Municipal Power Agency
Power Supply System Revenue Bonds
Zero Coupon Series 1994A (MBIA Insured) 6.72 2021 13,500,000(f) 3,926,610
Southern Minnesota Municipal Power Agency
Power Supply System Revenue Bonds
Zero Coupon Series 1994A (MBIA Insured) 6.73 2022 17,500,000(f) 4,824,925
Southern Minnesota Municipal Power Agency
Power Supply System Revenue Bonds
Zero Coupon Series 1994A (MBIA Insured) 6.74 2023 27,500,000(f) 7,187,400
Southern Minnesota Municipal Power Agency
Power Supply System Revenue Bonds
Zero Coupon Series 1994A (MBIA Insured) 6.75 2024-27 87,410,000(f) 20,079,756
Vadnais Heights Multi-family Housing Refunding
Revenue Bonds Cottages of Vadnais Heights
Series 1995 A.M.T. 7.00 2031 1,995,000 2,029,075
Washington County Housing & Redevelopment Authority
Woodbury Multi-family Housing Refunding
Revenue Bonds Series 1996 6.95 2023 4,940,000 5,035,046
Total 232,780,389
Mississippi (0.7%)
Claiborne County Pollution Control Refunding
Revenue Bonds System Energy Resources
Series 1995 7.30 2025 4,000,000 4,232,960
Claiborne County Pollution Control Revenue Bonds
Middle South Energy 9.50 2013 1,500,000 1,616,460
Claiborne County Pollution Control Revenue Bonds
Middle South Energy Series C 9.875 2014 15,375,000 16,624,988
Harrison County Waste Water Management District
Refunding Bonds Series 1986 5.00 2015 4,250,000 4,225,477
Jackson Industrial Development Revenue Bonds Dorsey 8.00 2005 422,000 425,929
Lowndes County Solid Waste Disposal Pollution Control
Revenue Bonds Weyerhaeuser Series 1989 A.M.T. 7.875 2005 12,250,000 13,305,215
Lowndes County Solid Waste Disposal Pollution Control
Refunding Revenue Bonds Weyerhaeuser Series 1989 7.99 2022 4,000,000(i) 4,808,680
Total 45,239,709
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Missouri (0.7%)
Regional Convention & Sports Complex Authority Bonds
<S> <C> <C> <C> <C>
St. Louis Sponsor Series 1991B 7.00 2021 5,810,000 6,568,495
State Environment & Improvement Energy Resources
Authority Pollution Control Revenue Bonds Chrysler 5.70 1999 9,250,000 9,418,535
Sikeston Electric System Refunding Revenue Bonds
Series 1992 (MBIA Insured) 5.80 2002 4,165,000 4,427,312
St. Louis Industrial Development Authority
Refunding Revenue Bonds Kiel Center
Multipurposes Arena Series 1992 A.M.T. 7.875 2024 15,400,000 16,815,414
St. Louis Regional Convention & Sports Complex Authority
Pre-Refunded Revenue Bonds Series 1991C 7.90 2021 2,575,000 3,027,144
St. Louis Regional Convention & Sports Complex Authority
Revenue Bonds Series 1991C 7.90 2021 125,000 139,589
Total 40,396,489
Nebraska (--%)
Omaha Public Power District Electric System
Revenue Bonds Series 1986A 6.00 2015 1,370,000 1,461,297
Nevada (0.7%)
Clark County Collateralized Pollution Control
Revenue Bonds Nevada Power A.M.T. 7.80 2009 11,850,000 12,584,345
Clark County Industrial Development Revenue Bonds
Nevada Power Series 1990 A.M.T. 7.80 2020 5,000,000 5,383,800
Las Vegas Redevelopment Agency Tax Increment
Subordinate Lien Revenue Bonds Series 1994A 6.00 2010 2,000,000 2,068,780
Las Vegas Redevelopment Agency Tax Increment
Subordinate Lien Revenue Bonds Series 1994A 6.10 2014 2,750,000 2,851,200
Las Vegas Special Improvement District 707
Local Improvement Bonds
Summerlin Area Series 1996 7.10 2016 6,000,000 6,235,200
Washoe County Hospital Revenue Bonds
Washoe Medical Center Series 1989A 7.60 2019 2,750,000 2,939,448
Washoe County Hospital Revenue Bonds
Washoe Medical Center Series 1993A 6.00 2015 7,250,000 7,520,062
Total 39,582,835
New Hampshire (2.4%)
Business Financial Authority Pollution Control
Refunding Revenue Bonds United Illuminating
Series 1993A 5.875 2033 13,200,000 13,262,964
Business Financial Authority Pollution Control &
Solid Waste Disposal Refunding Revenue Bonds
Crown Paper Company Series 1996 7.75 2022 4,255,000 4,691,180
Industrial Development Authority Pollution Control
Revenue Bonds State Public Service Series 1991B 7.50 2021 51,485,000 54,084,993
Industrial Development Authority Pollution Control
Revenue Bonds State Public Service
Series 1991C A.M.T. 7.65 2021 25,000,000 26,551,000
Industrial Development Authority Pollution Control
Revenue Bonds United Illuminating
Series 1989A A.M.T. 8.00 2014 8,000,000 8,562,480
State Higher Education & Health Facility Authority
Hospital Revenue Bonds Hitchcock Clinic
Series 1994 (MBIA Insured) 6.00 2024 13,000,000 13,657,410
State Turnpike System Refunding Revenue Bonds
Series 1992 5.75 2020 20,615,000 20,930,203
Total 141,740,230
New Jersey (0.2%)
Health Care Facility Finance Authority Revenue Bonds
St. Peter Medical Center Series 1994F (MBIA Insured) 5.00 2016 10,000,000 9,693,500
Health Care Facility Finance Authority Revenue Bonds
Zurbrugg Memorial Hospital Series C 8.50 2012 3,500,000 3,577,525
Total 13,271,025
New Mexico (1.8%)
Albuquerque Health Care System Revenue Bonds
Lovelace Medical Fund 10.25 2011 55,000 55,811
Bernalillo County Multi-family Housing Revenue Bonds
Series 1997D 7.70 2027 9,985,000 10,195,384
Cibola County Correctional Facility
Certificate of Participation Series 1993 8.50 2015 16,710,000 18,414,420
Farmington Pollution Control Refunding Revenue Bonds
Series 1996A-B 6.30 2016 10,000,000 10,561,000
Farmington Pollution Control Refunding Revenue Bonds
State Public Service San Juan Series 1994A 6.40 2023 30,650,000 32,185,259
Farmington Pollution Control Refunding Revenue Bonds
Series 1997A 6.95 2020 4,000,000 4,431,080
Farmington Power Refunding Revenue Bonds
Generating Division 9.875 2013 5,000,000 6,675,900
Las Vegas Hospital Facility Refunding Revenue Bonds
Northeastern Regional Hospital Series 1987 9.625 2013 5,525,000 5,667,103
Lordsberg Pollution Control Refunding Revenue Bonds
Phelps Dodge 6.50 2013 20,000,000 21,671,200
Total 109,857,157
New York (8.3%)
Battery Park City Authority Refunding Revenue Bonds
Series 1993A 5.50 2010 9,940,000 10,235,317
Dormitory Authority New York State University Education
Facility Pre-Refunded Revenue Bonds Series 1990A 7.70 2012 10,000,000 11,028,700
Dormitory Authority New York State University Education
Facility Revenue Bonds Series 1993A 5.50 2013 24,530,000 25,357,642
Dormitory Authority New York City University System
Consolidated 2nd General Resource Revenue Bonds
Series 1990C 5.00 2017 20,820,000 19,651,582
Dormitory Authority New York City University System
Consolidated 2nd General Resource Revenue Bonds
Series 1990C 6.00 2016 39,465,000 40,257,457
Dormitory Authority New York City University System
Consolidated 2nd General Resource Revenue Bonds
Series 1990D 7.00 2009 5,000,000 5,799,550
Dormitory Authority New York City University System
Consolidated 2nd General Resource Revenue Bonds
Series 1994A 5.75 2018 5,500,000 5,786,385
Dormitory Authority New York Court Facility Lease
Revenue Bonds Series 1993A 5.375 2016 11,000,000 10,879,220
Metropolitan Transportation Transit Facilities
Service Contract Series 3 6.00 2019 6,395,000 6,687,379
New York City General Obligation Bonds Series 1992B 7.40 2000 30,000,000 31,896,000
New York City General Obligation Bonds Series 1994B 7.00 2016 16,500,000 18,660,510
New York City General Obligation Bonds Series 1996F-G 5.75 2017-20 27,825,000 28,316,394
New York City Industrial Development Agency
Special Facility Revenue Bonds American Airlines
Series 1990 A.M.T. 8.00 2020 16,130,000 16,961,502
New York City Municipal Water Financial Authority
Water & Sewer System Revenue Bonds Series 1994B
Inverse Floater (MBIA Insured) 6.27 2009 15,500,000(d)15,906,875
New York City Municipal Water Financial Authority
Water & Sewer System Revenue Bonds Series A 6.25 2021 55,500,000 58,573,590
New York City Municipal Water Financial Authority
Water & Sewer System Revenue Bonds Series B 5.00 2017 6,255,000 6,102,440
Port Authority Special Obligation Revenue Bonds
KIAC A.M.T. 6.75 2019 3,500,000 3,816,960
Port Authority Special Project Bonds La Guardia
Airport Passenger Terminal Continental and
Eastern Airlines A.M.T. 9.00 2006 2,645,000 2,985,888
Port Authority Special Project Bonds La Guardia
Airport Passenger Terminal Continental and
Eastern Airlines Series 2 A.M.T. 9.00 2010 8,800,000 9,934,144
Port Authority Special Project Bonds La Guardia
Airport Passenger Terminal Continental and
Eastern Airlines Series 2 A.M.T. 9.125 2015 17,500,000 19,814,200
State Energy Research & Development Authority Electric
Facility Revenue Bonds Consolidated Edison A.M.T. 7.125 2022 10,750,000 10,981,555
State Energy Research & Development Authority Electric
Facility Revenue Bonds Consolidated Edison A.M.T. 7.375 2024 23,000,000 23,606,970
State Energy Research & Development Authority Electric
Facility Revenue Bonds Consolidated Edison A.M.T. 7.50 2021 9,000,000 9,113,400
State Energy Research & Development Authority Electric
Facility Revenue Bonds Consolidated Edison
Series 1990A A.M.T. 7.50 2025 30,975,000 32,660,350
State Housing Finance Agency Service Contract Obligation
Revenue Bonds Series 1995A 6.50 2025 12,475,000 13,728,862
State Housing Finance Agency State University
Construction Refunding Bonds Series 1986A 6.50 2013 3,500,000 3,972,430
State Local Government Assistance Corporation
Series 1991A 6.50 2020 11,000,000 11,832,260
State Medical Facilities Finance Agency Mental
Health Services Improvement Refunding Revenue Bonds
Series 1993D 5.25 2023 15,000,000 14,425,950
State Medical Facilities Finance Agency Mental
Health Services Improvement Refunding Revenue Bonds
Series 1993F 5.25 2019 5,790,000 5,581,502
State Urban Development Correctional Facility
Refunding Revenue Bonds Series A 5.50 2016 2,750,000 2,755,170
State Urban Development Correctional Facility
Revenue Bonds Series 1993A 5.25 2021 12,110,000 11,578,977
State Urban Development Correctional Facility
Revenue Bonds Series 6 5.375 2025 9,000,000 8,731,080
Total 497,620,241
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
North Carolina (4.1%)
Eastern Municipal Power Agency Power Supply System
<S> <C> <C> <C> <C>
Refunding Revenue Bonds Series 1993B 6.25 2012 24,655,000 25,963,687
Eastern Municipal Power Agency Power System
Refunding Revenue Bonds Series 1986A 4.00 2018 8,675,000 7,396,132
Eastern Municipal Power Agency Power System
Refunding Revenue Bonds Series 1986A 5.00 2017 6,500,000 6,374,035
Eastern Municipal Power Agency Power System
Refunding Revenue Bonds Series 1988A 6.00 2026 3,125,000 3,355,801
Eastern Municipal Power Agency Power System
Refunding Revenue Bonds Series 1989A 5.50 2011 37,800,000 37,861,236
Eastern Municipal Power Agency Power System
Refunding Revenue Bonds Series 1989A 6.50 2024 16,750,000 16,996,728
Eastern Municipal Power Agency Power System
Refunding Revenue Bonds Series 1989A 7.50 2010 29,160,000 35,236,810
Eastern Municipal Power Agency Power System
Refunding Revenue Bonds Series 1991A 5.75 2019 55,000,000 55,155,100
Eastern Municipal Power Agency Power System
Refunding Revenue Bonds Series 1994B 7.25 2007 5,000,000 5,737,500
Eastern Municipal Power Agency Power System
Refunding Revenue Bonds Series B 6.125 2009 10,000,000 10,547,200
Eastern Municipal Power Agency Power System
Revenue Bonds Series 1993D 5.875 2013 2,300,000 2,355,361
Municipal Power Agency 1 Catawba Electric
Revenue Bonds Series 1988 7.00 2016 5,140,000 5,256,986
Municipal Power Agency 1 Catawba Electric
Revenue Bonds Series 1993
Inverse Floater (MBIA Insured) 6.82 2012 7,400,000(d) 7,686,750
Municipal Power Agency 1 Catawba Electric
Revenue Bonds Series 1993
Inverse Floater (MBIA Insured) 7.02 2020 15,000,000(d)15,243,750
Offiss Incorporation Recreational Facilities
Gross Revenue Bonds Smoky Mountain Golf Course
Zero Coupon Series 1994-96 8.38 2019 8,295,000(e,g)8,094,759
Total 243,261,835
North Dakota (0.4%)
Fargo Hospital Refunding Revenue & Improvement Bonds
Dakota Hospital Series 1992 6.875 2012 3,000,000 3,370,410
Fargo Hospital Refunding Revenue & Improvement Bonds
Dakota Hospital Series 1992 7.00 2022 4,250,000 4,798,208
General Obligation Bonds Real Estate Series 1986A 6.00 2013 8,585,000 8,681,581
Ward County Health Care Facilities
Refunding Revenue Bonds Series 1996B 6.25 2021 4,000,000 4,148,760
Ward County Health Care Facilities Refunding
Revenue Bonds Trinity Group Series 1996A 6.25 2026 6,110,000 6,337,231
Total 27,336,190
Ohio (3.0%)
Air Quality Development Authority Pollution Control
Refunding Revenue Bonds Cleveland Electric
Company Series 1997B 6.00 2020 10,000,000 10,230,900
Air Quality Development Authority Pollution Control
Refunding Revenue Bonds Ohio Edison Series A 5.95 2029 13,300,000 13,607,496
Air Quality Development Authority Pollution Control
Revenue Bonds Ohio Edison Series 1989A 7.625 2023 6,750,000 7,126,717
Bellefontaine Hospital Facilities Refunding Revenue Bonds
Mary Rutan Health Association Series 1993 6.00 2013 5,330,000 5,421,356
Butler County Hospital Facilities
Refunding Revenue & Improvement Bonds
Fort Hamilton-Hughes Memorial Center Series 1991 7.50 2010 9,800,000 10,643,192
Carroll Water & Sewer District Unlimited Tax
General Obligation Bonds 6.25 2010 8,360,000 8,357,743
Cleveland Parking Facilities Improvement
Revenue Bonds Series 1992 8.10 2022 15,000,000 17,630,850
Coshocton County Solid Waste Disposal Refunding
Revenue Bonds Stone Container Series 1992 7.875 2013 17,500,000 19,549,600
Cuyahoga County Health Care Facilities Lifecare Refunding
Revenue Bonds Judson Retirement Community
Series 1996A 7.25 2013-18 6,210,000 6,584,338
Erie County Hospital Improvement Refunding
Revenue Bonds Firelands Community Hospital
Series 1992 6.75 2015 6,540,000 7,088,052
Lorain County Independent Living & Hospital Facilities
Mortgage Refunding Revenue Bonds
Elyria United Methodist
Series 1996C 6.875 2022 3,100,000 3,297,966
Marion County Health Care Facilities
Refunding & Improvement Revenue Bonds
United Church Homes Series 1993 6.30 2015 1,800,000 1,877,670
Marion County Health Care Facilities
Refunding & Improvement Revenue Bonds
United Church Homes Series 1993 6.375 2010 2,000,000 2,097,140
Montgomery County Health Facilities Refunding
Revenue Bonds Friendship Village of Dayton
Series 1990A 9.25 2016 9,025,000 10,117,386
Water Development Authority Collateralized Pollution
Control Refunding Revenue Bonds Cleveland Electric
Series 1995 7.70 2025 13,000,000 14,874,860
Water Development Authority Collateralized Pollution
Control Revenue Bonds Cleveland Electric
Series 1989 A.M.T. 8.00 2023 10,000,000 11,377,200
Water Development Authority Collateralized Pollution
Control Revenue Bonds Toledo Edison
Series 1989 A.M.T. 8.00 2023 8,500,000 8,978,040
Water Development Authority Pollution Control
Revenue Bonds Ohio Edison A.M.T. 8.10 2023 10,000,000 10,666,700
Water Development Authority Pollution Control
Refunding Revenue Bonds Toledo Edison
Series 1994A A.M.T. 8.00 2023 10,000,000 10,382,300
Total 179,909,506
Oklahoma (1.0%)
Grand River Dam Authority Refunding Revenue Bonds
Series 1987 5.00 2012 10,105,000 10,053,464
Hinton Economic Development Authority
Certificate of Participation Series 1994 8.75 2015 11,675,000 12,544,554
Hinton Economic Development Authority
Certificate of Participation Dominion Leasing
Series 1990A 9.75 2015 19,090,000 21,261,678
Jackson County Hospital Authority
Refunding Revenue Bonds
Jackson County Memorial Hospital Series 1994 7.30 2015 6,580,000 7,040,995
Midwest City Memorial Hospital Authority Hospital
Revenue Bonds Series 1992 7.375 2022 7,815,000 8,856,818
Stillwater Medical Center Authority
Hospital Revenue Bonds Series 1997B 6.50 2019 1,750,000 1,866,603
Total 61,624,112
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Oregon (0.6%)
State Health Housing Educational &
Cultural Facilities Authority Revenue Bonds
Oregon Baptist Retirement Homes-Weidler
<S> <C> <C> <C> <C>
Retirement Center Series 1995 8.00 2026 7,720,000 7,992,670
Western Generation Agency Revenue Bonds
Wauna Cogeneration Series 1994A 7.125 2021 19,200,000 20,682,432
Western Generation Agency Revenue Bonds
Wauna Cogeneration Series 1994B A.M.T. 7.40 2016 9,000,000 9,828,270
Total 38,503,372
Pennsylvania (4.1%)
Allegheny County Industrial Development Authority
Environment Improvement Revenue Bonds
USX Corporation Series 1994A 6.70 2020 6,000,000 6,480,600
Beaver County Industrial Development Authority
Collateralized Pollution Control Refunding
Revenue Bonds Cleveland Electric Illuminating
Series 1995 7.625 2025 7,500,000 8,523,675
Beaver County Industrial Development Authority
Collateralized Pollution Control Refunding
Revenue Bonds Cleveland Electric Illuminating
Series 1995A 7.75 2025 21,150,000 24,253,339
Beaver County Industrial Development Authority
Collateralized Pollution Control Refunding
Revenue Bonds Toledo Edison
Series 1995A 7.75 2020 14,000,000 16,109,520
Beaver County Industrial Development Authority
Pollution Control Revenue Bonds
Toledo Edison-Beaver Valley Series 1995 7.625 2020 11,700,000 13,296,933
Beaver County Industrial Development Authority
Pollution Control Revenue Bonds Ohio Edison 7.75 2024 34,650,000 36,578,966
Butler County Industrial Development Authority
Health Care Refunding Revenue Bonds
Pittsburgh Lifetime Care Community Sherwood Oaks
Series 1993 5.75 2011-16 5,000,000 5,111,860
Convention Center Authority Refunding Revenue Bonds
Philadelphia Series 1994A 6.75 2019 5,300,000 5,818,340
Delaware County Authority 1st Mortgage Revenue Bonds
Riddle Village Series 1996 7.00 2026 10,000,000 10,362,400
Delaware County Authority 1st Mortgage Revenue Bonds
Whitehorse Village Continuing Care Series 1989 9.70 2009-19 11,000,000 12,228,150
Delaware County Industrial Development Authority
Pollution Control Refunding Revenue Bonds
Philadelphia Electric Series A 7.375 2021 900,000 981,603
Harrisburg Dauphin County General Obligation Bonds
Zero Coupon Series 1997F (AMBAC Insured) 5.50 2020 3,000,000(f) 875,040
Harrisburg Dauphin County General Obligation Bonds
Zero Coupon Series 1997F (AMBAC Insured) 5.52 2021-22 2,000,000(f) 535,430
Montgomery County Higher Education & Health Authority
Retirement Community Revenue Bonds G.D.L. Farms
Series A 9.50 2020 3,000,000 3,365,820
Philadelphia Gas Works Revenue Bonds Series 13 7.70 2021 4,150,000 4,691,160
Philadelphia Hospital & Higher Education Facility
Authority Hospital Revenue Bonds
Albert Einstein Medical Center 7.625 2011 15,545,000 16,415,986
Philadelphia Municipal Authority Lease
Refunding Revenue Bonds Series 1993D 6.25 2013 2,500,000 2,615,375
Philadelphia Municipal Authority Lease
Refunding Revenue Bonds Series 1993D 6.30 2017 1,550,000 1,621,393
Philadelphia Water & Sewer Revenue Bonds 16th Series 7.00 2018 14,000,000 15,306,060
Philadelphia Water & Sewer Revenue Bonds 16th Series 7.50 2010 13,200,000 14,880,096
Philadelphia Water & Wastewater Revenue Bonds
Series 1993 (CGIC Insured) 5.50 2015 11,000,000 11,155,540
State Department of General Services Certificate of
Participation Series 1994A (AMBAC Insured) 5.00 2015 25,000,000 24,231,000
Wilkins Industrial Development Authority Revenue Bonds
Retirement Community Longwood at Oakmont
Series 1991A 10.00 2021 8,495,000 10,078,298
Total 245,516,584
Puerto Rico (0.8%)
Electric Power Agency Revenue Bonds Series N-O 6.00 2010 45,305,000 46,154,016
South Carolina (0.9%)
Cherokee County Spring City Knitting Cluett Peabody 7.40 2009 5,200,000 5,772,312
Piedmont Municipal Power Agency Electric
Refunding Revenue Bonds Series 1986B 5.75 2024 7,550,000 7,549,925
Public Service Authority Electric System Expansion
Revenue Bonds Santee Cooper Series 1991D 6.625 2031 14,975,000 16,657,441
Public Service Authority Electric System Revenue Bonds
Santee Cooper Series 1991B 6.00 2031 8,000,000 8,456,000
Public Service Authority Electric System Revenue Bonds
Santee Cooper Series 1993A Inverse Floater
(MBIA Insured) 6.50 2013 17,700,000(d)18,275,250
Total 56,710,928
South Dakota (0.5%)
Heartland Consumers Power District Electric System
Refunding Revenue Bonds Series 1986 6.00 2010 10,205,000 11,042,014
Souix Falls Multi-family Housing Revenue Bonds
Series 1996A 7.50 2034 12,200,000 12,754,124
State Lease Revenue Trust Certificates Series 1993
(CGIC Insured) 6.70 2017 7,260,000 8,576,964
Total 32,373,102
Tennessee (0.4%)
Nashville & Davidson County Health & Education Facility
1st Mortgage Revenue Bonds
Blakeford at Green Hills CCRC 9.25 2024 12,230,000 14,425,040
Knox County Health Education & Housing Facility Hospital
Revenue Bonds Baptist Health System East Tennessee
Series 1989 8.60 2016 10,000,000 10,779,600
Total 25,204,640
Texas (6.6%)
Alliance Airport Authority Special Facility Revenue Bonds
American Airlines Series 1990 A.M.T. 7.50 2029 37,400,000 40,724,860
Austin Combined Utility Systems Refunding
Revenue Bonds Series 1985 10.75 2010-15 12,000,000 13,833,480
Austin Combined Utility Systems Refunding
Revenue Bonds Series 1986 5.00 2013 20,000,000 19,400,600
Board of Regents of the University System General
Refunding Revenue Bonds Series 1986 6.50 2007 2,565,000 2,683,067
Brazos River Authority Collateralized Pollution Control
Revenue Bonds Texas Utility Electric
Series 1989A A.M.T. 8.25 2019 14,000,000 14,799,400
Brazos River Authority Collateralized Pollution Control
Revenue Bonds Texas Utility Electric
Series 1990A A.M.T. 8.125 2020 13,205,000 14,344,988
Brazos River Authority Collateralized Pollution Control
Revenue Bonds Texas Utility Electric
Series 1991A A.M.T. 7.875 2021 24,450,000 27,002,091
Brazos River Authority Collateralized
Refunding Revenue Bonds Houston Lighting & Power
Series 1989A 7.625 2019 26,300,000 28,060,259
Brownsville Utility System Priority Revenue Bonds
Series 1990 (AMBAC Insured) 6.50 2017 10,015,000 10,814,197
Castlewood Municipal Utility District Water &
Sewer Systems Unlimited Tax & Refunding Revenue Bonds
Series 1997 6.75 2014 2,890,000 2,895,607
Colony Municipal Utility District 1 Denton County
Series 1980 9.25 2007 1,000,000 1,355,490
Dallas & Fort Worth International Airport Special Facility
Revenue Bonds American Airlines Series 1990 A.M.T. 7.50 2025 26,200,000 28,481,234
Dallas & Fort Worth International Airport Special Facility
Revenue Bonds Delta Air Lines Series 1991 A.M.T. 7.125 2026 13,500,000 14,465,520
Denison Hospital Authority Hospital Revenue Bonds
Texoma Medical Center Series 1994 7.10 2024 3,950,000 4,308,621
Harris County Health Facilities Hospital Revenue Bonds
Memorial Hospital Series 1992 7.125 2015 16,000,000 18,233,440
Harris County Industrial Development Marine Terminal
Refunding Revenue Bonds GATX Terminal Series 1992 6.95 2022 15,000,000 16,278,150
Hidalgo County Health Services Corporation
Hospital Revenue Bonds Mission Hospital
Series 1996 6.875 2026 7,880,000 8,469,818
Interstate Municipal Utility District
Unlimited Tax Bonds Harris County Series 1996 6.75 2021 3,020,000 3,246,681
Karnes County Public Facility Lease Revenue Bonds 9.20 2015 15,990,000 16,996,890
Kings Manor Municipal Utility District
Waterworks & Sewer Systems Combination
Unlimited Tax & Revenue Bonds Series 1995 6.875 2018 2,470,000 2,561,909
Matagorda County Navigation District 1
Collateral Pollution Control Revenue Bonds
Central Power & Light Series 1986A
(AMBAC Insured) A.M.T. 7.50 2020 6,500,000 7,001,995
Midland County Hospital District Revenue Bonds
Series 1992 7.50 2016 3,025,000 3,430,894
Municipal Power Agency Refunding Revenue Bonds
(MBIA Insured) 5.25 2009 8,000,000 8,363,920
Municipal Power Agency Revenue Bonds 5.50 2013 7,410,000 7,410,222
Plano Collin & Denton County General Obligation Bonds
Limited Tax Series 1986 6.00 2006 1,600,000 1,607,984
Rio Grande City Consolidated Independent School District
Public Facilities Lease Revenue Bonds Series 1995 6.75 2010 4,000,000 4,298,400
Sabine River Authority Collateralized Pollution Control
Revenue Bonds Texas Utilities Electric
Series 1990A A.M.T. 8.125 2020 30,500,000 33,133,065
San Antonio Electric & Gas System
Refunding Revenue Bonds Series 1989B 5.00 2016 11,000,000 10,629,630
San Antonio Electric & Gas System
Revenue Bonds Series 1987 5.00 2014 8,680,000 8,481,749
West Side Calhoun County Navigation District
Solid Waste Disposal Revenue Bonds
Union Carbide Chemical & Plastics Series 1991 A.M.T. 8.20 2021 17,550,000 19,553,859
Total 392,868,020
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Utah (1.9%)
Association Municipal Power System Hunter Series A
<S> <C> <C> <C> <C>
(AMBAC Insured) 5.50 2012 4,000,000 4,000,920
Carbon County Solid Waste Disposal
Refunding Revenue Bonds Sunnyside
Cogeneration Associates Series 1991 A.M.T. 9.25 2018 25,350,000(e)13,942,500
Housing Finance Agency Single Family Mortgage
Senior Bonds Series 1991C (FGIC Insured) 7.30 2011 860,000 910,198
Housing Finance Agency Single Family Mortgage
Senior Bonds Series 1991C (FGIC Insured) 7.35 2016 685,000 724,367
Hurricane Health Facilities Development Revenue Bonds
Mission Health Services Series 1990 10.50 2020 7,635,000 8,475,842
Intermountain Power Agency Power Supply
Refunding Revenue Bonds Series F (AMBAC Insured) 5.00 2013 5,000,000 4,925,300
Intermountain Power Agency Power Supply
Refunding Revenue Bonds Series 1993B
Inverse Floater 7.14 2011 7,600,000(d) 8,037,000
Intermountain Power Agency Power Supply
Refunding Revenue Bonds Series 1996C
(MBIA Insured) 5.70 2017 46,000,000 47,579,640
Intermountain Power Agency Power Supply
Revenue Bonds Series 1987A (MBIA Insured) 5.00 2012 8,000,000 7,942,400
Intermountain Power Agency Power Supply
Revenue Bonds Series 1989A-B 6.00 2023 13,665,000 13,821,793
Tooele County Pollution Control Revenue Bonds
Laidlaw Environmental Services Incorporated
Series 1997A A.M.T. 7.55 2027 4,000,000 4,389,600
Total 114,749,560
Virginia (0.6%)
Fairfax County Redevelopment & Housing Authority
Multi-family Housing Revenue Bonds
Burkeshire Commons Series 1996 7.60 2036 13,245,000 14,172,680
Hopewell City Industrial Development Authority
Pollution Control Refunding Revenue Bonds
Stone Container Series 1992 8.25 2010 3,170,000 3,574,460
Housing Development Authority Commonwealth
Mortgage Bonds Series 1992A 7.15 2033 15,000,000 15,798,000
Total 33,545,140
Washington (3.6%)
King County Housing Authority Pooled Housing
Refunding Revenue Bonds Series 1995A 7.20 2026 4,000,000 4,113,520
Longview Industrial Development Corporation Solid Waste
Revenue Bonds Weyerhauser Series 1991 A.M.T. 7.45 2013 20,000,000 21,788,000
Public Power Supply System Nuclear Project 1
Refunding Revenue Bonds Series A 6.50 2015 21,000,000 23,186,100
Public Power Supply System Nuclear Project 1 Refunding
Revenue Bonds Bonneville Power Administration
Series 1993A Inverse Floater (FSA Insured) 7.32 2011 25,000,000(d)28,375,000
Public Power Supply System Nuclear Project 1
Revenue Bonds Series 1989 6.00 2017 28,070,000 28,891,328
Public Power Supply System Nuclear Project 1
Revenue Bonds Series 1990A 6.00 2017 38,875,000 39,683,989
Public Power Supply System Nuclear Project 2
Revenue Bonds Series 1994A 5.375 2011 10,000,000 10,043,900
Public Power Supply System Nuclear Project 3
Revenue Bonds Series 1989B 5.50 2017-18 27,550,000 27,342,242
Snohomish County Public Utility District 1
Generation System Revenue Bonds Series 1986A 5.00 2020 17,750,000 17,423,223
State General Obligation
Refunding Revenue Bonds
Zero Coupon Series 1997A 5.95 2019 16,260,000(f) 5,017,836
State Housing Finance Commission
Refunding Revenue Bonds Horizon House
Series 1995A (Asset Guaranty Insured) 6.00 2017 3,700,000 3,853,217
State Housing Finance Commission
Refunding Revenue Bonds Horizon House
Series 1995A (Asset Guaranty Insured) 6.125 2027 3,850,000 4,007,003
Total 213,725,358
West Virginia (1.5%)
Kanawha County Pollution Control
Revenue Bonds Union Carbide Series 1984 7.35 2004 3,000,000 3,453,660
Marion County Solid Waste Disposal Facility
Revenue Bonds American Power Paper Recycling
Series 1993 A.M.T. 7.75 2011 20,000,000(e) 9,500,000
Marion County Solid Waste Disposal Facility
Revenue Bonds American Power Paper Recycling
Series 1994 A.M.T. 8.25 2011 10,000,000(e) 4,750,000
Marion County Solid Waste Disposal Facility
Revenue Bonds American Power Paper Recycling
Series 1995 A.M.T. 9.00 2011 5,000,000(e) 2,375,000
Marion County Solid Waste Disposal Facility
Revenue Bonds American Power Paper Recycling
Series 1995B A.M.T. 9.25 2011 5,000,000(e) 2,375,000
Mason County Pollution Control Refunding
Revenue Bonds Appalachian Power Series 1992J 6.60 2022 25,000,000 26,735,750
Pea Ridge Public Service District Sewer
Refunding Revenue Bonds Series 1990 9.25 2020 2,575,000 2,713,329
Putnam County Pollution Control Revenue Bonds
Appalachian Power Series C 6.60 2019 10,600,000 11,282,322
School Building Authority Capital Improvement
Revenue Bonds Series 1991A 6.00 2021 20,785,000 21,473,191
South Charleston Pollution Control Refunding
Revenue Bonds Union Carbide Series 1985 7.625 2005 3,000,000 3,492,390
Total 88,150,642
Wisconsin (0.6%)
Health & Education Facilities Authority
Revenue Bonds St. Clare Hospital 7.00 2022 12,115,000 13,062,393
Health Facilities Authority Refunding Revenue Bonds
Villa Clement Series 1986 8.75 2012 4,365,000 4,376,000
Madison Industrial Development
Refunding Revenue Bonds Madison Gas & Electric
Series 1992B 6.70 2027 19,300,000 20,949,957
Total 38,388,350
Wyoming (0.2%)
Green River & Rock Springs Sweetwater County
Joint Powers Water Board Revenue Bonds
Series 1988A 8.50 2007 2,500,000 2,581,925
Natrona County Hospital Revenue Bonds
Wyoming Medical Center 8.125 2010 6,500,000 7,043,270
State Farm Loan Board Capital Facilities
Revenue Bonds Series 1994 6.10 2024 5,000,000 5,253,850
Total 14,879,045
Total municipal bonds
(Cost: $5,158,090,986) $5,720,784,228
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Short-term securities (2.4%)
Issuer (c,i,j) Effective Amount Value(a)
yield payable at
maturity
Municipal notes
Allegheny County Industrial Development Authority
Revenue Bonds Longwood at Oakmont Series D
<S> <C> <C> <C>
07-01-27 3.85% $ 2,500,000 $ 2,500,000
Burke County Development Authority Pollution
Control Revenue Bonds Georgia Power Vogtle
3rd Series
09-01-25 3.80 2,000,000 2,000,000
Burke County Development Authority Pollution
Control Revenue Bonds Georgia Power Vogtle
4th Series
07-01-24 3.85 1,800,000 1,800,000
Burke County Development Authority Pollution
Control Revenue Bonds Georgia Power Vogtle
5th Series V.R.
07-01-24 4.00 19,000,000 19,000,000
Columbia Industrial Development Pollution
Control Revenue Bonds Alabama Power
Series C V.R.
10-01-22 4.00 9,600,000 9,600,000
Duluth Health Facilities Revenue Bonds
Miller-Dwan Medical Center V.R.
06-01-19 3.85 5,200,000 5,200,000
Forsyth Pollution Control Revenue Bonds
Portland General Electric Series A
06-01-13 3.85 3,500,000 3,500,000
Harris County Health Facilities Development
Hospital Revenue V.R. Methodist Hospital
12-01-25 3.85 7,900,000 7,900,000
Jackson County Pollution Control Revenue Bonds
Chevron Series 1992
06-01-23 3.85 200,000 200,000
Jackson County Port Facility Chevron V.R.
06-01-23 3.90 15,500,000 15,500,000
Louisiana State Offshore Term Authority
Deepwater Port Revenue Bonds Loop V.R.
09-01-08 3.85 4,000,000 4,000,000
Monroe County Development Authority
Georgia Power 2nd Series
07-01-25 4.00 4,100,000 4,100,000
New York City General Obligation Bonds
Fiscal 1995 Series B
06-15-23 3.85 2,500,000 2,500,000
New York City Municipal Water Finance Authority
Series G V.R. (FGIC Insured)
06-15-25 4.00 25,800,000 25,800,000
New York City Municipal Water Finance Authority
Series 1994C
06-15-23 3.85 4,500,000 4,500,000
New York City Municipal Water Finance Authority
Water & Sewer System Revenue Bonds
06-15-22 3.85 9,600,000 9,600,000
06-15-23 3.85 2,100,000 2,100,000
Putnam County Development Authority Pollution
Control Revenue Georgia Power Company
09-01-29 3.85 8,400,000 8,400,000
Valdez Marine Term Revenue Bonds
Exxon Pipeline Series A V.R.
12-01-33 3.85 5,000,000 5,000,000
Washington State Public Power Supply System
07-01-17 3.85 6,100,000 6,100,000
Washington State Public Power Supply System
07-01-17 3.90 3,000,000 3,000,000
Total short-term securities
(Cost: $142,300,000) $ 142,300,000
Total investments in securities
(Cost: $5,300,390,986)(l) $5,863,084,228
See accompanying notes to investments in securities.
(This annual report is not part of the prospectus.)
</TABLE>
<PAGE>
Investments in securities
Tax-Free High Yield Portfolio
Notes to investments in securities
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) Investments in bonds, by rating category as a percentage of total bonds, are
as follows:
(Unaudited)
Rating 11-30-97 11-30-96
AAA 30% 25%
AA 5 6
A 15 16
BBB 28 33
BB and below 22 20
Non-rated -- --
Total 100% 100%
(c) The following abbreviations are used in portfolio descriptions to identify
the insurer of the issue:
AMBAC -- American Municipal Bond Association Corporation
CGIC -- Capital Guaranty Insurance Company..
FGIC -- Financial Guarantee Insurance Corporation
FHA -- Federal Housing Authority
FSA -- Financial Security Assurance
GNMA -- Government National Mortgage Association
MBIA -- Municipal Bond Investors Assurance
(d) Inverse floaters represent securities that pay interest at a rate that
increases (decreases) in the same magnitude as, or in a multiple of, a decline
(increase) in market short-term rates. Interest rate disclosed is the rate in
effect on Nov. 30, 1997. Inverse floaters in the aggregate represent 5.8% of the
Portfolio's net assets as of Nov. 30, 1997.
(e) Non-income producing. Items identified are in default as to payment of
interest and/or principal.
(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) Pledged as initial deposit on the following open interest rate futures
contracts (see Note 4 to the financial statements):
Type of security Notional amount
Sales contracts
Municipal Bonds Dec. 1997 $150,000,000
(i) Interest rate varies to reflect current market conditions; rate shown is the
effective rate on Nov. 30, 1997.
(j) The Portfolio is entitled to receive principal amount from issuer or
corporate guarantor, if indicated in parentheses, after a day or a week's
notice. The maturity date disclosed represents the final maturity. The following
abbreviations are used in the portfolio descriptions:
V.R. -- Variable Rate
V.R.D.N. -- Variable Rate Demand Note
A.M.T. -- Alternative Minimum Tax -- As of Nov. 30, 1997, the value of
securities subject to alternative minimum tax represented 18.4%
of net assets.
(k) Identifies issues considered to be illiquid as to their marketability (see
Note 1 to the financial statements). Information concerning such security
holdings at Nov. 30, 1997, is as follows:
Security Acquisition Purchase
date cost
Bloomington Community Development
Refunding Revenue Note
24th Avenue Motel 03-31-88 $1,721,000
(l) At Nov. 30, 1997, the cost of securities for federal income tax purposes was
$5,300,394,205 and the aggregate gross unrealized appreciation and depreciation
based on that cost was:
Unrealized appreciation........................................$614,690,695
Unrealized depreciation.........................................(52,000,672)
-----------
Net unrealized appreciation....................................$562,690,023
<PAGE>
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) FINANCIAL STATEMENTS:
Financial statements filed electronically in Part B of this
Registration Statement for IDS High Yield Tax-Exempt Fund:
- Independent Auditors' Report dated January 2, 1998
- Statement of Assets and Liabilities, Nov. 30, 1997
- Statement of Operations, Year ended Nov. 30, 1997
- Statement of Changes in net assets, for the two-year
period ended Nov. 30, 1996 and Nov. 30, 1997
- Notes to financial statements
For Tax-Free High Yield Portfolio:
- Independent Auditor's Report dated January 2, 1998
- Statement of Assets and Liabilities, Nov. 30, 1997
- Statement of Operations, year ended Nov. 30, 1997
- Statement of changes in net assets, period from
May 13, 1996 to Nov. 30, 1996 and year ended Nov. 30, 1997
- Notes to financial statements
- Investments in securities, Nov. 30, 1997
- Notes to investments in securities
(b) EXHIBITS:
1. Copy of Articles of Incorporation, filed as Exhibit 1 to
Registrant's Post-Effective Amendment No. 19 to Registration
Statement No. 2-63552, is incorporated herein by reference.
2. Copy of By-laws, as amended Jan. 12, 1989, filed as Exhibit 2 to
Registrant's Post-Effective Amendment No. 20 to Registration Statement
No. 2-63552, is incorporated herein by reference.
3. Not applicable.
4. Form of Stock certificate, filed as Exhibit 4 to Registrant's
Registration Statement No.2-63552, on February 9, 1979, is incorporated
herein by reference.
5. Copy of Investment Management Services Agreement between Registrant
and American Express Financial Corporation, dated March 20,
1995, filed electronically as Exhibit 5 to Registrant's
Post-Effective Amendment No. 34 to Registration Statement No.2-63552,
is incorporated herein by reference. The agreement was assumed by the
Portfolio when the Fund adopted the master/feeder structure.
<PAGE>
6. Copy of Distribution Agreement Between Registrant and American Express
Financial Advisors Inc., dated March 20, 1995, filed electronically as
Exhibit 6 to Registrant's Post-Effective Amendment No. 34 to
Registration Statement No. 2-63552, is incorporated herein by reference
7. All employees are eligible to participate in a profit sharing plan.
Entry into the plan is Jan. 1 or July 1. The Registrant contributes
each year an amount up to 15 percent of their annual salaries, the
maximum deductible amount permitted under Section 404(a) of the
Internal Revenue Code.
8(a). Copy of Custodian Agreement between Registrant and First National Bank
of Minneapolis, dated August 16, 1979, filed electronically as
Exhibit 8(a) to Registrant's Post-Effective Amendment No. 34 to
Registration Statement No.2-63552, is incorporated herein by reference.
8(b). Copy of Addendum to the Custodian Agreement between Registrant, First
Bank National Association and American Express Financial Corporation,
dated May 13, 1996 filed electronically as Exhibit 8(b) to Registrant's
Post-Effective Amendment No. 34 to Registration Statement No. 2-63552,
is incorporated herein by reference.
9(a). Copy of Plan and Agreement of Merger, filed electronically as Exhibit
No. 9 to Registrant's Post-Effective Amendment No. 13 to Registration
Statement No. 2-63552, is incorporated herein by reference.
9(b). Copy of Transfer Agency Agreement between Registrant and American
Express Client Service Corporation, dated Jan. 1, 1998, is filed
electronically herewith.
9(c). Copy of License Agreement between Registrant and IDS Financial
Corporation dated January 25, 1988, filed as Exhibit 9(c) to
Registrant's Post-Effective Amendment No. 21 to Registration
Statement No. 2-63552, is incorporated herein by reference.
9(d). Copy of Shareholder Service Agreement between Registrant and American
Express Financial Advisors Inc., dated March 20, 1995, filed
electronically as Exhibit 9(d) to Registrant's Post-Effective Amendment
No. 34 to Registration Statement No. 2-63552, is incorporated herein
by reference.
9(e). Copy of Administrative Service Agreement between Registrant and
American Express Financial Advisors Inc., dated March 20, 1995, filed
electronically as Exhibit 9(e) to Registrant's Post-Effective Amendment
No. 34 to Registration Statement No. 2-63552, is incorporated herein
by reference.
9(f). Copy of Agreement and Declaration of Unitholders between Registrant and
Strategist Tax-Free Income Fund, Inc., dated May 13, 1996, filed
electronically as Exhibit 9(f) to Registrant's Post-Effective Amendment
No. 34 to Registration Statement No. 2-63552, is incorporated herein
by reference.
<PAGE>
9(g). Copy of Class Y Shareholder Service Agreement between IDS Precious
Metals Fund, Inc. and American Express Financial Advisors Inc., dated
May 9, 1997, filed electronically on or about May 27 1997 as Exhibit
9(e) to IDS Precious Metals Fund, Inc.'s Post-Effective Amendment
No. 30 to Registration Statement No. 2-93745, is incorporated herein by
reference.
Registrant's Class Y Shareholder Service Agreement differs from the one
incorporated by reference only by the fact that Registrant is one
executing party.
10. Opinion and consent of counsel as to the legality of the securities
being registered is filed electronically herewith.
11. Independent Auditors' Consent, is filed electronically herewith.
12. None.
13. Not Applicable.
14. Forms of Keogh, IRA and other retirement plans, filed as
Exhibits 14(a) through 14(n) to IDS Growth Fund, Inc., Post-Effective
Amendment No. 19 to Registration Statement No. 2-54516 are incorporated
herein by reference.
15. Copy of Plan and Agreement of Distribution between Registrant and
American Express Financial Advisors Inc., dated March 20, 1995, filed
electronically as Exhibit 15 to Registrant's Post-Effective Amendment
No. 34 to Registration Statement No. 2-63552, is incorporated herein
by reference.
16. Schedule for computation of each performance quotation provided in the
Registration Statement in response to Item 22, filed electronically as
Exhibit 16(b)to Registrant's Post-Effective Amendment No. 25 to
Registration Statement No. 2-63552 is incorporated herein by reference.
17. Financial Data Schedules,are filed electronically herewith.
18. Copy of 18f-3 plan, dated May 9, 1997, filed electronically on or about
January 26, 1998 as Exhibit 18 to IDS Equity Select Fund, Inc.'s
Post-Effective Amendment No. 86 to Registration Statement No.
2-13188, is incorporated herein by reference.
19(a). Directors' Power of Attorney dated January 7,1998 to sign amendments to
this Registration Statement is filed electronically herewith as
Exhibit 19(a).
19(b). Officers' Power of Attorney dated November 1, 1995, to sign amendments
to this Registration Statement, filed electronically herewith as
Exhibit 19(b) to Registrant's Post-Effective Amendment No. 33, is
incorporated herein by reference.
19(c). Trustees Power of Attorney dated January 7, 1998, is filed
electronically herewith as Exhibit 19(c).
<PAGE>
19(d) Officers' Power of Attorney dated April 11, 1996 filed electronically
as Exhibit 19(d) to Registrant's Post-Effective Amendment No. 34 to
Registration Statement No.2-63552, is incorporated herein by reference.
Item 25. Persons Controlled by or under Common Control with Registrant
None.
Item 26. Number of Holders of Securities
(1) (2)
Number of Record
Title of as of
Class Jan. 13, 1998
Common Stock
Class A 148,544
Class B 8,197
Class Y 2
Item 27. Indemnification
The Articles of Incorporation of the registrant provide that the Fund shall
indemnify any person who was or is a party or is threatened to be made a party,
by reason of the fact that she or he is or was a director, officer, employee or
agent of the Fund, or is or was serving at the request of the Fund as a
director, officer, employee or agent of another company, partnership, joint
venture, trust or other enterprise, to any threatened, pending or completed
action, suit or proceeding, wherever brought, and the Fund may purchase
liability insurance and advance legal expenses, all to the fullest extent
permitted by the laws of the State of Minnesota, as now existing or hereafter
amended. The By-laws of the registrant provide that present or former directors
or officers of the Fund made or threatened to be made a party to or involved
(including as a witness) in an actual or threatened action, suit or proceeding
shall be indemnified by the Fund to the full extent authorized by the Minnesota
Business Corporation Act, all as more fully set forth in the By-laws filed as an
exhibit to this registration statement.
<PAGE>
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 of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Any indemnification hereunder shall not be exclusive of any other rights of
indemnification to which the directors, officers, employees or agents might
otherwise be entitled. No indemnification shall be made in violation of the
Investment Company Act of 1940.
<PAGE>
<PAGE>
PAGE 1
<PAGE>
Item 29(c). Not applicable.
Item 30. Location of Accounts and Records
American Express Financial Corporation
IDS Tower 10
Minneapolis, MN 55440
Item 31. Management Services
Not Applicable.
Item 32. Undertakings
(a) Not Applicable.
(b) Not Applicable.
(c) The Registrant undertakes to furnish each person
to whom a prospectus is delivered with a copy of
the Registrant's latest annual report to
shareholders, upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant, IDS High Yield Tax-Exempt Fund Inc.,
certifies that it meets the requirements for the effectiveness of this Amendment
to its Registration Statement pursuant to Rule 485(b) under the Securities Act
of 1933 and has duly caused this Amendment to its Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Minneapolis and the State of Minnesota on the 26th day of January, 1998.
IDS HIGH YIELD TAX-EXEMPT FUND, INC.
By___________________________________
Matthew N. Karstetter, Treasurer
By /s/ William R. Pearce**
William R. Pearce, Chief Executive Officer
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 26th day of January, 1998.
Signature Capacity
/s/ William R. Pearce** President and Principal
William R. Pearce Executive Officer and
Director
/s/ H. B. Atwater, Jr.* Director
H. Brewster Atwater, Jr.
/s/ Lynne V. Cheney* Director
Lynne V. Cheney
/s/ William H. Dudley* Director
William H. Dudley
/s/ David R. Hubers* Director
David R. Hubers
/s/ Heinz F. Hutter* Director
Heinz F. Hutter
<PAGE>
Signature Capacity
/s/ Anne P. Jones* Director
Anne P. Jones
/s/ Alan K. Simpson* Director
Alan K. Simpson
/s/ Edson W. Spencer* Director
Edson W. Spencer
/s/ John R. Thomas* Director
John R. Thomas
/s/ Wheelock Whitney* Director
Wheelock Whitney
/s/ C. Angus Wurtele* Director
C. Angus Wurtele
*Signed pursuant to Directors' Power of Attorney dated January 7, 1998, filed
electronically as Exhibit 19(a) herewith by:
- ------------------------------
Leslie L. Ogg
**Signed pursuant to Officers' Power of Attorney dated November 1, 1995, filed
electronically as Exhibit 19(b) to Registrant's Post-Effective Amendment
No. 33, by:
- ------------------------------
Leslie L. Ogg
<PAGE>
SIGNATURE
Pursuant to the requirement of the Investment Company Act of 1940, the
Registrant 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 26th day of January, 1998.
TAX-FREE INCOME TRUST
By___________________________________
Matthew N. Karstetter, Treasurer
By /s/ William R. Pearce**
William R. Pearce, Chief Executive Officer
Pursuant to the requirements of the Investment Company Act of 1940, this
Amendment to its Registration Statement has been signed below by the following
persons in the capacities indicated on the 26th day of January, 1998.
Signatures Capacity
/s/ William R. Pearce* Trustee
William R. Pearce
/s/ H. Brewster Atwater, Jr.* Trustee
H. Brewster Atwater, Jr.
/s/ Lynne V. Cheney* Trustee
Lynne V. Cheney
/s/ William H. Dudley* Trustee
William H. Dudley
/s/ David R. Hubers* Trustee
David R. Hubers
<PAGE>
Signatures Capacity
/s/ Heinz F. Hutter* Trustee
Heinz F. Hutter
/s/ Anne P. Jones* Trustee
Anne P. Jones
/s/ Alan K. Simpson* Trustee
Alan K. Simpson
/s/ Edson W. Spencer* Trustee
Edson W. Spencer
/s/ John R. Thomas* Trustee
John R. Thomas
/s/ Wheelock Whitney* Trustee
Wheelock Whitney
/s/ C. Angus Wurtele* Trustee
C. Angus Wurtele
* Signed pursuant to Trustees Power of Attorney dated January 7, 1998, filed
electronically as Exhibit 19(c) herewith by:
______________________________________
Leslie L. Ogg
** Signed pursuant to Officers Power of Attorney dated April 11, 1996, filed
electronically as Exhibit 19(d) to Registrant's Post-Effective Amendmen
No. 34, by:
______________________________________
Leslie L. Ogg
<PAGE>
CONTENTS OF THIS
POST-EFFECTIVE AMENDMENT NO. 35
TO REGISTRATION STATEMENT NO. 2-63552
This post-effective amendment comprises the following papers and documents:
The facing sheet.
Cross reference sheet.
Part A.
The prospectus.
Part B.
Statement of Additional Information.
Financial Statements.
Part C.
Other information.
Exhibits.
The signatures.
<PAGE>
IDS HIGH YIELD TAX-EXEMPT FUND, INC.
FILE NO. 2-63552/811-2901
EXHIBIT INDEX
EXHIBIT 9(b): Transfer Agency Agreement, dated Jan. 1, 1998.
EXHIBIT 10: Opinion and consent of counsel.
EXHIBIT 11: Independent Auditors' Consent.
EXHIBIT 17: Financial Data Schedules.
EXHIBIT 19(a): Directors' Power of of Attorney, dated Jan. 7, 1998.
EXHIBIT 19(c): Trustees Power of Attorney, dated Jan. 7, 1998.
<PAGE>
TRANSFER AGENCY AGREEMENT
AGREEMENT dated as of January 1, 1998, between IDS High Yield Tax-Exempt Fund,
Inc., a Minnesota corporation, (the "Company" or "Fund"), and American Express
Client Service Corporation (the "Transfer Agent"), a Minnesota corporation.
In consideration of the mutual promises set forth below, the Company and the
Transfer Agent agree as follows:
1. Appointment of the Transfer Agent. The Company hereby appoints the Transfer
Agent, as transfer agent for its shares and as shareholder servicing agent
for the Company, and the Transfer Agent accepts such appointment and agrees
to perform the duties set forth below.
2. Compensation. The Company will compensate the Transfer Agent for the
performance of its obligations as set forth in Schedule A. Schedule A does
not include out-of-pocket disbursements of the Transfer Agent for which the
Transfer Agent shall be entitled to bill the Company separately.
The Transfer Agent will bill the Company monthly. The fee provided for
hereunder shall be paid in cash by the Company to the Transfer Agent within
five (5) business days after the last day of each month.
Out-of-pocket disbursements shall include, but shall not be limited to, the
items specified in Schedule B. Reimbursement by the Company for expenses
incurred by the Transfer Agent in any month shall be made as soon as
practicable after the receipt of an itemized bill from the Transfer Agent.
Any compensation jointly agreed to hereunder may be adjusted from time to
time by attaching to this Agreement a revised Schedule A, dated and signed
by an officer of each party.
3. Documents. The Company will furnish from time to time such certificates
documents or opinions as the Transfer Agent deems to be appropriate or
necessary for the proper performance of its duties.
4. Representations of the Company and the Transfer Agent.
(a) The Company represents to the Transfer Agent that all outstanding
shares are validly issued, fully paid and non-assessable by the
Company. When shares are hereafter issued in accordance with the terms
of the Company's Articles of Incorporation and its By-laws, such
shares shall be validly issued, fully paid and non-assessable by the
Company.
(b) The Transfer Agent represents that it is registered under Section
17A(c) of the Securities Exchange Act of 1934. The Transfer Agent
agrees to maintain the necessary facilities, equipment and personnel
to perform its duties and obligations under this agreement and to
comply with all applicable laws.
<PAGE>
5. Duties of the Transfer Agent. The Transfer Agent shall be responsible,
separately and through its subsidiaries or affiliates, for the following
functions:
(a) Sale of Fund Shares.
(1) On receipt of an application and payment, wired instructions and
payment, or payment identified as being for the account of a
shareholder, the Transfer Agent will deposit the payment, prepare
and present the necessary report to the Custodian and record the
purchase of shares in a timely fashion in accordance with the
terms of the Fund's prospectus. All shares shall be held in book
entry form and no certificate shall be issued unless the Fund is
permitted to do so by its prospectus and the purchaser so
requests.
(2) On receipt of notice that payment was dishonored, the Transfer
Agent shall stop redemptions of all shares owned by the purchaser
related to that payment, place a stop payment on any checks that
have been issued to redeem shares of the purchaser and take such
other action as it deems appropriate.
(b) Redemption of Fund Shares. On receipt of instructions to redeem shares
in accordance with the terms of the Fund's prospectus, the Transfer
Agent will record the redemption of shares of the Fund, prepare and
present the necessary report to the Custodian and pay the proceeds of
the redemption to the shareholder, an authorized agent or legal
representative upon the receipt of the monies from the Custodian.
(c) Transfer or Other Change Pertaining to Fund Shares. On receipt of
instructions or forms acceptable to the Transfer Agent to transfer the
shares to the name of a new owner, change the name or address of the
present owner or take other legal action, the Transfer Agent will take
such action as is requested.
(d) Exchange of Fund Shares. On receipt of instructions to exchange the
shares of the Fund for the shares of another fund in the IDS MUTUAL
FUND GROUP or other American Express Financial Corporation product in
accordance with the terms of the prospectus, the Transfer Agent will
process the exchange in the same manner as a redemption and sale of
shares.
(e) Right to Seek Assurance. The Transfer Agent may refuse to transfer,
exchange or redeem shares of the Fund or take any action requested by
a shareholder until it is satisfied that the requested transaction or
action is legally authorized or until it is satisfied there is no
basis for any claims adverse to the transaction or action. It may rely
on the provisions of the Uniform Act for the Simplification of
Fiduciary Security Transfers or the Uniform Commercial Code. The
Company shall indemnify the Transfer Agent for any act done or omitted
to be done in reliance on such laws or for refusing to transfer,
exchange or redeem shares or taking an requested action if it acts on
a good faith belief that the transaction or action is illegal or
unauthorized.
<PAGE>
(f) Shareholder Records, Reports and Services.
(1) The Transfer Agent shall maintain all shareholder accounts, which
shall contain all required tax, legally imposed and regulatory
information; shall provide shareholders, and file with federal
and state agencies, all required tax and other reports pertaining
to shareholder accounts; shall prepare shareholder mailing lists;
shall cause to be printed and mailed all required prospectuses,
annual reports, semiannual reports, statements of additional
information (upon request), proxies and other mailings to
shareholders; and shall cause proxies to be tabulated.
(2) The Transfer Agent shall respond to all valid inquiries related
to its duties under this Agreement.
(3) The Transfer Agent shall create and maintain all records in
accordance with all applicable laws, rules and regulations,
including, but not limited to, the records required by Section
31(a) of the Investment Company Act of 1940.
(g) Dividends and Distributions. The Transfer Agent shall prepare and
present the necessary report to the Custodian and shall cause to be
prepared and transmitted the payment of income dividends and capital
gains distributions or cause to be recorded the investment of such
dividends and distributions in additional shares of the Fund or as
directed by instructions or forms acceptable to the Transfer Agent.
(h) Confirmations and Statements. The Transfer Agent shall confirm each
transaction either at the time of the transaction or through periodic
reports as may be legally permitted.
(i) Lost or Stolen Checks. The Transfer Agent will replace lost or stolen
checks issued to shareholders upon receipt of proper notification and
will maintain any stop payment orders against the lost or stolen
checks as it is economically desirable to do.
(j) Reports to Company. The Transfer Agent will provide reports pertaining
to the services provided under this Agreement as the Company may
request to ascertain the quality and level of services being provided
or as required by law.
(k) Other Duties. The Transfer Agent may perform other duties for
additional compensation if agreed to in writing by the parties to this
Agreement.
6. Ownership and Confidentiality of Records. The Transfer Agent agrees that
all records prepared or maintained by it relating to the services to be
performed by it under the terms of this Agreement are the property of the
Company and may be inspected by the Company or any person retained by the
Company at reasonable times. The Company and Transfer Agent agree to
protect the confidentiality of those records.
<PAGE>
7. Action by Board and Opinion of Counsel. The Transfer Agent may rely on
resolutions of the Board of Directors (the "Board") or the Executive
Committee of the Board and on opinion of counsel for the Company.
8. Duty of Care. It is understood and agreed that, in furnishing the Company
with the services as herein provided, neither the Transfer Agent, nor any
officer, director or agent thereof shall be held liable for any loss
arising out of or in connection with their actions under this Agreement so
long as they act in good faith and with due diligence and are not negligent
or guilty of any willful misconduct. It is further understood and agreed
that the Transfer Agent may rely upon information furnished to it
reasonably believed to be accurate and reliable. In the event the Transfer
Agent is unable to perform its obligations under the terms of this
Agreement because of an act of God, strike or equipment or transmission
failure reasonably beyond its control, the Transfer Agent shall not be
liable for any damages resulting from such failure.
9. Term and Termination. This Agreement shall become effective on the date
first set forth above (the "Effective Date") and shall continue in effect
from year to year thereafter as the parties may mutually agree provided
that either party may terminate this Agreement by giving th other party
notice in writing specifying the date of such termination which shall be
not less than 60 days after the date of receipt of such notice. In the
event such notice is given by the Company, it shall be accompanied by a
vote of the Board, certified by the Secretary, electing to terminate this
Agreement and designating a successor transfer agent or transfer agents.
Upon such termination and at the expense of the Company, the Transfer Agent
will deliver to such successor a certified list of shareholders of the Fund
(with name, address and taxpayer identification or Social Security number),
a historical record of the account of each shareholder and the status
thereof, and all other relevant books, records, correspondence, and other
data established o maintained by the Transfer Agent under this Agreement in
the form reasonably acceptable to the Company, and will cooperate in the
transfer of such duties and responsibilities, including provisions for
assistance from the Transfer Agent's personnel in the establishment of
books, records and other data by such successor or successors.
10. Amendment. This Agreement may not be amended or modified in any manner
except by a written agreement executed by both parties.
11. Subcontracting. The Company agrees that the Transfer Agent may subcontract
for certain of the services described under this Agreement with the
understanding that there shall be no diminution in the quality or level of
the services and that the Transfer Agent remains fully responsible for the
services. Except for out-of-pocket expenses identified in Schedule B, the
Transfer Agent shall bear the cost of subcontracting such services, unless
otherwise agreed by the parties.
<PAGE>
12. Miscellaneous.
(a) This Agreement shall extend to and shall be binding upon the parties
hereto, and their respective successors and assigns; provided,
however, that this Agreement shall not be assignable without the
written consent of the other party.
(b) This Agreement shall be governed by the laws of the State of
Minnesota.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their respective officers as of the day and year written above.
IDS HIGH YIELD TAX-EXEMPT FUND, INC.
By:/s/ Leslie L. Ogg
Leslie L. Ogg
Vice President
AMERICAN EXPRESS CLIENT SERVICE CORPORATION
By:/s/ Barry J. Murphy
Barry J. Murphy
President
<PAGE>
Schedule A
IDS HIGH YIELD TAX-EXEMPT FUND, INC.
FEE
The annual per account fee for services under this agreement, accrued daily and
payable monthly, is as follows:
Class A Class B Class Y
$15.50 $16.50 $15.50
<PAGE>
Schedule B
OUT-OF-POCKET EXPENSES
The Company shall reimburse the Transfer Agent monthly for the following
out-of-pocket expenses:
o typesetting, printing, paper, envelopes, postage and return postage
for proxy soliciting material, and proxy tabulation costs
o printing, paper, envelopes and postage for dividend notices, dividend
checks, records of account, purchase confirmations, exchange
confirmations and exchange prospectuses, redemption confirmations,
redemption checks, confirmations on changes of address and any other
communication required to be sent to shareholders
o typesetting, printing, paper, envelopes and postage for prospectuses,
annual and semiannual reports, statements of additional information,
supplements for prospectuses and statements of additional information
and other required mailings to shareholders
o stop orders
o outgoing wire charges
o other expenses incurred at the request or with the consent of the
Company
<PAGE>
January 26, 1998
IDS High Yield Tax-Exempt Fund, Inc.
IDS Tower 10
Minneapolis, Minnesota 55440-0010
Gentlemen:
I have examined the Articles of Incorporation and the By-Laws of the Company and
all necessary certificates, permits, minute books, documents and records of the
Company, and the applicable statutes of the State of Minnesota, and it is my
opinion:
(a) That the Company is a corporation duly organized and existing
under the laws of the State of Minnesota with an authorized
capital stock of 10,000,000,000 shares, all of $.01 par
value,and that such shares may be issued as full or fractional
shares;
(b) That all such authorized shares are, under the laws of the
State of Minnesota, redeemable as provided in the Articles of
Incorporation of the Company and upon redemption shall have
the status of authorized shares and unissued shares;
(c) That the Company registered on April 24, 1979 an indefinite
number of shares pursuant to Rule 24f-2; and
(d) That shares which were sold at not less than their par value
and in accordance with applicable federal and state securities
laws were legally issued, fully paid and nonassessable.
I hereby consent that the foregoing opinion may be used in connection with this
Post-Effective Amendment.
Very truly yours,
Leslie L. Ogg
Attorney at Law
901 S. Marquette Ave., Suite 2810
Minneapolis, Minnesota 55402-3268
<PAGE>
Independent auditors' consent
- ------------------------------------------------------------------------------
The board and shareholders
IDS High Yield Tax-Exempt Fund, Inc.:
The board of trustees and unitholders Tax-Free Income Trust:
Tax-Free High Yield Portfolio
We consent to the use of our reports included or incorporated herein by
reference and to the references to our Firm under the headings "Financial
highlights" in Part A and "INDEPENDENT AUDITORS" in Part B of the Registration
Statement.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 27, 1998
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<DISTRIBUTIONS-OF-INCOME> 8167910
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 15867346
<NUMBER-OF-SHARES-REDEEMED> 6596087
<SHARES-REINVESTED> 1442620
<NET-CHANGE-IN-ASSETS> (175178725)
<ACCUMULATED-NII-PRIOR> 91536
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<GROSS-ADVISORY-FEES> 845593
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<GROSS-EXPENSE> 42868280
<AVERAGE-NET-ASSETS> 161571675
<PER-SHARE-NAV-BEGIN> 4.56
<PER-SHARE-NII> 0.23
<PER-SHARE-GAIN-APPREC> 0.08
<PER-SHARE-DIVIDEND> 0.23
<PER-SHARE-DISTRIBUTIONS> 0
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<NAME> IDS HIGH YIELD TAX-EXEMPT FUND CLASS Y
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</TABLE>
<TABLE> <S> <C>
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<SERIES>
<NUMBER> 4
<NAME> TAX-FREE HIGH YIELD PORTFOLIO
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</TABLE>
<PAGE>
DIRECTORS/TRUSTEES POWER OF ATTORNEY
City of Minneapolis
State of Minnesota
Each of the undersigned, as directors and 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
IDS Bond Fund, Inc. 2-51586 811-2503
IDS California Tax-Exempt Trust 33-5103 811-4646
IDS Discovery Fund, Inc. 2-72174 811-3178
IDS Equity Select Fund, Inc. 2-13188 811-772
IDS Extra Income Fund, Inc. 2-86637 811-3848
IDS Federal Income Fund, Inc. 2-96512 811-4260
IDS Global Series, Inc. 33-25824 811-5696
IDS Growth Fund, Inc. 2-38355 811-2111
IDS High Yield Tax-Exempt Fund, Inc. 2-63552 811-2901
IDS International Fund, Inc. 2-92309 811-4075
IDS Investment Series, Inc. 2-11328 811-54
IDS Managed Retirement Fund, Inc. 2-93801 811-4133
IDS Market Advantage Series, Inc. 33-30770 811-5897
IDS Money Market Series, Inc. 2-54516 811-2591
IDS New Dimensions Fund, Inc. 2-28529 811-1629
IDS Precious Metals Fund, Inc. 2-93745 811-4132
IDS Progressive Fund, Inc. 2-30059 811-1714
IDS Selective Fund, Inc. 2-10700 811-499
IDS Special Tax-Exempt Series Trust 33-5102 811-4647
IDS Stock Fund, Inc. 2-11358 811-498
IDS Strategy Fund, Inc. 2-89288 811-3956
IDS Tax-Exempt Bond Fund, Inc. 2-57328 811-2686
IDS Tax-Free Money Fund, Inc. 2-66868 811-3003
IDS Utilities Income Fund, Inc. 33-20872 811-5522
hereby constitutes and appoints William R. Pearce and Leslie L. Ogg or either
one of them, as her or his attorney-in-fact and agent, to sign for her or him in
her or his name, place and stead any and all further amendments to said
registration statements filed pursuant to said 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.
<PAGE>
Dated the 7th day of January, 1998.
/s/ H. Brewster Atwater, Jr. /s/ William R. Pearce
H. Brewster Atwater, Jr. William R. Pearce
/s/ Lynne V. Cheney /s/ Alan K. Simpson
Lynne V. Cheney Alan K. Simpson
/s/ William H. Dudley /s/ Edson W. Spencer
William H. Dudley Edson W. Spencer
/s/ David R. Hubers /s/ John R. Thomas
David R. Hubers John R. Thomas
/s/ Heinz F. Hutter /s/ Wheelock Whitney
Heinz F. Hutter Wheelock Whitney
/s/ Anne P. Jones /s/ C. Angus Wurtele
Anne P. Jones C. Angus Wurtele
<PAGE>
TRUSTEES POWER OF ATTORNEY
City of Minneapolis
State of Minnesota
Each of the undersigned, as trustees of the below listed open-end,
diversified investment companies that previously have filed registration
statements and amendments thereto pursuant to the requirements of the Investment
Company Act of 1940 with the Securities and Exchange Commission:
1940 Act
Reg. Number
Growth Trust 811-07395
Growth and Income Trust 811-07393
Income Trust 811-07307
Tax-Free Income Trust 811-07397
World Trust 811-07399
hereby constitutes and appoints William R. Pearce and Leslie L. Ogg or either
one of them, as her or his attorney-in-fact and agent, to sign for her or him in
her or his name, place and stead any and all further amendments to said
registration statements filed pursuant to said Act and any rules and regulations
thereunder, and to file such amendments with all exhibits thereto and other
documents in connection therewith with the Securities and Exchange Commission,
granting to either of them the full power and authority to do and perform each
and every act required and necessary to be done in connection therewith.
Dated the 7th day of January, 1998.
/s/ H. Brewster Atwater, Jr. /s/ William R. Pearce
H. Brewster Atwater, Jr. William R. Pearce
/s/ Lynne V. Cheney /s/ Alan K. Simpson
Lynne V. Cheney Alan K. Simpson
/s/ William H. Dudley /s/ Edson W. Spencer
William H. Dudley Edson W. Spencer
/s/ David R. Hubers /s/ John R. Thomas
David R. Hubers John R. Thomas
/s/ Heinz F. Hutter /s/ Wheelock Whitney
Heinz F. Hutter Wheelock Whitney
/s/ Anne P. Jones /s/ C. Angus Wurtele
Anne P. Jones C. Angus Wurtele
