IDS
High Yield
Tax-Exempt
Fund
1998 ANNUAL REPORT
(PROSPECTUS ENCLOSED)
(icon of) padlock
The goal of IDS High Yield Tax-Exempt Fund, Inc. is to provide high yield
generally exempt from federal income taxes.
(This annual report includes a prospectus that describes in detail the Fund's
objective, investment strategies, risks, sales charges, fees and other matters
of interest. Please read the prospectus carefully before you invest or send
money.)
Distributed by American Express Financial Advisors Inc.
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More Yield, Less Taxes
Most of the time, making money means paying taxes. But investors still can enjoy
income that generally is free from federal taxes by taking advantage of
tax-exempt bonds. High Yield Tax-Exempt Fund strives to provide the maximum
amount of tax-free income by focusing on municipal bonds that pay above-average
interest. However, certain income may be subject to state or local or the
alternative minimum tax. To reduce the investment risk, the Fund holds a large,
widely diversified portfolio of bonds providing protection to shareholders
seeking to avoid the impact of default by an individual bond. The result may be
a superior after-tax return for investors in higher tax brackets.
IDS HIGH YIELD TAX-EXEMPT FUND (This annual report is not part of the
prospectus.)
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Table of Contents
1998 ANNUAL REPORT
The purpose of this annual report is to tell investors how the Fund performed.
From the Chairman 4
From the Portfolio Manager 4
Fund Facts 6
The 10 Largest Holdings 7
Making the Most of the Fund 8
The Fund's Long-term Performance 9
Independent Auditors' Report (Fund) 10
Financial Statements (Fund) 11
Notes to Financial Statements (Fund) 14
Independent Auditors' Report (Portfolio) 19
Financial Statements (Portfolio) 20
Notes to Financial Statements (Portfolio) 23
Investments in Securities 27
Federal Income Tax Information 80
1999 PROSPECTUS
The prospectus, which is bound into the middle of this annual report, describes
the Fund in detail.
The Fund 3p
Goal 3p
Investment Strategy 3p
Risks 4p
Past Performance 6p
Fees and Expenses 8p
Management 9p
Buying and Selling Shares 9p
Valuing Fund Shares 9p
Investment Options 10p
Purchasing Shares 11p
Sales Charges 14p
Exchanging/Selling Shares 18p
Distributions and Taxes 22p
Personalized Shareholder Information 24p
Master/Feeder Structure 25p
About the Company 26p
Quick Telephone Reference 28p
Financial Highlights 29p
Appendix 31p
(This annual report is not part of the prospectus.) ANNUAL REPORT -- 1998
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From the Chairman
(picture of) William R. Pearce
William R. Pearce
Chairman of the board
If you're an experienced investor, you know that the past 12 months was a highly
volatile period in many financial markets. But history tells us that substantial
market moves are nothing new. Though they're often unpredictable, declines --
whether they're brief or long-lasting, moderate or substantial -- are always a
possibility.
That potential for such volatility reinforces the need for investors to review
periodically their long-term goals and examine whether their investment program
remains on track to achieving them. Your quarterly investment statements are one
part of that monitoring process. The other is a meeting with your American
Express financial advisor. That becomes even more important if there's a major
change in your financial situation or in the financial markets.
William R. Pearce
From the Portfolio Manager
(picture of) Kurt Larson
Kurt Larson
Portfolio manager
A largely favorable environment for bonds prevailed during the past fiscal year,
enabling IDS High Yield Tax-Exempt Fund to enjoy a productive period. For the 12
months -- December 1997 through November 1998 -- the Fund's Class A shares
generated a total return, which includes net asset value change and dividends,
of 6.67%. Consistent with the Fund's investment objective, dividend payments to
shareholders made up the greatest portion of the return.
The driving force in the bond market early in the period was the financial
crisis that first hit Asia in October 1997. Investors quickly concluded that the
situation would ultimately result in slower economic growth in the United States
and, thus, a continuance of the low rate of inflation. That potential scenario
sent long-term interest rates lower through early January, enhancing bond values
in the process. (Falling rates boost bond prices, while rising rates depress
them.)
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After several uneventful months, the bond market got another boost from mid-July
through September when the so-called "Asian flu" struck again, this time in
Russia and Latin America. As before, investors sought out the perceived safety
of U.S. bonds, and their buying drove interest rates down and bond prices up.
The rally was snuffed out during the final two months, however, as rates
reversed direction.
A SURGE IN SUPPLY
As for municipal bonds in particular, their performance was considerably muted
compared with U.S. Treasury bonds, which were the chief beneficiary of
investors' desire for a safe-haven investment. In addition, the municipal market
was flooded with a huge supply of bonds, as issuers took advantage of an
environment that allowed them to issue securities paying historically low
interest rates. Those factors combined to limit the price appreciation of
municipals.
The low-interest-rate environment also meant a slight decline in the Fund's
dividend, which has been the trend in recent years. Although the Fund does
invest in below-investment-grade municipal bonds (about 20% of assets during the
12 months) to enhance its payout, I haven't lowered the Fund's credit-quality
standards to counter the declining-rate pattern. My reasoning is that a modest
increase in the Fund's dividend wouldn't justify the increased risk inherent in
adding more lower-grade bonds.
The only change of note to the portfolio was a modest lengthening of its
duration early in the period. (Duration determines how sensitive the Fund's net
asset value is to interest-rate fluctuations. A longer duration increases the
sensitivity.) That strategy paid off when rates came down over the winter and
again from mid-summer through September.
As the new fiscal year begins, I think the fundamentals -- especially the
still-tame inflation rate -- continue to favor municipal bonds. While a
continuation of the low-inflation trend won't preclude some volatility in
interest rates and, therefore, the bond market, I think that it will provide
solid, longer-term support.
Kurt Larson
(This annual report is not part of the prospectus.) ANNUAL REPORT -- 1998
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Fund Facts
Class A -- 12-month performance
(All figures per share)
Net asset value (NAV)
Nov. 30, 1998 $4.68
Nov. 30, 1997 $4.64
Increase $0.04
Distributions -- Dec. 1, 1997 - Nov. 30, 1998
From income $0.26
From capital gains $ --
Total distributions $0.26
Total return* +6.67%**
Class B -- 12-month performance
(All figures per share)
Net asset value (NAV)
Nov. 30, 1998 $4.68
Nov. 30, 1997 $4.64
Increase $0.04
Distributions -- Dec. 1, 1997 - Nov. 30, 1998
From income $0.22
From capital gains $ --
Total distributions $0.22
Total return* +5.85%**
Class Y -- 12-month performance
(All figures per share)
Net asset value (NAV)
Nov. 30, 1998 $4.68
Nov. 30, 1997 $4.64
Increase $0.04
Distributions -- Dec. 1, 1997 - Nov. 30, 1998
From income $0.26
From capital gains $ --
Total distributions $0.26
Total return* +6.73%**
* The prospectus discusses the effect of sales charges, if any, on the various
classes.
** The total return is a hypothetical investment in the Fund with all
distributions reinvested.
IDS HIGH YIELD TAX-EXEMPT FUND (This annual report is not part of the
prospectus.)
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<TABLE>
<CAPTION>
The 10 Largest Holdings
Percent Value
(of net assets) (as of Nov. 30, 1998)
New York City Municipal Water Financial Authority
Water & Sewer System Revenue Bonds Series A
<S> <C> <C>
6.25% 2021 .98% $58,594,124
Eastern North Carolina Municipal Power Agency
Power System Refunding Revenue Bonds Series 1991A
5.75% 2019 .93 55,646,250
New Hampshire Industrial Development Authority
Pollution Control Revenue Bonds
State Public Service Series 1991B
7.50% 2021 .91 54,766,139
Northern California Power Agency Geothermal 3 Revenue Bonds
5.00% 2009 .83 49,653,860
Utah Intermountain Power Agency Power Supply
Refunding Revenue Bonds Series 1996C
5.70% 2017 .82 49,294,980
Monroe County Michigan Pollution Control
Revenue Bonds Detroit Edison A.M.T.
7.75% 2019 .71 42,671,440
Puerto Rico Electric Power Agency Revenue Bonds Series N
6.00% 2010 .68 40,538,800
Dormitory Authority New York City University
System Consolidated 2nd Generation Resource
Revenue Bonds Series 1990C
6.00% 2016 .67 40,500,361
Washington Public Power Supply System
Nuclear Project 1 Revenue Bonds Series 1990A
6.00% 2017 .67 40,372,465
Texas Alliance Airport Authority Special Facility
Revenue Bonds American Airlines Series 1990 A.M.T.
7.50% 2029 .67 40,120,476
Note: Certain of the Portfolio's investment income may be subject to the Alternative Minimum Tax (A.M.T.).
For further detail about these holdings, please refer to the section entitled
"Investments in securities" herein.
(icon of) pie chart
The 10 holdings here
make up 7.87% of the net assets
(This annual report is not part of the prospectus.) ANNUAL REPORT -- 1998
</TABLE>
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Making the Most of the Fund
BUILD YOUR ASSETS SYSTEMATICALLY
One of the best ways to invest in the Fund is by dollar-cost averaging -- a
time-tested strategy that can make market fluctuations work for you. To
dollar-cost average, simply invest a fixed amount of money regularly. You'll
automatically buy more shares when the Fund's share price is low, fewer shares
when it is high. The chart below shows how dollar-cost averaging works. In these
three hypothetical scenarios, you will see six months of share price
fluctuations.
This strategy does not ensure a profit or avoid a loss if the market declines.
But, if you can continue to invest regularly through changing market conditions
even when the price of your shares fall or the market declines, it can be an
effective way to accumulate shares to meet your long-term goals.
How dollar-cost averaging works
Jan Feb Mar Apr May Jun
$15 $16 $18 $20
$10 $10 $12 $14
$ 5
Accumulated shares* Average market Your average
price per share cost per share
42.25 $15 $14.20
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Jan Feb Mar Apr May Jun
$15
$10 $10 $8 $8 $10
$ 5 $5 $5
Accumulated shares* Average market Your average
price per share cost per share
85.0 $7.66 $7.05
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Jan Feb Mar Apr May Jun
$15
$10 $10 $8 $6 $7
$ 5 $4 $4
Accumulated shares* Average market Your average
price per share cost per share
103.5 $6.50 $5.80
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$100 invested per month. Total invested: $600
*Shares purchased is determined by dividing the amount invested per month by the
current share price.
THREE WAYS TO BENEFIT FROM A MUTUAL FUND:
o your shares increase in value when the Fund's investments do well
o you receive capital gains when the gains on investments sold by the Fund
exceed losses
o you receive income when the Fund's stock dividends, interest and short-term
gains exceed its expenses.
All three make up your total return. You potentially can increase your
investment if, like most investors, you reinvest your dividends and capital gain
distributions to buy additional shares of the Fund or another fund.
IDS HIGH YIELD TAX-EXEMPT FUND (This annual report is not part of
the prospectus.)
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The Fund's Long-term Performance
How $10,000 has grown in IDS High Yield Tax-Exempt Fund
$20,000 Lehman Brothers
Municipal Bond Index
$19,819
IDS High Yield
$10,000 Tax-Exempt Fund
Class A
$9,500
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Average annual total return (as of Nov. 30, 1998):
1 year Since 5 years 10 years
inception*
Class A +1.33% --% +4.91% +7.08%
Class B +1.85% +6.13% --% --%
Class Y +6.73% +7.59% --% --%
*Inception date was March 20, 1995.
Assumes: Holding period from 12/1/88 to 11/30/98. Returns do not reflect taxes
payable on distributions. Reinvestment of all income and capital gain
distributions for the Fund, with a value of $9,697. Also see "Past Performance"
in the Fund's current prospectus.
On the graph above you can see how the Fund's total return compared to a widely
cited performance index, the Lehman Brothers Municipal Bond Index. In comparing
High YieldTax-Exempt Fund (Class A) to the index, you should take into account
the fact that the Fund's performance reflects the maximum sales charge of 5%,
while such charges are not reflected in the performance of the index.
Your investment and return values fluctuate so that your shares, when redeemed,
may be worth more or less than the original cost. Average annual total return
figures reflect the impact of the applicable sales charge up to a maximum of 5%.
This was a period of widely fluctuating security prices. Past performance is no
guarantee of future results.
Lehman Brothers Municipal Bond Index is made up of a representative list of
general obligation, revenue, insured and prefunded 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 High Yield Tax-Exempt Fund.
(This annual report is not part of the prospectus.) ANNUAL REPORT -- 1998
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The financial statements contained in Post-Effective Amendment #37 to
Registration Statement No. 2-63552 filed on or about January 26, 1999, are
incorporated herein by reference.
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Federal Income Tax Information
The Fund is required by the Internal Revenue Code of 1986 to tell its
shareholders about the tax treatment of the dividends it pays during its fiscal
year. The dividends listed below were reported to you on your year-end
statement.
IDS High Yield Tax-Exempt Fund, Inc.
Fiscal year ended Nov. 30, 1998
Class A
Exempt-interest dividends -- taxable status explained below.
Payable date Per share
Dec. 26, 1997 $0.02232
Jan. 28, 1998 0.02362
Feb. 26, 1998 0.02237
March 26, 1998 0.01963
April 28, 1998 0.02347
May 27, 1998 0.02004
June 25, 1998 0.02046
July 27, 1998 0.02231
Aug. 26, 1998 0.02117
Sept. 24, 1998 0.02052
Oct. 26, 1998 0.02218
Nov. 24, 1998 0.02076
Total $0.25885
Taxable dividend -- income distribution.
Payable date Per share
Dec. 26, 1997 $0.00035
Total distributions $0.25920
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Class B
Exempt-interest dividends -- taxable status explained below.
Payable date Per share
Dec. 26, 1997 $0.01934
Jan. 28, 1998 0.02041
Feb. 26, 1998 0.01956
March 26, 1998 0.01693
April 28, 1998 0.02028
May 27, 1998 0.01725
June 25, 1998 0.01766
July 27, 1998 0.01923
Aug. 26, 1998 0.01828
Sept. 24, 1998 0.01771
Oct. 26, 1998 0.01907
Nov. 24, 1998 0.01797
Total $0.22369
Taxable dividend -- income distribution.
Payable date Per share
Dec. 26, 1997 $0.00035
Total distributions $0.22404
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Class Y
Exempt-interest dividends -- taxable status explained below.
Payable date Per share
Dec. 26, 1997 $0.02261
Jan. 28, 1998 0.02394
Feb. 26, 1998 0.02269
March 26, 1998 0.01993
April 28, 1998 0.02383
May 27, 1998 0.02032
June 25, 1998 0.02073
July 27, 1998 0.02261
Aug. 26, 1998 0.02145
Sept. 24, 1998 0.02080
Oct. 26, 1998 0.02252
Nov. 24, 1998 0.02106
Total $0.26249
Taxable dividend -- income distribution.
Payable date Per share
Dec. 26, 1997 $0.00035
Total distributions $0.26284
Federal taxation
Exempt-interest dividends are exempt from federal income taxes and should not be
included in shareholders' gross income.
Other taxation
Exempt-interest dividends may be subject to state and local taxes. Each
shareholder should consult a tax advisor about reporting this income for state
and local tax purposes.
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Source of income by state
Percentages of income from municipal securities earned by the Fund from various
states during the year ended Nov. 30, 1998 are listed below.
Alabama 0.468%
Alaska 0.233
Arizona 1.168
Arkansas 0.070
California 8.525
Colorado 7.446
Connecticut 0.026
Florida 4.353
Georgia 2.112
Hawaii 0.360
Idaho 0.012
Illinois 7.826
Indiana 2.388
Iowa 0.732
Kansas 0.024
Kentucky 1.071
Louisiana 3.033
Maine 0.118
Maryland 0.668
Massachusetts 3.152
Michigan 4.270
Minnesota 4.124
Mississippi 0.763
Missouri 0.711
Montana 0.008
Nebraska 0.024
Nevada 0.761
New Hampshire 2.333
New Jersey 0.223
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New Mexico 1.851
New York 9.183
North Carolina 3.519
North Dakota 0.335
Ohio 3.418
Oklahoma 1.240
Oregon 0.614
Pennsylvania 4.407
Puerto Rico 0.917
South Carolina 0.981
South Dakota 0.556
Tennessee 0.440
Texas 7.333
Utah 1.757
Virginia 0.727
Washington 2.980
Washington, DC 0.624
West Virginia 1.161
Wisconsin 0.682
Wyoming 0.273
IDS HIGH YIELD TAX-EXEMPT FUND (This annual report is not part of
the prospectus.)
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S-6430 N (1/99)
IDS High Yield Tax-Exempt Fund
IDS Tower 10
Minneapolis, MN 55440-0010
