<PAGE>
AXPSM Tax-Free
Money Fund
American
Express(R)
Funds
PROSPECTUS
MARCH 1, 1999
AXP Tax-Free Money Fund seeks to provide shareholders with as high a level of
current income exempt from federal income tax as is consistent with liquidity
and stability of principal.
Please note that this 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
Like all mutual funds, the Securities and Exchange Commission has not approved
or disapproved these securities or passed upon the adequacy of this prospectus.
Any representation to the contrary is a criminal offense.
AMERICAN EXPRESS (logo)
<PAGE>
Table of Contents
TAKE A CLOSER LOOK AT:
The Fund 3p
Goal 3p
Investment Strategy 3p
Risks 4p
Past Performance 5p
Fees and Expenses 6p
Management 7p
Buying and Selling Shares 7p
Valuing Fund Shares 7p
Purchasing Shares 7p
Transactions Through Third Parties
Exchanging/Selling Shares 10p
Distributions and Taxes 14p
Financial Highlights 20p
Appendix 21p
FUND INFORMATION KEY
[icon of magnifying glass] Goal and Investment Strategy
The Fund's particular investment goal and
the strategies it intends to use in pursuing
its goal.
[icon of die] Risks
The major risk factors associated with the
Fund.
[icon of checkbook] Fees and Expenses
The overall costs incurred by an investor in
the Fund, including sales charges and annual
expenses.
[icon of folder] Management
The individual or group designated by the
investment manager to handle the Fund's
day-to-day management.
[icon of stack of dollar bills] Financial Highlights
Tables showing the Fund's financial
performance.
<PAGE>
The Fund
GOAL
AXP Tax-Free Money Fund (the Fund) seeks to provide shareholders with as high a
level of current income exempt from federal income tax as is consistent with
liquidity and stability of principal. Because any investment involves risk, the
Fund cannot guarantee this goal.
INVESTMENT STRATEGY
The Fund's assets primarily are invested in debt obligations. Under normal
market conditions, at least 80% of the Fund's net assets are invested in
short-term debt obligations whose interest is exempt from federal income taxes.
This 80% threshold is a fundamental policy of the Fund. These securities must be
rated in one of the two highest categories by national rating services. The Fund
may invest up to 25% of its net assets in securities of issuers located in the
same state or region or in industrial revenue bonds.
Because the Fund seeks to maintain a constant net asset value of $1.00 per
share, capital appreciation is not expected to play a role in the Fund's return.
An investment in the Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
The selection of short-term debt obligations is the primary decision in building
the investment portfolio.
American Express Financial Corporation (AEFC), the Fund's investment manager,
chooses debt obligations by:
o Considering opportunities and risks in short-term municipal obligations (such
as municipal bonds and notes) given current interest rates.
o Identifying bonds and notes that:
- -- have interest not subject to the alternative minimum tax, and
- -- have short-term maturities,
o Identifying obligations that contribute to portfolio diversification.
The Fund restricts its investments to instruments that meet certain maturity and
quality standards required for tax-exempt money market funds. For example, the
Fund:
o limits its average portfolio maturity to 90 days or less; and
o buys obligations with remaining maturities of 397 days or less.
<PAGE>
AEFC chooses investments by:
o Considering opportunities and risks given current interest rates and
expected interest rates.
o Identifying obligations that:
- -- have characteristics better than that of comparable obligations, and
- -- identifying obligations that contribute to portfolio diversification.
In evaluating whether to sell a security, AEFC considers, among other factors,
if:
- -- the issuer's credit rating declines or AEFC expects a decline (the Fund
may continue to own securities that are down-graded until the board of
directors believes it is advantageous to sell),
- -- political, economic, or other events could affect the issuer's performance,
and
- -- the issuer or the security continues to meet the other standards
described above.
If suitable tax-exempt securities are not available, the Fund may invest up to
20% of its net assets in taxable investments, including government securities,
bank obligations, commercial paper, and repurchase agreements. The Fund also may
invest, from time to time, in securities that are illiquid.
For more information on strategies and holdings, see the Fund's Statement of
Additional Information (SAI) and the annual/semiannual reports.
RISKS
Please remember that with any mutual fund investment you may lose money.
Although the Fund seeks to maintain the value of your investment at $1.00 per
share, it is possible to lose money by investing in the Fund. The Fund's yield
will vary from day-to-day. Principal risks associated with an investment in the
Fund include:
Market Risk
Interest Rate Risk
<PAGE>
Market Risk
The market may drop and you may lose money. Market risk may affect a single
issuer, sector of the economy, industry, or the market as a whole. The market
value of all securities may move up and down, sometimes rapidly and
unpredictably.
Interest Rate Risk
The risk of losses attributable to changes in interest rates. This term is
generally associated with bond prices (when interest rates rise, bond prices
fall).
PAST PERFORMANCE
The following bar chart and table indicate the risks and variability of
investing in the Fund by showing how the Fund's performance has varied for each
full calendar year shown on the chart below. How the Fund has performed in the
past does not indicate how the Fund will perform in the future.
Performance (based on calendar years)
+5.61%
+5.20%
+3.79% +3.24% +3.18%
+2.95% +2.94%
2.24% +2.09%
+1.59%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
During the period shown in the bar chart, the highest return for a calendar
quarter was +1.45% (quarter ending June 1989) and the lowest return for a
calendar quarter was +0.36% (quarter ending March 1994).
<PAGE>
Average Annual Total Returns (as of Dec. 31, 1998)
1 year 5 years 10 years
Tax-Free Money +2.94% +2.88% +3.28%
This table shows total returns from hypothetical investments in shares of the
Fund.
For purposes of this calculation we assumed no adjustments for taxes paid by an
investor on the reinvested income and capital gains.
FEES AND EXPENSES
Fund investors pay various expenses. The table below describes the fees and
expenses that you may pay if you buy and hold shares of the Fund.
Shareholder Fees (fees paid directly from your investment)
Maximum sales charge (load) imposed on purchases
(as a percentage of offering price) none
Maximum deferred sales charge (load) imposed on sales
(as a percentage of offering price at time of purchase) none
Annual Fund operating expenses (expenses that are deducted from Fund assets) As
a percentage of average daily net assets:
Management fees 0.31%
Distribution (12b-1) fees 0.00%
Other expenses* 0.23%
Total 0.54%
* Other expenses include an administrative services fee, a transfer agency fee
and other nonadvisory expenses.
<PAGE>
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
Assume you invest $10,000 and the Fund earns a 5% annual return. The operating
expenses remain the same each year. If you hold your shares until the end of the
years shown, your costs would be:
1 year 3 years 5 years 10 years
$55 $173 $302 $680
This example does not represent actual expenses, past or future. Actual expenses
may be higher or lower than those shown.
MANAGEMENT
Terry Fettig, senior portfolio manager, joined AEFC in 1986. He has managed this
Fund since April 1993. He also serves as portfolio manager of AXP Cash
Management Fund, AXP Intermediate Tax-Exempt Fund, IDS Life Moneyshare Fund and
IDS Life Series Fund, Money Market Portfolio.
Buying and Selling Shares
VALUING FUND SHARES
The NAV is the value of a single Fund share. The NAV usually changes daily, and
is calculated at the close of business of the New York Stock Exchange, normally
3 p.m. Central Standard Time (CST), each business day (any day the New York
Stock Exchange is open).
The Fund's investments are valued at amortized cost, which approximates market
value, as explained in the SAI. Although the Fund cannot guarantee it will
always be able to maintain a constant net asset value of $1 per share, it will
use its best efforts to do so.
PURCHASING SHARES
To purchase shares through a brokerage account or from entities other than
American Express Financial Advisors Inc., please consult your selling agent. The
following section explains how you can purchase shares from American Express
Financial Advisors (the Distributor).
If you do not have a mutual fund account, you need to establish one. Your
financial advisor will help you fill out and submit an application. Your
application will be accepted only when federal funds (funds of the Federal
Reserve System) are available to the Fund, normally within three days of receipt
of your application. Once your account is set up, you can choose among several
<PAGE>
convenient ways to invest. When you purchase shares for a new or existing
account, your order will be priced at the next NAV calculated after your order
is accepted by the Fund.
Important: When you open an account, you must provide your correct Taxpayer
Identification Number (TIN), which is either your Social Security or Employer
Identification number.
If you do not provide the correct TIN, you could be subject to backup
withholding of 31% of taxable distributions and proceeds from certain sales and
exchanges. You also could be subject to further penalties, such as:
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, and
o criminal penalties for falsifying information.
You also could be subject to backup withholding if the IRS requires us to do so
or if you failed to report required interest or dividends on your tax return.
<TABLE>
<CAPTION>
How to determine the correct TIN
For this type of account: Use the Social Security or Employer Identification number
of:
<S> <C>
Individual or joint account The individual or one of the individuals listed on the
joint account
Custodian account of a minor
(Uniform Gifts/Transfers to Minors Act) The minor
A living trust The grantor-trustee (the person who puts the money into the
trust)
An irrevocable trust, pension trust or estate The legal entity (not the personal representative or trustee, unless no
legal entity is designated in the account title)
Sole proprietorship The owner
Partnership The partnership
Corporate The corporation
Association, club or tax-exempt organization The organization
</TABLE>
For details on TIN requirements, contact your financial advisor for federal Form
W-9, "Request for Taxpayer Identification Number and Certification."
<PAGE>
Three ways to invest
1 By mail:
Once your account has been established, send your check with the
account number on it to:
American Express Funds
P.O. Box 74
Minneapolis, MN 55440-0074
Minimum amounts
Initial investment: $2,000
Additional investments: $100
Account balances: $1,000
If your account balance falls below $1,000, you will be asked to increase it to
$1,000 or establish a scheduled investment plan. If you do not do so within 30
days, your shares can be sold and the proceeds mailed to you.
2 By scheduled investment plan:
Contact your financial advisor to set up one of the following
scheduled plans:
o automatic payroll deduction,
o bank authorization,
o direct deposit of Social Security check, or
o other plan approved by the Fund.
Minimum amounts
Initial investment: $100
Additional investments: $100/mo.
Account balances: none (on active plans of monthly payments)
If your account falls below $2,000, you must make payments at least monthly.
<PAGE>
3 By wire or electronic funds transfer:
If you have an established account, you may wire money to:
Norwest Bank Minnesota
Routing Transit No. 091000019
Give these instructions:
Credit American Express Financial Advisors Account #0000030015 for personal
account # (your account number) for (your name). Please remember that you need
to provide all 10 digits.
If this information is not included, the order may be rejected, and all money
received by the Fund, less any costs the Fund or American Express Client Service
Corporation (AECSC) incurs, will be returned promptly.
Minimum amounts
Each wire investment: $1,000
TRANSACTIONS THROUGH THIRD PARTIES
You may buy or sell shares through certain 401(k) plans, banks, broker-dealers,
financial advisors or other investment professionals. These organizations may
charge you a fee for this service and may have different policies. Some policy
differences may include different minimum investment amounts, exchange
privileges, fund choices and cutoff times for investments. The Fund and the
Distributor are not responsible for the failure of one of these organizations to
carry out its obligations to its customers. Some organizations may receive
compensation from the Distributor or its affiliates for shareholder
recordkeeping and similar services. When authorized by the Fund, some
organizations may designate selected agents to accept purchase or sale orders on
the Fund's behalf. To buy or sell shares through third parties or determine if
there are policy differences, please consult your selling agent. For other
pertinent information related to buying or selling shares, please refer to the
appropriate section in the prospectus.
EXCHANGING/SELLING SHARES
Exchanges You can exchange your Fund shares for Class A shares of any other
publicly offered American Express mutual fund. If your initial investment was in
this Fund, you may exchange Fund shares for Class B shares of another fund. For
complete information on the other funds, including fees and expenses, read that
fund's prospectus carefully. Your exchange will be priced at the next NAV
calculated after it is accepted by that fund.
If your initial investment was in this Fund, and you exchange into a non-money
market fund, you will pay an initial sales charge if you exchange into Class A
and be subject to a contingent deferred sales charge if you exchange into Class
B. If your initial investment was in Class A shares of a non-money market fund
and you exchange shares into this Fund, you may exchange that amount, including
dividends earned on that amount, without paying a sales charge.
You may make up to three exchanges (1 1/2 round trips) within any 30-day period.
These limits do not apply to certain employee benefit plans. Exceptions may be
allowed with pre-approval of the Fund.
<PAGE>
Other exchange policies:
o Exchanges of Class A shares of other American Express mutual funds to this
Fund will be accepted. Exchanges of Class B shares to this Fund will not be
accepted.
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 another
exchange.
o If your shares are pledged as collateral, the exchange will be delayed
until AECSC receives written approval from the secured party.
Selling Shares
You can sell your shares at any time. The payment will be mailed within seven
days after accepting your request.
When you sell shares, the amount you receive may be more or less than the amount
you invested. Your sale price will be the next NAV calculated after your request
is accepted by the Fund.
The Fund reserves the right to redeem in kind.
For more details and a description of other sales policies, please see the SAI.
<PAGE>
To sell or exchange shares held through a brokerage account or with entities
other than American Express Financial Advisors, please consult your selling
agent. The following section explains how you can exchange or sell shares held
with American Express Financial Advisors.
Requests to sell shares of the Fund are not allowed within 30 days of a
telephoned-in address change.
Important: If you request a sale 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 payment is made.
(Payment may be made earlier if yor bank provides evidence satisfactory to the
Fund and AECSC that your check has cleared.)
Three ways to request an exchange or sale of shares
1 By letter:
Include in your letter:
o the name of the fund(s),
o your mutual fund account number(s) (for exchanges, both funds must be
registered in the same ownership),
o your TIN,
o the dollar amount or number of shares you want to exchange or sell,
o signature(s) of all registered account owners,
o for sales, indicate how you want your money delivered to you, and
o any paper certificates of shares you hold.
Regular mail:
American Express Client Service Corporation
Attn: Transactions
P.O. Box 534
Minneapolis, MN 55440-0534
Express mail:
American Express Client Service Corporation
Attn: Transactions
733 Marquette Ave.
Minneapolis, MN 55402
<PAGE>
2 By telephone:
American Express Client Service Corporation
Telephone Transaction Service
800-437-3133 or 612-671-3800
o The Fund and AECSC will use reasonable procedures to confirm authenticity of
telephone exchange or sale requests.
o Telephone exchange and sale privileges automatically apply to all accounts
except custodial, corporate or qualified retirement accounts. You may request
that these privileges NOT apply by writing AECSC. Each registered owner must
sign the request.
o Acting on your instructions, your financial advisor may conduct telephone
transactions on your behalf.
o Telephone privileges may be modified or discontinued at any time.
Minimum sale amount: $100 Maximum sale amount: $50,000
3 By draft:
Free drafts are available and can be used just like a check to withdraw
$100 or more from your account. The shares in your account earn dividends
until they are redeemed by the Fund to cover your drafts. Most accounts will
automatically receive free drafts. However, to receive drafts on qualified or
custodial business accounts, you must contact AECSC. A request form will be
supplied and must be signed by each registered owner. Your draft writing
privilege may be modified or discontinued at any time.
Minimum amount
Redemption: $100
<PAGE>
Three ways to receive payment when you sell shares
1 By regular or express mail:
o Mailed to the address on record.
o Payable to names listed on the account.
NOTE: The express mail delivery charges you pay will vary depending on the
courier you select.
2 By wire or electronic funds transfer:
o Minimum wire: $1,000.
o Request that money be wired to your bank.
o Bank account must be in the same ownership as the American Express mutual
fund account.
NOTE: Pre-authorization required. For instructions, contact your financial
advisor or AECSC.
3 By scheduled payout plan:
o Minimum payment: $50.
o Contact your financial advisor or AECSC to set up regular payments 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.
Distributions and Taxes
The Fund distributes to Shareholders (the variable accounts or subaccounts)
dividends and capital gains to qualify as a regulated investment company and to
avoid paying corporate income and excise taxes.
DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS
The Fund's net investment income is distributed to you as dividends. Capital
gains are realized when a security is sold for a higher price than was paid for
it. Net short-term capital gains are included in net investment income.
Long-term capital gains are realized when a security is held for more than one
year. The Fund offsets any net realized capital gains by any available capital
loss carryovers. Net realized long-term capital gains, if any, are distributed
by the end of the calendar year as capital gain distributions.
<PAGE>
REINVESTMENTS
Dividends and capital gain distributions are automatically reinvested in
additional shares in the same class of the Fund, unless:
o you request distributions in cash, or
o you direct the Fund to invest your distributions in the same class of any
publicly offered American Express mutual fund for which you have previously
opened an account.
We reinvest the distributions for you at the next calculated NAV after the
distribution is paid.
If you choose cash distributions, you will receive cash only for distributions
declared after your request has been processed.
TAXES
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.
If you buy shares shortly before a distribution you will pay taxes on money
earned by the Fund before you were a shareholder. You pay the full
pre-distribution price for the shares, then receive a portion of your investment
back as a distribution, which is taxable.
<PAGE>
For tax purposes, an exchange is considered a sale and purchase and may result
in a gain or loss. A sale is a taxable transaction. If you sell shares for more
than their cost, the difference is a capital gain. Your gain may be short term
(for shares held for one year or less) or long term (for shares held for more
than one year). If you sell shares for less than their cost, the difference is a
capital loss. If you buy Class A shares of this or another American Express
mutual fund and within 91 days exchange into this Fund, you may not include the
sales charge in your calculation of tax gain or loss on the sale of the first
fund you purchased. The sales charge may be included in the calculation of your
tax gain or loss on a subsequent sale.
Selling shares held in an IRA or qualified retirement account may subject you to
federal taxes, penalties and reporting requirements. Please consult your tax
advisor.
Important: This information is a brief and selective summary of some of the tax
rules that apply to this Fund. Because tax matters are highly individual and
complex, you should consult a qualified tax advisor.
YEAR 2000
The Fund could be adversely affected if the computer systems used by AEFC and
the Fund's other service providers do not properly process and calculate
date-related information from and after Jan. 1, 2000.
While Year 2000-related computer problems could have a negative effect on the
Fund, AEFC is working to avoid such problems and to obtain assurances from
service providers that they are taking similar steps. The companies or
governments in which the Fund invests also may be adversely affected by Year
2000 issues.
INVESTMENT MANAGER
The investment manager of the Fund is AEFC, located at IDS Tower 10,
Minneapolis, MN 55440-0010. The Fund pays AEFC a fee for managing its assets.
Under the Investment Management Services Agreement, the fee for the most recent
fiscal year was 0.31% of its average daily net asets. Under the agreement, the
Fund also pays taxes, brokerage commisions and nonadvisory expenses. AEFC is a
wholly-owned subsidiary of American Express Company, a financial services
company with headquarters at American Express Tower, World Financial Center, New
York, NY 10285.
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights
Fiscal period ended Dec. 31,
Per share income and capital changesa
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
Net asset value, beginning of period $1.00 $1.00 $1.00 $1.00 $1.00
Income from investment operations:
Net investment income (loss) .03 .03 .03 .03 .02
Less distributions:
Dividends from net investment income (.03) (.03) (.03) (.03) (.02)
Net asset value, end of period $1.00 $1.00 $1.00 $1.00 $1.00
Ratios/supplemental data
1998 1997 1996 1995 1994
Net assets, end of period (in millions) $173 $152 $157 $146 $133
Ratio of expenses to average daily net assetsb .54% .55% .55% .58% .68%
Ratio of net investment income (loss) to average
daily net assets 2.93% 3.13% 2.94% 3.19% 2.11%
Total return 2.94% 3.18% 2.95% 3.24% 2.09%
</TABLE>
a For a share outstanding throughout the year. Rounded to the nearest cent.
b Effective fiscal year 1996, expense ratio is based on total expenses of the
Fund before reduction of earnings credits on cash balances.
The information in this table 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.
<PAGE>
Appendix
1999 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:
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
$104,050-$158,550 range. Under Adjusted Gross Income, $175,000 is in the
$126,600 to $189,950 column. The Taxable Income line and Adjusted Gross Income
column meet at 31.93%. This is the rate you'll use in Step 2.
<PAGE>
<TABLE>
<CAPTION>
Adjusted gross income*
<S> <C> <C> <C> <C>
Taxable income** $0 $126,600 $189,950
to to to Over
$126,600(1) $189,950(2) $312,450(3) $312,450(2)
- ---------------------------------------------------------------------------------------------------
Married Filing Jointly
$ 0 - $ 43,050 15.00%
43,050 - 104,050 28.00 28.84%
104,050 - 158,550 31.00 31.93 33.29%
158,550 - 283,150 36.00 37.08 38.66 37.08%
283,150 + 39.60 42.53*** 40.79
- ---------------------------------------------------------------------------------------------------
Adjusted gross income*
- ---------------------------------------------------------------------------------------------------
Taxable income** $0 $126,600
to to Over
$126,600(1) $249,100(3) $249,100(2)
- ---------------------------------------------------------------------------------------------------
Single
===================================================================================================
$ 0 - $ 25,750 15.00%
25,750 - 62,450 28.00
62,450 - 130,250 31.00 32.61%
130,250 - 283,150 36.00 37.87 37.08%
283,150 + 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 $312,450 and your taxable income exceeds $283,150.
(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:
- ---------------------------------------------------------------------------------------------------
2.50% 3.00% 3.50% 4.00% 4.50% 5.00% 5.50% 6.00%
- ---------------------------------------------------------------------------------------------------
Marginal Tax Rates Equal the Taxable Rates shown below:
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
15.00% 2.94 3.53 4.12 4.71 5.29 5.88 6.47 7.06
28.00% 3.47 4.17 4.86 5.56 6.25 6.94 7.64 8.33
28.84% 3.51 4.22 4.92 5.62 6.32 7.03 7.73 8.43
31.00% 3.62 4.35 5.07 5.80 6.52 7.25 7.97 8.70
31.93% 3.67 4.41 5.14 5.88 6.61 7.35 8.08 8.81
32.61% 3.71 4.45 5.19 5.94 6.68 7.42 8.16 8.90
33.29% 3.75 4.50 5.25 6.00 6.75 7.50 8.24 8.99
36.00% 3.91 4.69 5.47 6.25 7.03 7.81 8.59 9.38
37.08% 3.97 4.77 5.56 6.36 7.15 7.95 8.74 9.54
37.87% 4.02 4.83 5.63 6.44 7.24 8.05 8.85 9.66
38.66% 4.08 4.89 5.71 6.52 7.34 8.15 8.97 9.78
39.60% 4.14 4.97 5.79 6.62 7.45 8.28 9.11 9.93
40.79% 4.22 5.07 5.91 6.76 7.60 8.44 9.29 10.13
42.53% 4.35 5.22 6.09 6.96 7.83 8.70 9.57 10.44
- ---------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
American
Express(R)
Funds
This Fund, along with the other American Express mutual funds, is distributed by
American Express Financial Advisors Inc. and can be purchased from an American
Express financial advisor or from other authorized broker-dealers or third
parties. The Funds can be found under the "Amer Express" banner in most mutual
fund quotations.
Additional information about the Fund and its investments is available in the
Fund's SAI, annual and semiannual reports to shareholders. In the Fund's annual
report, you will find a discussion of market conditions and investment
strategies that significantly affected the Fund during its last fiscal year. The
SAI is incorporated by reference in this prospectus. For a free copy of the SAI,
the annual report or the semiannual report contact your selling agent or
American Express Client Service Corporation.
American Express Client Service Corporation
P.O. Box 534, Minneapolis, MN 55440-0534
800-862-7919 TTY: 800-846-4852
Web site address:
http://www.americanexpress.com/advisors
You may review and copy information about the Fund, including the SAI, at the
Securities and Exchange Commission's (Commission) Public Reference Room in
Washington, D.C. (for information about the public reference room call
1-800-SEC-0330). Reports and other information about the Fund are available on
the Commission's Internet site at http://www.sec.gov. Copies of this information
may be obtained by writing and paying a duplicating fee to the Public Reference
Section of the Commission, Washington, D.C. 20549-6009.
Investment Company Act File #811-3003
Ticker Symbol
Class A:ITFXX
AMERICAN EXPRESS (logo)
S-6433-99 M (2/99)
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
FOR
AXPSM TAX-FREE MONEY FUND (the Fund)
March 1, 1999
This Statement of Additional Information (SAI) is not a prospectus. It should be
read together with the prospectus and the financial statements contained in the
most recent Annual Report to shareholders (Annual Report) that may be obtained
from your financial advisor or by writing to American Express Client Service
Corporation, P.O. Box 534, Minneapolis, MN 55440-0534 or by calling
800-862-7919.
The Independent Auditors' Report and the Financial Statements, including Notes
to the Financial Statements and the Schedule of Investments in Securities,
contained in the Annual Report are incorporated in this SAI by reference. No
other portion of the Annual Report, however, is incorporated by reference. The
prospectus for the Fund, dated the same date as this SAI, also is incorporated
in this SAI by reference.
<PAGE>
AXP Tax-Free Money Fund
TABLE OF CONTENTS
Mutual Fund Checklist..................................................p. 3
Fundamental Investment Policies........................................p. 5
Investment Strategies and Types of Investments.........................p. 6
Information Regarding Risks and Investment Strategies..................p. 7
Security Transactions..................................................p.15
Brokerage Commissions Paid to Brokers Affiliated with
American Express Financial Corporation.................................p.17
Performance Information................................................p.18
Valuing Fund Shares....................................................p.20
Investing in the Fund..................................................p.21
Selling Shares.........................................................p.22
Pay-out Plans..........................................................p.23
Taxes..................................................................p.24
Agreements.............................................................p.25
Organizational Information.............................................p.27
Board Members and Officers.............................................p.29
Compensation for Board Members.........................................p.32
Independent Auditors...................................................p.32
Appendix: Description of Ratings......................................p.33
<PAGE>
MUTUAL FUND CHECKLIST
- --------------------------------------------------------------------------------
|X|
Mutual funds are NOT guaranteed or insured by any
bank or government agency. You can lose money.
|X|
Mutual funds ALWAYS carry investment risks. Some
types carry more risk than others.
|X|
A higher rate of return typically involves a
higher risk of loss.
|X|
Past performance is not a reliable indicator of
future performance.
|X|
ALL mutual funds have costs that lower
investment return.
|X|
You can buy some mutual funds by contacting them
directly. Others, like this one, are sold mainly
through brokers, banks, financial planners, or
insurance agents. If you buy through these
financial professionals, you generally will pay a
sales charge.
|X|
Shop around. Compare a mutual fund with others of
the same type before you buy.
OTHER IDEAS FOR SUCCESSFUL MUTUAL FUND INVESTING:
Develop a Financial Plan
Have a plan - even a simple plan can help you take control of your financial
future. Review your plan with your advisor at least once a year or more
frequently if your circumstances change.
Dollar-Cost Averaging
An investment technique that works well for many investors is one that
eliminates random buy and sell decisions. One such system is dollar-cost
averaging. Dollar-cost averaging involves building a portfolio through the
investment of fixed amounts of money on a regular basis regardless of the price
or market condition. This may enable an investor to smooth out the effects of
the volatility of the financial markets. By using this strategy, more shares
will be purchased when the price is low and less when the price is high. As the
accompanying chart illustrates, dollar-cost averaging tends to keep the average
price paid for the shares lower than the average market price of shares
purchased, although there is no guarantee.
While this does not ensure a profit and does not protect against a loss if the
market declines, it is an effective way for many shareholders who can continue
investing through changing market conditions to accumulate shares to meet
long-term goals.
<PAGE>
Dollar-cost averaging:
- -----------------------------------------------------
Regular Market Price Shares
Investment of a Share Acquired
- -----------------------------------------------------
$100 $6.00 16.7
100 4.00 25.0
100 4.00 25.0
100 6.00 16.7
100 5.00 20.0
----- -------- ------
$500 $25.00 103.4
Average market price of a share over 5 periods: $5.00 ($25.00 divided by 5)
The average price you paid for each share: $4.84 ($500 divided by 103.4)
Diversify
Diversify your portfolio. By investing in different asset classes and different
economic environments you help protect against poor performance in one type of
investment while including investments most likely to help you achieve your
important goals.
Understand Your Investment
Know what you are buying. Make sure you understand the potential risks, rewards,
costs, and expenses associated with each of your investments.
<PAGE>
FUNDAMENTAL INVESTMENT POLICIES
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Fundamental investment policies adopted by the Fund cannot be changed without
the approval of a majority of the outstanding voting securities of the Fund as
defined in the Investment Company Act of 1940, as amended (the 1940 Act).
Notwithstanding any of the Fund's other investment policies, the Fund may invest
its assets in an open-end management investment company having substantially the
same investment objectives, policies, and restrictions as the Fund for the
purpose of having those assets managed as part of a combined pool.
The policies below are fundamental policies that apply to the Fund and may be
changed only with shareholder approval. Unless holders of a majority of the
outstanding voting securities agree to make the change, the Fund will not:
o Act as an underwriter (sell securities for others). However, under the
securities laws, the Fund may be deemed to be an underwriter when it
purchases securities directly from the issuer and later resells them.
o Borrow money or property, except as a temporary measure for extraordinary
or emergency purposes, in an amount not exceeding one-third of the market
value of its total assets (including borrowings) less liabilities (other
than borrowings) immediately after the borrowing.
o Make cash loans. The Fund, however, does make investments in debt
securities where the sellers agree to repurchase the securities at cost
plus an agreed-upon interest rate within a specified time.
o Invest in voting securities, securities of investment companies or
exploration or development programs, such as oil, gas or mineral leases.
o 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.
o Pledge or mortgage its assets beyond 15% of total assets.
o Invest more than 5% of its total assets in securities of any one company,
government, or political subdivision thereof, except the limitation will
not apply to investments in securities issued by the U.S. government, its
agencies, or instrumentalities, and except that up to 25% of the Fund's
total assets may be invested without regard to this 5% limitation. For
purposes of this policy, the terms of a municipal security determine the
issuer. In order to comply with revisions to Rule 2a-7, the Fund will
observe the limitation on investment in a single issuer as to 100% of its
portfolio.
o Buy on margin or sell short.
o Invest in real estate, but the Fund can invest in municipal bonds and notes
secured by real estate or interests therein. For purposes of this policy,
real estate includes real estate limited partnerships.
o Invest in commodities or commodity contracts.
o Lend Fund securities in excess of 30% of its net assets.
Except for the fundamental investment policies listed above, the other
investment policies described in the prospectus and in this SAI are not
fundamental and may be changed by the board at any time.
<PAGE>
INVESTMENT STRATEGIES AND TYPES OF INVESTMENTS
- --------------------------------------------------------------------------------
This table shows various investment strategies and investments that many funds
are allowed to engage in and purchase. It also lists certain percentage
guidelines that are generally followed by the Fund's investment manager. This
table is intended to show the breadth of investments that the investment manager
may make on behalf of the Fund. For a description of principal risks, please see
the prospectus.
- ----------------------------------------------- --------------------------
Investment strategies & types of investments: AXP Tax-Free Money
Allowable for the Fund?
Agency and Government Securities yes
Cash/Money Market Instruments yes
Commercial Paper yes
Debt Obligations yes
Illiquid and Restricted Securities yes
Lending of Portfolio Securities yes
Mortgage- and Asset-Backed Securities yes
Municipal Obligations yes
Repurchase Agreements yes
Variable- or Floating-Rate Securities yes
- ----------------------------------------------- --------------------------
Unless changed by the board, the Fund will not:
`Invest more than 10% of the Fund's net assets in securities and derivative
instruments that are illiquid. 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 obligations.
In addition to considering ratings assigned by the ratings services in the
selection of portfolio securities for the Fund, the Fund may consider, among
other things, information concerning the financial history and condition of the
issuer and its revenue and expense prospect and, in the case of revenue bonds,
the financial history and condition of the source of revenue to service the
bonds.
After a municipal bond or note has been purchased by the Fund, it may be
assigned a lower rating or cease to be rated. Such an event would not require
the elimination of the issue from the portfolio, but the Fund will consider such
an event in determining whether the Fund should continue to hold the security in
its portfolio.
<PAGE>
INFORMATION REGARDING RISKS AND INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
RISKS
The following is a summary of common risk characteristics. Following this
summary is a description of certain investments and investment strategies and
the risks most commonly associated with them (including certain risks not
described below and, in some cases, a more comprehensive discussion of how the
risks apply to a particular investment or investment strategy). Please remember
that a mutual fund's risk profile is largely defined by the fund's primary
securities and investment strategies. However, most mutual funds are allowed to
use certain other strategies and investments that may have different risk
characteristics. Accordingly, one or more of the following types of risk will be
associated with the Fund at any time (for a description of principal risks,
please see the prospectus):
Call/Prepayment Risk
The risk that a bond or other security might be called (or otherwise converted,
prepaid, or redeemed) before maturity. This type of risk is closely related to
"reinvestment risk."
Credit Risk
The risk that the issuer of a security, or the counterparty to a contract, will
default or otherwise become unable to honor a financial obligation (such as
payments due on a bond or a note). The price of junk bonds may react more to the
ability of the issuing company to pay interest and principal when due than to
changes in interest rates. They have greater price fluctuations and are more
likely to experience a default.
Event Risk
Occasionally, the value of a security may be seriously and unexpectedly changed
by a natural or industrial accident or occurrence.
Foreign/Emerging Markets Risk
The following are all components of foreign/emerging markets risk:
Country risk includes the political, economic, and other conditions of
a country. These conditions include lack of publicly available information, less
government oversight (including lack of accounting, auditing, and financial
reporting standards), the possibility of government-imposed restrictions, and
even the nationalization of assets.
Currency risk results from the constantly changing exchange rate
between local currency and the U.S. dollar. Whenever the Fund holds securities
valued in a foreign currency or holds the currency, changes in the exchange rate
add or subtract from the value of the investment.
Custody risk refers to the process of clearing and settling trades. It
also covers holding securities with local agents and depositories. Low trading
volumes and volatile prices in less developed markets make trades harder to
complete and settle. Local agents are held only to the standard of care of the
local market. Governments or trade groups may compel local agents to hold
securities in designated depositories that are not subject to independent
evaluation. The less developed a country's securities market is, the greater the
likelihood of problems occurring.
<PAGE>
Emerging markets risk includes the dramatic pace of change (economic,
social, and political) in these countries as well as the other considerations
listed above. These markets are in early stages of development and are extremely
volatile. They can be marked by extreme inflation, devaluation of currencies,
dependence on trade partners, and hostile relations with neighboring countries.
Inflation Risk
Also known as purchasing power risk, inflation risk measures the effects of
continually rising prices on investments. If an investment's yield is lower than
the rate of inflation, your money will have less purchasing power as time goes
on.
Interest Rate Risk
The risk of losses attributable to changes in interest rates. This term is
generally associated with, but not limited to, bond prices (when interest rates
rise, bond prices fall).
Issuer Risk
The risk that an issuer, or the value of its stocks or bonds, will perform
poorly. Poor performance may be caused by poor management decisions, competitive
pressures, breakthroughs in technology, reliance on suppliers, labor problems or
shortages, corporate restructurings, fraudulent disclosures, or other factors.
Legal/Legislative Risk
Congress and other governmental units have the power to change existing laws
affecting securities. A change in law might affect an investment adversely.
Leverage Risk
Some derivative investments (such as options, futures, or options on futures)
require little or no initial payment and base their price on a security, a
currency, or an index. A small change in the value of the underlying security,
currency, or index may cause a sizable gain or loss in the price of the
instrument.
Liquidity Risk
Securities may be difficult or impossible to sell at the time that the Fund
would like. The Fund may have to lower the selling price, sell other
investments, or forego an investment opportunity.
Management Risk
The risk that a strategy or selection method utilized by the investment manager
may fail to produce the intended result. When all other factors have been
accounted for and the investment manager chooses an investment, there is always
the possibility that the choice will be a poor one.
Market Risk
The market may drop and you may lose money. Market risk may affect a single
issuer, sector of the economy, industry, or the market as a whole. The market
value of all securities may move up and down, sometimes rapidly and
unpredictably.
<PAGE>
Reinvestment Risk
The risk that an investor will not be able to reinvest their income or principal
at the same rate as it currently is earning.
Sector/Concentration Risk
Investments that are concentrated in a particular issuer, geographic region, or
industry will be more susceptible to changes in price (the more you diversify,
the more you spread risk).
Small Company Risk
Investments in small and medium companies often involve greater risks than
investments in larger, more established companies because small and medium
companies may lack the management experience, financial resources, product
diversification, and competitive strengths of larger companies. In addition, in
many instances the securities of small and medium companies are traded only
over-the-counter or on regional securities exchanges and the frequency and
volume of their trading is substantially less than is typical of larger
companies.
<PAGE>
INVESTMENT STRATEGIES
The following information supplements the discussion of the Fund's investment
objectives, policies, and strategies that are described in the prospectus and in
this SAI. The following describes many strategies that many mutual funds use and
types of securities that they purchase. Please refer to the section entitled
Investment Strategies and Types of Investments to see which are applicable to
the Fund.
Agency and Government Securities
The U.S. government and its agencies issue many different types of securities.
U.S. Treasury bonds, notes, and bills and securities including mortgage pass
through certificates of the Government National Mortgage Association (GNMA) are
guaranteed by the U.S. government. Other U.S. government securities are issued
or guaranteed by federal agencies or government-sponsored enterprises but are
not guaranteed by the U.S. government. This may increase the credit risk
associated with these investments.
Government-sponsored entities issuing securities include privately owned,
publicly chartered entities created to reduce borrowing costs for certain
sectors of the economy, such as farmers, homeowners, and students. They include
the Federal Farm Credit Bank System, Farm Credit Financial Assistance
Corporation, Federal Home Loan Bank, FHLMC, FNMA, Student Loan Marketing
Association (SLMA), and Resolution Trust Corporation (RTC). Government-sponsored
entities may issue discount notes (with maturities ranging from overnight to 360
days) and bonds. Agency and government securities are subject to the same
concerns as other debt obligations. (See also Debt Obligations and Mortgage- and
Asset-Backed Securities.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with agency and government securities include:
Call/Prepayment Risk, Inflation Risk, Interest Rate Risk, Management Risk, and
Reinvestment Risk.
Cash/Money Market Instruments
The Fund may maintain a portion of its assets in cash and cash-equivalent
investments. Cash-equivalent investments include short-term U.S. and Canadian
government securities and negotiable certificates of deposit, non-negotiable
fixed-time deposits, bankers' acceptances, and letters of credit of banks or
savings and loan associations having capital, surplus, and undivided profits (as
of the date of its most recently published annual financial statements) in
excess of $100 million (or the equivalent in the instance of a foreign branch of
a U.S. bank) at the date of investment. The Fund also may purchase short-term
notes and obligations of U.S. and foreign banks and corporations and may use
repurchase agreements with broker-dealers registered under the Securities
Exchange Act of 1934 and with commercial banks. (See also Commercial Paper, Debt
Obligations, Repurchase Agreements, and Variable- or Floating-Rate Securities.)
These types of instruments generally offer low rates of return and subject the
Fund to certain costs and expenses.
See the appendix for a discussion of securities ratings.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with cash/money market instruments include: Credit
Risk, Inflation Risk, and Management Risk.
<PAGE>
Commercial Paper
Commercial paper is a short-term debt obligation with a maturity ranging from 1
to 270 days issued by banks, corporations, and other borrowers. It is sold to
investors with temporary idle cash as a way to increase returns on a short-term
basis. These instruments are generally unsecured, which increases the credit
risk associated with this type of investment. (See also Debt Obligations and
Illiquid and Restricted Securities.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with commercial paper include: Credit Risk, Liquidity
Risk, and Management Risk.
Debt Obligations
Many different types of debt obligations exist (for example, bills, bonds, or
notes). Issuers of debt obligations have a contractual obligation to pay
interest at a specified rate on specified dates and to repay principal on a
specified maturity date. Certain debt obligations (usually intermediate- and
long-term bonds) have provisions that allow the issuer to redeem or "call" a
bond before its maturity. Issuers are most likely to call these securities
during periods of falling interest rates. When this happens, an investor may
have to replace these securities with lower yielding securities, which could
result in a lower return.
The market value of debt obligations is affected primarily by changes in
prevailing interest rates and the issuers perceived ability to repay the debt.
The market value of a debt obligation generally reacts inversely to interest
rate changes. When prevailing interest rates decline, the price usually rises,
and when prevailing interest rates rise, the price usually declines.
In general, the longer the maturity of a debt obligation, the higher its yield
and the greater the sensitivity to changes in interest rates. Conversely, the
shorter the maturity, the lower the yield but the greater the price stability.
As noted, the values of debt obligations also may be affected by changes in the
credit rating or financial condition of their issuers. Generally, the lower the
quality rating of a security, the higher the degree of risk as to the payment of
interest and return of principal. To compensate investors for taking on such
increased risk, those issuers deemed to be less creditworthy generally must
offer their investors higher interest rates than do issuers with better credit
ratings. (See also Agency and Government Securities, Corporate Bonds, and
High-Yield (High-Risk) Securities.)
See the appendix for a discussion of securities ratings.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with debt obligations include: Call/Prepayment Risk,
Credit Risk, Interest Rate Risk, Issuer Risk, Management Risk, and Reinvestment
Risk.
Illiquid and Restricted Securities
The Fund may invest in illiquid securities (i.e., securities that are not
readily marketable). These securities may include, but are not limited to,
certain securities that are subject to legal or contractual restrictions on
resale, certain repurchase agreements, and derivative instruments.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with illiquid and restricted securities include:
Liquidity Risk and Management Risk.
<PAGE>
Lending of Portfolio Securities
The Fund may lend certain of its portfolio securities to broker-dealers. The
current policy of the Fund's board is to make these loans, either long- or
short-term, to broker-dealers. In making loans, the Fund receives the market
price in cash, U.S. government securities, letters of credit, or such other
collateral as may be permitted by regulatory agencies and approved by the board.
If the market price of the loaned securities goes up, an investor will get
additional collateral on a daily basis. The risks are that the borrower may not
provide additional collateral when required or return the securities when due.
During the existence of the loan, the Fund receives cash payments equivalent to
all interest or other distributions paid on the loaned securities. The Fund may
pay reasonable administrative and custodial fees in connection with a loan and
may pay a negotiated portion of the interest earned on the cash or money market
instruments held as collateral to the borrower or placing broker. The Fund will
receive reasonable interest on the loan or a flat fee from the borrower and
amounts equivalent to any dividends, interest, or other distributions on the
securities loaned.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with the lending of portfolio securities include:
Credit Risk and Management Risk.
Mortgage- and Asset-Backed Securities
Mortgage-backed securities represent direct or indirect participations in, or
are secured by and payable from, mortgage loans secured by real property, and
include single- and multi-class pass-through securities and Collateralized
Mortgage Obligations (CMOs). These securities may be issued or guaranteed by
U.S. government agencies or instrumentalities (see also Agency and Government
Securities), or by private issuers, generally originators and investors in
mortgage loans, including savings associations, mortgage bankers, commercial
banks, investment bankers, and special purpose entities. Mortgage-backed
securities issued by private lenders may be supported by pools of mortgage loans
or other mortgage-backed securities that are guaranteed, directly or indirectly,
by the U.S. government or one of its agencies or instrumentalities, or they may
be issued without any governmental guarantee of the underlying mortgage assets
but with some form of non-governmental credit enhancement.
Stripped mortgage-backed securities are a type of mortgage-backed security that
receive differing proportions of the interest and principal payments from the
underlying assets. Generally, there are two classes of stripped mortgage-backed
securities: Interest Only (IO) and Principal Only (PO). IOs entitle the holder
to receive distributions consisting of all or a portion of the interest on the
underlying pool of mortgage loans or mortgage-backed securities. POs entitle the
holder to receive distributions consisting of all or a portion of the principal
of the underlying pool of mortgage loans or mortgage-backed securities. The cash
flows and yields on IOs and POs are extremely sensitive to the rate of principal
payments (including prepayments) on the underlying mortgage loans or
mortgage-backed securities. A rapid rate of principal payments may adversely
affect the yield to maturity of IOs. A slow rate of principal payments may
adversely affect the yield to maturity of POs. If prepayments of principal are
greater than anticipated, an investor in IOs may incur substantial losses. If
prepayments of principal are slower than anticipated, the yield on a PO will be
affected more severely than would be the case with a traditional mortgage-backed
security.
CMOs are hybrid mortgage-related instruments secured by pools of mortgage loans
or other mortgage-related securities, such as mortgage pass through securities
or stripped mortgage-backed securities. CMOs may be structured into multiple
classes, often referred to as "tranches," with each class bearing a different
stated maturity and entitled to a different schedule for payments of principal
and interest, including prepayments. Principal prepayments on collateral
underlying a CMO may cause it to be retired substantially earlier than its
stated maturity.
<PAGE>
The yield characteristics of mortgage-backed securities differ from those of
other debt securities. Among the differences are that interest and principal
payments are made more frequently on mortgage-backed securities, usually
monthly, and principal may be repaid at any time. These factors may reduce the
expected yield.
Asset-backed securities have structural characteristics similar to
mortgage-backed securities. Asset-backed debt obligations represent direct or
indirect participation in, or secured by and payable from, assets such as motor
vehicle installment sales contracts, other installment loan contracts, home
equity loans, leases of various types of property, and receivables from credit
card or other revolving credit arrangements. The credit quality of most
asset-backed securities depends primarily on the credit quality of the assets
underlying such securities, how well the entity issuing the security is
insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit enhancement of the
securities. Payments or distributions of principal and interest on asset-backed
debt obligations may be supported by non-governmental credit enhancements
including letters of credit, reserve funds, overcollateralization, and
guarantees by third parties. The market for privately issued asset-backed debt
obligations is smaller and less liquid than the market for government sponsored
mortgage-backed securities. (See also Derivative Instruments.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with mortgage- and asset-backed securities include:
Call/Prepayment Risk, Credit Risk, Interest Rate Risk, Liquidity Risk, and
Management Risk.
Municipal Obligations
Municipal obligations include debt obligations issued by or on behalf of states,
territories, or possessions of the United States (including the District of
Columbia). The interest on these obligations is generally exempt from federal
income tax. Municipal obligations are generally classified as either "general
obligations" or "revenue obligations."
General obligation bonds are secured by the issuer's pledge of its full faith,
credit, and taxing power for the payment of interest and principal. Revenue
bonds are payable only from the revenues derived from a project or facility or
from the proceeds of a specified revenue source. Industrial development bonds
are generally revenue bonds secured by payments from and the credit of private
users. Municipal notes are issued to meet the short-term funding requirements of
state, regional, and local governments. Municipal notes include tax anticipation
notes, bond anticipation notes, revenue anticipation notes, tax and revenue
anticipation notes, construction loan notes, short-term discount notes,
tax-exempt commercial paper, demand notes, and similar instruments.
Municipal lease obligations may take the form of a lease, an installment
purchase, or a conditional sales contract. They are issued by state and local
governments and authorities to acquire land, equipment, and facilities. An
investor may purchase these obligations directly, or it may purchase
participation interests in such obligations. Municipal leases may be subject to
greater risks than general obligation or revenue bonds. State constitutions and
statutes set forth requirements that states or municipalities must meet in order
to issue municipal obligations. Municipal leases may contain a covenant by the
state or municipality to budget for and make payments due under the obligation.
Certain municipal leases may, however, provide that the issuer is not obligated
to make payments on the obligation in future years unless funds have been
appropriated for this purpose each year.
<PAGE>
Yields on municipal bonds and notes depend on a variety of factors, including
money market conditions, municipal bond market conditions, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. The municipal bond market has a large number of different issuers, many
having smaller sized bond issues, and a wide choice of different maturities
within each issue. For these reasons, most municipal bonds do not trade on a
daily basis and many trade only rarely. Because many of these bonds trade
infrequently, the spread between the bid and the offer may be wider and the time
needed to develop a bid or an offer may be longer than other security markets.
See the appendix for a discussion of securities ratings.
(See also Debt Obligations.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with municipal obligations include: Credit Risk, Event
Risk, Inflation Risk, Interest Rate Risk, Legal/Legislative Risk, and Market
Risk.
Repurchase Agreements
The Fund may enter into repurchase agreements with certain banks or non-bank
dealers. In a repurchase agreement, the Fund buys a security at one price, and
at the time of sale, the seller agrees to repurchase the obligation at a
mutually agreed upon time and price (usually within seven days). The repurchase
agreement, thereby, determines the yield during the purchaser's holding period,
while the seller's obligation to repurchase is secured by the value of the
underlying security. Repurchase agreements could involve certain risks in the
event of a default or insolvency of the other party to the agreement, including
possible delays or restrictions upon the Fund's ability to dispose of the
underlying securities. A specific risk of a repurchase agreement is that if the
seller seeks the protection of bankruptcy laws, the Fund's ability to liquidate
the security involved could be impaired.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with repurchase agreements include: Credit Risk and
Management Risk.
Variable- or Floating-Rate Securities
The Fund may invest in securities that offer a variable- or floating-rate of
interest. Variable-rate securities provide for automatic establishment of a new
interest rate at fixed intervals (e.g., daily, monthly, semi-annually, etc.).
Floating-rate securities generally provide for automatic adjustment of the
interest rate whenever some specified interest rate index changes.
Variable- or floating-rate securities frequently include a demand feature
enabling the holder to sell the securities to the issuer at par. In many cases,
the demand feature can be exercised at any time. Some securities that do not
have variable or floating interest rates may be accompanied by puts producing
similar results and price characteristics.
Variable-rate demand notes include master demand notes that are obligations that
permit the Fund to invest fluctuating amounts, which may change daily without
penalty, pursuant to direct arrangements between the Fund as lender, and the
borrower. The interest rates on these notes fluctuate from time to time. The
issuer of such obligations normally has a corresponding right, after a given
period, to prepay in its discretion the outstanding principal amount of the
obligations plus accrued interest upon a specified number of days' notice to the
holders of such obligations. Because these obligations are direct lending
arrangements between the lender and borrower, it is not contemplated that such
instruments generally will be traded. There generally is not an established
secondary market for these obligations. Accordingly, where these
<PAGE>
obligations are not secured by letters of credit or other credit support
arrangements, the Fund's right to redeem is dependent on the ability of the
borrower to pay principal and interest on demand. Such obligations frequently
are not rated by credit rating agencies and may involve heightened risk of
default by the issuer.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with variable- or floating-rate securities include:
Credit Risk and Management Risk.
SECURITY TRANSACTIONS
- --------------------------------------------------------------------------------
Subject to policies set by the board, AEFC is authorized to determine,
consistent with the Fund's investment goal and policies, which securities will
be purchased, held, or sold. In determining where the buy and sell orders are to
be placed, AEFC has been directed to use its best efforts to obtain the best
available price and the most favorable execution except where otherwise
authorized by the board. In selecting broker-dealers to execute transactions,
AEFC may consider the price of the security, including commission or mark-up,
the size and difficulty of the order, the reliability, integrity, financial
soundness, and general operation and execution capabilities of the broker, the
broker's expertise in particular markets, and research services provided by the
broker.
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.
The Fund's securities may be 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 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 the other American Express mutual
funds for which it acts as investment manager.
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 SEC.
<PAGE>
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 Fund to pay a commission in excess of the amount another
broker might have charged. AEFC has advised the Fund that it is necessary to do
business with a number of brokerage firms on a continuing basis to obtain such
services as the handling of large orders, the willingness of a broker to risk
its own money by taking a position in a security, and the specialized handling
of a particular group of securities that only certain brokers may be able to
offer. As a result of this arrangement, some portfolio transactions may not be
effected at the lowest commission, but AEFC believes it may obtain better
overall execution. AEFC has represented that under all three procedures the
amount of commission paid will be reasonable and competitive in relation to the
value of the brokerage services performed or research provided.
All other transactions will be placed on the basis of obtaining the best
available price and the most favorable execution. In so doing, if in the
professional opinion of the person responsible for selecting the broker or
dealer, several firms can execute the transaction on the same basis,
consideration will be given by such person to those firms offering research
services. Such services may be used by AEFC in providing advice to all American
Express mutual funds even though it is not possible to relate the benefits to
any particular fund.
Each investment decision made for the Fund is made independently from any
decision made for another portfolio, fund, or other account advised by AEFC or
any of its subsidiaries. When the Fund buys or sells the same security as
another portfolio, fund, or account, AEFC carries out the purchase or sale in a
way the Fund agrees in advance is fair. Although sharing in large transactions
may adversely affect the price or volume purchased or sold by the Fund, the Fund
hopes to gain an overall advantage in execution.
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 Fund paid total brokerage commissions of $0 for fiscal year ended Dec. 31,
1998, $0 for fiscal year 1997, and $0 for fiscal year 1996. 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 Fund.
As of the end of the most recent fiscal year, the Fund held no securities of its
regular brokers or dealers or of the parent of those brokers or dealers that
derived more than 15% of gross revenue from securities-related activities.
<PAGE>
BROKERAGE COMMISSIONS PAID TO BROKERS AFFILIATED WITH AMERICAN EXPRESS
FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
Affiliates of American Express Company (of which AEFC is a wholly-owned
subsidiary) may engage in brokerage and other securities transactions on behalf
of the Fund according to procedures adopted by the board and to the extent
consistent with applicable provisions of the federal securities laws. AEFC will
use an American Express affiliate only if (i) AEFC determines that the Fund will
receive prices and executions at least as favorable as those offered by
qualified independent brokers performing similar brokerage and other services
for the Fund and (ii) the affiliate charges the Fund commission rates consistent
with those the affiliate charges comparable unaffiliated customers in similar
transactions and if such use is consistent with terms of the Investment
Management Services Agreement.
No brokerage commissions were paid to brokers affiliated with AEFC for the three
most recent fiscal years.
<PAGE>
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
The Fund may quote various performance figures to illustrate past performance.
Average annual total return and current yield quotations, if applicable, used by
the Fund are based on standardized methods of computing performance as required
by the SEC. An explanation of the methods used by the Fund to compute
performance follows below.
AVERAGE ANNUAL TOTAL RETURN
The Fund may calculate average annual total return for 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 calculates annualized simple and compound yields based on a seven-day
period.
The simple yield is calculated by determining the net change in the value of a
hypothetical account having a balance of one share at the beginning of the
seven-day period, dividing the net change in account value by the value of the
account at the beginning of the period to obtain the return for the period, and
multiplying that return by 365/7 to obtain an annualized figure. The value of
the hypothetical account includes the amount of any declared dividends, the
value of any shares purchased with any dividend paid during the period and any
dividends declared for such shares. The Fund's yield does not include any
realized or unrealized gains or losses.
The Fund calculates its compound yield according to the following formula:
Compound Yield = (return for seven-day period + 1)(365/7) - 1
The Fund's simple annualized yield was 3.27% and its compound yield was 3.32%
on Dec. 31, 1998.
<PAGE>
Yield, or rate of return, on Fund shares may fluctuate daily and does not
provide a basis for determining future yields. However, it may be used as one
element in assessing how the Fund is meeting its goal. When comparing an
investment in the Fund with savings accounts and similar investment
alternatives, you must consider that such alternatives often provide an agreed
to or guaranteed fixed yield for a stated period of time, whereas the Fund's
yield fluctuates. In comparing the yield of one money market fund to another,
you should consider the Fund's investment policies, including the types of
investments permitted.
In its sales material and other communications, the Fund may quote, compare or
refer to rankings, yields, or returns as published by independent statistical
services or publishers and publications such as The Bank Rate Monitor National
Index, Barron's, Business Week, CDA Technologies, Donoghue's Money Market Fund
Report, Financial Services Week, Financial Times, Financial World, Forbes,
Fortune, Global Investor, Institutional Investor, Investor's Daily, Kiplinger's
Personal Finance, Lipper Analytical Services, Money, Morningstar, Mutual Fund
Forecaster, Newsweek, The New York Times, Personal Investor, Shearson Lehman
Aggregate Bond Index, Stanger Report, Sylvia Porter's Personal Finance, USA
Today, U.S. News and World Report, The Wall Street Journal, and Wiesenberger
Investment Companies Service.
<PAGE>
VALUING FUND SHARES
- --------------------------------------------------------------------------------
All of the securities in the Fund's portfolio are valued at amortized cost. The
amortized cost method of valuation 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. It
does not take into consideration unrealized capital gains or losses.
The board has established procedures designed to stabilize the fund's price per
share for purposes of sales and redemptions at $1, to the extent that it is
reasonably possible to do so. These procedures include review of the Fund's
securities by the board, at intervals deemed appropriate by it, to determine
whether the Fund's net asset value per share computed by using available market
quotations deviates from a share value of $1 as computed using the amortized
cost method. The board must consider any deviation that appears and if it
exceeds 0.5% it must determine what action, if any, needs to be taken. If the
board determines a deviation exists that may result in a material dilution of
the holdings of current shareholders or investors, or in other unfair
consequences for such persons, it must undertake remedial action that it deems
necessary and appropriate. Such action may include withholding dividends,
calculating net asset value per share for purposes of sales and redemptions
using available market quotations, making redemptions in kind, and selling
securities before maturity in order to realize capital gains or losses or to
shorten average portfolio maturity.
While the amortized cost method provides certainty and consistency in portfolio
valuation, it may result in valuations of securities that are either somewhat
higher or lower than the prices at which the securities could be sold. This
means that during times of declining interest rates the yield on the Fund's
shares may be higher than if valuations of securities were made based on actual
market prices and estimates of market prices. Accordingly, if using the
amortized cost method were to result in a lower portfolio value, a prospective
investor in the Fund would be able to obtain a somewhat higher yield than he
would get if portfolio valuation were based on actual market values. Existing
shareholders, on the other hand, would receive a somewhat lower yield than they
would otherwise receive. The opposite would happen during a period of rising
interest rates.
<PAGE>
INVESTING IN THE FUND
- --------------------------------------------------------------------------------
The minimum purchase for directors, officers and employees of the Fund or AEFC
and AEFC financial advisors is $1,000 for the Fund (except payroll deduction
plans), with a minimum additional purchase of $25.
SYSTEMATIC INVESTMENT PROGRAMS
After you make your initial investment of $100 or more, you must make additional
payments of $100 or more on at least a monthly basis until your balance reaches
$2,000. These minimums do not apply to all systematic investment programs. You
decide how often 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.
AUTOMATIC DIRECTED DIVIDENDS
Dividends, including capital gain distributions, paid by another American
Express mutual fund, may be used to automatically purchase shares of the Fund.
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 American Express mutual fund but cannot be split
to make purchases in two or more funds. Automatic directed dividends are
available between accounts of any ownership except:
o 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;
o 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); and
o 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.
REJECTION OF BUSINESS
The Fund reserves the right to reject any business, in its sole discretion.
<PAGE>
SELLING SHARES
- --------------------------------------------------------------------------------
You have a right to sell your shares at any time. For an explanation of sales
procedures, please see the prospectus.
During an emergency, the board can suspend the computation of NAV, 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:
o The Exchange closes for reasons other than the usual weekend and holiday
closings or trading on the Exchange is restricted, or
o Disposal of the Fund's securities is not reasonably practicable or it is
not reasonably practicable for the Fund to determine the fair value of its
net assets, or
o The SEC, under the provisions of the 1940 Act, declares a period of
emergency to exist.
Should the Fund stop selling shares, the board 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 board. In these
circumstances, the securities distributed would be valued as set forth in this
SAI. Should the Fund distribute securities, a shareholder may incur brokerage
fees or other transaction costs in converting the securities to cash.
<PAGE>
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. If
you are redeeming a tax-qualified plan account for which American Express Trust
Company acts as custodian, you can elect to receive your dividends and other
distributions in cash when permitted by law. If you redeem an IRA or a qualified
retirement account, certain restrictions, federal tax penalties, and special
federal income tax reporting requirements may apply. You should consult your tax
advisor about this complex area of the tax law.
Applications for a systematic investment in a class of the 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 consult your selling agent or write American
Express Client Service Corporation, P.O. Box 534, Minneapolis, MN 55440-0534, or
call 800-437-3133 (National/Minnesota) or 612-671-3800 (Mpls./St. Paul). Your
authorization must be received 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 will 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 your account.
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 the 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.
<PAGE>
TAXES
- --------------------------------------------------------------------------------
If you buy shares in the Fund and then exchange into another fund, it is
considered a redemption and subsequent purchase of shares. Under the 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.
If you have a nonqualified investment in the Fund and you wish to move part or
all of those shares to an IRA or qualified retirement account in the Fund, you
can do so without paying a sales charge. However, this type of exchange is
considered a redemption of shares and may result in a gain or loss for tax
purposes. In addition, this type of exchange may result in an excess
contribution under IRA or qualified plan regulations if the amount exchanged
plus the amount of the initial sales charge applied to the amount exchanged
exceeds annual contribution limitations. For example: If you were to exchange
$2,000 in Class A shares from a nonqualified account to an IRA without
considering the 5% ($100) initial sales charge applicable to that $2,000, you
may be deemed to have exceeded current IRA annual contribution limitations. You
should consult your tax advisor for further details about this complex subject.
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 most recent fiscal year, 100%
of the income distribution was designated as exempt from federal income taxes.
<PAGE>
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 the
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.
Capital gain distributions, if any, received by corporate shareholders should be
treated as long-term capital gains regardless of how long they owned their
shares. Capital gain distributions, if any, received by individuals should be
treated as long-term if held for more than one year. Short-term capital gains
earned by the Fund are paid to shareholders as part of their ordinary income
dividend and are taxable.
Under federal tax law, by the end of a calendar year the Fund must declare and
pay dividends representing 98% of ordinary income for that calendar year and 98%
of net capital gains (both long-term and short-term) for the 12-month period
ending Dec. 31 of that calendar year. The Fund is subject to an excise tax equal
to 4% of the excess, if any, of the amount required to be distributed over the
amount actually distributed. The Fund intends to comply with federal tax law and
avoid any excise tax.
This is a brief summary that relates to federal income taxation only.
Shareholders should consult their tax advisor as to the application of federal,
state, and local income tax laws to Fund distributions.
AGREEMENTS
- --------------------------------------------------------------------------------
INVESTMENT MANAGEMENT SERVICES AGREEMENT
AEFC, a wholly-owned subsidiary of American Express Company, is the investment
manager for the Fund. Under the Investment Management Services Agreement, AEFC,
subject to the policies set by the board, provides investment management
services.
For its services, AEFC is paid a fee based on the following schedule. Each class
of the Fund pays its proportionate share of the fee.
<PAGE>
Assets Annual rate at
(billions) each asset level
- --------- ----------------
First $1.0 0.310%
Next 0.5 0.293
Next 0.5 0.275
Next 0.5 0.258
Over 2.5 0.240
On the last day of the most recent fiscal year, the daily rate applied to the
Fund's net assets was equal to 0.310% 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 $496,593 for fiscal year 1998, $488,015 for fiscal year 1997, and $481,827
for fiscal year 1996.
Under the agreement, the Fund 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;
postage of confirmations except purchase confirmations; consultants' fees;
compensation of board members, officers and employees; corporate filing fees;
organizational expenses; expenses incurred in connection with lending
securities; and expenses properly payable by the Fund, approved by the board.
Under the agreement, nonadvisory expenses, net of earnings credits, paid by the
Fund were $91,073 for fiscal year 1998, $69,516 for fiscal year 1997, and
$125,715 for fiscal year 1996.
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 0.030%
Next 0.5 0.027
Next 0.5 0.025
Next 0.5 0.022
Over 2.5 0.020
On the last day of the most recent fiscal year, the daily rate applied to the
Fund's net assets was equal to 0.030% 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 $50,968 for fiscal year 1998, $48,992 for
fiscal year 1997, and $46,628 for fiscal year 1996.
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 earns a fee from the Fund determined by multiplying the number
of shareholder accounts at the end of the day by a rate of $20 per year and
dividing by the number of days in the year. The fees paid to AECSC may be
changed by the board without shareholder approval.
<PAGE>
DISTRIBUTION AGREEMENT
AEFA is the Fund's principal underwriter (distributor). The Fund's shares are
offered on a continuous basis.
Custodian Agreement
The Fund's securities and cash are held by U.S. Bank National Association, 180
E. Fifth St., St. Paul, MN 55101-1631, through 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 Fund pays
the custodian a maintenance charge and a charge per transaction in addition to
reimbursing the custodian's out-of-pocket expenses.
ORGANIZATIONAL INFORMATION
- --------------------------------------------------------------------------------
The Fund is an open-end management investment company. The Fund headquarters are
at 901 S. Marquette Ave., Suite 2810, Minneapolis, MN 55402-3268.
SHARES
The shares of the Fund represent an interest in that fund's assets only (and
profits or losses), and, in the event of liquidation, each share of the Fund
would have the same rights to dividends and assets as every other share of that
Fund.
VOTING RIGHTS
As a shareholder in the Fund, you have voting rights over the Fund's management
and fundamental policies. You are entitled to one vote for each share you own.
Each class, if applicable, has exclusive voting rights with respect to matters
for which separate class voting is appropriate under applicable law. All shares
have cumulative voting rights with respect to the election of board members.
This means that you have as many votes as the number of shares you own,
including fractional shares, multiplied by the number of members to be elected.
Dividend Rights
Dividends paid by the Fund, if any, with respect to each class of shares, if
applicable, will be calculated in the same manner, at the same time, on the same
day, and will be in the same amount, except for differences resulting from
differences in fee structures.
AMERICAN EXPRESS FINANCIAL CORPORATION
AEFC has been a provider of financial services since 1894. Its family of
companies offers not only mutual funds but also insurance, annuities, investment
certificates and a broad range of financial management services.
In addition to managing assets of more than $84 billion for the American Express
Funds, AEFC manages investments for itself and its subsidiaries, IDS Certificate
Company and IDS Life Insurance Company. Total assets under management as of the
end of the most recent fiscal year were more than $212 billion.
AEFA serves individuals and businesses through its nationwide network of more
than 180 offices and more than 8,700 advisors.
<PAGE>
<TABLE>
<CAPTION>
FUND HISTORY TABLE FOR ALL PUBLICLY OFFERED AMERICAN EXPRESS FUNDS*
<S> <C> <C> <C> <C> <C>
Date of Form of State of Fiscal
Fund Organization Organization Organization Year End Diversified
AXP Bond Fund, Inc. 6/27/74, 6/31/86*** Corporation NV/MN 8/31 Yes
AXP Discovery Fund, Inc. 4/29/81, 6/13/86*** Corporation NV/MN 7/31 Yes
AXP Equity Select Fund, Inc.** 3/18/57, 6/13/86*** Corporation NV/MN 11/30 Yes
AXP Extra Income Fund, Inc. 8/17/83 Corporation MN 5/31 Yes
AXP Federal Income Fund, Inc. 3/12/85 Corporation MN 5/31 Yes
AXP Global Series, Inc. 10/28/88 Corporation MN 10/31
AXP Emerging Markets Fund Yes
AXP Global Balanced Fund Yes
AXP Global Bond Fund No
AXP Global Growth Fund Yes
AXP Innovations Fund Yes
AXP Growth Series, Inc. 5/21/70, 6/13/86*** Corporation NV/MN 7/31
AXP Growth Fund Yes
AXP Research Opportunities Fund Yes
AXP High Yield Tax-Exempt Fund, Inc. 12/21/78, Corporation NV/MN 11/30 Yes
6/13/86***
AXP International Fund, Inc. 7/18/84 Corporation MN 10/31 Yes
AXP Investment Series, Inc. 1/18/40, 6/13/86*** Corporation NV/MN 9/30
AXP Diversified Equity Income Fund Yes
AXP Mutual Yes
AXP Managed Series, Inc. 10/9/84 Corporation MN 9/30
AXP Managed Allocation Fund Yes
AXP Market Advantage Series, Inc. 8/25/89 Corporation MN 1/31
AXP Blue Chip Advantage Fund Yes
AXP Small Company Index Fund Yes
AXP Money Market Series, Inc. 8/22/75, 6/13/86*** Corporation NV/MN 7/31
AXP Cash Management Fund Yes
AXP New Dimensions Fund, Inc. 2/20/68, 6/13/86*** Corporation NV/MN 7/31 Yes
AXP Precious Metals Fund, Inc. 10/5/84 Corporation MN 3/31 No
AXP Progressive Fund, Inc. 4/23/68, 6/13/86*** Corporation NV/MN 9/30 Yes
AXP Selective Fund, Inc. 2/10/45, 6/13/86*** Corporation NV/MN 5/31 Yes
AXP Stock Fund, Inc. 2/10/45, 6/13/86*** Corporation NV/MN 9/30 Yes
AXP Strategy Series, Inc. 1/24/84 Corporation MN 3/31
AXP Equity Value Fund** Yes
AXP Small Cap Advantage Fund Yes
AXP Strategy Aggressive Fund** Yes
AXP Tax-Exempt Series, Inc. 9/30/76, 6/13/86*** Corporation NV/MN 11/31
AXP Intermediate Tax-Exempt Fund Yes
AXP Tax-Exempt Bond Fund Yes
AXP Tax-Free Money Fund, Inc. 2/29/80, 6/13/86*** Corporation NV/MN 12/31 Yes
AXP Utilities Income Fund, Inc. 3/25/88 Corporation MN 6/30 Yes
AXP California Tax-Exempt Trust 4/7/86 Business MA 6/30
Trust****
AXP California Tax-Exempt Fund No
AXP Special Tax-Exempt Series Trust 4/7/86 Business MA 6/30
Trust****
AXP Insured Tax-Exempt Fund Yes
AXP Massachusetts Tax-Exempt Fund No
AXP Michigan Tax-Exempt Fund No
AXP Minnesota Tax-Exempt Fund No
AXP New York Tax-Exempt Fund No
AXP Ohio Tax-Exempt Fund No
</TABLE>
* At the shareholders meeting held on June 16, 1999, shareholders of the
existing funds (except for AXP Small Cap Advantage Fund) approved the name
change from IDS to AXP. In addition to substituting AXP for IDS, the
following series changed their names: IDS Growth Fund, Inc. to AXP Growth
<PAGE>
Series, Inc., IDS Managed Retirement Fund, Inc. to AXP Managed Series,
Inc., IDS Strategy Fund, Inc. to AXP Strategy Series, Inc., and IDS
Tax-Exempt Bond Fund, Inc. to AXP Tax-Exempt Series, Inc.
** At the shareholders meeting held on Nov. 9, 1994, IDS Equity Plus Fund,
Inc. changed its name to IDS Equity Select Fund, Inc. At that same time IDS
Strategy Aggressive Equity Fund changed its name to IDS Strategy Aggressive
Fund, and IDS Strategy Equity Fund changed its name to IDS Equity Value
Fund.
*** Date merged into a Minnesota corporation incorporated on 4/7/86.
**** Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which the
trust itself is unable to meet its obligations.
<PAGE>
BOARD MEMBERS AND OFFICERS
- --------------------------------------------------------------------------------
Shareholders elect a board that oversees the Fund's operations. The board
appoints officers who are responsible for day-to-day business decisions based on
policies set by the board.
The following is a list of the Fund's board members. They serve 15 Master Trust
portfolios and 58 American Express mutual funds.
H. Brewster Atwater, Jr.+'
Born in 1931
4900 IDS Tower
Minneapolis, MN
Retired chairman and chief executive officer, General Mills, Inc. Director,
Merck & Co., Inc. and Darden Restaurants, Inc.
Arne H. Carlson
Born in 1934
901 S. Marquette Ave.
Minneapolis, MN
Former two-term Governor for Minnesota.
Lynne V. Cheney'
Born in 1941
American Enterprise Institute
for Public Policy Research (AEI)
1150 17th St., N.W. Washington, D.C.
Distinguished Fellow AEI. Former Chair of National Endowment of the Humanities.
Director, The Reader's Digest Association Inc., Lockheed-Martin, and Union
Pacific Resources.
William H. Dudley**
Born in 1932
2900 IDS Tower
Minneapolis, MN
Senior advisor to the chief executive officer of AEFC.
David R. Hubers+**
Born in 1943
2900 IDS Tower
Minneapolis, MN
President, chief executive officer and director of AEFC.
Heinz F. Hutter+
Born in 1929
P.O. Box 2187
Minneapolis, MN
Retired president and chief operating officer, Cargill, Incorporated (commodity
merchants and processors).
<PAGE>
Anne P. Jones'
Born in 1935
5716 Bent Branch Rd.
Bethesda, MD
Attorney and telecommunications consultant. Former partner, law firm of
Sutherland, Asbill & Brennan. Director, Motorola, Inc. (electronics), C-Cor
Electronics, Inc., and Amnex, Inc. (communications).
William R. Pearce+*
Born in 1927
901 S. Marquette Ave.
Minneapolis, MN
Chairman of the board, Board Services Corporation (provides administrative
services to boards). Director, trustee and officer of registered investment
companies whose boards are served by the company. Retired vice chairman of the
board, Cargill, Incorporated (commodity merchants and processors).
Alan K. Simpson'
Born in 1931
1201 Sunshine Ave.
Cody, WY
Former three-term United States Senator for Wyoming. Former Assistant Republican
Leader, U.S. Senate. Director, PacifiCorp (electric power) and Biogen
(pharmaceuticals).
Edson W. Spencer+
Born in 1926
4900 IDS Center
80 S. 8th St.
Minneapolis, MN
President, Spencer Associates Inc. (consulting). Retired chairman of the board
and chief executive officer, Honeywell Inc. Director, Boise Cascade Corporation
(forest products). Member of International Advisory Council of NEC (Japan).
John R. Thomas**
Born in 1937
2900 IDS Tower
Minneapolis, MN
Senior vice president of AEFC.
Wheelock Whitney+
Born in 1926
1900 Foshay Tower
821 Marquette Ave.
Minneapolis, MN
Chairman, Whitney Management Company (manages family assets).
<PAGE>
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.
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 of Board Services Corporation. Vice president, general counsel and
secretary for the Fund.
Officers who also are officers and 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.
Frederick C. Quirsfeld
Born in 1947
IDS Tower 10
Minneapolis, MN
Vice president - taxable mutual fund investments of AEFC. Vice president - fixed
income investments for the Fund.
<PAGE>
John M. Knight
Born in 1952
IDS Tower 10
Minneapolis, MN
Vice president-investment accounting of AEFC. Treasurer for the Fund.
COMPENSATION FOR BOARD MEMBERS
- --------------------------------------------------------------------------------
During the most recent fiscal year, the independent members of the Fund board,
for attending up to 29 meetings, received the following compensation:
<TABLE>
<CAPTION>
Compensation Table
Total cash compensation from the IDS
MUTUAL FUND GROUP and Preferred Master
Board member Aggregate compensation Trust Group
from the Fund
<S> <C> <C>
H. Brewster Atwater, Jr. $1,075 $108,900
- -------------------------------
Lynne V. Cheney 806 95,400
- -------------------------------
Heinz F. Hutter 950 101,400
- -------------------------------
Anne P. Jones 1,058 111,400
- -------------------------------
Alan K. Simpson 756 92,400
- -------------------------------
Edson W. Spencer 1,042 106,900
- -------------------------------
Wheelock Whitney 1,000 104,400
- -------------------------------
C. Angus Wurtele 1,292 121,900
</TABLE>
As of 30 days prior to the date of this SAI, the Fund's board members and
officers as a group owned less than 1% of the outstanding shares of any class.
INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
The financial statements contained in the Annual Report 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.
<PAGE>
APPENDIX
DESCRIPTION OF RATINGS
Standard & Poor's Debt Ratings
A Standard & Poor's corporate or municipal debt rating is a current assessment
of the creditworthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration obligors such as guarantors,
insurers, or lessees.
The debt rating is not a recommendation to purchase, sell, or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer or obtained
by S&P from other sources it considers reliable. S&P does not perform an audit
in connection with any rating and may, on occasion, rely on unaudited financial
information. The ratings may be changed, suspended, or withdrawn as a result of
changes in, or unavailability of such information or based on other
circumstances.
The ratings are based, in varying degrees, on the following considerations:
o Likelihood of default capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation.
o Nature of and provisions of the obligation.
o Protection afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization, or other arrangement
under the laws of bankruptcy and other laws affecting creditors'
rights.
Investment Grade
Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity to
pay interest and repay principal is extremely strong.
Debt rated AA has a very strong capacity to pay interest and repay principal and
differs from the highest rated issues only in a small degree.
Debt rated A has a strong capacity to pay interest and repay principal, although
it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
Debt rated BBB is regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than in higher-rated categories.
Speculative grade
Debt rated BB, B, CCC, CC, and C is regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
<PAGE>
Debt rated BB has less near-term vulnerability to default than other speculative
issues. However, it faces major ongoing uncertainies or exposure to adverse
business, financial, or economic conditions that could lead to inadequate
capacity to meet timely interest and principal payments. The BB rating category
also is used for debt subordinated to senior debt that is assigned an actual or
implied BBB- rating.
Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category also is used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
Debt rated CCC has a currently identifiable vulnerability to default and is
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category also is
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
Debt rated CC typically is applied to debt subordinated to senior debt that is
assigned an actual or implied CCC rating.
Debt rated C typically is applied to debt subordinated to senior debt that is
assigned an actual or implied CCC rating. The C rating may be used to cover a
situation where a bankruptcy petition has been filed, but debt service payments
are continued.
The rating CI is reserved for income bonds on which no interest is being paid.
Debt rated D is in payment default. The D rating category is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Moody's Long-Term Debt Ratings
Aaa - Bonds that are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa - Bonds that are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present that make the
long-term risk appear somewhat larger than in Aaa securities.
A - Bonds that are rated A possess many favorable investment attributes and are
to be considered as upper-medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present that
suggest a susceptibility to impairment some time in the future.
Baa - Bonds that are rated Baa are considered as medium-grade obligations (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
<PAGE>
Ba - Bonds that are rated Ba are judged to have speculative elements--their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B - Bonds that are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or maintenance of other
terms of the contract over any long period of time may be small.
Caa - Bonds that are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds that are rated Ca represent obligations that are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C - Bonds that are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Fitch Investors Service, Inc. Bond Ratings
Fitch investment grade bond and preferred stock ratings provide a guide to
investors in determining the credit risk associated with a particular security.
The ratings represent Fitch's assessment of the issuer's ability to meet the
obligations of a specific debt or preferred issue in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guaranties unless otherwise indicated.
Bonds and preferred stock carrying the same rating are of similar but not
necessarily identical credit quality since the rating categories do not fully
reflect small differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other obligors,
underwriters, their experts, and other sources Fitch believes to be reliable.
Fitch does not audit or verify the truth or accuracy of such information.
Ratings may be changed, suspended, or withdrawn as a result of changes in, or
the unavailability of, information or for other reasons.
AAA Bonds and preferred stock considered to be investment grade
and of the highest credit quality. The obligor has an
exceptionally strong ability to pay interest and/or dividends
and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds and preferred stock considered to be investment grade
and of very high credit quality. The obligor's ability to pay
interest and/or dividends and repay principal is very strong,
although not quite as strong as bonds rated AAA.
<PAGE>
A Bonds and preferred stock considered to be investment grade
and of high credit quality. The obligor's ability to pay
interest and/or dividends and repay principal is considered to
be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than debt or preferred
securities with higher ratings.
BBB Bonds and preferred stock considered to be investment grade
and of satisfactory credit quality. The obligor's ability to
pay interest or dividends and repay principal is considered to
be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact
on these securities and, therefore, impair timely payment. The
likelihood that the ratings of these bonds or preferred stock
will fall below investment grade is higher than for securities
with higher ratings.
Fitch speculative grade bond or preferred stock ratings provide a guide to
investors in determining the credit risk associated with a particular security.
The ratings (BB to C) represent Fitch's assessment of the likelihood of timely
payment of principal and interest or dividends in accordance with the terms of
obligation for issues not in default. For defaulted bonds or preferred stock,
the rating (DDD to D) is an assessment of the ultimate recovery value through
reorganization or liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer or possible recovery value in
bankruptcy, the current and prospective financial condition and operating
performance of the issuer and any guarantor, as well as the economic and
political environment that might affect the issuer's future financial strength.
Bonds or preferred stock that have the same rating are of similar but not
necessarily identical credit quality since the rating categories cannot fully
reflect the differences in the degrees of credit risk.
BB Bonds or preferred stock are considered speculative. The
obligor's ability to pay interest or dividends and repay
principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be
identified, which could assist the obligor in satisfying its
debt service requirements.
B Bonds or preferred stock are considered highly speculative.
While bonds in this class are currently meeting debt service
requirements or paying dividends, the probability of continued
timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable
business and economic activity throughout the life of the
issue.
CCC Bonds or preferred stock have certain identifiable
characteristics that if not remedied, may lead to default. The
ability to meet obligations requires an advantageous business
and economic environment.
CC Bonds or preferred stock are minimally protected. Default in
payment of interest and/or principal seems probable over time.
C Bonds are in imminent default in payment of interest or
principal or suspension of preferred stock dividends is
imminent.
<PAGE>
DDD,
DD,
and D Bonds are in default on interest and/or principal payments
or preferred stock dividends are suspended. Such securities
are extremely speculative and should be valued on the basis of
their ultimate recovery value in liquidation or reorganization
of the obligor. DDD represents the highest potential for
recovery of these securities and D represents the lowest
potential for recovery.
Duff & Phelps, Inc. Long-Term Debt Ratings
These ratings represent a summary opinion of the issuer's long-term fundamental
quality. Rating determination is based on qualitative and quantitative factors
that may vary according to the basic economic and financial characteristics of
each industry and each issuer. Important considerations are vulnerability to
economic cycles as well as risks related to such factors as competition,
government action, regulation, technological obsolescence, demand shifts, cost
structure, and management depth and expertise. The projected viability of the
obligor at the trough of the cycle is a critical determination.
Each rating also takes into account the legal form of the security (e.g. first
mortgage bonds, subordinated debt, preferred stock, etc.). The extent of rating
dispersion among the various classes of securities is determined by several
factors including relative weightings of the different security classes in the
capital structure, the overall credit strength of the issuer, and the nature of
covenant protection. Review of indenture restrictions is important to the
analysis of a company's operating and financial constraints.
The Credit Rating Committee formally reviews all ratings once per quarter (more
frequently, if necessary). Ratings of BBB- and higher fall within the definition
of investment grade securities, as defined by bank and insurance supervisory
authorities. Structured finance issues, including real estate, asset-backed and
mortgage-backed financings, use this same rating scale with minor modification
in the definitions. Thus, an investor can compare the credit quality of
investment alternatives across industries and structural types. A "Cash Flow
Rating" (as noted for specific ratings) addresses the likelihood that aggregate
principal and interest will equal or exceed the rated amount under appropriate
stress conditions.
<TABLE>
<CAPTION>
Rating Scale Definition
-------------------------- --------------------------------------------------------------------------------
<S> <C>
AAA Highest credit quality. The risk factors are
negligible, being only slightly more than for
risk-free U.S. Treasury debt.
-------------------------- --------------------------------------------------------------------------------
AA+ High credit quality. Protection factors are strong. Risk is modest, but may
AA vary slightly from time to time because of economic conditions.
AA-
-------------------------- --------------------------------------------------------------------------------
A+ Protection factors are average but adequate. However, risk factors are more
A variable and greater in periods of economic stress.
A-
-------------------------- --------------------------------------------------------------------------------
<PAGE>
BBB+ Below-average protection factors but still considered sufficient for prudent
BBB investment. Considerable variability in risk during economic cycles.
BBB-
-------------------------- --------------------------------------------------------------------------------
BB+ Below investment grade but deemed likely to meet obligations when due. Present
BB or prospective financial protection factors fluctuate according to industry
BB- conditions or company fortunes. Overall quality may move up or down frequently
within this category.
-------------------------- --------------------------------------------------------------------------------
B+ Below investment grade and possessing risk that obligations will not be met
B when due. Financial protection factors will fluctuate widely according to
B- economic cycles, industry conditions, and/or company fortunes. Potential
exists for frequent changes in the rating within
this category or into a higher or lower rating
grade.
-------------------------- --------------------------------------------------------------------------------
CCC Well below investment grade securities. Considerable
uncertainty exists as to timely payment of
principal, interest, or preferred dividends.
Protection factors are narrow and risk can be
substantial with unfavorable economic/industry
conditions, and or with unfavorable company
developments.
-------------------------- --------------------------------------------------------------------------------
DD Defaulted debt obligations. Issuer failed to meet
scheduled principal and/or interest payments.
DP Preferred stock with dividend arrearages.
-------------------------- --------------------------------------------------------------------------------
</TABLE>
IBCA Long-Term Debt Ratings
AAA Obligations for which there is the lowest expectation of investment
risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic, or
financial conditions are unlikely to increase investment risk
substantially.
AA Obligations for which there is a very low expectation of investment
risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic, or financial
conditions may increase investment risk, albeit not very significantly.
A Obligations for which there is a low expectation of investment risk.
Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic, or financial conditions
may lead to increased investment risk.
BBB Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and
interest is adequate, although adverse changes in business, economic,
or financial conditions are more likely to lead to increased investment
risk than for obligations in other categories.
BB Obligations for which there is a possibility of investment risk
developing. Capacity for timely repayment of principal and interest
exists, but is susceptible over time to adverse changes in business,
economic, or financial conditions.
<PAGE>
B Obligations for which investment risk exists. Timely repayment of
principal and interest is not sufficiently protected against adverse
changes in business, economic, or financial conditions.
CCC Obligations for which there is a current perceived possibility of
default. Timely repayment of principal and interest is dependent on
favorable business, economic, or financial conditions.
CC Obligations that are highly speculative or that have a high risk of
default.
C Obligations that are currently in default.
Notes: "+" or "-" may be appended to a rating below AAA to denote relative
status within major rating categories. Ratings of BB and below are assigned
where it is considered that speculative characteristics are present.
Thomson Bank Watch Long-Term Debt Ratings
Investment Grade
AAA (LC-AAA) Indicates that the ability to repay principal and
interest on a timely basis is extremely high.
AA (LC-AA) Indicates a very strong ability to repay principal
and interest on a timely basis, with limited incremental
risk compared to issues rated in the highest category.
A (LC-A) Indicates the ability to repay principal and
interest is strong. Issues rated A could be more
vulnerable to adverse developments (both internal and
external) than obligations with higher ratings.
BBB (LC-BBB) The lowest investment-grade category: indicates
an acceptable capacity to repay principal and interest.
BBB issues are more vulnerable to adverse developments
(both internal and external) than obligations with higher
ratings.
Non-Investment Grade - may be speculative in the likelihood of timely repayment
of principal and interest.
BB (LC-BB) While not investment grade, the BB rating suggests
that the likelihood of default is considerably less than
for lower-rated issues. However, there are significant
uncertainties that could affect the ability to adequately
service debt obligations.
B (LC-B) Issues rated B show higher degree of uncertainty
and therefore greater likelihood of default than
higher-rated issues. Adverse developments could negatively
affect the payment of interest and principal on a timely
basis.
CCC (LC-CCC) Issues rated CCC clearly have a high likelihood
of default, with little capacity to address further
adverse changes in financial circumstances.
CC (LC-CC) CC is applied to issues that are subordinate to
other obligations rated CCC and are afforded less
protection in the event of bankruptcy or reorganization.
D (LC-D) Default.
<PAGE>
SHORT-TERM RATINGS
Standard & Poor's Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market.
Ratings are graded into several categories, ranging from A-1 for the highest
quality obligations to D for the lowest. These categories are as follows:
A-1 This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to
possess extremely strong safety characteristics are denoted
with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as
high as for issues designated A-1.
A-3 Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the
adverse effects of changes in circumstances than obligations
carrying the higher designations.
B Issues are regarded as having only speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with
doubtful capacity for payment.
D Debt rated D is in payment default. The D rating category is
used when interest payments or principal payments are not made
on the date due, even if the applicable grace period has not
expired, unless S&P believes that such payments will be made
during such grace period.
Standard & Poor's Note Ratings
An S&P note rating reflects the liquidity factors and market-access risks unique
to notes. Notes maturing in three years or less will likely receive a note
rating. Notes maturing beyond three years will most likely receive a long-term
debt rating.
Note rating symbols and definitions are as follows:
SP-1 Strong capacity to pay principal and interest. Issues
determined to possess very strong characteristics are given a
plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over
the term of the notes.
SP-3 Speculative capacity to pay principal and interest.
<PAGE>
Moody's Short-Term Ratings
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
Issuers rated Prime-l (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-l
repayment ability will often be evidenced by many of the following
characteristics: (i) leading market positions in well-established
industries, (ii) high rates of return on funds employed, (iii)
conservative capitalization structure with moderate reliance on debt
and ample asset protection, (iv) broad margins in earnings coverage of
fixed financial charges and high internal cash generation, and (v) well
established access to a range of financial markets and assured sources
of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above, but
to a lesser degree. Earnings trends and coverage ratios, while sound,
may be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Fitch Investors Service, Inc. Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
F-1+ Exceptionally Strong Credit Quality. Issues assigned this
rating are regarded as having the strongest degree of
assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in
degree than issues rated F.
F-2 Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment but the
margin of safety is not as great as for issues assigned F-1+
and F-1 ratings.
F-3 Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for
timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment
grade.
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F-S Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes
in financial and economic conditions.
D Default Issues assigned this rating are in actual or imminent
payment default.
LOC The symbol LOC indicates that the rating is based on a letter
of credit issued by a commercial bank.
Duff & Phelps, Inc. Short-Term Debt Ratings
Duff & Phelps' short-term ratings are consistent with the rating criteria used
by money market participants. The ratings apply to all obligations with
maturities of under one year, including commercial paper, the uninsured portion
of certificates of deposit, unsecured bank loans, master notes, banker's
acceptances, irrevocable letters of credit, and current maturities of long-term
debt. Asset-backed commercial paper also is rated according to this scale.
Emphasis is placed on liquidity, which is defined as not only cash from
operations but also access to alternative sources of funds including trade
credit, bank lines, and the capital markets. An important consideration is the
level of an obligor's reliance on short-term funds on an ongoing basis.
Rating Scale: Definition
High Grade
D-1+ Highest certainty of timely payment. Short-term
liquidity, including internal operating factors and
or access to alternative sources of funds, is
outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
D-1 Very high certainty of timely payment. Liquidity
factors are excellent and supported by good
fundamental protection factors. Risk factors are
minor.
D-1- High certainty of timely payment. Liquidity factors
are strong and supported by good fundamental
protection factors. Risk factors are very small.
Good Grade
D-2 Good certainty of timely payment. Liquidity factors
and company fundamentals are sound. Although
ongoing funding needs may enlarge total financing
requirements, access to capital markets is good.
Risk factors are small.
Satisfactory Grade
D-3 Satisfactory liquidity and other protection factors
qualify issues as to investment grade. Risk factors
are larger and subject to more variation.
Nevertheless, timely payment is expected.
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Non-Investment Grade
D-4 Speculative investment characteristics. Liquidity
is not sufficient to insure against disruption in
debt service. Operating factors and market access
may be subject to a high degree of variation.
Default
D-5 Issuer failed to meet scheduled principal and/or
interest payments.
Thomson BankWatch (TBW) Short-Term Ratings
The TBW Short-Term Ratings apply, unless otherwise noted, to specific debt
instruments of the rated entities with a maturity of one year or less. TBW
Short-Term Ratings are intended to assess the likelihood of untimely or
incomplete payments of principal or interest.
TBW-1 The highest category; indicates a very high likelihood that
principal and interest will be paid on a timely basis.
TBW-2 The second highest category; while the degree of safety
regarding timely repayment of principal and interest is
strong, the relative degree of safety is not as high as
for issues rated TBW- I.
TBW-3 The lowest investment-grade category; indicates that while
the obligation is more susceptible to adverse developments
(both internal and external) than those with higher
ratings, the capacity to service principal and interest in
a timely fashion is considered adequate.
TBW-4 The lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.
IBCA Short-Term Ratings
IBCA Short-Term Ratings assess the borrowing characteristics of banks and
corporations, and the capacity for timely repayment of debt obligations. The
Short-Term Ratings relate to debt that has a maturity of less than one year.
A1 Obligations supported by the highest capacity for timely
repayment. Where issues possess a particularly strong credit
feature, a rating of A1+ is assigned.
A2 Obligations supported by a good capacity for timely repayment.
A3 Obligations supported by a satisfactory capacity for timely
repayment.
B Obligations for which there is an uncertainty as to the
capacity to ensure timely repayment.
C Obligations for which there is a high risk of default or which
are currently in default.
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Moody's & S&P's
Short-Term Muni Bonds and Notes
Short-term municipal bonds and notes are rated by Moody's and by S&P. The
ratings reflect the liquidity concerns and market access risks unique to notes.
Moody's MIG 1/VMIG 1 indicates the best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
Moody's MIG 2/VMIG 2 indicates high quality. Margins of protection are ample
although not so large as in the preceding group.
Moody's MIG 3/VMIG 3 indicates favorable quality. All security elements are
accounted for but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
Moody' s MIG 4/VMIG 4 indicates adequate quality. Protection commonly regarded
as required of an investment security is present and although not distinctly or
predominantly speculative, there is specific risk.
Standard & Poor's rating SP-1 indicates very strong or strong capacity to pay
principal and interest. Those issues determined to possess overwhelming safety
characteristics will be given a plus (+) designation.
Standard & Poor's rating SP-2 indicates satisfactory capacity to pay principal
and interest.
Standard & Poor's rating SP-3 indicates speculative capacity to pay principal
and interest.
