SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 32 (File No. 33-5102) [X]
----
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 33 (File No. 811-4647) [X]
----
AXP SPECIAL TAX-EXEMPT SERIES TRUST
IDS Tower 10
Minneapolis, Minnesota 55440-0010
Leslie L. Ogg - 901 Marquette Avenue South, Suite 2810
Minneapolis, MN 55402-3268
(612) 330-9283
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[X] on Aug. 27, 1999 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
<PAGE>
AXPSM California Tax-Exempt Fund
AXPSM Massachusetts Tax-Exempt Fund
AXPSM Michigan Tax-Exempt Fund
AXPSM Minnesota Tax-Exempt Fund
AXPSM New York Tax-Exempt Fund
AXPSM Ohio Tax-Exempt Fund
PROSPECTUS
Aug. 27, 1999
Each Fund seeks to provide shareholders with a high level of income
generally exempt from federal income tax as well as from the
respective state and local income tax.
Please note that each 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.
<PAGE>
Table of Contents
TAKE A CLOSER LOOK AT:
The Funds 3p
Goal 3p
Investment Strategy 3p
Risks 4p
Past Performance 6p
Fees and Expenses 11p
Management 13p
Buying and Selling Shares 14p
Valuing Fund Shares 14p
Investment Options 14p
Purchasing Shares 15p
Sales Charges 18p
Exchanging/Selling Shares 21p
Distributions and Taxes 25p
Personalized Shareholder Information 26p
About the Company 27p
Quick Telephone Reference 28p
Financial Highlights 29p
Appendix 35p
<PAGE>
FUND INFORMATION KEY
Goal and Investment Strategy
Each Fund's particular investment goal and the strategies it intends to use in
pursuing its goal.
Risks
The major risk factors associated with each Fund.
Fees and Expenses
The overall costs incurred by an investor in each Fund, including sales
charges and annual expenses.
Management
The individual or group designated by the investment manager to handle each
Fund's day-to-day management.
Financial Highlights
Tables showing each Fund's financial performance.
<PAGE>
The Funds
GOAL
Each Fund seeks to provide shareholders with a high level of income generally
exempt from federal income tax as well as from the respective state and local
tax. Because any investment involves risk, achieving these goals cannot be
guaranteed.
INVESTMENT STRATEGY
Each of the California, Massachusetts, Michigan, Minnesota, New York and Ohio
Tax-Exempt Funds is a non-diversified mutual fund that invests primarily in
high- or medium-quality municipal obligations that are generally exempt from
federal income tax as well as from the respective state and local income tax.
Under normal market conditions, each Fund will invest at least 80% if its net
assets in bonds, notes, and commercial paper issued by or on behalf of its
respective state or local governmental units. Each Fund may invest more than 25%
of its total assets in a particular segment of the municipal securities market
or in industrial revenue bonds. Each Fund also may invest up to 20% of its net
assets in debt obligations whose interest is subject to the alternative minimum
tax computation. Additionally, each Fund may invest up to 25% of its net assets
in lower-quality bonds (junk bonds).
The selection of debt obligations that are tax-exempt is the primary decision in
building each Fund's investment portfolio.
In pursuit of each Fund's goal, American Express Financial Corporation (AEFC),
the Funds' investment manager, chooses investments by:
o Considering opportunities and risks given current and expected
interest rates.
o Identifying obligations in sectors which, due to supply and demand,
are offering higher yields than comparable instruments.
o Identifying obligations that:
-- are investment-grade,
-- have coupons and/or maturities that are consistent with AEFC's
interest rate outlook, and
-- are expected to outperform other securities on a risk-adjusted
basis (i.e., after considering coupon, sinking fund provision, call
protection, and quality).
In evaluating whether to sell a security, AEFC considers, among other factors,
whether:
-- the security is overvalued relative to other potential
investments,
-- the issuer's credit rating declines or AEFC expects a decline
(the Fund may continue to own securities that are down-graded until
AEFC believes it is advantageous to sell),
-- political, economic, or other events could affect the issuer's
performance,
-- AEFC expects the issuer to call the security, and
-- AEFC identifies a more attractive opportunity.
Although not a primary investment strategy, each Fund also may invest in
derivative instruments, money market securities and other short-term tax-exempt
securities.
<PAGE>
During weak or declining markets or when the supply of these types of
obligations is low, each Fund may invest more of its assets in money market
securities or certain taxable investments. Although a Fund primarily will invest
in these securities to avoid losses, this type of investing also could cause the
Fund to lose the opportunity to participate in market improvement. During these
times, AEFC may make frequent securities trades that could result in increased
fees, expenses, and taxes.
For more information on strategies and holdings, see the Funds' Statement of
Additional Information (SAI) and the annual/semiannual reports.
RISKS
Please remember that with any mutual fund investment you may lose money.
Principal risks associated with an investment in each
Fund include:
Market Risk
Interest Rate Risk
Credit Risk
Legal/Legislative Risk
Sector/Concentration Risk
Style Risk
For details regarding economic conditions and other recent developments in each
state please see the SAI.
Market Risk
The market may drop and you may lose money. Market risk may affect a single
issuer, sector of the economy, industry, or the market as a whole. The market
value of all securities may move up and down, sometimes rapidly and
unpredictably.
Interest Rate Risk
The risk of losses attributable to changes in interest rates. This term is
generally associated with bond prices (when interest rates rise, bond prices
fall). In general, the longer the maturity of a debt obligation, the higher its
yield and the greater the sensitivity to changes in interest rates.
<PAGE>
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.
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.
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).
Each Fund is non-diversified. A non-diversified fund may invest more of its
assets in fewer companies than if it were a diversified fund. Because each
investment has a greater effect on each Fund's performance, it may be more
susceptible to a single economic, political or regulatory occurence than a
diversified fund.
Style Risk
Each Fund invests primarily in municipal obligations. The yields on these
securities are dependent on a variety of factors, including the financial
condition of the issuer or other obligor or the revenue source from which the
debt service is payable, general economic and monetary conditions, conditions in
the relevant market, the size of a particular issue, and the rating of the
issue.
Although, such factors will apply to each Fund, each Fund will experience
particular sensitivity to local conditions -- such as political and economic
changes, adverse conditions to an industry significant to the area, and other
developments. Please remember that most state and local economies have
experienced significant expansions over the past 5-7 years. In recessionary
periods, more issuers may default on their obligations.
The following discussion provides background information about the economies of
those geographic areas in which each Fund may invest a significant portion of
its assets. These summaries are general in nature and economic conditions in a
particular state may change at any time. Please see the SAI for additional
state-specific risk factors.
AXP California Tax-Exempt Fund -- California's economy, although fairly diverse,
is impacted significantly by the retail, entertainment, tourism, construction
(residential and commercial) and telecommunications industries. Although
California's recent economic expansion slowed in early 1998, recent data
indicates that growth has again strengthened.
AXP Massachusetts Tax-Exempt Fund -- Massachusetts' economy is fundamentally
strong, due in part to strong financial operations and cash positions. Personal
income growth in the State recently ranked among the highest in the U.S. Major
contributors to the State's recent economic growth are the manufacturing,
services and trade sectors.
AXP Michigan Tax-Exempt Fund -- Michigan's economy, which continues to be
strong, is primarily concentrated in the manufacturing sector. This sector
accounts for about one-third of the State's personal income. Cost-containment
pressures in manufacturing are expected to limit future employment and wage-rate
growth.
AXP Minnesota Tax-Exempt Fund -- Minnesota's economy, although fairly diverse,
is primarily concentrated in the manufacturing, services and trade sectors and
is influenced by the vast supply of resources in the state. Factors contributing
to recent increases in the State's per-capita income include a growing
labor force, longer working hours and multiple job holdings.
AXP New York Tax-Exempt Fund -- New York's economy is well-diversified with
major industrial and commercial concerns across a broad range of employment
sectors. Much of the state's overall economic prosperity in recent years is tied
to the finance, insurance and real estate industries. The State's recent
economic recovery continues to be fairly steady.
AXP Ohio Tax-Exempt Fund -- Ohio's economy, although fairly diverse, is
primarily concentrated in the services sector and is highly influenced by the
contruction industry. The State's recent credit position has drawn increasing
strength from prudent financial management and economic changes contributing to
diversification and stability.
<PAGE>
PAST PERFORMANCE
Thefollowing bar chart and table indicate the risks and variability of
investing in each Fund by showing:
o how each Fund's performance has varied for each full calendar year
shown on the chart below, and
o how each Fund's average annual total returns compare to a recognized
index.
How each Fund has performed in the past does not indicate how the Fund will
perform in the future.
- --------------------------------------------------------------------------------
California -- Class A Performance* (based on calendar years)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
+10.04% +5.72% +10.93% +8.34% +12.03% -5.27% +15.23% +3.46% +7.93% +5.81%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
</TABLE>
During the period shown in the bar chart, the highest return for a calendar
quarter was +7.10% (quarter ending March 1995) and the lowest return for a
calendar quarter was -4.89% (quarter ending March 1994).
The Fund's year to date return as of June 30, 1999 was -1.36%.
<PAGE>
Massachusetts -- Class A Performance* (based on calendar years)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
+7.31% +6.11% +11.99% +9.06% +12.33% -5.20% +15.49% +3.32% +8.31% +5.67%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
</TABLE>
During the period shown in the bar chart, the highest return for a calendar
quarter was +7.08% (quarter ending March 1995) and the lowest return for a
calendar quarter was -5.40% (quarter ending March 1994).
The Fund's year to date return as of June 30, 1999 was -1.11%.
Michigan -- Class A Performance* (based on calendar years)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
+10.42% +4.73% +11.42% +9.50% +12.47% -4.86% +16.12% +2.78% +7.53% +5.60%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
</TABLE>
During the period shown in the bar chart, the highest return for a calendar
quarter was +7.02% (quarter ending March 1995) and the lowest return for a
calendar quarter was -5.00% (quarter ending March 1994).
The Fund's year to date return as of June 30, 1999 was -0.98%.
<PAGE>
Minnesota -- Class A Performance* (based on calendar years)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
+10.68% +5.36% +10.82% +8.63% +11.33% -4.31% +14.86% +3.57% +8.42% +5.83%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
</TABLE>
During the period shown in the bar chart, the highest return for a calendar
quarter was +6.68% (quarter ending March 1995) and the lowest return for a
calendar quarter was -5.03% (quarter ending March 1994).
The Fund's year to date return as of June 30, 1999 was -0.48%.
New York -- Class A Performance* (based on calendar years)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
+10.04% +5.23% +12.41% +9.59% +11.53% -5.04% +13.41% +2.79% +8.81% +5.63%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
</TABLE>
During the period shown in the bar chart, the highest return for a calendar
quarter was +6.20% (quarter ending March 1995) and the lowest return for a
calendar quarter was -5.09% (quarter ending March 1994).
The Fund's year to date return as of June 30, 1999 was -1.11%.
<PAGE>
Ohio -- Class A Performance* (based on calendar years)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
+9.28% +5.38% +11.43% +9.43% +11.54% -4.79% +14.51% +3.32% +7.95% +5.64%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
</TABLE>
During the period shown in the bar chart, the highest return for a calendar
quarter was +6.89% (quarter ending March 1995) and the lowest return for a
calendar quarter was -5.06% (quarter ending March 1994).
The Fund's year to date return as of June 30, 1999 was -0.64%.
*The 5% sales charge applicable to Class A shares of the Fund is not reflected
in the bar chart; if reflected, returns would be lower than those shown. The
performance of Class B may vary from that shown above because of differences in
sales charges and fees.
<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Returns (as of Dec. 31, 1998)
<S> <C> <C> <C> <C>
1 year 5 years 10 years Since inception
- ---------------------------------------------------------------------------------------------------------------------------------
California:
- ---------------------------------------------------------------------------------------------------------------------------------
Class A +0.52% +4.15% +6.74% --%
- ---------------------------------------------------------------------------------------------------------------------------------
Class B +1.05% --% --% +5.28%a
Massachusetts:
- ---------------------------------------------------------------------------------------------------------------------------------
Class A +0.39% +4.23% +6.75% --%
- ---------------------------------------------------------------------------------------------------------------------------------
Class B +0.89% --% --% +5.35%a
Michigan:
- ---------------------------------------------------------------------------------------------------------------------------------
Class A +0.32% +4.14% +6.87% --%
- ---------------------------------------------------------------------------------------------------------------------------------
Class B +0.83% --% --% +5.13%a
Minnesota:
- ---------------------------------------------------------------------------------------------------------------------------------
Class A +0.54% +4.41% +6.85% --%
- ---------------------------------------------------------------------------------------------------------------------------------
Class B +1.06% --% --% +5.46%a
New York:
- ---------------------------------------------------------------------------------------------------------------------------------
Class A +0.35% +3.87% +6.76% --%
- ---------------------------------------------------------------------------------------------------------------------------------
Class B +0.83% --% --% +5.04%a
Ohio:
- ---------------------------------------------------------------------------------------------------------------------------------
Class A +0.36% +4.06% +6.69% --%
- ---------------------------------------------------------------------------------------------------------------------------------
Class B +0.88% --% --% +5.09%a
- ---------------------------------------------------------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index +6.48% +5.84% +8.01% +7.41%b
</TABLE>
a Inception date was March 20, 1995.
b Measurement period started April 1, 1995.
This table shows total returns from hypothetical investments in Class A and
Class B shares of the Fund. These returns are compared to the index shown for
the same periods. The performance of Class B will vary from Class A because of
differences in sales charges and fees.
For purposes of this calculation we assumed:
o a sales charge of 5% for Class A shares,
o sales at the end of the period and deduction of the applicable contingent
deferred sales charge (CDSC)for Class B shares, and
o no adjustments for taxes paid by an investor on the reinvested income and
capital gains.
Lehman Brothers Municipal Bond Index, an unmanaged index made up of a
representative list of general obligation, revenue, insured and pre-refunded
bonds. The index is frequently used as a general measure of tax-exempt bond
market performance. However, the securities used to create the index may not be
representative of the bonds held in a Fund. The index reflects reinvestment of
all distributions and changes in market prices, but excludes brokerage
commissions or other fees. However, the securities used to create the index may
not be representative of the bonds held in the Fund.
<PAGE>
FEES AND EXPENSES
Fund investors pay various expenses. The table below describes the fees and
expenses that you may pay if you buy and hold shares of a Fund.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Shareholder Fees (fees paid directly from your investment)
Class A Class B
<S> <C> <C>
Maximum sales charge (load) imposed on purchasesa
- ----------------------------------------------------------------------------------------------------------
(as a percentage of offering price) 5% none
Maximum deferred sales charge (load) imposed on sales
(as a percentage of offering price at time of purchase) none 5%
- ----------------------------------------------------------------------------------------------------------
Annual Fund operating expenses (expenses that are deducted from Fund assets)
California
As a percentage of average daily net assets: Class A Class B
- ----------------------------------------------------------------------------------------------------------
Management fees 0.47% 0.47%
Distribution (12b-1) fees 0.25% 1.00%
Other expensesb 0.14% 0.16%
Total 0.86% 1.63%
Massachusetts
As a percentage of average daily net assets: Class A Class B
- ----------------------------------------------------------------------------------------------------------
Management fees 0.47% 0.47%
Distribution (12b-1) fees 0.25% 1.00%
Other expensesb 0.18% 0.19%
Total 0.90% 1.66%
Michigan
As a percentage of average daily net assets: Class A Class B
- ----------------------------------------------------------------------------------------------------------
Management fees 0.47% 0.47%
Distribution (12b-1) fees 0.25% 1.00%
Other expensesb 0.20% 0.22%
Total 0.92% 1.69%
<PAGE>
Minnesota
As a percentage of average daily net assets: Class A Class B
- ----------------------------------------------------------------------------------------------------------
Management fees 0.46% 0.46%
Distribution (12b-1) fees 0.25% 1.00%
Other expensesb 0.16% 0.17%
Total 0.87% 1.63%
New York
As a percentage of average daily net assets: Class A Class B
- ----------------------------------------------------------------------------------------------------------
Management fees 0.47% 0.47%
Distribution (12b-1) fees 0.25% 1.00%
Other expensesb 0.19% 0.19%
Total 0.91% 1.66%
Ohio
As a percentage of average daily net assets: Class A Class B
- ----------------------------------------------------------------------------------------------------------
Management fees 0.47% 0.47%
Distribution (12b-1) fees 0.25% 1.00%
Other expensesb 0.25% 0.25%
- ----------------------------------------------------------------------------------------------------------
Total 0.97% 1.72%
</TABLE>
a This charge may be reduced depending on your total investments in American
Express funds. See "Sales Charges."
b Expenses for Class A and Class B are based on actual expenses for the last
fiscal year, restated to reflect current fees.
c 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 each Fund
with the cost of investing in other mutual funds.
Assume you invest $10,000 and each 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:
<TABLE>
<CAPTION>
California
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
Class Aa $583 $761 $954 $1,512
- ----------------------------------------------------------------------------------------------------------
Class Bb $666 $914 $1,088 $1,731d
- ----------------------------------------------------------------------------------------------------------
Class Bc $166 $514 $888 $1,731d
Massachusetts
1 year 3 years 5 years 10 years
- ----------------------------------------------------------------------------------------------------------
Class Aa $587 $773 $974 $1,557
- ----------------------------------------------------------------------------------------------------------
Class Bb $669 $924 $1,103 $1,767d
- ----------------------------------------------------------------------------------------------------------
Class Bc $169 $524 $903 $1,767d
Michigan
1 year 3 years 5 years 10 years
- ----------------------------------------------------------------------------------------------------------
Class Aa $589 $779 $985 $1,579
- ----------------------------------------------------------------------------------------------------------
Class Bb $672 $933 $1,119 $1,797d
- ----------------------------------------------------------------------------------------------------------
Class Bc $172 $533 $919 $1,797d
Minnesota
1 year 3 years 5 years 10 years
- ----------------------------------------------------------------------------------------------------------
Class Aa $584 $764 $959 $1,523
- ----------------------------------------------------------------------------------------------------------
Class Bb $666 $914 $1,088 $1,734d
- ----------------------------------------------------------------------------------------------------------
Class Bc $166 $514 $888 $1,734d
New York
1 year 3 years 5 years 10 years
- ----------------------------------------------------------------------------------------------------------
Class Aa $588 $776 $979 $1,568
- ----------------------------------------------------------------------------------------------------------
Class Bb $669 $924 $1,103 $1,770d
- ----------------------------------------------------------------------------------------------------------
Class Bc $169 $524 $903 $1,770d
Ohio
1 year 3 years 5 years 10 years
- ----------------------------------------------------------------------------------------------------------
Class Aa $594 $794 $1,010 $1,634
Class Bb $675 $942 $1,134 $1,836d
- ----------------------------------------------------------------------------------------------------------
Class Bc $175 $542 $934 $1,836d
</TABLE>
a Includes a 5% sales charge.
b Assumes you sold your Class B shares at the end of the period and incurred the
applicable CDSC. c Assumes you did not sell your Class B shares at the end of
the period. d Based on conversion of Class B shares to Class A shares in the
ninth year of ownership.
This example does not represent actual expenses, past or future. Actual expenses
may be higher or lower than those shown.
MANAGEMENT
Paul Hylle, portfolio manager for each Fund, joined AEFC in 1993. He also serves
as portfolio manager of AXP Insured Tax-Exempt Fund.
Buying and Selling Shares
References to "Fund" throughout the remainder of this prospectus refers to AXP
California Tax-Exempt Fund, AXP Massachusetts Tax-Exempt Fund, AXP Michigan
Tax-Exempt Fund, AXP Minnesota Tax-Exempt Fund, AXP New York Tax-Exempt Fund,
AXP Ohio Tax-Exempt Fund, singularly or collectively as the context requires.
VALUING FUND SHARES
The public offering price for Class A is the net asset value (NAV) adjusted for
the sales charge. For Class B it is the NAV.
The NAV is the value of a single Fund share. The NAV usually changes daily, and
is calculated at the close of business of the New York Stock Exchange, normally
3 p.m. Central Standard Time (CST), each business day (any day the New York
Stock Exchange is open).
The Fund's investments are valued based on market quotations, or where market
quotations are not readily available, based on methods selected in good faith by
the board. If the Fund's investment policies permit it, invest in securities
that are listed on foreign stock exchanges that trade on weekends or other days
when the Fund does not price its shares, the value of the Fund's underlying
investments may change on days when you could not buy or sell shares of the
Fund. Please see the SAI for further information.
INVESTMENT OPTIONS
1. Class A shares are sold to the public with a sales charge at the time of
purchase and an annual distribution (12b-1) fee.
2. Class B shares are sold to the public with a CDSC and an annual distribution
(12b-1) fee.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Investment options summary:
<S> <C>
Class A Maximum sales charge of 5%
Initial sales charge waived or reduced for certain purchases
Annual distribution fee of 0.25% of average daily net assets*
Lower annual expenses than Class B shares
- ----------------------------------------------------------------------------------------------------------
Class B No initial sales charge
CDSC on shares sold in the first six years (maximum of 5% in first year, reduced
to 0% after year six)
CDSC waived in certain circumstances
Shares convert to Class A in ninth year of ownership
Annual distribution fee of 1.00% of average daily net assets*
Higher annual expenses than Class A shares
- ----------------------------------------------------------------------------------------------------------
</TABLE>
* The Fund has adopted a plan under Rule 12b-1 of the Investment Company Act of
1940 that allows it to pay distribution and servicing-related fees for the sale
of Class A and Class B shares. Because these fees are paid out of the Fund's
assets on an on-going basis, the fees may cost long-term shareholders more than
paying other types of sales charges imposed by some mutual funds.
<PAGE>
AXP STATE TAX-EXEMPT FUNDS Should you purchase Class A or Class B shares?
If your investments in American Express funds total $250,000 or more, Class A
shares may be the better option. If you qualify for a waiver of the sales
charge, Class A shares will be the best option.
If you invest less than $250,000, consider how long you plan to hold your
shares. Class B shares have an additional annual distribution fee of 0.75% and a
CDSC for six years. To help you determine what is best for you, consult your
financial advisor.
Class B shares convert to Class A shares in the ninth calendar year of
ownership. Class B shares purchased through reinvested dividends and
distributions also will convert to Class A shares in the same proportion as the
other Class B shares.
PURCHASING SHARES
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. Once your
account is set up, you can choose among several 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. If your application does not specify which class of shares
you are purchasing, we will assume you are investing in Class A shares.
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
because you failed to report required interest or dividends on your tax return.
<PAGE>
<TABLE>
<CAPTION>
How to determine the correct TIN
<S> ` <C>
For this type of account: Use the Social Security or Employer Identification number of:
Individual or joint account The individual or one of the individuals listed on the joint
account
- ----------------------------------------------------------------------------------------------------------
Custodian account of a minor The minor
(Uniform Gifts/Transfers to Minors Act)
A revocable living trust The grantor-trustee (the person who puts the money into
the trust)
An irrevocable trust, pension trust The legal entity (not the personal representative or
or estate 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, ask your financial advisor or contact your
local American Express Financial Advisors office to obtain a copy of federal
Form W-9, "Request for Taxpayer Identification Number and Certification."
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 Financial Advisors Inc.
P.O. Box 74
Minneapolis, MN 55440-0074
Minimum amounts
Initial investment: $2,000
Additional investments: $100
Account balances: $300
If your account balance falls below $300, you will be asked to increase it to
$300 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.
<PAGE>
2 By scheduled investment plan:
Contact your financial advisor for assistance in setting 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 with monthly payments)
If your account balance is below $2,000, you must make payments at least
monthly.
- --------------------------------------------------------------------------------
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
If you are in a wrap fee program sponsored by AEFA and your balance falls below
the required program minimum or your program is terminated, your shares will be
sold and the proceeds will be mailed to you.
<PAGE>
SALES CHARGES
Class A -- initial sales charge alternative
When you purchase Class A shares, you pay a 5% sales charge on the first $50,000
of your total investment and less on investments after the first $50,000:
- --------------------------------------------------------------------------------
Total investment Sales charge as percentage of:a
Public offering priceb Net amount invested
- --------------------------------------------------------------------------------
Up to $50,000 5.0% 5.26%
Next $50,000 4.5 4.71
Next $400,000 3.8 3.95
Next $500,000 2.0 2.04
- --------------------------------------------------------------------------------
$1,000,000 or more 0.0 0.00
a To calculate the actual sales charge on an investment greater than $50,000 and
less than $1,000,000, you must total the amounts of all increments that apply.
b Offering price includes a 5% sales charge.
The sales charge on Class A shares may be lower than 5%, depending on the total
amount:
o you now are investing in this Fund,
o you have previously invested in this Fund, or
o you and your primary household group are investing or have
invested in other American Express funds that have a sales charge.
(The primary household group consists of accounts in any ownership
for spouses or domestic partners and their unmarried
children under 21. For purposes of this policy, domestic
partners are individuals who maintain a shared primary residence
and have joint property or other insurable interests.) AXP Tax-Free
Money Fund and Class A shares of AXP Cash Management Fund do not have
sales charges.
Other Class A sales charge policies:
o IRA purchases or other employee benefit plan purchases made through a payroll
deduction plan or through a plan sponsored by an employer, association of
employers, employee organization or other similar group, may be added
together to reduce sales charges for all shares purchased through that plan,
and
o if you intend to invest $1 million over a period of 13 months, you can reduce
the sales charges in Class A by filing a letter of intent. For more details,
please see the SAI.
<PAGE>
Waivers of the sales charge for Class A shares Sales charges do not apply to:
o current or retired board members, officers or employees of the Fund or
AEFC or its subsidiaries, their
spouses or domestic partners and unmarried children under 21.
o current or retired American Express financial advisors, their spouses or
domestic partners and unmarried children under 21.
o investors who have a business relationship with a newly associated financial
advisor who joined AEFA from another investment firm provided that (1) the
purchase is made within six months of the advisor's appointment date with
AEFA, (2) the purchase is made with proceeds of shares sold that were
sponsored by the financial advisor's previous broker-dealer, and (3) the
proceeds are the result of a sale of an equal or greater value where a sales
load was assessed.
o qualified employee benefit plans using a daily transfer recordkeeping system
offering participants daily access to American Express funds. Eligibility
must be determined in advance by AEFA. For assistance, please contact your
financial advisor. (Participants in certain qualified plans where the initial
sales charge is waived may be subject to a deferred sales charge of up to
4%.)
o shareholders who have at least $1 million invested in American Express funds.
If the investment is sold in the first year after purchase, a CDSC of 1% will
be charged. The CDSC will be waived only in the circumstances described for
waivers for Class B shares.
o purchases made within 30 days after a sale of shares (up to the amount sold):
-- of a product distributed by AEFA in a qualified plan subject to a deferred
sales charge, or -- in a qualified plan or account where American Express
Trust Company has a recordkeeping, trustee,
investment management, or investment servicing relationship.
Send the Fund a written request along with your payment, indicating the date
and the amount of the sale.
o purchases made:
-- with dividend or capital gain distributions from this Fund or from the
same class of another American Express fund that has a sales charge,
-- through or under a wrap fee product sponsored by AEFA,
-- within the University of Texas System ORP,
-- within a segregated separate account offered by Nationwide Life Insurance
Company or Nationwide Life and Annuity Insurance Company,
-- within the University of Massachusetts After-Tax Savings Program,
-- with the proceeds from IDS Life Real Estate Variable Annuity
surrenders, or
-- through or under a subsidiary of AEFC offering Personal Trust
Services' Asset-Based pricing alternative.
<PAGE>
Class B -- contingent deferred sales charge (CDSC) alternative
A CDSC is based on the sale amount and the number of calendar years -- including
the year of purchase -- between purchase and sale. The following table shows how
CDSC percentages on sales decline after a purchase:
If the sale is made during the: The CDSC percentage rate is:
- --------------------------------------------------------------------------------
First year 5%
Second year 4%
Third year 4%
Fourth year 3%
Fifth year 2%
Sixth year 1%
Seventh year 0%
If the amount you are selling causes the value of your investment in Class B
shares to fall below the cost of the shares you have purchased during the last
six years including the current year, the CDSC is based on the lower of the cost
of those shares purchased or market value.
<PAGE>
Example:
Assume you had invested $10,000 in Class B shares and that your investment had
appreciated in value to $12,000 after 15 months, including reinvested dividends
and capital gain distributions. You could sell up to $2,000 worth of shares
without paying a CDSC ($12,000 current value less $10,000 purchase amount). If
you sold $2,500 worth of shares, the CDSC would apply to the $500 representing
part of your original purchase price. The CDSC rate would be 4% because the sale
was made during the second year after the purchase.
Because the CDSC is imposed only on sales that reduce your total purchase
payments, you never have to pay a CDSC on any amount that represents
appreciation in the value of your shares, income earned by your shares, or
capital gains. In addition, the CDSC rate on your sale will be based on your
oldest purchase payment. The CDSC on the next amount sold will be based on the
next oldest purchase payment.
The CDSC on Class B shares will be waived on sales of shares:
o in the event of the shareholder's death, o held in trust for an employee
benefit plan, or
o held in IRAs or certain qualified plans if American Express Trust
Company is the custodian, such as Keogh plans, tax-sheltered custodial
accounts or corporate pension plans, provided that the shareholder is:
-- at least 591/2 years old AND
-- taking a retirement distribution (if the sale is part of a
transfer to an IRA or qualified plan in a product distributed
by AEFA, or a custodian-to-custodian transfer to a product not
distributed by AEFA, the CDSC will not be waived) OR
-- selling under an approved substantially equal periodic payment
arrangement.
EXCHANGING/SELLING SHARES
Exchanges
You can exchange your Fund shares at no charge for shares of the same class of
any other publicly offered American Express fund. Exchanges into AXP Tax-Free
Money Fund may only be made from Class A shares. 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.
You may make up to three exchanges within any 30-day period, with each limited
to $300,000. These limits do not apply to scheduled exchange programs and
certain employee benefit plans or other arrangements through which one
shareholder represents the interests of several. Exceptions may be allowed with
pre-approval of the Fund.
Other exchange policies:
o Exchanges must be made into the same class of shares of the new fund.
o If your exchange creates a new account, it must satisfy the minimum
investment amount for new purchases.
o Once we receive your exchange request, you cannot cancel it.
o Shares of the new fund may not be used on the same day for another exchange.
o If your shares are pledged as collateral, the exchange will be delayed
until AECSC receives written approval from the secured party.
AECSC and the Fund reserve the right to reject any exchange, limit the amount,
or modify or discontinue the exchange privilege, to prevent abuse or adverse
effects on the Fund and its shareholders. For example, if exchanges are too
numerous or too large, they may disrupt the Fund's investment strategies or
increase its costs.
<PAGE>
Selling Shares
You can sell your shares at any time. AECSC will mail payment 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, minus any applicable CDSC.
You can change your mind after requesting a sale and use all or part of the
proceeds to purchase new shares in the same account from which you sold. If you
reinvest in Class A, you will purchase the new shares at NAV rather than the
offering price on the date of a new purchase. If you reinvest in Class B, any
CDSC you paid on the amount you are reinvesting also will be reinvested. To take
advantage of this option, send a request within 30 days of the date your sale
request was received and include your account number. This privilege may be
limited or withdrawn at any time and may have tax consequences.
Requests to sell shares of the Fund are not allowed within 30 days of a
telephoned-in address change.
The Fund reserves the right to redeem in kind.
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 your bank provides evidence satisfactory to the
Fund and AECSC that your check has cleared.)
For more details and a description of other sales policies, please see the SAI.
<PAGE>
Two ways to request an exchange or sale of shares
- --------------------------------------------------------------------------------
1 By letter:
Include in your letter:
o the name of the fund(s),
o the class of shares to be exchanged or sold,
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
- --------------------------------------------------------------------------------
2 By telephone:
American Express Financial Advisors
Telephone Transaction Service
800-437-3133
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
<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
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.
<PAGE>
Distributions and Taxes
As a shareholder you are entitled to your share of the Fund's net income and net
gains. The Fund distributes dividends and capital gains to qualify as a
regulated investment company and to avoid paying corporate income and excise
taxes.
DIVIDENDS AND CAPITAL GAIN DISTRIBUTION
The Fund's net investment income is distributed to you as dividends. Capital
gains are realized when a security is sold for a higher price than was paid for
it. Each realized capital gain or loss is long-term or short-term depending on
the length of time the Fund held the security. Realized capital gains and losses
offset each other. The Fund offsets any net realized capital gains by any
available capital loss carryovers. Net realized long-term capital gains, if any,
are distributed by the end of the calendar year as capital gain distributions.
REINVESTMENTS
Dividends and capital gain distributions are automatically reinvested in
additional shares 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 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 capital gain
distributions and income earned 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 money you borrow that is 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 the record date of a distribution you may pay
taxes on money earned by the Fund before you were a shareholder. You will pay
the full pre-distribution price for the shares, then receive a portion of your
investment back as a distribution, which may be 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 another American Express 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 of this Fund.
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.
Personalized Shareholder Information
To help you track and evaluate the performance of your investments, AECSC
provides these individualized reports:
QUARTERLY STATEMENTS
List your holdings and transactions during the previous three months, as well as
individualized return information.
YEARLY TAX STATEMENTS
Feature average-cost-basis reporting of capital gains or losses if you sell your
shares, along with distribution information to simplify tax calculations.
PERSONALIZED MUTUAL FUND PROGRESS REPORTS
Detail returns on your initial investment and cash-flow activity in your
account. This report calculates a total return reflecting your individual
history in owning Fund shares and is available from your financial advisor.
<PAGE>
About the Company
<TABLE>
<CAPTION>
BUSINESS STRUCTURE
<S> <C> <C> <C>
---------------------
Shareholders
---------------------
---------------------
Your American
Express financial
advisor and other
servicing agents
May receive a fee
for their sales
efforts and ongoing
service.
---------------------
- ----------------------- --------------------- --------------------- ---------------------
Transfer Agent: Administrative Distributor and
American Express Services Agent: Shareholder
Client Service American Express Services Agent:
Corporation Financial American Express
Corporation Financial Advisors
Maintains shareholder
accounts and records Provides <- The Fund -> Markets and
for the Fund; administrative and distributes shares;
receives a fee based accounting services receives a portion
on the number of for the Fund; of the sales charge
accounts it services. receives a fee or CDSC and
based on average distribution fee.
daily net assets. Also provides a
variety of ongoing
shareholder
services.
- ----------------------- --------------------- ---------------------
--------------------- ---------------------
Investment Manager: Custodian:
American Express U.S. Bank National
Financial Association
Corporation
Provides
Manages the <- -> safekeeping of
Fund's assets; receives a
investments and fee that varies
receives a fee based on the number
based on average of securities held.
daily net assets.*
--------------------- --------------------- ---------------------
</TABLE>
* Each Fund pays AEFC a fee for managing its assets. Under the Investment
Management Services Agreement, the fee for the most recent fiscal year was 0.47%
of its average daily net assets for California, 0.47% for Massachusetts, 0.47%
for Michigan, 0.46% for Minnesota, 0.47% for New York and 0.47% for Ohio. Under
the Agreement, each Fund also pays taxes, brokerage commissions and nonadvisory
expenses.
<PAGE>
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 $92 billion for all 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 $232 billion.
AEFA serves individuals and businesses through its nationwide network of more
than 180 offices and more than 9,300 advisors.
AEFC, located at IDS Tower 10, Minneapolis, MN 55440-0010, is a wholly-owned
subsidiary of American Express Company, a financial services company with
headquarters at American Express Tower, World Financial Center, New York, NY
10285.
YEAR 2000
The Fund could be adversely affected if the computer systems used by AEFC and
the Fund's other service providers do not properly process and calculate
date-related information from and after 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, governments or international markets in which the Fund invests
also may be adversely affected by Year 2000 issues. To the extent a portfolio
holding is adversely affected by a Year 2000 processing issue, the Fund's return
could be adversely affected.
Quick Telephone Reference
AMERICAN EXPRESS FINANCIAL ADVISORS
TELEPHONE TRANSACTION SERVICE
Sales and exchanges, dividend payments or reinvestments and automatic payment
arrangements:
800-437-3133
AMERICAN EXPRESS CLIENT SERVICE CORPORATION
Fund performance, fund prices, account values, recent account transactions and
account inquiries:
800-862-7919
TTY SERVICE For the hearing impaired:
800-846-4852
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
AXP California Tax-Exempt Trust
AXP California Tax-Exempt Fund
Fiscal period ended June 30,
- ----------------------------------------------------------------------------------------------------------
Per share income and capital changesa
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class A Class B
1999 1998 1997 1996 1995 1999 1998 1997 1996 1995b
Net asset value, beginning of period $5.35 $5.24 $5.15 $5.16 $5.13 $5.35 $5.24 $5.15 $5.16 $5.21
- ----------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .27 .29 .29 .28 .30 .22 .25 .25 .24 .09
Net gains (losses) (both realized and
unrealized) (.17) .11 .10 .02 .03 (.17) .11 .10 .02 (.05)
- ----------------------------------------------------------------------------------------------------------
Total from investment operations .10 .40 .39 .30 .33 .05 .36 .35 .26 .04
Less distributions:
Dividends from net investment income (.27) (.29) (.29) (.28) (.30) (.22) (.25) (.25) (.24) (.09)
Distributions from realized gains -- -- (.01) (.03) -- -- -- (.01) (.03) --
- ----------------------------------------------------------------------------------------------------------------------------------
Total distributions (.27) (.29) (.30) (.31) (.30) (.22) (.25) (.26) (.27) (.09)
Net asset value, end of period $5.18 $5.35 $5.24 $5.15 $5.16 $5.18 $5.35 $5.24 $5.15 $5.16
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios/supplemental data
Net assets, end of period (in millions) $246 $239 $232 $234 $239 $21 $15 $10 $6 $2
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average daily net
assetsd .79% .75% .77% .80% .65% 1.53% 1.50% 1.52% 1.57% 1.51%c
Ratio of net investment income (loss)
to average daily net assets 4.97% 5.24% 5.64% 5.40% 5.89% 4.23% 4.50% 4.94% 4.64% 4.87%c
Portfolio turnover rate
(excluding short-term securities) 16% 15% 14% 15% 48% 16% 15% 14% 15% 48%
Total returne 1.80% 7.72% 7.77% 6.00% 6.52% 1.03% 6.94% 6.95% 5.19% .80%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
a For a share outstanding throughout the period. Rounded to the nearest cent.
b Inception date was March 20, 1995.
c Adjusted to an annual basis.
d Effective fiscal year 1996, expense ratio is based on total expenses of the
Fund before reduction of earnings credits on cash balances.
e Total return does not reflect payment of a sales charge.
<PAGE>
<TABLE>
<CAPTION>
AXP Special Tax-Exempt Series Trust
AXP Massachusetts Tax-Exempt Fund
Fiscal period ended June 30,
- ----------------------------------------------------------------------------------------------------------
Per share income and capitala
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class A Class B
1999 1998 1997 1996 1995 1999 1998 1997 1996 1995b
Net asset value, beginning of period $5.56 $5.42 $5.30 $5.27 $5.24 $5.56 $5.42 $5.30 $5.27 $5.31
- ----------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .27 .29 .29 .28 .30 .23 .24 .25 .24 .09
Net gains (losses) (both realized
and unrealized) (.17) .14 .12 .03 .03 (.17) .14 .12 .03 (.04)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .10 .43 .41 .31 .33 .06 .38 .37 .27 .05
Less distributions:
Dividends from net investment income (.27) (.29) (.29) (.28) (.30) (.23) (.24) (.25) (.24) (.09)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $5.39 $5.56 $5.42 $5.30 $5.27 $5.39 $5.56 $5.42 $5.30 $5.27
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios/supplemental data
Net assets, end of period (in millions) $70 $67 $67 $68 $68 $17 $13 $8 $6 $2
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average daily
net assetsd .81% .82% .84% .86% .72% 1.56% 1.57% 1.59% 1.63% 1.59%c
Ratio of net investment income (loss)
to average daily net assets 4.99% 5.17% 5.32% 5.26% 5.74% 4.25% 4.43% 4.58% 4.51% 4.83%c
Portfolio turnover rate
(excluding short-term securities) 5% 9% 8% 6% 16% 5% 9% 8% 6% 16%
Total returne 1.72% 8.13% 7.81% 5.96% 6.53% .96% 7.32% 7.00% 5.19% .90%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
a For a share outstanding throughout the period. Rounded to the nearest cent. b
Inception date was March 20, 1995.
c Adjusted to an annual basis.
d Effective fiscal year 1996, expense ratio is based on total expenses of the
Fund before reduction of earnings credits on cash balances.
e Total return does not reflect payment of a sales charge.
<PAGE>
AXP Special Tax-Exempt Series Trust
AXP Michigan Tax-Exempt Fund
<TABLE>
<CAPTION>
Fiscal period ended June 30,
- ----------------------------------------------------------------------------------------------------------
Per share income and capital changesa
Class A Class B
1999 1998 1997 1996 1995 1999 1998 1997 1996 1995b
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $5.57 $5.44 $5.36 $5.39 $5.35 $5.57 $5.44 $5.36 $5.39 $5.43
- ----------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .28 .29 .29 .30 .30 .24 .25 .25 .25 .09
Net gains (losses) (both realized
and unrealized) (.17) .13 .08 .04 .05 (.17) .13 .08 .04 (.04)
- ----------------------------------------------------------------------------------------------------------
Total from investment operations .11 .42 .37 .34 .35 .07 .38 .33 .29 .05
Less distributions:
Dividends from net investment income (.28) (.29) (.29) (.30) (.31) (.24) (.25) (.25) (.25) (.09)
Distributions from realized gains (.02) -- -- (.07) -- (.02) -- -- (.07) --
- ----------------------------------------------------------------------------------------------------------
Total distributions (.30) (.29) (.29) (.37) (.31) (.26) (.25) (.25) (.32) (.09)
Net asset value, end of period $5.38 $5.57 $5.44 $5.36 $5.39 $5.38 $5.57 $5.44 $5.36 $5.39
- ----------------------------------------------------------------------------------------------------------
Ratios/supplemental data:
Net assets, end of period (in millions) $77 $77 $77 $79 $78 $7 $5 $4 $3 $1
- ----------------------------------------------------------------------------------------------------------
Ratio of expenses to average daily net
assetsd .83% .82% .81% .82% .70% 1.59% 1.57% 1.56% 1.59% 1.62%c
Ratio of net investment income
(loss) to average daily net assets 5.00% 5.19% 5.38% 5.37% 5.71% 4.25% 4.44% 4.65% 4.63% 4.89%c
Portfolio turnover rate
(excluding short-term securities) 20% 10% 21% 29% 48% 20% 10% 21% 29% 48%
Total returne 1.92% 7.66% 7.12% 6.30% 6.59% 1.17% 6.86% 6.32% 5.57% .90%
- ----------------------------------------------------------------------------------------------------------
</TABLE>
a For a share outstanding throughout the period. Rounded to the nearest cent.
b Inception date was March 20, 1995.
c Adjusted to an annual basis.
d Effective fiscal year 1996, expense ratio is based on total expenses of the
Fund before reduction of earnings credits on cash balances.
e Total return does not reflect payment of a sales charge.
<PAGE>
<TABLE>
<CAPTION>
AXP Special Tax-Exempt Series Trust
AXP Minnesota Tax-Exempt Fund
Fiscal period ended June 30,
- ----------------------------------------------------------------------------------------------------------
Per share income and capital changesa
Class A Class B
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1999 1998 1997 1996 1995 1999 1998 1997 1996 1995b
Net asset value, beginning of period $5.41 $5.30 $5.20 $5.19 $5.16 $5.41 $5.30 $5.20 $5.19 $5.24
- ----------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .29 .30 .31 .30 .31 .25 .26 .27 .26 .09
Net gains (losses) (both realized
and unrealized) (.15) .11 .10 .01 .03 (.15) .11 .10 .01 (.05)
- --------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .14 .41 .41 .31 .34 .10 .37 .37 .27 .04
Less distributions:
Dividends from net investment income (.29) (.30) (.31) (.30) (.31) (.25) (.26) (.27) (.26) (.09)
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $5.26 $5.41 $5.30 $5.20 $5.19 $5.26 $5.41 $5.30 $5.20 $5.19
- --------------------------------------------------------------------------------------------------------------------------------
Ratios/supplemental data:
Net assets, end of period (in millions) $406 $385 $376 $393 $403 $46 $31 $22 $16 $4
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average daily net
assetsd .78% .75% .75% .80% .67% 1.54% 1.50% 1.50% 1.57% 1.27%c
Ratio of net investment income (loss)
to average daily net assets 5.37% 5.61% 5.81% 5.66% 6.01% 4.61% 4.86% 5.05% 4.94% 5.40%c
Portfolio turnover rate
(excluding short-term securities) 13% 8% 14% 13% 28% 13% 8% 14% 13% 28%
Total returne 2.62% 7.96% 8.06% 5.90% 6.77% 1.85% 7.17% 7.23% 5.20% .80%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
a For a share outstanding throughout the period. Rounded to the nearest cent.
b Inception date was March 20, 1995.
c Adjusted to an annual basis.
d Effective fiscal year 1996, expense ratio is based on total expenses of the
Fund before reduction of earnings credits on cash balances.
e Total return does not reflect payment of a sales charge.
<PAGE>
AXP Special Tax-Exempt Series Trust
AXP New York Tax-Exempt Fund
<TABLE>
<CAPTION>
Fiscal period ended June 30,
- ----------------------------------------------------------------------------------------------------------
Per share income and capital changesa
Class A Class B
1999 1998 1997 1996 1995 1999 1998 1997 1996 1995b
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $5.29 $5.15 $5.06 $5.09 $5.12 $5.29 $5.15 $5.06 $5.09 $5.17
- ---------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .25 .27 .28 .29 .30 .21 .23 .25 .25 .09
Net gains (losses) (both realized
and unrealized) (.14) .14 .09 (.03) (.03) (.14) .14 .09 (.03) (.08)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .11 .41 .37 .26 .27 .07 .37 .34 .22 .01
Less distributions:
Dividends from net investment income (.25) (.27) (.28) (.29) (.30) (.21) (.23) (.25) (.25) (.09)
- ----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $5.15 $5.29 $5.15 $5.06 $5.09 $5.15 $5.29 $5.15 $5.06 $5.09
- ----------------------------------------------------------------------------------------------------------------------------------
Ratios/supplemental data:
Net assets, end of period
(in millions) $102 $105 $108 $115 $120 $14 $10 $8 $5 $2
- ----------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average daily net
assetsd .82% .79% .81% .82% .70% 1.57% 1.55% 1.56% 1.59% 1.59%c
Ratio of net investment income (loss)
to average daily net assets 4.93% 5.22% 5.55% 5.51% 6.00% 4.20% 4.47% 4.81% 4.79% 5.42%c
Portfolio turnover rate
(excluding short-term securities) 8% 10% 12% 9% 20% 8% 10% 12% 9% 20%
Total returne 2.04% 8.20% 7.60% 5.23% 5.46% 1.28% 7.35% 6.80% 4.40% .20%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
a For a share outstanding throughout the period. Rounded to the nearest cent.
b Inception date was March 20, 1995.
c Adjusted to an annual basis.
d Effective fiscal year 1996, expense ratio is based on total expenses of the
Fund before reduction of earnings credits on cash balances.
e Total return does not reflect payment of a sales charge.
<PAGE>
AXP Special Tax-Exempt Series Trust
AXP Ohio Tax-Exempt Fund
<TABLE>
<CAPTION>
Fiscal period ended June 30,
- --------------------------------------------------------------------------------------------------------------------------------
Per share income and capital changesa
Class A Class B
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1999 1998 1997 1996 1995 1999 1998 1997 1996 1995b
Net asset value, beginning of period $5.50 $5.38 $5.28 $5.28 $5.26 $5.50 $5.38 $5.28 $5.28 $5.34
- ---------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .27 .29 .29 .29 .29 .23 .24 .25 .24 .09
Net gains (losses) (both realized and
unrealized) (.14) .12 .10 .01 .03 (.14) .13 .10 .01 (.06)
- ----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .13 .41 .39 .30 .32 .09 .37 .35 .25 .03
Less distributions:
Dividends from net investment income (.27) (.29) (.29) (.29) (.30) (.23) (.25) (.25) (.24) (.09)
Distributions from realized gains -- -- - (.01) -- -- -- -- (.01) --
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions (.27) (.29) (.29) (.30) (.30) (.23) (.25) (.25) (.25) (.09)
Net asset value, end of period $5.36 $5.50 $5.38 $5.28 $5.28 $5.36 $5.50 $5.38 $5.28 $5.28
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios/supplemental data
Net assets, end of period
(in millions) $69 $67 $67 $72 $73 $8 $5 $4 $2 $1
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average daily
net assetsd .88% .83% .83% .85% .71% 1.63% 1.59% 1.59% 1.59% 1.66%c
Ratio of net investment income (loss)
to average daily net assets 5.02% 5.22% 5.46% 5.35% 5.65% 4.27% 4.47% 4.74% 4.63% 4.58%c
Portfolio turnover rate
(excluding short-term securities) 5% 10% 9% 24% 45% 5% 10% 9% 24% 45%
Total returne 2.50% 7.79% 7.43% 5.76% 6.23% 1.75% 6.98% 6.62% 4.96% .60%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
a For a share outstanding throughout the period. Rounded to the nearest cent.
b Inception date was March 20, 1995.
c Adjusted to an annual basis.
d Effective fiscal year 1996, expense ratio is based on total expenses of the
Fund before reduction of earnings credits on cash balances.
e Total return does not reflect payment of a sales charge.
The information in these tables has been audited by KPMG LLP, independent
auditors. The independent auditors' report and additional information about the
performance of each Fund are contained in the Fund's annual report which, if not
included with this prospectus, may be obtained without charge.
<PAGE>
Appendix
- --------------------------------------------------------------------------------
Appendix A
- --------------------------------------------------------------------------------
Description of bond ratings
Bond ratings concern the quality of the issuing state or local governmental
unit. They are not an opinion of the market value of the security. Such
ratings are opinions on whether the principal and interest will be repaid
when due. A security's rating may change, which could affect its price.
Ratings by Moody's Investors Service, Inc. are Aaa, Aa, A, Baa, Ba, B, Caa,
Ca and C. Ratings by Standard & Poor's Corporation are AAA, AA, A, BBB, BB,
B, CCC, CC, C and D. The following is a compilation of the two agencies'
rating descriptions. For further information, see the SAI.
Aaa/AAA Judged to be of the best quality and carry the smallest degree of
investment risk. Interest and principal are secure.
Aa/AA Judged to be high-grade although margins of protection for interest
and principal may not be quite as good as Aaa or AAA rated securities.
A Considered upper-medium grade. Protection for interest and principal
is deemed adequate but may be susceptible to future impairment.
Baa/BBB Considered medium-grade obligations. Protection for interest and
principal is adequate over the short-term; however, these obligations
may have certain speculative characteristics.
Ba/BB Considered to have speculative elements. The protection of interest
and principal payments may be very moderate.
B Lack characteristics of more desirable investments. There may be small
assurance over any long period of time of the payment of interest and
principal.
Caa/CCC Are of poor standing. Such issues may be in default or there may be
risk with respect to principal or interest.
Ca/CC Represent obligations that are highly speculative. Such issues are
often in default or have other marked shortcomings.
C Are obligations with a higher degree of speculation. These securities
have major risk exposures to default.
D Are in payment default. The D rating is used when interest payments or
principal payments are not made on the due date.
Non-rated securities will be considered for investment when they possess a
risk comparable to that of rated securities consistent with the Fund's
objectives and policies. When assessing the risk involved in each non-rated
security, the Fund will consider the financial condition of the issuer or
the protection afforded by the terms of the security.
Definitions of zero-coupon and pay-in-kind securities
A zero-coupon security is a security that is sold at a deep discount from
its face value and makes no periodic interest payments. The buyer of such a
security receives a rate of return by gradual appreciation of the security,
which is redeemed at face value on the maturity date.
A pay-in-kind security is a security in which the issuer has the option to
make interest payments in cash or in additional securities. The securities
issued as interest usually have the same terms, including maturity date, as
the pay-in-kind securities.
<PAGE>
Appendix B
- --------------------------------------------------------------------------------
1999 state tax-exempt and tax equivalent yield calculation
These table will help you determine your state taxable yield equivalents
for given rates of tax-exempt income.
Tax-exempt income vs. taxable income
1999 California tax-exempt and taxable equivalent yield calculation
These tables will help you determine your combined federal and state
taxable yield equivalents for given rates of tax-exempt income.
STEP 1: Calculating your marginal tax rate.
Using your Taxable Income and Adjusted Gross Income figures as guides, you
can locate your Marginal Tax Rate in the table below.
First, locate your Taxable Income in a filing status and income range in
the left-hand column. Then, locate your Adjusted Gross Income at the top of
the chart. At the point where your Taxable Income line meets your Adjusted
Gross Income column, the percentage indicated is an approximation of your
Marginal Tax Rate. For example: Let's assume you are married filing
jointly, your taxable income is $138,000 and your adjusted 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 38.26%. This is the rate you'll use in Step 2.
<TABLE>
<CAPTION>
Adjusted gross income*
- ---------------------------------------------------------------------------------------------------------------------------
Taxable income** $0 $126,600 $189,950
- ---------------------------------------------------------------------------------------------------------------------------
Married Filing Jointly to to to OVER
$126,600(1) $189,950(2) $312,450(3) $312,450(2)
<S> <C> <C> <C> <C>
$ 0 - $ 10,262 15.85%
10,262 - 24,322 16.70
24,322 - 38,386 18.40
38,386 - 43,050 20.10
43,050 - 53,288 32.32
53,288 - 67,346 33.76
67,346 - 104,050 34.70 35.46%
104,050 - 158,550 37.42 38.26 39.50%
158,550 - 283,150 41.95 42.93 44.37 42.93%
283,150 + 45.22 47.88*** 46.29
- ---------------------------------------------------------------------------------------------------------------------------
Taxable income** $0 $126,600
Single to to OVER
$126,600(1) $249,100(3) $249,100(2)
- ---------------------------------------------------------------------------------------------------------------------------
$ 0 - $ 5,131 15.85%
5,131 - 12,161 16.70
12,161 - 19,193 18.40
19,193 - 25,750 20.10
25,750 - 26,644 32.32
26,644 - 33,673 33.76
33,673 - 62,450 34.70
62,450 - 130,250 37.42 38.88%
130,250 - 283,150 41.95 43.65 42.93%
283,150 + 45.22 46.29
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Gross income with certain adjustments before taking itemized deductions and
personal exemptions. ** Amount subject to federal income tax after
itemized 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 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.
Federal taxes are not deductible on the California state tax return.
The combined federal/California tax brackets are based on state tax rates
and bracket in effect on Dec. 31, 1998. These rates may change if
California tax rates change in 1999. In California, tax brackets are
indexed for inflation. These figures do not reflect the 1999 inflation
adjustment. If state tax rates change, equivalent rates may differ from
those shown.
If these assumptions do not apply to you, it will be necessary to construct
your own personalized tax equivalency table.
STEP 2: Determining your combined federal and California state taxable
yield equivalents.
Using 38.26%, you may determine that a tax-exempt yield of 4% is equivalent
to earning a taxable 6.48% yield.
<TABLE>
<CAPTION>
For these Tax-Exempt Rates:
- ---------------------------------------------------------------------------------------------------------------------------
3.00% 3.50% 4.00% 4.50% 5.00% 5.50% 6.00% 6.50%
- ---------------------------------------------------------------------------------------------------------------------------
Marginal Tax Rates Equal the Taxable Rates shown below:
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
15.85% 3.57 4.16 4.75 5.35 5.94 6.54 7.13 7.72
16.70% 3.60 4.20 4.80 5.40 6.00 6.60 7.20 7.80
18.40% 3.68 4.29 4.90 5.51 6.13 6.74 7.35 7.97
20.10% 3.75 4.38 5.01 5.63 6.26 6.88 7.51 8.14
32.32% 4.43 5.17 5.91 6.65 7.39 8.13 8.87 9.60
33.76% 4.53 5.28 6.04 6.79 7.55 8.30 9.06 9.81
34.70% 4.59 5.36 6.13 6.89 7.66 8.42 9.19 9.95
35.46% 4.65 5.42 6.20 6.97 7.75 8.52 9.30 10.07
37.42% 4.79 5.59 6.39 7.19 7.99 8.79 9.59 10.39
38.26% 4.86 5.67 6.48 7.29 8.10 8.91 9.72 10.53
38.88% 4.91 5.73 6.54 7.36 8.18 9.00 9.82 10.63
39.50% 4.96 5.79 6.61 7.44 8.26 9.09 9.92 10.74
41.95% 5.17 6.03 6.89 7.75 8.61 9.47 10.34 11.20
42.93% 5.26 6.13 7.01 7.89 8.76 9.64 10.51 11.39
43.65% 5.32 6.21 7.10 7.99 8.87 9.76 10.65 11.54
44.37% 5.39 6.29 7.19 8.09 8.99 9.89 10.79 11.68
45.22% 5.48 6.39 7.30 8.21 9.13 10.04 10.95 11.87
46.29% 5.59 6.52 7.45 8.38 9.31 10.24 11.17 12.10
47.88% 5.76 6.72 7.67 8.63 9.59 10.55 11.51 12.47
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
1999 Massachusetts tax-exempt and taxable equivalent yield calculation
These tables will help you determine your combined federal and state
taxable yield equivalents for given rates of tax-exempt income.
STEP 1: Calculating your marginal tax rate.
Using your Taxable Income and Adjusted Gross Income figures as guides, you
can locate your Marginal Tax Rate in the table below.
First, locate your Taxable Income in a filing status and income range in
the left-hand column. Then, locate your Adjusted Gross Income at the top of
the chart. At the point where your Taxable Income line meets your Adjusted
Gross Income column, the percentage indicated is an approximation of your
Marginal Tax Rate. For example: Let's assume you are married filing
jointly, your taxable income is $138,000 and your adjusted 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 35.98%. This is the rate you'll use in Step 2.
<TABLE>
<CAPTION>
Adjusted gross income*
- ---------------------------------------------------------------------------------------------------------------------------
Taxable income** $0 $126,600 $189,950
- ---------------------------------------------------------------------------------------------------------------------------
Married Filing Jointly to to to OVER
$126,600(1) $189,950(2) $312,450(3) $312,450(2)
<S> <C> <C> <C> <C>
$ 0 -$ 43,050 20.06%
43,050 - 104,050 32.28 33.07%
104,050 - 158,550 35.11 35.98 37.26%
158,550 - 283,150 39.81 40.82 42.31 40.82%
283,150 + 43.19 45.95*** 44.31
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Taxable income** $0 $126,600
Single to to OVER
$126,600(1) $249,100(3) $249,100(2)
$ 0 - $ 25,750 20.06%
25,750 - 62,450 32.28
62,450 - 130,250 35.11 36.62%
130,250 - 283,150 39.81 41.57 40.82%
283,150 + 43.19 44.31
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Gross income with certain adjustments before taking itemized deductions and
personal exemptions. ** Amount subject to federal income tax after \
itemized 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 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.
Federal income taxes are not deductible on the Massachusetts state tax
return.
The combined federal/Massachusetts tax brackets are based on state tax
rates for Part A income in effect on Jan. 1, 1999. These rates may change
if Massachusetts tax rates change in 1999. If state tax rates change,
equivalent rates may differ from those shown.
If these assumptions do not apply to you, it will be necessary to construct
your own personalized tax equivalency table.
STEP 2: Determining your combined federal and Massachusetts state taxable
yield equivalents.
Using 35.98%, you may determine that a tax-exempt yield of 4% is equivalent
to earning a taxable 6.25% yield.
<TABLE>
<CAPTION>
For these Tax-Exempt Rates:
- ---------------------------------------------------------------------------------------------------------------------------
3.00% 3.50% 4.00% 4.50% 5.00% 5.50% 6.00% 6.50%
- ---------------------------------------------------------------------------------------------------------------------------
Marginal Tax Rates Equal the Taxable Rates shown below:
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
20.06% 3.75 4.38 5.00 5.63 6.25 6.88 7.51 8.13
32.28% 4.43 5.17 5.91 6.65 7.38 8.12 8.86 9.60
33.07% 4.48 5.23 5.98 6.72 7.47 8.22 8.96 9.71
35.11% 4.62 5.39 6.16 6.93 7.71 8.48 9.25 10.02
35.98% 4.69 5.47 6.25 7.03 7.81 8.59 9.37 10.15
36.62% 4.73 5.52 6.31 7.10 7.89 8.68 9.47 10.26
37.26% 4.78 5.58 6.38 7.17 7.97 8.77 9.56 10.36
39.81% 4.98 5.81 6.65 7.48 8.31 9.14 9.97 10.80
40.82% 5.07 5.91 6.76 7.60 8.45 9.29 10.14 10.98
41.57% 5.13 5.99 6.85 7.70 8.56 9.41 10.27 11.12
42.31% 5.20 6.07 6.93 7.80 8.67 9.53 10.40 11.27
43.19% 5.28 6.16 7.04 7.92 8.80 9.68 10.56 11.44
44.31% 5.39 6.28 7.18 8.08 8.98 9.88 10.77 11.67
45.95% 5.55 6.48 7.40 8.33 9.25 10.18 11.10 12.03
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
1999 Michigan tax-exempt and taxable equivalent yield calculation
These tables will help you determine your combined federal and state
taxable yield equivalents for given rates of tax-exempt income.
STEP 1: Calculating your marginal tax rate.
Using your Taxable Income and Adjusted Gross Income figures as guides, you
can locate your Marginal Tax Rate in the table below.
First, locate your Taxable Income in a filing status and income range in
the left-hand column. Then, locate your Adjusted Gross Income at the top of
the chart. At the point where your Taxable Income line meets your Adjusted
Gross Income column, the percentage indicated is an approximation of your
Marginal Tax Rate. For example: Let's assume you are married filing
jointly, your taxable income is $138,000 and your adjusted 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 34.93%. This is the rate you'll use in Step 2.
<TABLE>
<CAPTION>
Adjusted gross income*
- ---------------------------------------------------------------------------------------------------------------------------
Taxable income** $0 $126,600 $189,950
- ---------------------------------------------------------------------------------------------------------------------------
Married Filing Jointly to to to OVER
$126,600(1) $189,950(2) $312,450(3) $312,450(2)
<S> <C> <C> <C> <C>
$ 0 - $ 43,050 18.74%
43,050 - 104,050 31.17 31.97%
104,050 - 158,550 34.04 34.93 36.23%
158,550 - 283,150 38.82 39.85 41.36 39.85%
283,150 + 42.26 45.06*** 43.39
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Taxable income** $0 $126,600
Single to to OVER
$126,600(1) $249,100(3) $249,100(2)
$ 0 - $ 25,750 18.74%
25,750 - 62,450 31.17
62,450 - 130,250 34.04 35.58%
130,250 - 283,150 38.82 40.61 39.85%
283,150 + 42.26 43.39
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Gross income with certain adjustments before taking itemized deductions and
personal exemptions.
** Amount subject to federal income tax after itemized 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 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.
Federal taxes are not deductible on the Michigan state tax return.
The combined federal/Michigan tax brackets are based on state tax rates in
effect on Jan 1, 1999. These rates may change if Michigan tax rates change
in 1999. If state tax rates change, equivalent rates may differ from those
shown.
If these assumptions do not apply to you, it will be necessary to construct
your own personalized tax equivalency table.
STEP 2: Determining your combined federal and Michigan state taxable yield
equivalents.
Using 34.93%, you may determine that a tax-exempt yield of 4% is equivalent
to earning a taxable 6.15% yield.
<TABLE>
<CAPTION>
For these Tax-Exempt Rates:
- ---------------------------------------------------------------------------------------------------------------------------
3.00% 3.50% 4.00% 4.50% 5.00% 5.50% 6.00% 6.50%
- ---------------------------------------------------------------------------------------------------------------------------
Marginal Tax Rates Equal the Taxable Rates shown below:
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
18.74% 3.69 4.31 4.92 5.54 6.15 6.77 7.38 8.00
31.17% 4.36 5.08 5.81 6.54 7.26 7.99 8.72 9.44
31.97% 4.41 5.14 5.88 6.61 7.35 8.08 8.82 9.55
34.04% 4.55 5.31 6.06 6.82 7.58 8.34 9.10 9.85
34.93% 4.61 5.38 6.15 6.92 7.68 8.45 9.22 9.99
35.58% 4.66 5.43 6.21 6.99 7.76 8.54 9.31 10.09
36.23% 4.70 5.49 6.27 7.06 7.84 8.62 9.41 10.19
38.82% 4.90 5.72 6.54 7.36 8.17 8.99 9.81 10.62
39.85% 4.99 5.82 6.65 7.48 8.31 9.14 9.98 10.81
40.61% 5.05 5.89 6.74 7.58 8.42 9.26 10.10 10.94
41.36% 5.12 5.97 6.82 7.67 8.53 9.38 10.23 11.08
42.26% 5.20 6.06 6.93 7.79 8.66 9.53 10.39 11.26
43.39% 5.30 6.18 7.07 7.95 8.83 9.72 10.60 11.48
45.06% 5.46 6.37 7.28 8.19 9.10 10.01 10.92 11.83
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
1999 Minnesota tax-exempt and taxable equivalent yield calculation
These tables will help you determine your combined federal and state
taxable yield equivalents for given rates of tax-exempt income.
STEP 1: Calculating your marginal tax rate.
Using your Taxable Income and Adjusted Gross Income figures as guides, you
can locate your Marginal Tax Rate in the table below.
First, locate your Taxable Income in a filing status and income range in
the left-hand column. Then, locate your Adjusted Gross Income at the top of
the chart. At the point where your Taxable Income line meets your Adjusted
Gross Income column, the percentage indicated is an approximation of your
Marginal Tax Rate. For example: Let's assume you are married filing
jointly, your taxable income is $138,000 and your adjusted 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 37.38%. This is the rate you'll use in Step 2.
<TABLE>
<CAPTION>
Adjusted gross income*
- ---------------------------------------------------------------------------------------------------------------------------
Taxable income** $0 $126,600 $189,950
- ---------------------------------------------------------------------------------------------------------------------------
Married Filing Jointly to to to OVER
$126,600(1) $189,950(2) $312,450(3) $312,450(2)
<S> <C> <C> <C> <C>
$ 0 - $ 25,220 19.68%
25,220 - 43,050 21.16
43,050 - 100,200 33.22 34.00%
100,200 - 104,050 33.76 34.53
104,050 - 158,550 36.52 37.38 38.63%
158,550 - 283,150 41.12 42.11 43.57 42.11%
283,150 + 44.43 47.13*** 45.52
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Taxable income** $0 $126,600
Single to to OVER
$126,600(1) $249,100(3) $249,100(2))
$ 0 -$ 17,250 19.68%
17,250 - 25,750 21.16
25,750 - 56,680 33.22
56,680 - 62,450 33.76
62,450 - 130,250 36.52 38.00%
130,250 - 283,150 41.12 42.84 42.11%
283,150 + 44.43 45.52
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Gross income with certain adjustments before taking itemized deductions and
personal exemptions. ** Amount subject to federal income tax after
itemized 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 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.
Federal taxes are not deductible on the Minnesota state tax return.
The combined federal/Minnesota tax brackets are based on state tax rates
effective as of Jan. 1, 1999. These rates may change if Minnesota tax rates
change in 1999. If state tax rates change, equivalent rates may differ
from those shown.
If these assumptions do not apply to you, it will be necessary to construct
your own personalized tax equivalency table.
STEP 2: Determining your combined federal and Minnesota state taxable yield
equivalents.
Using 37.38%, you may determine that a tax-exempt yield of 4% is equivalent
to earning a taxable 6.39% yield.
<TABLE>
<CAPTION>
For these Tax-Exempt Rates:
- ---------------------------------------------------------------------------------------------------------------------------
3.00% 3.50% 4.00% 4.50% 5.00% 5.50% 6.00% 6.50%
- ---------------------------------------------------------------------------------------------------------------------------
Marginal Tax Rates Equal the Taxable Rates shown below:
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
19.68% 3.74 4.36 4.98 5.60 6.23 6.85 7.47 8.09
21.16% 3.81 4.44 5.07 5.71 6.34 6.95 7.61 8.24
33.22% 4.49 5.24 5.99 6.74 7.49 8.24 8.98 9.73
33.76% 4.53 5.28 6.04 6.79 7.55 8.30 9.06 9.81
34.00% 4.55 5.30 6.06 6.82 7.58 8.33 9.09 9.85
34.53% 4.58 5.35 6.11 6.87 7.64 8.40 9.16 9.93
36.52% 4.73 5.51 6.30 7.09 7.88 8.66 9.45 10.24
37.38% 4.79 5.59 6.39 7.19 7.98 8.78 9.58 10.38
38.00% 4.84 5.65 6.45 7.26 8.06 8.87 9.68 10.48
38.63% 4.89 5.70 6.52 7.33 8.15 8.96 9.78 10.59
41.12% 5.10 5.94 6.79 7.64 8.49 9.34 10.19 11.04
42.11% 5.18 6.05 6.91 7.77 8.64 9.50 10.36 11.23
42.84% 5.25 6.12 7.00 7.87 8.75 9.62 10.50 11.37
43.57% 5.32 6.20 7.09 7.97 8.86 9.75 10.63 11.52
44.43% 5.40 6.30 7.20 8.10 9.00 9.90 10.80 11.70
45.52% 5.51 6.42 7.34 8.26 9.18 10.10 11.01 11.93
47.13% 5.67 6.62 7.57 8.51 9.46 10.40 11.35 12.29
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
1999 New York State tax-exempt and taxable equivalent yield calculation
These tables will help you determine your combined federal and state
taxable yield equivalents for given rates of tax-exempt income.
STEP 1: Calculating your marginal tax rate.
Using your Taxable Income and Adjusted Gross Income figures as guides, you
can locate your Marginal Tax Rate in the table below.
First, locate your Taxable Income in a filing status and income range in
the left-hand column. Then, locate your Adjusted Gross Income at the top of
the chart. At the point where your Taxable Income line meets your Adjusted
Gross Income column, the percentage indicated is an approximation of your
Marginal Tax Rate. For example: Let's assume you are married filing
jointly, your taxable income is $138,000 and your adjusted 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 36.59%. This is the rate you'll use in Step 2.
<TABLE>
<CAPTION>
Adjusted gross income*
- ---------------------------------------------------------------------------------------------------------------------------
Taxable income** $0 $126,600 $189,950
- ---------------------------------------------------------------------------------------------------------------------------
Married Filing Jointly to to to OVER
$126,600(1) $189,950(2) $312,450(3) $312,450(2)
$ 0 - $ 16,000 18.40%
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
16,000 - 22,000 18.83
22,000 - 26,000 19.46
26,000 - 40,000 20.02
40,000 - 43,050 20.82
43,050 - 104,050 32.93 33.71%
104,050 - 158,550 35.73 36.59 37.86%
158,550 - 283,150 40.38 41.39 42.87 41.39%
283,150 + 43.74 46.47*** 44.84
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Taxable income** $0 $126,600
Single to to OVER
$126,600(1) $249,100(3) $249,100(2))
$ 0 -$ 8,000 18.40%
8,000 - 11,000 18.83
11,000 - 13,000 19.46
13,000 - 20,000 20.02
20,000 - 25,750 20.82
25,750 - 62,450 32.93
62,450 - 130,250 35.73 37.23%
130,250 - 283,150 40.38 42.13 41.39%
283,150 + 43.74 44.84
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Gross income with certain adjustments before taking itemized deductions and
personal exemptions.
** Amount subject to federal income tax after itemized 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 and Recapture of Personal Income Tax --
Assumes a phase-out of itemized deductions and no 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. Federal taxes are not deductible on the New York state tax
return. The state Tax Table Benefit Recapture is not included in the New
York tables. The combined federal/New York state tax brackets are based on
state tax rates in effect on Jan. 1, 1999. These rates may change if New
York state tax rates change in 1999. If state tax rates change, equivalent
rates may differ from those shown. This table does not reflect the state
itemized deduction adjustment. If these assumptions do not apply to you, it
will be necessary to construct your own personalized tax equivalency table.
STEP 2: Determining your combined federal and New York state taxable yield
equivalents.
Using 36.59%, you may determine that a tax-exempt yield of 4% is equivalent
to earning a taxable 6.31% yield.
<TABLE>
<CAPTION>
For these Tax-Exempt Rates:
- ---------------------------------------------------------------------------------------------------------------------------
3.00% 3.50%
4.00% 4.50% 5.00%
5.50% 6.00% 6.50%
- ---------------------------------------------------------------------------------------------------------------------------
Marginal Tax Rates Equal the Taxable Rates shown below:
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
18.40% 3.68 4.29 4.90 5.51 6.13 6.74 7.35 7.97
18.83% 3.70 4.31 4.93 5.54 6.16 6.78 7.39 8.01
19.46% 3.72 4.35 4.97 5.59 6.21 6.83 7.45 8.07
20.02% 3.75 4.38 5.00 5.63 6.25 6.88 7.50 8.13
20.82% 3.79 4.42 5.05 5.68 6.31 6.95 7.58 8.21
32.93% 4.47 5.22 5.96 6.71 7.45 8.20 8.95 9.69
33.71% 4.53 5.28 6.03 6.79 7.54 8.30 9.05 9.81
35.73% 4.67 5.45 6.22 7.00 7.78 8.56 9.34 10.11
36.59% 4.73 5.52 6.31 7.10 7.89 8.67 9.46 10.25
37.23% 4.78 5.58 6.37 7.17 7.97 8.76 9.56 10.36
37.86% 4.83 5.63 6.44 7.24 8.05 8.85 9.66 10.46
40.38% 5.03 5.87 6.71 7.55 8.39 9.23 10.06 10.90
41.39% 5.12 5.97 6.82 7.68 8.53 9.38 10.24 11.09
42.13% 5.18 6.05 6.91 7.78 8.64 9.50 10.37 11.23
42.87% 5.25 6.12 7.00 7.88 8.75 9.63 10.50 11.38
43.74% 5.33 6.22 7.11 8.00 8.89 9.78 10.66 11.55
44.84% 5.44 6.35 7.25 8.16 9.06 9.97 10.88 11.78
46.47% 5.60 6.54 7.47 8.41 9.34 10.27 11.21 12.14
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
1999 New York State and New York City tax-exempt and taxable equivalent yield
calculation
These tables will help you determine your combined federal and state
taxable yield equivalents for given rates of tax-exempt income.
STEP 1: Calculating your marginal tax rate.
Using your Taxable Income and Adjusted Gross Income figures as guides, you
can locate your Marginal Tax Rate in the table below.
First, locate your Taxable Income in a filing status and income range in
the left-hand column. Then, locate your Adjusted Gross Income at the top of
the chart. At the point where your Taxable Income line meets your Adjusted
Gross Income column, the percentage indicated is an approximation of your
Marginal Tax Rate. For example: Let's assume you are married filing
jointly, your taxable income is $138,000 and your adjusted 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 38.88%. This is the rate you'll use in Step 2.
<TABLE>
<CAPTION>
Adjusted gross income*
- ---------------------------------------------------------------------------------------------------------------------------
Taxable income** $0 $126,600 $189,950
- ---------------------------------------------------------------------------------------------------------------------------
Married Filing Jointly to to to OVER
$126,600(1) $189,950(2) $312,450(3) $312,450(2)
<S> <C> <C> <C> <C>
$ 0 - $ 16,000 20.67%
16,000 - 21,600 21.10
21,600 - 22,000 21.59
22,000 - 26,000 22.23
26,000 - 40,000 22.78
40,000 - 43,050 23.59
43,050 - 45,000 35.28
45,000 - 90,000 35.31 36.07%
90,000 - 104,050 35.35 36.10
104,050 - 158,550 38.04 38.88 40.10%
158,550 - 283,150 42.53 43.50 44.92 43.50%
283,150 + 45.77 48.40*** 46.83
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Taxable income** $0 $126,600
Single to to OVER
$126,600(1) $249,100(3) $249,100(2))
$ 0 -$ 8,000 20.67%
8,000 - 11,000 21.10
11,000 - 12,000 21.74
12,000 - 13,000 22.23
13,000 - 20,000 22.78
20,000 - 25,000 23.59
25,000 - 25,750 23.63
25,750 - 50,000 35.31
50,000 - 62,450 35.35
62,450 - 130,250 38.04 39.49%
130,250 - 283,150 42.53 44.21 43.50%
283,150 + 45.77 46.83
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Gross income with certain adjustments before taking itemized deductions and
personal exemptions.
** Amount subject to federal income tax after itemized 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 and Recapture of Personal Income Tax --
Assumes a single taxpayer has one personal exemption, joint taxpayers have
two personal exemptions. Does not take into consideration the state AGI
recapture of personal income tax, which might increase the percentage.
(3) Itemized Deductions and Personal Exemption Phase-outs -- Assumes a single
taxpayer has one personal exemption, joint taxpayers have two personal
exemptions and itemized deductions continue to phase-out. Federal taxes are
not deductible on the New York state tax return. The state Tax Table
Benefit Recapture is not included in the New York tables. The combined
federal/New York state and city tax brackets are based on state and blended
city tax rates in effect on January 1, 1999. These rates may change if New
York state or city tax rates change in 1999. The New York City Additional
Tax Surcharge, due to expire on December 31, 1999, is not reflected on this
table. If state or city tax rates change, equivalent rates may be higher
than those shown. This table does not reflect the state itemized deduction
adjustment. If these assumptions do not apply to you, it will be necessary
to construct your own personalized tax equivalency table.
STEP 2: Determining your combined federal, New York state and New York City
taxable yield equivalents.
Using 38.88%, you may determine that a tax-exempt yield of 4% is equivalent
to earning a taxable 6.54% yield.
<TABLE>
<CAPTION>
For these Tax-Exempt Rates:
- ---------------------------------------------------------------------------------------------------------------------------
3.00% 3.50% 4.00% 4.50% 5.00% 5.50% 6.00% 6.50%
- ---------------------------------------------------------------------------------------------------------------------------
Marginal Tax Rates Equal the Taxable Rates shown below:
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
20.67% 3.78 4.41 5.04 5.67 6.30 6.93 7.56 8.19 21.10% 3.80 4.44
5.07 5.70 6.34 6.97 7.60 8.24 21.59% 3.83 4.46 5.10 5.74 6.38
7.01 7.65 8.29 21.74% 3.83 4.47 5.11 5.75 6.39 7.03 7.67 8.31
22.23% 3.86 4.50 5.14 5.79 6.43 7.07 7.72 8.36 22.78% 3.89 4.53
5.18 5.83 6.48 7.12 7.77 8.42 23.59% 3.93 4.58 5.23 5.89 6.54
7.20 7.85 8.51 23.63% 3.93 4.58 5.24 5.89 6.55 7.20 7.86 8.51
35.28% 4.64 5.41 6.18 6.95 7.73 8.50 9.27 10.04 35.31% 4.64 5.41
6.18 6.96 7.73 8.50 9.28 10.05 35.35% 4.64 5.41 6.19 6.96 7.73
8.51 9.28 10.05 36.07% 4.69 5.47 6.26 7.04 7.82 8.60 9.39 10.17
36.10% 4.69 5.48 6.26 7.04 7.82 8.61 9.39 10.17 38.04% 4.84 5.65
6.46 7.26 8.07 8.88 9.68 10.49 38.88% 4.91 5.73 6.54 7.36 8.18
9.00 9.82 10.63 39.49% 4.96 5.78 6.61 7.44 8.26 9.09 9.92 10.74
40.10% 5.01 5.84 6.68 7.51 8.35 9.18 10.02 10.85 42.53% 5.22 6.09
6.96 7.83 8.70 9.57 10.44 11.31 43.50% 5.31 6.19 7.08 7.96 8.85
9.73 10.62 11.50 44.21% 5.38 6.27 7.17 8.07 8.96 9.86 10.75 11.65
44.92% 5.45 6.35 7.26 8.17 9.08 9.99 10.89 11.80 45.77% 5.53 6.45
7.38 8.30 9.22 10.14 11.06 11.99 46.83% 5.64 6.58 7.52 8.46 9.40
10.34 11.28 12.22 48.40% 5.81 6.78 7.75 8.72 9.69 10.66 11.63 12.60
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
1999 Ohio tax-exempt and taxable equivalent yield calculation
These tables will help you determine your combined federal and state
taxable yield equivalents for given rates of tax-exempt income.
STEP 1: Calculating your marginal tax rate.
Using your Taxable Income and Adjusted Gross Income figures as guides, you
can locate your Marginal Tax Rate in the table below.
First, locate your Taxable Income in a filing status and income range in
the left-hand column. Then, locate your Adjusted Gross Income at the top of
the chart. At the point where your Taxable Income line meets your Adjusted
Gross Income column, the percentage indicated is an approximation of your
Marginal Tax Rate. For example: Let's assume you are married filing
jointly, your taxable income is $138,000 and your adjusted 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 36.19%. This is the rate you'll use in Step 2.
<TABLE>
<CAPTION>
Adjusted gross income*
- ---------------------------------------------------------------------------------------------------------------------------
Taxable income** $0 $126,600 $189,950
- ---------------------------------------------------------------------------------------------------------------------------
Married Filing Jointly to to to OVER
$126,600(1) $189,950(2) $312,450(3) $312,450(2)
<S> <C> <C> <C> <C>
$ 0 - $ 5,000 15.57%
5,000 - 10,000 16.14
10,000 - 15,000 17.29
15,000 - 20,000 17.86
20,000 - 40,000 18.43
40,000 - 43,050 19.01
43,050 - 80,000 31.39
80,000 - 100,000 31.88 32.67%
100,000 - 104,050 32.50 33.29
104,050 - 158,550 35.32 36.19 37.47%
158,550 - 200,000 40.00 41.02 42.50
200,000 - 283,150 40.35 42.83 41.36%
283,150 + 43.71 46.44*** 44.81
- ---------------------------------------------------------------------------------------------------------------------------
Taxable income** $0 $126,600
- ---------------------------------------------------------------------------------------------------------------------------
Single to to OVER
$126,600(1) $249,100(3) $249,100(2))
$ 0 - $ 5,000 15.57%
5,000 - 10,000 16.14
10,000 - 15,000 17.29
15,000 - 20,000 17.86
20,000 - 25,750 18.43
25,750 - 40,000 30.91
40,000 - 62,450 31.39
62,450 - 80,000 34.25
80,000 - 100,000 34.72 36.24%
100,000 - 130,250 35.32 36.83
130,250 - 200,000 40.00 41.76 41.02%
200,000 - 283,150 40.35 42.10 41.36
283,150 + 43.71 44.81
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Gross income with certain adjustments before taking itemized deductions and
personal exemptions.
** Amount subject to federal income tax after itemized 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 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 the itemized deductions continue to
phase-out.
Federal taxes are not deductible on the Ohio state tax return.
The combined federal/Ohio tax brackets are based on state tax rates in
effect on Dec. 31, 1998. These rates may change if Ohio tax rates change in
1999. If state tax rates change, equivalent rates may differ from those
shown.
This table does not reflect the state joint filing credit.
If these assumptions do not apply to you, it will be necessary to construct
your own personalized tax equivalency table.
STEP 2: Determining your combined federal and Ohio state taxable yield
equivalents.
Using 36.19%, you may determine that a tax-exempt yield of 4% is equivalent
to earning a taxable 6.27% yield.
<TABLE>
<CAPTION>
For these Tax-Exempt Rates:
- ---------------------------------------------------------------------------------------------------------------------------
3.00% 3.50% 4.00% 4.50% 5.00% 5.50% 6.00% 6.50%
- ---------------------------------------------------------------------------------------------------------------------------
Marginal Tax Rates Equal the Taxable Rates shown below:
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
15.57% 3.55 4.15 4.74 5.33 5.92 6.51 7.11 7.70
16.14% 3.58 4.17 4.77 5.37 5.96 6.56 7.15 7.75
17.29% 3.63 4.23 4.84 5.44 6.05 6.65 7.25 7.86
17.86% 3.65 4.26 4.87 5.48 6.09 6.70 7.30 7.91
18.43% 3.68 4.29 4.90 5.52 6.13 6.74 7.36 7.97
19.01% 3.70 4.32 4.94 5.56 6.17 6.79 7.41 8.03
30.91% 4.34 5.07 5.79 6.51 7.24 7.96 8.68 9.41
31.39% 4.37 5.10 5.83 6.56 7.29 8.02 8.75 9.47
31.88% 4.40 5.14 5.87 6.61 7.34 8.07 8.81 9.54
32.20% 4.42 5.16 5.90 6.64 7.37 8.11 8.85 9.59
32.50% 4.44 5.19 5.93 6.67 7.41 8.15 8.89 9.63
32.67% 4.46 5.20 5.94 6.68 7.43 8.17 8.91 9.65
33.29% 4.50 5.25 6.00 6.75 7.50 8.24 8.99 9.74
34.25% 4.56 5.32 6.08 6.84 7.60 8.37 9.13 9.89
34.72% 4.60 5.36 6.13 6.89 7.66 8.43 9.19 9.96
35.32% 4.64 5.41 6.18 6.96 7.73 8.50 9.28 10.05
36.19% 4.70 5.49 6.27 7.05 7.84 8.62 9.40 10.19
36.24% 4.71 5.49 6.27 7.06 7.84 8.63 9.41 10.19
36.83% 4.75 5.54 6.33 7.12 7.92 8.71 9.50 10.29
37.47% 4.80 5.60 6.40 7.20 8.00 8.80 9.60 10.40
40.00% 5.00 5.83 6.67 7.50 8.33 9.17 10.00 10.83
40.35% 5.03 5.87 6.71 7.54 8.38 9.22 10.06 10.90
41.02% 5.09 5.93 6.78 7.63 8.48 9.33 10.17 11.02
41.36% 5.12 5.97 6.82 7.67 8.53 9.38 10.23 11.08
41.76% 5.15 6.01 6.87 7.73 8.59 9.44 10.30 11.16
42.10% 5.18 6.04 6.91 7.77 8.64 9.50 10.36 11.23
42.50% 5.22 6.09 6.96 7.83 8.70 9.57 10.43 11.30
42.83% 5.25 6.12 7.00 7.87 8.75 9.62 10.50 11.37
43.71% 5.33 6.22 7.11 7.99 8.88 9.77 10.66 11.55
44.81% 5.44 6.34 7.25 8.15 9.06 9.97 10.87 11.78
46.44% 5.60 6.53 7.47 8.40 9.34 10.27 11.20 12.14
</TABLE>
Descriptions of derivative instruments
What follows are brief descriptions of derivative instruments each Fund may
use. At various times a Fund may use some or all of these instruments and
is not limited to these instruments. It may use other similar types of
instruments if they are consistent with a Fund's investment goal and
policies. For more information on these instruments, see the SAI.
Options and futures contracts -- An option is an agreement to buy or sell
an instrument at a set price during a certain period of time. A futures
contract is an agreement to buy or sell an instrument for a set price on a
future date. A Fund may buy and sell options and futures contracts to
manage its exposure to changing interest rates, security prices and
currency exchange rates. Options and futures may be used to hedge a Fund's
investments against price fluctuations or to increase market exposure.
Asset-backed and mortgage-backed securities -- Asset-backed securities
include interests in pools of assets such as motor vehicle installment sale
contracts, installment loan contracts, leases on various types of real and
personal property, receivables from revolving credit (credit card)
agreements or other categories of receivables. Mortgage-backed securities
include collateralized mortgage obligations and stripped mortgage-backed
securities. Interest and principal payments depend on payment of the
underlying loans or mortgages. The value of these securities may also be
affected by changes in interest rates, the market's perception of the
issuers and the creditworthiness of the parties involved. The non-mortgage
related asset-backed securities do not have the benefit of a security
interest in the related collateral. Stripped mortgage-backed securities
include interest only (IO) and principal only (PO) securities. Cash flows
and yields on IOs and POs are extremely sensitive to the rate of principal
payments on the underlying mortgage loans or mortgage-backed securities.
Indexed securities -- The value of indexed securities is linked to
currencies, interest rates, commodities, indexes or other financial
indicators. Most indexed securities are short- to intermediate-term fixed
income securities whose values at maturity or interest rates rise or fall
according to the change in one or more specified underlying instruments.
Indexed securities may be more volatile than the underlying instrument
itself.
Inverse floaters -- Inverse floaters are created by underwriters using the
interest payment on securities. A portion of the interest received is paid
to holders of instruments based on current interest rates for short-term
securities. The remainder, minus a servicing fee, is paid to holders of
inverse floaters. As interest rates go down, the holders of the inverse
floaters receive more income and an increase in the price for the inverse
floaters. As interest rates go up, the holders of the inverse floaters
receive less income and a decrease in the price for the inverse floaters.
Structured products -- Structured products are over-the-counter financial
instruments created specifically to meet the needs of one or a small number
of investors. The instrument may consist of a warrant, an option or a
forward contract embedded in a note or any of a wide variety of debt,
equity and/or currency combinations. Risks of structured products include
the inability to close such instruments, rapid changes in the market and
defaults by other parties.
This Fund, along with the other American Express funds, is distributed by
American Express Financial Advisors Inc. and 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 Statement of Additional Information (SAI), annual and semiannual reports
to shareholders. In the Fund's annual report, you will find a discussion of
market conditions and investment strategies that significantly affected the Fund
during 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 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 #:
AXP California Tax-Exempt Fund 811-4646
AXP Massachusetts Tax-Exempt Fund 811-4647
AXP Michigan Tax-Exempt Fund 811-4647
AXP Minnesota Tax-Exempt Fund 811-4647
AXP New York Tax-Exempt Fund 811-4647
AXP Ohio Tax-Exempt Fund 811-4647
TICKER SYMBOL
AXP California Tax-Exempt Fund Class A: ICALXClass B:
AXP Massachusetts Tax-Exempt Fund Class A: IDMAXClass B:
AXP Michigan Tax-Exempt Fund Class A: INMIXClass B:
AXP Minnesota Tax-Exempt Fund Class A: IMNTXClass B: IDSMX
AXP New York Tax-Exempt Fund Class A: INYKXClass B:
AXP Ohio Tax-Exempt Fund Class A: IOHIXClass B:
S-6328-99 N (8/99)
<PAGE>
AXPSM Insured Tax-Exempt Fund
PROSPECTUS
Aug. 27, 1999
AXP Insured Tax-Exempt Fund seeks to provide shareholders with a high level of
income generally exempt from federal income tax and preservation of
shareholders' capital. 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.
<PAGE>
Table of Contents
TAKE A CLOSER LOOK AT:
The Fund 3p
Goal 3p
Investment Strategy 3p
Risks 5p
Past Performance 6p
Fees and Expenses 8p
Management 9p
Buying and Selling Shares 9p
Valuing Fund Shares 9p
Investment Options 10p
Purchasing Shares 11p
Sales Charges 14p
Exchanging/Selling Shares 18p
Distributions and Taxes 22p
Personalized Shareholder
Information 24p
About the Company 25p
Quick Telephone Reference 27p
Financial Highlights 28p
Appendix 30p
<PAGE>
FUND INFORMATION KEY
Goal and Investment Strategy
The Fund's particular investment goal and the strategies it intends
to use in pursuing its goal.
Risks
The major risk factors associated with the Fund.
Fees and Expenses
The overall costs incurred by an investor in the Fund, including
sales charges and annual expenses.
Management
The individual or group designated by the investment manager to
handle the Fund's day-to-day management.
Financial Highlights
Tables showing the Fund's financial performance.
<PAGE>
The Fund
GOAL
AXP Insured Tax-Exempt Fund (the Fund) seeks to provide shareholders with a high
level of income generally exempt from federal income tax and preservation of
shareholders' capital. Because any investment involves risk, achieving this goal
cannot be guaranteed.
INVESTMENT STRATEGY
The Fund's assets primarily are invested in a diversified portfolio of
securities exempt from federal income tax, with principal and interest either
fully insured by private insurers or guaranteed by an agency or instrumentality
of the U.S. government. If annual premiums are paid for a mutual fund insurance
policy from the Fund's assets, this will reduce the Fund's current yield. Under
normal market conditions, the Fund will invest at least 80% of its net assets in
securities issued by or on behalf of state of local governments. At least 65% of
its total assets will be invested in bonds and in other debt obligations that
are privately insured and have a maturity of more than one year. The Fund may
invest more than 25% of its total assets in a particular segment of the
municipal securities market or in industrial revenue bonds. The Fund also may
invest up to 20% of its net assets in debt obligations whose interest is subject
to the alternative minimum tax computation.
Although the Fund invests in securities that are privately insured, the Fund's
shares are not insured or guaranteed in any respect.
The selection of debt obligations that are tax-exempt is the primary decision in
building the investment portfolio.
In pursuit of the Fund's goal, American Express Financial Corporation (AEFC),
the Fund's investment manager, chooses investments by:
o Considering opportunities and risks given current and expected interest
rates.
o Identifying obligations in states or sectors which, due to supply and demand,
are offering higher yields than comparable instruments.
<PAGE>
o Identifying obligations that:
-- are investment-grade,
-- are lower quality provided that they are insured,
-- have coupons and/or maturities that are consistent with AEFC's interest
rate outlook, and
-- are expected to outperform other securities on a risk-adjusted basis
(i.e., after considering coupon, sinking fund provision, call protection,
and quality).
In evaluating whether to sell a security, AEFC considers, among other factors,
whether:
-- the security is overvalued relative to other potential
investments,
-- the issuer's credit rating declines or AEFC expects a decline (the
Fund may continue to own securities that are down-graded until AEFC
believes it is advantageous to sell),
-- political, economic, or other events could affect the issuer's
performance,
-- AEFC expects the issuer to call the security, and
-- AEFC identifies a more attractive opportunity.
Although not a primary investment strategy, the Fund also may invest in
derivative instruments, money market securities and other short-term tax-exempt
securities.
During weak or declining markets, the Fund may invest more of its assets in
money market securities or certain taxable investments. Although the Fund
primarily will invest in these securities to avoid losses, this type of
investing also could cause the Fund to lose the opportunity to participate in
market improvement. During these times, AEFC may make frequent securities trades
that could result in increased fees, expenses, and taxes.
For more information on strategies and holdings, see the Fund's Statement of
Additional Information (SAI) and the annual/semiannual reports.
<PAGE>
RISKS
Please remember that with any mutual fund investment you may lose money.
Principal risks associated with an investment in the Fund include:
Market Risk
Interest Rate Risk
Legal/Legislative Risk
Market Risk
The market may drop and you may lose money. Market risk may affect a single
issuer, sector of the economy, industry, or the market as a whole. The market
value of all securities may move up and down, sometimes rapidly and
unpredictably.
Interest Rate Risk
The risk of losses attributable to changes in interest rates. This term is
generally associated with bond prices (when interest rates rise, bond prices
fall). In general, the longer the maturity of a debt obligation, the higher its
yield and the greater the sensitivity to changes in interest rates.
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.
<PAGE>
PAST PERFORMANCE
The following bar chart and table indicate the risks and variability of
investing in the Fund by showing:
o how the Fund's performance has varied for each full calendar year
shown on the chart below, and
o how the Fund's average annual total returns compare to a recognized
index.
How the Fund has performed in the past does not indicate how the Fund will
perform in the future.
- --------------------------------------------------------------------------------
Class A Performance (based on calendar years)
+10.42% +5.98% +11.66% +8.95% +13.58% -6.08% +16.71% +2.26% +7.70% +5.42%
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 +7.56% (quarter ending March 1995) and the lowest return for a
calendar quarter was -6.11% (quarter ending March 1994).
The 5% sales charge applicable to Class A shares of the Fund is not reflected in
the bar chart; if reflected, returns would be lower than those shown. The
performance of Class B and Class Y may vary from that shown above because of
differences in sales charges and fees.
The Fund's year to date return as of June 30, 1999 was -1.26%.
<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Returns (as of Dec. 31, 1998)
1 year 5 years 10 years Since inception
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Insured Tax-Exempt:
Class A +0.15% +3.87% +6.93% --%
- ---------------------------------------------------------------------------------------------------------------------------
Class B +0.64% --% --% +5.04%a
Class Y +5.56% --% --% +6.60%a
- ---------------------------------------------------------------------------------------------------------------------------
Lehman Brothers
- ---------------------------------------------------------------------------------------------------------------------------
Municipal Bond Index +6.48% +5.84% +8.01% +7.41%b
</TABLE>
a Inception date was March 20, 1995.
b Measurement period started April 1, 1995.
This table shows total returns from hypothetical investments in Class A, Class B
and Class Y shares of the Fund. These returns are compared to the index shown
for the same periods. The performance of Classes A, B and Y vary because of
differences in sales charges and fees. Past performance for Class Y for the
periods prior to March 20, 1995 may be calculated based on the performance of
Class A, adjusted to reflect differences in sales charges, although not for
other differences in expenses.
For purposes of this calculation we assumed:
o a sales charge of 5% for Class A shares,
o sales at the end of the period and deduction of the applicable contingent
deferred sales charge (CDSC) for Class B shares,
o no sales charge for Class Y shares, and
o no adjustments for taxes paid by an investor on the reinvested income and
capital gains.
Lehman Brothers Municipal Bond Index, an unmanaged index, is made up of a
representative list of general obligation, revenue, insured and pre-refunded
bonds. The index is frequently used as a general measure of tax-exempt bond
market performance. The index reflects reinvestment of all distributions and
changes in market prices, but excludes brokerage commissions or other fees.
However, the securities used to create the index may not be representative of
the bonds held in the Fund.
<PAGE>
FEES AND EXPENSES
Fund investors pay various expenses. The table below describes the fees and
expenses that you may pay if you buy and hold shares of the Fund.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Shareholder Fees (fees paid directly from your investment)
Class A Class B Class Y
<S> <C> <C> <C>
Maximum sales charge (load) imposed on purchasesa
(as a percentage of offering price) 5% none none
Maximum deferred sales charge (load) imposed on sales
- ---------------------------------------------------------------------------------------------------------------------------
(as a percentage of offering price at time of purchase) none 5% none
- ---------------------------------------------------------------------------------------------------------------------------
Annual Fund operating expensesb (expenses that are deducted from Fund assets)
As a percentage of average daily net assets:Class A Class B Class Y
- ---------------------------------------------------------------------------------------------------------------------------
Management fees 0.45% 0.45% 0.45%
Distribution (12b-1) fees 0.25% 1.00% 0.00%
Other expensesc 0.14% 0.15% 0.24%
- ---------------------------------------------------------------------------------------------------------------------------
Total 0.84% 1.60% 0.69%
</TABLE>
a This charge may be reduced depending on your total investments in American
Express funds. See "Sales Charges."
b Expenses for Class A, Class B and Class Y are based on actual expenses for
the last fiscal year, restated to reflect current fees.
c Other expenses include an administrative services fee, a shareholder
services fee for Class Y, 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
- --------------------------------------------------------------------------------
Class Aa $581 $755 $ 943 $1,489
Class Bb $663 $905 $ 1,072 $1,701d
Class Bc $163 $505 $ 872 $1,701d
Class Y $ 70 $221 $ 385 $ 862
a Includes a 5% sales charge.
b Assumes you sold your Class B shares at the end of the period and incurred the
applicable CDSC.
c Assumes you did not sell your Class B shares at the end of the period.
d Based on conversion of Class B shares to Class A shares in the ninth year
of ownership.
This example does not represent actual expenses, past or future. Actual expenses
may be higher or lower than those shown.
MANAGEMENT
Paul Hylle, portfolio manager, joined AEFC in 1993. He also serves as portfolio
manager of AXP California Tax-Exempt Fund, AXP Massachusetts Tax-Exempt Fund,
AXP Michigan Tax-Exempt Fund, AXP Minnesota Tax-Exempt Fund, AXP New York
Tax-Exempt Fund and AXP Ohio Tax-Exempt Fund.
Buying and Selling Shares
VALUING FUND SHARES
The public offering price for Class A is the net asset value (NAV) adjusted for
the sales charge. For Class B and Class Y, it is the NAV.
The NAV is the value of a single Fund share. The NAV usually changes daily, and
is calculated at the close of business of the New York Stock Exchange, normally
3 p.m. Central Standard Time (CST), each business day (any day the New York
Stock Exchange is open).
<PAGE>
The Fund's investments are valued based on market quotations, or where market
quotations are not readily available, based on methods selected in good faith by
the board. Since the Fund's investment policies permit it to invest in
securities listed on foreign stock exchanges that trade on weekends or other
days when the Fund does not price its shares, the value of the Fund's underlying
investments may change on days when you could not buy or sell shares of the
Fund. Please see the SAI for further information.
INVESTMENT OPTIONS
1. Class A shares are sold to the public with a sales charge at the time of
purchase and an annual distribution (12b-1) fee.
2. Class B shares are sold to the public with a CDSC and an annual distribution
(12b-1) fee.
3. Class Y shares are sold to qualifying institutional investors without a sales
charge or distribution fee. Please see the SAI for information on eligibility to
purchase Class Y shares.
- --------------------------------------------------------------------------------
Investment options summary:
Class A Maximum sales charge of 5%
Initial sales charge waived or reduced for certain purchases
Annual distribution fee of 0.25% of average daily net assets*
Lower annual expenses than Class B shares
- --------------------------------------------------------------------------------
Class B No initial sales charge
CDSC on shares sold in the first six years (maximum of 5%
in first year, reduced to 0% after year six)
CDSC waived in certain circumstances
Shares convert to Class A in ninth year of ownership
Annual distribution fee of 1.00% of average daily net assets*
Higher annual expenses than Class A shares
- --------------------------------------------------------------------------------
Class Y No initial sales charge
No annual distribution fee
Service fee of 0.10% of average daily net assets
Available only to certain qualifying institutional investors
- --------------------------------------------------------------------------------
* The Fund has adopted a plan under Rule 12b-1 of the Investment Company Act of
1940 that allows it to pay distribution and servicing-related fees for the sale
of Class A and Class B shares. Because these fees are paid out of the Fund's
assets on an on-going basis, the fees may cost long-term shareholders more than
paying other types of sales charges imposed by some mutual funds.
<PAGE>
Should you purchase Class A or Class B shares?
If your investments in American Express funds total $250,000 or more, Class A
shares may be the better option. If you qualify for a waiver of the sales
charge, Class A shares will be the best option.
If you invest less than $250,000, consider how long you plan to hold your
shares. Class B shares have a higher annual distribution fee and a CDSC for six
years. To help you determine what is best for you, consult your financial
advisor.
Class B shares convert to Class A shares in the ninth calendar year of
ownership. Class B shares purchased through reinvested dividends and
distributions also will convert to Class A shares in the same proportion as the
other Class B shares.
PURCHASING SHARES
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. Once your
account is set up, you can choose among several 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. If
your application does not specify which class of shares you are purchasing, we
will assume you are investing in Class A shares.
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
because you failed to report required interest or dividends on your tax return.
<PAGE>
<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 revocable living trust The grantor-trustee (the person who puts the money into the trust)
An irrevocable trust, pension trust The legal entity (not the personal
or estate representative or trustee, unless no
legal entity is designated in the
account title)
Sole proprietorship The owner
Partnership The partnership
Corporate The corporation
Association, club or tax-exempt The organization
organization
</TABLE>
For details on TIN requirements, ask your financial advisor or contact your
local American Express Financial Advisors office to obtain a copy of federal
Form W-9, "Request for Taxpayer Identification Number and Certification."
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 Financial Advisors Inc.
P.O. Box 74
Minneapolis, MN 55440-0074
Minimum amounts
Initial investment: $2,000
Additional investments: $100
Account balances: $300
If your account balance falls below $300, you will be asked to increase it to
$300 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.
<PAGE>
2 By scheduled investment plan:
Contact your financial advisor for assistance in setting 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 with monthly payments)
If your account balance is below $2,000, you must make payments at least
monthly.
- --------------------------------------------------------------------------------
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
If you are in a wrap fee program sponsored by AEFA and your balance falls below
the required program minimum or your program is terminated, your shares will be
sold and the proceeds will be mailed to you.
<PAGE>
SALES CHARGES
Class A -- initial sales charge alternative
When you purchase Class A shares, you pay a 5% sales charge on the first $50,000
of your total investment and less on investments after the first $50,000:
- --------------------------------------------------------------------------------
Total investment Sales charge as percentage of:a
Public offering priceb Net amount invested
- --------------------------------------------------------------------------------
Up to $50,000 5.0% 5.26%
Next $50,000 4.5 4.71
Next $400,000 3.8 3.95
Next $500,000 2.0 2.04
$1,000,000 or more 0.0 0.00
a To calculate the actual sales charge on an investment greater than $50,000 and
less than $1,000,000, you must total the amounts of all increments that apply.
b Offering price includes a 5% sales charge.
The sales charge on Class A shares may be lower than 5%, depending on the total
amount:
o you now are investing in this Fund,
o you have previously invested in this Fund, or
o you and your primary household group are investing or have invested in other
American Express funds that have a sales charge. (The primary household group
consists of accounts in any ownership for spouses or domestic partners and
their unmarried children under 21. For purposes of this policy, domestic
partners are individuals who maintain a shared primary residence and have
joint property or other insurable interests.) AXP Tax-Free Money Fund and
Class A shares of AXP Cash Management Fund do not have sales charges.
Other Class A sales charge policies:
o IRA purchases or other employee benefit plan purchases made through a payroll
deduction plan or through a plan sponsored by an employer, association of
employers, employee organization or other similar group, may be added
together to reduce sales charges for all shares purchased through that plan,
and
o if you intend to invest $1 million over a period of 13 months, you can reduce
the sales charges in Class A by filing a letter of intent. For more details,
please see the SAI.
<PAGE>
Waivers of the sales charge for Class A shares Sales
charges do not apply to:
o current or retired board members, officers or
employees of the Fund or AEFC or its subsidiaries, their spouses or
domestic partners and unmarried children under 21.
o current or retired American Express financial advisors, their spouses or
domestic partners and unmarried children under 21.
o investors who have a business relationship with a newly associated financial
advisor who joined AEFA from another investment firm provided that (1) the
purchase is made within six months of the advisor's appointment date with
AEFA, (2) the purchase is made with proceeds of shares sold that were
sponsored by the financial advisor's previous broker-dealer, and (3) the
proceeds are the result of a sale of an equal or greater value where a sales
load was assessed.
o qualified employee benefit plans using a daily transfer recordkeeping system
offering participants daily access to American Express funds. Eligibility
must be determined in advance by AEFA. For assistance, please contact your
financial advisor. (Participants in certain qualified plans where the initial
sales charge is waived may be subject to a deferred sales charge of up to
4%.)
o shareholders who have at least $1 million invested in American Express funds.
If the investment is sold in the first year after purchase, a CDSC of 1% will
be charged. The CDSC will be waived only in the circumstances described for
waivers for Class B shares.
o purchases made within 30 days after a sale of shares (up to the amount sold):
-- of a product distributed by AEFA in a qualified plan subject to a deferred
sales charge, or
-- in a qualified plan or account where American Express Trust Company
has a recordkeeping, trustee, investment management, or investment
servicing relationship.
Send the Fund a written request along with your payment, indicating the date
and the amount of the sale.
<PAGE>
o purchases made:
-- with dividend or capital gain distributions from this Fund or from the
same class of another American Express fund that has a sales charge,
-- through or under a wrap fee product sponsored by AEFA,
-- within the University of Texas System ORP,
-- within a segregated separate account offered by Nationwide Life
Insurance Company or Nationwide Life and Annuity Insurance Company,
-- within the University of Massachusetts After-Tax Savings Program,
-- with the proceeds from IDS Life Real Estate Variable Annuity
surrenders, or
-- through or under a subsidiary of AEFC offering Personal Trust Services'
Asset-Based pricing alternative
Class B -- contingent deferred sales charge (CDSC) alternative
A CDSC is based on the sale amount and the number of calendar years
-- including the year of purchase
-- between purchase and sale.
The following table shows how CDSC percentages on sales decline after a
purchase:
If the sale is made during the: The CDSC percentage rate is:
- --------------------------------------------------------------------------------
First year 5%
Second year 4%
Third year 4%
Fourth year 3%
Fifth year 2%
Sixth year 1%
Seventh year 0%
If the amount you are selling causes the value of your investment in Class B
shares to fall below the cost of the shares you have purchased during the last
six years including the current year, the CDSC is based on the lower of the cost
of those shares purchased or market value.
<PAGE>
Example:
Assume you had invested $10,000 in Class B shares and that your investment had
appreciated in value to $12,000 after 15 months, including reinvested dividends
and capital gain distributions. You could sell up to $2,000 worth of shares
without paying a CDSC ($12,000 current value less $10,000 purchase amount). If
you sold $2,500 worth of shares, the CDSC would apply to the $500 representing
part of your original purchase price. The CDSC rate would be 4% because the sale
was made during the second year after the purchase.
Because the CDSC is imposed only on sales that reduce your total purchase
payments, you never have to pay a CDSC on any amount that represents
appreciation in the value of your shares, income earned by your shares, or
capital gains. In addition, the CDSC rate on your sale will be based on your
oldest purchase payment. The CDSC on the next amount sold will be based on the
next oldest purchase payment.
The CDSC on Class B shares will be waived on sales of shares:
o in the event of the shareholder's death,
o held in trust for an employee benefit plan, or
o held in IRAs or certain qualified plans if American Express Trust
Company is the custodian, such as Keogh plans, tax-sheltered custodial
accounts or corporate pension plans, provided that the shareholder is:
-- at least 591/2 years old AND
-- taking a retirement distribution (if the sale is part of a
transfer to an IRA or qualified plan in a product distributed
by AEFA, or a custodian-to-custodian transfer to a product not
distributed by AEFA, the CDSC will not be waived) OR
-- selling under an approved substantially equal periodic
payment arrangement.
<PAGE>
EXCHANGING/SELLING SHARES
Exchanges
You can exchange your Fund shares at no charge for shares of the same class of
any other publicly offered American Express fund. Exchanges into AXP Tax-Free
Money Fund may only be made from Class A shares. 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.
You may make up to three exchanges within any 30-day period, with each limited
to $300,000. These limits do not apply to scheduled exchange programs and
certain employee benefit plans or other arrangements through which one
shareholder represents the interests of several. Exceptions may be allowed with
pre-approval of the Fund.
Other exchange policies:
o Exchanges must be made into the same class of shares of the new fund.
o If your exchange creates a new account, it must satisfy the minimum
investment amount for new purchases.
o Once we receive your exchange request, you cannot cancel it.
o Shares of the new fund may not be used on the same day for another exchange.
o If your shares are pledged as collateral, the exchange will be delayed
until AECSC receives written approval from the secured party.
AECSC and the Fund reserve the right to reject any exchange, limit the amount,
or modify or discontinue the exchange privilege, to prevent abuse or adverse
effects on the Fund and its shareholders. For example, if exchanges are too
numerous or too large, they may disrupt the Fund's investment strategies or
increase its costs.
Selling Shares
You can sell your shares at any time. AECSC will mail payment 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, minus any applicable CDSC.
<PAGE>
You can change your mind after requesting a sale and use all or part of the
proceeds to purchase new shares in the same account from which you sold. If you
reinvest in Class A, you will purchase the new shares at NAV rather than the
offering price on the date of a new purchase. If you reinvest in Class B, any
CDSC you paid on the amount you are reinvesting also will be reinvested. To take
advantage of this option, send a request within 30 days of the date your sale
request was received and include your account number. This privilege may be
limited or withdrawn at any time and may have tax consequences. Requests to sell
shares of the Fund are not allowed within 30 days of a telephoned-in
address change.
The Fund reserves the right to redeem in kind.
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 your bank provides evidence satisfactory to the
Fund and AECSC that your check has cleared.)
For more details and a description of other sales policies, please see the SAI.
<PAGE>
Two ways to request an exchange or sale of shares
- --------------------------------------------------------------------------------
1 By letter:
Include in your letter:
o the name of the fund(s),
o the class of shares to be exchanged or sold,
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
- --------------------------------------------------------------------------------
2 By telephone:
American Express Financial Advisors
Telephone Transaction Service
800-437-3133
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
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
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.
<PAGE>
Distributions and Taxes
As a shareholder you are entitled to your share of the Fund's net income and net
gains. The Fund distributes dividends and capital gains to qualify as a
regulated investment company and to avoid paying corporate income and excise
taxes.
DIVIDENDS AND CAPITAL GAIN DISTRIBUTION
The Fund's net investment income is distributed to you as dividends. Capital
gains are realized when a security is sold for a higher price than was paid for
it. Each realized capital gain or loss is long-term or short-term depending on
the length of the time the Fund held the security. Realized capital gains and
losses offset each other. The Fund offsets any net realized capital gains by any
available capital loss carryovers. Net short-term capital gains are included in
net investment income. Net realized long-term capital gains, if any, are
distributed by the end of the calendar year as capital gain distributions.
REINVESTMENTS
Dividends and capital gain distributions are automatically reinvested in
additional shares 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 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 capital gain
distributions and other income earned 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.
<PAGE>
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 money you borrowed that is 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 the record date of a distribution you may pay
taxes on money earned by the Fund before you were a shareholder. You will pay
the full pre-distribution price for the shares, then receive a portion of your
investment back as a distribution, which may be taxable.
For tax purposes, an exchange is considered a sale and purchase and may result
in a gain or loss. A sale is a taxable transaction. If you sell shares for less
than their cost, the difference is a capital loss. 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 buy Class A shares of this or another American Express 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 of this Fund.
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.
<PAGE>
Personalized Shareholder Information
To help you track and evaluate the performance of your investments, AECSC
provides these individualized reports:
QUARTERLY STATEMENTS
List your holdings and transactions during the previous three months, as well as
individualized return information.
YEARLY TAX STATEMENTS
Feature average-cost-basis reporting of capital gains or losses if you sell your
shares, along with distribution information to simplify tax calculations.
PERSONALIZED MUTUAL FUND PROGRESS REPORTS
Detail returns on your initial investment and cash-flow activity in your
account. This report calculates a total return reflecting your individual
history in owning Fund shares and is available from your financial advisor.
<PAGE>
About the Company
<TABLE>
<CAPTION>
BUSINESS STRUCTURE
<S> <C> <C> <C>
---------------------
Shareholders
---------------------
---------------------
Your American
Express financial
advisor and other
servicing agents
May receive a fee
for their sales
efforts and ongoing
service.
---------------------
- ----------------------- --------------------- --------------------- ---------------------
Transfer Agent: Administrative Distributor and
American Express Services Agent: Shareholder
Client Service American Express Services Agent:
Corporation Financial American Express
Corporation Financial Advisors
Maintains shareholder
accounts and records Provides <- The Fund -> Markets and
for the Fund; administrative and distributes shares;
receives a fee based accounting services receives a portion
on the number of for the Fund; of the sales charge
accounts it services. receives a fee or CDSC and
based on average distribution fee.
daily net assets. Also provides a
variety of ongoing
shareholder
services.
- ----------------------- --------------------- ---------------------
--------------------- ---------------------
Investment Manager: Custodian:
American Express U.S. Bank National
Financial Association
Corporation
Provides
Manages the <- -> safekeeping of
Fund's assets; receives a
investments and fee that varies
receives a fee based on the number
based on average of securities held.
daily net assets.*
--------------------- --------------------- ---------------------
</TABLE>
* 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 0.45%
of its average daily net assets. Under the Agreement, the Fund also pays taxes,
brokerage commissions and nonadvisory expenses.
<PAGE>
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 $92 billion for all 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 $232 billion.
AEFA serves individuals and businesses through its nationwide network of more
than 180 offices and more than 9,300 advisors.
AEFC, located at IDS Tower 10, Minneapolis, MN 55440-0010, is a wholly-owned
subsidiary of American Express Company, a financial services company with
headquarters at American Express Tower, World Financial Center, New York, NY
10285.
YEAR 2000
The Fund could be adversely affected if the computer systems used by AEFC and
the Fund's other service providers do not properly process and calculate
date-related information from and after 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, governments or international markets in which the Fund invests
also may be adversely affected by Year 2000 issues. To the extent a portfolio
holding is adversely affected by a Year 2000 processing issue, the Fund's return
could be adversely affected.
<PAGE>
Quick Telephone Reference
AMERICAN EXPRESS FINANCIAL ADVISORS
TELEPHONE TRANSACTION SERVICE
Sales and exchanges, dividend payments or reinvestments and automatic payment
arrangements: 800-437-3133
AMERICAN EXPRESS CLIENT SERVICE CORPORATION
Fund performance, fund prices, account values, recent account transactions and
account inquiries: 800-862-7919
TTY SERVICE
For the hearing impaired: 800-846-4852
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
Fiscal period ended June 30,
- ---------------------------------------------------------------------------------------------------------------------------
Per share income and capital changesa
Class A
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $5.63 $5.51 $5.43 $5.40 $5.35
- ---------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .27 .28 .30 .30 .30
Net gains (losses) (both realized and unrealized) (.18) .13 .07 .03 .05
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations .09 .41 .37 .33 .35
Less distributions:
Dividends from net investment income (.27) (.29) (.29) (.28) (.30)
Distributions from realized gains (.01) -- -- (.02) --
Total distributions (.28) (.29) (.29) (.30) (.30)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $5.44 $5.63 $5.51 $5.43 $5.40
- ---------------------------------------------------------------------------------------------------------------------------
Ratios/supplemental data
Net assets, end of period (in millions) $439 $455 $462 $491 $505
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average daily net assetsb .75% .73% .74% .75% .66%
Ratio of net investment income (loss)
to average daily net assets 4.87% 5.09% 5.42% 5.16% 5.66%
Portfolio turnover rate
(excluding short-term securities) 13% 17% 33% 52% 53%
Total returnc 1.74% 7.60% 7.08% 6.26% 6.65%
</TABLE>
a For a share outstanding throughout the period. 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.
c Total return does not reflect payment of a sales charge.
<PAGE>
Fiscal period ended June 30,
<TABLE>
<CAPTION>
Per share income and capital changesa
Class B Class Y
1999 1998 1997 1996 1995b 1999 1998 1997 1996 1995b
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $5.63 $5.51 $5.43 $5.40 $5.47 $5.64 $5.52 $5.44 $5.41 $5.47
Income from investment operations:
Net investment income (loss) .23 .24 .25 .26 .09 .30 .29 .30 .31 .08
Net gains (losses) (both
realized and unrealized) (.18) .13 .08 .03 (.07) (.19) .13 .08 .03 (.06)
Total from investment
operations .05 .37 .33 .29 .02 .11 .42 .38 .34 .02
Less distributions:
Dividends from net
investment income (.23) (.25) (.25) (.24) (.09) (.30) (.30) (.30) (.29) (.08)
Distributions from
realized gains (.01) -- -- (.02) -- (.01) -- -- (.02) --
Total distributions (.24) (.25) (.25) (.26) (.09) (.31) (.30) (.30) (.31) (.08)
Net asset value, end
of period $5.44 $5.63 $5.51 $5.43 $5.40 $5.44 $5.64 $5.52 $5.44 $5.41
Ratios/supplemental data
Net assets, end of period
(in millions) $61 $44 $31 $21 $6 $-- $-- $-- $-- $--
Ratio of expenses to
average daily net assetsd 1.51% 1.49% 1.50% 1.51% 1.49%c .60% .48% .58% .57% .54%c
Ratio of net investment
income (loss)
to average daily net assets 4.13% 4.34% 4.71% 4.42% 4.72%c 5.01% 5.30% 5.78% 5.32% 5.38%c
Portfolio turnover rate
(excluding short-term
securities) 13% 17% 33% 52% 53% 13% 17% 33% 52% 53%
Total returne .99% 6.80% 6.26% 5.46% .41% 1.87% 7.73% 7.25% 6.40% .49%
</TABLE>
a For a share outstanding throughout the period. Rounded to the nearest cent.
b Inception date was March 20, 1995.
c Adjusted to an annual basis.
d Effective fiscal year 1996, expense ratio is based on total expenses of the
Fund before reduction of earnings credits on cash balances.
e Total return does not reflect payment of a sales charge.
The information in these tables has been audited by KPMG LLP, independent
auditors. The independent auditor's 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*
Taxable income** $0 $126,600 $189,950
to to to Over
$126,600(1) $189,950(2) $312,450(3) $312,450(2)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
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
* 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. For these Tax-Exempt Rates:
<TABLE>
<CAPTION>
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>
This Fund, along with the other American Express funds, is distributed by
American Express Financial Advisors Inc. and 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 Statement of Additional Information (SAI), annual and semiannual reports
to shareholders. In the Fund's annual report, you will find a discussion of
market conditions and investment strategies that significantly affected the Fund
during 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 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 #811-4647
TICKER SYMBOL
Class A: IINSX Class B: IINBX Class Y: NA
S-6327-99 N (8/99)
<PAGE>
AXPSM SPECIAL TAX-EXEMPT SERIES TRUST
AXPSM CALIFORNIA TAX-EXEMPT TRUST
STATEMENT OF ADDITIONAL INFORMATION
FOR
AXPSM CALIFORNIA TAX-EXEMPT FUND
AXPSM MASSACHUSETTS TAX-EXEMPT FUND
AXPSM MICHIGAN TAX-EXEMPT FUND
AXPSM MINNESOTA TAX-EXEMPT FUND
AXPSM NEW YORK TAX-EXEMPT FUND
AXPSM OHIO TAX-EXEMPT FUND
(singularly and collectively, where the context requires, referred to as the
Fund)
For state specific risk factors, please see Appendix B.
Aug. 27, 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 American Express financial advisor or by writing to American Express
Shareholder Service, 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>
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.8
Security Transactions.................................................p.28
Brokerage Commissions Paid to Brokers Affiliated with
American Express Financial Corporation................................p.30
Performance Information...............................................p.30
Valuing Fund Shares...................................................p.33
Investing in the Fund.................................................p.34
Selling Shares........................................................p.37
Pay-out Plans.........................................................p.38
Capital Loss Carryover................................................p.39
Taxes.................................................................p.39
Agreements............................................................p.40
Organizational Information............................................p.44
Board Members and Officers............................................p.46
Compensation for Board Members........................................p.50
Independent Auditors..................................................p.52
Appendix A: Description of Ratings...................................p.53
Appendix B: State Risk Factors.......................................p.58
<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
- --------------------------------------------------------------------------------
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 if the total commitment amount exceeds 5% of the Fund's
total assets.
o Buy or sell real estate, unless acquired as a result of ownership of
securities or other instruments, except this shall not prevent the Fund
from investing in securities or other instruments backed by real estate or
securities of companies engaged in the real estate business or real estate
investment trusts. For purposes of this policy, real estate includes real
estate limited partnerships.
o Buy or sell physical commodities unless acquired as a result of ownership
of securities or other instruments, except this shall not prevent the Fund
from buying or selling options and futures contracts or from investing in
securities or other instruments backed by, or whose value is derived from,
physical commodities.
o Make a loan of any part of its assets to American Express Financial
Corporation (AEFC), to the board members and officers of AEFC or to its own
board members and officers.
o Lend Fund securities in excess of 30% of its net assets, at market value.
Except for the fundamental investment policies listed above, the other
investment policies described in the prospectus and in this SAI are not
fundamental and may be changed by the board at any time.
<PAGE>
INVESTMENT STRATEGIES AND TYPES OF INVESTMENTS
- --------------------------------------------------------------------------------
This table shows various investment strategies and investments that many funds
are allowed to engage in and purchase. It also lists certain percentage
guidelines that are generally followed by the Fund's investment manager. This
table is intended to show the breadth of investments that the investment manager
may make on behalf of the Fund. For a description of principal risks, please see
the prospectus. Notwithstanding the Fund's ability to utilize these strategies
and techniques, the investment manager is not obligated to use them at any
particular time. For example, even though the investment manager is authorized
to adopt temporary defensive positions and is authorized to attempt to hedge
against certain types of risk, these practices are left to the investment
manager's sole discretion.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------- --------------------------
Investment strategies & types of investments: Allowable for the Fund?
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
<S> <C>
Agency and Government Securities yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Borrowing yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Cash/Money Market Instruments yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Collateralized Bond Obligations yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Commercial Paper yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Common Stock no
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Convertible Securities yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Corporate Bonds yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Debt Obligations yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Depositary Receipts no
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Derivative Instruments yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Foreign Currency Transactions no
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Foreign Securities yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
High-Yield (High-Risk) Securities (Junk Bonds) yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Illiquid and Restricted Securities yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Indexed Securities yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Inverse Floaters yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Investment Companies no
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Lending of Portfolio Securities yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Loan Participations yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Mortgage- and Asset-Backed Securities yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Mortgage Dollar Rolls yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Municipal Obligations yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Preferred Stock yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Real Estate Investment Trusts yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Repurchase Agreements yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Reverse Repurchase Agreements yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Short Sales no
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Sovereign Debt yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Structured Products yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Variable- or Floating-Rate Securities yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Warrants yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
When-Issued Securities yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Zero-Coupon, Step-Coupon, and Pay-in-Kind Securities yes
- ---------------------------------------------------------------------------------- --------------------------
</TABLE>
<PAGE>
The following are guidelines that may be changed by the board at any time:
o Under normal market conditions, California, Massachusetts, Michigan,
Minnesota, New York and Ohio Funds will invest at least 80% of their net
assets in bonds, notes and commercial paper issued by or on behalf of their
respective state or local governmental units whose interest, in the opinion
of bond counsel for the issuer, is exempt from federal, state and local (if
applicable) income tax in their respective states.
o A portion of the Fund's assets may be invested in bonds whose interest is
subject to the alternative minimum tax computation. As long as the staff of
the SEC maintains its current position that a fund calling itself a
"tax-exempt" fund may not invest more than 20% of its net assets in these
bonds, the Fund will limit its investments in these bonds to 20% of its net
assets.
o At least 75% of the Fund's investments will be in investment-grade
securities or in non-rated securities of equivalent investment quality in
the judgment of the Fund's investment manager. The other 25% may be in
securities rated Ba or B by Moody's or BB or B by S&P or the equivalent
(commonly known as junk bonds).
o The Fund may invest more than 25% of its total assets in a particular
segment of the municipal securities market or in industrial revenue bonds,
but does not intend to invest more than 25% of its total assets in
industrial revenue bonds issued for companies in the same industry.
o If, in the opinion of the investment manager, appropriate tax-exempt
securities are not available, the Fund may invest up to 20% of its net
assets, or more on a temporary defensive basis, in taxable investments.
o No more than 5% of the Fund's net assets can be used at any one time for
good faith deposits on futures and premiums for options on futures that do
not offset existing investment positions.
o No more than 10% of the Fund's net assets will be held in inverse floaters.
o No more than 10% of the Fund's net assets will be held in securities and
other instruments that are illiquid.
o The Fund will not buy or margin or sell short, except the Fund may enter
into interest rate futures contracts.
o Under normal market conditions, the Fund does not intend to commit more
than 5% of its total assets to purchase debt securities on a when-issued
basis.
For a description of ratings see Appendix A. For a discussion of state risk
factors see Appendix B.
<PAGE>
INFORMATION REGARDING RISKS AND INVESTMENT STRATEGIES
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RISKS
The following is a summary of common risk characteristics. Following this
summary is a description of certain investments and investment strategies and
the risks most commonly associated with them (including certain risks not
described below and, in some cases, a more comprehensive discussion of how the
risks apply to a particular investment or investment strategy). Please remember
that a mutual fund's risk profile is largely defined by the fund's primary
securities and investment strategies. However, most mutual funds are allowed to
use certain other strategies and investments that may have different risk
characteristics. Accordingly, one or more of the following types of risk will be
associated with the Fund at any time (for a description of principal risks,
please see the prospectus):
Call/Prepayment Risk
The risk that a bond or other security might be called (or otherwise converted,
prepaid, or redeemed) before maturity. This type of risk is closely related to
"reinvestment risk."
Correlation Risk
The risk that a given transaction may fail to achieve its objectives due to an
imperfect correlation between markets. Certain investments may react more
negatively than others in response to changing market conditions.
Credit Risk
The risk that the issuer of a security, or the counterparty to a contract, will
default or otherwise become unable to honor a financial obligation (such as
payments due on a bond or a note). The price of junk bonds may react more to the
ability of the issuing company to pay interest and principal when due than to
changes in interest rates. They have greater price fluctuations and are more
likely to experience a default.
Event Risk
Occasionally, the value of a security may be seriously and unexpectedly changed
by a natural or industrial accident or occurrence.
Foreign/Emerging Markets Risk
The following are all components of foreign/emerging markets risk:
Country risk includes the political, economic, and other conditions of
a country. These conditions include lack of publicly available information, less
government oversight (including lack of accounting, auditing, and financial
reporting standards), the possibility of government-imposed restrictions, and
even the nationalization of assets.
Currency risk results from the constantly changing exchange rate
between local currency and the U.S. dollar. Whenever the Fund holds securities
valued in a foreign currency or holds the currency, changes in the exchange rate
add or subtract from the value of the investment.
<PAGE>
Custody risk refers to the process of clearing and settling trades. It
also covers holding securities with local agents and depositories. Low trading
volumes and volatile prices in less developed markets make trades harder to
complete and settle. Local agents are held only to the standard of care of the
local market. Governments or trade groups may compel local agents to hold
securities in designated depositories that are not subject to independent
evaluation. The less developed a country's securities market is, the greater the
likelihood of problems occurring.
Emerging markets risk includes the dramatic pace of change (economic,
social, and political) in emerging market countries as well as the other
considerations listed above. These markets are in early stages of development
and are extremely volatile. They can be marked by extreme inflation, devaluation
of currencies, dependence on trade partners, and hostile relations with
neighboring countries.
Inflation Risk
Also known as purchasing power risk, inflation risk measures the effects of
continually rising prices on investments. If an investment's yield is lower than
the rate of inflation, your money will have less purchasing power as time goes
on.
Interest Rate Risk
The risk of losses attributable to changes in interest rates. This term is
generally associated with bond prices (when interest rates rise, bond prices
fall). In general, the longer the maturity of a debt obligation, the higher its
yield and the greater the sensitivity to changes in interest rates.
Issuer Risk
The risk that an issuer, or the value of its stocks or bonds, will perform
poorly. Poor performance may be caused by poor management decisions, competitive
pressures, breakthroughs in technology, reliance on suppliers, labor problems or
shortages, corporate restructurings, fraudulent disclosures, or other factors.
Legal/Legislative Risk
Congress and other governmental units have the power to change existing laws
affecting securities. A change in law might affect an investment adversely.
Leverage Risk
Some derivative investments (such as options, futures, or options on futures)
require little or no initial payment and base their price on a security, a
currency, or an index. A small change in the value of the underlying security,
currency, or index may cause a sizable gain or loss in the price of the
instrument.
Liquidity Risk
Securities may be difficult or impossible to sell at the time that the Fund
would like. The Fund may have to lower the selling price, sell other
investments, or forego an investment opportunity.
Management Risk
The risk that a strategy or selection method utilized by the investment manager
may fail to produce the intended result. When all other factors have been
accounted for and the investment manager chooses an investment, there is always
the possibility that the choice will be a poor one.
<PAGE>
Market Risk
The market may drop and you may lose money. Market risk may affect a single
issuer, sector of the economy, industry, or the market as a whole. The market
value of all securities may move up and down, sometimes rapidly and
unpredictably.
Reinvestment Risk
The risk that an investor will not be able to reinvest their income or principal
at the same rate as it currently is earning.
Sector/Concentration Risk
Investments that are concentrated in a particular issuer, geographic region, or
industry will be more susceptible to changes in price (the more you diversify,
the more you spread risk).
Small Company Risk
Investments in small and medium companies often involve greater risks than
investments in larger, more established companies because small and medium
companies may lack the management experience, financial resources, product
diversification, and competitive strengths of larger companies. In addition, in
many instances the securities of small and medium companies are traded only
over-the-counter or on regional securities exchanges and the frequency and
volume of their trading is substantially less than is typical of larger
companies.
<PAGE>
INVESTMENT STRATEGIES
The following information supplements the discussion of the Fund's investment
objectives, policies, and strategies that are described in the prospectus and in
this SAI. The following describes many strategies that many mutual funds use and
types of securities that they purchase. Please refer to the section entitled
Investment Strategies and Types of Investments to see which are applicable to
the Fund.
Agency and Government Securities
The U.S. government and its agencies issue many different types of securities.
U.S. Treasury bonds, notes, and bills and securities including mortgage pass
through certificates of the Government National Mortgage Association (GNMA) are
guaranteed by the U.S. government. Other U.S. government securities are issued
or guaranteed by federal agencies or government-sponsored enterprises but are
not guaranteed by the U.S. government. This may increase the credit risk
associated with these investments.
Government-sponsored entities issuing securities include privately owned,
publicly chartered entities created to reduce borrowing costs for certain
sectors of the economy, such as farmers, homeowners, and students. They include
the Federal Farm Credit Bank System, Farm Credit Financial Assistance
Corporation, Federal Home Loan Bank, FHLMC, FNMA, Student Loan Marketing
Association (SLMA), and Resolution Trust Corporation (RTC). Government-sponsored
entities may issue discount notes (with maturities ranging from overnight to 360
days) and bonds. Agency and government securities are subject to the same
concerns as other debt obligations. (See also Debt Obligations and Mortgage- and
Asset-Backed Securities.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with agency and government securities include:
Call/Prepayment Risk, Inflation Risk, Interest Rate Risk, Management Risk, and
Reinvestment Risk.
Borrowing
The Fund may borrow money from banks for temporary or emergency purposes and
make other investments or engage in other transactions permissible under the
1940 Act that may be considered a borrowing (such as derivative instruments).
Borrowings are subject to costs (in addition to any interest that may be paid)
and typically reduce the Fund's total return. Except as qualified above,
however, the Fund will not buy securities on margin.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with borrowing include: Inflation Risk and Management
Risk.
Cash/Money Market Instruments
The Fund may maintain a portion of its assets in cash and cash-equivalent
investments. Cash-equivalent investments include short-term U.S. and Canadian
government securities and negotiable certificates of deposit, non-negotiable
fixed-time deposits, bankers' acceptances, and letters of credit of banks or
savings and loan associations having capital, surplus, and undivided profits (as
of the date of its most recently published annual financial statements) in
excess of $100 million (or the equivalent in the instance of a foreign branch of
a U.S. bank) at the date of investment. The Fund also may purchase short-term
notes and obligations of U.S. and foreign banks and corporations and may use
repurchase agreements with broker-dealers registered under the Securities
Exchange Act of 1934 and with commercial banks. (See also Commercial Paper, Debt
Obligations, Repurchase Agreements, and Variable- or Floating-Rate Securities.)
These types of instruments generally offer low rates of return and subject the
Fund to certain costs and expenses.
<PAGE>
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.
Collateralized Bond Obligations
Collateralized bond obligations (CBOs) are investment grade bonds backed by a
pool of junk bonds. CBOs are similar in concept to collateralized mortgage
obligations (CMOs), but differ in that CBOs represent different degrees of
credit quality rather than different maturities. (See also Mortgage- and
Asset-Backed Securities.) Underwriters of CBOs package a large and diversified
pool of high-risk, high-yield junk bonds, which is then separated into "tiers."
Typically, the first tier represents the higher quality collateral and pays the
lowest interest rate; the second tier is backed by riskier bonds and pays a
higher rate; the third tier represents the lowest credit quality and instead of
receiving a fixed interest rate receives the residual interest payments--money
that is left over after the higher tiers have been paid. CBOs, like CMOs, are
substantially overcollateralized and this, plus the diversification of the pool
backing them, earns them investment-grade bond ratings. Holders of third-tier
CBOs stand to earn high yields or less money depending on the rate of defaults
in the collateral pool. (See also High-Yield (High-Risk) Securities.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with CBOs include: Call/Prepayment Risk, Credit Risk,
Interest Rate Risk, and Management Risk.
Commercial Paper
Commercial paper is a short-term debt obligation with a maturity ranging from 2
to 270 days issued by banks, corporations, and other borrowers. It is sold to
investors with temporary idle cash as a way to increase returns on a short-term
basis. These instruments are generally unsecured, which increases the credit
risk associated with this type of investment. (See also Debt Obligations and
Illiquid and Restricted Securities.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with commercial paper include: Credit Risk, Liquidity
Risk, and Management Risk.
Common Stock
Common stock represents units of ownership in a corporation. Owners typically
are entitled to vote on the selection of directors and other important matters
as well as to receive dividends on their holdings. In the event that a
corporation is liquidated, the claims of secured and unsecured creditors and
owners of bonds and preferred stock take precedence over the claims of those who
own common stock.
The price of common stock is generally determined by corporate earnings, type of
products or services offered, projected growth rates, experience of management,
liquidity, and general market conditions for the markets on which the stock
trades.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with common stock include: Issuer Risk, Management
Risk, Market Risk, and Small Company Risk.
<PAGE>
Convertible Securities
Convertible securities are bonds, debentures, notes, preferred stocks, or other
securities that may be converted into common stock of the same or a different
issuer within a particular period of time at a specified price. Some convertible
securities, such as preferred equity-redemption cumulative stock (PERCs), have
mandatory conversion features. Others are voluntary. A convertible security
entitles the holder to receive interest normally paid or accrued on debt or the
dividend paid on preferred stock until the convertible security matures or is
redeemed, converted, or exchanged. Convertible securities have unique investment
characteristics in that they generally (i) have higher yields than common stocks
but lower yields than comparable non-convertible securities, (ii) are less
subject to fluctuation in value than the underlying stock since they have fixed
income characteristics, and (iii) provide the potential for capital appreciation
if the market price of the underlying common stock increases.
The value of a convertible security is a function of its "investment value"
(determined by its yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying common stock). The investment value of a convertible security is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline. The credit
standing of the issuer and other factors also may have an effect on the
convertible security's investment value. The conversion value of a convertible
security is determined by the market price of the underlying common stock. If
the conversion value is low relative to the investment value, the price of the
convertible security is governed principally by its investment value. Generally,
the conversion value decreases as the convertible security approaches maturity.
To the extent the market price of the underlying common stock approaches or
exceeds the conversion price, the price of the convertible security will be
increasingly influenced by its conversion value. A convertible security
generally will sell at a premium over its conversion value by the extent to
which investors place value on the right to acquire the underlying common stock
while holding a fixed income security.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with convertible securities include: Call/Prepayment
Risk, Interest Rate Risk, Issuer Risk, Management Risk, Market Risk, and
Reinvestment Risk.
Corporate Bonds
Corporate bonds are debt obligations issued by private corporations, as distinct
from bonds issued by a government agency or a municipality. Corporate bonds
typically have four distinguishing features: (1) they are taxable; (2) they have
a par value of $1,000; (3) they have a term maturity, which means they come due
all at once; and (4) many are traded on major exchanges. Corporate bonds are
subject to the same concerns as other debt obligations. (See also Debt
Obligations and High-Yield (High-Risk) Securities.)
Corporate bonds may be either secured or unsecured. Unsecured corporate bonds
are generally referred to as "debentures." See the appendix for a discussion of
securities ratings.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with corporate bonds include: Call/Prepayment Risk,
Credit Risk, Interest Rate Risk, Issuer Risk, Management Risk, and Reinvestment
Risk.
<PAGE>
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.)
All ratings limitations are applied at the time of purchase. Subsequent to
purchase, a debt security may cease to be rated or its rating may be reduced
below the minimum required for purchase by the Fund. Neither event will require
the sale of such a security, but it will be a factor in considering whether to
continue to hold the security. To the extent that ratings change as a result of
changes in a rating organization or their rating systems, the Fund will attempt
to use comparable ratings as standards for selecting investments.
See the appendix for a discussion of securities ratings.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with debt obligations include: Call/Prepayment Risk,
Credit Risk, Interest Rate Risk, Issuer Risk, Management Risk, and Reinvestment
Risk.
Depositary Receipts
Some foreign securities are traded in the form of American Depositary Receipts
(ADRs). ADRs are receipts typically issued by a U.S. bank or trust company
evidencing ownership of the underlying securities of foreign issuers. European
Depositary Receipts (EDRs) and Global Depositary Receipts (GDRs) are receipts
typically issued by foreign banks or trust companies, evidencing ownership of
underlying securities issued by either a foreign or U.S. issuer. Generally,
depositary receipts in registered form are designed for use in the U.S. and
depositary receipts in bearer form are designed for use in securities markets
outside the U.S. Depositary receipts may not necessarily be denominated in the
same currency as the underlying securities into which they may be converted.
Depositary receipts involve the risks of other investments in foreign
securities. In addition, ADR holders may not have all the legal rights of
shareholders and may experience difficulty in receiving shareholder
communications. (See also Common Stock and Foreign Securities.)
<PAGE>
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with depositary receipts include: Foreign/Emerging
Markets Risk, Issuer Risk, Management Risk, and Market Risk.
Derivative Instruments
Derivative instruments are commonly defined to include securities or contracts
whose values depend, in whole or in part, on (or "derive" from) the value of one
or more other assets, such as securities, currencies, or commodities.
A derivative instrument generally consists of, is based upon, or exhibits
characteristics similar to options or forward contracts. Such instruments may be
used to maintain cash reserves while remaining fully invested, to offset
anticipated declines in values of investments, to facilitate trading, to reduce
transaction costs, or to pursue higher investment returns. Derivative
instruments are characterized by requiring little or no initial payment. Their
value changes daily based on a security, a currency, a group of securities or
currencies, or an index. A small change in the value of the underlying security,
currency, or index can cause a sizable gain or loss in the price of the
derivative instrument.
Options and forward contracts are considered to be the basic "building blocks"
of derivatives. For example, forward-based derivatives include forward
contracts, swap contracts, and exchange-traded futures. Forward-based
derivatives are sometimes referred to generically as "futures contracts."
Option-based derivatives include privately negotiated, over-the-counter (OTC)
options (including caps, floors, collars, and options on futures) and
exchange-traded options on futures. Diverse types of derivatives may be created
by combining options or futures in different ways, and by applying these
structures to a wide range of underlying assets.
Options. An option is a contract. A person who buys a call option for a
security has the right to buy the security at a set price for the length of the
contract. A person who sells a call option is called a writer. The writer of a
call option agrees for the length of the contract to sell the security at the
set price when the buyer wants to exercise the option, no matter what the market
price of the security is at that time. A person who buys a put option has the
right to sell a security at a set price for the length of the contract. A person
who writes a put option agrees to buy the security at the set price if the
purchaser wants to exercise the option during the length of the contract, no
matter what the market price of the security is at that time. An option is
covered if the writer owns the security (in the case of a call) or sets aside
the cash or securities of equivalent value (in the case of a put) that would be
required upon exercise.
The price paid by the buyer for an option is called a premium. In addition to
the premium, the buyer generally pays a broker a commission. The writer receives
a premium, less another commission, at the time the option is written. The
premium received by the writer is retained whether or not the option is
exercised. A writer of a call option may have to sell the security for a
below-market price if the market price rises above the exercise price. A writer
of a put option may have to pay an above-market price for the security if its
market price decreases below the exercise price.
When an option is purchased, the buyer pays a premium and a commission. It then
pays a second commission on the purchase or sale of the underlying security when
the option is exercised. For record keeping and tax purposes, the price obtained
on the sale of the underlying security is the combination of the exercise price,
the premium, and both commissions.
<PAGE>
One of the risks an investor assumes when it buys an option is the loss of the
premium. To be beneficial to the investor, the price of the underlying security
must change within the time set by the option contract. Furthermore, the change
must be sufficient to cover the premium paid, the commissions paid both in the
acquisition of the option and in a closing transaction or in the exercise of the
option and sale (in the case of a call) or purchase (in the case of a put) of
the underlying security. Even then, the price change in the underlying security
does not ensure a profit since prices in the option market may not reflect such
a change.
Options on many securities are listed on options exchanges. If the Fund writes
listed options, it will follow the rules of the options exchange. Options are
valued at the close of the New York Stock Exchange. An option listed on a
national exchange, CBOE, or NASDAQ will be valued at the last quoted sales price
or, if such a price is not readily available, at the mean of the last bid and
ask prices.
Options on certain securities are not actively traded on any exchange, but may
be entered into directly with a dealer. These options may be more difficult to
close. If an investor is unable to effect a closing purchase transaction, it
will not be able to sell the underlying security until the call written by the
investor expires or is exercised.
Futures Contracts. A futures contract is a sales contract between a
buyer (holding the "long" position) and a seller (holding the "short" position)
for an asset with delivery deferred until a future date. The buyer agrees to pay
a fixed price at the agreed future date and the seller agrees to deliver the
asset. The seller hopes that the market price on the delivery date is less than
the agreed upon price, while the buyer hopes for the contrary. Many futures
contracts trade in a manner similar to the way a stock trades on a stock
exchange and the commodity exchanges.
Generally, a futures contract is terminated by entering into an offsetting
transaction. An offsetting transaction is effected by an investor taking an
opposite position. At the time a futures contract is made, a good faith deposit
called initial margin is set up. Daily thereafter, the futures contract is
valued and the payment of variation margin is required so that each day an
investor would pay out cash in an amount equal to any decline in the contract's
value or receive cash equal to any increase. At the time a futures contract is
closed out, a nominal commission is paid, which is generally lower than the
commission on a comparable transaction in the cash market.
Futures contracts may be based on various securities, securities indices (such
as the S&P 500 Index), foreign currencies and other financial instruments and
indices.
Options on Futures Contracts. Options on futures contracts give the
holder a right to buy or sell futures contracts in the future. Unlike a futures
contract, which requires the parties to the contract to buy and sell a security
on a set date (some futures are settled in cash), an option on a futures
contract merely entitles its holder to decide on or before a future date (within
nine months of the date of issue) whether to enter into a contract. If the
holder decides not to enter into the contract, all that is lost is the amount
(premium) paid for the option. Further, because the value of the option is fixed
at the point of sale, there are no daily payments of cash to reflect the change
in the value of the underlying contract. However, since an option gives the
buyer the right to enter into a contract at a set price for a fixed period of
time, its value does change daily.
<PAGE>
One of the risks in buying an option on a futures contract is the loss of the
premium paid for the option. The risk involved in writing options on futures
contracts an investor owns, or on securities held in its portfolio, is that
there could be an increase in the market value of these contracts or securities.
If that occurred, the option would be exercised and the asset sold at a lower
price than the cash market price. To some extent, the risk of not realizing a
gain could be reduced by entering into a closing transaction. An investor could
enter into a closing transaction by purchasing an option with the same terms as
the one previously sold. The cost to close the option and terminate the
investor's obligation, however, might still result in a loss. Further, the
investor might not be able to close the option because of insufficient activity
in the options market. Purchasing options also limits the use of monies that
might otherwise be available for long-term investments.
Options on Stock Indexes. Options on stock indexes are securities
traded on national securities exchanges. An option on a stock index is similar
to an option on a futures contract except all settlements are in cash. A fund
exercising a put, for example, would receive the difference between the exercise
price and the current index level.
Tax Treatment. As permitted under federal income tax laws and to the
extent the Fund is allowed to invest in futures contacts, the Fund intends to
identify futures contracts as mixed straddles and not mark them to market, that
is, not treat them as having been sold at the end of the year at market value.
Such an election may result in the Fund being required to defer recognizing
losses incurred on futures contracts and on underlying securities identified as
hedged positions.
Federal income tax treatment of gains or losses from transactions in options on
futures contracts and indexes will depend on whether the option is a section
1256 contract. If the option is a non-equity option, the Fund will either make a
1256(d) election and treat the option as a mixed straddle or mark to market the
option at fiscal year end and treat the gain/loss as 40% short-term and 60%
long-term.
The IRS has ruled publicly that an exchange-traded call option is a security for
purposes of the 50%-of-assets test and that its issuer is the issuer of the
underlying security, not the writer of the option, for purposes of the
diversification requirements.
Accounting for futures contracts will be according to generally accepted
accounting principles. Initial margin deposits will be recognized as assets due
from a broker (the Fund's agent in acquiring the futures position). During the
period the futures contract is open, changes in value of the contract will be
recognized as unrealized gains or losses by marking to market on a daily basis
to reflect the market value of the contract at the end of each day's trading.
Variation margin payments will be made or received depending upon whether gains
or losses are incurred. All contracts and options will be valued at the
last-quoted sales price on their primary exchange.
Other Risks of Derivatives.
Derivatives are risky investments.
The primary risk of derivatives is the same as the risk of the underlying asset,
namely that the value of the underlying asset may go up or down. Adverse
movements in the value of an underlying asset can expose an investor to losses.
Derivative instruments may include elements of leverage and, accordingly, the
fluctuation of the value of the derivative instrument in relation to the
underlying asset may be magnified. The successful use of derivative instruments
depends upon a variety of factors, particularly the investment
<PAGE>
manager's ability to predict movements of the securities, currencies, and
commodity markets, which requires different skills than predicting changes in
the prices of individual securities. There can be no assurance that any
particular strategy will succeed.
Another risk is the risk that a loss may be sustained as a result of the failure
of a counterparty to comply with the terms of a derivative instrument. The
counterparty risk for exchange-traded derivative instruments is generally less
than for privately-negotiated or OTC derivative instruments, since generally a
clearing agency, which is the issuer or counterparty to each exchange-traded
instrument, provides a guarantee of performance. For privately-negotiated
instruments, there is no similar clearing agency guarantee. In all transactions,
an investor will bear the risk that the counterparty will default, and this
could result in a loss of the expected benefit of the derivative transaction and
possibly other losses.
When a derivative transaction is used to completely hedge another position,
changes in the market value of the combined position (the derivative instrument
plus the position being hedged) result from an imperfect correlation between the
price movements of the two instruments. With a perfect hedge, the value of the
combined position remains unchanged for any change in the price of the
underlying asset. With an imperfect hedge, the values of the derivative
instrument and its hedge are not perfectly correlated. For example, if the value
of a derivative instrument used in a short hedge (such as writing a call option,
buying a put option, or selling a futures contract) increased by less than the
decline in value of the hedged investment, the hedge would not be perfectly
correlated. Such a lack of correlation might occur due to factors unrelated to
the value of the investments being hedged, such as speculative or other
pressures on the markets in which these instruments are traded.
Derivatives also are subject to the risk that they cannot be sold, closed out,
or replaced quickly at or very close to their fundamental value. Generally,
exchange contracts are very liquid because the exchange clearinghouse is the
counterparty of every contract. OTC transactions are less liquid than
exchange-traded derivatives since they often can only be closed out with the
other party to the transaction.
Another risk is caused by the legal unenforcibility of a party's obligations
under the derivative. A counterparty that has lost money in a derivative
transaction may try to avoid payment by exploiting various legal uncertainties
about certain derivative products.
(See also Foreign Currency Transactions.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with derivative instruments include: Leverage Risk,
Liquidity Risk, and Management Risk.
Foreign Currency Transactions
Since investments in foreign countries usually involve currencies of foreign
countries, the value of an investor's assets as measured in U.S. dollars may be
affected favorably or unfavorably by changes in currency exchange rates and
exchange control regulations. Also, an investor may incur costs in connection
with conversions between various currencies. Currency exchange rates may
fluctuate significantly over short periods of time causing a fund's NAV to
fluctuate. Currency exchange rates are generally determined by the forces of
supply and demand in the foreign exchange markets, actual or anticipated changes
in interest rates, and other complex factors. Currency exchange rates also can
be affected by the intervention of U.S. or foreign governments or central banks,
or the failure to intervene, or by currency controls or political developments.
Many funds utilize diverse types of derivative instruments in connection with
their foreign currency exchange transactions.
(See also Derivative Instruments and Foreign Securities.)
<PAGE>
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with foreign currency transactions include: Correlation
Risk, Interest Rate Risk, Leverage Risk, Liquidity Risk, and Management Risk.
Foreign Securities and Domestic Companies with Foreign Operations
Foreign securities, foreign currencies, and securities issued by U.S. entities
with substantial foreign operations involve special risks, including those set
forth below, which are not typically associated with investing in U.S.
securities. Foreign companies are not generally subject to uniform accounting,
auditing, and financial reporting standards comparable to those applicable to
domestic companies. Additionally, many foreign stock markets, while growing in
volume of trading activity, have substantially less volume than the New York
Stock Exchange, and securities of some foreign companies are less liquid and
more volatile than securities of domestic companies. Similarly, volume and
liquidity in most foreign bond markets are less than the volume and liquidity in
the U.S. and, at times, volatility of price can be greater than in the U.S.
Further, foreign markets have different clearance, settlement, registration, and
communication procedures and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions making it difficult to conduct such transactions. Delays in such
procedures could result in temporary periods when assets are uninvested and no
return is earned on them. The inability of an investor to make intended security
purchases due to such problems could cause the investor to miss attractive
investment opportunities. Payment for securities without delivery may be
required in certain foreign markets and, when participating in new issues, some
foreign countries require payment to be made in advance of issuance (at the time
of issuance, the market value of the security may be more or less than the
purchase price). Some foreign markets also have compulsory depositories (i.e.,
an investor does not have a choice as to where the securities are held). Fixed
commissions on some foreign stock exchanges are generally higher than negotiated
commissions on U.S. exchanges. Further, an investor may encounter difficulties
or be unable to pursue legal remedies and obtain judgments in foreign courts.
There is generally less government supervision and regulation of business and
industry practices, stock exchanges, brokers, and listed companies than in the
U.S. It may be more difficult for an investor's agents to keep currently
informed about corporate actions such as stock dividends or other matters that
may affect the prices of portfolio securities. Communications between the U.S.
and foreign countries may be less reliable than within the U.S., thus increasing
the risk of delays or loss of certificates for portfolio securities. In
addition, with respect to certain foreign countries, there is the possibility of
nationalization, expropriation, the imposition of additional withholding or
confiscatory taxes, political, social, or economic instability, diplomatic
developments that could affect investments in those countries, or other
unforeseen actions by regulatory bodies (such as changes to settlement or
custody procedures).
The risks of foreign investing may be magnified for investments in emerging
markets, which may have relatively unstable governments, economies based on only
a few industries, and securities markets that trade a small number of
securities.
The introduction of a single currency, the euro, on January 1, 1999 for
participating European nations in the Economic and Monetary Union ("EU")
presents unique uncertainties, including whether the payment and operational
systems of banks and other financial institutions will be ready by the scheduled
launch date; the creation of suitable clearing and settlement payment systems
for the new currency; the legal treatment of certain outstanding financial
contracts after January 1, 1999 that refer to existing currencies rather than
the euro; the establishment and maintenance of exchange rates; the fluctuation
of the euro relative to non-euro currencies during the transition period from
January 1, 1999 to December 31, 2000 and beyond; whether the interest rate, tax
or labor regimes of European countries participating in the euro will converge
over time; and whether the conversion of the currencies of other EU countries
such as the United Kingdom, Denmark, and Greece into the euro and the admission
of other non-EU countries such as Poland, Latvia, and Lithuania as members of
the EU may have an impact on the euro.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with foreign securities include: Foreign/Emerging
Markets Risk, Issuer Risk, and Management Risk.
<PAGE>
High-Yield (High-Risk) Securities (Junk Bonds)
High yield (high-risk) securities are sometimes referred to as "junk bonds."
They are non-investment grade (lower quality) securities that have speculative
characteristics. Lower quality securities, while generally offering higher
yields than investment grade securities with similar maturities, involve greater
risks, including the possibility of default or bankruptcy. They are regarded as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal. The special risk considerations in connection with
investments in these securities are discussed below.
See the appendix for a discussion of securities ratings. (See also Debt
Obligations.)
The lower-quality and comparable unrated security market is relatively new and
its growth has paralleled a long economic expansion. As a result, it is not
clear how this market may withstand a prolonged recession or economic downturn.
Such conditions could severely disrupt the market for and adversely affect the
value of such securities.
All interest-bearing securities typically experience appreciation when interest
rates decline and depreciation when interest rates rise. The market values of
lower-quality and comparable unrated securities tend to reflect individual
corporate developments to a greater extent than do higher rated securities,
which react primarily to fluctuations in the general level of interest rates.
Lower-quality and comparable unrated securities also tend to be more sensitive
to economic conditions than are higher-rated securities. As a result, they
generally involve more credit risks than securities in the higher-rated
categories. During an economic downturn or a sustained period of rising interest
rates, highly leveraged issuers of lower-quality securities may experience
financial stress and may not have sufficient revenues to meet their payment
obligations. The issuer's ability to service its debt obligations also may be
adversely affected by specific corporate developments, the issuer's inability to
meet specific projected business forecast, or the unavailability of additional
financing. The risk of loss due to default by an issuer of these securities is
significantly greater than issuers of higher-rated securities because such
securities are generally unsecured and are often subordinated to other
creditors. Further, if the issuer of a lower quality security defaulted, an
investor might incur additional expenses to seek recovery.
Credit ratings issued by credit rating agencies are designed to evaluate the
safety of principal and interest payments of rated securities. They do not,
however, evaluate the market value risk of lower-quality securities and,
therefore, may not fully reflect the true risks of an investment. In addition,
credit rating agencies may or may not make timely changes in a rating to reflect
changes in the economy or in the condition of the issuer that affect the market
value of the securities. Consequently, credit ratings are used only as a
preliminary indicator of investment quality.
An investor may have difficulty disposing of certain lower-quality and
comparable unrated securities because there may be a thin trading market for
such securities. Because not all dealers maintain markets in all lower quality
and comparable unrated securities, there is no established retail secondary
market for many of these securities. To the extent a secondary trading market
does exist, it is generally not as liquid as the secondary market for
higher-rated securities. The lack of a liquid secondary market may have an
adverse impact on the market price of the security. The lack of a liquid
secondary market for certain securities also may make it more difficult for an
investor to obtain accurate market quotations. Market quotations are generally
available on many lower-quality and comparable unrated issues only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales.
Legislation may be adopted from time to time designed to limit the use of
certain lower quality and comparable unrated securities by certain issuers.
<PAGE>
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with high-yield (high-risk) securities include:
Call/Prepayment Risk, Credit Risk, Currency Risk, Interest Rate Risk, and
Management Risk.
Illiquid and Restricted Securities
The Fund may invest in illiquid securities (i.e., securities that are not
readily marketable). These securities may include, but are not limited to,
certain securities that are subject to legal or contractual restrictions on
resale, certain repurchase agreements, and derivative instruments.
To the extent the Fund invests in illiquid or restricted securities, it may
encounter difficulty in determining a market value for such securities.
Disposing of illiquid or restricted securities may involve time-consuming
negotiations and legal expense, and it may be difficult or impossible for the
Fund to sell such an investment promptly and at an acceptable price.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with illiquid and restricted securities include:
Liquidity Risk and Management Risk.
Indexed Securities
The value of indexed securities is linked to currencies, interest rates,
commodities, indexes, or other financial indicators. Most indexed securities are
short- to intermediate-term fixed income securities whose values at maturity or
interest rates rise or fall according to the change in one or more specified
underlying instruments. Indexed securities may be more volatile than the
underlying instrument itself and they may be less liquid than the securities
represented by the index. (See also Derivative Instruments.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with indexed securities include: Liquidity Risk,
Management Risk, and Market Risk.
Inverse Floaters
Inverse floaters are created by underwriters using the interest payment on
securities. A portion of the interest received is paid to holders of instruments
based on current interest rates for short-term securities. The remainder, minus
a servicing fee, is paid to holders of inverse floaters. As interest rates go
down, the holders of the inverse floaters receive more income and an increase in
the price for the inverse floaters. As interest rates go up, the holders of the
inverse floaters receive less income and a decrease in the price for the inverse
floaters. (See also Derivative Instruments.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with inverse floaters include: Interest Rate Risk and
Management Risk.
Investment Companies
The Fund may invest in securities issued by registered and unregistered
investment companies. These investments may involve the duplication of advisory
fees and certain other expenses.
Although one or more of the other risks described in this SAI may apply, the
largest risk associated with the securities of other investment companies
includes: Management Risk and Market Risk.
<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, the Fund will get
additional collateral on a daily basis. The risks are that the borrower may not
provide additional collateral when required or return the securities when due.
During the existence of the loan, the Fund receives cash payments equivalent to
all interest or other distributions paid on the loaned securities. The Fund may
pay reasonable administrative and custodial fees in connection with a loan and
may pay a negotiated portion of the interest earned on the cash or money market
instruments held as collateral to the borrower or placing broker. The Fund will
receive reasonable interest on the loan or a flat fee from the borrower and
amounts equivalent to any dividends, interest, or other distributions on the
securities loaned.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with the lending of portfolio securities include:
Credit Risk and Management Risk.
Loan Participations
Loans, loan participations, and interests in securitized loan pools are
interests in amounts owed by a corporate, governmental, or other borrower to a
lender or consortium of lenders (typically banks, insurance companies,
investment banks, government agencies, or international agencies). Loans involve
a risk of loss in case of default or insolvency of the borrower and may offer
less legal protection to an investor in the event of fraud or misrepresentation.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with loan participations include: Credit Risk and
Management Risk.
Mortgage- and Asset-Backed Securities
Mortgage-backed securities represent direct or indirect participations in, or
are secured by and payable from, mortgage loans secured by real property, and
include single- and multi-class pass-through securities and Collateralized
Mortgage Obligations (CMOs). These securities may be issued or guaranteed by
U.S. government agencies or instrumentalities (see also Agency and Government
Securities), or by private issuers, generally originators and investors in
mortgage loans, including savings associations, mortgage bankers, commercial
banks, investment bankers, and special purpose entities. Mortgage-backed
securities issued by private lenders may be supported by pools of mortgage loans
or other mortgage-backed securities that are guaranteed, directly or indirectly,
by the U.S. government or one of its agencies or instrumentalities, or they may
be issued without any governmental guarantee of the underlying mortgage assets
but with some form of non-governmental credit enhancement.
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.
<PAGE>
CMOs are hybrid mortgage-related instruments secured by pools of mortgage loans
or other mortgage-related securities, such as mortgage pass through securities
or stripped mortgage-backed securities. CMOs may be structured into multiple
classes, often referred to as "tranches," with each class bearing a different
stated maturity and entitled to a different schedule for payments of principal
and interest, including prepayments. Principal prepayments on collateral
underlying a CMO may cause it to be retired substantially earlier than its
stated maturity.
The yield characteristics of mortgage-backed securities differ from those of
other debt securities. Among the differences are that interest and principal
payments are made more frequently on mortgage-backed securities, usually
monthly, and principal may be repaid at any time. These factors may reduce the
expected yield.
Asset-backed securities have structural characteristics similar to
mortgage-backed securities. Asset-backed debt obligations represent direct or
indirect participation in, or secured by and payable from, assets such as motor
vehicle installment sales contracts, other installment loan contracts, home
equity loans, leases of various types of property, and receivables from credit
card or other revolving credit arrangements. The credit quality of most
asset-backed securities depends primarily on the credit quality of the assets
underlying such securities, how well the entity issuing the security is
insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit enhancement of the
securities. Payments or distributions of principal and interest on asset-backed
debt obligations may be supported by non-governmental credit enhancements
including letters of credit, reserve funds, overcollateralization, and
guarantees by third parties. The market for privately issued asset-backed debt
obligations is smaller and less liquid than the market for government sponsored
mortgage-backed securities. (See also Derivative Instruments.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with mortgage- and asset-backed securities include:
Call/Prepayment Risk, Credit Risk, Interest Rate Risk, Liquidity Risk, and
Management Risk.
Mortgage Dollar Rolls
Mortgage dollar rolls are investments whereby an investor would sell
mortgage-backed securities for delivery in the current month and simultaneously
contract to purchase substantially similar securities on a specified future
date. While an investor would forego principal and interest paid on the
mortgage-backed securities during the roll period, the investor would be
compensated by the difference between the current sales price and the lower
price for the future purchase as well as by any interest earned on the proceeds
of the initial sale. The investor also could be compensated through the receipt
of fee income equivalent to a lower forward price.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with mortgage dollar rolls include: Credit Risk,
Interest Rate Risk, and Management Risk.
Municipal Obligations
Municipal obligations include debt obligations issued by or on behalf of states,
territories, possessions, or sovereign nations within the territorial boundaries
of the United States (including the District of Columbia). The interest on these
obligations is generally exempt from federal income tax. Municipal obligations
are generally classified as either "general obligations" or "revenue
obligations."
<PAGE>
General obligation bonds are secured by the issuer's pledge of its full faith,
credit, and taxing power for the payment of interest and principal. Revenue
bonds are payable only from the revenues derived from a project or facility or
from the proceeds of a specified revenue source. Industrial development bonds
are generally revenue bonds secured by payments from and the credit of private
users. Municipal notes are issued to meet the short-term funding requirements of
state, regional, and local governments. Municipal notes include tax anticipation
notes, bond anticipation notes, revenue anticipation notes, tax and revenue
anticipation notes, construction loan notes, short-term discount notes,
tax-exempt commercial paper, demand notes, and similar instruments.
Municipal lease obligations may take the form of a lease, an installment
purchase, or a conditional sales contract. They are issued by state and local
governments and authorities to acquire land, equipment, and facilities. An
investor may purchase these obligations directly, or it may purchase
participation interests in such obligations. Municipal leases may be subject to
greater risks than general obligation or revenue bonds. State constitutions and
statutes set forth requirements that states or municipalities must meet in order
to issue municipal obligations. Municipal leases may contain a covenant by the
state or municipality to budget for and make payments due under the obligation.
Certain municipal leases may, however, provide that the issuer is not obligated
to make payments on the obligation in future years unless funds have been
appropriated for this purpose each year.
Yields on municipal bonds and notes depend on a variety of factors, including
money market conditions, municipal bond market conditions, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. The municipal bond market has a large number of different issuers, many
having smaller sized bond issues, and a wide choice of different maturities
within each issue. For these reasons, most municipal bonds do not trade on a
daily basis and many trade only rarely. Because many of these bonds trade
infrequently, the spread between the bid and offer may be wider and the time
needed to develop a bid or an offer may be longer than other security markets.
See the appendix for a discussion of securities ratings. (See also Debt
Obligations.)
Taxable Municipal Obligations. There is another type of municipal obligation
that is subject to federal income tax for a variety of reasons. These municipal
obligations do not qualify for the federal income exemption because (a) they did
not receive necessary authorization for tax-exempt treatment from state or local
government authorities, (b) they exceed certain regulatory limitations on the
cost of issuance for tax-exempt financing or (c) they finance public or private
activities that do not qualify for the federal income tax exemption. These
non-qualifying activities might include, for example, certain types of
multi-family housing, certain professional and local sports facilities,
refinancing of certain municipal debt, and borrowing to replenish a
municipality's underfunded pension plan.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with municipal obligations include: Credit Risk, Event
Risk, Inflation Risk, Interest Rate Risk, Legal/Legislative Risk, and Market
Risk.
Preferred Stock
Preferred stock is a type of stock that pays dividends at a specified rate and
that has preference over common stock in the payment of dividends and the
liquidation of assets. Preferred stock does not ordinarily carry voting rights.
The price of a preferred stock is generally determined by earnings, type of
products or services, projected growth rates, experience of management,
liquidity, and general market conditions of the markets on which the stock
trades.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with preferred stock include: Issuer Risk, Management
Risk, and Market Risk.
<PAGE>
Real Estate Investment Trusts
Real estate investment trusts (REITs) are entities that manage a portfolio of
real estate to earn profits for their shareholders. REITs can make investments
in real estate such as shopping centers, nursing homes, office buildings,
apartment complexes, and hotels. REITs can be subject to extreme volatility due
to fluctuations in the demand for real estate, changes in interest rates, and
adverse economic conditions. Additionally, the failure of a REIT to continue to
qualify as a REIT for tax purposes can materially affect its value.
Although one or more of the other risks described in this SAI may apply, the
largest associated with REITs include: Issuer Risk, Management Risk, and Market
Risk.
Repurchase Agreements
The Fund may enter into repurchase agreements with certain banks or non-bank
dealers. In a repurchase agreement, the Fund buys a security at one price, and
at the time of sale, the seller agrees to repurchase the obligation at a
mutually agreed upon time and price (usually within seven days). The repurchase
agreement thereby determines the yield during the purchaser's holding period,
while the seller's obligation to repurchase is secured by the value of the
underlying security. Repurchase agreements could involve certain risks in the
event of a default or insolvency of the other party to the agreement, including
possible delays or restrictions upon the Fund's ability to dispose of the
underlying securities.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with repurchase agreements include: Credit Risk and
Management Risk.
Reverse Repurchase Agreements
In a reverse repurchase agreement, the investor would sell a security and enter
into an agreement to repurchase the security at a specified future date and
price. The investor generally retains the right to interest and principal
payments on the security. Since the investor receives cash upon entering into a
reverse repurchase agreement, it may be considered a borrowing. (See also
Derivative Instruments.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with reverse repurchase agreements include: Credit
Risk, Interest Rate Risk, and Management Risk.
Short Sales
With short sales, an investor sells a security that it does not own in
anticipation of a decline in the market value of the security. To complete the
transaction, the investor must borrow the security to make delivery to the
buyer. The investor is obligated to replace the security that was borrowed by
purchasing it at the market price on the replacement date. The price at such
time may be more or less than the price at which the investor sold the security.
A fund that is allowed to utilize short sales will designate cash or liquid
securities to cover its open short positions. Those funds also may engage in
"short sales against the box," a form of short-selling that involves selling a
security that an investor owns (or has an unconditioned right to purchase) for
delivery at a specified date in the future. This technique allows an investor to
hedge protectively against anticipated declines in the market of its securities.
If the value of the securities sold short increased prior to the scheduled
delivery date, the investor loses the opportunity to participate in the gain.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with short sales include: Management Risk and Market
Risk.
<PAGE>
Sovereign Debt
A sovereign debtor's willingness or ability to repay principal and pay interest
in a timely manner may be affected by a variety of factors, including its cash
flow situation, the extent of its reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole, the sovereign debtor's policy toward
international lenders, and the political constraints to which a sovereign debtor
may be subject. (See also Foreign Securities.)
With respect to sovereign debt of emerging market issuers, investors should be
aware that certain emerging market countries are among the largest debtors to
commercial banks and foreign governments. At times, certain emerging market
countries have declared moratoria on the payment of principal and interest on
external debt.
Certain emerging market countries have experienced difficulty in servicing their
sovereign debt on a timely basis that led to defaults and the restructuring of
certain indebtedness.
Sovereign debt includes Brady Bonds, which are securities issued under the
framework of the Brady Plan, an initiative announced by former U.S. Treasury
Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to
restructure their outstanding external commercial bank indebtedness.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with sovereign debt include: Credit Risk,
Foreign/Emerging Markets Risk, and Management Risk.
Structured Products
Structured products are over-the-counter financial instruments created
specifically to meet the needs of one or a small number of investors. The
instrument may consist of a warrant, an option, or a forward contract embedded
in a note or any of a wide variety of debt, equity, and/or currency
combinations. Risks of structured products include the inability to close such
instruments, rapid changes in the market, and defaults by other parties. (See
also Derivative Instruments.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with structured products include: Credit Risk,
Liquidity Risk, and Management Risk.
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'
<PAGE>
notice to the holders of such obligations. Because these obligations are direct
lending arrangements between the lender and borrower, it is not contemplated
that such instruments generally will be traded. There generally is not an
established secondary market for these obligations. Accordingly, where these
obligations are not secured by letters of credit or other credit support
arrangements, the Fund's right to redeem is dependent on the ability of the
borrower to pay principal and interest on demand. Such obligations frequently
are not rated by credit rating agencies and may involve heightened risk of
default by the issuer.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with variable- or floating-rate securities include:
Credit Risk and Management Risk.
Warrants
Warrants are securities giving the holder the right, but not the obligation, to
buy the stock of an issuer at a given price (generally higher than the value of
the stock at the time of issuance) during a specified period or perpetually.
Warrants may be acquired separately or in connection with the acquisition of
securities. Warrants do not carry with them the right to dividends or voting
rights and they do not represent any rights in the assets of the issuer.
Warrants may be considered to have more speculative characteristics than certain
other types of investments. In addition, the value of a warrant does not
necessarily change with the value of the underlying securities, and a warrant
ceases to have value if it is not exercised prior to its expiration date.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with warrants include: Management Risk and Market Risk.
When-Issued Securities
These instruments are contracts to purchase securities for a fixed price at a
future date beyond normal settlement time (when-issued securities or forward
commitments). The price of debt obligations purchased on a when-issued basis,
which may be expressed in yield terms, generally is fixed at the time the
commitment to purchase is made, but delivery and payment for the securities take
place at a later date. Normally, the settlement date occurs within 45 days of
the purchase although in some cases settlement may take longer. The investor
does not pay for the securities or receive dividends or interest on them until
the contractual settlement date. Such instruments involve a risk of loss if the
value of the security to be purchased declines prior to the settlement date,
which risk is in addition to the risk of decline in value of the investor's
other assets. In addition, when the Fund engages in forward commitment and
when-issued transactions, it relies on the counterparty to consummate the
transaction. The failure of the counterparty to consummate the transaction may
result in the Fund's losing the opportunity to obtain a price and yield
considered to be advantageous.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with when-issued securities include: Credit Risk and
Management Risk.
Zero-Coupon, Step-Coupon, and Pay-in-Kind Securities
These securities are debt obligations that do not make regular cash interest
payments (see also Debt Obligations). Zero-coupon and step-coupon securities are
sold at a deep discount to their face value because they do not pay interest
until maturity. Pay-in-kind securities pay interest through the issuance of
additional securities. Because these securities do not pay current cash income,
the price of these securities can be extremely volatile when interest rates
fluctuate. See the appendix for a discussion of securities ratings.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with zero-coupon, step-coupon, and pay-in-kind
securities include: Credit Risk, Interest Rate Risk, and Management Risk.
<PAGE>
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 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.
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
<PAGE>
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 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.
For fiscal years noted below, each Fund paid the following total brokerage
commissions. Substantially all firms through whom transactions were executed
provide research services.
<TABLE>
<CAPTION>
June 30, CA MA MI MN NY OH
<S> <C> <C> <C> <C> <C> <C>
1999 $1,180 $770 $790 $1,232 $1,724 $854
- --------------------
1998 1,224 408 420 1,572 2,076 408
- --------------------
1997 4,656 1,320 1,404 7,620 3,228 1,344
</TABLE>
No transactions were directed to brokers because of research services they
provided to each Fund.
As of the end of the most recent fiscal year, each 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.
The portfolio turnover rates for the two most recent fiscal years were as
follows:
<TABLE>
<CAPTION>
CA MA MI MN NY OH
<S> <C> <C> <C> <C> <C> <C>
1999 16% 5% 20% 13% 8% 5%
- --------------------
1998 15 9 10 8 10 10
</TABLE>
Higher turnover rates may result in higher brokerage expenses.
<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.
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)
<PAGE>
Annualized yield
The Fund may calculate an annualized yield for a class by dividing the net
investment income per share deemed earned during a 30-day period by the public
offering price per share (including the maximum sales charge) on the last day of
the period and annualizing the results.
Yield is calculated according to the following formula:
Yield = 2[(a-b + 1)6 - 1]
cd
where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the maximum offering price per share on the last day of
the period
The following table gives an annualized yield quotation for each of the funds:
<TABLE>
<CAPTION>
30-Day Period Ended Class A Class B
Fund June 30, 1999 Yield Yield
- ------------------------ ------------------------------ ----------------- -----------------
<S> <C> <C> <C>
California 4.09% 3.55%
Massachusetts 4.78 4.30
Michigan 3.99 3.44
Minnesota 4.48 3.96
New York 4.61 4.09
Ohio 3.61 3.04
- ------------------------ ------------------------------ ----------------- -----------------
</TABLE>
<PAGE>
Tax-equivalent yield
Tax-equivalent yield is calculated by dividing that portion of the yield (as
calculated above) which is tax-exempt by one minus a stated income tax rate and
adding the result to that portion, if any, of the yield that is not tax-exempt.
The following table shows the tax equivalent yield, based on federal but not
state tax rates, for the funds listed:
<TABLE>
<CAPTION>
Tax Equivalent Yield
for 30 Day Period Ended June 30, 1999
Marginal Income
Tax Bracket -------------
Massachusetts Michigan Minnesota New York Ohio
California
Class A
<S> <C> <C> <C> <C> <C> <C>
15.0% 4.81% 5.62% 4.69% 5.27% 5.42% 4.25%
28.0% 5.68% 6.64% 5.54% 6.22% 6.40% 5.01%
31.0% 5.93% 6.93% 5.78% 6.49% 6.68% 5.23%
36.0% 6.39% 7.47% 6.23% 7.00% 7.20% 5.64%
39.6% 6.77% 7.91% 6.61% 7.42% 7.63% 5.98%
Class B
15.0% 4.18% 5.06% 4.05% 4.66% 4.81% 3.58%
28.0% 4.93% 5.97% 4.78% 5.50% 5.68% 4.22%
31.0% 5.14% 6.23% 4.99% 5.74% 5.93% 4.41%
36.0% 5.55% 6.72% 5.38% 6.19% 6.39% 4.75%
39.6% 5.88% 7.12% 5.70% 6.56% 6.77% 5.03%
</TABLE>
In its sales material and other communications, the Fund may quote, compare or
refer to rankings, yields, or returns as published by independent statistical
services or publishers and publications such as The Bank Rate Monitor National
Index, Barron's, Business Week, CDA Technologies, Donoghue's Money Market Fund
Report, Financial Services Week, Financial Times, Financial World, Forbes,
Fortune, Global Investor, Institutional Investor, Investor's Business Daily,
Kiplinger's Personal Finance, Lipper Analytical Services, Money, Morningstar,
Mutual Fund Forecaster, Newsweek, The New York Times, Personal Investor,
Shearson Lehman Aggregate Bond Index, Stanger Report, Sylvia Porter's Personal
Finance, USA Today, U.S. News and World Report, The Wall Street Journal, and
Wiesenberger Investment Companies Service. The Fund also may compare its
performance to a wide variety of indexes or averages. There are similarities and
differences between the investments that the Fund may purchase and the
investments measured by the indexes or averages and the composition of the
indexes or averages will differ from that of the Fund.
<PAGE>
VALUING FUND SHARES
- --------------------------------------------------------------------------------
The value of an individual share is determined by using the net asset value
(NAV) before shareholder transactions for the day. On the first business day
following the end of the year, the computation looked like this:
<TABLE>
<CAPTION>
Net assets before Shares outstanding Net asset value
Fund shareholder at of one share
transactions the end of previous
day
- ------------------- ---------------------- ------------ ---------------------- --------- --------------------
<S> <C> <C> <C> <C> <C>
California divided by equals
Class A $245,949,355 47,434,784 $5.185
Class B 20,949,448 4,040,395 5.185
Massachusetts
Class A 70,452,372 13,070,941 5.390
Class B 16,920,126 3,139,170 5.390
Michigan
Class A 76,633,763 14,249,491 5.378
Class B 6,575,820 1,222,726 5.378
Minnesota
Class A 405,700,297 77,129,334 5.260
Class B 45,626,971 8,674,329 5.260
New York
Class A 102,455,250 19,898,087 5.149
Class B 13,518,107 2,625,385 5.149
Ohio
Class A 68,850,591 12,838,074 5.363
Class B 7,776,491 1,449,756 5.364
</TABLE>
In determining net assets before shareholder transactions, each Fund's
securities are valued as follows as of the close of business of the New York
Stock Exchange (the Exchange):
o Securities traded on a securities exchange for which a last-quoted sales
price is readily available are valued at the last-quoted sales price on the
exchange where such security is primarily traded.
o Securities traded on a securities exchange for which a last-quoted sales
price is not readily available are valued at the mean of the closing bid
and asked prices, looking first to the bid and asked prices on the exchange
where the security is primarily traded, and if none exists, to the
over-the-counter market.
o Securities included in the NASDAQ National Market System are valued at the
last-quoted sales price in this market.
o Securities included in the NASDAQ National Market System for which a
last-quoted sales price is not readily available, and other securities
traded over-the-counter but not included in the NASDAQ National Market
System, are valued at the mean of the closing bid and asked prices.
o Futures and options traded on major exchanges are valued at their
last-quoted sales price on their primary exchange.
<PAGE>
o Foreign securities traded outside the United States are generally valued as
of the time their trading is complete, which is usually different from the
close of the Exchange. Foreign securities quoted in foreign currencies are
translated into U.S. dollars at the current rate of exchange. Occasionally,
events affecting the value of such securities may occur between such times
and the close of the Exchange that will not be reflected in the computation
of the Fund's net asset value. If events materially affecting the value of
such securities occur during such period, these securities will be valued
at their fair value according to procedures decided upon in good faith by
the board.
o Short-term securities maturing more than 60 days from the valuation date
are valued at the readily available market price or approximate market
value based on current interest rates. Short-term securities maturing in 60
days or less that originally had maturities of more than 60 days at
acquisition date are valued at amortized cost using the market value on the
61st day before maturity. Short-term securities maturing in 60 days or less
at acquisition date are valued at amortized cost. Amortized cost is an
approximation of market value determined by systematically increasing the
carrying value of a security if acquired at a discount, or systematically
reducing the carrying value if acquired at a premium, so that the carrying
value is equal to the maturity value on maturity date.
o Securities without a readily available market price and other assets are
valued at fair value, as determined in good faith by the board. The board
is responsible for selecting methods they believe provide fair value. When
possible bonds are valued by a pricing service independent from a fund. If
a valuation of a bond is not available from a pricing service, the bond
will be valued by a dealer knowledgeable about the bond if such a dealer is
available.
INVESTING IN THE FUND
- --------------------------------------------------------------------------------
SALES CHARGE
Shares of the Fund are sold at the public offering price. The public offering
price is the NAV of one share adjusted for the sales charge for Class A. For
Class B, there is no initial sales charge so the public offering price is the
same as the NAV. For Class A, the public offering price for an investment of
less than $50,000, made on the first business day following the end of the
fiscal year, was determined as follows. The sales charge is paid to American
Express Financial Advisors Inc. (AEFA) by the person buying the shares.
<TABLE>
<CAPTION>
Net asset Divided by (1.00 - 0.05)
Fund ------------------------- for a sales charge -------------------------
value of one share Public offering price
<S> <C> <C> <C>
California $5.185 / 0.95 = $5.46
- ----------------------------
Massachusetts 5.390 / 0.95 = $5.67
- ----------------------------
Michigan 5.378 / 0.95 = $5.66
- ----------------------------
Minnesota 5.260 / 0.95 = $5.54
- ----------------------------
New York 5.149 / 0.95 = $5.42
- ----------------------------
Ohio 5.363 / 0.95 = $5.65
</TABLE>
<PAGE>
Class A - Calculation of the Sales Charge
Sales charges are determined as follows:
<TABLE>
<CAPTION>
Within each
increment, sales
charge as a
percentage of:
------------------------------------------------------------
Public Net
Amount of Investment Offering Price Amount Invested
- -------------------- -------------- ---------------
<S> <C> <C>
First $ 50,000 5.0% 5.26%
Next 50,000 4.5 4.71
Next 400,000 3.8 3.95
Next 500,000 2.0 2.04
$1,000,000 or more 0.0 0.00
</TABLE>
Sales charges on an investment greater than $50,000 and less than $1,000,000 are
calculated for each increment separately and then totaled. The resulting total
sales charge, expressed as a percentage of the public offering price and of the
net amount invested, will vary depending on the proportion of the investment at
different sales charge levels.
For example, compare an investment of $60,000 with an investment of $85,000. The
$60,000 investment is composed of $50,000 that incurs a sales charge of $2,500
(5.0% x $50,000) and $10,000 that incurs a sales charge of $450 (4.5% x
$10,000). The total sales charge of $2,950 is 4.92% of the public offering price
and 5.17% of the net amount invested.
In the case of the $85,000 investment, the first $50,000 also incurs a sales
charge of $2,500 (5.0% x $50,000) and $35,000 incurs a sales charge of $1,575
(4.5% x $35,000). The total sales charge of $4,075 is 4.79% of the public
offering price and 5.04% of the net amount invested.
The following table shows the range of sales charges as a percentage of the
public offering price and of the net amount invested on total investments at
each applicable level.
<TABLE>
<CAPTION>
On total
investment, sales
charge as a
percentage of:
------------------------------------------------------------
Public Net
Offering Price Amount Invested
Amount of investment ranges from:
- ----------------------------------------------
<S> <C> <C>
First $ 50,000 5.00% 5.26%
Next 50,000 to 100,000 5.00-4.50 5.26-4.71
Next 100,000 to 500,000 4.50-3.80 4.71-3.95
Next 500,000 to 999,999 3.80-2.00 3.95-2.04
$1,000,000 or more 0.00 0.00
</TABLE>
The following table shows the range of sales charges as a percentage of the
public offering price and of the net amount invested on total investments at
each applicable level.
<PAGE>
<TABLE>
<CAPTION>
On total
investment, sales
charge as a
percentage of:
------------------------------------------------------------
Public Net
Offering Price Amount Invested
Amount of Investment ranges from:
- -------------------- ------------
<S> <C> <C>
First $ 50,000 5.00% 5.26%
Next 50,000 to 100,000 5.00-4.50 5.26-4.71
Next 100,000 to 500,000 4.50-3.80 4.71-3.95
Next 500,000 to 999,999 3.80-2.00 3.95-2.04
$1,000,000 or more 0.00 0.00
</TABLE>
Class A - Reducing the Sales Charge
Your total investments in the Fund determine your sales charges. The amount of
all prior investments plus any new purchase is referred to as your "total amount
invested." For example, suppose you have made an investment of $20,000 and later
decide to invest $40,000 more. Your total amount invested would be $60,000. As a
result, $10,000 of your $40,000 investment qualifies for the lower 4.5% sales
charge that applies to investments of more than $50,000 and up to $100,000.
Class A - Letter of Intent (LOI)
If you intend to invest $1 million over a period of 13 months, you can reduce
the sales charges in Class A by filing a LOI. The agreement can start at any
time and will remain in effect for 13 months. Your investment will be charged
normal sales charges until you have invested $1 million. At that time, your
account will be credited with the sales charges previously paid. Class A
investments made prior to signing a LOI may be used to reach the $1 million
total, excluding AXP Cash Management Fund and AXP Tax-Free Money Fund. However,
we will not adjust for sales charges on investments made prior to the signing of
the LOI. If you do not invest $1 million by the end of 13 months, there is no
penalty, you will just miss out on the sales charge adjustment. A LOI is not an
option (absolute right) to buy shares.
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 fund subject to a sales charge, may be used to automatically purchase
shares in the same class of this Fund without paying a sales charge. Dividends
may be directed to existing accounts only. Dividends declared by a fund are
exchanged to this Fund the following day. Dividends can be exchanged into the
same class of another American Express 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
<PAGE>
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.
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 write American Express Shareholder Service,
P.O. Box 534, Minneapolis, MN 55440-0534, or call American Express Financial
Advisors Telephone Transaction Service at 800-437-3133. Your authorization must
be received in the Minneapolis headquarters at least five days before the date
you want your payments to begin. The initial payment must be at least $50.
Payments will be made on a monthly, bimonthly, quarterly, semiannual, or annual
basis. Your choice is effective until you change or cancel it.
The following pay-out plans are designed to take care of the needs of most
shareholders in a way AEFC can handle efficiently and at a reasonable cost. If
you need a more irregular schedule of payments, it may be necessary for you to
make a series of individual redemptions, in which case you 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>
CAPITAL LOSS CARRYOVER
- --------------------------------------------------------------------------------
For federal income tax purposes, California, Massachusetts, Michigan, Minnesota,
New York and Ohio Tax-Exempt Funds had total capital loss carryovers of
$1,940,553, $207,717, $233,234, $1,997,741, $1,342,074 and $182,633,
respectively at the end of the most recent fiscal year, that if not offset by
subsequent capital gains will expire as follows:
<TABLE>
<CAPTION>
Fund 2005 2006 2008
- ---------------------------- -------------------------- -------------------------- --------------------------
<S> <C> <C> <C>
California $7,825 $1,932,728
Massachusetts 207,717
Michigan 233,234
Minnesota $178,699 1,819,042
New York 1,215,694 126,380
Ohio 114,642 67,991
</TABLE>
It is unlikely that the board will authorize a distribution of any net realized
capital gains until the available capital loss carryover has been offset or has
expired except as required by Internal Revenue Service rules.
TAXES
- --------------------------------------------------------------------------------
If you buy shares in the Fund and then exchange shares, 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 is treated as if it 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.
For example:
You purchase 100 shares of one fund having a public offering price of $10.00 per
share. With a sales load of 5%, you pay $50.00 in sales load. With a NAV of
$9.50 per share, the value of your investment is $950.00. Within 91 days of
purchasing that fund, you decide to exchange out of that fund, now at a NAV of
$11.00 per share, up from the original NAV of $9.50, and purchase into a second
fund, at a NAV of $15.00 per share. The value of your investment is now
$1,100.00 ($11.00 x 100 shares). You cannot use the $50.00 paid as a sales load
when calculating your tax gain or loss in the sale of the first fund shares. So
instead of having $100.00 gain ($1,100.00 - $1,000.00), you have a $150.00 gain
($1,100.00 - $950.00). You can include the $50.00 sales load in the basis of
your shares in the second fund.
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.
<PAGE>
Capital gain distributions, if any, received by corporate shareholders should be
treated as long-term capital gains regardless of how long they owned their
shares. Capital gain distributions, if any, received by individuals should be
treated as long-term if held for more than one year. Short-term capital gains
earned by the Fund are paid to shareholders as part of their ordinary income
dividend and are taxable. A special 28% rate on capital gains applies to sales
of precious metals owned directly by the Fund.
Under federal tax law, by the end of a calendar year the Fund must declare and
pay dividends representing 98% of ordinary income for that calendar year and 98%
of net capital gains (both long-term and short-term) for the 12-month period
ending Oct. 31 of that calendar year. The Fund is subject to an excise tax equal
to 4% of the excess, if any, of the amount required to be distributed over the
amount actually distributed. The Fund intends to comply with federal tax law and
avoid any excise tax.
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.
Assets Annual rate at
(billions) each asset level
- --------- ----------------
First $0.25 0.470%
Next 0.25 0.445
Next 0.25 0.420
Next 0.25 0.405
Over 1.00 0.380
On the last day of the most recent fiscal year, the daily rate applied to each
Fund's net assets was equal to 0.470% on an annual basis for Massachusetts,
Michigan, New York and Ohio and 0.468% for California and 0.459% for Minnesota.
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.
<PAGE>
The management fee is paid monthly. The table below shows the total amount paid
by each Fund over the past three fiscal years.
<TABLE>
<CAPTION>
Fiscal Year
Fund 1999 1998 1997
<S> <C> <C> <C>
- -------------------------------------
California $1,257,978 $1,171,054 $1,136,825
- -------------------------------------
Massachusetts 399,923 358,885 349,582
- -------------------------------------
Michigan 391,881 379,412 382,131
- -------------------------------------
Minnesota 1,994,409 1,872,006 1,856,870
- -------------------------------------
New York 543,353 545,320 555,919
- -------------------------------------
Ohio 357,073 336,754 335,881
- -------------------------------------
</TABLE>
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 each Fund pays nonadvisory expenses, net of earnings
credits. The table below shows the expenses paid over the past three fiscal
years.
<TABLE>
<CAPTION>
Fiscal Year
Fund 1999 1998 1997
- -------------------------------------
<S> <C> <C> <C>
California $130,650 $36,849 $79,107
- -------------------------------------
Massachusetts 47,438 46,784 64,534
- -------------------------------------
Michigan 82,592 59,281 66,202
- -------------------------------------
Minnesota 194,930 45,166 44,674
- -------------------------------------
New York 93,581 48,628 64,887
- -------------------------------------
Ohio 106,275 52,683 55,835
- -------------------------------------
</TABLE>
Administrative Services Agreement
Each Fund has an Administrative Services Agreement with AEFC. Under this
agreement, each Fund pays AEFC for providing administration and accounting
services. The fee is calculated as follows:
Assets Annual rate
(billions) each asset level
- --------- ----------------
First $0.25 0.040%
Next 0.25 0.035
Next 0.25 0.030
Next 0.25 0.025
Over 1.00 0.020
On the last day of the most recent fiscal year, the daily rate applied to each
Fund's net assets was equal to 0.040% on an annual basis for California,
Massachusetts, Michigan, New York and Ohio and 0.378% for Minnesota. 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 table below shows the expenses paid over the past three fiscal years.
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year
----------------------------------------------------------------------
Fund 1999 1998 1997
<S> <C> <C> <C>
California $110,275 $103,284 $96,751
Massachusetts 35,242 32,602 28,771
Michigan 34,586 34,433 32,522
Minnesota 176,098 160,057 153,661
New York 47,870 48,804 47,312
Ohio 30,748 31,132 28,586
- --------------------------------------
</TABLE>
Transfer Agency Agreement
The Fund has a Transfer Agency Agreement with American Express Client Service
Corporation (AECSC). This agreement governs AECSC's responsibility for
administering and/or performing transfer agent functions, for acting as service
agent in connection with dividend and distribution functions and for performing
shareholder account administration agent functions in connection with the
issuance, exchange and redemption or repurchase of the Fund's shares. Under the
agreement, AECSC will earn a fee from the Fund determined by multiplying the
number of shareholder accounts at the end of the day by a rate determined for
each class per year and dividing by the number of days in the year. The rate for
Class A is $19.50 per year and for Class B is $20.50 per year. The fees paid to
AECSC may be changed by the board without shareholder approval.
Distribution Agreement
AEFA is the Fund's principal underwriter (distributor). The Fund's shares are
offered on a continuous basis.
Under a Distribution Agreement, sales charges deducted for distributing Fund
shares are paid to AEFA daily. Line one of the following table shows total sales
charges collected. Line two shows the amounts retained by AEFA for the past
three fiscal years.
<TABLE>
<CAPTION>
Year California Massachusetts Michigan Minnesota New York Ohio
<S> <C> <C> <C> <C> <C> <C>
1999 (1) $803,524 $445,136 $209,314 $1,266,014 $266,790 $205,720
- -------------------
(2) 81,354 64,561 28,730 80,516 2,865 15,091
- -------------------
1998 (1) 590,397 319,341 165,232 996,195 288,596 115,270
- -------------------
(2) 76,867 13,498 16,959 134,545 33,874 (24,371)
- -------------------
1997 (1) 447,310 217,111 132,029 815,821 244,183 107,454
- -------------------
(2) 77,322 17,237 18,556 140,883 29,981 (19,095)
</TABLE>
SHAREHOLDER SERVICE AGREEMENT
During the most recent fiscal year the Fund paid a Fund fee for service provided
to shareholders by financial advisors and other servicing agents with respect to
Class A and Class B shares at a rate of 0.175% of average daily net assets. The
Shareholder Service Agreement for Class A and Class B shares was converted to a
Plan and Agreement of Distribution effective July 1, 1999.
<PAGE>
PLAN AND AGREEMENT OF DISTRIBUTION
For Class A and Class B shares, to help AEFA defray the cost of distribution and
servicing not covered by the sales charges received under the Distribution
Agreement, the Fund and AEFA entered into a Plan and Agreement of Distribution
(Plan) pursuant to Rule 12b-1 under the 1940 Act. Under the Plan, AEFA is paid a
fee up to actual expenses incurred at an annual rate of up to 0.25% of the
Fund's average daily net assets attributable to Class A shares and up to 1.00%
for Class B shares.
Expenses covered under this Plan include sales commissions; business, employee
and financial advisor expenses charged to distribution of Class A and Class B
shares; and overhead appropriately allocated to the sale of Class A and Class B
shares. These expenses also include costs of providing personal service to
shareholders. A substantial portion of the costs are not specifically identified
to any one of the American Express funds.
The Plan must be approved annually by the board, including a majority of the
disinterested board members, if it is to continue for more than a year. At least
quarterly, the board must review written reports concerning the amounts expended
under the Plan and the purposes for which such expenditures were made. The Plan
and any agreement related to it may be terminated at any time by vote of a
majority of board members who are not interested persons of the Fund and have no
direct or indirect financial interest in the operation of the Plan or in any
agreement related to the Plan, or by vote of a majority of the outstanding
voting securities of the relevant class of shares or by AEFA. The Plan (or any
agreement related to it) will terminate in the event of its assignment, as that
term is defined in the 1940 Act. The Plan may not be amended to increase the
amount to be spent for distribution without shareholder approval, and all
material amendments to the Plan must be approved by a majority of the board
members, including a majority of the board members who are not interested
persons of the Fund and who do not have a financial interest in the operation of
the Plan or any agreement related to it. The selection and nomination of
disinterested board members is the responsibility of the other disinterested
board members. No board member who is not an interested person, has any direct
or indirect financial interest in the operation of the Plan or any related
agreement.
The following fees were paid for under the plan. The fees were based on the
0.75% in effect for Class B Shares during the most recent fiscal year:
Fees paid as of the most
recent fiscal year for
Class B shares
California $136,155
- ----------------------------
Massachusetts 114,158
- ----------------------------
Michigan 43,183
- ----------------------------
Minnesota 284,736
- ----------------------------
New York 86,839
- ----------------------------
Ohio 49,653
The Plan was not effective with respect to Class A shares until July 1, 1999. As
a result, no fees were paid as of the most recent fiscal year for Class A
shares.
The fee is not allocated to any one service (such as advertising, payments to
underwriters, or other uses). However, a significant portion of the fee is
generally used for sales and promotional expenses.
<PAGE>
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.
<PAGE>
FUND HISTORY TABLE FOR ALL PUBLICLY OFFERED AMERICAN EXPRESS FUNDS*
<TABLE>
<CAPTION>
- -------------------------------------- -------------------- ----------------- -------------- ----------- ---------------
Date of Form of State of Fiscal
Fund Organization Organization Organization Year End Diversified
- -------------------------------------- -------------------- ----------------- -------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
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
funds listed in the table (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 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 shareholder 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 53 American Express Funds.
H. Brewster Atwater, Jr.'
Born in 1931
4900 IDS Tower
Minneapolis, MN
Retired chairman and chief executive officer, General Mills, Inc. Director,
Merck & Co., Inc. and Darden Restaurants, Inc.
Arne H. Carlson+'*
Born in 1934
901 S. Marquette Ave.
Minneapolis, MN
Chairman and chief executive officer of the Fund. Chairman, Board Services
Corporation (provides administrative services to boards). Former Governor of
Minnesota.
Lynne V. Cheney
Born in 1941
American Enterprise Institute
for Public Policy Research (AEI)
1150 17th St., N.W. Washington, D.C.
Distinguished Fellow AEI. Former Chair of National Endowment of the Humanities.
Director, The Reader's Digest Association Inc., Lockheed-Martin, and Union
Pacific Resources.
William H. Dudley'**
Born in 1932
2900 IDS Tower
Minneapolis, MN
Senior adviser to the chief executive officer of AEFC.
<PAGE>
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).
Anne P. Jones+
Born in 1935
5716 Bent Branch Rd.
Bethesda, MD
Attorney and telecommunications consultant. Former partner, law firm of
Sutherland, Asbill & Brennan. Director, Motorola, Inc. (electronics), C-Cor
Electronics, Inc., and Amnex, Inc. (communications).
William R. Pearce'
Born in 1927
2050 One Financial Plaza
Minneapolis, MN
RII Weyerhaeuser World Timberfund, L.P. (develops timber resources) - management
committee. Retired vice chairman of the board, Cargill, Incorporated (commodity
merchants and processors). Former chairman, Board Services Corporation.
Alan K. Simpson+
Born in 1931
1201 Sunshine Ave.
Cody, WY
Director of The Institute of Politics, Harvard University. Former three-term
United States Senator for Wyoming. Former Assistant Republican Leader, U.S.
Senate. Director, PacifiCorp (electric power) and Biogen (bio-pharmaceuticals).
<PAGE>
John R. Thomas+'**
Born in 1937
2900 IDS Tower
Minneapolis, MN
Senior vice president of AEFC.
C. Angus Wurtele+'
Born in 1934
Valspar Corporation
Suite 1700
Foshay Tower
Minneapolis, MN
Retired chairman of the board and chief executive officer, The Valspar
Corporation (paints). Director, Valspar, Bemis Corporation (packaging) and
General Mills, Inc. (consumer foods).
+ Member of executive committee.
' Member of investment review committee.
* Interested person by reason of being an officer and employee of the Fund.
**Interested person by reason of being an officer, board member, employee and/or
shareholder of AEFC or American Express.
The board has appointed officers who are responsible for day-to-day business
decisions based on policies it has established. In addition to Mr. Carlson, who
is chairman of the board, and Mr. Thomas, who is president, the 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.
<PAGE>
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.
John M. Knight
Born in 1952
IDS Tower 10
Minneapolis, MN
Vice President - investment accounting of AEFC. Treasurer for the Fund.
<PAGE>
COMPENSATION FOR BOARD MEMBERS
- --------------------------------------------------------------------------------
During the most recent fiscal year, the independent members of the Fund board,
for attending up to 27 meetings, received the following compensation:
<TABLE>
<CAPTION>
Compensation Table
AXP California Tax-Exempt Fund
<S> <C> <C>
Total cash compensation from
--------------------------------- ---------------------------------
Board member Aggregate American Express Funds and
compensation from the Fund Preferred Master Trust Group
H. Brewster Atwater, Jr. $1,200 $116,400
Lynne V. Cheney 831 96,900
Heinz F. Hutter 925 99,900
Anne P. Jones 1,082 112,400
William R. Pearce 225 24,600
Alan K. Simpson 831 96,900
C. Angus Wurtele 1,267 120,400
Compensation Table
AXP Massachusetts Tax-Exempt Fund
Total cash compensation from
--------------------------------- ---------------------------------
Board member Aggregate American Express Funds and
compensation from the Fund Preferred Master Trust Group
H. Brewster Atwater, Jr. $1,200 $116,400
Lynne V. Cheney 831 96,900
Heinz F. Hutter 925 99,900
Anne P. Jones 1,082 112,400
William R. Pearce 225 24,600
Alan K. Simpson 831 96,900
C. Angus Wurtele 1,267 120,400
Compensation Table
AXP Michigan Tax-Exempt Fund
Total cash compensation from
--------------------------------- ---------------------------------
Board member Aggregate American Express Funds and
compensation from the Fund Preferred Master Trust Group
H. Brewster Atwater, Jr. $1,200 $116,400
Lynne V. Cheney 831 96,900
Heinz F. Hutter 925 99,900
Anne P. Jones 1,082 112,400
William R. Pearce 225 24,600
Alan K. Simpson 831 96,900
C. Angus Wurtele 1,267 120,400
<PAGE>
Compensation Table
AXP Minnesota Tax-Exempt Fund
Total cash compensation from
--------------------------------- ---------------------------------
Board member Aggregate American Express Funds and
compensation from the Fund Preferred Master Trust Group
H. Brewster Atwater, Jr. $1,300 $116,400
Lynne V. Cheney 937 96,900
Heinz F. Hutter 1,025 99,900
Anne P. Jones 1,189 112,400
William R. Pearce 250 24,600
Alan K. Simpson 937 96,900
C. Angus Wurtele 1,367 120,400
Compensation Table
AXP New York Tax-Exempt Fund
Total cash compensation from
--------------------------------- ---------------------------------
Board member Aggregate American Express Funds and
compensation from the Fund Preferred Master Trust Group
H. Brewster Atwater, Jr. $1,200 $116,400
Lynne V. Cheney 831 96,900
Heinz F. Hutter 925 99,900
Anne P. Jones 1,082 112,400
William R. Pearce 225 24,600
Alan K. Simpson 831 96,900
C. Angus Wurtele 1,267 120,400
Compensation Table
AXP Ohio Tax-Exempt Fund
Total cash compensation from
--------------------------------- ---------------------------------
Board member Aggregate American Express Funds and
compensation from the Fund Preferred Master Trust Group
H. Brewster Atwater, Jr. $1,200 $116,400
Lynne V. Cheney 831 96,900
Heinz F. Hutter 925 99,900
Anne P. Jones 1,082 112,400
William R. Pearce 225 24,600
Alan K. Simpson 831 96,900
C. Angus Wurtele 1,267 120,400
</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.
<PAGE>
INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
The financial statements contained in the Annual Report were audited by
independent auditors, KPMG LLP, 4200 Norwest Center, 90 S. Seventh St.,
Minneapolis, MN 55402-3900. The independent auditors also provide other
accounting and tax-related services as requested by the Fund.
<PAGE>
APPENDIX A
DESCRIPTION OF RATINGS
Standard & Poor's Debt Ratings
A Standard & Poor's corporate or municipal debt rating is a current assessment
of the creditworthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration obligors such as guarantors,
insurers, or lessees.
The debt rating is not a recommendation to purchase, sell, or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer or obtained
by S&P from other sources it considers reliable. S&P does not perform an audit
in connection with any rating and may, on occasion, rely on unaudited financial
information. The ratings may be changed, suspended, or withdrawn as a result of
changes in, or unavailability of such information or based on other
circumstances.
The ratings are based, in varying degrees, on the following considerations:
o Likelihood of default capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation.
o Nature of and provisions of the obligation.
o Protection afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization, or other arrangement
under the laws of bankruptcy and other laws affecting creditors'
rights.
Investment Grade
Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity to
pay interest and repay principal is extremely strong.
Debt rated AA has a very strong capacity to pay interest and repay principal and
differs from the highest rated issues only in a small degree.
Debt rated A has a strong capacity to pay interest and repay principal, although
it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
Debt rated BBB is regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than in higher-rated categories.
<PAGE>
Speculative grade
Debt rated BB, B, CCC, CC, and C is regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
Debt rated BB has less near-term vulnerability to default than other speculative
issues. However, it faces major ongoing uncertainies or exposure to adverse
business, financial, or economic conditions that could lead to inadequate
capacity to meet timely interest and principal payments. The BB rating category
also is used for debt subordinated to senior debt that is assigned an actual or
implied BBB- rating.
Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category also is used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
Debt rated CCC has a currently identifiable vulnerability to default and is
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category also is
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
Debt rated CC typically is applied to debt subordinated to senior debt that is
assigned an actual or implied CCC rating.
Debt rated C typically is applied to debt subordinated to senior debt that is
assigned an actual or implied CCC rating. The C rating may be used to cover a
situation where a bankruptcy petition has been filed, but debt service payments
are continued.
The rating CI is reserved for income bonds on which no interest is being paid.
Debt rated D is in payment default. The D rating category is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Moody's Long-Term Debt Ratings
Aaa - Bonds that are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa - Bonds that are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present that make the
long-term risk appear somewhat larger than in Aaa securities.
<PAGE>
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.
Ba - Bonds that are rated Ba are judged to have speculative elements--their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds that are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or maintenance of other
terms of the contract over any long period of time may be small.
Caa - Bonds that are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds that are rated Ca represent obligations that are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C - Bonds that are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
SHORT-TERM RATINGS
Standard & Poor's Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market.
Ratings are graded into several categories, ranging from A-1 for the highest
quality obligations to D for the lowest. These categories are as follows:
A-1 This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to
possess extremely strong safety characteristics are denoted
with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as
high as for issues designated A-1.
A-3 Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the
adverse effects of changes in circumstances than obligations
carrying the higher designations.
B Issues are regarded as having only speculative capacity
for timely payment.
<PAGE>
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.
Moody's Short-Term Ratings
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
Issuers rated Prime-l (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-l
repayment ability will often be evidenced by many of the following
characteristics: (i) leading market positions in well-established
industries, (ii) high rates of return on funds employed, (iii)
conservative capitalization structure with moderate reliance on debt
and ample asset protection, (iv) broad margins in earnings coverage of
fixed financial charges and high internal cash generation, and (v) well
established access to a range of financial markets and assured sources
of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above, but
to a lesser degree. Earnings trends and coverage ratios, while sound,
may be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
<PAGE>
Moody's & S&P's
Short-Term Muni Bonds and Notes
Short-term municipal bonds and notes are rated by Moody's and by S&P. The
ratings reflect the liquidity concerns and market access risks unique to notes.
Moody's MIG 1/VMIG 1 indicates the best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
Moody's MIG 2/VMIG 2 indicates high quality. Margins of protection are ample
although not so large as in the preceding group.
Moody's MIG 3/VMIG 3 indicates favorable quality. All security elements are
accounted for but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
Moody' s MIG 4/VMIG 4 indicates adequate quality. Protection commonly regarded
as required of an investment security is present and although not distinctly or
predominantly speculative, there is specific risk.
Standard & Poor's rating SP-1 indicates very strong or strong capacity to pay
principal and interest. Those issues determined to possess overwhelming safety
characteristics will be given a plus (+) designation.
Standard & Poor's rating SP-2 indicates satisfactory capacity to pay principal
and interest.
Standard & Poor's rating SP-3 indicates speculative capacity to pay principal
and interest.
<PAGE>
APPENDIX B
STATE RISK FACTORS
The yields on the securities in which the Funds will invest generally are
dependent on a variety of factors, including the financial condition of the
issuer or other obligator, the revenue source from which the debt service is
payable, general economic and monetary conditions, conditions in the relevant
market, the size of a particular issue, the maturity of the obligation, and the
rating of the issue.
In addition to such factors, such securities will experience particular
sensitivity to local conditions including political and economic changes,
adverse conditions to an industry significant to the area, and other
developments within a particular locality including: ecological or environmental
concerns; litigation; natural disasters; and statutory limitations on an
issuer's ability to increase taxes. Because many tax-exempt bonds may be revenue
or general obligations of local governments or authorities, ratings on
tax-exempt bonds may be different from the ratings given to the general
obligation bonds of a particular state. A summary description of certain factors
and statistics describing the economies in each state is set forth below. Such
information is not specific to the issuer of a particular security that a Fund
may own and is only intended to provide a general overview. Such information has
been excerpted from publicly available offering documents and from other
research reports prepared by rating agencies. No Fund has independently verified
this information and no Fund makes any representations regarding this
information.
Please remember that most state and local economies have experienced significant
expansions over the past 5-7 years. In recessionary periods, an issuer's ability
to pay interest on or repay principal of securities in which the Funds will
invest may be significantly impaired. Accordingly, please monitor your
investment accordingly.
FACTORS AFFECTING CALIFORNIA
California's economic expansion slowed in early 1998. However, the dangers of a
sharp deceleration through 1999 have been eased by the vigorous pace of the U.S.
economy. Although employment rose 3.5% in 1998, unemployment continues to be
relatively high at 5.7%. Personal income growth was 6.1% in 1998 and Gross State
Product rose nearly 5%. Job figures for late in the year reflect a slowing that
can be attributed to the impact of the Asian financial crisis. In November and
December, 24,000 net new jobs per month were created. This figure is not
indicative of a weak economy, but below the 35,000 per month average gain over
the whole year. Manufacturing weakened in 1998. Not only were there weaknesses
associated with high tech trade, but the apparel-making industry, which was
doing well in Southern California, weakened as producers looked to out of
country locations where costs are even lower.
Strong forces from within and from out of the state are helping offset weaker
areas. Interest rates are low and stable. The built-up wealth in equity markets
is strong support for retail demand, big ticket buying and housing. On June 30,
1999 general debt obligations were rated Aa3 by Moody's and AA+ by Standard and
Poor's.
Certain California constitutional amendments, legislative measures, executive
orders, civil actions and voter initiatives could adversely affect the ability
of issuers of California state and municipal securities to obtain sufficient
revenue to pay their bond obligations. Prior to 1977, revenues of the state
government experienced significant growth primarily as a result of inflation and
continuous expansion of the tax base of the state. In 1978, California voters
approved an amendment to the California constitution known as
<PAGE>
Proposition 13, which added Article XIIIA to the state Constitution. Article
XIIIA reduced ad valorem (according to value) taxes on real property, and
restricted the ability of taxing entities to increase real property tax
revenues. In addition, Article XIIIA provides that additional taxes may be
levied by cities, counties and special districts only upon approval of not less
than a two-thirds vote of the "qualified electors" of such district and requires
not less than a two-thirds vote of each of the two houses of the state
legislature to enact any changes in state taxes for purposes of increasing
revenues, whether by increased rate or changes in methods of computation.
In 1986, Proposition 62, an initiative statute enacted in California, placed
further limits on the ability of local governments to levy taxes other than ad
valorem property taxes, except with voter approval. Legislation enacted
subsequent to Article XIIIA provided for the redistribution of California's
general fund surplus to local agencies, the reallocation of certain state
revenues to local agencies and the assumption of certain local obligations by
the state so as to help California municipal issuers raise revenues to pay their
bond obligations.
Primarily as a result of the reductions in local property tax revenues received
by local governments following the passage of Proposition 13, the legislature
undertook to provide assistance to such governments by substantially increasing
expenditures from the general fund for that purpose beginning in the 1978-1979
fiscal year. In past years, in addition to such increased expenditures, the
indexing of personal income tax rates (to adjust such rates for the effects of
inflation), the elimination of certain inheritance and gift taxes, and the
increase of exemption levels for certain other such taxes and a moderating
impact on the growth in state revenues. In addition, the state has increased
expenditures by providing a variety of tax credits, senior citizens' credits and
energy credits.
In 1979, the voters of California passed an initiative adding Article XIIIB to
the California Constitution. Article XIIIB prohibits the state from spending
"appropriations subject to limitation" in excess of the appropriations limit
imposed. "Appropriations subject to limitation" are authorizations to spend
"proceeds of taxes" which consist of tax revenues and certain other funds. One
of the exclusions from these limitations is "debt service" (defined as
"appropriations required to pay the cost of interest and redemption charges,
including the funding of any reserve or sinking fund required in connection
therewith, on indebtedness on existing or legally authorized as of Jan. 1, 1979,
or on bonded indebtedness thereafter approved" by voters). In addition,
appropriations required to comply with mandates of courts or the Federal
government are not included as appropriations subject to limitation.
The state's appropriations limit is adjusted annually to reflect change in cost
of living and population and transfer of financial responsibility from one
governmental unit to another. Revenues in any fiscal year which exceed the
amount which may be appropriated in compliance with Article XIIIB must be
returned to taxpayers by a revision of tax rates or fee schedules within the two
subsequent fiscal years.
In November 1988, voters approved an initiative called Proposition 98 which
substantially modified Article XIIIB, by providing that a substantial amount (up
to $600 million per year currently) of any excess state revenues would, instead
of being returned to taxpayers, be paid to public schools and community college
districts.
In the years immediately after enactment of Article XIIIB, very few California
government entities neared their appropriations limits. To the extent the state
remains constrained by its appropriations limit, the absolute level, or the rate
of growth, of assistance to local governments may be reduced.
<PAGE>
Because of the complex nature of Articles XIIIA and XIIIB, the ambiguities and
possible inconsistencies in their terms and the applicability of their
exemptions and exceptions and impossibility of predicting future appropriations
or changes in population and cost of living, it is not currently possible to
determine the impact of Article XIIIA or Article XIIIB or any related
legislation on the securities held in the Fund or the ability of state or local
governments to pay interest on or repay the principal of such securities. With a
limited exception, to date the California courts have either upheld the
constitutionality of Article XIIIA and its implementing and related legislation
or have interpreted them in such a manner as to avoid the necessity for direct
determination of constitutional issues. Article XIIIA and XIIIB and their
respective implementing and related legislation will most probably be subject to
continuing or future legal challenges. It is not presently possible to predict
the outcome of any such legislation with respect to the ultimate scope, impact
or constitutionality of either Article XIIIA or Article XIIIB, or their
respective related legislation; or the impact of any determinations upon state
agencies or local government, or upon the abilities of such entities to pay the
interest on, or repay the principal of, the securities held by a Fund.
FACTORS AFFECTING MASSACHUSETTS
Massachusetts' economy continues to maintain its fiscal health. Strong revenue
performance over the past few years enabled rebuilding of reserves to
substantial levels, now at about 6% of revenues. However, debt ratios and
servicing costs continue to be high. Net tax supported debt amount at $13.7
billion was equal to $2,259 per capita and 7.6% of personal income. A five-year
capital program incorporating guaranteed authority debt has been established
projecting commonwealth general obligation bonding at about $1 billion annually,
with the Massachusetts Bay Transportation Authority (MBTA) representing over
$300 million annually. This program should sustain the high debt ratios.
Employment rose 1.9% in 1998 while the unemployment rate was 3.3%, the lowest
annual rate since 1988. Personal Income per-capita ranks third highest in the
U.S.
The downside risks for Massachusetts include the shortage of skilled labor, low
net population growth which will further constrain job creation, and the
prominence of the financial services industry in the economy coupled with a
relatively high proportion of non-wage income both of which are sensitive to the
performance of the financial markets.
The Massachusetts constitution requires that a balanced budget be provided for
each year. In addition, the commonwealth adopted certain budgetary and fiscal
controls to eliminate the possibilities of expenditures exceeding available
revenues and funds. The general fund, the local aid fund and the highway fund
are the three principal operating funds of the commonwealth and the condition of
these funds is generally regarded as the principal indicator of whether the
commonwealth's operating revenues and expenses are balanced.
The commonwealth had and may continue to have unfunded general liabilities of
its retirement systems and a program to fund these liabilities. In 1978, the
commonwealth began assuming full financial responsibility for all costs of the
administration of justice within the state, and Medicaid expenditures which have
increased each year. It also raised aggregate aid to cities, towns, schools and
other districts and transit authorities. In the past the commonwealth signed
constant decrees to improve mental health care and programs for the mentally
retarded to meet federal standards including those governing federal
reimbursements under various programs.
All of the 351 cities and towns in Massachusetts have achieved a property tax
level of no more than 2.5% of full property values. Legislation that effected
this leveling is Proposition 2 1/2. Under Proposition 2 1/2, cities and towns
may increase the property tax levy annually. In most cases property taxes can
increase by 2.5% of the prior year's tax levy plus 2.5% of the value of new
properties and of significant improvements to property.
<PAGE>
The reductions in local revenues and reductions in local personnel and services
resulting from Proposition 2 1/2 created a strong demand for substantial
increases in state-funded local aid, with increases in fiscal years 1982 through
1987. The effect of this increase in local aid was to shift a major part of the
impact of Proposition 2 1/2 to the commonwealth. Legislation had been enacted
providing for certain local option taxes.
Efforts to limit and reduce the levels of taxation in Massachusetts have been
underway for several years. Chapter 62F of the Massachusetts General Laws
establishes a state tax revenue growth limit and does not exclude principal and
interest payments on commonwealth debt obligations from the scope of the limit.
Lawsuits filed against the commonwealth or its authorities may affect its future
fiscal condition.
FACTORS AFFECTING MICHIGAN
Fiscal year 1998 marked another successful year for Michigan. The economy is
flourishing and the state's fiscal health remains strong. Tax savings amounted
to $2 billion in 1998 alone. Michigan has an "unreserved" fund balance of $55.2
million in the state's General Fund and one of the nation's largest rainy day
funds with a balance of $1 billion. In 1998, Standard & Poors, Moody's, and
Fitch IBCA, the three major credit rating agencies, upgraded the state's credit
rating to the highest ratings in 20 years. In 1998, more men and women had jobs
than at any time in the state's history. The unemployment rate continued to set
record lows and job growth continued to increase. On June 30, 1999 general debt
obligations were rated Aa1 by Moody's and AA+ by Standard and Poor's.
Michigan's low debt position helped it to weather recent difficult economic
times. Financial operations remained solvent through budget adjustments,
spending cuts and use of non-recurring items. Previous budget problems arose
from revenue estimates falling below expectation and increased spending levels.
This caused deficits in the general fund budget for fiscal years ended 1990 and
1991.
The principal sectors of Michigan's economy are manufacturing of durable goods
(including automobiles and office equipment), tourism and agriculture. Because
of the emphasis on durable goods, however, economic activity in the state has
tended to be more cyclical than in the nation as a whole. Moreover, this
domination left the state's economy more susceptible to upward and downward
cycles. The manufacturer sector has benefited from significant private
investment and improved international competitiveness. The current low interest
rate environment should continue to help strengthen business investment.
Some local economies have been significantly affected by recent weather
conditions.
FACTORS AFFECTING MINNESOTA
Minnesota's economy is healthy with unemployment rates at 3.3% in 1998.
Statewide employment continued to expand at 1.4%. Employers' ability to find
enough workers to fill available jobs continued tight labor market conditions.
Per-capita income was above the national average as Minnesotan's worked more
hours and held multiple jobs with higher and growing labor force participation.
State law requires the Governor to recommend targets in his budget for
Minnesota's "Price of Government Policy." This policy is defined as total state
and local revenues as a percentage of personal income to be collected in taxes
and fees for the next four years. This ratio is a measure of the overall size of
Minnesota's state and local government and its relative cost to taxpayers. In
1998, 17.7% of all state personal income went to state and local government.
This year, Minnesota tax-payers will receive a $1.3 billion sales tax rebate
that will provide a small but significant, one time boost to Minnesota's
economy. Many of the items purchased with rebates will be subject to sales tax.
State revenues will depend on how much of the rebate is spent and saved, and
what items are ultimately purchased. On June 30, 1999 general debt obligations
were rated Aaa by Moody's and AAA by Standard and Poor's .
<PAGE>
Net general fund revenues for the 1998-99 biennium are now expected to total
$22.526 billion, $285 million (1.3 percent) more than forecast in November.
State expenditures for the current biennium are now projected to be $3 million
more than previously anticipated. The combined revenue and expenditure changes
increase the expected budgetary balance at the close of the current biennium by
$282 million. A stronger than expected economy during the fourth quarter of 1998
was the source of much of the additional revenue.
Economic weakness has, in the recent past, tested Minnesota's historically
strong financial management. The rainy day fund established in the mid-1980s
totaled $550 million as of fiscal 1990. To address budget gaps in 1991 and the
1992-1993 biennium, the reserve was drawn down to $240 million as of June, 1992,
demonstrating the severe effects of a lasting recession.
The unemployment rate, growth rates and income trends in Minnesota compare
favorably with national averages, but the economy is cyclically sensitive.
Minnesota's employment and population are forecasted to continue to grow at
rates near the national average. Total employment in the state is expected to
grow at an average annual rate of 1.3% a year through 2005, slightly below the
projected national growth rate of 1.5% annually. During the recessionary period
from 1980 to 1983, economic conditions in the agricultural and iron mining
industries, which are two of the leading sectors of Minnesota's economy, were
poor. However, mining is a less significant factor in the state economy than it
once was while the manufacture of durable and non-durable goods is relatively
more important to the economy.
FACTORS AFFECTING NEW YORK
Economic recovery since the 1990's has been fairly steady. New York experienced
employment growth at 1.9% in 1998, while unemployment was higher than the nation
at 5.7%. Income growth has traditionally lagged national performance but grew to
4.9% in 1998. Improved financial position was achieved while implementing
personal income tax reduction. However, the high cost of living and doing
business is New York has been a limiting factor on economic growth.
Working together in 1995 and 1996, Governor Pataki and the Legislature cut
income taxes, business taxes and sales taxes. In 1997 and 1998 those tax cuts
were expanded to include taxes on estates, utility bills, property taxes,
corporate taxes and the first New York City income tax cut in more that a
decade. Major changes that are helping create jobs and opportunity include:
ending sales tax on clothing, reducing taxes on business, cutting regulatory
waste and bureaucratic red tape, landmark worker's compensation reform, estate
tax reform, and energy tax reductions. The State's overall debt levels are
relatively high at $1,501 per capita and 4.8% of personal income. On June 30,
1999 general debt obligations were rated A2 by Moody's and A by Standard and
Poor's.
The state has historically been one of the wealthiest in the nation. For
decades, however, the state economy has grown more slowly than that of the
nation as a whole, resulting in a gradual erosion of its relative economic
affluence. The causes of this decline are varied and complex, in many cases
involving national and international developments beyond the state's control.
Part of the reason for the long-term relative decline in the state economy has
been attributed to the combined state and local tax burden. The existence of
this tax burden limits the state's ability to impose higher taxes in the event
of future financial difficulties.
<PAGE>
The fiscal stability of the state is related to the fiscal stability of New York
City and the authorities (which generally finance, construct and operate
revenue-producing public benefit facilities). The state's experience has been
that if New York City or any of the authorities suffer serious financial
difficulties, the ability of the state, New York City, the state's political
subdivisions and the authorities to obtain financing in the public credit
markets is adversely affected. This results in part from the expectation that to
the extent that any authority or local government experiences financial
difficulty, it will seek and receive state financial assistance. Moreover, New
York City accounts for approximately 40% of the state's population and tax
receipts, so New York City's financial integrity affects the state directly.
Accordingly, if there should be a default by New York City or any of the
authorities, the market value and marketability of all New York tax-exempt
securities could be adversely affected.
While principal and interest payments on outstanding authority obligations are
normally paid from revenues generated by the projects of the authorities, in
recent years New York has had to appropriate large amounts to enable certain
authorities to meet their financial obligations and in some cases to prevent
default. Further assistance may be required in the future. In particular, the
New York State Urban Development Corporation (UDC), the New York State Housing
Finance Agency (HFA), and the Metropolitan Transportation Authority (MTA) may
require substantial amounts of assistance from the state.
The HFA provides financing for multifamily housing, state university
construction, hospital and nursing home development and other programs. HFA
depends upon mortgagors in each of its programs to generate sufficient funds
from rental income, subsidies and other payments to meet their respective
mortgage repayment obligations to HFA as well as to meet the operating and
maintenance costs of the project. On several occasions in the past, in
fulfillment of its moral obligation commitment, New York appropriated funds on
behalf of HFA to replenish its debt service reserve funds. There can be no
assurance that the state will not be called upon to provide further assistance
in the future. Any litigation decided against HFA also may have an adverse
effect on the financial condition of HFA mortgages.
The MTA oversees the operations of the city's bus and subway system by the New
York City Transit Authority and the Manhattan and Bronx Surface Operating
Authority (collectively, the TA) and, through subsidiaries, operates certain
commuter rail lines. The MTA has depended and will continue to depend upon
federal, state and local government support to operate the transit system
because fare revenues are insufficient.
The TA and New York City had damage claims filed against it from deaths and
injuries sustained during a Dec. 1990 subway fire and an Aug. 1991 train
derailment. Lawsuits could have an adverse financial impact on TA.
Beginning in 1975 (in part as a result of the New York City and UDC financial
crises), various localities of New York began experiencing difficulty in
marketing their securities. As a result, certain localities, in addition to New
York City, have experienced financial problems leading to requests for state
assistance. If future financial problems cause agencies or localities to seek
special state assistance, this could adversely affect New York's ability to pay
its obligations. Similarly, if financial difficulties of the state result in the
inability to meet its regular aid commitments or to provide further emergency
financing, issuers may default on their outstanding obligations, which would
affect the marketability of debt obligations of the state, its agencies and
municipalities, such as the New York tax-exempt bonds in the Fund's portfolio.
Reductions in federal spending could materially and adversely affect the
financial condition and budget projections of New York's localities. Should
localities be adversely affected by federal cutbacks, they may seek additional
assistance from the state that might, in turn, have an adverse impact on New
York's ability to maintain a balanced budget.
<PAGE>
The Long Island Lighting Company (LILCO) is the investor-owned utility which
supplies gas service and substantially all electric service in Nassau and
Suffolk Counties and a small portion of Queens County and New York City. In
early 1984, LILCO reported that it faced serious cash-flow and other financial
difficulties that were attributable to, among other things, construction
problems on its 809-megawatt Shoreham Nuclear Power Facility. LILCO is the
largest single real property taxpayer in both Suffolk and Nassau Counties and if
its financial problems continue, there could be severe financial difficulties
for the affected localities, particularly in Suffolk County. State legislation
was enacted in 1986 creating the Long Island Power Authority (LIPA), a public
benefit corporation that has the power to acquire LILCO if it determines that to
do so would result in lower electric rates for LILCO customers. The legislation
requires that, with certain exceptions, if LILCO property is acquired by LIPA
and is therefore removed from the tax rolls, LIPA is to make payments in lieu of
most state and local taxes that would otherwise have been paid by LILCO. LIPA
made and subsequently amended an offer to the Board of Directors of LILCO for a
negotiated acquisition of LILCO by LIPA. The New York State comptroller recently
reached a preliminary conclusion that the issuance of tax-exempt bonds by LIPA
to acquire LILCO may create a temporary oversupply in the market for new and
outstanding issues of New York tax-exempt bonds.
In February 1989, the Governor and LILCO reached an agreement pursuant to which
LILCO would sell Shoreham to the New York Power Authority for $1 (which would
then decommission Shoreham) in return for a schedule of rate increases which
have since been approved by the State Public Service Commission (the PSC). The
agreement has been approved by the New York Power Authority and LIPA. The
agreement and PSC rate increases have enabled LILCO to reenter the public credit
markets. It is difficult to predict the ultimate fiscal and economic impact on
the state or on local governments on Long Island of any litigation to which
LILCO is or may become a party, or of any bankruptcy by or takeover of LILCO.
New York City and Municipal Assistance Corporation. In 1975, New York City
encountered severe financial difficulties that impaired the borrowing ability of
the city, the state and the authorities. As a result, New York City lost access
to public credit markets and was not able to sell debt to the public until 1979.
MAC was organized in 1975 to provide financing assistance for New York City and
to exercise certain oversight and review functions with respect to the city's
financing. Prior to 1985, MAC had the authority to issue bonds and notes and to
pay or lend the proceeds to the city. Since 1985, MAC has been authorized to
issue bonds and notes only to refund its outstanding bonds and notes. MAC also
has the authority to exchange its obligations for New York City obligations. MAC
bonds are payable from appropriations of certain state sales and use taxes
imposed by New York City, the state stock transfer tax and per capita state aid
to New York City. The state is not, however, obligated to continue these taxes,
to continue to appropriate revenue from these taxes or to continue the
appropriation of per capita state aid to pay MAC obligations. MAC does not have
taxing powers and its bonds are not obligations enforceable against either New
York City of New York.
New York City has maintained a balanced budget for several fiscal years and has
retired all of its federally guaranteed debt. As a result, certain restrictions
imposed on New York City by the New York State Financial Control Board (the
Control Board), which was created in response to New York City's 1975 fiscal
crisis, have been suspended. Those restrictions, including the Control Board's
power to approve or disapprove certain contracts, long-term and short-term
borrowings and the four-year financial plan of the City, will remain suspended
unless and until, among other things, there is a substantial threat of or an
actual failure by the City to pay debt service on its notes and bonds or to keep
its annual operating deficits below $100 million. The City's four-year financial
plan for fiscal years 1989 through 1992 was submitted to the Control Board on
July 5, 1988, and had been subsequently modified by the City. As modified it
projects a balanced budget for the 1989 fiscal year, and budget gaps of $661
million, $945 million and $818 million for the 1990, 1991, and 1992 fiscal
years, respectively, before implementation of gap closing programs.
<PAGE>
The ability of New York City to balance its future budgets as provided in its
financial plans depend on various actions the City expects will be taken but are
not within its control. If expected federal and state aid is not forthcoming, if
economic conditions significantly further reduce revenue derived from
economically sensitive taxes or increase expenditure for public assistance, or
if other uncertainties materialize which reduce expected revenues or increase
projected expenditures, then, to avoid operating deficits, it is likely that New
York City would make demands upon the state for substantial additional financial
assistance.
Litigation. Certain litigation pending against the state, its subdivisions and
their officers and employees could have a substantial and long-term adverse
effect on state finances. In addition, New York City is a defendant in a
significant number of lawsuits pertaining to material matters, including those
claims asserted that are incidental to performing routine governmental and other
functions.
FACTORS AFFECTING OHIO
Ohio is a highly industrialized state with a developed, diverse economy and
employment trends that mirror the nation. Overall job growth has been
concentrated in construction and services. Ohio's 1998 unemployment rate at 4.3%
was lower than that of the nation's 4.5% and has remained below the U.S. rate in
recent months (3.7% vs. 4.0% in May of 1999). Non-farm employment growth in 1998
at 1.5% was lower than the national rate of 2.6%, reflecting slowed employment
growth due to the constraints of full employment in the region and unfavorable
demographic trends. April 1999 non-farm employment figures show growth of about
1% over April of the previous year, still below the comparable U.S. rate of
2.3%. Overall, Ohio's aggregate personal income growth rate has slightly lagged
the US rate during the last five years. On June 30, 1999 general debt
obligations were rated Aa1 by Moody's and A+ by Standard and Poor's.
Ohio continues to be among the most important contributors to the national
manufacturing sector. Even with the proportional decline of the manufacturing
sector over the past two decades, its dominance still makes Ohio vulnerable to
recession.
Recently, the Ohio Supreme Court found that the current method of educational
funding is unconstitutional. The Ohio General Assembly has one year to remedy
specific findings. The outcome is unpredictable. Bonding and higher tax rates
may be required.
As with other states, Ohio experienced economic weakness during the recent
recession. This, and other factors, led to budget shortfalls in 1991-1992.
However, these shortfalls were effectively managed through a draw-down on the
state's budget stabilization fund and an executive order to reduce state
spending by $196 million. In the early 1980s, Ohio's financial operations
continued a trend of vulnerability to economic cycles. Spending reductions
coupled with tax increases were implemented as a method of maintaining control
during recessionary periods. Ohio may face similar scenarios in future years.
However, the effects of economic cycles should be less severe because the
state's economic base is more diversified than it has been in the two previous
decades. Constitutional and statutory provisions require the state to close each
fiscal year with a positive general fund balance, in conjunction with Ohio's
advantageous current budgetary practice should help future financial
performance.
Ohio benefits from a diversified revenue structure and a relatively low tax
burden. The state carries out most of its operations through the general revenue
fund which receives general state revenues not otherwise dedicated. General fund
revenues are derived mainly from personal income, sales, corporate and franchise
taxes. General fund operations historically have paralleled economic trends, as
evidenced by the performance in recent recessionary periods.
<PAGE>
While diversifying more into the service area, Ohio's economy continues to rely
in part on durable-goods and manufacturing. This reliance is largely
concentrated in motor vehicles and equipment, steel, rubber products and
household appliances. As a result, economic activity in Ohio, as in many other
industrially developed states, tends to be more cyclical than in some other
states and in the nation as a whole.
A number of local Ohio communities and school districts have faced significant
financial problems. The state has established procedures for municipal fiscal
emergencies, under which joint state and local commissions are established to
monitor the fiscal affairs of a financially troubled municipality the
municipality must develop a financial plan to eliminate deficits and cure any
defaults. Since their adoption in 1979, these procedures have been applied to
approximately twenty cities and villages, including the City of Cleveland; in a
majority of these communities, the fiscal situation has been resolved and the
procedures terminated.
Local school districts in Ohio receive a major portion of their operational
funds from state subsidies, but are dependent upon local taxes for significant
portions of their budgets. Local school districts are authorized to submit for
voter approval an income tax on the district income of individuals and estates.
A small number of local school districts have required emergency advances from
the state in order to prevent year-end deficits. The number of districts
applying for aid has fluctuated over the years. Legislation (with enhanced
provision for individual district borrowing) has replaced the emergency advance
loan program.
FACTORS AFFECTING PUERTO RICO
The Funds may invest in municipal securities issued by or on behalf of Puerto
Rico, its agencies or instrumentalities.
The economy of Puerto Rico continued its expansion phase during fiscal year
1998. Record levels in construction investment, along with reduced energy prices
and low interest rates are supporting growth in consumer markets are helping to
maintain better employment levels. Puerto Rico's economy now has a diverse
technology-oriented manufacturing base that is approximately 41% of Gross
Domestic Product.
Puerto Rico's seasonally adjusted unemployment rate remains relatively high at
12.9% with per capita income significantly less than the U.S. average. Debt
ratios for the Commonwealth are high as it assumes much of the responsibility
for financing improvements in the local infrastructure. Effective January 1,
1998, companies new to Puerto Rico, or existing companies planning to expand by
at least 25%, may be eligible for a new package of incentives that substantially
reduce their corporate taxes and encourage investment in research and
development, job training and upgrades in operations, facilities or machinery.
Since the early 1970s, manufacturing has been the primary force in Puerto Rican
development. Other major sectors of Puerto Rico's economy include government,
trade and services. Puerto Rico's economic base remain centered around tax
advantages offered to U.S. manufacturing firms. Legislation or other action that
would eliminate or reduce such tax incentives might give rise to economic
instability and volatility in the market for the securities.
<PAGE>
AXPSM SPECIAL TAX-EXEMPT SERIES TRUST
STATEMENT OF ADDITIONAL INFORMATION
FOR
AXPSM INSURED TAX-EXEMPT FUND (the Fund)
Aug. 27, 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 American Express financial advisor or by writing to American Express
Shareholder Service, 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>
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. 8
Security Transactions...................................................p. 28
Brokerage Commissions Paid to Brokers Affiliated with
American Express Financial Corporation..................................p. 29
Performance Information.................................................p. 30
Valuing Fund Shares.....................................................p. 32
Investing in the Fund...................................................p. 33
Selling Shares..........................................................p. 36
Pay-out Plans...........................................................p. 36
Taxes...................................................................p. 38
Agreements..............................................................p. 39
Organizational Information..............................................p. 41
Board Members and Officers..............................................p. 43
Compensation for Board Members..........................................p. 46
Independent Auditors....................................................p. 46
Appendix A: Description of Ratings......................................p. 47
Appendix B: Insured Fund................................................p. 52
<PAGE>
MUTUAL FUND CHECKLIST
- --------------------------------------------------------------------------------
|X|
Mutual funds are NOT guaranteed or insured by any
bank or government agency. You can lose money.
|X|
Mutual funds ALWAYS carry investment risks. Some
types carry more risk than others.
|X|
A higher rate of return typically involves a
higher risk of loss.
|X|
Past performance is not a reliable indicator of
future performance.
|X|
ALL mutual funds have costs that lower investment
return.
|X|
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
- --------------------------------------------------------------------------------
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 if the total commitment amount exceeds 5% of the Fund's
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.
o Buy or sell real estate, unless acquired as a result of ownership of
securities or other instruments, except this shall not prevent the Fund
from investing in securities or other instruments backed by real estate or
securities of companies engaged in the real estate business or real estate
investment trusts. For purposes of this policy, real estate includes real
estate limited partnerships.
o Buy or sell physical commodities unless acquired as a result of ownership
of securities or other instruments, except this shall not prevent the Fund
from buying or selling options and futures contracts or from investing in
securities or other instruments backed by, or whose value is derived from,
physical commodities.
o Make a loan of any part of its assets to American Express Financial
Corporation (AEFC), to the board members and officers of AEFC or to its own
board members and officers.
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. Notwithstanding the Fund's ability to utilize these strategies
and techniques, the investment manager is not obligated to use them at any
particular time. For example, even though the investment manager is authorized
to adopt temporary defensive positions and is authorized to attempt to hedge
against certain types of risk, these practices are left to the investment
manager's sole discretion.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------- --------------------------
<S> <C>
Investment strategies & types of investments: Allowable for the Fund?
Agency and Government Securities yes
Borrowing yes
Cash/Money Market Instruments yes
Collateralized Bond Obligations yes
Commercial Paper yes
Common Stock no
Convertible Securities yes
Corporate Bonds yes
Debt Obligations yes
Depositary Receipts no
Derivative Instruments yes
Foreign Currency Transactions no
Foreign Securities yes
High-Yield (High-Risk) Securities (Junk Bonds) yes
Illiquid and Restricted Securities yes
Indexed Securities yes
Inverse Floaters yes
Investment Companies no
Lending of Portfolio Securities yes
Loan Participations yes
Mortgage- and Asset-Backed Securities yes
Mortgage Dollar Rolls yes
Municipal Obligations yes
Preferred Stock yes
Real Estate Investment Trusts yes
Repurchase Agreements yes
Reverse Repurchase Agreements yes
Short Sales no
Sovereign Debt yes
Structured Products yes
Variable- or Floating-Rate Securities yes
Warrants yes
When-Issued Securities yes
Zero-Coupon, Step-Coupon, and Pay-in-Kind Securities yes
- ---------------------------------------------------------------------------------- --------------------------
</TABLE>
<PAGE>
The following are guidelines that may be changed by the board at any time:
o Under normal market conditions, the Fund will invest at least 80% of its
net assets in securities issued by or on behalf of state or local
governmental units whose interest in exempt from federal income tax.
o Under normal market conditions, at least 65% of the Fund's total assets
will be invested in securities that are insured and have a maturity of more
than one year.
o A portion of the Fund's assets may be invested in bonds whose interest is
subject to the alternative minimum tax computation. As long as the staff of
the SEC maintains its current position that a fund calling itself a
"tax-exempt" fund may not invest more than 20% of its net assets in these
bonds, the Fund will limit its investments in these bonds to 20% of its net
assets.
o The Fund may purchase securities rated Aaa by Moody's Investors Service,
Inc. (Moody's) or AAA by Standard & Poor's Corporation (S&P). In addition,
the Fund may purchase securities rated lower than Aaa by Moody's or AAA by
S&P without regard to their rating, provided the securities are insured.
o The Fund may purchase short-term corporate notes and obligations rated in
the top two classifications by Moody's or S&P or the equivalent.
o Pending investment in municipal securities maturing in more than one year,
or as a temporary defensive position, the Fund may hold up to 35% of its
net assets in short-term tax-exempt instruments that are not insured or
guaranteed. The Fund will purchase these instruments only if they are rated
MIG-1 by Moody's or SP-1 by S&P or if the long-term debt of such issuers is
rated Aaa by Moody's or AAA by S&P or the equivalent.
o Except for securities guaranteed by the U.S. government, or an agency
thereof, and the short-term tax-exempt instruments rated MIG-1 by Moody's
or SP-1 by S&P or if the long-term debt of such issuers is rated Aaa by
Moody's or AAA by S&P or the equivalent, each tax-exempt security purchased
by the Fund will be insured either by a New Issue Insurance Policy or by a
Portfolio Insurance Policy issued by Financial Guaranty Insurance Company
or a comparable insurer as long as that insurer is rated Aaa by Moody's or
AAA by S&P or the equivalent.
o The Fund may invest more than 25% of its total assets in a particular
segment of the municipal securities market or in industrial revenue bonds,
but it does not intend to invest more than 25% of its total assets in
industrial revenue bonds issued for companies in the same industry or
state.
o If, in the opinion of the investment manager appropriate tax-exempt
securities are not available, the Fund may invest up to 20% of its net
assets, or more on a temporary defensive basis, in taxable investments.
o No more than 10% of the Fund's assets will be held in inverse floaters.
o No more than 5% of the Fund's net assets can be used at any one time for
good faith deposits on futures and premiums for options on futures that do
not offset existing investment positions.
o No more than 10% of the Fund's net assets will be held in securities and
other instruments that are illiquid.
o The Fund will not buy on margin or sell short, except the Fund may enter
into interest rate futures contracts.
o Under normal market conditions, the Fund does not intend to commit more
than 5% of its total assets to when-issued securities or forward
commitments.
o The Fund will not invest in voting securities or securities of investment
companies.
<PAGE>
For a description of ratings see Appendix A. For a discussion on Insured Fund,
See appendix B.
INFORMATION REGARDING RISKS AND INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
RISKS
The following is a summary of common risk characteristics. Following this
summary is a description of certain investments and investment strategies and
the risks most commonly associated with them (including certain risks not
described below and, in some cases, a more comprehensive discussion of how the
risks apply to a particular investment or investment strategy). Please remember
that a mutual fund's risk profile is largely defined by the fund's primary
securities and investment strategies. However, most mutual funds are allowed to
use certain other strategies and investments that may have different risk
characteristics. Accordingly, one or more of the following types of risk will be
associated with the Fund at any time (for a description of principal risks,
please see the prospectus):
Call/Prepayment Risk
The risk that a bond or other security might be called (or otherwise converted,
prepaid, or redeemed) before maturity. This type of risk is closely related to
"reinvestment risk."
Correlation Risk
The risk that a given transaction may fail to achieve its objectives due to an
imperfect relationship between markets. Certain investments may react more
negatively than others in response to changing market conditions.
Credit Risk
The risk that the issuer of a security, or the counterparty to a contract, will
default or otherwise become unable to honor a financial obligation (such as
payments due on a bond or a note). The price of junk bonds may react more to the
ability of the issuing company to pay interest and principal when due than to
changes in interest rates. They have greater price fluctuations and are more
likely to experience a default.
Event Risk
Occasionally, the value of a security may be seriously and unexpectedly changed
by a natural or industrial accident or occurrence.
Foreign/Emerging Markets Risk
The following are all components of foreign/emerging markets risk:
Country risk includes the political, economic, and other conditions of
a country. These conditions include lack of publicly available information, less
government oversight (including lack of accounting, auditing, and financial
reporting standards), the possibility of government-imposed restrictions, and
even the nationalization of assets.
Currency risk results from the constantly changing exchange rate
between local currency and the U.S. dollar. Whenever the Fund holds securities
valued in a foreign currency or holds the currency, changes in the exchange rate
add or subtract from the value of the investment.
<PAGE>
Custody risk refers to the process of clearing and settling trades. It
also covers holding securities with local agents and depositories. Low trading
volumes and volatile prices in less developed markets make trades harder to
complete and settle. Local agents are held only to the standard of care of the
local market. Governments or trade groups may compel local agents to hold
securities in designated depositories that are not subject to independent
evaluation. The less developed a country's securities market is, the greater the
likelihood of problems occurring.
Emerging markets risk includes the dramatic pace of change (economic,
social, and political) in emerging market countries as well as the other
considerations listed above. These markets are in early stages of development
and are extremely volatile. They can be marked by extreme inflation, devaluation
of currencies, dependence on trade partners, and hostile relations with
neighboring countries.
Inflation Risk
Also known as purchasing power risk, inflation risk measures the effects of
continually rising prices on investments. If an investment's yield is lower than
the rate of inflation, your money will have less purchasing power as time goes
on.
Interest Rate Risk
The risk of losses attributable to changes in interest rates. This term is
generally associated with bond prices (when interest rates rise, bond prices
fall). In general , the longer the maturity of a debt obligation, the higher its
yield and the greater the sensitivity to changes in interest rates.
Issuer Risk
The risk that an issuer, or the value of its stocks or bonds, will perform
poorly. Poor performance may be caused by poor management decisions, competitive
pressures, breakthroughs in technology, reliance on suppliers, labor problems or
shortages, corporate restructurings, fraudulent disclosures, or other factors.
Legal/Legislative Risk
Congress and other governmental units have the power to change existing laws
affecting securities. A change in law might affect an investment adversely.
Leverage Risk
Some derivative investments (such as options, futures, or options on futures)
require little or no initial payment and base their price on a security, a
currency, or an index. A small change in the value of the underlying security,
currency, or index may cause a sizable gain or loss in the price of the
instrument.
Liquidity Risk
Securities may be difficult or impossible to sell at the time that the Fund
would like. The Fund may have to lower the selling price, sell other
investments, or forego an investment opportunity.
Management Risk
The risk that a strategy or selection method utilized by the investment manager
may fail to produce the intended result. When all other factors have been
accounted for and the investment manager chooses an investment, there is always
the possibility that the choice will be a poor one.
<PAGE>
Market Risk
The market may drop and you may lose money. Market risk may affect a single
issuer, sector of the economy, industry, or the market as a whole. The market
value of all securities may move up and down, sometimes rapidly and
unpredictably.
Reinvestment Risk
The risk that an investor will not be able to reinvest their income or principal
at the same rate as it currently is earning.
Sector/Concentration Risk
Investments that are concentrated in a particular issuer, geographic region, or
industry will be more susceptible to changes in price (the more you diversify,
the more you spread risk).
Small Company Risk
Investments in small and medium companies often involve greater risks than
investments in larger, more established companies because small and medium
companies may lack the management experience, financial resources, product
diversification, and competitive strengths of larger companies. In addition, in
many instances the securities of small and medium companies are traded only
over-the-counter or on regional securities exchanges and the frequency and
volume of their trading is substantially less than is typical of larger
companies.
<PAGE>
INVESTMENT STRATEGIES
The following information supplements the discussion of the Fund's investment
objectives, policies, and strategies that are described in the prospectus and in
this SAI. The following describes many strategies that many mutual funds use and
types of securities that they purchase. Please refer to the section entitled
Investment Strategies and Types of Investments to see which are applicable to
the Fund.
Agency and Government Securities
The U.S. government and its agencies issue many different types of securities.
U.S. Treasury bonds, notes, and bills and securities including mortgage pass
through certificates of the Government National Mortgage Association (GNMA) are
guaranteed by the U.S. government. Other U.S. government securities are issued
or guaranteed by federal agencies or government-sponsored enterprises but are
not guaranteed by the U.S. government. This may increase the credit risk
associated with these investments.
Government-sponsored entities issuing securities include privately owned,
publicly chartered entities created to reduce borrowing costs for certain
sectors of the economy, such as farmers, homeowners, and students. They include
the Federal Farm Credit Bank System, Farm Credit Financial Assistance
Corporation, Federal Home Loan Bank, FHLMC, FNMA, Student Loan Marketing
Association (SLMA), and Resolution Trust Corporation (RTC). Government-sponsored
entities may issue discount notes (with maturities ranging from overnight to 360
days) and bonds. Agency and government securities are subject to the same
concerns as other debt obligations. (See also Debt Obligations and Mortgage- and
Asset-Backed Securities.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with agency and government securities include:
Call/Prepayment Risk, Inflation Risk, Interest Rate Risk, Management Risk, and
Reinvestment Risk.
Borrowing
The Fund may borrow money from banks for temporary or emergency purposes and
make other investments or engage in other transactions permissible under the
1940 Act that may be considered a borrowing (such as derivative instruments).
Borrowings are subject to costs (in addition to any interest that may be paid)
and typically reduce the Fund's total return. Except as qualified above,
however, the Fund will not buy securities on margin.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with borrowing include: Inflation Risk and Management
Risk.
Cash/Money Market Instruments
The Fund may maintain a portion of its assets in cash and cash-equivalent
investments. Cash-equivalent investments include short-term U.S. and Canadian
government securities and negotiable certificates of deposit, non-negotiable
fixed-time deposits, bankers' acceptances, and letters of credit of banks or
savings and loan associations having capital, surplus, and undivided profits (as
of the date of its most recently published annual financial statements) in
excess of $100 million (or the equivalent in the instance of a foreign branch of
a U.S. bank) at the date of investment. The Fund also may purchase short-term
notes and obligations of U.S. and foreign banks and corporations and may use
repurchase agreements with broker-dealers registered under the Securities
Exchange Act of 1934 and with commercial banks. (See also Commercial Paper, Debt
Obligations, Repurchase Agreements, and Variable- or Floating-Rate Securities.)
These types of instruments generally offer low rates of return and subject the
Fund to certain costs and expenses.
See the appendix for a discussion of securities ratings.
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.
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Collateralized Bond Obligations
Collateralized bond obligations (CBOs) are investment grade bonds backed by a
pool of junk bonds. CBOs are similar in concept to collateralized mortgage
obligations (CMOs), but differ in that CBOs represent different degrees of
credit quality rather than different maturities. (See also Mortgage- and
Asset-Backed Securities.) Underwriters of CBOs package a large and diversified
pool of high-risk, high-yield junk bonds, which is then separated into "tiers."
Typically, the first tier represents the higher quality collateral and pays the
lowest interest rate; the second tier is backed by riskier bonds and pays a
higher rate; the third tier represents the lowest credit quality and instead of
receiving a fixed interest rate receives the residual interest payments--money
that is left over after the higher tiers have been paid. CBOs, like CMOs, are
substantially overcollateralized and this, plus the diversification of the pool
backing them, earns them investment-grade bond ratings. Holders of third-tier
CBOs stand to earn high yields or less money depending on the rate of defaults
in the collateral pool. (See also High-Yield (High-Risk) Securities.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with CBOs include: Call/Prepayment Risk, Credit Risk,
Interest Rate Risk, and Management Risk.
Commercial Paper
Commercial paper is a short-term debt obligation with a maturity ranging from 2
to 270 days issued by banks, corporations, and other borrowers. It is sold to
investors with temporary idle cash as a way to increase returns on a short-term
basis. These instruments are generally unsecured, which increases the credit
risk associated with this type of investment. (See also Debt Obligations and
Illiquid and Restricted Securities.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with commercial paper include: Credit Risk, Liquidity
Risk, and Management Risk.
Common Stock
Common stock represents units of ownership in a corporation. Owners typically
are entitled to vote on the selection of directors and other important matters
as well as to receive dividends on their holdings. In the event that a
corporation is liquidated, the claims of secured and unsecured creditors and
owners of bonds and preferred stock take precedence over the claims of those who
own common stock.
The price of common stock is generally determined by corporate earnings, type of
products or services offered, projected growth rates, experience of management,
liquidity, and general market conditions for the markets on which the stock
trades.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with common stock include: Issuer Risk, Management
Risk, Market Risk, and Small Company Risk.
Convertible Securities
Convertible securities are bonds, debentures, notes, preferred stocks, or other
securities that may be converted into common stock of the same or a different
issuer within a particular period of time at a specified price. Some convertible
securities, such as preferred equity-redemption cumulative stock (PERCs), have
mandatory conversion features. Others are voluntary. A convertible security
entitles the holder to receive interest normally paid or accrued on debt or the
dividend paid on preferred stock until the convertible security matures or is
redeemed, converted, or exchanged. Convertible securities have unique investment
characteristics in that they generally (i) have higher yields than common stocks
but lower yields than comparable non-convertible securities, (ii) are less
subject to fluctuation in value than the underlying stock since they have fixed
income characteristics, and (iii) provide the potential for capital appreciation
if the market price of the underlying common stock increases.
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The value of a convertible security is a function of its "investment value"
(determined by its yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying common stock). The investment value of a convertible security is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline. The credit
standing of the issuer and other factors also may have an effect on the
convertible security's investment value. The conversion value of a convertible
security is determined by the market price of the underlying common stock. If
the conversion value is low relative to the investment value, the price of the
convertible security is governed principally by its investment value. Generally,
the conversion value decreases as the convertible security approaches maturity.
To the extent the market price of the underlying common stock approaches or
exceeds the conversion price, the price of the convertible security will be
increasingly influenced by its conversion value. A convertible security
generally will sell at a premium over its conversion value by the extent to
which investors place value on the right to acquire the underlying common stock
while holding a fixed income security.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with convertible securities include: Call/Prepayment
Risk, Interest Rate Risk, Issuer Risk, Management Risk, Market Risk, and
Reinvestment Risk.
Corporate Bonds
Corporate bonds are debt obligations issued by private corporations, as distinct
from bonds issued by a government agency or a municipality. Corporate bonds
typically have four distinguishing features: (1) they are taxable; (2) they have
a par value of $1,000; (3) they have a term maturity, which means they come due
all at once; and (4) many are traded on major exchanges. Corporate bonds are
subject to the same concerns as other debt obligations. (See also Debt
Obligations and High-Yield (High-Risk) Securities.)
Corporate bonds may be either secured or unsecured. Unsecured corporate bonds
are generally referred to as "debentures." See the appendix for a discussion of
securities ratings.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with corporate bonds include: Call/Prepayment Risk,
Credit Risk, Interest Rate Risk, Issuer Risk, Management Risk, and Reinvestment
Risk.
Debt Obligations
Many different types of debt obligations exist (for example, bills, bonds, or
notes). Issuers of debt obligations have a contractual obligation to pay
interest at a specified rate on specified dates and to repay principal on a
specified maturity date. Certain debt obligations (usually intermediate- and
long-term bonds) have provisions that allow the issuer to redeem or "call" a
bond before its maturity. Issuers are most likely to call these securities
during periods of falling interest rates. When this happens, an investor may
have to replace these securities with lower yielding securities, which could
result in a lower return.
The market value of debt obligations is affected primarily by changes in
prevailing interest rates and the issuers perceived ability to repay the debt.
The market value of a debt obligation generally reacts inversely to interest
rate changes. When prevailing interest rates decline, the price usually rises,
and when prevailing interest rates rise, the price usually declines.
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.
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As noted, the values of debt obligations also may be affected by changes in the
credit rating or financial condition of their issuers. Generally, the lower the
quality rating of a security, the higher the degree of risk as to the payment of
interest and return of principal. To compensate investors for taking on such
increased risk, those issuers deemed to be less creditworthy generally must
offer their investors higher interest rates than do issuers with better credit
ratings. (See also Agency and Government Securities, Corporate Bonds, and
High-Yield (High-Risk) Securities.)
All ratings limitations are applied at the time of purchase. Subsequent to
purchase, a debt security may cease to be rated or its rating may be reduced
below the minimum required for purchase by the Fund. Neither event will require
the sale of such a security, but it will be a factor in considering whether to
continue to hold the security. To the extent that ratings change as a result of
changes in a rating organization or their rating systems, the Fund will attempt
to use comparable ratings as standards for selecting investments.
See the appendix for a discussion of securities ratings.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with debt obligations include: Call/Prepayment Risk,
Credit Risk, Interest Rate Risk, Issuer Risk, Management Risk, and Reinvestment
Risk.
Depositary Receipts
Some foreign securities are traded in the form of American Depositary Receipts
(ADRs). ADRs are receipts typically issued by a U.S. bank or trust company
evidencing ownership of the underlying securities of foreign issuers. European
Depositary Receipts (EDRs) and Global Depositary Receipts (GDRs) are receipts
typically issued by foreign banks or trust companies, evidencing ownership of
underlying securities issued by either a foreign or U.S. issuer. Generally,
depositary receipts in registered form are designed for use in the U.S. and
depositary receipts in bearer form are designed for use in securities markets
outside the U.S. Depositary receipts may not necessarily be denominated in the
same currency as the underlying securities into which they may be converted.
Depositary receipts involve the risks of other investments in foreign
securities. In addition, ADR holders may not have all the legal rights of
shareholders and may experience difficulty in receiving shareholder
communications. (See also Common Stock and Foreign Securities.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with depositary receipts include: Foreign/Emerging
Markets Risk, Issuer Risk, Management Risk, and Market Risk.
Derivative Instruments
Derivative instruments are commonly defined to include securities or contracts
whose values depend, in whole or in part, on (or "derive" from) the value of one
or more other assets, such as securities, currencies, or commodities.
A derivative instrument generally consists of, is based upon, or exhibits
characteristics similar to options or forward contracts. Such instruments may be
used to maintain cash reserves while remaining fully invested, to offset
anticipated declines in values of investments, to facilitate trading, to reduce
transaction costs, or to pursue higher investment returns. Derivative
instruments are characterized by requiring little or no initial payment. Their
value changes daily based on a security, a currency, a group of securities or
currencies, or an index. A small change in the value of the underlying security,
currency, or index can cause a sizable gain or loss in the price of the
derivative instrument.
Options and forward contracts are considered to be the basic "building blocks"
of derivatives. For example, forward-based derivatives include forward
contracts, swap contracts, and exchange-traded futures. Forward-based
derivatives are sometimes referred to generically as "futures contracts."
Option-based derivatives include privately negotiated, over-the-counter (OTC)
options (including caps, floors, collars, and options on futures) and
exchange-traded options on futures. Diverse types of derivatives may be created
by combining options or futures in different ways, and by applying these
structures to a wide range of underlying assets.
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Options. An option is a contract. A person who buys a call option for a
security has the right to buy the security at a set price for the length of the
contract. A person who sells a call option is called a writer. The writer of a
call option agrees for the length of the contract to sell the security at the
set price when the buyer wants to exercise the option, no matter what the market
price of the security is at that time. A person who buys a put option has the
right to sell a security at a set price for the length of the contract. A person
who writes a put option agrees to buy the security at the set price if the
purchaser wants to exercise the option during the length of the contract, no
matter what the market price of the security is at that time. An option is
covered if the writer owns the security (in the case of a call) or sets aside
the cash or securities of equivalent value (in the case of a put) that would be
required upon exercise.
The price paid by the buyer for an option is called a premium. In addition to
the premium, the buyer generally pays a broker a commission. The writer receives
a premium, less another commission, at the time the option is written. The
premium received by the writer is retained whether or not the option is
exercised. A writer of a call option may have to sell the security for a
below-market price if the market price rises above the exercise price. A writer
of a put option may have to pay an above-market price for the security if its
market price decreases below the exercise price.
When an option is purchased, the buyer pays a premium and a commission. It then
pays a second commission on the purchase or sale of the underlying security when
the option is exercised. For record keeping and tax purposes, the price obtained
on the sale of the underlying security is the combination of the exercise price,
the premium, and both commissions.
One of the risks an investor assumes when it buys an option is the loss of the
premium. To be beneficial to the investor, the price of the underlying security
must change within the time set by the option contract. Furthermore, the change
must be sufficient to cover the premium paid, the commissions paid both in the
acquisition of the option and in a closing transaction or in the exercise of the
option and sale (in the case of a call) or purchase (in the case of a put) of
the underlying security. Even then, the price change in the underlying security
does not ensure a profit since prices in the option market may not reflect such
a change.
Options on many securities are listed on options exchanges. If the Fund writes
listed options, it will follow the rules of the options exchange. Options are
valued at the close of the New York Stock Exchange. An option listed on a
national exchange, CBOE, or NASDAQ will be valued at the last quoted sales price
or, if such a price is not readily available, at the mean of the last bid and
ask prices.
Options on certain securities are not actively traded on any exchange, but may
be entered into directly with a dealer. These options may be more difficult to
close. If an investor is unable to effect a closing purchase transaction, it
will not be able to sell the underlying security until the call written by the
investor expires or is exercised.
Futures Contracts. A futures contract is a sales contract between a
buyer (holding the "long" position) and a seller (holding the "short" position)
for an asset with delivery deferred until a future date. The buyer agrees to pay
a fixed price at the agreed future date and the seller agrees to deliver the
asset. The seller hopes that the market price on the delivery date is less than
the agreed upon price, while the buyer hopes for the contrary. Many futures
contracts trade in a manner similar to the way a stock trades on a stock
exchange and the commodity exchanges.
Generally, a futures contract is terminated by entering into an offsetting
transaction. An offsetting transaction is effected by an investor taking an
opposite position. At the time a futures contract is made, a good faith deposit
called initial margin is set up. Daily thereafter, the futures contract is
valued and the payment of variation margin is required so that each day an
investor would pay out cash in an amount equal to any decline in the contract's
value or receive cash equal to any increase. At the time a futures contract is
closed out, a nominal commission is paid, which is generally lower than the
commission on a comparable transaction in the cash market.
Futures contracts may be based on various securities, securities indices (such
as the S&P 500 Index), foreign currencies and other financial instruments and
indices.
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Options on Futures Contracts. Options on futures contracts give the
holder a right to buy or sell futures contracts in the future. Unlike a futures
contract, which requires the parties to the contract to buy and sell a security
on a set date (some futures are settled in cash), an option on a futures
contract merely entitles its holder to decide on or before a future date (within
nine months of the date of issue) whether to enter into a contract. If the
holder decides not to enter into the contract, all that is lost is the amount
(premium) paid for the option. Further, because the value of the option is fixed
at the point of sale, there are no daily payments of cash to reflect the change
in the value of the underlying contract. However, since an option gives the
buyer the right to enter into a contract at a set price for a fixed period of
time, its value does change daily.
One of the risks in buying an option on a futures contract is the loss of the
premium paid for the option. The risk involved in writing options on futures
contracts an investor owns, or on securities held in its portfolio, is that
there could be an increase in the market value of these contracts or securities.
If that occurred, the option would be exercised and the asset sold at a lower
price than the cash market price. To some extent, the risk of not realizing a
gain could be reduced by entering into a closing transaction. An investor could
enter into a closing transaction by purchasing an option with the same terms as
the one previously sold. The cost to close the option and terminate the
investor's obligation, however, might still result in a loss. Further, the
investor might not be able to close the option because of insufficient activity
in the options market. Purchasing options also limits the use of monies that
might otherwise be available for long-term investments.
Options on Stock Indexes. Options on stock indexes are securities
traded on national securities exchanges. An option on a stock index is similar
to an option on a futures contract except all settlements are in cash. A fund
exercising a put, for example, would receive the difference between the exercise
price and the current index level.
Tax Treatment. As permitted under federal income tax laws and to the
extent the Fund is allowed to invest in futures contacts, the Fund intends to
identify futures contracts as mixed straddles and not mark them to market, that
is, not treat them as having been sold at the end of the year at market value.
Such an election may result in the Fund being required to defer recognizing
losses incurred on futures contracts and on underlying securities identified as
hedged positions.
Federal income tax treatment of gains or losses from transactions in options on
futures contracts and indexes will depend on whether the option is a section
1256 contract. If the option is a non-equity option, the Fund will either make a
1256(d) election and treat the option as a mixed straddle or mark to market the
option at fiscal year end and treat the gain/loss as 40% short-term and 60%
long-term.
The IRS has ruled publicly that an exchange-traded call option is a security for
purposes of the 50%-of-assets test and that its issuer is the issuer of the
underlying security, not the writer of the option, for purposes of the
diversification requirements.
Accounting for futures contracts will be according to generally accepted
accounting principles. Initial margin deposits will be recognized as assets due
from a broker (the Fund's agent in acquiring the futures position). During the
period the futures contract is open, changes in value of the contract will be
recognized as unrealized gains or losses by marking to market on a daily basis
to reflect the market value of the contract at the end of each day's trading.
Variation margin payments will be made or received depending upon whether gains
or losses are incurred. All contracts and options will be valued at the
last-quoted sales price on their primary exchange.
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Other Risks of Derivatives.
Derivatives are risky investments.
The primary risk of derivatives is the same as the risk of the underlying asset,
namely that the value of the underlying asset may go up or down. Adverse
movements in the value of an underlying asset can expose an investor to losses.
Derivative instruments may include elements of leverage and, accordingly, the
fluctuation of the value of the derivative instrument in relation to the
underlying asset may be magnified. The successful use of derivative instruments
depends upon a variety of factors, particularly the investment manager's ability
to predict movements of the securities, currencies, and commodity markets, which
requires different skills than predicting changes in the prices of individual
securities.
There can be no assurance that any particular strategy will succeed.
Another risk is the risk that a loss may be sustained as a result of the failure
of a counterparty to comply with the terms of a derivative instrument. The
counterparty risk for exchange-traded derivative instruments is generally less
than for privately-negotiated or OTC derivative instruments, since generally a
clearing agency, which is the issuer or counterparty to each exchange-traded
instrument, provides a guarantee of performance. For privately-negotiated
instruments, there is no similar clearing agency guarantee. In all transactions,
an investor will bear the risk that the counterparty will default, and this
could result in a loss of the expected benefit of the derivative transaction and
possibly other losses.
When a derivative transaction is used to completely hedge another position,
changes in the market value of the combined position (the derivative instrument
plus the position being hedged) result from an imperfect correlation between the
price movements of the two instruments. With a perfect hedge, the value of the
combined position remains unchanged for any change in the price of the
underlying asset. With an imperfect hedge, the values of the derivative
instrument and its hedge are not perfectly correlated. For example, if the value
of a derivative instrument used in a short hedge (such as writing a call option,
buying a put option, or selling a futures contract) increased by less than the
decline in value of the hedged investment, the hedge would not be perfectly
correlated. Such a lack of correlation might occur due to factors unrelated to
the value of the investments being hedged, such as speculative or other
pressures on the markets in which these instruments are traded.
Derivatives also are subject to the risk that they cannot be sold, closed out,
or replaced quickly at or very close to their fundamental value. Generally,
exchange contracts are very liquid because the exchange clearinghouse is the
counterparty of every contract. OTC transactions are less liquid than
exchange-traded derivatives since they often can only be closed out with the
other party to the transaction.
Another risk is caused by the legal unenforcibility of a party's obligations
under the derivative. A counterparty that has lost money in a derivative
transaction may try to avoid payment by exploiting various legal uncertainties
about certain derivative products.
(See also Foreign Currency Transactions.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with derivative instruments include: Leverage Risk,
Liquidity Risk, and Management Risk.
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Foreign Currency Transactions
Since investments in foreign countries usually involve currencies of foreign
countries, the value of an investor's assets as measured in U.S. dollars may be
affected favorably or unfavorably by changes in currency exchange rates and
exchange control regulations. Also, an investor may incur costs in connection
with conversions between various currencies. Currency exchange rates may
fluctuate significantly over short periods of time causing a fund's NAV to
fluctuate. Currency exchange rates are generally determined by the forces of
supply and demand in the foreign exchange markets, actual or anticipated changes
in interest rates, and other complex factors. Currency exchange rates also can
be affected by the intervention of U.S. or foreign governments or central banks,
or the failure to intervene, or by currency controls or political developments.
Many funds utilize diverse types of derivative instruments in connection with
their foreign currency exchange transactions.
(See also Derivative Instruments and Foreign Securities.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with foreign currency transactions include: Correlation
Risk, Interest Rate Risk, Leverage Risk, Liquidity Risk, and Management Risk.
Foreign Securities and Domestic Companies with Foreign Operations
Foreign securities, foreign currencies, and securities issued by U.S. entities
with substantial foreign operations involve special risks, including those set
forth below, which are not typically associated with investing in U.S.
securities. Foreign companies are not generally subject to uniform accounting,
auditing, and financial reporting standards comparable to those applicable to
domestic companies. Additionally, many foreign stock markets, while growing in
volume of trading activity, have substantially less volume than the New York
Stock Exchange, and securities of some foreign companies are less liquid and
more volatile than securities of domestic companies. Similarly, volume and
liquidity in most foreign bond markets are less than the volume and liquidity in
the U.S. and, at times, volatility of price can be greater than in the U.S.
Further, foreign markets have different clearance, settlement, registration, and
communication procedures and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions making it difficult to conduct such transactions. Delays in such
procedures could result in temporary periods when assets are uninvested and no
return is earned on them. The inability of an investor to make intended security
purchases due to such problems could cause the investor to miss attractive
investment opportunities. Payment for securities without delivery may be
required in certain foreign markets and, when participating in new issues, some
foreign countries require payment to be made in advance of issuance (at the time
of issuance, the market value of the security may be more or less than the
purchase price). Some foreign markets also have compulsory depositories (i.e.,
an investor does not have a choice as to where the securities are held). Fixed
commissions on some foreign stock exchanges are generally higher than negotiated
commissions on U.S. exchanges. Further, an investor may encounter difficulties
or be unable to pursue legal remedies and obtain judgments in foreign courts.
There is generally less government supervision and regulation of business and
industry practices, stock exchanges, brokers, and listed companies than in the
U.S. It may be more difficult for an investor's agents to keep currently
informed about corporate actions such as stock dividends or other matters that
may affect the prices of portfolio securities. Communications between the U.S.
and foreign countries may be less reliable than within the U.S., thus increasing
the risk of delays or loss of certificates for portfolio securities. In
addition, with respect to certain foreign countries, there is the possibility of
nationalization, expropriation, the imposition of additional withholding or
confiscatory taxes, political, social, or economic instability, diplomatic
developments that could affect investments in those countries, or other
unforeseen actions by regulatory bodies (such as changes to settlement or
custody procedures).
The risks of foreign investing may be magnified for investments in emerging
markets, which may have relatively unstable governments, economies based on only
a few industries, and securities markets that trade a small number of
securities.
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The introduction of a single currency, the euro, on January 1, 1999 for
participating European nations in the Economic and Monetary Union ("EU")
presents unique uncertainties, including whether the payment and operational
systems of banks and other financial institutions will be ready by the scheduled
launch date; the creation of suitable clearing and settlement payment systems
for the new currency; the legal treatment of certain outstanding financial
contracts after January 1, 1999 that refer to existing currencies rather than
the euro; the establishment and maintenance of exchange rates; the fluctuation
of the euro relative to non-euro currencies during the transition period from
January 1, 1999 to December 31, 2000 and beyond; whether the interest rate, tax
or labor regimes of European countries participating in the euro will converge
over time; and whether the conversion of the currencies of other EU countries
such as the United Kingdom, Denmark, and Greece into the euro and the admission
of other non-EU countries such as Poland, Latvia, and Lithuania as members of
the EU may have an impact on the euro.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with foreign securities include: Foreign/Emerging
Markets Risk, Issuer Risk, and Management Risk.
High-Yield (High-Risk) Securities (Junk Bonds)
High yield (high-risk) securities are sometimes referred to as "junk bonds."
They are non-investment grade (lower quality) securities that have speculative
characteristics. Lower quality securities, while generally offering higher
yields than investment grade securities with similar maturities, involve greater
risks, including the possibility of default or bankruptcy. They are regarded as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal. The special risk considerations in connection with
investments in these securities are discussed below.
See the appendix for a discussion of securities ratings. (See also Debt
Obligations.)
The lower-quality and comparable unrated security market is relatively new and
its growth has paralleled a long economic expansion. As a result, it is not
clear how this market may withstand a prolonged recession or economic downturn.
Such conditions could severely disrupt the market for and adversely affect the
value of such securities.
All interest-bearing securities typically experience appreciation when interest
rates decline and depreciation when interest rates rise. The market values of
lower-quality and comparable unrated securities tend to reflect individual
corporate developments to a greater extent than do higher rated securities,
which react primarily to fluctuations in the general level of interest rates.
Lower-quality and comparable unrated securities also tend to be more sensitive
to economic conditions than are higher-rated securities. As a result, they
generally involve more credit risks than securities in the higher-rated
categories. During an economic downturn or a sustained period of rising interest
rates, highly leveraged issuers of lower-quality securities may experience
financial stress and may not have sufficient revenues to meet their payment
obligations. The issuer's ability to service its debt obligations also may be
adversely affected by specific corporate developments, the issuer's inability to
meet specific projected business forecast, or the unavailability of additional
financing. The risk of loss due to default by an issuer of these securities is
significantly greater than issuers of higher-rated securities because such
securities are generally unsecured and are often subordinated to other
creditors. Further, if the issuer of a lower quality security defaulted, an
investor might incur additional expenses to seek recovery.
Credit ratings issued by credit rating agencies are designed to evaluate the
safety of principal and interest payments of rated securities. They do not,
however, evaluate the market value risk of lower-quality securities and,
therefore, may not fully reflect the true risks of an investment. In addition,
credit rating agencies may or may not make timely changes in a rating to reflect
changes in the economy or in the condition of the issuer that affect the market
value of the securities. Consequently, credit ratings are used only as a
preliminary indicator of investment quality.
<PAGE>
An investor may have difficulty disposing of certain lower-quality and
comparable unrated securities because there may be a thin trading market for
such securities. Because not all dealers maintain markets in all lower quality
and comparable unrated securities, there is no established retail secondary
market for many of these securities. To the extent a secondary trading market
does exist, it is generally not as liquid as the secondary market for
higher-rated securities. The lack of a liquid secondary market may have an
adverse impact on the market price of the security. The lack of a liquid
secondary market for certain securities also may make it more difficult for an
investor to obtain accurate market quotations. Market quotations are generally
available on many lower-quality and comparable unrated issues only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales.
Legislation may be adopted from time to time designed to limit the use of
certain lower quality and comparable unrated securities by certain issuers.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with high-yield (high-risk) securities include:
Call/Prepayment Risk, Credit Risk, Currency Risk, Interest Rate Risk, and
Management Risk.
Illiquid and Restricted Securities
The Fund may invest in illiquid securities (i.e., securities that are not
readily marketable). These securities may include, but are not limited to,
certain securities that are subject to legal or contractual restrictions on
resale, certain repurchase agreements, and derivative instruments.
To the extent the Fund invests in illiquid or restricted securities, it may
encounter difficulty in determining a market value for such securities.
Disposing of illiquid or restricted securities may involve time-consuming
negotiations and legal expense, and it may be difficult or impossible for the
Fund to sell such an investment promptly and at an acceptable price.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with illiquid and restricted securities include:
Liquidity Risk and Management Risk.
Indexed Securities
The value of indexed securities is linked to currencies, interest rates,
commodities, indexes, or other financial indicators. Most indexed securities are
short- to intermediate-term fixed income securities whose values at maturity or
interest rates rise or fall according to the change in one or more specified
underlying instruments. Indexed securities may be more volatile than the
underlying instrument itself and they may be less liquid than the securities
represented by the index. (See also Derivative Instruments.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with indexed securities include: Liquidity Risk,
Management Risk, and Market Risk.
Inverse Floaters
Inverse floaters are created by underwriters using the interest payment on
securities. A portion of the interest received is paid to holders of instruments
based on current interest rates for short-term securities. The remainder, minus
a servicing fee, is paid to holders of inverse floaters. As interest rates go
down, the holders of the inverse floaters receive more income and an increase in
the price for the inverse floaters. As interest rates go up, the holders of the
inverse floaters receive less income and a decrease in the price for the inverse
floaters. (See also Derivative Instruments.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with inverse floaters include: Interest Rate Risk and
Management Risk.
<PAGE>
Investment Companies
The Fund may invest in securities issued by registered and unregistered
investment companies. These investments may involve the duplication of advisory
fees and certain other expenses.
Although one or more of the other risks described in this SAI may apply, the
largest risk associated with the securities of other investment companies
includes: Management Risk and Market Risk.
Lending of Portfolio Securities
The Fund may lend certain of its portfolio securities to broker-dealers. The
current policy of the Fund's board is to make these loans, either long- or
short-term, to broker-dealers. In making loans, the Fund receives the market
price in cash, U.S. government securities, letters of credit, or such other
collateral as may be permitted by regulatory agencies and approved by the board.
If the market price of the loaned securities goes up, the Fund will get
additional collateral on a daily basis. The risks are that the borrower may not
provide additional collateral when required or return the securities when due.
During the existence of the loan, the Fund receives cash payments equivalent to
all interest or other distributions paid on the loaned securities. The Fund may
pay reasonable administrative and custodial fees in connection with a loan and
may pay a negotiated portion of the interest earned on the cash or money market
instruments held as collateral to the borrower or placing broker. The Fund will
receive reasonable interest on the loan or a flat fee from the borrower and
amounts equivalent to any dividends, interest, or other distributions on the
securities loaned.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with the lending of portfolio securities include:
Credit Risk and Management Risk.
Loan Participations
Loans, loan participations, and interests in securitized loan pools are
interests in amounts owed by a corporate, governmental, or other borrower to a
lender or consortium of lenders (typically banks, insurance companies,
investment banks, government agencies, or international agencies). Loans involve
a risk of loss in case of default or insolvency of the borrower and may offer
less legal protection to an investor in the event of fraud or misrepresentation.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with loan participations include: Credit Risk and
Management Risk.
Mortgage- and Asset-Backed Securities
Mortgage-backed securities represent direct or indirect participations in, or
are secured by and payable from, mortgage loans secured by real property, and
include single- and multi-class pass-through securities and Collateralized
Mortgage Obligations (CMOs). These securities may be issued or guaranteed by
U.S. government agencies or instrumentalities (see also Agency and Government
Securities), or by private issuers, generally originators and investors in
mortgage loans, including savings associations, mortgage bankers, commercial
banks, investment bankers, and special purpose entities. Mortgage-backed
securities issued by private lenders may be supported by pools of mortgage loans
or other mortgage-backed securities that are guaranteed, directly or indirectly,
by the U.S. government or one of its agencies or instrumentalities, or they may
be issued without any governmental guarantee of the underlying mortgage assets
but with some form of non-governmental credit enhancement.
<PAGE>
Stripped mortgage-backed securities are a type of mortgage-backed security that
receive differing proportions of the interest and principal payments from the
underlying assets. Generally, there are two classes of stripped mortgage-backed
securities: Interest Only (IO) and Principal Only (PO). IOs entitle the holder
to receive distributions consisting of all or a portion of the interest on the
underlying pool of mortgage loans or mortgage-backed securities. POs entitle the
holder to receive distributions consisting of all or a portion of the principal
of the underlying pool of mortgage loans or mortgage-backed securities. The cash
flows and yields on IOs and POs are extremely sensitive to the rate of principal
payments (including prepayments) on the underlying mortgage loans or
mortgage-backed securities. A rapid rate of principal payments may adversely
affect the yield to maturity of IOs. A slow rate of principal payments may
adversely affect the yield to maturity of POs. If prepayments of principal are
greater than anticipated, an investor in IOs may incur substantial losses. If
prepayments of principal are slower than anticipated, the yield on a PO will be
affected more severely than would be the case with a traditional mortgage-backed
security.
CMOs are hybrid mortgage-related instruments secured by pools of mortgage loans
or other mortgage-related securities, such as mortgage pass through securities
or stripped mortgage-backed securities. CMOs may be structured into multiple
classes, often referred to as "tranches," with each class bearing a different
stated maturity and entitled to a different schedule for payments of principal
and interest, including prepayments. Principal prepayments on collateral
underlying a CMO may cause it to be retired substantially earlier than its
stated maturity.
The yield characteristics of mortgage-backed securities differ from those of
other debt securities. Among the differences are that interest and principal
payments are made more frequently on mortgage-backed securities, usually
monthly, and principal may be repaid at any time. These factors may reduce the
expected yield.
Asset-backed securities have structural characteristics similar to
mortgage-backed securities. Asset-backed debt obligations represent direct or
indirect participation in, or secured by and payable from, assets such as motor
vehicle installment sales contracts, other installment loan contracts, home
equity loans, leases of various types of property, and receivables from credit
card or other revolving credit arrangements. The credit quality of most
asset-backed securities depends primarily on the credit quality of the assets
underlying such securities, how well the entity issuing the security is
insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit enhancement of the
securities. Payments or distributions of principal and interest on asset-backed
debt obligations may be supported by non-governmental credit enhancements
including letters of credit, reserve funds, overcollateralization, and
guarantees by third parties. The market for privately issued asset-backed debt
obligations is smaller and less liquid than the market for government sponsored
mortgage-backed securities. (See also Derivative Instruments.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with mortgage- and asset-backed securities include:
Call/Prepayment Risk, Credit Risk, Interest Rate Risk, Liquidity Risk, and
Management Risk.
Mortgage Dollar Rolls
Mortgage dollar rolls are investments whereby an investor would sell
mortgage-backed securities for delivery in the current month and simultaneously
contract to purchase substantially similar securities on a specified future
date. While an investor would forego principal and interest paid on the
mortgage-backed securities during the roll period, the investor would be
compensated by the difference between the current sales price and the lower
price for the future purchase as well as by any interest earned on the proceeds
of the initial sale. The investor also could be compensated through the receipt
of fee income equivalent to a lower forward price.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with mortgage dollar rolls include: Credit Risk,
Interest Rate Risk, and Management Risk.
<PAGE>
Municipal Obligations
Municipal obligations include debt obligations issued by or on behalf of states,
territories, possessions, or sovereign nations within the territorial boundaries
of the United States (including the District of Columbia). The interest on these
obligations is generally exempt from federal income tax. Municipal obligations
are generally classified as either "general obligations" or "revenue
obligations."
General obligation bonds are secured by the issuer's pledge of its full faith,
credit, and taxing power for the payment of interest and principal. Revenue
bonds are payable only from the revenues derived from a project or facility or
from the proceeds of a specified revenue source. Industrial development bonds
are generally revenue bonds secured by payments from and the credit of private
users. Municipal notes are issued to meet the short-term funding requirements of
state, regional, and local governments. Municipal notes include tax anticipation
notes, bond anticipation notes, revenue anticipation notes, tax and revenue
anticipation notes, construction loan notes, short-term discount notes,
tax-exempt commercial paper, demand notes, and similar instruments.
Municipal lease obligations may take the form of a lease, an installment
purchase, or a conditional sales contract. They are issued by state and local
governments and authorities to acquire land, equipment, and facilities. An
investor may purchase these obligations directly, or it may purchase
participation interests in such obligations. Municipal leases may be subject to
greater risks than general obligation or revenue bonds. State constitutions and
statutes set forth requirements that states or municipalities must meet in order
to issue municipal obligations. Municipal leases may contain a covenant by the
state or municipality to budget for and make payments due under the obligation.
Certain municipal leases may, however, provide that the issuer is not obligated
to make payments on the obligation in future years unless funds have been
appropriated for this purpose each year.
Yields on municipal bonds and notes depend on a variety of factors, including
money market conditions, municipal bond market conditions, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. The municipal bond market has a large number of different issuers, many
having smaller sized bond issues, and a wide choice of different maturities
within each issue. For these reasons, most municipal bonds do not trade on a
daily basis and many trade only rarely. Because many of these bonds trade
infrequently, the spread between the bid and offer may be wider and the time
needed to develop a bid or an offer may be longer than other security markets.
See the appendix for a discussion of securities ratings. (See also Debt
Obligations.)
Taxable Municipal Obligations. There is another type of municipal obligation
that is subject to federal income tax for a variety of reasons. These municipal
obligations do not qualify for the federal income exemption because (a) they did
not receive necessary authorization for tax-exempt treatment from state or local
government authorities, (b) they exceed certain regulatory limitations on the
cost of issuance for tax-exempt financing or (c) they finance public or private
activities that do not qualify for the federal income tax exemption. These
non-qualifying activities might include, for example, certain types of
multi-family housing, certain professional and local sports facilities,
refinancing of certain municipal debt, and borrowing to replenish a
municipality's underfunded pension plan.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with municipal obligations include: Credit Risk, Event
Risk, Inflation Risk, Interest Rate Risk, Legal/Legislative Risk, and Market
Risk.
<PAGE>
Preferred Stock
Preferred stock is a type of stock that pays dividends at a specified rate and
that has preference over common stock in the payment of dividends and the
liquidation of assets. Preferred stock does not ordinarily carry voting rights.
The price of a preferred stock is generally determined by earnings, type of
products or services, projected growth rates, experience of management,
liquidity, and general market conditions of the markets on which the stock
trades.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with preferred stock include: Issuer Risk, Management
Risk, and Market Risk.
Real Estate Investment Trusts
Real estate investment trusts (REITs) are entities that manage a portfolio of
real estate to earn profits for their shareholders. REITs can make investments
in real estate such as shopping centers, nursing homes, office buildings,
apartment complexes, and hotels. REITs can be subject to extreme volatility due
to fluctuations in the demand for real estate, changes in interest rates, and
adverse economic conditions. Additionally, the failure of a REIT to continue to
qualify as a REIT for tax purposes can materially affect its value.
Although one or more of the other risks described in this SAI may apply, the
largest associated with REITs include: Issuer Risk, Management Risk, and Market
Risk.
Repurchase Agreements
The Fund may enter into repurchase agreements with certain banks or non-bank
dealers. In a repurchase agreement, the Fund buys a security at one price, and
at the time of sale, the seller agrees to repurchase the obligation at a
mutually agreed upon time and price (usually within seven days). The repurchase
agreement thereby determines the yield during the purchaser's holding period,
while the seller's obligation to repurchase is secured by the value of the
underlying security. Repurchase agreements could involve certain risks in the
event of a default or insolvency of the other party to the agreement, including
possible delays or restrictions upon the Fund's ability to dispose of the
underlying securities.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with repurchase agreements include: Credit Risk and
Management Risk.
Reverse Repurchase Agreements
In a reverse repurchase agreement, the investor would sell a security and enter
into an agreement to repurchase the security at a specified future date and
price. The investor generally retains the right to interest and principal
payments on the security. Since the investor receives cash upon entering into a
reverse repurchase agreement, it may be considered a borrowing. (See also
Derivative Instruments.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with reverse repurchase agreements include: Credit
Risk, Interest Rate Risk, and Management Risk.
<PAGE>
Short Sales
With short sales, an investor sells a security that it does not own in
anticipation of a decline in the market value of the security. To complete the
transaction, the investor must borrow the security to make delivery to the
buyer. The investor is obligated to replace the security that was borrowed by
purchasing it at the market price on the replacement date. The price at such
time may be more or less than the price at which the investor sold the security.
A fund that is allowed to utilize short sales will designate cash or liquid
securities to cover its open short positions. Those funds also may engage in
"short sales against the box," a form of short-selling that involves selling a
security that an investor owns (or has an unconditioned right to purchase) for
delivery at a specified date in the future. This technique allows an investor to
hedge protectively against anticipated declines in the market of its securities.
If the value of the securities sold short increased prior to the scheduled
delivery date, the investor loses the opportunity to participate in the gain.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with short sales include: Management Risk and Market
Risk.
Sovereign Debt
A sovereign debtor's willingness or ability to repay principal and pay interest
in a timely manner may be affected by a variety of factors, including its cash
flow situation, the extent of its reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole, the sovereign debtor's policy toward
international lenders, and the political constraints to which a sovereign debtor
may be subject. (See also Foreign Securities.)
With respect to sovereign debt of emerging market issuers, investors should be
aware that certain emerging market countries are among the largest debtors to
commercial banks and foreign governments. At times, certain emerging market
countries have declared moratoria on the payment of principal and interest on
external debt.
Certain emerging market countries have experienced difficulty in servicing their
sovereign debt on a timely basis that led to defaults and the restructuring of
certain indebtedness.
Sovereign debt includes Brady Bonds, which are securities issued under the
framework of the Brady Plan, an initiative announced by former U.S. Treasury
Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to
restructure their outstanding external commercial bank indebtedness.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with sovereign debt include: Credit Risk,
Foreign/Emerging Markets Risk, and Management Risk.
Structured Products
Structured products are over-the-counter financial instruments created
specifically to meet the needs of one or a small number of investors. The
instrument may consist of a warrant, an option, or a forward contract embedded
in a note or any of a wide variety of debt, equity, and/or currency
combinations. Risks of structured products include the inability to close such
instruments, rapid changes in the market, and defaults by other parties. (See
also Derivative Instruments.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with structured products include: Credit Risk,
Liquidity Risk, and Management Risk.
<PAGE>
Variable- or Floating-Rate Securities
The Fund may invest in securities that offer a variable- or floating-rate of
interest. Variable-rate securities provide for automatic establishment of a new
interest rate at fixed intervals (e.g., daily, monthly, semi-annually, etc.).
Floating-rate securities generally provide for automatic adjustment of the
interest rate whenever some specified interest rate index changes.
Variable- or floating-rate securities frequently include a demand feature
enabling the holder to sell the securities to the issuer at par. In many cases,
the demand feature can be exercised at any time. Some securities that do not
have variable or floating interest rates may be accompanied by puts producing
similar results and price characteristics.
Variable-rate demand notes include master demand notes that are obligations that
permit the Fund to invest fluctuating amounts, which may change daily without
penalty, pursuant to direct arrangements between the Fund as lender, and the
borrower. The interest rates on these notes fluctuate from time to time. The
issuer of such obligations normally has a corresponding right, after a given
period, to prepay in its discretion the outstanding principal amount of the
obligations plus accrued interest upon a specified number of days' notice to the
holders of such obligations. Because these obligations are direct lending
arrangements between the lender and borrower, it is not contemplated that such
instruments generally will be traded. There generally is not an established
secondary market for these obligations. Accordingly, where these obligations are
not secured by letters of credit or other credit support arrangements, the
Fund's right to redeem is dependent on the ability of the borrower to pay
principal and interest on demand. Such obligations frequently are not rated by
credit rating agencies and may involve heightened risk of default by the issuer.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with variable- or floating-rate securities include:
Credit Risk and Management Risk.
Warrants
Warrants are securities giving the holder the right, but not the obligation, to
buy the stock of an issuer at a given price (generally higher than the value of
the stock at the time of issuance) during a specified period or perpetually.
Warrants may be acquired separately or in connection with the acquisition of
securities. Warrants do not carry with them the right to dividends or voting
rights and they do not represent any rights in the assets of the issuer.
Warrants may be considered to have more speculative characteristics than certain
other types of investments. In addition, the value of a warrant does not
necessarily change with the value of the underlying securities, and a warrant
ceases to have value if it is not exercised prior to its expiration date.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with warrants include: Management Risk and Market Risk.
When-Issued Securities
These instruments are contracts to purchase securities for a fixed price at a
future date beyond normal settlement time (when-issued securities or forward
commitments). The price of debt obligations purchased on a when-issued basis,
which may be expressed in yield terms, generally is fixed at the time the
commitment to purchase is made, but delivery and payment for the securities take
place at a later date. Normally, the settlement date occurs within 45 days of
the purchase although in some cases settlement may take longer. The investor
does not pay for the securities or receive dividends or interest on them until
the contractual settlement date. Such instruments involve a risk of loss if the
value of the security to be purchased declines prior to the settlement date,
which risk is in addition to the risk of decline in value of the investor's
other assets.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with when-issued securities include: Credit Risk and
Management Risk.
<PAGE>
Zero-Coupon, Step-Coupon, and Pay-in-Kind Securities
These securities are debt obligations that do not make regular cash interest
payments (see also Debt Obligations). Zero-coupon and step-coupon securities are
sold at a deep discount to their face value because they do not pay interest
until maturity. Pay-in-kind securities pay interest through the issuance of
additional securities. Because these securities do not pay current cash income,
the price of these securities can be extremely volatile when interest rates
fluctuate. See the appendix for a discussion of securities ratings.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with zero-coupon, step-coupon, and pay-in-kind
securities include: Credit Risk, Interest Rate Risk, and Management Risk.
<PAGE>
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 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.
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.
<PAGE>
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 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 $2,178 for fiscal year ended June
30, 1999, $7,740 for fiscal year 1998, and $0 for fiscal year 1997.
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.
The portfolio turnover rate was 13% in the most recent fiscal year, and 17% in
the year before. Higher turnover rates may result in higher brokerage expenses.
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 may calculate an annualized yield for a class by dividing the net
investment income per share deemed earned during a 30-day period by the public
offering price per share (including the maximum sales charge) on the last day of
the period and annualizing the results.
Yield is calculated according to the following formula:
Yield = 2[(a-b + 1)6 - 1]
cd
where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the maximum offering price per share on the last day of
the period
The Fund's annualized yield was 3.98% for Class A, 3.44% for Class B, and 4.30%
for Class Y for the 30-day period ended June 30, 1999.
<PAGE>
Distribution yield
Distribution yield is calculated according to the following formula:
D divided by POPF equals DY
30 30
where: D = sum of dividends for 30-day period
POP = sum of public offering price for 30-day period
F = annualizing factor DY = distribution yield
The Fund's distribution yield was 4.74% for Class A, 4.24% for Class B, and
5.18% for Class Y for the 30-day period ended June 30, 1999.
Tax-equivalent yield
Tax-equivalent yield is calculated by dividing that portion of the yield (as
calculated above) which is tax-exempt by one minus a stated income tax rate and
adding the result to that portion, if any, of the yield that is not tax-exempt.
The following table shows the fund's tax equivalent yield, based on federal but
not state tax rates, for the 30-day period ended June 30, 1999.
Marginal
Income Tax Tax-Equivalent Yield
Bracket Distribution Annualized
- ------- ------------ ----------
Class A
15.0% 5.58% 4.68%
28.0% 6.58% 5.53%
31.0% 6.87% 5.77%
36.0% 7.41% 6.22%
39.6% 7.85% 6.59%
Class B
15.0% 4.99% 4.05%
28.0% 5.89% 4.78%
31.0% 6.14% 4.99%
36.0% 6.63% 5.38%
39.6% 7.02% 5.70%
Class Y
15.0% 6.09% 5.06%
28.0% 7.19% 5.97%
31.0% 7.51% 6.23%
36.0% 8.09% 6.72%
39.6% 8.58% 7.12%
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
<PAGE>
Services Week, Financial Times, Financial World, Forbes, Fortune, Global
Investor, Institutional Investor, Investor's Business Daily, Kiplinger's
Personal Finance, Lipper Analytical Services, Money, Morningstar, Mutual Fund
Forecaster, Newsweek, The New York Times, Personal Investor, Shearson Lehman
Aggregate Bond Index, Stanger Report, Sylvia Porter's Personal Finance, USA
Today, U.S. News and World Report, The Wall Street Journal, and Wiesenberger
Investment Companies Service. The Fund also may compare its performance to a
wide variety of indexes or averages. There are similarities and differences
between the investments that the Fund may purchase and the investments measured
by the indexes or averages and the composition of the indexes or averages will
differ from that of the Fund.
VALUING FUND SHARES
- --------------------------------------------------------------------------------
The value of an individual share for each class is determined by using the net
asset value (NAV) before shareholder transactions for the day. On the first
business day following the end of the fiscal year, the computation looked like
this:
<TABLE>
<CAPTION>
Net assets Shares
before outstanding at Net asset value
shareholder the end of of one share
transactions previous day
----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Class A $439,376,859 divided by 80,693,638 equals $5.445
Class B 60,510,563 11,113,051 5.445
Class Y 1,261.4 232 5.437
</TABLE>
In determining net assets before shareholder transactions, the Fund's securities
are valued as follows as of the close of business of the New York Stock Exchange
(the Exchange):
o Securities traded on a securities exchange for which a last-quoted sales
price is readily available are valued at the last-quoted sales price on the
exchange where such security is primarily traded.
o Securities other than convertibles traded on a securities exchange for
which a last-quoted sales price is not readily available are valued at the
mean of the closing bid and asked prices, looking first to the bid and
asked prices on the exchange where the security is primarily traded, and if
none exists, to the over-the-counter market.
o Securities included in the NASDAQ National Market System are valued at the
last-quoted sales price in this market.
o Securities included in the NASDAQ National Market System for which a
last-quoted sales price is not readily available, and other securities
traded over-the-counter but not included in the NASDAQ National Market
System are valued at the mean of the closing bid and asked prices.
o Futures and options traded on major exchanges are valued at the last-quoted
sales price on their primary exchange.
o Foreign securities traded outside the United States are generally valued as
of the time their trading is complete, which is usually different from the
close of the Exchange. Foreign securities quoted in foreign currencies are
translated into U.S. dollars at the current rate of exchange. Occasionally,
events affecting the value of such securities may occur between such times
and the close of the Exchange that will not be reflected in the computation
of the Fund's net asset value. If events materially affecting the value of
such securities occur during such period, these securities will be valued
at their fair value according to procedures decided upon in good faith by
the board.
<PAGE>
o Short-term securities maturing more than 60 days from the valuation date
are valued at the readily available market price or approximate market
value based on current interest rates. Short-term securities maturing in 60
days or less that originally had maturities of more than 60 days at
acquisition date are valued at amortized cost using the market value on the
61st day before maturity. Short-term securities maturing in 60 days or less
at acquisition date are valued at amortized cost. Amortized cost is an
approximation of market value determined by systematically increasing the
carrying value of a security if acquired at a discount, or systematically
reducing the carrying value if acquired at a premium, so that the carrying
value is equal to maturity value on maturity date.
o Securities without a readily available market price and other assets are
valued at fair value, as determined in good faith by the board. The board
is responsible for selecting methods they believe provide fair value. When
possible, bonds are valued by a pricing service independent from the Fund.
If a valuation of a bond is not available from a pricing service, the bond
will be valued by a dealer knowledgeable about the bond if such a dealer is
available.
o In valuing securities subject to Portfolio Insurance, the Trust will use
the greater of (a) the value of the security with timely payments of
principal and interest guaranteed, less the predetermined premiums for
Secondary Market Insurance, or (b) the uninsured value of the security.
INVESTING IN THE FUND
- --------------------------------------------------------------------------------
SALES CHARGE
Shares of the Fund are sold at the public offering price. The public offering
price is the NAV of one share adjusted for the sales charge for Class A. For
Class B and Class Y, there is no initial sales charge so the public offering
price is the same as the NAV. For Class A, the public offering price for an
investment of less than $50,000, made on the first business day following the
end of the fiscal year, was determined by dividing the NAV of one share, $5.445,
by 0.95 (1.00-0.05 for a maximum 5% sales charge) for a public offering price of
$5.73. The sales charge is paid to American Express Financial Advisors Inc.
(AEFA) by the person buying the shares.
Class A - Calculation of the Sales Charge
Sales charges are determined as follows:
Within each
increment, sales
charge as a
percentage of:
-----------------------------------------------------
Public Net
Amount of Investment Offering Price Amount Invested
- -------------------- -------------- ---------------
First $ 50,000 5.0% 5.26%
Next 50,000 4.5 4.71
Next 400,000 3.8 3.95
Next 500,000 2.0 2.04
$1,000,000 or more 0.0 0.00
Sales charges on an investment greater than $50,000 and less than $1,000,000 are
calculated for each increment separately and then totaled. The resulting total
sales charge, expressed as a percentage of the public offering price and of the
net amount invested, will vary depending on the proportion of the investment at
different sales charge levels.
For example, compare an investment of $60,000 with an investment of $85,000. The
$60,000 investment is composed of $50,000 that incurs a sales charge of $2,500
(5.0% x $50,000) and $10,000 that incurs a sales charge of $450 (4.5% x
$10,000). The total sales charge of $2,950 is 4.92% of the public offering price
and 5.17% of the net amount invested.
<PAGE>
In the case of the $85,000 investment, the first $50,000 also incurs a sales
charge of $2,500 (5.0% x $50,000) and $35,000 incurs a sales charge of $1,575
(4.5% x $35,000). The total sales charge of $4,075 is 4.79% of the public
offering price and 5.04% of the net amount invested.
The following table shows the range of sales charges as a percentage of the
public offering price and of the net amount invested on total investments at
each applicable level.
On total
investment, sales
charge as a
percentage of:
-------------------------------------------
Public Net
Offering Price Amount Invested
Amount of investment ranges from:
- -------------------------------------
First $ 50,000 5.00% 5.26%
Next 50,000 to 100,000 5.00-4.50 5.26-4.71
Next 100,000 to 500,000 4.50-3.80 4.71-3.95
Next 500,000 to 999,999 3.80-2.00 3.95-2.04
$1,000,000 or more 0.00 0.00
Class A - Reducing the Sales Charge
Your total investments in the Fund determine your sales charges. The amount of
all prior investments plus any new purchase is referred to as your "total amount
invested." For example, suppose you have made an investment of $20,000 and later
decide to invest $40,000 more. Your total amount invested would be $60,000. As a
result, $10,000 of your $40,000 investment qualifies for the lower 4.5% sales
charge that applies to investments of more than $50,000 and up to $100,000.
Class A - Letter of Intent (LOI)
If you intend to invest $1 million over a period of 13 months, you can reduce
the sales charges in Class A by filing a LOI. The agreement can start at any
time and will remain in effect for 13 months. Your investment will be charged
normal sales charges until you have invested $1 million. At that time, your
account will be credited with the sales charges previously paid. Class A
investments made prior to signing a LOI may be used to reach the $1 million
total, excluding AXP Cash Management Fund and AXP Tax-Free Money Fund. However,
we will not adjust for sales charges on investments made prior to the signing of
the LOI. If you do not invest $1 million by the end of 13 months, there is no
penalty, you will just miss out on the sales charge adjustment. A LOI is not an
option (absolute right) to buy shares.
Class Y Shares
Class Y shares are offered to certain institutional investors. Class Y shares
are sold without a front-end sales charge or a CDSC and are not subject to a
distribution fee. The following investors are eligible to purchase Class Y
shares:
o Qualified employee benefit plans* if the plan:
- uses a daily transfer recordkeeping service offering participants daily
access to American Express funds and has
- at least $10 million in plan assets or
- 500 or more participants; or
<PAGE>
- does not use daily transfer recordkeeping and has
- at least $3 million invested in American Express funds or
- 500 or more participants.
o Trust companies or similar institutions, and charitable organizations that
meet the definition in Section 501(c)(3) of the Internal Revenue Code.*
These institutions must have at least $10 million in American Express
funds.
o Nonqualified deferred compensation plans* whose participants are included
in a qualified employee benefit described above.
* Eligibility must be determined in advance by AEFA. To do so, contact your
financial advisor.
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 fund subject to a sales charge, may be used to automatically purchase
shares in the same class of this Fund without paying a sales charge. Dividends
may be directed to existing accounts only. Dividends declared by a fund are
exchanged to this Fund the following day. Dividends can be exchanged into the
same class of another American Express 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.
<PAGE>
REJECTION OF BUSINESS
The Fund reserves the right to reject any business, in its sole discretion.
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.
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.
<PAGE>
To start any of these plans, please write American Express Shareholder Service,
P.O. Box 534, Minneapolis, MN 55440-0534, or call American Express Financial
Advisors Telephone Transaction Service at 800-437-3133. Your authorization must
be received in the Minneapolis headquarters at least five days before the date
you want your payments to begin. The initial payment must be at least $50.
Payments will be made on a monthly, bimonthly, quarterly, semiannual, or annual
basis. Your choice is effective until you change or cancel it.
The following pay-out plans are designed to take care of the needs of most
shareholders in a way AEFC can handle efficiently and at a reasonable cost. If
you need a more irregular schedule of payments, it may be necessary for you to
make a series of individual redemptions, in which case you 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 shares, 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 is treated
as if it 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.
For example:
You purchase 100 shares of one fund having a public offering price of $10.00 per
share. With a sales load of 5%, you pay $50.00 in sales load. With a NAV of
$9.50 per share, the value of your investment is $950.00. Within 91 days of
purchasing that fund, you decide to exchange out of that fund, now at a NAV of
$11.00 per share, up from the original NAV of $9.50, and purchase into a second
fund, at a NAV of $15.00 per share. The value of your investment is now
$1,100.00 ($11.00 x 100 shares). You cannot use the $50.00 paid as a sales load
when calculating your tax gain or loss in the sale of the first fund shares. So
instead of having $100.00 gain ($1,100.00 - $1,000.00), you have a $150.00 gain
($1,100.00 - $950.00). You can include the $50.00 sales load in the basis of
your shares in the second fund.
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.
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 Oct. 31 of that calendar year. The Fund is subject to an excise tax equal
to 4% of the excess, if any, of the amount required to be distributed over the
amount actually distributed. The Fund intends to comply with federal tax law and
avoid any excise tax.
This is a brief summary that relates to federal income taxation only.
Shareholders should consult their tax advisor as to the application of federal,
state, and local income tax laws to Fund distributions.
<PAGE>
AGREEMENTS
- --------------------------------------------------------------------------------
INVESTMENT MANAGEMENT SERVICES AGREEMENT
AEFC, a wholly-owned subsidiary of American Express Company, is the investment
manager for the Fund. Under the Investment Management Services Agreement, 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.
Assets Annual rate at
(billions) each asset level
- --------- ----------------
First $1.0 0.450%
Next 1.0 0.425
Next 1.0 0.400
Next 3.0 0.375
Over 6.0 0.350
On the last day of the most recent fiscal year, the daily rate applied to the
Fund's net assets was equal to 0.45% 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 $2,290,350 for fiscal year 1999, $2,244,150 for fiscal year 1998, and
$2,269,770 for fiscal year 1997.
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 $187,225 for fiscal year 1999, $48,096 for fiscal year 1998, and
$130,318 for fiscal year 1997.
Administrative Services Agreement
The Fund has an Administrative Services Agreement with AEFC. Under this
agreement, the Fund pays AEFC for providing administration and accounting
services. The fee is calculated as follows:
Assets Annual rate
(billions) each asset level
- --------- ----------------
First $1.0 0.040%
Next 1.0 0.035
Next 1.0 0.030
Next 3.0 0.025
Over 6.0 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 0.04% 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 $210,787 for fiscal year 1999, $205,702 for
fiscal year 1998, and $201,757 for fiscal year 1997.
<PAGE>
Transfer Agency Agreement
The Fund has a Transfer Agency Agreement with American Express Client Service
Corporation (AECSC). This agreement governs AECSC's responsibility for
administering and/or performing transfer agent functions, for acting as service
agent in connection with dividend and distribution functions and for performing
shareholder account administration agent functions in connection with the
issuance, exchange and redemption or repurchase of the Fund's shares. Under the
agreement, AECSC will earn a fee from the Fund determined by multiplying the
number of shareholder accounts at the end of the day by a rate determined for
each class per year and dividing by the number of days in the year. The rate for
Class A is $19.50 per year, for Class B is $20.50 per year and for Class Y is
$17.50 per year. The fees paid to AECSC may be changed by the board without
shareholder approval.
DISTRIBUTION AGREEMENT
AEFA is the Fund's principal underwriter (distributor). The Fund's shares are
offered on a continuous basis.
Under a Distribution Agreement, sales charges deducted for distributing Fund
shares are paid to AEFA daily. These charges amounted to $1,237,213 for fiscal
year 1999. After paying commissions to personal financial advisors, and other
expenses, the amount retained was $(55,813). The amounts were $1,028,640 and
$42,382 for fiscal year 1998, and $1,002,387 and $115,180 for fiscal year 1997.
SHAREHOLDER SERVICE AGREEMENT
With respect to Class Y shares, the Fund pays a fee for service provided to
shareholders by financial advisors and other servicing agents. The fee is
calculated at a rate of 0.10% of average daily net assets. During the most
recent fiscal year, the Fund also paid a shareholder service fee with respect to
Class A and Class B shares at a rate of 0.175% of average daily net assets. The
Shareholder Service Agreement for Class A and Class B shares was converted to a
Plan and Agreement of Distribution effective July 1, 1999.
PLAN AND AGREEMENT OF DISTRIBUTION
For Class A and Class B shares, to help AEFA defray the cost of distribution and
servicing not covered by the sales charges received under the Distribution
Agreement, the Fund and AEFA entered into a Plan and Agreement of Distribution
(Plan) pursuant to Rule 12b-1 under the 1940 Act. Under the Plan, AEFA is paid a
fee up to actual expenses incurred at an annual rate of up to 0.25% of the
Fund's average daily net assets attributable to Class A shares and up to 1.00%
for Class B shares.
Expenses covered under this Plan include sales commissions, business, employee
and financial advisor expenses charged to distribution of Class A and Class B
shares; and overhead appropriately allocated to the sale of Class A and Class B
shares. These expenses also include costs of providing personal service to
shareholders. A substantial portion of the costs are not specifically identified
to any one of the American Express funds.
The Plan must be approved annually by the board, including a majority of the
disinterested board members, if it is to continue for more than a year. At least
quarterly, the board must review written reports concerning the amounts expended
under the Plan and the purposes for which such expenditures were made. The Plan
and any agreement related to it may be terminated at any time by vote of a
majority of board members who are not interested persons of the Fund and have no
direct or indirect financial interest in the operation of the Plan or in any
agreement related to the Plan, or by vote of a majority of the outstanding
voting securities of the relevant class of shares or by AEFA. The Plan (or any
agreement related to it) will terminate in the event of its assignment, as that
term is defined in the 1940 Act. The Plan may not be amended to increase the
amount to be spent for distribution without shareholder approval, and all
material amendments to the Plan must be approved by a majority of the board
members, including a majority of the board members who are not interested
persons of the Fund and who do not have a financial interest in the operation of
the Plan or any agreement related to it. The selection and nomination of
disinterested board members is the responsibility of the other disinterested
board members. No board member who is not an interested
<PAGE>
person, has any direct or indirect financial interest in the operation of the
Plan or any related agreement. For the most recent fiscal year, under the Plan,
the Fund paid fees of $400,031 for Class B shares. These fees were based on the
0.75% fee in effect for Class B shares during the most recent fiscal year. The
Plan was not effective with respect to Class A shares until July 1, 1999. As a
result, no fees were paid as of the most recent fiscal year for Class A shares.
The fee is not allocated to any one service (such as advertising, payments to
underwriters, or other uses). However, a significant portion of the fee is
generally used for sales and promotional expenses.
Custodian Agreement
The Fund's securities and cash 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.
<PAGE>
<TABLE>
<CAPTION>
FUND HISTORY TABLE FOR ALL PUBLICLY OFFERED AMERICAN EXPRESS FUNDS
Date of Form of State of Fiscal
Fund Organization Organization Organization Year End Diversified
- -------------------------------------- ------------------- ----------------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
AXP Bond Fund, Inc. 6/27/74, Corporation NV/MN 8/31 Yes
6/31/86***
- -------------------------------------- ------------------- ----------------- ------------- ---------- ----------
- -------------------------------------- ------------------- ----------------- ------------- ---------- ----------
AXP Discovery Fund, Inc. 4/29/81, Corporation NV/MN 7/31 Yes
6/13/86***
- -------------------------------------- ------------------- ----------------- ------------- ---------- ----------
- -------------------------------------- ------------------- ----------------- ------------- ---------- ----------
AXP Equity Select Fund, Inc.** 3/18/57, Corporation NV/MN 11/30 Yes
6/13/86***
- -------------------------------------- ------------------- ----------------- ------------- ---------- ----------
- -------------------------------------- ------------------- ----------------- ------------- ---------- ----------
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, Corporation NV/MN 7/31
6/13/86***
- -------------------------------------- ------------------- ----------------- ------------- ---------- ----------
- -------------------------------------- ------------------- ----------------- ------------- ---------- ----------
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, Corporation NV/MN 9/30
6/13/86***
- -------------------------------------- ------------------- ----------------- ------------- ---------- ----------
- -------------------------------------- ------------------- ----------------- ------------- ---------- ----------
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, Corporation NV/MN 7/31
6/13/86***
- -------------------------------------- ------------------- ----------------- ------------- ---------- ----------
- -------------------------------------- ------------------- ----------------- ------------- ---------- ----------
AXP Cash Management Fund Yes
- -------------------------------------- ------------------- ----------------- ------------- ---------- ----------
- -------------------------------------- ------------------- ----------------- ------------- ---------- ----------
AXP New Dimensions Fund, Inc. 2/20/68, Corporation NV/MN 7/31 Yes
6/13/86***
- -------------------------------------- ------------------- ----------------- ------------- ---------- ----------
- -------------------------------------- ------------------- ----------------- ------------- ---------- ----------
AXP Precious Metals Fund, Inc. 10/5/84 Corporation MN 3/31 No
- -------------------------------------- ------------------- ----------------- ------------- ---------- ----------
- -------------------------------------- ------------------- ----------------- ------------- ---------- ----------
AXP Progressive Fund, Inc. 4/23/68, Corporation NV/MN 9/30 Yes
6/13/86***
- -------------------------------------- ------------------- ----------------- ------------- ---------- ----------
- -------------------------------------- ------------------- ----------------- ------------- ---------- ----------
AXP Selective Fund, Inc. 2/10/45, Corporation NV/MN 5/31 Yes
6/13/86***
- -------------------------------------- ------------------- ----------------- ------------- ---------- ----------
- -------------------------------------- ------------------- ----------------- ------------- ---------- ----------
AXP Stock Fund, Inc. 2/10/45, Corporation NV/MN 9/30 Yes
6/13/86***
- -------------------------------------- ------------------- ----------------- ------------- ---------- ----------
- -------------------------------------- ------------------- ----------------- ------------- ---------- ----------
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, Corporation NV/MN 11/31
6/13/86***
- -------------------------------------- ------------------- ----------------- ------------- ---------- ----------
- -------------------------------------- ------------------- ----------------- ------------- ---------- ----------
AXP Intermediate Tax-Exempt Fund Yes
- -------------------------------------- ------------------- ----------------- ------------- ---------- ----------
- -------------------------------------- ------------------- ----------------- ------------- ---------- ----------
AXP Tax-Exempt Bond Fund Yes
- -------------------------------------- ------------------- ----------------- ------------- ---------- ----------
- -------------------------------------- ------------------- ----------------- ------------- ---------- ----------
AXP Tax-Free Money Fund, Inc. 2/29/80, Corporation NV/MN 12/31 Yes
6/13/86***
- -------------------------------------- ------------------- ----------------- ------------- ---------- ----------
- -------------------------------------- ------------------- ----------------- ------------- ---------- ----------
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
funds listed in the table (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 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.
<PAGE>
**** 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.
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 53 American Express funds.
H. Brewster Atwater, Jr.'
Born in 1931
4900 IDS Tower
Minneapolis, MN
Retired chairman and chief executive officer, General Mills, Inc. Director,
Merck & Co., Inc. and Darden Restaurants, Inc.
Arne H. Carlson+'*
Born in 1934
901 S. Marquette Ave.
Minneapolis, MN
Chairman and chief executive officer of the Fund. Chairman, Board Services
Corporation (provides administrative services to boards). Former Governor of
Minnesota.
Lynne V. Cheney
Born in 1941
American Enterprise Institute
for Public Policy Research (AEI)
1150 17th St., N.W. Washington, D.C.
Distinguished Fellow AEI. Former Chair of National Endowment of the Humanities.
Director, The Reader's Digest Association Inc., Lockheed-Martin, and Union
Pacific Resources.
William H. Dudley'**
Born in 1932
2900 IDS Tower
Minneapolis, MN
Senior adviser 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.
<PAGE>
Heinz F. Hutter+'
Born in 1929
P.O. Box 2187
Minneapolis, MN
Retired president and chief operating officer, Cargill, Incorporated (commodity
merchants and processors).
Anne P. Jones+
Born in 1935
5716 Bent Branch Rd.
Bethesda, MD
Attorney and telecommunications consultant. Former partner, law firm of
Sutherland, Asbill & Brennan. Director, Motorola, Inc. (electronics), C-Cor
Electronics, Inc., and Amnex, Inc. (communications).
William R. Pearce'
Born in 1927
2050 One Financial Plaza
Minneapolis, MN
RII Weyerhaeuser World Timberfund, L.P. (develops timber resources) - management
committee. Retired vice chairman of the board, Cargill, Incorporated (commodity
merchants and processors). Former chairman, Board Services Corporation.
Alan K. Simpson+
Born in 1931
1201 Sunshine Ave.
Cody, WY
Director of The Institute of Politics, Harvard University. Former three-term
United States Senator for Wyoming. Former Assistant Republican Leader, U.S.
Senate. Director, PacifiCorp (electric power) and Biogen (bio-pharmaceuticals).
John R. Thomas+'**
Born in 1937
2900 IDS Tower
Minneapolis, MN
Senior vice president of AEFC.
C. Angus Wurtele+'
Born in 1934
Valspar Corporation
Suite 1700
Foshay Tower
Minneapolis, MN
Retired chairman of the board and chief executive officer, The Valspar
Corporation (paints). Director, Valspar, Bemis Corporation (packaging) and
General Mills, Inc. (consumer foods).
<PAGE>
+ Member of executive committee.
' Member of investment review 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 has appointed officers who are responsible for day-to-day business
decisions based on policies it has established. In addition to Mr. Carlson, who
is chairman of the board, and Mr. Thomas, who is president, the 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.
John M. Knight
Born in 1952
IDS Tower 10
Minneapolis, MN
Vice President - investment accounting of AEFC. Treasurer for the Fund.
<PAGE>
COMPENSATION FOR BOARD MEMBERS
- --------------------------------------------------------------------------------
During the most recent fiscal year, the independent members of the Fund board,
for attending up to 27 meetings, received the following compensation:
<TABLE>
<CAPTION>
Compensation Table
Total cash compensation from
---------------------------------
Aggregate compensation from the American Express Funds and the
Board member Fund Preferred Master Trust Group
<S> <C> <C>
H. Brewster Atwater, Jr. $1,400 $116,400
Lynne V. Cheney 1,043 96,900
Heinz F. Hutter 1,125 99,900
Anne P. Jones 1,296 112,400
William R. Pearce 275 24,600
Alan K. Simpson 1,043 96,900
C. Angus Wurtele 1,467 120,400
</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 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 A
DESCRIPTION OF RATINGS
Standard & Poor's Debt Ratings
A Standard & Poor's corporate or municipal debt rating is a current assessment
of the creditworthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration obligors such as guarantors,
insurers, or lessees.
The debt rating is not a recommendation to purchase, sell, or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer or obtained
by S&P from other sources it considers reliable. S&P does not perform an audit
in connection with any rating and may, on occasion, rely on unaudited financial
information. The ratings may be changed, suspended, or withdrawn as a result of
changes in, or unavailability of such information or based on other
circumstances.
The ratings are based, in varying degrees, on the following considerations:
o Likelihood of default capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation.
o Nature of and provisions of the obligation.
o Protection afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization, or other arrangement
under the laws of bankruptcy and other laws affecting creditors'
rights.
Investment Grade
Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity to
pay interest and repay principal is extremely strong.
Debt rated AA has a very strong capacity to pay interest and repay principal and
differs from the highest rated issues only in a small degree.
Debt rated A has a strong capacity to pay interest and repay principal, although
it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
Debt rated BBB is regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than in higher-rated categories.
<PAGE>
Speculative grade
Debt rated BB, B, CCC, CC, and C is regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
Debt rated BB has less near-term vulnerability to default than other speculative
issues. However, it faces major ongoing uncertainies or exposure to adverse
business, financial, or economic conditions that could lead to inadequate
capacity to meet timely interest and principal payments. The BB rating category
also is used for debt subordinated to senior debt that is assigned an actual or
implied BBB- rating.
Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category also is used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
Debt rated CCC has a currently identifiable vulnerability to default and is
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category also is
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
Debt rated CC typically is applied to debt subordinated to senior debt that is
assigned an actual or implied CCC rating.
Debt rated C typically is applied to debt subordinated to senior debt that is
assigned an actual or implied CCC rating. The C rating may be used to cover a
situation where a bankruptcy petition has been filed, but debt service payments
are continued.
The rating CI is reserved for income bonds on which no interest is being paid.
Debt rated D is in payment default. The D rating category is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Moody's Long-Term Debt Ratings
Aaa - Bonds that are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa - Bonds that are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present that make the
long-term risk appear somewhat larger than in Aaa securities.
A - Bonds that are rated A possess many favorable investment attributes and are
to be considered as upper-medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present that
suggest a susceptibility to impairment some time in the future.
<PAGE>
Baa - Bonds that are rated Baa are considered as medium-grade obligations (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds that are rated Ba are judged to have speculative elements--their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds that are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or maintenance of other
terms of the contract over any long period of time may be small.
Caa - Bonds that are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds that are rated Ca represent obligations that are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C - Bonds that are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
SHORT-TERM RATINGS
Standard & Poor's Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market.
Ratings are graded into several categories, ranging from A-1 for the highest
quality obligations to D for the lowest. These categories are as follows:
A-1 This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to
possess extremely strong safety characteristics are denoted
with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as
high as for issues designated A-1.
A-3 Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the
adverse effects of changes in circumstances than obligations
carrying the higher designations.
B Issues are regarded as having only speculative capacity
for timely payment.
C This rating is assigned to short-term debt obligations with
doubtful capacity for payment.
D Debt rated D is in payment default. The D rating category is
used when interest payments or principal payments are not made
on the date due, even if the applicable grace period has not
expired, unless S&P believes that such payments will be made
during such grace period.
<PAGE>
Standard & Poor's Note Ratings
An S&P note rating reflects the liquidity factors and market-access risks unique
to notes. Notes maturing in three years or less will likely receive a note
rating. Notes maturing beyond three years will most likely receive a long-term
debt rating.
Note rating symbols and definitions are as follows:
SP-1 Strong capacity to pay principal and interest. Issues
determined to possess very strong characteristics are given a
plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over
the term of the notes.
SP-3 Speculative capacity to pay principal and interest.
Moody's Short-Term Ratings
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
Issuers rated Prime-l (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-l
repayment ability will often be evidenced by many of the following
characteristics: (i) leading market positions in well-established
industries, (ii) high rates of return on funds employed, (iii)
conservative capitalization structure with moderate reliance on debt
and ample asset protection, (iv) broad margins in earnings coverage of
fixed financial charges and high internal cash generation, and (v) well
established access to a range of financial markets and assured sources
of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above, but
to a lesser degree. Earnings trends and coverage ratios, while sound,
may be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require
relatively high financial leverage.
Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
<PAGE>
Moody's & S&P's
Short-Term Muni Bonds and Notes
Short-term municipal bonds and notes are rated by Moody's and by S&P. The
ratings reflect the liquidity concerns and market access risks unique to notes.
Moody's MIG 1/VMIG 1 indicates the best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
Moody's MIG 2/VMIG 2 indicates high quality. Margins of protection are ample
although not so large as in the preceding group.
Moody's MIG 3/VMIG 3 indicates favorable quality. All security elements are
accounted for but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
Moody' s MIG 4/VMIG 4 indicates adequate quality. Protection commonly regarded
as required of an investment security is present and although not distinctly or
predominantly speculative, there is specific risk.
Standard & Poor's rating SP-1 indicates very strong or strong capacity to pay
principal and interest. Those issues determined to possess overwhelming safety
characteristics will be given a plus (+) designation.
Standard & Poor's rating SP-2 indicates satisfactory capacity to pay principal
and interest.
Standard & Poor's rating SP-3 indicates speculative capacity to pay principal
and interest.
<PAGE>
APPENDIX B
INSURED FUND
Insurance
The Fund's entire portfolio of municipal obligations will at all times be fully
insured as to the scheduled payment of all installments of principal and
interest thereon, except as noted below. This insurance feature minimizes the
risks to the Fund and its shareholders associated with any defaults in the
municipal obligations owned by the Fund.
Each insured municipal obligation in the Fund's portfolio will be covered by
either a mutual fund Portfolio Insurance Policy issued by Financial Guaranty
Insurance Company (Financial Guaranty) or a New Issue Insurance Policy obtained
by the issuer of the obligation at the time of its original issuance. If a
municipal obligation is already covered by a New Issue Insurance Policy then the
obligation is not required to be additionally insured under a Portfolio
Insurance Policy. A New Issue Insurance Policy may have been written by
Financial Guaranty or other insurers. Premiums are paid from the Fund's assets,
and will reduce the current yield on its portfolio by the amount thereof.
Currently, there are no issuers insured under a Portfolio Insurance Policy.
Both types of policies discussed above insure the scheduled payment of all
principal and interest on the municipal obligations as they fall due. The
insurance does not guarantee the market value of the municipal obligations nor
the value of the shares of the Fund and, except as described above, has no
effect on the net asset value or redemption price of the shares of the Fund. The
insurance of principal refers to the face or par value of the municipal
obligation, and is not affected by the price paid by the Fund or by the market
value.
The Fund may purchase municipal obligations on which the payment of interest and
principal is guaranteed by an agency or instrumentality of the U.S. government
or which are rated Aaa, MIG-1 or Prime-1 by Moody's or AAA, A-1 or SP-1 by S&P,
in either case without being required to insure the municipal obligations under
the Portfolio Insurance Policy.
New Issue Insurance. The New Issue Insurance Policies, if any, have been
obtained by the respective issuers or underwriters of the municipal obligations
and all premiums respecting the securities have been paid in advance by the
issuers or underwriters. The policies are noncancelable and will continue in
force so long as the municipal obligations are outstanding and the respective
insurers remain in business. Since New Issue Insurance remains in effect as long
as the insured municipal obligations are outstanding, the insurance may have an
effect on the resale value of municipal obligations so insured in the Fund's
portfolio.
Therefore, New Issue Insurance may be considered to represent an element of
market value in regard to municipal obligations thus insured, but the exact
effect, if any, of this insurance on market value cannot be estimated. The Fund
will acquire municipal obligations subject to New Issue Insurance Policies only
where the insurer is rated Aaa by Moody's or AAA by S&P.
Portfolio Insurance. The Portfolio Insurance Policy to be obtained by the Fund
from Financial Guaranty will be effective only so long as the Fund is in
existence, Financial Guaranty is still in business, and the municipal
obligations described in the Portfolio Insurance Policy continue to be held by
the Fund. In the event of a sale of any municipal obligation by the Fund or
payment prior to maturity, the Portfolio Insurance Policy terminates as to that
municipal obligation. Currently, there are no issuers insured under a Portfolio
Insurance Policy.
In determining whether to insure any municipal obligation, Financial Guaranty
applies its own standards, which are not necessarily the same as the criteria
used in regard to the selection of municipal obligations by the Fund's
investment adviser. Financial Guaranty's decision is made prior to the Fund's
purchase of the municipal obligations. Contracts to purchase municipal
obligations are not covered by the Portfolio Insurance Policy although municipal
obligations underlying the contracts are covered by this insurance upon their
physical delivery to the Fund or its Custodian.
<PAGE>
Secondary Market Insurance. The Fund may at any time purchase from Financial
Guaranty a secondary market insurance policy (Secondary Market Policy) on any
municipal obligation currently covered by the Portfolio Insurance Policy. The
coverage and obligation to pay monthly premiums under the Portfolio Insurance
Policy would cease with the purchase by the Fund of a Secondary Market Policy.
By purchasing a Secondary Market Policy, the Fund would, upon payment of a
single premium, obtain insurance against nonpayment of scheduled principal and
interest for the remaining term of the municipal obligation, regardless of
whether the Fund then owned the obligation. This insurance coverage would be
noncancelable and would continue in force so long as the municipal obligations
so insured are outstanding. The purpose of acquiring such a Policy would be to
enable the Fund to sell a municipal obligation to a third party as a Aaa/AAA
rated insured obligation at a market price higher than what otherwise might be
obtainable if the obligation were sold without the insurance coverage. This
rating is not automatic, however, and must specifically be requested for each
obligation. Any difference between the excess of an obligation's market value as
a Aaa/AAA rated security over its market value without this rating and the
single premium payment would inure to the Fund in determining the net capital
gain or loss realized by the Fund upon the sale of the obligation.
Since the Fund has the right to purchase a Secondary Market Policy for an
eligible municipal obligation even if the obligation is currently in default as
to any payments by the issuer, the Fund would have the opportunity to sell the
obligation rather than be obligated to hold it in its portfolio in order to
continue the Portfolio Insurance Policy in force.
Because coverage under the Portfolio Insurance Policy terminates upon sale of a
municipal obligation insured thereunder, the insurance does not have an effect
on the resale value of the obligation. Therefore, it is the intention of the
Fund to retain any insured municipal obligations which are in default or in
significant risk of default, and to place a value on the insurance which will be
equal to the difference between the market value of similar obligations which
are not in default. Because of this policy, the Fund's investment manager may be
unable to manage the Fund's portfolio to the extent that it holds defaulted
municipal obligations, which may limit its ability in certain circumstances to
purchase other municipal obligations. While a defaulted municipal obligation is
held in the Fund's portfolio, the Fund continues to pay the insurance premium
but also collects interest payments from the insurer and retains the right to
collect the full amount of principal from the insurer when the municipal
obligation comes due. This would not be applicable if the Fund elected to
purchase a Secondary Market Policy discussed above with respect to a municipal
obligation.
Financial Guaranty Insurance Company. Financial Guaranty is a wholly owned
subsidiary of FGIC Corporation (the Corporation), a Delaware holding company.
Financial Guaranty, domiciled in the State of New York, commenced its business
of providing insurance and financial guaranties for a variety of investment
instruments in January 1984. The Corporation is a wholly-owned subsidiary of
General Electric Capital Corporation.
In addition to providing insurance for the payment of interest on and principal
of municipal bonds and notes held in unit investment trust and mutual fund
portfolios, Financial Guaranty provides insurance for new and secondary market
issues of municipal bonds and notes and for portions of new and secondary market
issues of municipal bonds and notes. Financial Guaranty also guarantees a
variety of non-municipal structured obligations, such as mortgage-backed
securities. It also is authorized to write surety insurance. Moody's and
Standard & Poor's have rated the claims-paying ability of Financial Guaranty Aaa
and AAA, respectively.
Financial Guaranty is licensed to provide insurance in 48 states and the
District of Columbia. It files reports with state insurance regulatory agencies
and is subject to audit and review by these authorities. Financial Guaranty is
also subject to regulation by the State of New York Insurance Department. This
regulation, however, is no guarantee that Financial Guaranty will be able to
perform on its contracts of insurance in the event a claim should be made
thereunder at some time in the future.
The information about Financial Guaranty contained above has been furnished by
the Corporation. No representation is made as to the accuracy or adequacy of
this information.
<PAGE>
The policy of insurance obtained by the Fund from Financial Guaranty and the
agreement and negotiations in respect thereof represent the only relationship
between Financial Guaranty and the Fund. Otherwise, neither Financial Guaranty
nor its parent, FGIC Corporation, has any significant relationship, direct or
indirect, with the Fund.
Government Securities
The Fund may invest in securities guaranteed by an agency or instrumentality of
the United States government. These agencies include Federal National Mortgage
Association and Federal Housing Administration (FHA). In the case of a default
on a FHA security, the outstanding balance is subject to an assignment fee and
interest payments may be delayed. This will reduce the return to the Fund.
<PAGE>
Independent Auditors' Report
THE BOARD AND SHAREHOLDERS
AXP CALIFORNIA TAX-EXEMPT TRUST
AXP SPECIAL TAX-EXEMPT SERIES TRUST
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments in securities, of AXP California Tax-Exempt Fund (a
fund within AXP California Tax-Exempt Trust) and AXP Massachusetts Tax-Exempt
Fund, AXP Michigan Tax-Exempt Fund, AXP Minnesota Tax-Exempt Fund, AXP New York
Tax-Exempt Fund and AXP Ohio Tax-Exempt Fund (funds within AXP Special
Tax-Exempt Series Trust) as of June 30, 1999 and the related statements of
operations for the year then ended and the statements of changes in net assets
for each of the years in the two-year period then ended and the financial
highlights for each of the years in the five-year period ended June 30, 1999.
These financial statements and the financial highlights are the responsibility
of fund management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Investment securities held in custody are confirmed to us by the
custodian. As to securities purchased and sold but not received or delivered, we
request confirmations from brokers, and where replies are not received, we carry
out other appropriate auditing procedures. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AXP California Tax-Exempt Fund,
AXP Massachusetts Tax-Exempt Fund, AXP Michigan Tax-Exempt Fund, AXP Minnesota
Tax-Exempt Fund, AXP New York Tax-Exempt Fund and AXP Ohio Tax-Exempt Fund as of
June 30, 1999, and the results of their operations, changes in their net assets
and the financial highlights for the periods stated in the first paragraph
above, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
KPMG LLP
Minneapolis, Minnesota
August 6, 1999
<PAGE>
<TABLE>
<CAPTION>
Financial Statements
Statements of assets and liabilities
AXP California Tax-Exempt Trust
AXP Special Tax-Exempt Series Trust
California Massachusetts Michigan
Tax-Exempt Tax-Exempt Tax-Exempt
June 30, 1999 Fund Fund Fund
Assets
Investments in securities, at value (Note 1)
(identified cost $250,933,404, $83,969,770
<S> <C> <C> <C> <C>
and $77,357,899) $265,125,212 $87,543,887 $81,951,809
Cash in bank on demand deposit -- 86,720 48,808
Accrued interest receivable 4,446,385 1,782,398 1,280,815
Receivable for investment securities sold 93,655 74,053 43,125
------ ------ ------
Total assets 269,665,252 89,487,058 83,324,557
----------- ---------- ----------
Liabilities
Disbursements in excess of cash on demand deposit 41,293 -- --
Dividends payable to shareholders 262,513 136,702 80,810
Payable for investment securities purchased 2,389,396 1,984,564 --
Accrued investment management services fee 3,415 982 1,070
Accrued distribution fee 425 157 135
Accrued service fee 1,276 614 398
Accrued transfer agency fee 305 117 117
Accrued administrative services fee 289 84 91
Other accrued expenses 71,937 986 39,743
------ --- ------
Total liabilities 2,770,849 2,124,206 122,364
--------- --------- -------
Net assets applicable to outstanding shares $266,894,403 $87,362,852 $83,202,193
============ =========== ===========
Represented by
Shares of beneficial interest-- $.01 par value (Note 1) $ 514,752 $ 162,101 $ 154,722
Additional paid-in capital 257,756,410 84,626,917 79,786,750
Undistributed (excess of distributions over) net investment income (1) 43,000 (42)
Accumulated net realized gain (loss) (Note 6) (5,440,474) (951,438) (1,230,063)
Unrealized appreciation (depreciation) on investments (Note 5) 14,063,716 3,482,272 4,490,826
---------- --------- ---------
Total-- representing net assets applicable to outstanding shares $266,894,403 $87,362,852 $83,202,193
============ =========== ===========
Net assets applicable to outstanding shares: Class A $245,947,413 $70,445,011 $76,626,447
Class B $ 20,946,990 $16,917,841 $ 6,575,746
Outstanding shares of beneficial interest: Class A shares 47,434,784 13,070,941 14,249,491
Class B shares 4,040,395 3,139,170 1,222,726
Net asset value per share: Class A $ 5.18 $ 5.39 $ 5.38
Class B $ 5.18 $ 5.39 $ 5.38
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statements of assets and liabilities
AXP California Tax-Exempt Trust
AXP Special Tax-Exempt Series Trust
Minnesota New York Ohio
Tax-Exempt Tax-Exempt Tax-Exempt
June 30, 1999 Fund Fund Fund
Assets
Investments in securities, at value (Note 1)
(identified cost $428,411,014, $106,965,927
<S> <C> <C> <C> <C>
and $72,955,761) $446,760,910 $113,854,117 $76,668,203
Cash in bank on demand deposit 1,978,035 81,591 56,769
Accrued interest receivable 8,315,564 2,210,875 974,511
Receivable for investment securities sold 2,105,222 86,394 40,474
--------- ------ ------
Total assets 459,159,731 116,232,977 77,739,957
----------- ----------- ----------
Liabilities
Dividends payable to shareholders 458,715 252,537 78,154
Payable for investment securities purchased 7,203,642 -- 990,221
Accrued investment management services fee 5,666 1,488 982
Accrued distribution fee 934 275 157
Accrued service fee 2,161 554 366
Accrued transfer agency fee 705 189 117
Accrued administrative services fee 466 127 84
Other accrued expenses 95,494 31,496 50,675
------ ------ ------
Total liabilities 7,767,783 286,666 1,120,756
--------- ------- ---------
Net assets applicable to outstanding shares $451,391,948 $115,946,311 $76,619,201
============ ============ ===========
Represented by
Shares of beneficial interest-- $.01 par value (Note 1) $ 858,037 $ 225,235 $ 142,878
Additional paid-in capital 440,508,272 111,262,398 74,018,536
Undistributed (excess of distributions over) net investment income (1,845) -- 1,028
Accumulated net realized gain (loss) (Note 6) (8,228,569) (2,216,501) (1,152,599)
Unrealized appreciation (depreciation) on investments (Note 5) 18,256,053 6,675,179 3,609,358
---------- --------- ---------
Total-- representing net assets applicable to outstanding shares $451,391,948 $115,946,311 $76,619,201
============ ============ ===========
Net assets applicable to outstanding shares: Class A $405,757,712 $102,430,635 $68,844,000
Class B $ 45,634,236 $ 13,515,676 $ 7,775,201
Outstanding shares of beneficial interest: Class A shares 77,129,334 19,898,087 12,838,074
Class B shares 8,674,329 2,625,385 1,449,756
Net asset value per share: Class A $ 5.26 $ 5.15 $ 5.36
Class B $ 5.26 $ 5.15 $ 5.36
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statements of operations
AXP California Tax-Exempt Trust
AXP Special Tax-Exempt Series Trust
California Massachusetts Michigan
Tax-Exempt Tax-Exempt Tax-Exempt
Year ended June 30, 1999 Fund Fund Fund
Investment income
Income:
<S> <C> <C> <C>
Interest $15,420,754 $4,930,570 $4,860,883
----------- ---------- ----------
Expenses (Note 2):
Investment management services fee 1,257,978 399,923 391,881
Distribution fee-- Class B 136,155 114,158 43,183
Transfer agency fee 95,461 46,821 37,827
Incremental transfer agency fee-- Class B 1,268 1,045 430
Service fee
Class A 433,279 121,582 134,988
Class B 31,443 26,576 9,964
Administrative services fees and expenses 110,275 35,242 34,586
Compensation of board members 7,977 7,977 7,977
Custodian fees 26,592 10,753 12,895
Printing and postage 51,027 4,877 16,607
Registration fees 39,715 19,023 30,044
Audit fees 17,000 15,500 15,500
Other 10,309 -- 3,426
------ ---- -----
Total expenses 2,218,479 803,477 739,308
Earnings credits on cash balances (Note 2) (21,970) (10,692) (3,857)
------- ------- ------
Total net expenses 2,196,509 792,785 735,451
--------- ------- -------
Investment income (loss)-- net 13,224,245 4,137,785 4,125,432
---------- --------- ---------
Realized and unrealized gain (loss) -- net Net realized gain (loss) on:
Security transactions (Note 3) (123,320) 6,655 430,554
Financial futures contracts (8,912) 28,371 30,112
------ ------ ------
Net realized gain (loss) on investments (132,232) 35,026 460,666
Net change in unrealized appreciation (depreciation) on investments (8,521,862) (2,888,857) (3,039,567)
---------- ---------- ----------
Net gain (loss) on investments (8,654,094) (2,853,831) (2,578,901)
---------- ---------- ----------
Net increase (decrease) in net assets resulting from operations $ 4,570,151 $1,283,954 $1,546,531
=========== ========== ==========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statements of operations
AXP California Tax-Exempt Trust
AXP Special Tax-Exempt Series Trust
Minnesota New York Ohio
Tax-Exempt Tax-Exempt Tax-Exempt
Year ended June 30, 1999 Fund Fund Fund
Investment income
Income:
<S> <C> <C> <C>
Interest $26,649,745 $6,646,639 $4,475,701
----------- ---------- ----------
Expenses (Note 2):
Investment management services fee 1,994,409 543,353 357,073
Distribution fee-- Class B 284,736 86,839 49,653
Transfer agency fee 219,595 59,911 36,842
Incremental transfer agency fee-- Class B 3,049 952 453
Service fee
Class A 688,742 180,174 120,698
Class B 66,271 20,226 11,347
Administrative services fees and expenses 176,098 47,870 30,748
Compensation of board members 8,821 7,977 4,093
Custodian fees 40,333 12,282 17,120
Printing and postage 109,994 24,087 15,053
Registration fees 48,930 36,660 33,582
Audit fees 18,000 17,000 15,500
Other 12,502 2,362 23,198
------ ----- ------
Total expenses 3,671,480 1,039,693 715,360
Earnings credits on cash balances (Note 2) (43,650) (6,787) (2,271)
------- ------ ------
Total net expenses 3,627,830 1,032,906 713,089
--------- --------- -------
Investment income (loss)-- net 23,021,915 5,613,733 3,762,612
---------- --------- ---------
Realized and unrealized gain (loss) -- net Net realized gain (loss) on:
Security transactions (Note 3) 406,366 155,442 69,725
Financial futures contracts (7,149) 56,533 30,114
------ ------ ------
Net realized gain (loss) on investments 399,217 211,975 99,839
Net change in unrealized appreciation (depreciation) on investments (13,019,298) (3,443,059) (2,055,350)
----------- ---------- ----------
Net gain (loss) on investments (12,620,081) (3,231,084) (1,955,511)
----------- ---------- ----------
Net increase (decrease) in net assets resulting from operations $10,401,834 $2,382,649 $1,807,101
=========== ========== ==========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statements of changes in net assets
AXP California Tax-Exempt Trust
AXP Special Tax-Exempt Series Trust
California Massachusetts
Tax-Exempt Fund Tax-Exempt Fund
Year ended June 30, 1999 1998 1999 1998
Operations and distributions
<S> <C> <C> <C> <C>
Investment income (loss)-- net $ 13,224,245 $ 12,975,883 $ 4,137,785 $ 3,873,971
Net realized gain (loss) on investments (132,232) 1,926,039 35,026 277,400
Net change in unrealized appreciation (depreciation)
on investments (8,521,862) 3,558,638 (2,888,857) 1,722,338
---------- --------- ---------- ---------
Net increase (decrease) in net assets resulting
from operations 4,570,151 18,460,560 1,283,954 5,873,709
--------- ---------- --------- ---------
Distributions to shareholders from:
Net investment income
Class A (12,458,083) (12,717,817) (3,454,620) (3,418,898)
Class B (766,108) (572,424) (640,114) (455,124)
Net realized gain
Class A -- (9,568) (33,427) --
Class B -- (507) (7,530) --
----- ---- ------ -----
Total distributions (13,224,191) (13,300,316) (4,135,691) (3,874,022)
----------- ----------- ---------- ----------
Share transactions (Note 4)
Proceeds from sales
Class A shares (Note 2) 42,285,590 27,263,050 16,960,957 9,567,532
Class B shares 8,682,050 5,637,162 6,288,904 5,760,628
Reinvestment of distributions at net asset value
Class A shares 8,430,940 8,796,579 2,675,840 2,647,896
Class B shares 588,371 436,950 532,827 392,654
Payments for redemptions
Class A shares (36,166,864) (33,740,758) (13,594,414) (13,778,211)
Class B shares (Note 2) (2,589,325) (1,396,348) (2,358,655) (1,502,976)
---------- ---------- ---------- ----------
Increase (decrease) in net assets from share transactions 21,230,762 6,996,635 10,505,459 3,087,523
---------- --------- ---------- ---------
Total increase (decrease) in net assets 12,576,722 12,156,879 7,653,722 5,087,210
Net assets at beginning of year 254,317,681 242,160,802 79,709,130 74,621,920
----------- ----------- ---------- ----------
Net assets at end of year $266,894,403 $254,317,681 $87,362,852 $79,709,130
============ ============ =========== ===========
Undistributed (excess of distributions over)
net investment income $ (1) $ (55) $ 43,000 $ (51)
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statements of changes in net assets
AXP California Tax-Exempt Trust
AXP Special Tax-Exempt Series Trust
Michigan Minnesota
Tax-Exempt Fund Tax-Exempt Fund
Year ended June 30, 1999 1998 1999 1998
Operations and distributions
<S> <C> <C> <C> <C>
Investment income (loss)-- net $ 4,125,432 $ 4,153,422 $ 23,021,915 $ 22,597,273
Net realized gain (loss) on investments 460,666 39,801 399,217 867,273
Net change in unrealized appreciation (depreciation)
on investments (3,039,567) 1,755,887 (13,019,298) 7,572,218
---------- --------- ----------- ---------
Net increase (decrease) in net assets resulting
from operations 1,546,531 5,949,110 10,401,834 31,036,764
--------- --------- ---------- ----------
Distributions to shareholders from:
Net investment income
Class A (3,880,954) (3,959,928) (21,267,346) (21,338,695)
Class B (244,520) (194,070) (1,747,010) (1,277,193)
Net realized gain
Class A (295,764) -- -- --
Class B (21,598) -- -- --
------- --------- --------- ---------
Total distributions (4,442,836) (4,153,998) (23,014,356) (22,615,888)
Share transactions (Note 4)
Proceeds from sales
Class A shares (Note 2) 10,840,031 6,481,056 81,903,764 55,067,262
Class B shares 2,076,128 2,106,132 19,340,345 10,919,373
Reinvestment of distributions at net asset value
Class A shares 3,033,680 2,829,652 16,537,485 16,634,462
Class B shares 216,608 153,120 1,430,174 1,015,306
Payments for redemptions
Class A shares (11,501,402) (10,742,181) (66,199,264) (71,239,533)
Class B shares (Note 2) (620,911) (849,531) (5,079,371) (3,414,186)
-------- -------- ---------- ----------
Increase (decrease) in net assets from share transactions 4,044,134 (21,752) 47,933,133 8,982,684
--------- ------- ---------- ---------
Total increase (decrease) in net assets 1,147,829 1,773,360 35,320,611 17,403,560
Net assets at beginning of year 82,054,364 80,281,004 416,071,337 398,667,777
---------- ---------- ----------- -----------
Net assets at end of year $83,202,193 $82,054,364 $451,391,948 $416,071,337
----------- ----------- ------------ ------------
Undistributed (excess of distributions over) net
investment income $ (42) $ -- $ (1,845) $ (9,944)
----------- ----------- ------------ ------------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statements of changes in net assets
AXP California Tax-Exempt Trust
AXP Special Tax-Exempt Series Trust
New York Ohio
Tax-Exempt Fund Tax-Exempt Fund
Year ended June 30, 1999 1998 1999 1998
Operations and distributions
<S> <C> <C> <C> <C>
Investment income (loss)-- net $ 5,613,733 $ 5,988,600 $ 3,762,612 $ 3,710,452
Net realized gain (loss) on investments 211,975 748,448 99,839 441,486
Net change in unrealized appreciation (depreciation)
on investments (3,443,059) 2,313,952 (2,055,350) 1,193,891
---------- --------- ---------- ---------
Net increase (decrease) in net assets resulting
from operations 2,382,649 9,051,000 1,807,101 5,345,829
--------- --------- --------- ---------
Distributions to shareholders from:
Net investment income
Class A (5,126,805) (5,597,877) (3,477,589) (3,541,325)
Class B (485,770) (391,627) (282,186) (193,178)
Net realized gain
Class A -- -- -- --
Class B -- -- -- --
------ ------- ------ ------
Total distributions (5,612,575) (5,989,504) (3,759,775) (3,734,503)
---------- ---------- ---------- ----------
Share transactions (Note 4)
Proceeds from sales
Class A shares (Note 2) 13,763,495 13,077,412 12,196,295 6,692,901
Class B shares 5,556,166 3,058,971 3,287,691 1,943,456
Reinvestment of distributions at net asset value
Class A shares 3,536,147 4,046,559 2,533,703 2,702,866
Class B shares 382,826 331,272 214,576 143,123
Payments for redemptions
Class A shares (17,500,028) (22,106,362) (11,351,271) (10,309,437)
Class B shares (Note 2) (1,828,945) (1,358,542) (820,294) (415,851)
---------- ---------- -------- --------
Increase (decrease) in net assets from share transactions 3,909,661 (2,950,690) 6,060,700 757,058
--------- ---------- --------- -------
Total increase (decrease) in net assets 679,735 110,806 4,108,026 2,368,384
Net assets at beginning of year 115,266,576 115,155,770 72,511,175 70,142,791
----------- ----------- ---------- ----------
Net assets at end of year $115,946,311 $115,266,576 $76,619,201 $72,511,175
============ ============ =========== ===========
Undistributed (excess of distributions over) net
investment income $ -- $ (193) $ 1,028 $ (1,809)
See accompanying notes to financial statements.
</TABLE>
<PAGE>
Notes to Financial Statements
AXP California Tax-Exempt Trust
AXP Special Tax-Exempt Series Trust
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
AXP California Tax-Exempt Trust and AXP Special Tax-Exempt Series Trust were
organized as Massachusetts business trusts. AXP California Tax-Exempt Trust
includes only AXP California Tax-Exempt Fund. AXP Special Tax-Exempt Series
Trust is a "series fund" that is currently composed of individual state
tax-exempt funds and one insured national tax-exempt fund, including AXP
Massachusetts Tax-Exempt Fund, AXP Michigan Tax-Exempt Fund, AXP Minnesota
Tax-Exempt Fund, AXP New York Tax-Exempt Fund and AXP Ohio Tax-Exempt Fund (the
Funds). The Funds are non-diversified, open-end management investment companies
as defined in the Investment Company Act of 1940 (as amended). Each Fund has
unlimited authorized shares of beneficial interest.
Each Fund's goal is to provide a high level of income generally exempt from
federal income tax as well as from the respective state and local income tax. A
portion of each Fund's assets may be invested in bonds whose interest is subject
to the alternative minimum tax computation. The Funds concentrate their
investments in a single state and therefore may have more credit risk related to
the economic conditions of the respective state than Funds that have a broader
geographical diversification.
Each Fund offers Class A and Class B shares.
o Class A shares are sold with a front-end sales charge.
o Class B shares may be subject to a contingent deferred sales charge and
automatically convert to Class A shares during the ninth calendar year of
ownership.
All classes of shares have identical voting, dividend and liquidation rights.
The distribution fee, incremental transfer agency fee and service fee (class
specific expenses) differs among classes. Income, expenses (other than
class-specific expenses) and realized and unrealized gains or losses on
investments are allocated to each class of shares based upon its relative net
assets.
The Fund's significant accounting policies are summarized below:
Use of estimates
Preparing financial statements that conform to generally accepted accounting
principles requires management to make estimates (e.g., on assets and
liabilities) that could differ from actual results.
Valuation of securities
All securities are valued at the close of each business day. Securities traded
on national securities exchanges or included in national market systems are
valued at the last quoted sale price. Debt securities are generally traded in
the over-the-counter market and are valued at a price that reflects fair value
as quoted by dealers in these securities or by an independent pricing service.
Securities for which market quotations are not readily available are valued at
fair value according to methods selected in good faith by the board. Short-term
securities maturing in more than 60 days from the valuation date are valued at
the market price or approximate market value based on current interest rates;
those maturing in 60 days or less are valued at amortized cost.
Option transactions
To produce incremental earnings, protect gains and facilitate buying and selling
of securities for investments, the Funds may buy and sell put and call options
and write covered call options on portfolio securities as well as write
cash-secured put options. The risk in writing a call option is that the Funds
give up the opportunity for profit if the market price of the security
increases. The risk in writing a put option is that the Funds may incur a loss
if the market price of the security decreases and the option is exercised. The
risk in buying an option is that the Funds pay a premium whether or not the
option is exercised. The Funds also have the additional risk of being unable to
enter into a closing transaction if a liquid secondary market does not exist.
The Funds also may write over-the-counter options where completing the
obligation depends upon the credit standing of the other party.
Option contracts are valued daily at the closing prices on their primary
exchanges and unrealized appreciation or depreciation is recorded. Each Fund
will realize a gain or loss when the option transaction expires or closes. When
options on debt securities or futures are exercised, the Fund will realize a
gain or loss. When other options are exercised, the proceeds on sales for a
written call option, the purchase cost for a written put option or the cost of a
security for a purchased put or call option is adjusted by the amount of the
premium received or paid.
Futures transactions
To gain exposure to or protect itself from market changes, the Funds may buy and
sell financial futures contracts. Risks of entering into futures contracts and
related options include the possibility of an illiquid market and that a change
in the value of the contract or option may not correlate with changes in the
value of the underlying securities.
Upon entering into a futures contract, the Funds are required to deposit either
cash or securities in an amount (initial margin) equal to a certain percentage
of the contract value. Subsequent payments (variation margin) are made or
received by the Funds each day. The variation margin payments are equal to the
daily changes in the contract value and are recorded as unrealized gains and
losses. The Funds recognize a realized gain or loss when the contract is closed
or expires.
Federal taxes
Each Fund's policy to comply with all sections of the Internal Revenue Code that
apply to regulated investment companies and to distribute all of its taxable
income to shareholders. No provision for income or excise taxes is thus
required. Each Fund is treated as a separate entity for federal income tax
purposes.
Net investment income (loss) and net realized gains (losses) may differ for
financial statement and tax purposes primarily because of deferred losses on
certain futures contracts and losses deferred due to "wash sale" transactions.
The character of distributions made during the year from net investment income
or net realized gains may differ from their ultimate characterization for
federal income tax purposes. Also, due to the timing of dividend distributions,
the fiscal year in which amounts are distributed may differ from the year that
the income or realized gains (losses) were recorded by the Funds.
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<CAPTION>
On the statement of assets and liabilities, as a result of permanent book-to-tax
differences, undistributed net investment income and accumulated net realized
gain (loss) have been increased (decreased), resulting in net reclassification
adjustments to additional paid-in capital by the following:
California Massachusetts Michigan Minnesota New York Ohio
Tax-Exempt Tax-Exempt Tax-Exempt Tax-Exempt Tax-Exempt Tax-Exempt
Fund Fund Fund Fund Fund Fund
<S> <C> <C> <C> <C> <C> <C>
Undistributed net investment income $-- $-- $-- $540 $(965) $--
Accumulated net realized gain (loss) $-- $-- $-- $(540) $965 $--
Additional paid-in capital increase (decrease) $-- $-- $-- $-- $-- $--
Dividends to shareholders
Dividends from net investment income, declared daily and paid monthly, are
reinvested in additional shares of each Fund at net asset value or payable in
cash. Capital gains, when available, are distributed along with the last income
dividend of the calendar year.
Other
Security transactions are accounted for on the date securities are purchased or
sold. Interest income, including level-yield amortization of premium and
discount, is accrued daily.
2. EXPENSES AND SALES CHARGES
Each Fund has agreements with American Express Financial Corporation (AEFC) to
manage its portfolio and provide administrative services. Under an Investment
Management Services Agreement, AEFC determines which securities will be
purchased, held or sold. The management fee is a percentage of each Fund's
average daily net assets in reducing percentages from 0.47% to 0.38% annually.
Under an Administrative Services Agreement, each Fund pays AEFC a fee for
administration and accounting services at a percentage of the Fund's average
daily net assets in reducing percentages from 0.04% to 0.02% annually.
Additional administrative service expenses paid by the Fund are office expenses,
consultants' fees and compensation of officers and employees. Under this
agreement, the Fund also pays taxes, audit and certain legal fees, registration
fees for shares, compensation of board members, corporate filing fees and any
other expenses properly payable by the Fund and approved by the board.
Under a separate Transfer Agency Agreement, American Express Client Service
Corporation (AECSC) maintains shareholder accounts and records. Each Fund pays
AECSC an annual fee per shareholder account for this service as follows:
o Class A $19.50
o Class B $20.50
Under terms of a prior agreement that ended Jan. 31, 1999, each Fund paid a
transfer agency fee at an annual rate per shareholder account of $15.50 for
Class A and $16.50 for Class B.
Each Fund has agreements with American Express Financial Advisors Inc. for
distribution and shareholder services. Under a Plan and Agreement of
Distribution, each Fund pays a distribution fee at an annual rate of 0.75% of
the Fund's average daily net assets attributable to Class B shares. Effective
July 1, 1999, each Fund will pay a distribution fee at an annual rate up to
0.25% of the Fund's average daily net assets attributable to Class A shares and
up to 1.00% of the Fund's average daily net assets attributable to Class B
shares.
Under a Shareholder Service Agreement, each Fund pays a fee for service provided
to shareholders by financial advisors and other servicing agents. The fee is
calculated at a rate of 0.175% of each Fund's average daily net assets
attributable to Class A and Class B shares. Effective July 1, 1999, each Fund
will convert the Shareholder Service Agreement with respect to Class A and Class
B shares into the Plan and Agreement of Distribution discussed above.
Sales charges received by American Express Financial Advisors Inc. for
distributing the Funds' shares for the year ended June 30, 1999, are as follows:
Fund Class A Class B
California Tax-Exempt Fund $ 769,887 $33,637
Massachusetts Tax-Exempt Fund 420,351 24,785
Michigan Tax-Exempt Fund 203,210 6,104
Minnesota Tax-Exempt Fund 1,220,871 45,143
New York Tax-Exempt Fund 244,591 22,199
Ohio Tax-Exempt Fund 194,819 10,901
During the year ended June 30, 1999, the Funds' custodian and transfer agency
fees were reduced as a result of earnings credits from overnight cash balances
as follows:
Fund Reduction
California Tax-Exempt Fund $21,970
Massachusetts Tax-Exempt Fund 10,692
Michigan Tax-Exempt Fund 3,857
Minnesota Tax-Exempt Fund 43,650
New York Tax-Exempt Fund 6,787
Ohio Tax-Exempt Fund 2,271
3. SECURITIES TRANSACTIONS
For the year ended June 30, 1999, cost of purchases and proceeds from sales
(other than short-term obligations) aggregated for each Fund are as follows:
Fund Purchases Proceeds
California Tax-Exempt Fund $66,396,954 $40,438,928
Massachusetts Tax-Exempt Fund 15,264,267 4,496,663
Michigan Tax-Exempt Fund 19,263,445 16,063,648
Minnesota Tax-Exempt Fund 91,250,893 54,528,576
New York Tax-Exempt Fund 12,563,522 9,359,640
Ohio Tax-Exempt Fund 9,469,572 3,978,938
Realized gains and losses are determined on an identified cost basis.
4. SHARE TRANSACTIONS
Transactions in shares of each Fund for the years indicated are as follows:
California Tax-Exempt Fund
Year ended June 30, 1999
Class A Class B
Sold 7,876,900 1,618,457
Issued for reinvested distributions 1,573,110 109,894
Redeemed (6,741,823) (485,671)
Net increase (decrease) 2,708,187 1,242,680
Year ended June 30, 1998
Class A Class B
Sold 5,116,223 1,058,071
Issued for reinvested distributions 1,651,772 82,051
Redeemed (6,331,307) (262,162)
Net increase (decrease) 436,688 877,960
Massachusetts Tax-Exempt Fund
Year ended June 30, 1999
Class A Class B
Sold 3,046,475 1,130,787
Issued for reinvested distributions 481,681 95,959
Redeemed (2,445,264) (425,397)
Net increase (decrease) 1,082,892 801,349
Year ended June 30, 1998
Class A Class B
Sold 1,728,151 1,040,229
Issued for reinvested distributions 479,241 71,032
Redeemed (2,493,940) (271,030)
Net increase (decrease) (286,548) 840,231
Michigan Tax-Exempt Fund
Year ended June 30, 1999
Class A Class B
Sold 1,952,027 218,977
Issues for reinvested distributions 546,553 194,235
Redeemed (2,069,273) (111,961)
Net increase (decrease) 429,307 301,251
Year ended June 30, 1998
Class A Class B
Sold 1,170,022 380,067
Issued for reinvested distributions 511,164 27,650
Redeemed (1,941,314) (153,133)
Net increase (decrease) (260,128) 254,584
Minnesota Tax-Exempt Fund
Year ended June 30, 1999
Class A Class B
Sold 15,143,882 3,578,954
Issued for reinvested distributions 3,061,091 264,909
Redeemed (12,237,821) (942,705)
Net increase (decrease) 5,967,152 2,901,158
Year ended June 30, 1998
Class A Class B
Sold 10,219,416 2,026,791
Issued for reinvested distributions 3,090,353 188,593
Redeemed (13,225,380) (633,606)
Net increase (decrease) 84,389 1,581,778
New York Tax-Exempt Fund
Year ended June 30, 1999
Class A Class B
Sold 2,594,887 1,048,359
Issued for reinvested distributions 667,318 72,294
Redeemed (3,294,574) (345,553)
Net increase (decrease) (32,369) 775,100
Year ended June 30, 1998
Class A Class B
Sold 2,476,927 580,183
Issued for reinvested distributions 768,096 62,867
Redeemed (4,193,469) (257,849)
Net increase (decrease) (948,446) 385,201
Ohio Tax-Exempt Fund
Year ended June 30, 1999
Class A Class B
Sold 2,212,340 596,770
Issued for reinvested distributions 460,278 38,999
Redeemed (2,061,123) (149,003)
Net increase (decrease) 611,495 486,766
Year ended June 30, 1998
Class A Class B
Sold 1,224,084 354,262
Issued for reinvested distributions 493,970 26,147
Redeemed (1,882,921) (75,894)
Net increase (decrease) (164,867) 304,515
5. INTEREST RATE FUTURES CONTRACTS
Investments in securities as of June 30, 1999, included securities that were
valued and pledged as collateral to cover initial margin deposits, (see "Summary
of significant accounting policies") as follows:
Open
Market purchase
Fund value contracts
California Tax-Exempt Fund $ 208,494 70
Massachusetts Tax-Exempt Fund 83,483 55
Michigan Tax-Exempt Fund 1,684,345 60
Minnesota Tax-Exempt Fund 92,019 70
New York Tax-Exempt Fund 249,688 120
Ohio Tax-Exempt Fund 1,579,595 60
The market value of the open purchase contracts as of June 30, 1999, was as
follows:
Net
Market unrealized
Fund value gain (loss)
California Tax-Exempt Fund $8,314,688 $(128,092)
Massachusetts Tax-Exempt Fund 6,532,969 (91,845)
Michigan Tax-Exempt Fund 7,126,875 (103,084)
Minnesota Tax-Exempt Fund 8,314,688 (93,843)
New York Tax-Exempt Fund 14,253,750 (213,011)
Ohio Tax-Exempt Fund 7,126,875 (103,084)
The Funds maintain, in a segregated account with its custodian, advanced
refunded bonds with at least a market value equal to the value of these open
long futures contracts. Advanced refunded bonds are highly liquid, usually
covered by government securities, which will be refunded at the bond's first
call date.
6. CAPITAL LOSS CARRYOVER
For federal income tax purposes, capital loss carryovers were as follows as of
June 30, 1999:
Fund Carryover Expiration
date
California Tax-Exempt Fund $1,940,553 2006-2008
Massachusetts Tax-Exempt Fund 207,717 2008
Michigan Tax-Exempt Fund 233,234 2008
Minnesota Tax-Exempt Fund 1,997,741 2005 - 2008
New York Tax-Exempt Fund 1,342,074 2005-2008
Ohio Tax-Exempt Fund 182,633 2005-2008
It is unlikely the board will authorize a distribution of any net realized
capital gains for a Fund until the respective capital loss carryover has been
offset or expires.
7. BANK BORROWINGS
Each Fund has a revolving credit agreement with U.S. Bank, N.A., whereby each
Fund is permitted to have bank borrowings for temporary or emergency purposes to
fund shareholder redemptions. Each Fund must have asset coverage for borrowings
not to exceed the aggregate of 333% of advances equal to or less than five
business days plus 367% of advances over five business days. The agreement,
which enables each Fund to participate with other American Express funds,
permits borrowings up to $200 million, collectively. Interest is charged to each
Fund based on its borrowings at a rate equal to the Federal Funds Rate plus
0.30% or the Eurodollar Rate (Reserve Adjusted) plus 0.20%. Borrowings are
payable up to 90 days after such loan is executed. Each Fund also pays a
commitment fee equal to its pro rata share of the amount of the credit facility
at a rate of 0.05% per annum. Each Fund had no borrowings outstanding during the
year ended June 30,1999.
8. FINANCIAL HIGHLIGHTS
"Financial highlights" showing per share data and selected financial information
are presented on pages 29-34 of the prospectus.
</TABLE>
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<TABLE>
<CAPTION>
Investments in Securities
AXP California Tax-Exempt Fund
June 30, 1999
(Percentages represent value of investments compared to net assets)
Municipal bonds (99.0%)
Name of issuer and Coupon Principal Value(a)
title of issue(b,c) rate amount
ABAG Financial Authority for Nonprofit Corporations
Certificate of Participation International School
Series 1996
<S> <C> <C> <C> <C> <C>
05-01-26 7.38% $2,200,000 $2,306,656
Anaheim Public Finance Authority
Capital Appreciation Improvement Revenue Bonds
Zero Coupon Series 1997C (FSA Insured)
09-01-25 5.61 2,170,000(e) 504,026
Anaheim Public Finance Authority
Revenue Bonds Electric Utilities
San Juan Series 2 (FGIC Insured)
10-01-22 5.75 11,100,000 11,389,154
Brea Redevelopment Agency Tax Allocation Refunding Bonds
Redevelopment Project AB (MBIA Insured)
08-01-17 5.50 1,800,000 1,813,770
Burbank Redevelopment Agency Tax Allocation Bonds
Golden State Series 1993A
12-01-23 6.00 2,000,000 2,058,800
Calleguas-Las Virgines Public Finance Authority
Refunding Revenue Bonds
Las Virgines Municipal Water District (FSA Insured)
11-01-23 5.00 1,000,000 944,810
Chapman College Educational Facilities Authority
Revenue Bonds Series 1991B
01-01-18 7.50 500,000 535,155
Clearlake Redevelopment Agency
Highlands Park Community Development
Tax Allocation Bonds Series 1993
10-01-23 6.40 1,420,000 1,479,839
Community Development Authority Health Facilities
Unihealth America Certificate of Participation
Series 1993 Inverse Floater (AMBAC Insured)
10-01-11 7.93 5,000,000(f) 5,362,499
Contra Costa County Residential Rent Facility
Multi-family Housing Revenue Bonds Cypress Meadows
Series 1998E A.M.T.
09-01-28 7.00 2,000,000 1,894,340
Corona Community Facilities District 90-1
Special Tax Refunding Bonds Series 1998A
09-01-20 4.70 1,905,000 1,711,242
East Bay Municipal Utility District
Water Systems Revenue Bonds
(MBIA Insured)
06-01-28 4.75 2,695,000 2,407,470
Eastern Municipal Water District Riverside County
Water & Sewer Pre-refunded Revenue
Certificates of Participation Series 1991 (FGIC Insured)
07-01-20 6.50 3,000,000 3,205,020
Eastern Municipal Water District Riverside County
Water & Sewer Revenue Certificates of Participation
Series 1991
07-01-23 6.00 1,000,000 1,057,800
El Centro Financial Authority Water & Wastewater
Revenue Bonds Series 1997A (AMBAC Insured)
10-01-27 5.13 1,200,000 1,147,332
Encinitas Unified School District
Unlimited General Obligation Bonds
Zero Coupon Series 1996 (MBIA Insured)
08-01-15 5.85 2,500,000(e) 1,055,975
08-01-16 5.85 1,000,000(e) 397,700
Fontana Redevelopment Agency
Refunding Certificate of Participation
Police Facility Series 1993
04-01-16 5.63 4,500,000 4,560,165
Fontana Unified School District
San Bernardino County General Obligation
Convertible Capital Appreciation Bonds
Series 1995C (FGIC Insured)
05-01-20 6.15 3,470,000 3,704,503
Fontana Unified School District
Unlimited Tax General Obligation Bonds
Zero Coupon Series D (FGIC Insured)
05-01-00 6.28 2,000,000(g) 1,981,640
Foothill/Eastern Transportation Corridor Agency
Toll Road Senior Lien Revenue Bonds Series 1995A
01-01-34 6.00 1,775,000 1,873,104
Garden Grove Agency Community Development
Tax Allocation Refunding Bonds
Garden Grove Community
10-01-23 5.88 3,000,000 3,039,570
Garden Grove Certificates of Participation
Bahia Village/Emerald Isle
(FSA Insured)
08-01-23 5.70 2,660,000 2,717,376
Hemet Redevelopment Agency Tax Allocation
Bonds Series 1999A (AMBAC Insured)
09-15-28 4.75 2,390,000 2,133,888
Huntington Beach Certificate of Participation Revenue Bonds
Civic Center Refinancing (AMBAC Insured)
08-01-16 5.50 1,715,000 1,725,496
Inglewood Redevelopment Agency Revenue Bonds
Series 1998A (AMBAC Insured)
05-01-23 5.25 1,100,000 1,082,290
Intercommunity Hospital Finance Authority
Certificate of Participation (ACA Insured)
11-01-19 5.25 4,000,000 3,840,360
Irwindale Redevelopment Agency Sub Lien
Tax Allocation Bonds Series 1996
12-01-19 7.00 1,700,000 1,835,286
Janesville Union School District
Lassen County General Obligation Bonds
Series 1996
08-01-21 6.45 870,000(d) 906,949
La Mirada Redevelopment Agency Special Tax
Refunding Revenue Bonds Community Facilities
District 89-1 Series 1998
10-01-20 5.70 1,000,000 963,430
Lake Elsinore Public Finance Authority
Local Agency Revenue Bonds Series 1997F
09-01-20 7.10 3,000,000 3,176,940
Lake Elsinore Public Finance Authority
Tax Allocation Revenue Bonds Series 1999A
09-01-30 5.50 2,500,000 2,364,750
Lake Elsinore Redevelopment Agency
Community Facilities District 90
Tuscany Hills Public Improvements
Special Tax Parity Bonds Series 1999A
10-01-24 6.05 2,000,000 1,956,740
Lake Elsinore School Finance Authority
Revenue Bonds Series 1997
09-01-19 6.13 1,235,000 1,276,422
Los Angeles Convention & Exhibition Center
Pre-refunded Certificate of Participation
Series 1989A
08-15-18 7.38 2,900,000 2,957,942
08-15-20 7.00 5,000,000 5,097,700
Los Angeles County Transportation Commission
Sales Tax Refunding Revenue Bonds
Series 1989A
07-01-15 7.40 2,000,000 2,040,220
Los Angeles County Transportation Commission
Sales Tax Refunding Revenue Bonds Series A
07-01-19 7.00 4,150,000 4,233,415
Los Angeles Department of Airports Revenue Bonds
Los Angeles International Airport Series 1995D
(FGIC Insured) A.M.T.
05-15-15 5.50 1,000,000 1,010,110
Los Angeles Department of Water & Power
Waterworks Refunding Revenue Bonds
Series 2 (Secondary FGIC Insured)
05-15-18 4.50 3,000,000 2,666,430
Los Angeles Multi-family Housing Revenue Bonds
Park Parthenia Series 1986A
(GNMA Insured) A.M.T.
01-20-22 7.40 1,000,000 1,022,820
Los Angeles Single Family Home Mortgage Revenue Bonds
Series 1991A (GNMA & FNMA Insured) A.M.T.
06-01-25 6.88 745,000 777,311
Los Angeles State Harbor Revenue Bonds
Escrowed to Maturity
10-01-18 7.60 1,000,000 1,239,380
Los Angeles State Harbor Revenue Bonds
Series 1996B (MBIA Insured) A.M.T.
11-01-19 5.38 2,000,000 1,979,120
11-01-23 5.38 1,300,000 1,266,330
Los Angeles Wastewater System
Refunding Revenue Bonds Series D (FGIC Insured)
11-01-17 4.70 1,000,000 920,190
Los Angeles Water & Power
Electric Plant Revenue Bonds Series 1990
05-15-30 7.13 6,500,000 6,816,159
Millbrae Residential Facility Revenue Bonds
Magnolia of Millbrae Series 1997A A.M.T.
09-01-27 7.38 2,500,000 2,628,875
Modesto Irrigation District Finance Authority
Refunding Revenue Bonds Domestic Water
Series 1998D (AMBAC Insured)
09-01-22 4.75 2,000,000 1,807,140
Mount Diablo Hospital District Hospital
Pre-refunded Revenue Bonds
Series 1990A (AMBAC Insured)
12-01-17 7.00 3,000,000 3,195,570
North City West Community School Facility
Authority Special Tax Refunding Revenue Bonds
Series 1995B (CGIC Insured)
09-01-15 5.75 1,000,000 1,046,310
Northern California Transmission Agency
California-Oregon Transmission
Pre-refunded Revenue Bonds
Series 1990A (MBIA Insured)
05-01-24 7.00 2,000,000 2,090,400
Northern California Transmission Select Auction
Variable Rate Security & Residual Interest
Revenue Bonds Inverse Floater (MBIA Insured)
04-29-24 5.50 4,500,000(f) 4,504,050
Novato Community Facility District 1 Vintage Oaks
Public Improvement Special Tax Refunding Bonds
08-01-21 7.25 2,000,000 2,137,200
Orange County Special Tax Community Facilities Bonds
Aliso Veijo District 88-1 Series 1992A
08-15-18 7.35 3,000,000 3,334,980
Oxnard Certificates of Participation
Series 1999 (AMBAC Insured)
06-01-28 4.75 1,250,000 1,116,638
Pittsburg Infrastructure Finance Authority
Reassessment Revenue Improvement Bonds
Series 1998A
09-02-24 5.60 1,465,000 1,396,189
Pleasanton Joint Powers Financing Authority Reassessment
Revenue Bonds Series 1993A
09-02-12 6.15 1,765,000 1,860,981
Port of Oakland Refunding Revenue Bonds
Series 1997G (MBIA Insured) A.M.T.
11-01-25 5.38 3,080,000 3,022,312
Poway Unified School District Special Tax
Refunding Bonds Community Facilities
District 1 (MBIA Insured)
10-01-23 4.75 2,500,000 2,253,425
Rancho Cucamonga Redevelopment Agency
Allocation Pre-refunded Bonds Series 1990
(MBIA Insured)
09-01-19 7.13 3,540,000 3,633,244
Rancho Mirage Joint Powers Finance Authority
Certificate of Participation Eisenhower Memorial Hospital
03-01-22 7.00 4,250,000 4,630,418
Redding Redevelopment Agency Tax Allocation
Refunding Bonds Canby Hilltop Cypress
Series D (CGIC Insured)
09-01-23 5.00 4,700,000 4,435,437
Redwood City Elementary School District Capital
Appreciation General Obligation Bonds
San Mateo County Zero Coupon
Series 1997 (FGIC Insured)
08-01-20 5.65 5,475,000(e) 1,722,545
Richmond Elementary School District
Lassen County General Obligation Bonds
Series 1996
08-01-21 6.50 649,000 688,219
Richmond Joint Powers Financing Authority
Leases and Gas Tax Refunding Revenue Bonds
Series 1995A
05-15-13 5.25 2,000,000 1,982,380
Rural Home Mortgage Financing Authority Single Family Mortgage Revenue Bonds
3rd Series 1997A (GNMA Insured) A.M.T.
09-01-29 7.00 1,425,000 1,579,769
Rural Home Mortgage Financing Authority Single Family Mortgage Revenue Bonds
4th Series 1998B (FNMA/GNMA Insured) A.M.T.
12-01-29 5.75 1,455,000 1,557,156
Sacramento Cogeneration Authority
Pre-refunded Revenue Bonds
Procter & Gamble
07-01-10 6.38 500,000 556,215
Sacramento Cogeneration Authority
Unrefunded Revenue Bonds
Procter & Gamble
07-01-10 6.38 500,000 547,625
Sacramento County Certificates of Participation
(AMBAC Insured)
10-01-17 4.75 1,500,000 1,381,050
Sacramento County Certificates of Participation
Refunding Bonds Public Facilities (AMBAC Insured)
10-01-27 4.75 2,000,000 1,788,620
Sacramento Municipal Utility District Pre-refunded Bonds
Series Y (MBIA Insured)
09-01-19 6.75 3,400,000 3,662,752
Sacramento Power Authority Cogeneration
Revenue Bonds Campbell Soup Series 1995
07-01-22 6.00 1,000,000 1,024,430
San Diego Community Facilities District 1
Special Tax (MBIA Insured)
09-01-20 4.75 2,000,000 1,815,940
San Diego County Capital Asset Lease
Certificate of Participation
Series 1993 Inverse Floater (AMBAC Insured)
09-01-07 7.47 3,200,000(f) 3,572,000
San Diego County Water Authority
Revenue Bonds Certificates of Participation
Series 1998A (FGIC Insured)
05-01-24 4.50 2,500,000 2,145,300
San Francisco City & County Airport Commission
International Airport Revenue Bonds Issue 15B
2nd Series 1998 (MBIA Insured)
05-01-20 4.90 2,000,000 1,852,120
05-01-25 4.50 1,500,000 1,290,615
San Joaquin County Certificate of Participation
Jail & Sheriff's Operation Center (MBIA Insured)
11-15-15 6.75 2,000,000 2,065,780
San Jose Redevelopment Agency Merged Area
Redevelopment Tax Allocation Bonds
Series 1993 (MBIA Insured)
08-01-24 4.75 3,055,000 2,752,738
San Jose Redevelopment Agency Merged Area
Redevelopment Tax Allocation Bonds
Series 1999 (AMBAC Insured)
08-01-23 4.75 1,000,000 898,040
San Jose Redevelopment Agency Merged Area
Tax Allocation Bonds Series 1993 Inverse Floater
(MBIA Insured)
08-01-14 7.41 3,000,000(f) 3,108,750
San Rafael Redevelopment Agency Tax Allocation
Capital Appreciation Bonds Zero Coupon
(AMBAC Insured)
12-01-18 5.58 1,440,000(e) 496,411
12-01-19 5.58 1,440,000(e) 468,058
12-01-20 5.60 1,440,000(e) 441,158
12-01-21 5.60 1,440,000(e) 414,994
12-01-22 5.60 2,070,000(e) 563,330
San Ysidro School District General Obligation Bonds
San Diego County Series 1997 (AMBAC Insured)
08-01-21 6.13 1,000,000 1,087,540
Santa Clara County Mountain View
Los Altos Union High School District Unlimited Tax
General Obligation Bonds Series A
08-01-15 5.75 1,200,000 1,257,576
Santa Cruz Certificate of Participation
08-01-07 8.38 1,140,000 1,161,113
Santa Monica-Malibu Unified School District
Capital Appreciation General Obligation Bonds
Los Angeles County Zero Coupon Series 1999
(FGIC Insured)
08-01-22 5.38 7,300,000(e) 2,042,978
Santa Nella County Water District Improvement
Limited Obligation Refunding Improvement Bonds
Series 1998
09-02-28 6.25 2,500,000 2,405,825
Sierra Madre Finance Authority Water & Sewer
Refunding Revenue Bonds Series 1998A (MBIA Insured)
11-01-18 5.00 2,010,000 1,932,756
South Tahoe Joint Powers Financing Authority
Refunding Revenue Bonds Series 1995B
10-01-20 6.25 2,700,000 2,808,999
South Whittier Elementary School District
Unlimited Tax General Obligation Capital
Appreciation Bonds Zero Coupon
Series 1998A (FGIC Insured)
08-01-15 5.15 300,000(e) 126,717
08-01-16 5.15 500,000(e) 198,850
Southern California Home Financing Authority
Single Family Mortgage Revenue Bonds 1990B
(GNMA Insured) A.M.T.
03-01-24 7.75 400,000 414,840
Southern California Metropolitan Water District
Waterworks Revenue Bonds Series 1998A
07-01-22 4.75 3,750,000 3,399,038
Southern California Public Power Authority Transmission
Special Bonds
07-01-12 6.00 2,700,000 2,852,334
State Department Water Resource
Water Systems Revenue Bonds Center Valley
Series 1995O
12-01-18 4.75 2,000,000 1,844,720
State Department Water Resource
Water Systems Revenue Bonds Central Valley
Series L
12-01-23 5.50 3,000,000 2,999,850
State Education Facility Authority
Revenue Bonds Pomona College
02-15-17 6.00 3,000,000 3,141,330
State Education Facility Authority
Revenue Bonds Series 1997B
04-01-21 6.30 1,000,000 1,049,650
State Health Facility Finance Authority
Pre-refunded Revenue Bonds
St. Joseph Health System Series 1989A
07-01-14 6.90 3,500,000 3,570,315
State Pollution Control Finance Authority Pollution Control
Revenue Bonds Southern California Edison
Series 1988A A.M.T.
09-01-06 6.90 2,000,000 2,048,640
State Public Works Board California Community
Colleges Lease Pre-refunded Revenue Bonds
Series 1994B
03-01-19 7.00 2,000,000 2,259,800
State Public Works Board Lease Revenue Bonds
Department of Correction Substance Abuse Treatment
Facility & State Prison at Corcoran Series 1996A
(AMBAC Insured)
01-01-21 5.25 1,870,000 1,839,239
State Public Works Board University of California Lease
Pre-refunded Revenue Bonds Series 1990A
09-01-15 7.00 2,250,000 2,384,550
State University Refunding Revenue Bonds
Series C (AMBAC Insured)
09-01-23 5.00 2,000,000 1,890,000
State Unlimited Tax General Obligation Bonds
(Secondary FGIC Insured)
09-01-23 4.75 1,325,000 1,199,470
State Unlimited Tax General Obligation Refunding Bonds
02-01-21 5.00 3,000,000 2,829,750
State Unlimited Tax General Obligation Refunding Bonds
(MBIA Insured)
10-01-28 4.50 6,250,000 5,273,749
Statewide Communities Services Authority
Water & Wastewater Revenue Bonds
Pooled Financing Program Series 1999A (FSA Insured)
10-01-25 5.00 1,000,000 942,790
Statewide Community Development Authority
Certificate of Participation San Diego State University
Student Residence Series 1998A (MBIA Insured)
06-01-20 5.00 1,500,000 1,423,470
Statewide Community Development Authority
Revenue Certificate of Participation
St. Joseph Health System Group
07-01-15 6.50 5,500,000 6,117,814
Stockton Single Family Mortgage Revenue Bonds
Series 1990A (GNMA Insured) A.M.T.
02-01-23 7.50 90,000 96,777
University of Southern California Educational
Facilities Authority Pre-refunded Revenue Bonds
Series 1989B
10-01-15 6.75 5,000,000 5,136,249
Upland Certificate of Participation Water System
Refunding Bonds (FGIC Insured)
08-01-16 6.60 1,000,000 1,070,070
West Sacramento Financing Authority
Special Tax Revenue Bonds Series 1999F
09-01-29 6.10 3,000,000 2,864,700
West Sacramento Redevelopment Agency
Tax Allocation Bonds (MBIA Insured)
09-01-20 4.75 2,780,000 2,546,925
Total municipal bonds
(Cost: $249,933,404) $264,125,212
Municipal note (0.4%)
Issuer(b,c,h) Effective Amount Value(a)
yield payable at
maturity
State Health Facilities Finance Authority
Revenue Bonds Sutter Health V.R.
Series 1990B (AMBAC Insured)
03-01-20 2.90% $1,000,000 $1,000,000
Total municipal note
(Cost: $1,000,000) $1,000,000
Total investments in securities
(Cost: $250,933,404)(i) $265,125,212
</TABLE>
<PAGE>
Notes to investments in securities
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) The following abbreviations may be used in portfolio descriptions to
identify the insurer of the issue:
ACA -- ACA Financial Guaranty Corporation
AMBAC -- American Municipal Bond Association Corporation
BIG -- Bond Investors Guarantee
CGIC -- Capital Guaranty Insurance Company
FGIC -- Financial Guarantee Insurance Corporation
FHA -- Federal Housing Authority
FNMA -- Federal National Mortgage Association
FSA -- Financial Security Assurance
GNMA -- Government National Mortgage Association
MBIA -- Municipal Bond Investors Assurance
(c) The following abbreviations may be used in the portfolio descriptions:
A.M.T. -- Alternative Minimum Tax -- As of June 30, 1999, the value of
securities subject to alternative minimum tax represented
7.23% of net assets.
B.A.N. -- Bond Anticipation Note
C.P. -- Commercial Paper
R.A.N. -- Revenue Anticipation Note
T.A.N. -- Tax Anticipation Note
T.R.A.N. -- Tax & Revenue Anticipation Note
V.R. -- Variable Rate
V.R.D.B. -- Variable Rate Demand Bond
V.R.D.N. -- Variable Rate Demand Note
(d) Partially pledged as initial deposit on the following open interest rate
futures contracts (see Note 5 to the financial statements):
Type of security Notional amount
Purchase contracts
Municipal Bonds, Sept. 1999 $7,000,000
(e) For zero coupon bonds, the interest rate disclosed represents the annualized
effective yield on the date of acquisition.
(f) Inverse floaters represent securities that pay interest at a rate that
increases (decreases) in the same magnitude as, or in a multiple of, a decline
(increase) in market short-term rates. Interest rate disclosed is the rate in
effect on June 30, 1999. Inverse floaters in the aggregate represent 6.20% of
the Fund's net assets as of June 30, 1999.
(g) For those zero coupon bonds that become coupon paying at a future date, the
interest rate disclosed represents the annualized effective yield from the date
of acquisition to interest reset date disclosed.
(h) The Fund is entitled to receive principal amount from issuer or corporate
guarantor, if indicated in parantheses, after a day or a week's notice. The
maturity date disclosed represents the final maturity. Interest rate varies to
reflect current market conditions; rate shown is the effective rate on June 30,
1999.
(i) At June 30, 1999, the cost of securities for federal income tax purposes was
$250,959,654 and the aggregate gross unrealized appreciation and depreciation
based on that cost was:
Unrealized appreciation $16,476,856
Unrealized depreciation (2,311,298)
----------
Net unrealized appreciation $14,165,558
<PAGE>
<TABLE>
<CAPTION>
Investments in Securities
AXP Massachusetts Tax-Exempt Fund
June 30, 1999
(Percentages represent value of investments compared to net assets)
Municipal bonds (98.7%)
Name of issuer and Coupon Principal Value(a)
title of issue(b,c) rate amount
Bay Transportation Authority
General Transportation System
Refunding Bonds Series 1992B
<S> <C> <C> <C> <C> <C>
03-01-16 6.20% $1,500,000 $1,655,115
Bay Transportation Authority
Pre-refunded Revenue Bonds
Series 1992B (FSA Insured)
03-01-21 5.50 15,000 15,585
Bay Transportation Authority
Unrefunded Revenue Bonds
Series 1992B (FSA Insured)
03-01-21 5.50 485,000 484,350
Boston City Hospital Pre-refunded Revenue Bonds
Series A (FHA Insured)
02-15-21 7.63 1,000,000 1,061,620
Boston City Hospital Refunding Revenue Bonds
Series B (FHA Insured)
02-15-23 5.75 3,000,000 3,032,189
Boston General Obligation Bonds
Series 1991A (MBIA Insured)
07-01-11 6.75 500,000 535,350
Boston General Obligation Refunding Bonds
Series 1993A (AMBAC Insured)
02-01-09 5.65 1,500,000 1,562,805
Boston Industrial Development Financing Authority
Revenue Bonds Massachusetts College of Pharmacy
Series 1993A (Connie Lee Insured)
10-01-26 5.25 1,000,000 956,660
Boston Water & Sewer Commission
General Pre-refunded Revenue Bonds
Senior Series 1991A (FGIC Insured)
11-01-18 7.00 1,000,000(e) 1,084,200
Boston Water & Sewer Commission
General Revenue Bonds
Series 1998D (FGIC Insured)
11-01-22 4.75 1,000,000 898,370
Commonwealth General Obligation Consolidated Loan
Pre-refunded Bonds
Series 1990A (FGIC Insured)
03-01-09 7.25 500,000 522,595
Haverhill City Unlimited Tax General Obligation Bonds
Series 1997 (FGIC Insured)
06-15-17 5.00 1,000,000 957,680
Health & Educational Facilities Authority
Pre-refunded Bonds Northeastern University
Series 1989C (AMBAC Insured)
10-01-06 7.10 1,000,000 1,028,570
Health & Educational Facilities Authority
Pre-refunded Bonds Northeastern University
Series E (MBIA Insured)
10-01-22 6.55 1,000,000 1,075,760
Health & Educational Facilities Authority
Pre-refunded Revenue Bonds
Stonehill College Series 1990D (AMBAC Insured)
07-01-20 7.70 1,000,000 1,060,860
Health & Educational Facilities Authority
Pre-refunded Revenue Bonds
Wentworth Institute of Technology
Series A (AMBAC Insured)
04-01-10 7.40 750,000 786,968
Health & Educational Facilities Authority
Refunding Revenue Bonds
Beth Israel Hospital Series 1989E
07-01-09 7.00 300,000 306,363
07-01-14 7.00 250,000 255,218
Health & Educational Facilities Authority
Revenue Bonds Berkshire Health Systems
Series C
10-01-11 5.90 1,000,000 1,010,980
Health & Educational Facilities Authority
Revenue Bonds Brigham & Women's Hospital
Series 1991D
07-01-24 6.75 1,000,000 1,069,700
Health & Educational Facilities Authority
Revenue Bonds Cape Cod Health System
Series 1993A (Connie Lee Insured)
11-15-21 5.25 2,500,000 2,385,925
Health & Educational Facilities Authority
Revenue Bonds Charlton Memorial Hospital
Series 1991B
07-01-13 7.25 1,750,000 1,884,418
Health & Educational Facilities Authority
Revenue Bonds Holyoke Hospital
Series B
07-01-15 6.50 1,000,000 1,038,070
Health & Educational Facilities Authority
Revenue Bonds New England Deaconess Hospital
Series 1992D
04-01-12 6.63 1,000,000 1,078,540
Health & Educational Facilities Authority
Revenue Bonds Newton Wellesley Hospital
Series 1991D (MBIA Insured)
07-01-15 7.00 1,000,000 1,074,460
Health & Educational Facilities Authority
Revenue Bonds South Shore Hospital
Series 1992D (MBIA Insured)
07-01-22 6.50 1,000,000 1,067,550
Health & Educational Facilities Authority
Revenue Bonds Suffolk University
Series B (Connie Lee Insured)
07-01-22 6.35 2,495,000 2,649,565
Industrial Finance Agency Assumption College
Revenue Bonds Series 1996 (Connie Lee Insured)
07-01-26 6.00 1,000,000 1,036,560
Industrial Finance Agency Hampshire College
Revenue Bonds Series 1997
10-01-17 5.80 1,105,000 1,078,182
Industrial Finance Agency Pollution Control
Refunding Revenue Bonds Eastern Edison
Series 1993
08-01-08 5.88 2,000,000 2,023,300
Industrial Finance Agency Resource Recovery
Revenue Bonds SEMASS Series 1991A
07-01-15 9.00 1,500,000 1,642,440
Industrial Finance Agency Revenue Bonds
Museum of Science Series 1989 (FSA Insured)
11-01-09 7.30 800,000 826,160
Leominster General Obligation Bonds (MBIA Insured)
04-01-09 7.50 1,000,000 1,050,030
Mansfield General Obligation Bonds (AMBAC Insured)
11-15-11 6.70 1,000,000 1,077,590
Municipal Wholesale Electric Power
Supply System Pre-refunded Revenue Bonds
Series 1992B
07-01-17 6.75 1,395,000 1,518,583
Municipal Wholesale Electric Power
Supply System Refunding Revenue Bonds
Series 1994B (MBIA Insured)
07-01-11 4.75 1,750,000 1,659,368
Municipal Wholesale Electric Power
Supply System Revenue Bonds
Special Parts & Inflows (AMBAC Insured)
07-01-18 5.45 1,600,000 1,586,912
Nantucket General Obligation Bonds
12-01-11 6.80 1,000,000 1,080,400
New Bedford General Obligation Bonds
Series 1995 (AMBAC Insured)
10-15-15 5.50 700,000 707,364
North Andover General Obligation Bonds (MBIA Insured)
09-15-08 7.35 310,000 331,570
North Andover Unlimited Tax General
Obligation Municipal Purpose Loan Bonds
Series 1998 (FGIC Insured)
01-15-18 4.75 1,000,000 916,740
North Attleborough Unlimited General Obligation Bonds
Series 1997 (AMBAC Insured)
03-01-17 5.25 1,000,000 987,460
Port Authority Revenue Bonds
Series 1990A (FGIC Insured) A.M.T.
07-01-20 7.50 1,000,000 1,050,930
Southeastern University Building Refunding Revenue Bonds
Series A (AMBAC Insured)
05-01-16 5.75 1,250,000 1,291,250
Southern Berkshire Regional School District Unlimited Tax
General Obligation Pre-refunded Bonds (AMBAC Insured)
04-15-10 7.55 1,000,000 1,052,150
State Development Finance Agency
Private School Revenue Bonds
Series 1998
11-01-18 5.88 500,000 481,790
State Development Finance Agency
Revenue Bonds 1st Mortgage
Berkshire Retirement Community
Lennox Series 1999
07-01-29 5.63 1,500,000 1,416,195
State Development Finance Agency
Revenue Bonds Boston University
Series 1999P
05-15-29 6.00 1,500,000 1,572,990
State Development Finance Agency
Revenue Bonds Landmark School
Series 1999 (Asset Guaranty)
06-01-29 5.25 1,000,000 952,210
State Development Finance Agency
Revenue Bonds Suffolk University
Series 1999
07-01-29 5.85 1,000,000 993,000
State Development Finance Authority
Revenue Bonds Boston Biomedical Research Institute
02-01-29 5.75 1,000,000 957,530
State Education Loan Authority
Educational Loan Revenue Bonds
Issue E Series B (AMBAC Insured) A.M.T.
01-01-12 6.00 815,000 848,977
State General Obligation Consolidated Loan Bonds
Series 1991A (FGIC Insured)
06-01-11 6.00 1,095,000 1,134,891
State Health & Education Facilities Authority
College Revenue Bonds Brandeis University
Series 1998I (MBIA Insured)
10-01-28 4.75 1,000,000 887,470
State Health & Education Facilities Authority
Hospital Revenue Bonds Harvard Pilgrim Health
Series 1998A (FSA Insured)
07-01-22 4.75 1,000,000 893,190
State Health & Education Facilities Authority
Hospital Revenue Bonds Milford-Whitinsville
Regional Hospital Series 1998C
07-15-28 5.38 1,065,000 976,680
State Health & Education Facilities Authority
Pre-refunded Revenue Bonds Boston College
Series 1991J (FGIC Insured)
07-01-21 6.63 1,940,000 2,068,661
State Health & Education Facilities Authority
Pre-refunded Revenue Bonds Melrose-Wakefield
Hospital Series 1992B
07-01-16 6.38 1,000,000 1,076,940
State Health & Education Facilities Authority
Refunding Revenue Bonds Caritas Christi
Obligated Group Series 1999A
07-01-15 5.70 1,000,000 976,440
State Health & Education Facilities Authority
Revenue Bonds Boston College Series L
06-01-31 4.75 2,000,000 1,735,140
State Health & Education Facilities Authority
Revenue Bonds North Adams Regional Hospital
Series C
07-01-18 6.63 1,000,000 1,055,080
State Health & Education Facilities Authority
Revenue Bonds South Shore Hospital
Series 1999F
07-01-29 5.75 1,000,000 994,340
State Health & Education Facilities Authority
Revenue Bonds Southcoast Health System
Series 1998A (MBIA Insured)
07-01-27 4.75 1,000,000 879,260
State Health & Education Facilities Authority
Revenue Bonds Valley Regional Health System
Series 1994C (Connie Lee Insured)
07-01-18 5.75 1,000,000 1,017,270
State Health & Education Facilities Authority
Revenue Bonds Vinfen Corporation
Series 1998A (ACA Insured)
11-15-28 5.30 500,000 467,565
State Health & Education Facilities Authority
Unrefunded Revenue Bonds Boston College
Series 1991J (FGIC Insured)
07-01-21 6.63 60,000 63,674
State Housing Authority Residential
Development Bonds Series 1992A (FNMA Insured)
11-15-11 6.88 1,000,000 1,074,720
State Industrial Finance Agency Assisted Living
Facility Revenue Bonds Marina Bay LLC
Series 1997 A.M.T.
12-01-27 7.50 1,000,000 1,065,530
State Industrial Finance Agency Assisted Living
Facility Revenue Bonds Newton Group Properties LLC
Series 1997 A.M.T.
09-01-27 8.00 1,160,000 1,276,162
State Industrial Finance Agency College Revenue
Bonds Tufts University Series 1998H (MBIA Insured)
02-15-28 4.75 1,000,000 888,490
State Industrial Finance Agency Miscellaneous
Revenue Bonds Cambridge Friends School
Series 1998
09-01-28 5.80 700,000 677,019
State Industrial Finance Agency School Bonds
St. John's High School of Worcester County
Series 1998
06-01-28 5.35 500,000 462,035
State Turnpike Authority Metro Highway System
Senior Lien Revenue Bonds Toll Road
Series 1997A (MBIA Insured)
01-01-37 5.00 2,000,000 1,818,500
State Water Resource Authority Revenue Bonds
Series 1992A (Secondary MBIA Insured)
07-15-22 5.50 1,100,000 1,140,095
University of Massachusetts Building Authority
Revenue Bonds Escrowed to Maturity
05-01-11 7.50 105,000 120,464
Water Resource Authority General
Pre-refunded Revenue Bonds Series 1990A
04-01-14 7.63 500,000 525,475
Water Resource Authority General
Pre-refunded Revenue Bonds Series 1991A
12-01-19 6.50 1,000,000 1,075,000
Water Resource Authority General
Revenue Bonds Series B (MBIA Insured)
03-01-22 5.00 1,365,000 1,278,759
Worcester General Obligation Refunding Bonds
Series 1995G (MBIA Insured)
07-01-15 5.30 1,000,000 999,570
Worcester Unlimited Tax General
Obligation Bonds Series 1998A (FSA Insured)
07-01-17 4.90 1,000,000 936,320
Total municipal bonds
(Cost: $82,669,770) $86,243,887
Municipal note (1.5%)
Issuer(c,d) Effective Amount Value(a)
yield payable at
maturity
State Health & Education Facility
Capital Asset V.R.
01-01-35 3.35% $1,300,000 $1,300,000
Total municipal note
(Cost: $1,300,000) $1,300,000
Total investments in securities
(Cost: $83,969,770)(f) $87,543,887
</TABLE>
<PAGE>
Notes to investments in securities
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) The following abbreviations may be used in portfolio descriptions to
identify the insurer of the issue:
ACA -- ACA Financial Guaranty Corporation
AMBAC -- American Municipal Bond Association Corporation
BIG -- Bond Investors Guarantee
CGIC -- Capital Guaranty Insurance Company
FGIC -- Financial Guarantee Insurance Corporation
FHA -- Federal Housing Authority
FNMA -- Federal National Mortgage Association
FSA -- Financial Security Assurance
GNMA -- Government National Mortgage Association
MBIA -- Municipal Bond Investors Assurance
(c) The following abbreviations may be used in the portfolio descriptions:
A.M.T. -- Alternative Minimum Tax-- As of June 30, 1999, the value of
securities subject to alternative minimum tax represented
4.86% of net assets.
B.A.N. -- Bond Anticipation Note
C.P. -- Commercial Paper
R.A.N. -- Revenue Anticipation Note
T.A.N. -- Tax Anticipation Note
T.R.A.N. -- Tax & Revenue Anticipation Note
V.R. -- Variable Rate
V.R.D.B. -- Variable Rate Demand Bond
V.R.D.N. -- Variable Rate Demand Note
(d) The Fund is entitled to receive principal amount from issuer or corporate
guarantor, if indicated in parentheses, after a day or a week's notice. The
maturity date disclosed represents the final maturity. Interest rate varies to
reflect current market conditions; rate shown is the effective rate on June 30,
1999.
(e) Partially pledged as initial deposit on the following open interest rate
futures contracts (see Note 5 to the financial statements):
Type of security Notional amount
Purchase contracts
Municipal Bonds, Sept. 1999 $5,500,000
(f) At June 30, 1999, the cost of securities for federal income tax purposes was
$83,969,770 and the aggregate gross unrealized appreciation and depreciation
based on that cost was:
Unrealized appreciation $4,458,677
Unrealized depreciation (884,560)
Net unrealized appreciation $3,574,117
<PAGE>
<TABLE>
<CAPTION>
Investments in Securities
AXP Michigan Tax-Exempt Fund
June 30, 1999
(Percentages represent value of investments compared to net assets)
Municipal bonds (98.4%)
Name of issuer and Coupon Principal Value(a)
title of issue(b,c) rate amount
Anchor Bay School District Unlimited Tax General
Obligation Refunding Bonds (FGIC Insured)
<S> <C> <C> <C> <C> <C>
05-01-26 4.75% $1,870,000 $1,667,124
Auburn Hills Limited Tax General Obligation
Street Improvement Bonds
05-01-04 6.00 200,000(e) 204,546
Battle Creek Calhoun County Downtown
Development Authority Pre-refunded Bonds
Series 1994
05-01-22 7.65 1,250,000 1,431,225
Belding Area Schools Unlimited Tax General
Obligation Refunding Bonds Series 1998
(AMBAC Insured)
05-01-26 5.00 1,000,000 934,190
Buena Vista School District Saginaw County
School Building & Site Unlimited Tax
General Obligation Pre-refunded Bonds Series 1991
05-01-16 7.20 1,500,000 1,611,135
Central Michigan University Revenue Bonds
Series 1997 (FGIC Insured)
10-01-26 5.50 750,000 792,278
Central Michigan University Revenue Bonds
Series 1998 (FGIC Insured)
10-01-27 5.00 1,000,000 932,700
Chippewa County Hospital Financial Authority
Hospital Refunding Revenue Bonds
Chippewa County War Memorial Hospital
Series 1997B
11-01-14 5.63 500,000 487,185
Chippewa Valley School District Unlimited Tax
General Obligation Bonds (FGIC Insured)
05-01-21 5.00 1,000,000 940,450
Concord Academy Certificate of Participation Series 1998
10-01-19 7.00 1,000,000 959,210
Detroit Downtown Development Authority
Development Area Project 1 Junior Lien
Tax Increment Refunding Bonds Series 1996D
07-01-25 6.50 1,000,000 1,116,980
Detroit Sewer Disposal Revenue Bonds (FGIC Insured)
07-01-23 5.70 2,000,000 2,098,444
Detroit Unlimited Tax General Obligation Bonds
Series 1995A
04-01-15 6.80 1,000,000(e) 1,119,850
Detroit Unlimited Tax General Obligation
Bonds Series 1999A (FSA Insured)
04-01-19 5.00 1,000,000 941,280
Detroit Water Supply System Second Lien
Revenue Bonds Series 1995A (MBIA Insured)
07-01-25 5.50 1,500,000 1,495,875
East Lansing School District School Building & Site
Unlimited Tax General Obligation
Pre-refunded Bonds Series 1991
05-01-14 6.63 1,000,000 1,063,210
Eaton Rapids Public Schools Unlimited Tax
General Obligation Refunding Bonds (MBIA Insured)
Series 1999
05-01-25 4.75 1,000,000 893,340
Farmington Hills Hospital Finance Authority
Revenue Bonds Botsford General Hospital
Series 1992A (MBIA Insured)
02-15-22 6.50 1,500,000 1,610,745
Ferris State University Board of Trustees
General Refunding Revenue Bonds
Series 1995 (MBIA Insured)
10-01-20 5.25 1,000,000 970,020
Forest Hills School District Unlimited Tax
General Obligation Pre-refunded Bonds
05-01-15 7.38 1,000,000 1,041,620
Fowlerville Community Schools Unlimited Tax
General Obligation Refunding Bonds (FSA Insured)
Series 1999
05-01-26 4.75 1,000,000 891,510
Garden City Hospital Finance Authority
Hospital Revenue Bonds Series 1998
09-01-17 5.75 1,000,000 940,880
Genesee County General Obligation Bonds
Sewer Disposal System Series A (AMBAC Insured)
04-01-15 5.40 1,400,000 1,408,022
Gogebic County Hospital Finance Authority
Hospital Refunding Revenue Bonds
Grandview Health System Series 1999
10-01-16 5.88 1,000,000 959,620
Grand Ledge Public Schools Unlimited Tax General Obligation
Refunding Bonds Eaton, Clinton & Ionia Counties
Series 1995 (MBIA Insured)
05-01-24 5.38 2,000,000 1,968,859
Grand Rapids Community College Limited Tax
General Obligation Bonds Series 1996 (MBIA Insured)
05-01-19 5.38 1,000,000 993,290
Grand Rapids Sanitary Sewer System Refunding
Revenue Bonds Series 1998A (FGIC Insured)
01-01-28 4.75 1,000,000 892,680
Grand Rapids Tax Increment Revenue Bonds
Series 1994 (MBIA Insured)
06-01-24 6.88 380,000 420,364
Grand Rapids Water Supply System Improvement
Pre-refunded Revenue Bonds Series 1990 (FGIC Insured)
01-01-20 7.25 1,000,000 1,039,050
Holly Area School District Unlimited Tax
General Obligation Refunding Bonds (FGIC Insured)
Series 1999
05-01-25 4.75 1,000,000 893,340
Inkster School District Unlimited Tax General Obligation
Pre-refunded Bonds (AMBAC Insured)
05-01-18 7.00 450,000 469,805
Iosco County Water Supply System Limited Tax
General Obligation Bonds (AMBAC Insured)
05-01-08 5.50 175,000 178,836
05-01-09 5.50 200,000 204,344
05-01-10 5.50 200,000 204,296
Kalamazoo Hospital Finance Authority
Hospital Refunding Revenue Bonds
Bronson Methodist Hospital Series 1998 (MBIA Insured)
05-15-18 5.25 500,000 481,990
Lake Orion School District General Obligation Bonds
(AMBAC Insured)
05-01-20 5.50 1,000,000 1,000,480
Lincoln Park School District Wayne County
School Building & Site Unlimited Tax
General Obligation Bonds (FGIC Insured)
05-01-26 5.90 1,000,000 1,079,110
Monroe County Pollution Control Revenue Bonds
Detroit Edison Fermi 2 Plants
Series CC (AMBAC Insured) A.M.T.
12-01-19 7.50 1,750,000 1,826,615
Monroe County Pollution Control Revenue Bonds
Detroit Edison Fermi Plants Series
1990I (FGIC Insured) A.M.T.
09-01-20 7.65 1,000,000 1,057,000
Northville Public Schools Unlimited Tax
General Obligation Bonds Series 1991B
05-01-08 7.00 1,500,000 1,604,670
Ovid-Elsie School District Unlimited Tax
General Obligation Bonds (Secondary MBIA Insured)
05-01-21 5.60 1,000,000 1,062,500
Redford General Obligation Bonds (MBIA Insured)
04-01-16 5.25 1,450,000 1,462,992
Richmond Limited Obligation Refunding Revenue Bonds
K mart Series A
01-01-07 6.63 530,000 554,407
Rockford Public Schools Kent County Unlimited Tax
General Obligation Pre-refunded Revenue Bonds
05-01-19 7.38 1,000,000 1,040,850
Romulus Township School District Unlimited Tax
General Obligation Refunding Bonds (FGIC Insured)
05-01-22 5.75 2,500,000 2,551,874
Schoolcraft Community School District
Kalamazoo County School Building
& Site Unlimited General Obligation Bonds
Series 1996 (FGIC Insured)
05-01-26 5.38 1,000,000 1,041,760
South Lake District Unlimited Tax General Obligation
Pre-refunded Bonds
05-01-10 6.80 355,000 377,401
South Redford School District Unlimited General
Obligation Bonds Series 1996 (FGIC Insured)
05-01-22 5.50 1,000,000 1,032,080
State Building Authority Refunding
Revenue Bonds Series 1991I
10-01-20 6.25 2,200,000 2,315,389
State Hospital Finance Authority
Hospital Pre-refunded Revenue Bonds
McLaren Obligated Group Series 1991A
09-15-21 7.50 1,750,000 1,906,239
State Hospital Finance Authority
Hospital Refunding Revenue Bonds
Detroit Medical Center Series 1988A
08-15-12 8.13 90,000 91,688
State Hospital Finance Authority
Hospital Refunding Revenue Bonds
Detroit Medical Center Series A
08-15-13 6.25 1,200,000 1,189,908
State Hospital Finance Authority
Hospital Refunding Revenue Bonds
Memorial Healthcare Center
Obligated Group Series 1999
11-15-21 5.88 1,000,000 996,840
State Hospital Finance Authority
Hospital Refunding Revenue Bonds
Sinai Hospital of Greater Detroit Series 1995
01-01-26 6.70 1,000,000 1,023,380
State Hospital Finance Authority
Pre-refunded Revenue Bonds
Henry Ford Hospital Series 1990A
07-01-10 7.00 1,000,000 1,053,410
State Hospital Finance Authority
Pre-refunded Revenue Bonds
Oakwood Hospital Group Series 1990A (FGIC Insured)
07-01-18 7.10 1,000,000 1,054,300
State Hospital Finance Authority
Refunding Revenue Bonds
Presbyterian Villages Obligated Group Series 1995
01-01-25 6.50 1,000,000 1,044,420
State Hospital Finance Authority Revenue Bonds
Central Michigan Community Hospital
10-01-27 6.25 1,000,000 1,029,240
State Hospital Finance Authority Revenue Bonds
Presbyterian Villages of Michigan
Obligated Group Series 1997
01-01-25 6.38 700,000 727,013
State Hospital Finance Authority Revenue Bonds
St. John's Hospital & Medical Center (AMBAC Insured)
05-15-26 5.25 1,400,000 1,337,854
State Public Power Agency Belle River
Refunding Revenue Bonds Series A
01-01-18 5.25 1,000,000 970,070
State Strategic Fund Limited Tax Obligation Refunding
Revenue Bonds Detroit Edison
Series 1990BB (MBIA Insured)
07-15-08 7.00 1,000,000 1,146,380
State Strategic Fund Limited Tax Obligation
Refunding Revenue Bonds Detroit Edison
Series 1992BB (FGIC Insured)
02-15-16 6.50 1,500,000 1,590,870
State Strategic Fund Limited Tax Obligation
Refunding Revenue Bonds Ford Motor
Series 1991A
02-01-06 7.10 1,650,000(e) 1,855,986
State Strategic Fund Limited Tax Obligation Refunding
Revenue Bonds Great Lakes Pulp & Fibre
Series 1994 A.M.T.
12-01-27 5.00 641,479 449,035
State Strategic Fund Limited Tax Obligation
Refunding Revenue Bonds
Oxford Institute Escrowed to Maturity
08-15-05 7.88 150,000 165,758
State Strategic Fund Nursing Home
Revenue Bonds Holland Home Series 1998
11-15-28 5.75 1,000,000 938,130
State Trunk Line Refunding Revenue Bonds
Series 1998A (MBIA Insured)
11-01-20 4.75 1,000,000 905,250
State Trunk Line Revenue Bonds Series 1994A (FGIC Insured)
11-15-20 5.75 1,065,000 1,146,228
State University Revenue Bonds Series A
08-15-22 5.50 560,000 579,757
Summit Academy Certificates of Participation
Junior High School Facility Series 1999
09-01-29 7.00 695,000 670,446
Summit Academy Certificates of Participation Series 1998
09-01-18 7.00 1,110,000 1,076,878
Troy City Downtown Development Authority
Oakland County Development Bonds
Series 1995A (Asset Guaranty)
11-01-18 6.38 1,500,000 1,611,015
Van Buren Township Tax Increment Revenue Bonds
Series 1994
10-01-16 8.40 1,000,000 1,117,110
Wayne Charter County Airport Revenue Bonds
Detroit Metropolitan Airport Series 1998A
(MBIA Insured) A.M.T.
12-01-28 5.00 2,000,000 1,827,820
Wayne Charter County Airport Revenue Bonds Detroit Metropolitan Airport Series
1990A (AMBAC Insured) A.M.T.
12-01-20 7.00 1,080,000 1,139,303
Wayne State University Revenue Bonds
University Board of Govenors (FGIC Insured)
11-15-29 5.13 1,000,000 942,060
Total municipal bonds
(Cost: $77,257,899) $81,851,809
Municipal note (0.1%)
Issuer(c,d) Effective Amount Value(a)
yield payable at
maturity
Regents of the University of Michigan Hospital
Revenue Bonds V.R. Series A
12-01-19 3.45% $100,000 $100,000
Total municipal note
(Cost: $100,000) $100,000
Total investments in securities
(Cost: $77,357,899)(f) $81,951,809
</TABLE>
<PAGE>
Notes to investments in securities
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) The following abbreviations may be used in portfolio descriptions to
identify the insurer of the issue:
ACA -- ACA Financial Guaranty Corporation
AMBAC -- American Municipal Bond Association Corporation
BIG -- Bond Investors Guarantee
CGIC -- Capital Guaranty Insurance Company
FGIC -- Financial Guarantee Insurance Corporation
FHA -- Federal Housing Authority
FNMA -- Federal National Mortgage Association
FSA -- Financial Security Assurance
GNMA -- Government National Mortgage Association
MBIA -- Municipal Bond Investors Assurance
(c) The following abbreviations may be used in the portfolio descriptions:
A.M.T. -- Alternative Minimum Tax-- As of June 30, 1999, the value of
securities subject to alternative minimum tax represented
7.57% of net assets.
B.A.N. -- Bond Anticipation Note
C.P. -- Commercial Paper
R.A.N. -- Revenue Anticipation Note
T.A.N. -- Tax Anticipation Note
T.R.A.N. -- Tax & Revenue Anticipation Note
V.R. -- Variable Rate
V.R.D.B. -- Variable Rate Demand Bond
V.R.D.N. -- Variable Rate Demand Note
(d) The Fund is entitled to receive principal amount from issuer or corporate
guarantor, if indicated in parentheses, after a day or a week's notice. The
maturity date disclosed represents the final maturity. Interest rate varies to
reflect current market conditions; rate shown is the effective rate on June 30,
1999.
(e) Partially pledged as initial deposit on the following open interest rate
futures contracts (see Note 5 to the financial statements):
Type of security Notional amount
Purchase contracts
Municipal Bonds, Sept. 1999 $6,000,000
(f) At June 30, 1999, the cost of securities for federal income tax purposes was
$77,357,899 and the aggregate gross unrealized appreciation and depreciation
based on that cost was:
Unrealized appreciation $5,362,724
Unrealized depreciation (768,814)
--------
Net unrealized appreciation $4,593,910
<PAGE>
<TABLE>
<CAPTION>
Investments in Securities
AXP Minnesota Tax-Exempt Fund
June 30, 1999
(Percentages represent value of investments compared to net assets)
Municipal bonds (95.6%)
Name of issuer and Coupon Principal Value(a)
title of issue(b,c) rate amount
Albert Lea Independent School District 241
Unlimited Tax General Obligation Bonds
Series 1998 (MBIA Insured)
<S> <C> <C> <C> <C> <C>
02-01-16 4.80% $2,555,000 $2,401,112
Anoka County Resource Recovery Revenue Bonds
Northern States Power Series 1985
12-01-08 7.15 3,750,000 3,860,738
Becker Pollution Control Revenue Bonds Northern
States Power Sherburne County Generating Station
Units 1 & 2 Series 1987A
12-01-05 7.25 2,000,000 2,004,940
Becker Solid Waste Disposal Facility Revenue Bonds
Liberty Paper Series 1994B A.M.T.
08-01-15 9.00 3,825,000 3,915,385
Bemidji Hospital Facilities 1st Mortgage Pre-refunded
Revenue Bonds North Country Health Services
Series 1991
09-01-21 7.00 1,755,000 1,889,345
Bloomington Housing & Redevelopment Authority
Housing Revenue Bonds Senior Summerhouse
Bloomington
05-01-35 6.13 3,400,000 3,278,076
Brooklyn Center Tax Credit Investor Refunding
Revenue Bonds Four Courts Apartments
Series 1995B A.M.T.
06-01-09 7.58 2,450,000 2,481,091
Buffalo Independent School District 877 Unlimited
Tax General Obligation Refunding Bonds
(MBIA Insured)
02-01-18 4.80 1,710,000 1,586,333
Burnsville Multi-family Housing Refunding Revenue
Bonds Summit Park Apartments Series 1993
(FHA Insured)
07-01-33 6.00 4,000,000 4,109,280
Chaska Multi-family Housing Revenue Bonds West
Suburban Housing Partners A.M.T.
09-01-19 5.75 175,000 170,503
03-01-31 5.88 2,115,000 2,049,858
Columbia Heights Multi-family Housing Pre-refunded
Revenue Bonds Crestview Lutheran Home Royce
Place Series 1991 (FHA Insured)
06-01-32 7.75 2,705,000 2,960,325
Columbia Heights Multi-family Housing Revenue
Bonds Crestview Lutheran Home Royce Place
Series 1991
06-01-32 10.00 535,000 611,334
Duluth Economic Development Authority Health Care
Facilities Pre-refunded Revenue Bonds Benedictine
Health System St. Mary's Medical Center
Series 1990
02-15-20 8.38 2,000,000 2,099,960
Duluth Economic Development Authority Health Care
Facilities Revenue Bonds BSM Properties
Series 1998A
12-01-28 5.88 500,000 479,085
Eden Prairie Housing Development Authority
Refunding Revenue Bonds Eden Commons
Series 1990 (FHA Insured)
03-01-25 8.25 6,035,000 6,176,521
Eden Prairie Multi-family Housing Refunding
Revenue Bonds Sterling Ponds Series 1999A A.M.T.
12-01-29 6.25 5,335,000 5,200,131
Eden Prairie Multi-family Housing Refunding
Revenue Bonds Sterling Ponds Series 1999B A.M.T.
12-01-29 6.25 745,000 726,166
Edina Hospital System Pre-refunded Revenue Bonds
Fairview Hospital & Health Care Services
Series 1989A
07-01-19 7.13 2,500,000 2,550,250
Edina Multi-family Housing Revenue Bonds Walker
Assisted Living Series 1991
09-01-31 9.00 6,640,000 7,460,837
Faribault Rice & Goodhue Counties Independent
School District 656 General Obligation School
Building Bonds Series 1995 (FSA Insured)
06-01-15 5.75 6,900,000 7,083,609
Faribault Single Family Housing Mortgage Refunding
Revenue Bonds Series 1991A
12-01-11 7.50 930,000 974,993
Farmington Independent School District 192
Unlimited Tax General Obligation Capital
Appreciation School Building Bonds Zero Coupon
Series 1998B (FSA Insured)
02-01-15 5.30 2,070,000(e) 887,243
Fergus Falls Health Care Facilities Revenue Bonds
LRHC Long-term Care Facility Series 1995
12-01-25 6.50 1,500,000 1,591,620
Golden Valley Revenue Bonds Covenant Retirement
Communities Series 1999A
12-01-29 5.50 6,250,000 5,931,938
Harmony Multi-family Housing Refunding
Revenue Bonds Zedakah Foundation Series 1997A
09-01-20 5.95 1,240,000 1,269,326
Hastings Healthcare Tax-Exempt Nursing Home
Revenue Bonds Regina Medical Center
(ACA Insured)
09-15-28 5.30 4,100,000 3,834,525
Hennepin County Lease Revenue Certificates of
Participation Series 1991
05-15-17 6.80 7,250,000 7,695,004
Hopkins Pre-refunded Revenue Bonds Blake School
09-01-24 6.70 3,120,000 3,418,147
Hubbard County Solid Waste Disposal Revenue
Bonds Potlatch Series 1989 A.M.T.
08-01-13 7.38 5,610,000 5,733,196
International Falls Solid Waste Disposal Revenue
Bonds Boise Cascade Series 1990 A.M.T.
01-01-15 7.75 4,000,000 4,110,080
Little Canada Multi-family Housing Revenue Bonds
Housing Alternatives Development Company
Series 1997A
12-01-27 6.25 3,450,000 3,436,131
Little Canada Multi-family Housing Revenue Bonds
Little Canada Series 1996 A.M.T.
02-01-27 7.00 3,810,000 3,878,694
Mahtomedi Multi-family Housing Revenue Bonds
Briarcliff A.M.T.
06-01-36 7.35 2,245,000 2,317,311
Maplewood Elder Care Facilities Revenue Bonds Care
Institute Series 1994
01-01-24 7.75 3,830,000 3,926,210
Maplewood Multi-family Housing Refunding Revenue
Bonds Carefree Cottages of Maplewood III
Series 1995 A.M.T.
11-01-32 7.20 2,895,000 2,946,415
Maplewood Multi-family Housing Revenue Bonds
Cottages Maplewood (FHA Insured) A.M.T.
07-15-21 7.75 1,985,000 2,047,786
Minneapolis & St. Paul Housing & Redevelopment
Authority Health Care System Revenue Bonds
Group Health Plan Series 1992
12-01-13 6.75 10,500,000 11,128,529
Minneapolis & St. Paul Housing & Redevelopment
Authority Health Care System Revenue Bonds
Healthspan Series 1993A (AMBAC Insured)
11-15-18 4.75 13,500,000(f) 12,422,564
Minneapolis & St. Paul Metropolitan Airports
Commission Airport Revenue Bonds Series 1998A
(AMBAC Insured)
01-01-22 5.00 2,500,000 2,383,150
Minneapolis Community Development Agency
Limited Tax Supported Development General
Obligation Bonds Common Bond Fund Series 1997A
06-01-12 5.50 250,000 254,198
Minneapolis Community Development Agency
Limited Tax Supported Development Revenue
Bonds Common Bond Fund 1st Series 1996
06-01-11 6.00 980,000 999,365
Minneapolis Community Development Agency
Limited Tax Supported Development Revenue
Bonds Common Bond Fund 2nd Series 1998A
A.M.T.
06-01-16 5.20 290,000 277,104
06-01-19 5.25 500,000 476,245
Minneapolis Community Development Agency
Limited Tax Supported Development Revenue
Bonds Common Bond Fund 5th Series 1997
12-01-27 5.70 680,000 687,208
Minneapolis General Obligation Bonds Sports Arena
Series 1996
10-01-24 5.20 4,940,000 4,851,031
Minneapolis Hospital Facilities Pre-refunded Revenue
Bonds Lifespan Series 1989A
12-01-14 7.00 5,000,000 5,173,850
Minneapolis Nursing Home Revenue Bonds Walker
Cityview & Southview Series 1992
07-01-22 8.50 5,280,000 6,007,214
Minneapolis Special School District 1 Certificates of
Participation Series 1997A (MBIA Insured)
02-01-17 5.38 2,400,000 2,409,528
Minneapolis Special School District 1 Certificates of
Participation Series 1998A (FGIC Insured)
02-01-19 4.75 2,000,000 1,832,640
Minnetonka Multi-family Housing Refunding
Revenue Bonds Cedar Hills West (FHA Insured)
06-01-26 7.75 5,370,000 5,514,668
Minnetonka Multi-family Housing Revenue Bonds
Cedar Hills West Series 1985
12-01-17 7.50 500,000 518,285
Minnetonka Senior Housing Revenue Bonds
Westridge Senior Housing
09-01-17 6.75 650,000 657,241
09-01-27 7.00 500,000 510,590
Moorhead Economic Development Authority
Multi-family Housing Development Refunding
Revenue Bonds Eventide Senior Housing
Series 1999B
06-01-19 5.90 500,000 486,340
06-01-29 6.00 1,400,000 1,354,626
New Brighton Tax Credit Investor Revenue Bonds
Polynesian Village Apartments
Series 1995B A.M.T.
07-15-09 7.75 2,355,000 2,408,835
New Hope Housing & Healthcare Facilities Revenue
Bonds Minnesota Masonic Home North Ridge
Series 1999
03-01-19 5.90 2,000,000 1,945,420
03-01-29 5.88 7,000,000 6,655,040
North St. Paul & Maplewood Independent School
District 622 General Obligation Refunding Bonds
Series 1996A
02-01-25 5.13 6,310,000 5,986,802
Northern Minnesota Municipal Power Agency
Electric System Refunding Revenue Bonds
Series 1998B (AMBAC Insured)
01-01-20 4.75 4,500,000 4,145,220
Oakdale Multi-family Housing Refunding
Revenue Bonds Oakdale Village Apartments
Series 1998 A.M.T.
11-01-28 6.00 3,650,000 3,546,742
Olmsted County Health Care Facilities Refunding
Revenue Bonds Olmsted Medical Center
07-01-19 5.55 1,125,000 1,032,908
Owatonna Public Utilities Pre-refunded Revenue
Bonds Series 1991
01-01-16 6.75 1,000,000 1,040,020
Park Rapids Independent School District 309
Unlimited Tax General Obligation Bonds
Series 1999 (MBIA Insured)
02-01-21 4.75 3,000,000 2,742,000
Plymouth Multi-family Housing Revenue Bonds
Harbor Lane Apartments Series 1993
(Asset Guaranty) A.M.T.
09-01-13 5.90 2,325,000 2,398,633
Richfield Independent School District 280 Unlimited
Tax General Obligation School Building Bonds
Series 1993C Inverse Floater (FGIC Insured)
02-01-10 6.33 3,300,000(g) 3,386,625
02-01-12 6.33 2,510,000(g) 2,550,788
Richfield Multi-family Housing Refunding Revenue
Bonds Village Shores Apartments Series 1996
08-01-31 7.63 2,970,000 3,052,447
Robbinsdale Multi-family Housing Revenue Bonds
Copperfield Hill Series 1996A
12-01-31 7.35 3,260,000 3,306,096
Rochester Health Care Facilities Revenue Bonds
Mayo Foundation Series 1992A
11-15-19 4.95 5,000,000 4,625,550
Rochester Multi-family Housing Development
Revenue Bonds Civic Square Series 1991
(FHA Insured) A.M.T.
07-15-31 7.45 4,340,000 4,564,161
Rochester Multi-family Housing Development
Revenue Bonds Wedum Shorewood Campus
06-01-36 6.60 5,000,000 4,918,150
Roseville Housing Facilities Nursing Home
Refunding Revenue Bonds College Properties
Series 1998
10-01-28 5.88 5,000,000 4,783,200
Shoreview Senior Housing Revenue Bonds
Series 1996
02-01-26 7.25 2,700,000 2,728,917
Southeastern Minnesota Multi-county Housing &
Redevelopment Authority Winona County Unlimited
Tax General Obligation Bonds Series 1997
01-01-28 5.35 1,170,000 1,172,867
Southern Minnesota Municipal Power Agency Power
Supply System Pre-refunded Revenue Bonds
Series 1992A Escrowed to Maturity
(Secondary MBIA Insured)
01-01-18 5.75 1,970,000 2,051,834
Southern Minnesota Municipal Power Agency Power
Supply System Revenue Bonds Zero Coupon
Series 1994A (MBIA Insured)
01-01-19 6.67 19,500,000(e) 6,678,945
01-01-22 6.88 12,000,000(e) 3,449,160
01-01-24 6.08 5,150,000(e) 1,319,945
Southern Minnesota Municipal Power Agency
Revenue Bonds (Secondary MBIA Insured)
01-01-16 4.75 9,165,000 8,538,663
Southern Minnesota Municipal Power Agency
Unrefunded Balance Revenue Bonds Series 1992A
01-01-18 5.75 1,895,000 1,933,431
Spring Park Health Care Facilities Revenue Bonds
Twin Birch Health Care Center Series 1991
08-01-11 8.25 1,780,000 1,877,633
St. Cloud Certificates of Participation
12-01-17 5.90 400,000 404,228
St. Cloud Hospital Facility Pre-refunded Revenue
Bonds St. Cloud Hospital Series 1990B
(AMBAC Insured)
07-01-20 7.00 5,000,000 5,372,300
St. Cloud Hospital Facility Refunding Revenue
Bonds Series 1993C (AMBAC Insured)
10-01-20 5.30 1,515,000 1,475,307
St. Louis Park Health Care Facilities Pre-refunded
Revenue Bonds Park Nicollet Medical Center
Series 1990A
01-01-20 9.25 4,000,000 4,194,400
St. Louis Park Health Care Facilities Pre-refunded
Revenue Bonds Park Nicollet Medical Center
Series 1991A
01-01-21 8.63 2,000,000 2,131,320
St. Louis Park Health Care Facilities Revenue Bonds
Healthsystem Minnesota Obligated Group
Series 1993 (AMBAC Insured)
07-01-23 5.20 5,000,000 4,782,200
St. Louis Park Health Care Facilities Revenue Bonds
Healthsystem Minnesota Obligated Group
Series 1993B Inverse Floater (AMBAC Insured)
07-01-13 5.83 7,000,000(g) 6,763,750
St. Louis Park Multi-family Housing Refunding
Revenue Bonds Park Boulevard Towers
Series 1996A
04-01-31 7.00 3,940,000 4,048,232
St. Paul Housing & Redevelopment Authority Health
Care Facilities Revenue Bonds Lyngblomsten Care
Center Series 1993A
11-01-06 7.13 890,000 916,718
11-01-17 7.13 1,840,000 1,924,566
St. Paul Housing & Redevelopment Authority Health
Care Facilities Revenue Bonds Lyngblomsten
Multi-family Rental Housing Series 1993B
11-01-24 7.00 1,870,000 1,888,943
St. Paul Housing & Redevelopment Authority Health
Care Facilities Revenue Bonds Regions Hospital
Series 1998
05-15-28 5.30 4,125,000 3,794,134
St. Paul Housing & Redevelopment Authority Sales
Tax Revenue Bonds Civic Center Escrowed
to Maturity (Secondary MBIA Insured)
11-01-23 5.55 7,500,000 7,627,499
St. Paul Housing & Redevelopment Authority Single
Family Housing Mortgage Refunding Revenue
Mortgage-backed Bonds Middle Income Phase II
(FNMA Insured)
03-01-28 6.80 3,345,000 3,570,553
St. Paul Independent School District 625 Certificates
of Participation Series 1999A
02-01-19 4.75 1,000,000 917,450
St. Paul Port Authority Unlimited Tax General
Obligation Bonds
03-01-24 5.13 4,770,000 4,542,042
St. Paul Unlimited Tax General Obligation Bonds
Block 39 Parking Facility Series 1998A
02-01-25 4.75 2,000,000 1,790,180
State Agricultural & Economic Development Board
Health Care Facilities Refunding Revenue Bonds
Benedictine Health System-St. Mary's Health System
Duluth Clinic Obligated Group Series 1999A
(MBIA Insured)
02-15-23 5.00 2,250,000 2,121,930
State Agricultural & Economic Development Board
Health Care Facilities Refunding Revenue Bonds
Fairview Hospital & Healthcare Services
Series 1997A (MBIA Insured)
11-15-26 5.75 2,000,000 2,048,520
State General Obligation Various Purpose
Pre-refunded Bonds Series 1990
08-01-09 7.00 7,850,000 8,139,743
State General Obligation Various Purpose
Pre-refunded Bonds Series 1991
08-01-11 6.70 8,000,000 8,426,239
State Higher Education Facilities Authority Augsburg
College Mortgage Revenue Bonds 4th Series 1999Y
10-01-27 5.30 1,200,000 1,109,964
State Higher Education Facilities Authority Augsburg
College Mortgage Revenue Bonds Series 4F-1
05-01-23 6.25 1,750,000 1,824,550
State Higher Education Facilities Authority Gustavus
Adolphus College Revenue Bonds 4th Series 1998X
10-01-24 4.80 2,340,000 2,105,298
State Higher Education Facilities Authority
Macalester College Refunding Revenue Bonds
2nd Series 1998U
03-01-22 5.13 1,155,000 1,100,611
State Higher Education Facilities Authority
Macalester College Revenue Bonds 4th Series 1997J
03-01-17 5.55 1,000,000 1,027,550
State Higher Education Facilities Authority
Northwestern College of Chiropractic Mortgage
Revenue Bonds 4th Series 1999Z
10-01-13 5.20 275,000 265,843
State Higher Education Facilities Authority
University of St. Thomas Revenue Bonds
4th Series 1997P
04-01-23 5.40 580,000 572,309
State Housing Finance Agency Single Family
Housing Mortgage Revenue Bonds Series 1991A
A.M.T.
07-01-22 7.45 2,065,000 2,144,028
State Housing Finance Agency Single Family
Housing Mortgage Revenue Bonds Series 1992A
07-01-16 6.95 2,320,000 2,447,090
State Housing Finance Agency Single Family
Housing Mortgage Revenue Bonds Series 1994L
A.M.T.
07-01-20 6.70 860,000 904,754
State Housing Finance Agency Single Family
Housing Mortgage Revenue Bonds Series 1996J
A.M.T.
07-01-21 5.60 500,000 500,000
State Housing Finance Agency Single Family
Housing Mortgage Revenue Bonds Series 1997D
A.M.T.
07-01-19 5.85 2,465,000 2,509,025
State Housing Finance Agency Single Family
Housing Mortgage Revenue Bonds Series 1997E
A.M.T.
01-01-26 5.75 2,935,000 2,979,583
07-01-29 5.90 8,658,000 8,909,687
State Public Facilities Authority Drinking Water
Revenue Bonds Series 1999B
03-01-19 5.13 4,000,000 3,900,520
State Public Facilities Authority Water Pollution
Control Revenue Bonds Series 1998A
03-01-16 4.75 3,500,000 3,266,375
State University Board of Regents General Obligation
Bonds Inverse Floater Series 1993A
08-15-03 6.12 5,000,000(g) 5,150,000
State University Board of Regents General Obligation
Bonds Series 1996A
07-01-21 5.50 12,500,000 12,838,874
State University Board of Regents Refunding
Revenue Bonds Series 1986A Escrowed to Maturity
02-01-11 6.00 4,625,000 4,640,633
Vadnais Heights Multi-family Housing Refunding
Revenue Bonds Cottages of Vadnais Heights
Series 1995 A.M.T.
12-01-31 7.00 3,130,000 3,183,899
Vadnais Heights Multi-family Housing Tax Credit
Revenue Bonds Series 1997 A.M.T.
07-15-09 7.00 1,080,000 1,087,085
Washington County Housing & Redevelopment
Authority Refunding Revenue Bonds Woodbury
Multi-family Housing Series 1996
12-01-23 6.95 1,945,000 1,982,500
Western Minnesota Municipal Power Agency
Revenue Bonds Escrowed to Maturity
(AMBAC Insured)
01-01-16 6.75 5,935,000 6,254,897
Western Minnesota Municipal Power Agency
Refunding Revenue Bonds Series 1987A
01-01-15 5.50 5,000,000 5,002,350
Western Minnesota Municipal Power Agency
Refunding Revenue Bonds Series 1987A
(Secondary MBIA Insured)
01-01-15 5.50 6,250,000 6,258,375
White Bear Lake Industrial Development Revenue
Bonds Taylor Series 1988A A.M.T.
09-01-08 8.75 2,250,000 2,287,103
Windom Independent School District 177
Unlimited Tax General Obligation Bonds
Series 1999
02-01-24 4.75 2,695,000 2,464,847
Total municipal bonds
(Cost: $413,126,014) $431,475,910
Municipal notes (3.4%)
Issuer Annualized Amount Value(a)
yield on date payable at
of purchase maturity
Cohasset Revenue Notes (Minnesota Power & Light)
Series 1997A V.R.D.N.
06-01-20 3.60% $1,300,000(c,d) $1,300,000
Duluth Health Facilities Revenue Notes (Miller-Dwan
Medical Center) V.R.
06-01-19 3.60 2,000,000(c,d) 2,000,000
Mankato Multi-family Housing Refunding Revenue
Notes (Highland Hills) V.R.
05-01-27 3.75 3,185,000(c,d) 3,185,000
Minneapolis & St. Paul Housing & Redevelopment
Authority Health Care System Revenue Notes
(Children's Hospital) Series 1995B V.R.
08-15-25 3.65 1,800,000(c,d) 1,800,000
Rochester Health Care Facilities Revenue Notes
(Mayo Clinic) Series 1999C
07-01-99 3.00 2,000,000(d) 2,000,000
St. Cloud Hospital Facility Revenue Notes
St. Cloud Hospital Series 1997A V.R.
07-01-27 3.60 3,000,000(c,d) 3,000,000
University of Minnesota Notes Series 1999A V.R.
01-01-34 3.50 2,000,000(c,d) 2,000,000
Total municipal notes
(Cost: $15,285,000) $15,285,000
Total investments in securities
(Cost: $428,411,014)(h) $446,760,910
</TABLE>
<PAGE>
Notes to investments in securities
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) The following abbreviations may be used in portfolio descriptions to
identify the insurer of the issue:
ACA -- ACA Financial Guaranty Corporation
AMBAC -- American Municipal Bond Association Corporation
BIG -- Bond Investors Guarantee
CGIC -- Capital Guaranty Insurance Company
FGIC -- Financial Guarantee Insurance Corporation
FHA -- Federal Housing Authority
FNMA -- Federal National Mortgage Association
FSA -- Financial Security Assurance
GNMA -- Government National Mortgage Association
MBIA -- Municipal Bond Investors Assurance
(c) The following abbreviations may be used in the portfolio descriptions:
A.M.T. -- Alternative Minimum Tax-- As of June 30, 1999, the value of
securities subject to alternative minimum tax represented
16.34% of net assets.
B.A.N. -- Bond Anticipation Note
C.P. -- Commercial Paper
R.A.N. -- Revenue Anticipation Note
T.A.N. -- Tax Anticipation Note
T.R.A.N. -- Tax & Revenue Anticipation Note
V.R. -- Variable Rate -- Interest rate varies to reflect current
market conditions; rate shown is the effective rate on
June 30, 1999.
V.R.D.B. -- Variable Rate Demand Bond
V.R.D.N. -- Variable Rate Demand Note
(d) The Fund is entitled to receive principal amount from issuer or corporate
guarantor, if indicated in parentheses, after a day or a week's notice. The
maturity date disclosed represents the final maturity.
(e) For zero coupon bonds, the interest rate disclosed represents the annualized
effective yield on the date of acquisition.
(f) Partially pledged as initial deposit on the following open interest rate
futures contracts (see Note 5 to the financial statements):
Type of security Notional amount
Purchase contracts
Municipal Bonds, Sept. 1999 $7,000,000
(g) Inverse floaters represent securities that pay interest at a rate that
increases (decreases) in the same magnitude as, or in a multiple of, a decline
(increase) in market short-term rates. Interest rate disclosed is the rate in
effect on June 30, 1999. Inverse floaters in the aggregate represent 3.95% of
the Fund's net assets as of June 30, 1999.
(h) At June 30, 1999, the cost of securities for federal income tax purposes was
$428,411,014 and the aggregate gross unrealized appreciation and depreciation
based on that cost was:
Unrealized appreciation $21,951,427
Unrealized depreciation (3,601,531)
----------
Net unrealized appreciation $18,349,896
<PAGE>
<TABLE>
<CAPTION>
Investments in Securities
AXP New York Tax-Exempt Fund
June 30, 1999
(Percentages represent value of investments compared to net assets)
Municipal bonds (97.8%)
Name of issuer and Coupon Principal Value(a)
title of issue(b,c) rate amount
Albany County Airport Authority Airport Revenue Bonds
Series 1997 (FSA Insured) A.M.T.
<S> <C> <C> <C> <C> <C>
12-15-19 5.50% $250,000(d) $249,688
Broome County Certificates of Participation
Public Safety Facilities Series 1994 (MBIA Insured)
04-01-22 5.25 2,650,000 2,587,884
Buffalo Municipal Water Finance Authority Water
System Revenue Bonds Series 1995 (FGIC Insured)
07-01-25 5.00 1,000,000 933,880
Buffalo Unlimited Tax General Obligation School
Bonds Series 1997B (AMBAC Insured)
02-01-16 5.38 500,000 501,645
Erie County Unlimited Tax General Obligation Bonds
Series 1995B (FGIC Insured)
06-15-25 5.50 700,000 702,219
Erie County Water Authority Water Works System
Revenue Bonds Series 1990A Escrowed to Maturity
(AMBAC Insured)
12-01-08 6.00 1,765,000 1,883,908
Fallsburg & Sullivan Counties Unlimited Tax General
Obligation Pre-refunded Improvement Bonds
Series 1991 (AMBAC Insured)
04-01-11 7.05 325,000 348,036
04-01-12 7.05 325,000 348,036
04-01-13 7.05 325,000 348,036
04-01-14 7.05 325,000 348,036
Huntington Housing Authority Senior Housing
Facilities Revenue Bonds Gurwin Jewish Senior
Residences Series 1999A
05-01-39 6.00 1,750,000 1,697,570
Metropolitan Transportation Authority Commuter
Facilities Revenue Bonds Series 1997B
(AMBAC Insured)
07-01-24 5.13 1,000,000 951,980
Metropolitan Transportation Authority Commuter
Facilities Revenue Bonds Series 1998A
(MBIA Insured)
07-01-24 4.75 1,500,000 1,348,125
Metropolitan Transportation Authority Commuter
Facilities Service Contract Refunding Bonds
5th Series 1991
07-01-16 6.50 1,775,000 1,869,838
Mount Vernon Industrial Development Agency Civic
Facilities Revenue Bonds Wartburg Senior Housing
Incorporated Meadowview
06-01-29 6.20 1,000,000 999,940
New York & New Jersey Port Authority Special
Obligation Revenue Bonds KIAC Partners
4th Series 1996 A.M.T.
10-01-19 6.75 1,500,000 1,633,515
New York City Industrial Development Agency
Civic Facilities Refunding Revenue & Improvement
Bonds Lighthouse International Series 1998
(MBIA Insured)
07-01-23 4.50 200,000 172,330
New York City Industrial Development Agency
Civic Facilities Revenue Bonds Riverdale Country
School Series 1997 (MBIA Insured)
06-01-17 5.25 1,000,000 988,520
New York City Industrial Development Agency
Civic Facilities Revenue Bonds Rockefeller
Foundation Series 1993
07-01-23 5.38 2,000,000 1,982,680
New York City Industrial Development Agency
Civic Facilities Revenue Bonds Touro College
Series 1999A
06-01-29 6.35 1,000,000 993,310
New York City Industrial Development Agency
Civic Facilities Revenue Bonds Trinity Episcopal
School Series 1997 (MBIA Insured)
06-15-27 5.25 1,000,000 967,260
New York City Industrial Development Agency
Civic Facilities Revenue Bonds YMCA Series 1997
08-01-16 5.80 1,000,000 1,019,010
New York City Municipal Water Finance Authority
Water & Sewer System Revenue Bonds
Series 1994B Inverse Floater (MBIA Insured)
06-15-09 7.07 2,000,000(e) 2,052,500
New York City Municipal Water Finance Authority
Water & Sewer System Revenue Bonds
Series 1996B (MBIA Insured)
06-15-26 5.75 500,000 511,835
New York City Transitional Finance Authority
Future Secured Sales Tax Revenue Bonds Series 1998B
11-15-23 4.75 1,500,000 1,342,470
New York City Transitional Finance Authority
Future Secured Sales Tax Revenue Bonds Series 1999C
05-01-29 5.00 1,000,000 922,910
New York City Unlimited Tax General Obligation
Bonds Series 1996G
02-01-17 5.75 1,500,000 1,547,040
New York City Unlimited Tax General Obligation
Bonds Series 1996J
02-15-19 5.88 1,000,000 1,029,560
New York City Unlimited Tax General Obligation
Bonds Series 1999I (MBIA Insured)
04-15-29 5.00 1,000,000 929,820
New York City Unlimited Tax General Obligation
Pre-refunded Bonds Series 1994B-1
08-15-16 7.00 1,500,000 1,686,165
North Great Neck Water Authority Water System
Pre-refunded Revenue Bonds Series 1989A
01-01-20 6.00 1,415,000 1,433,537
North Hempstead Unlimited Tax General Obligation
Various Purpose Bonds Series 1998A
(FGIC Insured)
01-15-23 4.75 1,000,000 902,850
Oneida County Industrial Development Agency Civic
Facilities Revenue Bonds Mohawk Valley
Handicapped Services (ACA Insured)
03-15-19 5.30 500,000 484,510
State Dormitory Authority College Revenue Bonds
Barnard College Series 1996 (AMBAC Insured)
07-01-16 5.25 1,140,000 1,131,142
State Dormitory Authority College Revenue Bonds
Consolidated City University System Series 1993A
07-01-13 5.75 3,000,000 3,111,210
State Dormitory Authority College Revenue Bonds
Cooper Union (AMBAC Insured)
07-01-20 5.38 860,000 854,118
State Dormitory Authority College Revenue Bonds
Culinary Institute of America Series 1997
(MBIA Insured)
07-01-17 5.00 500,000 477,710
State Dormitory Authority College Revenue Bonds
Long Island University Series 1999
(Asset Guaranty)
09-01-28 5.25 1,400,000 1,335,656
State Dormitory Authority College Revenue Bonds
St. Thomas Aquinas College Series 1998
(Asset Guaranty)
07-01-14 5.00 1,125,000 1,068,041
State Dormitory Authority Pre-refunded College
Revenue Bonds Consolidated City University
System 3rd General Resolution 2nd Series 1994
(MBIA Insured)
07-01-19 6.25 1,500,000 1,623,405
State Dormitory Authority Revenue Bonds Frances
Schervier Home Series 1997
(Asset Guaranty)
07-01-17 5.50 1,000,000 996,600
State Dormitory Authority Revenue Bonds New York
& Presbyterian Hospitals (AMBAC & FHA Insured)
08-01-27 4.75 1,000,000 894,610
State Dormitory Authority Revenue Bonds NYACK
Hospital Series 1996
07-01-13 6.25 1,000,000 1,055,600
State Dormitory Authority State University Educational
Facilities Pre-refunded Revenue Bonds Series 1990A
05-15-12 7.70 1,750,000 1,848,403
State Dormitory Authority State University Educational
Facilities Refunding Revenue Bonds Series 1990B
05-15-11 7.50 1,900,000 2,219,352
State Dormitory Authority State University Educational
Facilities Refunding Revenue Bonds Series 1993A
(Secondary AMBAC Insured)
05-15-15 5.25 1,000,000 1,007,450
05-15-19 5.50 2,000,000 2,053,620
State Energy Research & Development Authority
Electric Facilities Revenue Bonds Consolidated
Edison Series 1990A A.M.T.
07-01-25 7.50 5,000,000 5,063,899
State Energy Research & Development Authority
Gas Facilities Revenue Bonds Brooklyn Union Gas
Series 1996 (MBIA Insured)
01-01-21 5.50 2,000,000 2,008,080
State Energy Research & Development Authority
Pollution Control Refunding Revenue Bonds
Rochester Gas & Electric Series 1992B
(MBIA Insured) A.M.T.
05-15-32 6.50 2,500,000 2,653,550
State Energy Research & Development Authority
Solid Waste Disposal Revenue Bonds New York
State Electric & Gas Company Series 1993A
(MBIA Insured) A.M.T.
12-01-28 5.70 3,000,000 3,019,050
State Environmental Facilities State Water Revolving
Fund Pollution Control Revenue Bonds Series 1990A
06-15-12 7.50 3,000,000 3,157,620
State Local Government Assistance Pre-refunded
Sales Tax Revenue Bonds Series 1991A
04-01-16 7.00 4,000,000 4,277,600
State Local Government Assistance Sales Tax
Refunding Revenue Bonds Series 1997B
(MBIA Insured)
04-01-20 4.88 1,000,000 928,980
State Local Government Assistance Sales Tax
Revenue Bonds Series 1992C
04-01-22 5.50 1,500,000 1,500,615
State Medical Care Facilities Finance Agency Mental
Health Services Refunding Revenue Bonds
Series 1993F (Secondary FSA Insured)
02-15-14 5.38 1,000,000 997,430
State Medical Care Facilities Finance Agency Mental
Health Services Revenue Bonds Series 1994A
(Secondary FSA Insured)
08-15-23 5.25 1,500,000 1,457,940
State Mortgage Agency Homeowner Mortgage
Refunding Revenue Bonds Series 1991TT
04-01-15 7.50 4,000,000 4,211,760
State Mortgage Agency Homeowner Mortgage
Revenue Bonds 27th Series 1992
04-01-15 6.90 3,000,000 3,238,890
State Thruway Authority Local Highway & Bridge
Service Contract Pre-refunded Revenue Bonds
Series 1991
01-01-11 6.00 2,500,000 2,573,700
State Urban Development Capital Correctional
Facilities Pre-refunded Revenue Bonds
1st Series 1990 (FSA Insured)
01-01-20 7.50 4,500,000 4,682,250
State Urban Development Capital Correctional
Facilities Refunding Revenue Bonds Series 1994A
01-01-21 5.25 2,500,000 2,385,375
State Urban Development Capital Correctional
Facilities Revenue Bonds 5th Series 1995
(MBIA Insured)
01-01-25 5.50 750,000 751,823
State Urban Development Higher Education Applied
Technology Grants Revenue Bonds Series 1995
(MBIA Insured)
04-01-15 5.75 1,000,000 1,032,060
Triborough Bridge & Tunnel Authority General
Purpose Pre-refunded Revenue Bonds Series 1990S
01-01-21 7.00 3,000,000 3,174,210
Triborough Bridge & Tunnel Authority Special
Obligation Refunding Revenue Bonds Series 1991B
(Secondary FGIC Insured)
01-01-15 6.88 2,000,000 2,111,400
Troy Municipal Assistance General Obligation
Revenue Bonds Series 1996A (MBIA Insured)
01-15-22 5.00 1,250,000 1,182,125
Ulster County Industrial Development Agency Civic
Facilities Revenue Bonds Benedictine Hospital
Series 1999A
06-01-24 6.45 1,950,000 1,940,621
United Nations Development Senior Lien
Pre-refunded Revenue Bonds Series 1992A
07-01-26 6.00 4,500,000 4,856,219
Utica Industrial Development Agency Civic Facilities
Revenue Bonds Munson-Williams-Proctor
Series 1996A (MBIA Insured)
07-15-16 5.50 750,000 753,360
Total municipal bonds
(Cost: $106,465,927) $113,354,117
Municipal note (0.4%)
Issuer(b,c,f) Effective Amount Value(a)
yield payable at
maturity
New York City General Obligation Notes
Series 1994B-6 V.R. (MBIA Insured)
08-15-05 3.40% $500,000 $500,000
Total municipal note
(Cost: $500,000) $500,000
Total investments in securities
(Cost: $106,965,927)(g) $113,854,117
</TABLE>
<PAGE>
Notes to investments in securities
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) The following abbreviations may be used in portfolio descriptions to
identify the insurer of the issue:
ACA -- ACA Financial Guaranty Corporation
AMBAC -- American Municipal Bond Association Corporation
BIG -- Bond Investors Guarantee
CGIC -- Capital Guaranty Insurance Company
FGIC -- Financial Guarantee Insurance Corporation
FHA -- Federal Housing Authority
FNMA -- Federal National Mortgage Association
FSA -- Financial Security Assurance
GNMA -- Government National Mortgage Association
MBIA -- Municipal Bond Investors Assurance
(c) The following abbreviations may be used in the portfolio descriptions:
A.M.T. -- Alternative Minimum Tax-- As of June 30, 1999, the value of
securities subject to alternative minimum tax represented
10.88% of net assets.
B.A.N. -- Bond Anticipation Note
C.P. -- Commercial Paper
R.A.N. -- Revenue Anticipation Note
T.A.N. -- Tax Anticipation Note
T.R.A.N. -- Tax & Revenue Anticipation Note
V.R. -- Variable Rate
V.R.D.B. -- Variable Rate Demand Bond
V.R.D.N. -- Variable Rate Demand Note
(d) Partially pledged as initial deposit on the following open interest rate
futures contracts (see Note 5 to the financial statements):
Type of security Notional amount
Purchase contracts
Municipal Bonds, Sept. 1999 $12,000,000
(e) Inverse floaters represent securities that pay interest at a rate that
increases (decreases) in the same magnitude as, or in a multiple of, a decline
(increase) in market short-term rates. Interest rate disclosed is the rate in
effect on June 30, 1999. Inverse floaters in the aggregate represent 1.77% of
the Fund's net assets as of June 30, 1999.
(f) The Fund is entitled to receive principal amount from issuer or corporate
guarantor, if indicated in parentheses, after a day or a week's notice. The
maturity date disclosed represents the final maturity. Interest rate varies to
reflect current market conditions; rate shown is the effective rate on June 30,
1999.
(g) At June 30, 1999, the cost of securities for federal income tax purposes was
$106,965,927 and the aggregate gross unrealized appreciation and depreciation
based on that cost was:
Unrealized appreciation $7,406,191
Unrealized depreciation (518,001)
--------
Net unrealized appreciation $6,888,190
<PAGE>
<TABLE>
<CAPTION>
Investments in Securities
AXP Ohio Tax-Exempt Fund
June 30, 1999
(Percentages represent value of investments compared to net assets)
Municipal bonds (97.4%)
Name of issuer and Coupon Principal Value(a)
title of issue(b,c) rate amount
Akron Bath Copley Joint Township Hospital District
Summa Hospital Revenue Bonds Series 1998A
<S> <C> <C> <C> <C> <C>
11-15-24 5.38% $1,500,000 $1,382,160
Barberton Limited Tax Various Purpose General
Obligation Bonds 1st Series 1989
12-01-09 7.35 700,000 724,262
Bellefontaine Hospital Facility Refunding Revenue
Bonds Mary Rutan Health Association of Logan
County Series 1993
12-01-13 6.00 1,000,000 1,003,370
Buckeye Valley Local School District School
Improvement Unlimited Tax General Obligation
Bonds Series 1995A (MBIA Insured)
12-01-20 5.25 1,000,000 983,540
Butler County Hospital Facility Improvement
Refunding Revenue Bonds Fort Hamilton-Hughes
Memorial Center Series 1991
01-01-10 7.50 1,750,000 1,854,388
Butler County Transportation Improvement District
Highway Improvement Transit Revenue Bonds
Series 1997A (FSA Insured)
04-01-17 5.13 1,000,000 977,690
Carroll Water & Sewer District Unlimited Tax
General Obligation Bonds
12-01-10 6.25 475,000 491,701
Carroll Water & Sewer District Unlimited Tax
General Obligation Bonds Water System
Improvement
12-01-10 6.25 955,000 995,578
Celina Local School District Unlimited Tax General
Obligation Bonds Series 1996 (FGIC Insured)
12-01-20 5.25 1,000,000 983,540
Clermont County Hospital Facility Revenue Bonds
Mercy Health System Province of Cincinnati
Series 1989A (AMBAC Insured)
09-01-19 7.50 750,000 777,360
Cleveland Airport Systems Revenue Bonds
Series 1990A (MBIA Insured) A.M.T.
01-01-20 7.40 500,000 519,925
Cleveland Waterworks Improvement 1st Mortgage
Refunding Revenue Bonds Series F 1992B
(AMBAC Insured)
01-01-16 6.25 1,000,000 1,057,900
Columbus Tax Increment Finance Revenue Bonds
Easton Series 1999 (AMBAC Insured)
12-01-24 4.88 1,000,000 918,770
Coshocton County Solid Waste Disposal Refunding
Revenue Bonds Stone Container Series 1992
08-01-13 7.88 1,000,000 1,077,380
Cuyahoga County Health Care Facilities Refunding
Revenue Bonds Judson Retirement Community
Series A
11-15-18 7.25 1,000,000 1,062,750
Cuyahoga County Hospital Improvement Revenue
Bonds Mount Sinai Medical Center Series 1991
(AMBAC Insured)
11-15-21 6.63 600,000 645,240
Cuyahoga County Hospital Improvement Revenue
Bonds University Hospitals Health System
Series 1992 (AMBAC Insured)
01-15-11 6.50 500,000 529,925
01-15-19 5.40 1,000,000 1,000,150
Cuyahoga County Hospital Refunding Revenue
Bonds Cleveland Clinic Foundation Series 1992
11-15-11 5.50 1,500,000 1,542,705
Cuyahoga County Hospital Revenue Bonds Meridia
Health Series 1991
08-15-23 7.00 1,000,000 1,078,430
Cuyahoga County Limited Tax General
Obligation Bonds
05-15-13 5.60 500,000 526,650
Delaware County Sewer Improvement Limited Tax
General Obligation Bonds
12-01-15 5.25 1,000,000 995,600
Dover Limited Tax Improvement General Obligation
Bonds Municipal Sewer System
12-01-09 7.10 1,000,000 1,033,800
Elyria Limited Tax Improvement General Obligation
Recreation Facility Bonds
12-01-09 7.10 715,000 740,311
Erie County Hospital Improvement Refunding
Revenue Bonds Firelands Community Hospital
Series 1992
01-01-15 6.75 2,000,000(e) 2,117,220
Franklin County Convention Facilities Authority
Tax & Lease Revenue Anticipation Pre-refunded
Bonds (MBIA Insured)
12-01-19 7.00 1,500,000 1,596,060
Franklin County Health Care Facilities Refunding
Revenue Bonds Lutheran Senior City Incorporated
Series 1999
12-15-28 6.13 1,250,000 1,177,900
Franklin County Multi-family Housing Refunding
Revenue Bonds Jefferson Chase Apartments
Series 1998B A.M.T.
11-01-35 6.40 1,000,000 968,440
Franklin County Multi-family Housing Refunding
Revenue Bonds West Bay Apartments A.M.T.
12-01-25 6.38 1,000,000 995,500
Gahanna-Jefferson Public Schools
Unlimited Tax General Obligation Bonds
Series 1999
12-01-21 4.75 1,000,000 901,970
Hamilton County Sales Tax Revenue Bonds
Hamilton County Football Series 1998A
(MBIA Insured)
12-01-17 4.75 1,000,000 921,410
Highland Heights Limited Tax Improvement
General Obligation Street Bonds
12-01-08 7.75 400,000 409,308
Hilliard County School District Unlimited Tax
General Obligation Bonds Series A (FGIC Insured)
12-01-20 5.00 1,000,000 955,650
Lakota Local School District Butler County School
Unlimited Tax Improvement Bonds
12-01-12 7.00 500,000 507,645
Lakota Local School District Unlimited Tax
Improvement General Obligation Bonds
(AMBAC Insured)
12-01-14 6.25 2,000,000 2,187,360
Lorain County Hospital Facilities Refunding
Revenue Bonds EMH Regional Medical Center
Series 1995 (AMBAC Insured)
11-01-21 5.38 2,000,000 1,965,400
Lorain County Independent Living & Hospital
Facilities Refunding Revenue Bonds Elyria United
Methodist Series 1996C
06-01-22 6.88 1,000,000 1,072,900
Marion County Health Care Facilities Improvement
Refunding Revenue Bonds United Church Homes
Series 1993
11-15-10 6.38 1,000,000 1,034,500
Marysville Sewer System 1st Mortgage Revenue
Bonds Series 1988 (BIG Insured) A.M.T.
02-15-08 7.85 370,000 371,203
Marysville Water System Mortgage Revenue Bonds
Series 1991 (MBIA Insured)
12-01-21 7.05 1,000,000 1,078,140
Montgomery County Health Facilities Refunding
Revenue Bonds Friendship Village Dayton
Series 1990A
02-01-16 9.25 1,000,000 1,052,340
Montgomery County Hospital Facility Refunding
Revenue & Improvement Bonds Ketter Medical
Center Series 1996 (MBIA Insured)
04-01-26 5.50 1,000,000 997,130
Montgomery County Water Revenue Bonds Greater
Moraine-Beavercreek District (FGIC Insured)
11-15-17 6.25 1,000,000 1,070,080
North Olmstead County General Obligation Bonds
(AMBAC Insured)
12-01-16 5.00 1,500,000 1,454,145
12-01-21 5.00 200,000 190,412
Oak Hills Local School District Unlimited Tax
General Obligation Bonds Series 1997
(MBIA Insured)
12-01-25 5.13 1,000,000 958,780
Orrville Electric System Refunding Revenue &
Improvement Mortgage Bonds Series 1997
(AMBAC Insured)
12-01-17 5.10 1,000,000 974,320
Pickerington Local School District Unlimited Tax
General Obligation Pre-refunded Bonds
(AMBAC Insured)
12-01-13 7.00 1,000,000 1,064,040
Rural Loraine County Water Authority Water
Resource Improvement Pre-refunded Revenue
Bonds Series 1991 (AMBAC Insured)
10-01-11 7.00 1,000,000 1,071,510
Southwest Local School District Hamilton & Butler
Counties School Unlimited Tax Improvement Bonds
(AMBAC Insured)
12-01-10 7.65 475,000 497,572
Stark County Health Care Facilities Refunding
Revenue Bonds Rose Lane (GNMA/FHA Insured)
07-20-33 5.45 215,000 206,019
State Air Quality Development Authority Refunding
Revenue Bonds JMG Funding Limited Partnership
(AMBAC Insured) A.M.T.
04-01-29 6.38 500,000 538,600
State Air Quality Development Authority Refunding
Revenue Bonds Series 1994 (AMBAC Insured)
A.M.T.
01-01-29 6.38 2,000,000 2,154,400
State Air Quality Development Authority Revenue
Bonds Columbus & Southern Series A
(FGIC Insured)
12-01-20 6.38 1,000,000 1,066,410
State Building Authority Local Jail Grant Bonds
Series 1989A (MBIA Insured)
04-01-09 7.35 500,000 524,385
State Building Authority State Facility Pre-refunded
Bonds Columbus State Office Building Series 1985C
10-01-05 7.35 1,000,000 1,039,650
State Department of Administrative Services
Certificate of Participation Ohio Center Series 1998
(AMBAC Insured)
07-15-28 5.00 550,000 516,384
State Higher Educational Facility Pre-refunded
Revenue Bonds Oberlin College Series 1989
10-01-14 7.38 500,000 514,830
State Housing Finance Agency Mortgage Revenue
Bonds Aristocrat South Board & Care Series 1991A
(FHA Insured) A.M.T.
08-01-31 7.30 1,500,000 1,570,260
State Housing Finance Agency Single Family
Mortgage Revenue Bonds Series 1990A
(GNMA Insured) A.M.T.
03-01-30 7.80 260,000 267,441
State Housing Finance Agency Single Family
Mortgage Revenue Bonds Series 1990C
(GNMA Insured) A.M.T.
09-01-21 7.85 495,000 516,978
State Municipal Electric Generation Agency
Revenue Bonds Joint Venture 5 (AMBAC Insured)
02-15-24 5.38 2,000,000 1,987,700
State Turnpike Commission Revenue Bonds Series 1998B
(FGIC Insured)
02-15-28 4.75 800,000 712,888
State Turnpike Commission Revenue Bonds Series A
02-15-24 5.75 1,000,000 1,069,630
State Turnpike Commission Revenue Bonds Series A
(MBIA Insured)
02-15-26 5.50 1,000,000 1,062,680
State Valley School District School Improvement
Unlimited Tax General Obligation Bonds Counties
of Adams & Highland Series 1995 (MBIA Insured)
12-01-21 5.25 2,000,000 1,963,720
State Water & Air Quality Development Authority
Pollution Control Refunding Revenue Bonds
Cleveland Electric Illuminating Series 1995
08-01-25 7.70 1,000,000 1,116,600
State Water & Air Quality Development Authority
Pollution Control Refunding Revenue Bonds
Toledo Edison Series 1994A A.M.T.
10-01-23 8.00 1,000,000 1,118,140
State Water & Air Quality Development Authority
Water Development Refunding Revenue Bonds
Pure Water (AMBAC Insured)
12-01-18 5.50 750,000 755,198
State Water & Air Quality Development Authority
Solid Waste Disposal Revenue Bonds Northstar
BHP Steel LLC-Cargill
Series 1995 A.M.T.
09-01-20 6.30 500,000(e) 520,985
Sycamore Board of Education Community School
District Hamilton County School Improvement Bonds
12-01-09 6.50 500,000 506,615
University of Cincinnati Certificates of Participation
Student Recreation Center (MBIA Insured)
06-01-24 5.13 1,000,000 959,880
University of Toledo General Receipt
College Revenue Bonds Series 1998
(FGIC Insured)
06-01-20 4.75 1,000,000 912,060
University of Toledo General Receipt Pre-refunded
Bonds Series 1990 (MBIA Insured)
06-01-20 7.13 500,000 526,270
Warren County Various Purpose Limited Tax
General Obligation Bonds Series 1992
12-01-12 6.10 500,000 548,135
Whitehall City School District Franklin County
Unlimited Tax Improvement General Obligation
Pre-refunded Revenue Bonds
12-01-13 7.25 500,000 517,985
Youngstown State University General Receipts
College Revenue Bonds Series 1998
(AMBAC Insured)
12-15-16 4.75 1,000,000 930,300
Total municipal bonds
(Cost: $70,905,761) $74,618,203
Municipal notes (2.7%)
Issuer(c,d) Effective Amount Value(a)
yield payable at
maturity
Cuyahoga County Hospital Revenue Bonds
Cleveland Clinic V.R.
01-01-16 3.80% $1,100,000 $1,100,000
01-01-26 3.50 300,000 300,000
State Air Quality Development Authority Revenue
Bonds Cincinnati Gas & Electric V.R. Series 1995A
09-01-30 3.35 650,000 650,000
Total municipal notes
(Cost: $2,050,000) $2,050,000
Total investments in securities
(Cost: $72,955,761)(f) $76,668,203
</TABLE>
<PAGE>
Notes to investments in securities
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) The following abbreviations may be used in portfolio descriptions to
identify the insurer of the issue:
ACA -- ACA Financial Guaranty Corporation
AMBAC -- American Municipal Bond Association Corporation
BIG -- Bond Investors Guarantee
CGIC -- Capital Guaranty Insurance Company
FGIC -- Financial Guarantee Insurance Corporation
FHA -- Federal Housing Authority
FNMA -- Federal National Mortgage Association
FSA -- Financial Security Assurance
GNMA -- Government National Mortgage Association
MBIA -- Municipal Bond Investors Assurance
(c) The following abbreviations may be used in the portfolio descriptions:
A.M.T. -- Alternative Minimum Tax-- As of June 30, 1999, the value of
securities subject to alternative minimum tax represented
12.45% of net assets.
B.A.N. -- Bond Anticipation Note
C.P. -- Commercial Paper
R.A.N. -- Revenue Anticipation Note
T.A.N. -- Tax Anticipation Note
T.R.A.N. -- Tax & Revenue Anticipation Note
V.R. -- Variable Rate
V.R.D.B. -- Variable Rate Demand Bond
V.R.D.N. -- Variable Rate Demand Note
(d) The Fund is entitled to receive principal amount from issuer or corporate
guarantor, if indicated in parentheses, after a day or a week's notice. The
maturity date disclosed represents the final maturity. Interest rate varies to
reflect current market conditions; rate shown is the effective rate on June 30,
1999.
(e) Partially pledged as initial deposit on the following open interest rate
futures contracts (see Note 5 to the financial statements):
Type of security Notional amount
Purchase contracts
Municipal Bonds, Sept. 1999 $6,000,000
(f) At June 30, 1999, the cost of securities for federal income tax purposes was
$72,955,761 and the aggregate gross unrealized appreciation and depreciation
based on that cost was:
Unrealized appreciation $4,157,351
Unrealized depreciation (444,909)
--------
Net unrealized appreciation $3,712,442
<PAGE>
Independent Auditors' Report
THE BOARD AND SHAREHOLDERS
AXP SPECIAL TAX-EXEMPT SERIES TRUST
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments in securities, of AXP Insured Tax-Exempt Fund (a
fund within AXP Special Tax-Exempt Series Trust) as of June 30, 1999, and the
related statement of operations for the year then ended and the statements of
changes in net assets for each of the years in the two-year period ended June
30,1999, and the financial highlights for each of the years in the five-year
period ended June 30, 1999. These financial statements and the financial
highlights are the responsibility of fund management. Our responsibility is to
express an opinion on these financial statements and the financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Investment securities held in custody are confirmed to us by the
custodian. As to securities purchased and sold but not received or delivered, we
request confirmations from brokers, and where replies are not received, we carry
out other appropriate auditing procedures. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AXP Insured Tax-Exempt Fund as
of June 30, 1999, and
the results of its operations, changes in its net assets and the financial
highlights for the periods stated in the first paragraph above, in conformity
with generally accepted accounting principles.
/s/ KPMG LLP
KPMG LLP
Minneapolis, Minnesota
August 6, 1999
<PAGE>
<TABLE>
<CAPTION>
Financial Statements
Statement of assets and liabilities
AXP Insured Tax-Exempt Fund
June 30, 1999
Assets
Investments in securities, at value (Note 1)
<S> <C> <C>
(identified cost $465,682,485) $496,359,418
Cash in bank on demand deposit 26,834
Accrued interest receivable 7,842,801
Receivable for investment securities sold 56,782
------
Total assets 504,285,835
-----------
Liabilities
Dividends payable to shareholders 487,735
Payable for investment securities purchased 3,840,700
Accrued investment management services fee 6,143
Accrued distribution fee 1,239
Accrued service fee 4,966
Accrued transfer agency fee 693
Accrued administrative services fee 546
Other accrued expenses 79,139
------
Total liabilities 4,421,161
---------
Net assets applicable to outstanding shares $499,864,674
============
Represented by
Shares of beneficial interest-- $.01 par value (Note 1) $ 918,069
Additional paid-in capital 482,401,365
Excess of distributions over net investment income (493)
Accumulated net realized gain (loss) (14,023,756)
Unrealized appreciation (depreciation) on investments (Note 5) 30,569,489
----------
Total-- representing net assets applicable to outstanding shares $499,864,674
============
Net assets applicable to outstanding shares:Class A $439,354,973
Class B $ 60,508,439
Class Y $ 1,262
Net asset value per share of outstanding shares:
Class A shares 80,693,638 $ 5.44
Class B shares 11,113,051 $ 5.44
Class Y shares 232 $ 5.44
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statement of operations
AXP Insured Tax-Exempt Fund
Year ended June 30, 1999
Investment income
Income:
<S> <C>
Interest $ 28,611,911
------------
Expenses (Note 2):
Investment management services fee 2,290,350
Distribution fee-- Class B 400,031
Transfer agency fee 208,581
Incremental transfer agency fee
Class A 12,931
Class B 3,359
Service fee
Class A 791,200
Class B 93,211
Administrative services fees and expenses 210,787
Compensation of board members 9,665
Custodian fees 27,605
Printing and postage 67,951
Registration fees 86,786
Audit fees 18,000
Other 782
---
Total expenses 4,221,239
Earnings credits on cash balances (Note 2) (23,564)
-------
Total net expenses 4,197,675
---------
Investment income (loss) -- net 24,414,236
----------
Realized and unrealized gain (loss) -- net Net realized gain (loss) on:
Security transactions (Note 3) 742,277
Financial futures contracts (8,140)
------
Net realized gain (loss) on investments 734,137
Net change in unrealized appreciation (depreciation) on investments (16,718,013)
-----------
Net gain (loss) on investments (15,983,876)
-----------
Net increase (decrease) in net assets resulting from operations $ 8,430,360
=============
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statements of changes in net assets
AXP Insured Tax-Exempt Fund
Year ended June 30, 1999 1998
Operations and distributions
<S> <C> <C>
Investment income (loss) -- net $ 24,414,236 $ 25,080,192
Net realized gain (loss) on investments 734,137 358,569
Net change in unrealized appreciation (depreciation)
on investments (16,718,013) 10,861,233
----------- ----------
Net increase (decrease) in net assets resulting
from operations 8,430,360 36,299,994
--------- ----------
Distributions to shareholders from:
Net investment income
Class A (22,223,076) (23,865,771)
Class B (2,197,167) (1,669,839)
Class Y (68) (64)
Net realized gains
Class A (922,787) --
Class B (107,713) --
Class Y (3) --
-- ---
Total distributions (25,450,814) (25,535,674)
----------- -----------
Share transactions (Note 4)
Proceeds from sales
Class A shares (Note 2) 58,225,005 40,050,443
Class B shares 23,201,849 15,365,511
Reinvestment of distributions at net asset value
Class A shares 15,818,861 16,237,196
Class B shares 1,774,014 1,264,769
Class Y shares 70 63
Payments for redemptions
Class A shares (74,499,480) (73,881,447)
Class B shares (Note 2) (6,558,443) (4,572,619)
---------- ----------
Increase (decrease) in net assets from share transactions 17,961,876 (5,536,084)
---------- ----------
Total increase (decrease) in net assets 941,422 5,228,236
Net assets at beginning of year 498,923,252 493,695,016
----------- -----------
Net assets at end of year $499,864,674 $498,923,252
============ ============
Undistributed (excess of distributions over)
net investment income $ (493) $ 9,195
See accompanying notes to financial statements.
</TABLE>
<PAGE>
Notes to Financial Statements
AXP Insured Tax-Exempt Fund
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
AXP Special Tax-Exempt Series Trust was organized as a Massachusetts business
trust on April 7, 1986. AXP Special Tax-Exempt Series Trust is a "series fund"
that is currently composed of six individual funds, including AXP Insured
Tax-Exempt Fund. The Fund is registered under the Investment Company Act of 1940
(as amended) as a diversified, open-end management investment company. The Fund
has unlimited authorized shares of beneficial interest.
The Fund invests primarily in securities that are insured as to their scheduled
payment of principal and interest for at least as long as the securities are
held in the Fund. Insured securities fluctuate in market value as interest rates
change.
The Fund offers Class A, Class B and Class Y shares.
o Class A shares are sold with a front-end sales charge.
o Class B shares may be subject to a contingent deferred sales charge and
automatically convert to Class A shares during the ninth calendar year of
ownership.
o Class Y shares have no sales charge and are offered only to qualifying
institutional investors.
All classes of shares have identical voting, dividend and liquidation rights.
The distribution fee, incremental transfer agency fee and service fee (class
specific expenses) differs among classes. Income, expenses (other than class
specific expenses) and realized and unrealized gains or losses on investments
are allocated to each class of shares based upon its relative net assets.
The Fund's significant accounting policies are summarized below:
Use of estimates
Preparing financial statements that conform to generally accepted accounting
principles requires management to make estimates (e.g., on assets and
liabilities) that could differ from actual results.
Valuation of securities
All securities are valued at the close of each business day. Securities traded
on national securities exchanges or included in national market systems are
valued at the last quoted sales price. Debt securities are generally traded in
the over-the-counter market and are valued at a price that reflects fair value
as quoted by dealers in these securities or by an independent pricing service.
Securities for which market quotations are not readily available are valued at
fair value according to methods selected in good faith by the board. Short-term
securities maturing in more than 60 days from the valuation date are valued at
the market price or approximate market value based on current interest rates;
those maturing in 60 days or less are valued at amortized cost.
Option transactions
To produce incremental earnings, protect gains, and facilitate buying and
selling of securities for investments, the Fund may buy and sell put and call
options and write covered call options on portfolio securities as well as write
cash-secured put options. The risk in writing a call option is that the Fund
gives up the opportunity for profit if the market price of the security
increases. The risk in writing a put option is that the Fund may incur a loss if
the market price of the security decreases and the option is exercised. The risk
in buying an option is that the Fund pays a premium whether or not the option is
exercised. The Fund also has the additional risk of being unable to enter into a
closing transaction if a liquid secondary market does not exist. The Fund also
may write over-the-counter options where completing the obligation depends upon
the credit standing of the other party.
Option contracts are valued daily at the closing prices on their primary
exchanges and unrealized appreciation or depreciation is recorded. The Fund will
realize a gain or loss when the option transaction expires or closes. When
options on debt securities or futures are exercised, the Fund will realize a
gain or loss. When other options are exercised, the proceeds on sales for a
written call option, the purchase cost for a written put option or the cost of a
security for a purchased put or call option is adjusted by the amount of premium
received or paid.
Futures transactions
To gain exposure to or protect itself from market changes, the Fund may buy and
sell financial futures contracts. Risks of entering into futures contracts and
related options include the possibility of an illiquid market and that a change
in the value of the contract or option may not correlate with changes in the
value of the underlying securities.
Upon entering into a futures contract, the Fund is required to deposit either
cash or securities in an amount (initial margin) equal to a certain percentage
of the contract value. Subsequent payments (variation margin) are made or
received by the Fund each day. The variation margin payments are equal to the
daily changes in the contract value and are recorded as unrealized gains and
losses. The Fund recognizes a realized gain or loss when the contract is closed
or expires.
Federal taxes
The Fund's policy is to comply with all sections of the Internal Revenue Code
that apply to regulated investment companies and to distribute all of its
taxable income to shareholders. No provision for income or excise taxes is thus
required.
Net investment income (loss) and net realized gains (losses) may differ for
financial statement and tax purposes primarily because of deferred losses on
certain futures contracts and losses deferred due to "wash sale" transactions.
The character of distributions made during the year from net investment income
or net realized gains may differ from their ultimate characterization for
federal income tax purposes. Also, due to the timing of dividend distributions,
the fiscal year in which amounts are distributed may differ from the year that
the income or realized gains (losses) were recorded by the Fund.
On the statement of assets and liabilities, as a result of permanent book-to-tax
differences, undistributed net investment income has been decreased by $3,613
and accumulated net realized loss has been increased by $3,619 resulting in a
net reclassification adjustment to decrease paid-in capital by $6.
Dividends to shareholders
Dividends from net investment income, declared daily and payable monthly, are
reinvested in additional shares of the Fund at net asset value or payable in
cash. Capital gains, when available, are distributed along with the last income
dividend of the calendar year.
Other
Security transactions are accounted for on the date securities are purchased or
sold. Interest income, including level-yield amortization of premium and
discount, is accrued daily.
As of June 30, 1999, American Express Financial Corporation (AEFC)owned 232
Class Y shares.
2. EXPENSES AND SALES CHARGES
The Fund has agreements with AEFC to manage its portfolio and provide
administrative services. Under an Investment Management Services Agreement, AEFC
determines which securities will be purchased, held or sold. The management fee
is a percentage of the Fund's average daily net assets in reducing percentages
from 0.45% to 0.35% annually.
Under an Administrative Services Agreement, the Fund pays AEFC a fee for
administration and accounting services at a percentage of the Fund's average
daily net assets in reducing percentages from 0.04% to 0.02% annually.
Additional administrative service expenses paid by the Fund are office expenses,
consultants' fees and compensation of officers and employees. Under this
agreement, the Fund also pays taxes, audit and certain legal fees, registration
fees for shares, compensation of board members, corporate filing fees and any
other expenses properly payable by the Fund and approved by the board.
Under a separate Transfer Agency Agreement, American Express Client Service
Corporation (AECSC) maintains shareholder accounts and records. The Fund pays
AECSC an annual fee per shareholder account for this service as follows:
o Class A $19.50
o Class B $20.50
o Class Y $17.50
Under terms of a prior agreement that ended Jan. 31, 1999, the Fund paid a
transfer agency fee at an annual rate per shareholder account of $15.50 for
Class A and $16.50 for Class B. Under terms of a prior agreement that ended
March 31, 1999, the Fund paid a transfer agency fee at an annual rate per
shareholder account of $15.50 for Class Y.
The Fund has agreements with American Express Financial Advisors Inc. for
distribution and shareholder services. Under a Plan and Agreement of
Distribution, the Fund pays a distribution fee at an annual rate of 0.75% of the
Fund's average daily net assets attributable to Class B shares. Effective July
1, 1999, the Fund will pay a distribution fee at an annual rate up to 0.25% of
the Fund's average daily net assets attributable to Class A shares and up to
1.00% of the Fund's average daily net assets attributable to Class B shares.
Under a Shareholder Service Agreement, the Fund pays a fee for service provided
to shareholders by financial advisors and other servicing agents. The fee is
calculated at a rate of 0.175% of the Fund's average daily net assets
attributable to Class A and Class B shares and 0.10% of the Fund's average daily
net assets attributable to Class Y shares. Effective July 1, 1999, the Fund will
convert the Shareholder Service Agreement with respect to Class A and Class B
shares into the Plan and Agreement of Distribution discussed above.
Sales charges received by American Express Financial Advisors Inc. for
distributing Fund shares were $1,190,885 for Class A and $46,328 for Class B for
the year ended June 30, 1999.
During the year ended June 30, 1999, the Fund's custodian and transfer agency
fees were reduced by $23,564 as a result of earnings credits from overnight cash
balances.
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities (other than short-term
obligations) aggregated $82,116,950 and $63,690,377, respectively, for the year
ended June 30, 1999. Realized gains and losses are determined on an identified
cost basis.
<PAGE>
<TABLE>
<CAPTION>
4. SHARE TRANSACTIONS
Transactions in shares of the Fund for the years indicated are as follows:
Year ended June 30, 1999
Class A Class B Class Y
<S> <C> <C> <C>
Sold 10,339,760 4,119,334 --
Issued for reinvested distributions 2,813,067 315,747 12
Redeemed (13,244,629) (1,174,064) --
----------- ---------- ---
Net increase (decrease) (91,802) 3,261,017 12
Year ended June 30, 1998
Class A Class B Class Y
Sold 7,152,603 2,743,185 --
Issued for reinvested distributions 2,900,525 225,893 12
Redeemed (13,187,728) (816,165) --
----------- -------- ---
Net increase (decrease) (3,134,600) 2,152,913 12
5. INTEREST RATE FUTURES CONTRACTS
As of June 30, 1999, investments in securities included securities valued at
$1,014,520 that were pledged as collateral to cover initial margin deposits on
72 open purchase contracts. The market value of the open purchase contracts as
of June 30, 1999, was $8,552,250 with a net unrealized loss of $107,444. See
"Summary of significant accounting policies."
6. BANK BORROWINGS
The Fund has a revolving credit agreement with U.S. Bank, N.A., whereby the Fund
is permitted to have bank borrowings for temporary or emergency purposes to fund
shareholder redemptions. The Fund must have asset coverage for borrowings not to
exceed the aggregate of 333% of advances equal to or less than five business
days plus 367% of advances over five business days. The agreement, which enables
the Fund to participate with other American Express funds, permits borrowings up
to $200 million, collectively. Interest is charged to each Fund based on its
borrowings at a rate equal to the Federal Funds Rate plus 0.30% or the
Eurodollar Rate (Reserve Adjusted) plus 0.20%. Borrowings are payable up to 90
days after such loan is executed. The Fund also pays a commitment fee equal to
its pro rata share of the amount of the credit facility at a rate of 0.05% per
annum. The Fund had no borrowings outstanding during the year ended June 30,
1999.
7. FINANCIAL HIGHLIGHTS
"Financial highlights" showing per share data and selected financial information
is presented on pages 28 and 29 of the prospectus.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Investments in Securities
AXP Insured Tax-Exempt Fund
June 30, 1999
(Percentages represent value of investments compared to net assets)
Municipal bonds (99.0%)
Name of issuer and title of issue(b,c) Coupon Principal Value(a)
rate amount
Alabama (0.6%)
Mobile General Obligation Capital Improvement Warrants
Convention Center Pre-refunded Bonds
Series 1990 (AMBAC Insured)
<S> <C> <C> <C> <C> <C>
08-15-20 7.13% $3,000,000 $3,174,900
Alaska (1.8%)
North Slope Borough Capital Appreciation
Unlimited General Obligation Bonds
Zero Coupon Series 1995A (MBIA Insured)
06-30-06 5.61 5,300,000(d) 3,774,077
North Slope Borough General Obligation Bonds
Zero Coupon Series 1996B (MBIA Insured)
06-30-07 5.72 8,000,000(d) 5,384,800
Total 9,158,877
Arizona (1.4%)
Chandler Water & Sewer Refunding Revenue Bonds
Series 1991 (FGIC Insured)
07-01-12 7.00 1,250,000 1,324,600
Health Facilities Authority Hospital System
Refunding Revenue Bonds Phoenix Baptist Hospital
Series 1992 (MBIA Insured)
09-01-11 6.25 1,650,000 1,766,309
Phoenix Civic Improvement Wastewater System
Lease Refunding Revenue Bonds (Secondary MBIA Insured)
07-01-23 4.75 4,500,000 4,097,250
Total 7,188,159
Arkansas (0.2%)
Jonesboro Residential Housing & Health Care Facility Board
St. Bernards Regional Medical Center Hospital Refunding
Revenue & Construction Bonds Series 1996B
(AMBAC Insured)
07-01-16 5.90 1,200,000 1,246,500
California (12.0%)
Contra Costa Water District Revenue Bonds
Series 1994G (MBIA Insured)
10-01-19 5.50 4,675,000 4,716,280
Delta Counties Home Mortgage Finance Authority Single Family Mortgage Revenue
Bonds Series 1998A (MBIA Insured) A.M.T.
06-01-24 6.70 1,500,000 1,638,495
Desert Sands Unified School District Convertible
Capital Appreciation Certificates Zero Coupon Series 1995
(FSA Insured)
03-01-01 6.45 3,000,000(g) 2,979,480
Eastern Municipal Water District Riverside County
Water & Sewer Pre-refunded Revenue
Certificates of Participation Series 1991 (FGIC Insured)
07-01-20 6.50 5,460,000 5,833,136
Fontana Unified School District
San Bernardino County General Obligation
Convertible Capital Appreciation Bonds
Series 1995C (FGIC Insured)
05-01-20 6.15 6,000,000 6,405,480
Fresno Health Facility Revenue Bonds Holy Cross-St. Agnes
(Secondary MBIA Insured)
06-01-21 6.63 2,000,000 2,170,760
Los Angeles Department of Airports Revenue Bonds
Los Angeles International Airport Series 1995D
(FGIC Insured) A.M.T.
05-15-15 5.50 2,000,000 2,020,220
Los Angeles Department of Water & Power Waterworks
Refunding Revenue Bonds
Second Issue (Secondary FGIC Insured)
05-15-23 4.50 2,000,000 1,740,600
Northern California Transmission Select Auction
Variable Rate Security & Residual Interest Revenue Bonds
Inverse Floater (MBIA Insured)
04-29-24 5.50 2,500,000(e) 2,502,250
Oceanside Certificate of Participation Refunding Bonds
Oceanside Civic Center (MBIA Insured)
08-01-19 5.25 1,730,000 1,704,586
Rural Home Mortgage Financing Authority Single Family Mortgage Revenue Bonds 3rd
Series 1997A (GNMA Insured) A.M.T.
09-01-29 7.00 1,425,000 1,579,769
San Diego County Certificate of Participation
Regional Authority Bonds Mt. Tower
Series 1991 Inverse Floater (MBIA Insured)
11-18-19 6.36 9,000,000(e) 9,487,080
San Jose Redevelopment Agency Merged Area
Redevelopment Tax Allocation Bonds
Series 1993 (MBIA Insured)
08-01-24 4.75 2,400,000 2,162,544
San Jose Redevelopment Agency Tax
Allocation Bonds Series 1997 (MBIA Insured)
08-01-17 5.50 1,000,000 1,015,420
San Mateo County Joint Power Financing Authority
Lease Revenue Bonds San Mateo County Health Center
Series 1994A (FSA Insured)
07-15-22 5.75 1,500,000 1,622,535
State Public Works Board Lease Revenue Bonds
Department of Correction Substance Abuse Treatment
Facility & State Prison at Corcoran
Series 1996A (AMBAC Insured)
01-01-21 5.25 2,000,000 1,967,100
State Public Works Board Lease Revenue Bonds
University of California Series 1992A (AMBAC Insured)
12-01-16 6.40 2,000,000 2,180,780
State Unlimited Tax General Obligation Bonds
(Secondary FGIC Insured)
09-01-23 4.75 2,500,000 2,263,150
Statewide Community Development Authority
Certificate of Participation
Sutter Health Obligated Group (MBIA Insured)
08-15-22 5.50 5,750,000 5,790,768
Total 59,780,433
Colorado (1.7%)
Denver City & County Airport Revenue Bonds Series 1995B (MBIA Insured) A.M.T.
11-15-17 5.75 4,290,000(i) 4,352,291
Douglas County School District General Obligation
Improvement Bonds Series 1994A (MBIA Insured)
12-15-16 6.50 1,500,000 1,631,955
Larimer County School District R-1 Certificate of Participation
Series 1997 (MBIA Insured)
12-01-16 5.65 1,000,000 1,032,710
Larimer, Weld & Boulder Counties School District R-2J
Thompson Unlimited General Obligation Capital
Appreciation Bonds Zero Coupon
Series 1997 (FGIC Insured)
12-15-11 5.45 2,000,000(d) 1,039,800
12-15-12 5.50 1,400,000(d) 685,216
Total 8,741,972
Delaware (0.2%)
Health Facilities Authority Refunding Revenue Bonds
Medical Center of Delaware Series 1989 (MBIA Insured)
10-01-15 7.00 1,000,000 1,108,310
District of Columbia (0.9%)
Association of American Medical Colleges
College Revenue Bonds Series 1997A (AMBAC Insured)
02-15-27 5.38 2,500,000 2,441,825
Unlimited Tax General Obligation Refunding Bonds
Series 1993B-2 (FSA Insured)
06-01-10 5.50 2,000,000 2,052,780
Total 4,494,605
Florida (1.7%)
Alachua County Public Improvement
Refunding Revenue Bonds
(FSA Insured)
08-01-21 5.13 2,000,000 1,929,440
Department of Transportation Turnpike Revenue Bonds
Series 1991A (AMBAC Insured)
07-01-20 6.25 1,250,000 1,303,375
Fort Myers Utility System Refunding Revenue Bonds
Series 1989A (BIG Insured)
10-01-19 6.00 2,000,000 2,010,580
Gulf Breeze Local Government Loan Program Boca Raton
Series 1985A (FGIC Insured)
12-01-15 7.75 2,000,000 2,071,680
State Correctional Privatization Commission
Certificate of Participation 350 Bed Youthful Columbia
Series 1995A (AMBAC Insured)
08-01-17 5.00 1,000,000 959,710
Total 8,274,785
Georgia (3.1%)
Chatham County Hospital Authority Revenue Bonds
Memorial Medical Center Series 1990A (MBIA Insured)
01-01-21 7.00 4,500,000 4,776,390
Cherokee County Water & Sewer Authority
Water & Sewer Revenue Bonds Series 1995
(MBIA Insured)
08-01-25 5.20 4,970,000 4,862,151
Fulton County Water & Sewer Revenue Bonds
(FGIC Insured)
01-01-14 6.38 3,250,000 3,637,361
Richmond County Water & Sewer Refunding Revenue
Improvement Bonds Series 1996A (FGIC Insured)
10-01-28 5.25 2,500,000 2,437,775
Total 15,713,677
Hawaii (0.2%)
Harbor System Revenue Bonds
Series 1997 (MBIA Insured) A.M.T.
07-01-27 5.50 1,000,000 990,130
Illinois (6.0%)
Chicago O'Hare International Airport
General Revenue Bonds Series 1990A
(AMBAC Insured) A.M.T.
01-01-16 7.50 2,000,000 2,072,800
Chicago O'Hare International Airport Terminal
Revenue Bonds (MBIA Insured) A.M.T.
01-01-10 7.63 3,000,000 3,115,470
Chicago Public Building Commission
Pre-refunded Revenue Bonds Series 1990A (MBIA Insured)
01-01-15 7.13 5,000,000 5,312,351
Chicago Reform Board of Trustees
Board of Education Unlimited Tax General Obligation
Refunding Bonds Dedicated Tax Revenue
Zero Coupon Series 1999A (FGIC Insured)
12-01-21 5.27 10,465,000(d) 2,932,921
Cook County Consolidated High School
District 200 Limited Tax General Obligation Bonds
Oak Park Zero Coupon Series 1998 (FSA Insured)
12-01-15 5.60 7,190,000(d) 2,894,047
12-01-17 5.62 3,750,000(d) 1,341,375
McHenry County Community High School District
157 Unlimited Tax Capital Appreciation General
Obligation Bonds Zero Coupon Series 1998 (FSA Insured)
12-01-17 5.60 5,790,000(d) 2,071,083
Southern Illinois University Housing & Auxiliary
Facilities System Revenue Bonds
Zero Coupon Series 1999A (MBIA Insured)
04-01-26 5.55 4,000,000(d) 859,560
St. Clair County Public Community Building
Capital Appreciation Revenue Bonds
Zero Coupon Series 1997B (FGIC Insured)
12-01-14 5.95 2,000,000(d) 863,740
St. Clair County Unlimited Tax Capital Appreciation
General Obligation Bonds Zero Coupon
Series 1999 (FGIC Insured)
10-01-16 5.58 4,710,000(d) 1,786,079
10-01-17 5.58 6,745,000(d) 2,413,698
10-01-18 5.80 6,935,000(d) 2,242,848
10-01-19 5.80 7,060,000(d) 2,140,592
Total 30,046,564
Indiana (2.4%)
Fort Wayne Hospital Authority Revenue Bonds
Parkview Health System (MBIA Insured)
11-15-28 4.75 2,500,000 2,188,800
Marion County Hospital Authority Refunding Revenue Bonds
Methodist Hospital Series 1989 (MBIA Insured)
09-01-13 6.50 4,000,000 4,059,960
State Health Facility Finance Authority Hospital
Refunding Revenue Bonds Columbus Regional Hospital
Series 1993 (CGIC Insured)
08-15-15 7.00 5,000,000 5,823,250
Total 12,072,010
Kansas (0.5%)
Labette County Single Family Housing Revenue
Bonds Series 1998A-2 (GNMA Insured)
12-01-11 7.65 260,000 278,379
Sedgwick & Shawnee Counties Single Family Housing Revenue Mortgage Backed
Securities 1st Series 1997A (MBIA Insured) A.M.T.
06-01-29 6.95 1,810,000(h) 1,977,299
Total 2,255,678
Louisiana (1.5%)
Energy & Power Authority Refunding Revenue Bonds
Rodemacher Unit 2 Series 1991 (FGIC Insured)
01-01-08 6.75 7,000,000 7,387,800
Maine (0.4%)
State Turnpike Authority Turnpike Revenue Bonds
(MBIA Insured)
07-01-18 6.00 1,790,000 1,941,094
Massachusetts (5.7%)
Health & Educational Facilities Authority
Pre-refunded Bonds Northeastern University
Series 1989C (AMBAC Insured)
10-01-06 7.10 1,000,000 1,028,570
Health & Educational Facilities Authority
Revenue Bonds Cape Cod Health System
Series 1993A (Connie Lee Insured)
11-15-21 5.25 4,000,000 3,817,480
Industrial Finance Agency Revenue Bonds
Brandeis University (MBIA Insured)
10-01-19 6.80 1,700,000 1,746,257
Municipal Wholesale Electric Power
Supply System Refunding Revenue Bonds
Series 1994B (MBIA Insured)
07-01-11 4.75 5,250,000 4,978,103
Plymouth County Certificates of Participation
Plymouth Correctional Facility Series 1999
(AMBAC Insured)
04-01-22 5.00 1,750,000 1,643,530
State Bay Transportation Authority Series 1995B
(AMBAC Insured)
03-01-25 5.38 4,000,000 3,936,760
State Health & Education Facilities Authority
Revenue Bonds Southcoast Health System
Series 1998A (MBIA Insured)
07-01-27 4.75 3,000,000 2,637,780
State Health & Education Facilities Authority
Revenue Bonds Valley Regional Health System
Series 1994C (Connie Lee Insured)
07-01-18 5.75 1,500,000 1,525,905
State Turnpike Authority Metro Highway System
Revenue Bonds Series 1999A (AMBAC Insured)
01-01-34 4.75 2,500,000 2,176,975
State Turnpike Authority Metro Highway System
Senior Lien Revenue Bonds Toll Road
Series 1997A (MBIA Insured)
01-01-37 5.00 3,000,000 2,727,750
State Water Resource Authority Revenue Bonds
Series 1992A (Secondary MBIA Insured)
07-15-22 5.50 2,000,000 2,072,900
Total 28,292,010
Michigan (4.3%)
Almont Community Schools
Unlimited Tax General Obligation Bonds
Series 1996 (FGIC Insured)
05-01-22 5.38 1,900,000 1,876,478
Genesee County Sewer Disposal System 3
Limited Tax General Obligation Bonds
Series 1996A (AMBAC Insured)
04-01-16 5.50 1,400,000 1,416,352
Grand Rapids Sanitary Sewer System Revenue Bonds
Series 1998A (FGIC Insured)
01-01-28 4.75 3,000,000 2,678,040
Holly Area School District
Unlimited Tax General Obligation
Refunding Bonds (FGIC Insured)
05-01-25 4.75 1,000,000 893,340
Iron Mountain School Unlimited Tax
General Obligation Refunding Bonds (AMBAC Insured)
05-01-21 5.13 1,500,000 1,431,645
Kalamazoo Hospital Finance Authority
Refunding & Improvement Bonds
Bronson Methodist Hospital (Secondary MBIA Insured)
05-15-12 6.25 3,000,000 3,245,130
Lincoln Park School District Wayne County School Building
& Site Unlimited Tax General Obligation Bonds
(FGIC Insured)
05-01-26 5.90 1,500,000 1,618,665
Monroe County Pollution Control Refunding Bonds Detroit Edison Series 1992I-B
(MBIA Insured) A.M.T.
09-01-24 6.55 5,000,000 5,381,150
State Trunk Line Bonds Series 1998A (MBIA Insured)
11-01-20 4.75 1,000,000 905,250
Wayne Charter County Airport Revenue Bonds
Detroit Metro Wayne County Series 1998A
(MBIA Insured) A.M.T.
12-01-28 5.00 2,000,000 1,827,820
Total 21,273,870
Minnesota (2.1%)
Southern Minnesota Municipal Power Agency
Power Supply System Refunding Revenue Bonds
Series 1993A (Secondary FGIC Insured)
01-01-16 4.75 4,250,000 3,959,555
Southern Minnesota Municipal Power Agency
Power Supply System Refunding Revenue Bonds
Zero Coupon Series 1994A (MBIA Insured)
01-01-21 6.12 6,000,000(d) 1,825,860
Western Minnesota Municipal Power Agency
Revenue Bonds Escrowed to Maturity (AMBAC Insured)
01-01-16 6.75 4,500,000 4,742,550
Total 10,527,965
Mississippi (1.1%)
Alcorn County Hospital Refunding Revenue Bonds
Magnolia Regional Hospital Center (AMBAC Insured)
10-01-13 5.75 1,000,000 1,029,670
State Home Single Family Mortgage Revenue Bonds Series 1997H (GNMA & FNMA
Insured) A.M.T.
12-01-29 6.70 1,980,000(h) 2,112,026
State Home Single Family Mortgage Revenue Bonds Series 1999A (GNMA Insured)
A.M.T.
06-01-31 5.25 2,000,000 2,140,840
Total 5,282,536
Montana (1.9%)
Forsyth Rosebud County Pollution Refunding
Revenue Bonds Puget Sound Power & Light
(AMBAC Insured) A.M.T.
08-01-21 7.25 4,000,000 4,270,840
State Board of Investments Payroll Tax Bonds
Worker's Compensation Program
Series 1991 (MBIA Insured)
06-01-20 6.88 4,750,000 5,079,508
Total 9,350,348
Nevada (1.0%)
Clark County Passenger Facility Charge Revenue Bonds Las Vegas McCarren Airport
Series 1995B (Secondary AMBAC Insured) A.M.T.
07-01-25 5.50 5,000,000 4,921,200
New Hampshire (1.0%)
Industrial Development Authority Pollution Control
Revenue Bonds Light & Power Series 1989 (AMBAC Insured) A.M.T.
12-01-19 7.38 5,000,000 5,167,150
New Jersey (0.2%)
Carteret Board of Education Refunding
Certificates of Participation
Series 1999 (MBIA Insured)
04-15-19 4.75 1,000,000 929,530
New Mexico (0.5%)
Rio Rancho Water & Wastewater System
Refunding Revenue Bonds
Series 1999 (AMBAC Insured)
05-15-22 4.75 1,500,000 1,361,745
Santa Fe Water Revenue Bonds (AMBAC Insured)
06-01-24 6.30 1,000,000 1,079,970
Total 2,441,715
New York (7.6%)
New York City Municipal Water Finance Authority
Water & Sewer System Revenue Bonds
Series 1995A (Secondary MBIA Insured)
06-15-23 5.50 5,000,000 5,012,450
State Dormitory Authority City University System
Consolidated 3rd Resolution Revenue Bonds
2nd Series 1994 (MBIA Insured)
07-01-19 6.25 2,500,000 2,705,675
State Dormitory Authority State University Education Facility
Revenue Bonds (Secondary AMBAC Insured)
05-15-15 5.25 2,700,000 2,720,115
State Energy Resource & Development Authority
Gas Facility Revenue Bonds Brooklyn Union Gas
(MBIA Insured) A.M.T.
06-01-25 5.60 4,500,000 4,505,625
State Energy Resource & Development Authority
Pollution Control Bonds Series 1987A
(MBIA Insured) A.M.T.
07-01-26 6.15 3,000,000 3,148,620
State Energy Research & Development Authority Pollution Control Refunding
Revenue Bonds Rochester Gas & Electric (MBIA Insured) A.M.T.
05-15-32 6.50 4,000,000 4,245,680
State Energy Research & Development Authority Solid Waste Development Revenue
Bonds State Gas & Electric Company Series A (MBIA Insured) A.M.T.
12-01-28 5.70 11,210,000 11,281,183
State Urban Development Corporation Correctional
Capital Facilities Lease Revenue Bonds
Series 1995-96 (AMBAC Insured)
01-01-25 5.38 3,000,000 2,956,980
State Urban Development Correction Facility
Pre-refunded Revenue Bonds 1st Series 1990
(FSA Insured)
01-01-20 7.50 1,500,000 1,560,750
Total 38,137,078
North Carolina (1.3%)
Charlotte Pre-refunded Certificates of Participation
Convention Facility Series 1991 (AMBAC Insured)
12-01-21 6.75 3,150,000 3,404,237
Concord Certificate of Participation Series 1996B
(MBIA Insured)
06-01-16 5.75 1,480,000 1,518,317
Cumberland County Financial Corporation
Installment Payment Miscellaneous Revenue Bonds
Public Building & Equipment Series 1998 (MBIA Insured)
12-01-17 4.75 1,640,000 1,505,733
Fayetteville Financial Corporation Installment Payment
Revenue Bonds Series 1996 (MBIA Insured)
02-01-14 5.63 300,000 308,307
Total 6,736,594
North Dakota (0.8%)
Fargo Health System Meritcare Obligated Group
Revenue Bonds Series 1996A (MBIA Insured)
06-01-27 5.38 4,350,000 4,224,329
Ohio (1.2%)
Lorain County Hospital Facilities Refunding Revenue Bonds
EMH Regional Medical Center
Series 1995 (AMBAC Insured)
11-01-21 5.38 2,000,000 1,965,400
Lucas County Hospital Refunding Revenue Bonds
St. Vincent's Medical Center Series 1993C (MBIA Insured)
08-15-22 5.25 1,725,000 1,662,279
Montgomery County Hospital Facility
Refunding Revenue & Improvement Bonds
Ketter Medical Center
Series 1996 (MBIA Insured)
04-01-26 5.50 2,500,000 2,492,825
Total 6,120,504
Oklahoma (0.6%)
McAlester Public Works Authority Oklahoma Improvement
Refunding Revenue Bonds (FSA Insured)
12-01-17 5.25 1,470,000 1,526,507
12-01-18 5.25 1,000,000 1,038,440
Moore Public Works Authority Refunding Revenue Bonds
Series 1989 (AMBAC Insured)
07-01-06 7.60 245,000 249,927
Total 2,814,874
Pennsylvania (4.4%)
Allegheny County Certificates of Participation
County Courthouse Renovation
Series 1999 (AMBAC Insured)
12-01-28 5.00 3,000,000 2,778,300
Harrisburg Authority Dauphin County Revenue Bonds
Series 1997-II (MBIA Insured)
09-15-22 5.63 2,000,000 2,022,740
Philadelphia Gas Works Revenue Bonds
General Ordinance 2nd Series 1998 (FSA Insured)
07-01-29 5.00 4,325,000 3,997,079
Pittsburgh Water & Sewer Authority System
Pre-refunded Revenue Bonds Series 1991A (FGIC Insured)
09-01-14 6.50 10,000,000 10,690,900
Robinson Township Municipal Authority Water & Sewer
Revenue Bonds (FGIC Insured)
11-15-19 6.00 2,200,000 2,290,310
Total 21,779,329
Rhode Island (0.6%)
Health & Education Building Corporation Higher Education
Facility Revenue Bonds Series 1996 (MBIA Insured)
06-01-26 5.63 3,000,000 3,030,210
South Carolina (0.9%)
Piedmont Municipal Power Agency Electric
Refunding Revenue Bonds (FGIC Insured)
01-01-21 6.25 1,000,000 1,112,800
Piedmont Municipal Power Agency Electric
Refunding Revenue Bonds Series 1998A (MBIA Insured)
01-01-25 4.75 3,900,000 3,472,131
Total 4,584,931
Tennessee (1.5%)
Franklin Special School District Williamson County
Limited Tax Capital Appreciation General Obligation Bonds
Zero Coupon (FSA Insured)
06-01-19 5.79 1,425,000(d) 465,163
06-01-20 5.80 2,345,000(d) 722,190
Knox County Health Education & Housing Facility Board
Hospital Refunding Revenue Bonds Fort Sanders
Alliance Obligation Group Series 1993 (MBIA Insured)
01-01-14 5.75 3,750,000 3,930,899
Metropolitan Government Nashville & Davidson Counties
Sports Authority Public Improvement Revenue Bonds
Series 1996 (AMBAC Insured)
07-01-17 5.75 2,160,000 2,238,257
Total 7,356,509
Texas (18.1%)
Austin Airport System Prior Lien Revenue Bonds Series 1995A (MBIA Insured)
A.M.T.
11-15-25 6.13 3,000,000 3,140,640
Austin Combined Utilities System Capital Appreciation
Refunding Revenue Bonds Series 1994 Zero Coupon
(FGIC Insured)
05-15-17 5.83 5,900,000(d) 2,206,010
Austin Combined Utilities System Refunding Revenue Bonds
Series 1994 (FGIC Insured)
05-15-24 5.75 8,500,000 8,793,419
Austin Combined Utilities System Revenue Bonds
Series 1987 (BIG Insured)
11-15-12 8.63 750,000 837,368
11-15-17 8.63 500,000 558,245
Bexar County Health Facility Development Hospital
Revenue Bonds San Antonio Baptist Memorial
Hospital System Series 1994 (MBIA Insured)
08-15-19 6.75 5,000,000 5,584,200
Brazos River Authority Collateralized Pollution Control
Refunding Revenue Bonds Texas Utility Electric
Series 1992C (FGIC Insured) A.M.T.
10-01-22 6.70 14,935,000 15,992,696
Colorado River Municipal Water District Water System
Pre-refunded Revenue Bonds Series 1991A
(AMBAC Insured)
01-01-21 6.63 8,900,000 9,236,152
Corsicana Waterworks & Sewer System
Refunding Revenue Bonds Series 1997A (FGIC Insured)
08-15-22 5.75 2,075,000 2,118,285
Georgetown Combination Tax & Utilities System
Limited Revenue Certificates of Obligation
Series 1997 (FGIC Insured)
08-15-17 5.38 1,000,000 998,210
Harris County Toll Road Senior Lien
Pre-refunded Revenue Bonds Series 1992A
(AMBAC Insured)
08-15-17 6.50 8,170,000 8,850,397
Hillsboro Independent School District
Unlimited Tax School Building & Refunding
Revenue Bonds Series 1997
(Permanent School Fund Guarantee)
08-15-26 5.25 1,000,000 960,830
Houston Water & Sewer System
Junior Lien Refunding Revenue Bonds
Series 1997A (FGIC Insured)
12-01-22 5.25 7,210,000 6,973,872
League City General Obligation
Refunding & Improvement Bonds
Series 1990 (FGIC Insured)
02-01-13 6.25 2,500,000 2,584,500
Matagorda County Navigation District 1
Collateralized Pollution Control Revenue Bonds
Central Power & Light Series 1984A (AMBAC Insured)
12-15-14 7.50 2,500,000 2,613,225
Matagorda County Navigation District 1 Pollution Control
Refunding Revenue Bonds Houston Light & Power
Series 1989E (FGIC Insured)
12-01-18 7.20 2,150,000 2,222,176
Matagorda County Navigation District 1 Pollution Control
Revenue Bonds Central Power & Light
Series 1990 (AMBAC Insured) A.M.T.
03-01-20 7.50 2,000,000 2,082,660
Mineral Wells Independent School Districts Palo
Pinto & Parker Counties Unlimited Tax General Obligation
School Building & Refunding Bonds Series 1998
(Permanent School Fund Guarantee)
02-15-28 4.75 2,000,000 1,774,360
Municipal Power Agency Refunding Revenue Bonds
Series 1991A (AMBAC Insured)
09-01-12 6.75 5,250,000 5,603,378
Rosenberg Limited Tax General Obligation Bonds
Series 1998 (FSA Insured)
03-01-16 4.50 740,000 653,213
03-01-17 4.50 785,000 687,260
Turnpike Authority Dallas North Tollway Revenue Bonds
Addison Airport Toll Tunnel Series 1994 (FGIC Insured)
01-01-23 6.60 2,000,000 2,228,840
University of Houston System Consolidated
Pre-refunded Revenue Bonds Series 1990A (MBIA Insured)
02-15-06 7.40 3,160,000 3,238,210
Total 89,938,146
Vermont (0.2%)
University of Vermont & State Agricultural College
Revenue Bonds Series 1998 (MBIA Insured)
10-01-38 4.75 1,000,000 879,760
Virginia (5.5%)
Hanover County Industrial Development Authority
Memorial Regional Medical Center (MBIA Insured)
08-15-25 5.50 3,800,000 3,784,078
Loudoun County Sanitation Authority Waste & Sewer
Refunding Revenue Bonds (MBIA Insured)
01-01-30 5.25 1,435,000 1,394,633
Metropolitan Washington D.C. Airports Authority Airport
System Revenue Bonds Series 1992A (MBIA Insured)
A.M.T.
10-01-19 6.63 9,420,000 10,095,603
Portsmouth Redevelopment Housing Authority
Multi-family Housing Refunding Revenue Bonds
(FNMA Insured)
12-01-08 6.05 5,780,000 6,096,686
Upper Occoquan Sewer Authority Regional Sewer
Revenue Bonds Series 1995A (MBIA Insured)
07-01-29 4.75 4,000,000 3,572,400
William County Lease Certificate of Participation Bonds
(MBIA Insured)
12-01-20 5.50 2,590,000 2,593,315
Total 27,536,715
Washington (0.5%)
Central Puget Sound Regional Transit Authority
Sales Tax Revenue Bonds (FGIC Insured)
02-01-28 4.75 3,000,000 2,653,950
West Virginia (1.8%)
School Building Authority Capital Improvement
Pre-refunded Revenue Bonds (MBIA Insured)
07-01-15 7.25 3,415,000 3,606,786
School Building Authority Capital Improvement
Revenue Bonds Series 1990B (MBIA Insured)
07-01-17 6.75 5,000,000 5,257,400
Total 8,864,186
Wisconsin (0.5%)
Center District Sales Tax Appreciation Senior
Dedicated Bonds Zero Coupon Series 1996A
(MBIA Insured)
12-15-17 6.03 4,000,000(d) 1,448,360
12-15-21 5.45 3,045,000(d) 870,139
Southeast Professional Baseball Park District
Sales Tax Revenue Bonds Zero Coupon
(MBIA Insured)
12-15-29 5.15 2,125,000(d) 383,626
Total 2,702,125
Wyoming (1.1%)
Central Regional Water System-Joint Powers Board
Refunding Revenue Bonds (FSA Insured)
06-01-30 5.25 4,000,000 3,880,280
Green River Joint Powers Board Water & Sewer
Refunding Revenue Bonds Sweetwater County
Series 1999A (FSA Insured)
03-01-24 5.00 2,000,000 1,858,080
Total 5,738,360
Total municipal bonds
(Cost: $464,182,485) $494,859,418
Municipal notes (0.3%)
Issuer(c,f) Effective Amount Value(a)
yield payable at
maturity
Columbia Alabama Industrial Development Authority
Pollution Control Revenue Bonds (Alabama Power)
Series C V.R.
10-01-22 3.40% $1,400,000 $1,400,000
Regents of the University of Michigan Hospital
Revenue Bonds Series 1995A V.R.
12-01-27 3.45 100,000 100,000
Total municipal notes
(Cost: $1,500,000) $1,500,000
Total investments in securities
(Cost: $465,682,485)(j) $496,359,418
See accompanying notes to investments in securities.
</TABLE>
<PAGE>
Notes to investments in securities
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) The following abbreviations may be used in portfolio descriptions to
identify the insurer of the issue:
ACA -- ACA Financial Guaranty Corporation
AMBAC -- American Municipal Bond Association Corporation
BIG -- Bond Investors Guarantee
CGIC -- Capital Guaranty Insurance Company
FGIC -- Financial Guarantee Insurance Corporation
FHA -- Federal Housing Authority
FNMA -- Federal National Mortgage Association
FSA -- Financial Security Assurance
GNMA -- Government National Mortgage Association
MBIA -- Municipal Bond Investors Assurance
(c) The following abbreviations may be used in the portfolio descriptions:
A.M.T. -- Alternative Minimum Tax -- As of June 30, 1999, the value of
securities subject to alternative minimum tax represented 19.62%
of net assets.
B.A.N. -- Bond Anticipation Note
C.P. -- Commercial Paper
R.A.N. -- Revenue Anticipation Note
T.A.N. -- Tax Anticipation Note
T.R.A.N. -- Tax & Revenue Anticipation Note
V.R. -- Variable Rate
V.R.D.B. -- Variable Rate Demand Bond
V.R.D.N. -- Variable Rate Demand Note
(d) For zero coupon bonds, the interest rate disclosed represents the annualized
effective yield on the date of acquisition.
(e) Inverse floaters represent securities that pay interest at a rate that
increases (decreases) in the same magnitude as, or in a multiple of, a decline
(increase) in market short-term rates. Interest rate disclosed is the rate in
effect on June 30, 1999. Inverse floaters in the aggregate represent 2.40% of
the Fund's net assets as of June 30, 1999.
(f) The Fund is entitled to receive principal amount from issuer or corporate
guarantor, if indicated in parentheses, after a day or a week's notice. The
maturity date disclosed represents the final maturity. Interest rate varies to
reflect current market conditions; rate shown is the effective rate on June 30,
1999.
(g) For those zero coupon bonds that become coupon paying at a future date, the
interest rate disclosed represents the annualized effective yield from the date
of acquisition to interest reset date disclosed.
(h) Interest rate varies either based on a predetermined schedule or to reflect
current market conditions; rate shown is the effective rate on June 30, 1999.
(i) Partially pledged as initial deposit on the following open interest rate
futures contracts (see Note 5 to the financial statements):
Type of security Notional amount
Purchase contracts
Municipal Bonds, Sept. 1999 $7,200,000
(j) At June 30, 1999, the cost of securities for federal income tax purposes was
$465,682,485 and the aggregate gross unrealized appreciation and depreciation
based on that cost was:
Unrealized appreciation $32,910,063
Unrealized depreciation (2,233,130)
----------
Net unrealized appreciation $30,676,933
<PAGE>
PART C. OTHER INFORMATION
Item 23. Exhibits
(a) Declaration of Trust, dated April 7, 1986, filed as Exhibit 1 to
Registration Statement No. 33-5102, is incorporated by reference.
(b) Amended By-laws, dated June 8, 1989, filed electronically as Exhibit 2
to Registrant's Post-Effective Amendment No. 29 to Registration
Statement No. 33-5102, are incorporated by reference.
(c) Certificate for shares of beneficial interest, filed as Exhibit 4 to
Pre-Effective Amendment No. 1 to Registration Statement No. 33-5102, is
incorporated by reference.
(d) Investment Management Services Agreement between Registrant and
American Express Financial Corporation, dated March 20, 1995 is filed
electronically as Exhibit 5 to Registrant's Post-Effective Amendment
No. 29 to Registration Statement No. 33-5102, is incorporated by
reference.
(e) Distribution Agreement between AXP Utilities Income Fund, Inc. and
American Express Financial Advisors Inc. dated July 8, 1999, filed
electronically as Exhibit (e) to Registrant's Post-Effective Amendment
No. 22 File No. 33-20872 filed on or about August 26, 1999, is
incorporated by reference. Registrant's Distribution Agreement differs
from the one incorporated by reference only by the fact that Registrant
is one executing party.
(f) All employees are eligible to participate in a profit sharing plan.
Entry into the plan is Jan. 1 or July 1. The Registrant contributes
each year an amount up to 15 percent of their annual salaries, the
maximum deductible amount permitted under Section 404(a) of the
Internal Revenue Code.
(g) Custodian Agreement between Registrant and First National Bank of
Minneapolis, dated July 23, 1986, filed electronically as Exhibit 8 to
Registrant's Post-Effective Amendment No. 29 to Registration Statement
No. 33-5102, is incorporated by reference.
(h)(1) Insurance Agreement between IDS Insured Tax-Exempt Fund and
Financial Guaranty Insurance Company, filed as Exhibit 9 to
Pre-Effective Amendment No. 1 to Registration Statement No. 33-5102,
is incorporated by reference.
(h)(2) Administrative Services Agreement between Registrant and American
Express Financial Corporation, dated March 20, 1995, filed
electronically as Exhibit 9(d) to Registrant's Post-Effective
Amendment No. 29 to Registration Statement No. 33-5102, is
incorporated by reference.
(h)(3) License Agreement, dated January 25, 1988, filed electronically as
Exhibit 9(e) to Registrant's Post-Effective Amendment No. 29 to
Registration Statement No. 33-5102, is incorporated by reference.
(h)(4) Shareholder Service Agreement between Registrant and American
Express Financial Advisors Inc., dated March 20, 1995, filed
electronically as Exhibit 9(c) to Registrant's Post-Effective
Amendment No. 29 to Registration Statement No. 33-5102, is
incorporated by reference.
(h)(5) Class Y Shareholder Service Agreement between IDS Precious Metals Fund,
Inc. and American Express Financial Advisors Inc., dated May 9, 1997,
filed electronically on or about May 27, 1997 as Exhibit 9(e) to IDS
Precious Metals Fund, Inc.'s Post-Effective Amendment No. 30 to
Registration Statement No. 2-93745, is incorporated by reference.
Registrant's Class Y Shareholder Service Agreement differs from the one
incorporated by reference only by the fact that Registrant is one
executing party.
<PAGE>
(h)(6) Transfer Agency Agreement between Registrant and American Express
Client Service Corporation, dated Feb. 1, 1999, is incorporated by
reference to Exhibit (h)(6) to Registrant's Post-Effective Amendment
No. 31 to Registration Statement No. 33-5102.
(i) Opinion and consent of counsel as to the legality of the securities
being registered is incorporated by reference to Exhibit 10 to
Registrant's Post-Effective Amendment No. 30 filed on or about Aug. 28,
1998.
(j) Independent Auditors' Consent is filed electronically herewith.
(k) Omitted Financial Statements: Not Applicable.
(l) Initial Capital Agreements: Not Applicable.
(m) Plan and Agreement of Distribution dated July 1, 1999 between AXP
Discovery Fund, Inc. and American Express Financial Advisors Inc., is
incorporated by reference to Exhibit (m) to AXP Discovery Fund, Inc.
Post-Effective Amendment No. 36 to Registration Statement No. 2-72174
filed on or about July 30, 1999.
(n) Financial Data Schedules: Not Applicable
(o) Rule 18f-3 Plan dated April 1999 is incorporated by reference to
Exhibit (o) to IDS Precious Metals Fund Inc. Post-Effective Amendment
No. 33 to Registration Statement No. 2-93745 filed on or about May 24,
1999.
(p)(1) Trustees' Power of Attorney to sign Amendments to this Registration
Statement, dated January 14, 1999, is incorporated by reference as
Exhibit (p)(1) to Registrant's Post-Effective Amendment No. 31 to
Registration Statement No. 33-5102.
(p)(2) Officers' Power of Attorney to sign Amendments to this Registration
Statement, dated March 1, 1999 is incorporated by reference as Exhibit
(p)(2) to Registrant's Post-Effective Amendment No. 31 to Registration
Statement No. 33-5102.
Item 24. Persons Controlled by or Under Common Control with Registrant
None.
Item 25. Indemnification
The Declaration of Trust of the registrant provides that the Trust shall
indemnify any person who was or is a party or is threatened to be made a party,
by reason of the fact that he or she is or was a trustee, officer, employee or
agent of the Trust, or is or was serving at the request of the Trust as a
trustee, officer, employee or agent of another company, partnership, joint
venture, trust or other enterprise, to any threatened, pending or completed
action, suit or proceeding, wherever brought, and the Trust may purchase
liability insurance and advance legal expenses, all to the fullest extent
permitted by the laws of the State of Massachusetts, as now existing or
hereafter amended. The By-laws of the registrant provide that present or former
trustees or officers of the Trust made or threatened to be made a party to or
involved (including as a witness) in an actual or threatened action, suit or
proceeding shall be indemnified by the Trust to the full extent authorized by
the laws of the Commonwealth of Massachusetts, all as more fully set forth in
the By-laws filed as an exhibit to this registration statement.
<PAGE>
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to trustees, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a trustee, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Any indemnification hereunder shall not be exclusive of any other rights of
indemnification to which the trustees, officers, employees or agents might
otherwise be entitled. No indemnification shall be made in violation of the
Investment Company Act of 1940.
<TABLE>
<CAPTION>
Item 26. Business and Other Connections of Investment Adviser (American Express Financial Corporation)
Directors and officers of American Express Financial Corporation who are
directors and/or officers of one or more other companies:
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C>
Name and Title Other company(s) Address Title within other
company(s)
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Ronald G. Abrahamson, American Express Client IDS Tower 10 Director and Vice President
Vice President Service Corporation Minneapolis, MN 55440
American Express Financial Vice President
Advisors Inc.
Public Employee Payment Director and Vice President
Company
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Douglas A. Alger, American Express Financial IDS Tower 10 Senior Vice President
Director and Senior Vice Advisors Inc. Minneapolis, MN 55440
President
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Peter J. Anderson, Advisory Capital IDS Tower 10 Director
Director and Senior Vice Strategies Group Inc. Minneapolis, MN 55440
President
American Express Asset Director and Chairman of
Management Group Inc. the Board
American Express Asset Director, Chairman of the
Management International, Board and Executive Vice
Inc. President
American Express Financial Senior Vice President
Advisors Inc.
IDS Capital Holdings Inc. Director and President
IDS Futures Corporation Director
NCM Capital Management 2 Mutual Plaza Director
Group, Inc. 501 Willard Street
Durham, NC 27701
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Ward D. Armstrong, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
American Express Service Vice President
Corporation
American Express Trust Director and Chairman of
Company the Board
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
John M. Baker, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
American Express Trust Senior Vice President
Company
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Joseph M. Barsky III, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Timothy V. Bechtold, American Centurion Life IDS Tower 10 Director and President
Vice President Assurance Company Minneapolis, MN 55440
American Express Financial Vice President
Advisors Inc.
IDS Life Insurance Company Executive Vice President
IDS Life Insurance Company P.O. Box 5144 Director and President
of New York Albany, NY 12205
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
John C. Boeder, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
IDS Life Insurance Company P.O. Box 5144 Director
of New York Albany, NY 12205
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Douglas W. Brewers, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Karl J. Breyer, American Express Financial IDS Tower 10 Senior Vice President
Director, Corporate Senior Advisors Inc. Minneapolis, MN 55440
Vice President
American Express Financial Director
Advisors Japan Inc.
American Express Minnesota Director
Foundation
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Cynthia M. Carlson, American Enterprise IDS Tower 10 Director, President and
Vice President Investment Services Inc. Minneapolis, MN 55440 Chief Executive Officer
American Express Financial Vice President
Advisors Inc.
American Express Service Vice President
Corporation
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Mark W. Carter, American Express Financial IDS Tower 10 Senior Vice President and
Director, Senior Vice Advisors Inc. Minneapolis, MN 55440 Chief Marketing Officer
President and Chief Marketing
Officer
IDS Life Insurance Company Executive Vice President
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
James E. Choat, American Centurion Life IDS Tower 10 Executive Vice President
Director and Senior Vice Assurance Company Minneapolis, MN 55440
President
American Enterprise Life Director, President and
Insurance Company Chief Executive Officer
American Express Financial Senior Vice President
Advisors Inc.
American Express Insurance Vice President
Agency of Idaho Inc.
American Express Insurance Vice President
Agency of Nevada Inc.
American Express Insurance Vice President
Agency of Oregon Inc.
American Express Property Vice President
Casualty Insurance Agency
of Kentucky Inc.
American Express Property Vice President
Casualty Insurance Agency
of Maryland Inc.
American Express Property Vice President
Casualty Insurance Agency
of Pennsylvania Inc.
IDS Insurance Agency of Vice President
Alabama Inc.
IDS Insurance Agency of Vice President
Arkansas Inc.
IDS Insurance Agency of Vice President
Massachusetts Inc.
IDS Insurance Agency of Vice President
New Mexico Inc.
IDS Insurance Agency of Vice President
North Carolina Inc.
IDS Insurance Agency of Vice President
Ohio Inc.
IDS Insurance Agency of Vice President
Wyoming Inc.
IDS Life Insurance Company P.O. Box 5144 Executive Vice President
of New York Albany, NY 12205
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Kenneth J. Ciak, AMEX Assurance Company IDS Tower 10 Director and President
Vice President and General Minneapolis, MN 55440
Manager
American Express Financial Vice President and General
Advisors Inc. Manager
IDS Property Casualty 1 WEG Blvd. Director and President
Insurance Company DePere, WI 54115
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Paul A. Connolly, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
Colleen Curran, American Express Financial IDS Tower 10 Vice President and
Vice President and Assistant Advisors Inc. Minneapolis, MN 55440 Assistant General Counsel
General Counsel
American Express Service Vice President and Chief
Corporation Legal Counsel
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Luz Maria Davis American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Douglas K. Dunning, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Gordon L. Eid, American Express Financial IDS Tower 10 Senior Vice President,
Director, Senior Vice Advisors Inc. Minneapolis, MN 55440 General Counsel and Chief
President, General Counsel Compliance Officer
and Chief Compliance Officer
American Express Financial Vice President and Chief
Advisors Japan Inc. Compliance Officer
American Express Insurance Director and Vice President
Agency of Arizona Inc.
American Express Insurance Director and Vice President
Agency of Idaho Inc.
American Express Insurance Director and Vice President
Agency of Nevada Inc.
American Express Insurance Director and Vice President
Agency of Oregon Inc.
American Express Property Director and Vice President
Casualty Insurance Agency
of Kentucky Inc.
American Express Property Director and Vice President
Casualty Insurance Agency
of Maryland Inc.
American Express Property Director and Vice President
Casualty Insurance Agency
of Pennsylvania Inc.
IDS Insurance Agency of Director and Vice President
Alabama Inc.
IDS Insurance Agency of Director and Vice President
Arkansas Inc.
IDS Insurance Agency of Director and Vice President
Massachusetts Inc.
IDS Insurance Agency of Director and Vice President
New Mexico Inc.
IDS Insurance Agency of Director and Vice President
North Carolina Inc.
IDS Insurance Agency of Director and Vice President
Ohio Inc.
IDS Insurance Agency of Director and Vice President
Wyoming Inc.
IDS Real Estate Services, Vice President
Inc.
Investors Syndicate Director
Development Corp.
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Robert M. Elconin, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
IDS Life Insurance Company Vice President
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Gordon M. Fines, American Express Asset IDS Tower 10 Senior Vice President and
Vice President Management Group Inc. Minneapolis, MN 55440 Chief Investment Officer
American Express Financial Vice President
Advisors Inc.
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Douglas L. Forsberg, American Centurion Life IDS Tower 10 Director
Vice President Assurance Company Minneapolis, MN 55440
American Express Financial Vice President
Advisors Inc.
American Express Financial Director, President and
Advisors Japan Inc. Chief Executive Officer
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Jeffrey P. Fox, American Enterprise Life IDS Tower 10 Vice President and
Vice President and Corporate Insurance Company Minneapolis, MN 55440 Controller
Controller
American Express Financial Vice President and
Advisors Inc. Corporate Controller
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Harvey Golub, American Express Company American Express Tower Chairman and Chief
Director World Financial Center Executive Officer
New York, NY 10285
American Express Travel Chairman and Chief
Related Services Company, Executive Officer
Inc.
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
David A. Hammer, American Express Financial IDS Tower 10 Vice President and
Vice President and Marketing Advisors Inc. Minneapolis, MN 55440 Marketing Controller
Controller
IDS Plan Services of Director and Vice President
California, Inc.
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Lorraine R. Hart, AMEX Assurance Company IDS Tower 10 Vice President
Vice President Minneapolis, MN 55440
American Centurion Life Vice President
Assurance Company
American Enterprise Life Vice President
Insurance Company
American Express Financial Vice President
Advisors Inc.
American Partners Life Director and Vice
Insurance Company President
IDS Certificate Company Vice President
IDS Life Insurance Company Vice President
IDS Life Series Fund, Inc. Vice President
IDS Life Variable Annuity Vice President
Funds A and B
Investors Syndicate Director and Vice
Development Corp. President
IDS Life Insurance Company P.O. Box 5144 Vice President
of New York Albany, NY 12205
IDS Property Casualty 1 WEG Blvd. Vice President
Insurance Company DePere, WI 54115
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Scott A. Hawkinson, American Express Financial IDS Tower 10 Vice President and
Vice President and Controller Advisors Inc. Minneapolis, MN 55440 Controller
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Janis K. Heaney, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Darryl G. Horsman, American Express Trust IDS Tower 10 Director and President
Vice President Company Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Jeffrey S. Horton, AMEX Assurance Company IDS Tower 10 Vice President, Treasurer
Vice President and Corporate Minneapolis, MN 55440 and Assistant Secretary
Treasurer
American Centurion Life Vice President and
Assurance Company Treasurer
American Enterprise Vice President and
Investment Services Inc. Treasurer
American Enterprise Life Vice President and
Insurance Company Treasurer
American Express Asset Vice President and
Management Group Inc. Treasurer
American Express Asset Vice President and
Management International Treasurer
Inc.
American Express Client Vice President and
Service Corporation Treasurer
American Express Vice President and
Corporation Treasurer
American Express Financial Vice President and
Advisors Inc. Treasurer
American Express Financial Vice President and
Advisors Japan Inc. Treasurer
American Express Insurance Vice President and
Agency of Arizona Inc. Treasurer
American Express Insurance Vice President and
Agency of Idaho Inc. Treasurer
American Express Insurance Vice President and
Agency of Nevada Inc. Treasurer
American Express Insurance Vice President and
Agency of Oregon Inc. Treasurer
American Express Minnesota Vice President and
Foundation Treasurer
American Express Property Vice President and
Casualty Insurance Agency Treasurer
of Kentucky Inc.
American Express Property Vice President and
Casualty Insurance Agency Treasurer
of Maryland Inc.
American Express Property Vice President and
Casualty Insurance Agency Treasurer
of Pennsylvania Inc.
American Partners Life Vice President and
Insurance Company Treasurer
IDS Cable Corporation Director, Vice President
and Treasurer
IDS Cable II Corporation Director, Vice President
and Treasurer
IDS Capital Holdings Inc. Vice President, Treasurer
and Assistant Secretary
IDS Certificate Company Vice President and
Treasurer
IDS Insurance Agency of Vice President and
Alabama Inc. Treasurer
IDS Insurance Agency of Vice President and
Arkansas Inc. Treasurer
IDS Insurance Agency of Vice President and
Massachusetts Inc. Treasurer
IDS Insurance Agency of Vice President and
New Mexico Inc. Treasurer
IDS Insurance Agency of Vice President and
North Carolina Inc. Treasurer
IDS Insurance Agency of Vice President and
Ohio Inc. Treasurer
IDS Insurance Agency of Vice President and
Wyoming Inc. Treasurer
IDS Life Insurance Company Vice President, Treasurer
and Assistant Secretary
IDS Life Insurance Company P.O. Box 5144 Vice President and
of New York Albany, NY 12205 Treasurer
IDS Life Series Fund Inc. Vice President and
Treasurer
IDS Life Variable Annuity Vice President and
Funds A & B Treasurer
IDS Management Corporation Director, Vice President
and Treasurer
IDS Partnership Services Vice President and
Corporation Treasurer
IDS Plan Services of Vice President and
California, Inc. Treasurer
IDS Real Estate Services, Vice President and
Inc. Treasurer
IDS Realty Corporation Vice President and
Treasurer
IDS Sales Support Inc. Vice President and
Treasurer
Investors Syndicate Vice President and
Development Corp. Treasurer
IDS Property Casualty 1 WEG Blvd. Vice President, Treasurer
Insurance Company DePere, WI 54115 and Assistant Secretary
Public Employee Payment Vice President and
Company Treasurer
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
David R. Hubers, AMEX Assurance Company IDS Tower 10 Director
Director, President and Chief Minneapolis, MN 55440
Executive Officer
American Express Financial Chairman, President and
Advisors Inc. Chief Executive Officer
American Express Service Director and President
Corporation
IDS Certificate Company Director
IDS Life Insurance Company Director
IDS Plan Services of Director and President
California, Inc.
IDS Property Casualty 1 WEG Blvd. Director
Insurance Company DePere, WI 54115
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Martin G. Hurwitz, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Debra A. Hutchinson American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
James M. Jensen, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
IDS Life Insurance Company Vice President
IDS Life Series Fund, Inc. Director
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Marietta L. Johns, American Express Financial IDS Tower 10 Senior Vice President
Director and Senior Vice Advisors Inc. Minneapolis, MN 55440
President
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Nancy E. Jones, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
American Express Service Vice President
Corporation
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Ora J. Kaine, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Linda B. Keene, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
G. Michael Kennedy, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Susan D. Kinder, American Express Financial IDS Tower 10 Senior Vice President
Director and Senior Vice Advisors Inc. Minneapolis, MN 55440
President
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Richard W. Kling, AMEX Assurance Company IDS Tower 10 Director
Director and Senior Vice Minneapolis, MN 55440
President
American Centurion Life Director and Chairman of
Assurance Company the Board
American Enterprise Life Director and Chairman of
Insurance Company the Board
American Express Director and President
Corporation
American Express Financial Senior Vice President
Advisors Inc.
American Express Insurance Director and President
Agency of Arizona Inc.
American Express Insurance Director and President
Agency of Idaho Inc.
American Express Insurance Director and President
Agency of Nevada Inc.
American Express Insurance Director and President
Agency of Oregon Inc.
American Express Property Director and President
Casualty Insurance Agency
of Kentucky Inc.
American Express Property Director and President
Casualty Insurance Agency
of Maryland Inc.
American Express Property Director and President
Casualty Insurance Agency
of Pennsylvania Inc.
American Express Service Vice President
Corporation
American Partners Life Director and Chairman of
Insurance Company the Board
IDS Certificate Company Director and Chairman of
the Board
IDS Insurance Agency of Director and President
Alabama Inc.
IDS Insurance Agency of Director and President
Arkansas Inc.
IDS Insurance Agency of Director and President
Massachusetts Inc.
IDS Insurance Agency of Director and President
New Mexico Inc.
IDS Insurance Agency of Director and President
North Carolina Inc.
IDS Insurance Agency of Director and President
Ohio Inc.
IDS Insurance Agency of Director and President
Wyoming Inc.
IDS Life Insurance Company Director and President
IDS Life Series Fund, Inc. Director and President
IDS Life Variable Annuity Manager, Chairman of the
Funds A and B Board and President
IDS Property Casualty 1 WEG Blvd. Director
Insurance Company DePere, WI 54115
IDS Life Insurance Company P.O. Box 5144 Director and Chairman of
of New York Albany, NY 12205 the Board
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
John M. Knight American Express Financial IDS Tower 10 Vice President
Advisors Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Paul F. Kolkman, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
IDS Life Insurance Company Director and Executive
Vice President
IDS Life Series Fund, Inc. Vice President and Chief
Actuary
IDS Property Casualty 1 WEG Blvd. Director
Insurance Company DePere, WI 54115
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Claire Kolmodin, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Steve C. Kumagai, American Express Financial IDS Tower 10 Director and Senior Vice
Director and Senior Vice Advisors Inc. Minneapolis, MN 55440 President
President
Kurt A Larson, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Lori J. Larson, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Daniel E. Laufenberg, American Express Financial IDS Tower 10 Vice President and Chief
Vice President and Chief U.S. Advisors Inc. Minneapolis, MN 55440 U.S. Economist
Economist
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Peter A. Lefferts, American Express Financial IDS Tower 10 Senior Vice President
Director and Senior Vice Advisors Inc. Minneapolis, MN 55440
President
American Express Trust Director
Company
IDS Plan Services of Director
California, Inc.
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Douglas A. Lennick, American Express Financial IDS Tower 10 Director and Executive
Director and Executive Vice Advisors Inc. Minneapolis, MN 55440 Vice President
President
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Mary J. Malevich, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Fred A. Mandell, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Timothy J. Masek American Express Financial IDS Tower 10 Vice President and
Vice President and Director Advisors Inc. Minneapolis, MN 55440 Director of Global Research
of Global Research
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Sarah A. Mealey, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Paula R. Meyer, American Enterprise Life IDS Tower 10 Vice President
Vice President Insurance Company Minneapolis, MN 55440
American Express Director
Corporation
American Express Financial Vice President
Advisors Inc.
American Partners Life Director and President
Insurance Company
IDS Certificate Company Director and President
IDS Life Insurance Company Director and Executive
Vice President
Investors Syndicate Director, Chairman of the
Development Corporation Board and President
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
William P. Miller, Advisory Capital IDS Tower 10 Vice President
Vice President and Senior Strategies Group Inc. Minneapolis, MN 55440
Portfolio Manager
American Express Asset Senior Vice President and
Management Group Inc. Chief Investment Officer
American Express Financial Vice President and Senior
Advisors Inc. Portfolio Manager
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Shashank B. Modak American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Pamela J. Moret, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
American Express Trust Vice President
Company
IDS Life Insurance Company Executive Vice President
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Barry J. Murphy, American Express Client IDS Tower 10 Director and President
Director and Senior Vice Service Corporation Minneapolis, MN 55440
President
American Express Financial Senior Vice President
Advisors Inc.
IDS Life Insurance Company Director and Executive
Vice President
Mary Owens Neal, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Michael J. O'Keefe, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
James R. Palmer, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
IDS Life Insurance Company Vice President
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Carla P. Pavone, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
Public Employee Payment Director and President
Company
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Thomas P. Perrine, American Express Financial IDS Tower 10 Senior Vice President
Director and Senior Vice Advisors Inc. Minneapolis, MN 55440
President
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Susan B. Plimpton, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Ronald W. Powell, American Express Financial IDS Tower 10 Vice President and
Vice President and Assistant Advisors Inc. Minneapolis, MN 55440 Assistant General Counsel
General Counsel
IDS Cable Corporation Vice President and
Assistant Secretary
IDS Cable II Corporation Vice President and
Assistant Secretary
IDS Management Corporation Vice President and
Assistant Secretary
IDS Partnership Services Vice President and
Corporation Assistant Secretary
IDS Plan Services of Vice President and
California, Inc. Assistant Secretary
IDS Realty Corporation Vice President and
Assistant Secretary
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
James M. Punch, American Express Financial IDS Tower 10 Vice President and Project
Vice President and Project Advisors Inc. Minneapolis, MN 55440 Manager
Manager
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Frederick C. Quirsfeld, American Express Asset IDS Tower 10 Senior Vice President and
Director and Senior Vice Management Group Inc. Minneapolis, MN 55440 Senior Portfolio Manager
President
American Express Financial Senior Vice President
Advisors Inc.
Rollyn C. Renstrom, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
ReBecca K. Roloff, American Express Financial IDS Tower 10 Senior Vice President
Director and Senior Vice Advisors Inc. Minneapolis, MN 55440
President
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Stephen W. Roszell, Advisory Capital IDS Tower 10 Director
Director and Senior Vice Strategies Group Inc. Minneapolis, MN 55440
President
American Express Asset Director, President and
Management Group Inc. Chief Executive Officer
American Express Asset Director
Management International,
Inc.
American Express Asset Director
Management Ltd.
American Express Financial Senior Vice President
Advisors Inc.
American Express Trust Director
Company
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Erven A. Samsel, American Express Financial IDS Tower 10 Senior Vice President
Director and Senior Vice Advisors Inc. Minneapolis, MN 55440
President
American Express Insurance Vice President
Agency of Idaho Inc.
American Express Insurance Vice President
Agency of Nevada Inc.
American Express Insurance Vice President
Agency of Oregon Inc.
American Express Property Vice President
Casualty Insurance Agency
of Kentucky Inc.
American Express Property Vice President
Casualty Insurance Agency
of Maryland Inc.
American Express Property Vice President
Casualty Insurance Agency
of Pennsylvania Inc.
IDS Insurance Agency of Vice President
Alabama Inc.
IDS Insurance Agency of Vice President
Arkansas Inc.
IDS Insurance Agency of Vice President
Massachusetts Inc.
IDS Insurance Agency of Vice President
New Mexico Inc.
IDS Insurance Agency of Vice President
North Carolina Inc.
IDS Insurance Agency of Vice President
Ohio Inc.
IDS Insurance Agency of Vice President
Wyoming Inc.
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Theresa M. Sapp American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Stuart A. Sedlacek, AMEX Assurance Company IDS Tower 10 Director
Director, Senior Vice Minneapolis, MN 55440
President and Chief Financial
Officer
American Enterprise Life Executive Vice President
Insurance Company
American Express Financial Senior Vice President and
Advisors Inc. Chief Financial Officer
American Express Trust Director
Company
American Partners Life Director and Vice President
Insurance Agency
IDS Certificate Company Director and President
IDS Life Insurance Company Executive Vice President
and Controller
IDS Property Casualty 1 WEG Blvd. Director
Insurance Company DePere, WI 54115
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Donald K. Shanks, AMEX Assurance Company IDS Tower 10 Senior Vice President
Vice President Minneapolis, MN 55440
American Express Financial Vice President
Advisors Inc.
IDS Property Casualty 1 WEG Blvd. Senior Vice President
Insurance Company DePere, WI 54115
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
F. Dale Simmons, AMEX Assurance Company IDS Tower 10 Vice President
Vice President Minneapolis, MN 55440
American Centurion Life Vice President
Assurance Company
American Enterprise Life Vice President
Insurance
American Express Financial Vice President
Advisors Inc.
American Partners Life Vice President
Insurance Company
IDS Certificate Company Vice President
IDS Life Insurance Company Vice President
IDS Partnership Services Director and Vice President
Corporation
IDS Real Estate Services Chairman of the Board and
Inc. President
IDS Realty Corporation Director and Vice President
IDS Life Insurance Company P.O. Box 5144 Vice President
of New York Albany, NY 12205
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Judy P. Skoglund, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Bridget Sperl, American Express Client IDS Tower 10 Vice President
Vice President Service Corporation Minneapolis, MN 55440
American Express Financial Vice President
Advisors Inc.
Public Employee Payment Director and President
Company
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Lisa A. Steffes, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
William A. Stoltzmann, American Enterprise Life IDS Tower 10 Director, Vice President,
Vice President and Assistant Insurance Company Minneapolis, MN 55440 General Counsel and
General Counsel Secretary
American Express Director, Vice President
Corporation and Secretary
American Express Financial Vice President and
Advisors Inc. Assistant General Counsel
American Partners Life Director, Vice President,
Insurance Company General Counsel and
Secretary
IDS Life Insurance Company Vice President, General
Counsel and Secretary
IDS Life Series Fund Inc. General Counsel and
Assistant Secretary
IDS Life Variable Annuity General Counsel and
Funds A & B Assistant Secretary
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
James J. Strauss, American Express Financial IDS Tower 10 Vice President
Vice President and General Advisors Inc. Minneapolis, MN 55440
Auditor
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Jeffrey J. Stremcha, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
Barbara Stroup Stewart, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Keith N. Tufte American Express Financial IDS Tower 10 Vice President and
Vice President and Director Advisors Inc. Minneapolis, MN 55440 Director of Equity Research
of Equity Research
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Norman Weaver Jr., American Express Financial IDS Tower 10 Senior Vice President
Director and Senior Vice Advisors Inc. Minneapolis, MN 55440
President
American Express Insurance Vice President
Agency of Arizona Inc.
American Express Insurance Vice President
Agency of Idaho Inc.
American Express Insurance Vice President
Agency of Nevada Inc.
American Express Insurance Vice President
Agency of Oregon Inc.
American Express Property Vice President
Casualty Insurance Agency
of Kentucky Inc.
American Express Property Vice President
Casualty Insurance Agency
of Maryland Inc.
American Express Property Vice President
Casualty Insurance Agency
of Pennsylvania Inc.
IDS Insurance Agency of Vice President
Alabama Inc.
IDS Insurance Agency of Vice President
Arkansas Inc.
IDS Insurance Agency of Vice President
Massachusetts Inc.
IDS Insurance Agency of Vice President
New Mexico Inc.
IDS Insurance Agency of Vice President
North Carolina Inc.
IDS Insurance Agency of Vice President
Ohio Inc.
IDS Insurance Agency of Vice President
Wyoming Inc.
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Michael L. Weiner, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
IDS Capital Holdings Inc. Vice President
IDS Futures Brokerage Group Vice President
IDS Futures Corporation Vice President, Treasurer
and Secretary
IDS Sales Support Inc. Director, Vice President
and Assistant Treasurer
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Lawrence J. Welte, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Jeffry F. Welter, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Edwin M. Wistrand, American Express Financial IDS Tower 10 Vice President and
Vice President and Assistant Advisors Inc. Minneapolis, MN 55440 Assistant General Counsel
General Counsel
American Express Financial Vice President and Chief
Advisors Japan Inc. Legal Officer
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Michael D. Wolf, American Express Asset IDS Tower 10 Executive Vice President
Vice President Management Group Inc. Minneapolis, MN 55440 and Senior Portfolio
Manager
American Express Financial Vice President
Advisors Inc.
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Michael R. Woodward, American Express Financial IDS Tower 10 Senior Vice President
Director and Senior Vice Advisors Inc. Minneapolis, MN 55440
President
American Express Insurance Vice President
Agency of Idaho Inc.
American Express Insurance Vice President
Agency of Nevada Inc.
American Express Insurance Vice President
Agency of Oregon Inc.
American Express Property Vice President
Casualty Insurance Agency
of Kentucky Inc.
American Express Property Vice President
Casualty Insurance Agency
of Maryland Inc.
American Express Property Vice President
Casualty Insurance Agency
of Pennsylvania Inc.
IDS Insurance Agency of Vice President
Alabama Inc.
IDS Insurance Agency of Vice President
Arkansas Inc.
IDS Insurance Agency of Vice President
Massachusetts Inc.
IDS Insurance Agency of Vice President
New Mexico Inc.
IDS Insurance Agency of Vice President
North Carolina Inc.
IDS Insurance Agency of Vice President
Ohio Inc.
IDS Insurance Agency of Vice President
Wyoming Inc.
IDS Life Insurance Company P.O. Box 5144 Director
of New York Albany, NY 12205
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
</TABLE>
<TABLE>
<CAPTION>
Item 27. Principal Underwriters.
(a) American Express Financial Advisors acts as principal underwriter for the
following investment companies:
AXP Bond Fund, Inc.; AXP California Tax-Exempt Trust; AXP Discovery
Fund, Inc.; AXP Equity Select Fund, Inc.; AXP Extra Income Fund, Inc.;
AXP Federal Income Fund, Inc.; AXP Global Series, Inc.; AXP Growth
Fund, Inc.; AXP High Yield Tax-Exempt Fund, Inc.; AXP International
Fund, Inc.; AXP Investment Series, Inc.; AXP Managed Retirement Fund,
Inc.; AXP Market Advantage Series, Inc.; AXP Money Market Series, Inc.;
AXP New Dimensions Fund, Inc.; AXP Precious Metals Fund, Inc.; AXP
Progressive Fund, Inc.; AXP Selective Fund, Inc.; AXP Special
Tax-Exempt Series Trust; AXP Stock Fund, Inc.; AXP Strategy Fund, Inc.;
AXP Tax-Exempt Bond Fund, Inc.; AXP Tax-Free Money Fund, Inc.; AXP
Utilities Income Fund, Inc., Growth Trust; Growth and Income Trust;
Income Trust, Tax-Free Income Trust, World Trust and IDS Certificate
Company.
(b) As to each director, officer or partner of the principal underwriter:
Name and Principal Business Address Position and Offices with Offices with Registrant
Underwriter
- -------------------------------------- ----------------------------------- -----------------------------------
<S> <C> <C>
Ronald G. Abrahamson Vice President-Service Quality None
IDS Tower 10 and Reengineering
Minneapolis, MN 55440
Douglas A. Alger Senior Vice President-Human None
IDS Tower 10 Resources
Minneapolis, MN 55440
Peter J. Anderson Senior Vice President-Investment Vice President-Investments
IDS Tower 10 Operations
Minneapolis, MN 55440
Ward D. Armstrong Vice President-American Express None
IDS Tower 10 Retirement Services
Minneapolis, MN 55440
John M. Baker Vice President-Plan Sponsor None
IDS Tower 10 Services
Minneapolis, MN 55440
Joseph M. Barsky III Vice President - Mutual Fund None
IDS Tower 10 Equities
Minneapolis, MN 55440
Timothy V. Bechtold Vice President-Risk Management None
IDS Tower 10 Products
Minneapolis, MN 55440
John D. Begley Group Vice President-Ohio/Indiana None
Suite 100
7760 Olentangy River Rd.
Columbus, OH 43235
Brent L. Bisson Group Vice President-Los Angeles None
Suite 900, E. Westside Twr Metro
11835 West Olympic Blvd.
Los Angeles, CA 90064
John C. Boeder Vice President-Nonproprietary None
IDS Tower 10 Products
Minneapolis, MN 55440
Walter K. Booker Group Vice President-New Jersey None
Suite 200, 3500 Market Street
Camp Hill, NJ 17011
Bruce J. Bordelon Group Vice President - San None
1333 N. California Blvd., Suite 200 Francisco Area
Walnut Creek, CA 94596
Charles R. Branch Group Vice President-Northwest None
Suite 200
West 111 North River Dr.
Spokane, WA 99201
Douglas W. Brewers Vice President-Sales Support None
IDS Tower 10
Minneapolis, MN 55440
Karl J. Breyer Corporate Senior Vice President None
IDS Tower 10
Minneapolis, MN 55440
Cynthia M. Carlson Vice President-American Express None
IDS Tower 10 Securities Services
Minneapolis, MN 55440
Mark W. Carter Senior Vice President and Chief None
IDS Tower 10 Marketing Officer
Minneapolis, MN 55440
James E. Choat Senior Vice President - Third None
IDS Tower 10 Party Distribution
Minneapolis, MN 55440
Kenneth J. Ciak Vice President and General None
IDS Property Casualty Manager-IDS Property Casualty
1400 Lombardi Avenue
Green Bay, WI 54304
Paul A. Connolly Vice President-Advisor Staffing, None
IDS Tower 10 Training and Support
Minneapolis, MN 55440
Henry J. Cormier Group Vice President-Connecticut None
Commerce Center One
333 East River Drive
East Hartford, CT 06108
John M. Crawford Group Vice President-Arkansas/ None
Suite 200 Springfield/Memphis
10800 Financial Ctr Pkwy
Little Rock, AR 72211
Kevin F. Crowe Group Vice None
Suite 312 President-Carolinas/Eastern
7300 Carmel Executive Pk Georgia
Charlotte, NC 28226
Colleen Curran Vice President and Assistant None
IDS Tower 10 General Counsel
Minneapolis, MN 55440
Luz Maria Davis Vice President-Communications None
IDS Tower 10
Minneapolis, MN 55440
Arthur E. Delorenzo Group Vice President - Upstate None
4 Atrium Drive, #100 New York
Albany, NY 12205
Scott M. DiGiammarino Group Vice None
Suite 500, 8045 Leesburg Pike President-Washington/Baltimore
Vienna, VA 22182
Bradford L. Drew Group Vice President-Eastern None
Two Datran Center Florida
Penthouse One B
9130 S. Dadeland Blvd.
Miami, FL 33156
Douglas K. Dunning Vice President-Assured Assets None
IDS Tower 10 Product Development and Management
Minneapolis, MN 55440
James P. Egge Group Vice President-Western None
4305 South Louise, Suite 202 Iowa, Nebraska, Dakotas
Sioux Falls, SD 57103
Gordon L. Eid Senior Vice President, General None
IDS Tower 10 Counsel and Chief Compliance
Minneapolis, MN 55440 Officer
Robert M. Elconin Vice President-Government None
IDS Tower 10 Relations
Minneapolis, MN 55440
Phillip W. Evans Group Vice President-Rocky None
Suite 600 Mountain
6985 Union Park Center
Midvale, UT 84047-4177
Gordon M. Fines Vice President-Mutual Fund Equity None
IDS Tower 10 Investments
Minneapolis, MN 55440
Douglas L. Forsberg Vice President - International None
IDS Tower 10
Minneapolis, MN 55440
Jeffrey P. Fox Vice President and Corporate None
IDS Tower 10 Controller
Minneapolis, MN 55440
William P. Fritz Group Vice President-Gateway None
Suite 160
12855 Flushing Meadows Dr
St. Louis, MO 63131
Carl W. Gans Group Vice President-Twin City None
8500 Tower Suite 1770 Metro
8500 Normandale Lake Blvd.
Bloomington, MN 55437
David A. Hammer Vice President and Marketing None
IDS Tower 10 Controller
Minneapolis, MN 55440
Teresa A. Hanratty Group Vice President-Northern New None
Suites 6&7 England
169 South River Road
Bedford, NH 03110
Robert L. Harden Group Vice President-Boston Metro None
Two Constitution Plaza
Boston, MA 02129
Lorraine R. Hart Vice President-Insurance None
IDS Tower 10 Investments
Minneapolis, MN 55440
Scott A. Hawkinson Vice President and None
IDS Tower 10 Controller-Private Client Group
Minneapolis, MN 55440
Brian M. Heath Group Vice President-North Texas None
Suite 150
801 E. Campbell Road
Richardson, TX 75081
Janis K. Heaney Vice President-Incentive None
IDS Tower 10 Management
Minneapolis, MN 55440
Jon E. Hjelm Group Vice President-Rhode None
319 Southbridge Street Island/Central-Western
Auburn, MA 01501 Massachusetts
David J. Hockenberry Group Vice President-Tennessee None
30 Burton Hills Blvd. Valley
Suite 175
Nashville, TN 37215
Jeffrey S. Horton Vice President and Treasurer None
IDS Tower 10
Minneapolis, MN 55440
David R. Hubers Chairman, President and Chief Board member
IDS Tower 10 Executive Officer
Minneapolis, MN 55440
Martin G. Hurwitz Vice President-Senior Portfolio None
IDS Tower 10 Manager
Minneapolis, MN 55440
Debra A. Hutchinson Vice President - Relationship None
IDS Tower 10 Leader
Minneapolis, MN 55440
James M. Jensen Vice President-Insurance Product None
IDS Tower 10 Development and Management
Minneapolis, MN 55440
Marietta L. Johns Senior Vice President-Field None
IDS Tower 10 Management
Minneapolis, MN 55440
Nancy E. Jones Vice President-Business None
IDS Tower 10 Development
Minneapolis, MN 55440
Ora J. Kaine Vice President-Financial Advisory None
IDS Tower 10 Services
Minneapolis, MN 55440
Linda B. Keene Vice President-Market Development None
IDS Tower 10
Minneapolis, MN 55440
G. Michael Kennedy Vice President - Senior Portfolio None
IDS Tower 10 Manager
Minneapolis, MN 55440
Susan D. Kinder Senior Vice None
IDS Tower 10 President-Distribution Services
Minneapolis, MN 55440
Richard W. Kling Senior Vice President-Products None
IDS Tower 10
Minneapolis, MN 55440
John M. Knight Vice President-Investment Treasurer
IDS Tower 10 Accounting
Minneapolis, MN 55440
Paul F. Kolkman Vice President-Actuarial Finance None
IDS Tower 10
Minneapolis, MN 55440
Claire Kolmodin Vice President-Service Quality None
IDS Tower 10
Minneapolis, MN 55440
David S. Kreager Group Vice President-Greater None
Suite 108 Michigan
Trestle Bridge V
5136 Lovers Lane
Kalamazoo, MI 49002
Steven C. Kumagai Director and Senior Vice None
IDS Tower 10 President-Field Management and
Minneapolis, MN 55440 Business Systems
Mitre Kutanovski Group Vice President-Chicago Metro None
Suite 680
8585 Broadway
Merrillville, IN 48410
Kurt A. Larson Vice President-Senior Portfolio None
IDS Tower 10 Manager
Minneapolis, MN 55440
Lori J. Larson Vice President-Brokerage and None
IDS Tower 10 Direct Services
Minneapolis, MN 55440
Daniel E. Laufenberg Vice President and Chief U.S. None
IDS Tower 10 Economist
Minneapolis, MN 55440
Peter A. Lefferts Senior Vice President-Corporate None
IDS Tower 10 Strategy and Development
Minneapolis, MN 55440
Douglas A. Lennick Director and Executive Vice None
IDS Tower 10 President-Private Client Group
Minneapolis, MN 55440
Mary J. Malevich Vice President-Senior Portfolio None
IDS Tower 10 Manager
Minneapolis, MN 55440
Fred A. Mandell Vice President-Field Marketing None
IDS Tower 10 Readiness
Minneapolis, MN 55440
Daniel E. Martin Group Vice President-Pittsburgh None
Suite 650 Metro
5700 Corporate Drive
Pittsburgh, PA 15237
Timothy J. Masek Vice President and Director of None
IDS Tower 10 Global Research
Minnapolis, MN 55440
Sarah A. Mealey Vice President-Mutual Funds None
IDS Tower 10
Minneapolis, MN 55440
Paula R. Meyer Vice President-Assured Assets None
IDS Tower 10
Minneapolis, MN 55440
William P. Miller Vice President and Senior None
IDS Tower 10 Portfolio Manager
Minneapolis, MN 55440
Shashank B. Modak Vice President - Technology Leader None
IDS Tower 10
Minneapolis, MN 55440
Pamela J. Moret Vice President-Variable Assets None
IDS Tower 10
Minneapolis, MN 55440
Alan D. Morgenstern Group Vice President-Central None
Suite 200 California/Western Nevada
3500 Market Street
Camp Hill, NJ 17011
Barry J. Murphy Senior Vice President-Client None
IDS Tower 10 Service
Minneapolis, MN 55440
Mary Owens Neal Vice President-Mature Market None
IDS Tower 10 Segment
Minneapolis, MN 55440
Thomas V. Nicolosi Group Vice President-New York None
Suite 220 Metro Area
500 Mamaroneck Avenue
Harrison, NY 10528
Michael J. O'Keefe Vice President-Advisory Business None
IDS Tower 10 Systems
Minneapolis, MN 55440
James R. Palmer Vice President-Taxes None
IDS Tower 10
Minneapolis, MN 55440
Marc A. Parker Group Vice None
10200 SW Greenburg Road President-Portland/Eugene
Suite 110
Portland, OR 97223
Carla P. Pavone Vice President-Compensation and None
IDS Tower 10 Field Administration
Minneapolis, MN 55440
Thomas P. Perrine Senior Vice President-Group None
IDS Tower 10 Relationship Leader/American
Minneapolis, MN 55440 Express Technologies Financial
Services
Susan B. Plimpton Vice President-Marketing Services None
IDS Tower 10
Minneapolis, MN 55440
Larry M. Post Group Vice President-Philadelphia None
One Tower Bridge Metro
100 Front Street 8th Fl
West Conshohocken, PA 19428
Ronald W. Powell Vice President and Assistant None
IDS Tower 10 General Counsel
Minneapolis, MN 55440
Diana R. Prost Group Vice None
3030 N.W. Expressway President-Kansas/Oklahoma
Suite 900
Oklahoma City, OK 73112
James M. Punch Vice President and Project None
IDS Tower 10 Manager-Platform I Value Enhanced
Minneapolis, MN 55440
Frederick C. Quirsfeld Senior Vice President-Fixed Income Vice President - Fixed Income
IDS Tower 10 Investments
Minneapolis, MN 55440
Rollyn C. Renstrom Vice President-Corporate Planning None
IDS Tower 10 and Analysis
Minneapolis, MN 55440
R. Daniel Richardson III Group Vice President-Southern None
Suite 800 Texas
Arboretum Plaza One
9442 Capital of Texas Hwy N.
Austin, TX 78759
ReBecca K. Roloff Senior Vice President-Field None
IDS Tower 10 Management and Financial Advisory
Minneapolis, MN 55440 Service
Stephen W. Roszell Senior Vice None
IDS Tower 10 President-Institutional
Minneapolis, MN 55440
Max G. Roth Group Vice None
Suite 201 S IDS Ctr President-Wisconsin/Upper Michigan
1400 Lombardi Avenue
Green Bay, WI 54304
Erven A. Samsel Senior Vice President-Field None
45 Braintree Hill Park Management
Suite 402
Braintree, MA 02184
Theresa M. Sapp Vice President - Relationship None
IDS Tower 10 Leader
Minneapolis, MN 55440
Russell L. Scalfano Group Vice None
Suite 201 President-Illinois/Indiana/Kentucky
101 Plaza East Blvd.
Evansville, IN 47715
William G. Scholz Group Vice President-Arizona/Las None
Suite 205 Vegas
7333 E Doubletree Ranch Rd
Scottsdale, AZ 85258
Stuart A. Sedlacek Senior Vice President and Chief None
IDS Tower 10 Financial Officer
Minneapolis, MN 55440
Donald K. Shanks Vice President-Property Casualty None
IDS Tower 10
Minneapolis, MN 55440
F. Dale Simmons Vice President-Senior Portfolio None
IDS Tower 10 Manager, Insurance Investments
Minneapolis, MN 55440
Judy P. Skoglund Vice President-Quality and None
IDS Tower 10 Service Support
Minneapolis, MN 55440
James B. Solberg Group Vice President-Eastern Iowa None
466 Westdale Mall Area
Cedar RapIDS, IA 52404
Bridget Sperl Vice President-Geographic Service None
IDS Tower 10 Teams
Minneapolis, MN 55440
Paul J. Stanislaw Group Vice President-Southern None
Suite 1100 California
Two Park Plaza
Irvine, CA 92714
Lisa A. Steffes Vice President - Marketing Offer None
IDS Tower 10 Development
Minneapolis, MN 55440
Lois A. Stilwell Group Vice President-Outstate None
Suite 433 Minnesota Area/ North
9900 East Bren Road Dakota/Western Wisconsin
Minnetonka, MN 55343
William A. Stoltzmann Vice President and Assistant None
IDS Tower 10 General Counsel
Minneapolis, MN 55440
James J. Strauss Vice President and General Auditor None
IDS Tower 10
Minneapolis, MN 55440
Jeffrey J. Stremcha Vice President-Information None
IDS Tower 10 Resource Management/ISD
Minneapolis, MN 55440
Barbara Stroup Stewart Vice President-Channel Development None
IDS Tower 10
Minneapolis, MN 55440
Craig P. Taucher Group Vice None
Suite 150 President-Orlando/Jacksonville
4190 Belfort Road
Jacksonville, FL 32216
Neil G. Taylor Group Vice None
Suite 425 President-Seattle/Tacoma/Hawaii
101 Elliott Avenue West
Seattle, WA 98119
John R. Thomas Senior Vice President Board Member
IDS Tower 10
Minneapolis, MN 55440
Keith N. Tufte Vice President and Director of None
IDS Tower 10 Equity Research
Minneapolis, MN 55440
Peter S. Velardi Group Vice None
Suite 180 President-Atlanta/Birmingham
1200 Ashwood Parkway
Atlanta, GA 30338
Charles F. Wachendorfer Group Vice President-Detroit Metro None
8115 East Jefferson Avenue
Detroit, MI 48214
Donald F. Weaver Group Vice President-Greater None
3500 Market Street, Suite 200 Pennsylvania
Camp Hill, PA 17011
Norman Weaver Jr. Senior Vice President - Alliance None
1010 Main St. Suite 2B Group
Huntington Beach, CA 92648
Michael L. Weiner Vice President-Tax Research and None
IDS Tower 10 Audit
Minneapolis, MN 55440
Lawrence J. Welte Vice President-Investment None
IDS Tower 10 Administration
Minneapolis, MN 55440
Jeffry M. Welter Vice President-Equity and Fixed None
IDS Tower 10 Income Trading
Minneapolis, MN 55440
Thomas L. White Group Vice President-Cleveland None
Suite 200 Metro
28601 Chagrin Blvd.
Woodmere, OH 44122
Eric S. Williams Group Vice President-Virginia None
Suite 250
3951 Westerre Parkway
Richmond, VA 23233
William J. Williams Group Vice President-Western None
Two North Tamiami Trail Florida
Suite 702
Sarasota, FL 34236
Edwin M. Wistrand Vice President and Assistant None
IDS Tower 10 General Counsel
Minneapolis, MN 55440
Michael D. Wolf Vice President-Senior Portfolio None
IDS Tower 10 Manager
Minneapolis, MN 55440
Michael R. Woodward Senior Vice President-Field None
32 Ellicott St Management
Suite 100
Batavia, NY 14020
</TABLE>
Item 27(c). Not applicable.
Item 28. Location of Accounts and Records
American Express Financial Corporation
IDS Tower 10
Minneapolis, MN 55440
Item 29. Management Services
Not Applicable.
Item 30. Undertakings
Not Applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act and the Investment Company
Act, the Registrant, AXP Special Tax-Exempt Series Trust, has duly caused this
Amendment to its Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Minneapolis and State of
Minnesota on the 27th day of August, 1999.
AXP SPECIAL TAX-EXEMPT SERIES TRUST
By /s/ Arne H. Carlson**
Arne H. Carlson, Chief Executive Officer
By /s/ John Knight
John Knight, Treasurer
Pursuant to the requirements of the Securities Act, this Amendment to the
Registration Statement has been signed below by the following persons in the
capacities indicated on the 27th day of August, 1999.
Signature Capacity
/s/ H. Brewster Atwater, Jr.* Trustee
H. Brewster Atwater, Jr.
/s/ Arne H. Carlson* Chairman of the Board
Arne H. Carlson
/s/ Lynne V. Cheney* Trustee
Lynn V. Cheney
/s/ William H. Dudley* Trustee
William H. Dudley
/s/ David R. Hubers* Trustee
David R. Hubers
/s/ Heinz F. Hutter* Trustee
Heinz F. Hutter
/s/ Anne P. Jones* Trustee
Anne P. Jones
/s/ William R. Pearce* Trustee
William R. Pearce
<PAGE>
Signature Capacity
/s/ Alan K. Simpson* Trustee
Alan K. Simpson
/s/ John R. Thomas* Trustee
John R. Thomas
/s/ C. Angus Wurtele* Trustee
C. Angus Wurtele
*Signed pursuant to Trustees' Power of Attorney, dated January 14, 1999, is
incorporated by reference as Exhibit (p)(1) to Registrant's Post-Effective
Amendment No. 31 to Registration Statement No. 33-5102, by:
/s/ Leslie L. Ogg
Leslie L. Ogg
**Signed pursuant to Officers' Power of Attorney, dated March 1, 1999, is
incorporated by reference as Exhibit (p)(2) to Registrant's Post-Effective
Amendment No. 31 to Registration Statement No. 33-5102, by:
/s/ Leslie L. Ogg
Leslie L. Ogg
<PAGE>
CONTENTS OF THIS
POST-EFFECTIVE AMENDMENT NO. 32
TO REGISTRATION STATEMENT NO. 33-5102
This Post-Effective Amendment comprises the following papers and documents:
The facing sheet.
PART A
Prospectus for AXP California, Massachusetts, Michigan, Minnesota, \
New York and Ohio Tax-Exempt Funds.
Prospectus for AXP Insured Tax-Exempt Fund.
PART B
Statement of Additional Information for AXP California, Massachusetts,
Michigan, Minnesota, New York and Ohio Tax-Exempt Funds.
Statement of Additional Information for AXP Insured Tax-Exempt Fund.
PART C
Other information.
The signatures.
EXHIBIT INDEX
Exhibit (j) Independent Auditors' Consent is filed electronically
herewith
<PAGE>
Independent auditors' consent
The board of trustees and shareholders
AXP Special Tax-Exempt Series Trust
Massachusetts Tax-Exempt Fund
Michigan Tax-Exempt Fund
Minnesota Tax-Exempt Fund
New York Tax-Exempt Fund
Ohio Tax-Exempt Fund
Insured Tax-Exempt Fund
We consent to the use of our reports incorporated herein by reference and to the
references to our Firm under the headings "Financial highlights" in Part A and
"INDEPENDENT AUDITORS" in Part B of the Registration Statement.
/s/ KPMG LLP
KPMG LLP
Minneapolis, Minnesota
August 27, 1999
