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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 2 X
File No. 811-7397
TAX-FREE INCOME TRUST
(Exact Name of Registrant as Specified in Charter)
IDS Tower 10, Minneapolis, MN 55440-0010
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: 612-671-2772
Eileen J. Newhouse
IDS Tower 10, Minneapolis, MN 55440-0010
(Name and Address of Agent for Service)
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PART A
Item 1-3. Responses to Items 1 through 3 have been omitted
pursuant to Paragraph 4 of Instruction F of the
General Instructions to Form N-1A.
Item 4. General Description of Registrant.
Tax-Free Income Trust (the Trust) is an open-end management
investment company organized as a Massachusetts business trust on
Oct. 2, 1995. The Trust consists of one series: Tax-Free High
Yield Portfolio (the Portfolio). The Portfolio issues units of
beneficial interest without any sales charge. Units in the
Portfolio are issued solely in private placement transactions that
do not involve any public offering within the meaning of Section
4(2) of the Securities Act of 1933, as amended (the 1933 Act).
Investments in the Portfolio may be made only by investment
companies, common or commingled trust funds or similar
organizations or entities that are accredited investors within the
meaning of Regulation D under the 1933 Act. This Registration
Statement does not constitute an offer to sell, or the solicitation
of an offer to buy, any security within the meaning of the 1933
Act. Organizations or entities that become holders of units of
beneficial interest of the Trust are referred to as unitholders.
Goals and types of Portfolio investments and their risks
The Portfolio seeks to provide unitholders with a high yield
generally exempt from federal income taxes. The Portfolio is a
diversified mutual fund that usually invests in medium- and lower-
quality bonds and notes issued by or on behalf of state and local
governmental units whose interest generally is exempt from federal
income tax. The Portfolio also may invest in derivative
instruments and money market instruments.
Because investments involve risk, the Portfolio cannot guarantee
achieving its goal. Some of the Portfolio's investments may be
considered speculative and involve additional investment risks.
The foregoing investment goal is a fundamental policy of the
Portfolio, which may not be changed unless authorized by a majority
of the outstanding voting securities.
Investment policies and risks
Under normal market conditions, the Portfolio will invest at least
80% of its net assets in bonds and notes issued by or on behalf of
state and local governmental units whose interest is exempt from
federal income tax (according to the opinion of counsel for the
issuer) and is not subject to the alternative minimum tax. This
policy cannot be changed without approval of a majority of the
outstanding voting securities. Other investments include
derivative instruments, money market instruments and bonds subject
to the alternative minimum tax computation.
The various types of investments described above that the portfolio
managers uses to achieve investment performance are explained in
more detail in the next section and in Part B of this Registration
Statement.<PAGE>
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Facts about investments and their risks
Bonds and notes exempt from federal income taxes: The price of
bonds generally falls as interest rates increase, and rises as
interest rates decrease. The price of bonds or notes also
fluctuates if the credit rating is upgraded or downgraded. The
price of bonds or notes below investment grade may react more to
the ability of a company to pay interest or principal when due than
to changes in interest rates. They have greater price
fluctuations, are more likely to experience a default, and
sometimes are referred to as junk bonds. Reduced market liquidity
for these bonds may occasionally make it more difficult to value
them.
The Portfolio usually invests in medium- and lower-quality notes
rated A, BBB or BB by Standard & Poor's Corporation, Moody's
Investors Service, Inc. or Fitch Investors Services, Inc., or in
securities the portfolio manager believes have similar qualities
even though they are not rated or have been given a lower rating by
a rating agency. The Portfolio invests in higher-quality bonds and
notes when the difference in yield between higher- and lower-
quality securities does not warrant the increase in risk or there
is not an adequate supply of lower-quality securities. Securities
that are subsequently downgraded in quality may continue to be held
by the Portfolio and will be sold only when the investment manager
believes it is advantageous to do so.
Tax-Free High Yield Portfolio
Bond ratings and holdings
for the period ending Nov. 30, 1996
Percent of
net assets
S&P Rating in unrated
(or Moody's Protection of securities
Percent of of Fitch's principal and assessed by
net assets equivalent) interest the Advisor
21.47% AAA Highest quality 4.26%
6.08 AA High quality -
18.57 A Upper medium grade 0.24
25.46 BBB Medium grade 1.95
4.11 BB Moderately speculative 8.54
0.85 B Speculative 3.57
- CCC Highly speculative 0.89
- CC Poor quality -
- C Lowest quality -
- D In default 0.31
20.39 Unrated Unrated securities 0.33
For the period from Dec. 1, 1995 to May 12, 1996, the information
in the table above relates to IDS High Yield Tax-Exempt Fund, a
fund that transferred its assets to Tax-Free High Yield Portfolio
on May 13, 1996. See Description of bond ratings for further
information.)
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Bonds sold at a deep discount: Some bonds are sold at deep
discounts because they do not pay interest until maturity. They
include zero coupon bonds and PIK (pay-in-kind) bonds. To comply
with tax laws, the Portfolio has to recognize a computed amount of
interest income and pay dividends to unitholders even though no
cash has been received. In some instances, the Portfolio may have
to sell securities to have sufficient cash to pay the dividends.
Concentration: The Portfolio may invest more than 25% of its total
assets in industrial revenue bonds, but it does not intend to
invest more than 25% of its total assets in industrial revenue
bonds issued for companies in the same industry or state. As the
similarity in issuers increases, the potential for fluctuation in
the net asset value also increases.
Derivative instruments: The portfolio manager may use derivative
instruments in addition to securities to achieve investment
performance. Derivative instruments include futures, options and
forward contracts. Such instruments may be used to maintain cash
reserves while remaining fully invested, to offset anticipated
declines in values of investments, to facilitate trading, to reduce
transaction costs, or to pursue higher investment returns.
Derivative instruments are characterized by requiring little or no
initial payment and a daily change in price based on or derived
from a security, a currency, a group of securities or currencies,
or an index. A number of strategies or combination of instruments
can be used to achieve the desired investment performance
characteristics. A small change in the value of the underlying
security, currency or index will cause a sizable gain or loss in
the price of the derivative instrument. Derivative instruments
allow the portfolio manager to change the investment performance
characteristics very quickly and at lower costs. Risks include
losses of premiums, rapid changes in prices, defaults by other
parties, and inability to close such instruments. The Portfolio
will use derivative instruments only to achieve the same investment
performance characteristics it could achieve by directly holding
those securities and currencies permitted under the investment
policies. The Portfolio will designate cash or appropriate liquid
assets to cover its portfolio obligations. The use of derivative
instruments may produce taxable income. No more than 5% of the
Portfolio's net assets can be used at any one time for good faith
deposits on futures and premiums for options on futures that do not
offset existing investment positions. This does not, however,
limit the portion of the Portfolio's assets at risk to 5%. The
Portfolio is not limited as to the percentage of its assets that
may be invested in permissible investments, including derivatives,
except as otherwise explicitly provided in Part A or Part B of this
Registration Statement. For descriptions of these and any other
types of derivative instruments, see "Descriptions of derivative
instruments" and Part B of this Registration Statement.
Securities and other instruments that are illiquid: A security or
other instrument is illiquid if it cannot be sold quickly in the
normal course of business. Some investments cannot be resold to
the U.S. public because of their terms or government regulations.
All securities and other instruments, however, can be sold in
private sales, and many may be sold to other institutions and <PAGE>
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qualified buyers or on foreign markets. The portfolio manager will
follow guidelines established by the board and consider relevant
factors such as the nature of the security and the number of likely
buyers when determining whether a security is illiquid. No more
than 10% of the Portfolio's net assets will be held in securities
and other instruments that are illiquid.
Money market instruments: Short-term tax-exempt debt securities
rated in the top two grades or the equivalent are used to meet
daily cash needs and at various times to hold assets until better
investment opportunities arise. Under extraordinary conditions
where, in the opinion of the portfolio manager, appropriate short-
term tax-exempt securities are not available, the Portfolio is
authorized to make certain taxable investments as described in Part
B of this Registration Statement.
The investment policies described above may be changed by the
board.
Lending portfolio securities: The Portfolio may lend its
securities to earn income so long as borrowers provide collateral
equal to the market value of the loans. The risks are that
borrowers will not provide collateral when required or return
securities when due. Unless holders of a majority of the
outstanding voting securities approve otherwise, loans may not
exceed 30% of the Portfolio's net assets.
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 Part B of this
Registration Statement.
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.
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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 Portfolio's objectives and policies. When assessing the
risk involved in each non-rated security, the Portfolio will
consider the financial condition of the issuer or the protection
afforded by the terms of the security.
Definitions of zero-coupon and pay-in-kind securities
A zero-coupon security is a security that is sold at a deep
discount from its face value and makes no periodic interest
payments. The buyer of such a security receives a rate of return
by gradual appreciation of the security, which is redeemed at face
value on the maturity date.
A pay-in-kind security is a security in which the issuer has the
option to make interest payments in cash or in additional
securities. The securities issued as interest usually have the
same terms, including maturity date, as the pay-in-kind securities.
Descriptions of derivative instruments
What follows are brief descriptions of derivative instruments the
Portfolio may use. At various times the Portfolio may use some or
all of these instruments and is not limited to these instruments.
It may use other similar types of instruments if they are
consistent with the Portfolio's investment goal and policies. For
more information on these instruments, see Part B of this
Registration Statement.
Options and futures contracts. An option is an agreement to buy or
sell an instrument at a set price during a certain period of time.
A futures contract is an agreement to buy or sell an instrument for
a set price on a future date. The Portfolio may buy and sell
options and futures contracts to manage its exposure to changing
interest rates, security prices and currency exchange rates.
Options and futures may be used to hedge the Portfolio's
investments against price fluctuations or to increase market
exposure.
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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.
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.
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.
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.
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 <PAGE>
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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.
Item 5. Management of the Fund.
The Board
The Trust has a board of trustees (the Board) which has primary
responsibility for the overall management of the Trust. It elects
officers and retains service providers to carry out day-to-day
operations.
The Advisor
American Express Financial Corporation (the Advisor), a provider of
financial services since 1894, has been retained to serve as the
investment manager for the Portfolio. The Advisor, 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.
The Portfolio pays the Advisor for managing its assets. Under the
Investment Management Services Agreement, the Advisor is paid a fee
for these services based on the average daily net assets of the
Portfolio, as follows:
Assets Annual rate at
(billions) each asset level
First $1.0 0.490%
Next 1.0 0.465
Next 1.0 0.440
Next 3.0 0.415
Next 3.0 0.390
Over 9.0 0.360
Under the agreement, the Portfolio also pays taxes, brokerage
commissions and nonadvisory expenses. The Portfolio may pay
brokerage commissions to broker-dealer affiliates of the Advisor.
The Advisor also has been retained to provide transfer agent
services (handling unitholder accounts) and administrative
services.
Portfolio manager
Kurt Larson joined the Advisor in 1961 and serves as vice president
and senior portfolio manager. He has managed the assets of Tax-
Free High Yield Portfolio and its predecessor fund since 1979.
Item 5A. Response to Item 5A has been omitted pursuant to
Paragraph 4 of Instruction F of the General Instructions
to Form N-1A.
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Item 6. Capital Stock and Other Securities.
The Trust is an open-end, management investment company organized
as a Massachusetts business trust on Oct. 2, 1995 and is registered
under the Investment Company Act of 1940, as amended (the 1940
Act). The Trust is authorized to issue an unlimited number of
units of beneficial interest. Each unit of the Trust has one vote,
and, when issued, is fully paid, non-assessable, and redeemable.
Units have cumulative voting rights when electing trustees.
Currently, the Trust has one series of units, the "Portfolio." The
assets and liabilities of each series are separate and distinct
from any other series. Additional series may be added in the
future by the board.
A unitholder's interest in the Trust cannot be transferred, but the
unitholder may withdraw all or any portion of its investment at any
time at net asset value. Under the terms of the Declaration of
Trust on file with the Secretary of State of the Commonwealth of
Massachusetts, all persons having any claim against a Portfolio
shall look only to the assets of that Portfolio for payment and no
unitholder, trustee, officer or agent shall be personally liable
therefor.
The Portfolio is a partnership that is not subject to any federal
income tax. However, each unitholder in the Portfolio is taxable
on its share (as determined in accordance with the governing
instruments of the Trust) of the Portfolio's ordinary income and
capital gain pursuant to the rules governing the unitholders. The
determination of the unitholder's share will be made in accordance
with the Internal Revenue Code of 1986, as amended (the Code),
regulations promulgated thereunder and the Declaration of Trust.
The Portfolio's taxable year-end will be Nov. 30. It is intended
that the Portfolio's assets, income and distributions will be
managed to satisfy the requirements of Subchapter M of the Code
assuming that the unitholder invests all its assets in the
Portfolio.
There are tax issues that are relevant to unitholders who purchase
units with assets rather than cash. Such purchases will not be
taxable provided certain requirements are met. Unitholders are
advised to consult their own tax advisors about the tax
consequences of investing in the Portfolio.
Item 7. Purchase of Securities Being Offered.
The Portfolio's units are not registered under the 1933 Act and may
not be sold publicly. Instead, units are offered pursuant to
exemptions from that Act in private transactions.
Units are offered only to other investment companies and certain
institutional investors. All units are sold without a sales
charge. All investments in the Portfolio are credited to the
unitholder's account in the form of full and fractional units of
the Portfolio (rounded to the nearest 1/1000 of a unit). The
Portfolio does not issue stock certificates.
The minimum initial investment is $5,000,000 with no minimum on
subsequent investments.<PAGE>
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Net asset value (NAV) is the total value of the Portfolio's
investments and other assets less any liabilities. Each unit has a
value of $1.00. The Portfolio is deemed to have outstanding the
number of units equal to its NAV and each unitholder is deemed to
hold the number of units equal to its proportionate investment in
the Portfolio. NAV is calculated at the close of business,
normally 3 p.m. Central time, each business day (any day the New
York Stock Exchange is open).
American Express Financial Advisors Inc. (the Placement Agent), a
wholly owned subsidiary of the Advisor, serves as the Placement
Agent for the Trust. The Placement Agent is located at IDS Tower
10, Minneapolis, MN 55440-0010.
Item 8. Redemption or Repurchase.
Redemptions are processed on any date on which the Portfolio is
open for business and are effected at the Portfolio's net asset
value next determined after the Portfolio receives a redemption
request in good form.
Payment for redeemed units will be made promptly, but in no event
later than seven days after receipt of the redemption request in
good form. However, the right of redemption may be suspended or
the date of payment postponed in accordance with the rules under
the 1940 Act. The Portfolio reserves the right upon 30-days'
written notice to redeem, at net asset value, the units of any
unitholder whose account had a value of less than $1,000,000 as a
result of voluntary redemptions. Redemptions are taxable events,
and the amount received upon redemption may be more or less than
the amount paid for the units depending upon the fluctuations in
the market value of the assets owned by the Portfolio.
Item 9. Pending Legal Proceedings.
Not Applicable.
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PART B
Item 10: Cover Page
Not applicable.
Item 11: Table of Contents
Not applicable.
Item 12: General Information and History
Not applicable.
Item 13: Investment Objectives and Policies
Please refer to Item 4 of Part A for the objectives of the
Portfolio.
Investment policies applicable to the Portfolio:
These are investment policies in addition to those presented in
Part A. The policies below are fundamental policies of the
Portfolio and may be changed only with unitholder approval. Unless
holders of a majority of the outstanding units agree to make the
change, the Portfolio will not:
'Act as an underwriter (sell securities for others). However,
under the securities laws, the Portfolio may be deemed to be an
underwriter when it purchases securities directly from the issuer
and later resells them.
'Borrow money or property, except as a temporary measure for
extraordinary or emergency purposes, in an amount not exceeding
one-third of the market value of its total assets (including
borrowings) less liabilities (other than borrowings) immediately
after the borrowing. The Portfolio has not borrowed in the past
and has no present intention to borrow.
'Make cash loans, if the total commitment amount exceeds 5% of the
Portfolio's total assets.
'Invest more than 5% of its total assets in securities of any one
company, government or political subdivision thereof, except the
limitation will not apply to investments in securities issued by
the U.S. government, its agencies or instrumentalities, and except
that up to 25% of the Portfolio's total assets may be invested
without regard to this 5% limitation. For purposes of this policy,
the terms of a municipal security determine the issuer.
'Buy or sell real estate, unless acquired as a result of ownership
of securities or other instruments, except this shall not prevent
the Portfolio from investing in securities or other instruments
backed by real estate or securities of companies engaged in the
real estate business or real estate investment trusts. For
purposes of this policy, real estate includes real estate limited
partnerships.
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'Buy or sell physical commodities unless acquired as a result of
ownership of securities or other instruments, except this shall not
prevent the Portfolio from buying or selling options and futures
contracts or from investing in securities or other instruments
backed by, or whose value is derived from, physical commodities.
'Lend portfolio securities in excess of 30% of its net assets. The
current policy of the board is to make these loans, either long- or
short-term, to broker-dealers. In making such loans, the Portfolio
gets 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 of trustees. If the
market price of the loaned securities goes up, the Portfolio will
get additional collateral on a daily basis. The risks are that the
borrower may not provide additional collateral when required or
return the securities when due. During the existence of the loan,
the Portfolio receives cash payments equivalent to all interest or
other distributions paid on the loaned securities. A loan will not
be made unless American Express Financial Corporation (the Advisor)
believes the opportunity for additional income outweighs the risks.
The policies below are non-fundamental and may be changed without
unitholder approval. Unless changed by the board, the Portfolio
will not:
'Buy on margin or sell short, but it may enter into interest rate
future contracts.
'Pledge or mortgage its assets beyond 15% of total assets. If the
Portfolio were ever to do so, valuation of the pledged or mortgaged
assets would be based on market values. For purposes of this
policy, collateral arrangements for margin deposits on futures
contracts are not deemed to be a pledge of assets.
'Invest more than 5% of its total assets in securities whose issuer
or guarantor of principal and interest has been in operation for
less than three years.
'Invest in voting securities, securities of investment companies or
exploration or development programs, such as oil, gas or mineral
leases.
'Invest more than 5% of its net assets in warrants. Under one
state's law, no more than 2% of the Portfolio's net assets may be
invested in warrants not listed on the New York or American Stock
Exchange.
'Invest more than 10% of its net assets in securities and
derivative instruments that are illiquid. In determining the
liquidity of municipal lease obligations, the Advisor, under
guidelines established by the board, will consider the essential
nature of the leased property, the likelihood that the municipality
will continue appropriating funding for the leased property, and
other relevant factors related to the general credit quality of the
municipality and the marketability of the municipal lease
obligation.
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'Purchase securities of an issuer if the board members and officers
of the Portfolio and of the Advisor hold more than a certain
percentage of the issuer's outstanding securities. If the holdings
of all board members and officers of the Fund, the Portfolio and
the Advisor who own more than 0.5% of an issuer's securities are
added together, and if in total they own more than 5%, the
Portfolio will not purchase securities of that issuer.
The Portfolio may make contracts to purchase securities for a fixed
price at a future date beyond normal settlement time (when-issued
securities or forward commitments). Under normal market
conditions, the Portfolio does not intend to commit more than 5% of
its total assets to these practices. The Portfolio does not pay
for the securities or receive dividends or interest on them until
the contractual settlement date. The Portfolio will designate cash
or liquid high-grade debt securities at least equal in value to its
commitments to purchase the securities. When-issued securities or
forward commitments are subject to market fluctuations and they may
affect the Portfolio's total assets the same as owned securities.
The Portfolio may invest up to 20% of its net assets in certain
taxable investments for temporary defensive purposes. It may
purchase short-term U.S. and Canadian government securities. It
may invest in bank obligations including negotiable certificates of
deposit, non-negotiable fixed time deposits, bankers' acceptances
and letters of credit. The issuing bank or savings and loan
generally must have capital, surplus and undivided profits (as of
the date of its most recently published annual financial
statements) in excess of $100 million (or the equivalent in the
instance of a foreign branch of a U.S. bank) at the date of
investment.
The Portfolio may purchase short-term corporate notes and
obligations rated in the top two classifications by Moody's
Investors Service Inc. (Moody's) or Standard & Poor's Corporation
(S&P) or the equivalent. It also may use repurchase agreements
with broker-dealers registered under the Securities Exchange Act of
1934 and with commercial banks. Repurchase agreements involve
investments in debt securities where the seller (broker-dealer or
bank) agrees to repurchase the securities from the Portfolio at
cost plus an agreed-to interest rate within a specified time. A
risk of a repurchase agreement is that if the seller seeks the
protection of the bankruptcy laws, the Portfolio's ability to
liquidate the security involved could be impaired, and it might
subsequently incur a loss if the value of the security declines or
if the other party to a repurchase agreement defaults on its
obligation.
The Portfolio may invest in commercial paper issued in transactions
not involving a public offering under Section 4(2) of the
Securities Act of 1933 (4(2) paper). In determining the liquidity
of 4(2) paper, the Advisor, under guidelines established by the
board, will evaluate relevant factors such as the issuer and the
size and nature of its commercial paper programs, the willingness
and ability of the issuer or dealer to repurchase the paper, and
the nature of the clearance and settlement procedures for the
paper.
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For a description of short-term securities and options and interest
rate futures contracts, see descriptions below.
DESCRIPTION OF SHORT-TERM SECURITIES
Short-term Tax-exempt Securities
A portion of the Portfolio's assets are in cash and short-term
securities for day-to-day operating purposes. The investments will
usually be in short-term municipal bonds and notes. These include:
(1) Tax anticipation notes sold to finance working capital needs
of municipalities in anticipation of receiving taxes on a future
date.
(2) Bond anticipation notes sold on an interim basis in
anticipation of a municipality issuing a longer term bond in the
future.
(3) Revenue anticipation notes issued in anticipation of revenues
from sources other than taxes, such as federal revenues available
under the Federal Revenue Sharing Program.
(4) Tax and revenue anticipation notes issued in anticipation of
revenues from taxes and other sources of revenue, except bond
placements.
(5) Construction loan notes insured by the Federal Housing
Administration which remain outstanding until permanent financing
by the Federal National Mortgage Association (FNMA) or the
Government National Mortgage Association (GNMA) at the end of the
project construction period.
(6) Tax-exempt commercial paper with a stated maturity of 365 days
or less issued by agencies of state and local governments to
finance seasonal working capital needs or as short-term financing
in anticipation of longer-term financing.
(7) Project notes issued by local housing authorities to finance
urban renewal and public housing projects. These notes are
guaranteed by the full faith and credit of the U.S. government.
(8) Variable rate demand notes, on which the yield is adjusted at
periodic intervals not exceeding 31 days and on which the principal
may be repaid after not more than seven days' notice, are
considered short-term regardless of the stated maturity.
Short-term Taxable Securities and Repurchase Agreements
Depending on market conditions, a portion of the Portfolio's
investments may be in short-term taxable securities. These
include:
(1) Obligations of the U.S. government, its agencies and
instrumentalities resulting principally from lending programs of
the U.S. government;
<PAGE>
PAGE 15
(2) U.S. Treasury bills with maturities up to one year. The
difference between the purchase price and the maturity value or
resale price is the interest income to the Portfolio;
(3) Certificates of deposit or receipts with fixed interest rates
issued by banks in exchange for deposit of funds;
(4) Bankers' acceptances arising from short-term credit
arrangements designed to enable business to obtain funds to finance
commercial transactions;
(5) Letters of credit which are short-term notes issued in bearer
form with a bank letter of credit obligating the bank to pay the
bearer the amount of the note;
(6) Commercial paper rated in the two highest grades by Standard &
Poor's or Moody's. Commercial paper is generally defined as
unsecured short-term notes issued in bearer form by large well-
known corporations and finance companies. These ratings reflect a
review of management, economic evaluation of the industry
competition, liquidity, long-term debt and ten-year earning trends;
Standard & Poor's rating A-1 indicates that the degree of safety
regarding timely payment is either overwhelming or very strong.
Standard & Poor's ratings A-2 indicates that capacity for timely
payment on issues with this designation is strong.
Moody's rating Prime-1 (P-1) indicates a superior capacity for
repayment of short-term promissory obligations.
Moody's rating Prime-2 (P-2) indicates a strong capacity for
repayment of short-term promissory obligations.
(7) Repurchase agreements involving acquisition of securities by
the Portfolio with a concurrent agreement by the seller, usually a
bank or securities dealer, to reacquire the securities at cost plus
interest within a specified time. From this investment, the
Portfolio receives a fixed rate of return that is insulated from
market rate changes while it holds the security.
OPTIONS AND INTEREST RATE FUTURES CONTRACTS
The Portfolio may buy or write options traded on any U.S. or
foreign exchange or in the over-the-counter market. The Portfolio
may enter into interest rate futures contracts traded on any U.S.
or foreign exchange. The Portfolio also may buy or write put and
call options on these futures. Options in the over-the-counter
market will be purchased only when the investment manager believes
a liquid secondary market exists for the options and only from
dealers and institutions the investment manager believes present a
minimal credit risk. Some options are exercisable only on a
specific date. In that case, or if a liquid secondary market does
not exist, the Portfolio could be required to buy or sell
securities at disadvantageous prices, thereby incurring losses.
<PAGE>
PAGE 16
OPTIONS. An option is a contract. A person who buys a call option
for a security has the right to buy the security at a set price for
the length of the contract. A person who sells a call option is
called a writer. The writer of a call option agrees to sell the
security at the set price when the buyer wants to exercise the
option, no matter what the market price of the security is at that
time. A person who buys a put option has the right to sell a
security at a set price for the length of the contract. A person
who writes a put option agrees to buy the security at the set price
if the purchaser wants to exercise the option, no matter what the
market price of the security is at that time. An option is covered
if the writer owns the security (in the case of a call) or sets
aside the cash (in the case of a put) that would be required upon
exercise.
The price paid by the buyer for an option is called a premium. In
addition the buyer generally pays a broker a commission. The
writer receives a premium, less a commission, at the time the
option is written. The cash received is retained by the writer
whether or not the option is exercised. A writer of a call option
may have to sell the security for a below-market price if the
market price rises above the exercise price. A writer of a put
option may have to pay an above-market price for the security if
its market price decreases below the exercise price.
Options can be used to produce incremental earnings, protect gains
and facilitate buying and selling securities for investment
purposes. The use of options and futures contracts may benefit the
Portfolio and its unitholders by improving the Portfolio's
liquidity and by helping to stabilize the value of its net assets.
Buying options. Put and call options may be used as a trading
technique to facilitate buying and selling securities for
investment reasons. Options are used as a trading technique to
take advantage of any disparity between the price of the underlying
security in the securities market and its price on the options
market. It is anticipated the trading technique will be utilized
only to effect a transaction when the price of the security plus
the option price will be as good or better than the price at which
the security could be bought or sold directly. When the option is
purchased, the Portfolio pays a premium and a commission. It then
pays a second commission on the purchase or sale of the underlying
security when the option is exercised. For record-keeping and tax
purposes, the price obtained on the purchase of the underlying
security will be the combination of the exercise price, the premium
and both commissions. When using options as a trading technique,
commissions on the option will be set as if only the underlying
securities were traded.
Put and call options also may be held by the Portfolio for
investment purposes. Options permit the Portfolio to experience
the change in the value of a security with a relatively small
initial cash investment. The risk the Portfolio assumes when it
buys an option is the loss of the premium. To be beneficial to the
Portfolio, the price of the underlying security must change within
the time set by the option contract. Furthermore, the change must <PAGE>
PAGE 17
be sufficient to cover the premium paid, the commissions paid both
in the acquisition of the option and in a closing transaction or in
the exercise of the option and subsequent sale (in the case of a
call) or purchase (in the case of a put) of the underlying
security. Even then the price change in the underlying security
does not ensure a profit since prices in the option market may not
reflect such a change.
Writing covered options. The Portfolio will write covered options
when it feels it is appropriate and will follow these guidelines:
'Underlying securities will continue to be bought or sold solely on
the basis of investment considerations consistent with the
Portfolio's goal.
'All options written by the Portfolio will be covered. For covered
call options if a decision is made to sell the security, the
Portfolio will attempt to terminate the option contract through a
closing purchase transaction.
'The Portfolio will write options only as permitted under federal
or state laws or regulations, such as those that limit the amount
of total assets subject to the options. While no limit has been
set by the Portfolio, it will conform to the requirements of
certain states. For example, California limits the writing of
options to 50% of the assets of a portfolio.
Net premiums on call options closed or premiums on expired call
options are treated as short-term capital gains. Since the
Portfolio is taxed as a regulated investment company under the
Internal Revenue Code, any gains on options and other securities
held less than three months must be limited to less than 30% of its
annual gross income.
If a covered call option is exercised, the security is sold by the
Portfolio. The Portfolio will recognize a capital gain or loss
based upon the difference between the proceeds and the security's
basis.
Options on many securities are listed on options exchanges. If the
Portfolio writes listed options, it will follow the rules of the
options exchange. Options are valued at the close of the New York
Stock Exchange. An option listed on a national exchange, Chicago
Board Options Exchange (CBOE) or NASDAQ will be valued at the last
quoted sales price or, if such a price is not readily available, at
the mean of the last bid and asked prices.
FUTURES CONTRACTS. A futures contract is an agreement between two
parties to buy and sell a security for a set price on a future
date. They have been established by boards of trade which have
been designated contracts markets by the Commodity Futures Trading
Commission (CFTC). Futures contracts trade on these markets in a
manner similar to the way a stock trades on a stock exchange, and
the boards of trade, through their clearing corporations, guarantee
performance of the contracts. Currently, there are futures
contracts based on such debt securities as long-term U.S. Treasury <PAGE>
PAGE 18
bonds, Treasury notes, GNMA modified pass-through mortgage-backed
securities, three-month U.S. Treasury bills and bank certificates
of deposit. While futures contracts based on debt securities do
provide for the delivery and acceptance of securities, such
deliveries and acceptances are very seldom made. Generally, the
futures contract is terminated by entering into an offsetting
transaction. An offsetting transaction for a futures contract sale
is effected by the Portfolio entering into a futures contract
purchase for the same aggregate amount of the specific type of
financial instrument and same delivery date. If the price in the
sale exceeds the price in the offsetting purchase, the Portfolio
immediately is paid the difference and realizes a gain. If the
offsetting purchase price exceeds the sale price, the Portfolio
pays the difference and realizes a loss. Similarly, closing out a
futures contract purchase is effected by the Portfolio entering
into a futures contract sale. If the offsetting sale price
exceeds the purchase price, the Portfolio realizes a gain, and if
the offsetting sale price is less than the purchase price, the
Portfolio realizes a loss. At the time a futures contract is made,
a good-faith deposit called initial margin is set up within a
segregated account at the Portfolio's custodian bank. The initial
margin deposit is approximately 1.5% of a contract's face value.
Daily thereafter, the futures contract is valued and the payment of
variation margin is required so that each day the Portfolio would
pay out cash in an amount equal to any decline in the contract's
value or receive cash equal to any increase. At the time a futures
contract is closed out, a nominal commission is paid, which is
generally lower than the commission on a comparable transaction in
the cash markets.
The purpose of a futures contract, in the case of a portfolio
holding long-term debt securities, is to gain the benefit of
changes in interest rates without actually buying or selling long-
term debt securities. For example, if the Portfolio owned long-
term bonds and interest rates were expected to increase, it might
enter into futures contracts to sell securities which would have
much the same effect as selling some of the long-term bonds it
owned.
Futures contracts are based on types of debt securities referred to
above, which have historically reacted to an increase or decline in
interest rates in a fashion similar to the debt securities the
Portfolio owns. If interest rates did increase, the value of the
debt securities in the portfolio would decline, but the value of
the Portfolio's futures contracts would increase at approximately
the same rate, thereby keeping the net asset value of the Portfolio
from declining as much as it otherwise would have. If, on the
other hand, the Portfolio held cash reserves and interest rates
were expected to decline, the Portfolio might enter into interest
rate futures contracts for the purchase of securities. If short-
term rates were higher than long-term rates, the ability to
continue holding these cash reserves would have a very beneficial
impact on the Portfolio's earnings. Even if short-term rates were
not higher, the Portfolio would still benefit from the income
earned by holding these short-term investments. At the same time,
by entering into futures contracts for the purchase of securities,
the Portfolio could take advantage of the anticipated rise in the <PAGE>
PAGE 19
value of long-term bonds without actually buying them until the
market had stabilized. At that time, the futures contracts could
be liquidated and the Portfolio's cash reserves could then be used
to buy long-term bonds on the cash market. The Portfolio could
accomplish similar results by selling bonds with long maturities
and investing in bonds with short maturities when interest rates
are expected to increase or by buying bonds with long maturities
and selling bonds with short maturities when interest rates are
expected to decline. But by using futures contracts as an
investment tool, given the greater liquidity in the futures market
than in the cash market, it might be possible to accomplish the
same result more easily and more quickly. Successful use of
futures contracts depends on the investment manager's ability to
predict the future direction of interest rates. If the investment
manager's prediction is incorrect, the Portfolio would have been
better off had it not entered into futures contracts.
OPTIONS ON FUTURES CONTRACTS. Options give the holder a right to
buy or sell futures contracts in the future. Unlike a futures
contract, which requires the parties to the contract to buy and
sell a security on a set date, an option on a futures contract
merely entitles its holder to decide on or before a future date
(within nine months of the date of issue) whether to enter into
such a contract. If the holder decides not to enter into the
contract, all that is lost is the amount (premium) paid for the
option. Furthermore, because the value of the option is fixed at
the point of sale, there are no daily payments of cash to reflect
the change in the value of the underlying contract. However, since
an option gives the buyer the right to enter into a contract at a
set price for a fixed period of time, its value does change daily
and that change is reflected in the net asset value of the
Portfolio.
RISKS. There are risks in engaging in each of the management tools
described above. The risk the Portfolio assumes when it buys an
option is the loss of the premium paid for the option. Purchasing
options also limits the use of monies that might otherwise be
available for long-term investments.
The risk involved in writing options on futures contracts the
Portfolio owns, or on securities held in its portfolio, is that
there could be an increase in the market value of such contracts or
securities. If that occurred, the option would be exercised and
the asset sold at a lower price than the cash market price. To
some extent, the risk of not realizing a gain could be reduced by
entering into a closing transaction. The Portfolio could enter
into a closing transaction by purchasing an option with the same
terms as the one it had previously sold. The cost to close the
option and terminate the Portfolio's obligation, however, might be
more or less than the premium received when it originally wrote the
option. Furthermore, the Portfolio might not be able to close the
option because of insufficient activity in the options market.
A risk in employing futures contracts to protect against the price
volatility of portfolio securities is that the prices of securities
subject to futures contracts may not correlate perfectly with the <PAGE>
PAGE 20
behavior of the cash prices of the securities. The correlation may
be distorted because the futures market is dominated by short-term
traders seeking to profit from the difference between a contract or
security price and their cost of borrowed funds. Such distortions
are generally minor and would diminish as the contract approached
maturity.
Another risk is that the Portfolio's investment manager could be
incorrect in anticipating as to the direction or extent of various
interest rate movements or the time span within which the movements
take place. For example, if the Portfolio sold futures contracts
for the sale of securities in anticipation of an increase in
interest rates, and interest rates declined instead, the Portfolio
would lose money on the sale.
TAX TREATMENT. As permitted under federal income tax laws, the
Portfolio intends to identify futures contracts as mixed straddles
and not mark them to market, that is, not treat them as having been
sold at the end of the year at market value. Such an election may
result in the Portfolio being required to defer recognizing losses
incurred by entering into futures contracts and losses on
underlying securities identified as being hedged against.
Federal income-tax treatment of gains or losses from transactions
in options on futures contracts and indexes will depend on whether
such option is a section 1256 contract. If the option is a non-
equity option, the Portfolio will either make a 1256(d) election
and treat the option as a mixed straddle or mark to market the
option at fiscal year end and treat the gain/loss as 40% short-term
and 60% long-term. Certain provisions of the Internal Revenue Code
may also limit the Portfolio's ability to engage in futures
contracts and related options transactions. For example, at the
close of each quarter of the Portfolio's taxable year, at least 50%
of the value of its assets must consist of cash, government
securities and other securities, subject to certain diversification
requirements. Less than 30% of its gross income must be derived
from sales of securities held less than three months.
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. In order
to avoid realizing a gain within the three-month period, the
Portfolio may be required to defer closing out a contract beyond
the time when it might otherwise be advantageous to do so. The
Portfolio also may be restricted in purchasing put options for the
purpose of hedging underlying securities because of applying the
short sale holding period rules with respect to such underlying
securities.
Accounting for futures contracts will be according to generally
accepted accounting principles. Initial margin deposits will be
recognized as assets due from a broker (the Portfolio's agent in
acquiring the futures position). During the period the futures
contract is open, changes in value of the contract will be <PAGE>
PAGE 21
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.
Portfolio turnover rates:
For the fiscal periods 1996 and 1995, the Portfolio turnover rates
were 9% and 14%.
For periods prior to the Portfolio's commencement of operations,
turnover rates are based on the turnover rates of the corresponding
IDS fund, which transferred all of its assets to the Portfolio on
May 13, 1996. A higher turnover rate (in excess of 100%) results
in higher fees and expenses.
Item 14: Management of the Fund
BOARD MEMBERS AND OFFICERS
The following is a list of the Trust's board members and officers,
who are board members and officers of all five Trusts in the
Preferred Master Trust Group and, except for Mr. Dudley, all 47
funds in the IDS MUTUAL FUND GROUP. Mr. Dudley is a board member
of all IDS funds except the nine life funds. All units have
cumulative voting rights with respect to the election of board
members.
Trustees and Officers of the Preferred Master Trust Group
H. Brewster Atwater, Jr.
Born in 1931
4900 IDS Tower
Minneapolis, MN
Former chairman and chief executive officer, General Mills, Inc.
Director, Merck & Co., Inc. and Darden Restaurants, Inc.
Lynne V. Cheney'
Born in 1941
American Enterprise Institute
for Public Policy Research (AEI)
1150 17th St., N.W.
Washington, D.C.
Distinguished Fellow AEI. Former Chair of National Endowment of
the Humanities. Director, The Reader's Digest Association Inc.,
Lockheed-Martin, Union Pacific Resources, and FPL Group, Inc.
(holding company for Florida Power and Light).
William H. Dudley**
Born in 1932
2900 IDS Tower
Minneapolis, MN
Executive vice president and director of the Advisor.<PAGE>
PAGE 22
Robert F. Froehlke+
Born in 1922
1201 Yale Place
Minneapolis, MN
Former president of all funds in the IDS MUTUAL FUND GROUP.
Director, the ICI Mutual Insurance Co., Institute for Defense
Analyses, Marshall Erdman and Associates, Inc. (architectural
engineering) and Public Oversight Board of the American Institute
of Certified Public Accountants.
David R. Hubers+**
Born in 1943
2900 IDS Tower
Minneapolis, MN
President, chief executive officer and director of the Advisor.
Previously, senior vice president, finance and chief financial
officer of the Advisor.
Heinz F. Hutter+'
Born in 1929
P.O. Box 2187
Minneapolis, MN
Former president and chief operating officer, Cargill, Incorporated
(commodity merchants and processors).
Anne P. Jones
Born in 1935
5716 Bent Branch Rd.
Bethesda, MD
Attorney and telecommunications consultant. Former partner, law
firm of Sutherland, Asbill & Brennan. Director, Motorola, Inc. and
C-Cor Electronics, Inc.
Melvin R. Laird
Born in 1922
Reader's Digest Association, Inc.
1730 Rhode Island Ave., N.W.
Washington, D.C.
Senior counsellor for national and international affairs, The
Reader's Digest Association, Inc. Former nine-term U.S.
Congressman, U.S. Secretary of Defense and Presidential Counsellor.
Director, Metropolitan Life Insurance Co., The Reader's Digest
Association, Inc., Science Applications International Corp.,
Wallace Reader's Digest Funds and Public Oversight Board (SEC
Practice Section, American Institute of Certified Public
Accountants).
<PAGE>
PAGE 23
William R. Pearce+*
Born in 1927
901 S. Marquette Ave.
Minneapolis, MN
President of all Trusts in the Preferred Master Trust Group since
April 1996 and president of all funds in the IDS MUTUAL FUND GROUP
since June 1993. Former vice chairman of the board, Cargill,
Incorporated (commodity merchants and processors).
Alan K. Simpson
Born in 1931
1201 Sunshine Ave.
Cody, WY
Former three-term United States senator for Wyoming. Former
Assistant Republican Leader, U.S. Senate. Director, PacifiCorp
(electric power).
Edson W. Spencer+
Born in 1926
4900 IDS Center
80 S. 8th St.
Minneapolis, MN
President, Spencer Associates Inc. (consulting). Former chairman
of the board and chief executive officer, Honeywell Inc. Director,
Boise Cascade Corporation (forest products). Member of
International Advisory Council of NEC (Japan).
John R. Thomas**
Born in 1937
2900 IDS Tower
Minneapolis, MN
Senior vice president and director of the Advisor.
Wheelock Whitney+
Born in 1926
1900 Foshay Tower
821 Marquette Ave.
Minneapolis, MN
Chairman, Whitney Management Company (manages family assets).
C. Angus Wurtele'
Born in 1934
Valspar Corporation
Suite 1700
Foshay Tower
Minneapolis, MN
Chairman of the board and retired chief executive officer, The
Valspar Corporation (paints). Director, Bemis Corporation
(packaging), Donaldson Company (air cleaners & mufflers) and
General Mills, Inc. (consumer foods).
<PAGE>
PAGE 24
+ Member of executive committee.
' Member of joint audit committee.
* Interested person of the Trust by reason of being an officer and
employee of the Trust.
**Interested person of the Trust by reason of being an officer,
board member, employee and/or shareholder of the Advisor or
American Express.
The board also has appointed officers who are responsible for day-
to-day business decisions based on policies it has established.
In addition to Mr. Pearce, who is president, the Trust's other
officers are:
Leslie L. Ogg
Born in 1938
901 S. Marquette Ave.
Minneapolis, MN
Vice president, general counsel and secretary of all Trusts in the
Preferred Master Trust Group and of all funds in the IDS MUTUAL
FUND GROUP.
Officers who also are officers and/or employees of the Advisor.
Peter J. Anderson
Born in 1942
IDS Tower 10
Minneapolis, MN
Vice president-investments of all Trusts in the Preferred Master
Trust Group. Director and senior vice president-investments of the
Advisor.
Melinda S. Urion
Born in 1953
IDS Tower 10
Minneapolis, MN
Treasurer of all Trusts in the Preferred Master Trust Group.
Director, senior vice president and chief financial officer of the
Advisor. Director and executive vice president and controller of
IDS Life Insurance Company.
Members of the board who are not officers of the Portfolio or of
the Advisor receive an annual fee of $3,600. The chair of the
Contracts Committee receives an additional $90. Board members
receive a $50 per day attendance fee for board meetings. The
attendance fee for meetings of the Contracts and Investment Review
Committees is $50; for meetings of the Audit Committee and
Personnel Committee $25 and for traveling from out-of-state $8.
Expenses for attending meetings are reimbursed.
<PAGE>
PAGE 25
During the fiscal period from May 13, 1996 to Nov. 30, 1996 the
members of the board, for attending up to 25 meetings, received the
following compensation, in total, from all Portfolios in the
Preferred Master Trust Group:
<TABLE><CAPTION>
Compensation Table
Pension or Estimated Total cash
Aggregate Retirement annual compensation from
compensation benefits benefit the Preferred Master
from the accrued as upon Trust Group and IDS
Board member Portfolio Portfolio expenses retirement MUTUAL FUND GROUP
<S> <C> <C> <C> <C>
Lynne V. Cheney $1,956 $0 $0 $78,300
Robert F. Froehlke 2,015 0 0 81,700
Heinz F. Hutter 1,968 0 0 81,100
Anne P. Jones 1,981 0 0 81,200
Melvin R. Laird 1,909 0 0 78,000
Edson W. Spencer 2,010 0 0 86,800
Wheelock Whitney 1,985 0 0 80,100
C. Angus Wurtele 1,978 0 0 80,100
H. Brewster Atwater, Jr.400 0 0 9,800
(part of year)
</TABLE>
During the fiscal period from May 13, 1996 to Nov. 30, 1996, no
board member or officer earned more than $60,000 from the
Portfolio. All board members and officers as a group earned
$22,799 from the Portfolio.
Item 15: Control Persons and Principal Holder of Securities
<TABLE><CAPTION>
Portfolio Unitholder Percentage of ownership
<S> <C> <C>
Tax-Free High Yield IDS High Yield Tax-Exempt Fund 99.98%
</TABLE>
Item 16: Investment Advisory and Other Services
AGREEMENTS
Investment Management Services Agreement
The trust, on behalf of the Portfolio, has an Investment Management
Services Agreement with the Advisor. For managing the assets of
the Portfolio, the Advisor is paid a fee from the assets of the
Portfolio, based upon the following schedule:
Assets Annual rate at
(billions) each asset level
First $1.0 0.490%
Next 1.0 0.465
Next 1.0 0.440
Next 3.0 0.415
Next 3.0 0.390
Over $9.0 0.360
On Nov. 30, 1996, the daily rate applied to the Portfolio's net
assets on an annual basis was equal to 0.439%. The fee is
calculated for each calendar day on the basis of net assets as of
the close of business two days prior to the day for which the
calculation is made. The management fee is paid monthly.
The management fee is paid monthly. For the fiscal year ended Nov.
30, 1996, the Portfolio paid nonadvisory expenses of $14,890,546.
<PAGE>
PAGE 26
Under the Agreement, the Portfolio also pays taxes, brokerage
commissions and nonadvisory expenses, which include custodian fees;
audit and certain legal fees; fidelity bond premiums; registration
fees for units; office expenses; consultants' fees; compensation of
board members, officers and employees; corporate filing fees;
organizational expenses; expenses incurred in connection with
lending portfolio securities; and expenses properly payable by the
Portfolio, approved by the board. For the fiscal year ended Nov.
30, 1996, the Portfolio paid nonadvisory expenses of $188,679.
Transfer Agency and Administration Agreement
The Trust, on behalf of the Portfolio, has a Transfer Agency and
Administration Agreement with the Advisor. This Agreement governs
the responsibility for administering and/or performing transfer
agent functions, for acting as service agent in connection with
dividend and distribution functions and for performing unitholder
account administration agent functions in connection with the
issuance, exchange and redemption or repurchase of the Portfolio's
units. The fee is determined by multiplying the number of
unitholder accounts at the end of the day by a rate of $1 per year
and dividing by the number of days in that year. For the fiscal
year ended Nov. 30, 1996, no fees were paid for the Portfolio.
Placement Agency Agreement
Pursuant to a Placement Agency Agreement, American Express
Financial Advisors Inc. acts as placement agent of the units of the
Trust.
Custodian
The Trust's securities and cash are held by First Bank National
Association, 180 E. Fifth St. St. Paul, MN 55101-1631, through a
custodian agreement. The custodian is permitted to deposit some or
all of its securities in central depository systems as allowed by
federal law. For its services, the Portfolios pay the custodian a
maintenance charge and a charge per transaction in addition to
reimbursing the custodian's out-of-pocket expenses.
Item 17: Brokerage Allocations and Other Practices
SECURITY TRANSACTIONS
Subject to policies set by the board, the Advisor is authorized to
determine, consistent with the Portfolio's investment goal and
policies, which securities will be purchased, held or sold. In
determining where the buy and sell orders are to be placed, the
Advisor has been directed to use its best efforts to obtain the
best available price and most favorable execution except where
otherwise authorized by the board.
The Advisor 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 Advisor carefully monitors
compliance with its Code of Ethics.<PAGE>
PAGE 27
Normally, the Portfolio's securities are traded on a principal
rather than an agency basis. In other words, the Advisor 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. The Advisor 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 the Advisor to do so to the extent authorized by
law, if the Advisor 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 the Advisor's overall responsibilities to
the Portfolios advised by the Advisor.
Research provided by brokers supplements the Advisor'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. The Advisor 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, the
Advisor must follow procedures authorized by the board. To date,
three procedures have been authorized. One procedure permits the
Advisor 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 the
Advisor, 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 the Advisor, in
order to obtain research and brokerage services, to cause the
Portfolio to pay a commission in excess of the amount another
broker might have charged. The Advisor has advised the Trust 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
<PAGE>
PAGE 28
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 the
Advisor believes it may obtain better overall execution. The
Advisor has assured the Trust 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 shall be placed on the basis of obtaining
the best available price and the most favorable execution. In so
doing, if, in the professional opinion of the person responsible
for selecting the broker or dealer, several firms can execute the
transaction on the same basis, consideration will be given by such
person to those firms offering research services. Such services
may be used by the Advisor in providing advice to all the Trusts in
the Preferred Master Trust Group, their corresponding Funds and
other accounts advised by the Advisor, even though it is not
possible to relate the benefits to any particular fund, portfolio
or account.
Each investment decision made for a Portfolio is made independently
from any decision made for the other portfolios or accounts advised
by the Advisor or any of its subsidiaries. When a Portfolio buys
or sells the same security as another portfolio or account, the
Advisor carries out the purchase or sale in a way the Trust agrees
in advance is fair. Although sharing in large transactions may
adversely affect the price or volume purchased or sold by the
Portfolio, the Portfolio hopes to gain an overall advantage in
execution. The Advisor has assured the Trust it will continue to
seek ways to reduce brokerage costs.
On a periodic basis, the Advisor makes a comprehensive review of
the broker-dealers and the overall reasonableness of their
commissions. The review evaluates execution, operational
efficiency and research services.
No transactions were directed to brokers because of research
services they provided to the Portfolio.
As of the fiscal year ended Nov. 30, 1996, the Portfolio held no
securities of its regular broker or dealers or of the parents of
those brokers or dealers that derived more than 15% of gross
revenue from securities-related activities.
BROKERAGE COMMISSIONS PAID TO BROKERS AFFILIATED WITH THE ADVISOR
Affiliates of American Express Company (American Express) (of which
the Advisor is a wholly owned subsidiary) may engage in brokerage
and other securities transactions on behalf of the Portfolio
according to procedures adopted by the board and to the extent
consistent with applicable provisions of the federal securities
laws. The Advisor will use an American Express affiliate only if
(i) the Advisor determines that the Portfolio will receive prices
and executions at least as favorable as those offered by qualified
independent brokers performing similar brokerage and other services
for the Portfolio and (ii) the affiliate charges the Portfolio<PAGE>
PAGE 29
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.
The Advisor may direct brokerage to compensate an affiliate. The
Advisor will receive research on South Africa from New Africa
Advisors, a wholly-owned subsidiary of Sloan Financial Group. The
Advisor owns 100% of IDS Capital Holdings Inc. which in turn owns
40% of Sloan Financial Group. New Africa Advisors will send
research to the Advisor and in turn the Advisor will direct trades
to a particular broker. The broker will have an agreement to pay
New Africa Advisors. All transactions will be on a best execution
basis. Compensation received will be reasonable for the services
rendered.
No brokerage commissions were paid to brokers affiliated with the
Advisor for the fiscal period from May 13, 1996 to Nov. 30, 1996.
Item 18: Capital Stock and Other Securities
The information in response to this item is provided in addition to
information provided in Item 6 of Part A.
The Declaration of Trust dated October 2, 1995, a copy of which is
on file in the office of the Secretary of the Commonwealth of
Massachusetts, authorizes the issuance of units of beneficial
interest in the Trust without par value. Each unit of the
Portfolio has one vote and shares equally in dividends and
distributions, when and if declared by the board, and in the
Portfolio's net assets upon liquidation. All units, when issued,
are fully paid and non-assessable. There are no preemptive,
conversion or exchange rights.
The board may classify or reclassify any unissued units of the
Trust into units of any series by setting or changing in any one or
more respect, from time to time, prior to the issuance of such
units, the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, or qualifications, of
such units. Any such classification or reclassification will
comply with the provisions of the Investment Company Act of 1940
(the 1940 Act).
The overall management of the business of the Portfolio is vested
with the board members. The board members approve all significant
agreements between the Portfolio and persons or companies
furnishing services to the Portfolio. The day-to-day operations of
the Portfolio are delegated to the officers of the Trust subject to
the investment objective and policies of the Portfolio, the general
supervision of the board members and the applicable laws of The
Commonwealth of Massachusetts.
Generally, there will not be annual meetings of unitholders.
Unitholders may remove board members from office by votes cast at a
meeting of unitholders or by written consent.
<PAGE>
PAGE 30
Under Massachusetts law, unitholders could, under certain
circumstances, be held liable for the obligations of the Trust.
However, the Declaration of Trust disclaims unitholder liability
for acts or obligations of the Trust and requires that notice of
such disclaimer be given in each agreement, obligation or
instrument entered into or executed by the Trust. The Declaration
of Trust provides for indemnification out of the Trust property for
all loss and expense of any unitholder of the Trust held liable on
account of being or having been a unitholder. Thus, the risk of a
unitholder incurring financial loss on account of unitholder
liability is limited to circumstances in which the Trust would be
unable to meet its obligations wherein the complaining party was
held not to be bound by the disclaimer.
The Declaration of Trust further provides that the board members
will not be liable for errors of judgment or mistakes of fact or
law. However, nothing in the Declaration of Trust protects a board
member against any liability to which the board member would
otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involving the
conduct of his or her office. The Declaration of Trust provides
for indemnification by the Trust of the board members and officers
of the Trust except with respect to any matter as to which any such
person did not act in good faith in the reasonable belief that his
or her action was in or not opposed to the best interests of the
Trust. Such person may not be indemnified against any liability to
the Trust or the Trust unitholders to which he or she would
otherwise be subjected by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in
the conduct of his or her office. The Declaration of Trust also
authorizes the purchase of liability insurance on behalf of board
members and officers.
Item 19: Purchase, Redemption and Pricing of Securities Being
Offered
The information in response to this item is provided in addition to
information provided in Items 7 and 8 in Part A.
REDEEMING UNITS
Unitholders have a right to redeem units at any time. For an
explanation of redemption procedures, please see Item 8 in Part A.
During an emergency, the board can suspend the computation of net
asset value, stop accepting payments for purchase of units or
suspend the duty of the Portfolio to redeem units for more than
seven days. Such emergency situations would occur if:
'The New York Stock Exchange closes for reasons other than the
usual weekend and holiday closings or trading on the Exchange is
restricted, or
'Disposal of the Portfolio's securities is not reasonably
practicable or it is not reasonably practicable for the Portfolio
to determine the fair value of its net assets, or
<PAGE>
PAGE 31
'The SEC, under the provisions of the 1940 Act, as amended,
declares a period of emergency to exist.
Should the Portfolio stop selling units, the board members may make
a deduction from the value of the assets held by the Portfolio to
cover the cost of future liquidations of the assets so as to
distribute fairly these costs among all unitholders.
REDEMPTIONS BY THE PORTFOLIO
The Portfolio reserves the right to redeem, involuntarily, the
units of any unitholder whose account has a value of less than a
minimum amount but only where the value of such account has been
reduced by voluntary redemption of units. Until further notice, it
is the policy of the Portfolio not to exercise this right with
respect to any unitholder whose account has a value of $1,000,000
or more. In any event, before the Portfolio redeems such units and
sends the proceeds to the unitholder, it will notify the unitholder
that the value of the units in the account is less than the minimum
amount and allow the unitholder 30 days to make an additional
investment in an amount which will increase the value of the
accounts to at least $1,000,000.
REDEMPTIONS IN KIND
The Trust has elected to be governed by Rule 18f-1 under the 1940
Act, which obligates the Portfolio to redeem units in cash, with
respect to any one unitholder during any 90-day period, up to the
lesser of $250,000 or 1% of the net assets of the Portfolio at the
beginning of such period. Although redemptions in excess of this
limitation would normally be paid in cash, the Portfolio reserves
the right to make payments in whole or in part in securities or
other assets in case of an emergency, or if the payment of such
redemption in cash would be detrimental to the existing unitholders
of the Trust as determined by the board. In such circumstances,
the securities distributed would be valued as set forth in Item 8
of Part A. Should the Portfolio distribute securities, a
unitholder may incur brokerage fees or other transaction costs in
converting the securities to cash.
Despite its right to redeem units through a redemption-in-kind,
each Portfolio does not expect to exercise this option unless the
Portfolio has an unusually low level of cash to meet redemptions
and/or is experiencing unusually strong demands for cash.
VALUING PORTFOLIO INTERESTS
The number of units held by each unitholder is equal to the value
in dollars of that unitholder's interest in the Portfolio. The
dollar value of a unitholder's interest in the Portfolio is
determined by multiplying the unitholder's proportionate interest
by the net asset value of that Portfolio.
<PAGE>
PAGE 32
On Dec. 2, 1996, the first business day following the end of the
fiscal period, the computation looked like this:
<TABLE><CAPTION>
Net assets before Units outstanding Net asset value
Portfolio unitholder transactions at end of previous day of one unit
<S> <C> <C> <C> <C> <C>
Tax-Free High $2,800,697,861 divided by 610,173,826 equals $4.59
Yield
</TABLE>
In determining net assets before unitholder transactions, the
securities held by the Portfolio are valued as follows as of the
close of business of the New York Stock Exchange (the Exchange):
'Securities, except bonds other than convertibles, traded on a
securities exchange for which a last-quoted sales price is readily
available are valued at the last-quoted sales price on the exchange
where such security is primarily traded.
'Securities traded on a securities exchange for which a last-quoted
sales price is not readily available are valued at the mean of the
closing bid and asked prices, looking first to the bid and asked
prices on the exchange where the security is primarily traded and,
if none exist, to the over-the-counter market.
'Securities included in the NASDAQ National Market System are
valued at the last-quoted sales price in this market.
'Securities included in the NASDAQ National Market System for which
a last-quoted sales price is not readily available, and other
securities traded over-the-counter but not included in the NASDAQ
National Market System are valued at the mean of the closing bid
and asked prices.
'Futures and options traded on major exchanges are valued at the
last-quoted sales price on their primary exchange.
'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 portfolio's net asset value. If events materially affecting
the value of such securities occur during such period, these
securities will be valued at their fair value according to
procedures decided upon in good faith by the board.
'Short-term securities maturing more than 60 days from the
valuation date are valued at the readily available market price or
approximate market value based on current interest rates. Short-
term securities maturing in 60 days or less that originally had
maturities of more than 60 days at acquisition date are valued at
amortized cost using the market value on the 61st day before
maturity. Short-term securities maturing in 60 days or less at
acquisition date are valued at amortized cost. Amortized cost is
an approximation of market value determined by systematically
increasing the carrying value of a security if acquired at a <PAGE>
PAGE 33
discount, or reducing the carrying value if acquired at a premium,
so that the carrying value is equal to maturity value on the
maturity date.
'Securities without a readily available market price, bonds other
than convertibles and other assets are valued at fair value as
determined in good faith by the board. The board is responsible
for selecting methods it believes provide fair value. When
possible, bonds are valued by a pricing service independent from
the Portfolio. If a valuation of a bond is not available from a
pricing service, the bond will be valued by a dealer knowledgeable
about the bond if such a dealer is available.
The Exchange, the Advisor and the Portfolio will be closed on the
following holidays: New Year's Day, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
Item 20: Tax Status
The information in response to this item is provided in Item 6 of
Part A.
CAPITAL LOSS CARRYOVER
For federal income tax purposes, the Portfolio had total capital
loss carryovers of $1,194, at Nov. 30, 1996, that if not offset by
subsequent capital gains will expire in 2004.
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.
Item 21: Underwriters
The information in response to this item is provided in Item 7 of
Part A and Item 16 of Part B.
Item 22: Calculation of Performance Data
Not Applicable.
Item 23: Financial Statements
<PAGE>
<PAGE>
PAGE 34
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) FINANCIAL STATEMENTS:
Financial Statements filed as part of this amendment:
Tax-Free High Yield Portfolio
o Independent Auditors' Report dated January 3, 1997
o Statement of assets and liabilities, Nov. 30, 1996
o Statement of operations, for the period from May 13, 1996 to
Nov. 30, 1996
o Statement of changes in net assets, for the period from May
13, 1996 to Nov. 30, 1996
o Notes to financial statements
o Investment in securities, Nov. 30, 1996
o Notes to investments in securities
(b) EXHIBITS:
1. Declaration of Trust, filed electronically on or about
Nov. 1, 1995 as Exhibit 1 to Registrant's initial
Registration Statement No. 811-7397, is incorporated
herein by reference.
2. Form of By-laws, filed electronically on or about April
18, 1996 as Exhibit 2 to Registrant's Amendment No. 1, is
incorporated herein by reference.
3. Not Applicable.
4. Not Applicable.
5. Copy of Investment Management Services Agreement between
Tax-Free Income Trust, on behalf of Tax-Free High Yield
Portfolio, and American Express Financial Corporation,
dated May 13, 1996, is filed electronically herewith.
6. Not Applicable.
7. Not Applicable.
8. Copy of Custodian Agreement between Tax-Free Income
Trust, on behalf of Tax-Free High Yield Portfolio, and
First Bank National Association, dated May 13, 1996, is
filed electronically herewith.
9(a). Copy of Transfer Agency and Administrative Services
Agreement between Tax-Free Income Trust, on behalf of
Tax-Free High Yield Portfolio, and American Express
Financial Corporation, dated May 13, 1996, is filed
electronically herewith.
9(b). Copy of Placement Agent Agreement between Tax-Free Income
Trust, on behalf of Tax-Free High Yield Portfolio, and
American Express Financial Advisors Inc., dated May 13,
1996, is filed electronically herewith.
<PAGE>
PAGE 35
9(c). Copy of Conversion Agreement by IDS High Yield Tax-Exempt
Fund, Inc., dated May 13, 1996, is filed electronically
herewith.
10. Not Applicable.
11. Not Applicable.
12. Not Applicable.
13. Copy of Subscription Agreement between Tax-Free Income
Trust and Strategist Tax-Free Income Fund, Inc. dated
April 16, 1996, is filed electronically herewith.
14. Not Applicable.
15. Not Applicable.
16. Not Applicable.
17. Financial Data Schedule is filed electronically herewith.
18. Not Applicable.
19(a) Trustees' Power of Attorney to sign Amendments to this
Registration Statement, dated January 8, 1997, is filed
electronically herewith.
19(b) Officers' Power of Attorney to sign Amendments to this
Registration Statement, dated April 11, 1996, filed
electronically on or about April 18, 1996 as Exhibit
19(b) to Registrant's Amendment No. 1, is incorporated
herein by reference.
Item 25. Persons Controlled by or Under Common Control with
Registrant
None.
Item 26. Number of Holders of Securities
(1) (2)
Title of Class Number of Record Holders
Units of as of January 22, 1997
Beneficial Interest 2
Item 27. Indemnification
Reference is hereby made to Article 8 of Registrant's Declaration
of Trust filed electronically on or about Nov. 1, 1995 as Exhibit 1
to Registrant's initial Registration Statement No. 811-7397.
<PAGE>
PAGE 36
<PAGE>
PAGE 1
American Express Financial Corporation is the investment advisor of
the Portfolios of the Trust.
<PAGE>
Item 29(c). Not applicable.
Item 30. Location of Accounts and Records
American Express Financial Corporation
IDS Tower 10
Minneapolis, MN 55440
Item 31. Management Services
Not Applicable.
Item 32. Undertakings
(a) Not Applicable.
(b) Not Applicable.
(c) Not Applicable.
<PAGE>
PAGE 37
SIGNATURE
Pursuant to the requirement of the Investment Company Act of 1940,
the Registrant has duly caused this Amendment to its Registration
Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Minneapolis and State of Minnesota,
on the 28th day of January, 1997.
TAX-FREE INCOME TRUST
By /s/ William R. Pearce**
William R. Pearce, President
By /s/ Melinda S. Urion**
Melinda S. Urion, Treasurer
Pursuant to the requirements of the Investment Company Act of 1940,
this Amendment to the Registration Statement has been signed below
by the following persons in the capacities indicated on the 28th
day of January, 1997.
Signatures Capacity
/s/ William R. Pearce* Trustee
William R. Pearce
/s/ H. Brewster Atwater, Jr.* Trustee
H. Brewster Atwater, Jr.
/s/ Lynne V. Cheney* Trustee
Lynne V. Cheney
/s/ William H. Dudley* Trustee
William H. Dudley
/s/ Robert F. Froehlke* Trustee
Robert F. Froehlke
/s/ David R. Hubers* Trustee
David R. Hubers
/s/ Heinz F. Hutter* Trustee
Heinz F. Hutter
/s/ Anne P. Jones* Trustee
Anne P. Jones
<PAGE>
PAGE 38
Signatures Capacity
/s/ Melvin R. Laird* Trustee
Melvin R. Laird
/s/ Alan K. Simpson* Trustee
Alan K. Simpson
/s/ Edson W. Spencer* Trustee
Edson W. Spencer
/s/ John R. Thomas* Trustee
John R. Thomas
/s/ Wheelock Whitney* Trustee
Wheelock Whitney
/s/ C. Angus Wurtele* Trustee
C. Angus Wurtele
* Signed pursuant to Trustees' Power of Attorney dated January 8,
1997, filed electronically herewith as Exhibit 19(a), by:
Leslie L. Ogg
** Signed pursuant to Officers' Power of Attorney dated April 11,
1996, filed electronically as Exhibit 19(b) to Registrant's
Amendment No. 1, by:
Leslie L. Ogg
<PAGE>
PAGE 1
TAX-FREE INCOME TRUST
Registration Number 811-7397
EXHIBIT INDEX
Exhibit 5: Copy of Investment Management Services Agreement
between Tax-Free Income Trust, on behalf of Tax-Free
High Yield Portfolio, and American Express Financial
Corporation, dated May 13, 1996.
Exhibit 8: Copy of Custodian Agreement between Tax-Free Income
Trust, on behalf of Tax-Free High Yield Portfolio,
and First Bank National Association, dated May 13,
1996.
Exhibit 9(a): Copy of Transfer Agency and Administrative Services
Agreement between Tax-Free Income Trust, on behalf
of Tax-Free High Yield Portfolio, and American
Express Financial Corporation, dated May 13, 1996.
Exhibit 9(b): Copy of Placement Agent Agreement between Tax-Free
Income Trust, on behalf of Tax-Free High Yield
Portfolio, and American Express Financial Advisors
Inc., dated May 13, 1996.
Exhibit 9(c): Copy of Conversion Agreement by IDS High Yield Tax-
Exempt Fund, Inc., dated May 13, 1996.
Exhibit 13: Copy of Subscription Agreement between Tax-Free
Income Trust and Strategist Tax-Free Income Fund,
Inc. dated April 16, 1996.
Exhibit 17: Financial Data Schedules.
Exhibit 19(a): Trustees' Power of Attorney to sign Amendments to
this Registration Statement, dated January 8, 1997.
<PAGE>
PAGE 1
INVESTMENT MANAGEMENT SERVICES AGREEMENT
AGREEMENT made the 13th day of May, 1996, by and between Tax-
Free Income Trust (the "Trust"), a Massachusetts business trust, on
behalf of its underlying portfolio, Tax-Free High Yield Portfolio,
and American Express Financial Corporation (the "Advisor"), a
Delaware corporation.
Part One: INVESTMENT MANAGEMENT AND OTHER SERVICES
(1) The Trust hereby retains the Advisor, and the Advisor
hereby agrees, for the period of this Agreement and under the terms
and conditions hereinafter set forth, to furnish the Portfolios
continuously with suggested investment planning; to determine,
consistent with the Portfolios' investment objectives and policies,
which securities in the Advisor's discretion shall be purchased,
held or sold and to execute or cause the execution of purchase or
sell orders; to prepare and make available to the Portfolios all
necessary research and statistical data in connection therewith; to
furnish all services of whatever nature required in connection with
the management of the Portfolios as provided under this Agreement;
and to pay such expenses as may be provided for in Part Three;
subject always to the direction and control of the Board of
Trustees (the "Board"), the Executive Committee and the authorized
officers of the Trust. The Advisor agrees to maintain an adequate
organization of competent persons to provide the services and to
perform the functions herein mentioned. The Advisor agrees to meet
with any persons at such times as the Board deems appropriate for
the purpose of reviewing the Advisor's performance under this
Agreement.
(2) The Advisor agrees that the investment planning and
investment decisions will be in accordance with general investment
policies of the Portfolios as disclosed to the Advisor from time to
time by the Portfolios and as set forth in their prospectuses and
registration statements filed with the United States Securities and
Exchange Commission (the "SEC").
(3) The Advisor agrees that it will maintain all required
records, memoranda, instructions or authorizations relating to the
acquisition or disposition of securities for the Portfolios.
(4) The Trust agrees that it will furnish to the Advisor any
information that the latter may reasonably request with respect to
the services performed or to be performed by the Advisor under this
Agreement.
(5) The Advisor is authorized to select the brokers or
dealers that will execute the purchases and sales of portfolio
securities for the Portfolios and is directed to use its best
efforts to obtain the best available price and most favorable
execution, except as prescribed herein. Subject to prior
authorization by the Board of appropriate policies and procedures,
and subject to termination at any time by the Board, the Advisor
may also be authorized to effect individual securities transactions
at commission rates in excess of the minimum commission rates
<PAGE>
PAGE 2
available, to the extent authorized by law, if the Advisor
determines in good faith that such amount of commission was
reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer, viewed in terms of
either that particular transaction or the Advisor's overall
responsibilities with respect to the Portfolios and other funds for
which it acts as investment advisor.
(6) It is understood and agreed that in furnishing the
Portfolios with the services as herein provided, neither the
Advisor nor any officer, director or agent thereof shall be held
liable to the Trust, a Portfolio or its creditors or unitholders
for errors of judgment or for anything except willful misfeasance,
bad faith, or gross negligence in the performance of its duties, or
reckless disregard of its obligations and duties under the terms of
this Agreement. It is further understood and agreed that the
Advisor may rely upon information furnished to it reasonably
believed to be accurate and reliable.
Part Two: COMPENSATION TO INVESTMENT MANAGER
(1) The Trust agrees to pay to the Advisor, and the Advisor
covenants and agrees to accept from each Portfolio in full payment
for the services furnished, a fee for each calendar day of each
year equal to the total of 1/365th (1/366th in each leap year) of
the amount computed as shown below. The computation shall be made
for each day on the basis of net assets as of the close of business
of the full business day two (2) business days prior to the day for
which the computation is being made. In the case of the suspension
of the computation of net asset value, the asset charge for each
day during such suspension shall be computed as of the close of
business on the last full business day on which the net assets were
computed. Net assets as of the close of a full business day shall
include all transactions in shares of the Portfolio recorded on the
books of the Portfolio for that day.
The asset charge shall be based on the net assets of each
Portfolio as set forth in the following table.
Tax-Free High Yield Portfolio
Assets Annual rate at
(billions) each asset level
First $1.0 0.490%
Next 1.0 0.465
Next 1.0 0.440
Next 3.0 0.415
Next 3.0 0.390
Over 9.0 0.360
(2) The fee shall be paid on a monthly basis and, in the
event of the termination of this Agreement, the fee accrued shall
be prorated on the basis of the number of days that this Agreement
is in effect during the month with respect to which such payment is
made.
(3) The fee provided for hereunder shall be paid in cash by
the Portfolios to the Advisor within five business days after the
last day of each month.
<PAGE>
PAGE 3
Part Three: ALLOCATION OF EXPENSES
(1) The Trust agrees to pay:
(a) Fees payable to the Advisor for its services under the
terms of this Agreement.
(b) Taxes.
(c) Brokerage commissions and charges in connection with the
purchase and sale of assets.
(d) Custodian fees and charges.
(e) Fees and charges of its independent certified public
accountants for services the Trust or Portfolios request.
(f) Premium on the bond required by Rule 17g-1 under the
Investment Company Act of 1940.
(g) Fees and expenses of attorneys (i) it employs in matters
not involving the assertion of a claim by a third party against the
Trust, its trustees and officers, (ii) it employs in conjunction
with a claim asserted by the Board against the Advisor except that
the Advisor shall reimburse the Trust for such fees and expenses if
it is ultimately determined by a court of competent jurisdiction,
or the Advisor agrees, that it is liable in whole or in part to the
Trust, and (iii) it employs to assert a claim against a third
party.
(h) Fees paid for the qualification and registration for
public sale of the securities of the Portfolios under the laws of
the United States and of the several states in which such
securities shall be offered for sale.
(i) Fees of consultants employed by the Trust or Portfolios.
(j) Trustees, officers and employees expenses which shall
include fees, salaries, memberships, dues, travel, seminars,
pension, profit sharing, and all other benefits paid to or provided
for trustees, officers and employees, trustees and officers
liability insurance, errors and omissions liability insurance,
worker's compensation insurance and other expenses applicable to
the trustees, officers and employees, except the Trust will not pay
any fees or expenses of any person who is an officer or employee of
the Advisor or its affiliates.
(k) Filing fees and charges incurred by the Trust in
connection with filing any amendment to its agreement or
declaration of Trust, or incurred in filing any other document with
the State of Massachusetts or its political subdivisions.
(l) Organizational expenses of the Trust.
(m) Expenses incurred in connection with lending portfolio
securities of the Portfolios.
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PAGE 4
(n) Expenses properly payable by the Trust or Portfolios,
approved by the Board.
(2) The Advisor agrees to pay all expenses associated with
the services it provides under the terms of this Agreement.
Part Four: MISCELLANEOUS
(1) The Advisor shall be deemed to be an independent
contractor and, except as expressly provided or authorized in this
Agreement, shall have no authority to act for or represent the
Trust or Portfolios.
(2) A "full business day" shall be as defined in the By-laws.
(3) The Trust and each Portfolio recognize that the Advisor
now renders and may continue to render investment advice and other
services to other investment companies and persons which may or may
not have investment policies and investments similar to those of
the Portfolios and that the Advisor manages its own investments
and/or those of its subsidiaries. The Advisor shall be free to
render such investment advice and other services and the Trust and
each Portfolio hereby consent thereto.
(4) Neither this Agreement nor any transaction made pursuant
hereto shall be invalidated or in any way affected by the fact that
trustees, officers, agents and/or unitholders of the Trust are or
may be interested in the Advisor or any successor or assignee
thereof, as directors, officers, stockholders or otherwise; that
directors, officers, stockholders or agents of the Advisor are or
may be interested in the Trust or Portfolios as trustees, officers,
unitholders, or otherwise; or that the Advisor or any successor or
assignee, is or may be interested in the Portfolios as unitholder
or otherwise, provided, however, that neither the Advisor nor any
officer, trustee or employee thereof or of the Trust, shall sell to
or buy from the Portfolios any property or security other than
units issued by the Portfolios, except in accordance with
applicable regulations or orders of the SEC.
(5) Any notice under this Agreement shall be given in
writing, addressed, and delivered, or mailed postpaid, to the party
to this Agreement entitled to receive such, at such party's
principal place of business in Minneapolis, Minnesota, or to such
other address as either party may designate in writing mailed to
the other.
(6) The Advisor agrees that no officer, director or employee
of the Advisor will deal for or on behalf of the Trust or
Portfolios with himself as principal or agent, or with any
corporation or partnership in which he may have a financial
interest, except that this shall not prohibit:
(a) Officers, directors or employees of the Advisor from
having a financial interest in the Portfolios or in the Advisor.
(b) The purchase of securities for the Portfolios, or the
sale of securities owned by the Portfolios, through a security
<PAGE>
PAGE 5
broker or dealer, one or more of whose partners, officers,
directors or employees is an officer, director or employee of the
Advisor provided such transactions are handled in the capacity of
broker only and provided commissions charged do not exceed
customary brokerage charges for such services.
(c) Transactions with the Portfolios by a broker- dealer
affiliate of the Advisor as may be allowed by rule or order of the
SEC, and if made pursuant to procedures adopted by the Board.
(7) The Advisor agrees that, except as herein otherwise
expressly provided or as may be permitted consistent with the use
of a broker-dealer affiliate of the Advisor under applicable
provisions of the federal securities laws, neither it nor any of
its officers, directors or employees shall at any time during the
period of this Agreement, make, accept or receive, directly or
indirectly, any fees, profits or emoluments of any character in
connection with the purchase or sale of securities (except shares
issued by the Portfolios) or other assets by or for the Trust or
Portfolios.
Part Five: RENEWAL AND TERMINATION
(1) This Agreement shall continue in effect for each
Portfolio until May 12, 1998, or until a new agreement is approved
by a vote of the majority of the outstanding units of each
Portfolio and by vote of the Trust's Board, including the vote
required by (b) of this paragraph, and if no new agreement is so
approved, this Agreement shall continue from year to year
thereafter unless and until terminated by either party as
hereinafter provided, except that such continuance shall be
specifically approved at least annually (a) by the Board or by a
vote of the majority of the outstanding units of the relevant
Portfolios and (b) by the vote of a majority of the trustees who
are not parties to this Agreement or interested persons of any such
party, cast in person at a meeting called for the purpose of voting
on such approval. As used in this paragraph, the term "interested
person" shall have the same meaning as set forth in the Investment
Company Act of 1940, as amended (the "1940 Act").
(2) This Agreement may be terminated by either the Trust on
behalf of a Portfolio or the Advisor at any time by giving the
other party 60 days' written notice of such intention to terminate,
provided that any termination shall be made without the payment of
any penalty, and provided further that termination may be effected
either by the Board or by a vote of the majority of the outstanding
voting units of the Portfolio. The vote of the majority of the
outstanding voting units of a Portfolio for the purpose of this
Part Five shall be the vote at a unitholders' regular meeting, or a
special meeting duly called for the purpose, of 67% or more of the
Portfolio's shares present at such meeting if the holders of more
than 50% of the outstanding voting units are present or represented
by proxy, or more than 50% of the outstanding voting units of the
Portfolio, whichever is less.
(3) This Agreement shall terminate in the event of its
assignment, the term "assignment" for this purpose having the same
meaning as set forth in the 1940 Act.
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PAGE 6
IN WITNESS THEREOF, the parties hereto have executed the
foregoing Agreement as of the day and year first above written.
TAX-FREE INCOME TRUST
Tax-Free High Yield Portfolio
By: /s/ Leslie L. Ogg
Leslie L. Ogg
Vice President
AMERICAN EXPRESS FINANCIAL CORPORATION
By: /s/ Richard W. Kling
Richard W. Kling
Senior Vice President
<PAGE>
PAGE 1
CUSTODIAN AGREEMENT
THIS CUSTODIAN AGREEMENT dated May 13, 1996, between Tax-Free
Income Trust, a Massachusetts business trust, (the "Trust"), on
behalf of its underlying portfolio, Tax-Free High Yield Portfolio
and First National Bank of Minneapolis, a corporation organized
under the laws of the United States of America with its principal
place of business at Minneapolis, Minnesota (hereinafter also
called the "Custodian").
WHEREAS, the Trust desires that its securities and cash be
hereafter held and administered by Custodian pursuant to the terms
of this Agreement.
NOW, THEREFORE, in consideration of the mutual agreements herein
made, the Trust and the Custodian agree as follows:
Section l. Definitions
The word "securities" as used herein shall be construed to include,
without being limited to, shares, stocks, treasury stocks,
including any stocks of this Trust, notes, bonds, debentures,
evidences of indebtedness, options to buy or sell stocks or stock
indexes, certificates of interest or participation in any profit-
sharing agreements, collateral trust certificates, preorganization
certificates or subscriptions, transferable shares, investment
contracts, voting trust certificates, certificates of deposit for a
security, fractional or undivided interests in oil, gas or other
mineral rights, or any certificates of interest or participation
in, temporary or interim certificates for, receipts for, guarantees
of, or warrants or rights to subscribe to or purchase any of the
foregoing, acceptances and other obligations and any evidence of
any right or interest in or to any cash, property or assets and any
interest or instrument commonly known as a security. In addition,
for the purpose of this Agreement, the word "securities" also shall
include other instruments in which the Trust may invest including
currency forward contracts and commodities such as interest rate or
index futures contracts, margin deposits on such contracts or
options on such contracts.
The words "custodian order" shall mean a request or direction,
including a computer printout, directed to the Custodian and
signed in the name of the Trust by any two individuals designated
in the current certified list referred to in Section 2.
The word "facsimile" shall mean an exact copy or likeness which is
electronically transmitted for instant reproduction.
Section 2. Names, Titles and Signatures of Authorized Persons
The Trust will certify to the Custodian the names and signatures of
its present officers and other designated persons authorized on
behalf of the Trust to direct the Custodian by custodian order as
hereinbefore defined. The Trust agrees that whenever any change
<PAGE>
PAGE 2
occurs in this list it will file with the Custodian a copy of a
resolution certified by the Secretary or an Assistant Secretary of
the Trust as having been duly adopted by the Board of Directors or
the Executive Committee of the Board of Directors of the Trust
designating those persons currently authorized on behalf of the
Trust to direct the Custodian by custodian order, as hereinbefore
defined, and upon such filing (to be accompanied by the filing of
specimen signatures of the designated persons) the persons so
designated in said resolution shall constitute the current
certified list. The Custodian is authorized to rely and act upon
the names and signatures of the individuals as they appear in the
most recent certified list from the Trust which has been delivered
to the Custodian as hereinabove provided.
Section 3. Use of Subcustodians
The Custodian may make arrangements, where appropriate, with other
banks having not less than two million dollars aggregate capital,
surplus and undivided profits for the custody of securities and
cash.
The Custodian also may enter into arrangements for the custody of
"Foreign Securities" and cash entrusted to its care through
"Eligible Foreign Custodian," as those terms are defined by Rule
17f-5 under the Investment Company Act of 1940 (the "Act"), or such
other entity as permitted by the Securities and Exchange Commission
(the "SEC") (such Eligible Foreign Custodians, collectively,
"Foreign Custodial Agents") provided, if required by the SEC, that
the Board has given its prior approval to the use of, and
Custodian's contract with, each Foreign Custodial Agent by
resolution, and a certified copy of such resolution has been
provided to the Custodian. To the extent the provisions of this
Agreement are consistent with the requirements of the Act, rules,
orders or no-action letters of the SEC, they shall apply to all
such foreign custodianships. To the extent such provisions are
inconsistent with or additional requirements are established by the
Act or such rules, orders or no-action letters, the requirements of
the Act or such rules, orders or no-action letters will prevail and
the parties will adhere to such requirements; provided, however, in
the absence of notification from the Trust of any changes or
additions to such requirements, the Custodian shall have no duty or
responsibility to inquire as to any such changes or additions.
All subcustodians of the Custodian (such subcustodians,
collectively, the "Subcustodians"), including all Foreign Custodial
Agents, shall be subject to the instructions of the Custodian and
not to those of the Trust and shall act solely as agent of the
Custodian.
Section 4. Receipt and Disbursement of Money
(1) The Custodian shall open and maintain a separate account or
accounts in the name of the Trust and cause any Subcustodians to
open and maintain such account or accounts, subject only to checks,
drafts or directives by the Custodian or such Subcustodian pursuant
to the terms of this Agreement. The Custodian or such Subcustodian
<PAGE>
PAGE 3
shall hold in such account or accounts, subject to the provisions
hereof, all cash received by it from or for the account of the
Trust. The Custodian or such Subcustodian shall make payments of
cash to or for the account of the Trust from such cash only:
(a) for the purchase of securities for the portfolio of the
Trust upon the receipt of such securities by the
Custodian or such Subcustodian;
(b) for the purchase or redemption of shares of capital
stock of the Trust;
(c) for the payment of interest, dividends, taxes,
management fees, or operating expenses (including,
without limitation thereto, fees for legal, accounting
and auditing services);
(d) for payment of distribution fees, commissions, or
redemption fees, if any;
(e) for payments in connection with the conversion,
exchange or surrender of securities owned or subscribed
to by the Trust held by or to be delivered to the
Custodian;
(f) for payments in connection with the return of
securities loaned by the Trust upon receipt of such
securities or the reduction of collateral upon receipt
of proper notice;
(g) for payments for other proper corporate purposes; or
(h) upon the termination of this Agreement.
Before making any such payment for the purposes permitted under the
terms of items (a), (b), (c), (d), (e), (f) or (g) of paragraph (1)
of this section, the Custodian shall receive and may rely upon a
custodian order directing such payment and stating that the payment
is for such a purpose permitted under these items (a), (b), (c),
(d), (e), (f) or (g) and that in respect to item (g), a copy of a
resolution of the Board of Directors or of the Executive Committee
of the Board of Directors of the Trust signed by an officer of the
Trust and certified by its Secretary or an Assistant Secretary,
specifying the amount of such payment, setting forth the purpose to
be a proper corporate purpose, and naming the person or persons to
whom such payment is made. Notwithstanding the above, for the
purposes permitted under items (a) or (f) of paragraph (1) of this
section, the Custodian may rely upon a facsimile order.
(2) The Custodian is hereby appointed the attorney-in-fact of the
Trust to endorse and collect all checks, drafts or other orders
for the payment of money received by the Custodian for the account
of the Trust and drawn on or to the order of the Trust and to
deposit same to the account of the Trust pursuant to this
Agreement.
<PAGE>
PAGE 4
(3) Subject to the prior authorization provisions of Section 3 of
this Agreement, the Trust authorizes the Custodian to establish and
maintain in each country or other jurisdiction in which the
principal trading market for any Foreign Securities is located, or
in which any Foreign Securities are to be presented for payment, an
account or accounts which may include nostro accounts with
Custodian branches and omnibus accounts of Custodian at Foreign
Custodial Agents for receipt of cash in such currencies as directed
by custodian order. For purposes of this Agreement, cash so held
in any such account shall be evidenced by separate book entries
maintained by Custodian and shall be deemed to be cash held by
Custodian. Cash received or credited by Custodian or any Custodian
branch or any Foreign Custodial Agent in a currency other than
United States dollars shall be maintained in such currency and
shall not be converted or remitted except in accordance with the
custodian order, except as permitted by Section 7.
Section 5. Receipt of Securities
Except as permitted by the second paragraph of this section, the
Custodian shall, and shall cause any Subcustodians to, hold in a
separate account or accounts, and physically segregated at all
times from those of any other persons, firms or corporations,
pursuant to the provisions hereof, all securities and cash received
for the account of the Trust. The Custodian shall, and shall cause
any Subcustodians to, record and maintain a record of all
certificate numbers. Securities so received shall be held in the
name of the Trust, in the name of an exclusive nominee duly
appointed by the Custodian or such Subcustodian, or in bearer form,
as appropriate.
Subject to such rules, regulations or guidelines as the SEC may
adopt, the Custodian may deposit all or any part of the securities
owned by the Trust in a securities depository which includes any
system for the central handling of securities established by a
national securities exchange or a national securities association
registered with the SEC under the Securities Exchange Act of 1934,
or such other person as may be permitted by the SEC, pursuant to
which system all securities of any particular class or series of
any issuer deposited within the system are treated as fungible and
may be transferred or pledged by bookkeeping entry without physical
delivery of such securities.
All securities are to be held or disposed of by the Custodian for,
and subject at all times to the instructions of, the Trust pursuant
to the terms of this Agreement. The Custodian shall have no power
or authority to assign, hypothecate, pledge or otherwise dispose of
any such securities, except pursuant to the directive of the Trust
and only for the account of the Trust as set forth in Section 6 of
this Agreement.
<PAGE>
PAGE 5
Section 6. Transfer Exchange, Delivery, etc. of Securities
The Custodian shall have sole power to release or deliver any
securities of the Trust held by it pursuant to this Agreement. The
Custodian agrees to transfer, exchange or deliver securities held
by it or any Subcustodian only:
(a) for sales of such securities for the account of the Trust,
upon receipt of payment therefor;
(b) when such securities are called, redeemed, retired or
otherwise become payable;
(c) for examination upon the sale of any such securities in
accordance with "street delivery" custom which would include
delivery against interim receipts or other proper delivery
receipts;
(d) in exchange for or upon conversion into other securities alone
or other securities and cash whether pursuant to any plan of
merger, consolidation, reorganization, recapitalization or
readjustment, or otherwise;
(e) for the purpose of exchanging interim receipts or temporary
certificates for permanent certificates;
(f) upon conversion of such securities pursuant to their terms
into other securities;
(g) upon exercise of subscription, purchase or other similar
rights represented by such securities;
(h) for loans of such securities by the Trust upon receipt of
collateral; or
(i) for other proper corporate purposes.
As to any deliveries made by the Custodian pursuant to items (a),
(b), (c), (d), (e), (f), (g) and (h), securities or cash received
in exchange therefore shall be delivered to the Custodian, a
Subcustodian, or to a securities depository. Before making any
such transfer, exchange or delivery, the Custodian shall receive a
custodian order or a facsimile from the Trust requesting such
transfer, exchange or delivery and stating that it is for a purpose
permitted under this section (whenever a facsimile is utilized, the
Trust will also deliver an original signed custodian order) and, in
respect to item (i), a copy of a resolution of the Board of
Directors or of the Executive Committee of the Board of Directors
of the Trust signed by an officer of the Trust and certified by its
Secretary or an Assistant Secretary, specifying the securities,
setting forth the purpose for which such payment, transfer,
exchange or delivery is to be made, declaring such
<PAGE>
PAGE 6
purpose to be a proper corporate purpose, and naming the person or
persons to whom such transfer, exchange or delivery of such
securities shall be made.
Section 7. Custodian's Acts Without Instructions
Unless and until the Custodian receives a contrary custodian order
from the Trust, the Custodian shall or shall cause a Subcustodian
to:
(a) present for payment all coupons and other income items held by
the Custodian or such Subcustodian for the account of the
Trust which call for payment upon presentation and hold all
cash received by it upon such payment for the account of the
Trust;
(b) present for payment all securities held by it or such
Subcustodian which mature or when called, redeemed, retired or
otherwise become payable;
(c) ascertain all stock dividends, rights and similar securities
to be issued with respect to any securities other than Foreign
Securities;
(d) collect and hold for the account of the Trust all stock
dividends, rights and similar securities issued with respect
to any securities;
(e) ascertain all interest and cash dividends to be paid to
security holders with respect to any securities other than
Foreign Securities;
(f) collect and hold all interest and cash dividends for the
account of the Trust;
(g) present for exchange securities converted pursuant to their
terms into other securities;
(h) exchange interim receipts or temporary securities for
definitive securities;
(i) execute in the name of the Trust such ownership and other
certificates as may be required to obtain payments in respect
thereto, provided that the Trust shall have furnished to the
Custodian or such Subcustodian any information necessary in
connection with such certificates; and
(j) convert interest and dividends received with respect to
Foreign Securities into United States dollars whenever it is
practicable to do so through customary banking channels,
including the Custodian's own banking facilities.
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PAGE 7
Section 8. Settlement Procedures
Settlement procedures for transactions in Foreign Securities,
including receipts and payments of cash held in any nostro account
or omnibus account, shall be carried out in accordance with
instructions in the operational manual provided by the Custodian
(the "Operational Manual"). It is understood that such settlement
procedures may vary, as provided in the Operational Manual, from
securities market to securities market, to reflect particular
settlement practices in such markets.
With respect to any transaction involving Foreign Securities, the
Custodian or any Subcustodian in its discretion may cause the Trust
to be credited on the contractual settlement date with proceeds of
any sale or exchange of Foreign Securities and to be debited on the
contractual settlement date for the cost of Foreign Securities
purchased or acquired. The Custodian may reverse any such credit
or debit if the transaction with respect to which such credit or
debit was made fails to settle within a reasonable period,
determined by the Custodian in its discretion, after the
contractual settlement date except that if any Foreign Securities
delivered pursuant to this section are returned by the recipient
thereof, the Custodian may cause any such credits and debits to be
reversed at any time. With respect to any transactions as to which
the Custodian does not determine so to credit or debit the Trust,
the proceeds from the sale or exchange of Foreign Securities will
be credited and the cost of such Foreign Securities purchased or
acquired will be debited on the date such proceeds or Foreign
Securities are received by the Custodian.
Notwithstanding the preceding paragraph, settlement, payment and
delivery for Foreign Securities may be effected in accordance with
the customary or established securities trading or securities
processing practices and procedures in the jurisdiction or market
in which the transaction occurs, including, without limitation,
delivering Foreign Securities to the purchaser thereof or to a
dealer therefor against a receipt with the exception of receiving
later payment for such Foreign Securities from such purchaser or
dealer.
Section 9. Records
The Custodian hereby agrees that it shall create, maintain, and
retain all records relating to its activities and obligations under
this Agreement in such manner as will meet their obligations under
this Agreement and the obligations of the Trust under the Act,
particularly Section 31 thereof and Rules 31a-1 and 31a-2
thereunder and Section 17(f) thereof and the rules thereunder, and
applicable federal, state and foreign tax laws and other laws or
administrative rules or procedures, in each case as currently in
effect, which may be applicable to the Trust. All records so
maintained in connection with the performance of its duties under
this Agreement shall remain the property of the Trust and, in
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PAGE 8
the event of termination of this Agreement, shall be delivered in
accordance with the provisions of this Agreement.
(a) With respect to securities and cash held by the Custodian's
branches, such securities and cash may be placed in an omnibus
account for the customers of the Custodian, and the Custodian
shall maintain separate book entry records for each such
omnibus account.
(b) With respect to securities and cash deposited by the Custodian
with a Foreign Custodial Agent, the Custodian shall indemnify
on its books as belonging to the Trust the securities and cash
shown on the Custodian's account on the books of such Foreign
Custodial Agent.
(c) With respect to securities and cash deposited with a
securities depository or clearing agency, incorporated or
organized under the laws of a country other than the United
States, which operates the central system for handling of
securities or equivalent book-entries in that country or which
operates a transnational system for the central handling or
securities or equivalent book-entries (on "Eligible Foreign
Securities Depository"), the Custodian shall cause the
securities and cash shown on the account on the books of the
Eligible Foreign Securities Depository to be identified as
belonging to the Custodian as agent for the Trust.
The Custodian hereby agrees that the books and records of the
Custodian (including any Custodian branch) pertaining to its
actions under this Agreement shall be open to the physical, on-
premises inspection and audit by the independent accountant (the
"Accountant") employed by, or other representatives of, the Trust,
and, upon the request of the Accountant, confirmation of the
contents of those records shall be provided by the Custodian. The
Custodian shall use its best efforts to cause any Foreign Custodial
Agent to afford access to the Accountant to the books and records
of such Foreign Custodial Agent with respect to securities and cash
held by such Foreign Custodial Agent for the Trust. the Custodian
also agrees to furnish the Accountant with such reports of the
Custodian's (including any Custodian branches') auditors as they
relate to the services provided under this Agreement and as are
necessary for the Accountant to conduct its examination of the
books and records pertaining to affairs of the Trust, and the
Custodian shall use its best efforts to obtain and furnish similar
reports of any Foreign Custodial Agent holding securities and cash
for the Trust.
Section 10. Registration of Securities
Securities which are ordinarily held in registered form may be
registered in the name of the Custodian's nominee or, as to any
securities in the physical possession of an entity other than the
Custodian, in the name of such entity's nominee. The Trust
<PAGE>
PAGE 9
agrees to hold any such nominee harmless from any liability as a
holder of record of such securities. The Custodian may without
notice to the Trust cause any such securities to cease to be
registered in the name of any such nominee and to be registered in
the name of the Trust. In the event that any security registered
in the name of the Custodian's nominee or held by any Subcustodians
and registered in the name of such Subcustodian's nominee is called
for partial redemption by the issuer of such security, the
Custodian may allot, or cause to be allotted, the called portion to
the respective beneficial holders of such class of security in any
manner the Custodian deems to be fair and equitable.
Section 11. Transfer Taxes
The Trust shall pay or reimburse the Custodian and any Subcustodian
for any transfer taxes payable upon transfers of securities made
hereunder, including transfers resulting from the termination of
this Agreement. The Custodian shall, and shall use its best
efforts to cause any Subcustodian to, execute such certificates in
connection with securities delivered to it under this Agreement as
may be required, under any applicable law or regulation, to exempt
from taxation any transfers and/or deliveries of any such
securities which may be entitled to such exemption.
Section 12. Voting and Other Action
Neither the Custodian or any Subcustodian nor any nominee of the
Custodian or such Subcustodian shall vote any of the securities
held hereunder by or for the account of the Trust. The Custodian
shall, and shall use its best efforts to cause any Subcustodian to,
promptly deliver to the Trust all notices, proxies and proxy
soliciting materials with relation to such securities, such proxies
to be executed by the registered holder of such securities (if
registered otherwise than in the name of the Trust), but without
indicating the manner in which such proxies are to be voted.
The Custodian shall, and shall use its best efforts to cause any
Subcustodian to, transmit promptly to the Trust all written
information (including, without limitation, pendency of calls and
maturities of securities and expirations of rights in connection
therewith) received by the Custodian or such Subcustodian from
issuers of the securities being held for the Trust. With respect
to tender or exchange offers, the Custodian shall, and shall use
its best efforts to cause any Subcustodian to, transmit promptly to
the Trust all written information received by the Custodian or such
Subcustodian from issuers of the securities whose tender or
exchange is sought and from the party (or his agents) making the
tender or exchange offer.
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PAGE 10
Section 13. Custodian's Reports
The Custodian shall furnish the Trust as of the close of business
each day a statement showing all transactions and entries for the
account of the Trust. The books and records of the Custodian
pertaining to its actions as Custodian under this Agreement and
securities held hereunder by the Custodian shall be open to
inspection and audit by officers of the Trust, internal auditors
employed by the Trust's investment adviser, and independent
auditors employed by the Trust. The Custodian shall furnish the
Trust in such form as may reasonably be requested by the Trust a
report, including a list of the securities held by it in custody
for the account of the Trust, identification of any subcustodian,
and identification of such securities held by such subcustodian, as
of the close of business of the last business day of each month,
which shall be certified by a duly authorized officer of the
Custodian. It is further understood that additional reports may
from time to time be requested by the Trust. Should any report
ever be filed with any governmental authority pertaining to lost or
stolen securities, the Custodian will concurrently provide the
Trust with a copy of that report.
The Custodian also shall furnish such reports on its systems of
internal accounting control as the Trust may reasonably request
from time to time.
Section 14. Security Interest, Liens and Transfers of Beneficial
Ownership
The securities and cash held by the Custodian hereunder shall not
be subject to any right, change, security interest, lien or claim
of any kind in favor of the Custodian or its creditors, except a
claim of payment for their safe custody or administration, and
beneficial ownership of such securities and cash shall be freely
transferable without the payment of money or value other than for
safe custody or administration. Any agreement the Custodian shall
enter into with any Subcustodian, including any Foreign Custodial
Agent, shall contain a provision which is substantially identical
to the foregoing.
In the event that there shall be asserted any attachment or lien on
or against any securities or cash held in any omnibus account or
nostro account referred to in this Agreement which results from any
claim against the Custodian (including any branch) or any such
account, which is not directly related to transactions in
securities or cash for the Trust, the Custodian will use its best
efforts promptly to discharge such attachment or lien. If the
Custodian shall not have discharged such attachment or lien within
five business days, it shall notify the Trust of the existence of
the attachment or lien. If the attachment or lien is not
discharged on the date required for delivery or payment with
respect to any securities or cash in accordance with the provisions
of the Operation Manual:
<PAGE>
PAGE 11
(a) in the case of such securities, at the option of the Trust,
the Custodian shall either immediately transfer to the Trust a like
amount of such securities (provided the same shall be reasonably
available) or immediately transfer an amount in United States
dollars equal to the market value of such securities, valued in
accordance with such procedures as may be mutually agreed to by the
parties thereto;
(b) in the case of cash, the Custodian shall immediately transfer
to the Trust an equal amount of cash in United States dollars.
Section 15. Compensation
For its services hereunder the Custodian shall be paid such
compensation and out-of-pocket or incidental expenses at such times
as may from time to time be agreed on in writing by the parties
hereto in a Custodian Fee Agreement.
Section 16. Standard of Care
The Custodian shall not be liable for any action taken in good
faith upon any custodian order or facsimile herein described or
certified copy of any resolution of the Board of Directors or of
the Executive Committee of the Board of Directors of the Trust, and
may rely on the genuineness of any such document which it may in
good faith believe to have been validly executed.
The Trust agrees to indemnify and hold harmless the Custodian, any
Subcustodian, or any nominee thereof from all taxes, charges,
expenses, assessments, claims and liabilities (including counsel
fees) incurred or assessed against any such entity in connection
with the performance of this Agreement, except such as may arise
from such entity's own negligent action, negligent failure to act
or willful misconduct. The Custodian is authorized to charge any
account of the Trust for such items. In the event of any advance
of cash for any purpose made by the Custodian resulting from orders
or instructions of the Trust, or in the event that the Custodian or
any nominee thereof shall incur or be assessed any taxes, charges,
expenses, assessments, claims or liabilities in connection with the
performance of this Agreement, except such as may arise from such
entity's own negligent action, negligent failure to act or willful
misconduct, any property at any time held for the account of the
Trust shall be security therefor.
The Custodian shall maintain a standard of care equivalent to that
which would be required of a bailee for hire and shall not be
liable for any loss or damage to the Trust resulting from
participation in a securities depository unless such loss or damage
arises by reason of any negligence, misfeasance, or willful
misconduct of officers or employees of the Custodian, or from its
<PAGE>
PAGE 12
failure to enforce effectively such rights as it may have against
any securities depository or from use of a Subcustodian, unless
such loss or damage arises by reason of any negligence, mis-
feasance, or willful misconduct of officers or employees of the
Custodian, or from its failure to enforce effectively such rights
as it may have against such Subcustodian. Anything in the
foregoing to the contrary notwithstanding, the Custodian shall
exercise, in the performance of its obligations undertaken or
reasonably assumed with respect to this Agreement, including the
recommendation to the Board of Foreign Custodial Agents, reasonable
care, for which the Custodian shall be responsible to the same
extent as if it were performing such duties directly and holding
such securities and cash in Minnesota, United States of America.
The Custodian shall be indemnified and held harmless by the Trust
from and against any loss or liability for any action taken or
omitted to be taken hereunder in good faith upon custodian order
and may rely on the genuineness of all such orders and documents as
it in good faith believes to have been validly executed. The
Custodian shall be responsible for the securities and cash held by
or deposited with any Subcustodian to the same extent as if such
securities and cash were directly held by or deposited with the
Custodian. The Custodian hereby agrees that it shall indemnify and
hold the Trust harmless from and against any loss which shall occur
as a result of the failure of a foreign Custodial Agent holding the
securities and cash to exercise reasonable care with respect to the
safekeeping of such securities and cash to the extent that the
Custodian would be required to indemnify and hold the Trust
harmless if the Custodian were itself holding such securities and
cash in Minnesota. It is also understood that the Custodian shall
not have liability for loss except by reason of the Custodian's
negligence, fraud or willful misconduct, or by reason of
negligence, fraud or willful misconduct of any Subcustodian holding
such securities or cash for the Trust.
The Custodian warrants that the established procedures to be
followed by any Subcustodian, in the opinion of the Custodian after
due inquiry, afford protection for such securities and cash at
least equal to that afforded by the Custodian's established
procedures with respect to similar securities and cash held by the
Custodian (including its securities depositories) in Minnesota.
However, the Custodian shall have no liability for any loss or
liability occasioned by delay in the actual receipt by it or any
Subcustodian of notice of any payment, redemption, or other
transaction regarding securities unless such delay is a result of
its own negligence, fraud, or willful misconduct.
The Custodian shall not be responsible for any loss of the Trust,
or to take any action with respect to any attachment or lien on any
omnibus account or nostro account, except as provided in Section 14
of this Agreement, in such loss, attachment or lien arises by
reason of any cause or circumstances beyond the control of the
Custodian, including acts of civil or military
<PAGE>
PAGE 13
authority, expropriation, national emergency, acts of God,
insurrection, war, riots, or failure of transportation,
communication or power supply, or the failure of any person, firm
or corporation (other than the Custodian or any Subcustodian acting
on behalf of the Custodian) to perform any obligation if such
failure results in any such loss.
Section 17. Insurance
The Custodian represents and warrants that it presently maintains
and shall maintain for the duration of this Agreement a bankers'
blanket bond (the "Bond") which provides standard fidelity and non-
negligent loss coverage with respect to securities and cash which
may be held by the Custodian and securities and cash which may be
held by any Subcustodian which may be utilized by the Custodian
pursuant to this Agreement. The Custodian agrees that, if at any
time the Custodian for any reason discontinues such coverage, it
shall immediately notify the Trust in writing. The Custodian
represents that only the named insured on the Bond, which includes
the Custodian but not any of its customers, is directly protected
against loss. The Custodian represents that while it might resist
a claim of one of its customers to recover for a loss not covered
by the Bond, as a practical matter, where a claim is brought and a
loss is possibly covered by the Bond, the Custodian would give
notice of the claim to its insurer, and the insurer would normally
determine whether to defend the claim against the Custodian or to
pay the claim on behalf of the Custodian.
The Custodian also represents that it does not intend to obtain any
insurance for the benefit of the Trust which protects against the
imposition of the proceeds of sale of any securities or against
confiscation, expropriation or nationalization of any securities or
the assets of the issuer of such securities by a government or any
foreign country in which the issuer of such securities is organized
or in which securities are held for safekeeping either by the
Custodian or any Subcustodian in such country. The Custodian
represents that it has discussed the availability of expropriation
insurance with the Trust. The Custodian also represents that it
has advised the Trust as to its understanding of the position of
the Staff of the SEC that any investment company investing in
securities of foreign issuers has the responsibility for reviewing
the possibility of the imposition of exchange control restrictions
which would affect the liquidity of such investment company's
assets and the possibility of exposure to political risk, including
the appropriateness of insuring against such risk. The Custodian
represents that the Trust has acknowledged that it has the
responsibility to review the possibility of such risks and what, if
any, action should be taken.
Section 18. Termination and Amendment of Agreement
The Trust and the Custodian mutually may agree from time to time in
writing to amend, to add to, or to delete from any provision of
this Agreement.
<PAGE>
PAGE 14
The Custodian may terminate this Agreement by giving the Trust
ninety days' written notice of such termination by registered mail
addressed to the Trust at its principal place of business.
The Trust may terminate this Agreement at any time by written
notice thereof delivered, together with a copy of the resolution of
the Board of Directors authorizing such termination and certified
by the Secretary of the Trust, by registered mail to the Custodian.
Upon such termination of this Agreement, assets of the Trust held
by the Custodian shall be delivered by the Custodian to a successor
custodian, if one has been appointed by the Trust, upon receipt by
the Custodian of a copy of the resolution of the Board of Directors
of the Trust certified by the Secretary, showing appointment of the
successor custodian, and provided that such successor custodian is
a bank or trust company, organized under the laws of the United
States or of any State of the United States, having not less than
two million dollars aggregate capital, surplus and undivided
profits. Upon the termination of this Agreement as a part of the
transfer of assets, either to a successor custodian or otherwise,
the Custodian will deliver securities held by it hereunder, when so
authorized and directed by resolution of the Board of Directors of
the Trust, to a duly appointed agent of the successor custodian or
to the appropriate transfer agents for transfer of registration and
delivery as directed. Delivery of assets on termination of this
Agreement shall be effected in a reasonable, expeditious and
orderly manner; and in order to accomplish an orderly transition
from the Custodian to the successor custodian, the Custodian shall
continue to act as such under this Agreement as to assets in its
possession or control. Termination as to each security shall
become effective upon delivery to the successor custodian, its
agent, or to a transfer agent for a specific security for the
account of the successor custodian, and such delivery shall
constitute effective delivery by the Custodian to the successor
under this Agreement.
In addition to the means of termination hereinbefore authorized,
this Agreement may be terminated at any time by the vote of a
majority of the outstanding shares of the Trust and after written
notice of such action to the Custodian.
Section 19. Limitations of Liability of the Trustees and
Unitholders of Trust
A copy of the Declaration of Trust, dated October 2, 1995, together
with all amendments, is on file in the office of the Secretary of
State of the Commonwealth of Massachusetts. The execution and
delivery of this Agreement have been authorized by the Trustees and
the Agreement has been signed by an authorized officer of the
Trust. It is expressly agreed that the obligations of the Trust
under this Agreement shall not be binding upon any of the Trustees,
unitholders, nominees, officers, agents or employees of the Trust,
personally, but bind only the assets and property of the Trust, as
provided in the Declaration of Trust.
<PAGE>
PAGE 15
Section 20. General
Nothing expressed or mentioned in or to be implied from any
provision of this Agreement is intended to, or shall be construed
to give any person or corporation other than the parties hereto,
any legal or equitable right, remedy or claim under or in respect
of this Agreement, or any covenant, condition or provision herein
contained, this Agreement and all of the covenants, conditions and
provisions hereof being intended to be and being for the sole and
exclusive benefit of the parties hereto and their respective
successors and assigns.
This Agreement shall be governed by the laws of the State of
Minnesota.
TAX-FREE INCOME TRUST
Tax-Free High Yield Portfolio
By /s/ Leslie L. Ogg
Leslie L. Ogg
Vice President
FIRST NATIONAL BANK OF MINNEAPOLIS
By /s/ Robert Spies
Robert Spies
Vice President
<PAGE>
PAGE 1
TRANSFER AGENCY AND ADMINISTRATIVE SERVICES AGREEMENT
AGREEMENT dated as of May 13, 1996, between Tax-Free Income Trust,
a Massachusetts business trust, (the "Trust"), on behalf of its
underlying portfolio, and American Express Financial Corporation
(the "Transfer Agent"), a Delaware corporation.
In consideration of the mutual promises set forth below, the Trust
and the Transfer Agent agree as follows:
1. Appointment of the Transfer Agent. The Trust hereby appoints the
Transfer Agent, as transfer agent for its units and as
administrator for the Trust, and the Transfer Agent accepts such
appointment and agrees to perform the duties set forth below.
2. Compensation. The Trust will compensate the Transfer Agent for
the performance of its obligations as set forth in Schedule A.
Schedule A does not include out-of- pocket disbursements of the
Transfer Agent for which the Transfer Agent shall be entitled to
bill the Trust separately.
The Transfer Agent will bill the Trust annually. The fee provided
for hereunder shall be paid in cash by the Trust to the Transfer
Agent within five (5) business days after the last day of each
calendar year.
Out-of-pocket disbursements shall include, but shall not be limited
to, the items specified in Schedule B. Reimbursement by the Trust
for expenses incurred by the Transfer Agent in any month shall be
made as soon as practicable after the receipt of an itemized bill
from the Transfer Agent.
Any compensation jointly agreed to hereunder may be adjusted from
time to time by attaching to this Agreement a revised Schedule A,
dated and signed by an officer of each party.
3. Documents. The Trust will furnish from time to time such
certificates, documents or opinions as the Transfer Agent deems to
be appropriate or necessary for the proper performance of its
duties.
4. Representations of the Trust and the Transfer Agent.
(a) The Trust represents to the Transfer Agent that all outstanding
units are validly issued, fully paid and non-assessable by the
Trust. When units are hereafter issued in accordance with the
terms of the Trust's Declaration of Trust and its Registration
Statement, such units shall be validly issued, fully paid and non-
assessable by the Trust.
(b) The Transfer Agent represents that it is registered under
Section 17A(c) of the Securities Exchange Act of 1934. The
Transfer Agent agrees to maintain the necessary facilities,
equipment and personnel to perform its duties and obligations under
this agreement and to comply with all applicable laws.
<PAGE>
PAGE 2
5. Duties of the Transfer Agent. The Transfer Agent shall be
responsible, separately and through its subsidiaries or affiliates,
for the following functions:
(a) Sale of Trust Units.
(1) On receipt of an application and payment, wired instructions
and payment, or payment identified as being for the account of a
unitholder, the Transfer Agent will deposit the payment, prepare
and present the necessary report to the Custodian and record the
purchase of units in a timely fashion in accordance with the terms
of the prospectus. All units shall be held in book entry form and
no certificate shall be issued unless the Trust is permitted to do
so by the prospectus and the purchaser so requests.
(2) On receipt of notice that payment was dishonored, the Transfer
Agent shall stop redemptions of all units owned by the purchaser
related to that payment and take such other action as it deems
appropriate.
(b) Redemption of Trust Units. On receipt of instructions to redeem
units in accordance with the terms of the Trust's Registration
Statement, the Transfer Agent will record the redemption of units
of the Trust, prepare and present the necessary report to the
Custodian and pay the proceeds of the redemption to the unitholder,
an authorized agent or legal representat ive upon the receipt of
the monies from the Custodian.
(c) Transfer or Other Change Pertaining to Trust Units. On receipt
of instructions or forms acceptable to the Transfer Agent to
transfer the units to the name of a new owner, change the name or
address of the present owner or take other legal action, the
Transfer Agent will take such action as is requested.
(d) Right to Seek Assurance. The Transfer Agent may refuse to
transfer, exchange or redeem units of the Trust or take any action
requested by a unitholder until it is satisfied that the requested
transaction or action is legally authorized or until it is
satisfied there is no basis for any claims adverse to the
transaction or action. It may rely on the provisions of the
Uniform Act for the Simplification of Fiduciary Security Transfers
or the Uniform Commercial Code. The Trust shall indemnify the
Transfer Agent for any act done or omitted to be done in reliance
on such laws or for refusing to transfer, exchange or redeem units
or taking any requested action if it acts on a good faith belief
that the transaction or action is illegal or unauthorized.
(e) Unitholder Records, Reports and Services.
(1) The Transfer Agent shall maintain all unitholder accounts,
which shall contain all required tax, legally imposed and
regulatory information; shall provide unitholders, and file with
federal and state agencies, all required tax and other reports
pertaining to unitholder accounts; shall prepare unitholder mailing
lists; shall cause to be delivered all required prospectuses,
<PAGE>
PAGE 3
annual reports, semiannual reports, statements of additional
information (upon request), proxies and other mailings to
unitholders; and shall cause proxies to be tabulated.
(2) The Transfer Agent shall respond to all valid inquiries related
to its duties under this Agreement.
(3) The Transfer Agent shall create and maintain all records in
accordance with all applicable laws, rules and regulations,
including, but not limited to, the records required by Section
31(a) of the Investment Company Act of 1940.
(f) Distributions. The Transfer Agent shall prepare and present the
necessary report to the Custodian and shall cause to be prepared
and transmitted the payment of income dividends and capital gains
distributions or cause to be recorded the investment of such
dividends and distributions in additional units of the Trust or as
directed by instructions or forms acceptable to the Transfer Agent.
(g) Confirmations and Statements. The Transfer Agent shall confirm
each transaction through periodic reports as may be legally
permitted.
(h) Reports to the Trust. The Transfer Agent will provide reports
pertaining to the services provided under this Agreement as the
Trust may request to ascertain the quality and level of services
being provided or as required by law.
(i) Administrative Services. The Transfer Agent will provide all
administrative, accounting, clerical, statistical, correspondence,
corporate and all other services of whatever nature required in
connection with the administration of the Trust.
(j) Other Duties. The Transfer Agent may perform other duties for
additional compensation if agreed to in writing by the parties to
this Agreement.
6. Ownership of Records. The Transfer Agent agrees that all records
prepared or maintained by it relating to the services to be
performed by it under the terms of this Agreement are the property
of the Trust and may be inspected by the Trust or any person
retained by the Trust at reasonable times.
7. Action by Board of Trustees (the "Board") and Opinion of the
Trust's Counsel. The Transfer Agent may rely on resolutions of the
Board or the Executive Committee of the Board and on opinion of
counsel for the Trust.
8. Duty of Care. It is understood and agreed that, in furnishing
the Trust with the services as herein provided, neither the
Transfer Agent, nor any officer, trustee or agent thereof shall be
held liable for any loss arising out of or in connection with their
actions under this Agreement so long as they act in good faith and
with due diligence, and are not negligent or guilty of any willful
misconduct. It is further understood and agreed that the Transfer
Agent may rely upon information furnished to it reasonably believed
<PAGE>
PAGE 4
to be accurate and reliable. In the event the Transfer Agent is
unable to perform its obligations under the terms of this Agreement
because of an act of God, strike or equipment or transmission
failure reasonably beyond its control, the Transfer Agent shall not
be liable for any damages resulting from such failure.
9. Term and Termination. This Agreement shall become effective on
the date first set forth above (the "Effective Date") and shall
continue in effect from year to year thereafter as the parties may
mutually agree; provided that either party may terminate this
Agreement by giving the other party notice in writing specifying
the date of such termination, which shall be not less than 60 days
after the date of receipt of such notice. In the event such notice
is given by the Trust, it shall be accompanied by a vote of the
Board, certified by the Secretary, electing to terminate this
Agreement and designating a successor transfer agent or transfer
agents. Upon such termination and at the expense of the Trust, the
Transfer Agent will deliver to such successor a certified list of
unitholders of the Trust (with name, address and taxpayer
identification or Social Security number), a historical record of
the account of each unitholder and the status thereof, and all
other relevant books, records, correspondence, and other data
established or maintained by the Transfer Agent under this
Agreement in the form reasonably acceptable to the Trust, and will
cooperate in the transfer of such duties and responsibilities,
including provisions for assistance from the Transfer Agent's
personnel in the establishment of books, records and other data by
such successor or successors.
10. Amendment. This Agreement may not be amended or modified in any
manner except by a written agreement executed by both parties.
11. Subcontracting. The Trust agrees that the Transfer Agent may
subcontract for certain of the services described under this
Agreement with the understanding that there shall be no diminution
in the quality or level of the services and that the Transfer Agent
remains fully responsible for the services. Except for
out-of-pocket expenses identified in Schedule B, the Transfer Agent
shall bear the cost of subcontracting such services, unless
otherwise agreed by the parties.
12. Limitations of Liability of the Trustees and Unitholders of
Trust
A copy of the Declaration of Trust, dated October 2, 1995, together
with all amendments, is on file in the office of the Secretary of
State of the Commonwealth of Massachusetts. The execution and
delivery of this Agreement have been authorized by the Trustees and
the Agreement has been signed by an authorized officer of the
Trust. It is expressly agreed that the obligations of the Trust
under this Agreement shall not be binding upon any of the Trustees,
unitholders, nominees, officers, agents or employees of the Trust,
personally, but bind only the assets and property of the Trust, as
provided in the Declaration of Trust.
<PAGE>
PAGE 5
13. Miscellaneous.
(a) This Agreement shall extend to and shall be binding upon the
parties hereto, and their respective successors and assigns;
provided, however, that this Agreement shall not be assignable
without the written consent of the other party.
(b) This Agreement shall be governed by the laws of the State of
Minnesota.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed by their respective officers as of the day and year
written above.
TAX-FREE INCOME TRUST
Tax-Free High Yield Portfolio
By: /s/ Leslie L. Ogg
Leslie L. Ogg
Vice President
AMERICAN EXPRESS FINANCIAL CORPORATION
By: /s/ Richard W. Kling
Richard W. Kling
Senior Vice President
<PAGE>
PAGE 6
Schedule A
TAX-FREE INCOME TRUST
FEE
Effective the 13th day of May, 1996 the annual fee for
services under this agreement is $1 per year for the Portfolio.
<PAGE>
PAGE 7
Schedule B
OUT-OF-POCKET EXPENSES
The Trust shall reimburse the Transfer Agent monthly for the
following out-of-pocket expenses:
o typesetting, printing, paper, envelopes, postage and return
postage for proxy soliciting material, and proxy tabulation costs
o printing, paper, envelopes and postage for dividend notices,
dividend checks, records of account, purchase confirmations,
exchange confirmations and exchange prospectuses, redemption
confirmations, redemption checks, confirmations on changes of
address and any other communication required to be sent to
unitholders
o typesetting, printing, paper, envelopes and postage for
prospectuses, annual and semiannual reports, statements of
additional information, supplements for prospectuses and statements
of additional information and other required mailings to
unitholders
o stop orders
o outgoing wire charges
o other expenses incurred at the request or with the consent of the
Trust.
<PAGE>
PAGE 1
PLACEMENT AGENT AGREEMENT
THIS AGREEMENT dated May 13, 1996 between Tax-Free Income Trust, a
Massachusetts business trust (the "Trust"), on behalf of its
underlying portfolio and American Express Financial Advisors Inc.,
a Delaware corporation, the placement agent (the "Placement Agent")
of units in the Trust ("Trust Units").
Part One: SERVICES AS PLACEMENT AGENT
(1) Placement Agent will act as placement agent of the Trust
Units covered by the Trust's registration statement then in effect
under the Investment Company Act of 1940 (the "1940 Act"). Under
this Agreement, neither the Placement Agent nor its employees or
any of its agents will make any offer or sale of Trust Units in a
manner which would require the Trust Units to be registered under
the Securities Act of 1933, as amended (the "1933 Act").
(2) The Placement Agent will act as
placement agent for each class of units issued and to be issued by
the Trust during the period of this agreement and agrees to offer
for sale those units as long as those units remain available for
sale, unless the Placement Agent is unable or unwilling to make
such offer for sale or sales or solicitations therefor legally
because of any federal, state, provincial or governmental law, rule
or agency or for any financial reason.
(3) Nothing in this Agreement requires the Trust to accept any
offer to purchase any Trust units; all offers are subject to
approval by the Board of Trustees (the "Board").
(4) The Trust represents to the Placement Agent that all
registration statements filed by the Trust with the Commission
under the Investment Company Act of 1940 with respect to Trust
units have been and will be prepared in conformity with the
requirements of the Investment Company Act of 1940 and the rules
and regulations of the Commission.
(5) The Trust agrees to make prompt and
reasonable effort to do any and all things necessary, in the
opinion of the Placement Agent, to have and to keep the Trust and
the units properly registered or qualified in all appropriate
jurisdictions.
(6) The Trust agrees that it will
furnish the Placement Agent with information with respect to the
affairs and accounts of the Trust, and in such form, as the
Placement Agent may from time to time reasonably require and
further agrees that the Placement Agent, at all reasonable times,
shall be permitted to inspect the books and records of the Trust.
(7) The Placement Agent and the Trust
agree to use their best efforts to conform with all applicable
state and federal laws and regulations relating to any rights or
obligations under the terms of this agreement.
<PAGE>
PAGE 2
Part Two: ALLOCATION OF EXPENSES
Except as provided by any other agreements between the parties, the
Placement Agent covenants and agrees that during the period of this
agreement it will pay or cause or be paid all expenses incurred by
the Placement Agent or any of its affiliates, in the offering for
sale or sale of each class of the Trust's units.
Part Three: MISCELLANEOUS
(1) The Placement Agent shall be deemed to be an independent
contractor and, except as expressly provided or authorized in this
agreement, shall have no authority to act for or represent the
Trust.
(2) The Placement Agent shall be free to render to others services
similar to those rendered under this agreement.
(3) Neither this agreement nor any transaction pursuant hereto
shall be invalidated or in any way affected by the fact that
trustees, officers, agents and/or unitholders of the Trust are or
may be interested in the Placement Agent as trustees, officers,
unitholders or otherwise; that directors, officers, shareholders or
agents of the Placement Agent are or may be interested in the Trust
as trustees, officers, or otherwise; or that the Placement Agent is
or may be interested in the Trust as unitholder or otherwise;
provided, however, that neither the Placement Agent nor any officer
or director of the Placement Agent or any officers or trustees of
the Trust shall sell to or buy from the Trust any property or
security other than a security issued by the Trust, except in
accordance with a rule, regulation or order of the Securities and
Exchange Commission.
(4) Any notice under this agreement shall be given in writing,
addressed and delivered, or mailed postpaid, to the parties to this
agreement at each company's principal place of business in
Minneapolis, Minnesota, or to such other address as either party
may designate in writing mailed to the other.
(5) The Placement Agent agrees that no officer, director or
employee of the Placement Agent will deal for or on behalf of the
Trust with himself or herself as principal or agent, or with any
corporation or partnership in which he or she may have a financial
interest, except that this shall not prohibit:
(a) Officers, directors and employees of the Placement Agent
from having a financial interest in the Trust or in the Placement
Agent.
(b) The purchase of securities for the Trust, or the sale of
securities owned by the Trust, through a security broker or dealer,
one or more of whose partners, officers, directors or employees is
an officer, director or employee of the Placement Agent provided
such transactions are handled in the capacity of broker only and
provided commissions charged do not exceed customary brokerage
charges for such services.
<PAGE>
PAGE 3
(c) Transactions with the Trust by a broker-dealer affiliate
of the Placement Agent if allowed by rule or order of the
Securities and Exchange Commission and if made pursuant to
procedures adopted by the Trust's Board of Trustees (the "Board").
(6) The Placement Agent agrees that, except as otherwise provided
in this agreement, or as may be permitted consistent with the use
of a broker-dealer affiliate of the Placement Agent under
applicable provisions of the federal securities laws, neither it
nor any of its officers, directors or employees shall at any time
during the period of this agreement make, accept or receive,
directly or indirectly, any fees, profits or emoluments of any
character in connection with the purchase or sale of securities
(except securities issued by the Trust) or other assets by or for
the Trust.
(7) A copy of the Declaration of Trust, dated October 2, 1995,
together with all amendments, is on file in the office of the
Secretary of State of the Commonwealth of Massachusetts. The
execution and delivery of this Agreement have been authorized by
the Trustees and the Agreement has been signed by an authorized
officer of the Trust. It is expressly agreed that the obligations
of the Trust under this Agreement shall not be binding upon any of
the Trustees, unitholders, nominees, officers, agents or employees
of the Trust, personally, but bind only the assets and property of
the Trust, as provided in the Declaration of Trust.
Part Five: TERMINATION
(1) This agreement shall continue from year to year unless and
until terminated by the Placement Agent or the Trust, except that
such continuance shall be specifically approved at least annually
by a vote of a majority of the Board of Trustees who are not
parties to this agreement or interested persons of any such party,
cast in person at a meeting called for the purpose of voting on
such approval, and by a majority of the Board of Trustees or by
vote of a majority of the outstanding voting securities of the
Trust. As used in this paragraph, the terms "interested person"
and "vote of a majority of the outstanding voting securities" shall
have the meaning as set forth in the Investment Company Act of
1940, as amended.
(2) This agreement may be terminated by either party at any time
by giving the other party sixty (60) days written notice of such
intention to terminate.
(3) This agreement shall terminate in the event of its assignment,
the term "assignment" for this purpose having the same meaning as
set forth in the Investment Company Act of 1940, as amended.
<PAGE>
PAGE 4
IN WITNESS WHEREOF, The parties hereto have executed the foregoing
agreement on the date and year first above written.
TAX-FREE INCOME TRUST
Tax-Free High Yield Portfolio
By /s/ Leslie L. Ogg
Leslie L. Ogg
Vice President
AMERICAN EXPRESS FINANCIAL ADVISORS INC.
By /s/ Richard W. Kling
Richard W. Kling
Senior Vice President
<PAGE>
PAGE 1
CONVERSION AGREEMENT
May 13, 1996
Tax-Free Income Trust
IDS Tower 10
Minneapolis, Minnesota 55440
Dear Trustees:
The Tax-Free Income Trust (the "Trust") proposes to issue and sell
in private placements, units of beneficial interest (the "Units")
in certain series of Units (each a "Portfolio" and together, the
"Portfolios") pursuant to a registration statement on Form N-1A
filed with the Securities and Exchange Commission. The Trust
currently consists of two Portfolios as follows:
Tax-Free High Yield Portfolio
IDS High Yield Tax-Exempt Fund (the "Fund") hereby offers to invest
all of its assets in World Income Portfolio in exchange for Units
equal in value to the value of the Fund's assets.
The Fund represents and warrants to the Trust that the Units are
being acquired for investment and not with a view to the resale or
further distribution thereof.
Please confirm that the foregoing correctly sets forth the
agreement with the Trust.
Sincerely,
IDS HIGH YIELD TAX-EXEMPT FUND, INC.
By /s/ Leslie L. Ogg
Leslie L. Ogg
Vice President and General Counsel
Confirmed, as of the date first above mentioned.
TAX-FREE INCOME TRUST
By /s/ Leslie L. Ogg
Leslie L. Ogg
Vice President and General Counsel
<PAGE>
PAGE 1
SUBSCRIPTION AGREEMENT
April 16, 1996
Tax-Free Income Trust
IDS Tower 10
Minneapolis, Minnesota 55440
Dear Trustees:
The Tax-Free Income Trust (the "Trust") proposes to issue and sell
in private placements, units of beneficial interest (the "Units")
in certain series of Units (each a "Portfolio" and together, the
"Portfolios") pursuant to a registration statement on Form N-1A
filed with the Securities and Exchange Commission (the "SEC"). The
Trust currently consists of one Portfolio as follows:
Tax-Free High Yield Portfolio
In order to provide the Trust with a net worth of at least
$100,000, we hereby offer to purchase $100,000 worth of Units.
We represent and warrant to the Trust that the Units are being
acquired by us for investment and not with a view to the resale or
further distribution thereof and that we have no present intention
to redeem the Units.
Please confirm that the foregoing correctly sets forth our
agreement with the Trust.
Sincerely,
STRATEGIST TAX-FREE INCOME FUND, INC.
By /s/ William H. Dudley
William H. Dudley
President
Confirmed, as of the date first above mentioned.
TAX-FREE INCOME TRUST
By /s/ Leslie L. Ogg
Leslie L. Ogg
Vice President and General Counsel
<PAGE>
PAGE 1
[ARTICLE] 6
[NAME] TAX-FREE HIGH YIELD PORTFOLIO
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] NOV-30-1996
[PERIOD-END] NOV-30-1996
[INVESTMENTS-AT-COST] 5629402073
[INVESTMENTS-AT-VALUE] 6072595429
[RECEIVABLES] 128219856
[ASSETS-OTHER] 0
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 6200815285
[PAYABLE-FOR-SECURITIES] 33466051
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 3557079
[TOTAL-LIABILITIES] 37023130
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 0
[SHARES-COMMON-STOCK] 0
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 0
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 0
[NET-ASSETS] 6163792155
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 229180401
[OTHER-INCOME] 0
[EXPENSES-NET] 15079225
[NET-INVESTMENT-INCOME] 214101176
[REALIZED-GAINS-CURRENT] 2001114
[APPREC-INCREASE-CURRENT] 2984788
[NET-CHANGE-FROM-OPS] 142421758
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 0
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 0
[NUMBER-OF-SHARES-REDEEMED] 0
[SHARES-REINVESTED] 0
[NET-CHANGE-IN-ASSETS] 6163692155
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 14890546
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 15079225
[AVERAGE-NET-ASSETS] 6203340936
[PER-SHARE-NAV-BEGIN] 0
[PER-SHARE-NII] 0
[PER-SHARE-GAIN-APPREC] 0
[PER-SHARE-DIVIDEND] 0
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 0
[EXPENSE-RATIO] 0
[AVG-DEBT-OUTSTANDING] 0<PAGE>
PAGE 2
[AVG-DEBT-PER-SHARE] 0
<PAGE>
PAGE 1
TRUSTEES POWER OF ATTORNEY
City of Minneapolis
State of Minnesota
Each of the undersigned, as trustees of the below listed open-
end, diversified investment companies that previously have filed
registration statements and amendments thereto pursuant to the
requirements of the Investment Company Act of 1940 with the
Securities and Exchange Commission:
1940 Act
Reg. Number
Growth Trust 811-07395
Growth and Income Trust 811-07393
Income Trust 811-07307
Tax-Free Income Trust 811-07397
World Trust 811-07399
hereby constitutes and appoints William R. Pearce and Leslie L. Ogg
or either one of them, as her or his attorney-in-fact and agent, to
sign for her or him in her or his name, place and stead any and all
further amendments to said registration statements filed pursuant
to said Act and any rules and regulations thereunder, and to file
such amendments with all exhibits thereto and other documents in
connection therewith with the Securities and Exchange Commission,
granting to either of them the full power and authority to do and
perform each and every act required and necessary to be done in
connection therewith.
Dated the 8th day of January, 1997.
/s/ H. Brewster Atwater, Jr. /s/ Melvin R. Laird
H. Brewster Atwater, Jr. Melvin R. Laird
/s/ Lynne V. Cheney /s/ William R. Pearce
Lynne V. Cheney William R. Pearce
/s/ William H. Dudley /s/ Alan K. Simpson
William H. Dudley Alan K. Simpson
/s/ Robert F. Froehlke /s/ Edson W. Spencer
Robert F. Froehlke Edson W. Spencer
/s/ David R. Hubers /s/ John R. Thomas
David R. Hubers John R. Thomas
/s/ Heinz F. Hutter /s/ Wheelock Whitney
Heinz F. Hutter Wheelock Whitney
/s/ Anne P. Jones /s/ C. Angus Wurtele
Anne P. Jones C. Angus Wurtele
