-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JOjU80TWZf0NeacrfyM0cWAjLzTr9d74swJ8yt9O80yEumA5i2UShMSMr0YPbw96 dHTCS3zXqD10Oyavm1uFTw== 0000820027-05-001114.txt : 20051205 0000820027-05-001114.hdr.sgml : 20051205 20051205164211 ACCESSION NUMBER: 0000820027-05-001114 CONFORMED SUBMISSION TYPE: N-14/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 20051205 DATE AS OF CHANGE: 20051205 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AXP FIXED INCOME SERIES INC CENTRAL INDEX KEY: 0000049697 IRS NUMBER: 411237361 STATE OF INCORPORATION: MN FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: N-14/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-128985 FILM NUMBER: 051244637 BUSINESS ADDRESS: STREET 1: 50606 AXP FINANCIAL CENTER STREET 2: H27/52 CITY: MINNEAPOLIS STATE: MN ZIP: 55474 BUSINESS PHONE: 6126712772 MAIL ADDRESS: STREET 1: 50606 AXP FINANCIAL CENTER STREET 2: H27/52 CITY: MINNEAPOLIS STATE: MN ZIP: 55474 FORMER COMPANY: FORMER CONFORMED NAME: AXP BOND FUND INC DATE OF NAME CHANGE: 20000829 FORMER COMPANY: FORMER CONFORMED NAME: IDS BOND FUND INC DATE OF NAME CHANGE: 19920703 N-14/A 1 n-14.txt AXP FIXED INCOME SERIES, INC. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM N-14 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X] Pre-Effective Amendment No. 1 (File No.: 333-128985) [ ] Post-Effective Amendment No. [ ] (Check Appropriate Box or Boxes) AXP Fixed Income Series, Inc. - ------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in Charter) (612) 330-9283 - ------------------------------------------------------------------------------- (Area Code and Telephone Number) 901 Marquette Avenue South, Suite 2810, Minneapolis, MN 55402-3268 - ------------------------------------------------------------------------------- (Address of Principal Executive Offices: Number, Street, City, State, Zip Code) Leslie L. Ogg - 901 Marquette Avenue South, - ------------------------------------------------------------------------------- (Name and Address of Agent For Service) Suite 2810, Minneapolis MN 55402-3268 - ------------------------------------------------------------------------------- (Number and Street) (City) (State) (Zip Code) Approximate Date of Proposed Public Offering: As soon as practicable after the effective date of the Registration Statement. Title of Securities Being Registered: Common Stock No filing fee is due because of reliance on Section 24(f) of the Investment Company Act of 1940. This Registration Statement shall hereafter become effective in accordance with Section 8(a) of the Securities Act of 1933. RIVERSOURCE FUNDS (formerly known as American Express Funds) Principal Executive Office 901 Marquette Avenue South, Suite 2810 Minneapolis, MN 55402-3268 NOTICE OF A REGULAR MEETING OF SHAREHOLDERS TO BE HELD FEB. 15, 2006 AXP(R) INCOME SERIES, INC. - RiverSource Selective Fund (formerly AXP Selective Fund) RiverSource Selective Fund ("Selective" or the "Selling Fund") will hold a regular shareholders' meeting at 10:00 a.m. on Feb. 15, 2006, at the IDS Center, 80 S. Eighth Street, Minneapolis, MN, on the 50th floor. At the meeting, shareholders will consider the following proposals: - - To approve an Agreement and Plan of Reorganization (the "Agreement") between the Selling Fund and RiverSource Diversified Bond Fund ("Diversified Bond" or the "Buying Fund") (formerly AXP Diversified Bond Fund). Under this Agreement, the Selling Fund will transfer all of its assets attributable to Classes A, B, C, I and Y to the Buying Fund in exchange for corresponding Class A, B, C, I and Y shares of the Buying Fund. These shares will be distributed proportionately to you and the other shareholders of the Selling Fund. The Buying Fund will assume the Selling Fund's liabilities. - - To elect Board members. - - To amend the Articles of Incorporation. - - To approve an Investment Management Services Agreement ("IMS Agreement") with RiverSource Investments, LLC. - - Other business as may properly come before the meeting, or any adjournment of the meeting. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 1 Please take some time to read the proxy statement. It discusses the proposals in more detail. If you were a shareholder on Dec. 16, 2005, you may vote at the meeting or any adjournment of the meeting. We hope you can attend the meeting. For those of you who cannot attend, please vote by mail, telephone or internet. Just follow the instructions on the enclosed proxy card. If you have questions, please call your advisor or call client services toll free at (877) 256-6085. It is important that you vote. The Board of Directors (the "Board") recommends that you vote FOR each of the proposals. This proxy statement was first mailed to shareholders on or about Dec. 16, 2005. By order of the Board of Directors Leslie L. Ogg, Secretary Dec. 16, 2005 RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 2 COMBINED PROXY STATEMENT/PROSPECTUS DATED DEC. 16, 2005 This document is a proxy statement for Selective and a prospectus for Diversified Bond (each individually a "Fund" and collectively the "Funds"). It contains the information you should know before voting on the proposals. Please read it carefully and keep it for future reference. The address of each of the Funds is 901 Marquette Avenue South, Suite 2810, Minneapolis, MN 55402-3268. The phone number for each of the Funds is (612) 330-9283. The following information describes the proposed reorganization of the Selling Fund into the Buying Fund (the "Reorganization"). HOW THE REORGANIZATION WILL WORK - - The Selling Fund will transfer all of its assets to the Buying Fund. The Buying Fund will assume the Selling Fund's liabilities. - - The Buying Fund will issue shares of Classes A, B, C, I and Y to the Selling Fund in an amount equal to the value of the assets of Classes A, B, C, I and Y that it receives from the Selling Fund, less the liabilities it assumes. These shares will be distributed to the Selling Fund's shareholders in proportion to their holdings in the Selling Fund. Selling Fund shareholders will not pay any sales charge in connection with this distribution of shares. FUND INVESTMENT OBJECTIVES The investment objective for each of the Funds is as follows: SELLING FUND: The Fund seeks to provide shareholders with current income and preservation of capital. BUYING FUND: The Fund seeks to provide shareholders with a high level of current income while conserving the value of the investment for the longest period of time. Please note that the Fund is not a bank deposit, is not federally insured, is not endorsed by any bank or government agency and is not guaranteed to achieve its investment objective. As with all mutual funds, the Securities and Exchange Commission (the "SEC") has not approved or disapproved these securities or passed on the adequacy of this prospectus. Any representation to the contrary is a criminal offense. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 3 WHERE TO GET MORE INFORMATION THE BUYING FUND Most recent prospectus, dated Accompanying, and incorporated by reference into, this Oct. 28, 2005. proxy statement/prospectus. Most recent annual report, for Incorporated by reference into this proxy the period ended Aug. 31, 2005. statement/prospectus. For a copy at no charge, call toll-free (800) 862-7919 or write to the address at the bottom of this table. THE SELLING FUND Most recent prospectus, dated Incorporated by reference into this proxy July 29, 2005, amended as of statement/prospectus. For a copy at no charge, call Oct. 3, 2005. toll-free (800) 862-7919 or write to the address at the bottom of this table. Most recent annual report, for Incorporated by reference into this proxy the period ended May 31, 2005. statement/prospectus. For a copy at no charge, call toll-free (800) 862-7919 or write to the address at the bottom of this table. THIS PROXY STATEMENT/PROSPECTUS Statement of Additional Incorporated by reference into this proxy Information dated the same date statement/prospectus. For a copy at no charge, call as this proxy toll-free (877) 256-6085 or write to the address at the statement/prospectus. This bottom of this table. document contains information about both the Selling Fund and the Buying Fund. To ask questions about this Call toll-free (877) 256-6085 or write to: RiverSource proxy statement/prospectus. Service Corporation, 70100 Ameriprise Financial Center, Minneapolis, MN 55474.
RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 4 Each of the Funds is subject to the information requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940 (the "1940 Act") and files reports, proxy materials and other information with the SEC. These reports, proxy materials and other information can be inspected and copied at the Public Reference Room maintained by the SEC. Copies may be obtained, after paying a duplicating fee, by electronic request at http://www.publicinfo@sec.gov, or by writing to the Public Reference Section of the SEC, Washington, D.C. 20549-0102. In addition, copies of these documents may be viewed on-line or downloaded from the SEC's Web site at http://www.sec.gov. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 5 TABLE OF CONTENTS PAGE SECTION A -- FUND PROPOSALS PROPOSAL 1. APPROVE OR REJECT THE AGREEMENT AND PLAN OF REORGANIZATION 7 SUMMARY 7 How the Reorganization Will Work 7 Comparison of the Selling Fund and the Buying Fund 8 Risk Factors 12 Tax Consequences 14 FEES AND EXPENSES 15 THE REORGANIZATION 19 Terms of the Reorganization 19 Conditions to Closing the Reorganization 19 Termination of the Agreement 20 Tax Status of the Reorganization 20 Reasons for the Proposed Reorganization and Board Deliberations 22 Boards' Determinations 24 Recommendation and Vote Required 25 PROPOSAL 2. ELECT BOARD MEMBERS 25 PROPOSAL 3. APPROVE OR REJECT AN AMENDMENT TO THE ARTICLES OF INCORPORATION 32 PROPOSAL 4. APPROVE OR REJECT AN INVESTMENT MANAGEMENT SERVICES AGREEMENT WITH RIVERSOURCE INVESTMENTS, LLC 34 SECTION B -- PROXY VOTING AND SHAREHOLDER MEETING INFORMATION 41 SECTION C -- CAPITALIZATION, OWNERSHIP OF FUND SHARES AND OTHER FUND INFORMATION 44 EXHIBITS A. Form of Agreement and Plan of Reorganization A.1 B. Matters Subject to Approval at Regular Meeting of Buying Fund B.1 C. Minnesota Business Corporation Act Sections 302A.471 and 302A.473 C.1 D. Most Recent Buying Fund Prospectus D.1 E. Board Effectiveness Committee Charter E.1 F. Joint Audit Committee Charter F.1 RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 6 SECTION A -- FUND PROPOSALS PROPOSAL 1. APPROVE OR REJECT THE AGREEMENT AND PLAN OF REORGANIZATION SUMMARY This proxy statement/prospectus is being used by the Selling Fund to solicit proxies to vote at a meeting of shareholders. Shareholders will consider a proposal to approve the Agreement providing for the Reorganization of the Selling Fund into the Buying Fund. A form of the Agreement is included in Exhibit A. The following is a summary. More complete information appears later in this proxy statement/prospectus. You should read the entire proxy statement/prospectus and the exhibits because they contain details that are not in the summary. HOW THE REORGANIZATION WILL WORK - - The Selling Fund will transfer all of its assets to the Buying Fund. The Buying Fund will assume the Selling Fund's stated liabilities. - - The Buying Fund will issue shares of Classes A, B, C, I and Y to the Selling Fund in an amount equal to the value of the assets of Classes A, B, C, I and Y that it receives from the Selling Fund, less the liabilities it assumes. These shares will be distributed to the Selling Fund's shareholders in proportion to their holdings in the Selling Fund. If you already have a Buying Fund account, shares distributed in the Reorganization will be added to that account. As a result, when average cost is calculated for income tax purposes, the cost of the shares in the two accounts you owned will be combined. - - As part of the Reorganization, systematic transactions (such as bank authorizations and systematic payouts) currently set up for your Selling Fund account will be transferred to your new Buying Fund account. If you do not want your systematic transactions to continue, please contact your financial advisor to make changes. - - Neither the Selling Fund nor the shareholders of the Selling Fund will pay any sales charge in connection with the Reorganization. - - After the Reorganization is completed, current Selling Fund shareholders will be shareholders of the Buying Fund. The Selling Fund will be terminated. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 7 COMPARISON OF THE SELLING FUND AND THE BUYING FUND Both the Selling Fund and the Buying Fund: - - Are structured as a series of capital stock of an open-end management investment company organized as a Minnesota corporation. - - Have RiverSource Investments, LLC (the "investment manager" or "RiverSource Investments") as an investment adviser. - - Have the same policies for buying and selling shares and the same exchange rights. - - Have the same distribution policies. - - Have different classes of shares: Classes A, B, C, I and Y. COMPARISON OF INVESTMENT OBJECTIVES The investment objectives for the Funds are as follows: SELLING FUND: The Fund seeks to provide shareholders with current income and preservation of capital. BUYING FUND: The Fund seeks to provide shareholders with a high level of current income while conserving the value of the investment for the longest period of time. COMPARISON OF INVESTMENT STRATEGIES The Selling Fund and the Buying Fund share similar investment strategies, investing in securities like those included in the Lehman Brothers Aggregate Bond Index, which are investment grade securities denominated in U.S. dollars. Because the Buying Fund contains the term "bond" in its name, it has adopted a policy to invest at least 80% of its net assets in bonds and other debt securities. Although the Selling Fund has not adopted such a policy, it has similar, although not identical, exposure to the bond market. Specifically, whereas the Selling Fund may only purchase investment grade securities (although it may continue to hold these securities if they are downgraded after purchase), the Buying Fund emphasizes investment grade securities (high- and medium-quality), but it is permitted to purchase lower-quality (junk) bonds in an attempt to achieve higher yield and/or capital appreciation. Additionally, whereas the Selling Fund is permitted to invest up to 25% in foreign investments, the Buying Fund is only permitted to invest up to 15% in foreign investments. Detailed strategies for the Selling Fund and the Buying Fund are set forth below: RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 8 SELECTIVE (SELLING FUND): The Fund's assets are primarily invested in debt obligations. Although the Fund is not an index fund, under normal market conditions, it will invest primarily in securities like those included in the Lehman Brothers Aggregate Bond Index (the "Index"), which are investment grade and denominated in U.S. dollars. The Index includes securities issued by the U.S. government, corporate bonds, and mortgage- and asset-backed securities. The Fund will not invest in securities rated below investment grade, although it may hold securities that have been downgraded. In pursuit of the Fund's objective, the investment manager chooses investments by: - - Reviewing the stage and direction of economic business cycles. Depending on the stage of the business cycle, the investment manager will choose debt obligations from the following market sectors: government securities, corporate securities, and asset-backed securities. - - Reviewing credit characteristics and interest rate outlook. - - Targeting an average portfolio duration within one year of the duration of the Index which, as of Aug. 31, 2005, was 4.26 years. Duration measures the sensitivity of bond prices to changes in interest rates. The longer the duration of a bond, the longer it will take to repay the principal and interest obligations and the more sensitive it will be to changes in interest rates. For example, a five year duration means a bond is expected to decrease in value by 5% if interest rates rise 1% and increase in value by 5% if interest rates fall 1%. - - Identifying and buying securities that: - are medium and high quality (investment grade), - have maturities that complement the investment manager's expectations for long-term and short-term interest rates, and - are expected to outperform other market sectors. In this analysis, the investment manager will take risk factors into account (for example, whether money has been set aside to cover the cost of principal and interest payments). In evaluating whether to sell a security, the investment manager considers, among other factors, whether: - - The interest rate or economic outlook changes. - - A sector or industry is experiencing change. - - A security's rating is changed or is vulnerable to a change. - - The security is overvalued relative to alternative investments. - - The investment manager identifies a more attractive opportunity. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 9 DIVERSIFIED BOND (BUYING FUND): Under normal market conditions, the Fund invests at least 80% of its net assets in bonds and other debt securities. At least 50% of the Fund's net assets will be invested in securities like those included in the Index, which are investment grade and denominated in U.S. dollars. The Index includes securities issued by the U.S. government, corporate bonds, and mortgage- and asset-backed securities. Although the Fund emphasizes high- and medium-quality debt securities, it will assume some credit risk to achieve higher yield and/or capital appreciation by buying lower-quality (junk) bonds. The Fund may invest up to 15% in foreign investments, which may include investments in emerging markets. The Fund will provide shareholders with at least 60 days' notice of any change in the 80% policy. The selection of debt obligations is the primary decision in building the investment portfolio. In pursuit of the Fund's objective, the investment manager chooses investments by: - - Evaluating the portfolio's total exposure to sectors, industries and securities relative to the Index. - - Analyzing factors such as credit quality, interest rate outlook and price to select the most attractive securities within each sector. - - Investing in lower-quality (junk) bonds and foreign investments as attractive opportunities arise. - - Targeting an average portfolio duration within one year of the duration of the Index which, as of Aug. 31, 2005, was 4.26 years. Duration measures the sensitivity of bond prices to changes in interest rates. The longer the duration of a bond, the longer it will take to repay the principal and interest obligations and the more sensitive it will be to changes in interest rates. For example, a five-year duration means a bond is expected to decrease in value by 5% if interest rates rise 1% and increase in value by 5% if interest rates fall 1%. In evaluating whether to sell a security, the investment manager considers, among other factors: - - Identification of more attractive investments based on relative value. - - The portfolio's total exposure to sectors, industries and securities relative to the Index. - - Whether a security's rating has changed or is vulnerable to a change. - - Whether a sector or industry is experiencing change. - - Changes in the interest rate or economic outlook. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 10 BOTH FUNDS: - - UNUSUAL MARKET CONDITIONS. During unusual market conditions, each of the Funds may temporarily invest more of its assets in money market securities than during normal market conditions. Although investing in these securities would serve primarily to avoid losses, this type of investing also could prevent the Fund from achieving its investment objective. During these times, the portfolio managers may make frequent securities trades that could result in increased fees, expenses and taxes, and decreased performance. - - OTHER INVESTMENT STRATEGIES. Each Fund may invest in other securities and may use other investment strategies that are not principal investment strategies. Additionally, each Fund may use derivatives (financial instruments where the value depends upon, or is derived from, the value of something else) such as futures, options and forward contracts, to produce incremental earnings, to hedge existing positions or to increase flexibility. Just as with securities in which the Fund invests directly, derivatives are subject to a number of risks, including market, liquidity, interest rate and credit risk. In addition, a relatively small price movement in the underlying security, currency or index may result in a substantial gain or loss for the Fund using derivatives. Even though the Fund's policies permit the use of derivatives in this manner, the portfolio managers are not required to use derivatives. COMPARISON OF FUNDAMENTAL POLICIES The Buying Fund will vote on changes to the fundamental policies for the Buying Fund at a meeting scheduled to be held on the same day as the Selling Fund shareholder meeting. The proposed changes are shown in Exhibit B. If all of the proposed changes to the Buying Fund's fundamental policies are approved, the differences in investment policies will be as follows: Both Funds have substantially similar fundamental investment policies. The Buying Fund has a policy permitting borrowing money for temporary purposes in an amount not exceeding one-third of the market value of its total assets. The Selling Fund has a similar policy that applies to money or property and permits borrowing only for extraordinary or emergency purposes. The Selling Fund has a policy prohibiting the issuing of senior securities, except as permitted under the 1940 Act. Even though this is not stated as a fundamental policy of the Buying Fund, the Fund is nonetheless subject to that restriction under the provisions of the 1940 Act. The Buying Fund has a policy permitting the Fund to lend fund securities and participate in an interfund lending program up to 33-1/3% of the value of the fund's total assets. This policy does not prohibit the Buying Fund from purchasing money market securities, loans, loan participation or other debt securities, or from entering into repurchase agreements. The Selling Fund has a policy RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 11 permitting the Selling Fund to lend fund securities up to 30% of its net assets. In addition, the Selling Fund has a policy that it may make cash loans up to 5% of its total assets. The Selling Fund has a policy prohibiting loans to the investment manager, its board members and officers and to the board members and officers of the Selling Fund. The Buying Fund has a policy that it will not purchase more than 10% of the outstanding voting securities of an issuer, except up to 25% of its total assets may be invested without regard to this 10% limitation. The Selling Fund has a similar policy, but does not have the 25% exception. The Buying Fund has a policy that it will not 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, or other investment companies, and except that up to 25% of its total assets may be invested without regard to this 5% limitation. The Selling Fund has a similar policy, but does not include other investment companies in the exception. If shareholders of the Selling Fund approve the Reorganization, they will be subject to the fundamental investment policies of the Buying Fund. The investment manager does not believe that the differences between the fundamental investment policies will result in any material difference in the way the Funds are managed. RISK FACTORS The principal risks of investing in each of the Selling Fund and the Buying Fund are similar. However, the Buying Fund has additional Credit Risk and Liquidity Risk, which are risks typically associated with lower-quality (junk) bonds. Although the Selling Fund potentially has these same risks, to the extent it continues to hold bonds that have been downgraded after purchase, these risks are increased for the Buying Fund, which is permitted to purchase lower-quality bonds directly for the portfolio. The principal risks associated with an investment in each of the Buying Fund and the Selling Fund are shown below:
RISK SELECTIVE DIVERSIFIED BOND Active Management Risk X X Credit Risk X X Interest Rate Risk X X Liquidity Risk X Market Risk X X Prepayment and Extension Risk X X
RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 12 - - ACTIVE MANAGEMENT RISK. The Fund is actively managed and its performance therefore will reflect in part the ability of the portfolio managers to make investment decisions that are suited to achieving the Fund's investment objective. Due to its active management, the Fund could underperform other mutual funds with similar investment objectives. - - CREDIT RISK -- SELLING FUND. The risk that the issuer of a security, or the counterparty to a contract, will default or otherwise become unable or unwilling to honor a financial obligation, such as payments due on a bond or a note. If the Fund purchases unrated securities, or if the rating of a security is reduced after purchase, the Fund will depend on the investment manager's analysis of credit risk more heavily than usual. - - CREDIT RISK -- BUYING FUND. The risk that the issuer of a security, or the counterparty to a contract, will default or otherwise become unable or unwilling to honor a financial obligation, such as payments due on a bond or a note. If the Fund purchases unrated securities, or if the rating of a security is reduced after purchase, the Fund will depend on the investment manager's analysis of credit risk more heavily than usual. Non-investment grade securities, commonly called "high-yield" or "junk" bonds, may react more to perceived changes in the ability of the issuing company to pay interest and principal when due than to changes in interest rates. Non-investment grade securities have greater price fluctuations and are more likely to experience a default than investment grade bonds. - - INTEREST RATE RISK. The risk of losses attributable to changes in interest rates. Interest rate risk is generally associated with bond prices: when interest rates rise, bond prices fall. In general, the longer the maturity or duration of a bond, the greater its sensitivity to changes in interest rates. - - LIQUIDITY RISK. The risk associated from a lack of marketability of securities which may make it difficult or impossible to sell at desirable prices in order to minimize loss. The Fund may have to lower the selling price, sell other investments, or forego another, more appealing investment opportunity. - - MARKET RISK. The market value of securities may fall or fail to rise. Market risk may affect a single issuer, sector of the economy, industry, or the market as a whole. The market value of securities may fluctuate, sometimes rapidly and unpredictably. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 13 - - PREPAYMENT AND EXTENSION RISK. The risk that a bond or other security might be called, or otherwise converted, prepaid, or redeemed, before maturity. This risk is primarily associated with asset-backed securities, including mortgage backed securities. If a security is converted, prepaid, or redeemed, before maturity, particularly during a time of declining interest rates, the investment manager may not be able to reinvest in securities providing as high a level of income, resulting in a reduced yield to the Fund. Conversely, as interest rates rise, the likelihood of prepayment decreases. The investment manager may be unable to capitalize on securities with higher interest rates because the Fund's investments are locked in at a lower rate for a longer period of time. PERFORMANCE Performance information for Class A shares of the Funds is shown below. TABLE A-1 AVERAGE ANNUAL TOTAL RETURNS AS OF SEPT. 30, 2005(a)
1 YEAR 5 YEARS 10 YEARS FUND Selective -2.33% 3.37% 4.55% Diversified Bond -2.00% 4.37% 5.10%
(a) Returns include the 4.75% Class A sales charge. TAX CONSEQUENCES The Reorganization is expected to be tax-free for federal income tax purposes and will not take place unless the Selling Fund and the Buying Fund receive a satisfactory opinion of tax counsel, substantially to that effect. Accordingly, no gain or loss is expected to be recognized by the Selling Fund or its shareholders as a direct result of the Reorganization. Prior to or after completion of the Reorganization, no major sell-offs to realign the portfolio are expected in relation to, or as a result of the Reorganization. However, the Reorganization will end the tax year of the Selling Fund, and so it will accelerate distributions from the Selling Fund for its short tax year ending on the date of the Reorganization to shareholders. Those tax year-end distributions, which are taxable, will also include any capital gains resulting from portfolio turnover prior to the implementation of the Reorganization. At any time prior to the consummation of the Reorganization a shareholder may redeem shares. This would likely result in recognition of gain or loss to the shareholder for federal income tax purposes. The tax basis and holding period of the shareholders' Selling Fund shares are expected to carry over to the shareholders' new shares in the Buying Fund. For more information about the federal income tax consequences of the Reorganization, see the section entitled "Tax Status of the Reorganization." RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 14 FEES AND EXPENSES The following table describes the fees and expenses, adjusted to reflect current fees, that you pay if you buy and hold shares of the Selling Fund or shares of the Buying Fund. The table also shows pro forma expenses of the Buying Fund assuming the proposed Reorganization had been effective during the most recent fiscal year, adjusted to reflect current fees. The fees and expenses below exclude the costs of this Reorganization as these will be paid by Ameriprise Financial. TABLE A-2 ACTUAL AND PRO FORMA FUND EXPENSES FOR THE MOST RECENT FISCAL YEAR SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A CLASS B CLASS C CLASS I CLASS Y Maximum sales charge (load) imposed on purchases(a) as a percentage of offering price 4.75% none none none none Maximum deferred sales charge (load) imposed on sales (as a percentage of offering price at time of purchase) none(b) 5% 1% none none
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS:
CLASS A CLASS B CLASS C CLASS I CLASS Y SELECTIVE FUND (SELLING FUND)(c) Management fees(d) 0.52% 0.52% 0.52% 0.52% 0.52% Distribution (12b-1) fees 0.25% 1.00% 1.00% 0.00% 0.00% Other expenses(e) 0.27% 0.28% 0.29% 0.13% 0.36% Total 1.04% 1.80% 1.81% 0.65% 0.88% Fee waiver/expense reimbursement 0.15% 0.16% 0.17% 0.06% 0.16% Net expenses(f) 0.89% 1.64% 1.64% 0.59% 0.72% DIVERSIFIED BOND (BUYING FUND) Management fees(g) 0.46% 0.46% 0.46% 0.46% 0.46% Distribution (12b-1) fees 0.25% 1.00% 1.00% 0.00% 0.00% Other expenses(e) 0.29% 0.30% 0.31% 0.12% 0.37% Total 1.00% 1.76% 1.77% 0.58% 0.83% Fee waiver/expense reimbursement 0.11% 0.11% 0.11% --% 0.10% Net expenses(f) 0.89% 1.65% 1.66% 0.58% 0.73%
RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 15 ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) (CONTINUED) AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS:
CLASS A CLASS B CLASS C CLASS I CLASS Y DIVERSIFIED BOND - PRO FORMA WITH SELECTIVE Management fees(g) 0.45% 0.45% 0.45% 0.45% 0.45% Distribution (12b-1) fees 0.25% 1.00% 1.00% 0.00% 0.00% Other expenses(e) 0.27% 0.29% 0.29% 0.10% 0.36% Total 0.97% 1.74% 1.74% 0.55% 0.81% Fee waiver/expense reimbursement 0.08% 0.09% 0.08% 0.00% 0.08% Net expenses(h) 0.89% 1.65% 1.66% 0.55% 0.73%
NOTES TO ANNUAL FUND OPERATING EXPENSES. (a) This charge may be reduced depending on the value of your total investments in RiverSource funds. (b) For Class A purchases over $1,000,000 on which no sales charge is assessed, a 1% sales charge may apply if you sell your shares within one year after purchase. (c) Selective is a feeder fund that is part of a master/feeder structure. For Selective, both in this table and the following example, fund operating expenses, include expenses charged by both the Fund and its master portfolio. (d) The management fee ratio is the actual ratio as of May 31, 2005. If this Reorganization is not approved, there is a separate proposal to modify the management fee schedule. The estimated management fee ratio under this proposed schedule based on average net assets as of May 31, 2005 is .48%. (e) Other expenses include an administrative services fee, a transfer agency fee, a custody fee and other nonadvisory expenses and, for Class Y shares, a shareholder service fee. The other expense ratios shown in this chart have been adjusted to reflect the new administrative services fee that went into effect in October 2005. (f) For Selective, the investment manager and its affiliates have contractually agreed to waive certain fees and to absorb certain expenses until May 31, 2006, unless sooner terminated at the discretion of the Fund's Board. Any amounts waived will not be reimbursed by the Fund. Under this agreement, net expenses will not exceed 0.89% for Class A, 1.64% for Class B, 1.64% for Class C, 0.59% for Class I and 0.72% for Class Y. For Diversified Bond, the investment manager and its affiliates have contractually agreed to waive certain fees and to absorb certain expenses until Aug. 31, 2006, unless sooner terminated at the discretion of the Fund's Board. Any amounts waived will not be reimbursed by the Fund. Under this agreement, total expenses will not exceed 0.89% for Class A, 1.65% for Class B, 1.66% for Class C, 0.59% for Class I and 0.73% for Class Y. (g) The management fee ratio shown reflects what the ratio would be under the proposed management fee schedule based on average net assets as of Aug. 31, 2005. (h) If shareholders approve the Reorganization, the investment manager and its affiliates have contractually agreed to waive certain fees and to absorb certain expenses until Aug. 31, 2006, unless sooner terminated at the discretion of the Fund's Board. Under this agreement, total expenses will not exceed 0.89% for Class A, 1.65% for Class B, 1.66% for Class C, 0.59% for Class I and 0.73% for Class Y. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 16 EXAMPLE: These examples are intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. These examples assume that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods indicated under the current arrangements and if the proposed Reorganization had been in effect. These examples also assume that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS SELECTIVE (SELLING FUND)(d) Class A(a) $562 $776 $1,009 $1,677 Class B $667(b) $951(b) $1,161(b) $1,907(c) Class C $267(b) $553 $ 965 $2,118 Class I $ 60 $202 $ 357 $ 808 Class Y $ 74 $265 $ 473 $1,074 DIVERSIFIED BOND (BUYING FUND)(d) Class A(a) $562 $768 $ 992 $1,636 Class B $668(b) $944(b) $1,145(b) $1,868(c) Class C $269(b) $547 $ 950 $2,080 Class I $ 59 $186 $ 324 $ 729 Class Y $ 75 $255 $ 451 $1,020 DIVERSIFIED BOND - PRO FORMA WITH SELECTIVE(d) Class A(a) $562 $762 $ 979 $1,606 Class B $668(b) $940(b) $1,136(b) $1,845(c) Class C $269(b) $541 $ 937 $2,050 Class I $ 56 $176 $ 308 $ 692 Class Y $ 75 $251 $ 443 $ 998
(a) Includes a 4.75% sales charge. (b) Includes the applicable contingent deferred sales charge. (c) Based on conversion of Class B shares to Class A shares in the ninth year of ownership. (d) Includes new expense waivers in year 1 only. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 17 You would pay the following expenses if you did not redeem your shares.
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS SELECTIVE (SELLING FUND)(c) Class A(a) $562 $776 $1,009 $1,677 Class B $167 $551 $ 961 $1,907(b) Class C $167 $553 $ 965 $2,118 Class I $ 60 $202 $ 357 $ 808 Class Y $ 74 $265 $ 473 $1,074 DIVERSIFIED BOND (BUYING FUND)(c) Class A(a) $562 $768 $ 992 $1,636 Class B $168 $544 $ 945 $1,868(b) Class C $169 $547 $ 950 $2,080 Class I $ 59 $186 $ 324 $ 729 Class Y $ 75 $255 $ 451 $1,020 DIVERSIFIED BOND - PRO FORMA WITH SELECTIVE(c) Class A(a) $562 $762 $ 979 $1,606 Class B $168 $540 $ 936 $1,845(b) Class C $169 $541 $ 937 $2,050 Class I $ 56 $176 $ 308 $ 692 Class Y $ 75 $251 $ 443 $ 998
(a) Includes a 4.75% sales charge. (b) Based on conversion of Class B shares to Class A shares in the ninth year of ownership. (c) Includes new expense waivers for year 1 only. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 18 THE REORGANIZATION TERMS OF THE REORGANIZATION The Board has approved the Agreement, a copy of which is attached as Exhibit A. The Agreement provides for Reorganization on the following terms: - - The Reorganization is scheduled to occur on the first day that the New York Stock Exchange is open for business following shareholder approval and receipt of any necessary regulatory approvals, but may occur on any later date agreed to by the Selling Fund and the Buying Fund. - - The Selling Fund will transfer all of its assets to the Buying Fund and, in exchange, the Buying Fund will assume the Selling Fund's stated liabilities. - - The Buying Fund will issue Class A, B, C, I and Y shares to the Selling Fund in an amount equal to the value of the assets of Classes A, B, C, I and Y that it receives from the Selling Fund, less the liabilities assumed by the Buying Fund in the transaction. These shares will immediately be distributed by the Selling Fund to its shareholders in proportion to their holdings in the Selling Fund. As a result, shareholders of the Selling Fund will become Class A, B, C, I or Y shareholders of the Buying Fund. - - Neither the Selling Fund nor the shareholders of the Selling Fund will pay any sales charge in connection with the Reorganization. - - The net asset value of the Selling Fund and the Buying Fund will be computed as of 3:00 p.m. Central time, on the closing date. - - After the Reorganization, the Selling Fund will be terminated. CONDITIONS TO CLOSING THE REORGANIZATION The completion of the Reorganization is subject to certain conditions described in the Agreement, including: - - The Selling Fund will have declared and paid a dividend that will distribute all of the Fund's taxable income, if any, to the shareholders of the Fund for the taxable years ending at or prior to the closing. - - The Funds will have received any approvals, consents or exemptions from the SEC or any regulatory body necessary to carry out the Reorganization. - - A registration statement on Form N-14 will have been filed with the SEC and declared effective. - - The shareholders of the Selling Fund will have approved the Agreement. - - The Selling Fund will have received an opinion of tax counsel that the proposed Reorganization will result in no gain or loss being recognized by any shareholder. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 19 TERMINATION OF THE AGREEMENT The Agreement and the transactions contemplated by it may be terminated and abandoned by resolutions of the Board of the Selling Fund or the Buying Fund at any time prior to closing. In the event of a termination, there will be no liability for damages on the part of either the Selling Fund or the Buying Fund or the Board members, officers or shareholders of the Selling Corporation or of the Buying Corporation. TAX STATUS OF THE REORGANIZATION The Reorganization is expected to be tax-free for federal income tax purposes and will not take place unless the Selling Fund and the Buying Fund receive a satisfactory opinion of tax counsel (which opinion will be based on certain factual representations and certain customary assumptions), to the effect that, although not entirely free from doubt, on the basis of existing provisions of the Internal Revenue Code of 1986, as amended (the "Code"): - - The transfer of the Selling Fund's assets to the Buying Fund in exchange for Class A, B, C, I and Y shares of the Buying Fund and the assumption of the Selling Fund's liabilities, followed by the distribution of those Class A, B, C, I and Y shares to the Selling Fund's shareholders and the termination of the Selling Fund will be a "reorganization" within the meaning of Section 368(a)(1) of the Code, and the Selling Fund and the Buying Fund will each be a "party to the reorganization" within the meaning of Section 368(b) of the Code. - - Under Section 361 of the Code, no gain or loss will be recognized by the Selling Fund upon the transfer of all of its assets to the Buying Fund or on the distribution by the Selling Fund of Class A, B, C, I and Y shares of the Buying Fund to Selling Fund shareholders in liquidation. - - Under Section 354 of the Code, the shareholders of the Selling Fund will not recognize gain or loss upon the exchange of their Class A, B, C, I or Y shares of the Selling Fund solely for Buying Fund Class A, B, C, I or Y shares as part of the Reorganization. - - Under Section 358 of the Code, the aggregate basis of the Class A, B, C, I or Y shares of the Buying Fund that a Selling Fund shareholder receives in the Reorganization will be the same as the aggregate basis of the Class A, B, C, I or Y shares of the Selling Fund exchanged therefor. - - Under Section 1223(1) of the Code, the holding period for the Class A, B, C, I or Y shares of the Buying Fund that a Selling Fund shareholder receives in the Reorganization will include the period for which he or she held the Class A, B, C, I or Y shares of the Selling Fund exchanged therefor, provided that on the date of the exchange he or she held such Selling Fund shares as capital assets. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 20 - - Under Section 1032 of the Code, no gain or loss will be recognized by the Buying Fund upon the receipt of the Selling Fund's assets solely in exchange for the issuance of Buying Fund's Class A, B, C, I and Y shares to the Selling Fund and the assumption of all of the Selling Fund's liabilities by the Buying Fund. - - Under Section 362(b) of the Code, the Buying Fund's tax basis in the assets that the Buying Fund receives from the Selling Fund will be the same as the Selling Fund's tax basis in those assets immediately prior to the transfer. - - Under Section 1223(2) of the Code, the Buying Fund's holding periods in the assets received from the Selling Fund will include the Selling Fund's holding periods in such assets. - - Under Section 381 of the Code, the Buying Fund will succeed to and take into account the items of the Selling Fund described in Section 381(c) of the Code, subject to the conditions and limitations specified in Sections 381, 382, 383 and 384 of the Code and Regulations thereunder. Tax counsel will express no view with respect to the effect of the Reorganization on any transferred asset as to which any unrealized gain or loss is required to be recognized at the end of a taxable year (or on the termination or transfer thereof) under federal income tax principles. Prior to the closing of the Reorganization, the Selling Fund will, and the Buying Fund may, declare a distribution to shareholders, which together with all previous distributions, will have the effect of distributing to shareholders all of its investment company taxable income (computed without regard to the deduction for dividends paid) and net realized capital gains (after reduction by any available capital loss carryforwards), if any, through the closing of the Reorganization. These distributions will be taxable to shareholders. A fund's ability to carry forward capital losses and use them to offset future gains may be limited. First, one fund's "pre-acquisition losses" (including capital loss carryforwards, net current-year capital losses, and unrealized losses that exceed certain thresholds) cannot be used to offset unrealized gains in another fund that are "built in" at the time of the reorganization and that exceed certain thresholds ("non-de minimis built-in gains") for five tax years. Second, a portion of a fund's pre-acquisition losses may become unavailable to offset any gains at all. Third, any remaining pre-acquisition losses will offset capital gains realized after a reorganization and thus will reduce subsequent capital gain distributions to a broader group of shareholders than would have been the case absent such reorganization. Therefore, in certain circumstances, former shareholders of a fund may pay taxes sooner, or pay more taxes, than they would have had a reorganization not occurred. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 21 The Buying Fund's ability to carry forward the pre-acquisition losses of the Selling Fund and use them to offset future gains will technically be limited as a result of the Reorganization due to the effect of loss limitation rules under applicable tax law. The effect of such limitation will depend on the losses and gains in each fund at the time of the Reorganization. For example, based on data as of Aug. 31, 2005, the Selling Fund and the Buying Fund had pre-Reorganization "net losses" (i.e., capital loss carryforwards as of its last fiscal year end as adjusted by year-to-date realized gains or losses and all net unrealized gains) equal to 3.15% and 4.28% of each fund's net assets, respectively. If the Reorganization had occurred on Aug. 31, 2005, the combined fund would have had net losses equal to 3.61% of its net assets (due to the Buying Fund's relatively larger losses). In addition, for five years after the closing date, the combined fund will not be allowed to offset any gains "built in" to either fund at the time of the Reorganization against capital losses (including capital loss carryforwards) built in to the other fund. The realized and unrealized gains and losses of each Fund at the time of the Reorganization will determine the extent to which the combining Funds' respective losses, both realized and unrealized, will be available to reduce gains realized by the combined Fund following the Reorganization, and consequently the extent to which the combined Fund may be required to distribute gains to its shareholders earlier than would have been the case absent the Reorganization. This description of the federal income tax consequences of the Reorganization does not take into account your particular facts and circumstances. Consult your own tax adviser about the effect of state, local, foreign, and other tax laws. REASONS FOR THE PROPOSED REORGANIZATION AND BOARD DELIBERATIONS The Board believes that the proposed Reorganization will be advantageous to Selling Fund shareholders based on its consideration of the following matters: - - TERMS AND CONDITIONS OF THE REORGANIZATION. The Board considered the terms and conditions of the Reorganization as described in the previous paragraphs. - - TAX CONSEQUENCES. The Board considered the tax-free nature of the Reorganization. - - CONTINUITY OF INVESTMENT. The Board took into account the fact that, currently, the Selling Fund and the Buying Fund have similar investment objectives and investment strategies, except that with respect to the Buying Fund, a portion of the Buying Fund's assets are invested in lower-quality (junk) bonds. The Board took note of the fact that following the Reorganization, shareholders of the Selling Fund will continue to be invested in a fund holding a portfolio consisting principally of investment grade bonds. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 22 - - EXPENSE RATIOS. The Board considered the relative expenses of the Funds and took into account that, as of the end of each Fund's most recent fiscal year, the expense ratios for the Selling Fund were higher than the expense ratios for the Buying Fund (without taking into account any fee waivers or expense caps). The Board accorded weight to the fact that, if shareholders approve the Reorganization, the expense ratio for the combined Fund, adjusted to reflect current fees, before giving effect to any fee waivers or expense caps by the investment manager or its affiliates is expected to be lower than the expense ratio of the Selling Fund. Thus, Selling Fund shareholders are expected to experience lower per share expenses by holding shares of the Buying Fund than they would if they continued to hold shares in the Selling Fund. The Board considered that higher aggregate net assets resulting from the Reorganization and the opportunity for net cash inflows may reduce the risk that, if net assets of the Selling Fund fail to grow, or diminish, its total expense ratio could rise as fixed expenses become a larger percentage of net assets. - - ECONOMIES OF SCALE. The Board believes that by combining the Funds, the shareholders continue to have available to them a Fund with a larger portfolio of investment grade debt securities, but can at the same time take advantage of the economies of scale associated with a larger fund. For example, a larger fund should have an enhanced ability to effect portfolio transactions on more favorable terms and should have greater investment flexibility. Furthermore, fixed expenses such as audit expenses and accounting expenses that are charged on a per fund basis will be reduced. - - COSTS. The Board considered the fact that the investment manager has agreed to bear all solicitation expenses in order to achieve shareholder approval of the Reorganization and to bear any other costs of effecting the Reorganization (i.e., the filing, closing and other cost of consummating the transaction). - - DILUTION. The Board considered the fact that the Reorganization will not dilute the interests of the current shareholder because it would be effected on the basis of the relative net asset values per share of the Selling Fund and Buying Fund, respectively. Thus, a Class A shareholder of the Selling Fund will receive Class A shares of the Buying Fund equal in value to his or her Class A shares in the Selling Fund. - - PERFORMANCE AND OTHER CONSIDERATIONS. The Board considered the relative performance records of the Funds. The Board took into account the better track record of the Buying Fund, when compared to the Selling Fund, over the past five years. While the Board was cognizant of the fact that the Buying Fund's past performance is no guarantee of its future results, it did consider that the better track record of the Buying Fund could help attract more assets into the combined Fund and therefore could help stem the stream of outflows that have RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 23 been experienced by the Selling Fund. The Board considered that reduced outflows or increased inflows could help the Selling Fund shareholders achieve further economies of scale (see "Economies of Scale" above). The Board also considered the fact that the Funds have a similar investment objective and similar investment strategies and, absent the Reorganization, the two Funds may continue to compete against each other for the same investor base and, thus, could draw assets away from the other Fund. The Reorganization should allow for a concentrated selling effort thereby potentially benefiting both Funds. The Board further took into account the investment manager's belief that the Selling Fund, as a stand-alone Fund, was unlikely to experience any growth in assets as a result of the trend of net outflows. - - POTENTIAL BENEFITS TO THE INVESTMENT MANAGER AND ITS AFFILIATES. The Board also considered the potential benefits from the Reorganization that could be realized by the investment manager and its affiliates. The Board recognized that the potential benefits to the investment manager consist principally of the elimination of expenses incurred in duplicative efforts to administer separate funds. The Board also noted, however, that shareholders of the Selling Fund will benefit over time from any decrease in overall operating expense ratios resulting from the proposed Reorganization. BOARDS' DETERMINATIONS After considering the factors described above and other relevant information, at a meeting held on Nov. 9-10, 2005, the Selling Fund Board members, including a majority of the independent Board members, found that participation in the Reorganization is in the best interests of the Selling Fund and that the interests of existing shareholders of the Fund will not be diluted as a result of the Reorganization. The Board of Directors of the Buying Fund approved the Agreement at a meeting held on Nov. 9-10, 2005. Among other factors, the Board members considered the terms of the Agreement, the provisions intended to avoid the dilution of shareholder interests and the anticipated tax consequences of the Reorganization. The Board also took into account that the Buying Fund's expense ratio will decline as a result of the Reorganization (without taking into account fee waivers or expense caps). The Board found that participation in the Reorganization is in the best interests of the Buying Fund and that the interests of existing shareholders of the Buying Fund will not be diluted as a result of the Reorganization. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 24 RECOMMENDATION AND VOTE REQUIRED The Board recommends that shareholders approve the proposed Agreement. The Agreement must be approved by a majority of the voting power of all shares entitled to vote. If the Agreement is not approved, the Board will consider what further action should be taken. If shareholders approve the Reorganization, it will take place shortly after the shareholder meeting. During the period between the shareholder meeting and the Reorganization, or if the Reorganization is not approved, it will be important for the Fund to have a properly elected Board and an IMSAgreement that has been approved by shareholders. Therefore, the Board is also recommending that shareholders approve the other proposals. PROPOSAL 2. ELECT BOARD MEMBERS REFERENCE TO THE "FUND" IN THIS PROPOSAL IS A REFERENCE TO SELECTIVE. NOMINEES FOR THE BOARD. Nominees are listed in the following table. Each person is a nominee for each of the 90 RiverSource Funds. The following nominees were elected as members of the Board at the last regular shareholders' meeting: Mr. Arne H. Carlson, Ms. Anne P. Jones, Mr. Stephen R. Lewis, Jr., Mr. Alan K. Simpson, Ms. Alison Taunton-Rigby and Mr. William F. Truscott. The following nominees are recommended for the position of Board member by the independent Board members: Ms. Kathleen Blatz, Ms. Patricia M. Flynn, Mr. Jeffrey Laikind, Ms. Catherine James Paglia and Ms. Vikki L. Pryor. Each Board member will serve until the next regular shareholders' meeting or until he or she reaches the mandatory retirement age established by the Board. Under the current Board policy, members may serve until the end of the meeting following their 75th birthday, or the fifteenth anniversary of the first Board meeting they attend as members of the Board, whichever occurs first. This policy does not apply to Ms. Jones, who may retire following her 75th birthday. All nominees have agreed to serve. If an unforeseen event prevents a nominee from serving, your votes will be cast for the election of a substitute selected by the Board. Information on each nominee follows. Election requires a vote by a majority of the fund's shares voted at the meeting. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 25 TABLE A-3. INDEPENDENT NOMINEES
NAME, POSITION HELD WITH ADDRESS, FUND AND LENGTH PRINCIPAL OCCUPATION COMMITTEE AGE OF SERVICE DURING PAST FIVE YEARS OTHER DIRECTORSHIPS MEMBERSHIPS - -------------------------------------------------------------------------------------------------------------------------- Kathleen Blatz Board member Chief Justice, Minnesota Supreme 901 S. Marquette Ave. since January 2006 Court, 1998-2005 Minneapolis, MN 55402 Age 51 Arne H. Carlson Board member Chair, Board Services Corporation Contracts, 901 S. Marquette Ave. since 1999 (provides administrative services Executive, Minneapolis, MN 55402 to boards); former Governor of Investment Review, Age 71 Minnesota Board Effectiveness Patricia M. Flynn Board member Trustee Professor of Economics and Investment Review, 901 S. Marquette Ave. since 2004 Management, Bentley College; Joint Audit Minneapolis, MN 55402 former Dean, McCallum Graduate Age 54 School of Business, Bentley College Anne P. Jones Board member Attorney and consultant Joint Audit, Board 901 S. Marquette Ave. since 1985 Effectiveness, Minneapolis, MN 55402 Executive, Age 70 Investment Review
RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 26 INDEPENDENT NOMINEES (CONTINUED)
NAME, POSITION HELD WITH ADDRESS, FUND AND LENGTH OF PRINCIPAL OCCUPATION COMMITTEE AGE SERVICE DURING PAST FIVE YEARS OTHER DIRECTORSHIPS MEMBERSHIPS - -------------------------------------------------------------------------------------------------------------------------- Jeffrey Laikind Board member Former Managing Director, Shikiar American Progressive 901 S. Marquette Ave. since 2005 Asset Management Insurance Minneapolis, MN 55402 Age 70 Stephen R. Lewis, Jr. Board member President Emeritus and Professor Valmont Industries, Contracts, 901 S. Marquette Ave. since 2002 of Economics, Carleton College Inc. (manufactures Investment Review, Minneapolis, MN 55402 irrigation systems) Executive, Board Age 65 Effectiveness Catherine James Paglia Board member Director, Enterprise Asset Strategic Contracts, 901 S. Marquette Ave. since 2004 Management, Inc. (private real Distribution, Inc. Investment Review Minneapolis, MN 55402 estate and asset management (transportation, Age 53 company) distribution and logistics consultants) Vikki L. Pryor President and Chief Executive 901 S. Marquette Ave. Officer, SBLI USA Mutual Life Minneapolis, MN 55402 Insurance Company, Inc. since 1999 Age 52 Alan K. Simpson Board member Former three-term United States Investment Review, 1201 Sunshine Ave. since 1997 Senator for Wyoming Board Effectiveness Cody, Wyoming 82414 Age 74
RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 27 INDEPENDENT NOMINEES (CONTINUED)
NAME, POSITION HELD WITH ADDRESS, FUND AND LENGTH OF PRINCIPAL OCCUPATION COMMITTEE AGE SERVICE DURING PAST FIVE YEARS OTHER DIRECTORSHIPS MEMBERSHIPS - -------------------------------------------------------------------------------------------------------------------------- Alison Taunton-Rigby Board member Chief Executive Officer, Hybridon, Inc. Investment Review, 901 S. Marquette Ave. since 2002 RiboNovix, Inc. since 2003 (biotechnology) Contracts Minneapolis, MN 55402 (biotechnology); former President, Age 61 Forester Biotech
TABLE A-4. NOMINEE AFFILIATED WITH RIVERSOURCE INVESTMENTS
NAME, POSITION HELD WITH ADDRESS, FUND AND LENGTH OF PRINCIPAL OCCUPATION COMMITTEE AGE SERVICE DURING PAST FIVE YEARS OTHER DIRECTORSHIPS MEMBERSHIPS - -------------------------------------------------------------------------------------------------------------------------- William F. Truscott* Board member President - U.S. Asset Management 53600 Ameriprise since 2001, and Chief Investment Officer, Financial Center Vice President Ameriprise Financial, Inc. and Minneapolis, MN 55474 since 2002 President, Chairman of the Board Age 45 and Chief Investment Officer, RiverSource Investments, LLC since 2005; Senior Vice President - Chief Investment Officer, Ameriprise Financial, Inc. and Chairman of the Board and Chief Investment Officer, RiverSource Investments, LLC, 2001-2005; former Chief Investment Officer and Managing Director, Zurich Scudder Investments
* Interested person by reason of being an officer, director, securityholder and/or employee of RiverSource Investments. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 28 BOARD COMMITTEES. The Board has several committees that facilitate the work of the Board. The Executive Committee has authority to act for the full Board between meetings. The Contracts Committee receives and analyzes reports covering the level and quality of services provided under contracts with the fund and advises the Board regarding actions taken on these contracts during the annual review process. The Investment Review Committee considers investment management policies and strategies; investment performance; risk management techniques; and securities trading practices and reports areas of concern to the Board. The Board Effectiveness Committee's charter, Exhibit E, requires it to make recommendations regarding nominees based on criteria approved by the Board. All members of the Committee are independent. Nominee recommendations are based on a matrix of skill sets, experience, and geographical location and each nominee must have a background that demonstrates the ability to furthering the interest of all shareholders. The Committee will consider recommendations from shareholders who write to the Boards and provide detailed information about a candidate. All candidates are processed in the same fashion; first by evaluating a candidate's detailed information against the criteria; then interviewing those candidates who best fill vacancies identified by the matrix. You may write the Board by addressing a letter to Arne H. Carlson, the independent Chair of the Board or any other independent member of the Board, at Board Services Corporation, 901 Marquette Avenue South, Suite 2810, Minneapolis, MN 55402-3268. However, do not address letters to this address if you are requesting some action regarding your investments. In order to avoid any delay in processing a request regarding an investment, please address these requests to 70100 Ameriprise Financial Center, Minneapolis, MN 55474. The Joint Audit Committee, made up entirely of independent Board members, operates under a written charter, Exhibit F. The Joint Audit Committee meets with the independent auditors, internal auditors and corporate officers to review and discuss audited financial statements, reports, issues, and compliance matters. This Committee reports significant issues to the Board and makes recommendations to the independent Board members regarding the selection of the independent public accountant. More information regarding this Committee and the fund's independent auditor is found in Section C. During the 12-month period ended Sept. 30, 2005, the Board met 8 times, Executive 2 times, Contracts 7 times, Investment Review 5 times, Board Effectiveness 6 times and Joint Audit 4 times. All Board members had 100% attendance except for Mr. Simpson who had 82% attendance due to serious illness in January 2005. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 29 SHAREHOLDER COMMUNICATIONS WITH THE BOARD. Shareholders may communicate directly with the Board by sending correspondence to Arne H. Carlson, Chair of the Board, RiverSource Funds, 901 Marquette Avenue South, Suite 2810, Minneapolis, MN 55402-3268. Correspondence to specific individual Board members also may be directed to the same address. Account-specific correspondence should be directed to RiverSource Funds, 70100 Ameriprise Financial Center, Minneapolis, MN 55474. BOARD MEMBER COMPENSATION. The following table shows the total compensation received by each Board member from all of the RiverSource Funds. The funds do not pay retirement benefits to Board members. Under a Deferred Compensation Plan, independent Board members may defer receipt of their compensation. Deferred amounts are treated as though equivalent dollar amounts had been invested in shares of one or more designated RiverSource funds. TABLE A-5. BOARD MEMBER COMPENSATION(a)
AGGREGATE COMPENSATION FROM COMPENSATION FROM ALL RIVERSOURCE FUNDS FOR THE THE SELLING FUND DURING NOMINEE YEAR ENDED SEPT. 30, 2005 THE LAST FISCAL YEAR Flynn $143,675(d) $1,750(b) Jones 185,892 3,210 Lewis 204,700(e) 3,514(c) Paglia 157,708 1,809 Simpson 138,842 2,300 Taunton-Rigby 166,842 2,800
(a) Board members affiliated with RiverSource Investments or Board Services Corporation, a company providing administrative services to the RiverSource funds, are not paid by the RiverSource funds. Mr. Carlson's total compensation was $373,750. Board member compensation is a combination of a base fee and meeting fees. Because the spin-off of Ameriprise Financial from American Express Company necessitated 5 additional meetings, each Board member was paid $23,500 to cover those additional meetings. That cost, which is included in the aggregate compensation shown above, was borne by Ameriprise Financial. Ms. Blatz, Mr. Laikind and Ms. Pryor were not Board members prior to Sept. 30, 2005 and therefore are not included in the table. (b) Includes portion of compensation deferred in the amount of $646 from the Fund. (c) Includes portion of compensation deferred in the amount of $1,340 from the Fund. (d) Includes portion of compensation deferred in the amount of $60,371 from the RiverSource funds. (e) Includes portion of compensation deferred in the amount of $54,839 from the RiverSource funds. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 30 The following table shows the dollar range of shares of all the funds owned by the Board members and the dollar range of shares owned in the Selling Fund. TABLE A-6. BOARD MEMBER HOLDINGS* Dollar range of equity securities beneficially owned as of Sept. 30, 2005
AGGREGATE DOLLAR RANGE OF EQUITY DOLLAR RANGE OF SECURITIES OF ALL RIVERSOURCE FUNDS EQUITY SECURITIES IN NOMINEE OVERSEEN BY BOARD MEMBER THE SELLING FUND** Carlson over $100,000 None Flynn $10,001 - $50,000 None Jones over $100,000 $10,001 - $50,000 Lewis over $100,000 None Paglia $50,001 - $100,000 None Simpson $50,001 - $100,000 None Taunton-Rigby over $100,000 None Truscott over $100,000 None
* Ms. Blatz, Mr. Laikind and Ms. Pryor were not Board members prior to Sept. 30, 2005 and therefore are not included in the table. ** The percentage of shares beneficially owned by all Board members and officers as a group does not exceed 1% of any class of shares of any fund. FUND OFFICERS. In addition to Mr. Truscott, the fund's other executive officers are: LESLIE L. OGG, age 67. Vice president, general counsel and secretary since 1978. President of Board Services Corporation. JEFFREY P. FOX, age 50. Treasurer since 2002. Vice President - Investment Accounting of Ameriprise Financial. PAULA R. MEYER, age 51. President since 2002. Senior Vice President - Mutual Funds, RiverSource Investments. BETH E. WEIMER, age 52. Chief Compliance Officer since 2004. Vice President and Chief Compliance Officer, Ameriprise Financial and Chief Compliance Officer, RiverSource Investments. Officers serve at the pleasure of the Board. Officers are paid by Ameriprise Financial, RiverSource Investments or Board Services Corporation. During the last fiscal year, no officer earned more than $60,000 from any fund. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 31 PROPOSAL 3: APPROVE OR REJECT AN AMENDMENT TO THE ARTICLES OF INCORPORATION REFERENCE TO THE "FUND" IN THIS PROPOSAL IS A REFERENCE TO SELECTIVE. The fund is a Minnesota corporation and operates under an organizational document called the articles of incorporation. The articles of incorporation set forth various provisions relating to the authority of the fund to conduct business and the governance of the fund. The Board has approved, and recommends that shareholders approve, a proposal to amend the fund's articles of incorporation (the "Articles"). The fund's investments and investment policies will not change by virtue of the adoption of the amendment to the Articles. A. MINIMUM ACCOUNT VALUE Generally, shareholders must invest at least $2,000 to open a fund account. Section 7 of the Articles currently provides that the fund may redeem shares if an account falls below a value of $1,000. Small accounts can be costly to maintain and this provision allows the Board to close accounts that no longer meet the fund's minimum standards. However, the current provision does not allow the Board to redeem accounts if the value is higher than $1,000. In the future, there may be circumstances in which a minimum account value higher than $1,000 is in the best interest of the fund and its shareholders. As a consequence, the Board recommends that the Articles be amended to eliminate the reference to a specific dollar amount. As proposed, the amended Articles will permit the Board to establish a minimum account value that will be disclosed in the fund prospectus. The Board will be able to change the minimum account value without further action by shareholders. If the change is approved, the Articles will be amended as follows (additions are underlined, [STRIKETHROUGH]deletions are lined through[/STRIKETHROUGH]): Article III, Section 7 will be amended to read: Section 7. The Fund may redeem the shares of a shareholder if the amount invested is less than [STRIKETHROUGH]$1,000[/STRIKETHROUGH] an amount determined by the Board of Directors and set forth in the current Fund prospectus. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 32 B. NAME CHANGE. Historically the name of the fund has reflected the name of the investment manager. Since 1999, the name of the fund has included the letters AXP, which is an abbreviated form of the name American Express. In August 2005, American Express Financial Corporation ("AEFC"), the fund's investment manager changed its name to Ameriprise Financial, Inc. in anticipation of its spin off from American Express Company, its parent company. On Oct. 1, 2005, Ameriprise Financial transferred responsibility for the fund's investment advisory services to its wholly owned subsidiary, RiverSource Investments. The Board made a corresponding change to the name of the fund by substituting the name RiverSource for AXP. The fund is part of a corporation made up of one fund. The name of the corporate entity can be changed only with approval of the shareholders of all the underlying funds that make up the corporation. The Board recommends that the name of the corporate entity also be changed to include the name RiverSource instead of AXP. The change to the name of the corporation is shown in the table below. This is the first shareholder meeting since the spin off of the investment manager and the first opportunity for shareholders to consider a name change for the corporation. TABLE A-7. PROPOSED NAME OF CORPORATION
CURRENT NAME OF CORPORATION PROPOSED NAME OF CORPORATION AXP Income Series, Inc. RiverSource Income Series, Inc.
BOARD RECOMMENDATION AND VOTE REQUIRED. The Board recommends that you vote to approve the amendments to the Articles. The changes require the approval by a majority of the shares voted at the meeting. The changes will be effective when the amendments are filed with the Secretary of State's office. This filing is expected to occur shortly after the shareholder meeting. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 33 PROPOSAL 4: APPROVE OR REJECT AN INVESTMENT MANAGEMENT SERVICES AGREEMENT WITH RIVERSOURCE INVESTMENTS, LLC REFERENCE TO THE "FUND" IN THIS PROPOSAL IS A REFERENCE TO SELECTIVE. The fund pays fees to RiverSource Investments under an Investment Management Services Agreement (the "IMS Agreement") for investment management services. The services include providing the personnel, equipment and office facilities necessary for the management of the fund's assets. Subject to the oversight of the Board and consistent with the fund's investment policies, the investment manager decides what securities to buy, hold or sell. The investment manager also executes buy and sell orders and provides research and statistical data to support investment management activities. The Fund is part of a master/feeder structure. In this structure, the fund invests all of its assets in a master fund (the "portfolio") with the same policies as the fund. For purposes of this discussion, the portfolio is referred to as a "fund". INVESTMENT MANAGER. On Sept. 30, 2005, Ameriprise Financial became a publicly traded company and on Oct. 1, 2005 transferred the investment management functions and IMS Agreement to RiverSource Investments, a wholly-owned subsidiary. While these transfers did not cause a termination of the IMS Agreement, the Board determined that it would be prudent to give shareholders an opportunity to vote on the arrangement and the changes described below. SUMMARY OF KEY CHANGES A. STANDARD OF CARE. For all funds, the investment manager will be held to a higher standard of care than under the current IMS Agreement. B. CONFIDENTIALITY. The proposed IMS Agreement contains an explicit acknowledgement from the fund that the investment manager may be prevented from divulging or acting upon certain confidential information learned in connection with its activities, including the provision of investment advice to clients other than the fund. In addition, the proposed IMS Agreement contains additional confidentiality provisions prohibiting the fund from disclosing to third parties any information or advice furnished by the investment manager to the fund, unless required by law or necessary to provide services to the fund. C. AMENDMENTS. The proposed IMS Agreement clarifies that, as permitted under applicable law, the parties may make non-material amendments or modifications without obtaining shareholder approval. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 34 TERMS OF THE CURRENT IMS AGREEMENT. The fee the fund pays to RiverSource Investments for its services under the current IMS Agreement is based on the net assets of the fund and decreases as the size of the fund increases. The complete fee schedule for the fund and other similar funds managed by RiverSource Investments is found in Section C. The fund also pays its taxes, brokerage commission and nonadvisory expenses, which include custodian fees; audit and certain legal fees; fidelity bond premiums; registration fees for shares; consultant fees; Board compensation; corporate filing fees; organizational expenses; expenses incurred in connection with lending portfolio securities; and other expenses properly payable by the fund, approved by the Board. Section C includes information on the date of the current IMS Agreement, the date it was last approved by shareholders and the reason why it was submitted to shareholders at that time. A. STANDARD OF CARE. The proposed IMS Agreement revises the standard of care to provide that, except for bad faith, intentional misconduct or negligence in regard to the performance of its duties pursuant to the agreement, neither the investment manager, nor any of its respective directors, officers, partners, principals, employees, or agents shall be liable for any acts or omissions or for any loss suffered by the fund or its shareholders or creditors. This means that the investment manager is held to a higher standard of care. B. CONFIDENTIALITY. The current IMS Agreement contains an acknowledgement by the fund that the investment manager renders 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 fund. The proposed IMS Agreement adds an explicit acknowledgement from the fund that the investment manager may not be free to divulge to the fund or act, for the benefit of the fund, upon confidential information learned in connection with its activities, including the provision of investment advice to clients other than the fund. The current IMS Agreement is silent on the fund's obligation to refrain from divulging confidential information. The proposed IMS Agreement includes a new provision that prohibits the fund from disclosing to third parties any information or advice furnished to the fund by the investment manager, unless required by law or necessary to provide services to the fund. C. AMENDMENTS. The current IMS Agreement does not address whether shareholder approval must be obtained before non-material amendments or modifications may be made. The proposed IMS Agreement includes a new provision clarifying that the parties may make non-material amendments or modifications without obtaining shareholder approval, as permitted under applicable law. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 35 BASIS FOR RECOMMENDATION OF THE BOARD Following announcement of the spin-off of Ameriprise Financial from American Express Company, the Board and Ameriprise Financial agreed to review and revise, where appropriate, the terms of all contracts, including the IMS Agreement, pursuant to which Ameriprise Financial or its affiliates provides services to the fund. Each year, the Board determines whether to continue the IMS Agreement for the fund and, in doing so, evaluates the quality and level of service received under the IMS Agreement and the costs associated with those services. Accordingly, in March and April of each year, Ameriprise Financial prepares detailed reports for the Board, which include data prepared by independent organizations, to assist the Board in making this determination. The Board accords considerable weight to the work, deliberations and conclusions of its committees in determining whether to continue the IMS Agreement. After thorough review of the reports and data provided at a meeting held in person on April 14, 2005, the Board, including all of its independent members, determined that the quality and level of advisory services provided pursuant to the IMS Agreement for the fund were satisfactory and that fees were fair and reasonable. However, in light of the announced plans of the spin-off, the Board approved continuation of the IMS Agreement for only an interim period ending on the later of (i) the effective date of the spin-off; or (ii) the approval of a new investment management services agreement with Ameriprise Financial (or its subsidiary) by the shareholders of the fund, but in no event for a period longer than one year. While it was expected that the spin-off would not result in an "assignment" of an IMS Agreement under the 1940 Act and, therefore, would not cause the termination of the IMS Agreement according to its terms, Schulte Roth & Zabel LLP, retained as independent counsel to the Board, advised the Board that the legal question of whether the spin-off would result in an assignment turns on a highly fact-sensitive analysis. Therefore, the Board determined, as a matter of prudence, to proceed as if the IMS Agreement would terminate as a result of the spin-off. Accordingly, the Board determined to renew the IMS Agreement for the interim period only and to consider a new IMS Agreement for the fund prior to the spin-off. For the six months following the April 2005 meeting, the Board and its committees evaluated whether to approve a proposed IMS Agreement for the fund with post-spin Ameriprise Financial (or its subsidiary). Schulte Roth & Zabel LLP assisted the Board in fulfilling its statutory and other responsibilities associated with the spin-off and the resulting consideration of new contracts, including the proposed IMS Agreement. As a key step in this process, independent counsel sent, on behalf of the independent members of the Board, a detailed and expansive request for information to American Express Company and Ameriprise Financial, seeking specified information thought to be relevant to RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 36 the Board's consideration of the proposed contracts with post-spin Ameriprise Financial. The Board and its committees were provided with a wealth of written and oral information intended to assist them in considering the proposed contracts, including the proposed IMS Agreement. Furthermore, in connection with the Board's considerations as to whether post-spin Ameriprise Financial, as an independent entity, would be capable of continuing to provide a high quality of services to the funds, the Board's independent members retained their own financial adviser, Credit Suisse First Boston LLC ("CSFB"). At the Board's requests, CSFB provided various written materials and oral presentations analyzing the capital adequacy of Ameriprise Financial. The costs of independent counsel and CSFB and of additional meetings of the Board were borne by Ameriprise Financial as part of the commitment of American Express Company to ensure a complete and thorough review of the proposed spin-off and its effect on the services provided by Ameriprise Financial and its subsidiaries. During the course of the six-month period following the April 2005 meeting, the Board and its committees met at five in-person meetings to consider the information provided by American Express Company, Ameriprise Financial, independent counsel and CSFB. At an in-person meeting held on Sept. 8, 2005, based on all of the information provided as well as the deliberations occurring at that meeting and the previous meetings held since the announcement of the spin-off, the Board, including all of its independent members, approved each of the new contracts, including the proposed IMS Agreement. On Oct. 1, 2005, pursuant to an agreement between the Fund and Ameriprise Financial, the IMS Agreement was transferred to RiverSource Investments, a wholly-owned subsidiary of Ameriprise Financial. For these reasons, the Board, including all of its independent members, recommends that you approve the proposed IMS Agreement for your fund. THE BOARD'S SPECIFIC CONSIDERATIONS RELATING TO THE PROPOSED IMS AGREEMENT. In carrying out its legal responsibilities associated with the consideration of the proposed IMS Agreements, the Board evaluated the following four factors: (i) the nature, extent and quality of services to be provided by RiverSource Investments; (ii) the investment performance of the fund; (iii) the costs of the services to be provided and the profits to be realized by Ameriprise Financial; and (iv) the extent to which economies of scale would be realized as the fund grows and whether the fee level reflects these economies of scale for the benefit of fund investors. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 37 NATURE, EXTENT AND QUALITY OF SERVICES TO BE PROVIDED BY POST-SPIN AMERIPRISE FINANCIAL (AND ITS SUBSIDIARIES). The Board recognized that only a few months had passed since its April 2005 determination to renew the IMS Agreement for the fund and that in April 2005, it had concluded that the nature, extent and quality of services provided by Ameriprise Financial were satisfactory and consistent with those that would be expected for a fund family of the size of the RiverSource funds. However, the Board also recognized that this assessment must be supplemented with an evaluation of whether the spin-off or other factors would result in any changes to the advisory services currently provided to the funds. In this regard, the Board focused its evaluation on the following factors potentially impacting the nature, extent and quality of advisory services to be provided by RiverSource Investments: (i) Ameriprise Financial's projected capital structure and capital adequacy as a stand-alone entity; (ii) its legal and regulatory risks; (iii) its ability to retain and attract personnel; and (iv) its ability to successfully rebrand its products and services. Based on extensive presentations and reports by Ameriprise Financial, CSFB and independent counsel, the Board concluded that the proposed capital structure (which includes certain indemnification commitments made by American Express Company) should enable RiverSource Investments to continue to provide a high quality of advisory services to the funds. In making this determination, the Board took into account representations by management of Ameriprise Financial that projected capital levels would allow Ameriprise Financial (including RiverSource Investments) to continue to meet its legal and compliance responsibilities, build its distribution network, pursue technological upgrades, make capital commitments necessary to retain and attract key personnel devoted to legal and compliance responsibilities, portfolio management and distribution, and pursue smaller asset management acquisitions to help grow its business. The Board accorded significant weight to CSFB's confirmation as to the reasonableness of the foregoing representations. The Board also considered the fact that there were no expected departures of key personnel involved in the portfolio management, operations and marketing of the funds as a result of the announcement of the spin-off. The Board concluded that, based on all of the materials and information provided (and with the assistance of independent counsel), post-spin Ameriprise Financial (including RiverSource Investments) would be in a position to continue to provide a high quality of investment management services to the funds. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 38 INVESTMENT PERFORMANCE. The Board next focused on investment performance. The Board reviewed reports documenting the fund's performance over one-, three- and/or five-year periods, as well as the entire period during which its current portfolio manager has managed the fund, and compared the performance to relevant Lipper and market indices. The Board took into account its considerations in April 2005, in particular noted that the fund's investment performance in 2004 approximated the median. The Board also considered that it has received monthly performance reports for the funds. The Board and its committees concluded in September 2005 that there have been no significant deviations from April's overall performance data. COST OF SERVICES PROVIDED. The Board evaluated comparative fees and the costs of services to be provided under the current and proposed IMS Agreements, including fees charged by Ameriprise Financial (including RiverSource Investments and other subsidiaries) to its institutional clients and paid to subadvisers. The Board studied RiverSource Investments' effort (its "pricing philosophy") to set most funds' total expense ratios at or below the median expense ratio of their peer groups. The Board considered that the fund's management fees would decrease under the proposed IMS Agreement and its expense ratio would be below the median expense ratio of its Lipper peer group. The Board next considered the expected profitability to RiverSource Investments and its affiliates derived from their relationship with the fund, recalling the April 2005 determination that the profitability level was appropriate. The Board noted that projected profitability of RiverSource Investments would allow it to operate effectively and, at the same time, reinvest in its businesses. The Board also considered that the proposed changes in advisory fees for certain RiverSource funds as well as the mergers of certain funds would result in revenue gains, while taking into account that these increases would not materially alter profit margins due to expected increases in costs associated with the spin-off, particularly rebranding and separation. CSFB also reported that Ameriprise Financial's projected level of return on equity was generally reasonable in light of the returns on equity of its industry competitors. In evaluating profitability, the Board also considered the benefits Ameriprise Financial obtains through the use of commission dollars paid on portfolio transactions for the fund and from other business relationships that result from managing the fund. The Board also considered the fees charged by Ameriprise Financial to its institutional clients and paid to subadvisers, noting the differences in services provided in each case. In light of these considerations, the Board concluded that projected profitability levels were appropriate. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 39 ECONOMIES OF SCALE. The Board also considered the breakpoints in fees that would be triggered as the net asset levels of the fund grew and the extent to which shareholders would benefit from such growth. The Board observed that the fee schedule under the proposed IMS Agreement would continue to provide breakpoints similar to those in place pursuant to the current IMS Agreement. Accordingly, the Board concluded that the proposed IMS Agreement provides adequate opportunity for shareholders to realize benefits as fund assets grow. OTHER CONSIDERATIONS. In addition, the Board accorded weight to the fact that, under the proposed IMS Agreement, RiverSource Investments is held to a higher standard of care than under the current IMS Agreement. The Board also noted Ameriprise Financial's commitment to a culture that adheres to ethical business practice, assigns accountability to senior management and seeks to identify conflicts and propose appropriate action to minimize the risks posed by the conflicts. Furthermore, the Board recognized that it was not limited to considering management's proposed contracts. In this regard, the Board evaluated the circumstances under which it would consider the retention of an investment adviser different from RiverSource Investments (or its subsidiaries). The Board concluded, based on its consultation with independent counsel, that pursuing the retention of a different adviser was not necessary, primarily because, in its best judgment, RiverSource Investments continues to be basically the same organization (from a functional and managerial standpoint) as it was prior to the spin-off. The Board reasoned that shareholders purchased shares of the fund with an expectation that the current investment advisory organization would be servicing the fund. As a result of all of the foregoing, the Board determined that the fees to be paid under the proposed IMS Agreement were fair and reasonable in light of services proposed to be provided. BOARD RECOMMENDATION AND VOTE REQUIRED. For the foregoing reasons, the Board recommends that shareholders of the fund approve the proposed IMS Agreement. The proposed IMS Agreement must be approved by the lesser of (a) a majority of the fund's outstanding shares or (b) 67% of the shares voted at the meeting, so long as more than 50% of the shares actually vote. If shareholders approve the proposed IMS Agreement, it will take effect shortly after the shareholder meeting. If the proposed IMS Agreement is not approved, the Board will consider appropriate steps to take. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 40 SECTION B -- PROXY VOTING AND SHAREHOLDER MEETING INFORMATION REFERENCE TO THE "FUND" IN THIS SECTION IS A REFERENCE TO SELECTIVE. VOTING. You are entitled to vote based on your total dollar interest in the fund. Each dollar is entitled to one vote. For those of you who cannot come to the meeting, the Board is asking permission to vote for you. The shares will be voted as you instruct either by mail, telephone or internet. Signed proxy cards returned without instructions will be voted in favor of all proposals. In voting for Board members, you may vote all of your shares cumulatively. This means that you have the right to give each nominee an equal number of votes or divide the votes among the nominees as you wish. You have as many votes as the number of dollars you own on the record date, multiplied by the number of Board members to be elected. If you elect to withhold authority for any individual nominee or nominees, you may do so by marking the box labeled "For All Except," and by striking the name of any excepted nominee, as is further explained on the card itself. If you do withhold authority, the proxies will not vote shares equivalent to the proportionate number applicable to the names for which authority is withheld. All votes count toward a quorum, regardless of how they are voted (For, Against or Abstain). Broker non-votes will be counted toward a quorum but not toward the approval of any proposals. (Broker non-votes are shares for which the underlying owner has not voted and the broker holding the shares does not have authority to vote.) If your shares are held in an IRA account with Ameriprise Trust Company as custodian, you have the right to instruct the IRA Custodian how to vote those shares. The IRA Custodian will vote any shares for which it has not received voting instructions in proportionately the same manner -- either For, Against, or Abstain -- as other fund shareholders have voted. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 41 MASTER/FEEDER FUNDS. Selective currently is part of a master/feeder structure. The feeder fund seeks its investment objective by investing its assets in a master fund with the same policies. The master fund invests in and manages the securities. Immediately prior to the Reorganization, the Board intends to withdraw the Fund's assets from the master fund. REVOKING YOUR PROXY. If you change your mind after you vote and you can attend the meeting, simply inform the Secretary at the meeting that you will be voting your shares in person. Also, if you change your mind after you vote, but cannot attend the meeting, you may change your vote or revoke it by mail, telephone or internet. SIMULTANEOUS MEETINGS. The meeting will be held simultaneously with meetings of other RiverSource mutual funds. Each proposal will be voted on separately by shareholders of a corporation or by shareholders of a fund or by a class of shares of the fund where appropriate. If any shareholder objects to the holding of simultaneous meetings, the shareholder may move for an adjournment of his or her fund's meeting to a time immediately after the simultaneous meetings so that a meeting of that fund may be held separately. If a shareholder makes this motion, the persons named as proxies will take into consideration the reasons for the objection in deciding whether to vote in favor of the adjournment. SOLICITATION OF PROXIES. The Board is asking for your vote and for you to vote as promptly as possible. The investment manager will pay the expenses of the solicitation. Supplementary solicitations may be made by mail, telephone, electronic means or personal contact. SHAREHOLDER PROPOSALS. No proposals were received from shareholders. The RiverSource funds are not required to hold regular meetings of shareholders each year. However, meetings of shareholders are held from time to time and proposals of shareholders that are intended to be presented at future shareholder meetings must be submitted in writing to the RiverSource funds in reasonable time prior to the solicitation of proxies for the meeting. DISSENTERS' RIGHT OF APPRAISAL. Under Sections 302A.471 and 302A.473 of the Minnesota Business Corporation Act, Selling Fund shareholders are entitled to assert dissenters' rights in connection with the Reorganization and obtain payment of the "fair value" of their shares, provided that they comply with the requirements of Minnesota law. A copy of the relevant provisions is attached as Exhibit C. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 42 Notwithstanding the provisions of Minnesota law, the SEC has taken the position that use of state appraisal procedures by a mutual fund would be a violation of Rule 22c-1, the forward pricing rule, under the 1940 Act. This rule states that no mutual fund may redeem its shares other than at net asset value next computed after receipt of a request for redemption. It is the SEC's position that Rule 22c-1 supersedes appraisal provisions in state statutes. In the interest of ensuring equal valuation for all shareholders, dissenters' rights will be determined in accordance with the SEC's interpretation. As a result, if any shareholder elects to exercise dissenters' rights under Minnesota law, the Selling Fund intends to submit this question to a court of competent jurisdiction. In that event, a dissenting shareholder would not receive any payment until the end of the court proceeding. OTHER BUSINESS. The Board does not know at this time of any other business to come before the meetings. If something does come up, the proxies will use their best judgment to vote for you on the matter. ADJOURNMENT. In the event that not enough votes are received by the time scheduled for the meeting, the persons named as proxies may move for one or more adjournments of the meeting for a period of not more than 120 days in the aggregate to allow further solicitation of shareholders on the proposals. Any adjournment requires the affirmative vote of a majority of the voting power of the shares present at the meeting. The persons named as proxies will vote in favor of adjournment those shares they are entitled to vote that have voted in favor of the proposals. They will vote against any adjournment those shares that have voted against the proposals. The investment manager will pay the costs of any additional solicitation and of any adjourned meeting. A shareholder vote may be taken on one or more of the items in this proxy statement prior to adjournment if sufficient votes have been received. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 43 SECTION C -- CAPITALIZATION, OWNERSHIP OF FUND SHARES AND OTHER FUND INFORMATION REFERENCE TO THE "FUND" IN THIS SECTION IS A REFERENCE TO SELECTIVE. This section contains the following information about the funds, their investment manager and the independent auditors: TABLE CONTENT (all information is shown for the last fiscal year unless noted otherwise) C-1 Actual and pro forma capitalization of the Selling Fund and the Buying Fund C-2 Actual and pro forma ownership of fund shares C-3 Current management fee schedule for the fund and other RiverSource funds with similar investment objectives C-4 Payments the fund made to the investment manager and its affiliates C-5 Brokerage commissions the fund paid to a broker-dealer affiliate C-6 Information about shareholder approval of current management agreements C-7A Audit fees C-7B Audit-related, tax and other fees THE FUND'S INVESTMENT MANAGER AND DISTRIBUTOR. RiverSource Investments is the investment manager for each fund. Ameriprise Financial Services, Inc., a wholly-owned subsidiary of Ameriprise Financial, is the distributor for the fund. The address for RiverSource Investments and Ameriprise Financial Services, Inc. is 200 Ameriprise Financial Center, Minneapolis, MN 55474. PRESIDENT AND BOARD OF DIRECTORS OF RIVERSOURCE INVESTMENTS. William F. Truscott is President of RiverSource Investments. The following individuals are directors of RiverSource Investments. Each director is an officer of RiverSource Investments, 200 Ameriprise Financial Center, Minneapolis, MN 55474. Directors: William F. Truscott, Ward D. Armstrong and Michelle M. Keeley. CAPITALIZATION The following table shows the capitalization of the Funds as of Sept. 30, 2005 and on a pro forma basis, assuming the proposed Reorganization had taken place. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 44 TABLE C-1. ACTUAL AND PRO FORMA CAPITALIZATION OF THE SELLING FUND AND THE BUYING FUND
NET ASSET SHARES FUND NET ASSETS VALUE PER SHARE OUTSTANDING SELECTIVE Class A $ 550,902,844 $8.58 64,241,920 Class B 103,286,565 8.57 12,046,917 Class C 3,874,388 8.57 451,846 Class I 157,739,460 8.58 18,393,234 Class Y 47,038,967 8.57 5,489,949 DIVERSIFIED BOND Class A $1,742,668,306 $4.83 360,929,225 Class B 476,270,093 4.83 98,619,257 Class C 17,722,563 4.84 3,665,171 Class I 9,836 4.83 2,037 Class Y 144,541,408 4.83 29,933,483 DIVERSIFIED BOND - PRO FORMA WITH SELECTIVE Class A $ 2,293,571,150 $4.83 474,987,785 Class B 579,556,658 4.83 120,003,639 Class C 21,596,951 4.84 4,465,664 Class I 157,749,296 4.83 32,660,310 Class Y 191,580,375 4.83 39,672,400
RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 45 OWNERSHIP OF FUND SHARES The following table provides information on shareholders who owned more than 5% of each Fund's outstanding shares as of Sept. 30, 2005. As of Sept. 30, 2005, officers and Board members of the Fund as a group owned less than 1% of the outstanding shares of the Fund. TABLE C-2. ACTUAL AND PRO FORMA OWNERSHIP OF FUND SHARES
PERCENT OF PERCENT SHARES HELD OF SHARES FOLLOWING THE FUND 5% OWNERS HELD REORGANIZATION SELECTIVE Class A None -- -- Class B None -- -- Class C None -- -- Class I (1) 100% 100% Class Y (2) 98% 24% DIVERSIFIED BOND Class A (3) 6% 5% Class B None -- -- Class C None -- -- Class I (4) 100% * Class Y (5) 97% 73%
(1) RiverSource Portfolio Builder Moderate Fund owns 41.04%. RiverSource Portfolio Builder Moderate Aggressive Fund owns 27.82%. RiverSource Portfolio Builder Moderate Conservative Fund owns 18.21%. RiverSource Portfolio Builder Conservative Fund owns 12.93% (2) Ameriprise Trust Company, Minneapolis, MN owns of record 97.54%. (3) Charles Schwab & Co Inc., a brokerage firm, owns of record 6.36%. (4) Ameriprise Financial, Minneapolis, MN owns 100%. (5) Ameriprise Trust Company, Minneapolis, MN owns of record 96.62%. * Less than 1%. The following table shows the management fee schedule for the fund and other domestic fixed-income funds managed by the investment manager. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 46 TABLE C-3. CURRENT MANAGEMENT FEE SCHEDULE FOR THE FUND AND OTHER RIVERSOURCE FUNDS WITH SIMILAR INVESTMENT OBJECTIVES
MANAGEMENT FEE FEE CAP OR WAIVERS(1) RETAIL FUNDS (ANNUAL RATE; IN BILLIONS) (IF APPLICABLE) - ---------------------------------------------------------------------------------------------------------------- Core Bond First $1 - .54%; next $1 - .515%; next $1 - .49%; 0.89% until 7/31/06 Limited Duration next $3 - .465%; next $3 - .44%; over $9 - .415% Diversified Bond First $1 - .52%; next $1 - .495%; next $1 - .47%; Diversified Bond: 0.89% until Selective(2) next $3 - .445%; next $3 - .42%; over $9 - .395% 8/31/06 Short Duration Selective, Short Duration and U.S. Gov't Mortgage U.S. Gov't Mortgage: 0.89% until 5/31/06 Global Bond First $.25 - .77%; next $.25 - .745%; 1.25% until 10/31/06 next $.25 - .72%; next $.25 - .695%; over $1 - .67% High Yield Bond First $1 - .59%; next $1 - .565%; next $1 - .54%; next $3 - .515%; next $3 - .49%; over $9 - .465% Income Opportunities First $1 - .61%; next $1 - .585%; next $1 - .56%; 1.19% until 7/31/06 next $3 - .535%; next $3 - .51%; over $9 - .485% Inflation Protected First $1 - .44%; next $1 - .415%; next $1 - .39%; 0.84% until 7/31/06 Securities next $3 - .365%; next $3 - .34%; over $9 - .315%
(1) For all funds the information is shown for Class A shares. Fees and expenses in excess of the percentage shown will be waived. Fee caps for other classes of shares will vary slightly based on the expenses of those classes. (2) The fund is part of a master/feeder structure. Management fees are paid by the portfolio on behalf of the fund. TABLE C-4. FUND PAYMENTS TO THE INVESTMENT MANAGER AND ITS AFFILIATES*
FUND ADMIN DIST IMS SERVICE TA Selective $477,298 $3,204,968 $4,922,235 $64,993 $1,321,600
* The Administrative Services Agreement ("Admin") is between the fund and Ameriprise Financial. The Agreement of Distribution ("Dist") and Shareholder Service Agreement ("Service") are between the fund and Ameriprise Financial Services, Inc. The Investment Management Services Agreement ("IMS") is between the fund and RiverSource Investments. The Transfer Agent Agreement ("TA") is between the fund and RiverSource Service Corporation. Services under these agreements will continue to be provided by the same companies after the IMS Agreement is approved. TABLE C-5. BROKERAGE COMMISSIONS PAID TO BROKER-DEALER AFFILIATES
BROKER/ AMOUNT OF % OF ALL FUND DEALER COMMISSIONS COMMISSIONS Selective N/A N/A N/A
RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 47 TABLE C-6. DATES RELATING TO APPROVAL OF MANAGEMENT AGREEMENT
DATE LAST REASON DATE OF APPROVED BY SUBMITTED TO FUND CONTRACT SHAREHOLDERS SHAREHOLDERS Selective 6/10/96 9/9/94 1
(1) Shareholders approved (1) basing the fee solely on the assets of the fund, not on the assets of all of the funds in the fund family and (2) eliminating provisions regarding administration and accounting services. The fund and the investment manager then entered into a separate Administrative Services Agreement. THE FUND'S INDEPENDENT REGISTERED PUBLIC ACCOUNTANT. The 1940 Act provides that every registered investment company must be audited at least once each year by independent registered public accountants selected by a majority of the independent Board members. The Selling Fund's Board has selected KPMG LLP to be the Fund's independent registered public accountant for the current fiscal year. KPMG LLP, in accordance with Independence Standards Board Standard No. 1 ("ISB No. 1"), has confirmed in writing to the Board's Joint Audit Committee that they are independent accountants with respect to the Fund. The independent accountants examine the financial statements for the Fund that are set forth in the annual report to shareholders and provide other requested non-audit and tax-related services to the Fund. The Joint Audit Committee reviewed and discussed the audited financial statements with RiverSource Investments and reviewed with KPMG LLP the matters required to be discussed by SAS 61 (for example, methods used to account for significant unusual transactions). The Joint Audit Committee does not consider other non-audit services provided by KPMG LLP to be incompatible with maintaining the independence of KPMG LLP in its audits of the Fund, taking into account representations from KPMG LLP, in accordance with ISB No. 1, regarding its independence from the Fund and its related entities. Representatives of KPMG LLP are expected to be present at the meeting. They will be given the opportunity to make a statement to shareholders and are expected to be available to respond to any questions that may be raised at the meeting. JOINT AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES. Pursuant to the pre-approval requirements of the Sarbanes-Oxley Act of 2002, all services to be performed by KPMG LLP for the Fund; the Fund's investment adviser; and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the Fund, must be pre-approved by the Joint Audit Committee. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 48 AUDIT FEES. During the last two fiscal years, the aggregate fees paid to KPMG LLP for professional services rendered for the audit of the annual financial statements or services that are normally provided in connection with statutory and regulatory filings for the fund were as follows: TABLE C-7A. AUDIT FEES DURING THE FUND'S LAST TWO FISCAL YEARS
FUND LAST FISCAL YEAR PREVIOUS FISCAL YEAR Selective $44,000 $44,000
The following table shows aggregate fees paid by the Fund to KPMG LLP in each of the last two fiscal years for services that are not included in Table C-7A. All of the services performed were pre-approved by the Joint Audit Committee. - - AUDIT-RELATED FEES. Assurance and related services that are reasonably related to the performance of the audit or review. - - TAX FEES. Tax compliance, tax advice and tax planning. - - ALL OTHER FEES. All other services rendered by KPMG LLP. TABLE C-7B. AUDIT-RELATED, TAX AND OTHER FEES DURING THE FUND'S LAST TWO FISCAL YEARS
AGGREGATE AGGREGATE AGGREGATE AUDIT-RELATED FEES TAX FEES OTHER FEES - --------------------------------------------------------------------------------- LAST PREVIOUS LAST PREVIOUS LAST PREVIOUS FISCAL FISCAL FISCAL FISCAL FISCAL FISCAL FUND YEAR YEAR YEAR YEAR YEAR YEAR Selective $211 $224 $6,950 $6,650 $461 $0
INVESTMENT MANAGER RELATED FEES Aggregate Non-Audit Fees for Selective, Investment Manager and its Affiliates For the year ended Sept. 30, 2005, the aggregate non-audit fees billed for services rendered to the Fund, to the investment manager and to any entity controlling, controlled by or under common control with the investment manager that provides ongoing services to the funds was $94,622. For the year ended Sept. 30, 2004, the aggregate amount was $133,774. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT 49 EXHIBIT A FORM OF AGREEMENT AND PLAN OF REORGANIZATION This Agreement and Plan of Reorganization dated as of Nov. 10, 2005 (the "Agreement") is between AXP Income Series, Inc. (the "Selling Corporation"), a Minnesota corporation, on behalf of its series, RiverSource Selective Fund (the "Selling Fund"), and AXP Fixed Income Series, Inc. (the "Buying Corporation), a Minnesota corporation, on behalf of its series, RiverSource Diversified Bond Fund (the "Buying Fund"), and RiverSource Investments, LLC (solely for the purposes of Section 3c and 10 of the Agreement). In consideration of their mutual promises, the parties agree as follows: 1. SHAREHOLDER APPROVAL. The Selling Fund will call a meeting of its shareholders for the purpose of approving the Agreement and the transactions it contemplates (the "Reorganization"). The Buying Fund agrees to furnish data and information, as reasonably requested, for the proxy statement to be furnished to shareholders of the Selling Fund. 2. REORGANIZATION. a. Plan of Reorganization. The Reorganization will be a reorganization within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended (the "Code"). At the Closing, the Selling Corporation will convey all of the assets of the Selling Fund to the Buying Fund. The Buying Fund will assume all liabilities of the Selling Fund. At the Closing, the Buying Corporation will deliver shares of the Buying Fund, including fractional shares, to the Selling Corporation. The number of shares will be determined by dividing the value of the net assets of shares of the Selling Fund, computed as described in paragraph 3(a), by the net asset value of one share of the Buying Fund, computed as described in paragraph 3(b). The Selling Fund will not pay a sales charge on the receipt of Buying Fund shares in exchange for the assets of the Selling Fund. In addition, the shareholders of the Selling Fund will not pay a sales charge on distribution to them of shares of the Buying Fund. b. Closing and Effective Time of the Reorganization. The Reorganization and all related acts necessary to complete the Reorganization (the "Closing") will occur on the first day on which the New York Stock Exchange (the "NYSE") is open for business following approval of shareholders of the Selling Fund and receipt of all necessary regulatory approvals, or such later date as the parties may agree. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT A.1 3. VALUATION OF NET ASSETS. a. The net asset value of shares of the Selling Fund will be computed as of the close of regular trading on the NYSE on the day of Closing (the "Valuation Date") using the valuation procedures in the Buying Fund's prospectus. b. The net asset value per share of shares of the Buying Fund will be determined as of the close of regular trading on the NYSE on the Valuation Date, using the valuation procedures in the Buying Fund's prospectus. c. At the Closing, the Selling Fund will provide the Buying Fund with a copy of the computation showing the valuation of the net asset value per share of shares of the Selling Fund on the Valuation Date. The Buying Fund will provide the Selling Fund with a copy of the computation showing the determination of the net asset value per share of shares of the Buying Fund on the Valuation Date. Both computations will be certified by an officer of RiverSource Investments, LLC, the investment manager. 4. LIQUIDATION AND DISSOLUTION OF THE SELLING FUND. a. As soon as practicable after the Valuation Date, the Selling Corporation will liquidate the Selling Fund and distribute shares of the Buying Fund to the Selling Fund's shareholders of record. The Buying Fund will establish shareholder accounts in the names of each Selling Fund shareholder, representing the respective pro rata number of full and fractional shares of the Buying Fund due to each shareholder. All issued and outstanding shares of the Selling Fund will simultaneously be cancelled on the books of the Selling Corporation. The Buying Fund or its transfer agent will establish shareholder accounts in accordance with instructions from the Selling Corporation. b. Immediately after the Valuation Date, the share transfer books of the Selling Corporation relating to the Selling Fund will be closed and no further transfer of shares will be made. c. Promptly after the distribution, the Buying Fund or its transfer agent will notify each shareholder of the Selling Fund of the number of shares distributed to the shareholder and confirm the registration in the shareholder's name. d. As promptly as practicable after the liquidation of the Selling Fund, and in no event later than twelve months from the date of the Closing, the Selling Fund will be dissolved. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT A.2 5. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BUYING CORPORATION. The Buying Corporation represents and warrants to the Selling Fund as follows: a. Organization, Existence, etc. The Buying Corporation is a corporation duly organized, validly existing and in good standing under the laws of the state of Minnesota and has the power to carry on its business as it is now being conducted. b. Registration as Investment Company. The Buying Fund is a series of the Buying Corporation, registered under the Investment Company Act of 1940 (the "1940 Act") as an open-end, management investment company. c. Capitalization. The Buying Corporation has authorized capital of 10,000,000,000 shares of common stock, par value $0.01 per share. All of the outstanding shares have been duly authorized and are validly issued, fully paid and non-assessable. Since the Buying Fund is engaged in the continuous offering and redemption of its shares, the number of outstanding shares may vary daily. d. Financial Statements. The audited financial statements as of the end of the last fiscal year, and the subsequent unaudited semi-annual financial statements, if any (the "Buying Fund Financial Statements"), fairly present the financial position of the Buying Fund, and the results of its operations and changes in its net assets for the periods shown. e. Shares to be Issued Upon Reorganization. The shares to be issued in connection with the Reorganization will be duly authorized and, at the time of the Closing, will be validly issued, fully paid and non-assessable. f. Authority Relative to the Agreement. The Buying Corporation has the power to enter into and carry out the obligations described in this Agreement. The Agreement and the transactions contemplated by it have been duly authorized by the Board of Directors of the Buying Corporation and no other proceedings by the Buying Corporation or the Buying Fund are necessary. g. No Violation. The Buying Corporation is not in violation of its Articles of Incorporation or By-Laws (the "Articles") or in default in the performance of any material agreement to which it is a party. The execution of this Agreement and the completion of the transactions contemplated by it will not conflict with, or constitute a breach of, any material contract or other instrument to which the Buying Fund is subject. The transactions will not result in any violation of the provisions of the Articles or any law, administrative regulation or administrative or court decree applicable to the Buying Fund. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT A.3 h. Liabilities. There are no liabilities of the Buying Fund other than: - liabilities disclosed in the Buying Fund Financial Statements, - liabilities incurred in the ordinary course of business subsequent to the date of the latest annual or semi-annual financial statements, or - liabilities previously disclosed to the Selling Fund, none of which has been materially adverse to the business, assets or results of operation of the Buying Fund. i. Litigation. There is no litigation, administrative proceeding or investigation before any court or governmental body currently pending or, to the knowledge of the Buying Fund, threatened, that would materially and adversely affect the Buying Fund, its financial condition or the conduct of its business, or that would prevent or hinder completion of the transactions contemplated by this Agreement. The Buying Fund knows of no facts that might form the basis for the institution of any such litigation, proceeding or investigation and the Buying Fund is not a party to or subject to the provisions of any order, decree or judgment. j. Contracts. Except for contracts and agreements previously disclosed to the Selling Corporation, the Buying Fund is not a party to or subject to any material contract, debt instrument, plan, lease, franchise, license or permit. k. Taxes. The Buying Fund has qualified as a regulated investment company under the Internal Revenue Code with respect to each taxable year since commencement of its operations and will qualify as a regulated investment company at all times through the Closing. As of the Closing, the Buying Fund will (i) have filed all federal and other tax returns and reports that have been required to be filed, (ii) have paid or provided for payment of all federal and other taxes shown to be due on such returns or on any assessments received, (iii) have adequately provided for all tax liabilities on its books, (iv) except as disclosed to the Selling Fund, not have had any tax deficiency or liability asserted against it or question with respect thereto raised, and (v) except as disclosed to the Selling Fund, not be under audit by the Internal Revenue Service or by any state or local tax authority for taxes in excess of those already paid. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT A.4 l. Registration Statement. The Buying Fund will file a registration statement on Form N-14 (the "Registration Statement") with the Securities and Exchange Commission under the Securities Act of 1933 (the "1933 Act") relating to the shares to be issued in the Reorganization. At the time the Registration Statement becomes effective, at the time of the shareholders' meeting and at the Closing, the Registration Statement will not contain an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein not misleading. However, none of the representations and warranties in this subsection apply to statements in, or omissions from, the Registration Statement made in reliance on information furnished by the Selling Fund for use in the Registration Statement. 6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE SELLING CORPORATION. The Selling Corporation represents and warrants to the Buying Fund as follows: a. Organization, Existence, etc. The Selling Corporation is a corporation duly organized, validly existing and in good standing under the laws of the state of Minnesota and has the power to carry on its business as it is now being conducted. b. Registration as Investment Company. The Selling Fund is a series of the Selling Corporation, registered under the 1940 Act as an open-end, management investment company. c. Capitalization. The Selling Corporation has authorized capital of 10,000,000,000 shares of common stock, par value $0.01 per share. All of the outstanding shares have been duly authorized and are validly issued, fully paid and non-assessable. Since the Selling Fund is engaged in the continuous offering and redemption of its shares, the number of outstanding shares may vary daily. d. Financial Statements. The audited financial statements as of the end of the last fiscal year, and the subsequent unaudited semi-annual financial statements, if any (the "Selling Fund Financial Statements"), fairly present the financial position of the Selling Fund, and the results of its operations and changes in its net assets for the periods shown. e. Authority Relative to the Agreement. The Selling Corporation has the power to enter into and to carry out its obligations under this Agreement. The Agreement and the transactions contemplated by it have been duly authorized by the Board of Directors of the Selling Corporation and no other proceedings by the Selling Corporation or the Selling Fund are necessary. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT A.5 f. No Violation. The Selling Corporation is not in violation of its Articles or in default in the performance of any material agreement to which it is a party. The execution of this Agreement and the completion of the transactions contemplated by it will not conflict with or constitute a breach of, any material contract to which the Selling Fund is subject. The transactions will not result in any violation of the provisions of the Articles or any law, administrative regulation or administrative or court decree applicable to the Selling Fund. g. Liabilities. There are no liabilities of the Selling Fund other than: - liabilities disclosed in the Selling Fund Financial Statements, - liabilities incurred in the ordinary course of business subsequent to the date of the latest annual or semi-annual financial statements, or - liabilities previously disclosed to the Buying Fund, none of which has been materially adverse to the business, assets or results of operation of the Selling Fund. h. Litigation. There is no litigation, administrative proceeding or investigation before any court or governmental body currently pending or, to the knowledge of the Selling Fund, threatened, that would materially and adversely affect the Selling Fund, its financial condition or the conduct of its business, or that would prevent or hinder completion of the transactions contemplated by this Agreement. The Selling Fund knows of no facts that might form the basis for the institution of any such litigation, proceeding or investigation and is not a party to or subject to the provisions of any order, decree or judgment. i. Contracts. Except for contracts and agreements previously disclosed to the Buying Corporation, the Selling Fund is not a party to or subject to any material contract, debt instrument, plan, lease, franchise, license or permit. j. Taxes. The Selling Fund has qualified as a regulated investment company under the Internal Revenue Code with respect to each taxable year since commencement of its operations and will qualify as regulated investment company at all times through the Closing. As of the Closing, the Selling Fund will (i) have filed all federal and other tax returns and reports that have been required to be filed, (ii) have paid or provided for payment of all federal and other taxes shown to be due on such returns or on any assessments received, (iii) have adequately provided for all tax liabilities on its books, (iv) except as disclosed to the Buying Fund, not have had any tax deficiency or liability asserted against it or question with respect thereto raised, and (v) except as disclosed to the Buying Fund, not be under audit by the Internal Revenue Service or by any state or local tax authority for taxes in excess of those already paid. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT A.6 k. Fund Securities. All securities listed in the schedule of investments of the Selling Fund as of the Closing will be owned by the Selling Fund free and clear of any encumbrances, except as indicated in the schedule. l. Registration Statement. The Selling Fund will cooperate with the Buying Fund and will furnish information relating to the Selling Corporation and the Selling Fund required in the Registration Statement. At the time the Registration Statement becomes effective, at the time of the shareholders' meeting and at the Closing, the Registration Statement, as it relates to the Selling Corporation or the Selling Fund, will not contain an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein not misleading. However, the representations and warranties in this subsection apply only to statements in or omissions from the Registration Statement made in reliance upon information furnished by the Selling Corporation or the Selling Fund for use in the Registration Statement. 7. CONDITIONS TO OBLIGATIONS OF THE BUYING CORPORATION. The obligations of the Buying Corporation with respect to the Reorganization are subject to the satisfaction of the following conditions: a. Shareholder Approval. This Agreement will have been approved by the affirmative vote of the holders of the majority of the voting power of all Selling Fund shares entitled to vote. b. Representations, Warranties and Agreements. The Selling Corporation and the Selling Fund will have complied with this Agreement and each of the representations and warranties in this Agreement will be true in all material respects as of the Closing. An officer of the Selling Corporation will provide a certificate to the Buying Fund confirming that, as of the Closing, the representations and warranties set forth in Section 6 are true and correct and that there have been no material adverse changes in the financial condition, results of operations, business, properties or assets of the Selling Fund since the date of its last financial statement, except as otherwise indicated in any financial statements, certified by an officer of the Selling Corporation, and delivered to the Buying Fund on or prior to the last business day before the Closing. c. Regulatory Approvals. - The Registration Statement referred to in Section 5(l) will be effective and no stop orders under the 1933 Act will have been issued. - All necessary approvals, consents and exemptions from federal and state regulatory authorities will have been obtained. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT A.7 d. Tax Opinion. The Buying Corporation will have received the opinion of Ropes & Gray LLP dated as of the Closing, as to the federal income tax consequences of the Reorganization to the Buying Fund and its shareholders. For purposes of rendering their opinion, Ropes & Gray LLP may rely, as to factual matters, upon the statements made in this Agreement, the proxy statement which will be distributed to the shareholders of the Selling Fund, and other written representations as an officer of the Selling Corporation will have verified as of Closing. The opinion of Ropes & Gray LLP will be to the effect that: (i) neither the Selling Fund nor the Buying Fund will recognize any gain or loss upon the transfer of the assets of the Selling Fund to, and assumption of its liabilities by, the Buying Fund in exchange for shares of the Buying Fund and upon the distribution of the shares to the Selling Fund shareholders in exchange for their shares of the Selling Fund; (ii) the shareholders of the Selling Fund who receive shares of the Buying Fund in the Reorganization will not recognize any gain or loss on the exchange of their shares of the Selling Fund for the shares of the Buying Fund; (iii) the holding period and the basis of the shares received by the Selling Fund shareholders will be the same as the holding period and the basis of the shares of the Selling Fund surrendered in the exchange; (iv) the holding period and the basis of the assets acquired by the Buying Fund will be the same as the holding period and the basis of the assets to the Selling Fund immediately prior to the Reorganization. e. Opinion of Counsel. The Buying Corporation will have received an opinion of counsel for the Selling Corporation, dated as of the Closing, to the effect that: (i) the Selling Corporation is a corporation duly organized and validly existing under the laws of the state of Minnesota; (ii) the Selling Fund is a series of the Selling Corporation, an open-end investment company registered under the 1940 Act; (iii) this Agreement and the Reorganization have been duly authorized and approved by all requisite action of the Selling Corporation and the Selling Fund and this Agreement has been duly executed by, and is a valid and binding obligation of, the Selling Corporation. f. Declaration of Dividend. The Selling Fund, prior to the Closing, has declared a dividend or dividends, which, together with all previous such dividends, shall have the effect of distributing to the Selling Fund shareholders (i) all of the excess of (x) the Selling Fund's investment income excludable from gross income under Section 103 of the Code over (y) the Selling Fund's deductions disallowed under Sections 265 and 171 of the Code, (ii) all of the Selling Fund's investment company RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT A.8 taxable income as defined in Section 852 of the Code (in each case computed without regard to any deduction for dividends paid) and (iii) all of the Selling Fund's net capital gain realized (after reduction for any capital loss carryover), in each case for the current taxable year (which will end on the Closing date) and any preceding taxable years for which such a dividend is eligible to be made under Section 855 of the Code. 8. CONDITIONS TO OBLIGATIONS OF THE SELLING CORPORATION. The obligations of the Selling Corporation with respect to the Reorganization are subject to the satisfaction of the following conditions: a. Shareholder Approval. This Agreement will have been approved by the affirmative vote of the holders of the majority of the voting power of all Selling Fund shares entitled to vote. b. Representations, Warranties and Agreements. The Buying Fund will have complied with this Agreement and each of the representations and warranties in this Agreement will be true in all material respects as of the Closing. An officer of the Buying Corporation will provide a certificate to the Selling Fund confirming that, as of the Closing, the representations and warranties set forth in Section 5 are true and correct and that there have been no material adverse changes in the financial condition, results of operations, business, properties or assets of the Buying Fund since the date of its last financial statement, except as otherwise indicated in any financial statements, certified by an officer of the Buying Corporation, and delivered to the Selling Fund on or prior to the last business day before the Closing. c. Regulatory Approvals. - The Registration Statement referred to in Section 5(l) will be effective and no stop orders under the 1933 Act will have been issued. - All necessary approvals, consents and exemptions from federal and state regulatory authorities will have been obtained. d. Tax Opinion. The Selling Corporation will have received the opinion of Ropes & Gray LLP dated as of the Closing, as to the federal income tax consequences of the Reorganization to the Selling Fund and its shareholders. For purposes of rendering their opinion, Ropes & Gray LLP may rely, as to factual matters, upon the statements made in this Agreement, the proxy statement which will be distributed to the shareholders of the Selling Fund, and other written representations as an officer of the Buying Corporation will have verified as of Closing. The opinion of Ropes & Gray LLP will be to the effect that: (i) neither the Selling Fund nor the Buying Fund will recognize any gain or loss RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT A.9 upon the transfer of the assets of the Selling Fund to, and assumption of its liabilities by, the Buying Fund in exchange for shares of the Buying Fund and upon the distribution of the shares to the Selling Fund shareholders in exchange for their shares of the Selling Fund; (ii) the shareholders of the Selling Fund who receive shares of the Buying Fund in the Reorganization will not recognize any gain or loss on the exchange of their shares of the Selling Fund for the shares of the Buying Fund; (iii) the holding period and the basis of the shares received by the Selling Fund shareholders will be the same as the holding period and the basis of the shares of the Selling Fund surrendered in the exchange; (iv) the holding period and the basis of the assets acquired by the Buying Fund will be the same as the holding period and the basis of the assets to the Selling Fund immediately prior to the Reorganization; and (v) the Buying Fund will succeed to and take into account the items of the Selling Fund described in Section 381(c) of the Code, subject to the conditions and limitations specified in Sections 381, 382, 383, and 384 of the Code and the regulations thereunder. e. Opinion of Counsel. The Selling Corporation will have received the opinion of counsel for the Buying Corporation, dated as of the Closing, to the effect that: (i) the Buying Corporation is a corporation duly organized and validly existing under the laws of the state of Minnesota; (ii) the Buying Fund is a series of the Buying Corporation, an open-end investment company registered under the 1940 Act; (iii) this Agreement and the Reorganization have been authorized and approved by all requisite action of the Buying Corporation and the Buying Fund and this Agreement has been duly executed by, and is a valid and binding obligation of, the Buying Corporation; and (iv) the shares to be issued in the Reorganization are duly authorized and upon issuance in accordance with this Agreement will be validly issued, fully paid and non-assessable shares of the Buying Fund. 9. AMENDMENT; TERMINATION; NON-SURVIVAL OF COVENANTS, WARRANTIES AND REPRESENTATIONS. a. This Agreement may be amended in writing if authorized by the respective Boards of Directors. The Agreement may be amended at any time before or after approval by the shareholders of the Selling Fund, but after shareholder approval, no amendment shall be made that substantially changes the terms of paragraphs 2 or 3. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT A.10 b. At any time prior to the Closing, any of the parties may waive in writing (i) any inaccuracies in the representations and warranties made to it and (ii) compliance with any of the covenants or conditions made for its benefit. However, neither party may waive the requirement to obtain shareholder approval or the requirement to obtain a tax opinion. c. The Selling Corporation may terminate this Agreement at any time prior to the Closing by notice to the Buying Corporation if a material condition to its performance or a material covenant of the Buying Corporation on behalf of the Buying Fund is not fulfilled on or before the date specified for its fulfillment or a material breach of this Agreement is made by the Buying Corporation on behalf of the Buying Fund and is not cured. d. The Buying Corporation may terminate this Agreement at any time prior to the Closing by notice to the Selling Corporation if a material condition to its performance or a material covenant of the Selling Corporation on behalf of the Selling Fund is not fulfilled on or before the date specified for its fulfillment or a material breach of this Agreement is made by the Selling Corporation on behalf of the Selling Fund and is not cured. e. This Agreement may be terminated by any party at any time prior to the Closing, whether before or after approval by the shareholders of the Selling Fund, without any liability on the part of either party or its respective directors, officers, or shareholders, on written notice to the other party, and shall be terminated without liability as of the close of business on Dec. 31, 2006, or a later date agreed upon by the parties, if the Closing is not on or prior to that date. f. The representations, warranties and covenants contained in this Agreement, or in any document delivered in connection with this Agreement, will survive the Reorganization. 10. EXPENSES. RiverSource Investments, LLC will pay all solicitation expenses in order to achieve shareholder approval of the Reorganization whether or not the Reorganization is completed and will bear the other costs of effecting the Reorganization. 11. GENERAL. a. Headings. The headings contained in this Agreement are for reference purposes only and will not affect the meaning or interpretation of this Agreement. Nothing in this Agreement is intended to confer upon any other person any rights or remedies by reason of this Agreement. b. Governing Law. This Agreement will be governed by the laws of the state of Minnesota. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT A.11 12. INDEMNIFICATION. Each party will indemnify and hold the other and its officers and directors (each an "Indemnitee") harmless from and against any liability or other cost and expense, in connection with the defense or disposition of any action, suit, or other proceeding, before any court or administrative or investigative body in which the Indemnitee may be involved as a party, with respect to actions taken under this Agreement. However, no Indemnitee will be indemnified against any liability or expense arising by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of the Indemnitee's position. IN WITNESS WHEREOF, each of the parties has caused this Agreement to be signed. AXP Income Series, Inc. on behalf of RiverSource Selective Fund By ------------------------------------------- Leslie L. Ogg Vice President AXP Fixed Income Series, Inc. on behalf of RiverSource Diversified Bond Fund By ------------------------------------------- Leslie L. Ogg Vice President The undersigned is a party to this Agreement for purposes of Section 3c and 10 only. RiverSource Investments, LLC By ------------------------------------------- Paula R. Meyer Senior Vice President - Mutual Funds RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT A.12 EXHIBIT B REFERENCE TO THE "FUND" IN THIS EXHIBIT IS A REFERENCE TO DIVERSIFIED BOND. MATTERS SUBJECT TO APPROVAL AT REGULAR MEETING OF BUYING FUND In addition to voting on proposals to elect Board members, to amend the Articles of Incorporation and to approve the IMS Agreement, Buying Fund shareholders will consider the following: APPROVE OR REJECT CHANGES IN FUNDAMENTAL INVESTMENT POLICIES The fund has some investment policies that are fundamental. This means the policies can be changed only with the approval of shareholders. RiverSource Investments recommended to the Board that certain of those policies be modified in order to standardize the policies for all RiverSource funds and to eliminate unnecessary limitations. RiverSource Investments believes that increased standardization will help to promote operational efficiencies and facilitate monitoring of compliance with fundamental investment policies. Adoption of a new or revised policy is not intended to change current investment techniques employed for the fund. The Board recommends the following changes to the fund's fundamental investment policies: A. DIVERSIFICATION. The Board recommends that the fund's fundamental policy with respect to diversification be revised to give the fund the maximum flexibility permitted by the 1940 Act. The Board recommends that shareholders vote to replace the fund's current fundamental investment policy with the following policy (additional or revised language is underlined): The fund will not invest more than 5% of its total assets in securities of any company, government, or political subdivision thereof, except the limitation will not apply to investments in securities issued or guaranteed by the U.S. government, its agencies or instrumentalities or other investment companies, and except that up to 25% of the fund's total assets may be invested without regard to this 5% limitation. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT B.1 The percentage limits in the proposed policy are required under the 1940 Act. The amended policy makes one change from the current policy: subject to applicable 1940 Act requirements, it would permit the fund to invest without limit in the securities of other investment companies. Pursuant to an exemptive order granted by the Securities and Exchange Commission (the "SEC"), the fund may invest up to 25% of its total assets in a non-publicly offered money market fund managed by RiverSource Investments (the "cash pool fund"). The cash pool fund is not expected to pay investment advisory, management, or transfer agent fees, although it may do so subject to the conditions of the SEC order and Board approval. The cash pool fund will incur minimal costs for services, such as custodian and auditor fees. The investment manager anticipates that making use of the cash pool fund will benefit the fund by enhancing the efficiency of cash management and by providing increased short-term investment opportunities. If the proposal is approved, the cash pool fund is expected to serve as a principal option for managing the cash positions of the fund. Future amendments to the fund's fundamental diversification policy would continue to require shareholder approval. B. TEN PERCENT LIMITATION IN SINGLE ISSUER. The Board recommends that the fund's fundamental policy with respect to investment in a single issuer be revised to permit the fund the maximum flexibility permitted by the 1940 Act. The Board recommends that shareholders vote to replace the fund's current fundamental investment policy with the following policy (additional language is underlined): The Fund will not purchase more than 10% of the outstanding voting securities of an issuer, except that up to 25% of the Fund's assets may be invested without regard to this 10% limitation. The 10% percent limit in the proposed policy is required under the 1940 Act. Under the 1940 Act, a fund is permitted to invest up to 25% of its assets without regard to the 10% limitation. The Board recommends that shareholders amend the policy so that it reflects the terms of the 1940 Act. The proposal is not expected to materially affect the operation of the fund. However, the adoption of the proposed investment policy will standardize investment policies. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT B.2 C. LENDING The Board recommends that the fund's fundamental policies with respect to lending be replaced with the following policy: The Fund will not lend securities or participate in an interfund lending program if the total of all such loans would exceed 33 1/3% of the Fund's total assets except this fundamental investment policy shall not prohibit the Fund from purchasing money market securities, loans, loan participation or other debt securities, or from entering into repurchases agreements. Currently the fund has two policies with respect to lending. One policy limits lending of portfolio securities to 30% of net assets and the other policy limits cash loans to 5% of total assets. In addition, the fund has a policy prohibiting loans to the investment manager, or to board members and officers of the investment manager or the fund. This third policy simply states a prohibition of the 1940 Act and the fund is not required to declare this policy as a fundamental policy. It is proposed that all three of these policies be superseded by the policy stated above. The proposal is not expected to materially affect the operation of the fund. However, the proposed policy would clarify that the fund can participate in an interfund borrowing and lending program with other RiverSource Funds, subject to the requirements of an SEC exemptive order. A fund may only borrow money for temporary purposes and may not borrow for leverage or investment purposes. Appropriate safeguards will be implemented to assure that the fund will not be disadvantaged by making loans to affiliated funds. The proposed policy also would confirm the fund's ability to invest in direct debt instruments such as loans and loan participations, which are interests in amounts owed to another party by a company, government or other borrower. These types of securities may have additional risks beyond conventional debt securities because they may provide less legal protection for the fund, or there may be a requirement that the fund supply additional cash to a borrower on demand. Finally, the adoption of the proposed investment policy will advance the goal of standardizing investment policies. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT B.3 D. BORROWING The Board recommends that the fund's fundamental policy with respect to borrowing be replaced with the following policy: The fund may not borrow money, except for temporary purposes (not for leveraging or investment) in an amount not exceeding 33 1/3% of its total assets (including the amount borrowed) less liabilities (other than borrowings) immediately after the borrowings. Funds typically borrow money to meet redemptions in order to avoid forced, unplanned sales of portfolio securities. This technique allows RiverSource Investments greater flexibility in managing the fund's cash flow. The current policy limits borrowing to "emergency or extraordinary purposes". In order to avoid debate over what constitutes emergency or extraordinary purposes, it is proposed to revise the policy to reflect that the purposes, whatever the circumstances, must be temporary. The fund may not use borrowing for leverage or for investment purposes. In addition, the policy for certain funds includes a prohibition on borrowing "property". The Board recommends that this prohibition be deleted in order to standardize investment policies. BOARD RECOMMENDATION AND VOTE REQUIRED. The Board recommends that shareholders approve the proposed changes. Changes in fundamental policies must be approved by the lesser of (a) a majority of the fund's outstanding shares or (b) 67% of the shares voted at the meeting, so long as more than 50% of the shares actually vote. If the any of the proposed changes is not approved, the fund will continue to operate under its current policy. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT B.4 EXHIBIT C MINNESOTA BUSINESS CORPORATION ACT SECTIONS 302A.471 AND 302A.473 Minnesota law requires that we provide you with a copy of the state law on dissenters' rights. Notwithstanding the provisions of the law set out below, the SEC has taken the position that use of state appraisal procedures by a registered mutual fund such as the Fund would be a violation of Rule 22c-1, the forward pricing rule, under the 1940 Act. As a result, if any shareholder elects to exercise dissenters' rights under Minnesota law, the Fund intends to submit this question to a court of competent jurisdiction. In that event, a dissenting shareholder would not receive any payment until the end of the court proceeding. 302A.471. RIGHTS OF DISSENTING SHAREHOLDERS SUBDIVISION 1. ACTIONS CREATING RIGHTS. A shareholder of a corporation may dissent from, and obtain payment for the fair value of the shareholder's shares in the event of, any of the following corporate actions: (a) An amendment of the articles that materially and adversely affects the rights or preferences of the shares of the dissenting shareholder in that it: (1) alters or abolishes a preferential right of the shares; (2) creates, alters, or abolishes a right in respect of the redemption of the shares, including a provision respecting a sinking fund for the redemption or repurchase of the shares; (3) alters or abolishes a preemptive right of the holder of the shares to acquire shares, securities other than shares, or rights to purchase shares or securities other than shares; (4) excludes or limits the right of a shareholder to vote on a matter, or to cumulate votes, except as the right may be excluded or limited through the authorization or issuance of securities of an existing or new class or series with similar or different voting rights; except that an amendment to the articles of an issuing public corporation that provides that section 302A.671 does not apply to a control share acquisition does not give rise to the right to obtain payment under this section; (b) A sale, lease, transfer, or other disposition of all or substantially all of the property and assets of the corporation, but not including a transaction permitted without shareholder approval in section 302A.661, subdivision 1, or a disposition in dissolution described in section 302A.725, subdivision 2, or a disposition pursuant to an order of a court, or a disposition for cash on terms requiring that all or substantially all of the net proceeds of disposition be distributed to the shareholders in accordance with their respective interests within one year after the date of disposition; RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT C.1 (c) A plan of merger, whether under this chapter or under chapter 322B, to which the corporation is a party, except as provided in subdivision 3, and except for a plan of merger adopted under section 302A.626; (d) A plan of exchange, whether under this chapter or under chapter 322B, to which the corporation is a party as the corporation whose shares will be acquired by the acquiring corporation, except as provided in subdivision 3; or (e) Any other corporate action taken pursuant to a shareholder vote with respect to which the articles, the bylaws, or a resolution approved by the board directs that dissenting shareholders may obtain payment for their shares. SUBDIVISION 2. BENEFICIAL OWNERS. (a) A shareholder shall not assert dissenters' rights as to less than all of the shares registered in the name of the shareholder, unless the shareholder dissents with respect to all the shares that are beneficially owned by another person but registered in the name of the shareholder and discloses the name and address of each beneficial owner on whose behalf the shareholder dissents. In that event, the rights of the dissenter shall be determined as if the shares as to which the shareholder has dissented and the other shares were registered in the names of different shareholders. (b) The beneficial owner of shares who is not the shareholder may assert dissenters' rights with respect to shares held on behalf of the beneficial owner, and shall be treated as a dissenting shareholder under the terms of this section and section 302A.473, if the beneficial owner submits to the corporation at the time of or before the assertion of the rights a written consent of the shareholder. SUBDIVISION 3. RIGHTS NOT TO APPLY. (a) Unless the articles, the bylaws, or a resolution approved by the board otherwise provide, the right to obtain payment under this section does not apply to a shareholder of (1) the surviving corporation in a merger with respect to shares of the shareholder that are not entitled to be voted on the merger or (2) the corporation whose shares will be acquired by the acquiring corporation in a plan of exchange with respect to shares of the shareholder that are not entitled to be voted on the plan of exchange and are not exchanged in the plan of exchange. (b) If a date is fixed according to section 302A.445, subdivision 1, for the determination of shareholders entitled to receive notice of and to vote on an action described in subdivision 1, only shareholders as of the date fixed, and beneficial owners as of the date fixed who hold through shareholders, as provided in subdivision 2, may exercise dissenters' rights. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT C.2 SUBDIVISION 4. OTHER RIGHTS. The shareholders of a corporation who have a right under this section to obtain payment for their shares do not have a right at law or in equity to have a corporate action described in subdivision 1 set aside or rescinded, except when the corporate action is fraudulent with regard to the complaining shareholder or the corporation. 302A.473. PROCEDURES FOR ASSERTING DISSENTERS' RIGHTS SUBDIVISION 1. DEFINITIONS. (a) For purposes of this section, the terms defined in this subdivision have the meanings given them. (b) "Corporation" means the issuer of the shares held by a dissenter before the corporate action referred to in section 302A.471, subdivision 1 or the successor by merger of that issuer. (c) "Fair value of the shares" means the value of the shares of a corporation immediately before the effective date of the corporate action referred to in section 302A.471, subdivision 1. (d) "Interest" means interest commencing five days after the effective date of the corporate action referred to in section 302A.471, subdivision 1, up to and including the date of payment, calculated at the rate provided in section 549.09 for interest on verdicts and judgments. SUBDIVISION 2. NOTICE OF ACTION. If a corporation calls a shareholder meeting at which any action described in section 302A.471, subdivision 1 is to be voted upon, the notice of the meeting shall inform each shareholder of the right to dissent and shall include a copy of section 302A.471 and this section and a brief description of the procedure to be followed under these sections. SUBDIVISION 3. NOTICE OF DISSENT. If the proposed action must be approved by the shareholders, a shareholder who is entitled to dissent under section 302A.471 and who wishes to exercise dissenters' rights must file with the corporation before the vote on the proposed action a written notice of intent to demand the fair value of the shares owned by the shareholder and must not vote the shares in favor of the proposed action. SUBDIVISION 4. NOTICE OF PROCEDURE; DEPOSIT OF SHARES. (a) After the proposed action has been approved by the board and, if necessary, the shareholders, the corporation shall send to all shareholders who have complied with subdivision 3 and to all shareholders entitled to dissent if no shareholder vote was required, a notice that contains: (1) The address to which a demand for payment and certificates of certificated shares must be sent in order to obtain payment and the date by which they must be received; (2) Any restrictions on transfer of uncertificated shares that will apply after the demand for payment is received; RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT C.3 (3) A form to be used to certify the date on which the shareholder, or the beneficial owner on whose behalf the shareholder dissents, acquired the shares or an interest in them and to demand payment; and (4) A copy of section 302A.471 and this section and a brief description of the procedures to be followed under these sections. (b) In order to receive the fair value of the shares, a dissenting shareholder must demand payment and deposit certificated shares or comply with any restrictions on transfer of uncertificated shares within 30 days after the notice required by paragraph (a) was given, but the dissenter retains all other rights of a shareholder until the proposed action takes effect. SUBDIVISION 5. PAYMENT; RETURN OF SHARES. (a) After the corporate action takes effect, or after the corporation receives a valid demand for payment, whichever is later, the corporation shall remit to each dissenting shareholder who has complied with subdivisions 3 and 4 the amount the corporation estimates to be the fair value of the shares, plus interest, accompanied by: (1) The corporation's closing balance sheet and statement of income for a fiscal year ending not more than 16 months before the effective date of the corporate action, together with the latest available interim financial statements; (2) An estimate by the corporation of the fair value of the shares and a brief description of the method used to reach the estimate; and (3) A copy of section 302A.471 and this section, and a brief description of the procedure to be followed in demanding supplemental payment. (b) The corporation may withhold the remittance described in paragraph (a) from a person who was not a shareholder on the date the action dissented from was first announced to the public or who is dissenting on behalf of a person who was not a beneficial owner on that date. If the dissenter has complied with subdivisions 3 and 4, the corporation shall forward to the dissenter the materials described in paragraph (a), a statement of the reason for withholding the remittance, and an offer to pay to the dissenter the amount listed in the materials if the dissenter agrees to accept that amount in full satisfaction. The dissenter may decline the offer and demand payment under subdivision 6. Failure to do so entitles the dissenter only to the amount offered. If the dissenter makes demand, subdivision 7 and 8 apply. (c) If the corporation fails to remit payment within 60 days of the deposit of certificates or the imposition of transfer restrictions on uncertificated shares, it shall return all deposited certificates and cancel all transfer restrictions. However, the corporation may again give notice under subdivision 4 and require deposit or restrict transfer at a later time. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT C.4 SUBDIVISION 6. SUPPLEMENTAL PAYMENT; DEMAND. If a dissenter believes that the amount remitted under subdivision 5 is less than the fair value of the shares plus interest, the dissenter may give written notice to the corporation of the dissenter's own estimate of the fair value of the shares, plus interest, within 30 days after the corporation mails the remittance under subdivision 5, and demand payment of the difference. Otherwise, a dissenter is entitled only to the amount remitted by the corporation. SUBDIVISION 7. PETITION; DETERMINATION. If the corporation receives a demand under subdivision 6, it shall, within 60 days after receiving the demand, either pay to the dissenter the amount demanded or agreed to by the dissenter after discussion with the corporation or file in a court a petition requesting that the court determine the fair value of the shares, plus interest. The petition shall be filed in the county in which the registered office of the corporation is located, except that a surviving foreign corporation that receives a demand relating to the shares of a constituent domestic corporation shall file the petition in the county in this state in which the last registered office of the constituent corporation was located. The petition shall name as parties all dissenters who have demanded payment under subdivision 6 and who have not reached agreement with the corporation. The corporation shall, after filing the petition, serve all parties with a summons and copy of the petition under the rules of civil procedure. Nonresidents of this state may be served by registered or certified mail or by publication as provided by law. Except as otherwise provided, the rules of civil procedures apply to this proceeding. The jurisdiction of the court is plenary and exclusive. The court may appoint appraisers, with powers and authorities the court deems proper, to receive evidence on and recommend the amount of the fair value of the shares. The court shall determine whether the shareholder or shareholders in question have fully complied with the requirements of this section, and shall determine the fair value of the shares, taking into account any and all factors the court finds relevant, computed by any method or combination of methods that the court, in its discretion, sees fit to use, whether or not used by the corporation or by a dissenter. The fair value of the shares as determined by the court is binding on all shareholders, wherever located. A dissenter is entitled to judgment in cash for the amount by which the fair value of the shares as determined by the court, plus interest, exceeds the amount, if any, remitted under subdivision 5, but shall not be liable to the corporation for the amount, if any, by which the amount, if any, remitted to the dissenter under subdivision 5 exceeds the fair value of the shares as determined by the court, plus interest. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT C.5 SUBDIVISION 8. COSTS; FEES; EXPENSES. (a) The court shall determine the costs and expenses of a proceeding under subdivision 7, including the reasonable expenses and compensation of any appraisers appointed by the court, and shall assess those costs and expenses against the corporation, except that the court may assess part or all of those costs and expenses against a dissenter whose action in demanding payment under subdivision 6 is found to be arbitrary, vexatious, or not in good faith. (b) If the court finds that the corporation has failed to comply substantially with this section, the court may assess all fees and expenses of any experts or attorneys as the court deems equitable. These fees and expenses may also be assessed against a person who has acted arbitrarily, vexatiously, or not in good faith in bringing the proceeding, and may be awarded to a party injured by those actions. (c) The court may award, in its discretion, fees and expenses to an attorney for the dissenters out of the amount awarded to the dissenters, if any. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT C.6 EXHIBIT D Prospectus [RIVERSOURCE(SM) INVESTMENTS LOGO] RIVERSOURCE(SM) DIVERSIFIED BOND FUND PROSPECTUS OCT. 28, 2005 - - RIVERSOURCE DIVERSIFIED BOND FUND (FORMERLY AXP(R) DIVERSIFIED BOND FUND) SEEKS TO PROVIDE SHAREHOLDERS WITH A HIGH LEVEL OF CURRENT INCOME WHILE CONSERVING THE VALUE OF THE INVESTMENT FOR THE LONGEST PERIOD OF TIME. As with all mutual funds, the Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense. You may qualify for sales charge discounts on purchases of Class A shares. Please notify your financial advisor or investment professional if you have other accounts holding shares of RiverSource funds to determine whether you qualify for a sales charge discount. See "Buying and Selling Shares" for more information. NOT FDIC INSURED - MAY LOSE VALUE - NO BANK GUARANTEE RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT D.1 TABLE OF CONTENTS THE FUND D.3 Objective D.3 Principal Investment Strategies D.3 Principal Risks D.4 Past Performance D.5 Fees and Expenses D.8 Other Investment Strategies and Risks D.10 Fund Management and Compensation D.11 BUYING AND SELLING SHARES D.17 Transactions Through Unaffiliated Financial Intermediaries D.17 Valuing Fund Shares D.18 Investment Options D.19 Purchasing Shares D.21 Sales Charges D.24 Exchanging/Selling Shares D.30 DISTRIBUTIONS AND TAXES D.35 Dividends and Capital Gain Distributions D.35 Reinvestments D.35 Taxes D.36 FINANCIAL HIGHLIGHTS D.37 CORPORATE REORGANIZATION On Sept. 30, 2005, Ameriprise Financial, Inc. (Ameriprise Financial) (formerly American Express Financial Corporation) was spun off to shareholders of its parent corporation, American Express Company (American Express), and is now a separate public company, trading under the ticker symbol AMP. Ameriprise Financial provides administrative services to the Fund and is the parent company of the Fund's investment manager, RiverSource Investments, LLC; the Fund's distributor, Ameriprise Financial Services, Inc. (formerly American Express Financial Advisors Inc.); and the Fund's transfer agent, RiverSource Service Corporation (formerly American Express Client Service Corporation). On Oct. 1, 2005, the Fund changed its name, such that it no longer is branded AXP(R). The Fund now bears the RiverSource(SM) brand. Ameriprise Financial and its subsidiaries are no longer affiliated with American Express. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT D.2 THE FUND OBJECTIVE RiverSource Diversified Bond Fund (the Fund) seeks to provide shareholders with a high level of current income while conserving the value of the investment for the longest period of time. Because any investment involves risk, achieving this objective cannot be guaranteed. PRINCIPAL INVESTMENT STRATEGIES Under normal market conditions, the Fund invests at least 80% of its net assets in bonds and other debt securities. At least 50% of the Fund's net assets will be invested in securities like those included in the Lehman Brothers Aggregate Bond Index (the Index), which are investment grade and denominated in U.S. dollars. The Index includes securities issued by the U.S. government, corporate bonds, and mortgage- and asset-backed securities. Although the Fund emphasizes high- and medium-quality debt securities, it will assume some credit risk to achieve higher yield and/or capital appreciation by buying lower-quality (junk) bonds. The Fund may invest up to 15% in foreign investments, which may include investments in emerging markets. The Fund will provide shareholders with at least 60 days' notice of any change in the 80% policy. The selection of debt obligations is the primary decision in building the investment portfolio. In pursuit of the Fund's objective, the investment manager (RiverSource Investments, LLC) chooses investments by: - - Evaluating the portfolio's total exposure to sectors, industries and securities relative to the Index. - - Analyzing factors such as credit quality, interest rate outlook and price to select the most attractive securities within each sector. - - Investing in lower-quality (junk) bonds and foreign investments as attractive opportunities arise. - - Targeting an average portfolio duration within one year of the duration of the Index which, as of Aug. 31, 2005, was 4.26 years. Duration measures the sensitivity of bond prices to changes in interest rates. The longer the duration of a bond, the longer it will take to repay the principal and interest obligations and the more sensitive it will be to changes in interest rates. For example, a five-year duration means a bond is expected to decrease in value by 5% if interest rates rise 1% and increase in value by 5% if interest rates fall 1%. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT D.3 In evaluating whether to sell a security, the investment manager considers, among other factors: - - Identification of more attractive investments based on relative value. - - The portfolio's total exposure to sectors, industries and securities relative to the Index. - - Whether a security's rating has changed or is vulnerable to a change. - - Whether a sector or industry is experiencing change. - - Changes in the interest rate or economic outlook. PRINCIPAL RISKS Please remember that with any mutual fund investment you may lose money. Principal risks associated with an investment in the Fund include: ACTIVE MANAGEMENT RISK. The Fund is actively managed and its performance therefore will reflect in part the ability of the portfolio managers to make investment decisions that are suited to achieving the Fund's investment objective. Due to its active management, the Fund could underperform other mutual funds with similar investment objectives. CREDIT RISK. The risk that the issuer of a security, or the counterparty to a contract, will default or otherwise become unable or unwilling to honor a financial obligation, such as payments due on a bond or a note. If the Fund purchases unrated securities, or if the rating of a security is reduced after purchase, the Fund will depend on the investment manager's analysis of credit risk more heavily than usual. Non-investment grade securities, commonly called "high-yield" or "junk" bonds, may react more to perceived changes in the ability of the issuing company to pay interest and principal when due than to changes in interest rates. Non-investment grade securities have greater price fluctuations and are more likely to experience a default than investment grade bonds. INTEREST RATE RISK. The risk of losses attributable to changes in interest rates. Interest rate risk is generally associated with bond prices: when interest rates rise, bond prices fall. In general, the longer the maturity or duration of a bond, the greater its sensitivity to changes in interest rates. LIQUIDITY RISK. The risk associated from a lack of marketability of securities which may make it difficult or impossible to sell at desirable prices in order to minimize loss. The Fund may have to lower the selling price, sell other investments, or forego another, more appealing investment opportunity. MARKET RISK. The market value of securities may fall or fail to rise. Market risk may affect a single issuer, sector of the economy, industry, or the market as a whole. The market value of securities may fluctuate, sometimes rapidly and unpredictably. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT D.4 PREPAYMENT AND EXTENSION RISK. The risk that a bond or other security might be called, or otherwise converted, prepaid, or redeemed, before maturity. This risk is primarily associated with asset-backed securities, including mortgage backed securities. If a security is converted, prepaid, or redeemed, before maturity, particularly during a time of declining interest rates, the investment manager may not be able to reinvest in securities providing as high a level of income, resulting in a reduced yield to the Fund. Conversely, as interest rates rise, the likelihood of prepayment decreases. The investment manager may be unable to capitalize on securities with higher interest rates because the Fund's investments are locked in at a lower rate for a longer period of time. PAST PERFORMANCE The following bar chart and table provide some illustration of the risks of investing in the Fund by showing, respectively: - - how the Fund's performance has varied for each full calendar year shown on the bar chart, and - - how the Fund's average annual total returns compare to recognized indexes shown on the table. Both the bar chart and the table assume that all distributions have been reinvested. The performance of different classes varies because of differences in sales charges and other fees and expenses. How the Fund has performed in the past (before and after taxes) does not indicate how the Fund will perform in the future. Performance reflects any fee waivers/expense caps in effect for the periods reported. In the absence of such fee waivers/expense caps, performance would have been lower. See "Fee and Expenses" for any current fee waivers/expense caps. BAR CHART. Class A share information is shown in the bar chart; the sales charge for Class A shares is not reflected in the bar chart. TABLE. The table shows total returns from hypothetical investments in Class A, Class B, Class C and Class Y shares of the Fund. These returns are compared to the indexes shown for the same periods. Past performance for Class Y for the periods prior to March 20, 1995 may be calculated based on the performance of Class A, adjusted to reflect differences in sales charges, but not differences in annual Fund operating expenses. For purposes of the performance calculation in the table we assumed: - - the maximum sales charge for Class A shares, - - sales at the end of the period and deduction of the applicable contingent deferred sales charge (CDSC) for Class B and Class C shares, - - no sales charge for Class Y shares, and - - no adjustments for taxes paid by an investor on the reinvested income and capital gains. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT D.5 AFTER-TAX RETURNS After-tax returns are shown only for Class A shares. After-tax returns for the other classes will vary. After-tax returns are calculated using the highest historical individual federal marginal income tax rate and do not reflect the impact of state and local taxes. Actual after-tax returns will depend on your tax situation and most likely will differ from the returns shown in the table. If you hold your shares in a tax-deferred account, such as a 401(k) plan or an IRA, the after-tax returns do not apply to you since you will not incur taxes until you begin to withdraw from your account. The return after taxes on distributions for a period may be the same as the return before taxes for the same period if there were no distributions or if the distributions were small. The return after taxes on distributions and sale of Fund shares for a period may be greater than the return before taxes for the same period if there was a tax loss realized on sale of Fund shares. The benefit of the tax loss (since it can be used to offset other gains) may result in a higher return. [CHART] CLASS A PERFORMANCE (BASED ON CALENDAR YEARS) 1995 +21.22% 1996 +2.50% 1997 +8.25% 1998 +8.18% 1999 -1.11% 2000 +9.97% 2001 +6.89% 2002 +2.43% 2003 +3.13% 2004 +3.90%
During the periods shown in the bar chart, the highest return for a calendar quarter was +7.79% (quarter ended June 30, 1995) and the lowest return for a calendar quarter was -2.53% (quarter ended June 30, 2004). The 4.75% sales charge applicable to Class A shares of the Fund is not reflected in the bar chart; if reflected, returns would be lower than those shown. The performance of other classes may vary from that shown because of differences in expenses. The Fund's Class A year-to-date return at Sept. 30, 2005 was +2.88%. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT D.6 AVERAGE ANNUAL TOTAL RETURNS (FOR PERIODS ENDED DEC. 31, 2004)
SINCE SINCE 1 YEAR 5 YEARS 10 YEARS INCEPTION (B&Y) INCEPTION (C) RiverSource Diversified Bond: Class A Return before taxes -0.55% +4.77% +6.51% N/A N/A Return after taxes on distributions -1.82% +2.77% +3.98% N/A N/A Return after taxes on distributions and sale of fund shares -0.37% +2.81% +3.98% N/A N/A Class B Return before taxes -1.39% +4.66% N/A +5.92%(a) N/A Class C Return before taxes +2.62% N/A N/A N/A +5.50%(b) Class Y Return before taxes +4.58% +5.96% N/A +6.88%(a) N/A Lehman Brothers Aggregate Bond Index (reflects no deduction for fees, expenses or taxes) +4.34% +7.71% +7.72% +7.38%(c) +7.66%(d) Lipper Intermediate Investment Grade Index +4.28% +7.33% +7.21% +6.91%(c) +7.40%(d)
(a) Inception date is March 20, 1995. (b) Inception date is June 26, 2000. (c) Measurement period started April 1, 1995. (d) Measurement period started July 1, 2000. The Lehman Brothers Aggregate Bond Index, an unmanaged index, is made up of a representative list of government, corporate, asset-backed and mortgage-backed securities. The index is frequently used as a general measure of bond market performance. The index reflects reinvestment of all distributions and changes in market prices, but excludes brokerage commissions or other fees. The Lipper Intermediate Investment Grade Index includes the 30 largest investment grade funds tracked by Lipper Inc. The index's returns include net reinvested dividends. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT D.7 FEES AND EXPENSES Fund investors pay various expenses. The table below describes the fees and expenses that you may pay if you buy and hold shares of the Fund. Expenses are based on the Fund's most recent fiscal year, adjusted to reflect current fees. SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A CLASS B CLASS C CLASS Y Maximum sales charge (load) imposed on purchases(a) (as a percentage of offering price) 4.75% none none none Maximum deferred sales charge (load) imposed on sales (as a percentage of offering price at time of purchase) none(b) 5% 1% none
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS: CLASS A CLASS B CLASS C CLASS Y Management fees 0.50% 0.50% 0.50% 0.50% Distribution (12b-1) fees 0.25% 1.00% 1.00% 0.00% Other expenses(c) 0.29% 0.30% 0.31% 0.38% Total 1.04% 1.80% 1.81% 0.88% Fee waiver/expense reimbursement 0.15% 0.15% 0.15% 0.15% Net expenses(d) 0.89% 1.65% 1.66% 0.73%
(a) This charge may be reduced depending on the value of your total investments in RiverSource funds. See "Sales Charges." (b) For Class A purchases over $1,000,000 on which no sales charge is assessed, a 1% sales charge may apply if you sell your shares within one year after purchase. (c) Other expenses include an administrative services fee, a transfer agency fee, a custody fee and other nonadvisory expenses and, for Class Y shares, a shareholder service fee. (d) The investment manager and its affiliates have contractually agreed to waive certain fees and to absorb certain expenses until Aug. 31, 2006 unless sooner terminated at the discretion of the Fund's Board. Any amounts waived will not be reimbursed by the Fund. Under this agreement, net expenses will not exceed 0.89% for Class A; 1.65% for Class B; 1.66% for Class C and 0.73% for Class Y. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT D.8 EXAMPLES These examples are intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. These examples assume that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. These examples also assume that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $562 $776 $1,009 $1,677 Class B $668(b) $952(b) $1,162(b) $1,908(c) Class C $269(b) $555 $ 967 $2,119 Class Y $ 75 $266 $ 474 $1,075
(a) Includes a 4.75% sales charge. (b) Includes the applicable CDSC. (c) Based on conversion of Class B shares to Class A shares in the ninth year of ownership. You would pay the following expenses if you did not redeem your shares:
1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $562 $776 $1,009 $1,677 Class B $168 $552 $ 962 $1,908(b) Class C $169 $555 $ 967 $2,119 Class Y $ 75 $266 $ 474 $1,075
(a) Includes a 4.75% sales charge. (b) Based on conversion of Class B shares to Class A shares in the ninth year of ownership. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT D.9 OTHER INVESTMENT STRATEGIES AND RISKS OTHER INVESTMENT STRATEGIES. In addition to the principal investment strategies previously described, the Fund may invest in other securities and may use other investment strategies that are not principal investment strategies. Additionally, the Fund may use derivatives (financial instruments where the value depends upon, or is derived from, the value of something else) such as futures, options and forward contracts, to produce incremental earnings, to hedge existing positions or to increase flexibility. Just as with securities in which the Fund invests directly, derivatives are subject to a number of risks, including market, liquidity, interest rate and credit risk. In addition, a relatively small price movement in the underlying security, currency or index may result in a substantial gain or loss for the Fund using derivatives. Even though the Fund's policies permit the use of derivatives in this manner, the portfolio managers are not required to use derivatives. For more information on strategies and holdings, and the risks of such strategies, including other derivative instruments that the Fund may use, see the Fund's Statement of Additional Information (SAI) and its annual and semiannual reports. UNUSUAL MARKET CONDITIONS. During unusual market conditions, the Fund may temporarily invest more of its assets in money market securities than during normal market conditions. Although investing in these securities would serve primarily to avoid losses, this type of investing also could prevent the Fund from achieving its investment objective. During these times, the portfolio managers may make frequent securities trades that could result in increased fees, expenses and taxes, and decreased performance. PORTFOLIO TURNOVER. Trading of securities may produce capital gains, which are taxable to shareholders when distributed. Active trading may also increase the amount of commissions or mark-ups paid to broker-dealers that the Fund pays when it buys and sells securities. The Fund's historical portfolio turnover rate, which measures how frequently the Fund buys and sells investments, is shown in the "Financial Highlights." SECURITIES TRANSACTION COMMISSIONS. Securities transactions involve the payment by the Fund of brokerage commissions to broker-dealers, on occasion as compensation for research or brokerage services (commonly referred to as "soft dollars"), as the portfolio managers buy and sell securities for the Fund in pursuit of its objective. A description of the policies governing the Fund's securities transactions and the dollar value of brokerage commissions paid by the Fund are set forth in the SAI. The brokerage commissions set forth in the SAI do not include implied commissions or mark-ups (implied commissions) paid by the Fund for principal transactions (transactions made directly with a dealer or other counterparty), including most fixed income securities and RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT D.10 certain derivatives. In addition, brokerage commissions do not reflect other elements of transaction costs, including the extent to which the Fund's purchase and sale transactions may cause the market to move and change the market price for an investment. Although brokerage commissions and implied commissions are not reflected in the expense table under "Fees and Expenses," they are reflected in the total return of the Fund. DIRECTED BROKERAGE. The Fund's Board of Directors (Board) has adopted a policy prohibiting the investment manager, or any subadviser, from considering sales of shares of the Fund as a factor in the selection of broker-dealers through which to execute securities transactions. Additional information regarding securities transactions can be found in the SAI. FUND MANAGEMENT AND COMPENSATION INVESTMENT MANAGER RiverSource Investments, LLC (the investment manager or RiverSource Investments), 200 Ameriprise Financial Center, Minneapolis, Minnesota 55474, is the investment manager to the RiverSource funds, and is a wholly-owned subsidiary of Ameriprise Financial, Inc. (Ameriprise Financial). Ameriprise Financial is a financial planning and financial services company that has been offering solutions for clients' asset accumulation, income management and protection needs for more than 110 years. In addition to managing investments for all of the RiverSource funds, RiverSource Investments manages investments for itself and its affiliates. For institutional clients, RiverSource Investments and its affiliates provide investment management and related services, such as separate account asset management, institutional trust and custody, and employee benefit plan administration, as well as other investment products. For all of its clients, RiverSource Investments seeks to allocate investment opportunities in an equitable manner over time. See the SAI for more information. The Fund pays RiverSource Investments a fee for managing its assets. Under the Investment Management Services Agreement (Agreement), the fee for the most recent fiscal year was 0.50% of the Fund's average daily net assets. Under the Agreement, the Fund also pays taxes, brokerage commissions, and nonadvisory expenses. A discussion regarding the basis for the Board approving the Agreement is available in the Fund's most recent shareholder report. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT D.11 PORTFOLIO MANAGER(S). The portfolio managers responsible for the day-to-day management of the Fund are: Jamie Jackson, CFA, Portfolio Manager - - Co-managed the Fund since 2003. - - Leader of the liquid assets sector team. - - Joined RiverSource Investments (previously American Express Financial Corporation (AEFC)) in 2003. - - Co-head of U.S. Investment Grade Fixed Income, UBS Global Asset Management, 1997 to 2003. - - Began investment career in 1988. - - MBA, Marquette University. Scott Kirby, Portfolio Manager - - Co-managed the Fund since 2003. - - Leader of the structured assets sector team. - - Employed by RiverSource Investments (previously AEFC) from 1979 to 1985 and from 1987 to the present. - - Began investment career in 1979. - - MBA, University of Minnesota. Tom Murphy, CFA, Portfolio Manager - - Co-managed the Fund since 2003. - - Leader of the investment grade corporate bond sector team. - - Joined RiverSource Investments (previously AEFC) in 2002. - - Managing Director and Portfolio Manager, BlackRock Financial Management, 2002; various positions, Zurich Scudder, 1992 to 2002. - - Began investment career in 1986. - - MBA, University of Michigan. Nicholas Pifer, CFA, Portfolio Manager - - Co-managed the Fund since 2003. - - Leader of the global sector team. - - Joined RiverSource Investments (previously AEFC) in 2000. - - Fixed Income Portfolio Manager, Investment Advisers, Inc., 1997 to 2000. - - Began investment career in 1990. - - MA, Johns Hopkins University School of Advanced International Studies. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT D.12 Jennifer Ponce de Leon, Portfolio Manager - - Co-managed the Fund since 2003. - - Leader of the high yield sector team. - - Joined RiverSource Investments (previously AEFC) in 1997. - - Began investment career in 1989. - - MBA, De Paul University. The fixed income department of RiverSource Investments is divided into six sector teams, each of which includes a portfolio manager or portfolio managers and several analysts, and each of which specializes in a specific sector of the fixed income market. The Fund's portfolio managers lead the teams that specialize in the sectors in which the Fund primarily invests, and collectively determine allocation of Fund assets among the sectors. The SAI provides additional information about portfolio manager compensation, management of other accounts and ownership of shares in the Fund. ADDITIONAL SERVICES AND COMPENSATION As described above, RiverSource Investments receives compensation for acting as the Fund's investment manager. RiverSource Investments and its affiliates also receive compensation for providing other services to the Fund. ADMINISTRATION SERVICES. Ameriprise Financial, 200 Ameriprise Financial Center, Minneapolis, Minnesota 55474, provides or compensates others to provide administrative services to the RiverSource funds. These services include administrative, accounting, treasury, and other services. Fees paid by the Fund for these services are included under "Other expenses" in the expense table under "Fees and Expenses." CUSTODY SERVICES. Ameriprise Trust Company, 200 Ameriprise Financial Center, Minneapolis, Minnesota 55474 (the custodian or Ameriprise Trust Company), provides custody services to all but a limited number of the RiverSource funds, including this Fund for which U.S. Bank National Association provides custody services. In addition, Ameriprise Trust Company is paid for certain transaction fees and out-of-pocket expenses incurred while providing services to the funds. Fees paid by the Fund for these services are included under "Other expenses" in the expense table under "Fees and Expenses." RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT D.13 DISTRIBUTION SERVICES. Ameriprise Financial Services, Inc., 70100 Ameriprise Financial Center, Minneapolis, Minnesota 55474 (the distributor or Ameriprise Financial Services), provides underwriting and distribution services to the RiverSource funds. Under the Distribution Agreement and related distribution and shareholder servicing plan(s), the distributor receives distribution and shareholder servicing fees. The distributor pays a portion of these fees to financial advisors and retains a portion of these fees to support its distribution and shareholder servicing activity. For third party sales, the distributor re-allows a portion of these fees to the financial intermediaries that sell Fund shares and provide services to shareholders, and retains a portion of these fees to support its distribution and shareholder servicing activity. Fees paid by the Fund for these services are set forth under "Distribution (12b-1) fees" in the expense table under "Fees and Expenses." More information on how these fees are used is set forth under "Investment Options" and in the SAI. The distributor also administers any sales charges paid by an investor at the time of purchase or at the time of sale (deferred sales charge). See "Shareholder Fees (fees paid directly from your investment)" under "Fees and Expenses" for the scheduled sales charge of each share class. See "Buying and Selling Shares" for variations in the scheduled sales charges, and for how these sales charges are used by the distributor. See "Other Investment Strategies and Risks" for Fund policy regarding directed brokerage. TRANSFER AGENCY SERVICES. RiverSource Service Corporation, 70100 Ameriprise Financial Center, Minneapolis, Minnesota 55474 (the transfer agent or RiverSource Service Corporation), provides or compensates others to provide transfer agency services to the RiverSource funds. The RiverSource funds pay the transfer agent a fee, which varies by share class, as set forth in the SAI and reimburses the transfer agent for its out-of-pocket expenses incurred while providing these transfer agency services to the funds. Fees paid by the Fund for these services are included under "Other expenses" in the expense table under "Fees and Expenses." RiverSource funds are primarily sold through Ameriprise Financial Services which is allocated a portion of these fees for providing services to Fund shareholders. RiverSource Service Corporation may also pay a portion of these fees to other financial intermediaries that provide sub-recordkeeping and other services to Fund shareholders. The SAI provides additional information about the services provided and the fee schedules for the agreements set forth above. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT D.14 PAYMENTS TO FINANCIAL INTERMEDIARIES RiverSource Investments and its affiliates may make additional cash payments out of their own resources to financial intermediaries, such as broker-dealers, banks, qualified plan administrators and recordkeepers, or other institutions, including inter-company allocation of resources to affiliated broker-dealers such as Ameriprise Financial Services (financial intermediaries) in connection with the sale of shares of the Fund and/or the provision of services to the Fund or its shareholders. These payments may create an incentive for the financial intermediary, its employees or registered representatives to recommend or sell shares of the Fund to its customers. These payments and inter-company allocations are in addition to any 12b-1 distribution and/or shareholder service fees or other amounts paid by the Fund under distribution or shareholder servicing plans, or paid by the Fund for shareholder account maintenance, sub-accounting or recordkeeping services provided directly by the financial intermediary providing such services. In exchange for these payments and inter-company allocations, RiverSource Investments and its affiliates may receive preferred access to registered representatives of a financial intermediary (for example, the ability to make presentations in branch offices or at conferences) or preferred access to customers of the financial intermediary (for example, the ability to advertise or directly interact with the financial intermediary's customers in order to sell the Fund). These arrangements are sometimes referred to as "revenue sharing payments." In some cases, these arrangements may create an incentive for a financial intermediary or its representatives to recommend or sell shares of a fund and may create a conflict of interest between a financial intermediary's financial interest and its duties to its customers. Please contact the financial intermediary through which you are purchasing shares of the Fund for details about any payments it may receive in connection with the sale of Fund shares or the provision of services to the Fund. These payments and inter-company allocations are usually calculated based on a percentage of fund sales, and/or as a percentage of fund assets attributable to a particular financial intermediary. These payments may also be negotiated based on other criteria or factors including, but not limited to, the financial intermediary's affiliation with the investment manager, its reputation in the industry, its ability to attract and retain assets, its access to target markets, its customer relationships and the scope and quality of services it provides. The amount of payment or inter-company allocation may vary by financial intermediary and by type of sale (e.g., purchases of different share classes or purchases of the Fund through a qualified plan or through a wrap program), and may be significant. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT D.15 From time to time, RiverSource Investments and its affiliates may make other payments, including non-cash compensation, to financial intermediaries or their representatives in the form of gifts of nominal value, occasional meals, tickets, or other entertainment, support for due diligence trips, training and educational meetings or conference sponsorships, support for recognition programs, and other forms of non-cash compensation permissible under regulations to which these financial intermediaries and their representatives are subject. ADDITIONAL MANAGEMENT INFORMATION MANAGER OF MANAGER EXEMPTION. The Fund has received an order from the Securities and Exchange Commission that permits the investment manager, subject to the approval of the Board, to appoint a subadviser or change the terms of a subadvisory agreement for the Fund without first obtaining shareholder approval. Before the Fund may rely on the order, holders of a majority of the Fund's outstanding voting securities will need to approve operating the Fund in this manner. If shareholder approval is received, the Fund may add or change unaffiliated subadvisers or the fees paid to subadvisers from time to time without the expense and delays associated with obtaining shareholder approval of the change. There is no assurance shareholder approval will be received, and no changes will be made without shareholder approval until that time. AFFILIATED FUNDS-OF-FUNDS. RiverSource Investments also serves as investment manager to the RiverSource Portfolio Builder Funds (Portfolio Builder Funds), a group of six funds-of-funds that provide asset-allocation services to shareholders by investing in shares of other RiverSource funds, including the Fund. The Fund may experience relatively large purchases or redemptions from the Portfolio Builder Funds. Although RiverSource Investments seeks to minimize the impact of these transactions by structuring them over a reasonable period of time, the Fund may experience increased expenses as it buys and sells securities to manage transactions for the Portfolio Builder Funds. In addition, because the Portfolio Builder Funds may own a substantial portion of the Fund, a redemption by the Portfolio Builder Funds could cause the Fund's expense ratio to increase as the Fund's fixed costs would be spread over a smaller asset base. RiverSource Investments monitors expense levels and is committed to offering funds that are competitively priced. RiverSource Investments will report to the Fund's Board on the steps it has taken to manage any potential conflicts. FUND HOLDINGS DISCLOSURE. The Fund's Board has adopted policies and procedures that govern the timing and circumstances of disclosure to shareholders and third parties of information regarding the securities owned by the Fund. A description of these policies and procedures is included in the Fund's SAI. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT D.16 BUYING AND SELLING SHARES TRANSACTIONS THROUGH UNAFFILIATED FINANCIAL INTERMEDIARIES Where authorized by the distributor, shares of the Fund may be available through certain 401(k) or other qualified plans, banks, broker-dealers or other institutions (financial intermediaries). These financial intermediaries may charge you additional fees for the services they provide and they may have different policies not described in this prospectus. Some policy differences may include different minimum investment amounts, exchange privileges, fund choices and cutoff times for investments. Additionally, recordkeeping, transaction processing and payments of distributions relating to your account may be performed by the financial intermediaries or their representatives through whom shares are held. Since the Fund may not have a record of your transactions, you should always contact the financial intermediary through whom you purchased the Fund to make changes to or give instructions concerning your account or to obtain information about your account. The Fund and the distributor are not responsible for the failure of one of these financial intermediaries to carry out its obligations to its customers. AVAILABILITY AND TRANSFERABILITY OF FUND SHARES. Please consult your investment professional or financial intermediary to determine availability of the Fund. Currently, RiverSource funds may be purchased or sold through affiliated broker-dealers of RiverSource Investments, including Ameriprise Financial Services and Securities America, Inc. (Securities America), and through a limited number of unaffiliated institutions. If you set up an account at another financial intermediary, you will not be able to transfer RiverSource fund holdings to that account unless that institution has obtained a selling agreement with the distributor of the RiverSource funds. If you set up an account with an unaffiliated financial intermediary that does not have, and is unable to obtain, such a selling agreement, you must either maintain your position with Ameriprise Financial Services or Securities America, find another financial intermediary with such a selling agreement, or sell your shares, paying any applicable deferred sales charge. Please be aware that transactions in taxable accounts would generate a taxable event and may result in an increased income tax liability. For more information, please call RiverSource Service Corporation at (888) 791-3380. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT D.17 The public offering price for Class A shares of the Fund is the net asset value (NAV) plus a sales charge, and for Class B, C, and Y shares, the NAV. Orders in good form are priced at the NAV next determined after you place your order. Good form or good order means that your instructions have been received in the form required by the distributor. This may include, for example, providing the fund name and account number, the amount of the transaction and all required signatures. For more information, refer to the sections on "Purchasing Shares" and "Exchanging/Selling Shares," or contact your financial advisor or investment professional. If you buy or sell shares through an authorized financial intermediary, consult that firm to determine its procedures for accepting and processing orders. The financial intermediary may charge a fee for its services. VALUING FUND SHARES The NAV is the value of a single share of the Fund. The NAV is determined by dividing the value of the Fund's assets, minus any liabilities, by the number of shares outstanding. The NAV is calculated as of the close of business on the New York Stock Exchange (NYSE), normally 4:00 p.m. Eastern time, on each day that the NYSE is open. The Fund's securities are valued primarily on the basis of market quotations obtained from outside pricing services approved and monitored under procedures adopted by the Board. Certain short-term securities with maturities of 60 days or less are valued at amortized cost. When reliable market quotations are not readily available, securities are priced at fair value based on procedures adopted by the Board. These procedures are also used when the value of a security held by the Fund is materially affected by events that occur after the close of the primary market on which the security is traded but prior to the time as of which the Fund's NAV is determined. Valuing securities at fair value involves reliance on judgment. The fair value of a security is likely to differ from any available quoted or published price. To the extent that the Fund has significant holdings of high yield securities that may trade infrequently, fair valuation may be used more frequently than for other funds. Foreign investments are valued in U.S. dollars. Some of the Fund's securities may be listed on foreign exchanges that trade on weekends or other days when the Fund does not price its shares. In that event, the NAV of the Fund's shares may change on days when shareholders will not be able to purchase or sell the Fund's shares. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT D.18 INVESTMENT OPTIONS 1. CLASS A shares are sold to the public with a sales charge at the time of purchase and an annual distribution and shareholder servicing (12b-1) fee of 0.25%. 2. CLASS B shares are sold to the public with a contingent deferred sales charge (CDSC) and an annual distribution and shareholder servicing (12b-1) fee of 1.00%. 3. CLASS C shares are sold to the public without a sales charge at the time of purchase and with an annual distribution and shareholder servicing (12b-1) fee of 1.00%. Class C shares redeemed within one year after purchase may be subject to a CDSC. 4. CLASS Y shares are sold to qualifying institutional investors without a sales charge or distribution fee, but with a separate shareholder servicing fee of 0.10%. Please see the SAI for information on eligibility requirements to purchase Class Y shares. The distribution and shareholder servicing fees for Class A, Class B and Class C shares are subject to the requirements of Rule 12b-1 under the Investment Company Act of 1940, as amended, and are used to reimburse the distributor for certain expenses it incurs in connection with distributing the Fund's shares and providing services to Fund shareholders. These expenses include payment of distribution and shareholder servicing fees to financial intermediaries that sell shares of the Fund. Financial intermediaries receive shareholder servicing fees equal to 0.25% of the average daily net assets of Class A, Class B and Class C shares sold and held through them. For Class A and Class B shares, the distributor begins to pay these fees immediately after purchase. For Class C shares, the distributor begins to pay these fees one year after purchase. Financial intermediaries also receive distribution fees equal to 0.75% of the average daily net assets of Class C shares sold and held through them, which the distributor begins to pay one year after purchase. For Class B shares, the Fund's distributor retains the 0.75% distribution fee in order to finance the payment of sales commissions to financial intermediaries that sell Class B shares, and to pay for other distribution related expenses. Financial intermediaries may compensate their financial advisors and investment professionals with the shareholder servicing and distribution fees paid to them by the distributor. The shareholder servicing fees for Class Y shares are used to reimburse the distributor for providing services and assistance to shareholders regarding ownership of their shares or their accounts. The Fund also offers an additional class of shares, Class I, exclusively to certain institutional investors. Class I shares are made available through a separate prospectus supplement provided to investors eligible to purchase the shares. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT D.19 INVESTMENT OPTIONS SUMMARY The Fund offers different classes of shares. There are differences among the fees and expenses for each class. Not everyone is eligible to buy every class. After determining which classes you are eligible to buy, decide which class best suits your needs. Your financial advisor or investment professional can help you with this decision. The following table shows the key features of each class:
CLASS A CLASS B CLASS C CLASS Y - ------------------------------------------------------------------------------------------------------------------------- AVAILABILITY Available to all Available to all Available to all Limited to qualifying investors. investors. investors. institutional investors. INITIAL SALES CHARGE Yes. Payable at time No. Entire purchase No. Entire purchase No. Entire purchase of purchase. Lower price is invested in price is invested in price is invested in sales charge for shares of the Fund. shares of the Fund. shares of the Fund. larger investments. DEFERRED SALES CHARGE On purchases over Maximum 5% CDSC during 1% CDSC may apply if None. $1,000,000, 1% CDSC the first year you sell your shares may apply if you sell decreasing to 0% after within one year after your shares within one six years. purchase. year after purchase. 12b-1 DISTRIBUTION FEE Yes. 0.25% Yes. 1.00% Yes. 1.00% Yes. 0.10% AND/OR SHAREHOLDER SERVICE FEE* CONVERSION TO CLASS A N/A Yes, automatically in No. No. ninth year of ownership.
* The Fund has adopted a plan under Rule 12b-1 of the Investment Company Act of 1940, as amended, that allows it to pay distribution and shareholder servicing-related expenses for the sale of Class A, Class B and Class C shares. The Fund has also adopted a separate shareholder servicing plan to pay for servicing-related expenses related to Class Y shares. Because these fees are paid out of the Fund's assets on an on-going basis, over time, these fees will increase the cost of your investment and may cost you more than paying other types of distribution (sales) or servicing charges. SHOULD YOU PURCHASE CLASS A, CLASS B OR CLASS C SHARES? If your investments in RiverSource funds total $100,000 or more, Class A shares may be the better option because the sales charge is reduced for larger purchases. If you qualify for a waiver of the sales charge, Class A shares will be the best option. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT D.20 If you invest less than $100,000, consider how long you plan to hold your shares. Class B shares have a higher annual distribution fee than Class A shares and a CDSC for six years. Class B shares convert to Class A shares in the ninth year of ownership. Class B shares purchased through reinvested dividends and distributions also will convert to Class A shares in the same proportion as the other Class B shares. Class C shares also have a higher annual distribution fee than Class A shares. Class C shares have no sales charge if you hold the shares for longer than one year. Unlike Class B shares, Class C shares do not convert to Class A. As a result, you will pay a 1% distribution fee for as long as you hold Class C shares. If you choose a deferred sales charge option (Class B or Class C), you should consider the length of time you intend to hold your shares. To help you determine which investment is best for you, consult your financial advisor or investment professional. For more information, see the SAI. PURCHASING SHARES Financial intermediaries are required by law to obtain certain personal information from each person who opens an account in order to verify the identity of the person. As a result, when you open an account you will be asked to provide your name, permanent street address, date of birth, and Social Security or Employer Identification number. You may also be asked for other identifying documents or information. If you do not provide this information, the Fund, or the financial intermediary through which you are investing in the Fund, may not be able to open an account for you. If the Fund or if the financial intermediary through which you are investing in the Fund is unable to verify your identity, your account may be closed, or other steps may be taken, as deemed appropriate. TO PURCHASE SHARES WITH A FINANCIAL INTERMEDIARY OTHER THAN AMERIPRISE FINANCIAL SERVICES, PLEASE CONSULT YOUR FINANCIAL INTERMEDIARY. SEE "TRANSACTIONS THROUGH UNAFFILIATED FINANCIAL INTERMEDIARIES" FOR MORE INFORMATION. THE FOLLOWING SECTION EXPLAINS POLICIES OF THE RIVERSOURCE FUNDS AND HOW YOU CAN PURCHASE FUND SHARES FROM AMERIPRISE FINANCIAL SERVICES. If you do not have an existing RiverSource fund account with Ameriprise Financial Services, you will need to establish a brokerage account. Your financial advisor or investment professional will help you fill out and submit an application. Once your account is set up, you can choose among several convenient ways to invest. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT D.21 When you purchase, your order will be priced at the next NAV calculated after your order is accepted by the Fund. If your application does not specify which class of shares you are purchasing, we will assume you are investing in Class A shares. IMPORTANT: When you open an account, you must provide your correct Taxpayer Identification Number (TIN), which is either your Social Security or Employer Identification number. If you do not provide and certify the correct TIN, you could be subject to backup withholding of 28% of taxable distributions and proceeds from certain sales and exchanges. You also could be subject to further penalties, such as: - - a $50 penalty for each failure to supply your correct TIN, - - a civil penalty of $500 if you make a false statement that results in no backup withholding, and - - criminal penalties for falsifying information. You also could be subject to backup withholding, if the IRS notifies us to do so, because you failed to report required interest or dividends on your tax return. HOW TO DETERMINE THE CORRECT TIN
FOR THIS TYPE OF ACCOUNT: USE THE SOCIAL SECURITY OR EMPLOYER IDENTIFICATION NUMBER OF: Individual or joint account The individual or one of the owners listed on the joint account Custodian account of a minor The minor (Uniform Gifts/Transfers to Minors Act) A revocable living trust The grantor-trustee (the person who puts the money into the trust) An irrevocable trust, pension trust or estate The legal entity (not the personal representative or trustee, unless no legal entity is designated in the account title) Sole proprietorship or single-owner LLC The owner Partnership or multi-member LLC The partnership Corporate or LLC electing corporate status on The corporation Form 8832 Association, club or tax-exempt organization The organization
For details on TIN requirements, contact your financial advisor or investment professional to obtain a copy of Form W-9, "Request for Taxpayer Identification Number and Certification." You also may obtain the form on the Internet at www.irs.gov. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT D.22 METHODS OF PURCHASING SHARES BY MAIL Once your account has been established, send your check to: AMERIPRISE FINANCIAL SERVICES 70200 AMERIPRISE FINANCIAL CENTER MINNEAPOLIS, MN 55474 MINIMUM AMOUNTS Initial investment: $2,000* Additional investments: $ 500** Account balances: $ 300 Qualified account balances: none
If your Fund account balance falls below $300 for any reason, including a market decline, you will be asked to increase it to $300 or establish a scheduled investment plan. If you do not do so within 30 days, your shares may be automatically redeemed and the proceeds mailed to you. * $1,000 for tax qualified accounts. ** $100 minimum add-on for existing mutual fund accounts outside of a brokerage account. BY SCHEDULED INVESTMENT PLAN MINIMUM AMOUNTS Initial investment: $2,000* Additional investments: $ 100** Account balances: none (on a scheduled investment plan with monthly payments)
If your Fund account balance is below $2,000, you must make payments at least monthly. * $100 for accounts outside of a brokerage account. ** $50 minimum per payment for qualified accounts outside of a brokerage account. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT D.23 BY WIRE OR ELECTRONIC FUNDS TRANSFER Please contact your financial advisor or investment professional for specific instructions. Minimum wire purchase amount: $1,000 or new account minimum, as applicable. BY TELEPHONE If you have a brokerage account, you may use the money in your account to make initial and subsequent purchases. To place your order, call: (800) 297-7378 for brokerage accounts (800) 967-4377 for wrap accounts SALES CHARGES CLASS A -- INITIAL SALES CHARGE ALTERNATIVE Your purchase price for Class A shares is generally the NAV plus a front-end sales charge. Sales charges vary depending on the amount of your purchase. The distributor receives the sales charge and re-allows a portion of the sales charge to the financial intermediary through which you purchased the shares. The distributor retains the balance of the sales charge. Sales charge* for Class A shares:
MAXIMUM AS A % OF AS A % OF RE-ALLOWANCE AS A TOTAL MARKET VALUE PURCHASE PRICE** NET AMOUNT INVESTED % OF PURCHASE PRICE Up to $49,999 4.75% 4.99% 4.00% $50,000-$99,999 4.25 4.44 3.50 $100,000-$249,999 3.50 3.63 3.00 $250,000-$499,999 2.50 2.56 2.15 $500,000-$999,999 2.00 2.04 1.75 $1,000,000 or more*** 0.00 0.00 0.00
* Because of rounding in the calculation of the offering price, the portion of the sales charge retained by the distributor may vary and the actual sales charge you pay may be more or less than the sales charge calculated using these percentages. ** Offering price includes the sales charge. *** Although there is no sales charge for purchases with a total market value over $1,000,000, and therefore no re-allowance, the distributor may pay a sales commission to a financial intermediary making a sale with a total market value of $1,000,000 to $3,000,000, a sales commission up to 1.00%; $3,000,000 to $10,000,000, a sales commission up to 0.50%; and $10,000,000 or more, a sales commission up to 0.25%. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT D.24 RIGHTS OF ACCUMULATION YOU MAY BE ABLE TO REDUCE THE SALES CHARGE ON CLASS A SHARES, BASED ON THE COMBINED MARKET VALUE OF YOUR ACCOUNTS. The current market values of the following investments are eligible to be added together for purposes of determining the sales charge on your purchase: - - Your current investment in this Fund, and - - Previous investments you and members of your primary household group have made in Class A, Class B or Class C shares in this and other RiverSource funds, provided your investment was subject to a sales charge. - Your primary household group consists of you, your spouse or domestic partner, and your unmarried children under age 21 sharing a mailing address. For purposes of this policy a domestic partner is an individual who shares your primary residence and with whom you own joint property. If you or any member of your primary household group elects to separate from the primary household group (for example, by asking that account statements be sent to separate addresses), your assets will no longer be combined for purposes of reducing your sales charge. The following accounts are eligible to be included in determining the sales charge on your purchase: - - Individual or joint accounts held outside of a brokerage account; - - Individual or joint accounts held through a brokerage account; - - Roth and traditional IRAs, SEPs, SIMPLEs and TSCAs, provided they are invested in Class A, Class B or Class C shares that are subject to a sales charge; - - UGMA/UTMA accounts for which you, your spouse, or your domestic partner is parent or guardian of the minor child; - - Revocable trust accounts for which you or a member of your primary household group, individually, is the beneficiary; - - Accounts held in the name of your, your spouse's, or your domestic partner's sole proprietorship or single owner limited liability company or S corporation; and - - Qualified retirement plan assets, provided that you are the sole owner of the business sponsoring the plan, are the sole participant (other than a spouse) in the plan, and have no intention of adding participants to the plan. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT D.25 The following accounts are NOT eligible to be included in determining the sales charge on your purchase: - - Accounts of pension and retirement plans with multiple participants, such as 401(k) plans (which are combined to reduce the sales charge for the entire pension or retirement plan and therefore are not used to reduce the sales charge for your individual accounts); - - Investments in Class A shares where the sales charge is waived, for example, purchases through wrap accounts, including Ameriprise Strategic Portfolio Service ADVANTAGE (SPS); - - Investments in Class D, Class E, or Class Y shares; - - Investments in 529 plans, donor advised funds, variable annuities, variable life insurance products, wrap accounts or managed separate accounts; and - - Charitable and irrevocable trust accounts. If you purchase RiverSource fund shares through different channels or different financial intermediaries, and you want to include those assets toward a reduced sales charge, you must inform Ameriprise Financial Services, your financial advisor or investment professional in writing about the other accounts when placing your purchase order. When placing your purchase order, you must provide your most recent account statement and contact information regarding the other accounts. A financial intermediary other than Ameriprise Financial Services may require additional information. UNLESS YOU PROVIDE AMERIPRISE FINANCIAL SERVICES, YOUR FINANCIAL ADVISOR OR YOUR INVESTMENT PROFESSIONAL IN WRITING WITH INFORMATION ABOUT ALL OF THE ACCOUNTS THAT MAY COUNT TOWARD A SALES CHARGE REDUCTION, THERE CAN BE NO ASSURANCE THAT YOU WILL RECEIVE ALL OF THE REDUCTIONS FOR WHICH YOU MAY BE ELIGIBLE. For more information on rights of accumulation, please see the SAI. LETTER OF INTENT (LOI) Generally, if you intend to invest $50,000 or more over a period of 13 months, you may be able to reduce the front-end sales charges for investments in Class A shares by completing and filing a LOI form. The LOI becomes effective only after the form is processed in good order by the distributor. An LOI can be backdated up to a maximum of 90 days. If the LOI is backdated, you may include prior investments in Class A shares that were charged a front-end sales load toward the LOI commitment amount. If the LOI is backdated, the 13 month period begins on the date of the earliest purchase included in the LOI. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT D.26 HOLDINGS MORE THAN 90 DAYS OLD. Purchases made more than 90 days before your LOI is processed by the distributor will not be counted towards the commitment amount of the LOI and cannot be used as the starting point for the LOI. While these purchases cannot be included in an LOI, they may help you obtain a reduced sales charge on future purchases as described in "Rights of Accumulation." NOTIFICATION OBLIGATION. If purchasing shares in a brokerage account or through a financial intermediary, you must request the reduced sales charge when you buy shares. If you do not complete and file the LOI form, or do not request the reduced sales charge at the time of purchase, you will not be eligible for the reduced sales charge. For more details on LOIs, please contact your financial advisor, investment professional or see the SAI. WAIVERS OF THE SALES CHARGE FOR CLASS A SHARES Sales charges do not apply to: - - current or retired Board members, officers or employees of the Fund or Ameriprise Financial or its subsidiaries, their spouses or domestic partners, children and parents. - - current or retired Ameriprise Financial Services financial advisors, employees of financial advisors, their spouses or domestic partners, children and parents. - - portfolio managers employed by subadvisers of the RiverSource funds, including their spouses or domestic partners, children and parents. - - registered representatives and other employees of financial intermediaries having a sub-distribution agreement with the distributor, including their spouses, domestic partners, children and parents. - - qualified employee benefit plans offering participants daily access to RiverSource funds. Eligibility must be determined in advance. For assistance, please contact your financial advisor or investment professional. Participants in certain qualified plans where the initial sales charge is waived may be subject to a deferred sales charge of up to 4%. - - shareholders who have at least $1 million in RiverSource funds. If the investment is sold within one year after purchase, a CDSC of 1% may be charged. - - direct rollovers from Ameriprise Retirement Services, provided that the rollover involves a transfer of Class Y shares in this Fund to Class A shares in this Fund. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT D.27 - - purchases made: - with dividend or capital gain distributions from this Fund or from the same class of another RiverSource fund, - through or under a wrap fee product or other investment product sponsored by the distributor or another authorized broker-dealer, investment advisor, bank or investment professional, - within a segregated separate account offered by Nationwide Life Insurance Company or Nationwide Life and Annuity Insurance Company, - through American Express Personal Trust Services' Asset-Based pricing alternative, provided by American Express Bank, FSB. - - shareholders whose original purchase was in a Strategist fund merged into a RiverSource fund in 2000. Policies related to reducing or waiving the sales charge may be modified or withdrawn at any time. UNLESS YOU PROVIDE AMERIPRISE FINANCIAL SERVICES, YOUR FINANCIAL ADVISOR OR INVESTMENT PROFESSIONAL WITH INFORMATION IN WRITING ABOUT ALL OF THE FACTORS THAT MAY COUNT TOWARD A WAIVER OF THE SALES CHARGE, THERE CAN BE NO ASSURANCE THAT YOU WILL RECEIVE ALL OF THE WAIVERS FOR WHICH YOU MAY BE ELIGIBLE. You also may view this information about sales charges and breakpoints free of charge on the Fund's website. Go to www.riversource.com/investments and click on the hyperlink "Sales Charge Discount Information." CLASS B AND CLASS C -- CONTINGENT DEFERRED SALES CHARGE (CDSC) ALTERNATIVE FOR CLASS B, the CDSC is based on the sale amount and the number of years -- including the year of purchase -- between purchase and sale. The following table shows how CDSC percentages on sales decline:
IF THE SALE IS MADE DURING THE: THE CDSC PERCENTAGE RATE IS:* First year 5% Second year 4% Third year 4% Fourth year 3% Fifth year 2% Sixth year 1% Seventh year 0%
* Because of rounding in the calculation, the portion of the CDSC retained by the distributor may vary and the actual CDSC you pay may be more or less than the CDSC calculated using these percentages. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT D.28 Although there is no front-end sales charge when you buy Class B shares, the distributor pays a sales commission of 4% to financial intermediaries that sell Class B shares. A portion of this commission may, in turn, be paid to your financial advisor. The distributor receives any CDSC imposed when you sell your Class B shares. Purchases made prior to May 21, 2005 age on a calendar year basis. Purchases made beginning May 21, 2005 age on a daily basis. For example, a purchase made on Nov. 12, 2004 will complete its first year on Dec. 31, 2004 under calendar year aging. However, a purchase made on Nov. 12, 2005 will complete its first year on Nov. 11, 2006 under daily aging. For Class B shares purchased prior to May 21, 2005, those shares will convert to Class A shares in the ninth calendar year of ownership. For Class B shares purchased beginning May 21, 2005, those shares will convert to Class A shares one month after the completion of the eighth year of ownership. FOR CLASS C, a 1% CDSC may be charged if you sell your shares within one year after purchase. Although there is no front-end sales charge when you buy Class C shares, the distributor pays a sales commission of 1% to financial intermediaries that sell Class C shares. A portion of this commission may, in turn, be paid to your financial advisor. The distributor receives any CDSC imposed when you sell your Class C shares. For both Class B and Class C, if the amount you sell causes the value of your investment to fall below the cost of the shares you have purchased, the CDSC will be based on the lower of the cost of those shares purchased or market value. Because the CDSC is imposed only on sales that reduce your total purchase payments, you do not have to pay a CDSC on any amount that represents appreciation in the value of your shares, income earned by your shares, or capital gains. In addition, the CDSC on your sale, if any, will be based on your oldest purchase payment. The CDSC on the next amount sold will be based on the next oldest purchase payment. EXAMPLE Assume you had invested $10,000 in Class B shares and that your investment had appreciated in value to $12,000 after 3 1/2 years, including reinvested dividends and capital gain distributions. You could sell up to $2,000 worth of shares without paying a CDSC ($12,000 current value less $10,000 purchase amount). If you sold $2,500 worth of shares, the CDSC would apply to the $500 representing part of your original purchase price. The CDSC rate would be 3% because the sale was made during the fourth year after the purchase. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT D.29 WAIVERS OF THE CDSC FOR CLASS B SHARES The CDSC will be waived on sales of shares: - - in the event of the shareholder's death, - - held in trust for an employee benefit plan, or - - held in IRAs or certain qualified plans if Ameriprise Trust Company is the custodian, such as Keogh plans, tax-sheltered custodial accounts or corporate pension plans, provided that the shareholder is: - at least 59 1/2 years old AND - taking a retirement distribution (if the sale is part of a transfer to an IRA or qualified plan, or a custodian-to-custodian transfer, the CDSC will not be waived) OR - selling under an approved substantially equal periodic payment arrangement. WAIVERS OF THE CDSC FOR CLASS C SHARES The CDSC will be waived on sales of shares in the event of the shareholder's death. EXCHANGING/SELLING SHARES TO SELL OR EXCHANGE SHARES HELD WITH FINANCIAL INTERMEDIARIES OTHER THAN AMERIPRISE FINANCIAL SERVICES, PLEASE CONSULT YOUR FINANCIAL INTERMEDIARY. SEE "TRANSACTIONS THROUGH UNAFFILIATED FINANCIAL INTERMEDIARIES" FOR MORE INFORMATION. THE FOLLOWING SECTION EXPLAINS POLICIES OF THE RIVERSOURCE FUNDS ON HOW YOU CAN EXCHANGE OR SELL SHARES HELD WITH AMERIPRISE FINANCIAL SERVICES. EXCHANGES You may exchange your Fund shares at no charge for shares of the same class of any other publicly offered RiverSource fund. Exchanges into RiverSource Tax-Exempt Money Market Fund may only be made from Class A shares. For complete information on the other fund, including fees and expenses, read that fund's prospectus carefully. Your exchange will be priced at the next NAV calculated after your transaction request is received in good order. MARKET TIMING IS FREQUENT OR SHORT-TERM TRADING BY CERTAIN SHAREHOLDERS INTENDED TO PROFIT AT THE EXPENSE OF OTHER SHAREHOLDERS BY SELLING SHARES OF A FUND SHORTLY AFTER PURCHASE. MARKET TIMING MAY ADVERSELY IMPACT A FUND'S PERFORMANCE BY PREVENTING THE INVESTMENT MANAGER FROM FULLY INVESTING THE ASSETS OF THE FUND, DILUTING THE VALUE OF SHARES HELD BY LONG-TERM SHAREHOLDERS, OR INCREASING THE FUND'S TRANSACTION COSTS. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT D.30 FUNDS THAT INVEST IN SECURITIES WHICH TRADE INFREQUENTLY MAY BE VULNERABLE TO MARKET TIMERS WHO SEEK TO TAKE ADVANTAGE OF INEFFICIENCIES IN THE SECURITIES MARKETS. TO THE EXTENT THAT THE FUND HAS SIGNIFICANT HOLDINGS OF HIGH YIELD SECURITIES, THE RISKS OF MARKET TIMING MAY BE GREATER FOR THE FUND THAN FOR OTHER FUNDS. SEE "PRINCIPAL INVESTMENT STRATEGIES" FOR A DISCUSSION OF THE KINDS OF SECURITIES IN WHICH THE FUND INVESTS. SEE "VALUING FUND SHARES" FOR A DISCUSSION OF THE FUND'S POLICY ON FAIR VALUE PRICING, WHICH IS INTENDED, IN PART, TO REDUCE THE FREQUENCY AND EFFECT OF MARKET TIMING. THE FUND'S BOARD HAS ADOPTED A POLICY THAT IS DESIGNED TO DETECT AND DETER MARKET TIMING. THE FUND SEEKS TO ENFORCE THIS POLICY AS FOLLOWS: - - The Fund tries to distinguish market timing from trading that it believes is not harmful, such as periodic rebalancing for purposes of asset allocation or dollar cost averaging. Under the Fund's procedures, there is no set number of transactions in the Fund that constitutes market timing. Even one purchase and subsequent sale by related accounts may be market timing. Generally, the Fund seeks to restrict the exchange privilege of an investor who makes more than three exchanges into or out of the Fund in any 90-day period. Accounts held by a retirement plan or an institution for the benefit of its participants or clients, which typically engage in daily transactions, are not subject to this limit. The Fund seeks the assistance of financial intermediaries in applying similar restrictions on the sub-accounts of their participants or clients. - - If an investor's trading activity is determined to be market timing or otherwise harmful to existing shareholders, the Fund reserves the right to modify or discontinue the investor's exchange privilege or reject the investor's purchases or exchanges, including purchases or exchanges accepted by a financial intermediary. The Fund may treat accounts it believes to be under common control as a single account for these purposes, although it may not be able to identify all such accounts. - - Although the Fund does not knowingly permit market timing, it cannot guarantee that it will be able to identify and restrict all short-term trading activity. The Fund receives purchase and sale orders through financial intermediaries where market timing activity may not always be successfully detected. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT D.31 Other exchange policies: - - Exchanges must be made into the same class of shares of the new fund. - - If your exchange creates a new account, it must satisfy the minimum investment amount for new purchases. - - Once we receive your exchange request, you cannot cancel it. - - Shares of the new fund may not be used on the same day for another exchange. - - If your shares are pledged as collateral, the exchange will be delayed until written approval is received from the secured party. SELLING SHARES You may sell your shares at any time. The payment will be mailed within seven days after your request is received in good order. When you sell shares, the amount you receive may be more or less than the amount you invested. Your sale price will be the next NAV calculated after your request is received in good order, minus any applicable CDSC. REPURCHASES. You can change your mind after requesting a sale and use all or part of the proceeds to purchase new shares in the same account from which you sold. If you reinvest in Class A, you will purchase the new shares at NAV rather than the offering price on the date of a new purchase. If you reinvest in Class B or Class C, any CDSC you paid on the amount you are reinvesting also will be reinvested. To take advantage of this waiver, you must send a written request within 90 days of the date your sale request was processed and include your account number. This privilege may be limited or withdrawn at any time and use of this option may have tax consequences. The Fund reserves the right to redeem in kind. For more details and a description of other sales policies, please see the SAI. If you decide to sell your shares within 30 days of a telephoned-in address change, a written request is required. IMPORTANT: Payments sent by a bank authorization, check or money order that are not guaranteed may take up to ten days to clear. This may cause your scheduled arrangement or unscheduled request to fail to process if the requested amount includes unguaranteed funds. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT D.32 WAYS TO REQUEST AN EXCHANGE OR SALE OF SHARES BY REGULAR OR EXPRESS MAIL AMERIPRISE FINANCIAL SERVICES 70200 AMERIPRISE FINANCIAL CENTER MINNEAPOLIS, MN 55474 Include in your letter: - - your account number - - the name of the fund(s) - - the class of shares to be exchanged or sold - - your Social Security number or Employer Identification number - - the dollar amount or number of shares you want to exchange or sell - - specific instructions regarding delivery or exchange destination - - signature(s) of registered account owner(s) (All signatures may be required. Contact your financial advisor or Ameriprise Financial Services for more information.) - - any paper certificates of shares you hold Payment will be mailed to the address of record and made payable to the names listed on the account, unless your request specifies differently and is signed by all owners. The express mail delivery charges you pay will vary depending on domestic or international delivery instructions. BY TELEPHONE (800) 297-7378 for brokerage accounts (800) 967-4377 for wrap accounts (800) 862-7919 for non-brokerage/wrap accounts - - Reasonable procedures will be used to confirm authenticity of telephone exchange or sale requests. - - Telephone exchange and sale privileges automatically apply to all accounts except custodial, corporate or qualified retirement accounts. You may request that these privileges NOT apply by writing the distributor. Each registered owner must sign the request. - - Acting on your instructions, your financial advisor may conduct telephone transactions on your behalf. - - Telephone privileges may be modified or discontinued at any time. MINIMUM SALE AMOUNT: $100 MAXIMUM SALE AMOUNT: $100,000 RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT D.33 BY WIRE You can wire money from your account to your bank account. Contact your financial advisor or Ameriprise Financial Services at the above numbers for additional information. - - Minimum amount: $1,000 - - Pre-authorization is required. - - A service fee may be charged against your account for each wire sent. BY SCHEDULED PAYOUT PLAN - - Minimum payment: $100* - - Contact your financial advisor or Ameriprise Financial Services to set up regular payments. - - Purchasing new shares while under a payout plan may be disadvantageous because of the sales charges. * Minimum is $50 in a non-brokerage/wrap account. ELECTRONIC TRANSACTIONS The ability to initiate transactions via the internet may be unavailable or delayed at certain times (for example, during periods of unusual market activity). The Fund and the distributor are not responsible for any losses associated with unexecuted transactions. In addition, the Fund and the distributor are not responsible for any losses resulting from unauthorized transactions if reasonable security measures are followed to validate the investor's identity. The Fund may modify or discontinue electronic privileges at any time for any shareholder without prior notice as deemed necessary and in the best interests of the Fund. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT D.34 DISTRIBUTIONS AND TAXES As a shareholder you are entitled to your share of the Fund's net income and net gains. The Fund distributes dividends and capital gains to qualify as a regulated investment company and to avoid paying corporate income and excise taxes. DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS The Fund's net investment income is distributed to you as DIVIDENDS. Dividends will generally be composed of ordinary dividend income (which may include interest income, short-term capital gains and non-qualifying dividends). It is unlikely the Fund will distribute qualifying dividend income, which is eligible for preferential tax rates under current tax law. Capital gains are realized when a security is sold for a higher price than was paid for it. Each realized capital gain or loss is long-term or short-term depending on the length of time the Fund held the security. Realized capital gains and losses offset each other. The Fund offsets any net realized capital gains by any available capital loss carryovers. Net short-term capital gains are included in net investment income. Net realized long-term capital gains, if any, are distributed by the end of the calendar year as CAPITAL GAIN DISTRIBUTIONS. REINVESTMENTS Dividends and capital gain distributions are automatically reinvested in additional shares in the same class of the Fund, unless: - - you request distributions in cash, or - - you direct the Fund to invest your distributions in the same class of any publicly offered RiverSource fund for which you have previously opened an account. We reinvest the distributions for you at the next calculated NAV after the distribution is paid. If you choose cash distributions, you will receive cash only for distributions declared after your request has been processed. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT D.35 TAXES Distributions are subject to federal income tax and may be subject to state and local taxes in the year they are declared. You must report distributions on your tax returns, even if they are reinvested in additional shares. If you buy shares shortly before the record date of a distribution, you may pay taxes on money earned by the Fund before you were a shareholder. You will pay the full pre-distribution price for the shares, then receive a portion of your investment back as a distribution, which may be taxable. For tax purposes, an exchange is considered a sale and purchase, and may result in a gain or loss. A sale is a taxable transaction. If you sell shares for less than their cost, the difference is a capital loss. If you sell shares for more than their cost, the difference is a capital gain. Your gain may be short term (for shares held for one year or less) or long term (for shares held for more than one year). You may not create a tax loss, based on paying a sales charge, by exchanging shares within 91 days of purchase. If you buy Class A shares and within 91 days exchange into another fund, you may not include the sales charge in your calculation of tax gain or loss on the sale of the first fund you purchased. The sales charge may be included in the calculation of your tax gain or loss on a subsequent sale of the second fund you purchased. For more information, see the SAI. Selling shares held in an IRA or qualified retirement account may subject you to federal taxes, penalties and reporting requirements. Please consult your tax advisor. IMPORTANT: This information is a brief and selective summary of some of the tax rules that apply to this Fund. Because tax matters are highly individual and complex, you should consult a qualified tax advisor. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT D.36 FINANCIAL HIGHLIGHTS THE FINANCIAL HIGHLIGHTS TABLES ARE INTENDED TO HELP YOU UNDERSTAND THE FUND'S FINANCIAL PERFORMANCE. CERTAIN INFORMATION REFLECTS FINANCIAL RESULTS FOR A SINGLE FUND SHARE. THE TOTAL RETURNS IN THE TABLES REPRESENT THE RATE THAT AN INVESTOR WOULD HAVE EARNED OR LOST ON AN INVESTMENT IN THE FUND (ASSUMING REINVESTMENT OF ALL DIVIDENDS AND DISTRIBUTIONS). THIS INFORMATION HAS BEEN AUDITED BY KPMG LLP, WHOSE REPORT, ALONG WITH THE FUND'S FINANCIAL STATEMENTS, IS INCLUDED IN THE ANNUAL REPORT WHICH, IF NOT INCLUDED WITH THIS PROSPECTUS, IS AVAILABLE UPON REQUEST. [STRIKETHROUGH]CLASS A[/STRIKETHROUGH] PER SHARE INCOME AND CAPITAL CHANGES(a)
FISCAL PERIOD ENDED AUG. 31, 2005 2004 2003 2002 2001 Net asset value, beginning of period $ 4.87 $ 4.78 $ 4.75 $ 4.86 $ 4.70 - --------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .18 .18 .20 .25 .31 Net gains (losses) (both realized and unrealized) .03 .08 .03 (.10) .17 - --------------------------------------------------------------------------------------------------------- Total from investment operations .21 .26 .23 .15 .48 - --------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.19) (.17) (.20) (.25) (.32) Tax return of capital -- -- -- (.01) -- - --------------------------------------------------------------------------------------------------------- Total distributions (.19) (.17) (.20) (.26) (.32) - --------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 4.89 $ 4.87 $ 4.78 $ 4.75 $ 4.86 - --------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $1,774 $1,933 $2,280 $2,438 $2,390 - --------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(b) .94%(c) .98%(c) .97% .95% .94% - --------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 3.67% 3.55% 4.16% 5.17% 6.51% - --------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 300% 279% 256% 169% 115% - --------------------------------------------------------------------------------------------------------- Total return(d) 4.38% 5.54% 4.91% 3.13% 10.48% - ---------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (c) Ameriprise Financial and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class A would have been 1.02% and 1.00% for the years ended Aug. 31, 2005 and 2004, respectively. (d) Total return does not reflect payment of a sales charge. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT D.37 [STRIKETHROUGH]CLASS B[/STRIKETHROUGH] PER SHARE INCOME AND CAPITAL CHANGES(a)
FISCAL PERIOD ENDED AUG. 31, 2005 2004 2003 2002 2001 Net asset value, beginning of period $4.88 $4.78 $4.75 $ 4.86 $4.70 - --------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .15 .14 .16 .21 .27 Net gains (losses) (both realized and unrealized) .01 .09 .03 (.10) .17 - --------------------------------------------------------------------------------------------------------- Total from investment operations .16 .23 .19 .11 .44 - --------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.15) (.13) (.16) (.21) (.28) Tax return of capital -- -- -- (.01) -- - --------------------------------------------------------------------------------------------------------- Total distributions (.15) (.13) (.16) (.22) (.28) - --------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.89 $4.88 $4.78 $ 4.75 $4.86 - --------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 484 $ 628 $ 902 $1,047 $ 954 - --------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(b) 1.70%(c) 1.73%(c) 1.73% 1.71% 1.70% - --------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 2.92% 2.78% 3.40% 4.40% 5.74% - --------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 300% 279% 256% 169% 115% - --------------------------------------------------------------------------------------------------------- Total return(d) 3.39% 4.95% 4.12% 2.35% 9.65% - ---------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (c) Ameriprise Financial and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class B would have been 1.78% and 1.75% for the years ended Aug. 31, 2005 and 2004, respectively. (d) Total return does not reflect payment of a sales charge. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT D.38 [STRIKETHROUGH]CLASS C[/STRIKETHROUGH] PER SHARE INCOME AND CAPITAL CHANGES(a)
FISCAL PERIOD ENDED AUG. 31, 2005 2004 2003 2002 2001 Net asset value, beginning of period $4.88 $4.78 $4.75 $4.86 $4.71 - --------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .15 .14 .16 .21 .27 Net gains (losses) (both realized and unrealized) .02 .09 .03 (.10) .16 - --------------------------------------------------------------------------------------------------------- Total from investment operations .17 .23 .19 .11 .43 - --------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.15) (.13) (.16) (.21) (.28) Tax return of capital -- -- -- (.01) -- - --------------------------------------------------------------------------------------------------------- Total distributions (.15) (.13) (.16) (.22) (.28) - --------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.90 $4.88 $4.78 $4.75 $4.86 - --------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 18 $ 21 $ 27 $ 24 $ 10 - --------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(b) 1.70%(c) 1.73%(c) 1.74% 1.72% 1.70% - --------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 2.93% 2.79% 3.34% 4.33% 5.62% - --------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 300% 279% 256% 169% 115% - --------------------------------------------------------------------------------------------------------- Total return(d) 3.60% 4.95% 4.11% 2.35% 9.43% - ---------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (c) Ameriprise Financial and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class C would have been 1.79% and 1.75% for the years ended Aug. 31, 2005 and 2004, respectively. (d) Total return does not reflect payment of a sales charge. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT D.39 [STRIKETHROUGH]CLASS Y[/STRIKETHROUGH] PER SHARE INCOME AND CAPITAL CHANGES(a)
FISCAL PERIOD ENDED AUG. 31, 2005 2004 2003 2002 2001 Net asset value, beginning of period $4.88 $4.78 $4.75 $4.86 $ 4.70 - --------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .19 .18 .21 .25 .32 Net gains (losses) (both realized and unrealized) .02 .10 .03 (.10) .17 - --------------------------------------------------------------------------------------------------------- Total from investment operations .21 .28 .24 .15 .49 - --------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.20) (.18) (.21) (.25) (.33) Tax return of capital -- -- -- (.01) -- - --------------------------------------------------------------------------------------------------------- Total distributions (.20) (.18) (.21) (.26) (.33) - --------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.89 $4.88 $4.78 $4.75 $ 4.86 - --------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 202 $ 203 $ 268 $ 297 $ 533 - --------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(b) .78%(c) .81%(c) .81% .78% .78% - --------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 3.85% 3.70% 4.34% 5.30% 6.66% - --------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 300% 279% 256% 169% 115% - --------------------------------------------------------------------------------------------------------- Total return(d) 4.34% 5.92% 5.08% 3.29% 10.65% - ---------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (c) Ameriprise Financial and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class Y would have been 0.86% and 0.83% for the years ended Aug. 31, 2005 and 2004, respectively. (d) Total return does not reflect payment of a sales charge. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT D.40 This Fund, along with the other RiverSource funds, is distributed by Ameriprise Financial Services, Inc. and can be purchased from Ameriprise Financial Services or from a limited number of other authorized financial intermediaries. The Fund can be found under the "RiverSource" banner in most mutual fund quotations. Additional information about the Fund and its investments is available in the Fund's SAI, and annual and semiannual reports to shareholders. In the Fund's annual report, you will find a discussion of market conditions and investment strategies that significantly affected the Fund's performance during its most recent fiscal year. The SAI is incorporated by reference in this prospectus. For a free copy of the SAI, the annual report, or the semiannual report, or to request other information about the Fund or make a shareholder inquiry, contact your financial advisor, investment professional or Ameriprise Financial Services. Ameriprise Financial Services 70100 Ameriprise Financial Center Minneapolis, MN 55474 (800) 862-7919 TTY: (800) 846-4852 RiverSource Investments Website address: riversource.com/investments You may review and copy information about the Fund, including the SAI, at the Securities and Exchange Commission's (Commission) Public Reference Room in Washington, D.C. (for information about the public reference room call 1-202-942-8090). Reports and other information about the Fund are available on the EDGAR Database on the Commission's Internet site at www.sec.gov. Copies of this information may be obtained, after paying a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing to the Public Reference Section of the Commission, Washington, D.C. 20549-0102. Investment Company Act File #811-2503 TICKER SYMBOL Class A: INBNX Class B: ININX Class C: AXBCX Class I: -- Class Y: IDBYX [RIVERSOURCE(SM) INVESTMENTS LOGO] RIVERSOURCE INVESTMENTS 200 AMERIPRISE FINANCIAL CENTER MINNEAPOLIS, MN 55474 S-6495-99 Y (10/05) RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT D.41 EXHIBIT E BOARD EFFECTIVENESS COMMITTEE CHARTER RESOLVED, That the Board Effectiveness Committee be composed of the independent members appointed annually by the Board and the Chair of the Board; RESOLVED, That one member shall be appointed to Chair the Committee and the Committee shall meet upon call of the Chair; RESOLVED, That the Committee will make recommendations to the Board on: - - The responsibilities and duties of the Board; - - The criteria to be used to determine the size and structure of the Boards and the background and characteristics of independent Board members; - - The persons to serve as Board members based on approved criteria whenever necessary to fill a vacancy or in conjunction with a regular meeting of shareholders in which nominees are required to be submitted for a vote of shareholders; - - The annual evaluation of the Board's performance and the attendance of members; and - - The compensation to be paid to independent members; and further RESOLVED, That the Committee shall be assigned such further areas of responsibility as appropriate to assist the Board in meeting its fiduciary duties in an efficient and effective manner. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT E.1 EXHIBIT F THIS CHARTER IS SCHEDULED TO BE REVIEWED AT AN UPCOMING MEETING OF THE BOARD. AT THAT TIME, THE BOARD IS EXPECTED TO UPDATE THE CHARTER, INCLUDING CHANGING REFERENCES FROM AMERICAN EXPRESS FINANCIAL CORPORATION AND ITS SUBSIDIARIES TO AMERIPRISE FINANCIAL AND ITS SUBSIDIARIES. IN ADDITION, REFERENCES TO AMERICAN EXPRESS COMPANY WILL BE ELIMINATED. JOINT AUDIT COMMITTEE CHARTER MEMBERSHIP AND QUALIFICATIONS The Joint Audit Committee shall consist of at least three members appointed by the Board. The Board may replace members of the Committee for any reason. No member shall be an "interested person" as that term is defined in Section 2(a)(19) of the Investment Company Act, nor shall any member receive any compensations from the Fund except compensations for service as a member of the Board and Board committees. At least one member of the Committee shall be an "audit committee financial expert." An "audit committee financial expert" means a person who has the following attributes: - - An understanding of generally accepted accounting principles and financial statements; - - The ability to assess the general application of such principles in connection with the accounting for estimates, accruals, and reserves; - - Experience preparing, auditing, analyzing, or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the registrant's financial statements, or experience actively supervising one or more persons engaged in such activities; - - An understanding of internal controls and procedures for financial reporting; and - - An understanding of audit committee functions. A person shall have acquired such attributes through: - - Education and experience as a principal financial officer, principal accounting officer, controller, public accountant, or auditor or experience in one or more positions that involve the performance of similar functions; - - Experience actively supervising a principal financial officer, principal accounting officer, controller, public accountant, auditor, or person performing similar functions; RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT F.1 - - Experience overseeing or assessing the performance of companies or public accountants with respect to the preparation, auditing, or evaluation of financial statements; or - - Other relevant experience. The Board shall determine "audit committee financial experts" annually. PURPOSES OF THE COMMITTEE The Committee is to assist independent members of the Boards in fulfilling their oversight responsibilities to the shareholders, potential shareholders and investment community relating to the reliability of financial reporting, the effectiveness and efficiency of operations, the work done by external auditors, the adequacy of internal controls, and the compliance with applicable laws and regulations by: - - Overseeing the accounting and financial reporting processes of the Fund and its internal control over financial reporting and, as the Committee deems appropriate, to inquire into the internal control over financial reporting of certain third-party service providers; - - Overseeing, or, as appropriate, assisting Board oversight of, the quality and integrity of the Fund's financial statements and the independent audit thereof; - - Overseeing, or, as appropriate, assisting Board oversight of, the Fund's compliance with legal and regulatory requirements that relate to the Fund's accounting and financial reporting, internal control over financial reporting and independent audits; and - - Approving prior to appointment the engagement of the Fund's independent auditor (Auditor) and, in connection therewith, to review and evaluate the qualifications, independence and performance of the Fund's Auditor. The Auditor for the Fund shall report directly to the Committee. DUTIES AND POWERS To carry out its purposes, the Committee shall have the following duties and powers: - - Recommend the Auditor that the Committee believes is qualified to examine and report on the financial statements to the independent members of the Board within 90 days before or after the fiscal year end of the Fund; - - Meet with representatives of the Auditor to: - Review and evaluate matters potentially affecting its independence and capabilities by: - Approving prior to appointment the professional services the Auditor requests to perform for American Express Financial Corporation and any of its subsidiaries that provide services to the Fund; RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT F.2 - Considering the controls applied by the Auditor and measures taken by American Express Financial Corporation to assure that all items requiring pre-approval are identified and referred to the Committee in a timely fashion; and - Evaluating the auditor's independence by receiving a report on business relationships at each meeting setting forth the work it has been engaged to do for American Express Company or its subsidiaries. - Consider the scope of the annual audit and any special audits and review and approve the estimated fees to be charged; - Consider the information and comments from the Auditor with respect to the Fund's accounting and financial reporting policies, procedures and internal controls over financial reporting; the responses to the comments by American Express Financial Corporation; and possible improvements that can be made in the quality of the Fund's accounting and financial reporting; - - Meet with representatives of American Express Enterprise Risk and Assurance Services to: - Discuss its responsibility to the Fund with respect to its review of operations of American Express Financial Corporation and affiliates to the extent they pertain to the registered investment companies; - Consider its authority, including the support it receives from American Express Financial Corporation's senior management and American Express Company's General Auditor; - Discuss whether it complies with the Institute of Internal Auditors' "Standard for the Professional Practice of Internal Auditing;" - Review its budget, staffing and proposed audit plans each year; and - Review reports issued by American Express Enterprise Risk and Assurance Services that pertain to American Express Financial Corporation's operations related to the registered investment companies. - - Encourage open lines of communications among the Committee, the Auditor, and American Express Enterprise Risk and Assurance Services to: - Consider information and comments from the Auditor with respect to the Fund's financial statements, including any adjustments to such statements recommended by the Auditor and to review the opinion of the Auditor; - Resolve any disagreements between American Express Financial Corporation and the Auditor; - Review, in connection with required certifications of Form N-CSR, any significant deficiencies in the design or operations of internal control over financial reporting or material weaknesses therein and any reported evidence of fraud involving any person who has a significant role in the Fund's internal control over financial reporting; RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT F.3 - Establish procedures for the receipt, retention and treatment of complaints received by the Fund relating to accounting, internal accounting controls, or auditing matters, and the confidential, anonymous submission by employees of American Express Financial Corporation of concerns about accounting or auditing matters, and address reports from attorneys or auditors of possible violations of federal or state laws or fiduciary duty; - Investigate or initiate an investigation of reports of improprieties or suspected improprieties in connection with the Fund's accounting or financial reporting; - - Consider the adequacy and effectiveness of internal controls, including the controls over computerized information systems, through discussions with the Auditor, American Express Enterprise Risk and Assurance Services and appropriate American Express Financial Corporation managers who provide reports to the Committee and elicit their recommendations for improving or identifying particular areas where new or more detailed controls or procedures are desirable giving particular emphasis to the adequacy of internal controls for exposing any payments, transactions, or procedures that might be deemed illegal or otherwise improper; - - Request to be informed about all new or changed accounting principles and disclosure practices on a timely basis and inquire regarding the judgment and reasoning regarding the appropriateness, not just the acceptability, of the changes or proposed changes; - - Report the work of the Committee to the Board as frequently as the Committee deems appropriate; - - Review and assess the adequacy of the Committee's charter at least annually and recommend any changes to the Board; - - Meet at least once a year in a private meeting with each of the three following groups: the Auditor, the American Express Financial Corporation's management personnel responsible for the financial statements and recordkeeping of the Fund, the Senior Vice President - Enterprise Risk and Assurance Services for American Express Financial Corporation, and the General Auditor and Chief Operational Risk Officer for American Express Company; - - Consider such other matters as any Board or Committee deems appropriate and perform such additional tasks as directed by resolution of any Board; - - Conduct its own investigations into issues related to its responsibilities and is authorized to employ such professional and technical assistance as it deems necessary. The Committee shall have the resources and authority appropriate to discharge its responsibilities, including appropriate funding, as determined by the Committee, for payment of compensation to the Auditor for the purpose of RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT F.4 conducting the audit and rendering their audit report, the authority to retain and compensate special counsel and other experts or consultants as the Committee deems necessary, and the authority to obtain specialized training for Committee members, at the expense of the Fund, as appropriate. The Committee may delegate any portion of its authority, including the authority to grant pre-approvals of audit and permitted non-audit services to one or more members. Any decisions of the member to grant pre-approvals shall be presented to the Committee at its next regularly scheduled meeting. ROLE AND RESPONSIBILITIES The function of the Committee is oversight; it is American Express Financial Corporation's responsibility to maintain appropriate systems for accounting and internal control over financial reporting, and the Auditor's responsibility to plan and carry out a proper audit. Specifically, American Express Financial Corporation is responsible for: (1) the preparation, presentation and integrity of the Fund's financial statements; (2) the maintenance of appropriate accounting and financial reporting principles and policies; and (3) the maintenance of internal control over financial reporting and other procedures designed to assure compliance with accounting standards and related laws and regulations. The Auditor is responsible for planning and carrying out an audit consistent with applicable legal and professional standards and the terms of their engagement letter. Nothing in the Charter shall be construed to reduce the responsibilities or liabilities of the Fund's service providers, including the Auditor. Although the Committee is expected to take a detached and questioning approach to the matters that come before it, the review of a Fund's financial statements by the Committee is not an audit, nor does the Committee's review substitute for the responsibilities of American Express Financial Corporation's for preparing, or the Auditor for auditing, the financial statements. Members of the Committee are not employees of the Fund and, in serving on this Committee, are not, and do not hold themselves out to be, acting as accountants or auditors. As such, it is not the duty or responsibility of the Committee or its members to conduct "field work" or other types of auditing or accounting reviews or procedures. In discharging their duties, the members of the Committee are entitled to rely on information, opinions, reports, or statements, including financial statements and other financial data, if prepared or presented by: (1) one or more officers of the Fund whom the director reasonably believes to be reliable and competent in the matters presented; (2) legal counsel, public accountants, or other persons as to matters the director reasonably believes are within the person's professional or expert competence; or (3) a Board committee of which the director is not a member. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT F.5 OPERATIONS The Board shall adopt and approve this Charter and may amend it on the Board's own motion. The Committee shall review this Charter at least annually and recommend to the full Board any changes the Committee deems appropriate. The Committee may select one of its members to be the chair and may select a vice chair. A majority of the members of the Committee shall constitute a quorum for the transaction of business at any meeting of the Committee. The action of a majority of the members of the Audit Committee present at a meeting at which a quorum is present shall be the action of the Committee. The Committee shall meet on a regular basis and at least four times annually and is empowered to hold special meetings as circumstances require. The Chairperson or a majority of the members shall be authorized to call a meeting of the Committee or meetings may be fixed in advance by the Committee. The agenda shall be prepared under the direction and control of the Chairperson. The Committee shall ordinarily meet in person; however, members may attend telephonically, and the Committee may act by written consent, to the extent permitted by law and by the Fund's bylaws. The Committee shall have the authority to meet privately and to admit non-members individually. The Committee may also request to meet with internal legal counsel and compliance personnel of American Express Financial Corporation and with entities that provide significant accounting or administrative services to the Fund to discuss matters relating to the Fund's accounting and compliance as well as other Fund-related matters. The Committee shall prepare and retain minutes of its meetings and appropriate documentation of decisions made outside of meetings by delegated authority. The Committee shall evaluate its performance at least annually. RIVERSOURCE SELECTIVE FUND -- PROXY STATEMENT F.6 S-6387 A (12/05)
ezVote(SM)Consolidated Proxy Card RIVERSOURCE(SM) FUNDS formerly known as American Express(R) Funds This form is your EzVote Consolidated Proxy. P.O. BOX 9132 It reflects all of your accounts registered to HINGHAM, MA 02043-9132 the same Social Security or Tax I.D. number at this address. By voting and signing the Consolidated Proxy Card, you are voting all of these accounts in the same manner as indicated on the reverse side of the form.
999 999 999 999 99 <- RIVERSOURCE(SM) FUNDS (formerly known as AMERICAN EXPRESS FUNDS) AXP INCOME SERIES, INC. PROXY FOR THE REGULAR MEETING OF SHAREHOLDERS RIVERSOURCE SELECTIVE FUND FEBRUARY 15, 2006 Your fund will hold a shareholders' meeting in the Galaxy Room on the 50th floor of the IDS Center, 80 South Eight Street, Minneapolis, MN, at 10:00 a.m. on February 15, 2006. You are entitled to vote at the meeting if you were a shareholder on December 16, 2005. Please read the proxy statement and vote immediately by mail, telephone or internet, even if you plan to attend the meeting. Just follow the instructions on this proxy card. The Board of Directors recommends that you vote FOR each proposal. The undersigned hereby appoints Arne H. Carlson and Leslie L. Ogg or either of them, as proxies, with full power of substitution, to represent and to vote all of the shares of the undersigned at the regular meeting to be held on February 15, 2006, and any adjournment thereof. Date __________________ Signature(s) (Joint owners) (Sign in the Box) Note: Please sign this proxy exactly as your name (or names) appears on this card. Joint owners should each sign personally. Trustees and other fiduciaries should indicate the capacity in which they sign, and where more than one name appears, a majority must sign. If a corporation, this signature should be that of an authorized officer who should state his or her title. AMPF Selective EZ - DH IF VOTING THE CONSOLIDATED PROXY CARD DO NOT SIGN, DATE OR RETURN THE INDIVIDUAL BALLOTS
THREE EASY WAYS TO VOTE To vote by Telephone To vote by Internet To vote by Mail 1) Read the proxy statement and have the 1) Read the proxy statement and have 1) Read the Proxy Statement. Consolidated Proxy Card at hand. Consolidated Proxy Card at hand. 2) Check the appropriate boxes on the 2) Call 1-888-221-0697. 2) Go to www.proxyweb.com reverse side. 3) Follow the recorded instructions. 3) Follow the on-line directions. 3) Sign and date the proxy card. 4) Return the proxy card in the envelope provided.
IF YOU VOTE BY TELEPHONE OR INTERNET, DO NOT MAIL YOUR CARD. INDIVIDUAL BALLOTS On the reverse side of this form (and on accompanying pages, if necessary) you will find individual ballots, one for each of your accounts. If you would wish to vote each of these accounts separately, sign in the signature box below, mark each individual ballot to indicate your vote, detach the form at the perforation above and return the individual ballots portion only. NOTE: If you choose to vote each account separately, do not return the Consolidated Proxy Card above. Date _____________________________ ------------------------------------------------------- Signature(s) (Joint owners) (Sign in the Box) Note: Please sign this proxy exactly as your name or names appears on this card. Joint owners should each sign personally. Trustees and other fiduciaries should indicate the capacity in which they sign, and where more than one name appears, a majority must sign. If a corporation, this signature should be that of an authorized officer who should state his or her title. AMPF Selective EZ - DH
ezVote(SM)Consolidated Proxy Card Please fill in box(es) as shown using black or blue ink or number 2 pencil. [X] PLEASE DO NOT USE FINE POINT PENS.
To vote FOR on all Proposals, MARK this box (no other vote is necessary) [ ] FOR AGAINST ABSTAIN 1. Approve the Agreement and Plan of Reorganization. [ ] [ ] [ ] 1. 2. ELECTION OF BOARD MEMBERS. FOR WITHHOLD FOR ALL ALL ALL EXCEPT (01) Kathleen Blatz (05) Jeffrey Laikind (09) Alan K. Simpson (02) Arne H. Carlson (06) Stephen R. Lewis, Jr. (10) Alison Taunton-Rigby (03) Patricia M. Flynn (07) Catherine James Paglia (11) William F. Truscott [ ] [ ] [ ] 2. (04) Anne P. Jones (08) Vikki L. Pryor (INSTRUCTIONS: To withhold authority to vote for any individual nominee, mark the "FOR ALL EXCEPT" box and write the nominee's number on the line below.) FOR AGAINST ABSTAIN 3. Approve an Amendment to the Articles of Incorporation. [ ] [ ] [ ] 3. 4. Approve an Investment Management Services Agreement with RiverSource Investments, LLC. [ ] [ ] [ ] 4. PLEASE SIGN AND DATE ON THE REVERSE SIDE. AMPF Selective EZ - DH IF VOTING THE CONSOLIDATED PROXY CARD DO NOT SIGN, DATE OR RETURN THE INDIVIDUAL BALLOTS INDIVIDUAL BALLOTS NOTE: IF YOU HAVE USED THE CONSOLIDATED BALLOT ABOVE, DO NOT VOTE THE INDIVIDUAL BALLOTS BELOW.
000 0000000000 000 0 000 0000000000 000 0 JOHN Q. PUBLIC JOHN Q. PUBLIC 123 MAIN STREET 123 MAIN STREET ANYTOWN, MA 02030 999 999 999 999 99 ANYTOWN, MA 02030 999 999 999 999 99 RIVERSOURCE SELECTIVE FUND RIVERSOURCE SELECTIVE FUND FOR AGAINST ABSTAIN FOR AGAINST ABSTAIN 1. Approve the Agreement 1. Approve the Agreement and Plan of and Plan of Reorganization. [ ] [ ] [ ] Reorganization. [ ] [ ] [ ] 2. ELECTION OF BOARD 2. ELECTION OF BOARD MEMBERS. FOR WITHHOLD FOR ALL MEMBERS. FOR WITHHOLD FOR ALL (See Nominee list on ALL ALL EXCEPT* (See Nominee list on ALL ALL EXCEPT* consolidated ballot.) consolidated ballot.) *EXCEPT____________________ [ ] [ ] [ ] *EXCEPT____________________ [ ] [ ] [ ] FOR AGAINST ABSTAIN FOR AGAINST ABSTAIN 3. Amend the Articles of 3. Amend the Articles of Incorporation. [ ] [ ] [ ] Incorporation. [ ] [ ] [ ] 4. Approve Investment 4. Approve Investment Management Services Management Services Agreement. [ ] [ ] [ ] Agreement. [ ] [ ] [ ]
AMPF Selective EZ - DH AXP(R) INCOME SERIES, INC. - RiverSource(SM) Selective Fund (formerly AXP Selective Fund) PROXY STATEMENT Dec. 16, 2005 HERE IS A BRIEF OVERVIEW OF THE CHANGES BEING RECOMMENDED FOR YOUR RIVERSOURCE MUTUAL FUND. WE ENCOURAGE YOU TO READ THE FULL TEXT OF THE ENCLOSED PROXY STATEMENT. Q: WHAT CHANGES HAVE RECENTLY TAKEN PLACE? On Sept. 30, the fund's investment manager, Ameriprise Financial, Inc. ("Ameriprise Financial") (formerly American Express Financial Corporation) was spun off from its parent company, American Express Company. The investment management functions were then moved to RiverSource Investments, LLC ("RiverSource Investments"), a wholly-owned subsidiary of Ameriprise Financial. The Board of Directors ("Board") changed the name of each fund and the funds are now listed in newspapers under RiverSource. Q: WHY AM I BEING ASKED TO VOTE? Mutual funds are required to get shareholders' approval for certain contracts and certain kinds of changes, like the ones included in this proxy statement. Q: IS MY VOTE IMPORTANT? Absolutely! While the Board of each RiverSource Fund has reviewed these changes and recommends you approve them, you have the right to voice your opinion. Until the Fund is sure that a quorum has been reached (50% of existing shares), it will continue to contact shareholders asking them to vote. These efforts cost money -- so please, vote immediately. Q: WHAT AM I BEING ASKED TO VOTE ON? Shareholders are being asked to vote on: - - The merger ("Reorganization") of RiverSource Selective Fund and RiverSource Diversified Bond Fund. - - Election of Board members. - - An amendment to the Fund's Articles of Incorporation to permit the Board to establish the minimum account value and to change the name of the corporation to "RiverSource" consistent with the name of the fund. - - An Investment Management Services Agreement ("IMS Agreement") with RiverSource Investments. We encourage you to read the full text of the proxy statement to obtain a more detailed understanding of the issues. Q: IF APPROVED, WHEN WILL THE REORGANIZATION HAPPEN? If shareholders approve the Reorganization, it will take place shortly after the shareholder meeting. In the interim, however, it will be important for the Fund to have a properly elected Board and an IMS Agreement that has been approved by shareholders. Q: WHAT DO BOARD MEMBERS DO? Board members represent the interests of the shareholders and oversee the management of the Fund. Q: WHAT CHANGES ARE PROPOSED TO THE INVESTMENT MANAGEMENT SERVICES AGREEMENT? While the spin off of Ameriprise Financial and transfer of the IMS Agreement to RiverSource Investments did not cause a termination of the IMS Agreement, the Board determined that it would be prudent to give shareholders an opportunity to vote on the IMS Agreement. Q: HOW DOES THE BOARD RECOMMEND THAT I VOTE? After careful consideration, the Board recommends that you vote FOR each proposal. Q: HOW DO I VOTE? You can vote in one of four ways: - - By mail with the enclosed proxy card - - By telephone - - By web site - - In person at the meeting Please refer to the enclosed voting instruction card for the telephone number and internet address. Q: WHOM SHOULD I CALL IF I HAVE QUESTIONS? If you have questions about any of the proposals described in the proxy statement or about voting procedures, please call your financial advisor or call client services toll free at (877) 256-6085. Statement of Additional Information Dec. 16, 2005 AXP(R) Fixed Income Series, Inc. RiverSource(SM) Diversified Bond Fund This Statement of Additional Information ("SAI") consists of this cover page and incorporates by reference the following described documents, each of which has been previously filed and accompanies this SAI. 1. RiverSource Diversified Bond Fund's most recent SAI, dated Nov. 29, 2005. 2. RiverSource Diversified Bond Fund's most recent annual report, for the period ended Aug. 31, 2005. 3. RiverSource Selective Fund's most recent SAI, dated Nov. 29, 2005. 4. RiverSource Selective Fund's most recent annual report, for the period ended May 31, 2005. This SAI is not a prospectus. It should be read in conjunction with the proxy statement/prospectus, which may be obtained by calling (877) 256-6085 or writing RiverSource Service Corporation, 70100 Ameriprise Financial Center, Minneapolis, MN 55474. RiverSource Diversified Bond Fund (Buying Fund) RiverSource Selective Fund (Selling Fund) Introduction to Proposed Fund Merger Aug. 31, 2005 The accompanying unaudited pro forma combining statement of assets and liabilities and the statement of operations reflect the accounts of the two funds at and for the 12-month period ending Aug. 31, 2005. These statements have been derived from financial statements prepared for RiverSource Diversified Bond Fund and RiverSource Selective Fund as of Aug. 31, 2005. RiverSource Diversified Bond Fund invests primarily in bonds and other debt securities including securities issued by the U.S. government, corporate bonds and mortgage and asset-backed securities. RiverSource Selective Fund invests all of its assets in Quality Income Portfolio, a series of Income Trust, an open-end investment company that has the same objectives as the Fund. The Portfolio invests primarily in bonds, which are investment grade and denominated in U.S. dollars. Under the proposed Agreement and Plan of Reorganization, Class A shares of the RiverSource Selective Fund would be exchanged for Class A shares of the RiverSource Diversified Bond Fund. Class B shares of the RiverSource Selective Fund would be exchanged for Class B shares of the RiverSource Diversified Bond Fund. Class C shares of the RiverSource Selective Fund would be exchanged for Class C shares of the RiverSource Diversified Bond Fund. Class I shares of the RiverSource Selective Fund would be exchanged for Class I shares of the RiverSource Diversified Bond Fund. Class Y shares of the RiverSource Selective Fund would be exchanged for Class Y shares of the RiverSource Diversified Bond Fund. The pro forma combining statements have been prepared to give effect to the proposed transaction on the historical operations of the accounting survivor, RiverSource Diversified Bond Fund, as if the transaction had occurred at the beginning of the fiscal year ending Aug. 31, 2005. 2 -- AXP Fixed Income Series, Inc. -- RiverSource Diversified Bond Fund RiverSource Diversified Bond Fund (Buying Fund) RiverSource Selective Fund (Selling Fund) Pro forma combining
Statement of assets and liabilities RiverSource RiverSource Diversified Selective Pro forma Pro forma Aug. 31, 2005 (Unaudited) Bond Fund Fund Adjustments Combined Assets Investments in securities, at cost (Note 2) $2,548,650,816 $ -- $ 914,853,014(a) $3,463,503,830 -------------- ------------ ------------- -------------- Investments in securities, at value* (Note 2) $2,556,951,047 $ -- $ 919,957,764(a) $3,476,908,811 Investment in Portfolio (Note 2) -- 879,765,683 (879,765,683)(a) -- Capital shares receivable 479,976 29,875 -- 509,851 Dividends and accrued interest receivable (Note 2) 15,852,024 -- 5,780,725(a) 21,632,749 Receivable for investment securities sold (Note 2) 206,792,872 -- 87,940,716(a) 294,733,588 Receivable from RiverSource Investments, LLC (Note 2) -- -- 89,190(g) 89,190 Unrealized appreciation on swap transactions, at value (Note 2) 878,275 -- 331,006(a) 1,209,281 -------------- ----------- ------------- -------------- Total assets 2,780,954,194 879,795,558 134,333,718 3,795,083,470 -------------- ----------- ------------- -------------- Liabilities Disbursements in excess of cash on demand deposit (Note 2) 887,631 -- 173,197(a) 1,060,828 Dividends payable to shareholders 451,716 168,153 -- 619,869 Capital shares payable 164,578 76,626 -- 241,204 Payable for investment securities purchased (Note 2) 140,630,243 -- 73,567,586(a) 214,197,829 Payable upon return of securities loaned (Note 2) 18,330,000 -- 9,234,879(a) 27,564,879 Accrued investment management services fee (Note 2) 33,907 -- (1,984,712)(a),(b) (1,950,805) Accrued distribution fee 538,031 160,952 -- 698,983 Accrued service fee 553 129 -- 682 Accrued transfer agency fee 2,626 1,669 (27,562)(h),(i) (23,267) Accrued administrative services fee (Note 2) 3,122 1,202 487,541(c) 491,865 Other accrued expenses (Note 2) 324,785 54,264 (123,647)(a), 255,402 (d), (e), (f) Forward Sale Commitments, at value (proceeds receivable $139,123,964 for RiverSource Diversified Bond Fund and proceeds receivable $50,768,433 for RiverSource Selective Fund) (Note 2) 140,462,038 -- 51,226,682(a) 191,688,720 -------------- ----------- ------------- -------------- Total liabilities 301,829,230 462,995 132,553,964 434,846,189 -------------- ----------- ------------- -------------- Net assets applicable to outstanding capital stock $2,479,124,964 $879,332,563 $ 1,779,754 $3,360,237,281 ============== ============ ============= ============== Represented by Capital stock -- $.01 par value (Note 3) $ 5,068,498 $ 1,012,382 $ 789,467 $ 6,870,347 Additional paid-in capital (Note 3) 2,579,293,685 904,470,148 (789,467) 3,482,974,366 Undistributed (excess of distributions over) net investment income (Note 2) 5,270,078 (135,196) 1,779,754 6,914,636 Accumulated net realized gain (loss) (117,341,155) (30,555,103) -- (147,896,258) Unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 6,833,858 4,540,332 -- 11,374,190 -------------- ----------- ------------- -------------- Total -- representing net assets applicable to outstanding capital stock $2,479,124,964 $879,332,563 $ 1,779,754 $3,360,237,281 ============== ============ ============= ============== Net assets applicable to outstanding shares: Class A $1,774,392,052 $568,270,394 $ 1,241,452 $2,343,903,898 Class B $ 484,320,317 $107,242,362 $ 313,488 $ 591,876,167 Class C $ 18,092,300 $ 4,006,610 $ 11,711 $ 22,110,621 Class I $ 9,963 $152,498,448 $ 80,819 $ 152,589,230 Class Y $ 202,310,332 $ 47,314,749 $ 132,284 $ 249,757,365 Shares outstanding (Note 3): Class A shares 362,799,390 65,421,428 -- 479,263,980 Class B shares 99,003,330 12,348,634 -- 120,998,391 Class C shares 3,693,765 461,303 -- 4,513,831 Class I shares 2,037 17,555,166 -- 31,204,341 Class Y shares 41,351,259 5,451,649 -- 51,054,129 Net asset value per share of outstanding capital stock: Class A $ 4.89 $ 8.69 $ -- $ 4.89 Class B $ 4.89 $ 8.68 $ -- $ 4.89 Class C $ 4.90 $ 8.69 $ -- $ 4.90 Class I $ 4.89 $ 8.69 $ -- $ 4.89 Class Y $ 4.89 $ 8.68 $ -- $ 4.89 -------------- ------------ ------------- -------------- * Including securities on loan, at value (Note 2) $ 18,115,920 $ -- $ 9,234,879(a) $ 27,350,799 ============== ============ ============= ==============
See accompanying notes to pro forma financial statements. 3 -- AXP Fixed Income Series, Inc. -- RiverSource Diversified Bond Fund RiverSource Diversified Bond Fund (Buying Fund) RiverSource Selective Fund (Selling Fund)
Pro forma combining Statement of operations RiverSource RiverSource Diversified Selective Pro forma Pro forma Year ended Aug. 31, 2005 (Unaudited) Bond Fund Fund Adjustments Combined Investment income Income: Interest $120,064,422 $41,006,745 $ -- $161,071,167 Fee income from securities lending 361,192 166,712 -- 527,904 ------------ ----------- ----------- ------------ Total income 120,425,614 41,173,457 -- 161,599,071 ------------ ----------- ----------- ------------ Expenses: Expenses allocated from Portfolio (Note 2) -- 5,011,437 (5,011,437)(a) -- Investment management services fee (Note 2) 13,003,467 -- 2,793,477(a),(b) 15,796,944 Distribution fee Class A 4,534,413 1,550,727 -- 6,085,140 Class B 5,752,444 1,360,696 -- 7,113,140 Class C 193,278 46,375 -- 239,653 Transfer agency fee 4,365,376 1,131,176 (11,975)(h),(i) 5,484,577 Incremental transfer agency fee Class A 239,386 77,977 (9,510)(i) 307,853 Class B 149,792 35,628 (5,859)(i) 179,561 Class C 5,897 1,444 (218)(i) 7,123 Service fee -- Class Y 198,919 54,909 -- 253,828 Administrative services fees and expenses (Note 2) 1,259,427 464,620 487,541(c) 2,211,588 Custodian fees (Note 2) 207,936 -- 42,064(a),(d) 250,000 Compensation of board members (Note 2) 22,793 9,573 (7,366)(a),(e) 25,000 Printing and postage 619,638 141,850 -- 761,488 Registration fees 109,340 53,990 -- 163,330 Audit fees (Note 2) 45,000 11,000 (11,000)(a),(f) 45,000 Other (Note 2) 105,201 22,515 48,491(a) 176,207 ------------ ----------- ----------- ------------ Total expenses 30,812,307 9,973,917 (1,685,792) 39,100,432 Expenses waived/reimbursed by RiverSource Investments, LLC (Note 2) (2,024,845) (758,444) (89,190)(g) (2,872,479) ----------- ----------- ----------- ------------ 28,787,462 9,215,473 (1,774,982) 36,227,953 Earnings credits on cash balances (117,177) (36,841) (4,772)(a) (158,790) ------------ ----------- ----------- ------------ Total net expenses 28,670,285 9,178,632 (1,779,754) 36,069,163 ------------ ----------- ----------- ------------ Investment income (loss) -- net 91,755,329 31,994,825 1,779,754 125,529,908 ------------ ----------- ----------- ------------ Realized and unrealized gain (loss) -- net Net realized gain (loss) on: Security transactions 29,398,036 5,990,494 -- 35,388,530 Foreign currency transactions (215,482) (21,848) -- (237,330) Futures contracts 208,446 (3,822,594) -- (3,614,148) Swap transactions (467,823) (180,348) -- (648,171) ------------ ----------- ----------- ------------ Net realized gain (loss) on investments 28,923,177 1,965,704 -- 30,888,881 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (14,927,428) (714,370) -- (15,641,798) ------------ ----------- ----------- ------------ Net gain (loss) on investments and foreign currencies 13,995,749 1,251,334 -- 15,247,083 ------------ ----------- ----------- ------------ Net increase (decrease) in net assets resulting from operations $105,751,078 $33,246,159 $ 1,779,754 $140,776,991 ============ =========== =========== ============
See accompanying notes to pro forma financial statements. 4 -- AXP Fixed Income Series, Inc. -- RiverSource Diversified Bond Fund RiverSource Diversified Bond Fund (Buying Fund) RiverSource Selective Fund (Selling Fund) Notes to Pro Forma Financial Statements (Unaudited as to Aug. 31, 2005) 1. BASIS OF COMBINATION The unaudited pro forma combining statement of assets and liabilities and the statement of operations reflect the accounts of the two funds at and for the 12-month period ending Aug. 31, 2005. These statements have been derived from financial statements prepared for the RiverSource Diversified Bond Fund and RiverSource Selective Fund as of Aug. 31, 2005. Each Fund is registered under the Investment Company Act of 1940 (as amended) as a diversified, open-end management investment company. The primary investments of each Fund are as follows: RiverSource Diversified Bond Fund invests primarily in bonds and other debt securities including securities issued by the U.S. government, corporate bonds and mortgage and asset-backed securities. RiverSource Selective Fund invests all of its assets in Quality Income Portfolio, a series of Income Trust, an open-end investment company that has the same objectives as the Fund. The Portfolio invests primarily in bonds, which are investment grade and denominated in U.S. dollars. The pro forma statements give effect to the proposed transfer of the assets and liabilities of RiverSource Selective Fund in exchange for Class A, B, C, I and Y shares of RiverSource Diversified Bond Fund under U.S. generally accepted accounting principles. The pro forma statements also reflect changes needed regarding the change in structure of RiverSource Selective Fund. Finally, the pro forma statements reflect estimates for the combined RiverSource Diversified Bond Fund based on the increased asset level of the merger and associated economies of scale, adjusted to reflect current fees. The pro forma combining statements should be read in conjunction with the historical financial statements of the funds incorporated by reference in the Statement of Additional Information. The pro forma statement of operations give effect to the proposed transaction on the historical operations of the accounting survivor, RiverSource Diversified Bond Fund, as if the transaction had occurred at the beginning of the year presented. 2. PRO FORMA ADJUSTMENTS (a) To reflect adjustments needed regarding the change in structure of RiverSource Selective Fund from a feeder fund presentation into a reporting format comparable with the accounting survivor. (b) To reflect the decrease in investment management services fee due to the Reorganization and to include the impact of the proposed new investment management services agreement. (c) To reflect the net increase in administrative services fees due to the Reorganization and the revised administrative services agreement. (d) To reflect the decrease in custodian fees due to the Reorganization. (e) To adjust for the change in the compensation of board members due to the Reorganization. (f) To reflect the reduction in audit fees due to the Reorganization. (g) To adjust the expense reimbursement to include the impact of the agreement by RiverSource Investments, LLC and its affiliates to waive certain fees and to absorb certain expenses following the merger. (h) To adjust for closed account fees for each RiverSource Selective Fund account that will be closed on the system as a result of this merger. (i) To reflect the anticipated reduction in the transfer agent fees due to the RiverSource Diversified Bond Fund and RiverSource Selective Fund accounts that will be combined as a result of the merger. 5 -- AXP Fixed Income Series, Inc. -- RiverSource Diversified Bond Fund 3. CAPITAL SHARES The pro forma net asset value per share assumes the issuance of additional Class A, Class B, Class C, Class I and Class Y shares of RiverSource Diversified Bond Fund if the reorganization were to have taken place on Aug. 31, 2005. The pro forma number of Class A shares outstanding of 479,263,980 consists of 116,464,590 shares assumed to be issued to Class A shareholders of the RiverSource Selective Fund, plus 362,799,390 Class A shares of the RiverSource Diversified Bond Fund outstanding as of Aug. 31, 2005. The pro forma number of Class B shares outstanding of 120,998,391 consists of 21,995,061 shares assumed to be issued to Class B shareholders of the RiverSource Selective Fund, plus 99,003,330 Class B shares of the RiverSource Diversified Bond Fund outstanding as of Aug. 31, 2005. The pro forma number of Class C shares outstanding of 4,513,831 consists of 820,066 shares assumed to be issued to Class C shareholders of the RiverSource Selective Fund, plus 3,693,765 Class C shares of the RiverSource Diversified Bond Fund outstanding as of Aug. 31, 2005. The pro forma number of Class I shares outstanding of 31,204,341 consists of 31,202,304 shares assumed to be issued to Class I shareholders of the RiverSource Selective Fund, plus 2,037 Class I shares of the RiverSource Diversified Bond Fund outstanding as of Aug. 31, 2005. The pro forma number of Class Y shares outstanding of 51,054,129 consists of 9,702,870 shares assumed to be issued to Class Y shareholders of the RiverSource Selective Fund, plus 41,351,259 Class Y shares of the RiverSource Diversified Bond Fund outstanding as of Aug. 31, 2005. 6 -- AXP Fixed Income Series, Inc. -- RiverSource Diversified Bond Fund
Combined Investments in Securities RiverSource Diversified Bond Fund Aug. 31, 2005 (Unaudited) (Percentages represent value of investments compared to net assets) Bonds (99.3%) Issuer Coupon rate Principal Principal Principal Value(a) Value(a) Value(a) amount amount amount RiverSource Quality RiverSource Quality Diversified Income Pro Forma Diversified Income Pro Forma Bond Fund Portfolio Combined Bond Fund Portfolio Combined Sovereign (1.9%) Bundesrepublik Deutschland (European Monetary Unit) 01/04/07 6.00% $18,818,000 $6,747,000 $25,565,000(c) $24,359,708 $8,733,922 $33,093,630 United Kingdom Treasury (British Pound) 12/07/06 7.50 8,906,000 3,223,000 12,129,000(c) 16,710,308 6,047,308 22,757,616 United Mexican States 09/27/34 6.75 4,880,000 1,730,000 6,610,000(c) 5,289,920 1,875,320 7,165,240 Total 46,359,936 16,656,550 63,016,486 U.S. Government Obligations & Agencies (22.0%) Federal Farm Credit Bank 10/10/08 4.25 9,800,000 3,485,000 13,285,000 9,856,046 3,504,931 13,360,977 Federal Home Loan Bank 08/11/06 3.25 -- 7,050,000 7,050,000 -- 6,998,817 6,998,817 04/18/08 4.13 5,615,000 2,585,000 8,200,000 5,626,926 2,590,491 8,217,417 Federal Home Loan Mtge Corp 09/15/06 3.63 -- 7,265,000 7,265,000 -- 7,239,580 7,239,580 06/15/08 3.88 51,935,000 18,350,000 70,285,000 51,671,170 18,256,782 69,927,952 10/15/08 5.13 33,750,000 21,335,000 55,085,000 34,775,089 21,983,008 56,758,097 03/18/09 3.76 6,890,000 2,810,000 9,700,000 6,807,065 2,776,176 9,583,241 07/15/09 4.25 -- 10,000,000 10,000,000 -- 10,043,590 10,043,590 07/12/10 4.13 42,370,000 16,052,000 58,422,000 42,293,692 16,023,090 58,316,782 Federal Natl Mtge Assn 04/13/06 2.15 33,200,000 -- 33,200,000 32,835,265 -- 32,835,265 08/15/08 3.25 86,170,000 -- 86,170,000 84,227,728 -- 84,227,728 Overseas Private Investment U.S. Govt Guaranty Series 1996A 09/15/08 6.99 -- 3,888,889 3,888,889 -- 4,077,072 4,077,072 U.S. Treasury 12/31/05 1.88 -- 3,000,000 3,000,000(p) -- 2,982,306 2,982,306 08/15/07 3.25 -- 14,000,000 14,000,000 -- 13,847,428 13,847,428 02/15/08 3.38 -- 1,500,000 1,500,000 -- 1,483,593 1,483,593 05/15/15 4.13 18,590,000 13,880,000 32,470,000(r) 18,709,813 13,969,457 32,679,270 08/15/15 4.25 32,765,000 11,970,000 44,735,000 33,384,455 12,196,305 45,580,760 08/15/23 6.25 90,504,000 19,435,000 109,939,000(p) 112,147,217 24,082,705 136,229,922 02/15/26 6.00 56,232,000 32,524,000 88,756,000(p) 68,958,876 39,885,091 108,843,967 U.S. Treasury Inflation-Indexed Bond 01/15/15 1.63 25,602,511 9,259,074 34,861,585(h) 25,572,008 9,248,043 34,820,051 Total 526,865,350 211,188,465 738,053,815
See accompanying notes to combined investments in securities. 7 -- AXP Fixed Income Series, Inc. -- RiverSource Diversified Bond Fund
Bonds (continued) Issuer Coupon rate Principal Principal Principal Value(a) Value(a) Value(a) amount amount amount RiverSource Quality RiverSource Quality Diversified Income Pro Forma Diversified Income Pro Forma Bond Fund Portfolio Combined Bond Fund Portfolio Combined Asset-Backed (4.1%) AAA Trust Series 2005-2 Cl A1 11/26/35 3.74% $-- $5,351,412 $5,351,412(d,m) $-- $5,345,875 $5,345,875 Aesop Funding II LLC Series 2002-1A Cl A1 (AMBAC) 10/20/06 3.85 2,363,333 -- 2,363,333(d,l) 2,363,187 -- 2,363,187 Series 2004-2A Cl A1 (FGIC) 04/20/08 2.76 2,000,000 825,000 2,825,000(d,l) 1,959,323 808,221 2,767,544 AmeriCredit Automobile Receivables Trust Series 2002-C Cl A4 (FSA) 02/12/09 3.55 2,660,000 -- 2,660,000(l) 2,647,671 -- 2,647,671 Series 2004-CA Cl A3 (AMBAC) 03/06/09 3.00 5,500,000 2,000,000 7,500,000(l) 5,438,983 1,977,812 7,416,795 Series 2005-BM Cl A3 (MBIA) 02/06/10 4.05 8,750,000 3,000,000 11,750,000(l) 8,710,354 2,986,407 11,696,761 ARG Funding Series 2005-1A Cl A3 (MBIA) 04/20/10 4.29 6,300,000 2,250,000 8,550,000(d,l) 6,257,918 2,234,971 8,492,889 Capital Auto Receivables Asset Trust Series 2004-1 09/15/10 2.84 3,000,000 1,200,000 4,200,000 2,924,645 1,169,858 4,094,503 Series 2005-1 Cl A4 07/15/09 4.05 7,100,000 2,800,000 9,900,000 7,110,792 2,804,256 9,915,048 Capital One Auto Finance Trust Series 2005-BSS Cl A3 11/15/09 4.08 4,700,000 1,600,000 6,300,000 4,668,510 1,589,280 6,257,790 Carmax Auto Owner Trust Series 2005-1 Cl A4 03/15/10 4.35 2,400,000 900,000 3,300,000 2,406,635 902,488 3,309,123 Honda Auto Receivables Owner Trust Series 2005-1 Cl A3 10/21/08 3.53 4,500,000 1,400,000 5,900,000 4,453,740 1,385,608 5,839,348 Long Beach Auto Receivables Trust Series 2004-C Cl A3 (FSA) 09/15/09 3.40 4,000,000 1,400,000 5,400,000(l) 3,958,280 1,385,398 5,343,678 Metris Master Trust Series 2001-2 Cl C 11/20/09 5.51 3,425,000 -- 3,425,000(d,m) 3,425,000 -- 3,425,000 Series 2004-2 Cl D 10/20/10 6.86 1,200,000 -- 1,200,000(d,m) 1,218,000 -- 1,218,000 Series 2004-2 Cl M 10/20/10 4.00 2,700,000 1,000,000 3,700,000(m) 2,702,565 1,000,950 3,703,515 Series 2005-1A Cl D 03/21/11 5.51 1,375,000 -- 1,375,000(d,m) 1,374,995 -- 1,374,995 Morgan Stanley Auto Loan Trust Series 2004-HB2 Cl A3 03/16/09 2.94 4,300,000 1,500,000 5,800,000 4,236,506 1,477,851 5,714,357 Nissan Auto Lease Trust Series 2004-A Cl A3 08/15/07 2.90 3,000,000 1,450,000 4,450,000 2,968,921 1,434,979 4,403,900 Nissan Auto Receivables Owner Trust Series 2005-A Cl A3 10/15/08 3.54 5,475,000 1,900,000 7,375,000 5,418,443 1,880,373 7,298,816 Popular ABS Mtge Pass-Through Trust Series 2005-A Cl AF2 06/25/35 4.49 2,660,000 955,000 3,615,000 2,647,942 950,671 3,598,613
See accompanying notes to combined investments in securities. 8 -- AXP Fixed Income Series, Inc. -- RiverSource Diversified Bond Fund
Bonds (continued) Issuer Coupon Principal Principal Principal Value(a) Value(a) Value(a) rate amount amount amount RiverSource Quality RiverSource Quality Diversified Income Pro Forma Diversified Income Pro Forma Bond Fund Portfolio Combined Bond Fund Portfolio Combined Asset-Backed (cont.) Residential Asset Securities Series 2002-KS1 Cl AI4 (AMBAC) 11/25/29 5.86% $1,178,876 $440,114 $1,618,990(l) $1,176,306 $439,154 $1,615,460 Triad Auto Receivables Owner Trust Series 2005-A Cl A3 (AMBAC) 03/12/10 4.05 7,600,000 2,700,000 10,300,000(l) 7,561,696 2,686,392 10,248,088 WFS Financial Owner Trust Series 2004-1 Cl D 08/22/11 3.17 -- 1,092,057 1,092,057 -- 1,076,829 1,076,829 Series 2004-3 Cl A3 03/17/09 3.30 5,000,000 5,000,000 10,000,000 4,952,182 4,952,181 9,904,363 World Omni Auto Receivables Trust Series 2005-A Cl A3 06/12/09 3.54 7,500,000 2,750,000 10,250,000 7,423,950 2,722,115 10,146,065 Total 98,006,544 41,211,669 139,218,213 Commercial Mortgage-Backed(f) (11.5%) Banc of America Commercial Mtge Series 2005-1 Cl A4 11/10/42 5.03 3,600,000 1,250,000 4,850,000 3,699,823 1,284,661 4,984,484 Bank of America-First Union NB Commercial Mtge Series 2001-3 Cl A1 04/11/37 4.89 3,308,970 1,203,262 4,512,232 3,344,098 1,216,036 4,560,134 Bear Stearns Commercial Mtge Securities Series 2003-T10 Cl A1 03/13/40 4.00 -- 2,975,134 2,975,134 -- 2,913,222 2,913,222 Series 2004-T16 Cl A3 02/13/46 4.03 3,240,000 600,000 3,840,000 3,194,726 591,616 3,786,342 Series 2005-PWR8 Cl A1 06/11/41 4.21 7,410,978 2,448,130 9,859,108 7,392,006 2,441,862 9,833,868 California State Teachers' Retirement System Trust Series 2002-C6 Cl A3 11/20/14 4.46 6,645,827 5,340,397 11,986,224(d) 6,660,137 5,351,895 12,012,032 CDC Commercial Mtge Trust Series 2002-FX1 Cl A2 11/15/30 5.68 4,500,000 1,750,000 6,250,000 4,747,593 1,846,286 6,593,879 Citigroup Commercial Mtge Trust Series 2005-EMG Cl A1 09/20/51 4.15 12,141,109 4,202,692 16,343,801(d) 12,098,072 4,187,794 16,285,866 Commercial Mtge Pass-Through Ctfs Series 2004-CNL Cl A1 09/15/14 3.79 6,000,000 3,280,000 9,280,000(d,m) 5,973,120 3,265,306 9,238,426 CS First Boston Mtge Securities Series 2002-CKS4 Cl A1 11/15/36 4.49 4,931,045 1,890,234 6,821,279 4,938,080 1,892,931 6,831,011 Series 2004-C1 Cl A2 01/15/37 3.52 3,000,000 1,550,000 4,550,000 2,933,706 1,515,748 4,449,454 Federal Natl Mtge Assn #385683 02/01/13 4.83 6,321,619 -- 6,321,619 6,438,261 -- 6,438,261 Federal Natl Mtge Assn #385717 11/01/12 4.84 1,172,908 1,824,523 2,997,431 1,192,226 1,854,573 3,046,799 Federal Natl Mtge Assn #386599 11/01/10 4.47 1,645,633 556,474 2,202,107 1,638,888 554,193 2,193,081 Federal Natl Mtge Assn #555264 02/01/13 5.02 5,743,751 -- 5,743,751 5,915,413 -- 5,915,413 Federal Natl Mtge Assn #555806 10/01/13 5.11 537,301 -- 537,301 557,756 -- 557,756
See accompanying notes to combined investments in securities. 9 -- AXP Fixed Income Series, Inc. -- RiverSource Diversified Bond Fund
Bonds (continued) Issuer Coupon Principal Principal Principal Value(a) Value(a) Value(a) rate amount amount amount RiverSource Quality RiverSource Quality Diversified Income Pro Forma Diversified Income Pro Forma Bond Fund Portfolio Combined Bond Fund Portfolio Combined Commercial Mortgage-Backed(f) (cont.) GE Capital Commercial Mtge Series 2004-C2 Cl A2 03/10/40 4.12% $3,000,000 $3,250,000 $6,250,000 $2,958,600 $3,205,150 $6,163,750 Series 2005-C3 Cl A1 07/10/45 4.59 4,590,000 1,630,000 6,220,000 4,624,331 1,642,192 6,266,523 Series 2005-C3 Cl A2 07/10/45 4.85 3,460,000 1,230,000 4,690,000 3,517,649 1,250,494 4,768,143 General Electric Capital Assurance Series 2003-1 Cl A3 05/12/35 4.77 7,650,000 2,700,000 10,350,000(d) 7,725,504 2,726,648 10,452,152 General Electric Capital Commercial Mtge Series 2001-3 Cl A1 06/10/38 5.56 3,516,761 1,394,578 4,911,339 3,612,410 1,432,507 5,044,917 GMAC Commercial Mtge Securities Series 1999-C1 Cl B 05/15/33 6.30 5,800,000 2,200,000 8,000,000 6,143,449 2,330,274 8,473,723 Series 2004-C3 Cl A4 12/10/41 4.55 4,700,000 1,700,000 6,400,000 4,690,168 1,696,444 6,386,612 Series 2005-C1 Cl A1 05/10/43 4.21 3,632,143 1,276,158 4,908,301 3,620,863 1,272,195 4,893,058 Greenwich Capital Commercial Funding Series 2004-GG1 Cl A5 06/10/36 4.88 2,400,000 1,000,000 3,400,000 2,443,639 1,018,183 3,461,822 Series 2005-GG3 Cl A1 08/10/42 3.92 3,387,067 1,190,050 4,577,117 3,363,019 1,181,601 4,544,620 Series 2005-GG3 Cl A3 08/10/42 4.57 7,225,000 2,650,000 9,875,000 7,229,214 2,651,546 9,880,760 GS Mtge Securities II Series 2004-GG2 Cl A4 08/10/38 4.96 4,300,000 1,600,000 5,900,000 4,383,521 1,631,077 6,014,598 Series 2005-GG4 Cl A1 07/10/39 4.37 5,797,892 2,081,294 7,879,186 5,801,369 2,082,543 7,883,912 JPMorgan Chase Commercial Mtge Securities Series 2002-CIB5 Cl A1 10/12/37 4.37 3,784,852 1,320,297 5,105,149 3,786,302 1,320,803 5,107,105 Series 2003-CB6 Cl A1 07/12/37 4.39 7,651,905 -- 7,651,905 7,613,646 -- 7,613,646 Series 2003-CB6 Cl A2 07/12/37 5.26 4,200,000 1,500,000 5,700,000 4,376,803 1,563,144 5,939,947 Series 2003-LN1 Cl A1 10/15/37 4.13 3,457,029 1,273,642 4,730,671 3,406,364 1,254,976 4,661,340 Series 2003-ML1A Cl A1 03/12/39 3.97 3,029,203 1,101,528 4,130,731 2,979,707 1,083,530 4,063,237 Series 2004-CBX Cl A3 01/12/37 4.18 3,000,000 1,000,000 4,000,000 2,967,024 989,008 3,956,032 Series 2004-CBX Cl A5 01/12/37 4.65 5,000,000 1,500,000 6,500,000 5,021,358 1,506,407 6,527,765 Series 2005-CB11 Cl A3 08/12/37 5.20 4,700,000 1,557,000 6,257,000 4,863,327 1,611,107 6,474,434 Series 2005-LDP2 Cl A1 07/15/42 4.33 5,721,867 2,054,004 7,775,871 5,737,144 2,059,488 7,796,632 LB-UBS Commercial Mtge Trust Series 2002-C2 Cl A3 06/15/26 5.39 7,360,000 2,790,000 10,150,000 7,640,829 2,896,456 10,537,285 Series 2002-C4 Cl A4 09/15/26 4.56 5,200,000 1,800,000 7,000,000 5,206,430 1,802,226 7,008,656
See accompanying notes to combined investments in securities. 10 -- AXP Fixed Income Series, Inc. -- RiverSource Diversified Bond Fund
Bonds (continued) Issuer Coupon Principal Principal Principal Value(a) Value(a) Value(a) rate amount amount amount RiverSource Quality RiverSource Quality Diversified Income Pro Forma Diversified Income Pro Forma Bond Fund Portfolio Combined Bond Fund Portfolio Combined Commercial Mortgage-Backed(f) (cont.) LB-UBS Commercial Mtge Trust (cont.) Series 2002-C4 Cl A5 09/15/31 4.85% $6,000,000 $-- $6,000,000 $6,100,501 $-- $6,100,501 Series 2003-C8 Cl A2 11/15/27 4.21 7,500,000 5,130,000 12,630,000 7,452,300 5,097,373 12,549,673 Series 2003-C8 Cl A3 11/15/27 4.83 5,250,000 1,150,000 6,400,000 5,322,765 1,165,939 6,488,704 Series 2004-C2 Cl A3 03/15/29 3.97 3,275,000 1,200,000 4,475,000 3,165,026 1,159,704 4,324,730 Series 2004-C4 Cl A3 06/15/29 5.16 3,000,000 1,000,000 4,000,000(m) 3,099,411 1,033,137 4,132,548 Series 2004-C6 Cl A2 08/15/29 4.19 5,250,000 1,995,000 7,245,000 5,208,945 1,979,399 7,188,344 Series 2004-C6 Cl A4 08/15/29 4.58 4,425,000 1,550,000 5,975,000 4,440,719 1,555,506 5,996,225 Series 2004-C7 Cl A2 10/15/29 3.99 5,400,000 1,000,000 6,400,000 5,304,420 982,300 6,286,720 Series 2004-C8 Cl A2 12/15/29 4.20 5,800,000 2,300,000 8,100,000 5,748,496 2,279,576 8,028,072 Series 2005-C3 Cl A1 07/15/30 4.39 3,902,242 1,317,007 5,219,249 3,910,475 1,319,785 5,230,260 Series 2005-C5 Cl A2 09/15/40 4.89 4,600,000 1,500,000 6,100,000 4,667,988 1,522,170 6,190,158 Merrill Lynch Mtge Trust Series 2005-MCP1 Cl A1 06/12/43 4.22 4,569,849 1,759,514 6,329,363 4,557,707 1,754,839 6,312,546 Morgan Stanley Capital I Series 2003-IQ4 Cl A1 05/15/40 3.27 5,400,919 4,136,100 9,537,019 5,165,854 3,956,083 9,121,937 Series 2004-HQ4 Cl A5 04/14/40 4.59 3,600,000 1,350,000 4,950,000 3,597,948 1,349,231 4,947,179 Series 2004-IQ8 Cl A2 06/15/40 3.96 4,884,318 2,100,782 6,985,100 4,840,891 2,082,104 6,922,995 Morgan Stanley, Dean Witter Capital I Series 2002-TOP7 Cl A2 01/15/39 5.98 10,900,000 4,335,000 15,235,000 11,768,644 4,680,465 16,449,109 Prudential Commercial Mtge Trust Series 2003-PWR1 Cl A1 02/11/36 3.67 4,340,476 1,519,167 5,859,643 4,241,613 1,484,565 5,726,178 Wachovia Bank Commercial Mtge Trust Series 2005-C16 Cl A2 10/15/41 4.38 2,000,000 1,500,000 3,500,000 1,992,985 1,494,739 3,487,724 Series 2005-C16 Cl A3 10/15/41 4.62 5,500,000 1,962,000 7,462,000 5,515,590 1,967,561 7,483,151 Total 280,538,853 105,988,598 386,527,451
See accompanying notes to combined investments in securities. 11 -- AXP Fixed Income Series, Inc. -- RiverSource Diversified Bond Fund
Bonds (continued) Issuer Coupon Principal Principal Principal Value(a) Value(a) Value(a) rate amount amount amount RiverSource Quality RiverSource Quality Diversified Income Pro Forma Diversified Income Pro Forma Bond Fund Portfolio Combined Bond Fund Portfolio Combined Mortgage-Backed(f,n) (38.4%) Adjustable Rate Mtge Trust Series 2004-2 Cl 6A1 02/25/35 5.27% $5,603,629 $1,895,652 $7,499,281(k) $5,666,421 $1,916,893 $7,583,314 Series 2005-3 Cl 7A1 07/25/35 5.10 6,139,038 -- 6,139,038(k) 6,178,417 -- 6,178,417 Banc of America Mtge Securities Series 2004-E Cl B1 06/25/34 4.04 2,942,734 -- 2,942,734(k) 2,902,977 -- 2,902,977 Series 2004-F Cl B1 07/25/34 4.14 5,294,199 1,831,047 7,125,246(k) 5,252,851 1,816,746 7,069,597 Bank of America Alternative Loan Trust Series 2003-11 Cl 1A1 01/25/34 6.00 7,291,347 2,310,130 9,601,477 7,393,134 2,342,379 9,735,513 Series 2003-11 Cl 4A1 01/25/19 4.75 3,708,501 1,333,412 5,041,913 3,698,494 1,329,814 5,028,308 Series 2004-3 Cl 1A1 04/25/34 6.00 11,556,909 -- 11,556,909 11,845,831 -- 11,845,831 Bear Stearns Adjustable Rate Mtge Trust Series 2004-10 Cl 13A1 01/25/35 5.03 7,520,943 2,705,375 10,226,318(k) 7,536,103 2,710,828 10,246,931 Series 2004-12 Cl 3A1 02/25/35 5.19 -- 2,039,266 2,039,266(k) -- 2,048,810 2,048,810 Chaseflex Trust Series 2005-2 Cl 2A2 06/25/35 6.50 -- 3,172,946 3,172,946 -- 3,265,162 3,265,162 Countrywide Alternative Loan Trust Series 2003-11T1 Cl A1 07/25/18 4.75 4,435,623 1,506,363 5,941,986 4,410,359 1,497,784 5,908,143 Series 2005-6CB Cl 1A1 04/25/35 7.50 5,997,930 2,134,777 8,132,707 6,286,825 2,237,601 8,524,426 Countrywide Home Loans Series 2004-12 Cl 1M 08/25/34 4.63 3,544,824 1,173,287 4,718,111(k) 3,485,568 1,153,674 4,639,242 Series 2005-R2 Cl 2A1 06/25/35 7.00 8,176,043 2,975,699 11,151,742(d) 8,669,161 3,155,171 11,824,332 CS First Boston Mtge Securities Series 2003-29 Cl 8A1 11/25/18 6.00 3,715,185 -- 3,715,185 3,786,886 -- 3,786,886 Series 2004-AR5 Cl CB1 06/25/34 4.42 3,367,444 1,189,559 4,557,003(k) 3,314,749 1,170,945 4,485,694 Federal Home Loan Mtge Corp Collateralized Mtge Obligation 01/15/18 6.50 3,873,181 1,373,219 5,246,400 4,125,454 1,462,661 5,588,115 03/15/22 7.00 1,660,835 -- 1,660,835 1,658,043 -- 1,658,043 02/15/27 5.00 10,070,000 4,000,000 14,070,000 10,191,724 4,048,351 14,240,075 10/15/27 5.00 21,553,000 7,425,000 28,978,000 21,792,004 7,507,337 29,299,341 06/15/28 5.00 13,925,000 4,625,000 18,550,000 14,095,999 4,681,795 18,777,794 12/15/28 5.50 6,005,000 2,175,000 8,180,000 6,166,619 2,233,538 8,400,157 02/15/33 5.50 9,099,150 3,474,221 12,573,371 9,433,938 3,602,049 13,035,987 Collateralized Mtge Obligation Interest Only 02/15/14 7.40 3,690,563 1,342,023 5,032,586(i) 229,036 83,286 312,322 08/01/20 8.00 10,223,903 3,688,527 13,912,430(i) 1,763,521 636,234 2,399,755 10/15/22 14.56 10,672,675 -- 10,672,675(i) 610,196 -- 610,196 Collateralized Mtge Obligation Principal Only 08/01/20 4.60 10,223,903 3,688,527 13,912,430(j) 8,399,754 3,030,420 11,430,174
See accompanying notes to combined investments in securities. 12 -- AXP Fixed Income Series, Inc. -- RiverSource Diversified Bond Fund
Bonds (continued) Issuer Coupon Principal Principal Principal Value(a) Value(a) Value(a) rate amount amount amount RiverSource Quality RiverSource Quality Diversified Income Pro Forma Diversified Income Pro Forma Bond Fund Portfolio Combined Bond Fund Portfolio Combined Mortgage-Backed (f,n) (cont.) Federal Home Loan Mtge Corp #170216 03/01/17 8.50% $-- $12,207 $12,207 $-- $13,226 $13,226 Federal Home Loan Mtge Corp #275036 07/01/16 8.00 -- 140 140 -- 150 150 Federal Home Loan Mtge Corp #284190 01/01/17 8.00 -- 1,026 1,026 -- 1,102 1,102 Federal Home Loan Mtge Corp #290970 04/01/17 8.00 15,808 -- 15,808 16,875 -- 16,875 Federal Home Loan Mtge Corp #295114 06/01/17 8.50 -- 4,116 4,116 -- 4,460 4,460 Federal Home Loan Mtge Corp #540861 09/01/19 8.50 -- 36,300 36,300 -- 39,435 39,435 Federal Home Loan Mtge Corp #A00304 04/01/21 9.00 -- 96,128 96,128 -- 104,649 104,649 Federal Home Loan Mtge Corp #B11835 01/01/19 5.50 -- 728,843 728,843 -- 745,070 745,070 Federal Home Loan Mtge Corp #C00103 03/01/22 8.50 -- 204,867 204,867 -- 223,374 223,374 Federal Home Loan Mtge Corp #C00144 08/01/22 8.50 -- 201,197 201,197 -- 219,460 219,460 Federal Home Loan Mtge Corp #C00356 08/01/24 8.00 624,134 -- 624,134 669,664 -- 669,664 Federal Home Loan Mtge Corp #C00666 10/01/28 7.00 80,935 -- 80,935 84,827 -- 84,827 Federal Home Loan Mtge Corp #C53878 12/01/30 5.50 2,337,257 -- 2,337,257 2,366,188 -- 2,366,188 Federal Home Loan Mtge Corp #C62993 01/01/32 6.50 -- 1,692,998 1,692,998 -- 1,754,021 1,754,021 Federal Home Loan Mtge Corp #C63552 01/01/32 6.50 -- 2,255,948 2,255,948 -- 2,354,136 2,354,136 Federal Home Loan Mtge Corp #C64703 03/01/32 6.50 -- 1,483,530 1,483,530 -- 1,545,043 1,545,043 Federal Home Loan Mtge Corp #C67723 06/01/32 7.00 -- 1,341,628 1,341,628 -- 1,411,450 1,411,450 Federal Home Loan Mtge Corp #C78031 04/01/33 5.50 11,745,658 -- 11,745,658 11,922,489 -- 11,922,489 Federal Home Loan Mtge Corp #C79930 06/01/33 5.50 8,300,923 3,354,263 11,655,186 8,400,785 3,394,616 11,795,401 Federal Home Loan Mtge Corp #C90767 12/01/23 6.00 11,556,730 -- 11,556,730 11,904,523 -- 11,904,523 Federal Home Loan Mtge Corp #D96300 10/01/23 5.50 6,534,781 -- 6,534,781 6,651,761 -- 6,651,761 Federal Home Loan Mtge Corp #E01127 02/01/17 6.50 1,941,898 -- 1,941,898 2,010,138 -- 2,010,138 Federal Home Loan Mtge Corp #E01419 05/01/18 5.50 4,549,999 1,846,684 6,396,683 4,651,301 1,887,799 6,539,100 Federal Home Loan Mtge Corp #E79810 11/01/14 7.50 -- 1,621,619 1,621,619 -- 1,722,025 1,722,025 Federal Home Loan Mtge Corp #E90216 05/01/17 6.00 2,069,339 -- 2,069,339 2,135,147 -- 2,135,147 Federal Home Loan Mtge Corp #E96516 05/01/13 4.50 3,126,398 1,930,506 5,056,904 3,122,161 1,927,890 5,050,051 Federal Home Loan Mtge Corp #E98725 08/01/18 5.00 14,419,765 -- 14,419,765 14,549,256 -- 14,549,256 Federal Home Loan Mtge Corp #E99101 09/01/18 5.00 -- 3,552,539 3,552,539 -- 3,585,240 3,585,240 Federal Home Loan Mtge Corp #E99593 10/01/18 5.00 -- 1,276,726 1,276,726 -- 1,288,393 1,288,393
See accompanying notes to combined investments in securities. 13 -- AXP Fixed Income Series, Inc. -- RiverSource Diversified Bond Fund
Bonds (continued) Issuer Coupon Principal Principal Principal Value(a) Value(a) Value(a) rate amount amount amount RiverSource Quality RiverSource Quality Diversified Income Pro Forma Diversified Income Pro Forma Bond Fund Portfolio Combined Bond Fund Portfolio Combined Mortgage-Backed (f,n) (cont.) Federal Home Loan Mtge Corp #E99684 10/01/18 5.00% $9,250,763 $4,302,520 $13,553,283 $9,335,142 $4,341,765 $13,676,907 Federal Home Loan Mtge Corp #G00286 02/01/25 8.00 -- 265,254 265,254 -- 284,605 284,605 Federal Home Loan Mtge Corp #G01108 04/01/30 7.00 5,093,691 -- 5,093,691(g) 5,332,408 -- 5,332,408 Federal Home Loan Mtge Corp #G01441 07/01/32 7.00 -- 4,586,308 4,586,308 -- 4,798,866 4,798,866 Federal Home Loan Mtge Corp #G01535 04/01/33 6.00 8,624,579 5,643,194 14,267,773 8,916,929 5,834,484 14,751,413 Federal Home Loan Mtge Corp #G11302 07/01/17 7.00 -- 5,388,733 5,388,733 -- 5,636,285 5,636,285 Federal Home Loan Mtge Corp #G30225 02/01/23 6.00 15,199,368 -- 15,199,368 15,661,912 -- 15,661,912 Federal Natl Mtge Assn 09/01/20 4.50 4,550,000 -- 4,550,000(g) 4,511,607 -- 4,511,607 09/01/20 5.50 -- 4,500,000 4,500,000(g) -- 4,595,625 4,595,625 09/01/20 6.00 24,000,000 4,000,000 28,000,000(g) 24,765,000 4,127,500 28,892,500 12/01/33 5.50 5,958,396 -- 5,958,396 6,025,189 -- 6,025,189 12/01/33 6.50 16,903,129 -- 16,903,129 17,491,196 -- 17,491,196 07/01/34 6.50 9,483,434 -- 9,483,434 9,801,139 -- 9,801,139 Collateralized Mtge Obligation 12/25/26 8.00 4,115,274 1,448,474 5,563,748 4,372,293 1,538,938 5,911,231 Collateralized Mtge Obligation Interest Only 12/25/12 13.29 3,083,805 1,121,384 4,205,189(i) 128,336 46,668 175,004 12/25/22 8.27 -- 1,114,247 1,114,247(i) -- 143,786 143,786 12/25/31 1.19 2,997,188 1,332,083 4,329,271(i) 490,517 218,008 708,525 Collateralized Mtge Obligation Principal Only 09/01/18 5.16 -- 24,587 24,587(j) -- 22,015 22,015 Federal Natl Mtge Assn #125479 04/01/27 7.50 -- 408,758 408,758 -- 434,275 434,275 Federal Natl Mtge Assn #190899 04/01/23 8.50 691,252 -- 691,252 745,517 -- 745,517 Federal Natl Mtge Assn #190944 05/01/24 6.00 8,425,530 -- 8,425,530 8,659,748 -- 8,659,748 Federal Natl Mtge Assn #190988 06/01/24 9.00 592,157 -- 592,157 640,068 -- 640,068 Federal Natl Mtge Assn #231309 09/01/23 6.50 167,530 -- 167,530 174,136 -- 174,136 Federal Natl Mtge Assn #231310 09/01/23 6.50 530,658 -- 530,658 551,582 -- 551,582 Federal Natl Mtge Assn #250330 09/01/25 8.00 445,666 -- 445,666 477,876 -- 477,876 Federal Natl Mtge Assn #250495 03/01/26 7.00 1,019,300 -- 1,019,300 1,072,872 -- 1,072,872 Federal Natl Mtge Assn #250765 12/01/26 8.00 -- 389,659 389,659 -- 417,730 417,730 Federal Natl Mtge Assn #251116 08/01/27 8.00 -- 440,530 440,530 -- 472,257 472,257 Federal Natl Mtge Assn #252498 06/01/29 7.00 8,820 -- 8,820 9,257 -- 9,257 Federal Natl Mtge Assn #252982 01/01/30 8.00 -- 322,384 322,384 -- 344,948 344,948 Federal Natl Mtge Assn #253883 08/01/16 6.00 4,640,029 -- 4,640,029 4,792,353 -- 4,792,353
See accompanying notes to combined investments in securities. 14 -- AXP Fixed Income Series, Inc. -- RiverSource Diversified Bond Fund
Bonds (continued) Issuer Coupon Principal Principal Principal Value(a) Value(a) Value(a) rate amount amount amount RiverSource Quality RiverSource Quality Diversified Income Pro Forma Diversified Income Pro Forma Bond Fund Portfolio Combined Bond Fund Portfolio Combined Mortgage-Backed (f,n) (cont.) Federal Natl Mtge Assn #254236 03/01/17 6.50% $-- $2,781,796 $2,781,796 $-- $2,883,759 $2,883,759 Federal Natl Mtge Assn #254383 06/01/32 7.50 -- 639,725 639,725 -- 678,268 678,268 Federal Natl Mtge Assn #254608 12/01/17 6.50 1,339,393 -- 1,339,393 1,388,487 -- 1,388,487 Federal Natl Mtge Assn #254802 07/01/18 4.50 3,971,772 -- 3,971,772 3,944,369 -- 3,944,369 Federal Natl Mtge Assn #254916 09/01/23 5.50 10,454,827 3,416,610 13,871,437 10,639,996 3,477,123 14,117,119 Federal Natl Mtge Assn #255788 06/01/15 5.50 -- 4,469,242 4,469,242 -- 4,576,764 4,576,764 Federal Natl Mtge Assn #268071 01/01/24 6.50 163,729 -- 163,729 170,185 -- 170,185 Federal Natl Mtge Assn #303226 02/01/25 8.00 201,866 -- 201,866 216,503 -- 216,503 Federal Natl Mtge Assn #313049 08/01/11 8.50 1,847,533 -- 1,847,533 1,953,848 -- 1,953,848 Federal Natl Mtge Assn #323654 04/01/14 6.50 1,105,313 -- 1,105,313 1,146,548 -- 1,146,548 Federal Natl Mtge Assn #323933 09/01/29 7.00 6,009,746 -- 6,009,746 6,307,656 -- 6,307,656 Federal Natl Mtge Assn #323980 04/01/14 6.00 -- 2,359,829 2,359,829 -- 2,436,995 2,436,995 Federal Natl Mtge Assn #408207 01/01/28 6.50 -- 239,049 239,049 -- 249,535 249,535 Federal Natl Mtge Assn #455791 01/01/29 6.50 674,373 -- 674,373 700,032 -- 700,032 Federal Natl Mtge Assn #489888 05/01/29 6.50 3,487,023 -- 3,487,023 3,617,671 -- 3,617,671 Federal Natl Mtge Assn #496029 01/01/29 6.50 4,246,764 -- 4,246,764 4,408,597 -- 4,408,597 Federal Natl Mtge Assn #50700 03/01/08 7.00 1,499,358 -- 1,499,358 1,546,308 -- 1,546,308 Federal Natl Mtge Assn #545008 06/01/31 7.00 -- 3,672,660 3,672,660 -- 3,879,746 3,879,746 Federal Natl Mtge Assn #545342 04/01/13 7.00 4,627,493 -- 4,627,493 4,772,395 -- 4,772,395 Federal Natl Mtge Assn #545684 05/01/32 7.50 -- 519,878 519,878 -- 551,283 551,283 Federal Natl Mtge Assn #545869 07/01/32 6.50 2,312,018 924,807 3,236,825 2,403,683 961,473 3,365,156 Federal Natl Mtge Assn #545885 08/01/32 6.50 -- 5,691,728 5,691,728 -- 5,905,168 5,905,168 Federal Natl Mtge Assn #545910 08/01/17 6.00 7,295,950 -- 7,295,950 7,554,568 -- 7,554,568 Federal Natl Mtge Assn #555343 08/01/17 6.00 1,825,352 5,467,991 7,293,343 1,885,417 5,647,921 7,533,338 Federal Natl Mtge Assn #555375 04/01/33 6.00 25,228,537 9,204,453 34,432,990 26,013,313 9,490,772 35,504,085 Federal Natl Mtge Assn #555458 05/01/33 5.50 22,096,938 5,340,093 27,437,031 22,366,300 5,405,189 27,771,489 Federal Natl Mtge Assn #555734 07/01/23 5.00 7,351,062 2,800,048 10,151,110 7,363,536 2,804,799 10,168,335 Federal Natl Mtge Assn #555740 08/01/18 4.50 8,178,587 5,347,420 13,526,007 8,119,484 5,328,632 13,448,116 Federal Natl Mtge Assn #555794 09/01/28 7.50 1,301,201 -- 1,301,201 1,383,293 -- 1,383,293
See accompanying notes to combined investments in securities. 15 -- AXP Fixed Income Series, Inc. -- RiverSource Diversified Bond Fund
Bonds (continued) Issuer Coupon Principal Principal Principal Value(a) Value(a) Value(a) rate amount amount amount RiverSource Quality RiverSource Quality Diversified Income Pro Forma Diversified Income Pro Forma Bond Fund Portfolio Combined Bond Fund Portfolio Combined Mortgage-Backed (f,n) (cont.) Federal Natl Mtge Assn #567840 10/01/30 7.00% $2,157,244 $-- $2,157,244 $2,264,181 $-- $2,264,181 Federal Natl Mtge Assn #587859 12/01/16 5.50 7,033,699 -- 7,033,699 7,189,301 -- 7,189,301 Federal Natl Mtge Assn #597374 09/01/31 7.00 1,003,150 -- 1,003,150 1,061,237 -- 1,061,237 Federal Natl Mtge Assn #631027 03/01/32 7.50 -- 497,494 497,494 -- 527,500 527,500 Federal Natl Mtge Assn #634650 04/01/32 7.50 -- 367,634 367,634 -- 389,784 389,784 Federal Natl Mtge Assn #638969 03/01/32 5.50 1,951,630 -- 1,951,630 1,975,290 -- 1,975,290 Federal Natl Mtge Assn #640961 06/01/32 7.50 -- 505,155 505,155 -- 535,591 535,591 Federal Natl Mtge Assn #643362 04/01/17 6.50 -- 1,155,745 1,155,745 -- 1,198,107 1,198,107 Federal Natl Mtge Assn #646147 06/01/32 7.00 3,519,163 -- 3,519,163 3,704,808 -- 3,704,808 Federal Natl Mtge Assn #646446 06/01/17 6.50 1,556,345 -- 1,556,345 1,613,391 -- 1,613,391 Federal Natl Mtge Assn #649068 06/01/17 6.50 2,780,638 -- 2,780,638 2,892,464 -- 2,892,464 Federal Natl Mtge Assn #649263 08/01/17 6.50 2,834,879 -- 2,834,879 2,948,868 -- 2,948,868 Federal Natl Mtge Assn #654208 10/01/32 6.50 2,862,683 -- 2,862,683 2,964,719 -- 2,964,719 Federal Natl Mtge Assn #654682 10/01/32 6.00 1,981,337 -- 1,981,337 2,036,797 -- 2,036,797 Federal Natl Mtge Assn #654689 11/01/32 6.00 1,966,180 -- 1,966,180 2,021,184 -- 2,021,184 Federal Natl Mtge Assn #656908 09/01/32 6.50 2,800,382 -- 2,800,382 2,917,397 -- 2,917,397 Federal Natl Mtge Assn #662061 09/01/32 6.50 -- 2,351,821 2,351,821 -- 2,435,647 2,435,647 Federal Natl Mtge Assn #662809 09/01/17 6.50 3,244,057 -- 3,244,057 3,362,963 -- 3,362,963 Federal Natl Mtge Assn #667787 02/01/18 5.50 2,591,140 -- 2,591,140 2,648,678 -- 2,648,678 Federal Natl Mtge Assn #670382 09/01/32 6.00 15,960,099 -- 15,960,099 16,351,933 -- 16,351,933 Federal Natl Mtge Assn #670387 08/01/32 7.00 1,554,656 612,939 2,167,595 1,631,151 643,098 2,274,249 Federal Natl Mtge Assn #678028 09/01/17 6.00 1,359,078 6,242,279 7,601,357 1,403,800 6,447,687 7,851,487 Federal Natl Mtge Assn #678065 02/01/33 6.50 664,741 -- 664,741 693,492 -- 693,492 Federal Natl Mtge Assn #678937 01/01/18 5.50 4,146,084 -- 4,146,084 4,245,988 -- 4,245,988 Federal Natl Mtge Assn #678941 02/01/18 5.50 5,003,683 -- 5,003,683 5,124,238 -- 5,124,238 Federal Natl Mtge Assn #678944 01/01/18 5.50 2,401,887 -- 2,401,887 2,459,769 -- 2,459,769 Federal Natl Mtge Assn #679095 04/01/18 5.00 7,305,388 -- 7,305,388 7,362,964 -- 7,362,964 Federal Natl Mtge Assn #680961 01/01/33 6.00 -- 1,102,449 1,102,449 -- 1,130,889 1,130,889
See accompanying notes to combined investments in securities. 16 -- AXP Fixed Income Series, Inc. -- RiverSource Diversified Bond Fund
Bonds (continued) Issuer Coupon Principal Principal Principal Value(a) Value(a) Value(a) rate amount amount amount RiverSource Quality RiverSource Quality Diversified Income Pro Forma Diversified Income Pro Forma Bond Fund Portfolio Combined Bond Fund Portfolio Combined Mortgage-Backed (f,n) (cont.) Federal Natl Mtge Assn #681400 03/01/18 5.50% $7,352,297 $-- $7,352,297 $7,522,689 $-- $7,522,689 Federal Natl Mtge Assn #682825 01/01/33 6.00 -- 2,924,936 2,924,936 -- 2,996,745 2,996,745 Federal Natl Mtge Assn #683274 02/01/18 5.50 3,212,613 -- 3,212,613 3,287,078 -- 3,287,078 Federal Natl Mtge Assn #684586 03/01/33 6.00 5,096,687 -- 5,096,687 5,235,207 -- 5,235,207 Federal Natl Mtge Assn #686172 02/01/33 6.00 -- 3,493,909 3,493,909 -- 3,579,687 3,579,687 Federal Natl Mtge Assn #686528 02/01/33 6.00 -- 4,958,756 4,958,756 -- 5,094,283 5,094,283 Federal Natl Mtge Assn #687051 01/01/33 6.00 13,160,407 -- 13,160,407 13,473,208 -- 13,473,208 Federal Natl Mtge Assn #687302 11/01/32 7.00 1,455,078 -- 1,455,078 1,526,178 -- 1,526,178 Federal Natl Mtge Assn #689093 07/01/28 5.50 2,839,252 1,698,724 4,537,976 2,873,672 1,719,318 4,592,990 Federal Natl Mtge Assn #694628 04/01/33 5.50 5,834,454 3,070,965 8,905,419 5,917,620 3,114,739 9,032,359 Federal Natl Mtge Assn #694795 04/01/33 5.50 7,515,706 3,076,560 10,592,266 7,629,798 3,123,264 10,753,062 Federal Natl Mtge Assn #694988 03/01/33 5.50 15,430,151 -- 15,430,151 15,620,402 -- 15,620,402 Federal Natl Mtge Assn #695202 03/01/33 6.50 6,246,202 -- 6,246,202 6,463,510 -- 6,463,510 Federal Natl Mtge Assn #695220 04/01/33 5.50 -- 2,123,883 2,123,883 -- 2,147,692 2,147,692 Federal Natl Mtge Assn #695385 03/01/18 5.50 9,243,583 -- 9,243,583 9,488,435 -- 9,488,435 Federal Natl Mtge Assn #695909 05/01/18 5.50 3,288,547 -- 3,288,547 3,367,835 -- 3,367,835 Federal Natl Mtge Assn #697843 04/01/18 5.00 -- 2,933,681 2,933,681 -- 2,959,013 2,959,013 Federal Natl Mtge Assn #699424 04/01/33 5.50 -- 5,943,139 5,943,139 -- 6,033,437 6,033,437 Federal Natl Mtge Assn #702427 04/01/33 5.50 -- 5,707,738 5,707,738 -- 5,794,462 5,794,462 Federal Natl Mtge Assn #704049 05/01/18 5.50 -- 4,220,532 4,220,532 -- 4,320,305 4,320,305 Federal Natl Mtge Assn #709901 06/01/18 5.00 7,588,174 -- 7,588,174 7,653,818 -- 7,653,818 Federal Natl Mtge Assn #710823 05/01/33 5.50 879,427 -- 879,427 891,965 -- 891,965 Federal Natl Mtge Assn #712109 04/01/18 5.00 -- 2,526,487 2,526,487 -- 2,554,477 2,554,477 Federal Natl Mtge Assn #720006 07/01/33 5.50 8,817,572 3,181,349 11,998,921 8,916,417 3,217,012 12,133,429 Federal Natl Mtge Assn #720070 07/01/23 5.50 -- 3,286,705 3,286,705 -- 3,344,917 3,344,917 Federal Natl Mtge Assn #720378 06/01/18 4.50 6,275,690 1,624,296 7,899,986 6,232,392 1,613,090 7,845,482 Federal Natl Mtge Assn #723687 08/01/28 5.50 5,180,382 -- 5,180,382 5,243,184 -- 5,243,184 Federal Natl Mtge Assn #725232 03/01/34 5.00 21,324,820 7,754,480 29,079,300 21,240,157 7,723,693 28,963,850
See accompanying notes to combined investments in securities. 17 -- AXP Fixed Income Series, Inc. -- RiverSource Diversified Bond Fund
Bonds (continued) Issuer Coupon Principal Principal Principal Value(a) Value(a) Value(a) rate amount amount amount RiverSource Quality RiverSource Quality Diversified Income Pro Forma Diversified Income Pro Forma Bond Fund Portfolio Combined Bond Fund Portfolio Combined Mortgage-Backed (f,n) (cont.) Federal Natl Mtge Assn #725684 05/01/18 6.00% $10,990,068 $4,026,267 $15,016,335 $11,351,538 $4,158,693 $15,510,231 Federal Natl Mtge Assn #725719 07/01/33 4.85 6,242,791 2,139,755 8,382,546(k) 6,207,707 2,127,730 8,335,437 Federal Natl Mtge Assn #725737 08/01/34 4.53 6,327,018 -- 6,327,018(k) 6,330,940 -- 6,330,940 Federal Natl Mtge Assn #726362 06/01/18 5.00 -- 1,880,739 1,880,739(k) -- 1,898,296 1,898,296 Federal Natl Mtge Assn #730153 08/01/33 5.50 875,217 729,348 1,604,565 885,029 737,524 1,622,553 Federal Natl Mtge Assn #735160 12/01/34 4.40 2,586,904 1,006,018 3,592,922(k) 2,581,575 1,003,946 3,585,521 Federal Natl Mtge Assn #738921 11/01/32 6.50 -- 1,285,427 1,285,427 -- 1,337,607 1,337,607 Federal Natl Mtge Assn #743262 10/01/18 5.00 4,693,966 -- 4,693,966 4,730,506 -- 4,730,506 Federal Natl Mtge Assn #747642 11/01/28 5.50 -- 3,224,163 3,224,163 -- 3,263,249 3,263,249 Federal Natl Mtge Assn #747784 10/01/18 4.50 -- 3,001,000 3,001,000 -- 2,980,295 2,980,295 Federal Natl Mtge Assn #747786 10/01/18 6.00 2,452,852 -- 2,452,852 2,533,798 -- 2,533,798 Federal Natl Mtge Assn #753074 12/01/28 5.50 9,902,895 -- 9,902,895 10,022,948 -- 10,022,948 Federal Natl Mtge Assn #753919 12/01/33 4.95 7,758,768 -- 7,758,768(k) 7,789,310 -- 7,789,310 Federal Natl Mtge Assn #759342 01/01/34 6.50 1,248,772 1,395,276 2,644,048 1,297,598 1,449,830 2,747,428 Federal Natl Mtge Assn #765183 01/01/19 5.50 -- 897,129 897,129 -- 917,571 917,571 Federal Natl Mtge Assn #765759 12/01/18 5.00 6,108,349 -- 6,108,349 6,156,491 -- 6,156,491 Federal Natl Mtge Assn #765761 02/01/19 5.00 -- 2,430,810 2,430,810 -- 2,449,968 2,449,968 Federal Natl Mtge Assn #766641 03/01/34 5.00 5,900,296 3,233,039 9,133,335(g) 5,868,236 3,215,472 9,083,708 Federal Natl Mtge Assn #776962 04/01/29 5.00 17,655,239 3,429,858 21,085,097 17,544,567 3,408,358 20,952,925 Federal Natl Mtge Assn #779327 06/01/34 4.56 -- 5,545,801 5,545,801(k) -- 5,544,406 5,544,406 Federal Natl Mtge Assn #790759 09/01/34 4.84 1,759,706 3,695,383 5,455,089(k) 1,766,256 3,709,137 5,475,393 Federal Natl Mtge Assn #804442 12/01/34 6.50 -- 3,048,351 3,048,351 -- 3,150,474 3,150,474 Federal Natl Mtge Assn #811925 04/01/35 4.92 6,121,823 2,203,763 8,325,586(k) 6,163,315 2,218,700 8,382,015 Federal Natl Mtge Assn #837258 09/01/35 4.92 3,360,503 -- 3,360,503(g,k) 3,378,213 -- 3,378,213 First Horizon Alternative Mtge Securities Series 2004-AA4 Cl A1 10/25/34 5.41 5,233,780 1,768,908 7,002,688(m) 5,338,613 1,804,340 7,142,953 Series 2005-AA2 Cl 2A1 04/25/35 5.43 6,015,205 2,459,749 8,474,954(m) 6,111,388 2,499,081 8,610,469 Series 2005-AA3 Cl 3A1 05/25/35 5.41 6,223,717 2,211,357 8,435,074(m) 6,291,244 2,235,350 8,526,594 Series 2005-AA4 Cl B1 06/25/35 5.39 -- 724,639 724,639 -- 736,748 736,748
See accompanying notes to combined investments in securities. 18 -- AXP Fixed Income Series, Inc. -- RiverSource Diversified Bond Fund
Bonds (continued) Issuer Coupon Principal Principal Principal Value(a) Value(a) Value(a) rate amount amount amount RiverSource Quality RiverSource Quality Diversified Income Pro Forma Diversified Income Pro Forma Bond Fund Portfolio Combined Bond Fund Portfolio Combined Mortgage-Backed (f,n) (cont.) Govt Natl Mtge Assn 09/01/35 5.00% $13,650,000 $5,000,000 $18,650,000(g) $13,692,656 $5,015,625 $18,708,281 Collateralized Mtge Obligation Interest Only Series 2002-70 Cl IC 08/20/32 0.00 10,214,633 3,783,001 13,997,634(i) 1,337,623 495,390 1,833,013 Collateralized Mtge Obligation Interest Only Series 2002-80 Cl CI 01/20/32 0.00 2,303,524 863,822 3,167,346(i) 246,989 92,621 339,610 Govt Natl Mtge Assn #345538 02/15/24 8.00 217,162 -- 217,162 233,213 -- 233,213 Govt Natl Mtge Assn #398831 08/15/26 8.00 244,458 -- 244,458 262,806 -- 262,806 Govt Natl Mtge Assn #423782 05/15/26 7.50 -- 631,900 631,900 -- 674,051 674,051 Govt Natl Mtge Assn #425004 10/15/33 5.50 4,552,190 -- 4,552,190 4,644,658 -- 4,644,658 Govt Natl Mtge Assn #426170 06/15/26 8.00 220,818 -- 220,818 237,392 -- 237,392 Govt Natl Mtge Assn #595256 12/15/32 6.00 -- 9,258,691 9,258,691 -- 9,555,361 9,555,361 Govt Natl Mtge Assn #604708 10/15/33 5.50 9,918,654 3,837,144 13,755,798 10,120,131 3,915,087 14,035,218 Harborview Mtge Loan Trust Series 2004-3 Cl B1 05/19/34 4.39 4,328,576 -- 4,328,576(k) 4,273,123 -- 4,273,123 IndyMac Index Mtge Loan Trust Series 2005-AR3 Cl 3A1 04/25/35 5.34 3,671,672 1,293,471 4,965,143(k) 3,710,669 1,307,208 5,017,877 Series 2005-AR8 Cl AX1 Collateralized Mtge Obligation Interest Only 04/25/35 4.50 192,739,443 68,938,140 261,677,583(i,k) 2,379,128 850,955 3,230,083 Master Adjustable Rate Mtge Trust Series 2004-5 Cl B1 07/25/34 4.40 4,154,484 1,456,588 5,611,072(k) 4,100,060 1,437,506 5,537,566 Master Alternative Loans Trust Series 2004-2 Cl 4A1 02/25/19 5.00 6,477,592 2,313,426 8,791,018 6,514,029 2,326,439 8,840,468 Series 2004-4 Cl 2A1 05/25/34 6.00 1,556,968 3,538,564 5,095,532 1,589,773 3,613,121 5,202,894 Series 2004-7 Cl 8A1 08/25/19 5.00 4,969,254 1,703,999 6,673,253 4,972,384 1,705,073 6,677,457 Series 2004-8 Cl 7A1 09/25/19 5.00 6,808,338 2,343,854 9,152,192 6,814,057 2,345,823 9,159,880 Structured Adjustable Rate Mtge Loan Trust Series 2004-3AC Cl B1 03/25/34 4.93 5,562,433 -- 5,562,433(k) 5,545,078 -- 5,545,078 Series 2004-5 Cl B1 05/25/34 4.61 4,235,971 1,345,544 5,581,515(k) 4,173,872 1,325,818 5,499,690 Structured Asset Securities Series 2003-33H Cl 1A1 10/25/33 5.50 14,679,726 5,035,180 19,714,906 14,763,922 5,064,060 19,827,982 Washington Mutual Series 2003-AR10 Cl A7 10/25/33 4.07 6,650,000 2,375,000 9,025,000(k) 6,666,218 2,380,792 9,047,010
See accompanying notes to combined investments in securities. 19 -- AXP Fixed Income Series, Inc. -- RiverSource Diversified Bond Fund
Bonds (continued) Issuer Coupon Principal Principal Principal Value(a) Value(a) Value(a) rate amount amount amount RiverSource Quality RiverSource Quality Diversified Income Pro Forma Diversified Income Pro Forma Bond Fund Portfolio Combined Bond Fund Portfolio Combined Mortgage-Backed (f,n) (cont.) Washington Mutual (cont.) Series 2004-CB2 Cl 6A 07/25/19 4.50% $4,278,238 $1,637,286 $5,915,524 $4,175,688 $1,598,040 $5,773,728 Series 2004-CB4 Cl 22A 12/25/19 6.00 5,135,060 -- 5,135,060 5,296,976 -- 5,296,976 Series 2005-AR11 Cl A1B1 08/25/45 3.93 12,675,000 4,550,000 17,225,000(k) 12,675,000 4,550,000 17,225,000 Wells Fargo Mtge Backed Securities Trust Series 2005 10/25/35 5.00 12,000,000 4,300,000 16,300,000(g) 12,061,875 4,322,172 16,384,047 Series 2005-5 Cl 2A1 05/25/35 5.50 10,678,903 3,883,237 14,562,140 10,828,805 3,937,747 14,766,552 Series 2005-AR1 Cl 1A1 02/25/35 4.56 9,806,695 3,467,941 13,274,636(k) 9,764,134 3,452,891 13,217,025 Total 944,124,154 345,145,191 1,289,269,345 Aerospace & Defense (0.1%) L-3 Communications 06/15/12 7.63 2,000,000 -- 2,000,000 2,120,000 -- 2,120,000 07/15/13 6.13 190,000 -- 190,000 191,900 -- 191,900 Moog Sr Sub Nts 01/15/15 6.25 165,000 -- 165,000 165,000 -- 165,000 Total 2,476,900 -- 2,476,900 Automotive (0.2%) DaimlerChrysler NA Holding 11/15/13 6.50 2,125,000 755,000 2,880,000 2,285,544 812,040 3,097,584 Ford Motor 02/01/29 6.38 2,300,000 -- 2,300,000 1,681,261 -- 1,681,261 Lear Series B 08/01/14 5.75 -- 1,030,000 1,030,000 -- 915,413 915,413 Total 3,966,805 1,727,453 5,694,258 Banking (4.4%) Bank of America Sr Unsecured 08/01/10 4.50 11,120,000 7,910,000 19,030,000 11,157,819 7,936,902 19,094,721 Banknorth Group Sr Nts 05/01/08 3.75 3,960,000 3,370,000 7,330,000(p) 3,916,876 3,333,301 7,250,177 Citigroup 08/03/10 4.63 32,600,000 11,500,000 44,100,000 32,873,285 11,596,404 44,469,689 Sr Nts 05/29/15 4.70 2,665,000 1,005,000 3,670,000 2,661,911 1,003,835 3,665,746 HSBC Bank USA Sub Nts 08/15/35 5.63 5,500,000 2,000,000 7,500,000 5,674,202 2,063,346 7,737,548 KFW Intl Finance 10/17/05 2.50 18,400,000 6,275,000 24,675,000(c) 18,370,852 6,265,060 24,635,912 M&I Marshall & Ilsley Bank Sub Nts 06/16/15 4.85 2,575,000 1,075,000 3,650,000 2,592,958 1,082,497 3,675,455 Wells Fargo Bank NA Sub Nts 02/01/11 6.45 24,007,000 8,604,000 32,611,000 26,369,865 9,450,840 35,820,705 Total 103,617,768 42,732,185 146,349,953
See accompanying notes to combined investments in securities. 20 -- AXP Fixed Income Series, Inc. -- RiverSource Diversified Bond Fund
Bonds (continued) Issuer Coupon Principal Principal Principal Value(a) Value(a) Value(a) rate amount amount amount RiverSource Quality RiverSource Quality Diversified Income Pro Forma Diversified Income Pro Forma Bond Fund Portfolio Combined Bond Fund Portfolio Combined Building Materials (--%) Norcraft Companies LP/Finance Sr Sub Nts 11/01/11 9.00% $570,000 $-- $570,000 $598,500 $-- $598,500 Chemicals (0.1%) Airgas 10/01/11 9.13 1,500,000 -- 1,500,000 1,612,500 -- 1,612,500 Compass Minerals Group 08/15/11 10.00 1,000,000 -- 1,000,000 1,095,000 -- 1,095,000 Georgia Gulf Sr Nts 12/15/13 7.13 1,525,000 -- 1,525,000 1,582,188 -- 1,582,188 MacDermid 07/15/11 9.13 575,000 -- 575,000 618,125 -- 618,125 Total 4,907,813 -- 4,907,813 Diversified Manufacturing (0.7%) Tyco Intl Group 02/15/11 6.75 15,205,000 5,405,000 20,610,000(c) 16,744,172 5,952,137 22,696,309 Electric (2.9%) CMS Energy Sr Nts 01/15/09 7.50 1,275,000 -- 1,275,000 1,345,125 -- 1,345,125 Consumers Energy 1st Mtge 09/15/35 5.80 5,340,000 2,000,000 7,340,000 5,566,800 2,084,944 7,651,744 Dayton Power & Light 1st Mtge 10/01/13 5.13 3,305,000 1,185,000 4,490,000 3,403,459 1,220,302 4,623,761 Dominion Resources 06/15/35 5.95 5,620,000 2,025,000 7,645,000(p) 5,870,191 2,115,149 7,985,340 DPL Sr Nts 09/01/11 6.88 2,755,000 -- 2,755,000 3,016,725 -- 3,016,725 Exelon 06/15/35 5.63 4,320,000 1,555,000 5,875,000 4,348,287 1,565,182 5,913,469 IPALCO Enterprises Secured 11/14/08 8.38 400,000 -- 400,000 429,000 -- 429,000 11/14/11 8.63 3,680,000 -- 3,680,000 4,140,000 -- 4,140,000 NorthWestern Energy Secured 11/01/14 5.88 645,000 -- 645,000(d) 666,045 -- 666,045 Ohio Edison 06/15/09 5.65 4,005,000 -- 4,005,000(d) 4,123,548 -- 4,123,548 Sr Nts 05/01/15 5.45 1,195,000 -- 1,195,000 1,235,972 -- 1,235,972 Ohio Power Sr Nts Series H 01/15/14 4.85 7,395,000 2,545,000 9,940,000 7,451,498 2,564,444 10,015,942 Pacific Gas & Electric 03/01/34 6.05 4,580,000 1,605,000 6,185,000 5,018,718 1,758,743 6,777,461 Pacificorp 1st Mtge 06/15/35 5.25 2,825,000 1,015,000 3,840,000 2,842,190 1,021,176 3,863,366
See accompanying notes to combined investments in securities. 21 -- AXP Fixed Income Series, Inc. -- RiverSource Diversified Bond Fund
Bonds (continued) Issuer Coupon Principal Principal Principal Value(a) Value(a) Value(a) rate amount amount amount RiverSource Quality RiverSource Quality Diversified Income Pro Forma Diversified Income Pro Forma Bond Fund Portfolio Combined Bond Fund Portfolio Combined Electric (cont.) Potomac Edison 1st Mtge 11/15/14 5.35% $3,195,000 $-- $3,195,000(d) $3,310,308 $-- $3,310,308 08/15/15 5.13 2,275,000 1,895,000 4,170,000(d) 2,326,160 1,937,615 4,263,775 Southern California Edison 1st Mtge 07/15/35 5.35 5,710,000 2,055,000 7,765,000 5,830,875 2,098,502 7,929,377 Tenaska Alabama Partners LP Secured 06/30/21 7.00 360,000 -- 360,000(d) 375,548 -- 375,548 Utilicorp Canada Finance 06/15/11 7.75 1,915,000 -- 1,915,000(c) 2,001,175 -- 2,001,175 Westar Energy 1st Mtge 07/01/14 6.00 11,450,000 4,150,000 15,600,000 12,464,563 4,517,724 16,982,287 Total 75,766,187 20,883,781 96,649,968 Entertainment (0.4%) Time Warner 05/15/29 6.63 4,940,000 1,755,000 6,695,000 5,374,068 1,909,208 7,283,276 United Artists Theatre 07/01/15 9.30 7,739,913 -- 7,739,913 7,662,514 -- 7,662,514 Total 13,036,582 1,909,208 14,945,790 Food and Beverage (0.3%) Burns Philp Capital Property Sr Sub Nts 02/15/11 10.75 940,000 -- 940,000(c) 1,048,100 -- 1,048,100 Cott Beverages 12/15/11 8.00 1,135,000 -- 1,135,000 1,197,425 -- 1,197,425 Kraft Foods 06/01/12 6.25 4,991,000 1,810,000 6,801,000(p) 5,477,343 1,986,374 7,463,717 Total 7,722,868 1,986,374 9,709,242 Gaming (0.3%) Boyd Gaming Sr Sub Nts 12/15/12 7.75 375,000 -- 375,000 399,375 -- 399,375 04/15/14 6.75 455,000 -- 455,000 464,669 -- 464,669 Caesars Entertainment Sr Nts 04/15/13 7.00 2,535,000 -- 2,535,000 2,833,569 -- 2,833,569 MGM MIRAGE 10/01/09 6.00 670,000 -- 670,000 670,000 -- 670,000 Sr Nts 02/27/14 5.88 720,000 -- 720,000 694,800 -- 694,800 07/15/15 6.63 2,165,000 -- 2,165,000(d,g) 2,186,650 -- 2,186,650 Mohegan Tribal Gaming Authority Sr Nts 02/15/13 6.13 540,000 -- 540,000 546,750 -- 546,750 Sr Sub Nts 04/01/12 8.00 750,000 -- 750,000 798,750 -- 798,750 Station Casinos Sr Nts 04/01/12 6.00 1,000,000 -- 1,000,000 1,007,500 -- 1,007,500 Sr Sub Nts 03/01/16 6.88 1,515,000 -- 1,515,000(d,g) 1,556,663 -- 1,556,663 Total 11,158,726 -- 11,158,726
See accompanying notes to combined investments in securities. 22 -- AXP Fixed Income Series, Inc. -- RiverSource Diversified Bond Fund
Bonds (continued) Issuer Coupon Principal Principal Principal Value(a) Value(a) Value(a) rate amount amount amount RiverSource Quality RiverSource Quality Diversified Income Pro Forma Diversified Income Pro Forma Bond Fund Portfolio Combined Bond Fund Portfolio Combined Gas Pipelines (0.2%) ANR Pipeline 03/15/10 8.88% $875,000 $-- $875,000 $954,587 $-- $954,587 Colorado Interstate Gas Sr Nts 03/15/15 5.95 470,000 -- 470,000(d) 466,475 -- 466,475 El Paso Natural Gas Sr Nts Series A 08/01/10 7.63 735,000 -- 735,000 786,823 -- 786,823 Southern Natural Gas 03/15/10 8.88 875,000 -- 875,000 954,587 -- 954,587 Southern Star Central Secured 08/01/10 8.50 645,000 -- 645,000 696,600 -- 696,600 Transcontinental Gas Pipe Line Series B 08/15/11 7.00 1,915,000 -- 1,915,000 2,058,624 -- 2,058,624 Total 5,917,696 -- 5,917,696 Health Care (0.6%) Cardinal Health 06/15/15 4.00 15,779,000 5,625,000 21,404,000 14,604,269 5,206,224 19,810,493 HCA Sr Nts 03/15/14 5.75 1,000,000 -- 1,000,000 988,267 -- 988,267 Triad Hospitals Sr Nts 05/15/12 7.00 1,000,000 -- 1,000,000 1,035,000 -- 1,035,000 Total 16,627,536 5,206,224 21,833,760 Home Construction (0.2%) DR Horton 12/01/07 7.50 1,000,000 -- 1,000,000 1,054,672 -- 1,054,672 01/15/09 5.00 990,000 -- 990,000 986,494 -- 986,494 Sr Nts 02/15/15 5.25 4,290,000 -- 4,290,000 4,121,039 -- 4,121,039 Meritage Homes 03/15/15 6.25 445,000 -- 445,000 416,631 -- 416,631 Standard-Pacific Sr Nts 08/15/15 7.00 930,000 -- 930,000 916,050 -- 916,050 Total 7,494,886 -- 7,494,886 Independent Energy (0.2%) Chesapeake Energy 01/15/15 7.75 1,275,000 -- 1,275,000 1,370,625 -- 1,370,625 Sr Nts 06/15/14 7.50 152,000 -- 152,000 164,160 -- 164,160 Sr Unsecured 08/15/17 6.50 1,860,000 -- 1,860,000(d) 1,897,200 -- 1,897,200 Encore Acquisition Sr Sub Nts 04/15/14 6.25 590,000 -- 590,000 587,050 -- 587,050 Newfield Exploration Sr Nts 03/01/11 7.63 2,500,000 -- 2,500,000 2,725,000 -- 2,725,000 Sr Sub Nts 08/15/12 8.38 380,000 -- 380,000 413,250 -- 413,250
See accompanying notes to combined investments in securities. 23 -- AXP Fixed Income Series, Inc. -- RiverSource Diversified Bond Fund
Bonds (continued) Issuer Coupon Principal Principal Principal Value(a) Value(a) Value(a) rate amount amount amount RiverSource Quality RiverSource Quality Diversified Income Pro Forma Diversified Income Pro Forma Bond Fund Portfolio Combined Bond Fund Portfolio Combined Independent Energy (cont.) Plains Exploration & Production Sr Nts 06/15/14 7.13% $790,000 $-- $790,000 $841,350 $-- $841,350 Total 7,998,635 -- 7,998,635 Life Insurance (2.1%) ASIF Global Financing XIX Secured 01/17/13 4.90 5,748,000 2,045,000 7,793,000(d) 5,826,575 2,072,955 7,899,530 ING Security Life Institutional Funding 01/15/10 4.25 11,475,000 4,080,000 15,555,000(d) 11,397,326 4,052,382 15,449,708 Metlife Sr Nts 06/15/35 5.70 9,600,000 3,475,000 13,075,000 9,974,506 3,610,563 13,585,069 Metropolitan Life Global Funding I Sr Nts 08/19/10 4.63 3,360,000 1,015,000 4,375,000(d) 3,386,154 1,022,901 4,409,055 Pricoa Global Funding I 06/25/12 4.63 16,125,000 5,660,000 21,785,000(d) 16,154,880 5,670,488 21,825,368 Prudential Financial 06/13/35 5.40 4,720,000 1,675,000 6,395,000 4,698,788 1,667,473 6,366,261 Total 51,438,229 18,096,762 69,534,991 Lodging (0.1%) Hilton Hotels 12/01/12 7.63 1,250,000 -- 1,250,000 1,434,175 -- 1,434,175 ITT 11/15/15 7.38 635,000 -- 635,000 695,325 -- 695,325 Total 2,129,500 -- 2,129,500 Media Cable (0.2%) Comcast 03/15/11 5.50 3,635,000 1,395,000 5,030,000 3,758,408 1,442,360 5,200,768 DIRECTV Holdings LLC/Finance Sr Nts 03/15/13 8.38 406,000 -- 406,000 445,585 -- 445,585 Videotron Ltee 01/15/14 6.88 530,000 -- 530,000(c) 544,575 -- 544,575 Total 4,748,568 1,442,360 6,190,928 Media Non Cable (0.6%) Corus Entertainment Sr Sub Nts 03/01/12 8.75 395,000 -- 395,000(c) 424,625 -- 424,625 Dex Media West LLC/Finance Sr Nts Series B 08/15/10 8.50 1,340,000 -- 1,340,000 1,448,875 -- 1,448,875 Emmis Operating Sr Sub Nts 05/15/12 6.88 400,000 -- 400,000 400,000 -- 400,000 Lamar Media 01/01/13 7.25 375,000 -- 375,000 394,688 -- 394,688 Sr Sub Nts 08/15/15 6.63 805,000 -- 805,000(d) 821,100 -- 821,100 News America 12/15/34 6.20 9,392,000 3,410,000 12,802,000 9,731,812 3,533,377 13,265,189 Quebecor Media Sr Nts 07/15/11 11.13 640,000 -- 640,000(c) 704,000 -- 704,000
See accompanying notes to combined investments in securities. 24 -- AXP Fixed Income Series, Inc. -- RiverSource Diversified Bond Fund
Bonds (continued) Issuer Coupon Principal Principal Principal Value(a) Value(a) Value(a) rate amount amount amount RiverSource Quality RiverSource Quality Diversified Income Pro Forma Diversified Income Pro Forma Bond Fund Portfolio Combined Bond Fund Portfolio Combined Media Non Cable (cont.) Radio One Series B 07/01/11 8.88% $1,000,000 $-- $1,000,000 $1,068,750 $-- $1,068,750 Sun Media 02/15/13 7.63 745,000 -- 745,000(c) 786,906 -- 786,906 Susquehanna Media Sr Sub Nts 04/15/13 7.38 900,000 -- 900,000 943,875 -- 943,875 Total 16,724,631 3,533,377 20,258,008 Metals (0.1%) Peabody Energy Series B 03/15/13 6.88 1,640,000 -- 1,640,000 1,707,650 -- 1,707,650 Oil Field Services (0.2%) Halliburton 10/15/10 5.50 3,450,000 1,225,000 4,675,000 3,608,327 1,281,218 4,889,545 Key Energy Services Series C 03/01/08 8.38 1,250,000 -- 1,250,000 1,293,750 -- 1,293,750 Offshore Logistics 06/15/13 6.13 195,000 -- 195,000 190,125 -- 190,125 Pride Intl Sr Nts 07/15/14 7.38 495,000 -- 495,000 537,075 -- 537,075 Total 5,629,277 1,281,218 6,910,495 Other Financial Institutions (0.9%) HSBC Finance 06/30/15 5.00 15,705,000 5,585,000 21,290,000 15,786,776 5,614,081 21,400,857 Residential Capital 06/30/10 6.38 6,745,000 2,400,000 9,145,000(d) 6,885,431 2,449,968 9,335,399 Total 22,672,207 8,064,049 30,736,256 Packaging (0.1%) Owens-Illinois Glass Container 05/15/11 7.75 1,100,000 -- 1,100,000 1,166,000 -- 1,166,000 Silgan Holdings Sr Sub Nts 11/15/13 6.75 615,000 -- 615,000 628,069 -- 628,069 Total 1,794,069 -- 1,794,069 Paper (0.1%) Crown Paper Sr Sub Nts 09/01/05 11.00 6,950,000 -- 6,950,000(b,o,q) -- -- -- Louisiana-Pacific Sr Nts 08/15/10 8.88 2,260,000 -- 2,260,000 2,554,354 -- 2,554,354 Total 2,554,354 -- 2,554,354 Pharmaceuticals (0.1%) Merck & Co 03/01/15 4.75 1,450,000 515,000 1,965,000 1,437,452 510,543 1,947,995 Property & Casualty (0.1%) Willis Group North America 07/15/15 5.63 3,370,000 1,220,000 4,590,000 3,421,831 1,238,764 4,660,595
See accompanying notes to combined investments in securities. 25 -- AXP Fixed Income Series, Inc. -- RiverSource Diversified Bond Fund
Bonds (continued) Issuer Coupon Principal Principal Principal Value(a) Value(a) Value(a) rate amount amount amount RiverSource Quality RiverSource Quality Diversified Income Pro Forma Diversified Income Pro Forma Bond Fund Portfolio Combined Bond Fund Portfolio Combined Railroads (0.4%) Union Pacific 04/15/12 6.50% $7,390,000 $215,000 $7,605,000 $8,151,495 $237,154 $8,388,649 05/01/14 5.38 2,995,000 3,145,000 6,140,000 3,118,403 3,274,584 6,392,987 Total 11,269,898 3,511,738 14,781,636 REITS (0.6%) Archstone-Smith Operating Trust 05/01/15 5.25 7,660,000 2,735,000 10,395,000 7,781,533 2,778,393 10,559,926 ERP Operating LP 04/01/13 5.20 2,815,000 1,010,000 3,825,000 2,871,337 1,030,213 3,901,550 Simon Property Group LP 06/15/15 5.10 4,975,000 1,765,000 6,740,000(d) 4,956,543 1,758,452 6,714,995 Total 15,609,413 5,567,058 21,176,471 Retailers (0.3%) United Auto Group 03/15/12 9.63 455,000 -- 455,000 488,556 -- 488,556 Wal-Mart Stores 09/01/35 5.25 5,570,000 1,990,000 7,560,000(g) 5,620,487 2,008,037 7,628,524 Series C 06/29/11 8.88 3,500,000 -- 3,500,000 3,533,355 -- 3,533,355 Total 9,642,398 2,008,037 11,650,435 Transportation Services (0.2%) ERAC USA Finance 05/01/15 5.60 5,075,000 1,750,000 6,825,000(d) 5,241,490 1,807,411 7,048,901 Greater Beijing First Expressways Sr Nts 06/15/07 9.50 3,640,000 -- 3,640,000(b,c,o,q) -- -- -- Total 5,241,490 1,807,411 7,048,901 Wireless (0.3%) Nextel Communications Sr Nts Series E 10/31/13 6.88 1,875,000 -- 1,875,000 2,008,262 -- 2,008,262 US Cellular Sr Nts 12/15/33 6.70 5,835,000 2,090,000 7,925,000 6,254,583 2,240,288 8,494,871 Total 8,262,845 2,240,288 10,503,133 Wirelines (4.4%) BellSouth Sr Unsecured 11/15/34 6.00 2,775,000 985,000 3,760,000 2,929,690 1,039,908 3,969,598 Qwest 03/15/12 8.88 1,075,000 -- 1,075,000 1,174,438 -- 1,174,438 Sprint Capital 01/30/11 7.63 26,465,000 9,470,000 35,935,000 30,247,456 10,823,481 41,070,937 11/15/28 6.88 892,000 295,000 1,187,000 1,022,183 338,054 1,360,237 Telecom Italia Capital 09/30/34 6.00 6,265,000 2,225,000 8,490,000(c,d) 6,431,687 2,284,198 8,715,885 TELUS 06/01/11 8.00 20,552,500 7,367,500 27,920,000(c) 23,906,730 8,569,898 32,476,628 Verizon Pennsylvania Series A 11/15/11 5.65 41,125,000 14,615,000 55,740,000 43,003,178 15,282,467 58,285,645 Total 108,715,362 38,338,006 147,053,368 Total Bonds (Cost: $3,318,118,367) $2,446,929,085 $888,227,446 $3,335,156,531
See accompanying notes to combined investments in securities. 26 -- AXP Fixed Income Series, Inc. -- RiverSource Diversified Bond Fund
Other (0.1%) Issuer Shares Shares Shares Value(a) Value(a) Value(a) RiverSource Quality RiverSource Quality Diversified Income Pro Forma Diversified Income Pro Forma Bond Fund Portfolio Combined Bond Fund Portfolio Combined Wayland Investment LLC 6,000,000 -- 6,000,000(b,e,o) $3,053,100 $-- $3,053,100 Total Other (Cost: $6,671,880) $3,053,100 $-- $3,053,100
Short-Term Securities (4.1%) (s) Issuer Effective Amount Amount Value (a) Value (a) Value (a) yield payable payable at maturity at maturity RiverSource Quality RiverSource Quality Diversified Income Pro Forma Diversified Income Pro Forma Bond Fund Portfolio Combined Bond Fund Portfolio Combined U.S. Government Agency (0.7%) Federal Home Loan Mtge Corp Disc Nt 09/20/05 3.43% $25,000,000 $-- $25,000,000 $24,952,500 $-- $24,952,500 Commercial Paper (3.4%) Citibank Credit Card Dakota Nts 09/01/05 3.57 -- 11,900,000 11,900,000(t) -- 11,898,820 11,898,820 Jupiter Securitization 09/29/05 3.60 10,000,000 -- 10,000,000(t) 9,971,080 -- 9,971,080 Kitty Hawk Funding 09/07/05 3.51 9,310,000 -- 9,310,000(t) 9,303,646 -- 9,303,646 Morgan Stanley & Co 09/01/05 3.57 2,900,000 -- 2,900,000 2,899,712 -- 2,899,712 Park Avenue Receivables 09/22/05 3.55 15,000,000 -- 15,000,000(t) 14,967,550 -- 14,967,550 Rabobank USA Finance 09/02/05 3.49 -- 5,000,000 5,000,000 -- 4,999,031 4,999,031 Thames Asset Global Securitization 09/21/05 3.55 25,000,000 15,000,000 40,000,000(t) 24,948,374 14,969,024 39,917,398 Thunder Bay Funding LLC 10/07/05 3.61 20,000,000 -- 20,000,000(t) 19,926,000 -- 19,926,000 Total 82,016,362 31,866,875 113,883,237 Total Short-Term Securities (Cost: $138,849,380) $106,968,862 $31,866,875 $138,835,737 Total Investments in Securities (prior to pro forma adjustments) (Cost: $3,463,639,627)(u) $2,556,951,047 $920,094,321 $3,477,045,368 Pro forma Adjustments(v) -- (136,557) (136,557) Total Investments in Securities (after pro forma adjustments) (Cost: $3,463,503,830)(v) $2,556,951,047 $919,957,764 $3,476,908,811
See accompanying notes to combined investments in securities. 27 -- AXP Fixed Income Series, Inc. -- RiverSource Diversified Bond Fund Notes to Combined Investments in Securities (a) Securities are valued by procedures described in Note 1 to the financial statements in the annual report. (b) Non-income producing. For long-term debt securities, item identified is in default as to payment of interest and/or principal. (c) Foreign security values are stated in U.S. dollars. For debt securities, principal amounts are denominated in U.S. dollar currency unless otherwise noted. At Aug. 31, 2005, the value of foreign securities represented 4.7% of net assets. (d) Represents a security sold under Rule 144A, which is exempt from registration under the Securities Act of 1933, as amended. This security has been determined to be liquid under guidelines established by the Fund's Board of Directors. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At Aug. 31, 2005, the value of these securities amounted to $185,866,451 or 5.5% or net assets. (e) The share amount for Limited Liability Companies (LLC) or Limited Partnerships (LP) represents capital contributions. (f) Mortgage-backed securities represent direct or indirect participations in, or are secured by and payable from, mortgage loans secured by real property, and include single- and multi-class pass-through securities and collateralized mortgage obligations. These securities may be issued or guaranteed by U.S. government agencies or instrumentalities, or by private issuers, generally originators and investors in mortgage loans, including savings associations, mortgage bankers, commercial banks, investment bankers and special purpose entities. The maturity dates shown represent the original maturity of the underlying obligation. Actual maturity may vary based upon prepayment activity on these obligations. Unless otherwise noted, the coupon rates presented are fixed rates. (g) At Aug. 31, 2005, the cost of securities purchased, including interest purchased, on a when-issued and/or other forward-commitment basis was $96,072,655. (h) U.S. Treasury inflation-indexed bonds are securities in which the principal amount is adjusted for inflation and the semiannual interest payments equal a fixed percentage of the inflation-adjusted principal amount. (i) Interest only represents securities that entitle holders to receive only interest payments on the underlying mortgages. The yield to maturity of an interest only is extremely sensitive to the rate of principal payments on the underlying mortgage assets. A rapid (slow) rate of principal repayments may have an adverse (positive) effect on yield to maturity. The principal amount shown is the notional amount of the underlying mortgages. Interest rate disclosed represents yield based upon the estimated timing and amount of future cash flows at Aug. 31, 2005. (j) Principal only represents securities that entitle holders to receive only principal payments on the underlying mortgages. The yield to maturity of a principal only is sensitive to the rate of principal payments on the underlying mortgage assets. A slow (rapid) rate of principal repayments may have an adverse (positive) effect on yield to maturity. Interest rate disclosed represents yield based upon the estimated timing of future cash flows at Aug. 31, 2005. (k) Adjustable rate mortgage; interest rate varies to reflect current market conditions; rate shown is the effective rate on Aug. 31, 2005. (l) The following abbreviations are used in the portfolio security descriptions to identify the insurer of the issue: AMBAC -- Ambac Assurance Corporation FGIC -- Financial Guaranty Insurance Company FSA -- Financial Security Assurance MBIA -- MBIA Insurance Corporation (m) Interest rate varies either based on a predetermined schedule or to reflect current market conditions; rate shown is the effective rate on Aug. 31, 2005. (n) Comparable securities are held to satisfy future delivery requirements of the following open forward sale commitments at Aug. 31, 2005:
Security Principal Principal Settlement Proceeds Proceeds amount amount date receivable receivable RiverSource RiverSource Diversified Quality Diversified Quality Bond Income Pro forma Bond Income Pro forma Fund Portfolio Combined Fund Portfolio Combined Federal Home Loan Mtge Corp 09-01-35 6.50% $-- $3,000,000 $3,000,000 9-14-05 $-- $3,093,281 $3,093,281 Federal Natl Mtge Assn 09-01-20 4.50 -- 3,425,000 3,425,000 9-19-05 -- 3,357,035 3,357,035 09-01-20 5.00 13,150,000 2,500,000 15,650,000 9-19-05 13,139,726 2,498,047 15,637,774 09-01-20 5.50 7,000,000 -- 7,000,000 9-19-05 7,111,563 -- 7,111,563 09-01-35 5.00 21,300,000 8,000,000 29,300,000 9-14-05 20,837,391 7,826,250 28,663,641 09-01-35 5.50 72,550,000 22,000,000 94,550,000 9-14-05 72,436,641 21,967,500 94,404,141 09-01-35 6.00 5,000,000 3,000,000 8,000,000 9-14-05 5,091,406 3,054,844 8,146,250 09-01-35 6.50 19,870,000 8,700,000 28,570,000 9-14-05 20,507,237 8,979,012 29,486,249
Value Value RiverSource Diversified Quality Bond Income Pro forma Fund Portfolio Combined $-- $3,098,436 $3,098,436 -- 3,396,100 3,396,100 13,240,406 2,517,188 15,757,594 7,148,750 -- 7,148,750 21,153,563 7,945,000 29,098,563 73,275,500 22,220,000 95,495,500 5,115,625 3,069,375 8,185,000 20,528,194 8,988,187 29,516,381 28 -- AXP Fixed Income Series, Inc. -- RiverSource Diversified Bond Fund Notes to Combined Investments in Securities (continued) (o) Identifies issues considered to be illiquid as to their marketability. These securities are valued at fair value according to methods selected in good faith by the Fund's Board of Directors. Information concerning such security holdings at Aug. 31, 2005, is as follows:
Security Acquisition Cost dates Crown Paper 11.00% Sr Sub Nts 2005 02-10-00 thru 02-14-00 $4,216,724 Greater Beijing First Expressways 9.50% Sr Nts 2007 9/16/98 -- Wayland Investment LLC 5/19/00 6,671,880
(p) Partially pledged as initial deposit on the following open interest rate futures contracts:
Type of security Notional amount Purchase contracts U.S. Long Bond, Dec. 2005, 20-year $49,900,000 Sale contracts U.S. Treasury Note, Sept. 2005, 5-year 27,800,000 U.S. Treasury Note, Sept. 2005, 10-year 17,000,000 U.S. Treasury Note, Dec. 2005, 5-year 92,700,000 U.S. Treasury Note, Dec. 2005, 10-year 182,700,000
(q) Negligible market value. (r) At Aug. 31, 2005, security was partially or fully on loan. (s) Cash collateral received from security lending activity is invested in short-term securities and represents 0.8% of net assets. 3.3% of net assets is the Fund's cash equivalent position. (t) Commercial paper sold within terms of a private placement memorandum, exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, and may be sold only to dealers in that program or other "accredited investors." This security has been determined to be liquid under guidelines established by the Fund's Board of Directors. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At Aug. 31, 2005, the value of these securities amounted to $105,984,494 or 3.2% of net assets. (u) At Aug. 31, 2005, the approximate cost of securities for federal income tax purposes and the approximate aggregate gross unrealized appreciation and depreciation based on that cost was:
RiverSource Quality Diversified Income Pro forma Pro forma Bond Fund Portfolio Adjustments Combined Cost of securities for federal income tax purposes: $2,548,651,000 $914,989,000 $ (136,000) $3,463,504,000 Unrealized appreciation $ 29,867,000 $ 9,885,000 $ -- $ 39,752,000 Unrealized depreciation (21,567,000) (4,780,000) (2,032,000) (28,379,000) ----------- ---------- ---------- ----------- Net unrealized appreciation/depreciation $ 8,300,000 $ 5,105,000 $(2,032,000) $ 11,373,000 -------------- ------------ ----------- --------------
(v) To reflect the portion of the Quality Income Portfolio net assets not owned by RiverSource Selective Fund. (Cost decreased $135,797). S-6387-20 A (12/05) PART C. OTHER INFORMATION Item 15. Indemnification The Articles of Incorporation of the registrant provide that the Fund shall indemnify any person who was or is a party or is threatened to be made a party, by reason of the fact that she or he is or was a director, officer, employee or agent of the Fund, or is or was serving at the request of the Fund as a director, officer, employee or agent of another company, partnership, joint venture, trust or other enterprise, to any threatened, pending or completed action, suit or proceeding, wherever brought, and the Fund may purchase liability insurance and advance legal expenses, all to the fullest extent permitted by the laws of the State of Minnesota, as now existing or hereafter amended. The By-laws of the registrant provide that present or former directors or officers of the Fund made or threatened to be made a party to or involved (including as a witness) in an actual or threatened action, suit or proceeding shall be indemnified by the Fund to the full extent authorized by the Minnesota Business Corporation Act, all as more fully set forth in the By-laws filed as an exhibit to this registration statement. Insofar as indemnification for liability arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. Any indemnification hereunder shall not be exclusive of any other rights of indemnification to which the directors, officers, employees or agents might otherwise be entitled. No indemnification shall be made in violation of the Investment Company Act of 1940. Item 16. Exhibits (1)(a) Articles of Incorporation, as amended Oct. 17, 1988, filed electronically as Exhibit 1 to Registrant's Post-Effective Amendment No. 28 to Registration Statement No. 2-51586, are incorporated by reference. (1)(b) Articles of Amendment, dated June 16, 1999, filed electronically as Exhibit (a)(2) to Registrant's Post-Effective Amendment No. 53 to Registration Statement No. 2-51586 filed on or about Oct. 25, 2001 is incorporated by reference. (1)(c) Articles of Amendment, dated Nov. 14, 2002, filed electronically as Exhibit (a)(3) to Registrant's Post-Effective Amendment No. 55 to Registration Statement No. 2-51586 is incorporated by reference. (2) By-laws, as amended Jan. 11, 2001, filed electronically as Exhibit (b) to Registrant's Post-Effective Amendment No. 53 to Registration Statement No. 2-51586 filed on or about Oct. 25, 2001 is incorporated by reference. (3) Not applicable. (4) Form of Agreement and Plan of Reorganization is included herein as Exhibit A to Part A of this Regsitration Statement. (5) Not applicable. (6)(a) Investment Management Services Agreement between Registrant and American Express Financial Corporation, dated March 20, 1995, filed electronically as Exhibit 5 to Registrant's Post-Effective Amendment No. 47 to Registration Statement No. 2-51586 is incorporated by reference. (6)(b) Amendment to Investment Management Services Agreement between AXP Growth Series, Inc. and American Express Financial Corporation, dated June 3, 2002, filed electronically on or about June 12, 2002 as Exhibit (d)(7) to AXP Growth Series, Inc. Post-Effective Amendment No. 71 to Registration Statement No. 2-38355, is incorporated by reference. Registrant's Amendment to Investment Management Services Agreement differs from the one incorporated by reference only by the fact that Registrant is one executing party. (6)(c) Investment Management Services Transfer Agreement, dated Sept. 29, 2005, between Ameriprise Financial, Inc. (fka American Express Financial Corporation) and RiverSource Investments, LLC.(1) (7) Distribution Agreement, dated Oct. 1, 2005, between Registrant and Ameriprise Financial Services, Inc.(2) (8) All employees are eligible to participate in a profit sharing plan. Entry into the plan is Jan. 1 or July 1. The Registrant contributes each year an amount up to 15 percent of their annual salaries, the maximum deductible amount permitted under Section 404(a) of the Internal Revenue Code. (9) Custodian Agreement between Registrant and First National Bank of Minneapolis, dated July 23, 1986, filed electronically as Exhibit 8 to Registrant's Post-Effective Amendment No. 46 to Registration Statement No. 2-51586 is incorporated by reference. (10)(a) Plan and Agreement of Distribution (for Class A and Class B Shares), dated Oct. 1, 2005, between Registrant and Ameriprise Financial Services, Inc.(7) (10)(b) Plan and Agreement of Distribution (for Class C Shares), dated Oct. 1, 2005, between Registrant and Ameriprise Financial Services, Inc.(8) (10)(c) Amended 18f-3 Plan, dated as of May 26, 2004, filed electronically on or about July 29, 2004 as Exhibit (n) to AXP Discovery Series, Inc. Post-Effective Amendment No. 49 to Registration Statement No. 2-72174 is incorporated by reference. (11) Opinion and consent of counsel as to the legality of the securities being registered filed electronically on or about Oct. 13, 2005 as Exhibit (11) to Registration Statement No. 333-128985 is incorporated by reference. (12) Tax opinion to be filed by amendment. (13)(a) Administrative Services Agreement, dated Oct. 1, 2005, between Registrant and Ameriprise Financial, Inc. (3) (13)(b) Class Y Shareholder Service Agreement, dated Oct. 1, 2005, between Registrant and Ameriprise Financial Services, Inc. (4) (13)(c) Transfer Agency Agreement, dated Oct. 1, 2005, between Registrant and RiverSource Service Corporation. (5) (13)(d) License Agreement, dated Oct. 1, 2005, between Ameriprise Financial Inc. and the RiverSource funds. (6) (13)(e) License Agreement, dated June 17, 1999, between American Express Funds and American Express Company filed electronically on or about Sept. 23, 1999 as Exhibit (h)(4) to AXP Stock Fund, Inc.'s Post-Effective Amendment No. 98 to Registration Statement No. 2-11358, is incorporated by reference. (13)(f) Addendum to Schedule A and Schedule B of the License Agreement between the American Express Funds and American Express Company, dated June 23, 2004, filed electronically on or about June 28, 2004 as Exhibit (h)(2) to AXP Variable Portfolio - Select Series, Inc. Pre-Effective Amendment No. 1 to Registration Statement No. 333-113780 is incorporated by reference. (13)(g) Master Fee Waiver Agreement, dated Dec. 1, 2005, between Ameriprise Financial, Inc., RiverSource Investments, LLC, Ameriprise Financial Services, Inc. and RiverSource Funds filed electronically on or about Dec. 5, 2005 as Exhibit (13)(g) to AXP Tax-Exempt Series, Inc. Pre-Effective Amendment No. 1 to Registration Statement No. 333-128983 is incorporated by reference. (14) Consent of Independent Registered Public Accounting Firm is filed electronically herewith. (15) Financial Statements: Not applicable. (16) Directors' Power of Attorney to sign this Registration Statement and its amendments, dated Nov. 11, 2004, filed electronically on or about Oct. 13, 2005 as Exhibit (16)(a) to Registration Statement No. 333-128985 is incorporated by reference. (17)(a) Code of Ethics adopted under Rule 17j-1 for Registrant filed electronically on or about March 28, 2005 as Exhibit (p)(1) to AXP Selected Series, Inc.'s Post-Effective Amendment No. 42 to Registration Statement No. 2-93745 is incorporated by reference. (17)(b) Code of Ethics adopted under Rule 17j-1 for Registrant's investment adviser and principal underwriter, dated Oct. 26, 2005, filed electronically on or about Nov. 22, 2005 as Exhibit (p)(2) to AXP Equity Series, Inc. Post-Effective Amendment No. 100 to Registration Statement No. 2-13188 is incorporated by reference. (17)(c) Prospectus, dated Oct. 28, 2005, for RiverSource Diversified Bond Fund is filed electronically herewith. (17)(d) Statement of Additional Information, dated Nov. 29, 2005, for RiverSource Diversified Bond Fund and RiverSource Selective Fund is filed electronically herewith. (17)(e) Annual Report for the period ended Aug. 31, 2005 for RiverSource Diversified Bond Fund is filed electronically herewith. (17)(f) Prospectus, dated July 29, 2005, amended as of Oct. 3, 2005, for RiverSource Selective Fund filed electronically on or about Oct. 13, 2005 as Exhibit (17)(f) to Registration Statement No. 333-128985 is incorporated by reference. (17)(g) Annual Report for the period ended May 31, 2005 for RiverSource Selective Fund is filed electronically herewith. - -------------------- (1) Incorporated by reference to Exhibit (d)(3) of AXP Fixed Income Series, Inc. Post-Effective Amendment No. 59 to Registration Statement No. 2-51586 filed on or about Oct. 27, 2005. (2) Incorporated by reference to Exhibit (e) of AXP Fixed Income Series, Inc. Post-Effective Amendment No. 59 to Registration Statement No. 2-51586 filed on or about Oct. 27, 2005. (3) Incorporated by reference to Exhibit (h)(1) of AXP Fixed Income Series, Inc. Post-Effective Amendment No. 59 to Registration Statement No. 2-51586 filed on or about Oct. 27, 2005. (4) Incorporated by reference to Exhibit (h)(4) of AXP Fixed Income Series, Inc. Post-Effective Amendment No. 59 to Registration Statement No. 2-51586 filed on or about Oct. 27, 2005. (5) Incorporated by reference to Exhibit (h)(6) of AXP Fixed Income Series, Inc. Post-Effective Amendment No. 59 to Registration Statement No. 2-51586 filed on or about Oct. 27, 2005. (6) Incorporated by reference to Exhibit (h)(7) of AXP Fixed Income Series, Inc. Post-Effective Amendment No. 59 to Registration Statement No. 2-51586 filed on or about Oct. 27, 2005. (7) Incorporated by reference to Exhibit (m)(1) of AXP Fixed Income Series, Inc. Post-Effective Amendment No. 59 to Registration Statement No. 2-51586 filed on or about Oct. 27, 2005. (8) Incorporated by reference to Exhibit (m)(2) of AXP Fixed Income Series, Inc. Post-Effective Amendment No. 59 to Registration Statement No. 2-51586 filed on or about Oct. 27, 2005. Item 17. Undertakings. (1) The undersigned registrant agrees that prior to any public reoffering of the securities registered through the use of a prospectus which is a part of this registration statement by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c) of the Securities Act, the reoffering prospectus will contain the information called for by the applicable registration form for reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form. (2) The undersigned registrant agrees that every prospectus that is filed under paragraph (1) above will be filed as a part of an amendment to the registration statement and will not be used until the amendment is effective, and that, in determining any liability under the 1933 Act, each post-effective amendment shall be deemed to be a new registration statement for the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering of them. (3) The Registrant undertakes to file by Post-Effective Amendment an Opinion of Counsel supporting the tax consequences of the proposed reorganization within a reasonable time after receipt of such opinion. SIGNATURES As required by the Securities Act of 1933, as amended, this Amendment to the Registration Statement has been signed on behalf of the Registrant, in the city of Minneapolis, and State of Minnesota on the 5th day of Dec., 2005. AXP FIXED INCOME SERIES, INC. By /s/ Paula R. Meyer --------------------- Paula R. Meyer, President By /s/ Jeffrey P. Fox ------------------ Jeffrey P. Fox, Treasurer As required by the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities indicated on the 5th day of Dec., 2005. Signature Capacity /s/ Arne H. Carlson* Chair of the Board - --------------------- Arne H. Carlson /s/ Patricia M. Flynn* Director - ------------------------ Patricia M. Flynn /s/ Anne P. Jones* Director - ------------------- Anne P. Jones /s/ Stephen R. Lewis, Jr.* Director - ----------------------------- Stephen R. Lewis, Jr. /s/ Catherine James Paglia* Director - ----------------------------- Catherine James Paglia /s/ Alan K. Simpson* Director - --------------------- Alan K. Simpson /s/ Alison Taunton-Rigby* Director - --------------------------- Alison Taunton-Rigby /s/ William F. Truscott* Director - ------------------------- William F. Truscott * Signed pursuant to Directors' Power of Attorney, dated Nov. 11, 2004, filed electronically as Exhibit (q)(1) to Registration Statement No. 333-128985, by: /s/ Leslie L. Ogg - --------------------- Leslie L. Ogg EX-99 2 exindex.txt EXHIBIT INDEX EXHIBIT INDEX (14) Consent of Independent Registered Public Accounting Firm. (17)(c) Prospectus, dated Oct. 28, 2005, for RiverSource Diversified Bond Fund. (17)(d) Statement of Additional Information, dated Nov. 29, 2005, for RiverSource Diversified Bond Fund and RiverSource Selective Fund. (17)(e) Annual Report for the period ended Aug. 31, 2005 for RiverSource Diversified Bond Fund. (17)(g) Annual Report for the period ended May 31, 2005 for RiverSource Selective Fund. EX-99.14 AUD CONSENT 3 ex14-consent.txt CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Consent of Independent Registered Public Accounting Firm To the Board and Shareholders: AXP Fixed Income Series, Inc. RiverSource Diversified Bond Fund AXP Income Series, Inc. RiverSource Selective Fund We consent to the use of our reports incorporated herein by reference, the references to our Firm under the heading "Financial Highlights" in the prospectuses included or incorporated herein by reference and the references to our Firm under the heading "Independent Registered Public Accounting Firm" in the Statements of Additional Information incorporated herein by reference. We also consent to the references to our Firm in Section C of the combined proxy statement/prospectus being filed on Form N-14. /s/ KPMG LLP - -------------------------------- KPMG LLP Minneapolis, Minnesota December 5, 2005 EX-99.17C PROSPECTUS 4 ex17c_s6495-99.txt PROSPECTUS, DATED OCT. 28, 2005, FOR RIVERSOURCE DIVERSIFIED BOND FUND Prospectus (logo) RiverSource(SM Investments RiverSource(SM) Diversified Bond Fund Prospectus Oct. 28, 2005 > RiverSource Diversified Bond Fund (formerly AXP(R) Diversified Bond Fund) seeks to provide shareholders with a high level of current income while conserving the value of the investment for the longest period of time. As with all mutual funds, the Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense. You may qualify for sales charge discounts on purchases of Class A shares. Please notify your financial advisor or investment professional if you have other accounts holding shares of RiverSource funds to determine whether you qualify for a sales charge discount. See "Buying and Selling Shares" for more information. Not FDIC Insured o May Lose Value o No Bank Guarantee Table of Contents The Fund 3p Objective 3p Principal Investment Strategies 3p Principal Risks 4p Past Performance 5p Fees and Expenses 7p Other Investment Strategies and Risks 8p Fund Management and Compensation 10p Buying and Selling Shares 15p Transactions Through Unaffiliated Financial Intermediaries 15p Valuing Fund Shares 16p Investment Options 16p Purchasing Shares 18p Sales Charges 21p Exchanging/Selling Shares 26p Distributions and Taxes 29p Dividends and Capital Gain Distributions 29p Reinvestments 30p Taxes 30p Financial Highlights 31p CORPORATE REORGANIZATION On Sept. 30, 2005, Ameriprise Financial, Inc. (Ameriprise Financial) (formerly American Express Financial Corporation) was spun off to shareholders of its parent corporation, American Express Company (American Express), and is now a separate public company, trading under the ticker symbol AMP. Ameriprise Financial provides administrative services to the Fund and is the parent company of the Fund's investment manager, RiverSource Investments, LLC; the Fund's distributor, Ameriprise Financial Services, Inc. (formerly American Express Financial Advisors Inc.); and the Fund's transfer agent, RiverSource Service Corporation (formerly American Express Client Service Corporation). On Oct. 1, 2005, the Fund changed its name, such that it no longer is branded AXP(R). The Fund now bears the RiverSource(SM) brand. Ameriprise Financial and its subsidiaries are no longer affiliated with American Express. - -------------------------------------------------------------------------------- 2p --- RIVERSOURCE DIVERSIFIED BOND FUND --- 2005 PROSPECTUS The Fund OBJECTIVE RiverSource Diversified Bond Fund (the Fund) seeks to provide shareholders with a high level of current income while conserving the value of the investment for the longest period of time. Because any investment involves risk, achieving this objective cannot be guaranteed. PRINCIPAL INVESTMENT STRATEGIES Under normal market conditions, the Fund invests at least 80% of its net assets in bonds and other debt securities. At least 50% of the Fund's net assets will be invested in securities like those included in the Lehman Brothers Aggregate Bond Index (the Index), which are investment grade and denominated in U.S. dollars. The Index includes securities issued by the U.S. government, corporate bonds, and mortgage- and asset-backed securities. Although the Fund emphasizes high- and medium-quality debt securities, it will assume some credit risk to achieve higher yield and/or capital appreciation by buying lower-quality (junk) bonds. The Fund may invest up to 15% in foreign investments, which may include investments in emerging markets. The Fund will provide shareholders with at least 60 days' notice of any change in the 80% policy. The selection of debt obligations is the primary decision in building the investment portfolio. In pursuit of the Fund's objective, the investment manager (RiverSource Investments, LLC) chooses investments by: o Evaluating the portfolio's total exposure to sectors, industries and securities relative to the Index. o Analyzing factors such as credit quality, interest rate outlook and price to select the most attractive securities within each sector. o Investing in lower-quality (junk) bonds and foreign investments as attractive opportunities arise. o Targeting an average portfolio duration within one year of the duration of the Index which, as of Aug. 31, 2005, was 4.26 years. Duration measures the sensitivity of bond prices to changes in interest rates. The longer the duration of a bond, the longer it will take to repay the principal and interest obligations and the more sensitive it will be to changes in interest rates. For example, a five-year duration means a bond is expected to decrease in value by 5% if interest rates rise 1% and increase in value by 5% if interest rates fall 1%. In evaluating whether to sell a security, the investment manager considers, among other factors: o Identification of more attractive investments based on relative value. o The portfolio's total exposure to sectors, industries and securities relative to the Index. o Whether a security's rating has changed or is vulnerable to a change. o Whether a sector or industry is experiencing change. o Changes in the interest rate or economic outlook. - -------------------------------------------------------------------------------- 3p --- RIVERSOURCE DIVERSIFIED BOND FUND --- 2005 PROSPECTUS PRINCIPAL RISKS Please remember that with any mutual fund investment you may lose money. Principal risks associated with an investment in the Fund include: Active Management Risk. The Fund is actively managed and its performance therefore will reflect in part the ability of the portfolio managers to make investment decisions that are suited to achieving the Fund's investment objective. Due to its active management, the Fund could underperform other mutual funds with similar investment objectives. Credit Risk. The risk that the issuer of a security, or the counterparty to a contract, will default or otherwise become unable or unwilling to honor a financial obligation, such as payments due on a bond or a note. If the Fund purchases unrated securities, or if the rating of a security is reduced after purchase, the Fund will depend on the investment manager's analysis of credit risk more heavily than usual. Non-investment grade securities, commonly called "high-yield" or "junk" bonds, may react more to perceived changes in the ability of the issuing company to pay interest and principal when due than to changes in interest rates. Non-investment grade securities have greater price fluctuations and are more likely to experience a default than investment grade bonds. Interest Rate Risk. The risk of losses attributable to changes in interest rates. Interest rate risk is generally associated with bond prices: when interest rates rise, bond prices fall. In general, the longer the maturity or duration of a bond, the greater its sensitivity to changes in interest rates. Liquidity Risk. The risk associated from a lack of marketability of securities which may make it difficult or impossible to sell at desirable prices in order to minimize loss. The Fund may have to lower the selling price, sell other investments, or forego another, more appealing investment opportunity. Market Risk. The market value of securities may fall or fail to rise. Market risk may affect a single issuer, sector of the economy, industry, or the market as a whole. The market value of securities may fluctuate, sometimes rapidly and unpredictably. Prepayment and Extension Risk. The risk that a bond or other security might be called, or otherwise converted, prepaid, or redeemed, before maturity. This risk is primarily associated with asset-backed securities, including mortgage backed securities. If a security is converted, prepaid, or redeemed, before maturity, particularly during a time of declining interest rates, the investment manager may not be able to reinvest in securities providing as high a level of income, resulting in a reduced yield to the Fund. Conversely, as interest rates rise, the likelihood of prepayment decreases. The investment manager may be unable to capitalize on securities with higher interest rates because the Fund's investments are locked in at a lower rate for a longer period of time. - -------------------------------------------------------------------------------- 4p --- RIVERSOURCE DIVERSIFIED BOND FUND --- 2005 PROSPECTUS PAST PERFORMANCE The following bar chart and table provide some illustration of the risks of investing in the Fund by showing, respectively: o how the Fund's performance has varied for each full calendar year shown on the bar chart, and o how the Fund's average annual total returns compare to recognized indexes shown on the table. Both the bar chart and the table assume that all distributions have been reinvested. The performance of different classes varies because of differences in sales charges and other fees and expenses. How the Fund has performed in the past (before and after taxes) does not indicate how the Fund will perform in the future. Performance reflects any fee waivers/expense caps in effect for the periods reported. In the absence of such fee waivers/expense caps, performance would have been lower. See "Fee and Expenses" for any current fee waivers/expense caps. Bar Chart. Class A share information is shown in the bar chart; the sales charge for Class A shares is not reflected in the bar chart. Table. The table shows total returns from hypothetical investments in Class A, Class B, Class C and Class Y shares of the Fund. These returns are compared to the indexes shown for the same periods. Past performance for Class Y for the periods prior to March 20, 1995 may be calculated based on the performance of Class A, adjusted to reflect differences in sales charges, but not differences in annual Fund operating expenses. For purposes of the performance calculation in the table we assumed: o the maximum sales charge for Class A shares, o sales at the end of the period and deduction of the applicable contingent deferred sales charge (CDSC) for Class B and Class C shares, o no sales charge for Class Y shares, and o no adjustments for taxes paid by an investor on the reinvested income and capital gains. After-Tax Returns After-tax returns are shown only for Class A shares. After-tax returns for the other classes will vary. After-tax returns are calculated using the highest historical individual federal marginal income tax rate and do not reflect the impact of state and local taxes. Actual after-tax returns will depend on your tax situation and most likely will differ from the returns shown in the table. If you hold your shares in a tax-deferred account, such as a 401(k) plan or an IRA, the after-tax returns do not apply to you since you will not incur taxes until you begin to withdraw from your account. The return after taxes on distributions for a period may be the same as the return before taxes for the same period if there were no distributions or if the distributions were small. The return after taxes on distributions and sale of Fund shares for a period may be greater than the return before taxes for the same period if there was a tax loss realized on sale of Fund shares. The benefit of the tax loss (since it can be used to offset other gains) may result in a higher return. - -------------------------------------------------------------------------------- 5p --- RIVERSOURCE DIVERSIFIED BOND FUND --- 2005 PROSPECTUS [bar chart] CLASS A SHARE PERFORMANCE (based on calendar years) 22.02% 5.06% 9.94% 5.86% -0.22% 7.03% 7.33% 5.63% 4.61% 4.41% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 During the periods shown in the bar chart, the highest return for a calendar quarter was +7.79% (quarter ended June 30, 1995) and the lowest return for a calendar quarter was -2.53% (quarter ended June 30, 2004). The 4.75% sales charge applicable to Class A shares of the Fund is not reflected in the bar chart; if reflected, returns would be lower than those shown. The performance of other classes may vary from that shown because of differences in expenses. The Fund's Class A year-to-date return at Sept. 30, 2005 was +2.88%.
Average Annual Total Returns (for periods ended Dec. 31, 2004) Since Since 1 year 5 years 10 years inception (B&Y) inception (C) RiverSource Diversified Bond: Class A Return before taxes -0.55% +4.77% +6.51% N/A N/A Return after taxes on distributions -1.82% +2.77% +3.98% N/A N/A Return after taxes on distributions and sale of fund shares -0.37% +2.81% +3.98% N/A N/A Class B Return before taxes -1.39% +4.66% N/A +5.92%(a) N/A Class C Return before taxes +2.62% N/A N/A N/A +5.50%(b) Class Y Return before taxes +4.58% +5.96% N/A +6.88%(a) N/A Lehman Brothers Aggregate Bond Index (reflects no deduction for fees, expenses or taxes) +4.34% +7.71% +7.72% +7.38%(c) +7.66%(d) Lipper Intermediate Investment Grade Index +4.28% +7.33% +7.21% +6.91%(c) +7.40%(d)
(a) Inception date is March 20, 1995. (b) Inception date is June 26, 2000. (c) Measurement period started April 1, 1995. (d) Measurement period started July 1, 2000. - -------------------------------------------------------------------------------- 6p --- RIVERSOURCE DIVERSIFIED BOND FUND --- 2005 PROSPECTUS The Lehman Brothers Aggregate Bond Index, an unmanaged index, is made up of a representative list of government, corporate, asset-backed and mortgage-backed securities. The index is frequently used as a general measure of bond market performance. The index reflects reinvestment of all distributions and changes in market prices, but excludes brokerage commissions or other fees. The Lipper Intermediate Investment Grade Index includes the 30 largest investment grade funds tracked by Lipper Inc. The index's returns include net reinvested dividends. FEES AND EXPENSES Fund investors pay various expenses. The table below describes the fees and expenses that you may pay if you buy and hold shares of the Fund. Expenses are based on the Fund's most recent fiscal year, adjusted to reflect current fees.
Shareholder Fees (fees paid directly from your investment) Class A Class B Class C Class Y Maximum sales charge (load) imposed on purchases(a) (as a percentage of offering price) 4.75% none none none Maximum deferred sales charge (load) imposed on sales (as a percentage of offering price at time of purchase) none(b) 5% 1% none
Annual Fund Operating Expenses (expenses that are deducted from Fund assets) As a percentage of average daily net assets: Class A Class B Class C Class Y Management fees 0.50% 0.50% 0.50% 0.50% Distribution (12b-1) fees 0.25% 1.00% 1.00% 0.00% Other expenses(c) 0.29% 0.30% 0.31% 0.38% Total 1.04% 1.80% 1.81% 0.88% Fee waiver/expense reimbursement 0.15% 0.15% 0.15% 0.15% Net expenses(d) 0.89% 1.65% 1.66% 0.73% (a) This charge may be reduced depending on the value of your total investments in RiverSource funds. See "Sales Charges." (b) For Class A purchases over $1,000,000 on which no sales charge is assessed, a 1% sales charge may apply if you sell your shares within one year after purchase. (c) Other expenses include an administrative services fee, a transfer agency fee, a custody fee and other nonadvisory expenses and, for Class Y shares, a shareholder service fee. (d) The investment manager and its affiliates have contractually agreed to waive certain fees and to absorb certain expenses until Aug. 31, 2006 unless sooner terminated at the discretion of the Fund's Board. Any amounts waived will not be reimbursed by the Fund. Under this agreement, net expenses will not exceed 0.89% for Class A; 1.65% for Class B; 1.66% for Class C and 0.73% for Class Y. - -------------------------------------------------------------------------------- 7p --- RIVERSOURCE DIVERSIFIED BOND FUND --- 2005 PROSPECTUS Examples These examples are intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. These examples assume that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. These examples also assume that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 year 3 years 5 years 10 years Class A(a) $562 $776 $1,009 $1,677 Class B $668(b) $952(b) $1,162(b) $1,908(c) Class C $269(b) $555 $ 967 $2,119 Class Y $ 75 $266 $ 474 $1,075
(a) Includes a 4.75% sales charge. (b) Includes the applicable CDSC. (c) Based on conversion of Class B shares to Class A shares in the ninth year of ownership. You would pay the following expenses if you did not redeem your shares:
1 year 3 years 5 years 10 years Class A(a) $562 $776 $1,009 $1,677 Class B $168 $552 $ 962 $1,908(b) Class C $169 $555 $ 967 $2,119 Class Y $ 75 $266 $ 474 $1,075
(a) Includes a 4.75% sales charge. (b) Based on conversion of Class B shares to Class A shares in the ninth year of ownership. OTHER INVESTMENT STRATEGIES AND RISKS Other Investment Strategies. In addition to the principal investment strategies previously described, the Fund may invest in other securities and may use other investment strategies that are not principal investment strategies. Additionally, the Fund may use derivatives (financial instruments where the value depends upon, or is derived from, the value of something else) such as futures, options and forward contracts, to produce incremental earnings, to hedge existing positions or to increase flexibility. Just as with securities in which the Fund invests directly, derivatives are subject to a number of risks, including market, liquidity, interest rate and credit risk. In addition, a relatively small price movement in the underlying security, currency or index may result in a substantial gain or loss for the Fund using derivatives. Even though the Fund's policies permit the use of derivatives in this manner, the portfolio managers are not required to use derivatives. For more information on strategies and holdings, and the risks of such strategies, including other derivative instruments that the Fund may use, see the Fund's Statement of Additional Information (SAI) and its annual and semiannual reports. - -------------------------------------------------------------------------------- 8p --- RIVERSOURCE DIVERSIFIED BOND FUND --- 2005 PROSPECTUS Unusual Market Conditions. During unusual market conditions, the Fund may temporarily invest more of its assets in money market securities than during normal market conditions. Although investing in these securities would serve primarily to avoid losses, this type of investing also could prevent the Fund from achieving its investment objective. During these times, the portfolio managers may make frequent securities trades that could result in increased fees, expenses and taxes, and decreased performance. Portfolio Turnover. Trading of securities may produce capital gains, which are taxable to shareholders when distributed. Active trading may also increase the amount of commissions or mark-ups paid to broker-dealers that the Fund pays when it buys and sells securities. The Fund's historical portfolio turnover rate, which measures how frequently the Fund buys and sells investments, is shown in the "Financial Highlights." Securities Transaction Commissions. Securities transactions involve the payment by the Fund of brokerage commissions to broker-dealers, on occasion as compensation for research or brokerage services (commonly referred to as "soft dollars"), as the portfolio managers buy and sell securities for the Fund in pursuit of its objective. A description of the policies governing the Fund's securities transactions and the dollar value of brokerage commissions paid by the Fund are set forth in the SAI. The brokerage commissions set forth in the SAI do not include implied commissions or mark-ups (implied commissions) paid by the Fund for principal transactions (transactions made directly with a dealer or other counterparty), including most fixed income securities and certain derivatives. In addition, brokerage commissions do not reflect other elements of transaction costs, including the extent to which the Fund's purchase and sale transactions may cause the market to move and change the market price for an investment. Although brokerage commissions and implied commissions are not reflected in the expense table under "Fees and Expenses," they are reflected in the total return of the Fund. Directed Brokerage. The Fund's Board of Directors (Board) has adopted a policy prohibiting the investment manager, or any subadviser, from considering sales of shares of the Fund as a factor in the selection of broker-dealers through which to execute securities transactions. Additional information regarding securities transactions can be found in the SAI. - -------------------------------------------------------------------------------- 9p --- RIVERSOURCE DIVERSIFIED BOND FUND --- 2005 PROSPECTUS FUND MANAGEMENT AND COMPENSATION Investment Manager RiverSource Investments, LLC (the investment manager or RiverSource Investments), 200 Ameriprise Financial Center, Minneapolis, Minnesota 55474, is the investment manager to the RiverSource funds, and is a wholly-owned subsidiary of Ameriprise Financial, Inc. (Ameriprise Financial). Ameriprise Financial is a financial planning and financial services company that has been offering solutions for clients' asset accumulation, income management and protection needs for more than 110 years. In addition to managing investments for all of the RiverSource funds, RiverSource Investments manages investments for itself and its affiliates. For institutional clients, RiverSource Investments and its affiliates provide investment management and related services, such as separate account asset management, institutional trust and custody, and employee benefit plan administration, as well as other investment products. For all of its clients, RiverSource Investments seeks to allocate investment opportunities in an equitable manner over time. See the SAI for more information. The Fund pays RiverSource Investments a fee for managing its assets. Under the Investment Management Services Agreement (Agreement), the fee for the most recent fiscal year was 0.50% of the Fund's average daily net assets. Under the Agreement, the Fund also pays taxes, brokerage commissions, and nonadvisory expenses. A discussion regarding the basis for the Board approving the Agreement is available in the Fund's most recent shareholder report. Portfolio Manager(s). The portfolio managers responsible for the day-to-day management of the Fund are: Jamie Jackson, CFA, Portfolio Manager o Co-managed the Fund since 2003. o Leader of the liquid assets sector team. o Joined RiverSource Investments (previously American Express Financial Corporation (AEFC)) in 2003. o Co-head of U.S. Investment Grade Fixed Income, UBS Global Asset Management, 1997 to 2003. o Began investment career in 1988. o MBA, Marquette University. Scott Kirby, Portfolio Manager o Co-managed the Fund since 2003. o Leader of the structured assets sector team. o Employed by RiverSource Investments (previously AEFC) from 1979 to 1985 and from 1987 to the present. o Began investment career in 1979. o MBA, University of Minnesota. - -------------------------------------------------------------------------------- 10p --- RIVERSOURCE DIVERSIFIED BOND FUND --- 2005 PROSPECTUS Tom Murphy, CFA, Portfolio Manager o Co-managed the Fund since 2003. o Leader of the investment grade corporate bond sector team. o Joined RiverSource Investments (previously AEFC) in 2002. o Managing Director and Portfolio Manager, BlackRock Financial Management, 2002; various positions, Zurich Scudder, 1992 to 2002. o Began investment career in 1986. o MBA, University of Michigan. Nicholas Pifer, CFA, Portfolio Manager o Co-managed the Fund since 2003. o Leader of the global sector team. o Joined RiverSource Investments (previously AEFC) in 2000. o Fixed Income Portfolio Manager, Investment Advisers, Inc., 1997 to 2000. o Began investment career in 1990. o MA, Johns Hopkins University School of Advanced International Studies. Jennifer Ponce de Leon, Portfolio Manager o Co-managed the Fund since 2003. o Leader of the high yield sector team. o Joined RiverSource Investments (previously AEFC) in 1997. o Began investment career in 1989. o MBA, De Paul University. The fixed income department of RiverSource Investments is divided into six sector teams, each of which includes a portfolio manager or portfolio managers and several analysts, and each of which specializes in a specific sector of the fixed income market. The Fund's portfolio managers lead the teams that specialize in the sectors in which the Fund primarily invests, and collectively determine allocation of Fund assets among the sectors. The SAI provides additional information about portfolio manager compensation, management of other accounts and ownership of shares in the Fund. Additional Services and Compensation As described above, RiverSource Investments receives compensation for acting as the Fund's investment manager. RiverSource Investments and its affiliates also receive compensation for providing other services to the Fund. Administration Services. Ameriprise Financial, 200 Ameriprise Financial Center, Minneapolis, Minnesota 55474, provides or compensates others to provide administrative services to the RiverSource funds. These services include administrative, accounting, treasury, and other services. Fees paid by the Fund for these services are included under "Other expenses" in the expense table under "Fees and Expenses." - -------------------------------------------------------------------------------- 11p --- RIVERSOURCE DIVERSIFIED BOND FUND --- 2005 PROSPECTUS Custody Services. Ameriprise Trust Company, 200 Ameriprise Financial Center, Minneapolis, Minnesota 55474 (the custodian or Ameriprise Trust Company), provides custody services to all but a limited number of the RiverSource funds, including this Fund for which U.S. Bank National Association provides custody services. In addition, Ameriprise Trust Company is paid for certain transaction fees and out-of-pocket expenses incurred while providing services to the funds. Fees paid by the Fund for these services are included under "Other expenses" in the expense table under "Fees and Expenses." Distribution Services. Ameriprise Financial Services, Inc., 70100 Ameriprise Financial Center, Minneapolis, Minnesota 55474 (the distributor or Ameriprise Financial Services), provides underwriting and distribution services to the RiverSource funds. Under the Distribution Agreement and related distribution and shareholder servicing plan(s), the distributor receives distribution and shareholder servicing fees. The distributor pays a portion of these fees to financial advisors and retains a portion of these fees to support its distribution and shareholder servicing activity. For third party sales, the distributor re-allows a portion of these fees to the financial intermediaries that sell Fund shares and provide services to shareholders, and retains a portion of these fees to support its distribution and shareholder servicing activity. Fees paid by the Fund for these services are set forth under "Distribution (12b-1) fees" in the expense table under "Fees and Expenses." More information on how these fees are used is set forth under "Investment Options" and in the SAI. The distributor also administers any sales charges paid by an investor at the time of purchase or at the time of sale (deferred sales charge). See "Shareholder Fees (fees paid directly from your investment)" under "Fees and Expenses" for the scheduled sales charge of each share class. See "Buying and Selling Shares" for variations in the scheduled sales charges, and for how these sales charges are used by the distributor. See "Other Investment Strategies and Risks" for Fund policy regarding directed brokerage. Transfer Agency Services. RiverSource Service Corporation, 70100 Ameriprise Financial Center, Minneapolis, Minnesota 55474 (the transfer agent or RiverSource Service Corporation), provides or compensates others to provide transfer agency services to the RiverSource funds. The RiverSource funds pay the transfer agent a fee, which varies by share class, as set forth in the SAI and reimburses the transfer agent for its out-of-pocket expenses incurred while providing these transfer agency services to the funds. Fees paid by the Fund for these services are included under "Other expenses" in the expense table under "Fees and Expenses." RiverSource funds are primarily sold through Ameriprise Financial Services which is allocated a portion of these fees for providing services to Fund shareholders. RiverSource Service Corporation may also pay a portion of these fees to other financial intermediaries that provide sub-recordkeeping and other services to Fund shareholders. The SAI provides additional information about the services provided and the fee schedules for the agreements set forth above. - -------------------------------------------------------------------------------- 12p --- RIVERSOURCE DIVERSIFIED BOND FUND --- 2005 PROSPECTUS Payments to Financial Intermediaries RiverSource Investments and its affiliates may make additional cash payments out of their own resources to financial intermediaries, such as broker-dealers, banks, qualified plan administrators and recordkeepers, or other institutions, including inter-company allocation of resources to affiliated broker-dealers such as Ameriprise Financial Services (financial intermediaries) in connection with the sale of shares of the Fund and/or the provision of services to the Fund or its shareholders. These payments may create an incentive for the financial intermediary, its employees or registered representatives to recommend or sell shares of the Fund to its customers. These payments and inter-company allocations are in addition to any 12b-1 distribution and/or shareholder service fees or other amounts paid by the Fund under distribution or shareholder servicing plans, or paid by the Fund for shareholder account maintenance, sub-accounting or recordkeeping services provided directly by the financial intermediary providing such services. In exchange for these payments and inter-company allocations, RiverSource Investments and its affiliates may receive preferred access to registered representatives of a financial intermediary (for example, the ability to make presentations in branch offices or at conferences) or preferred access to customers of the financial intermediary (for example, the ability to advertise or directly interact with the financial intermediary's customers in order to sell the Fund). These arrangements are sometimes referred to as "revenue sharing payments." In some cases, these arrangements may create an incentive for a financial intermediary or its representatives to recommend or sell shares of a fund and may create a conflict of interest between a financial intermediary's financial interest and its duties to its customers. Please contact the financial intermediary through which you are purchasing shares of the Fund for details about any payments it may receive in connection with the sale of Fund shares or the provision of services to the Fund. These payments and inter-company allocations are usually calculated based on a percentage of fund sales, and/or as a percentage of fund assets attributable to a particular financial intermediary. These payments may also be negotiated based on other criteria or factors including, but not limited to, the financial intermediary's affiliation with the investment manager, its reputation in the industry, its ability to attract and retain assets, its access to target markets, its customer relationships and the scope and quality of services it provides. The amount of payment or inter-company allocation may vary by financial intermediary and by type of sale (e.g., purchases of different share classes or purchases of the Fund through a qualified plan or through a wrap program), and may be significant. From time to time, RiverSource Investments and its affiliates may make other payments, including non-cash compensation, to financial intermediaries or their representatives in the form of gifts of nominal value, occasional meals, tickets, or other entertainment, support for due diligence trips, training and educational meetings or conference sponsorships, support for recognition programs, and other forms of non-cash compensation permissible under regulations to which these financial intermediaries and their representatives are subject. - -------------------------------------------------------------------------------- 13p --- RIVERSOURCE DIVERSIFIED BOND FUND --- 2005 PROSPECTUS Additional Management Information Manager of Manager Exemption. The Fund has received an order from the Securities and Exchange Commission that permits the investment manager, subject to the approval of the Board, to appoint a subadviser or change the terms of a subadvisory agreement for the Fund without first obtaining shareholder approval. Before the Fund may rely on the order, holders of a majority of the Fund's outstanding voting securities will need to approve operating the Fund in this manner. If shareholder approval is received, the Fund may add or change unaffiliated subadvisers or the fees paid to subadvisers from time to time without the expense and delays associated with obtaining shareholder approval of the change. There is no assurance shareholder approval will be received, and no changes will be made without shareholder approval until that time. Affiliated Funds-of-Funds. RiverSource Investments also serves as investment manager to the RiverSource Portfolio Builder Funds (Portfolio Builder Funds), a group of six funds-of-funds that provide asset-allocation services to shareholders by investing in shares of other RiverSource funds, including the Fund. The Fund may experience relatively large purchases or redemptions from the Portfolio Builder Funds. Although RiverSource Investments seeks to minimize the impact of these transactions by structuring them over a reasonable period of time, the Fund may experience increased expenses as it buys and sells securities to manage transactions for the Portfolio Builder Funds. In addition, because the Portfolio Builder Funds may own a substantial portion of the Fund, a redemption by the Portfolio Builder Funds could cause the Fund's expense ratio to increase as the Fund's fixed costs would be spread over a smaller asset base. RiverSource Investments monitors expense levels and is committed to offering funds that are competitively priced. RiverSource Investments will report to the Fund's Board on the steps it has taken to manage any potential conflicts. Fund Holdings Disclosure. The Fund's Board has adopted policies and procedures that govern the timing and circumstances of disclosure to shareholders and third parties of information regarding the securities owned by the Fund. A description of these policies and procedures is included in the Fund's SAI. - -------------------------------------------------------------------------------- 14p --- RIVERSOURCE DIVERSIFIED BOND FUND --- 2005 PROSPECTUS Buying and Selling Shares TRANSACTIONS THROUGH UNAFFILIATED FINANCIAL INTERMEDIARIES Where authorized by the distributor, shares of the Fund may be available through certain 401(k) or other qualified plans, banks, broker-dealers or other institutions (financial intermediaries). These financial intermediaries may charge you additional fees for the services they provide and they may have different policies not described in this prospectus. Some policy differences may include different minimum investment amounts, exchange privileges, fund choices and cutoff times for investments. Additionally, recordkeeping, transaction processing and payments of distributions relating to your account may be performed by the financial intermediaries or their representatives through whom shares are held. Since the Fund may not have a record of your transactions, you should always contact the financial intermediary through whom you purchased the Fund to make changes to or give instructions concerning your account or to obtain information about your account. The Fund and the distributor are not responsible for the failure of one of these financial intermediaries to carry out its obligations to its customers. Availability and Transferability of Fund Shares. Please consult your investment professional or financial intermediary to determine availability of the Fund. Currently, RiverSource funds may be purchased or sold through affiliated broker-dealers of RiverSource Investments, including Ameriprise Financial Services and Securities America, Inc. (Securities America), and through a limited number of unaffiliated institutions. If you set up an account at another financial intermediary, you will not be able to transfer RiverSource fund holdings to that account unless that institution has obtained a selling agreement with the distributor of the RiverSource funds. If you set up an account with an unaffiliated financial intermediary that does not have, and is unable to obtain, such a selling agreement, you must either maintain your position with Ameriprise Financial Services or Securities America, find another financial intermediary with such a selling agreement, or sell your shares, paying any applicable deferred sales charge. Please be aware that transactions in taxable accounts would generate a taxable event and may result in an increased income tax liability. For more information, please call RiverSource Service Corporation at (888) 791-3380. The public offering price for Class A shares of the Fund is the net asset value (NAV) plus a sales charge, and for Class B, C, and Y shares, the NAV. Orders in good form are priced at the NAV next determined after you place your order. Good form or good order means that your instructions have been received in the form required by the distributor. This may include, for example, providing the fund name and account number, the amount of the transaction and all required signatures. For more information, refer to the sections on "Purchasing Shares" and "Exchanging/Selling Shares," or contact your financial advisor or investment professional. If you buy or sell shares through an authorized financial intermediary, consult that firm to determine its procedures for accepting and processing orders. The financial intermediary may charge a fee for its services. - -------------------------------------------------------------------------------- 15p --- RIVERSOURCE DIVERSIFIED BOND FUND --- 2005 PROSPECTUS VALUING FUND SHARES The NAV is the value of a single share of the Fund. The NAV is determined by dividing the value of the Fund's assets, minus any liabilities, by the number of shares outstanding. The NAV is calculated as of the close of business on the New York Stock Exchange (NYSE), normally 4:00 p.m. Eastern time, on each day that the NYSE is open. The Fund's securities are valued primarily on the basis of market quotations obtained from outside pricing services approved and monitored under procedures adopted by the Board. Certain short-term securities with maturities of 60 days or less are valued at amortized cost. When reliable market quotations are not readily available, securities are priced at fair value based on procedures adopted by the Board. These procedures are also used when the value of a security held by the Fund is materially affected by events that occur after the close of the primary market on which the security is traded but prior to the time as of which the Fund's NAV is determined. Valuing securities at fair value involves reliance on judgment. The fair value of a security is likely to differ from any available quoted or published price. To the extent that the Fund has significant holdings of high yield securities that may trade infrequently, fair valuation may be used more frequently than for other funds. Foreign investments are valued in U.S. dollars. Some of the Fund's securities may be listed on foreign exchanges that trade on weekends or other days when the Fund does not price its shares. In that event, the NAV of the Fund's shares may change on days when shareholders will not be able to purchase or sell the Fund's shares. INVESTMENT OPTIONS 1. Class A shares are sold to the public with a sales charge at the time of purchase and an annual distribution and shareholder servicing (12b-1) fee of 0.25%. 2. Class B shares are sold to the public with a contingent deferred sales charge (CDSC) and an annual distribution and shareholder servicing (12b-1) fee of 1.00%. 3. Class C shares are sold to the public without a sales charge at the time of purchase and with an annual distribution and shareholder servicing (12b-1) fee of 1.00%. Class C shares redeemed within one year after purchase may be subject to a CDSC. 4. Class Y shares are sold to qualifying institutional investors without a sales charge or distribution fee, but with a separate shareholder servicing fee of 0.10%. Please see the SAI for information on eligibility requirements to purchase Class Y shares. The distribution and shareholder servicing fees for Class A, Class B and Class C shares are subject to the requirements of Rule 12b-1 under the Investment Company Act of 1940, as amended, and are used to reimburse the distributor for certain expenses it incurs in connection with distributing the Fund's shares and providing services to Fund shareholders. These expenses include payment of distribution and shareholder servicing fees to financial intermediaries that sell shares of the Fund. Financial intermediaries receive shareholder servicing fees equal to 0.25% of the average daily net assets of Class A, Class B and Class C shares sold and held through them. For Class A and Class B shares, the distributor begins to pay these fees immediately after purchase. For Class C shares, the distributor begins to pay these fees one year after purchase. Financial intermediaries also receive distribution fees equal to 0.75% of the average daily net assets of Class C shares sold and held through them, which the distributor - -------------------------------------------------------------------------------- 16p --- RIVERSOURCE DIVERSIFIED BOND FUND --- 2005 PROSPECTUS begins to pay one year after purchase. For Class B shares, the Fund's distributor retains the 0.75% distribution fee in order to finance the payment of sales commissions to financial intermediaries that sell Class B shares, and to pay for other distribution related expenses. Financial intermediaries may compensate their financial advisors and investment professionals with the shareholder servicing and distribution fees paid to them by the distributor. The shareholder servicing fees for Class Y shares are used to reimburse the distributor for providing services and assistance to shareholders regarding ownership of their shares or their accounts. The Fund also offers an additional class of shares, Class I, exclusively to certain institutional investors. Class I shares are made available through a separate prospectus supplement provided to investors eligible to purchase the shares. Investment options summary The Fund offers different classes of shares. There are differences among the fees and expenses for each class. Not everyone is eligible to buy every class. After determining which classes you are eligible to buy, decide which class best suits your needs. Your financial advisor or investment professional can help you with this decision. The following table shows the key features of each class: Class A Class B Class C Class Y - ------------------- --------------- --------------- -------------- ------------- Availability Available to Available to Available to Limited to all all all qualifying investors. investors. investors. institutional investors. - ------------------- --------------- --------------- -------------- ------------- Initial Sales Yes. Payable No. Entire No. Entire No. Entire Charge at time of purchase purchase purchase purchase. price is price is price is Lower sales invested in invested in invested in charge for shares of the shares of shares of the larger Fund. the Fund. Fund. investments. - ------------------- --------------- --------------- -------------- ------------- Deferred Sales On purchases Maximum 5% 1% CDSC may None. Charge over CDSC during apply if $1,000,000, the first you sell 1% CDSC may year your shares apply if you decreasing to within one sell your 0% after six year after shares within years. purchase. one year after purchase. - ------------------- --------------- --------------- -------------- ------------- 12b-1 Yes. 0.25% Yes. 1.00% Yes. 1.00% Yes. 0.10% Distribution Fee and/or Shareholder Service Fee* - ------------------- --------------- --------------- -------------- ------------- Conversion to N/A Yes, No. No. Class A automatically in ninth year of ownership. - ------------------- --------------- --------------- -------------- ------------- * The Fund has adopted a plan under Rule 12b-1 of the Investment Company Act of 1940, as amended, that allows it to pay distribution and shareholder servicing-related expenses for the sale of Class A, Class B and Class C shares. The Fund has also adopted a separate shareholder servicing plan to pay for servicing-related expenses related to Class Y shares. Because these fees are paid out of the Fund's assets on an on-going basis, over time, these fees will increase the cost of your investment and may cost you more than paying other types of distribution (sales) or servicing charges. - -------------------------------------------------------------------------------- 17p --- RIVERSOURCE DIVERSIFIED BOND FUND --- 2005 PROSPECTUS Should you purchase Class A, Class B or Class C shares? If your investments in RiverSource funds total $100,000 or more, Class A shares may be the better option because the sales charge is reduced for larger purchases. If you qualify for a waiver of the sales charge, Class A shares will be the best option. If you invest less than $100,000, consider how long you plan to hold your shares. Class B shares have a higher annual distribution fee than Class A shares and a CDSC for six years. Class B shares convert to Class A shares in the ninth year of ownership. Class B shares purchased through reinvested dividends and distributions also will convert to Class A shares in the same proportion as the other Class B shares. Class C shares also have a higher annual distribution fee than Class A shares. Class C shares have no sales charge if you hold the shares for longer than one year. Unlike Class B shares, Class C shares do not convert to Class A. As a result, you will pay a 1% distribution fee for as long as you hold Class C shares. If you choose a deferred sales charge option (Class B or Class C), you should consider the length of time you intend to hold your shares. To help you determine which investment is best for you, consult your financial advisor or investment professional. For more information, see the SAI. PURCHASING SHARES Financial intermediaries are required by law to obtain certain personal information from each person who opens an account in order to verify the identity of the person. As a result, when you open an account you will be asked to provide your name, permanent street address, date of birth, and Social Security or Employer Identification number. You may also be asked for other identifying documents or information. If you do not provide this information, the Fund, or the financial intermediary through which you are investing in the Fund, may not be able to open an account for you. If the Fund or if the financial intermediary through which you are investing in the Fund is unable to verify your identity, your account may be closed, or other steps may be taken, as deemed appropriate. To purchase shares with a financial intermediary other than Ameriprise Financial Services, please consult your financial intermediary. See "Transactions Through Unaffiliated Financial Intermediaries" for more information. The following section explains policies of the RiverSource funds and how you can purchase Fund shares from Ameriprise Financial Services. If you do not have an existing RiverSource fund account with Ameriprise Financial Services, you will need to establish a brokerage account. Your financial advisor or investment professional will help you fill out and submit an application. Once your account is set up, you can choose among several convenient ways to invest. When you purchase, your order will be priced at the next NAV calculated after your order is accepted by the Fund. If your application does not specify which class of shares you are purchasing, we will assume you are investing in Class A shares. Important: When you open an account, you must provide your correct Taxpayer Identification Number (TIN), which is either your Social Security or Employer Identification number. - -------------------------------------------------------------------------------- 18p --- RIVERSOURCE DIVERSIFIED BOND FUND --- 2005 PROSPECTUS If you do not provide and certify the correct TIN, you could be subject to backup withholding of 28% of taxable distributions and proceeds from certain sales and exchanges. You also could be subject to further penalties, such as: o a $50 penalty for each failure to supply your correct TIN, o a civil penalty of $500 if you make a false statement that results in no backup withholding, and o criminal penalties for falsifying information. You also could be subject to backup withholding, if the IRS notifies us to do so, because you failed to report required interest or dividends on your tax return. How to determine the correct TIN For this type of account: Use the Social Security or Employer Identification number of: - ------------------------------------ ------------------------------------------ Individual or joint account The individual or one of the owners listed on the joint account - ------------------------------------ ------------------------------------------ Custodian account of a minor The minor (Uniform Gifts/Transfers to Minors Act) - ------------------------------------ ------------------------------------------ A revocable living trust The grantor-trustee (the person who puts the money into the trust) - ------------------------------------ ------------------------------------------ An irrevocable trust, pension The legal entity (not the personal trust or estate representative or trustee, unless no legal entity is designated in the account title) - ------------------------------------ ------------------------------------------ Sole proprietorship or The owner single-owner LLC - ------------------------------------ ------------------------------------------ Partnership or multi-member LLC The partnership - ------------------------------------ ------------------------------------------ Corporate or LLC electing The corporation corporate status on Form 8832 - ------------------------------------ ------------------------------------------ Association, club or tax-exempt The organization organization - ------------------------------------ ------------------------------------------ For details on TIN requirements, contact your financial advisor or investment professional to obtain a copy of Form W-9, "Request for Taxpayer Identification Number and Certification." You also may obtain the form on the Internet at www.irs.gov. - -------------------------------------------------------------------------------- 19p --- RIVERSOURCE DIVERSIFIED BOND FUND --- 2005 PROSPECTUS Methods of purchasing shares By mail Once your account has been established, send your check to: Ameriprise Financial Services 70200 Ameriprise Financial Center Minneapolis, MN 55474 Minimum amounts Initial investment: $2,000* Additional investments: $500** Account balances: $300 Qualified account balances: none If your Fund account balance falls below $300 for any reason, including a market decline, you will be asked to increase it to $300 or establish a scheduled investment plan. If you do not do so within 30 days, your shares may be automatically redeemed and the proceeds mailed to you. * $1,000 for tax qualified accounts. ** $100 minimum add-on for existing mutual fund accounts outside of a brokerage account. By scheduled investment plan Minimum amounts Initial investment: $2,000* Additional investments: $100** Account balances: none (on a scheduled investment plan with monthly payments) If your Fund account balance is below $2,000, you must make payments at least monthly. * $100 for accounts outside of a brokerage account. ** $50 minimum per payment for qualified accounts outside of a brokerage account. By wire or electronic funds transfer Please contact your financial advisor or investment professional for specific instructions. Minimum wire purchase amount: $1,000 or new account minimum, as applicable. By telephone If you have a brokerage account, you may use the money in your account to make initial and subsequent purchases. To place your order, call: (800) 297-7378 for brokerage accounts (800) 967-4377 for wrap accounts - -------------------------------------------------------------------------------- 20p --- RIVERSOURCE DIVERSIFIED BOND FUND --- 2005 PROSPECTUS SALES CHARGES Class A -- initial sales charge alternative Your purchase price for Class A shares is generally the NAV plus a front-end sales charge. Sales charges vary depending on the amount of your purchase. The distributor receives the sales charge and re-allows a portion of the sales charge to the financial intermediary through which you purchased the shares. The distributor retains the balance of the sales charge. Sales charge* for Class A shares:
Maximum As a % of As a % of re-allowance as a Total market value purchase price** net amount invested % of purchase price Up to $49,999 4.75% 4.99% 4.00% $50,000-$99,999 4.25 4.44 3.50 $100,000-$249,999 3.50 3.63 3.00 $250,000-$499,999 2.50 2.56 2.15 $500,000-$999,999 2.00 2.04 1.75 $1,000,000 or more*** 0.00 0.00 0.00
* Because of rounding in the calculation of the offering price, the portion of the sales charge retained by the distributor may vary and the actual sales charge you pay may be more or less than the sales charge calculated using these percentages. ** Offering price includes the sales charge. *** Although there is no sales charge for purchases with a total market value over $1,000,000, and therefore no re-allowance, the distributor may pay a sales commission to a financial intermediary making a sale with a total market value of $1,000,000 to $3,000,000, a sales commission up to 1.00%; $3,000,000 to $10,000,000, a sales commission up to 0.50%; and $10,000,000 or more, a sales commission up to 0.25%. Rights of Accumulation You may be able to reduce the sales charge on Class A shares, based on the combined market value of your accounts. The current market values of the following investments are eligible to be added together for purposes of determining the sales charge on your purchase: o Your current investment in this Fund, and o Previous investments you and members of your primary household group have made in Class A, Class B or Class C shares in this and other RiverSource funds, provided your investment was subject to a sales charge. o Your primary household group consists of you, your spouse or domestic partner, and your unmarried children under age 21 sharing a mailing address. For purposes of this policy a domestic partner is an individual who shares your primary residence and with whom you own joint property. If you or any member of your primary household group elects to separate from the primary household group (for example, by asking that account statements be sent to separate addresses), your assets will no longer be combined for purposes of reducing your sales charge. - -------------------------------------------------------------------------------- 21p --- RIVERSOURCE DIVERSIFIED BOND FUND --- 2005 PROSPECTUS The following accounts are eligible to be included in determining the sales charge on your purchase: o Individual or joint accounts held outside of a brokerage account; o Individual or joint accounts held through a brokerage account; o Roth and traditional IRAs, SEPs, SIMPLEs and TSCAs, provided they are invested in Class A, Class B or Class C shares that are subject to a sales charge; o UGMA/UTMA accounts for which you, your spouse, or your domestic partner is parent or guardian of the minor child; o Revocable trust accounts for which you or a member of your primary household group, individually, is the beneficiary; o Accounts held in the name of your, your spouse's, or your domestic partner's sole proprietorship or single owner limited liability company or S corporation; and o Qualified retirement plan assets, provided that you are the sole owner of the business sponsoring the plan, are the sole participant (other than a spouse) in the plan, and have no intention of adding participants to the plan. The following accounts are not eligible to be included in determining the sales charge on your purchase: o Accounts of pension and retirement plans with multiple participants, such as 401(k) plans (which are combined to reduce the sales charge for the entire pension or retirement plan and therefore are not used to reduce the sales charge for your individual accounts); o Investments in Class A shares where the sales charge is waived, for example, purchases through wrap accounts, including Ameriprise Strategic Portfolio Service Advantage (SPS); o Investments in Class D, Class E, or Class Y shares; o Investments in 529 plans, donor advised funds, variable annuities, variable life insurance products, wrap accounts or managed separate accounts; and o Charitable and irrevocable trust accounts. If you purchase RiverSource fund shares through different channels or different financial intermediaries, and you want to include those assets toward a reduced sales charge, you must inform Ameriprise Financial Services, your financial advisor or investment professional in writing about the other accounts when placing your purchase order. When placing your purchase order, you must provide your most recent account statement and contact information regarding the other accounts. A financial intermediary other than Ameriprise Financial Services may require additional information. Unless you provide Ameriprise Financial Services, your financial advisor or your investment professional in writing with information about all of the accounts that may count toward a sales charge reduction, there can be no assurance that you will receive all of the reductions for which you may be eligible. For more information on rights of accumulation, please see the SAI. - -------------------------------------------------------------------------------- 22p --- RIVERSOURCE DIVERSIFIED BOND FUND --- 2005 PROSPECTUS Letter of Intent (LOI) Generally, if you intend to invest $50,000 or more over a period of 13 months, you may be able to reduce the front-end sales charges for investments in Class A shares by completing and filing a LOI form. The LOI becomes effective only after the form is processed in good order by the distributor. An LOI can be backdated up to a maximum of 90 days. If the LOI is backdated, you may include prior investments in Class A shares that were charged a front-end sales load toward the LOI commitment amount. If the LOI is backdated, the 13 month period begins on the date of the earliest purchase included in the LOI. Holdings More than 90 Days Old. Purchases made more than 90 days before your LOI is processed by the distributor will not be counted towards the commitment amount of the LOI and cannot be used as the starting point for the LOI. While these purchases cannot be included in an LOI, they may help you obtain a reduced sales charge on future purchases as described in "Rights of Accumulation." Notification Obligation. If purchasing shares in a brokerage account or through a financial intermediary, you must request the reduced sales charge when you buy shares. If you do not complete and file the LOI form, or do not request the reduced sales charge at the time of purchase, you will not be eligible for the reduced sales charge. For more details on LOIs, please contact your financial advisor, investment professional or see the SAI. Waivers of the sales charge for Class A shares Sales charges do not apply to: o current or retired Board members, officers or employees of the Fund or Ameriprise Financial or its subsidiaries, their spouses or domestic partners, children and parents. o current or retired Ameriprise Financial Services financial advisors, employees of financial advisors, their spouses or domestic partners, children and parents. o portfolio managers employed by subadvisers of the RiverSource funds, including their spouses or domestic partners, children and parents. o registered representatives and other employees of financial intermediaries having a sub-distribution agreement with the distributor, including their spouses, domestic partners, children and parents. o qualified employee benefit plans offering participants daily access to RiverSource funds. Eligibility must be determined in advance. For assistance, please contact your financial advisor or investment professional. Participants in certain qualified plans where the initial sales charge is waived may be subject to a deferred sales charge of up to 4%. o shareholders who have at least $1 million in RiverSource funds. If the investment is sold within one year after purchase, a CDSC of 1% may be charged. o direct rollovers from Ameriprise Retirement Services, provided that the rollover involves a transfer of Class Y shares in this Fund to Class A shares in this Fund. o purchases made: o with dividend or capital gain distributions from this Fund or from the same class of another RiverSource fund, - -------------------------------------------------------------------------------- 23p --- RIVERSOURCE DIVERSIFIED BOND FUND --- 2005 PROSPECTUS o through or under a wrap fee product or other investment product sponsored by the distributor or another authorized broker-dealer, investment advisor, bank or investment professional, o within a segregated separate account offered by Nationwide Life Insurance Company or Nationwide Life and Annuity Insurance Company, o through American Express Personal Trust Services' Asset-Based pricing alternative, provided by American Express Bank, FSB. o shareholders whose original purchase was in a Strategist fund merged into a RiverSource fund in 2000. Policies related to reducing or waiving the sales charge may be modified or withdrawn at any time. Unless you provide Ameriprise Financial Services, your financial advisor or investment professional with information in writing about all of the factors that may count toward a waiver of the sales charge, there can be no assurance that you will receive all of the waivers for which you may be eligible. You also may view this information about sales charges and breakpoints free of charge on the Fund's website. Go to www.riversource.com/investments and click on the hyperlink "Sales Charge Discount Information." Class B and Class C -- contingent deferred sales charge (CDSC) alternative For Class B, the CDSC is based on the sale amount and the number of years -- including the year of purchase -- between purchase and sale. The following table shows how CDSC percentages on sales decline: If the sale is made during the: The CDSC percentage rate is:* First year 5% Second year 4% Third year 4% Fourth year 3% Fifth year 2% Sixth year 1% Seventh year 0% * Because of rounding in the calculation, the portion of the CDSC retained by the distributor may vary and the actual CDSC you pay may be more or less than the CDSC calculated using these percentages. Although there is no front-end sales charge when you buy Class B shares, the distributor pays a sales commission of 4% to financial intermediaries that sell Class B shares. A portion of this commission may, in turn, be paid to your financial advisor. The distributor receives any CDSC imposed when you sell your Class B shares. Purchases made prior to May 21, 2005 age on a calendar year basis. Purchases made beginning May 21, 2005 age on a daily basis. For example, a purchase made on Nov. 12, 2004 will complete its first year on Dec. 31, 2004 under calendar year aging. However, a purchase made on Nov. 12, 2005 will complete its first year on Nov. 11, 2006 under daily aging. - -------------------------------------------------------------------------------- 24p --- RIVERSOURCE DIVERSIFIED BOND FUND --- 2005 PROSPECTUS For Class B shares purchased prior to May 21, 2005, those shares will convert to Class A shares in the ninth calendar year of ownership. For Class B shares purchased beginning May 21, 2005, those shares will convert to Class A shares one month after the completion of the eighth year of ownership. For Class C, a 1% CDSC may be charged if you sell your shares within one year after purchase. Although there is no front-end sales charge when you buy Class C shares, the distributor pays a sales commission of 1% to financial intermediaries that sell Class C shares. A portion of this commission may, in turn, be paid to your financial advisor. The distributor receives any CDSC imposed when you sell your Class C shares. For both Class B and Class C, if the amount you sell causes the value of your investment to fall below the cost of the shares you have purchased, the CDSC will be based on the lower of the cost of those shares purchased or market value. Because the CDSC is imposed only on sales that reduce your total purchase payments, you do not have to pay a CDSC on any amount that represents appreciation in the value of your shares, income earned by your shares, or capital gains. In addition, the CDSC on your sale, if any, will be based on your oldest purchase payment. The CDSC on the next amount sold will be based on the next oldest purchase payment. Example Assume you had invested $10,000 in Class B shares and that your investment had appreciated in value to $12,000 after 3 1/2 years, including reinvested dividends and capital gain distributions. You could sell up to $2,000 worth of shares without paying a CDSC ($12,000 current value less $10,000 purchase amount). If you sold $2,500 worth of shares, the CDSC would apply to the $500 representing part of your original purchase price. The CDSC rate would be 3% because the sale was made during the fourth year after the purchase. Waivers of the CDSC for Class B shares The CDSC will be waived on sales of shares: o in the event of the shareholder's death, o held in trust for an employee benefit plan, or o held in IRAs or certain qualified plans if Ameriprise Trust Company is the custodian, such as Keogh plans, tax-sheltered custodial accounts or corporate pension plans, provided that the shareholder is: o at least 59 1/2 years old AND o taking a retirement distribution (if the sale is part of a transfer to an IRA or qualified plan, or a custodian-to-custodian transfer, the CDSC will not be waived) OR o selling under an approved substantially equal periodic payment arrangement. Waivers of the CDSC for Class C shares The CDSC will be waived on sales of shares in the event of the shareholder's death. - -------------------------------------------------------------------------------- 25p --- RIVERSOURCE DIVERSIFIED BOND FUND --- 2005 PROSPECTUS EXCHANGING/SELLING SHARES To sell or exchange shares held with financial intermediaries other than Ameriprise Financial Services, please consult your financial intermediary. See "Transactions Through Unaffiliated Financial Intermediaries" for more information. The following section explains policies of the RiverSource funds on how you can exchange or sell shares held with Ameriprise Financial Services. Exchanges You may exchange your Fund shares at no charge for shares of the same class of any other publicly offered RiverSource fund. Exchanges into RiverSource Tax-Exempt Money Market Fund may only be made from Class A shares. For complete information on the other fund, including fees and expenses, read that fund's prospectus carefully. Your exchange will be priced at the next NAV calculated after your transaction request is received in good order. Market timing is frequent or short-term trading by certain shareholders intended to profit at the expense of other shareholders by selling shares of a fund shortly after purchase. Market timing may adversely impact a fund's performance by preventing the investment manager from fully investing the assets of the fund, diluting the value of shares held by long-term shareholders, or increasing the fund's transaction costs. Funds that invest in securities which trade infrequently may be vulnerable to market timers who seek to take advantage of inefficiencies in the securities markets. To the extent that the Fund has significant holdings of high yield securities, the risks of market timing may be greater for the Fund than for other funds. See "Principal Investment Strategies" for a discussion of the kinds of securities in which the Fund invests. See "Valuing Fund Shares" for a discussion of the Fund's policy on fair value pricing, which is intended, in part, to reduce the frequency and effect of market timing. The Fund's Board has adopted a policy that is designed to detect and deter market timing. The Fund seeks to enforce this policy as follows: o The Fund tries to distinguish market timing from trading that it believes is not harmful, such as periodic rebalancing for purposes of asset allocation or dollar cost averaging. Under the Fund's procedures, there is no set number of transactions in the Fund that constitutes market timing. Even one purchase and subsequent sale by related accounts may be market timing. Generally, the Fund seeks to restrict the exchange privilege of an investor who makes more than three exchanges into or out of the Fund in any 90-day period. Accounts held by a retirement plan or an institution for the benefit of its participants or clients, which typically engage in daily transactions, are not subject to this limit. The Fund seeks the assistance of financial intermediaries in applying similar restrictions on the sub-accounts of their participants or clients. o If an investor's trading activity is determined to be market timing or otherwise harmful to existing shareholders, the Fund reserves the right to modify or discontinue the investor's exchange privilege or reject the investor's purchases or exchanges, including purchases or exchanges accepted by a financial intermediary. The Fund may treat accounts it believes to be under common control as a single account for these purposes, although it may not be able to identify all such accounts. - -------------------------------------------------------------------------------- 26p --- RIVERSOURCE DIVERSIFIED BOND FUND --- 2005 PROSPECTUS o Although the Fund does not knowingly permit market timing, it cannot guarantee that it will be able to identify and restrict all short-term trading activity. The Fund receives purchase and sale orders through financial intermediaries where market timing activity may not always be successfully detected. Other exchange policies: o Exchanges must be made into the same class of shares of the new fund. o If your exchange creates a new account, it must satisfy the minimum investment amount for new purchases. o Once we receive your exchange request, you cannot cancel it. o Shares of the new fund may not be used on the same day for another exchange. o If your shares are pledged as collateral, the exchange will be delayed until written approval is received from the secured party. Selling Shares You may sell your shares at any time. The payment will be mailed within seven days after your request is received in good order. When you sell shares, the amount you receive may be more or less than the amount you invested. Your sale price will be the next NAV calculated after your request is received in good order, minus any applicable CDSC. Repurchases. You can change your mind after requesting a sale and use all or part of the proceeds to purchase new shares in the same account from which you sold. If you reinvest in Class A, you will purchase the new shares at NAV rather than the offering price on the date of a new purchase. If you reinvest in Class B or Class C, any CDSC you paid on the amount you are reinvesting also will be reinvested. To take advantage of this waiver, you must send a written request within 90 days of the date your sale request was processed and include your account number. This privilege may be limited or withdrawn at any time and use of this option may have tax consequences. The Fund reserves the right to redeem in kind. For more details and a description of other sales policies, please see the SAI. If you decide to sell your shares within 30 days of a telephoned-in address change, a written request is required. Important: Payments sent by a bank authorization, check or money order that are not guaranteed may take up to ten days to clear. This may cause your scheduled arrangement or unscheduled request to fail to process if the requested amount includes unguaranteed funds. - -------------------------------------------------------------------------------- 27p --- RIVERSOURCE DIVERSIFIED BOND FUND --- 2005 PROSPECTUS Ways to request an exchange or sale of shares By regular or express mail Ameriprise Financial Services 70200 Ameriprise Financial Center Minneapolis, MN 55474 Include in your letter: o your account number o the name of the fund(s) o the class of shares to be exchanged or sold o your Social Security number or Employer Identification number o the dollar amount or number of shares you want to exchange or sell o specific instructions regarding delivery or exchange destination o signature(s) of registered account owner(s) (All signatures may be required. Contact your financial advisor or Ameriprise Financial Services for more information.) o any paper certificates of shares you hold Payment will be mailed to the address of record and made payable to the names listed on the account, unless your request specifies differently and is signed by all owners. The express mail delivery charges you pay will vary depending on domestic or international delivery instructions. By telephone (800) 297-7378 for brokerage accounts (800) 967-4377 for wrap accounts (800) 862-7919 for non-brokerage/wrap accounts o Reasonable procedures will be used to confirm authenticity of telephone exchange or sale requests. o Telephone exchange and sale privileges automatically apply to all accounts except custodial, corporate or qualified retirement accounts. You may request that these privileges NOT apply by writing the distributor. Each registered owner must sign the request. o Acting on your instructions, your financial advisor may conduct telephone transactions on your behalf. o Telephone privileges may be modified or discontinued at any time. Minimum sale amount: $100 Maximum sale amount: $100,000 - -------------------------------------------------------------------------------- 28p --- RIVERSOURCE DIVERSIFIED BOND FUND --- 2005 PROSPECTUS By wire You can wire money from your account to your bank account. Contact your financial advisor or Ameriprise Financial Services at the above numbers for additional information. o Minimum amount: $1,000 o Pre-authorization is required. o A service fee may be charged against your account for each wire sent. By scheduled payout plan o Minimum payment: $100* o Contact your financial advisor or Ameriprise Financial Services to set up regular payments. o Purchasing new shares while under a payout plan may be disadvantageous because of the sales charges. * Minimum is $50 in a non-brokerage/wrap account. Electronic transactions The ability to initiate transactions via the internet may be unavailable or delayed at certain times (for example, during periods of unusual market activity). The Fund and the distributor are not responsible for any losses associated with unexecuted transactions. In addition, the Fund and the distributor are not responsible for any losses resulting from unauthorized transactions if reasonable security measures are followed to validate the investor's identity. The Fund may modify or discontinue electronic privileges at any time for any shareholder without prior notice as deemed necessary and in the best interests of the Fund. Distributions and Taxes As a shareholder you are entitled to your share of the Fund's net income and net gains. The Fund distributes dividends and capital gains to qualify as a regulated investment company and to avoid paying corporate income and excise taxes. DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS The Fund's net investment income is distributed to you as dividends. Dividends will generally be composed of ordinary dividend income (which may include interest income, short-term capital gains and non-qualifying dividends). It is unlikely the Fund will distribute qualifying dividend income, which is eligible for preferential tax rates under current tax law. Capital gains are realized when a security is sold for a higher price than was paid for it. Each realized capital gain or loss is long-term or short-term depending on the length of time the Fund held the security. Realized capital gains and losses offset each other. The Fund offsets any net realized capital gains by any available capital loss carryovers. Net short-term capital gains are included in net investment income. Net realized long-term capital gains, if any, are distributed by the end of the calendar year as capital gain distributions. - -------------------------------------------------------------------------------- 29p --- RIVERSOURCE DIVERSIFIED BOND FUND --- 2005 PROSPECTUS REINVESTMENTS Dividends and capital gain distributions are automatically reinvested in additional shares in the same class of the Fund, unless: o you request distributions in cash, or o you direct the Fund to invest your distributions in the same class of any publicly offered RiverSource fund for which you have previously opened an account. We reinvest the distributions for you at the next calculated NAV after the distribution is paid. If you choose cash distributions, you will receive cash only for distributions declared after your request has been processed. TAXES Distributions are subject to federal income tax and may be subject to state and local taxes in the year they are declared. You must report distributions on your tax returns, even if they are reinvested in additional shares. If you buy shares shortly before the record date of a distribution, you may pay taxes on money earned by the Fund before you were a shareholder. You will pay the full pre-distribution price for the shares, then receive a portion of your investment back as a distribution, which may be taxable. For tax purposes, an exchange is considered a sale and purchase, and may result in a gain or loss. A sale is a taxable transaction. If you sell shares for less than their cost, the difference is a capital loss. If you sell shares for more than their cost, the difference is a capital gain. Your gain may be short term (for shares held for one year or less) or long term (for shares held for more than one year). You may not create a tax loss, based on paying a sales charge, by exchanging shares within 91 days of purchase. If you buy Class A shares and within 91 days exchange into another fund, you may not include the sales charge in your calculation of tax gain or loss on the sale of the first fund you purchased. The sales charge may be included in the calculation of your tax gain or loss on a subsequent sale of the second fund you purchased. For more information, see the SAI. Selling shares held in an IRA or qualified retirement account may subject you to federal taxes, penalties and reporting requirements. Please consult your tax advisor. Important: This information is a brief and selective summary of some of the tax rules that apply to this Fund. Because tax matters are highly individual and complex, you should consult a qualified tax advisor. - -------------------------------------------------------------------------------- 30p --- RIVERSOURCE DIVERSIFIED BOND FUND --- 2005 PROSPECTUS Financial Highlights The financial highlights tables are intended to help you understand the Fund's financial performance. Certain information reflects financial results for a single Fund share. The total returns in the tables represent the rate that an investor would have earned or lost on an investment in the Fund (assuming reinvestment of all dividends and distributions). This information has been audited by KPMG LLP, whose report, along with the Fund's financial statements, is included in the annual report which, if not included with this prospectus, is available upon request.
Class A Per share income and capital changes(a) Fiscal period ended Aug. 31, 2005 2004 2003 2002 2001 Net asset value, beginning of period $4.87 $4.78 $4.75 $4.86 $4.70 ----- ----- ----- ----- ----- Income from investment operations: Net investment income (loss) .18 .18 .20 .25 .31 Net gains (losses) (both realized and unrealized) .03 .08 .03 (.10) .17 ----- ----- ----- ----- ----- Total from investment operations .21 .26 .23 .15 .48 ----- ----- ----- ----- ----- Less distributions: Dividends from net investment income (.19) (.17) (.20) (.25) (.32) Tax return of capital -- -- -- (.01) -- ----- ----- ----- ----- ----- Total distributions (.19) (.17) (.20) (.26) (.32) ----- ----- ----- ----- ----- Net asset value, end of period $4.89 $4.87 $4.78 $4.75 $4.86 ----- ----- ----- ----- ----- Ratios/supplemental data Net assets, end of period (in millions) $1,774 $1,933 $2,280 $2,438 $2,390 Ratio of expenses to average daily net assets(b) .94%(c) .98%(c) .97% .95% .94% Ratio of net investment income (loss) to average daily net assets 3.67% 3.55% 4.16% 5.17% 6.51% Portfolio turnover rate (excluding short-term securities) 300% 279% 256% 169% 115% Total return(d) 4.38% 5.54% 4.91% 3.13% 10.48%
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (c) Ameriprise Financial and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class A would have been 1.02% and 1.00% for the years ended Aug. 31, 2005 and 2004, respectively. (d) Total return does not reflect payment of a sales charge. - -------------------------------------------------------------------------------- 31p --- RIVERSOURCE DIVERSIFIED BOND FUND --- 2005 PROSPECTUS
Class B Per share income and capital changes(a) Fiscal period ended Aug. 31, 2005 2004 2003 2002 2001 Net asset value, beginning of period $4.88 $4.78 $4.75 $4.86 $4.70 ----- ----- ----- ----- ----- Income from investment operations: Net investment income (loss) .15 .14 .16 .21 .27 Net gains (losses) (both realized and unrealized) .01 .09 .03 (.10) .17 ----- ----- ----- ----- ----- Total from investment operations .16 .23 .19 .11 .44 ----- ----- ----- ----- ----- Less distributions: Dividends from net investment income (.15) (.13) (.16) (.21) (.28) Tax return of capital -- -- -- (.01) -- ----- ----- ----- ----- ----- Total distributions (.15) (.13) (.16) (.22) (.28) ----- ----- ----- ----- ----- Net asset value, end of period $4.89 $4.88 $4.78 $4.75 $4.86 ----- ----- ----- ----- ----- Ratios/supplemental data Net assets, end of period (in millions) $484 $628 $902 $1,047 $954 Ratio of expenses to average daily net assets(b) 1.70%(c) 1.73%(c) 1.73% 1.71% 1.70% Ratio of net investment income (loss) to average daily net assets 2.92% 2.78% 3.40% 4.40% 5.74% Portfolio turnover rate (excluding short-term securities) 300% 279% 256% 169% 115% Total return(d) 3.39% 4.95% 4.12% 2.35% 9.65%
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (c) Ameriprise Financial and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class B would have been 1.78% and 1.75% for the years ended Aug. 31, 2005 and 2004, respectively. (d) Total return does not reflect payment of a sales charge. - -------------------------------------------------------------------------------- 32p --- RIVERSOURCE DIVERSIFIED BOND FUND --- 2005 PROSPECTUS
Class C Per share income and capital changes(a) Fiscal period ended Aug. 31, 2005 2004 2003 2002 2001 Net asset value, beginning of period $4.88 $4.78 $4.75 $4.86 $4.71 Income from investment operations: Net investment income (loss) .15 .14 .16 .21 .27 Net gains (losses) (both realized and unrealized) .02 .09 .03 (.10) .16 Total from investment operations .17 .23 .19 .11 .43 Less distributions: Dividends from net investment income (.15) (.13) (.16) (.21) (.28) Tax return of capital -- -- -- (.01) -- Total distributions (.15) (.13) (.16) (.22) (.28) Net asset value, end of period $4.90 $4.88 $4.78 $4.75 $4.86 Ratios/supplemental data Net assets, end of period (in millions) $18 $21 $27 $24 $10 Ratio of expenses to average daily net assets(b) 1.70%(c) 1.73%(c) 1.74% 1.72% 1.70% Ratio of net investment income (loss) to average daily net assets 2.93% 2.79% 3.34% 4.33% 5.62% Portfolio turnover rate (excluding short-term securities) 300% 279% 256% 169% 115% Total return(d) 3.60% 4.95% 4.11% 2.35% 9.43%
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (c) Ameriprise Financial and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class C would have been 1.79% and 1.75% for the years ended Aug. 31, 2005 and 2004, respectively. (d) Total return does not reflect payment of a sales charge. - -------------------------------------------------------------------------------- 33p --- RIVERSOURCE DIVERSIFIED BOND FUND --- 2005 PROSPECTUS
Class Y Per share income and capital changes(a) Fiscal period ended Aug. 31, 2005 2004 2003 2002 2001 Net asset value, beginning of period $4.88 $4.78 $4.75 $4.86 $4.70 ----- ----- ----- ----- ----- Income from investment operations: Net investment income (loss) .19 .18 .21 .25 .32 Net gains (losses) (both realized and unrealized) .02 .10 .03 (.10) .17 ----- ----- ----- ----- ----- Total from investment operations .21 .28 .24 .15 .49 ----- ----- ----- ----- ----- Less distributions: Dividends from net investment income (.20) (.18) (.21) (.25) (.33) Tax return of capital -- -- -- (.01) -- ----- ----- ----- ----- ----- Total distributions (.20) (.18) (.21) (.26) (.33) ----- ----- ----- ----- ----- Net asset value, end of period $4.89 $4.88 $4.78 $4.75 $4.86 ----- ----- ----- ----- ----- Ratios/supplemental data Net assets, end of period (in millions) $202 $203 $268 $297 $533 Ratio of expenses to average daily net assets(b) .78%(c) .81%(c) .81% .78% .78% Ratio of net investment income (loss) to average daily net assets 3.85% 3.70% 4.34% 5.30% 6.66% Portfolio turnover rate (excluding short-term securities) 300% 279% 256% 169% 115% Total return(d) 4.34% 5.92% 5.08% 3.29% 10.65%
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (c) Ameriprise Financial and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class Y would have been 0.86% and 0.83% for the years ended Aug. 31, 2005 and 2004, respectively. (d) Total return does not reflect payment of a sales charge. - -------------------------------------------------------------------------------- 34p --- RIVERSOURCE DIVERSIFIED BOND FUND --- 2005 PROSPECTUS This Fund, along with the other RiverSource funds, is distributed by Ameriprise Financial Services, Inc. and can be purchased from Ameriprise Financial Services or from a limited number of other authorized financial intermediaries. The Fund can be found under the "RiverSource" banner in most mutual fund quotations. Additional information about the Fund and its investments is available in the Fund's SAI, and annual and semiannual reports to shareholders. In the Fund's annual report, you will find a discussion of market conditions and investment strategies that significantly affected the Fund's performance during its most recent fiscal year. The SAI is incorporated by reference in this prospectus. For a free copy of the SAI, the annual report, or the semiannual report, or to request other information about the Fund or make a shareholder inquiry, contact your financial advisor, investment professional or Ameriprise Financial Services. Ameriprise Financial Services 70100 Ameriprise Financial Center Minneapolis, MN 55474 (800) 862-7919 TTY: (800) 846-4852 RiverSource Investments Website address: riversource.com/investments You may review and copy information about the Fund, including the SAI, at the Securities and Exchange Commission's (Commission) Public Reference Room in Washington, D.C. (for information about the public reference room call 1-202-942-8090). Reports and other information about the Fund are available on the EDGAR Database on the Commission's Internet site at www.sec.gov. Copies of this information may be obtained, after paying a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing to the Public Reference Section of the Commission, Washington, D.C. 20549-0102. Investment Company Act File #811-2503 Ticker Symbol Class A: INBNX Class B:ININX Class C: AXBCX Class I:-- Class Y: IDBYX (logo) RiverSource(SM Investments RiverSource Investments 200 Ameriprise Financial Center Minneapolis, MN 55474 S-6495-99 Y (10/05) EX-99.17D SAI 5 ex17d-s6500.txt STATEMENT OF ADDITIONAL INFORMATION, DATED NOV. 29, 2005 STATEMENT OF ADDITIONAL INFORMATION NOV. 29, 2005 AXP(R) California Tax-Exempt Trust RiverSource(SM) California Tax-Exempt Fund AXP Dimensions Series, Inc. RiverSource(SM) New Dimensions Fund(R) AXP Discovery Series, Inc. RiverSource Core Bond Fund RiverSource Discovery Fund RiverSource Income Opportunities Fund RiverSource Inflation Protected Securities Fund RiverSource Limited Duration Bond Fund AXP Equity Series, Inc. RiverSource Mid Cap Growth Fund AXP Fixed Income Series, Inc. RiverSource Diversified Bond Fund AXP Global Series, Inc. RiverSource Emerging Markets Fund RiverSource Global Balanced Fund RiverSource Global Bond Fund RiverSource Global Equity Fund RiverSource Global Technology Fund AXP Government Income Series, Inc. RiverSource Short Duration U.S. Government Fund RiverSource U.S. Government Mortgage Fund AXP Growth Series, Inc. RiverSource Disciplined Equity Fund RiverSource Growth Fund RiverSource Large Cap Equity Fund RiverSource Large Cap Value Fund AXP High Yield Income Series, Inc. RiverSource High Yield Bond Fund AXP High Yield Tax-Exempt Series, Inc. RiverSource Tax-Exempt High Income Fund AXP Income Series, Inc. RiverSource Selective Fund AXP International Series, Inc. RiverSource European Equity Fund RiverSource International Opportunity Fund AXP Investment Series, Inc. RiverSource Balanced Fund RiverSource Diversified Equity Income Fund RiverSource Mid Cap Value Fund AXP Managed Series, Inc. RiverSource Strategic Allocation Fund AXP Market Advantage Series, Inc. RiverSource Portfolio Builder Aggressive Fund RiverSource Portfolio Builder Conservative Fund RiverSource Portfolio Builder Moderate Fund RiverSource Portfolio Builder Moderate Aggressive Fund RiverSource Portfolio Builder Moderate Conservative Fund RiverSource Portfolio Builder Total Equity Fund RiverSource S&P 500 Index Fund RiverSource Small Company Index Fund AXP Money Market Series, Inc. RiverSource Cash Management Fund AXP Partners International Series, Inc. RiverSource International Aggressive Growth Fund RiverSource International Equity Fund RiverSource International Select Value Fund RiverSource International Small Cap Fund AXP Partners Series, Inc. RiverSource Aggressive Growth Fund RiverSource Fundamental Growth Fund RiverSource Fundamental Value Fund RiverSource Select Value Fund RiverSource Small Cap Equity Fund RiverSource Small Cap Value Fund RiverSource Value Fund AXP Sector Series, Inc. RiverSource Dividend Opportunity Fund RiverSource Real Estate Fund AXP Selected Series, Inc. RiverSource Precious Metals Fund AXP Special Tax-Exempt Series Trust RiverSource Insured Tax-Exempt Fund RiverSource Massachusetts Tax-Exempt Fund RiverSource Michigan Tax-Exempt Fund RiverSource Minnesota Tax-Exempt Fund RiverSource New York Tax-Exempt Fund RiverSource Ohio Tax-Exempt Fund AXP Stock Series, Inc. RiverSource Stock Fund AXP Strategy Series, Inc. RiverSource Equity Value Fund RiverSource Small Cap Advantage Fund RiverSource Small Cap Growth Fund RiverSource Strategy Aggressive Fund AXP Tax-Exempt Series, Inc. RiverSource Intermediate Tax-Exempt Fund RiverSource Tax-Exempt Bond Fund AXP Tax-Free Money Series, Inc. RiverSource Tax-Exempt Money Market Fund This is the Statement of Additional Information (SAI) for each of the funds listed on the previous page. This SAI is not a prospectus. It should be read together with the appropriate current prospectus that may be obtained, without charge, from your financial advisor, investment professional, or by writing to RiverSource Service Corporation, 70100 Ameriprise Financial Center, Minneapolis, MN 55474 or by calling (800) 862-7919. Each fund's financial statements for its most recent fiscal period are contained in the fund's Annual or Semiannual Report to shareholders. The Independent Registered Public Accounting Firm's Report and the Financial Statements, including Notes to the Financial Statements and the Schedule of Investments in Securities and any applicable Schedule of Affiliated Funds, contained in the Annual Report, are incorporated in this SAI by reference. No other portion of the Annual Report is incorporated by reference. The current prospectus for each of the funds also is incorporated in this SAI by reference. Each fund is governed by a Board of Directors/Trustees ("Board") that meets regularly to review a wide variety of matters affecting the funds. Detailed information about fund governance, the funds' investment manager, RiverSource Investments, LLC (the "investment manager" or "RiverSource Investments"), a wholly-owned subsidiary of Ameriprise Financial, Inc. ("Ameriprise Financial"), and other aspects of fund management can be found by referencing the Table of Contents below.
Table of Contents Mutual Fund Checklist ........................................................................................p. 4 Fundamental and Nonfundamental Investment Policies............................................................p. 7 Investment Strategies and Types of Investments ..............................................................p. 18 Information Regarding Risks and Investment Strategies .......................................................p. 19 Securities Transactions .....................................................................................p. 44 Brokerage Commissions Paid to Brokers Affiliated with the Investment Manager ................................p. 56 Valuing Fund Shares .........................................................................................p. 59 Portfolio Holdings Disclosure ...............................................................................p. 68 Proxy Voting ................................................................................................p. 70 Investing in a Fund .........................................................................................p. 71 Selling Shares ..............................................................................................p. 76 Pay-out Plans ...............................................................................................p. 77 Capital Loss Carryover.......................................................................................p. 78 Taxes ....................................................................................................p. 80 Agreements...................................................................................................p. 85 Organizational Information .................................................................................p. 136 Board Members and Officers .................................................................................p. 140 Control Persons and Principal Holders of Securities.........................................................p. 151 Independent Registered Public Accounting Firm...............................................................p. 160 Appendix A: Description of Ratings.........................................................................p. 161 Appendix B: State Risk Factors.............................................................................p. 167 Appendix C: Insured Tax-Exempt Fund........................................................................p. 168 Appendix D: Additional Information about the S&P 500 Index.................................................p. 170
Statement of Additional Information - Nov. 29, 2005 Page 2
List of Tables 1. Fund Fiscal Year Ends and Investment Categories..........................................................5 1A. Master/Feeder Funds......................................................................................6 2. Fundamental Policies.....................................................................................7 3. Nonfundamental Policies.................................................................................12 4. Investment Strategies and Types of Investments..........................................................18 5. Total Brokerage Commissions.............................................................................46 6. Brokerage Directed for Research and Turnover Rates......................................................48 7. Securities of Regular Brokers or Dealers................................................................50 8. Brokerage Commissions Paid to Investment Manager or Affiliates..........................................56 9. Valuing Fund Shares.....................................................................................59 10. Class A Sales Charge....................................................................................71 11. Public Offering Price...................................................................................72 12. Capital Loss Carryover..................................................................................78 13. Corporate Deduction and Qualified Dividend Income.......................................................82 14. Investment Management Services Agreement Fee Schedule...................................................85 15. Lipper Indexes..........................................................................................90 16. Performance Incentive Adjustment Calculation............................................................91 17. Management Fees and Nonadvisory Expenses................................................................92 18. Subadvisers and Subadvisory Agreement Fee Schedules.....................................................94 19. Subadvisory Fees........................................................................................97 20. Portfolio Managers......................................................................................99 21. Administrative Services Agreement Fee Schedule.........................................................126 22. Administrative Fees....................................................................................128 23. Sales Charges Paid to Distributor......................................................................131 24. 12b-1 Fees.............................................................................................134 25. Fund History Table for All Publicly Offered RiverSource Funds..........................................137 26. Board Members..........................................................................................140 27. Fund Officers..........................................................................................141 28. Committee Meetings.....................................................................................142 29. Board Member Holdings - All Funds......................................................................143 30. Board Member Holdings - Individual Funds...............................................................143 31. Board Member Compensation - All Funds..................................................................146 32. Board Member Compensation - Individual Funds...........................................................146 32A. Board Member Compensation - Master Portfolios..........................................................150 33. Control Persons and Principal Holders of Securities....................................................151
Statement of Additional Information - Nov. 29, 2005 Page 3 Mutual Fund Checklist o Mutual funds are NOT guaranteed or insured by any bank or government agency. You can lose money. o Mutual funds ALWAYS carry investment risks. Some types carry more risk than others. o A higher rate of return typically involves a higher risk of loss. o Past performance is not a reliable indicator of future performance. o ALL mutual funds have costs that lower investment return. o You can buy some mutual funds by contacting them directly. Others, like these, are sold mainly through brokers, banks, financial planners, or insurance agents. If you buy through these financial professionals, you generally will pay a sales charge. o Shop around. Compare a mutual fund with others of the same type before you buy. OTHER IDEAS FOR SUCCESSFUL MUTUAL FUND INVESTING Develop a Financial Plan Have a plan -- even a simple plan can help you take control of your financial future. Review your plan with your financial advisor or investment professional at least once a year or more frequently if your circumstances change. Dollar-Cost Averaging An investment technique that works well for many investors is one that eliminates random buy and sell decisions. One such system is dollar-cost averaging. Dollar-cost averaging involves building a portfolio through the investment of fixed amounts of money on a regular basis regardless of the price or market condition. This may enable an investor to smooth out the effects of the volatility of the financial markets. By using this strategy, more shares will be purchased when the price is low and less when the price is high. As the accompanying chart illustrates, dollar-cost averaging tends to keep the average price paid for the shares lower than the average market price of shares purchased, although there is no guarantee. While this does not ensure a profit and does not protect against a loss if the market declines, it is an effective way for many shareholders who can continue investing through changing market conditions to accumulate shares to meet long-term goals. Regular Market price Shares investment of a share acquired $100 $ 6.00 16.7 100 4.00 25.0 100 4.00 25.0 100 6.00 16.7 100 5.00 20.0 $500 $25.00 103.4 Average market price of a share over 5 periods: $5.00 ($25.00 divided by 5) The average price you paid for each share: $4.84 ($500 divided by 103.4) Diversify Diversify your portfolio. By investing in different asset classes and different economic environments you help protect against poor performance in one type of investment while including investments most likely to help you achieve your important goals. Understand Your Investment Know what you are buying. Make sure you understand the potential risks, rewards, costs, and expenses associated with each of your investments. Statement of Additional Information - Nov. 29, 2005 Page 4 The table that follows lists each fund's fiscal year end and investment category. The information can be used to identify groups of funds that are referenced throughout this SAI.
Table 1. Fund Fiscal Year Ends and Investment Categories - ----------------------------------------- ------------------------ -------------------------- Fund Fiscal Year End Fund Investment Category - ----------------------------------------- ------------------------ -------------------------- Aggressive Growth May 31 Equity - ----------------------------------------- ------------------------ -------------------------- Balanced September 30 Balanced - ----------------------------------------- ------------------------ -------------------------- California Tax-Exempt June 30 State tax-exempt bond - ----------------------------------------- ------------------------ -------------------------- Cash Management July 31 Taxable money market - ----------------------------------------- ------------------------ -------------------------- Core Bond July 31 Taxable bond - ----------------------------------------- ------------------------ -------------------------- Disciplined Equity July 31 Equity - ----------------------------------------- ------------------------ -------------------------- Discovery July 31 Equity - ----------------------------------------- ------------------------ -------------------------- Diversified Bond August 31 Taxable bond - ----------------------------------------- ------------------------ -------------------------- Diversified Equity Income September 30 Equity - ----------------------------------------- ------------------------ -------------------------- Dividend Opportunity June 30 Equity - ----------------------------------------- ------------------------ -------------------------- Emerging Markets October 31 Equity - ----------------------------------------- ------------------------ -------------------------- Equity Value March 31 Equity - ----------------------------------------- ------------------------ -------------------------- European Equity October 31 Equity - ----------------------------------------- ------------------------ -------------------------- Fundamental Growth May 31 Equity - ----------------------------------------- ------------------------ -------------------------- Fundamental Value May 31 Equity - ----------------------------------------- ------------------------ -------------------------- Global Balanced October 31 Balanced - ----------------------------------------- ------------------------ -------------------------- Global Bond October 31 Taxable bond - ----------------------------------------- ------------------------ -------------------------- Global Equity October 31 Equity - ----------------------------------------- ------------------------ -------------------------- Global Technology October 31 Equity - ----------------------------------------- ------------------------ -------------------------- Growth July 31 Equity - ----------------------------------------- ------------------------ -------------------------- High Yield Bond May 31 Taxable bond - ----------------------------------------- ------------------------ -------------------------- Income Opportunities July 31 Taxable bond - ----------------------------------------- ------------------------ -------------------------- Inflation Protected Securities July 31 Taxable bond - ----------------------------------------- ------------------------ -------------------------- Insured Tax-Exempt June 30 Tax-exempt bond - ----------------------------------------- ------------------------ -------------------------- Intermediate Tax-Exempt November 30 Tax-exempt bond - ----------------------------------------- ------------------------ -------------------------- International Aggressive Growth October 31 Equity - ----------------------------------------- ------------------------ -------------------------- International Equity October 31 Equity - ----------------------------------------- ------------------------ -------------------------- International Opportunity October 31 Equity - ----------------------------------------- ------------------------ -------------------------- International Select Value October 31 Equity - ----------------------------------------- ------------------------ -------------------------- International Small Cap October 31 Equity - ----------------------------------------- ------------------------ -------------------------- Large Cap Equity July 31 Equity - ----------------------------------------- ------------------------ -------------------------- Large Cap Value July 31 Equity - ----------------------------------------- ------------------------ -------------------------- Limited Duration Bond July 31 Taxable bond - ----------------------------------------- ------------------------ -------------------------- Massachusetts Tax-Exempt June 30 State tax-exempt bond - ----------------------------------------- ------------------------ -------------------------- Michigan Tax-Exempt June 30 State tax-exempt bond - ----------------------------------------- ------------------------ -------------------------- Mid Cap Growth November 30 Equity - ----------------------------------------- ------------------------ -------------------------- Mid Cap Value September 30 Equity - ----------------------------------------- ------------------------ -------------------------- Minnesota Tax-Exempt June 30 State tax-exempt bond - ----------------------------------------- ------------------------ -------------------------- New Dimensions July 31 Equity - ----------------------------------------- ------------------------ -------------------------- New York Tax-Exempt June 30 State tax-exempt bond - ----------------------------------------- ------------------------ -------------------------- Ohio Tax-Exempt June 30 State tax-exempt bond - ----------------------------------------- ------------------------ -------------------------- Portfolio Builder Aggressive January 31 Funds-of-funds - equity - ----------------------------------------- ------------------------ -------------------------- Portfolio Builder Conservative January 31 Funds-of-funds - bond - ----------------------------------------- ------------------------ -------------------------- Portfolio Builder Moderate January 31 Funds-of-funds - equity - ----------------------------------------- ------------------------ -------------------------- Portfolio Builder Moderate Aggressive January 31 Funds-of-funds - equity - ----------------------------------------- ------------------------ -------------------------- Portfolio Builder Moderate Conservative January 31 Funds-of-funds - bond - ----------------------------------------- ------------------------ -------------------------- Portfolio Builder Total Equity January 31 Funds-of-funds - equity - ----------------------------------------- ------------------------ --------------------------
Statement of Additional Information - Nov. 29, 2005 Page 5
- ----------------------------------------- ------------------------ -------------------------- Fund Fiscal Year End Fund Investment Category - ----------------------------------------- ------------------------ -------------------------- Precious Metals March 31 Equity - ----------------------------------------- ------------------------ -------------------------- Real Estate June 30 Equity - ----------------------------------------- ------------------------ -------------------------- S&P 500 Index January 31 Equity - ----------------------------------------- ------------------------ -------------------------- Select Value May 31 Equity - ----------------------------------------- ------------------------ -------------------------- Selective May 31 Taxable bond - ----------------------------------------- ------------------------ -------------------------- Short Duration U.S. Government May 31 Taxable bond - ----------------------------------------- ------------------------ -------------------------- Small Cap Advantage March 31 Equity - ----------------------------------------- ------------------------ -------------------------- Small Cap Equity May 31 Equity - ----------------------------------------- ------------------------ -------------------------- Small Cap Growth March 31 Equity - ----------------------------------------- ------------------------ -------------------------- Small Cap Value May 31 Equity - ----------------------------------------- ------------------------ -------------------------- Small Company Index January 31 Equity - ----------------------------------------- ------------------------ -------------------------- Stock September 30 Equity - ----------------------------------------- ------------------------ -------------------------- Strategic Allocation September 30 Balanced - ----------------------------------------- ------------------------ -------------------------- Strategy Aggressive March 31 Equity - ----------------------------------------- ------------------------ -------------------------- Tax-Exempt Bond November 30 Tax-exempt bond - ----------------------------------------- ------------------------ -------------------------- Tax-Exempt High Income November 30 Tax-exempt bond - ----------------------------------------- ------------------------ -------------------------- Tax-Exempt Money Market December 31 Tax-exempt money market - ----------------------------------------- ------------------------ -------------------------- U.S. Government Mortgage May 31 Taxable bond - ----------------------------------------- ------------------------ -------------------------- Value May 31 Equity - ----------------------------------------- ------------------------ --------------------------
Master/Feeder Funds Each fund listed in the following table pursues its investment objective by investing all of its assets in a separate investment company (a portfolio) as shown in the table, rather than investing directly in and managing its own portfolio of securities. The portfolio has the same investment objectives, policies, and restrictions as the fund. References in this SAI, where applicable, refer to the fund and portfolio, collectively; to the fund, singularly; or to the portfolio, singularly. The Board of each feeder fund has determined that it is in the best interests of shareholders to withdraw the fund's assets from the master/feeder structure. The necessary steps to finalize the withdrawal are expected to be completed in late 2005 or early 2006. After that date, each feeder fund will invest directly in and manage its own portfolio of securities rather than investing in a master portfolio. RiverSource Investments, the investment manager to the master portfolio, will continue to serve as investment manager to the fund under the same terms and conditions. Table 1A. Master/Feeder Funds ---------------------------- --------------------------------- Feeder Fund Master Portfolio ---------------------------- --------------------------------- Balanced Balanced ---------------------------- --------------------------------- Diversified Equity Income Equity Income ---------------------------- --------------------------------- Global Technology World Technologies ---------------------------- --------------------------------- Growth Growth ---------------------------- --------------------------------- New Dimensions Growth Trends ---------------------------- --------------------------------- Selective Quality Income ---------------------------- --------------------------------- Stock Equity ---------------------------- --------------------------------- Strategic Allocation Total Return ---------------------------- --------------------------------- Statement of Additional Information - Nov. 29, 2005 Page 6 Funds-of-Funds Funds-of-funds invest in a combination of underlying funds. These underlying funds have their own investment policies that may be more or less restrictive than the policies of the funds-of-funds. The policies of the underlying funds may permit funds-of-funds to engage in investment strategies indirectly that would otherwise be prohibited under the investment restrictions of the funds-of-funds. Fundamental and Nonfundamental Investment Policies Fundamental investment policies adopted by a fund cannot be changed without the approval of a majority of the outstanding voting securities of the fund as defined in the Investment Company Act of 1940, as amended (the 1940 Act). Nonfundamental investment policies may be changed by the Board at any time. Notwithstanding any of a fund's other investment policies, each fund may invest its assets in an open-end management investment company having substantially the same investment objectives, policies, and restrictions as the fund for the purpose of having those assets managed as part of a combined pool. Fundamental policies Fundamental policies are policies that can be changed only with shareholder approval. The chart below shows fundamental policies that are in addition to any fundamental policy described in the prospectus. The chart indicates whether or not the fund has a policy on a particular topic. The specific policy is stated in the paragraphs that follow the table. Table 2. Fundamental Policies Unless holders of a majority of the outstanding voting securities agree to make the change, the fund will not:
- ------------------------------------------------------------------------------------------------------------------------------------ A B C D E F G H I J K L M N - ------------------------------------------------------------------------------------------------------------------------------------ Buy Invest Buy more more Concen on Buy Buy than than trate margin Fund Act or or Lend Issue 10% 5% in or Buy Invest as Make sell sell fund senior of in any sell stocks, less under- cash real commode securit securit an an Borrow one Loan short bonds, than writer loans estate ties ies ies issuer issuer money industry assets (i) etc. 80% - ------------------------------------------------------------------------------------------------------------------------------------ Aggressive A1 B1 C1 D1 E1 F1 G1 H1 I1 J1 Growth - ------------------------------------------------------------------------------------------------------------------------------------ Balanced A1 B1 C1 D1 E1 G2 H2 I3 J1 K1 - ------------------------------------------------------------------------------------------------------------------------------------ California A1 B1 C1 D1 E1 I3 K1 N1 Tax-Exempt - ------------------------------------------------------------------------------------------------------------------------------------ Cash Management A1 C3 C3 E1 H3 I3 L2 M1 - ------------------------------------------------------------------------------------------------------------------------------------ Core Bond A1 B1 C1 D1 E1 F1 G1 H2 I2 J1 - ------------------------------------------------------------------------------------------------------------------------------------ Disciplined A1 B1 C1 D1 E1 F1 G1 H1 I1 J1 K1 Equity - ------------------------------------------------------------------------------------------------------------------------------------ Discovery A1 B1 C1 D1 E1 G2 H2 I3(v) J1 K1 - ------------------------------------------------------------------------------------------------------------------------------------ Diversified A1 B1 C1 D1 E1 G2 H2 I3 J1 Bond - ------------------------------------------------------------------------------------------------------------------------------------ Diversified A1 B1 C1 D1 E1 G2 H2 I3 J1 Equity Income - ------------------------------------------------------------------------------------------------------------------------------------ Dividend A1 B1 C1 D1 E1 G2 H2 I3 Opportunity - ------------------------------------------------------------------------------------------------------------------------------------ Emerging A1 B1 C1 D1 E1 F1 G2 H2 I3 J1 K1 Markets - ------------------------------------------------------------------------------------------------------------------------------------ Equity Value A1 B1 C1 D1 E1 F1 G2 H2 I3 J1 K1 - ------------------------------------------------------------------------------------------------------------------------------------ European Equity A1 B1 C1 D1 E1 F1 I3 J1 K1 - ------------------------------------------------------------------------------------------------------------------------------------ Fundamental A1 B1 C1 D1 E1 F1 G1 H1 I1 J1 Growth - ------------------------------------------------------------------------------------------------------------------------------------ Fundamental A1 B1 C1 D3 E1 F1 G1 H1 I1 J1 Value - ------------------------------------------------------------------------------------------------------------------------------------ Global Balanced A1 B1 C1 D1 E1 F1 G2 H2 I3 J1 K1 - ------------------------------------------------------------------------------------------------------------------------------------ Global Bond A1 B1 C1 D1 E1 F1 G2 I3 J1 K1 - ------------------------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2005 Page 7
- ------------------------------------------------------------------------------------------------------------------------------------ A B C D E F G H I J K L M N - ------------------------------------------------------------------------------------------------------------------------------------ Buy Invest Buy more more Concen on Buy Buy than than trate margin Fund Act or or Lend Issue 10% 5% in or Buy Invest as Make sell sell fund senior of in any sell stocks, less under- cash real commode securit securit an an Borrow one Loan short bonds, than writer loans estate ties ies ies issuer issuer money industry assets (i) etc. 80% - ------------------------------------------------------------------------------------------------------------------------------------ Global Equity A1 B1 C1 D1 E1 F1 G2 H2 I3 J1 K1 - ------------------------------------------------------------------------------------------------------------------------------------ Global A1 B1 C1 D1 E1 F1 I3 K1 Technology - ------------------------------------------------------------------------------------------------------------------------------------ Growth A1 B1 C1 D1 E1 G2 H2 I3 J1 K1 - ------------------------------------------------------------------------------------------------------------------------------------ High Yield Bond A1 B1 C1 D1 E1 F1 G2 H2 I3 J1 - ------------------------------------------------------------------------------------------------------------------------------------ Income A1 B1 C1 D1 E1 F1 G1 H2 I2 J1 Opportunities - -------------------------------------------------------------------------------------------------------------------------------- Inflation A1 B1 C1 D1 E1 F1 I2 J1 Protected Securities - ------------------------------------------------------------------------------------------------------------------------------------ Insured A1 B1 C1 D1 E1 H2 I3 K1 N3 Tax-Exempt - ------------------------------------------------------------------------------------------------------------------------------------ Intermediate A1 B1 C1 D1 E1 H2(ii) I3 N4(iii) Tax-Exempt - ------------------------------------------------------------------------------------------------------------------------------------ International A1 B1 C1 D3 E1 F1 G1 H1 I1 J1 K1 Aggressive Growth - ------------------------------------------------------------------------------------------------------------------------------------ International A1 B1 C1 D3 E1 F1 G1 H1 I1 J1 K1 Equity - ------------------------------------------------------------------------------------------------------------------------------------ International A1 B1 C1 D1 E1 F1 G2 H2 I3 J1 K1 Opportunity - ------------------------------------------------------------------------------------------------------------------------------------ International A1 B1 C1 D3 E1 F1 G1 H1 I1 J1 K1 Select Value - ------------------------------------------------------------------------------------------------------------------------------------ International A1 B1 C1 D3 E1 F1 G1 H1 I1 J1 K1 Small Cap - ------------------------------------------------------------------------------------------------------------------------------------ Large Cap A1 B1 C1 D1 E1 F1 G1 H2 I2 J1 Equity - ------------------------------------------------------------------------------------------------------------------------------------ Large Cap Value A1 B1 C1 D3 E1 F1 G1 H1 I2 J1 - ------------------------------------------------------------------------------------------------------------------------------------ Limited A1 B1 C1 D1 E1 F1 G1 H2 I2 J1 Duration Bond - ------------------------------------------------------------------------------------------------------------------------------------ Massachusetts A1 B1 C1 D1 E1 I3 K1 N1 Tax-Exempt - ------------------------------------------------------------------------------------------------------------------------------------ Michigan A1 B1 C1 D1 E1 I3 K1 N1 Tax-Exempt - ------------------------------------------------------------------------------------------------------------------------------------ Mid Cap Growth A1 B1 C1 D1 E1 G2 H2 I3 J1 - ------------------------------------------------------------------------------------------------------------------------------------ Mid Cap Value A1 B1 C1 D1 E1 F1 G1 H2 I2 J1 - ------------------------------------------------------------------------------------------------------------------------------------ Minnesota A1 B1 C1 D1 E1 I3 K1 N1 Tax-Exempt - ------------------------------------------------------------------------------------------------------------------------------------ New Dimensions A1 B1 C1 D1 E1 G2 H2 I3 J1 K1 - ------------------------------------------------------------------------------------------------------------------------------------ New York A1 B1 C1 D1 E1 I3 K1 N1 Tax-Exempt - ------------------------------------------------------------------------------------------------------------------------------------ Ohio A1 B1 C1 D1 E1 I3 K1 N1 Tax-Exempt - ------------------------------------------------------------------------------------------------------------------------------------ Portfolio A1 B1 C1 D1 E1 F1 I2 J2 Builder Aggressive - ------------------------------------------------------------------------------------------------------------------------------------ Portfolio A1 B1 C1 D1 E1 F1 I2 J2 Builder Conservative - ------------------------------------------------------------------------------------------------------------------------------------ Portfolio A1 B1 C1 D1 E1 F1 I2 J2 Builder Moderate - ------------------------------------------------------------------------------------------------------------------------------------ Portfolio A1 B1 C1 D1 E1 F1 I2 J2 Builder Moderate Aggressive - ------------------------------------------------------------------------------------------------------------------------------------ Portfolio A1 B1 C1 D1 E1 F1 I2 J2 Builder Moderate Conservative - ------------------------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2005 Page 8
- ------------------------------------------------------------------------------------------------------------------------------------ A B C D E F G H I J K L M N - ------------------------------------------------------------------------------------------------------------------------------------ Buy Invest Buy more more Concen on Buy Buy than than trate margin Fund Act or or Lend Issue 10% 5% in or Buy Invest as Make sell sell fund senior of in any sell stocks, less under- cash real commode securit securit an an Borrow one Loan short bonds, than writer loans estate ties ies ies issuer issuer money industry assets (i) etc. 80% - ------------------------------------------------------------------------------------------------------------------------------------ Portfolio A1 B1 C1 D1 E1 F1 I2 J2 Builder Total Equity - ------------------------------------------------------------------------------------------------------------------------------------ Precious Metals A1 B1 C1 D1(vi) E1 F1 I3 J3 K1 - ------------------------------------------------------------------------------------------------------------------------------------ Real Estate A1 B1 C1 D1 E1 F1 I2 - ------------------------------------------------------------------------------------------------------------------------------------ S&P 500 Index A1 B1 C1 D1 E1 F1 I3 J4 K1 - ------------------------------------------------------------------------------------------------------------------------------------ Select Value A1 B1 C1 D3 E1 F1 G2 H1 I1 J1 K1 - ------------------------------------------------------------------------------------------------------------------------------------ Selective A1 B1 C1 D1 E1 F1 G2 H2 I3 J1 K1 - ------------------------------------------------------------------------------------------------------------------------------------ Short Duration A1 B1 C1 D1 E1 F1 G2 H2 I3 J1 K1 U.S. Government - ------------------------------------------------------------------------------------------------------------------------------------ Small Cap A1 B1 C1 D1 E1 F1 G2 H2 I3 J1 Advantage - ------------------------------------------------------------------------------------------------------------------------------------ Small Cap A1 B1 C1 D3 E1 F1 G1 H1 I1 J1 Equity - ------------------------------------------------------------------------------------------------------------------------------------ Small Cap A1 B1 C1 D1 E1 F1 G2 H2 I3 J1 Growth - ------------------------------------------------------------------------------------------------------------------------------------ Small Cap Value A1 B1 C1 D3 E1 F1 I1 J1 - ------------------------------------------------------------------------------------------------------------------------------------ Small Company A1 B1 C1 D1 E1 G2 H2 I3 J1 K1 Index - ------------------------------------------------------------------------------------------------------------------------------------ Stock A1 B1 C1 D1 E1 G2 H2 I3 J1 - ------------------------------------------------------------------------------------------------------------------------------------ Strategic A1 B1 C1 D1 E1 F1 G2 H2 I3 J1 K1 Allocation - ------------------------------------------------------------------------------------------------------------------------------------ Strategy A1 B1 C1 D1 E1 F1 G2 H2 I3 J1 K1 Aggressive - ------------------------------------------------------------------------------------------------------------------------------------ Tax-Exempt Bond A1 B1 C1 D1 E1 H2(ii) I3 N4(iv) - ------------------------------------------------------------------------------------------------------------------------------------ Tax-Exempt A1 B1 C1 D1 E1 H2(ii) I3 N2 High Income - ------------------------------------------------------------------------------------------------------------------------------------ Tax-Exempt A1 B2 C2 D2 E1 H3(ii) I3 L1 N4 Money Market - ------------------------------------------------------------------------------------------------------------------------------------ U.S. Gov't A1 B1 C1 D1 E1 F1 G1 H2 I2 J1 K1 Mortgage - ------------------------------------------------------------------------------------------------------------------------------------ Value A1 B1 C1 D3 E1 F1 G1 H1 I1 J1 - ------------------------------------------------------------------------------------------------------------------------------------
(i) Nonfundamental policy for all funds except Cash Management and Tax-Exempt Money Market. (ii) For purposes of this policy, the terms of a municipal security determine the issuer. (iii) For purposes of this policy, the fund will not include any investments subject to the alternative minimum tax. (iv) The fund does not intend to purchase bonds or other debt securities the interest from which is subject to the alternative minimum tax. (v) For purposes of this policy, borrowing property does not include the borrowing of securities in connection with short sales. (vi) Additionally, the fund may purchase gold, silver, or other precious metals, strategic metals or other metals occurring naturally with such metals. A. Act as underwriter A1 - Act as an underwriter (sell securities for others). However, under the securities laws, the fund may be deemed to be an underwriter when it purchases securities directly from the issuer and later resells them. B. Make cash loans B1 - Make cash loans if the total commitment amount exceeds 5% of the fund's total assets. B2 - Make cash loans. The fund, however, does make investments in debt securities where the sellers agree to repurchase the securities at cost plus an agreed-upon interest rate within a specified time. Statement of Additional Information - Nov. 29, 2005 Page 9 C. Buy or sell real estate C1 - Buy or sell real estate, unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the fund from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business or real estate investment trusts. For purposes of this policy, real estate includes real estate limited partnerships. C2 - Invest in real estate, but the fund can invest in municipal bonds and notes secured by real estate or interest therein. For purposes of this policy, real estate includes real estate limited partnerships. C3 - Buy or sell real estate, commodities or commodity contracts. For purposes of this policy, real estate includes real estate limited partnerships. D. Buy or sell physical commodities D1 - Buy or sell physical commodities unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the fund from buying or selling options and futures contracts or from investing in securities or other instruments backed by, or whose value is derived from, physical commodities. D2 - Invest in commodities or commodity contracts. D3 - Buy or sell physical commodities unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the fund from buying or selling options, futures contracts and foreign currency or from investing in securities or other instruments backed by, or whose value is derived from, physical commodities. E. Lend fund securities E1 - Lend fund securities in excess of 30% of its net assets. F. Issue senior securities F1 - Issue senior securities, except as permitted under the 1940 Act. G. Buy more than 10% of an issuer G1 - Purchase more than 10% of the outstanding voting securities of an issuer, except that up to 25% of the fund's assets may be invested without regard to this 10% limitation. G2 - Purchase more than 10% of the outstanding voting securities of an issuer. H. Invest more than 5% in an issuer H1 - 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, or other registered investment companies and except up to 25% of the fund's total assets may be invested without regard to this 5% limitation. H2 - 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 up to 25% of the fund's total assets may be invested without regard to this 5% limitation. I. Borrow money I1 - Borrow money 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. Under current Board policy, the fund has no current intention to borrow to a material extent. I2 - Borrow money 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 fund has no current intention to borrow to a material extent. Statement of Additional Information - Nov. 29, 2005 Page 10 I3 - 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 fund has no current intention to borrow to a material extent. J. Concentrate J1 - Concentrate in any one industry. According to the present interpretation by the Securities and Exchange Commission (SEC), this means that up to 25% of the fund's total assets, based on current market value at time of purchase, can be invested in any one industry. J2 - Concentrate in any one industry. According to the present interpretation by the SEC, this means that up to 25% of the fund's total assets, based on current market value at time of purchase, can be invested in any one industry. The fund itself does not intend to concentrate, however the aggregation of holdings of the underlying funds may result in the fund indirectly investing more than 25% of its assets in a particular industry. The fund does not control the investments of the underlying funds and any indirect concentration will occur only as a result of the fund following its investment objectives by investing in the underlying funds. J3 - Invest less than 25% of its total assets in the precious metals industry, based on current market value at the time of purchase, unless market conditions temporarily require a defensive investment strategy. J4 - Concentrate in any one industry unless that industry represents more than 25% of the index tracked by the fund. For all other industries, in accordance with the current interpretation by the SEC, this means that up to 25% of the fund's total assets, based on current market value at time of purchase, can be invested in any one industry. K. Loan assets K1 - Make a loan of any part of its assets to the investment manager, to the board members and officers of the investment manager or to its own board members and officers. L. Buy on margin or sell short L1 - Buy on margin or sell short. L2 - Buy on margin or sell short or deal in options to buy or sell securities. M. Buy stocks, bonds, etc. M1 - Purchase common stocks, preferred stocks, warrants, other equity securities, corporate bonds or debentures, state bonds, municipal bonds, or industrial revenue bonds. N. Invest less than 80% N1 - Under normal market conditions, invest less than 80% of its net assets in municipal obligations that are generally exempt from federal income tax as well as respective state and local income tax. N2 - Under normal market conditions, invest less than 80% of its net assets in bonds and notes issued by or on behalf of state and local governmental units whose interest, in the opinion of counsel for the issuer, is exempt from federal income tax and is not subject to the alternative minimum tax. N3 - Under normal market conditions, invest less than 80% of its net assets in securities generally exempt from federal income tax, with principal and interest either fully insured by private insurers or guaranteed by an agency or instrumentality of the U.S. government N4 - Under normal market conditions, invest less than 80% of its net assets in bonds and other debt securities issued by or on behalf of state or local governmental units whose interest, in the opinion of counsel for the issuer, is exempt from federal income tax. Statement of Additional Information - Nov. 29, 2005 Page 11 Nonfundamental policies Nonfundamental policies are policies that can be changed by the Board without shareholder approval. The chart below shows nonfundamental policies that are in addition to those described in the prospectus. The chart indicates whether or not the fund has a policy on a particular topic. The specific policy is stated in the paragraphs that follow the table.
Table 3. Nonfundamental Policies The following are guidelines that may be changed by the Board at any time: - ----------------- --------- ------------- -------- --------- ------------ ---------------- ------------ ------------ ------------ A B C D E F G H I - ----------------- --------- ------------- -------- --------- ------------ ---------------- ------------ ------------ ------------ Invest Deposit Illiquid ment Margin, Money Investing Fund on securities; compa selling Market to control Foreign Debt Tax-exempt futures bullion nies short securities or manage securities securities securities - ----------------- --------- ------------- -------- --------- ------------ ---------------- ------------ ------------ ------------ Aggressive A1 B1 C1 D7 E1 F1 G1-15% H8 Growth - ----------------- --------- ------------- -------- --------- ------------ ---------------- ------------ ------------ ------------ Balanced A1 B1 C1 D3 E1 F1 G1-25% - ----------------- --------- ------------- -------- --------- ------------ ---------------- ------------ ------------ ------------ California A1 B1 D6 H18 I1, I4, I7 Tax-Exempt - ----------------- --------- ------------- -------- --------- ------------ ---------------- ------------ ------------ ------------ Cash Management B2 C1 See H17 Table 2 - ----------------- --------- ------------- -------- --------- ------------ ---------------- ------------ ------------ ------------ Core Bond A1 B1 C1 D3 E1 F1 G1-15% - ----------------- --------- ------------- -------- --------- ------------ ---------------- ------------ ------------ ------------ Disciplined A1 B1 C1 D7 E1 F1 G1-20% H7 Equity - ----------------- --------- ------------- -------- --------- ------------ ---------------- ------------ ------------ ------------ Discovery A1 B1 C1 D8 E1 F1 G1-25%(i) H7 - ----------------- --------- ------------- -------- --------- ------------ ---------------- ------------ ------------ ------------ Diversified Bond A1 B1 C1 D7 E1 F1 - ----------------- --------- ------------- -------- --------- ------------ ---------------- ------------ ------------ ------------ Diversified A1 B1 C1 D3 E1 F1 G1-25% H12 Equity Income - ----------------- --------- ------------- -------- --------- ------------ ---------------- ------------ ------------ ------------ Dividend A1 B1 C1 D3 E1 F1 G1-25% H5 Opportunity - ----------------- --------- ------------- -------- --------- ------------ ---------------- ------------ ------------ ------------ Emerging Markets A1 B1 C1 D1 E1 F1 H1, H8 - ----------------- --------- ------------- -------- --------- ------------ ---------------- ------------ ------------ ------------ Equity Value A1 B1 C1 D3 E1 F1 G1-25% H13, H15 - ----------------- --------- ------------- -------- --------- ------------ ---------------- ------------ ------------ ------------ European Equity A1 B1 D7 - ----------------- --------- ------------- -------- --------- ------------ ---------------- ------------ ------------ ------------ Fundamental A1 B1 C1 D7 E1 F1 G1-15% H8 Growth - ----------------- --------- ------------- -------- --------- ------------ ---------------- ------------ ------------ ------------ Fundamental A1 B1 C1 D1 E1 Value - ----------------- --------- ------------- -------- --------- ------------ ---------------- ------------ ------------ ------------ Global Balanced A1 B1 C1 D1 E1 F1 H15(ii) - ----------------- --------- ------------- -------- --------- ------------ ---------------- ------------ ------------ ------------ Global Bond A1 B1 C1 D1 E1 F1 H15 - ----------------- --------- ------------- -------- --------- ------------ ---------------- ------------ ------------ ------------ Global Equity A1 B1 C1 D1 E1 F1 H1, H7 - ----------------- --------- ------------- -------- --------- ------------ ---------------- ------------ ------------ ------------ Global A1 B1 C1 D1 E1 F1 H1, H7 Technology - ----------------- --------- ------------- -------- --------- ------------ ---------------- ------------ ----------- ------------ Growth A1 B1 C1 D7 E1 F1 G1-25% H5 - ----------------- --------- ------------- -------- --------- ------------ ---------------- ------------ ----------- ------------ High Yield Bond A1 B1 C1 D6 E1 F1 G1-25% - ----------------- --------- ------------- -------- --------- ------------ ---------------- ------------ ----------- ------------ Income A1 B1 C1 D3 E1 F1 G1-25% Opportunities - ----------------- --------- ------------- -------- --------- ------------ ---------------- ------------ ----------- ------------ Inflation A1 B1 C1 D3 G1-15% Protected Securities - ----------------- --------- ------------- -------- --------- ------------ ---------------- ------------ ----------- ------------ Insured A1 B1 J2 D6 H2, H18, I1, I5, Tax-Exempt H19, H20 I7, I8, I9 - ----------------- --------- ------------- -------- --------- ------------ ---------------- ------------ ----------- ------------ Intermediate A1 B1 J2 D2 H11 I2, I3, Tax-Exempt I6, I7 - ----------------- --------- ------------- -------- --------- ------------ ---------------- ------------ ----------- ------------ International A1 B1 C1 D1 E1 Aggressive Growth - ----------------- --------- ------------- -------- --------- ------------ ---------------- ------------ ----------- ------------ - ----------------- ------------ ------------ ------------ J K L - ----------------- ------------ ------------ ------------ Invest Fund Equity while Diversi Securities borrowing fication - ----------------- ------------ ------------ ------------ Aggressive Growth - ----------------- ------------ ------------ ------------ Balanced - ----------------- ------------ ------------ ------------ California Tax-Exempt - ----------------- ------------ ------------ ------------ Cash Management - ----------------- ------------ ------------ ------------ Core Bond - ----------------- ------------ ------------ ------------ Disciplined Equity - ----------------- ------------ ------------ ------------ Discovery - ----------------- ------------ ------------ ------------ Diversified Bond - ----------------- ------------ ------------ ------------ Diversified Equity Income - ----------------- ------------ ------------ ------------ Dividend Opportunity - ----------------- ------------ ------------ ------------ Emerging Markets - ----------------- ------------ ------------ ------------ Equity Value - ----------------- ------------ ------------ ------------ European Equity L1, L2 - ----------------- ------------ ------------ ------------ Fundamental Growth - ----------------- ------------ ------------ ------------ Fundamental K1 Value - ----------------- ------------ ------------ ------------ Global Balanced - ----------------- ------------ ------------ ------------ Global Bond - ----------------- ------------ ------------ ------------ Global Equity - ----------------- ------------ ------------ ------------ Global Technology - ----------------- ------------ ------------ ------------ Growth - ----------------- ------------ ------------ ------------ High Yield Bond J1 - ----------------- ------------ ------------ ------------ Income Opportunities - ----------------- ------------ ------------ ------------ Inflation Protected Securities - ----------------- ------------ ------------ ------------ Insured J2 Tax-Exempt - ----------------- ------------ ------------ ------------ Intermediate J2 Tax-Exempt - ----------------- ------------ ------------ ------------ International Aggressive Growth - ----------------- ------------ ------------ ------------
Statement of Additional Information - Nov. 29, 2005 Page 12
- ----------------- --------- ------------- -------- -------- ------------ ---------------- ------------ ----------- ------------ A B C D E F G H I - ----------------- --------- ------------- -------- -------- ------------ ---------------- ------------ ----------- ------------ Invest Deposit Illiquid ment Margin, Money Investing Fund on securities; compa selling Market to control Foreign Debt Tax-exempt futures bullion nies short securities or manage securities securities securities - ----------------- --------- ------------- -------- -------- ------------ ---------------- ------------ ----------- ------------ - ----------------- --------- ------------- -------- -------- ------------ ---------------- ------------ ----------- ------------ International A1 B1 C1 D1 E1 Equity - ----------------- --------- ------------- -------- -------- ------------ ---------------- ------------ ----------- ------------ International A1 B1 C1 D1 E1 F1 Opportunity - ----------------- --------- ------------- -------- -------- ------------ ---------------- ------------ ----------- ------------ International A1 B1 C1 D1 E1 Select Value - ----------------- --------- ------------- -------- -------- ------------ ---------------- ------------ ----------- ------------ International A1 B1 C1 D1 E1 Small Cap - ----------------- --------- ------------- -------- -------- ------------ ---------------- ------------ ----------- ------------ Large Cap Equity A1 B1 C1 D7 E1 F1 G1-20% H7 - ----------------- --------- ------------- -------- -------- ------------ ---------------- ------------ ----------- ------------ Large Cap Value A1 B1 C1 D1 E1 F1 G1-20% H8 - ----------------- --------- ------------- -------- -------- ------------ ---------------- ------------ ----------- ------------ Limited A1 B1 C1 D3 E1 F1 G1-15% Duration Bond - ----------------- --------- ------------- -------- -------- ------------ ---------------- ------------ ----------- ------------ Massachusetts A1 B1 D6 H18 I1, I4, I7 Tax-Exempt - ----------------- --------- ------------- -------- -------- ------------ ---------------- ------------ ----------- ------------ Michigan A1 B1 D6 H18 I1, I4, I7 Tax-Exempt - ----------------- --------- ------------- -------- -------- ------------ ---------------- ------------ ----------- ------------ Mid Cap Growth A1 B1 C1 D1 E1 F1 G1-15% H6 - ----------------- --------- ------------- -------- -------- ------------ ---------------- ------------ ----------- ------------ Mid Cap Value A1 B1 C1 D3 E1 F1 G1-25% H9 - ----------------- --------- ------------- -------- -------- ------------ ---------------- ------------ ----------- ------------ Minnesota A1 B1 D6 H18 I1, I4, I7 Tax-Exempt - ----------------- --------- ------------- -------- -------- ------------ ---------------- ------------ ----------- ------------ New Dimensions A1 B1 C1 D7 E1 F1 G1-30% H7 - ----------------- --------- ------------- -------- -------- ------------ ---------------- ------------ ----------- ------------ New York A1 B1 D6 H18 I1, I4, I7 Tax-Exempt - ----------------- --------- ------------- -------- -------- ------------ ---------------- ------------ ----------- ------------ Ohio Tax-Exempt A1 B1 D6 H18 I1, I4, I7 - ----------------- --------- ------------- -------- -------- ------------ ---------------- ------------ ----------- ------------ Portfolio A1 B1 D7 Builder Aggressive* - ----------------- --------- ------------- -------- -------- ------------ ---------------- ------------ ----------- ------------ Portfolio A1 B1 D7 Builder Conservative* - ----------------- --------- ------------- -------- -------- ------------ ---------------- ------------ ----------- ------------ Portfolio A1 B1 D7 Builder Moderate * - ----------------- --------- ------------- -------- -------- ------------ ---------------- ------------ ----------- ------------ Portfolio A1 B1 D7 Builder Moderate Aggressive* - ----------------- --------- ------------- -------- -------- ------------ ---------------- ------------ ----------- ------------ Portfolio A1 B1 D7 Builder Moderate Conservative* - ----------------- --------- ------------- -------- -------- ------------ ---------------- ------------ ----------- ------------ Portfolio A1 B1 D7 Builder Total Equity* - ----------------- --------- ------------- -------- -------- ------------ ---------------- ------------ ----------- ------------ Precious Metals A1 B1 C1 D7 E1 F1 G2, G4 H7(ii), H21 - ----------------- --------- ------------- -------- -------- ------------ ---------------- ------------ ----------- ------------ Real Estate A1 B1 C1 D7 G1-10% - ----------------- --------- ------------- -------- -------- ------------ ---------------- ------------ ----------- ------------ S&P 500 Index A1 B1 D3 - ----------------- --------- ------------- -------- -------- ------------ ---------------- ------------ ----------- ------------ Select Value A1 B1 C1 D1 E1 G1-20% H4 - ----------------- --------- ------------- -------- -------- ------------ ---------------- ------------ ----------- ------------ Selective A1 B1 C1 D6 E1 F1 G1-25% H5 - ----------------- --------- ------------- -------- -------- ------------ ---------------- ------------ ----------- ------------ Short Duration A1 B1 C1 D9 E1 F1 U.S. Government - ----------------- --------- ------------- -------- -------- ------------ ---------------- ------------ ----------- ------------ Small Cap A1 B1 C1 D1 E1 Advantage - ----------------- --------- ------------- -------- -------- ------------ ---------------- ------------ ----------- ------------ Small Cap Equity A2 B1 C1 D1 E1 G1-15% - ----------------- --------- ------------- -------- -------- ------------ ---------------- ------------ ----------- ------------ Small Cap Growth A1 B1 C1 D1 E1 - ----------------- --------- ------------- -------- -------- ------------ ---------------- ------------ ----------- ------------ - ----------------- ------------ ------------ ------------ J K L - ----------------- ------------ ------------ ------------ Invest Fund Equity while Diversi Securities borrowing fication - ----------------- ------------ ------------ ------------ International Equity - ----------------- ------------ ------------ ------------ International Opportunity - ----------------- ------------ ------------ ------------ International K1 Select Value - ----------------- ------------ ------------ ------------ International Small Cap - ----------------- ------------ ------------ ------------ Large Cap Equity - ----------------- ------------ ------------ ------------ Large Cap Value - ----------------- ------------ ------------ ------------ Limited Duration Bond - ----------------- ------------ ------------ ------------ Massachusetts Tax-Exempt - ----------------- ------------ ------------ ------------ Michigan Tax-Exempt - ----------------- ------------ ------------ ------------ Mid Cap Growth - ----------------- ------------ ------------ ------------ Mid Cap Value - ----------------- ------------ ------------ ------------ Minnesota Tax-Exempt - ----------------- ------------ ------------ ------------ New Dimensions - ----------------- ------------ ------------ ------------ New York Tax-Exempt - ----------------- ------------ ------------ ------------ Ohio Tax-Exempt - ----------------- ------------ ------------ ------------ Portfolio Builder Aggressive* - ----------------- ------------ ------------ ------------ Portfolio Builder Conservative* - ----------------- ------------ ------------ ------------ Portfolio Builder Moderate * - ----------------- ------------ ------------ ------------ Portfolio Builder Moderate Aggressive* - ----------------- ------------ ---------- ------------ Portfolio Builder Moderate Conservative* - ----------------- ------------ ---------- ------------ Portfolio Builder Total Equity* - ----------------- ------------ ---------- ------------ Portfolio Builder Total Equity* - ----------------- ------------ ---------- ------------ Precious Metals L1 - ----------------- ------------ ---------- ------------ Real Estate - ----------------- ------------ ---------- ------------ S&P 500 Index L1, L2 - ----------------- ------------ ---------- ------------ Select Value - ----------------- ------------ ---------- ------------ Selective - ----------------- ------------ ---------- ------------ Short Duration U.S. Government - ----------------- ------------ ---------- ------------ Small Cap Advantage - ----------------- ------------ ---------- ------------ Small Cap Equity K1 - ----------------- ------------ ---------- ------------ Small Cap Growth - ----------------- ------------ ---------- ------------
Statement of Additional Information - Nov. 29, 2005 Page 13
- ----------------- --------- ------------- -------- -------- ------------ ---------------- ------------ ----------- ------------ A B C D E F G H I - ----------------- --------- ------------- -------- -------- ------------ ---------------- ------------ ----------- ------------ Invest Deposit Illiquid ment Margin, Money Investing Fund on securities; compa selling Market to control Foreign Debt Tax-exempt futures bullion nies short securities or manage securities securities securities - ----------------- --------- ------------- -------- -------- ------------ ---------------- ------------ ----------- ------------ Small Cap Value A1 B1 C1 D1 E1 - ----------------- --------- ------------- -------- -------- ------------ ---------------- ------------ ----------- ------------ Small Company A1 B1 C1 D4 E1 F1 Index - ----------------- --------- ------------- -------- -------- ------------ ---------------- ------------ ----------- ------------ Stock A1 B1 C1 D7 E1 F1 G1-25% H7, H16 - ----------------- --------- ------------- -------- -------- ------------ ---------------- ------------ ----------- ------------ Strategic A1 B1 C1 D3 F1 G1-50% H3, H10 Allocation - ----------------- --------- ------------- -------- -------- ------------ ---------------- ------------ ----------- ------------ Strategy A1 B1 C1 D3 E1 F1 G1-25% H13, Aggressive H15(ii) - ----------------- --------- ------------- -------- -------- ------------ ---------------- ------------ ----------- ------------ Tax-Exempt Bond A1 B1 J2 D2 H22 I2 - ----------------- --------- ------------- -------- -------- ------------ ---------------- ------------ ----------- ------------ Tax-Exempt High A1 B1 D2 I2, I3 Income - ----------------- --------- ------------- -------- -------- ------------ ---------------- ------------ ----------- ------------ Tax-Exempt B1(iii) Money Market - ----------------- --------- ------------- -------- -------- ------------ ---------------- ------------ ----------- ------------ U.S. Gov't A1 B1 C1 D9 E1 F1 Mortgage - ----------------- --------- ------------- -------- -------- ------------ ---------------- ------------ ----------- ------------ Value A1 B1 C2 D1 E1 G1-25% H14 - ----------------- --------- ------------- -------- -------- ------------ ---------------- ------------ ----------- ------------ - ----------------- ------------ ---------- ------------ J K L - ----------------- ------------ ---------- ------------ Invest Fund Equity while Diversi Securities borrowing fication - ----------------- ------------ ---------- ------------ Small Cap Value K1 L1, L2 - ----------------- ------------ ---------- ------------ Small Company Index - ----------------- ------------ ---------- ------------ Stock - ----------------- ------------ ---------- ------------ Strategic Allocation - ----------------- ------------ ---------- ------------ Strategy Aggressive - ----------------- ------------ ---------- ------------ Tax-Exempt Bond J2 - ----------------- ------------ ---------- ------------ Tax-Exempt High Income - ----------------- ------------ ---------- ------------ Tax-Exempt Money Market - ----------------- ------------ ---------- ------------ U.S. Gov't Mortgage - ----------------- ------------ ---------- ------------ Value K1 - ----------------- ------------ ---------- ------------
* The fund invests in a combination of underlying funds. These underlying funds have adopted their own investment policies that may be more or less restrictive than those of the fund. The policies of the underlying funds may permit a fund to engage in investment strategies indirectly that would otherwise be prohibited under the fund's investment restrictions. (i) The fund has no current intention of investing more than 5% of its total assets in foreign securities. (ii) Securities that are subsequently downgraded in quality may continue to be held and will be sold only when the investment manager believes it is advantageous to do so. (iii) In determining the liquidity of municipal lease obligations, the investment manager, under guidelines established by the Board, will consider the essential nature of the leased property, the likelihood that the municipality will continue appropriating funding for the leased property, and other relevant factors related to the general credit quality of the municipality and the marketability of the municipal lease obligation. A. Deposit on futures/premiums on options A1 - No more than 5% of the fund's net assets can be used at any one time for good faith deposits on futures and premiums for options on futures that do not offset existing investment positions. A2 - No more than 5% of the fund's net assets can be used at any one time for good faith deposits on futures and premiums for options on futures other than for bona fide hedging purposes (within the meaning of the rules of the Commodities Futures Trading Commission). B. Illiquid securities B1 - No more than 10% of the fund's net assets will be held in securities and other instruments that are illiquid. B2 - The fund will not invest more than 10% of its net assets in securities that are illiquid whether or not registration or the filing of a notification under the Securities Act of 1933 or the taking of similar action under other securities laws relating to the sale of securities is required. A risk of any such investment is that it might not be able to be easily liquidated. For the purpose of this policy, repurchase agreements with maturities greater than seven days and non-negotiable fixed time deposits will be treated as illiquid securities. C. Investment companies C1 - The fund will not invest more than 10% of its total assets in the securities of investment companies. C2 - The fund will not invest more than 10% of its total assets in the securities of investment companies, unless a higher amount is permitted under an SEC exemptive order. Statement of Additional Information - Nov. 29, 2005 Page 14 D. Margin/selling short D1 - The fund will not buy on margin or sell securities short, except the fund may make margin payments in connection with transactions in derivative instruments. D2 - The fund will not buy on margin or sell short, except that the fund may use derivative instruments. D3 - The fund will not buy on margin or sell securities short, except the fund may make margin payments in connection with transactions in futures contracts. D4 - The fund will not buy on margin or sell short, except the fund may make margin payments in connection with transactions in options, futures contracts and other financial instruments. D5 - The fund will not buy on margin or sell securities short, except the fund may make margin payments in connection with transactions in interest rate futures contracts. D6 - The fund will not buy on margin or sell short, except the fund may enter into interest rate futures contracts. D7 - The fund will not buy on margin or sell securities short, except the fund may make margin payments in connection with transactions in stock index futures contracts. D8 - The fund will not buy on margin, except the fund may make margin payments in connection with transactions in stock index futures contracts. D9 - The fund will not buy on margin, except the fund may make margin payments in connection with interest rate futures contracts. E. Money market securities E1 - Ordinarily, less than 25% of the fund's total assets are invested in money market instruments. F. Investing to control or manage F1 - The fund will not invest in a company to control or manage it. G. Foreign securities G1 - The fund may invest its total assets, up to the amount shown, in foreign investments. G2 - Under normal market conditions, the fund intends to invest at least 50% of its total assets in foreign investments. G3 - Investments in U.S. issuers generally will constitute less than 20% of the fund's total assets. G4 - The fund may invest up to 10% of its total assets in gold and silver bullion, other precious metals, strategic metals and other metals occurring naturally with such metals and securities convertible into metals. The fund will invest only in metals and securities convertible into metals that are readily marketable. H. Debt securities H1 - The fund may invest up to 20% of its net assets in bonds. H2 - The fund 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. H3 - The fund may invest up to 30% of its total assets in short-term debt securities rated in the top two grades or the equivalent. H4 - The fund normally will purchase only investment grade convertible debt securities with a rating of, or equivalent to, at least BBB by S&P or, in the case of unrated securities, judged by the subadviser to be of comparable quality. The fund may invest in more speculative convertible debt securities, provided that such securities have a rating of, or equivalent to, at least an S&P rating of B and provided also that the total investment in such securities remains below 15% of the fund's assets. H5 - The fund may not purchase debt securities rated below investment grade. Statement of Additional Information - Nov. 29, 2005 Page 15 H6 - The fund only invests in bonds given the four highest ratings by Moody's or by S&P or in bonds of comparable quality in the judgment of the investment manager. H7 - The fund will not invest more than 5% of its net assets in bonds below investment grade. H8 - The fund may invest up to 10% of its net assets in bonds rated below investment grade H9 - No more than 10% of the fund's net assets may be invested in bonds below investment grade unless the bonds are convertible securities. H10- No more than 15% of the fund's total assets will be invested in below investment-grade debt securities. H11- The fund may invest 20% of its net assets in bonds rated or considered below investment grade (less than BBB/Baa). H12- No more than 20% of the fund's net assets may be invested in bonds below investment grade unless the bonds are convertible securities. H13- The fund will not invest more than 5% of its net assets in bonds rated BB or B, or in unrated bonds of equivalent quality. H14- No more than 10% of the fund's assets will be held in debt securities rated BB/Ba or lower. H15- The fund may not invest in debt securities rated lower than B (or in unrated bonds of comparable quality). H16- The fund will not purchase securities rated below C by Moody's or S&P, or the equivalent. H17- The fund may invest in commercial paper rated in the highest rating category by at least two nationally recognized statistical rating organizations (or by one, if only one rating is assigned) and in unrated paper determined by the Board to be of comparable quality. The fund also may invest up to 5% of its total assets in commercial paper receiving the second highest rating or in unrated paper determined to be of comparable quality. H18- No more than 10% of the fund's net assets will be held in inverse floaters. H19- The fund may purchase securities rated Aaa by Moody's or AAA by S&P. In addition, the fund may purchase other securities, provided the securities are insured. H20- Under normal market conditions, at least 65% of the fund's total assets will be invested in securities that are insured and have a maturity of more than one year. H21- In the event economic, political or financial conditions adverse to gold or metals industries or the metals themselves occur, the fund temporarily may invest over 75% of its total assets in U.S. government securities or investment-grade short-term obligations (denominated either in foreign currencies or U.S. dollars). H22- At least 75% of the fund's investments in bonds and other debt securities must be rated in the top four grades by Moody's, S&P, or Fitch Investors Services, Inc. or be of comparable rating given by other independent rating agencies. Up to 25% of the fund's remaining investments may be in unrated bonds and other debt securities that, in the investment manager'ss opinion, are of investment grade quality. All industrial revenue bonds must be rated. I. Tax- exempt securities I1 - If, in the opinion of the investment manager, appropriate tax-exempt securities are not available, the fund may invest up to 20% of its net assets, or more on a temporary defensive basis, in taxable investments. I2 - Short-term tax-exempt debt securities rated in the top two grades or the equivalent are used to meet daily cash needs and at various times to hold assets until better investment opportunities arise. Under extraordinary conditions, where, in the opinion of the investment manager, appropriate short-term tax-exempt securities are not available, the fund may invest up to 20% of its net assets in certain taxable investments for temporary defensive purposes. Statement of Additional Information - Nov. 29, 2005 Page 16 I3 - The fund 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. I4 - The fund may invest more than 25% of its total assets in a particular segment of the municipal securities market or in industrial revenue bonds, but does not intend to invest more than 25% of its total assets in industrial revenue bonds issued for companies in the same industry. I5 - The fund may invest more than 25% of its total assets in a particular segment of the municipal securities market or in industrial revenue bonds, but it does not intend to invest more than 25% of its total assets in industrial revenue bonds issued for companies in the same industry or state. I6 - The fund may invest more than 25% of its total assets in a particular segment of the municipal securities market or in securities relating to a particular state. Such markets may include electric revenue bonds, hospital bonds, housing bonds, industrial bonds, airport bonds, or in securities the interest on which is paid from revenues of a similar type of project. I7 - A portion of the fund's assets may be invested in bonds whose interest is subject to the alternative minimum tax computation. As long as the staff of the SEC maintains its current position that a fund calling itself a "tax-exempt" fund may not invest more than 20% of its net assets in these bonds, the fund will limit its investments in these bonds to 20% of its net assets. I8 - Pending investment in municipal securities maturing in more than one year, or as a temporary defensive position, the fund may hold up to 35% of its net assets in short-term tax-exempt instruments that are not insured or guaranteed. The fund will purchase these instruments only if they are rated MIG-1 by Moody's or SP-1 by S&P or if the long-term debt of such issuers is rated Aaa by Moody's or AAA by S&P or the equivalent. I9 - Except for securities guaranteed by the U.S. government, or an agency thereof, and the short-term tax-exempt instruments rated MIG-1 by Moody's or SP-1 by S&P or if the long-term debt of such issuers is rated Aaa by Moody's or AAA by S&P or the equivalent, each tax-exempt security purchased by the fund will be insured either by a New Issue Insurance Policy or by a Portfolio Insurance Policy issued by MBIA Insurance Corporation, Financial Guaranty Insurance Company or a comparable insurer as long as that insurer is rated Aaa by Moody's or AAA by S&P or the equivalent. J. Equity Securities J1 - The fund may invest up to 10% of its total assets in common stocks, preferred stocks that do not pay dividends and warrants to purchase common stocks. J2 - The fund will not invest in voting securities or securities of investment companies. K. Invest while Borrowing K1 - The fund will not make additional investments while any borrowing remains outstanding. L. Diversification L1 - Purchase more than 10% of the outstanding voting securities of an issuer, except that up to 25% of the fund's assets may be invested without regard to this 10% limitation. L2 - 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, or other registered investment companies and except up to 25% of the fund's total assets may be invested without regard to this 5% limitation. Statement of Additional Information - Nov. 29, 2005 Page 17 Investment Strategies and Types of Investments This table shows many of the various investment strategies and investments that many funds are allowed to engage in and purchase. It is intended to show the breadth of investments that the investment manager or subadviser (individually and collectively, the "investment manager") may make on behalf of a fund. For a description of principal risks for an individual fund, please see the applicable prospectus for that fund. Notwithstanding a fund's ability to utilize these strategies and techniques, the investment manager is not obligated to use them at any particular time. For example, even though the investment manager is authorized to adopt temporary defensive positions and is authorized to attempt to hedge against certain types of risk, these practices are left to the investment manager's sole discretion. Investment strategies and types of investments: A black circle indicates that the investment strategy or type of investment generally is authorized for a category of funds. Exceptions are noted in the footnotes to the table. See Table 1 for fund categories.
Table 4. Investment Strategies and Types of Investments - ------------------------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- Investment strategy Balanced Equity Funds-of- Taxable Taxable Tax-exempt Tax-exempt State funds - bond money money bond tax-exempt equity market market bond and bond - ------------------------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- Agency and government o o o o o o o o securities - ------------------------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- Borrowing o o o o o o o - ------------------------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- Cash/money market o o o o o o o o instruments - ------------------------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- Collateralized bond o o A o o o obligations - ------------------------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- Commercial paper o o o o o o o o - ------------------------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- Common stock o o o B - ------------------------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- Convertible securities o o o C o o - ------------------------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- Corporate bonds o o o o o - ------------------------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- Debt obligations o o o o o o o - ------------------------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- Depositary receipts o o o D - ------------------------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- Derivative instruments o o o o o o (including options and futures) - ------------------------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- Exchange-traded funds o o o o o - ------------------------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- Foreign currency o o o E o E transactions - ------------------------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- Foreign securities o o o F o o o - ------------------------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- Funding agreements o o o o o o o o - ------------------------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- High yield (high-risk) o o G o G o G o debt securities (junk bonds) - ------------------------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- Illiquid and restricted o o o o o o o o securities - ------------------------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- Indexed securities o o o o o - ------------------------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- Inflation protected o o o o o securities - ------------------------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- Inverse floaters o H o o o - ------------------------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- Investment companies o o o o I - ------------------------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- Lending of portfolio o o o o o o o o securities - ------------------------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- Loan participations o o o o o - ------------------------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- Mortgage-and o o J o o o o o asset-backed securities - ------------------------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- Mortgage dollar rolls o K o o o - ------------------------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- Municipal obligations o o o o o o - ------------------------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- Preferred stock o o o L o L o - ------------------------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- Real estate investment o o o o o trusts - ------------------------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- Repurchase agreements o o o o o o o - ------------------------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- Reverse repurchase o o o o o o agreements - ------------------------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- Short sales M M - ------------------------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- Sovereign debt o o N o o o o - ------------------------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- Structured investments o o o o o - ------------------------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- Swap agreements P o P - ------------------------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- -----------
Statement of Additional Information - Nov. 29, 2005 Page 18
- ------------------------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- Investment strategy Balanced Equity Funds-of- Taxable Taxable Tax-exempt Tax-exempt State funds - bond money money bond tax-exempt equity market market bond and bond - ------------------------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- Variable- or o o o o o o o o floating-rate securities - ------------------------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- Warrants o o o o o - ------------------------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- When-issued securities o o o o o and forward commitments - ------------------------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- Zero-coupon, o o o o o step-coupon and pay-in-kind securities - ------------------------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- -----------
A. The following funds are not authorized to invest in collateralized bond obligations: International Aggressive Growth, International Equity, International Select Value, International Small Cap, Select Value, Small Cap Equity, Small Cap Growth, Small Cap Value, and Small Cap Advantage. B. The following funds are not authorized to invest in common stock: Short Duration, U.S. Government Mortgage. C. The following funds are not authorized to invest in convertible securities: Short Duration, U.S. Government Mortgage. D. The following funds are not authorized to invest in depositary receipts: Short Duration, U.S. Government Mortgage. E. The following funds are not authorized to engage in foreign currency transactions: Insured Tax-Exempt Bond, U.S. Government Mortgage. F. The following funds are not authorized to invest in foreign securities: U.S. Government Mortgage. G. The following funds may hold securities that are downgraded to junk bond status, if the bonds were rated investment grade at the time of purchase: Core Bond, Dividend Opportunity, Mid Cap Growth, Growth, Inflation Protected Securities, Limited Duration, International Aggressive Growth, International Equity, International Select Value, International Small Cap, Small Cap Growth, Real Estate, S&P 500 Index, Selective, Short Duration, Small Cap Advantage, Small Company Index, Tax-Exempt Bond, European Equity, International Opportunity, U.S. Government Mortgage. H. The following funds are authorized to invest in inverse floaters: Real Estate. I. The following funds are authorized to invest in investment companies: Intermediate Tax-Exempt, Tax-Exempt Bond. J. The following funds are not authorized to invest in mortgage-and asset-backed securities: Small Cap Growth, Value, S&P 500 Index, Small Cap Advantage, Small Company Index. K. The following funds are authorized to invest in mortgage dollar rolls: Real Estate. L. The following funds are not authorized to invest in preferred stock: Tax-Exempt High Income, Intermediate Tax-Exempt, Tax-Exempt Bond, Short Duration, U.S. Government Mortgage. M. The following funds are authorized to engage in short sales: S&P 500 Index, Short Duration, U.S. Government Mortgage. N. The following funds are not authorized to invest in sovereign debt: Select Value, Small Cap Equity, Small Cap Growth, Small Cap Value, Small Cap Advantage. P. The following funds are authorized to invest in swap agreements: International Select Value. Tax-exempt bond funds may invest in interest rate swap agreements. Information Regarding Risks and Investment Strategies RISKS The following is a summary of common risk characteristics. Following this summary is a description of certain investments and investment strategies and the risks most commonly associated with them (including certain risks not described below and, in some cases, a more comprehensive discussion of how the risks apply to a particular investment or investment strategy). A mutual fund's risk profile is largely defined by the fund's primary securities and investment strategies. However, most mutual funds are allowed to use certain other strategies and investments that may have different risk characteristics. Accordingly, one or more of the following types of risk may be associated with a fund at any time (for a description of principal risks for an individual fund, please see that fund's prospectus): Active Management Risk. The fund is actively managed and its performance therefore will reflect in part the ability of the portfolio managers to make investment decisions that are suited to achieving the fund's investment objective. Due to its active management, the fund could underperform other mutual funds with similar investment objectives. Affiliated Fund Risk. For funds-of-funds the risk that the investment manager may have potential conflicts of interest in selecting underlying funds because the fees paid to it by some underlying funds are higher than the fees paid by other underlying funds. However, the investment manager is a fiduciary to the funds and is legally obligated to act in their best interests when selecting underlying funds, without taking fees into consideration. Statement of Additional Information - Nov. 29, 2005 Page 19 Allocation Risk. The risk that the investment manager's evaluations regarding asset classes or underlying funds may be incorrect. There is no guarantee that the underlying funds will achieve their investment objectives. There is also a risk that the selected underlying funds' performance may be lower than the performance of the asset class they were selected to represent or may be lower than the performance of alternative underlying funds that could have been selected to represent the asset class. Credit Risk. The risk that the issuer of a security, or the counterparty to a contract, will default or otherwise become unable or unwilling to honor a financial obligation, such as payments due on a bond or a note. If the fund purchases unrated securities, or if the rating of a security is reduced after purchase, the fund will depend on the investment manager's analysis of credit risk more heavily than usual. Derivatives Risk. Derivatives are financial instruments where value depends upon, or is derived from, the value of something else, such as one or more underlying investments, pools of investments, options, futures, indexes or currencies. Just as with securities in which the Fund invests directly, derivatives are subject to a number of risks, including market, correlation, liquidity, interest rate and credit risk. In addition, gains or losses involving derivatives may be substantial, because a relatively small price movement in the underlying security, currency or index may result in a substantial gain or loss for the Fund. The Fund will suffer a loss in connection with the use of derivative instruments if prices do not move in the direction anticipated by the Fund's portfolio managers when entering into the derivative instrument. Diversification Risk. A non-diversified fund may invest more of its assets in fewer companies than if it were a diversified fund. Because each investment has a greater effect on the fund's performance, the fund may be more exposed to the risks of loss and volatility then a fund that invests more broadly. For Portfolio Builder Funds. Although most of the underlying funds are diversified funds, because the Fund invests in a limited number of underlying funds, it is considered a non-diversified fund. A non-diversified fund may invest more of its assets in fewer companies than if it were a diversified fund. Because each investment has a greater effect on the Fund's performance, the Fund may be more exposed to the risks of loss and volatility then a fund that invests more broadly. Foreign/Emerging Markets Risk. The following are all components of foreign/emerging markets risk: Country risk includes the political, economic, and other conditions of the country. These conditions include lack of publicly available information, less government oversight (including lack of accounting, auditing, and financial reporting standards), the possibility of government-imposed restrictions, and even the nationalization of assets. The liquidity of foreign investments may be more limited than for most U.S. investments, which means that, at times it may be difficult to sell foreign securities at desirable prices. Currency risk results from the constantly changing exchange rates between local currency and the U.S. dollar. Whenever the fund holds securities valued in a foreign currency or holds the currency, changes in the exchange rate add to or subtract from the value of the investment. Custody risk refers to the process of clearing and settling trades. It also covers holding securities with local agents and depositories. Low trading volumes and volatile prices in less developed markets make trades harder to complete and settle. Local agents are held only to the standard of care of the local market. Governments or trade groups may compel local agents to hold securities in designated depositories that are not subject to independent evaluation. The less developed a country's securities market is, the greater the likelihood of problems occurring. Emerging markets risk includes the dramatic pace of change (economic, social, and political) in these countries as well as the other considerations listed above. These markets are in early stages of development and are extremely volatile. They can be marked by extreme inflation, devaluation of currencies, dependence on trade partners, and hostile relations with neighboring countries. Statement of Additional Information - Nov. 29, 2005 Page 20 Geographic Concentration Risk. Because state-specific tax-exempt funds invest primarily in the municipal securities issued by the state and political sub-divisions of the state, each fund will be particularly affected by political and economic conditions and developments in the state in which it invests. This vulnerability to factors affecting the state's tax-exempt investments will be significantly greater than that of a more geographically diversified fund, which may result in greater losses and volatility. See Appendix B for details. The value of municipal securities owned by a fund also may be adversely affected by future changes in federal or state income tax laws. In addition, because of the relatively small number of issuers of tax-exempt securities, the fund may invest a higher percentage of assets in a single issuer and, therefore, be more exposed to the risk of loss by investing in a few issuers than a fund that invests more broadly. At times, the fund and other accounts managed by investment manager may own all or most of the debt of a particular issuer. This concentration of ownership may make it more difficult to sell, or to determine the fair value of, these investments. Indexing Risk. For funds that are managed to an index and the fund's performance therefore will rise and fall as the performance of the index rises and falls. Inflation Risk. Also known as purchasing power risk, inflation risk reflects the effects of continually rising prices on investments. If an investment's return is lower than the rate of inflation, your money will have less purchasing power as time goes on. Inflation Protected Securities Risk. Inflation-protected debt securities tend to react to change in real interest rates. Real interest rates can be described as nominal interest rates minus the expected impact of inflation. In general, the price of an inflation-protected debt security falls when real interest rates rise, and rises when real interest rates fall. Interest payments on inflation-protected debt securities will vary as the principal and/or interest is adjusted for inflation and may be more volatile than interest paid on ordinary bonds. In periods of deflation, the fund may have no income at all. Income earned by a shareholder depends on the amount of principal invested and that principal will not grow with inflation unless the investor reinvests the portion of fund distributions that comes from inflation adjustments. Interest Rate Risk. The risk of losses attributable to changes in interest rates. Interest rate risk is generally associated with bond prices: when interest rates rise, bond prices fall. In general, the longer the maturity or duration of a bond, the greater its sensitivity to changes in interest rates. Issuer Risk. An issuer, or the value of its stocks or bonds, may perform poorly. Poor performance may be caused by poor management decisions, competitive pressures, breakthroughs in technology, reliance on suppliers, labor problems or shortages, corporate restructurings, fraudulent disclosures, or other factors. Liquidity Risk. The risk associated from a lack of marketability of securities which may make it difficult or impossible to sell at desirable prices in order to minimize loss. The Fund may have to lower the selling price, sell other investments, or forego another, more appealing investment opportunity. Market Risk. The market value of securities may fall or fail to rise. Market risk may affect a single issuer, sector of the economy, industry, or the market as a whole. The market value of securities may fluctuate, sometimes rapidly and unpredictably. This risk is generally greater for small and mid-sized companies, which tend to be more vulnerable to adverse developments. In addition, focus on a particular style, for example, investment in growth or value securities, may cause the Fund to underperform other mutual funds if that style falls out of favor with the market. Statement of Additional Information - Nov. 29, 2005 Page 21 Mid-Sized Company Risk. Investments in mid-sized companies often involve greater risks than investments in larger, more established companies because mid-sized companies may lack the management experience, financial resources, product diversification, and competitive strengths of larger companies. In addition, in many instances the securities of mid-sized companies are traded only over-the-counter or on regional securities exchanges and the frequency and volume of their trading is substantially less than is typical of larger companies. Prepayment and Extension Risk. The risk that a bond or other security might be called, or otherwise converted, prepaid, or redeemed, before maturity. This risk is primarily associated with asset-backed securities, including mortgage backed securities. If a security is converted, prepaid, or redeemed, before maturity, particularly during a time of declining interest rates, the portfolio managers may not be able to reinvest in securities providing as high a level of income, resulting in a reduced yield to the fund. Conversely, as interest rates rise, the likelihood of prepayment decreases. The portfolio managers may be unable to capitalize on securities with higher interest rates because the Fund's investments are locked in at a lower rate for a longer period of time. Reinvestment Risk. The risk that an investor will not be able to reinvest income or principal at the same rate it currently is earning. Sector Risk. Investments that are concentrated in a particular issuer, geographic region, or sector will be more susceptible to changes in price. The more a fund diversifies, the more it spreads risk and potentially reduces the risks of loss and volatility. Small and Mid-Sized Company Risk. Investments in small and medium companies often involve greater risks than investments in larger, more established companies because small and medium companies may lack the management experience, financial resources, product diversification, experience, and competitive strengths of larger companies. Additionally, in many instances the securities of small and medium companies are traded only over-the-counter or on regional securities exchanges and the frequency and volume of their trading is substantially less and may be more volatile than is typical of larger companies. Tracking Error Risk. For funds that are managed to an index, the fund may not track the index perfectly because differences between the index and the fund's portfolio can cause differences in performance. The investment manager purchases securities and other instruments in an attempt to replicate the performance of the index. However, the tools that the investment manager uses to replicate the index are not perfect and the fund's performance is affected by factors such as the size of the fund's portfolio, transaction costs, management fees and expenses, brokerage commissions and fees, the extent and timing of cash flows in and out of the fund and changes in the index. In addition, the returns from a specific type of security (for example, mid-cap stocks) may trail returns from other asset classes or the overall market. Each type of security will go through cycles of doing better or worse than stocks or bonds in general. These periods may last for several years. Statement of Additional Information - Nov. 29, 2005 Page 22 INVESTMENT STRATEGIES The following information supplements the discussion of each fund's investment objectives, policies, and strategies that are described in the prospectus and in this SAI. The following describes strategies that many mutual funds use and types of securities that they purchase. Please refer to the table titled Investment Strategies and Types of Investments to see which are applicable to various categories of funds. Agency and Government Securities The U.S. government and its agencies issue many different types of securities. U.S. Treasury bonds, notes, and bills and securities, including mortgage pass through certificates of the Government National Mortgage Association (GNMA), are guaranteed by the U.S. government. Other U.S. government securities are issued or guaranteed by federal agencies or government-sponsored enterprises but are not guaranteed by the U.S. government. This may increase the credit risk associated with these investments. Government-sponsored entities issuing securities include privately owned, publicly chartered entities created to reduce borrowing costs for certain sectors of the economy, such as farmers, homeowners, and students. They include the Federal Farm Credit Bank System, Farm Credit Financial Assistance Corporation, Federal Home Loan Bank, Federal Home Loan Mortgage Corporation (FHLMC), Federal National Mortgage Association (FNMA), Student Loan Marketing Association (SLMA), and Resolution Trust Corporation (RTC). Government-sponsored entities may issue discount notes (with maturities ranging from overnight to 360 days) and bonds. Agency and government securities are subject to the same concerns as other debt obligations. (See also Debt Obligations and Mortgage- and Asset-Backed Securities.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with agency and government securities include: Active Management Risk, Inflation Risk, Interest Rate Risk, Prepayment and Extension Risk, and Reinvestment Risk. Borrowing A fund may borrow money for temporary or emergency purposes, to make other investments or to engage in other transactions permissible under the 1940 Act that may be considered a borrowing (such as derivative instruments). Borrowings are subject to costs (in addition to any interest that may be paid) and typically reduce a fund's total return. Except as qualified above, however, a fund may not buy securities on margin. Although one or more of the other risks described in this SAI may apply, the largest risks associated with borrowing include: Active Management Risk and Inflation Risk. Cash/Money Market Instruments Cash-equivalent investments include short-term U.S. and Canadian government securities and negotiable certificates of deposit, non-negotiable fixed-time deposits, bankers' acceptances, and letters of credit of banks or savings and loan associations having capital, surplus, and undivided profits (as of the date of its most recently published annual financial statements) in excess of $100 million (or the equivalent in the instance of a foreign branch of a U.S. bank) at the date of investment. A fund also may purchase short-term notes and obligations of U.S. and foreign banks and corporations and may use repurchase agreements with broker-dealers registered under the Securities Exchange Act of 1934 and with commercial banks. (See also Commercial Paper, Debt Obligations, Repurchase Agreements, and Variable- or Floating-Rate Securities.) These types of instruments generally offer low rates of return and subject a fund to certain costs and expenses. See Appendix A for a discussion of securities ratings. Although one or more of the other risks described in this SAI may apply, the largest risks associated with cash/money market instruments include: Active Management Risk, Credit Risk, and Inflation Risk. Statement of Additional Information - Nov. 29, 2005 Page 23 Collateralized Bond Obligations Collateralized bond obligations (CBOs) are investment grade bonds backed by a pool of junk bonds. CBOs are similar in concept to collateralized mortgage obligations (CMOs), but differ in that CBOs represent different degrees of credit quality rather than different maturities. (See also Mortgage- and Asset-Backed Securities.) Underwriters of CBOs package a large and diversified pool of high-risk, high-yield junk bonds, which is then separated into "tiers." Typically, the first tier represents the higher quality collateral and pays the lowest interest rate; the second tier is backed by riskier bonds and pays a higher rate; the third tier represents the lowest credit quality and instead of receiving a fixed interest rate receives the residual interest payments -- money that is left over after the higher tiers have been paid. CBOs, like CMOs, are substantially overcollateralized and this, plus the diversification of the pool backing them, earns them investment-grade bond ratings. Holders of third-tier CBOs stand to earn high yields or less money depending on the rate of defaults in the collateral pool. (See also High-Yield (High-Risk) Debt Securities (Junk Bonds).) Although one or more of the other risks described in this SAI may apply, the largest risks associated with CBOs include: Active Management Risk, Credit Risk, Interest Rate Risk and Prepayment and Extension Risk. Commercial Paper Commercial paper is a short-term debt obligation with a maturity ranging from 2 to 270 days issued by banks, corporations, and other borrowers. It is sold to investors with temporary idle cash as a way to increase returns on a short-term basis. These instruments are generally unsecured, which increases the credit risk associated with this type of investment. (See also Debt Obligations and Illiquid and Restricted Securities.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with commercial paper include: Active Management Risk, Credit Risk, and Liquidity Risk. Common Stock Common stock represents units of ownership in a corporation. Owners typically are entitled to vote on the selection of directors and other important matters as well as to receive dividends on their holdings. In the event that a corporation is liquidated, the claims of secured and unsecured creditors and owners of bonds and preferred stock take precedence over the claims of those who own common stock. The price of common stock is generally determined by corporate earnings, type of products or services offered, projected growth rates, experience of management, liquidity, and general market conditions for the markets on which the stock trades. Although one or more of the other risks described in this SAI may apply, the largest risks associated with common stock include: Active Management Risk, Issuer Risk, Market Risk, and Small and Mid-sized Company Risk. Convertible Securities Convertible securities are bonds, debentures, notes, preferred stocks, or other securities that may be converted into common, preferred or other securities of the same or a different issuer within a particular period of time at a specified price. Some convertible securities, such as preferred equity-redemption cumulative stock (PERCs), have mandatory conversion features. Others are voluntary. A convertible security entitles the holder to receive interest normally paid or accrued on debt or the dividend paid on preferred stock until the convertible security matures or is redeemed, converted, or exchanged. Convertible securities have unique investment characteristics in that they generally (i) have higher yields than common stocks but lower yields than comparable non-convertible securities, (ii) are less subject to fluctuation in value than the underlying stock since they have fixed income characteristics, and (iii) provide the potential for capital appreciation if the market price of the underlying common stock increases. Statement of Additional Information - Nov. 29, 2005 Page 24 The value of a convertible security is a function of its "investment value" (determined by its yield in comparison with the yields of other securities of comparable maturity and quality that do not have a conversion privilege) and its "conversion value" (the security's worth, at market value, if converted into the underlying common stock). The investment value of a convertible security is influenced by changes in interest rates, with investment value declining as interest rates increase and increasing as interest rates decline. The credit standing of the issuer and other factors also may have an effect on the convertible security's investment value. The conversion value of a convertible security is determined by the market price of the underlying common stock. If the conversion value is low relative to the investment value, the price of the convertible security is governed principally by its investment value. Generally, the conversion value decreases as the convertible security approaches maturity. To the extent the market price of the underlying common stock approaches or exceeds the conversion price, the price of the convertible security will be increasingly influenced by its conversion value. A convertible security generally will sell at a premium over its conversion value by the extent to which investors place value on the right to acquire the underlying common stock while holding a fixed income security. Although one or more of the other risks described in this SAI may apply, the largest risks associated with convertible securities include: Active Management Risk, Interest Rate Risk, Issuer Risk, Market Risk, Prepayment and Extension Risk, and Reinvestment Risk. Corporate Bonds Corporate bonds are debt obligations issued by private corporations, as distinct from bonds issued by a government agency or a municipality. Corporate bonds typically have four distinguishing features: (1) they are taxable; (2) they have a par value of $1,000; (3) they have a term maturity, which means they come due all at once; and (4) many are traded on major exchanges. Corporate bonds are subject to the same concerns as other debt obligations. (See also Debt Obligations and High-Yield (High-Risk) Debt Securities (Junk Bonds).) Corporate bonds may be either secured or unsecured. Unsecured corporate bonds are generally referred to as "debentures." See Appendix A for a discussion of securities ratings. Although one or more of the other risks described in this SAI may apply, the largest risks associated with corporate bonds include: Active Management Risk, Credit Risk, Interest Rate Risk, Issuer Risk, Prepayment and Extension Risk, and Reinvestment Risk. Debt Obligations Many different types of debt obligations exist (for example, bills, bonds, or notes). Issuers of debt obligations have a contractual obligation to pay interest at a fixed, variable or floating rate on specified dates and to repay principal on a specified maturity date. Certain debt obligations (usually intermediate- and long-term bonds) have provisions that allow the issuer to redeem or "call" a bond before its maturity. Issuers are most likely to call these securities during periods of falling interest rates. When this happens, an investor may have to replace these securities with lower yielding securities, which could result in a lower return. The market value of debt obligations is affected primarily by changes in prevailing interest rates and the issuers perceived ability to repay the debt. The market value of a debt obligation generally reacts inversely to interest rate changes. When prevailing interest rates decline, the price usually rises, and when prevailing interest rates rise, the price usually declines. In general, the longer the maturity of a debt obligation, the higher its yield and the greater the sensitivity to changes in interest rates. Conversely, the shorter the maturity, the lower the yield but the greater the price stability. Statement of Additional Information - Nov. 29, 2005 Page 25 As noted, the values of debt obligations also may be affected by changes in the credit rating or financial condition of their issuers. Generally, the lower the quality rating of a security, the higher the degree of risk as to the payment of interest and return of principal. To compensate investors for taking on such increased risk, those issuers deemed to be less creditworthy generally must offer their investors higher interest rates than do issuers with better credit ratings. (See also Agency and Government Securities, Corporate Bonds, and High-Yield (High-Risk) Debt Securities (Junk Bonds).) Generally, debt obligations that are investment grade are those that have been rated in one of the top four credit quality categories by two out of the three independent rating agencies. In the event that a debt obligation has been rated by only two agencies, the most conservative, or lower, rating must be in one of the top four credit quality categories in order for the security to be considered investment grade. If only one agency has rated the debt obligation, that rating must be in one of the top four credit quality categories for the security to be considered investment grade. See Appendix A for a discussion of securities ratings. All ratings limitations are applied at the time of purchase. Subsequent to purchase, a debt security may cease to be rated or its rating may be reduced below the minimum required for purchase by a fund. Neither event will require the sale of such a security, but it will be a factor in considering whether to continue to hold the security. To the extent that ratings change as a result of changes in a rating agency or its rating system, a fund will attempt to use comparable ratings as standards for selecting investments. Although one or more of the other risks described in this SAI may apply, the largest risks associated with debt obligations include: Active Management Risk, Credit Risk, Interest Rate Risk, Issuer Risk, Prepayment and Extension Risk, and Reinvestment Risk. Depositary Receipts Some foreign securities are traded in the form of American Depositary Receipts (ADRs). ADRs are receipts typically issued by a U.S. bank or trust company evidencing ownership of the underlying securities of foreign issuers. European Depositary Receipts (EDRs) and Global Depositary Receipts (GDRs) are receipts typically issued by foreign banks or trust companies, evidencing ownership of underlying securities issued by either a foreign or U.S. issuer. Generally, depositary receipts in registered form are designed for use in the U.S. and depositary receipts in bearer form are designed for use in securities markets outside the U.S. Depositary receipts may not necessarily be denominated in the same currency as the underlying securities into which they may be converted. Depositary receipts involve the risks of other investments in foreign securities. In addition, ADR holders may not have all the legal rights of shareholders and may experience difficulty in receiving shareholder communications. (See also Common Stock and Foreign Securities.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with depositary receipts include: Active Management Risk, Foreign/Emerging Markets Risk, Issuer Risk, and Market Risk. Derivative Instruments Derivative instruments are commonly defined to include securities or contracts whose values depend, in whole or in part, on (or "derive" from) the value of one or more other assets, such as securities, currencies, or commodities. A derivative instrument generally consists of, is based upon, or exhibits characteristics similar to options or forward contracts. Such instruments may be used to maintain cash reserves while remaining fully invested, to offset anticipated declines in values of investments, to facilitate trading, to reduce transaction costs, or to pursue higher investment returns. Derivative instruments are characterized by requiring little or no initial payment. Their value changes daily based on a security, a currency, a group of securities or currencies, or an index. A small change in the value of the underlying security, currency, or index can cause a sizable percentage gain or loss in the price of the derivative instrument. Statement of Additional Information - Nov. 29, 2005 Page 26 Options and forward contracts are considered to be the basic "building blocks" of derivatives. For example, forward-based derivatives include forward contracts, swap contracts, and exchange-traded futures. Forward-based derivatives are sometimes referred to generically as "futures contracts." Option-based derivatives include privately negotiated, over-the-counter (OTC) options (including caps, floors, collars, and options on futures) and exchange-traded options on futures. Diverse types of derivatives may be created by combining options or futures in different ways, and by applying these structures to a wide range of underlying assets. Options. An option is a contract. A person who buys a call option for a security has the right to buy the security at a set price for the length of the contract. A person who sells a call option is called a writer. The writer of a call option agrees for the length of the contract to sell the security at the set price when the buyer wants to exercise the option, no matter what the market price of the security is at that time. A person who buys a put option has the right to sell a security at a set price for the length of the contract. A person who writes a put option agrees to buy the security at the set price if the purchaser wants to exercise the option during the length of the contract, no matter what the market price of the security is at that time. An option is covered if the writer owns the security (in the case of a call) or sets aside the cash or securities of equivalent value (in the case of a put) that would be required upon exercise. The price paid by the buyer for an option is called a premium. In addition to the premium, the buyer generally pays a broker a commission. The writer receives a premium, less another commission, at the time the option is written. The premium received by the writer is retained whether or not the option is exercised. A writer of a call option may have to sell the security for a below-market price if the market price rises above the exercise price. A writer of a put option may have to pay an above-market price for the security if its market price decreases below the exercise price. When an option is purchased, the buyer pays a premium and a commission. It then pays a second commission on the purchase or sale of the underlying security when the option is exercised. For record keeping and tax purposes, the price obtained on the sale of the underlying security is the combination of the exercise price, the premium, and both commissions. One of the risks an investor assumes when it buys an option is the loss of the premium. To be beneficial to the investor, the price of the underlying security must change within the time set by the option contract. Furthermore, the change must be sufficient to cover the premium paid, the commissions paid both in the acquisition of the option and in a closing transaction or in the exercise of the option and sale (in the case of a call) or purchase (in the case of a put) of the underlying security. Even then, the price change in the underlying security does not ensure a profit since prices in the option market may not reflect such a change. Options on many securities are listed on options exchanges. If a fund writes listed options, it will follow the rules of the options exchange. Options are valued at the close of the New York Stock Exchange. An option listed on a national exchange, Chicago Board Options Exchange, or NASDAQ will be valued at the last quoted sales price or, if such a price is not readily available, at the mean of the last bid and ask prices. Options on certain securities are not actively traded on any exchange, but may be entered into directly with a dealer. These options may be more difficult to close. If an investor is unable to effect a closing purchase transaction, it will not be able to sell the underlying security until the call written by the investor expires or is exercised. Futures Contracts. A futures contract is a sales contract between a buyer (holding the "long" position) and a seller (holding the "short" position) for an asset with delivery deferred until a future date. The buyer agrees to pay a fixed price at the agreed future date and the seller agrees to deliver the asset. The seller hopes that the market price on the delivery date is less than the agreed upon price, while the buyer hopes for the contrary. Many futures contracts trade in a manner similar to the way a stock trades on a stock exchange and the commodity exchanges. Statement of Additional Information - Nov. 29, 2005 Page 27 Generally, a futures contract is terminated by entering into an offsetting transaction. An offsetting transaction is effected by an investor taking an opposite position. At the time a futures contract is made, a good faith deposit called initial margin is set up. Daily thereafter, the futures contract is valued and the payment of variation margin is required so that each day a buyer would pay out cash in an amount equal to any decline in the contract's value or receive cash equal to any increase. At the time a futures contract is closed out, a nominal commission is paid, which is generally lower than the commission on a comparable transaction in the cash market. Futures contracts may be based on various securities, securities indices (such as the S&P 500 Index), foreign currencies and other financial instruments and indices. A fund may engage in futures and related options transactions to produce incremental earnings, to hedge existing positions, and to increase flexibility. The fund intends to comply with Rule 4.5 of the Commodity Futures Trading Commission (CFTC), under which a mutual fund is exempt from the definition of a "commodity pool operator." The fund, therefore, is not subject to registration or regulation as a pool operator, meaning that the fund may invest in futures contracts without registering with the CFTC. Options on Futures Contracts. Options on futures contracts give the holder a right to buy or sell futures contracts in the future. Unlike a futures contract, which requires the parties to the contract to buy and sell a security on a set date (some futures are settled in cash), an option on a futures contract merely entitles its holder to decide on or before a future date (within nine months of the date of issue) whether to enter into a contract. If the holder decides not to enter into the contract, all that is lost is the amount (premium) paid for the option. Further, because the value of the option is fixed at the point of sale, there are no daily payments of cash to reflect the change in the value of the underlying contract. However, since an option gives the buyer the right to enter into a contract at a set price for a fixed period of time, its value does change daily. One of the risks in buying an option on a futures contract is the loss of the premium paid for the option. The risk involved in writing options on futures contracts an investor owns, or on securities held in its portfolio, is that there could be an increase in the market value of these contracts or securities. If that occurred, the option would be exercised and the asset sold at a lower price than the cash market price. To some extent, the risk of not realizing a gain could be reduced by entering into a closing transaction. An investor could enter into a closing transaction by purchasing an option with the same terms as the one previously sold. The cost to close the option and terminate the investor's obligation, however, might still result in a loss. Further, the investor might not be able to close the option because of insufficient activity in the options market. Purchasing options also limits the use of monies that might otherwise be available for long-term investments. Options on Stock Indexes. Options on stock indexes are securities traded on national securities exchanges. An option on a stock index is similar to an option on a futures contract except all settlements are in cash. A fund exercising a put, for example, would receive the difference between the exercise price and the current index level. Tax and Accounting Treatment. As permitted under federal income tax laws and to the extent a fund is allowed to invest in futures contracts, a fund would intend 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. If a fund is using short futures contracts for hedging purposes, the fund may be required to defer recognizing losses incurred on short futures contracts and on underlying securities. Federal income tax treatment of gains or losses from transactions in options on futures contracts and indexes will depend on whether the option is a section 1256 contract. If the option is a non-equity option, a fund would 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. Statement of Additional Information - Nov. 29, 2005 Page 28 The IRS has ruled publicly that an exchange-traded call option is a security for purposes of the 50%-of-assets test and that its issuer is the issuer of the underlying security, not the writer of the option, for purposes of the diversification requirements. Accounting for futures contracts will be according to generally accepted accounting principles. Initial margin deposits will be recognized as assets due from a broker (a fund's agent in acquiring the futures position). During the period the futures contract is open, changes in value of the contract will be recognized as unrealized gains or losses by marking to market on a daily basis to reflect the market value of the contract at the end of each day's trading. Variation margin payments will be made or received depending upon whether gains or losses are incurred. All contracts and options will be valued at the last-quoted sales price on their primary exchange. Other Risks of Derivatives. The primary risk of derivatives is the same as the risk of the underlying asset, namely that the value of the underlying asset may go up or down. Adverse movements in the value of an underlying asset can expose an investor to losses. Derivative instruments may include elements of leverage and, accordingly, the fluctuation of the value of the derivative instrument in relation to the underlying asset may be magnified. The successful use of derivative instruments depends upon a variety of factors, particularly the investment manager's ability to predict movements of the securities, currencies, and commodity markets, which requires different skills than predicting changes in the prices of individual securities. There can be no assurance that any particular strategy will succeed. Another risk is the risk that a loss may be sustained as a result of the failure of a counterparty to comply with the terms of a derivative instrument. The counterparty risk for exchange-traded derivative instruments is generally less than for privately-negotiated or OTC derivative instruments, since generally a clearing agency, which is the issuer or counterparty to each exchange-traded instrument, provides a guarantee of performance. For privately-negotiated instruments, there is no similar clearing agency guarantee. In all transactions, an investor will bear the risk that the counterparty will default, and this could result in a loss of the expected benefit of the derivative transaction and possibly other losses. When a derivative transaction is used to completely hedge another position, changes in the market value of the combined position (the derivative instrument plus the position being hedged) result from an imperfect correlation between the price movements of the two instruments. With a perfect hedge, the value of the combined position remains unchanged for any change in the price of the underlying asset. With an imperfect hedge, the values of the derivative instrument and its hedge are not perfectly correlated. For example, if the value of a derivative instrument used in a short hedge (such as writing a call option, buying a put option, or selling a futures contract) increased by less than the decline in value of the hedged investment, the hedge would not be perfectly correlated. Such a lack of correlation might occur due to factors unrelated to the value of the investments being hedged, such as speculative or other pressures on the markets in which these instruments are traded. Derivatives also are subject to the risk that they cannot be sold, closed out, or replaced quickly at or very close to their fundamental value. Generally, exchange contracts are very liquid because the exchange clearinghouse is the counterparty of every contract. OTC transactions are less liquid than exchange-traded derivatives since they often can only be closed out with the other party to the transaction. Another risk is caused by the legal unenforcibility of a party's obligations under the derivative. A counterparty that has lost money in a derivative transaction may try to avoid payment by exploiting various legal uncertainties about certain derivative products. (See also Foreign Currency Transactions.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with derivative instruments include: Active Management Risk, Derivatives Risk, and Liquidity Risk. Statement of Additional Information - Nov. 29, 2005 Page 29 Exchange-Traded Funds Exchange-traded funds (ETFs) represent shares of ownership in mutual funds, unit investment trusts or depositary receipts. ETFs hold portfolios of securities that closely track the performance and dividend yield of specific domestic or foreign market indexes. Although one or more of the other risks described in this SAI may apply, the largest risks associated with ETFs include: Active Management Risk and Market Risk. Foreign Currency Transactions Investments in foreign countries usually involve currencies of foreign countries. In addition, a fund may hold cash and cash equivalent investments in foreign currencies. As a result, the value of a fund's assets as measured in U.S. dollars may be affected favorably or unfavorably by changes in currency exchange rates and exchange control regulations. Also, a fund may incur costs in connection with conversions between various currencies. Currency exchange rates may fluctuate significantly over short periods of time causing a fund's NAV to fluctuate. Currency exchange rates are generally determined by the forces of supply and demand in the foreign exchange markets, actual or anticipated changes in interest rates, and other complex factors. Currency exchange rates also can be affected by the intervention of U.S. or foreign governments or central banks, or the failure to intervene, or by currency controls or political developments. Spot Rates and Derivative Instruments. A fund may conduct its foreign currency exchange transactions either at the spot (cash) rate prevailing in the foreign currency exchange market or by entering into forward currency exchange contracts (forward contracts). (See also Derivative Instruments.) These contracts are traded in the interbank market conducted directly between currency traders (usually large commercial banks) and their customers. Because foreign currency transactions occurring in the interbank market might involve substantially larger amounts than those involved in the use of such derivative instruments, a fund could be disadvantaged by having to deal in the odd lot market for the underlying foreign currencies at prices that are less favorable than for round lots. A fund may enter into forward contracts for a variety of reasons. A fund may enter into forward contracts to settle a security transaction or handle dividend and interest collection. When a fund enters into a contract for the purchase or sale of a security denominated in a foreign currency or has been notified of a dividend or interest payment, it may desire to lock in the price of the security or the amount of the payment in dollars. By entering into a forward contract, a fund would be able to protect itself against a possible loss resulting from an adverse change in the relationship between different currencies from the date the security is purchased or sold to the date on which payment is made or received or when the dividend or interest is actually received. A fund may enter into forward contracts when management of the fund believes the currency of a particular foreign country may decline in value relative to another currency. When selling currencies forward in this fashion, a fund may seek to hedge the value of foreign securities it holds against an adverse move in exchange rates. The precise matching of forward contract amounts and the value of securities involved generally will not be possible since the future value of securities in foreign currencies more than likely will change between the date the forward contract is entered into and the date it matures. The projection of short-term currency market movements is extremely difficult and successful execution of a short-term hedging strategy is highly uncertain. A fund would not enter into such forward contracts or maintain a net exposure to such contracts when consummating the contracts would obligate it to deliver an amount of foreign currency in excess of the value of its securities or other assets denominated in that currency. A fund may designate cash or securities in an amount equal to the value of the fund's total assets committed to consummating forward contracts entered into under the circumstance set forth immediately above. If the value of the securities declines, additional cash or securities will be designated on a daily basis so that the value of the cash or securities will equal the amount of the fund's commitments on such contracts. Statement of Additional Information - Nov. 29, 2005 Page 30 This method of protecting the value of the fund's securities against a decline in the value of a currency does not eliminate fluctuations in the underlying prices of the securities. It simply establishes a rate of exchange that can be achieved at some point in time. Although forward contracts tend to minimize the risk of loss due to a decline in value of hedged currency, they tend to limit any potential gain that might result should the value of such currency increase. A fund also may enter into forward contracts when its management believes the currency of a particular country will increase in value relative to another currency. A fund may buy currencies forward to gain exposure to a currency without incurring the additional costs of purchasing securities denominated in that currency. At maturity of a forward contract, a fund may either deliver (if a contract to sell) or take delivery of (if a contract to buy) the foreign currency or terminate its contractual obligation by entering into an offsetting contract with the same currency trader, the same maturity date, and covering the same amount of foreign currency. If a fund engages in an offsetting transaction, it would incur a gain or loss to the extent there has been movement in forward contract prices. If a fund engages in an offsetting transaction, it may subsequently enter into a new forward contract to buy or sell the foreign currency. Although a fund values its assets each business day in terms of U.S. dollars, it may not intend to convert its foreign currencies into U.S. dollars on a daily basis. It would do so from time to time, and shareholders should be aware of currency conversion costs. Although foreign exchange dealers do not charge a fee for conversion, they do realize a profit based on the difference (spread) between the prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign currency to a fund at one rate, while offering a lesser rate of exchange should a fund desire to resell that currency to the dealer. Options on Foreign Currencies. A fund may buy put and call options and write covered call and cash-secured put options on foreign currencies for hedging purposes and to gain exposure to foreign currencies. For example, a decline in the dollar value of a foreign currency in which securities are denominated will reduce the dollar value of such securities, even if their value in the foreign currency remains constant. In order to protect against the diminutions in the value of securities, a fund may buy put options on the foreign currency. If the value of the currency does decline, a fund would have the right to sell the currency for a fixed amount in dollars and would offset, in whole or in part, the adverse effect on its portfolio that otherwise would have resulted. Conversely, where a change in the dollar value of a currency would increase the cost of securities a fund plans to buy, or where a fund would benefit from increased exposure to the currency, a fund may buy call options on the foreign currency. The purchase of the options could offset, at least partially, the changes in exchange rates. As in the case of other types of options, however, the benefit to a fund derived from purchases of foreign currency options would be reduced by the amount of the premium and related transaction costs. In addition, where currency exchange rates do not move in the direction or to the extent anticipated, a fund could sustain losses on transactions in foreign currency options that would require it to forego a portion or all of the benefits of advantageous changes in rates. A fund may write options on foreign currencies for the same types of purposes. For example, when a fund anticipates a decline in the dollar value of foreign-denominated securities due to adverse fluctuations in exchange rates it could, instead of purchasing a put option, write a call option on the relevant currency. If the expected decline occurs, the option would most likely not be exercised and the diminution in value of securities would be fully or partially offset by the amount of the premium received. Similarly, instead of purchasing a call option when a foreign currency is expected to appreciate, a fund could write a put option on the relevant currency. If rates move in the manner projected, the put option would expire unexercised and allow the fund to hedge increased cost up to the amount of the premium. Statement of Additional Information - Nov. 29, 2005 Page 31 As in the case of other types of options, however, the writing of a foreign currency option will constitute only a partial hedge up to the amount of the premium, and only if rates move in the expected direction. If this does not occur, the option may be exercised and the fund would be required to buy or sell the underlying currency at a loss that may not be offset by the amount of the premium. Through the writing of options on foreign currencies, the fund also may be required to forego all or a portion of the benefits that might otherwise have been obtained from favorable movements on exchange rates. All options written on foreign currencies will be covered. An option written on foreign currencies is covered if a fund holds currency sufficient to cover the option or has an absolute and immediate right to acquire that currency without additional cash consideration upon conversion of assets denominated in that currency or exchange of other currency held in its portfolio. An option writer could lose amounts substantially in excess of its initial investments, due to the margin and collateral requirements associated with such positions. Options on foreign currencies are traded through financial institutions acting as market-makers, although foreign currency options also are traded on certain national securities exchanges, such as the Philadelphia Stock Exchange and the Chicago Board Options Exchange, subject to SEC regulation. In an over-the-counter trading environment, many of the protections afforded to exchange participants will not be available. For example, there are no daily price fluctuation limits, and adverse market movements could therefore continue to an unlimited extent over a period of time. Although the purchaser of an option cannot lose more than the amount of the premium plus related transaction costs, this entire amount could be lost. Foreign currency option positions entered into on a national securities exchange are cleared and guaranteed by the Options Clearing Corporation (OCC), thereby reducing the risk of counterparty default. Further, a liquid secondary market in options traded on a national securities exchange may be more readily available than in the over-the-counter market, potentially permitting a fund to liquidate open positions at a profit prior to exercise or expiration, or to limit losses in the event of adverse market movements. The purchase and sale of exchange-traded foreign currency options, however, is subject to the risks of availability of a liquid secondary market described above, as well as the risks regarding adverse market movements, margining of options written, the nature of the foreign currency market, possible intervention by governmental authorities and the effects of other political and economic events. In addition, exchange-traded options on foreign currencies involve certain risks not presented by the over-the-counter market. For example, exercise and settlement of such options must be made exclusively through the OCC, which has established banking relationships in certain foreign countries for that purpose. As a result, the OCC may, if it determines that foreign governmental restrictions or taxes would prevent the orderly settlement of foreign currency option exercises, or would result in undue burdens on OCC or its clearing member, impose special procedures on exercise and settlement, such as technical changes in the mechanics of delivery of currency, the fixing of dollar settlement prices or prohibitions on exercise. Foreign Currency Futures and Related Options. A fund may enter into currency futures contracts to buy or sell currencies. It also may buy put and call options and write covered call and cash-secured put options on currency futures. Currency futures contracts are similar to currency forward contracts, except that they are traded on exchanges (and have margin requirements) and are standardized as to contract size and delivery date. Most currency futures call for payment of delivery in U.S. dollars. A fund may use currency futures for the same purposes as currency forward contracts, subject to CFTC limitations. Currency futures and options on futures values can be expected to correlate with exchange rates, but will not reflect other factors that may affect the value of the fund's investments. A currency hedge, for example, should protect a Yen-denominated bond against a decline in the Yen, but will not protect a fund against price decline if the issuer's creditworthiness deteriorates. Because the value of a fund's investments denominated in foreign currency will change in response to many factors other than exchange rates, it may not be possible to match the amount of a forward contract to the value of a fund's investments denominated in that currency over time. Statement of Additional Information - Nov. 29, 2005 Page 32 A fund will hold securities or other options or futures positions whose values are expected to offset its obligations. The fund would not enter into an option or futures position that exposes the fund to an obligation to another party unless it owns either (i) an offsetting position in securities or (ii) cash, receivables and short-term debt securities with a value sufficient to cover its potential obligations. (See also Derivative Instruments and Foreign Securities.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with foreign currency transactions include: Active Management Risk, Derivatives Risk, Interest Rate Risk, and Liquidity Risk. Foreign Securities Foreign securities, foreign currencies, and securities issued by U.S. entities with substantial foreign operations involve special risks, including those set forth below, which are not typically associated with investing in U.S. securities. Foreign companies are not generally subject to uniform accounting, auditing, and financial reporting standards comparable to those applicable to domestic companies. Additionally, many foreign stock markets, while growing in volume of trading activity, have substantially less volume than the New York Stock Exchange, and securities of some foreign companies are less liquid and more volatile than securities of domestic companies. Similarly, volume and liquidity in most foreign bond markets are less than the volume and liquidity in the U.S. and, at times, volatility of price can be greater than in the U.S. Further, foreign markets have different clearance, settlement, registration, and communication procedures and in certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions making it difficult to conduct such transactions. Delays in such procedures could result in temporary periods when assets are uninvested and no return is earned on them. The inability of an investor to make intended security purchases due to such problems could cause the investor to miss attractive investment opportunities. Payment for securities without delivery may be required in certain foreign markets and, when participating in new issues, some foreign countries require payment to be made in advance of issuance (at the time of issuance, the market value of the security may be more or less than the purchase price). Some foreign markets also have compulsory depositories (i.e., an investor does not have a choice as to where the securities are held). Fixed commissions on some foreign stock exchanges are generally higher than negotiated commissions on U.S. exchanges. Further, an investor may encounter difficulties or be unable to pursue legal remedies and obtain judgments in foreign courts. There is generally less government supervision and regulation of business and industry practices, stock exchanges, brokers, and listed companies than in the U.S. It may be more difficult for an investor's agents to keep currently informed about corporate actions such as stock dividends or other matters that may affect the prices of portfolio securities. Communications between the U.S. and foreign countries may be less reliable than within the U.S., thus increasing the risk of delays or loss of certificates for portfolio securities. In addition, with respect to certain foreign countries, there is the possibility of nationalization, expropriation, the imposition of additional withholding or confiscatory taxes, political, social, or economic instability, diplomatic developments that could affect investments in those countries, or other unforeseen actions by regulatory bodies (such as changes to settlement or custody procedures). The risks of foreign investing may be magnified for investments in emerging markets, which may have relatively unstable governments, economies based on only a few industries, and securities markets that trade a small number of securities. Statement of Additional Information - Nov. 29, 2005 Page 33 The introduction of a single currency, the euro, on Jan. 1, 1999 for participating European nations in the Economic and Monetary Union (EU) presents unique uncertainties, including the legal treatment of certain outstanding financial contracts after Jan. 1, 1999 that refer to existing currencies rather than the euro; the establishment and maintenance of exchange rates; the fluctuation of the euro relative to non-euro currencies; whether the interest rate, tax or labor regimes of European countries participating in the euro will converge over time; and whether the conversion of the currencies of other EU countries such as the United Kingdom and Denmark into the euro and the admission of other non-EU countries such as Poland, Latvia, and Lithuania as members of the EU may have an impact on the euro. Although one or more of the other risks described in this SAI may apply, the largest risks associated with foreign securities include: Active Management Risk, Foreign/Emerging Markets Risk, and Issuer Risk. Funding Agreements A fund may invest in funding agreements issued by domestic insurance companies. Funding agreements are short-term, privately placed, debt obligations of insurance companies that offer a fixed- or floating-rate of interest. These investments are not readily marketable and therefore are considered to be illiquid securities. (See also Illiquid and Restricted Securities.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with funding agreements include: Credit Risk and Liquidity Risk. High-Yield (High-Risk) Debt Securities (Junk Bonds) High yield (high-risk) debt securities are sometimes referred to as junk bonds. They are non-investment grade (lower quality) securities that have speculative characteristics. Lower quality securities, while generally offering higher yields than investment grade securities with similar maturities, involve greater risks, including the possibility of default or bankruptcy. They are regarded as predominantly speculative with respect to the issuer's capacity to pay interest and repay principal. The special risk considerations in connection with investments in these securities are discussed below. See Appendix A for a discussion of securities ratings. (See also Debt Obligations.) All interest-bearing securities typically experience appreciation when interest rates decline and depreciation when interest rates rise. The market values of lower-quality and comparable unrated securities tend to reflect individual corporate developments to a greater extent than do higher rated securities, which react primarily to fluctuations in the general level of interest rates. Lower-quality and comparable unrated securities also tend to be more sensitive to economic conditions than are higher-rated securities. As a result, they generally involve more credit risks than securities in the higher-rated categories. During an economic downturn or a sustained period of rising interest rates, highly leveraged issuers of lower-quality securities may experience financial stress and may not have sufficient revenues to meet their payment obligations. The issuer's ability to service its debt obligations also may be adversely affected by specific corporate developments, the issuer's inability to meet specific projected business forecasts, or the unavailability of additional financing. The risk of loss due to default by an issuer of these securities is significantly greater than issuers of higher-rated securities because such securities are generally unsecured and are often subordinated to other creditors. Further, if the issuer of a lower quality security defaulted, an investor might incur additional expenses to seek recovery. Credit ratings issued by credit rating agencies are designed to evaluate the safety of principal and interest payments of rated securities. They do not, however, evaluate the market value risk of lower-quality securities and, therefore, may not fully reflect the true risks of an investment. In addition, credit rating agencies may or may not make timely changes in a rating to reflect changes in the economy or in the condition of the issuer that affect the market value of the securities. Consequently, credit ratings are used only as a preliminary indicator of investment quality. Statement of Additional Information - Nov. 29, 2005 Page 34 An investor may have difficulty disposing of certain lower-quality and comparable unrated securities because there may be a thin trading market for such securities. Because not all dealers maintain markets in all lower quality and comparable unrated securities, there is no established retail secondary market for many of these securities. To the extent a secondary trading market does exist, it is generally not as liquid as the secondary market for higher-rated securities. The lack of a liquid secondary market may have an adverse impact on the market price of the security. The lack of a liquid secondary market for certain securities also may make it more difficult for an investor to obtain accurate market quotations. Market quotations are generally available on many lower-quality and comparable unrated issues only from a limited number of dealers and may not necessarily represent firm bids of such dealers or prices for actual sales. Legislation may be adopted from time to time designed to limit the use of certain lower quality and comparable unrated securities by certain issuers. Although one or more of the other risks described in this SAI may apply, the largest risks associated with high-yield (high-risk) securities include: Active Management Risk, Credit Risk, Interest Rate Risk, and Prepayment and Extension Risk. Illiquid and Restricted Securities Illiquid securities are securities that are not readily marketable. These securities may include, but are not limited to, certain securities that are subject to legal or contractual restrictions on resale, certain repurchase agreements, and derivative instruments. To the extent a fund invests in illiquid or restricted securities, it may encounter difficulty in determining a market value for the securities. Disposing of illiquid or restricted securities may involve time-consuming negotiations and legal expense, and it may be difficult or impossible for a fund to sell the investment promptly and at an acceptable price. In determining the liquidity of all securities and derivatives, such as Rule 144A securities, which are unregistered securities offered to qualified institutional buyers, and interest-only and principal-only fixed mortgage-backed securities (IOs and POs) issued by the U.S. government or its agencies and instrumentalities the investment manager, under guidelines established by the Board, will consider any relevant factors including the frequency of trades, the number of dealers willing to purchase or sell the security and the nature of marketplace trades. Although one or more of the other risks described in this SAI may apply, the largest risks associated with illiquid and restricted securities include: Active Management Risk and Liquidity Risk. Indexed Securities The value of indexed securities is linked to currencies, interest rates, commodities, indexes, or other financial indicators. Most indexed securities are short- to intermediate-term fixed income securities whose values at maturity or interest rates rise or fall according to the change in one or more specified underlying instruments. Indexed securities may be more volatile than the underlying instrument itself and they may be less liquid than the securities represented by the index. (See also Derivative Instruments.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with indexed securities include: Active Management Risk, Liquidity Risk, and Market Risk. Inflation Protected Securities Inflation is a general rise in prices of goods and services. Inflation erodes the purchasing power of an investor's assets. For example, if an investment provides a total return of 7% in a given year and inflation is 3% during that period, the inflation-adjusted, or real, return is 4%. Inflation protected securities are debt securities whose principal and/or interest payments are adjusted for inflation, unlike debt securities that make fixed principal and interest payments. One type of inflation-protected debt security is issued by the U.S. Treasury. The principal of these securities is adjusted for inflation as indicated by the Consumer Price Index for Urban Consumers (CPI) and interest is paid on the adjusted amount. The CPI is a measurement of changes in the cost of living, made up of components such as housing, food, transportation and energy. Statement of Additional Information - Nov. 29, 2005 Page 35 If the CPI falls, the principal value of inflation-protected securities will be adjusted downward, and consequently the interest payable on these securities (calculated with respect to a smaller principal amount) will be reduced. Conversely, if the CPI rises, the principal value of inflation-protected securities will be adjusted upward, and consequently the interest payable on these securities will be increased. Repayment of the original bond principal upon maturity is guaranteed in the case of U.S. Treasury inflation protected securities, even during a period of deflation. However, the current market value of the inflation-protected securities is not guaranteed and will fluctuate. Other inflation-indexed securities include inflation-related bonds, which may or may not provide a similar guarantee. If a guarantee of principal is not provided, the adjusted principal value of the bond repaid at maturity may be less than the original principal. Other issuers of inflation-protected debt securities include other U.S. government agencies or instrumentalities, corporations and foreign governments. There can be no assurance that the CPI or any foreign inflation index will accurately measure the real rate of inflation in the prices of goods and services. Moreover, there can be no assurance that the rate of inflation in a foreign country will be correlated to the rate of inflation in the United States. If interest rates rise due to reasons other than inflation (for example, due to changes in currency exchange rates), investors in these securities may not be protected to the extent that the increase is not reflected in the bond's inflation measure. Any increase in principal for an inflation-protected security resulting from inflation adjustments is considered by IRS regulations to be taxable income in the year it occurs. For direct holders of an inflation-protected security, this means that taxes must be paid on principal adjustments even though these amounts are not received until the bond matures. By contrast, a fund holding these securities distributes both interest income and the income attributable to principal adjustments in the form of cash or reinvested shares, which are taxable to shareholders. Although one or more of the other risks described in this SAI may apply, the largest risks associated with inflation-protected securities include: Interest Rate Risk and Market Risk. Inverse Floaters Inverse floaters are created by underwriters using the interest payment on securities. A portion of the interest received is paid to holders of instruments based on current interest rates for short-term securities. The remainder, minus a servicing fee, is paid to holders of inverse floaters. As interest rates go down, the holders of the inverse floaters receive more income and an increase in the price for the inverse floaters. As interest rates go up, the holders of the inverse floaters receive less income and a decrease in the price for the inverse floaters. (See also Derivative Instruments.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with inverse floaters include: Active Management Risk and Interest Rate Risk. Investment Companies Investing in securities issued by registered and unregistered investment companies may involve the duplication of advisory fees and certain other expenses. Although one or more of the other risks described in this SAI may apply, the largest risks associated with the securities of other investment companies include: Active Management Risk and Market Risk. Statement of Additional Information - Nov. 29, 2005 Page 36 Lending of Portfolio Securities A fund may lend certain of its portfolio securities. The current policy of the Board is to make these loans, either long- or short-term, to broker-dealers. In making loans, the lender receives the market price in cash, U.S. government securities, letters of credit, or such other collateral as may be permitted by regulatory agencies and approved by the Board. If the market price of the loaned securities goes up, the lender will get additional collateral on a daily basis. If the market price of the loaned securities goes down, the borrower may request that some collateral be returned. 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 lender receives cash payments equivalent to all interest or other distributions paid on the loaned securities. The lender may pay reasonable administrative and custodial fees in connection with a loan and may pay a negotiated portion of the interest earned on the cash or money market instruments held as collateral to the borrower or placing broker. The lender will receive reasonable interest on the loan or a flat fee from the borrower and amounts equivalent to any dividends, interest, or other distributions on the securities loaned. Although one or more of the other risks described in this SAI may apply, the largest risks associated with the lending of portfolio securities include: Active Management Risk and Credit Risk. Loan Participations Loans, loan participations, and interests in securitized loan pools are interests in amounts owed by a corporate, governmental, or other borrower to a lender or consortium of lenders (typically banks, insurance companies, investment banks, government agencies, or international agencies). Loans involve a risk of loss in case of default or insolvency of the borrower and may offer less legal protection to an investor in the event of fraud or misrepresentation. Although one or more of the other risks described in this SAI may apply, the largest risks associated with loan participations include: Active Management Risk and Credit Risk. Mortgage- and Asset-Backed Securities Mortgage-backed securities represent direct or indirect participations in, or are secured by and payable from, mortgage loans secured by real property, and include single- and multi-class pass-through securities and Collateralized Mortgage Obligations (CMOs). These securities may be issued or guaranteed by U.S. government agencies or instrumentalities (see also Agency and Government Securities), or by private issuers, generally originators and investors in mortgage loans, including savings associations, mortgage bankers, commercial banks, investment bankers, and special purpose entities. Mortgage-backed securities issued by private lenders may be supported by pools of mortgage loans or other mortgage-backed securities that are guaranteed, directly or indirectly, by the U.S. government or one of its agencies or instrumentalities, or they may be issued without any governmental guarantee of the underlying mortgage assets but with some form of non-governmental credit enhancement. Commercial mortgage-backed securities (CMBS) are a specific type of mortgage-backed security collateralized by a pool of mortgages on commercial real estate. Stripped mortgage-backed securities are a type of mortgage-backed security that receive differing proportions of the interest and principal payments from the underlying assets. Generally, there are two classes of stripped mortgage-backed securities: Interest Only and Principal Only. IOs entitle the holder to receive distributions consisting of all or a portion of the interest on the underlying pool of mortgage loans or mortgage-backed securities. POs entitle the holder to receive distributions consisting of all or a portion of the principal of the underlying pool of mortgage loans or mortgage-backed securities. The cash flows and yields on IOs and POs are extremely sensitive to the rate of principal payments (including prepayments) on the underlying mortgage loans or mortgage-backed securities. A rapid rate of principal payments may adversely affect the yield to maturity of IOs. A slow rate of principal payments may adversely affect the yield to maturity of POs. If prepayments of principal are greater than anticipated, an investor in IOs may incur substantial losses. If prepayments of principal are slower than anticipated, the yield on a PO will be affected more severely than would be the case with a traditional mortgage-backed security. Statement of Additional Information - Nov. 29, 2005 Page 37 CMOs are hybrid mortgage-related instruments secured by pools of mortgage loans or other mortgage-related securities, such as mortgage pass through securities or stripped mortgage-backed securities. CMOs may be structured into multiple classes, often referred to as "tranches," with each class bearing a different stated maturity and entitled to a different schedule for payments of principal and interest, including prepayments. Principal prepayments on collateral underlying a CMO may cause it to be retired substantially earlier than its stated maturity. The yield characteristics of mortgage-backed securities differ from those of other debt securities. Among the differences are that interest and principal payments are made more frequently on mortgage-backed securities, usually monthly, and principal may be repaid at any time. These factors may reduce the expected yield. Asset-backed securities have structural characteristics similar to mortgage-backed securities. Asset-backed debt obligations represent direct or indirect participation in, or secured by and payable from, assets such as motor vehicle installment sales contracts, other installment loan contracts, home equity loans, leases of various types of property, and receivables from credit card or other revolving credit arrangements. The credit quality of most asset-backed securities depends primarily on the credit quality of the assets underlying such securities, how well the entity issuing the security is insulated from the credit risk of the originator or any other affiliated entities, and the amount and quality of any credit enhancement of the securities. Payments or distributions of principal and interest on asset-backed debt obligations may be supported by non-governmental credit enhancements including letters of credit, reserve funds, overcollateralization, and guarantees by third parties. The market for privately issued asset-backed debt obligations is smaller and less liquid than the market for government sponsored mortgage-backed securities. (See also Derivative Instruments.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with mortgage and asset-backed securities include: Active Management Risk, Credit Risk, Interest Rate Risk, Liquidity Risk, and Prepayment and Extension Risk. Mortgage Dollar Rolls Mortgage dollar rolls are investments in which an investor sells mortgage-backed securities for delivery in the current month and simultaneously contracts to purchase substantially similar securities on a specified future date. While an investor foregoes principal and interest paid on the mortgage-backed securities during the roll period, the investor is compensated by the difference between the current sales price and the lower price for the future purchase as well as by any interest earned on the proceeds of the initial sale. The investor also could be compensated through the receipt of fee income equivalent to a lower forward price. Although one or more of the other risks described in this SAI may apply, the largest risks associated with mortgage dollar rolls include: Active Management Risk, Credit Risk, and Interest Rate Risk. Municipal Obligations Municipal obligations include debt obligations issued by or on behalf of states, territories, possessions, or sovereign nations within the territorial boundaries of the United States (including the District of Columbia and Puerto Rico). The interest on these obligations is generally exempt from federal income tax. Municipal obligations are generally classified as either "general obligations" or "revenue obligations." General obligation bonds are secured by the issuer's pledge of its full faith, credit, and taxing power for the payment of interest and principal. Revenue bonds are payable only from the revenues derived from a project or facility or from the proceeds of a specified revenue source. Industrial development bonds are generally revenue bonds secured by payments from and the credit of private users. Municipal notes are issued to meet the short-term funding requirements of state, regional, and local governments. Municipal notes include tax anticipation notes, bond anticipation notes, revenue anticipation notes, tax and revenue anticipation notes, construction loan notes, short-term discount notes, tax-exempt commercial paper, demand notes, and similar instruments. Statement of Additional Information - Nov. 29, 2005 Page 38 Municipal lease obligations may take the form of a lease, an installment purchase, or a conditional sales contract. They are issued by state and local governments and authorities to acquire land, equipment, and facilities. An investor may purchase these obligations directly, or it may purchase participation interests in such obligations. Municipal leases may be subject to greater risks than general obligation or revenue bonds. State constitutions and statutes set forth requirements that states or municipalities must meet in order to issue municipal obligations. Municipal leases may contain a covenant by the state or municipality to budget for and make payments due under the obligation. Certain municipal leases may, however, provide that the issuer is not obligated to make payments on the obligation in future years unless funds have been appropriated for this purpose each year. Yields on municipal bonds and notes depend on a variety of factors, including money market conditions, municipal bond market conditions, the size of a particular offering, the maturity of the obligation, and the rating of the issue. The municipal bond market has a large number of different issuers, many having smaller sized bond issues, and a wide choice of different maturities within each issue. For these reasons, most municipal bonds do not trade on a daily basis and many trade only rarely. Because many of these bonds trade infrequently, the spread between the bid and offer may be wider and the time needed to develop a bid or an offer may be longer than other security markets. See Appendix A for a discussion of securities ratings. (See also Debt Obligations.) Taxable Municipal Obligations. There is another type of municipal obligation that is subject to federal income tax for a variety of reasons. These municipal obligations do not qualify for the federal income exemption because (a) they did not receive necessary authorization for tax-exempt treatment from state or local government authorities, (b) they exceed certain regulatory limitations on the cost of issuance for tax-exempt financing or (c) they finance public or private activities that do not qualify for the federal income tax exemption. These non-qualifying activities might include, for example, certain types of multi-family housing, certain professional and local sports facilities, refinancing of certain municipal debt, and borrowing to replenish a municipality's underfunded pension plan. Although one or more of the other risks described in this SAI may apply, the largest risks associated with municipal obligations include: Credit Risk, Inflation Risk, Interest Rate Risk, Legal/Legislative Risk, and Market Risk. Preferred Stock Preferred stock is a type of stock that pays dividends at a specified rate and that has preference over common stock in the payment of dividends and the liquidation of assets. Preferred stock does not ordinarily carry voting rights. The price of a preferred stock is generally determined by earnings, type of products or services, projected growth rates, experience of management, liquidity, and general market conditions of the markets on which the stock trades. Although one or more of the other risks described in this SAI may apply, the largest risks associated with preferred stock include: Active Management Risk, Issuer Risk, and Market Risk. Statement of Additional Information - Nov. 29, 2005 Page 39 Real Estate Investment Trusts Real estate investment trusts (REITs) are pooled investment vehicles that manage a portfolio of real estate or real estate related loans to earn profits for their shareholders. REITs are generally classified as equity REITs, mortgage REITs or a combination of equity and mortgage REITs. Equity REITs invest the majority of their assets directly in real property, such as shopping centers, nursing homes, office buildings, apartment complexes, and hotels, and derive income primarily from the collection of rents. Equity REITs can also realize capital gains by selling properties that have appreciated in value. Mortgage REITs invest the majority of their assets in real estate mortgages and derive income from the collection of interest payments. REITs can be subject to extreme volatility due to fluctuations in the demand for real estate, changes in interest rates, and adverse economic conditions. Similar to investment companies, REITs are not taxed on income distributed to shareholders provided they comply with certain requirements under the tax law. The failure of a REIT to continue to qualify as a REIT for tax purposes can materially affect its value. A fund will indirectly bear its proportionate share of any expenses paid by a REIT in which it invests. REITs often do no provide complete tax information until after the calendar year-end. Consequently, because of the delay, it may be necessary for the Fund to request permission to extend the deadline for issuance of Forms 1099-DIV beyond January 31. Although one or more of the other risks described in this SAI may apply, the largest risks associated with REITs include: Active Management Risk, Interest Rate Risk, Issuer Risk and Market Risk. Repurchase Agreements Repurchase agreements may be entered into with certain banks or non-bank dealers. In a repurchase agreement, the purchaser buys a security at one price, and at the time of sale, the seller agrees to repurchase the obligation at a mutually agreed upon time and price (usually within seven days). The repurchase agreement determines the yield during the purchaser's holding period, while the seller's obligation to repurchase is secured by the value of the underlying security. Repurchase agreements could involve certain risks in the event of a default or insolvency of the other party to the agreement, including possible delays or restrictions upon the purchaser's ability to dispose of the underlying securities. Although one or more of the other risks described in this SAI may apply, the largest risks associated with repurchase agreements include: Active Management Risk and Credit Risk. Reverse Repurchase Agreements In a reverse repurchase agreement, an investor sells a security and enters into an agreement to repurchase the security at a specified future date and price. The investor generally retains the right to interest and principal payments on the security. Since the investor receives cash upon entering into a reverse repurchase agreement, it may be considered a borrowing. (See also Derivative Instruments.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with reverse repurchase agreements include: Active Management Risk, Credit Risk, and Interest Rate Risk. Statement of Additional Information - Nov. 29, 2005 Page 40 Short Sales With short sales, an investor sells a security that it does not own in anticipation of a decline in the market value of the security. To complete the transaction, the investor must borrow the security to make delivery to the buyer. The investor is obligated to replace the security that was borrowed by purchasing it at the market price at the time of replacement. The price at such time may be more or less than the price at which the investor sold the security. A fund that is allowed to engage in short sales will designate cash or liquid securities to cover its open short positions. Those funds also may engage in "short sales against the box," a form of short-selling that involves selling a security that an investor owns (or has an unconditioned right to purchase) for delivery at a specified date in the future. This technique allows an investor to hedge protectively against anticipated declines in the market of its securities. If the value of the securities sold short increased between the date of the short sale and the date on which the borrowed security is replaced, the investor loses the opportunity to participate in the gain. A "short sale against the box" will result in a constructive sale of appreciated securities thereby generating capital gains to a fund. Although one or more of the other risks described in this SAI may apply, the largest risks associated with short sales include: Active Management Risk and Market Risk. Sovereign Debt A sovereign debtor's willingness or ability to repay principal and pay interest in a timely manner may be affected by a variety of factors, including its cash flow situation, the extent of its reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the sovereign debtor's policy toward international lenders, and the political constraints to which a sovereign debtor may be subject. (See also Foreign Securities.) With respect to sovereign debt of emerging market issuers, investors should be aware that certain emerging market countries are among the largest debtors to commercial banks and foreign governments. At times, certain emerging market countries have declared moratoria on the payment of principal and interest on external debt. Certain emerging market countries have experienced difficulty in servicing their sovereign debt on a timely basis that led to defaults and the restructuring of certain indebtedness. Sovereign debt includes Brady Bonds, which are securities issued under the framework of the Brady Plan, an initiative announced by former U.S. Treasury Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to restructure their outstanding external commercial bank indebtedness. Although one or more of the other risks described in this SAI may apply, the largest risks associated with sovereign debt include: Active Management Risk, Credit Risk, and Foreign/Emerging Markets Risk. Structured Investments A structured investment is a security whose return is tied to an underlying index or to some other security or pool of assets. Structured investments generally are individually negotiated agreements and may be traded over-the-counter. Structured investments are created and operated to restructure the investment characteristics of the underlying security. This restructuring involves the deposit with or purchase by an entity, such as a corporation or trust, of specified instruments, such as commercial bank loans, and the issuance by that entity of one or more classes of debt obligations ("structured securities") backed by, or representing interests in, the underlying instruments. The cash flow on the underlying instruments may be apportioned among the newly issued structured securities to create securities with different investment characteristics, such as varying maturities, payment priorities, and interest rate provisions. The extent of the payments made with respect to structured securities is dependent on the extent of the cash flow on the underlying instruments. Because structured securities typically involve no credit enhancement, their credit risk generally will be equivalent to that of the underlying instruments. Structured securities are often offered in different classes. As a result a given class of a structured security may be either subordinated or unsubordinated to the right of payment of another class. Subordinated structured securities typically have higher yields and present greater risks than unsubordinated structured securities. Structured securities are typically sold in private placement transactions, and at any given time there may be no active trading market for a particular structured security. Statement of Additional Information - Nov. 29, 2005 Page 41 Although one or more of the other risks described in this SAI may apply, the largest risks associated with structured investments include: Active Management Risk, Credit Risk, and Liquidity Risk. Swap Agreements Swap agreements obligate one party to make payments to the other party based on the change in the market value of an index or other asset. In return, the other party agrees to make payments to the first party based on the return of another index or asset. Swap agreements entail the risk that a party will default on its payment obligations. Interest Rate Swaps. Interest rate swap agreements are used to obtain or preserve a desired return or spread at a lower cost than through a direct investment in an instrument that yields the desired return or spread. Swaps also may protect against changes in the price of securities that an investor anticipates buying or selling at a later date. Swap agreements are two-party contracts entered into primarily by institutional investors for periods ranging from a few weeks to several years. In a standard interest rate swap transaction, two parties agree to exchange their respective commitments to pay fixed or floating rates on a predetermined notional amount. The swap agreement notional amount is the predetermined basis for calculating the obligations that the swap counterparties have agreed to exchange. Under most swap agreements, the obligations of the parties are exchanged on a net basis. The two payment streams are netted out, with each party receiving or paying, as the case may be, only the net amount of the two payments. Swap agreements are usually entered into at a zero net market value of the swap agreement commitments. The market values of the underlying commitments will change over time resulting in one of the commitments being worth more than the other and the net market value creating a risk exposure for one counterparty to the other. Swap agreements may include embedded interest rate caps, floor and collars. In interest rate cap transactions, in return for a premium, one party agrees to make payments to the other to the extent that interest rates exceed a specified rate, or cap. Interest rate floor transactions require one party, in exchange for a premium to agree to make payments to the other to the extent that interest rates fall below a specified level, or floor. In interest rate collar transactions, one party sells a cap and purchases a floor, or vice versa, in an attempt to protect itself against interest rate movements exceeding given minimum or maximum levels or collar amounts. Swap agreements are traded in the over-the-counter market and may be considered to be illiquid. A fund will enter into interest rate swap agreements only if the claims-paying ability of the other party or its guarantor is considered to be investment grade by the Advisor. Generally, the unsecured senior debt or the claims-paying ability of the other party or its guarantor must be rated in one of the three highest rating categories of at least one Nationally Recognized Statistical Rating Organization (NRSRO) at the time of entering into the transaction. If there is a default by the other party to such a transaction, a fund will have to rely on its contractual remedies (which may be limited by bankruptcy, insolvency or similar laws) pursuant to the agreements related to the transaction. In certain circumstances, a fund may seek to minimize counterparty risk by requiring the counterparty to post collateral. CMBS Total Return Swaps. CMBS total return swaps are bilateral financial contracts designed to replicate synthetically the total returns of collateralized mortgage-backed securities. Currency Swaps. Currency swaps are similar to interest rate swaps, except that they involve currencies instead of interest rates. Although one or more of the other risks described in this SAI may apply, the largest risks associated with swaps include: Credit Risk and Liquidity Risk. Statement of Additional Information - Nov. 29, 2005 Page 42 Variable- or Floating-Rate Securities Variable-rate securities provide for automatic establishment of a new interest rate at fixed intervals (e.g., daily, monthly, semiannually, etc.). Floating-rate securities generally provide for automatic adjustment of the interest rate whenever some specified interest rate index changes. Variable- or floating-rate securities frequently include a demand feature enabling the holder to sell the securities to the issuer at par. In many cases, the demand feature can be exercised at any time. Some securities that do not have variable or floating interest rates may be accompanied by puts producing similar results and price characteristics. Variable-rate demand notes include master demand notes that are obligations that permit the investor to invest fluctuating amounts, which may change daily without penalty, pursuant to direct arrangements between the investor as lender, and the borrower. The interest rates on these notes fluctuate from time to time. The issuer of such obligations normally has a corresponding right, after a given period, to prepay in its discretion the outstanding principal amount of the obligations plus accrued interest upon a specified number of days' notice to the holders of such obligations. Because these obligations are direct lending arrangements between the lender and borrower, it is not contemplated that such instruments generally will be traded. There generally is not an established secondary market for these obligations. Accordingly, where these obligations are not secured by letters of credit or other credit support arrangements, the lender's right to redeem is dependent on the ability of the borrower to pay principal and interest on demand. Such obligations frequently are not rated by credit rating agencies and may involve heightened risk of default by the issuer. Although one or more of the other risks described in this SAI may apply, the largest risks associated with variable- or floating-rate securities include: Active Management Risk and Credit Risk. Warrants Warrants are securities giving the holder the right, but not the obligation, to buy the stock of an issuer at a given price (generally higher than the value of the stock at the time of issuance) during a specified period or perpetually. Warrants may be acquired separately or in connection with the acquisition of securities. Warrants do not carry with them the right to dividends or voting rights and they do not represent any rights in the assets of the issuer. Warrants may be considered to have more speculative characteristics than certain other types of investments. In addition, the value of a warrant does not necessarily change with the value of the underlying securities, and a warrant ceases to have value if it is not exercised prior to its expiration date. Although one or more of the other risks described in this SAI may apply, the largest risks associated with warrants include: Active Management Risk and Market Risk. When-Issued Securities and Forward Commitments When-issued securities and forward commitments involve a commitment to purchase or sell specific securities at a predetermined price or yield in which payment and delivery take place after the customary settlement period for that type of security. Normally, the settlement date occurs within 45 days of the purchase although in some cases settlement may take longer. The investor does not pay for the securities or receive dividends or interest on them until the contractual settlement date. Such instruments involve the risk of loss if the value of the security to be purchased declines prior to the settlement date and the risk that the security will not be issued as anticipated. If the security is not issued as anticipated, a fund may lose the opportunity to obtain a price and yield considered to be advantageous. Although one or more of the other risks described in this SAI may apply, the largest risks associated with when-issued securities and forward commitments include: Active Management Risk and Credit Risk. Statement of Additional Information - Nov. 29, 2005 Page 43 Zero-Coupon, Step-Coupon, and Pay-in-Kind Securities These securities are debt obligations that do not make regular cash interest payments (see also Debt Obligations). Zero-coupon and step-coupon securities are sold at a deep discount to their face value because they do not pay interest until maturity. Pay-in-kind securities pay interest through the issuance of additional securities. Because these securities do not pay current cash income, the price of these securities can be extremely volatile when interest rates fluctuate. See Appendix A for a discussion of securities ratings. Although one or more of the other risks described in this SAI may apply, the largest risks associated with zero-coupon, step-coupon, and pay-in-kind securities include: Active Management Risk, Credit Risk, and Interest Rate Risk. A fund cannot issue senior securities but this does not prohibit certain investment activities for which assets of the fund are set aside, or margin, collateral or escrow arrangements are established, to cover the related obligations. Examples of those activities include borrowing money, delayed-delivery and when-issued securities transactions, and contracts to buy or sell options, derivatives, and hedging instruments. Securities Transactions Except as otherwise noted, the description of policies and procedures in this section also applies to any fund subadviser. Subject to policies set by the Board, as well as the terms of the investment management agreements, the investment manager or subadviser for subadvised funds is authorized to determine, consistent with a fund's investment goal and policies, which securities will be purchased, held, or sold. In determining where the buy and sell orders are to be placed, the investment manager has been directed to use its best efforts to obtain the best available price and the most favorable execution except where otherwise authorized by the Board. In selecting broker-dealers to execute transactions, the investment manager may consider the price of the security, including commission or mark-up, the size and difficulty of the order, the reliability, integrity, financial soundness, and general operation and execution capabilities of the broker, the broker's expertise in particular markets, and research services provided by the broker. Each fund, the investment manager, any subadviser and Ameriprise Financial Services, Inc. (the distributor or Ameriprise Financial Services) has a strict Code of Ethics that prohibits affiliated personnel from engaging in personal investment activities that compete with or attempt to take advantage of planned portfolio transactions for the fund. A fund's securities may be traded on a principal rather than an agency basis. In certain circumstances, the investment manager 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 investment manager 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 investment manager to do so to the extent authorized by law, if the investment manager 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 investment manager's overall responsibilities with respect to a fund and the other RiverSource funds for which it acts as investment manager (or by any fund subadviser to any other client of such subadviser). Statement of Additional Information - Nov. 29, 2005 Page 44 Research provided by brokers supplements the investment manager'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; 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 investment manager 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 investment manager must follow procedures authorized by the Board. To date, three procedures have been authorized. One procedure permits the investment manager 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 investment manager, 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 investment manager, in order to obtain research and brokerage services, to cause a fund to pay a commission in excess of the amount another broker might have charged. The investment manager has advised the funds that it is necessary to do business with a number of brokerage firms on a continuing basis to obtain such services as the handling of large orders, the willingness of a broker to risk its own money by taking a position in a security, and the specialized handling of a particular group of securities that only certain brokers may be able to offer. As a result of this arrangement, some portfolio transactions may not be effected at the lowest commission, but the investment manager believes it may obtain better overall execution. The investment manager has represented that under all three procedures the amount of commission paid will be reasonable and competitive in relation to the value of the brokerage services performed or research provided. All other transactions will be placed on the basis of obtaining the best available price and the most favorable execution. In so doing, if in the professional opinion of the person responsible for selecting the broker or dealer, several firms can execute the transaction on the same basis, consideration will be given by such person to those firms offering research services. Such services may be used by the investment manager in providing advice to all RiverSource funds (or by any fund subadviser to any other client of such subadviser) even though it is not possible to relate the benefits to any particular fund. Each investment decision made for a fund is made independently from any decision made for another portfolio, fund, or other account advised by the investment manager. When a fund buys or sells the same security as another portfolio, fund, or account, the investment manager carries out the purchase or sale in a way believed to be fair to the fund. Although sharing in large transactions may adversely affect the price or volume purchased or sold by the fund, the fund hopes to gain an overall advantage in execution. On occasion, a fund may purchase and sell a security simultaneously in order to profit from short-term price disparities. On a periodic basis, the investment manager makes a comprehensive review of the broker-dealers and the overall reasonableness of their commissions. The review evaluates execution, operational efficiency, and research services. The Board has adopted a policy prohibiting the investment manager, or any subadviser, from considering sales of shares of the funds as a factor in the selection of broker-dealers through which to execute securities transactions. Statement of Additional Information - Nov. 29, 2005 Page 45 The following table shows total brokerage commissions paid in the last three fiscal periods. Substantially all firms through whom transactions were executed provide research services. The table is organized by fiscal year end. You can find your fund's fiscal year end in Table 1.
Table 5. Total Brokerage Commissions Total Brokerage Commissions - ---------------------------------------------------------------------------------------------------------------- Fund 2005 2004 2003 - ---------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending January 31 - ---------------------------------------------------------------------------------------------------------------- Portfolio Builder Aggressive $0(a) N/A N/A - -------------------------------------------------------- ------------------ ----------------- ------------------ Portfolio Builder Conservative 0(a) N/A N/A - -------------------------------------------------------- ------------------ ----------------- ------------------ Portfolio Builder Moderate 0(a) N/A N/A - -------------------------------------------------------- ------------------ ----------------- ------------------ Portfolio Builder Moderate Aggressive 0(a) N/A N/A - -------------------------------------------------------- ------------------ ----------------- ------------------ Portfolio Builder Moderate Conservative 0(a) N/A N/A - -------------------------------------------------------- ------------------ ----------------- ------------------ Portfolio Builder Total Equity 0(a) N/A N/A - -------------------------------------------------------- ------------------ ----------------- ------------------ Small Company Index 37,118 23,893 50,976 - -------------------------------------------------------- ------------------ ----------------- ------------------ S&P 500 Index 49,048 24,729 43,486 - ---------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending March 31 - ---------------------------------------------------------------------------------------------------------------- Equity Value 858,846 1,852,684 2,826,803 - -------------------------------------------------------- ------------------ ----------------- ------------------ Precious Metals 1,245,421 956,649 1,290,528 - -------------------------------------------------------- ------------------ ----------------- ------------------ Small Cap Advantage 3,294,757 4,102,653 3,784,304 - -------------------------------------------------------- ------------------ ----------------- ------------------ Small Cap Growth 2,105,168 3,334,707 3,301,903 - -------------------------------------------------------- ------------------ ----------------- ------------------ Strategy Aggressive 933,213 1,563,638 1,954,985 - ---------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending May 31 - ---------------------------------------------------------------------------------------------------------------- Aggressive Growth 181,981 72,985 8,489(b) - -------------------------------------------------------- ------------------ ----------------- ------------------ Fundamental Growth 180,023 46,313 7,136(b) - -------------------------------------------------------- ------------------ ----------------- ------------------ Fundamental Value 314,501 162,856 205,143 - -------------------------------------------------------- ------------------ ----------------- ------------------ High Yield Bond 0 876 0 - -------------------------------------------------------- ------------------ ----------------- ------------------ Select Value 310,913 539,192 532,619 - -------------------------------------------------------- ------------------ ----------------- ------------------ Selective 45,224 77,261 317,778 - -------------------------------------------------------- ------------------ ----------------- ------------------ Short Duration U.S. Government 95,868 407,216 552,895 - -------------------------------------------------------- ------------------ ----------------- ------------------ Small Cap Equity 429,969 846,218 273,634 - -------------------------------------------------------- ------------------ ----------------- ------------------ Small Cap Value 2,439,209 3,185,306 2,505,457 - -------------------------------------------------------- ------------------ ----------------- ------------------ U.S. Government Mortgage 10,708 31,267 23,812 - -------------------------------------------------------- ------------------ ----------------- ------------------ Value 363,273 389,539 629,327 - ---------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending June 30 - ---------------------------------------------------------------------------------------------------------------- California Tax-Exempt 0 0 0 - -------------------------------------------------------- ------------------ ----------------- ------------------ Dividend Opportunity 621,168 3,783,128 6,633,939 - -------------------------------------------------------- ------------------ ----------------- ------------------ Insured Tax-Exempt 0 0 0 - -------------------------------------------------------- ------------------ ----------------- ------------------ Massachusetts Tax-Exempt 0 0 0 - -------------------------------------------------------- ------------------ ----------------- ------------------ Michigan Tax-Exempt 0 0 0 - -------------------------------------------------------- ------------------ ----------------- ------------------ Minnesota Tax-Exempt 0 0 0 - -------------------------------------------------------- ------------------ ----------------- ------------------ New York Tax-Exempt 0 0 0 - -------------------------------------------------------- ------------------ ----------------- ------------------ Ohio Tax-Exempt 0 0 0 - -------------------------------------------------------- ------------------ ----------------- ------------------ Real Estate 185,877 34,975(c) 0 - -------------------------------------------------------- ------------------ ----------------- ------------------
Statement of Additional Information - Nov. 29, 2005 Page 46
- ---------------------------------------------------------------------------------------------------------------- Total Brokerage Commissions - ---------------------------------------------------------------------------------------------------------------- Fund 2005 2004 2003 - ---------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending July 31 - ---------------------------------------------------------------------------------------------------------------- Cash Management 0 0 0 - -------------------------------------------------------- ------------------ ----------------- ------------------ Core Bond 3,612 1,451 244(d) - -------------------------------------------------------- ------------------ ----------------- ------------------ Disciplined Equity 35,948 5,731 1,574(e) - -------------------------------------------------------- ------------------ ----------------- ------------------ Discovery 423,268 1,171,529 903,078 - -------------------------------------------------------- ------------------ ----------------- ------------------ Growth 15,623,111 22,702,374 38,887,668 - -------------------------------------------------------- ------------------ ----------------- ------------------ Income Opportunities 0 0 0(d) - -------------------------------------------------------- ------------------ ----------------- ------------------ Inflation Protected Securities 0 0(f) - - -------------------------------------------------------- ------------------ ----------------- ------------------ Large Cap Equity 6,832,334 1,306,601 311,242 - -------------------------------------------------------- ------------------ ----------------- ------------------ Large Cap Value 189,029 146,077 85,741 - -------------------------------------------------------- ------------------ ----------------- ------------------ Limited Duration Bond 3,268 839 40(d) - -------------------------------------------------------- ------------------ ----------------- ------------------ New Dimensions 29,467,597 20,989,555 11,242,565 - ---------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending August 31 - ---------------------------------------------------------------------------------------------------------------- Diversified Bond 161,336 160,646 319,860 - ---------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending September 30 - ---------------------------------------------------------------------------------------------------------------- Balanced 1,135,795 1,314,212 2,778,748 - -------------------------------------------------------- ------------------ ----------------- ------------------ Diversified Equity Income 3,191,513 2,416,265 2,987,610 - -------------------------------------------------------- ------------------ ----------------- ------------------ Mid Cap Value 919,813 365,435 345,711 - -------------------------------------------------------- ------------------ ----------------- ------------------ Stock 4,761,118 4,128,770 5,096,474 - -------------------------------------------------------- ------------------ ----------------- ------------------ Strategic Allocation 502,448 279,233 379,561 - -------------------------------------------------------- ------------------ ----------------- ------------------ 2004 2003 2002 - ---------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending October 31 - ---------------------------------------------------------------------------------------------------------------- Emerging Markets 2,022,969 2,106,670 2,989,019 - -------------------------------------------------------- ------------------ ----------------- ------------------ European Equity 324,079 783,457 979,690 - -------------------------------------------------------- ------------------ ----------------- ------------------ Global Balanced 189,252 175,551 323,220 - -------------------------------------------------------- ------------------ ----------------- ------------------ Global Bond 7,760 23,297 9,621 - -------------------------------------------------------- ------------------ ----------------- ------------------ Global Equity 1,992,985 1,582,657 3,706,450 - -------------------------------------------------------- ------------------ ----------------- ------------------ Global Technology 4,193,021 5,595,324 3,248,305 - -------------------------------------------------------- ------------------ ----------------- ------------------ International Aggressive Growth 598,644 495,189 509,926 - -------------------------------------------------------- ------------------ ----------------- ------------------ International Equity 315,047 144,417 16,699(g) - -------------------------------------------------------- ------------------ ----------------- ------------------ International Opportunity 1,303,677 2,047,954 2,953,477 - -------------------------------------------------------- ------------------ ----------------- ------------------ International Select Value 839,270 411,763 399,835 - -------------------------------------------------------- ------------------ ----------------- ------------------ International Small Cap 179,076 66,511 8,184(g) - ---------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending November 30 - ---------------------------------------------------------------------------------------------------------------- Intermediate Tax-Exempt 0 0 0 - -------------------------------------------------------- ------------------ ----------------- ------------------ Mid Cap Growth 1,630,670 1,597,573 746,295 - -------------------------------------------------------- ------------------ ----------------- ------------------ Tax-Exempt Bond 0 0 0 - -------------------------------------------------------- ------------------ ----------------- ------------------ Tax-Exempt High Income 0 0 2,507 - ---------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending December 31 - ---------------------------------------------------------------------------------------------------------------- Tax-Exempt Money Market 0 0 0 - -------------------------------------------------------- ------------------ ----------------- ------------------
(a) For the period from March 4, 2004 (when shares became publicly available) to Jan. 31, 2005. (b) For the period from April 24, 2003 (when shares became publicly available) to May 31, 2003. (c) For the period from March 4, 2004 (when shares became publicly available) to June 30, 2004. (d) For the period from June 19, 2003 (when shares became publicly available) to July 31, 2003. (e) For the period from April 24, 2003 (when shares became publicly available) to July 31, 2003. (f) For the period from March 4, 2004 (when shares became publicly available) to July 31, 2004. (g) For the period from Oct. 3, 2002 (when shares became publicly available) to Oct. 31, 2002. Statement of Additional Information - Nov. 29, 2005 Page 47 For the last fiscal period, transactions were specifically directed to firms in exchange for research services as shown in the following table. The table also shows portfolio turnover rates for the last two fiscal periods. Higher turnover rates may result in higher brokerage expenses and taxes. The table is organized by fiscal year end. You can find your fund's fiscal year end in Table 1.
Table 6. Brokerage Directed for Research and Turnover Rates - ------------------------------------------ ------------------------------------- -------------------------- Fund Brokerage directed for research Turnover rates - ------------------------------------------ ------------------------------------- -------------------------- Amount of Amount of transactions commissions imputed or paid - ------------------------------------------ ----------------- ------------------- -------------------------- 2005 2004 - ----------------------------------------------------------------------------------------------------------- For funds with fiscal period ending January 31 - ----------------------------------------------------------------------------------------------------------- Portfolio Builder Aggressive $0 $0 38%(a) N/A - ------------------------------------------ ----------------- ------------------- ------------- ------------ Portfolio Builder Conservative 0 0 51(a) N/A - ------------------------------------------ ----------------- ------------------- ------------- ------------ Portfolio Builder Moderate 0 0 28(a) N/A - ------------------------------------------ ----------------- ------------------- ------------- ------------ Portfolio Builder Moderate Aggressive 0 0 31(a) N/A - ------------------------------------------ ----------------- ------------------- ------------- ------------ Portfolio Builder Moderate Conservative 0 0 28(a) N/A - ------------------------------------------ ----------------- ------------------- ------------- ------------ Portfolio Builder Total Equity 0 0 39(a) N/A - ------------------------------------------ ----------------- ------------------- ------------- ------------ Small Company Index 0 0 12 10 - ------------------------------------------ ----------------- ------------------- ------------- ------------ S&P 500 Index 0 0 6 4 - ----------------------------------------------------------------------------------------------------------- For funds with fiscal period ending March 31 - ----------------------------------------------------------------------------------------------------------- Equity Value 0 0 25 39 - ------------------------------------------ ----------------- ------------------- ------------- ------------ Precious Metals 0 0 196 173 - ------------------------------------------ ----------------- ------------------- ------------- ------------ Small Cap Advantage 43,909,384 121,834 101 110 - ------------------------------------------ ----------------- ------------------- ------------- ------------ Small Cap Growth 46,579,305 115,768 153 224 - ------------------------------------------ ----------------- ------------------- ------------- ------------ Strategy Aggressive 0 0 35 55 - ----------------------------------------------------------------------------------------------------------- For funds with fiscal period ending May 31 - ----------------------------------------------------------------------------------------------------------- Aggressive Growth 4,034,256 6,709 218 189 - ------------------------------------------ ----------------- ------------------- ------------- ------------ Fundamental Growth 206,318 221 122 66 - ------------------------------------------ ----------------- ------------------- ------------- ------------ Fundamental Value 0 0 2 5 - ------------------------------------------ ----------------- ------------------- ------------- ------------ High Yield Bond 0 0 105 140 - ------------------------------------------ ----------------- ------------------- ------------- ------------ Select Value 73,512,978 115,967 12 15 - ------------------------------------------ ----------------- ------------------- ------------- ------------ Selective 0 0 297 292 - ------------------------------------------ ----------------- ------------------- ------------- ------------ Short Duration U.S. Government 0 0 169 125 - ------------------------------------------ ----------------- ------------------- ------------- ------------ Small Cap Equity 2,239,076 5,359 88 139 - ------------------------------------------ ----------------- ------------------- ------------- ------------ Small Cap Value 107,548,552 94,171 70 97 - ------------------------------------------ ----------------- ------------------- ------------- ------------ U.S. Government Mortgage 0 0 137 163 - ------------------------------------------ ----------------- ------------------- ------------- ------------ Value 0 0 40 34 - ----------------------------------------------------------------------------------------------------------- For funds with fiscal period ending June 30 - ----------------------------------------------------------------------------------------------------------- California Tax-Exempt 0 0 28 30 - ------------------------------------------ ----------------- ------------------- ------------- ------------ Dividend Opportunity 0 0 24 118 - ------------------------------------------ ----------------- ------------------- ------------- ------------ Insured Tax-Exempt 0 0 34 23 - ------------------------------------------ ----------------- ------------------- ------------- ------------ Massachusetts Tax-Exempt 0 0 9 14 - ------------------------------------------ ----------------- ------------------- ------------- ------------ Michigan Tax-Exempt 0 0 9 32 - ------------------------------------------ ----------------- ------------------- ------------- ------------ Minnesota Tax-Exempt 0 0 15 23 - ------------------------------------------ ----------------- ------------------- ------------- ------------ New York Tax-Exempt 0 0 30 36 - ------------------------------------------ ----------------- ------------------- ------------- ------------ Ohio Tax-Exempt 0 0 33 17 - ------------------------------------------ ----------------- ------------------- ------------- ------------ Real Estate 1,683,089 2,960 63 49(b) - ----------------------------------------------------------------------------------------------------------- For funds with fiscal period ending July 31 - ----------------------------------------------------------------------------------------------------------- Cash Management 0 0 N/A N/A - ------------------------------------------ ----------------- ------------------- ------------- ------------ Core Bond 0 0 313* 310 - ------------------------------------------ ------------------------------------- --------------------------
Statement of Additional Information - Nov. 29, 2005 Page 48
- ------------------------------------------ ------------------------------------- -------------------------- Fund Brokerage directed for research Turnover rates - ------------------------------------------ ------------------------------------- -------------------------- Amount of Amount of transactions commissions imputed or paid - ------------------------------------------ ----------------- ------------------- -------------------------- 2005 2004 - ----------------------------------------------------------------------------------------------------------- Disciplined Equity 0 0 64 64 - ------------------------------------------ ----------------- ------------------- ------------- ------------ Discovery 2,807,817 5,265 82 136 - ------------------------------------------ ----------------- ------------------- ------------- ------------ Growth 112,613,001 257,216 136 171 - ------------------------------------------ ----------------- ------------------- ------------- ------------ Income Opportunities 0 0 124 133 - ------------------------------------------ ----------------- ------------------- ------------- ------------ Inflation Protected Securities 0 0 43 11(c) - ------------------------------------------ ----------------- ------------------- ------------- ------------ Large Cap Equity 55,693,151 112,862 128 99 - ------------------------------------------ ----------------- ------------------- ------------- ------------ Large Cap Value 2,335,458 3,065 57 59 - ------------------------------------------ ----------------- ------------------- ------------- ------------ Limited Duration Bond 0 0 316* 317 - ------------------------------------------ ----------------- ------------------- ------------- ------------ New Dimensions 139,768,556 184,742 75 49 - ----------------------------------------------------------------------------------------------------------- For funds with fiscal period ending August 31 - ----------------------------------------------------------------------------------------------------------- Diversified Bond 0 0 300* 279 - ----------------------------------------------------------------------------------------------------------- For funds with fiscal period ending September 30 - ----------------------------------------------------------------------------------------------------------- Balanced 132,024,106 14,004 130 131 - ------------------------------------------ ----------------- ------------------- ------------- ------------ Diversified Equity Income 12,690,978 14,045 24 18 - ------------------------------------------ ----------------- ------------------- ------------- ------------ Mid Cap Value 0 0 26 9 - ------------------------------------------ ----------------- ------------------- ------------- ------------ Stock 131,399,280 30,000 132 76 - ------------------------------------------ ----------------- ------------------- ------------- ------------ Strategic Allocation 0 0 134 127 - -------------------------------------------------------------------------------- ------------- ------------ 2004 2003 - -------------------------------------------------------------------------------- ------------- ------------ For funds with fiscal period ending October 31 - ----------------------------------------------------------------------------------------------------------- Emerging Markets 0 0 128 174 - ------------------------------------------ ----------------- ------------------- ------------- ------------ European Equity 0 0 73 186 - ------------------------------------------ ----------------- ------------------- ------------- ------------ Global Balanced 0 0 74 90 - ------------------------------------------ ----------------- ------------------- ------------- ------------ Global Bond 0 0 92 117 - ------------------------------------------ ----------------- ------------------- ------------- ------------ Global Equity 0 0 104 132 - ------------------------------------------ ----------------- ------------------- ------------- ------------ Global Technology 21,309,491 84,503 349 546 - ------------------------------------------ ----------------- ------------------- ------------- ------------ International Aggressive Growth 114,966,759 202,719 87 116 - ------------------------------------------ ----------------- ------------------- ------------- ------------ International Equity 14,835,692 26,595 111 58 - ------------------------------------------ ----------------- ------------------- ------------- ------------ International Opportunity 0 0 98 147 - ------------------------------------------ ----------------- ------------------- ------------- ------------ International Select Value 544,373,529 831,282 23 18 - ------------------------------------------ ----------------- ------------------- ------------- ------------ International Small Cap 26,901,119 53,060 66 87 - ----------------------------------------------------------------------------------------------------------- For funds with fiscal period ending November 30 - ----------------------------------------------------------------------------------------------------------- Intermediate Tax-Exempt 0 0 25 59 - ------------------------------------------ ----------------- ------------------- ------------- ------------ Mid Cap Growth 0 0 26 26 - ------------------------------------------ ----------------- ------------------- ------------- ------------ Tax-Exempt Bond 0 0 21 92 - ------------------------------------------ ----------------- ------------------- ------------- ------------ Tax-Exempt High Income 0 0 22 44 - ----------------------------------------------------------------------------------------------------------- For funds with fiscal period ending December 31 - ----------------------------------------------------------------------------------------------------------- Tax-Exempt Money Market 0 0 N/A N/A - ------------------------------------------ ----------------- ------------------- ------------- ------------
* A significant portion of the turnover was the result of "roll" transactions in the liquid derivatives and Treasury securities. In the derivative transactions, positions in expiring contracts are liquidated and simultaneously replaced with positions in new contracts with equivalent characteristics. In the Treasury transactions, existing holdings are sold to purchase newly issued securities with slightly longer maturity dates. Although these transactions affect the turnover rate of the portfolio, they do not change the risk exposure or result in material transaction costs. The remaining turnover resulted from strategic reallocations and relative value trading. After transaction costs, we expect this activity to enhance the returns on the overall fund. (a) For the period from March 4, 2004 (when shares became publicly available) to Jan. 31, 2005. (b) For the period from March 4, 2004 (when shares became publicly available) to June 30, 2004. (c) For the period from March 4, 2004 (when shares became publicly available) to July 31, 2004. Statement of Additional Information - Nov. 29, 2005 Page 49 As of the end of the most recent fiscal period, the fund held securities of its regular brokers or dealers or of the parent of those brokers or dealers that derived more than 15% of gross revenue from securities-related activities as presented below. The table is organized by fiscal year end. You can find your fund's fiscal year end in Table 1.
Table 7. Securities of Regular Brokers or Dealers - ------------------------------------------ --------------------------------------------- ---------------------- Fund Issuer Value of securities owned at end of fiscal period - --------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending January 31 - --------------------------------------------------------------------------------------------------------------- Portfolio Builder Aggressive None N/A - ------------------------------------------ --------------------------------------------- ---------------------- Portfolio Builder Conservative None N/A - ------------------------------------------ --------------------------------------------- ---------------------- Portfolio Builder Moderate None N/A - ------------------------------------------ --------------------------------------------- ---------------------- Portfolio Builder Moderate Aggressive None N/A - ------------------------------------------ --------------------------------------------- ---------------------- Portfolio Builder Moderate Conservative None N/A - ------------------------------------------ --------------------------------------------- ---------------------- Portfolio Builder Total Equity None N/A - ------------------------------------------ --------------------------------------------- ---------------------- Small Company Index Investment Technology Group $2,067,454 Piper Jaffray Companies 1,947,534 - ------------------------------------------ --------------------------------------------- ---------------------- S&P 500 Index American Express 1,956,185 Bear Stearns Companies 304,797 Citigroup 7,436,421 Citigroup Global Markets Holdings 9,999,306 E*TRADE Financial 149,325 Franklin Resources 494,360 Goldman Sachs Group 1,525,107 Lehman Brothers Holdings 717,392 JP Morgan Chase & Co. 3,884,971 Merrill Lynch & co. 1,634,204 Morgan Stanley 1,789,097 PNC Financial Services Group 444,589 Charles Schwab 442,316 - --------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending March 31 - --------------------------------------------------------------------------------------------------------------- Equity Value Citigroup 39,340,476 JP Morgan Chase & Co. 8,513,814 Lehman Brothers Holdings 20,705,784 Merrill Lynch & Co. 17,608,260 Morgan Stanley 18,497,475 - ------------------------------------------ --------------------------------------------- ---------------------- Precious Metals None N/A - ------------------------------------------ --------------------------------------------- ---------------------- Small Cap Advantage Investment Technology Group 361,165 Jefferies Group 1,948,056 Knight Trading Group 186,659 - ------------------------------------------ --------------------------------------------- ---------------------- Small Cap Growth Affiliated Managers Group 1,111,267 Citigroup 3,399,731 Investment Technology Group 378,175 Jefferies Group 438,595 - ------------------------------------------ --------------------------------------------- ---------------------- Strategy Aggressive None N/A - ---------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2005 Page 50
- ------------------------------------------ --------------------------------------------- ---------------------- Fund Issuer Value of securities owned at end of fiscal period - ------------------------------------------ --------------------------------------------- ---------------------- For funds with fiscal period ending May 31 - --------------------------------------------------------------------------------------------------------------- Aggressive Growth Affiliated Managers Group 532,933 Jefferies Group 160,761 Legg Mason 478,863 - ------------------------------------------ --------------------------------------------- ---------------------- Fundamental Growth Schwab (Charles) 979,889 - ------------------------------------------ --------------------------------------------- ---------------------- Fundamental Value Citigroup 30,305,863 JP Morgan Chase & Co. 44,370,754 Morgan Stanley 6,771,168 - ------------------------------------------ --------------------------------------------- ---------------------- High Yield Bond LaBranche & Co. 16,010,175 - ------------------------------------------ --------------------------------------------- ---------------------- Select Value Bear Stearns Companies 693,280 BKF Capital Group 181,500 Merrill Lynch & Co. 1,899,100 - ------------------------------------------ --------------------------------------------- ---------------------- Selective Bear Stearns Adjustable Rate Mtge Trust 2,191,863 Bear Stearns Commercial Mtge Securities 5,347,849 Citigroup 8,545,622 Citigroup Commercial Mtge Trust 4,490,508 CS First Boston Mtge Securities 4,628,259 Goldman Sachs Group 2,106,773 J.P. Morgan Chase & Co. 2,428,993 J.P. Morgan Chase Commercial Mtge Securities 9,413,657 LB-UBS Commercial Mtge Trust 18,947,351 Morgan Stanley 928,881 Morgan Stanley Capital 1 7,691,766 Morgan Stanley, Dean Witter Capital 1 2,426,912 - ------------------------------------------ --------------------------------------------- ---------------------- Short Duration U.S. Government Bears Stearns Alternative Trust 8,575,000 LB-UBS Commercial Mtge Trust 6,128,195 Morgan Stanley Capital I 12,092,686 Morgan Stanley Mtge Loan Trust 3,549,817 - ------------------------------------------ --------------------------------------------- ---------------------- Small Cap Equity Affiliated Managers Group 546,940 Investment Technology Group 1,103,466 - ------------------------------------------ --------------------------------------------- ---------------------- Small Cap Value Affiliated Managers Group 1,855,928 Investment Technology Group 1,304,814 Options Xpress Holdings 271,188 - ------------------------------------------ --------------------------------------------- ---------------------- U.S. Government Mortgage CS First Boston Mtge Securities 367,506 - ------------------------------------------ --------------------------------------------- ---------------------- Value Citigroup 7,141,876 Goldman Sachs Group 4,182,750 Merrill Lynch & Co. 4,134,612 JP Morgan Chase & Co. 10,167,157 - --------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending June 30 - --------------------------------------------------------------------------------------------------------------- California Tax-Exempt None N/A - ------------------------------------------ --------------------------------------------- ---------------------- Dividend Opportunity Citigroup 27,770,361 Friedman, Billings, Ramsey Group CIA 2,562,560 JP Morgan Chase & Co. 9,822,492 - ------------------------------------------ --------------------------------------------- ---------------------- Insured Tax-Exempt None N/A - ------------------------------------------ --------------------------------------------- ---------------------- Massachusetts Tax-Exempt None N/A - ------------------------------------------ --------------------------------------------- ---------------------- Michigan Tax-Exempt None N/A - ------------------------------------------ --------------------------------------------- ---------------------- Minnesota Tax-Exempt None N/A - ------------------------------------------ --------------------------------------------- ---------------------- New York Tax-Exempt None N/A - ------------------------------------------ --------------------------------------------- ---------------------- Ohio Tax-Exempt None N/A - ------------------------------------------ --------------------------------------------- ---------------------- Real Estate None N/A - ---------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2005 Page 51
- ------------------------------------------ --------------------------------------------- ---------------------- Fund Issuer Value of securities owned at end of fiscal period - ------------------------------------------ --------------------------------------------- ---------------------- For funds with fiscal period ending July 31 - --------------------------------------------------------------------------------------------------------------- Cash Management Bear Stearns Companies 78,410,961 Credit Suisse First Boston NY 79,971,289 Goldman Sachs Group 75,000,000 Lehman Brothers Holdings 42,000,000 Morgan Stanley & Co. 44,105,490 - ------------------------------------------ --------------------------------------------- ---------------------- Core Bond Bear Stearns Commercial Mtge Securities 1,608,803 Bear Stearns Adjustable Rate Mortgage Trust 899,429 Citigroup 2,480,986 Citigroup Commercial Mortgage Trust 757,003 CS First Boston Mtge Securities 643,161 GS Mtg Securities 370,305 LB-UBS Commercial Mtge Trust 3,135,156 JP Morgan Chase Commercial Mtge Securities 2,160,054 Merrill Lynch Mtge Trust 323,480 Morgan Stanley Capital 1 406,481 - ------------------------------------------ --------------------------------------------- ---------------------- Disciplined Equity Bear Stearns Companies 303,981 Citigroup 2,851,817 Franklin Resources 890,557 Lehman Brothers Holdings 691,019 Merrill Lynch & Co. 226,597 Morgan Stanley 120,264 PNC Financial Services Group 554,285 - ------------------------------------------ --------------------------------------------- ---------------------- Discovery Affiliated Managers Group 424,235 Investment Technology Group 928,520 - ------------------------------------------ --------------------------------------------- ---------------------- Growth Franklin Resources 10,555,092 - ------------------------------------------ --------------------------------------------- ---------------------- Income Opportunities LaBranche & Co. 1,892,550 - ------------------------------------------ --------------------------------------------- ---------------------- Inflation Protected Securities None N/A - ------------------------------------------ --------------------------------------------- ---------------------- Large Cap Equity Citigroup 25,890,939 Citigroup Funding 19,794,538 E*Trade Financial 1,660,097 Franklin Resources 6,005,007 Legg Mason 1,157,564 Lehman Brothers Holdings 5,310,957 Merrill Lynch & Co. 3,107,522 JP Morgan Chase & Co. 14,572,909 Morgan Stanley 10,152,019 PNC Financial Services Group 4,508,671 - ------------------------------------------ --------------------------------------------- ---------------------- Large Cap Value Citigroup 4,454,096 E*Trade Financial 147,128 Franklin Resources 531,068 Legg Mason 317,891 Lehman Brothers Holdings 814,758 Merrill Lynch & Co. 883,405 JP Morgan Chase & Co. 2,588,131 Morgan Stanley 1,703,860 PNC Financial Services Group 683,386 - ------------------------------------------ --------------------------------------------- ----------------------
Statement of Additional Information - Nov. 29, 2005 Page 52
- ------------------------------------------ --------------------------------------------- ---------------------- Fund Issuer Value of securities owned at end of fiscal period - ------------------------------------------ --------------------------------------------- ---------------------- Limited Duration Bond Bear Stearns Commercial Mtge Securities 1,393,235 Bear Stearns Adjustable Rate Mortgage Trust 956,758 Citigroup 2,476,073 Citigroup Commercial Mortgage Trust 851,629 CS First Boston Mtge Securities 881,742 GS Mtg Securities 419,679 LB-UBS Commercial Mtge Trust 3,651,486 JP Morgan Chase Commercial Mtge Securities 2,884,355 Merrill Lynch Mtge Trust 362,690 Morgan Stanley Capital 1 509,109 - ------------------------------------------ --------------------------------------------- ---------------------- New Dimensions Citigroup 191,123,340 Schwab (Charles) 236,626,414 - --------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending August 31 - --------------------------------------------------------------------------------------------------------------- Diversified Bond Bear Stearns Adjustable Rate Mortgage Trust 7,536,103 Bear Stearns Commercial Mtge Securities 10,586,732 Citigroup 35,535,196 Citigroup Commercial Mortgage Trust 12,098,072 CS First Boston Mtge Securities 7,871,786 GS Mtg Securities 10,184,890 JP Morgan Chase Commercial Mtge Securities 40,751,675 LB-UBS Commercial Mtge Trust 67,268,305 Merrill Lynch Mtge Trust 4,557,707 Morgan Stanley & Co. 2,899,712 Morgan Stanley Capital 1 13,604,693 Morgan Stanley, Dean Witter Capital 1 11,768,644 - ------------------------------------------ --------------------------------------------- ---------------------- For funds with fiscal period ending September 30 - --------------------------------------------------------------------------------------------------------------- Balanced Bear Stearns Commercial Mtge Securities 2,691,282 Bear Stearns Adjustable Rate Mortgage Trust 1,285,883 Citigroup 26,730,801 Citigroup Commercial Mortgage Trust 1,894,303 CS First Boston Mtge Securities 4,216,015 Franklin Resources 3,152,026 GS Mtg Securities II 1,802,859 JP Morgan Chase 2,046,404 JP Morgan Chase & Co. 14,331,286 JP Morgan Chase Commercial Mtge Securities 5,957,081 Legg Mason 1,957,637 Lehman Brothers Holdings 6,048,108 LB-UBS Commercial Mtge Trust 11,371,831 Merrill Lynch & Co. 5,287,634 Merrill Lynch Mtge Trust 859,511 Morgan Stanley 9,935,101 Morgan Stanley Capital 1 3,509,890 Morgan Stanley, Dean Witter Capital 1 2,004,670 PNC Financial Services Group 4,544,533 - ------------------------------------------ --------------------------------------------- ---------------------- Diversified Equity Income Citigroup 173,731,632 Lehman Brothers Holdings 17,530,240 Merrill Lynch & Co. 29,834,505 Morgan Stanley 14,828,106 Morgan Stanley & Co. 34,827,111 - ------------------------------------------ --------------------------------------------- ----------------------
Statement of Additional Information - Nov. 29, 2005 Page 53
- ------------------------------------------ --------------------------------------------- ---------------------- Fund Issuer Value of securities owned at end of fiscal period - ------------------------------------------ --------------------------------------------- ---------------------- Mid Cap Value Morgan Stanley & Co. 18,876,087 - ------------------------------------------ --------------------------------------------- ---------------------- Stock Bear Stearns Companies 1,430,811 Citigroup 39,491,241 Citigroup Funding 899,708 Franklin Resources 7,969,063 Goldman Sachs Group 18,237,001 Lehman Brothers Holdings 12,993,693 Merrill Lynch & Co. 2,122,158 Morgan Stanley 3,211,911 PNC Financial Services Group 5,721,584 - ------------------------------------------ --------------------------------------------- ---------------------- Strategic Allocation Bear Stearns Adjustable Rate Mortgage Trust 653,482 Bear Stearns Commercial Mtge Securities 1,497,234 Bear Stearns Companies 2,412,415 Citigroup 17,045,203 Citigroup Commercial Mortgage Trust 1,571,411 Credit Suisse Group 530,415 CS First Boston Mtge Securities 1,348,098 Franklin Resources 4,447,781 GS Mtg Securities II 799,349 Investment Technology Group 560,269 JP Morgan Chase 715,248 JP Morgan Chase Commercial Mtge Securities 2,449,180 Knight Capital Group 97,227 LaBranche & Co. 104,975 LB-UBS Commercial Mtge Trust 3,739,983 Lehman Brothers Holdings 3,769,642 Merrill Lynch & Co. 753,439 Merrill Lynch Mtge Trust 429,755 Morgan Stanley 1,795,878 Morgan Stanley & Co. 19,193,760 Morgan Stanley Capital 1 295,290 Morgan Stanley, Dean Witter Capital 1 476,043 PNC Financial Services Group 3,027,600 - ------------------------------------------ --------------------------------------------- ----------------------
Statement of Additional Information - Nov. 29, 2005 Page 54
- ------------------------------------------ --------------------------------------------- ---------------------- Fund Issuer Value of securities owned at end of fiscal period - ------------------------------------------ --------------------------------------------- ---------------------- For funds with fiscal period ending October 31 - --------------------------------------------------------------------------------------------------------------- Emerging Markets None N/A - ------------------------------------------ --------------------------------------------- ---------------------- European Equity Credit Suisse Group 906,216 - ------------------------------------------ --------------------------------------------- ---------------------- Global Balanced Ameritrade Holding 209,622 Bear Stearns Companies 592,661 Citigroup 1,725,816 Goldman Sachs Group 540,599 - ------------------------------------------ --------------------------------------------- ---------------------- Global Bond Bear Stearns Commercial Mtge Securities 2,268,820 Citigroup 3,380,448 CS First Boston Mtge Securities 248,320 Goldman Sachs Group 557,710 LB-UBS Commercial Mtge Trust 2,269,733 J.P. Morgan Chase & Co. 1,793,898 Morgan Stanley Capital 1 1,016,380 Morgan Stanley Group 3,181,144 - ------------------------------------------ --------------------------------------------- ---------------------- Global Equity Ameritrade Holding 5,251,617 Bear Stearns Companies 3,564,211 Citigroup 18,148,572 Goldman Sachs Group 6,145,996 - ------------------------------------------ --------------------------------------------- ---------------------- Global Technology None N/A - ------------------------------------------ --------------------------------------------- ---------------------- International Aggressive Growth Pargesa Holdings 617,420 - ------------------------------------------ --------------------------------------------- ---------------------- International Equity None N/A - ------------------------------------------ --------------------------------------------- ---------------------- International Opportunity Credit Suisse Group 2,135,848 - ------------------------------------------ --------------------------------------------- ---------------------- International Select Value Credit Suisse Group 10,302,663 - ------------------------------------------ --------------------------------------------- ---------------------- International Small Cap None N/A - --------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending November 30 - --------------------------------------------------------------------------------------------------------------- Intermediate Tax-Exempt None N/A - ------------------------------------------ --------------------------------------------- ---------------------- Mid Cap Growth Legg Mason 51,786,400 - ------------------------------------------ --------------------------------------------- ---------------------- Tax-Exempt Bond None N/A - ------------------------------------------ --------------------------------------------- ---------------------- Tax-Exempt High Income None N/A - --------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending December 31 - --------------------------------------------------------------------------------------------------------------- Tax-Exempt Money Market None N/A - ------------------------------------------ --------------------------------------------- ----------------------
Statement of Additional Information - Nov. 29, 2005 Page 55 Brokerage Commissions Paid to Brokers Affiliated with the Investment Manager Affiliates of RiverSource Investments may engage in brokerage and other securities transactions on behalf of a fund according to procedures adopted by the Board and to the extent consistent with applicable provisions of the federal securities laws. Subject to approval by the Board, the same conditions apply to transactions with broker-dealer affiliates of any subadviser. The investment manager will use an affiliate only if (i) the investment manager determines that the fund will receive prices and executions at least as favorable as those offered by qualified independent brokers performing similar brokerage and other services for the fund and (ii) the affiliate charges the fund commission rates consistent with those the affiliate charges comparable unaffiliated customers in similar transactions and if such use is consistent with terms of the Investment Management Services Agreement. Information about any brokerage commissions paid by a fund in the last three fiscal periods to brokers affiliated with the fund's investment manager is contained in the following table. The table is organized by fiscal year end. You can find your fund's fiscal year end in Table 1.
Table 8. Brokerage Commissions Paid to Investment Manager or Affiliates - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Percent of aggregate Aggregate dollar amount Aggregate Aggregate dollar Percent of of dollar dollar Fund amount of aggregate transactions amount of amount of Nature of commissions brokerage involving commissions commissions Broker affiliation paid to commissions payment of paid to paid to broker commissions broker broker - ------------------------ -------------------------------------------------------------------------- ------------- ------------- 2005 2004 2003 - ------------------------ -------------------------------------------------------------------------- ------------- ------------- For funds with fiscal period ending January 31 - ------------------------------------------------------------------------------------------------------------------------------- Portfolio Builder None 0 0 Aggressive - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Portfolio Builder None 0 0 Conservative - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Portfolio Builder None 0 0 Moderate - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Portfolio Builder None 0 0 Moderate Aggressive - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Portfolio Builder None 0 0 Moderate Conservative - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Portfolio Builder None 0 0 Total Equity - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Small Company Index None 0 0 - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- S&P 500 Index None 0 0 - ------------------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending March 31 - ------------------------------------------------------------------------------------------------------------------------------- Equity Value American 1 10,142* 1.18 1.64 14,787* 5,415* Enterprise Investment Services, Inc (AEIS) - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Precious Metals AEIS 1 3,614* 0.29 0.65 24,650* 67,515* - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Small Cap Advantage AEIS 1 0 0 0 360* 683* - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Small Cap Growth SBCI Securities 2 0 0 0 757* 0 ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Neuberger Berman 3 0 0 0 0 40,332* - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Strategy Aggressive AEIS 1 7,880* 0.84 2.51 5,432* 41,748 - ------------------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending May 31 - ------------------------------------------------------------------------------------------------------------------------------- Aggressive Growth JP Morgan 4 27* 0.01 0.02 103 50(a) Securities, Inc. - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Fundamental Value None 0 0 - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- -------------
Statement of Additional Information - Nov. 29, 2005 Page 56
- ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Percent of aggregate Aggregate dollar amount Aggregate Aggregate dollar Percent of of dollar dollar Fund amount of aggregate transactions amount of amount of Nature of commissions brokerage involving commissions commissions Broker affiliation paid to commissions payment of paid to paid to broker commissions broker broker - ------------------------ -------------------------------------------------------------------------- ------------- ------------- 2005 2004 2003 - ------------------------ -------------------------------------------------------------------------- ------------- ------------- Fundamental Growth Goldman Sachs 5 38 0.02 0.01 0 0 & Co. ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Raymond James 6 0 0 0 15 0(a) Financial - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- High Yield Bond None 0 0 - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Selective None 0 0 - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Select Value Gabelli & Co. 7 143,463 46.14 43.33 464,895 264,461 - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Short Duration None 0 0 U.S. Government - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Small Cap Equity None 0 0 - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Small Cap Value Goldman Sachs 5 1,943 0.08 0.09 46,047 0 & Co. ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Janney 8 0 0 0 5,130 0 Montgomery Scott ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Legg Mason Wood 8 2,700 0.11 0.13 0 0 Walker, Inc. ------------------ ----------- ------------- ------------- --------------- ------------- ------------- M.J. Whitman 9 0 0 0 425,573 286,906 - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- U.S. Gov't Mortgage None 0 0 - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Value None 0 0 - ------------------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending June 30 - ------------------------------------------------------------------------------------------------------------------------------- California Tax-Exempt None 0 0 - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Dividend Opportunity AEIS 1 20,898* 3.36 7.33 217,347* 753,855* - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Insured Tax-Exempt None 0 0 - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Massachusetts None 0 0 Tax-Exempt - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Michigan Tax-Exempt None 0 0 - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Minnesota Tax-Exempt None 0 0 - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- New York Tax-Exempt None 0 0 - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Ohio Tax-Exempt None 0 0 - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Real Estate None 0 0 - ------------------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending July 31 - ------------------------------------------------------------------------------------------------------------------------------- Cash Management None 0 0 - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Core Bond None 0 0 - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Disciplined Equity None 0 0 - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Discovery None 0 0 - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Growth AEIS 1 13,720* 0.09 0.31 336,098* 745,620* - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Income Opportunities None 0 0 - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Inflation Protected None 0 0 Securities - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Large Cap Equity AEIS 1 10,214* 0.15 0.33 6,644* 353* - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Large Cap Value AEIS 1 276* 0.15 0.17 595* 1,577* - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Limited Duration Bond None 0 0 - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- New Dimensions AEIS 1 108,435* 0.37 0.77 1,018,149* 324,088* - ------------------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending August 31 - ------------------------------------------------------------------------------------------------------------------------------- Diversified Bond None 0 0 - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- -------------
Statement of Additional Information - Nov. 29, 2005 Page 56
- ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Percent of aggregate Aggregate dollar amount Aggregate Aggregate dollar Percent of of dollar dollar Fund amount of aggregate transactions amount of amount of Nature of commissions brokerage involving commissions commissions Broker affiliation paid to commissions payment of paid to paid to broker commissions broker broker - ------------------------ -------------------------------------------------------------------------- ------------- ------------- 2005 2004 2003 - ------------------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending September 30 - ------------------------------------------------------------------------------------------------------------------------------- Balanced AEIS 1 0 0 0 8,440* 82,086* - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Diversified Equity AEIS 1 1,716* 0.05 0.15 73,448* 73,410* Income - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Mid Cap Value AEIS 1 0 0 0 39,552* 23,417* - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Stock AEIS 1 23,308* 0.49 0.58 514,423* 329,816* - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Strategic Allocation None 0 0 - ------------------------ -------------------------------------------------------------------------- ------------- ------------- 2004 2003 2002 - ------------------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending October 31 - ------------------------------------------------------------------------------------------------------------------------------- Emerging Markets None 0 0 - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- European Equity None 0 0 - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Global Balanced None 0 0 - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Global Bond None 0 0 - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Global Equity None 0 0 - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Global Technology AEIS 1 97,718* 2.33 4.97 495,249* 202,910* - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- International J. P. Morgan 4 22,343 3.73 3.25 0 0 Aggressive Growth Securities, Inc. ------------------ ----------- ------------- ------------- --------------- ------------- ------------- J.P. Morgan Chase 4 0 0 0 0 9,567 - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- International Equity None 0 0 - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- International None 0 0 Opportunity - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- International Select Sanford C. 10 20,637 2.46 1.07 0 0 Value Bernstein & Co. LLC - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- International Small Cap None 0 0 - ------------------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending November 30 - ------------------------------------------------------------------------------------------------------------------------------- Intermediate None 0 0 Tax-Exempt - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Mid Cap Growth AEIS 1 17,994* 1.10 1.67 48,993* 56,544* - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Tax-Exempt Bond None 0 0 - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- ------------- Tax-Exempt High Income None 0 0 - ------------------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending December 31 - ------------------------------------------------------------------------------------------------------------------------------- Tax-Exempt Money Market None 0 0 - ------------------------ ------------------ ----------- ------------- ------------- --------------- ------------- -------------
* Represents brokerage clearing fees. (1) American Enterprise Investment Services, Inc., a wholly-owned subsidiary of Ameriprise Financial. (2) Affiliate of UBS, a subadviser. (3) Affiliate of Neuberger Berman Management, Inc., a former subadviser, terminated July 24, 2003. (4) Affiliate of American Century, a subadviser. (5) Affiliate of Goldman Sachs Asset Management, L.P., a subadviser. (6) Affiliate of Eagle Asset Management, Inc., a former subadviser, terminated April 2005. (7) Affiliate of GAMCO Investors, Inc. (8) Affiliate of Royce & Associates, LLC., a subadviser. (9) Affiliate of Third Avenue Management, LLC., a former subadviser, terminated March 15, 2004. (10) Affiliate of Alliance Capital, a subadviser. (a) For the period from April 24, 2003 (when shares became publicly available) to May 31, 2003. Statement of Additional Information - Nov. 29, 2005 Page 58 Valuing Fund Shares As of the end of the most recent fiscal period, the computation of net asset value was based on net assets divided by shares outstanding as shown in the following table. The table is organized by fiscal year end. You can find your fund's fiscal year end in Table 1. Table 9. Valuing Fund Shares
- --------------------------------------- --------------------- ----------------------- ------------------------------- Fund Net assets Shares outstanding Net asset value of one share - --------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending January 31 - --------------------------------------------------------------------------------------------------------------------- Portfolio Builder Aggressive Class A $119,627,607 11,362,951 $10.53 Class B 35,834,966 3,418,749 10.48 Class C 3,083,372 294,292 10.48 Class Y 47,631 4,524 10.53 - --------------------------------------- --------------------- ----------------------- ------------------------------- Portfolio Builder Conservative Class A 39,897,123 3,898,848 10.23 Class B 20,554,920 2,013,651 10.21 Class C 4,481,347 439,018 10.21 Class Y 10,201 1,000 10.20 - --------------------------------------- --------------------- ----------------------- ------------------------------- Portfolio Builder Moderate Class A 189,888,226 18,140,369 10.47 Class B 71,814,179 6,883,820 10.43 Class C 7,955,750 761,900 10.44 Class Y 40,620 3,879 10.47 - --------------------------------------- --------------------- ----------------------- ------------------------------- Portfolio Builder Moderate Aggressive Class A 245,769,977 23,417,138 10.50 Class B 67,228,623 6,423,185 10.47 Class C 6,552,993 626,119 10.47 Class Y 33,480 3,188 10.50 - --------------------------------------- --------------------- ----------------------- ------------------------------- Portfolio Builder Moderate Conservative 77,638,291 7,502,281 10.35 Class A 33,819,808 3,276,549 10.32 Class B 5,954,341 576,615 10.33 Class C 10,338 1,000 10.34 Class Y - --------------------------------------- --------------------- ----------------------- ------------------------------- Portfolio Builder Total Equity Class A 92,091,638 8,732,306 10.55 Class B 28,227,386 2,688,269 10.50 Class C 2,332,601 222,136 10.50 Class Y 83,553 7,917 10.55 - --------------------------------------- --------------------- ----------------------- ------------------------------- Small Company Index Class A 844,467,080 102,911,670 8.21 Class B 433,644,981 57,128,419 7.59 Class Y 19,752,240 2,373,075 8.32 - --------------------------------------- --------------------- ----------------------- ------------------------------- S&P 500 Index Class D 69,204,754 15,205,187 4.55 Class E 301,359,081 65,939,676 4.57 - ---------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2005 Page 59
- --------------------------------------- --------------------- ----------------------- ------------------------------- Fund Net assets Shares outstanding Net asset value of one share - --------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending March 31 - --------------------------------------------------------------------------------------------------------------------- Equity Value Class A 864,772,364 85,483,171 10.12 Class B 275,043,516 27,137,439 10.14 Class C 3,418,344 339,746 10.06 Class I 10,834 1,070 10.13 Class Y 7,588,846 749,495 10.13 - --------------------------------------- --------------------- ----------------------- ------------------------------- Precious Metals Class A 62,278,310 6,936,541 8.98 Class B 16,662,847 1,947,682 8.56 Class C 1,639,458 193,412 8.48 Class I 8,918 989 9.02 Class Y 43,718 4,837 9.04 - --------------------------------------- --------------------- ----------------------- ------------------------------- Small Cap Advantage Class A 621,674,455 87,943,516 7.07 Class B 234,464,316 34,760,836 6.75 Class C 12,376,977 1,834,812 6.75 Class I 5,533,930 771,966 7.17 Class Y 558,895 78,327 7.14 - --------------------------------------- --------------------- ----------------------- ------------------------------- Small Cap Growth Class A 153,495,002 36,595,831 4.19 Class B 70,741,549 17,412,915 4.06 Class C 6,481,577 1,595,042 4.06 Class I 5,507,843 1,300,608 4.23 Class Y 115,147 27,301 4.22 - --------------------------------------- --------------------- ----------------------- ------------------------------- Strategy Aggressive Class A 453,020,526 39,643,036 11.43 Class B 150,640,501 14,822,706 10.16 Class C 1,837,142 180,759 10.16 Class I 10,749 919 11.70 Class Y 1,740,559 149,294 11.66 - --------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending May 31 - --------------------------------------------------------------------------------------------------------------------- Aggressive Growth Class A 25,011,144 3,432,844 7.29 Class B 6,887,053 959,077 7.18 Class C 441,567 61,518 7.18 Class I 39,475,546 5,390,829 7.32 Class Y 35,231 4,821 7.31 - --------------------------------------- --------------------- ----------------------- ------------------------------- Fundamental Growth Class A 18,325,202 3,167,522 5.79 Class B 6,916,701 1,216,017 5.69 Class C 318,666 55,965 5.69 Class I 62,881,753 10,805,834 5.82 Class Y 20,924 3,597 5.82 - --------------------------------------- --------------------- ----------------------- ------------------------------- Fundamental Value Class A 641,156,030 117,692,649 5.45 Class B 293,904,772 55,227,068 5.32 Class C 17,116,872 3,204,289 5.34 Class I 38,341,137 6,987,269 5.49 Class Y 513,806 93,892 5.47 - --------------------------------------- --------------------- ----------------------- -------------------------------
Statement of Additional Information - Nov. 29, 2005 Page 60
- --------------------------------------- --------------------- ----------------------- ------------------------------- Fund Net assets Shares outstanding Net asset value of one share - --------------------------------------------------------------------------------------------------------------------- High Yield Bond Class A 1,734,607,908 606,766,116 2.86 Class B 628,996,597 220,191,985 2.86 Class C 36,119,894 12,717,550 2.84 Class I 10,072 3,521 2.86 Class Y 510,977 178,795 2.86 - --------------------------------------- --------------------- ----------------------- ------------------------------- Select Value Class A 525,317,144 79,034,723 6.65 Class B 202,624,816 31,180,806 6.50 Class C 11,856,832 1,824,372 6.50 Class I 13,938,125 2,079,347 6.70 Class Y 66,312 9,928 6.68 - --------------------------------------- --------------------- ----------------------- ------------------------------- Selective Class A 591,107,900 68,029,020 8.69 Class B 124,736,789 14,357,845 8.69 Class C 4,242,590 488,313 8.69 Class I 143,290,359 16,490,222 8.69 Class Y 50,484,935 5,815,214 8.68 - --------------------------------------- --------------------- ----------------------- ------------------------------- Short Duration U.S. Government Class A 894,085,093 186,727,963 4.79 Class B 588,209,128 122,837,566 4.79 Class C 23,606,429 4,929,965 4.79 Class I 31,332,182 6,535,370 4.79 Class Y 99,574,002 20,793,917 4.79 - --------------------------------------- --------------------- ----------------------- ------------------------------- Small Cap Equity Class A 122,560,969 21,107,913 5.81 Class B 46,071,722 8,146,718 5.66 Class C 3,743,293 662,650 5.65 Class I 7,041,819 1,202,122 5.86 Class Y 135,399 23,158 5.85 - --------------------------------------- --------------------- ----------------------- ------------------------------- Small Cap Value Class A 746,569,553 112,761,101 6.62 Class B 347,749,645 53,888,572 6.45 Class C 21,382,301 3,306,736 6.47 Class I 9,252,001 1,384,674 6.68 Class Y 237,915 35,744 6.66 - --------------------------------------- --------------------- ----------------------- ------------------------------- U.S. Government Mortgage Class A 159,223,769 31,128,293 5.12 Class B 97,863,453 19,124,334 5.12 Class C 10,556,978 2,062,750 5.12 Class I 9,924 1,942 5.11 Class Y 34,968 6,838 5.11 - --------------------------------------- --------------------- ----------------------- ------------------------------- Value Class A 266,775,559 49,757,191 5.36 Class B 145,697,978 27,768,947 5.25 Class C 9,149,580 1,739,170 5.26 Class I 48,010,163 8,894,177 5.40 Class Y 158,895 29,513 5.38 - ---------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2005 Page 61
- --------------------------------------- --------------------- ----------------------- ------------------------------- Fund Net assets Shares outstanding Net asset value of one share - --------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending June 30 - --------------------------------------------------------------------------------------------------------------------- California Tax-Exempt Class A 189,684,740 35,995,218 5.27 Class B 16,159,650 3,068,100 5.27 Class C 3,056,044 579,245 5.28 - --------------------------------------- --------------------- ----------------------- ------------------------------- Dividend Opportunity Class A 808,056,488 110,670,374 7.30 Class B 297,235,931 40,987,439 7.25 Class C 11,875,411 1,638,182 7.25 Class I 11,068 1,513 7.32 Class Y 168,909 23,085 7.32 - --------------------------------------- --------------------- ----------------------- ------------------------------- Insured Tax-Exempt Class A 323,488,272 58,836,401 5.50 Class B 46,534,461 8,464,126 5.50 Class C 5,852,002 1,062,313 5.51 Class Y 1,443 263 5.49 - --------------------------------------- --------------------- ----------------------- ------------------------------- Massachusetts Tax-Exempt Class A 56,077,745 10,296,587 5.45 Class B 17,522,009 3,217,293 5.45 Class C 1,368,946 251,459 5.44 - --------------------------------------- --------------------- ----------------------- ------------------------------- Michigan Tax-Exempt Class A 53,273,688 9,955,048 5.35 Class B 5,477,255 1,023,070 5.35 Class C 1,841,153 343,994 5.35 - --------------------------------------- --------------------- ----------------------- ------------------------------- Minnesota Tax-Exempt Class A 341,393,866 63,764,004 5.35 Class B 48,659,135 9,087,318 5.35 Class C 9,005,026 1,681,783 5.35 - --------------------------------------- --------------------- ----------------------- ------------------------------- New York Tax-Exempt Class A 72,589,870 14,013,395 5.18 Class B 10,908,968 2,105,995 5.18 Class C 1,372,838 265,013 5.18 - --------------------------------------- --------------------- ----------------------- ------------------------------- Ohio Tax-Exempt Class A 51,047,773 9,547,336 5.35 Class B 8,148,165 1,523,978 5.35 Class C 1,913,283 357,731 5.35 - --------------------------------------- --------------------- ----------------------- ------------------------------- Real Estate Class A 61,688,427 4,590,743 13.44 Class B 18,120,502 1,355,604 13.37 Class C 930,923 69,635 13.37 Class I 52,785,478 3,922,401 13.46 Class Y 35,779 2,669 13.41 - --------------------------------------- --------------------- ----------------------- ------------------------------- For funds with fiscal period ending July 31 - --------------------------------------------------------------------------------------------------------------------- Cash Management Class A 3,053,596,963 3,053,389,372 1.00 Class B 129,253,208 129,443,572 1.00 Class C 2,169,631 2,169,977 1.00 Class I 12,099,006 12,099,403 1.00 Class Y 139,530,681 139,596,472 1.00 - --------------------------------------- --------------------- ----------------------- -------------------------------
Statement of Additional Information - Nov. 29, 2005 Page 62
- --------------------------------------- --------------------- ----------------------- ------------------------------- Fund Net assets Shares outstanding Net asset value of one share - --------------------------------------------------------------------------------------------------------------------- Core Bond Class A 39,922,457 4,107,510 9.72 Class B 11,959,070 1,230,,225 9.72 Class C 595,484 61,240 9.72 Class I 113,058,521 11,642,707 9.71 Class Y 100,477 10,341 9.72 - --------------------------------------- --------------------- ----------------------- ------------------------------- Disciplined Equity Class A 28,058,336 4,189,337 6.70 Class B 9,287,787 1,402,057 6.62 Class C 188,938 28,519 6.62 Class I 81,805,703 12,152,084 6.73 Class Y 34,351 5,118 6.71 - --------------------------------------- --------------------- ----------------------- ------------------------------- Discovery Class A 150,554,497 16,143,047 9.33 Class B 12,996,095 1,539,633 8.44 Class C 26,679 3,168 8.42 Class Y 2,778,376 293,582 9.46 - --------------------------------------- --------------------- ----------------------- ------------------------------- Growth Class A 2,101,095,913 74,131,468 28.34 Class B 578,073,340 22,222,644 26.01 Class C 14,995,769 576,446 26.01 Class I 146,738,136 5,072,507 28.93 Class Y 304,157,098 10,557,701 28.81 - --------------------------------------- --------------------- ----------------------- ------------------------------- Income Opportunities Class A 196,563,730 18,663,072 10.53 Class B 79,198,259 7,522,267 10.53 Class C 6,860,418 651,716 10.53 Class I 68,574,958 6,502,225 10.55 Class Y 406,041 38,524 10.54 - --------------------------------------- --------------------- ----------------------- ------------------------------- Inflation Protected Securities Class A 86,210,888 8,606,293 10.02 Class B 48,510,793 4,844,943 10.01 Class C 3,772,778 376,805 10.01 Class I 51,702,672 5,161,341 10.02 Class Y 10,016 1,000 10.02 - --------------------------------------- --------------------- ----------------------- ------------------------------- Large Cap Equity Class A 1,030,109,387 195,824,050 5.26 Class B 471,864,336 91,616,485 5.15 Class C 9,284,115 1,799,299 5.16 Class I 42,610,172 8,026,676 5.31 Class Y 208,437 39,442 5.28 - --------------------------------------- --------------------- ----------------------- ------------------------------- Large Cap Value Class A 74,114,932 12,713,655 5.83 Class B 28,468,201 4,935,011 5.77 Class C 1,392,159 241,376 5.77 Class I 37,827,081 6,453,226 5.86 Class Y 140,096 23,947 5.85 - --------------------------------------- --------------------- ----------------------- -------------------------------
Statement of Additional Information - Nov. 29, 2005 Page 63
- --------------------------------------- --------------------- ----------------------- ------------------------------- Fund Net assets Shares outstanding Net asset value of one share - --------------------------------------------------------------------------------------------------------------------- Limited Duration Bond Class A 83,392,570 8,517,001 9.79 Class B 25,023,689 2,555,305 9.79 Class C 1,611,885 164,656 9.79 Class I 70,057,990 7,154,021 9.79 Class Y 59,896 6,118 9.79 - --------------------------------------- --------------------- ----------------------- ------------------------------- New Dimensions Class A 6,845,241,780 285,315,473 23.99 Class B 2,003,569,556 88,486,457 22.64 Class C 45,662,322 2,019,120 22.61 Class I 69,748,064 2,889,590 24.14 Class Y 2,557,141,395 106,000,741 24.12 - --------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending August 31 - --------------------------------------------------------------------------------------------------------------------- Diversified Bond Class A 1,774,392,052 362,799,390 4.89 Class B 484,320,317 99,003,330 4.89 Class C 18,092,300 3,693,765 4.90 Class I 9,963 2,037 4.89 Class Y 202,310,332 41,351,259 4.89 - --------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending September 30 - --------------------------------------------------------------------------------------------------------------------- Balanced Class A 989,855,377 100,563,086 9.84 Class B 81,235,914 8,306,982 9.78 Class C 3,167,458 324,045 9.77 Class Y 164,005,099 16,664,056 9.84 - --------------------------------------- --------------------- ----------------------- ------------------------------- Diversified Equity Income Class A 3,750,608,952 309,712,571 12.11 Class B 1,141,027,745 94,507,900 12.07 Class C 58,192,787 4,825,899 12.06 Class I 95,655,178 7,887,479 12.13 Class Y 57,832,165 4,771,115 12.12 - --------------------------------------- --------------------- ----------------------- ------------------------------- Mid Cap Value Class A 781,926,580 91,332,628 8.56 Class B 242,239,643 28,890,614 8.38 Class C 13,765,933 1,641,443 8.39 Class I 11,962,819 1,382,578 8.65 Class Y 817,961 94,943 8.62 - --------------------------------------- --------------------- ----------------------- ------------------------------- Stock Class A 1,465,893,330 73,190,529 20.03 Class B 96,842,633 4,876,852 19.86 Class C 2,561,437 129,515 19.78 Class I 29,862,147 1,491,161 20.03 Class Y 332,409,340 16,599,166 20.03 - --------------------------------------- --------------------- ----------------------- ------------------------------- Strategic Allocation Class A 937,598,891 94,157,621 9.96 Class B 96,316,098 9,745,469 9.88 Class C 6,951,641 705,134 9.86 Class Y 4,286,744 430,514 9.96 - --------------------------------------- --------------------- ----------------------- -------------------------------
Statement of Additional Information - Nov. 29, 2005 Page 64
- --------------------------------------- --------------------- ----------------------- ------------------------------- Fund Net assets Shares outstanding Net asset value of one share - --------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending October 31 - --------------------------------------------------------------------------------------------------------------------- Emerging Markets Class A 190,500,049 30,359,602 6.27 Class B 73,255,622 12,316,180 5.95 Class C 1,211,363 203,071 5.97 Class I 12,706,944 1,999,415 6.36 Class Y 18,013,900 2,838,508 6.35 - --------------------------------------- --------------------- ----------------------- ------------------------------- European Equity Class A 87,389,098 23,559,683 3.71 Class B 36,333,900 9,954,837 3.65 Class C 1,472,996 403,503 3.65 Class I 10,646 2,865 3.72 Class Y 16,178 4,358 3.71 - --------------------------------------- --------------------- ----------------------- ------------------------------- Global Balanced Class A 56,802,615 10,819,137 5.25 Class B 29,946,507 5,813,358 5.15 Class C 788,884 153,660 5.13 Class Y 12,506,399 2,368,527 5.28 - --------------------------------------- --------------------- ----------------------- ------------------------------- Global Bond Class A 388,702,892 55,378,028 7.02 Class B 141,856,065 20,209,576 7.02 Class C 4,716,721 674,551 6.99 Class I 24,020,955 3,414,514 7.03 Class Y 78,443 11,149 7.04 - --------------------------------------- --------------------- ----------------------- ------------------------------- Global Equity Class A 364,487,949 70,705,385 5.16 Class B 103,737,319 21,300,358 4.87 Class C 958,277 197,511 4.85 Class Y 4,482,992 862,149 5.20 - --------------------------------------- --------------------- ----------------------- ------------------------------- Global Technology Class A 146,065,605 79,952,878 1.83 Class B 59,344,328 36,990,705 1.60 Class C 3,952,783 2,457,559 1.61 Class I 10,781 5,882 1.83 Class Y 412,777 225,433 1.83 - --------------------------------------- --------------------- ----------------------- ------------------------------- International Aggressive Growth Class A 151,029,652 22,062,205 6.85 Class B 43,847,769 6,551,452 6.69 Class C 2,733,926 408,576 6.69 Class I 21,060,831 3,054,317 6.90 Class Y 194,904 28,337 6.88 - --------------------------------------- --------------------- ----------------------- ------------------------------- International Equity Class A 97,591,124 13,879,271 7.03 Class B 21,998,053 3,168,563 6.94 Class C 1,535,888 221,140 6.95 Class I 21,597,503 3,057,583 7.06 Class Y 82,712 11,738 7.05 - --------------------------------------- --------------------- ----------------------- -------------------------------
Statement of Additional Information - Nov. 29, 2005 Page 65
- --------------------------------------- --------------------- ----------------------- ------------------------------- Fund Net assets Shares outstanding Net asset value of one share - --------------------------------------------------------------------------------------------------------------------- International Opportunity Class A 347,164,473 52,723,946 6.58 Class B 74,433,389 11,592,373 6.42 Class C 1,792,168 280,894 6.38 Class I 21,542,373 3,240,063 6.65 Class Y 30,660,554 4,629,728 6.62 - --------------------------------------- --------------------- ----------------------- ------------------------------- International Select Value Class A 626,407,916 81,535,854 7.68 Class B 219,316,011 29,207,356 7.51 Class C 11,798,008 1,572,120 7.50 Class I 22,052,586 2,854,070 7.73 Class Y 487,420 63,137 7.72 - --------------------------------------- --------------------- ----------------------- ------------------------------- International Small Cap Class A 53,310,958 6,744,610 7.90 Class B 12,742,956 1,637,077 7.78 Class C 564,033 72,292 7.80 Class I 10,684,163 1,345,331 7.94 Class Y 74,286 9,371 7.93 - --------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending November 30 - --------------------------------------------------------------------------------------------------------------------- Intermediate Tax-Exempt Class A 125,807,592 23,343,822 5.39 Class B 22,556,935 4,188,280 5.39 Class C 9,148,911 1,698,678 5.39 Class Y 1,302 243 5.36 - --------------------------------------- --------------------- ----------------------- ------------------------------- Mid Cap Growth Class A 1,489,202,349 117,818,422 12.64 Class B 407,744,077 34,919,110 11.68 Class C 14,571,251 1,248,024 11.68 Class I 12,461,840 973,107 12.81 Class Y 233,309,493 18,259,470 12.78 - --------------------------------------- --------------------- ----------------------- ------------------------------- Tax-Exempt Bond Class A 674,338,988 173,415,848 3.89 Class B 36,040,487 9,267,790 3.89 Class C 4,656,372 1,197,023 3.89 Class Y 1,894 487 3.89 - --------------------------------------- --------------------- ----------------------- ------------------------------- Tax-Exempt High Income Class A 3,913,819,641 886,250,598 4.42 Class B 249,987,882 56,626,191 4.41 Class C 27,765,310 6,285,479 4.42 Class Y 1,992 451 4.42 - --------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending December 31 - --------------------------------------------------------------------------------------------------------------------- Tax-Exempt Money Market N/A N/A 1.00 - --------------------------------------- --------------------- ----------------------- -------------------------------
Statement of Additional Information - Nov. 29, 2005 Page 66 For Funds other than Money Market Funds. In determining net assets before shareholder transactions, a fund's securities are valued as follows as of the close of business of the New York Stock Exchange (the Exchange): o Securities traded on a securities exchange for which a last-quoted sales price is readily available are valued at the last-quoted sales price on the exchange where such security is primarily traded. o Securities traded on a securities exchange for which a last-quoted sales price is not readily available are valued at the mean of the closing bid and asked prices, looking first to the bid and asked prices on the exchange where the security is primarily traded and, if none exist, to the over-the-counter market. o Securities included in the NASDAQ National Market System are valued at the last-quoted sales price in this market. o Securities included in the NASDAQ National Market System for which a last-quoted sales price is not readily available, and other securities traded over-the-counter but not included in the NASDAQ National Market System are valued at the mean of the closing bid and asked prices. o Futures and options traded on major exchanges are valued at the last-quoted sales price on their primary exchange. o Foreign securities traded outside the United States are generally valued as of the time their trading is complete, which is usually different from the close of the Exchange. Foreign securities quoted in foreign currencies are translated into U.S. dollars utilizing spot exchange rates at the close of regular trading on the NYSE. o Occasionally, events affecting the value of securities occur between the time the primary market on which the securities are traded closes and the close of the Exchange. If events materially affect the value of securities, the securities will be valued at their fair value according to procedures decided upon in good faith by the Board. This occurs most commonly with foreign securities, but may occur in other cases. The fair value of a security is likely to be different from the quoted or published price. o Short-term securities maturing more than 60 days from the valuation date are valued at the readily available market price or approximate market value based on current interest rates. Short-term securities maturing in 60 days or less that originally had maturities of more than 60 days at acquisition date are valued at amortized cost using the market value on the 61st day before maturity. Short-term securities maturing in 60 days or less at acquisition date are valued at amortized cost. Amortized cost is an approximation of market value determined by systematically increasing the carrying value of a security if acquired at a discount, or reducing the carrying value if acquired at a premium, so that the carrying value is equal to maturity value on the maturity date. o Securities without a readily available market price and securities for which the price quotations or valuations received from other sources are deemed unreliable or not reflective of market value 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. o When possible, bonds are valued by a pricing service independent from the funds. 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 assets of Funds-of-Funds consist primarily of shares of the underlying funds, which are valued at their NAVs. Other securities held by a Fund-of-Funds are valued as described above. For Money Market Funds. In accordance with Rule 2a-7 of the 1940 Act, all of the securities in the fund's portfolio are valued at amortized cost. The amortized cost method of valuation is an approximation of market value determined by systematically increasing the carrying value of a security if acquired at a discount, or reducing the carrying value if acquired at a premium, so that the carrying value is equal to maturity value on the maturity date. Amortized cost does not take into consideration unrealized capital gains or losses. Statement of Additional Information - Nov. 29, 2005 Page 67 The Board has established procedures designed to stabilize the fund's price per share for purposes of sales and redemptions at $1, to the extent that it is reasonably possible to do so. These procedures include review of the fund's securities by the Board, at intervals deemed appropriate by it, to determine whether the fund's net asset value per share computed by using available market quotations deviates from a share value of $1 as computed using the amortized cost method. The Board must consider any deviation that appears and, if it exceeds 0.5%, it must determine what action, if any, needs to be taken. If the Board determines a deviation exists that may result in a material dilution of the holdings of current shareholders or investors, or in another unfair consequences for shareholders, it must undertake remedial action that it deems necessary and appropriate. Such action may include withholding dividends, calculating net asset value per share for purposes of sales and redemptions using available market quotations, making redemptions in kind, and selling securities before maturity in order to realize capital gains or losses or to shorten average portfolio maturity. While the amortized cost method provides certainty and consistency in portfolio valuation, it may result in valuations of securities that are either somewhat higher or lower than the prices at which the securities could be sold. This means that during times of declining interest rates the yield on the fund's shares may be higher than if valuations of securities were made based on actual market prices and estimates of market prices. Accordingly, if using the amortized cost method were to result in a lower portfolio value, a prospective investor in the fund would be able to obtain a somewhat higher yield than the investor would get if portfolio valuations were based on actual market values. Existing shareholders, on the other hand, would receive a somewhat lower yield than they would otherwise receive. The opposite would happen during a period of rising interest rates. Portfolio Holdings Disclosure The funds' Board and the investment manager believe that the investment ideas of the investment manager with respect to management of a fund should benefit the fund and its shareholders, and do not want to afford speculators an opportunity to profit by anticipating fund trading strategies or by using fund portfolio holdings information for stock picking. However, each fund's Board also believes that knowledge of the fund's portfolio holdings can assist shareholders in monitoring their investments, making asset allocation decisions, and evaluating portfolio management techniques. Each fund's Board has therefore adopted the investment manager's policies and approved the investment manager's procedures, including the investment manager's oversight of subadviser practices relating to disclosure of the fund's portfolio securities. These policies and procedures are intended to protect the confidentiality of fund portfolio holdings information and generally prohibit the release of such information until such information is made public, unless such persons have been authorized to receive such information on a selective basis, as described below. It is the policy of the fund not to provide or permit others to provide holdings information on a selective basis, and the investment manager does not intend to selectively disclose holdings information or expect that such holdings information will be selectively disclosed, except where necessary for the fund's operation or where there are legitimate business purposes for doing so and, in any case, where conditions are met that are designed to protect the interests of the fund and its shareholders. Although the investment manager seeks to limit the selective disclosure of portfolio holdings information and such selective disclosure is monitored under the fund's compliance program for conformity with the policies and procedures, there can be no assurance that these policies will protect the fund from the potential misuse of holdings information by individuals or firms in possession of that information. Under no circumstances may the investment manager, its affiliates or any employee thereof receive any consideration or compensation for disclosing such holdings information. A complete schedule of each fund's portfolio holdings is available semi-annually and annually in shareholder reports filed on Form N-CSR and, after the first and third fiscal quarters, in regulatory filings on Form N-Q. These shareholder reports and regulatory filings are filed with the SEC in accordance with federal securities laws and are generally available within sixty (60) days of the end of a fund's fiscal quarter, on the SEC's website. Once holdings information is filed with the SEC, it will also be posted on the website (www.riversource.com), and it may be mailed, e-mailed or otherwise transmitted to any person. Statement of Additional Information - Nov. 29, 2005 Page 68 In addition, the investment manager makes publicly available, on a monthly basis, information regarding a fund's top ten holdings (including name and percentage of a fund's assets invested in each such holding) and the percentage breakdown of a fund's investments by country, sector and industry, as applicable. This holdings information is generally made available through the website, marketing communications (including printed advertisements and sales literature), and/or telephone customer service centers that support the fund. This holdings information is generally not released until it is at least 30 days old. From time to time, the investment manager may make partial or complete fund holdings information that is not publicly available on the website or otherwise available in advance of the time restrictions noted above (1) to its affiliated and unaffiliated service providers that require the information in the normal course of business in order to provide services to the fund (including, without limitation entities identified by name in the fund's prospectus or this SAI, such as custodians, auditors, subadvisers, financial printers (Cenveo, Inc., Vestek), pricing services (including Reuters Pricing Service, FT Interactive Data Corporation, Bear Stearns Pricing Service, and Kenny S&P), proxy voting services (Investor Responsibility Research Center, Inc.), and companies that deliver or support systems that provide analytical or statistical information (including, for example, Factset Research Systems, Bloomberg, L.P.), (2) to facilitate the review and/or rating of the fund by ratings and rankings agencies (including, for example, Morningstar, Inc., Thomson Financial and Lipper Inc.), and (3) other entities that provide trading, research or other investment related services. In such situations, the information is released subject to confidentiality agreements, duties imposed under applicable policies and procedures (e.g., applicable codes of ethics) designed to prevent the misuse of confidential information, general duties under applicable laws and regulations, or other such duties of confidentiality. In addition, the fund discloses holdings information as required by federal or state securities laws, and may disclose holdings information in response to requests by governmental authorities. Each fund's Board has adopted the policies of the investment manager and approved the procedures Ameriprise Financial has established to ensure that the fund's holdings information is only disclosed in accordance with these policies. Before any selective disclosure of holdings information is permitted, the person seeking to disclose such holdings information must submit a written request to the Portfolio Holdings Committee ("PHC"). The PHC is comprised of members from the investment manager's General Counsel's Office, Compliance, and Communications. The PHC has been authorized by the funds' Board to perform an initial review of requests for disclosure of holdings information to evaluate whether there is a legitimate business purpose for selective disclosure, whether selective disclosure is in the best interests of a fund and its shareholders, to consider any potential conflicts of interest between the fund, the investment manager, and its affiliates, and to safeguard against improper use of holdings information. Factors considered in this analysis are whether the recipient has agreed to or has a duty to keep the holdings information confidential and whether risks have been mitigated such that the recipient has agreed or has a duty to use the holdings information only as necessary to effectuate the purpose for which selective disclosure was authorized, including a duty not to trade on such information. Before portfolio holdings may be selectively disclosed, requests approved by the PHC must also be authorized by a fund's Chief Compliance Officer or the fund's General Counsel. On at least an annual basis the PHC reviews the approved recipients of selective disclosure and, where appropriate, requires a resubmission of the request, in order to re-authorize any ongoing arrangements. These procedures are intended to be reasonably designed to protect the confidentiality of fund holdings information and to prohibit their release to individual investors, institutional investors, intermediaries that distribute the funds' shares, and other parties, until such holdings information is made public or unless such persons have been authorized to receive such holdings information on a selective basis, as set forth above. Although the investment manager has set up these procedures to monitor and control selective disclosure of holdings information, there can be no assurance that these procedures will protect a fund from the potential misuse of holdings information by individuals or firms in possession of that information. Statement of Additional Information - Nov. 29, 2005 Page 69 Proxy Voting GENERAL GUIDELINES The funds uphold a long tradition of sound and principled corporate governance. For approximately 30 years, the Board, which consists of a majority of independent directors, has voted proxies. The funds' administrator, Ameriprise Financial, provides support to the Board in connection with the proxy voting process. General guidelines are: o Corporate governance matters -- The Board supports proxy proposals that require changes or encourage decisions that have been shown to add shareholder value over time and votes against proxy proposals that entrench management. o Changes in capital structure -- The Board votes for amendments to corporate documents that strengthen the financial condition of a business. o Stock option plans and other management compensation issues -- The Board expects thoughtful consideration to be given by a company's management to developing a balanced compensation structure providing competitive current income with long-term employee incentives directly tied to the interest of shareholders and votes against proxy proposals that dilute shareholder value excessively. o Social and corporate policy issues -- The Board believes that proxy proposals should address the business interests of the corporation. Such proposals typically request that the company disclose or amend certain business practices but lack a compelling economic impact on shareholder value. In general, these matters are primarily the responsibility of management and should be reviewed by the corporation's board of directors, unless they have a substantial impact on the value of a fund's investment. Each proposal is viewed in light of the circumstances of the company submitting the proposal. POLICY AND PROCEDURES The policy of the Board is to vote all proxies of the companies in which a fund holds investments. The Board has implemented policies and procedures reasonably designed to ensure that there are no conflicts between interests of a fund's shareholders and those of the funds' investment manager, RiverSource Investments, or other affiliated entities. The recommendation of the management of a company as set out in the company's proxy statement is considered. In each instance in which a fund votes against the recommendation, the Board sends a letter to senior management of the company explaining the basis for its vote. This has permitted both the company's management and the fund's Board to gain better insight into issues presented by proxy proposals. In the case of foreign corporations, proxies of companies located in some countries may not be voted due to requirements of locking up the voting shares and when time constraints prohibit the processing of proxies. From time to time a proxy proposal is presented that has not been previously considered by the Board or that the investment manager recommends be voted different from the votes cast for similar proposals. In making recommendations to the Board about voting on a proposal, the investment manager relies on its own investment personnel (or the investment personnel of a fund's subadviser(s)) and information obtained from outside resources, including Glass Lewis & Co. The investment manager makes the recommendation in writing. The process established by the Board to vote proxies requires that either Board members or officers who are independent from the investment manager consider the recommendation and decide how to vote the proxy proposal. Statement of Additional Information - Nov. 29, 2005 Page 70 Funds-of-funds only own shares of other RiverSource funds and vote proxies of those funds whenever shareholder meetings are held. Funds-of-funds will vote for, against or abstain on each proposal that the underlying RiverSource fund sets forth in its proxy soliciting material in the same percentage as the public shareholders of the underlying RiverSource fund vote the proposal. Funds-of-funds do not invest in publicly-held operating companies. PROXY VOTING RECORD Information regarding how a fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 can be obtained without charge: o Through www.riversource.com/investments, o On a website maintained by the SEC, www.sec.gov, or o By calling the fund's administrator, Board Services Corporation, collect at (612) 330-9283. Investing in a Fund SALES CHARGE Investors should understand that the purpose and function of the initial sales charge and distribution fee for Class A shares is the same as the purpose and function of the contingent deferred sales charge (CDSC) and distribution fee for Class B and Class C shares. The sales charges and distribution fees applicable to each class pay for the distribution of shares of a fund. Shares of a fund are sold at the public offering price. The public offering price is the NAV of one share adjusted for the sales charge for Class A. For Class B, Class C, Class D, Class E, Class I and Class Y there is no initial sales charge so the public offering price is the same as the NAV. Class A -- Calculation of the Sales Charge Sales charges are determined as shown in the following table. The table is organized by investment category. You can find your fund's investment category in Table 1.
Table 10. Class A Sales Charge - ---------------------------- --------------------------------------- --------------------------------------------- Fund category Balanced, Equity, Fund of funds - Fund of funds - bond, State tax-exempt equity bond, Taxable bond, Tax-exempt bond - ---------------------------- --------------------------------------- --------------------------------------------- Sales charge* as a percentage of: - ---------------------------- ------------------------------------------------------------------------------------- Total market value Public offering Net amount Public offering Net amount invested price** invested price** - ---------------------------- ------------------- ------------------- ---------------------- ---------------------- Up to $49,000 5.75% 6.10% 4.75% 4.99% - ---------------------------- ------------------- ------------------- ---------------------- ---------------------- $50,000-$99,999 4.75% 4.99% 4.25% 4.44% - ---------------------------- ------------------- ------------------- ---------------------- ---------------------- $100,000-$249,999 3.50% 3.63% 3.50% 3.63% - ---------------------------- ------------------- ------------------- ---------------------- ---------------------- $250,000-$499,999 2.50% 2.56% 2.50% 2.56% - ---------------------------- ------------------- ------------------- ---------------------- ---------------------- $500,000-$999,999 2.00% 2.04% 2.00% 2.04% - ---------------------------- ------------------- ------------------- ---------------------- ---------------------- $1,000,000 or more*** 0.00% 0.00% 0.00% 0.00% - ---------------------------- ------------------- ------------------- ---------------------- ----------------------
* Because of rounding in the calculation of offering price, the portion of the sales charge retained by the distributor may vary and the actual sales charge you pay may be more or less than the sales charge calculated using these percentages. ** Offering price includes the sales charge. *** Although there is no sales charge for purchases with a total market value over $1,000,000, and therefore no re-allowance, the distributor may pay a fee to a financial intermediary making such a sale. Money market funds do not have a sales charge for Class A shares. Statement of Additional Information - Nov. 29, 2005 Page 71 Using the sales charge schedule in the table above, for Class A, the public offering price for an investment of less than $50,000, made on the last day of the most recent fiscal period, was determined as shown in the following table. The sales charge is paid to the distributor by the person buying the shares. The table is organized by fiscal year end. You can find your fund's fiscal year end in Table 1.
Table 11. Public Offering Price - ------------------------------------------ ---------------------- ----------------------- ----------------------- Fund Net asset value 1.0 minus maximum Public offering price sales charge - ------------------------------------------ ---------------------- ----------------------- ----------------------- For funds with fiscal period ending January 31 - ----------------------------------------------------------------------------------------------------------------- Portfolio Builder Aggressive $10.53 0.9425 $11.17 - ------------------------------------------ ---------------------- ----------------------- ----------------------- Portfolio Builder Conservative 10.23 0.9525 10.74 - ------------------------------------------ ---------------------- ----------------------- ----------------------- Portfolio Builder Moderate 10.47 0.9425 11.11 - ------------------------------------------ ---------------------- ----------------------- ----------------------- Portfolio Builder Moderate Aggressive 10.50 0.9425 11.14 - ------------------------------------------ ---------------------- ----------------------- ----------------------- Portfolio Builder Moderate Conservative 10.35 0.9525 10.87 - ------------------------------------------ ---------------------- ----------------------- ----------------------- Portfolio Builder Total Equity 10.55 0.9425 11.19 - ------------------------------------------ ---------------------- ----------------------- ----------------------- Small Company Index 8.21 0.9425 8.71 - ------------------------------------------ ---------------------- ----------------------- ----------------------- S&P 500 Index (for Class D) 4.55 No sales charge 4.55 - ----------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending March 31 - ----------------------------------------------------------------------------------------------------------------- Equity Value 10.12 0.9425 10.74 - ------------------------------------------ ---------------------- ----------------------- ----------------------- Precious Metals 8.98 0.9425 9.53 - ------------------------------------------ ---------------------- ----------------------- ----------------------- Small Cap Advantage 7.07 0.9425 7.50 - ------------------------------------------ ---------------------- ----------------------- ----------------------- Small Cap Growth 4.19 0.9425 4.45 - ------------------------------------------ ---------------------- ----------------------- ----------------------- Strategy Aggressive 11.43 0.9425 12.13 - ----------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending May 31 - ----------------------------------------------------------------------------------------------------------------- Aggressive Growth 7.29 0.9425 7.73 - ------------------------------------------ ---------------------- ----------------------- ----------------------- Fundamental Growth 5.79 0.9425 6.14 - ------------------------------------------ ---------------------- ----------------------- ----------------------- Fundamental Value 5.45 0.9425 5.78 - ------------------------------------------ ---------------------- ----------------------- ----------------------- High Yield Bond 2.86 0.9525 3.00 - ------------------------------------------ ---------------------- ----------------------- ----------------------- Select Value 6.65 0.9425 7.06 - ------------------------------------------ ---------------------- ----------------------- ----------------------- Selective 8.69 0.9525 9.12 - ------------------------------------------ ---------------------- ----------------------- ----------------------- Short Duration U.S. Government 4.79 0.9525 5.03 - ------------------------------------------ ---------------------- ----------------------- ----------------------- Small Cap Equity 5.81 0.9425 6.16 - ------------------------------------------ ---------------------- ----------------------- ----------------------- Small Cap Value 6.62 0.9425 7.02 - ------------------------------------------ ---------------------- ----------------------- ----------------------- U.S. Government Mortgage 5.12 0.9525 5.38 - ------------------------------------------ ---------------------- ----------------------- ----------------------- Value 5.36 0.9425 5.69 - ----------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending June 30 - ----------------------------------------------------------------------------------------------------------------- California Tax-Exempt 5.27 0.9525 5.53 - ------------------------------------------ ---------------------- ----------------------- ----------------------- Dividend Opportunity 7.30 0.9425 7.75 - ------------------------------------------ ---------------------- ----------------------- ----------------------- Insured Tax-Exempt 5.50 0.9525 5.77 - ------------------------------------------ ---------------------- ----------------------- ----------------------- Massachusetts Tax-Exempt 5.45 0.9525 5.72 - ------------------------------------------ ---------------------- ----------------------- ----------------------- Michigan Tax-Exempt 5.35 0.9525 5.62 - ------------------------------------------ ---------------------- ----------------------- ----------------------- Minnesota Tax-Exempt 5.35 0.9525 5.62 - ------------------------------------------ ---------------------- ----------------------- ----------------------- New York Tax-Exempt 5.18 0.9525 5.44 - ------------------------------------------ ---------------------- ----------------------- ----------------------- Ohio Tax-Exempt 5.35 0.9525 5.62 - ------------------------------------------ ---------------------- ----------------------- ----------------------- Real Estate 13.44 0.9425 14.26 - ----------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending July 31 - ----------------------------------------------------------------------------------------------------------------- Cash Management 1.00 No sales charge 1.00 - ------------------------------------------ ---------------------- ----------------------- ----------------------- Core Bond 9.72 0.9525 10.20 - ------------------------------------------ ---------------------- ----------------------- ----------------------- Disciplined Equity 6.70 0.9425 7.11 - ------------------------------------------ ---------------------- ----------------------- ----------------------- Discovery 9.33 0.9425 9.90 - ------------------------------------------ ---------------------- ----------------------- ----------------------- Growth 28.34 0.9425 30.07 - ------------------------------------------ ---------------------- ----------------------- -----------------------
Statement of Additional Information - Nov. 29, 2005 Page 72
- ------------------------------------------ ---------------------- ----------------------- ----------------------- Fund Net asset value 1.0 minus maximum Public offering price sales charge - ------------------------------------------ ---------------------- ----------------------- ----------------------- For funds with fiscal period ending October 31 - ----------------------------------------------------------------------------------------------------------------- Income Opportunities 10.53 0.9525 11.06 - ------------------------------------------ ---------------------- ----------------------- ----------------------- Inflation Protected Securities 10.02 0.9525 10.52 - ------------------------------------------ ---------------------- ----------------------- ----------------------- Large Cap Equity 5.26 0.9425 5.58 - ------------------------------------------ ---------------------- ----------------------- ----------------------- Large Cap Value 5.83 0.9425 6.19 - ------------------------------------------ ---------------------- ----------------------- ----------------------- Limited Duration Bond 9.79 0.9525 10.28 - ------------------------------------------ ---------------------- ----------------------- ----------------------- New Dimensions 23.99 0.9425 25.45 - ----------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending August 31 - ----------------------------------------------------------------------------------------------------------------- Diversified Bond 4.89 0.9525 5.13 - ----------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending September 30 - ----------------------------------------------------------------------------------------------------------------- Balanced 9.84 0.9425 10.44 - ------------------------------------------ ---------------------- ----------------------- ----------------------- Diversified Equity Income 12.11 0.9425 12.85 - ------------------------------------------ ---------------------- ----------------------- ----------------------- Mid Cap Value 8.56 0.9425 9.08 - ------------------------------------------ ---------------------- ----------------------- ----------------------- Stock 20.03 0.9425 21.25 - ------------------------------------------ ---------------------- ----------------------- ----------------------- Strategic Allocation 9.96 0.9425 10.57 - ------------------------------------------ ---------------------- ----------------------- ----------------------- Emerging Markets 6.27 0.9425 6.65 - ------------------------------------------ ---------------------- ----------------------- ----------------------- European Equity 3.71 0.9425 3.94 - ------------------------------------------ ---------------------- ----------------------- ----------------------- Global Balanced 5.25 0.9425 5.57 - ------------------------------------------ ---------------------- ----------------------- ----------------------- Global Bond 7.02 0.9525 7.37 - ------------------------------------------ ---------------------- ----------------------- ----------------------- Global Equity 5.16 0.9425 5.47 - ------------------------------------------ ---------------------- ----------------------- ----------------------- Global Technology 1.83 0.9425 1.94 - ------------------------------------------ ---------------------- ----------------------- ----------------------- International Aggressive Growth 6.85 0.9425 7.27 - ------------------------------------------ ---------------------- ----------------------- ----------------------- International Equity 7.03 0.9425 7.46 - ------------------------------------------ ---------------------- ----------------------- ----------------------- International Opportunity 6.58 0.9425 6.98 - ------------------------------------------ ---------------------- ----------------------- ----------------------- International Select Value 7.68 0.9425 8.15 - ------------------------------------------ ---------------------- ----------------------- ----------------------- International Small Cap 7.90 0.9425 8.38 - ----------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending November 30 - ----------------------------------------------------------------------------------------------------------------- Intermediate Tax-Exempt 5.39 0.9525 5.66 - ------------------------------------------ ---------------------- ----------------------- ----------------------- Mid Cap Growth 12.64 0.9425 13.41 - ------------------------------------------ ---------------------- ----------------------- ----------------------- Tax-Exempt Bond 3.89 0.9525 4.08 - ------------------------------------------ ---------------------- ----------------------- ----------------------- Tax-Exempt High Income 4.42 0.9525 4.64 - ----------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending December 31 - ----------------------------------------------------------------------------------------------------------------- Tax-Exempt Money Market 1.00 No sales charge 1.00 - ------------------------------------------ ---------------------- ----------------------- -----------------------
The initial sales charge is waived for certain qualified plans. Participants in these qualified plans may be subject to a deferred sales charge on certain redemptions. The deferred sales charge varies depending on the number of participants in the qualified plan and total plan assets as follows: Deferred Sales Charge - ------------------------- ------------------------------------------------------ Number of participants - ------------------------- ------------------------------------------------------ Total plan assets 1-99 100 or more - ------------------------- ---------------------------- ------------------------- Less than $1 million 4% 0% - ------------------------- ---------------------------- ------------------------- $1 million or more 0% 0% - ------------------------- ---------------------------- ------------------------- Statement of Additional Information - Nov. 29, 2005 Page 73 Class A -- Reducing the Sales Charge For purposes of reducing the sales charge: o If multiple trustees are listed on a revocable trust account, the account will be included only in the household group of the grantor-trustee (the person who put the money into the trust). o If the parents or guardians of a minor child who is the beneficiary of one or more Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA) accounts are not members of the same primary household group, the distributor will use its discretion in assigning such accounts to one of the primary household groups. Under most circumstances the distributor will consider the child's primary domicile to be the appropriate household group in which to include the UGMA/UTMA account(s). Your primary household group consists of you, your spouse or domestic partner, and your unmarried children under age 21 sharing a mailing address. For purposes of this policy a domestic partner is an individual who shares your primary residence and with whom you own joint property. If you or any member of your primary household group elects to separate from the primary household group (for example, by asking that account statements be sent to separate addresses), your assets will no longer be combined for purposes of reducing your sales charge. Class A -- Letter of Intent (LOI) If you intend to invest $50,000 or more over a period of time, you may be able to reduce the sales charge for investments in Class A by completing a LOI form and committing to invest a certain amount. The LOI must be filed with and accepted in good order by the distributor. The LOI can start at any time and you will have up to 13 months to fulfill your commitment. The LOI start date can be backdated by up to 90 days, but backdating the LOI will shorten the going forward window by the length of the backdating. Your holdings in RiverSource funds acquired more than 90 days before receipt of your signed LOI in the distributor's corporate office will not be counted towards the LOI commitment amount and cannot be used as the starting point for the LOI. While these purchases cannot be included within an LOI, you may still be able to take advantage of a reduced sales charge on future purchases because the historic purchases may count toward the combined market value for Rights of Accumulation. For example, if you made an investment more than 90 days ago, and that investment's current market value is $75,000, the sales charge you would pay on additional investment is 4.5% until the market value of your accounts is $100,000, at which point your sales charge will be reduced to 3.5%. If you plan to invest another $50,000 over the next 13 month period, you may not rely on a letter of intent to take immediate advantage of the lower 3.5% sales charge, but instead would naturally realize the lower sales charge of 3.5% (under Rights of Accumulation) after you invested $25,000. To take immediate advantage of the 3.5% sales charge level, you would need to sign a $100,000 LOI and then invest another $100,000. Your investments will be charged the sales charge that applies to the amount you have committed to invest under the LOI. Five percent of the commitment amount will be placed in escrow. The LOI will remain in effect for the entire 13 months, even if you reach your commitment amount. At the end of the 13-month period, the LOI will end and the shares will be released from escrow. Once the LOI has ended, future sales charges will be determined by Rights of Accumulation or the total value of the new investment combined with the market value of the existing RiverSource fund investments as described in the prospectus. If you do not invest the commitment amount by the end of the 13 months, the remaining unpaid sales charge will be redeemed from the escrowed shares and the remaining balance released from escrow. The commitment amount does not include purchases in any class of RiverSource funds other than Class A; does not include reinvested dividends and directed dividends earned in any RiverSource funds; purchases in RiverSource funds held within a wrap product; and purchases of RiverSource Cash Management Fund and RiverSource Tax-Exempt Money Market Fund unless they are subsequently exchanged to Class A shares of an RiverSource fund within the 13 month period. A LOI is not an option (absolute right) to buy shares. If you purchase shares through different channels, for example, in a brokerage account or through a third party, you must inform the distributor in writing about the LOI when placing any purchase orders during the period of the LOI. If you do not complete and file the LOI form, or do not request the reduced sales charge at the time of purchase, you will not be eligible for the reduced sales charge. Statement of Additional Information - Nov. 29, 2005 Page 74 Class B Shares Class B shares have a CDSC for six years. For Class B shares purchased prior to May 21, 2005, those shares will convert to Class A shares in the ninth calendar year of ownership. For Class B shares purchased beginning May 21, 2005, those shares will convert to Class A shares one month after the eighth year of ownership. Class Y Shares Class Y shares are offered to certain institutional investors. Class Y shares are sold without a front-end sales charge or a CDSC and are not subject to a distribution fee, but have a separate shareholder service fee. The following investors are eligible to purchase Class Y shares: o Qualified employee benefit plans* if the plan: o uses a daily transfer recordkeeping service offering participants daily access to RiverSource funds and has o at least $10 million in plan assets or o 500 or more participants; or o does not use daily transfer recordkeeping and has o at least $3 million invested in RiverSource funds or o 500 or more participants. A plan that qualifies for investment in Class E or Y may continue to invest in Class E or Y even if it subsequently falls below the required level of assets or participants. o Trust companies or similar institutions, and charitable organizations that meet the definition in Section 501(c)(3) of the Internal Revenue Code.* These institutions must have at least $10 million in RiverSource funds. o Nonqualified deferred compensation plans* whose participants are included in a qualified employee benefit plan described above. o State sponsored college savings plans established under Section 529 of the Internal Revenue Code. * Eligibility must be determined in advance. To do so, contact your financial advisor. Money Market Funds The minimum purchase amount for directors, officers and employees of the fund or the investment manager and Ameriprise Financial Services financial advisors is $1,000 (except payroll deduction plans), with a minimum additional purchase amount of $100 on a monthly systematic purchase plan. The minimum amount for additional purchases in a direct-at-fund account is $25 monthly. SYSTEMATIC INVESTMENT PROGRAMS You decide how often to make payments -- monthly, quarterly, or semiannually. Provided your account meets the minimum balance requirement, you are not obligated to make any payments. You can omit payments or discontinue the investment program altogether. A fund also can change the program or end it at any time. Statement of Additional Information - Nov. 29, 2005 Page 75 AUTOMATIC DIRECTED DIVIDENDS Dividends, including capital gain distributions, paid by another RiverSource fund may be used to automatically purchase shares in the same class of another fund. Dividends may be directed to existing accounts only. Dividends declared by a fund are exchanged to another fund the following day. Dividends can be exchanged into the same class of another RiverSource fund but cannot be split to make purchases in two or more funds. Automatic directed dividends are available between accounts of any ownership except: o Between a non-custodial account and an IRA, or 401(k) plan account or other qualified retirement account of which Ameriprise Trust Company acts as custodian; o Between two Ameriprise Trust Company custodial accounts with different owners (for example, you may not exchange dividends from your IRA to the IRA of your spouse); and o Between different kinds of custodial accounts with the same ownership (for example, you may not exchange dividends from your IRA to your 401(k) plan account, although you may exchange dividends from one IRA to another IRA). Dividends may be directed from accounts established under UGMA or UTMA only into other UGMA or UTMA accounts with identical ownership. Each fund's investment goal is described in its prospectus along with other information, including fees and expense ratios. Before exchanging dividends into another fund, you should read that fund's prospectus. You will receive a confirmation that the automatic directed dividend service has been set up for your account. REJECTION OF BUSINESS Each fund and RiverSource Service Corporation reserves the right to reject any business, in its sole discretion. Selling Shares You have a right to sell your shares at any time. For an explanation of sales procedures, please see the applicable prospectus. During an emergency, the Board can suspend the computation of NAV, stop accepting payments for purchase of shares, or suspend the duty of a fund to redeem shares for more than seven days. Such emergency situations would occur if: o The Exchange closes for reasons other than the usual weekend and holiday closings or trading on the Exchange is restricted, or o Disposal of a fund's securities is not reasonably practicable or it is not reasonably practicable for the fund to determine the fair value of its net assets, or o The SEC, under the provisions of the 1940 Act, declares a period of emergency to exist. Should a fund stop selling shares, the Board may make a deduction from the value of the assets held by the fund to cover the cost of future liquidations of the assets so as to distribute these costs fairly among all shareholders. Each fund has elected to be governed by Rule 18f-1 under the 1940 Act, which obligates the fund to redeem shares in cash, with respect to any one shareholder during any 90-day period, up to the lesser of $250,000 or 1% of the net assets of the fund at the beginning of the period. Although redemptions in excess of this limitation would normally be paid in cash, the fund reserves the right to make these payments in whole or in part in securities or other assets in case of an emergency, or if the payment of a redemption in cash would be detrimental to the existing shareholders of the fund as determined by the Board. In these circumstances, the securities distributed would be valued as set forth in this SAI. Should a fund distribute securities, a shareholder may incur brokerage fees or other transaction costs in converting the securities to cash. Statement of Additional Information - Nov. 29, 2005 Page 76 Pay-out Plans You can use any of several pay-out plans to redeem your investment in regular installments. If you redeem shares, you may be subject to a contingent deferred sales charge as discussed in the prospectus. While the plans differ on how the pay-out is figured, they all are based on the redemption of your investment. Net investment income dividends and any capital gain distributions will automatically be reinvested, unless you elect to receive them in cash. If you are redeeming a tax-qualified plan account for which Ameriprise Trust Company acts as custodian, you can elect to receive your dividends and other distributions in cash when permitted by law. If you redeem an IRA or a qualified retirement account, certain restrictions, federal tax penalties, and special federal income tax reporting requirements may apply. You should consult your tax advisor about this complex area of the tax law. Applications for a systematic investment in a class of a fund subject to a sales charge normally will not be accepted while a pay-out plan for any of those funds is in effect. Occasional investments, however, may be accepted. To start any of these plans, please consult your financial advisor or investment professional, or write RiverSource Service Corporation, 70100 Ameriprise Financial Center, Minneapolis, MN 55474, or call (800) 437-3133. Your authorization must be received at least five days before the date you want your payments to begin. Payments will be made on a monthly, bimonthly, quarterly, semiannual, or annual basis. Your choice is effective until you change or cancel it. The following pay-out plans are designed to take care of the needs of most shareholders in a way that can be handled efficiently and at a reasonable cost. If you need a more irregular schedule of payments, it may be necessary for you to make a series of individual redemptions, in which case you will have to send in a separate redemption request for each pay-out. Each fund reserves the right to change or stop any pay-out plan and to stop making such plans available. Plan #1: Pay-out for a fixed period of time If you choose this plan, a varying number of shares will be redeemed at regular intervals during the time period you choose. This plan is designed to end in complete redemption of all shares in your account by the end of the fixed period. Plan #2: Redemption of a fixed number of shares If you choose this plan, a fixed number of shares will be redeemed for each payment and that amount will be sent to you. The length of time these payments continue is based on the number of shares in your account. Plan #3: Redemption of a fixed dollar amount If you decide on a fixed dollar amount, whatever number of shares is necessary to make the payment will be redeemed in regular installments until the account is closed. Plan #4: Redemption of a percentage of net asset value Payments are made based on a fixed percentage of the net asset value of the shares in the account computed on the day of each payment. Percentages range from 0.25% to 0.75%. For example, if you are on this plan and arrange to take 0.5% each month, you will get $100 if the value of your account is $20,000 on the payment date. Statement of Additional Information - Nov. 29, 2005 Page 77 Capital Loss Carryover For federal income tax purposes, certain funds had total capital loss carryovers at the end of the most recent fiscal period that, if not offset by subsequent capital gains, will expire as follows. The table is organized by fiscal year end. You can find your fund's fiscal year end in Table 1.
Table 12. Capital Loss Carryover - ------------------ ------------- ------------ ------------ -------------- ------------- ------------- ------------ ------------ Total Amount Amount Amount Amount Amount Amount Amount Fund capital expiring expiring expiring in expiring in expiring in expiring expiring loss in 2007 in 2008 2009 2010 2011 in 2012 in 2013 carryovers - -------------------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending January 31 - -------------------------------------------------------------------------------------------------------------------------------- Portfolio 0 Builder Aggressive - ------------------ ------------- ------------ ------------ -------------- ------------- ------------- ------------ ------------ Portfolio 0 Builder Conservative - ------------------ ------------- ------------ ------------ -------------- ------------- ------------- ------------ ------------ Portfolio 0 Builder Moderate - ------------------ ------------- ------------ ------------ -------------- ------------- ------------- ------------ ------------ Portfolio 0 Builder Moderate Aggressive - ------------------ ------------- ------------ ------------ -------------- ------------- ------------- ------------ ------------ Portfolio 0 Builder Moderate Conservative - ------------------ ------------- ------------ ------------ -------------- ------------- ------------- ------------ ------------ Portfolio 0 Builder Total Equity - ------------------ ------------- ------------ ------------ -------------- ------------- ------------- ------------ ------------ Small Company 0 Index - ------------------ ------------- ------------ ------------ -------------- ------------- ------------- ------------ ------------ S&P 500 Index 49,784,007 0 0 2,387,603 5,744,216 9,288,103 16,618,673 15,745,412 - -------------------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending March 31 - -------------------------------------------------------------------------------------------------------------------------------- Equity Value 225,502,046 0 0 0 0 183,326,800 42,175,246 0 - ------------------ ------------- ------------ ------------ -------------- ------------- ------------- ------------ ------------ Precious Metals 12,026,077 0 0 6,859,490 0 0 0 1,731,355 - ------------------ ------------- ------------ ------------ -------------- ------------- ------------- ------------ ------------ Small Cap 0 Advantage - ------------------ ------------- ------------ ------------ -------------- ------------- ------------- ------------ ------------ Small Cap Growth 18,477,538 0 0 0 0 18,477,538 0 0 - ------------------ ------------- ------------ ------------ -------------- ------------- ------------- ------------ ------------ Strategy 1,414,474,084 0 0 207,116,650 841,156,325 315,348,051 23,741,111 27,111,947 Aggressive - -------------------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending May 31 - -------------------------------------------------------------------------------------------------------------------------------- Aggressive Growth 593,899 0 0 0 0 0 0 593,899 - ------------------ ------------- ------------ ------------ -------------- ------------- ------------- ------------ ------------ Fundamental 645,527 0 0 0 0 0 0 320,705 Growth - ------------------ ------------- ------------ ------------ -------------- ------------- ------------- ------------ ------------ Fundamental Value 10,783,099 0 0 0 180,117 5,185,330 2,015,696 1,996,447 - ------------------ ------------- ------------ ------------ -------------- ------------- ------------- ------------ ------------ High Yield Bond 1,376,361,404 0 80,574,095 226,001,198 517,121,802 552,664,309 0 0 - ------------------ ------------- ------------ ------------ -------------- ------------- ------------- ------------ ------------ Select Value 35,108,088 0 0 0 15,995,507 16,604,151 2,508,430 0 - ------------------ ------------- ------------ ------------ -------------- ------------- ------------- ------------ ------------ Selective 29,747,019 0 0 0 0 24,224,582 0 5,017,493 - ------------------ ------------- ------------ ------------ -------------- ------------- ------------- ------------ ------------ Short Duration 205,645,039 0 35,174,077 117,356,906 0 0 0 36,267,962 U.S. Government - ------------------ ------------- ------------ ------------ -------------- ------------- ------------- ------------ ------------ Small Cap Equity 0 - ------------------ ------------- ------------ ------------ -------------- ------------- ------------- ------------ ------------ Small Cap Value 0 - ------------------ ------------- ------------ ------------ -------------- ------------- ------------- ------------ ------------ U.S. Government 0 Mortgage - ------------------ ------------- ------------ ------------ -------------- ------------- ------------- ------------ ------------ Value 0 - ------------------ ------------- ------------ ------------ -------------- ------------- ------------- ------------ ------------ - ----------------------------------------------- ------------ Amount Fund expiring in 2014 - ----------------------------------------------- ------------ For funds with fiscal period ending January 31 - ----------------------------------------------- ------------ Portfolio Builder Aggressive - ----------------------------------------------- ------------ Portfolio Builder Conservative - ----------------------------------------------- ------------ Portfolio Builder Moderate - ----------------------------------------------- ------------ Portfolio Builder Moderate Aggressive - ----------------------------------------------- ------------ Portfolio Builder Moderate Conservative - ----------------------------------------------- ------------ Portfolio Builder Total Equity - ----------------------------------------------- ------------ Small Company Index - ----------------------------------------------- ------------ S&P 500 Index 0 - ----------------------------------------------- ------------ For funds with fiscal period ending March 31 - ----------------------------------------------- ------------ Equity Value 0 - ----------------------------------------------- ------------ Precious Metals 3,435,232 - ----------------------------------------------- ------------ Small Cap Advantage - ----------------------------------------------- ------------ Small Cap Growth 0 - ----------------------------------------------- ------------ Strategy 0 Aggressive - ----------------------------------------------- ------------ For funds with fiscal period ending May 31 - ----------------------------------------------- ------------ Aggressive Growth 0 - ----------------------------------------------- ------------ Fundamental 324,822 Growth - ----------------------------------------------- ------------ Fundamental Value 1,405,509 - ----------------------------------------------- ------------ High Yield Bond 0 - ----------------------------------------------- ------------ Select Value 0 - ----------------------------------------------- ------------ Selective 504,944 - ----------------------------------------------- ------------ Short Duration 16,846,094 U.S. Government - ----------------------------------------------- ------------ Small Cap Equity - ----------------------------------------------- ------------ Small Cap Value - ----------------------------------------------- ------------ U.S. Government Mortgage - ----------------------------------------------- ------------ Value - ----------------------------------------------- ------------
Statement of Additional Information - Nov. 29, 2005 Page 78
- -------------------- ------------- ----------- ------------ ------------- ------------- -------------- ----------- ---------- ------ Total Amount Amount Amount Amount Amount Amount Amount Amount Fund capital expiring expiring expiring in expiring in expiring in expiring expiring expiring loss in 2007 in 2008 2009 2010 2011 in 2012 in 2013 in 2014 carryovers - ------------------------------------------------------------------------------------------------------------------------------------ For funds with fiscal period ending June 30 - ------------------------------------------------------------------------------------------------------------------------------------ California 0 Tax-Exempt - -------------------- ------------- ----------- ------------ ------------- ------------- -------------- ----------- -------- -------- Dividend 501,472,613 0 0 0 0 501,472,613 0 0 0 Opportunity - -------------------- ------------- ----------- ------------ ------------- ------------- -------------- ----------- -------- -------- Insured 0 Tax-Exempt - -------------------- ------------- ----------- ------------ ------------- ------------- -------------- ----------- -------- -------- Massachusetts 0 Tax-Exempt - -------------------- ------------- ----------- ------------ ------------- ------------- -------------- ----------- -------- -------- Michigan 0 Tax-Exempt - -------------------- ------------- ----------- ------------ ------------- ------------- -------------- ----------- -------- -------- Minnesota 0 Tax-Exempt - -------------------- ------------- ----------- ------------ ------------- ------------- -------------- ----------- -------- -------- New York 0 Tax-Exempt - -------------------- ------------- ----------- ------------ ------------- ------------- -------------- ----------- -------- -------- Ohio 87,465 0 0 0 0 0 0 87,465 0 Tax-Exempt - -------------------- ------------- ----------- ------------ ------------- ------------- -------------- ----------- -------- -------- Real Estate 0 - ------------------------------------------------------------------------------------------------------------------------------------ For funds with fiscal period ending July 31 - ------------------------------------------------------------------------------------------------------------------------------------ Cash Management 0 - -------------------- ------------- ----------- ------------ ------------- ------------- -------------- ----------- -------- -------- Core Bond 138,430 0 0 0 0 0 0 0 138,430 - -------------------- ------------- ----------- ------------ ------------- ------------- -------------- ----------- -------- -------- Disciplined Equity 0 - -------------------- ------------- ----------- ------------ ------------- ------------- -------------- ----------- -------- -------- Discovery 68,875,260 0 0 0 26,744,961 42,130,299 0 0 0 - -------------------- ------------- ----------- ------------ ------------- ------------- -------------- ----------- -------- -------- Growth 913,031,953 0 0 0 544,257,626 368,774,327 0 0 0 - -------------------- ------------- ----------- ------------ ------------- ------------- -------------- ----------- -------- -------- Income 0 Opportunities - -------------------- ------------- ----------- ------------ ------------- ------------- -------------- ----------- -------- -------- Inflation 52,096 0 0 0 0 0 0 0 52,096 Protected Securities - -------------------- ------------- ----------- ------------ ------------- ------------- -------------- ----------- -------- -------- Large Cap Equity 953,822,923 0 506,643,917 416,711,846 20,988,174 9,478,986 0 0 0 - -------------------- ------------- ----------- ------------ ------------- ------------- -------------- ----------- -------- -------- Large Cap Value 0 - -------------------- ------------- ----------- ------------ ------------- ------------- -------------- ----------- -------- -------- Limited Duration 34,483 0 0 0 0 0 0 0 34,483 Bond - -------------------- ------------- ----------- ------------ ------------- ------------- -------------- ----------- -------- -------- New Dimensions 61,551,685 0 5,869,455 42,999,536 8,294,019 4,388,675 0 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ For funds with fiscal period ending August 31 - ------------------------------------------------------------------------------------------------------------------------------------ Diversified Bond 104,817,787 0 0 78,698,873 26,118,914 0 0 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ For funds with fiscal period ending September 3 - ------------------------------------------------------------------------------------------------------------------------------------ - -------------------- ------------- ----------- ------------ ------------- ------------- -------------- ----------- -------- -------- Balanced 836,509,970 0 0 0 442,946,112 368,676,980 24,886,878 0 0 - -------------------- ------------- ----------- ------------ ------------- ------------- -------------- ----------- -------- -------- Diversified Equity 0 Income - -------------------- ------------- ----------- ------------ ------------- ------------- -------------- ----------- -------- -------- Mid Cap Value 0 - -------------------- ------------- ----------- ------------ ------------- ------------- -------------- ----------- -------- -------- Stock 32,594,987 0 0 0 0 32,594,987 0 0 0 - -------------------- ------------- ----------- ------------ ------------- ------------- -------------- ----------- -------- -------- Strategic 112,166,989 0 0 0 9,602,040 102,564,949 0 0 0 Allocation - -------------------- ------------- ----------- ------------ ------------- ------------- -------------- ----------- -------- -------- - ------------------------------------------------------------------------------------------------------------------------------------ For funds with fiscal period ending October 31 - ------------------------------------------------------------------------------------------------------------------------------------ Emerging Markets 75,392,313 0 0 75,392,313 0 0 0 0 0 - -------------------- ------------- ----------- ------------ ------------- ------------- -------------- ----------- -------- -------- European Equity 103,905,954 0 0 82,370,221 16,514,518 5,021,215 0 0 0 - -------------------- ------------- ----------- ------------ ------------- ------------- -------------- ----------- -------- -------- Global Balanced 43,431,051 0 0 30,518,697 10,684,989 2,227,365 0 0 0 - -------------------- ------------- ----------- ------------ ------------- ------------- -------------- ----------- -------- -------- Global Bond 11,113,313 0 0 0 11,113,313 0 0 0 0 - -------------------- ------------- ----------- ------------ ------------- ------------- -------------- ----------- -------- -------- Global Equity 631,430,152 0 0 457,285,316 143,634,885 30,509,951 0 0 0 - -------------------- ------------- ----------- ------------ ------------- ------------- -------------- ----------- -------- -------- Global Technology 407,294,569 0 0 325,995,342 81,299,227 0 0 0 0 - -------------------- ------------- ----------- ------------ ------------- ------------- -------------- ----------- -------- --------
Statement of Additional Information - Nov. 29, 2005 Page 79
- -------------------- ------------- ----------- ------------ ------------- ------------- -------------- ----------- ---------- ------ Total Amount Amount Amount Amount Amount Amount Amount Amount Fund capital expiring expiring expiring in expiring in expiring in expiring expiring expiring loss in 2007 in 2008 2009 2010 2011 in 2012 in 2013 in 2014 carryovers - ------------------------------------------------------------------------------------------------------------------------------------ International 0 Aggressive Growth - -------------------- ------------- ----------- ------------ ------------- ------------- -------------- ----------- -------- -------- International 0 Equity - -------------------- ------------- ----------- ------------- ------------- ------------- ------------ ----------- -------- --------- International 476,235,045 0 0 378,740,075 59,231,998 38,262,972 0 0 0 Opportunity - -------------------- ------------- ----------- ------------- ------------- ------------- ------------ ----------- -------- --------- International 0 Select Value - -------------------- ------------- ----------- ------------- ------------- ------------- ------------ ----------- -------- --------- International 0 Small Cap - ------------------------------------------------------------------------------------------------------------------------------------ For funds with fiscal period ending November 30 - ------------------------------------------------------------------------------------------------------------------------------------ Intermediate 0 Tax-Exempt - -------------------- ------------- ----------- ------------- ------------- ------------- ------------ ----------- -------- --------- Mid Cap Growth 221,285,665 0 0 111,582,809 92,560,758 0 17,142,098 0 0 - -------------------- ------------- ----------- ------------- ------------- ------------- ------------ ----------- -------- --------- Tax-Exempt Bond 0 - -------------------- ------------- ----------- ------------- ------------- ------------- ------------ ----------- -------- --------- Tax-Exempt High 3,778,031 3,757,482 20,549 0 0 0 0 0 0 Income - ------------------------------------------------------------------------------------------------------------------------------------ For funds with fiscal period ending December 31 - ------------------------------------------------------------------------------------------------------------------------------------ Tax-Exempt Money 18,498 0 167 0 18,331 0 0 0 0 Market - -------------------- ------------- ----------- ------------- ------------- ------------- ------------ ----------- -------- ---------
It is unlikely that the Board will authorize a distribution of any net realized capital gains until the available capital loss carryover has been offset or has expired except as required by Internal Revenue Service rules. Taxes For tax purposes, an exchange is considered a sale and purchase, and may result in a gain or loss. A sale is a taxable transaction. If you sell shares for less than their cost, the difference is a capital loss. If you sell shares for more than their cost, the difference is a capital gain. Your gain may be short term (for shares held for one year or less) or long term (for shares held more than one year). If you buy Class A shares and within 91 days exchange into another fund, you may not include the sales charge in your calculation of tax gain or loss on the sale of the first fund you purchased. The sales charge may be included in the calculation of your tax gain or loss on a subsequent sale of the second fund you purchased. For example You purchase 100 shares of an Equity Fund having a public offering price of $10.00 per share. With a sales load of 5.75%, you pay $57.50 in sales load. With a NAV of $9.425 per share, the value of your investment is $942.50. Within 91 days of purchasing that fund, you decide to exchange out of that fund, now at a NAV of $11.00 per share, up from the original NAV of $9.425, and purchase a second fund, at a NAV of $15.00 per share. The value of your investment is now $1,100.00 ($11.00 x 100 shares). You cannot use the $57.50 paid as a sales load when calculating your tax gain or loss in the sale of the first fund shares. So instead of having a $100.00 gain ($1,100.00 - $1,000.00), you have a $157.50 gain ($1,100.00 - $942.50). You can include the $57.50 sales load in the calculation of your tax gain or loss when you sell shares in the second fund. The following paragraphs provide information based on a fund's investment category. You can find your fund's investment category in Table 1. Statement of Additional Information - Nov. 29, 2005 Page 80 For State Tax-Exempt Bond and Tax-Exempt Bond Funds, all distributions of net investment income during the year will have the same percentage designated as tax-exempt. This annual percentage is expected to be substantially the same as the percentage of tax-exempt income actually earned during any particular distribution period. For Balanced, Equity, Funds-of-Funds, Taxable Money Market and Taxable Bond Funds, if you have a nonqualified investment in a fund and you wish to move part or all of those shares to an IRA or qualified retirement account in the fund, you can do so without paying a sales charge. However, this type of exchange is considered a redemption of shares and may result in a gain or loss for tax purposes. In addition, this type of exchange may result in an excess contribution under IRA or qualified plan regulations if the amount exchanged exceeds annual contribution limitations. You should consult your tax advisor for further details about this complex subject. Net investment income dividends received should be treated as dividend income for federal income tax purposes. Corporate shareholders are generally entitled to a deduction equal to 70% of that portion of a fund's dividend that is attributable to dividends the fund received from domestic (U.S.) securities. For the most recent fiscal period, net investment income dividends qualified for the corporate deduction as shown in the following table. Under provisions of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (the Act), the maximum tax paid on dividends by individuals is reduced to 15% (5% for taxpayers in the 10% and 15% brackets) for tax years 2003 through 2008. The Act also reduces the maximum capital gain rate for securities sold on or after May 6, 2003 through 2008 from 20% to 15% (5% for taxpayers in the 10% and 15% brackets). The Act provides that only certain qualified dividend income (QDI) will be subject to the 15% and 5% tax rates. QDI is dividends earned from domestic corporations and qualified foreign corporations. Qualified foreign corporations are corporations incorporated in a U.S. possession, corporations whose stock is readily tradable on an established U.S. securities market (ADRs), and certain other corporations eligible for relief under an income tax treaty with the U.S. that includes an exchange of information agreement (except Barbados). Excluded are passive foreign investment companies (PFICs), foreign investment companies and foreign personal holding companies. Holding periods for shares must also be met to be eligible for QDI treatment (60 days for common stock and 90 days for preferreds). The QDI for individuals for the most recent fiscal period is shown in the table below. The table is organized by fiscal year end. You can find your fund's fiscal year end in Table 1. Statement of Additional Information - Nov. 29, 2005 Page 81
Table 13. Corporate Deduction and Qualified Dividend Income - ------------------------------------------ ------------------------------------- ------------------------------------- Fund Percent of dividends qualifying for Qualified dividend income for corporate deduction individuals - ---------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending January 31 - ---------------------------------------------------------------------------------------------------------------------- Portfolio Builder Aggressive 16.99% 29.31% - ------------------------------------------ ------------------------------------- ------------------------------------- Portfolio Builder Conservative 5.46 9.73 - ------------------------------------------ ------------------------------------- ------------------------------------- Portfolio Builder Moderate 10.03 17.52 - ------------------------------------------ ------------------------------------- ------------------------------------- Portfolio Builder Moderate Aggressive 13.43 23.64 - ------------------------------------------ ------------------------------------- ------------------------------------- Portfolio Builder Moderate Conservative 7.66 13.39 - ------------------------------------------ ------------------------------------- ------------------------------------- Portfolio Builder Total Equity 20.84 36.74 - ------------------------------------------ ------------------------------------- ------------------------------------- Small Company Index 0 0 - ------------------------------------------ ------------------------------------- ------------------------------------- S&P 500 Index 100.00 100.00 - ---------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending March 31 - ---------------------------------------------------------------------------------------------------------------------- Equity Value 100.00 100.00 - ------------------------------------------ ------------------------------------- ------------------------------------- Precious Metals 0.50 3.00 - ------------------------------------------ ------------------------------------- ------------------------------------- Small Cap Advantage 0 0 - ------------------------------------------ ------------------------------------- ------------------------------------- Small Cap Growth 0 0 - ------------------------------------------ ------------------------------------- ------------------------------------- Strategy Aggressive 0 0 - ---------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending May 31 - ---------------------------------------------------------------------------------------------------------------------- Aggressive Growth 3.17 3.23 - ------------------------------------------ ------------------------------------- ------------------------------------- Fundamental Growth 19.07 19.00 - ------------------------------------------ ------------------------------------- ------------------------------------- Fundamental Value 100.00 100.00 - ------------------------------------------ ------------------------------------- ------------------------------------- High Yield Bond 0.99 0.99 - ------------------------------------------ ------------------------------------- ------------------------------------- Select Value 100.00 100.00 - ------------------------------------------ ------------------------------------- ------------------------------------- Selective 0 0 - ------------------------------------------ ------------------------------------- ------------------------------------- Short Duration U.S. Government 0 0 - ------------------------------------------ ------------------------------------- ------------------------------------- Small Cap Equity 6.07 6.31 - ------------------------------------------ ------------------------------------- ------------------------------------- Small Cap Value 33.67 43.71 - ------------------------------------------ ------------------------------------- ------------------------------------- U.S. Government Mortgage 0 0 - ------------------------------------------ ------------------------------------- ------------------------------------- Value 100.00 100.00 - ---------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending June 30 - ---------------------------------------------------------------------------------------------------------------------- California Tax-Exempt 0 0 - ------------------------------------------ ------------------------------------- ------------------------------------- Dividend Opportunity 100.00 100.00 - ------------------------------------------ ------------------------------------- ------------------------------------- Insured Tax-Exempt 0 0 - ------------------------------------------ ------------------------------------- ------------------------------------- Massachusetts Tax-Exempt 0 0 - ------------------------------------------ ------------------------------------- ------------------------------------- Michigan Tax-Exempt 0 0 - ------------------------------------------ ------------------------------------- ------------------------------------- Minnesota Tax-Exempt 0 0 - ------------------------------------------ ------------------------------------- ------------------------------------- New York Tax-Exempt 0 0 - ------------------------------------------ ------------------------------------- ------------------------------------- Ohio Tax-Exempt 0 0 - ------------------------------------------ ------------------------------------- ------------------------------------- Real Estate 0.12 1.61 - ---------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending July 31 - ---------------------------------------------------------------------------------------------------------------------- Cash Management 0 0 - ------------------------------------------ ------------------------------------- ------------------------------------- Core Bond 0 0 - ------------------------------------------ ------------------------------------- ------------------------------------- Disciplined Equity 34.99 35.08 - ------------------------------------------ ------------------------------------- ------------------------------------- Discovery 0 0 - ------------------------------------------ ------------------------------------- ------------------------------------- Growth 0 0 - ------------------------------------------ ------------------------------------- ------------------------------------- Income Opportunities 0.13 0.13 - ------------------------------------------ ------------------------------------- ------------------------------------- Inflation Protected Securities 0 0 - ------------------------------------------ ------------------------------------- ------------------------------------- Large Cap Equity 91.46 91.96 - ------------------------------------------ ------------------------------------- ------------------------------------- Large Cap Value 50.94 55.22 - ------------------------------------------ ------------------------------------- -------------------------------------
Statement of Additional Information - Nov. 29, 2005 Page 82
- ------------------------------------------ ------------------------------------- ------------------------------------- Fund Percent of dividends qualifying for Qualified dividend income for corporate deduction individuals - ---------------------------------------------------------------------------------------------------------------------- Limited Duration Bond 0 0 - ------------------------------------------ ------------------------------------- ------------------------------------- New Dimensions 100.00 100.00 - ---------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending August 31 - ---------------------------------------------------------------------------------------------------------------------- Diversified Bond 0 0 - ---------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending September 30 - ---------------------------------------------------------------------------------------------------------------------- Balanced 61.50 68.42 - ------------------------------------------ ------------------------------------- ------------------------------------- Diversified Equity Income 100.00 100.00 - ------------------------------------------ ------------------------------------- ------------------------------------- Mid Cap Value 78.07 83.61 - ------------------------------------------ ------------------------------------- ------------------------------------- Stock 100.00 100.00 - ------------------------------------------ ------------------------------------- ------------------------------------- Strategic Allocation 78.92 99.76 - ------------------------------------------ ------------------------------------- ------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending October 31 - ---------------------------------------------------------------------------------------------------------------------- Emerging Markets 0 10.85 - ------------------------------------------ ------------------------------------- ------------------------------------- European Equity 0 67.45 - ------------------------------------------ ------------------------------------- ------------------------------------- Global Balanced 15.07 37.57 - ------------------------------------------ ------------------------------------- ------------------------------------- Global Bond 0 0 - ------------------------------------------ ------------------------------------- ------------------------------------- Global Equity 100.00 100.00 - ------------------------------------------ ------------------------------------- ------------------------------------- Global Technology 0 0 - ------------------------------------------ ------------------------------------- ------------------------------------- International Aggressive Growth 1.48 100.00 - ------------------------------------------ ------------------------------------- ------------------------------------- International Equity 0 39.28 - ------------------------------------------ ------------------------------------- ------------------------------------- International Opportunity 0 100.00 - ------------------------------------------ ------------------------------------- ------------------------------------- International Select Value 0 0 - ------------------------------------------ ------------------------------------- ------------------------------------- International Small Cap 0 17.89 - ---------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending November 30 - ---------------------------------------------------------------------------------------------------------------------- Intermediate Tax-Exempt 0 0 - ------------------------------------------ ------------------------------------- ------------------------------------- Mid Cap Growth 0 0 - ------------------------------------------ ------------------------------------- ------------------------------------- Tax-Exempt Bond 0 0 - ------------------------------------------ ------------------------------------- ------------------------------------- Tax-Exempt High Income 0 0 - ---------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending December 31 - ---------------------------------------------------------------------------------------------------------------------- Tax-Exempt Money Market 0 0 - ------------------------------------------ ------------------------------------- -------------------------------------
A fund may be subject to U.S. taxes resulting from holdings in a PFIC. To avoid taxation, a fund may make an election to mark to market. A foreign corporation is a PFIC when 75% or more of its gross income for the taxable year is passive income or 50% or more of the average value of its assets consists of assets that produce or could produce passive income. Income earned by a fund may have had foreign taxes imposed and withheld on it in foreign countries. Tax conventions between certain countries and the U.S. may reduce or eliminate such taxes. If more than 50% of a fund's total assets at the close of its fiscal year consists of securities of foreign corporations, the fund will be eligible to file an election with the Internal Revenue Service under which shareholders of the fund would be required to include their pro rata portions of foreign taxes withheld by foreign countries as gross income in their federal income tax returns. These pro rata portions of foreign taxes withheld may be taken as a credit or deduction in computing the shareholders' federal income taxes. If the election is filed, the fund will report to its shareholders the per share amount of such foreign taxes withheld and the amount of foreign tax credit or deduction available for federal income tax purposes. Capital gain distributions, if any, received by shareholders should be treated as long-term capital gains regardless of how long shareholders owned their shares. Short-term capital gains earned by a fund are paid to shareholders as part of their ordinary income dividend and are taxable. Special rates on capital gains may apply to sales of precious metals, if any, owned directly by a fund and to investments in REITs. Statement of Additional Information - Nov. 29, 2005 Page 83 Under the Internal Revenue Code of 1986 (the Code), gains or losses attributable to fluctuations in exchange rates that occur between the time a fund accrues interest or other receivables, or accrues expenses or other liabilities denominated in a foreign currency and the time the fund actually collects such receivables or pays such liabilities generally are treated as ordinary income or ordinary loss. Similarly, gains or losses on disposition of debt securities denominated in a foreign currency attributable to fluctuations in the value of the foreign currency between the date of acquisition of the security and the date of disposition also are treated as ordinary gains or losses. These gains or losses, referred to under the Code as "section 988" gains or losses, may increase or decrease the amount of a fund's investment company taxable income to be distributed to its shareholders as ordinary income. Under federal tax law, by the end of a calendar year a fund must declare and pay dividends representing 98% of ordinary income for that calendar year and 98% of net capital gains (both long-term and short-term) for the 12-month period ending Oct. 31 of that calendar year. The fund is subject to an excise tax equal to 4% of the excess, if any, of the amount required to be distributed over the amount actually distributed. Each fund intends to comply with federal tax law and avoid any excise tax. For purposes of the excise tax distributions, section 988 ordinary gains and losses are distributable based on an Oct. 31 year end. This is an exception to the general rule that ordinary income is paid based on a calendar year end. The Code imposes two asset diversification rules that apply to each fund as of the close of each quarter. First, as to 50% of its holdings, the fund may hold no more than 5% of its assets in securities of one issuer and no more than 10% of any one issuer's outstanding voting securities. Second, a fund cannot have more than 25% of its assets in any one issuer. If a mutual fund is the holder of record of any share of stock on the record date for any dividend payable with respect to the stock, the dividend will be included in gross income by the fund as of the later of (1) the date the share became ex-dividend or (2) the date the fund acquired the share. Because the dividends on some foreign equity investments may be received some time after the stock goes ex-dividend, and in certain rare cases may never be received by the fund, this rule may cause a fund to pay income to its shareholders that it has not actually received. To the extent that the dividend is never received, the fund will take a loss at the time that a determination is made that the dividend will not be received. Distributions, if any, that are in excess of a fund's current or accumulated earnings and profits will first reduce a shareholder's tax basis in the fund and, after the basis is reduced to zero, will generally result in capital gains to a shareholder. This is a brief summary that relates to federal income taxation only. Shareholders should consult their tax advisor as to the application of federal, state, and local income tax laws to fund distributions. Statement of Additional Information - Nov. 29, 2005 Page 84 Agreements INVESTMENT MANAGEMENT SERVICES AGREEMENT RiverSource Investments is the investment manager for each fund. Under the Investment Management Services Agreement, the investment manager, subject to the policies set by the Board, provides investment management services. For its services, the investment manager is paid a fee based on the following schedule. Each class of a fund pays its proportionate share of the fee.
Table 14. Investment Management Services Agreement Fee Schedule - -------------------------------------- ------------------------ ---------------------- --------------------------- Fund Assets (billions) Annual rate at each Daily rate on last day of asset level most recent fiscal period - -------------------------------------- ------------------------ ---------------------- --------------------------- Aggressive Growth First $0.50 0.890 0.890 Next 0.50 0.865 Next 1.0 0.840 Next 1.0 0.815 Next 3.0 0.790 Over 6.0 0.765 - -------------------------------------- ------------------------ ---------------------- --------------------------- Balanced First $1.0 0.530 0.525 Next 1.0 0.505 Next 1.0 0.480 Next 3.0 0.455 Over 6.0 0.430 - -------------------------------------- ------------------------ ---------------------- --------------------------- California Tax-Exempt First $0.25 0.470 California - 0.470 Massachusetts Tax-Exempt Next 0.25 0.445 Massachusetts - 0.470 Michigan Tax-Exempt Next 0.25 0.420 Michigan - 0.470 Minnesota Tax-Exempt Next 0.25 0.405 Minnesota - 0.461 New York Tax-Exempt Over 1.0 0.380 New York - 0.470 Ohio Tax-Exempt Ohio - 0.470 - -------------------------------------- ------------------------ ---------------------- --------------------------- Cash Management First $1.0 0.360 Cash - 0.327 Tax-Exempt Money Market Next 0.5 0.343 Tax-Exempt - 0.360 Next 0.5 0.325 Next 0.5 0.308 Next 1.0 0.290 Next 3.0 0.270 Over 6.5 0.250 - -------------------------------------- ------------------------ ---------------------- --------------------------- Core Bond First $1.0 0.540 0.540 Limited Duration Bond Next 1.0 0.515 Next 1.0 0.490 Next 3.0 0.465 Next 3.0 0.440 Over 9.0 0.415 - -------------------------------------- ------------------------ ---------------------- --------------------------- Disciplined Equity First $1.0 0.600 Disciplined Equity - 0.600 Growth Next 1.0 0.575 Growth - 0.573 Large Cap Equity Next 1.0 0.550 Large Cap Equity - 0.591 Large Cap Value Next 3.0 0.525 Large Cap Value - 0.600 Mid Cap Growth Next 6.0 0.500 Mid Cap Growth- 0.585 New Dimensions Next 12.0 0.490 New Dimensions - 0.526 Over 24.0 0.480 - -------------------------------------- ------------------------ ---------------------- ---------------------------
Statement of Additional Information - Nov. 29, 2005 Page 85
- -------------------------------------- ------------------------ ---------------------- --------------------------- Fund Assets (billions) Annual rate at each Daily rate on last day of asset level most recent fiscal period - -------------------------------------- ------------------------ ---------------------- --------------------------- Discovery First $0.25 0.640 0.640 Next 0.25 0.615 Next 0.25 0.590 Next 0.25 0.565 Next 1.0 0.540 Over 2.0 0.515 - -------------------------------------- ------------------------ ---------------------- --------------------------- Diversified Bond First $1.0 0.520 Diversified Bond - 0.500 Selective Next 1.0 0.495 Selective - 0.520 Next 1.0 0.470 Next 3.0 0.445 Next 3.0 0.420 Over 9.0 0.395 - -------------------------------------- ------------------------ ---------------------- --------------------------- Diversified Equity Income First $0.50 0.530 Diversified Equity Income Equity Value Next 0.50 0.505 - 0.462 Stock Next 1.0 0.480 Equity Value - 0.513 Strategic Allocation Next 1.0 0.455 Stock - 0.499 Next 3.0 0.430 Strategic Allocation - Over 6.0 0.400 0.516 - -------------------------------------- ------------------------ ---------------------- --------------------------- Dividend Opportunity First $0.50 0.610 0.594 Next 0.50 0.585 Next 1.0 0.560 Next 1.0 0.535 Next 3.0 0.510 Over 6.0 0.480 - -------------------------------------- ------------------------ ---------------------- --------------------------- Emerging Markets First $0.25 1.100 1.097 Next 0.25 1.080 Next 0.25 1.060 Next 0.25 1.040 Next 1.0 1.020 Over 2.0 1.000 - -------------------------------------- ------------------------ ---------------------- --------------------------- European Equity First $0.25 0.800 European Equity - 0.800 Global Equity Next 0.25 0.775 Global Equity - 0.788 International Opportunity Next 0.25 0.750 International Opportunity Precious Metals Next 0.25 0.725 - 0.788 Next 1.0 0.700 Precious Metals - 0.800 Over 2.0 0.675 - -------------------------------------- ------------------------ ---------------------- --------------------------- Fundamental Growth First $1.0 0.780 0.780 Next 1.0 0.755 Next 1.0 0.730 Next 3.0 0.705 Over 6.0 0.680 - -------------------------------------- ------------------------ ---------------------- --------------------------- Fundamental Value First $0.50 0.730 Fundamental Value - 0.718 Value Next 0.50 0.705 Value - 0.730 Next 1.0 0.680 Next 1.0 0.655 Next 3.0 0.630 Over 6.0 0.600 - -------------------------------------- ------------------------ ---------------------- --------------------------- Global Balanced First $0.25 0.790 0.790 Next 0.25 0.765 Next 0.25 0.740 Next 0.25 0.715 Next 1.0 0.690 Over 2.0 0.665 - -------------------------------------- ------------------------ ---------------------- ---------------------------
Statement of Additional Information - Nov. 29, 2005 Page 86
- -------------------------------------- ------------------------ ---------------------- --------------------------- Fund Assets (billions) Annual rate at each Daily rate on last day of asset level most recent fiscal period - -------------------------------------- ------------------------ ---------------------- --------------------------- Global Bond First $0.25 0.770 0.754 Next 0.25 0.745 Next 0.25 0.720 Next 0.25 0.695 Over 1.0 0.670 - -------------------------------------- ------------------------ ---------------------- --------------------------- Global Technology First $0.25 0.720 0.720 Next 0.25 0.695 Next 0.25 0.670 Next 0.25 0.645 Next 1.0 0.620 Over 2.0 0.595 - -------------------------------------- ------------------------ ---------------------- --------------------------- High Yield Bond First $1.0 0.590 0.568 Next 1.0 0.565 Next 1.0 0.540 Next 3.0 0.515 Next 3.0 0.490 Over 9.0 0.465 - -------------------------------------- ------------------------ ---------------------- --------------------------- Income Opportunities First $1.0 0.610 0.610 Next 1.0 0.585 Next 1.0 0.560 Next 3.0 0.535 Next 3.0 0.510 Over 9.0 0.485 - -------------------------------------- ------------------------ ---------------------- --------------------------- Inflation Protected Securities First $1.0 0.440 0.440 Next 1.0 0.415 Next 1.0 0.390 Next 3.0 0.365 Next 3.0 0.340 Over 9.0 0.315 - -------------------------------------- ------------------------ ---------------------- --------------------------- Insured Tax-Exempt First $1.0 0.450 0.450 Intermediate Tax-Exempt Next 1.0 0.425 Tax-Exempt Bond Next 1.0 0.400 Next 3.0 0.375 Over 6.0 0.350 - -------------------------------------- ------------------------ ---------------------- --------------------------- International Aggressive Growth First $0.25 1.000 1.000 Next 0.25 0.975 Next 0.25 0.950 Next 0.25 0.925 Next 1.0 0.900 Over 2.0 0.875 - -------------------------------------- ------------------------ ---------------------- --------------------------- International Equity First $0.25 0.970 0.970 Next 0.25 0.945 Next 0.25 0.920 Next 0.25 0.895 Next 1.0 0.870 Over 2.0 0.845 - -------------------------------------- ------------------------ ---------------------- --------------------------- International Select Value First $0.25 0.900 0.900 Next 0.25 0.875 Next 0.25 0.850 Next 0.25 0.825 Next 1.0 0.800 Over 2.0 0.775 - -------------------------------------- ------------------------ ---------------------- ---------------------------
Statement of Additional Information - Nov. 29, 2005 Page 87
- -------------------------------------- ------------------------ ---------------------- --------------------------- Fund Assets (billions) Annual rate at each Daily rate on last day of asset level most recent fiscal period - -------------------------------------- ------------------------ ---------------------- --------------------------- International Small Cap First $0.25 1.120 1.120 Next 0.25 1.095 Next 0.25 1.070 Next 0.25 1.045 Next 1.0 1.020 Over 2.0 0.995 - -------------------------------------- ------------------------ ---------------------- --------------------------- Mid Cap Value First $1.0 0.700 0.699 Next 1.0 0.675 Next 1.0 0.650 Next 3.0 0.625 Next 6.0 0.600 Next 12.0 0.590 Over 24.0 0.580 - -------------------------------------- ------------------------ ---------------------- --------------------------- Portfolio Builder Aggressive All 0.080 0.080 Portfolio Builder Conservative Portfolio Builder Moderate Portfolio Builder Moderate Aggressive Portfolio Builder Moderate Conservative Portfolio Builder Total Equity - -------------------------------------- ------------------------ ---------------------- --------------------------- Real Estate First $1.0 0.840 0.840 Next 1.0 0.815 Next 1.0 0.790 Next 3.0 0.765 Next 6.0 0.740 Next 12.0 0.730 Over 24.0 0.720 - -------------------------------------- ------------------------ ---------------------- --------------------------- S&P 500 Index First $1.0 0.240 0.240 Next 1.0 0.230 Next 3.0 0.220 Over 5.0 0.210 - -------------------------------------- ------------------------ ---------------------- --------------------------- Select Value First $0.50 0.780 0.772 Next 0.50 0.755 Next 1.0 0.730 Next 1.0 0.705 Next 3.0 0.680 Over 6.0 0.650 - -------------------------------------- ------------------------ ---------------------- --------------------------- Short Duration U.S. Government First $1.0 0.520 0.510 Next 1.0 0.495 Next 1.0 0.470 Next 3.0 0.445 Next 3.0 0.420 Over 9.0 0.395 - -------------------------------------- ------------------------ ---------------------- --------------------------- Small Cap Advantage First $0.25 0.740 0.708 Next 0.25 0.715 Next 0.25 0.690 Next 0.25 0.665 Next 1.0 0.640 Over 2.0 0.615 - -------------------------------------- ------------------------ ---------------------- ---------------------------
Statement of Additional Information - Nov. 29, 2005 Page 88
- -------------------------------------- ------------------------ ---------------------- --------------------------- Fund Assets (billions) Annual rate at each Daily rate on last day of asset level most recent fiscal period - -------------------------------------- ------------------------ ---------------------- --------------------------- Small Cap Equity First $0.25 0.970 Small Cap Equity - 0.970 Small Cap Value Next 0.25 0.945 Small Cap Value - 0.926 Next 0.25 0.920 Next 0.25 0.895 Over 1.0 0.870 - -------------------------------------- ------------------------ ---------------------- --------------------------- Small Cap Growth First $0.25 0.920 0.920 Next 0.25 0.895 Next 0.25 0.870 Next 0.25 0.845 Next 1.0 0.820 Over 2.0 0.795 - -------------------------------------- ------------------------ ---------------------- --------------------------- Small Company Index First $0.25 0.380 0.359 Next 0.25 0.370 Next 0.25 0.360 Next 0.25 0.350 Over 1.0 0.340 - -------------------------------------- ------------------------ ---------------------- --------------------------- Strategy Aggressive First $1.0 0.600 0.600 Next 1.0 0.575 Next 1.0 0.550 Next 3.0 0.525 Over 6.0 0.500 - -------------------------------------- ------------------------ ---------------------- --------------------------- Tax-Exempt High Income First $1.0 0.490 0.451 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 - -------------------------------------- ------------------------ ---------------------- --------------------------- U.S. Government Mortgage First $1.0 0.520 0.520 Next 1.0 0.495 Next 1.0 0.470 Next 3.0 0.445 Next 3.0 0.420 Over 9.0 0.395 - -------------------------------------- ------------------------ ---------------------- ---------------------------
The fee is calculated for each calendar day on the basis of net assets as of the close of the preceding business day. For Equity and Balanced Funds, before the fee based on the asset charge is paid, it is adjusted for the fund's investment performance relative to a Lipper Index (Index) as shown in the table below. If the Index ceases to be published for a period of more than 90 days, changes in any material respect, or otherwise becomes impracticable to use for purposes of the adjustment, no adjustment will be made until the Board approves a substitute index. The adjustment increased or decreased the fee for the last fiscal period as shown in the following table. The table is organized by fiscal year end. You can find your fund's fiscal year end in Table 1. Statement of Additional Information - Nov. 29, 2005 Page 89 Table 15. Lipper Indexes
- --------------------------------------- ---------------------------------------- --------------------------------- Fund Lipper Index Fee Increase or (Decrease) - ------------------------------------------------------------------------------------------------------------------ Fiscal year ending March 31 - ------------------------------------------------------------------------------------------------------------------ Equity Value Lipper Large-Cap Value Funds 817,917 - --------------------------------------- ---------------------------------------- --------------------------------- Precious Metals Lipper Gold Funds (27,758) - --------------------------------------- ---------------------------------------- --------------------------------- Small Cap Advantage Lipper Small-Cap Core Funds 89,147 - --------------------------------------- ---------------------------------------- --------------------------------- Small Cap Growth Lipper Small-Cap Growth Funds (249,698) - --------------------------------------- ---------------------------------------- --------------------------------- Strategy Aggressive Lipper Mid-Cap Growth Funds (854,620) - ------------------------------------------------------------------------------------------------------------------ Fiscal year ending May 31 - ------------------------------------------------------------------------------------------------------------------ Aggressive Growth Lipper Mid-Cap Growth Funds 1,158 - --------------------------------------- ---------------------------------------- --------------------------------- Fundamental Growth Lipper Large-Cap Growth Funds (31,784) - --------------------------------------- ---------------------------------------- --------------------------------- Fundamental Value Lipper Large-Cap Value Funds 39,947 - --------------------------------------- ---------------------------------------- --------------------------------- Select Value Lipper Multi-Cap Value Funds (211,710) - --------------------------------------- ---------------------------------------- --------------------------------- Small Cap Equity Lipper Small-Cap Core Funds (4,445) - --------------------------------------- ---------------------------------------- --------------------------------- Small Cap Value Lipper Small-Cap Value Funds (576,478) - --------------------------------------- ---------------------------------------- --------------------------------- Value Lipper Large-Cap Value Funds (69,520) - ------------------------------------------------------------------------------------------------------------------ Fiscal year ending June 30 - ------------------------------------------------------------------------------------------------------------------ Dividend Opportunity Lipper Equity Income Funds 29,485 - --------------------------------------- ---------------------------------------- --------------------------------- Real Estate Lipper Real Estate Funds 8,364 - ------------------------------------------------------------------------------------------------------------------ Fiscal year ending July 31 - ------------------------------------------------------------------------------------------------------------------ Disciplined Equity Lipper Large-Cap Core Funds 15,749 - --------------------------------------- ---------------------------------------- --------------------------------- Discovery Lipper Small-Cap Core Funds 39,153 - --------------------------------------- ---------------------------------------- --------------------------------- Growth Lipper Large-Cap Growth Funds 1,705,757 - --------------------------------------- ---------------------------------------- --------------------------------- Large Cap Equity Lipper Large-Cap Core Funds (414,150) - --------------------------------------- ---------------------------------------- --------------------------------- Large Cap Value Lipper Large-Cap Value Funds (14,485) - --------------------------------------- ---------------------------------------- --------------------------------- New Dimensions* Lipper Large-Cap Growth Funds (10,062,023) - ------------------------------------------------------------------------------------------------------------------ Fiscal year ending September 30 - ------------------------------------------------------------------------------------------------------------------ Balanced Lipper Balanced Funds 188,433 - --------------------------------------- ---------------------------------------- --------------------------------- Diversified Equity Income Lipper Equity Income Funds 4,016,026 - --------------------------------------- ---------------------------------------- --------------------------------- Mid Cap Value Lipper Mid-Cap Value Funds 573,945 - --------------------------------------- ---------------------------------------- --------------------------------- Stock Lipper Large-Cap Core Funds (423,352) - --------------------------------------- ---------------------------------------- --------------------------------- Strategic Allocation Lipper Flexible Portfolio Funds 722,849 - ------------------------------------------------------------------------------------------------------------------ Fiscal year ending October 31 - ------------------------------------------------------------------------------------------------------------------ Emerging Markets Lipper Emerging Markets Funds (232,104) - --------------------------------------- ---------------------------------------- --------------------------------- European Equity Lipper European Funds (157,194) - --------------------------------------- ---------------------------------------- --------------------------------- Global Balanced Lipper Global Flexible Funds (66,573) - --------------------------------------- ---------------------------------------- --------------------------------- Global Equity Lipper Global Funds (570,426) - --------------------------------------- ---------------------------------------- --------------------------------- Global Technology Lipper Science and Technology Funds 234,130 - --------------------------------------- ---------------------------------------- --------------------------------- International Aggressive Growth** Lipper International Multi-Cap Growth 39,785 Funds - --------------------------------------- ---------------------------------------- --------------------------------- International Equity Lipper International Funds (48,163) - --------------------------------------- ---------------------------------------- --------------------------------- International Opportunity** Lipper International Large-Cap Core (452,904) Funds - --------------------------------------- ---------------------------------------- --------------------------------- International Select Value** Lipper International Multi-Cap Value 218,467 Funds - --------------------------------------- ---------------------------------------- --------------------------------- International Small Cap Lipper International Small-Cap Funds (35,481) - ------------------------------------------------------------------------------------------------------------------ Fiscal year ending November 30 - ------------------------------------------------------------------------------------------------------------------ Mid Cap Growth Lipper Mid-Cap Growth Funds (2,001,794) - --------------------------------------- ---------------------------------------- ---------------------------------
* Effective Nov. 1, 2005 the index against which the Fund's performance will be measured is the Lipper Large-Cap Core Funds Index. ** The index against which the Fund's performance was measured prior to July 1, 2004 was the Lipper International Funds Index. Statement of Additional Information - Nov. 29, 2005 Page 90 The adjustment, determined monthly, will be determined by measuring the percentage difference over a rolling 12-month period between the performance of one Class A share of the fund and the change in the Index. The performance difference is then used to determine the adjustment rate. The adjustment rate, computed to five decimal places, is determined in accordance with the following table. The table is organized by fund category. You can find your fund's category in Table 1.
Table 16. Performance Incentive Adjustment Calculation ---------------------------------------------------------- -------------------------------------------------------- Equity Funds Balanced Funds ---------------------------------------------------------- -------------------------------------------------------- Performance Adjustment Rate Performance Adjustment Rate Difference Difference ------------------- -------------------------------------- --------------- ---------------------------------------- 0.00%-0.50% 0 0.00%-0.50% 0 ------------------- -------------------------------------- --------------- ---------------------------------------- 0.50%-1.00% 6 basis points times the performance 0.50%-1.00% 6 basis points times the performance difference over 0.50%, times 100 difference over 0.50%, times 100 (maximum of 3 basis points if a (maximum of 3 basis points if a 1% performance difference) 1% performance difference) ------------------- -------------------------------------- --------------- ---------------------------------------- 1.00%-2.00% 3 basis points, plus 3 basis points 1.00%-2.00% 3 basis points, plus 3 basis points times the performance difference times the performance difference over over 1.00%, times 100 (maximum 6 1.00%, times 100 (maximum 6 basis basis points if a 2% performance points if a 2% performance difference) difference) ------------------- -------------------------------------- --------------- ---------------------------------------- 2.00%-4.00% 6 basis points, plus 2 basis points 2.00%-3.00% 6 basis points, plus 2 basis points times the performance difference times the performance difference over over 2.00%, times 100 (maximum 10 2.00%, times 100 (maximum 8 basis basis points if a 4% performance points if a 3% performance difference) difference) ------------------- -------------------------------------- --------------- ---------------------------------------- 4.00%-6.00% 10 basis points, plus 1 basis point 3.00% or more 8 basis points times the performance difference over 4.00%, times 100 (maximum 12 basis points if a 6% performance difference) ------------------- -------------------------------------- --------------- ---------------------------------------- 6.00% or more 12 basis points ------------------- -------------------------------------- --------------- ----------------------------------------
For example, if the performance difference for an Equity Fund is 2.38%, the adjustment rate is 0.000676 (0.0006 [6 basis points] plus 0.0038 [the 0.38% performance difference over 2.00%] x 0.0002 [2 basis points] x 100 (0.000076)). Rounded to five decimal places, the adjustment rate is 0.00068. The maximum adjustment rate for the fund is 0.0012 per year. Where the fund's Class A performance exceeds that of the Index, the fee paid to the investment manager will increase. Where the performance of the Index exceeds the performance of the fund's Class A shares, the fee paid to the investment manager will decrease. The 12-month comparison period rolls over with each succeeding month, so that it always equals 12 months, ending with the month for which the performance adjustment is being computed. If an Index ceases to be published for a period of more than 90 days, changes in any material respect, otherwise becomes impracticable or, at the discretion of the Board, is no longer appropriate to use for purposes of a performance incentive adjustment, for example, if Lipper reclassifies the Fund from one peer group to another, the Board may take action it deems appropriate and in the best interests of shareholders, including: (1) discontinuance of the performance incentive adjustment until such time as it approves a substitute index, or (2) adoption of a methodology to transition to a substitute index it has approved. Transitions. In the case of a change in index, a fund's performance will be compared to a 12 month blended index return that reflects the performance of the current index for the portion of the 12 month performance measurement period beginning the effective date of the current index and the performance of the prior index for the remainder of the measurement period. At the conclusion of the transition period, the performance of the prior index will be eliminated from the performance incentive adjustment calculation, and the calculation will include only the performance of the current index. The management fee is paid monthly. Under the agreement, a fund also pays taxes, brokerage commissions and nonadvisory expenses, which include custodian fees; audit and certain legal fees; fidelity bond premiums; registration fees for shares; office expenses; postage of confirmations except purchase confirmations; Statement of Additional Information - Nov. 29, 2005 Page 91 consultants' fees; compensation of Board members, officers and employees; corporate filing fees; organizational expenses; expenses incurred in connection with lending securities; and expenses properly payable by a fund, approved by the Board. The table below shows the total management fees paid by each fund for the last three fiscal periods as well as nonadvisory expenses, net of earnings credits, waivers and expenses reimbursed by the investment manager and its affiliates. The table is organized by fiscal year end. You can find your fund's fiscal year end in Table 1.
Table 17. Management Fees and Nonadvisory Expenses - ------------------------------------------- ----------------------------------------- -------------------------------------- Fund Management Fees Nonadvisory expenses - ------------------------------------------- ----------------------------------------- -------------------------------------- 2005 2004 2003 2005 2004 2003 - ---------------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending January 31 - ---------------------------------------------------------------------------------------------------------------------------- Portfolio Builder Aggressive $55,141(a) N/A N/A $34,746 N/A N/A - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- Portfolio Builder Conservative 23,875(a) N/A N/A 43,296 N/A N/A - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- Portfolio Builder Moderate 93,838(a) N/A N/A 142,907 N/A N/A - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- Portfolio Builder Moderate Aggressive 112,009(a) N/A N/A 116,480 N/A N/A - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- Portfolio Builder Moderate Conservative 43,118(a) N/A N/A 75,264 N/A N/A - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- Portfolio Builder Total Equity 43,835(a) N/A N/A 27,696 N/A N/A - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- Small Company Index 4,547,058 3,962,556 4,217,776 536,282 604,079 630,193 - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- S&P 500 Index 933,587 954,894 632,281 (402,204) (24,079) (301,463) - ---------------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending March 31 - ---------------------------------------------------------------------------------------------------------------------------- Equity Value 6,836,800 6,126,938 5,929,794 465,953 493,392 514,413 - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- Precious Metals 659,595 724,228 478,457 176,012 175,964 208,238 - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- Small Cap Advantage 6,341,134 5,102,126 3,593,634 533,489 227,451 354,549 - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- Small Cap Growth 2,276,290 2,359,429 1,747,120 421,008 360,064 (136,353) - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- Strategy Aggressive 3,390,499 4,338,334 4,964,632 451,456 585,955 577,160 - ---------------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending May 31 - ---------------------------------------------------------------------------------------------------------------------------- Aggressive Growth 399,501 117,564 3,774(b) 82,999 18,117 1,282(b) - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- Fundamental Growth 410,475 79,513 3,368(b) 177,899 24,370 489(b) - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- Fundamental Value 5,556,219 3,377,169 2,055,809 488,580 210,468 (38,629) - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- High Yield Bond 14,973,845 15,136,003 12,593,999 817,018 1,035,459 900,663 - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- Select Value 5,256,934 2,995,527 1,268,532 423,030 283,570 (42,902) - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- Selective 4,922,235 6,210,559 7,763,060 (230,799) 522,092 460,190 - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- Short Duration U.S. Government 10,141,504 14,303,395 15,837,132 (958,143) 1,172,005 1,516,688 - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- Small Cap Equity 1,560,155 1,108,923 375,456 6,490 (76,600) (50,972) - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- Small Cap Value 9,857,858 7,749,795 5,539,260 788,885 675,289 (136,624) - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- U.S. Government Mortgage 1,532,464 2,063,726 1,714,820 (188,134) 18,299 101,644 - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- Value 3,311,867 2,926,194 1,925,005 285,856 202,871 42,263 - ---------------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending June 30 - ---------------------------------------------------------------------------------------------------------------------------- California Tax-Exempt 1,010,591 1,129,991 1,273,942 116,440 139,264 126,709 - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- Dividend Opportunity 6,201,403 5,081,258 7,090,687 453,329 596,965 562,883 - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- Insured Tax-Exempt 1,801,898 2,078,914 2,214,318 165,805 187,506 180,424 - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- Massachusetts Tax-Exempt 372,649 427,506 455,856 43,112 52,958 54,428 - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- Michigan Tax-Exempt 294,025 342,995 387,348 36,732 43,425 53,043 - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- Minnesota Tax-Exempt 1,895,714 2,045,996 2,129,734 161,536 182,884 159,041 - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- New York Tax-Exempt 434,449 495,538 549,702 54,945 62,139 73,579 - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- Ohio Tax-Exempt 307,214 360,176 397,430 38,356 43,070 54,325 - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- Real Estate 725,491 37,549(c) N/A 133,564 8,198(c) N/A - ----------------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2005 Page 92
- ------------------------------------------- ----------------------------------------- -------------------------------------- Fund Management Fees Nonadvisory expenses - ------------------------------------------- ----------------------------------------- -------------------------------------- 2005 2004 2003 2005 2004 2003 - ---------------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending September 30 - ---------------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending July 31 - ---------------------------------------------------------------------------------------------------------------------------- Cash Management 12,052,160 14,155,568 17,632,026 1,220,672 2,243,652 2,781,187 - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- Core Bond 846,872 417,836 32,016(d) 99,940 69,699 7,553(d) - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- Disciplined Equity 408,720 83,580 11,265(e) 130,016 8,110 4,595(e) - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- Discovery 1,074,727 1,239,497 752,017 369,132 177,032 128,264 - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- Growth 18,968,320 16,372,054 20,057,173 1,217,404 1,219,778 1,262,092 - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- Income Opportunities 1,954,757 985,862 38,550(d) 214,865 133,277 15,960(d) - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- Inflation Protected Securities 552,220 66,055(f) N/A 28,432 5,260(f) N/A - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- Large Cap Equity 9,680,873 2,441,621 342,000 161,534 391,817 40,890 - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- Large Cap Value 803,736 446,686 139,254 293,194 129,014 22,043 - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- Limited Duration Bond 960,788 571,688 34,385(d) 57,170 61,331 7,837(d) - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- New Dimensions 60,896,353 74,353,086 90,852,746 4,912,847 3,537,012 4,234,549 - ---------------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending August 31 - ---------------------------------------------------------------------------------------------------------------------------- Diversified Bond 13,003,467 15,409,504 18,159,757 (1,032,114) 575,900 1,058,347 - ------------------------------------------- ----------------------------------------- -------------------------------------- For funds with fiscal period ending September 30 - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- Balanced 7,169,932 7,736,525 7,434,993 651,610 707,529 567,687 - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- Diversified Equity Income 24,183,415 17,374,369 9,509,660 1,530,714 993,686 701,496 - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- Mid Cap Value 5,816,781 2,537,342 755,866 531,095 271,072 63,479 - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- Stock 9,961,824 11,111,422 10,665,505 688,423 582,837 641,829 - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- Strategic Allocation 5,960,581 5,004,559 5,083,754 642,432 629,876 498,156 - ------------------------------------------- ----------------------------------------- -------------------------------------- 2004 2003 2002 2004 2003 2002 - ---------------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending October 31 - ---------------------------------------------------------------------------------------------------------------------------- Emerging Markets 2,770,886 2,181,279 2,578,135 519,598 477,412 491,764 - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- European Equity 872,149 959,764 1,483,797 236,203 143,588 221,341 - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- Global Balanced 699,824 702,933 882,643 171,229 189,130 178,732 - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- Global Bond 4,143,713 4,084,088 3,677,461 427,277 450,208 359,934 - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- Global Equity 3,302,062 3,763,415 5,986,053 506,708 476,898 611,344 - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- Global Technology 1,812,789 1,185,180 1,358,065 304,625 235,797 330,225 - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- International Aggressive Growth 1,878,346 1,114,731 690,573 250,484 69,337 65,305 - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- International Equity 1,015,577 439,777 15,692(h) 316,320 131,195 6,693(g) - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- International Opportunity 2,926,933 2,672,683 4,334,965 442,832 451,756 563,325 - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- International Select Value 6,467,621 3,341,744 1,253,447 473,274 152,203 145,369 - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- International Small Cap 600,389 183,744 8,611(h) 208,586 63,029 3,583(g) - ---------------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending November 30 - ---------------------------------------------------------------------------------------------------------------------------- Mid Cap Growth 10,550,526 10,432,639 11,492,378 744,839 600,194 527,223 - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- Tax-Exempt High Income 20,079,644 21,646,724 21,993,068 976,647 892,351 737,356 - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- Intermediate Tax-Exempt 752,882 704,089 381,710 136,017 101,093 78,153 - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- Tax-Exempt Bond 3,457,986 3,967,418 4,086,654 248,267 270,404 225,129 - ---------------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending December 31 - ---------------------------------------------------------------------------------------------------------------------------- Tax-Exempt Money Market 515,265 678,981 725,514 177,477 218,380 195,140 - ------------------------------------------- ------------- ------------ -------------- ------------- ------------ ----------- (a) For the period from March 4, 2004 (when shares became publicly available) to Jan. 31, 2005. (b) For the period from April 24, 2003 (when shares became publicly available) to May 31, 2003. (c) For the period from March 4, 2004 (when shares became publicly available) to June 30, 2004. (d) For the period from June 19, 2003 (when shares became publicly available) to July 31, 2003. (e) For the period from April 24, 2003 (when shares became publicly available) to July 31, 2003. (f) For the period from March 4, 2004 (when shares became publicly available) to July 31, 2004. (g) For the period from Oct. 3, 2002 (when shares became publicly available) to Oct. 31, 2002.
Statement of Additional Information - Nov. 29, 2005 Page 93 Subadvisory Agreements The assets of certain funds are managed by subadvisers that have been selected by the investment manager, subject to the review and approval of the Board. The investment manager has recommended the subadvisers to the Board based upon its assessment of the skills of the subadvisers in managing other assets with goals and investment strategies substantially similar to those of the applicable fund. Short-term investment performance is not the only factor in selecting or terminating a subadviser, and the investment manager does not expect to make frequent changes of subadvisers. Certain subadviers, affiliated with the investment manager, have been directly approved by shareholders. These subadvisers are noted in Table 18. The investment manager allocates the assets of a fund with multiple subadvisers among the subadvisers. Each subadviser has discretion, subject to oversight by the Board and the investment manager, to purchase and sell portfolio assets, consistent with the fund's investment objectives, policies, and restrictions. Generally, the services that a subadviser provides to the fund are limited to asset management and related recordkeeping services. The investment manager has entered into an advisory agreement with each subadviser under which the subadviser provides investment advisory assistance and day-to-day management of some or all of the fund's portfolio, as well as investment research and statistical information. A subadviser may also serve as a discretionary or non-discretionary investment adviser to management or advisory accounts that are unrelated in any manner to the investment manager or its affiliates. The following table shows the advisory fee schedules for fees paid by the investment manager to subadvisers for funds that have subadvisers. The table is organized by fiscal year end. You can find your fund's fiscal year end in Table 1. Table 18. Subadvisers and Subadvisory Agreement Fee Schedules
- ------------------------- -------------------------------------------- ------------ --------------------------------- Parent Fund Subadviser name Company, Fee schedule if any - --------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending March 31 - --------------------------------------------------------------------------------------------------------------------- Small Cap Advantage Kenwood Capital Management LLC (Kenwood)* A 0.35% (effective May 4, 1999) - ------------------------- -------------------------------------------- ------------ --------------------------------- Small Cap Growth Essex Investment Management Company, LLC B 0.70% on the first $20 million, (Essex) (effective Sept. 23, 2005) reducing to 0.60% as assets increase -------------------------------------------- ------------ --------------------------------- MDT Advisers, Inc. (MDTA) N/A 0.60% on the first $100 million (effective Sept. 23, 2005) -------------------------------------------- ------------ --------------------------------- Turner Investment Partners, Inc. (Turner) N/A 0.60% on the first $50 million, (effective Aug. 18, 2003) reducing to 0.50% as assets increase -------------------------------------------- ------------ --------------------------------- UBS Global Asset Management (Americas) N/A 0.55% on the first $150 (UBS) million, reducing to 0.50% as (effective Aug. 18, 2003) assets increase - ------------------------- -------------------------------------------- ------------ --------------------------------- Strategy Aggressive** American Century Investment Management, N/A 0.50% on the first $100 Inc. (American Century) (effective Nov. million, reducing to 0.38% as 11, 2005) assets increase -------------------------------------------- ------------ --------------------------------- Turner N/A 0.55% on the first $100 (effective Nov. 11, 2005) million, reducing to 0.38% as assets increase - --------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending May 31 - --------------------------------------------------------------------------------------------------------------------- Aggressive Growth** American Century N/A 0.50% on the first $100 (effective April 24, 2003) million, reducing to 0.38% as assets increase -------------------------------------------- ------------ --------------------------------- Turner N/A 0.55% on the first $100 (effective April 24, 2003) million, reducing to 0.38% as assets increase - ------------------------- -------------------------------------------- ------------ --------------------------------- Fundamental Growth Goldman Sachs Asset Management L.P. C 0.50% on the first $50 million, (Goldman) (effective April 24, 2003) reducing to 0.30% as assets increase -------------------------------------------- ------------ --------------------------------- Wellington Management Company, LLP N/A 0.50% on the first $50 million, (Wellington) (effective April 2005) reducing to 0.40% as assets increase - ------------------------- -------------------------------------------- ------------ --------------------------------- Fundamental Value Davis Advisors (Davis)* N/A 0.45% on the first $100 (effective June 18, 2001) million, reducing to 0.35% as assets increase - ------------------------- -------------------------------------------- ------------ ---------------------------------
Statement of Additional Information - Nov. 29, 2005 Page 95
- ------------------------- -------------------------------------------- ------------ --------------------------------- Parent Fund Subadviser name Company, Fee schedule if any - --------------------------------------------------------------------------------------------------------------------- Select Value GAMCO Asset Management Inc. (GAMCO) N/A 0.40% on the first $500 (effective March 8, 2002) million****, reducing to 0.30% as assets increase - ------------------------- -------------------------------------------- ------------ --------------------------------- Small Cap Equity*** American Century N/A 0.65% on the first $25 (effective Dec. 2003) million****, reducing to 0.55% as assets increase -------------------------------------------- ------------ --------------------------------- Lord, Abbett & Co. (Lord, Abbett) N/A 0.65% on the first $100 (effective Dec. 2003) million****, reducing to 0.55% as assets increase -------------------------------------------- ------------ --------------------------------- Wellington N/A 0.60%, subject to possible (effective March 8, 2002) adjustment under a performance incentive adjustment - ------------------------- -------------------------------------------- ------------ --------------------------------- Small Cap Value Royce & Associates, LLC. (Royce) D 0.80% on the first $100 (effective June 18, 2001) million****, reducing to 0.60% as assets increase -------------------------------------------- ------------ --------------------------------- Goldman N/A 0.60% on the first $100 (effective Aug. 8, 2003) million****, reducing to 0.55% as assets increase -------------------------------------------- ------------ --------------------------------- Barrow, Hanley, Mewhinney & Strauss (BHMS) E 1.00% on the first $10 (effective March 12, 2004) million****, reducing to 0.30% as assets increase -------------------------------------------- ------------ --------------------------------- Donald Smith & Co. Inc. (Donald Smith) N/A 0.60% on the first $175 (effective March 12, 2004) million****, reducing to 0.55% as assets increase -------------------------------------------- ------------ --------------------------------- Franklin Portfolio Associates LLC F 0.60% on the first $100 (Franklin Portfolio Associates) (effective million****, reducing to 0.55% March 12, 2004) as assets increase - ------------------------- -------------------------------------------- ------------ --------------------------------- Value Lord, Abbett N/A 0.35% on the first $200 (effective June 18, 2001) million, reducing to 0.25% as assets increase - --------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending July 31 - --------------------------------------------------------------------------------------------------------------------- Discovery*** American Century N/A 0.65% on the first $25 (effective Dec. 22, 2003) million****, reducing to 0.55% as assets increase -------------------------------------------- ------------ --------------------------------- Lord Abbett N/A 0.65% on the first $100 (effective Dec. 22, 2003) million****, reducing to 0.55% as assets increase -------------------------------------------- ------------ --------------------------------- Wellington N/A 0.60%, subject to possible (effective Sept. 1, 2002) adjustment under a performance incentive adjustment - --------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending October 31 - --------------------------------------------------------------------------------------------------------------------- Emerging Markets Threadneedle International Limited * G 0.45% of the first $15 million, (Threadneedle) (effective July 10, 2004) reducing to 0.30% as assets increase, and subject to a performance incentive adjustment***** - ------------------------- -------------------------------------------- ------------ --------------------------------- European Equity Threadneedle* G 0.35% of the first $15 million, International (effective July 10, 2004) reducing to 0.20% as assets Opportunity increase, and subject to a performance incentive adjustment***** - ------------------------- -------------------------------------------- ------------ --------------------------------- Global Balanced Threadneedle* G 0.35% of the first $15 million, Global Equity (effective July 10, 2004) reducing to 0.20% as assets increase, and subject to a performance incentive adjustment***** - ------------------------- -------------------------------------------- ------------ --------------------------------- International American Century Global Investment H 0.65% on the first $100 Aggressive Growth Management, Inc. (ACGIM) million, 0.60% on assets $100 - (effective Jan. 1, 2005) $250 million, 0.55% on assets $250 - $500 million, 0.52% on assets $500 million - $1 billion and 0.50% on assets $1 billion plus****** -------------------------------------------- ------------ --------------------------------- Columbia Wanger Asset Management L.P. I 0.70% on the first $100 (Columbia WAM) (effective Sept. 5, 2001) million, reducing to 0.50% as assets increase - ------------------------- -------------------------------------------- ------------ ---------------------------------
Statement of Additional Information - Nov. 29, 2005 Page 95
- ------------------------- -------------------------------------------- ------------ --------------------------------- Parent Fund Subadviser name Company, Fee schedule if any - --------------------------------------------------------------------------------------------------------------------- International Equity The Boston Company Asset Management, LLC J 0.50% on the first $150 (Boston Company) (effective Sept. 25, 2002) million, reducing to 0.35% as assets increase -------------------------------------------- ------------ --------------------------------- Marsico Capital Management, LLC (Marsico) K 0.55% on the first $100 (effective Oct. 1, 2004) million, reducing to 0.45% as assets increase - ------------------------- -------------------------------------------- ------------ --------------------------------- International Select Alliance Capital Management L.P. N/A 0.65% on the first $75 million, Value (Alliance Capital) (effective Sept. 17, reducing to 0.30% as assets 2001) increase - ------------------------- -------------------------------------------- ------------ --------------------------------- International Small Cap Templeton Investment Counsel, LLC N/A 0.70% on the first $50 million, (Franklin Templeton) (effective Sept. 25, reducing to 0.50% as assets 2002) increase -------------------------------------------- ------------ --------------------------------- Wellington N/A 0.75% on the first $100 (effective Sept. 25, 2002) million, reducing to 0.60% as assets increase - ------------------------- -------------------------------------------- ------------ ---------------------------------
* Davis is a 1940 Act affiliate of the investment manager because it owns or has owned more than 5% of the public issued securities of the investment manager's parent company, Ameriprise Financial. Kenwood is an affiliate of the investment manager as an indirect partially-owned subsidiary of Ameriprise Financial. Threadneedle is an affiliate of the investment manager as a direct wholly-owned subsidiary of Ameriprise Financial. ** Assets of Strategy Aggressive and Aggressive Growth are aggregated for purposes of calculating subadviser fees under the Subadvisory Agreement fee schedule. *** Assets of Small Cap Equity and Discovery are aggregated for purposes of calculating subadviser fees under the Subadvisory Agreement fee schedule. **** Based on the combined net assets subject to the subadviser's investment management. ***** The adjustment for Threadneedle is based on the performance of one Class A share of the fund and the change in the Lipper Index described in Table 15. The performance of the fund and the Index will be calculated using the method described above for the performance incentive adjustment paid to the investment manager under the terms of the Investment Management Services Agreement. The amount of the adjustment to Threadneedle's fee, whether positive or negative, shall be equal to one-half of the performance incentive adjustment made to the investment management fee payable to the investment manager under the terms of the Investment Management Services Agreement. The performance incentive adjustment was effective Dec. 1, 2004. ****** These rates are retroactive. When average daily net assets fall within this range, the corresponding rate applies to all the assets in the fund, e.g., if average daily net assets are $200 million, the fee rate of 0.60% applies to the entire $200 million balance. A - Kenwood is an indirect partially-owned subsidiary of Ameriprise Financial. B - Essex is majority owned by Affiliated Managers Group. C - Goldman is an affiliate of Goldman Sachs & Co. D - Royce is a direct wholly-owned subsidiary of Legg Mason, Inc. E - BHMS is an independent-operating subsidiary of Old Mutual Asset Management. F - Franklin Portfolio Associates is an indirect wholly-owned subsidiary of Mellon Financial Corporation. G - Threadneedle is a direct wholly-owned subsidiary of Ameriprise Financial. H - ACGIM is a wholly-owned subsidiary of American Century. I - Columbia WAM is an indirect wholly-owned subsidiary of Columbia Management Group, Inc., which in turn is a wholly owned subsidiary of Bank of America Corporation. J - Boston Company is a subsidiary of Mellon Financial Corporation and an affiliate of The Dreyfus Corporation. K - Marsico is an indirect wholly-owned subsidiary of Bank of America Corporation. Statement of Additional Information - Nov. 29, 2005 Page 96 The following table shows the subadvisory fees paid by the investment manager to subadvisers in the last three fiscal periods. The table is organized by fiscal year end. You can find your fund's fiscal year end in Table 1.
Table. 19. Subadvisory Fees - --------------------------- --------------------------------------------- ------------------------------------------- Fund Subadviser Subadvisory fees paid - --------------------------- --------------------------------------------- ------------------------------------------- 2005 2004 2003 - --------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending March 31 - --------------------------------------------------------------------------------------------------------------------- Small Cap Advantage Kenwood $3,089,403 $2,282,191 $1,740,599 - --------------------------- --------------------------------------------- ---------------- ------------- ------------ Small Cap Growth Essex Effective N/A N/A 9/23/05 --------------------------------------------- ---------------- ------------- ------------ MDTA Effective N/A N/A 9/23/05 --------------------------------------------- ---------------- ------------- ------------ Turner 371,758 241,927 N/A --------------------------------------------- ---------------- ------------- ------------ UBS 342,815 224,007 N/A --------------------------------------------- ---------------- ------------- ------------ Former Subadviser: Bjurman, Barry & 366,178 274,992 N/A Associates (from Aug. 18, 2003 to Sept. 23, 2005) --------------------------------------------- ---------------- ------------- ------------ Former Subadviser: RS Investment 581,602 565,391 400,545 Management, L.P. (from Jan. 24, 2001 to Sept. 23, 2005) - --------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending May 31 - --------------------------------------------------------------------------------------------------------------------- Aggressive Growth American Century 114,981 32,431 1,218(a) --------------------------------------------- ---------------- ------------- ------------ Turner 119,529 36,468 1,359(a) - --------------------------- --------------------------------------------- ---------------- ------------- ------------ Fundamental Growth Wellington* 21,015(b) N/A N/A --------------------------------------------- ---------------- ------------- ------------ Goldman 143,448 28,129 1,205(a) --------------------------------------------- ---------------- ------------- ------------ Former subadviser: Eagle Asset Management, 139,312(c) 28,655 1,249(a) Inc., a subsidiary of Raymond James Financial, Inc. (from April 7, 2003 to April 26, 2005) - --------------------------- --------------------------------------------- ---------------- ------------- ------------ Fundamental Value Davis 2,834,365 1,946,906 1,156,584 - --------------------------- --------------------------------------------- ---------------- ------------- ------------ Select Value GAMCO 46,074 1,642,235 626,588 - --------------------------- --------------------------------------------- ---------------- ------------- ------------ Small Cap Equity American Century 302,079 90,891 N/A - --------------------------- --------------------------------------------- ---------------- ------------- ------------ Lord, Abbett 278,497 93,666 N/A --------------------------------------------- ---------------- ------------- ------------ Wellington* 388,922 339,459 99,787 --------------------------------------------- ---------------- ------------- ------------ Former subadviser: Pilgrim Baxter & N/A N/A 98,829 Associates, Ltd (from inception to Dec. 2003) - --------------------------- --------------------------------------------- ---------------- ------------- ------------ Small Cap Value Goldman 1,599,715 883,316 N/A --------------------------------------------- ---------------- ------------- ------------ Royce 2,287,184 3,103,451 2,373,829 --------------------------------------------- ---------------- ------------- ------------ Franklin Portfolio Associates 957,263 134,324 N/A --------------------------------------------- ---------------- ------------- ------------ BHMS 823,441 126,801 N/A --------------------------------------------- ---------------- ------------- ------------ Donald Smith 992,659 130,862 N/A --------------------------------------------- ---------------- ------------- ------------ Former subadviser: National City N/A N/A 124,993 Investment Co. (from inception to August 2003) --------------------------------------------- ---------------- ------------- ------------ Former subadviser: Third Avenue Management N/A 1,087,918 947,437 LLC (from inception to March 2004) - --------------------------- --------------------------------------------- ---------------- ------------- ------------ Value Lord, Abbett 1,389,323 1,251,762 878,954 - --------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending July 31 - --------------------------------------------------------------------------------------------------------------------- Discovery American Century 261,637 131,822 N/A --------------------------------------------- ---------------- ------------- ------------ Lord, Abbett 279,061 151,513 N/A --------------------------------------------- ---------------- ------------- ------------ Wellington* 458,629 620,176 342,165 --------------------------------------------- ---------------- ------------- ------------ Former subadviser: Pilgrim Baxter N/A N/A 337,687 (from April 2002 to December 2003) - ---------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2005 Page 97
- --------------------------- --------------------------------------------- ------------------------------------------- Fund Subadviser Subadvisory fees paid - --------------------------- --------------------------------------------- ------------------------------------------- 2004 2003 2002 - --------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending October 31 - --------------------------------------------------------------------------------------------------------------------- Emerging Markets Threadneedle 361,626 N/A N/A --------------------------------------------- ---------------- ------------- ------------ Former subadviser: American Express Asset 942,983 1,033,684 1,168,791 Management International Inc. (AEAMI) (from inception until July 2004) - --------------------------- --------------------------------------------- ---------------- ------------- ------------ European Equity Threadneedle 131,177 N/A N/A --------------------------------------------- ---------------- ------------- ------------ Former subadviser: AEAMI 316,031 448,432 668,033 (from inception until July 2004) - --------------------------- --------------------------------------------- ---------------- ------------- ------------ Global Balanced Threadneedle 96,408 N/A N/A --------------------------------------------- ---------------- ------------- ------------ Former subadviser: AEAMI 151,173 208,168 416,452 (from inception until July 2004) - --------------------------- --------------------------------------------- ---------------- ------------- ------------ Global Equity Threadneedle 449,149 N/A N/A --------------------------------------------- ---------------- ------------- ------------ Former subadviser: AEAMI 484,676 1,841,195 3,015,169 (from inception until July 2004) - --------------------------- --------------------------------------------- ---------------- ------------- ------------ International Aggressive American Century 542,561 394,806 224,250 Growth --------------------------------------------- ---------------- ------------- ------------ Columbia WAM 709,378 422,056 251,311 - --------------------------- --------------------------------------------- ---------------- ------------- ------------ International Equity Boston Company 288,191 118,846 5,039 --------------------------------------------- ---------------- ------------- ------------ Marsico 30,840 N/A N/A --------------------------------------------- ---------------- ------------- ------------ Former subadviser: Putnam Investment 308,350 142,969 6,823 Management, LLC (from inception until Sept. 30, 2004) - --------------------------- --------------------------------------------- ---------------- ------------- ------------ International Opportunity Threadneedle 434,968 N/A N/A --------------------------------------------- ---------------- ------------- ------------ Former subadviser: AEAMI 1,000,707 1,407,484 2,319,155 (from inception until July 2004) - --------------------------- --------------------------------------------- ---------------- ------------- ------------ International Select Value Alliance Capital 2,869,277 1,604,035 749,095 - --------------------------- --------------------------------------------- ---------------- ------------- ------------ International Small Cap Franklin Templeton 200,710 56,399 3,435 --------------------------------------------- ---------------- ------------- ------------ Wellington* 215,256 62,802 3,545 - --------------------------- --------------------------------------------- ---------------- ------------- ------------
* Beginning on July 1, 2006, under the Subadvisory Agreement, RiverSource Investments is subject to a minimum annual fee of $350,000, payable to Wellington Management. (a) For fiscal period from April 24, 2003 (when shares became publicly available) to May 31, 2003. (b) For fiscal period from April 26, 2005 to May 31, 2005. (c) For fiscal period from June 1, 2004 to April 26, 2005. Statement of Additional Information - Nov. 29, 2005 Page 98 Portfolio Managers. The following table provides information about the funds' portfolio managers as of the end of the most recent fiscal period. The table is organized by fiscal year end. You can find your fund's fiscal year end in Table 1. Table 20. Portfolio Managers
- ----------------- -------------------------- ------------------------------------------ --------------- ------------ --------------- Fund Potential Structure of Portfolio Manager Other Accounts Managed Ownership of Conflicts Compensation Fund Shares of Interest - ----------------- -------------------------- ------------------------------------------ --------------- ------------ --------------- Approximate Total Net Assets Number and type of (excluding account the fund) - ------------------------------------------------------------------------------------------------------------------------------------ For funds with fiscal period ending January 31 - ------------------------------------------------------------------------------------------------------------------------------------ Portfolio Kent M. Bergene None(a) None (1) (1) Builder David M. Joy None None Aggressive Michelle M. Keeley None(b) None William F. Truscott None(b) None - ----------------- --------------------------- ----------------------- --------------------------------- ------------ --------------- Portfolio Kent M. Bergene None(a) None Builder David M. Joy None None Conservative Michelle M. Keeley None(b) None (1) (1) William F. Truscott None(b) None - ----------------- --------------------------- ----------------------- ----------------- --------------- ------------ --------------- Portfolio Kent M. Bergene None(a) None Builder Moderate David M. Joy None None Michelle M. Keeley None(b) None (1) (1) William F. Truscott None(b) None - ----------------- --------------------------- ----------------------- ----------------- --------------- ------------ --------------- Portfolio Kent M. Bergene None(a) $1 - $10,000 Builder David M. Joy None None Moderate Michelle M. Keeley None(b) None (1) (1) Aggressive William F. Truscott None(b) $100,001 -$500,000 - ----------------- --------------------------- ----------------------- ----------------- --------------- ------------ --------------- Portfolio Kent M. Bergene None(a) None Builder David M. Joy None None Moderate Michelle M. Keeley None(b) None (1) (1) Conservative William F. Truscott None(b) None - ----------------- --------------------------- ----------------------- ----------------- --------------- ------------ --------------- Portfolio Kent M. Bergene None(a) None Builder Total David M. Joy None $100,001 - Equity $500,000 (1) (1) Michelle M. Keeley None(b) None William F. Truscott None(b) None - ----------------- --------------------------- ----------------------- ----------------- --------------- ------------ --------------- Small Company David Factor, CFA 2 registered $0.7 billion None (2) (2) Index investment companies (RICs); $2.6 billion 2 pooled investment vehicles (PIVs) - ----------------- --------------------------- ----------------------- ----------------- --------------- ------------ --------------- S&P 500 Index David Factor, CFA 2 RICs $1.7 billion None (2) (2) 2 PIVs $2.6 billion - ------------------------------------------------------------------------------------------------------------------------------------ For funds with fiscal period ending March 31 - ------------------------------------------------------------------------------------------------------------------------------------ Equity Value Warren Spitz 5 RICs(c) $4.4 billion $50,001 - (2) (3) 2 PIVs $216.3 million $100,000 --------------------------- --------------- Steve Schroll $10,001 - $50,000 --------------------------- --------------- Laton Spahr $1 - $10,000 - ----------------- --------------------------- ----------------------- ----------------- --------------- ------------ --------------- Precious Metals Clay Hoes 1 PIV $13.9 million $1 - $10,000 (2), (3) (4) - ----------------- --------------------------- ----------------------- ----------------- --------------- ------------ ---------------
Statement of Additional Information - Nov. 29, 2005 Page 99
- ----------------- -------------------------- ------------------------------------------ --------------- ------------ --------------- Fund Potential Structure of Portfolio Manager Other Accounts Managed Ownership of Conflicts Compensation Fund Shares of Interest - ----------------- -------------------------- ------------------------------------------ --------------- ------------ --------------- Approximate Total Net Assets Number and type of (excluding account the fund) - ------------------------------------------------------------------------------------------------------------------------------------ Small Cap RSIM: John L. Wallace(d) 4 RICs $1.5 billion None (4) (6) Growth 3 PIVs $15.9 million 6 other accounts $277.6 million -------------------------- ------------------------ --------------------------------- ------------ --------------- RSIM: John H. Seabern(d) 1 RIC $953.8 million 5 other accounts $252 million -------------------------- ------------------------ --------------------------------- ------------ --------------- Turner: William C. McVail 15 RICs $2.4 billion None (5) (7) 45 PIVs $2.2 billion 37 other accounts; $1.4 billion (for 1 PIV and 2 other accounts(c)) -------------------------- ------------------------ ----------------- Turner: 16 RICs $2.0 billion Christopher K. McHugh 49 PIVs $2.4 billion 35 other accounts $1.3 billion (for 1 PIV and 2 other accounts(c)) -------------------------- ------------------------ --------------------------------- ------------ --------------- Turner: Frank L. 4 RICs $41 million None (5) (7) Sustersic 11 PIVs $886 million 32 other accounts $881 million (for 2 RICs and 2 other accounts(c)) -------------------------- ------------------------ ----------------- Turner: 4 RICs $433 million Jason D. Schrotberger 12 PIVs $966 million 24 other accounts $682 million (for 2 other accounts(c)) -------------------------- ------------------------ --------------------------------- ------------ --------------- BB&A: O. Thomas Barry 7 RICs $824.2 million None (6) (8) 19 other accounts $169.2 million -------------------------- ------------------------ ----------------- BB&A: G. Andrew Bjurman 15 other accounts $1.3 billion -------------------------- ------------------------ ----------------- BB&A: 38 other accounts $41.2 million Stephen W. Shipman (for 8 accounts(c)) -------------------------- ------------------------ ----------------- BB&A: Patrick T. Bradford 1 RIC $7.3 million -------------------------- ------------------------ ----------------- BB&A: Roberto P. Wu 5 other accounts $7.9 million -------------------------- ------------------------ --------------------------------- ------------ --------------- UBS: Paul A. Graham 7 RICs (includes wrap $764.9 million None (7) (9) UBS: David N. Wabnik accounts as 1 model) 2 PIVs $440.2 million 7 other accounts $406.1 million (for 1 other account(c)) - ----------------- -------------------------- ------------------------ --------------------------------- ------------ --------------- Small Cap RiverSource Investments: 4 RICs(c) $1.5 billion None (2) (4), (10) Advantage Dimitris Bertsimas 1 PIV $12.7 million 11 other accounts(g) $84.9 million -------------------------- ------------------------ ----------------- RiverSource Investments: 2 RICs(c) $806.2 million Jonathan Calvert -------------------------- ------------------------ ----------------- Kenwood: Jake Hurwitz 1 RIC(c) $185.3 million $100,001 - (2), (8) (11) 1 PIV $44.9 million $500,000 18 other accounts $445.5 million -------------------------- --------------- Kenwood: Kent Kelley $100,001 - $500,000 - ----------------- -------------------------- ------------------------ --------------------------------- ------------ --------------- Strategy Paul Rokosz 1 RIC $741.1 million $10,000 - (2) (4) Aggressive 2 PIVs $141.5 million $50,000 10 other accounts $1.7 billion (for 2 RICs(c)) - ----------------- -------------------------- ------------------------ ----------------- --------------- ------------ ---------------
Statement of Additional Information - Nov. 29, 2005 Page 100
- ----------------- -------------------------- ------------------------------------------ --------------- ------------ --------------- Fund Potential Structure of Portfolio Manager Other Accounts Managed Ownership of Conflicts Compensation Fund Shares of Interest - ----------------- -------------------------- ------------------------------------------ --------------- ------------ --------------- Approximate Total Net Assets Number and type of (excluding account the fund) - ------------------------------------------------------------------------------------------------------------------------------------ For funds with fiscal period ending May 31 - ------------------------------------------------------------------------------------------------------------------------------------ Aggressive Turner: 18 RICs $2.2 billion None (5) (7) Growth Christopher K. McHugh 30 PIVs $640 million 59 other accounts $3.1 billion -------------------------- ------------------------ ----------------- Turner: Robert E. Turner 27 RICs $3.6 billion 40 PIVs $1.6 billion 88 other accounts $5.2 billion -------------------------- ------------------------ ----------------- Turner: William C. McVail 17 RICs $2.6 billion 24 PIVs $504 million 5 other accounts $3.3 billion -------------------------- ------------------------ --------------------------------- ------------ --------------- American Century: 5 RICs $5.584 billion None (9) (12) Glen A. Fogle 1 other account $27.823 million -------------------------- ------------------------ ----------------- American Century: David M. Holland - ----------------- -------------------------- ------------------------ ----------------- --------------- ------------ --------------- Fundamental Goldman: Herbert E. 49 RICs $10.7 billion None (11) (14), (20) Growth Ehlers 1 PIV $94.0 million 542 other accounts $18.0 billion -------------------------- Goldman: Gregory H. Ekizian -------------------------- Goldman: David G. Shell -------------------------- Goldman: Steven M. Barry -------------------------- Goldman: Kenneth T. Berents -------------------------- Goldman: Andrew F. Pyne -------------------------- Goldman: Scott Kolar -------------------------- Goldman: Prashant R. Khemka -------------------------- ------------------------ ----------------- --------------- ------------ --------------- Wellington: John A. 9 RICs $2,709.4 million None (12) (15) Boselli 7 PIVs $846.7 million 33 other accounts $5,232.5 million (for 1 other account(c)) -------------------------- Wellington: Andrew J. Schilling - ----------------- -------------------------- ------------------------ ----------------- --------------- ------------ --------------- Fundamental Davis: Christopher C. 23 RICs $48 billion None(e) (10) (13) Value Davis 6 PIVs $853 million Davis: Kenneth C. 30,000 other accounts $9.9 billing Feinberg (primarily managed money/ wrap accounts) - ----------------- -------------------------- ------------------------ ----------------- --------------- ------------ --------------- High Yield Bond Scott Schroepfer 1 RIC $1.2 billion $100,001 - (2) (4) $500,000 - ----------------- -------------------------- ------------------------ ----------------- --------------- ------------ --------------- Selective Tom Murphy 8 RICs $6.2 billion None (2) (4) 3 PIVs $1.2 billion 24 other accounts $20.9 billion (for 3 RICs and 1 other account(c)) -------------------------- ------------------------ ----------------- --------------- ------------ --------------- Scott Kirby 11 RICs $8.6 billion $10,001 - 7 PIVs $2.6 billion $50,000 46 other accounts $22.9 billion (for 3 RICs and 1 other account(c)) -------------------------- ------------------------ ----------------- --------------- ------------ --------------- Jamie Jackson 14 RICs $12.1 billion $10,001 - 6 PIVs $3.3 billion $50,000 31 other accounts $5.3 billion (for 3 RICs and 1 other account(c)) - ----------------- -------------------------- ------------------------ ----------------- --------------- ------------ ---------------
Statement of Additional Information - Nov. 29, 2005 Page 101
- ----------------- -------------------------- ------------------------------------------ --------------- ------------ --------------- Fund Potential Structure of Portfolio Manager Other Accounts Managed Ownership of Conflicts Compensation Fund Shares of Interest - ----------------- -------------------------- ------------------------------------------ --------------- ------------ --------------- Approximate Total Net Assets Number and type of (excluding account the fund) - ------------------------------------------------------------------------------------------------------------------------------------ Select Value GAMCO: Mario Gabelli 24 RICs $11.9 billion(f) None (13) (16) 14 PIVs(c) $707.7 1,747 other accounts million(f) (for 1 RIC and 3 other $9.9 billion accounts(c)) - ----------------- -------------------------- ------------------------ ----------------- --------------- ------------ --------------- Short Duration Scott Kirby 11 RICs $7.9 billion $10,001 - (2) (4) U.S. Government 7 PIVs $2.6 billion $50,000 46 other accounts $22.9 billion (for 3 RICs and 1 other account(c)) -------------------------- ------------------------ ----------------- --------------- Jamie Jackson 14 RICs $11.4 billion $10,001 - 6 PIVs $3.3 billion $50,000 31 other accounts $5.3 billion (for 3 RICs and 1 other account(c)) - ----------------- -------------------------- ------------------------ ----------------- --------------- ------------ --------------- Small Cap Equity American Century: 13 RICs $8.720 billion (9) (12) Thomas P. Vaiana 2 other accounts $229 million None -------------------------- ------------------------ ----------------- American Century: 14 RICs $9.276 billion William Martin 2 other accounts $229 million -------------------------- ------------------------ ----------------- American Century: 5 RICs $2.123 billion Wihelmine von Turk 2 other accounts $229 million -------------------------- ------------------------ ----------------- --------------- ------------ --------------- Lord, Abbett: 4 RICs $825.2 million None (14) (17) Michael T. Smith 7 other accounts $534.6 million -------------------------- ------------------------ ----------------- --------------- ------------ --------------- Wellington: 4 RICs $1,640.9 million $500,001 - (12) (15) Kenneth L. Abrams 3 PIVs $787.6 million $1,000,000 23 other accounts $1,846.3 million (for 2 RICs and 1 other account(c)) -------------------------- ------------------------ ----------------- --------------- Wellington: Daniel J. 4 RICs $1,640.9 million None Fitzpatrick 3 PIVs $787.6 million 16 other accounts $1,830.2 million (for 2 RICs and 1 other account(c)) - ----------------- -------------------------- ------------------------ ----------------- --------------- ----------- ---------------- Small Cap Value Royce: Jay S. Kaplan 6 RICs $7 billion None (15) (18) -------------------------- ------------------------ ----------------- --------------- ----------- ---------------- Goldman: Eileen Rominger 20 RICs $11.1 billion None (11) (19), (20) 2 PIVs $31.0 million 280 other accounts $5.41 billion -------------------------- Goldman: Dolores Bamford -------------------------- Goldman: David Berdon -------------------------- Goldman: Lisa Parisi -------------------------- ------------------------ ----------------- --------------- ----------- ---------------- Goldman: J. Kelly Flynn 20 RICs $2.83 billion None (11) (19), (20) 2 PIVs $31.0 million 6 other accounts $634.0 million -------------------------- Goldman: Chip Otness -------------------------- ------------------------ ----------------- --------------- ----------- ---------------- Donald Smith: Donald G. 2 RICs $0.786 billion None (16) (21) Smith 1 PIV $0.171 billion 23 other accounts $1.807 billion -------------------------- Donald Smith: Richard L. Greenberg
Statement of Additional Information - Nov. 29, 2005 Page 102
- ----------------- -------------------------- ------------------------------------------ --------------- ------------ --------------- Fund Potential Structure of Portfolio Manager Other Accounts Managed Ownership of Conflicts Compensation Fund Shares of Interest - ----------------- -------------------------- ------------------------------------------ --------------- ------------ --------------- Approximate Total Net Assets Number and type of (excluding account the fund) - ------------------------------------------------------------------------------------------------------------------------------------ Franklin Portfolio 6 RICs (with 14 total $13.5 billion None (17) (22) Associates: John S. Cone portfolios) 4 PIVs $0.7 billion 82 other accounts $14.3 billion -------------------------- Franklin Portfolio Associates: Michael F. Dunn -------------------------- Franklin Portfolio Associates: Oliver E. Buckley -------------------------- Franklin Portfolio Associates: Kristin J. Crawford -------------------------- Franklin Portfolio Associates: Langton Garvin -------------------------- ------------------------ ----------------- --------------- ----------- ---------------- BHMS: James S. McClure 3 RICs $392.0 million None (18) (23) 16 other accounts $569.8 million -------------------------- BHMS: John P. Harloe - ----------------- -------------------------- ------------------------ ----------------- --------------- ----------- ---------------- U.S. Government Scott Kirby 11 RICs $9.3 billion $10,001 - (2) (4) Mortgage 7 PIVs $2.6 billion $50,000 46 other accounts $22.9 billion (for 3 RICs and 1 other account(c)) - ----------------- -------------------------- ------------------------ ----------------- --------------- ----------- ---------------- Value Lord, Abbett: Eli M. 14 RICs $23,867.2 None (14) (17) Salzmann 11 PIVs million 53,962 other accounts $756.2 million (for 1 other $18,554.4 account(c)) million -------------------------- Lord, Abbett: Sholom Dinsky - ------------------------------------------------------------------------------------------------------------------------------------ For funds with fiscal period ending June 30 - ----------------- -------------------------- ------------------------ ----------------- --------------- ----------- ---------------- California Dave Kerwin 9 RICs $5.84 billion None (2) (4) Tax-Exempt 0 PIVs 18 other accounts $7.46 billion - ----------------- --------------- Insured None Tax-Exempt - ----------------- --------------- Massachusetts None Tax-Exempt - ----------------- --------------- Michigan None Tax-Exempt - ----------------- --------------- Minnesota $50,001 - Tax-Exempt $100,000 - ----------------- --------------- New-York None Tax-Exempt - ----------------- --------------- Ohio None Tax-Exempt - ----------------- -------------------------- ------------------------ ----------------- --------------- ----------- ---------------- Dividend Warren Spitz 5 RICs(c) $8.1 billion Over (2) (3) Opportunity 2 PIVs 0.22 billion $1,000,000 0 other accounts -------------------------- --------------- Steve Schroll $100,001 - $500,000 -------------------------- --------------- Laton Spahr $10,001 - $50,000 - ----------------- -------------------------- ------------------------ ----------------- --------------- ----------- ---------------- Real Estate Julene Melquist None $0 None (2), (3) (5) -------------------------- J. Blair Brumley - ----------------- -------------------------- ------------------------ ----------------- --------------- ----------- ----------------
Statement of Additional Information - Nov. 29, 2005 Page 103
- ----------------- -------------------------- ------------------------------------------ --------------- ------------ --------------- Fund Potential Structure of Portfolio Manager Other Accounts Managed Ownership of Conflicts Compensation Fund Shares of Interest - ----------------- -------------------------- ------------------------------------------ --------------- ------------ --------------- Approximate Total Net Assets Number and type of (excluding account the fund) - ------------------------------------------------------------------------------------------------------------------------------------ For funds with fiscal period ending July 31 - ------------------ -------------------------- ------------------------ ----------------- --------------- ----------- --------------- Core Bond Tom Murphy 8 RICs(h) $6.87 billion $10,001-$50,000 (2) (4) 3 PIVs $1.28 billion 25 other accounts(g) $21.02 billion -------------------------- ------------------------ ----------------- --------------- Jamie Jackson 12 RICs(h) $9.16 billion $10,001-$50,000 6 PIVs $3.14 billion 31 other accounts(g), $5.88 billion (i) -------------------------- ------------------------ ----------------- --------------- Scott Kirby 11 RICs(h) $9.14 billion $10,001-$50,000 7 PIVs $2.71 billion 48 other accounts(g), $23.49 billion (i) - ------------------ -------------------------- ------------------------ ----------------- --------------- ----------- --------------- Disciplined Dimitris Bertsimas 4 RICs(c) $1.74 billion None (2) (3), (10) Equity 1 PIVs $11.7 million 13 other accounts(g) $84.8 million -------------------------- ------------------------ ----------------- --------------- Gina Mourtzinou 2 RICs(c) $1.63 billion $50,001-$100,000 1 PIVs $11.7 million 13 other accounts(g) $84.8 million - ------------------ -------------------------- ------------------------ ----------------- --------------- ----------- --------------- Discovery Lord Abbett: 3 RICs $1,031 million None (14) (17) Michael Smith 0 PIVs 9 other accounts $600.03 million -------------------------- ------------------------ ----------------- --------------- ----------- --------------- American Century: 14 RICs $9.97 billion None (9) (12) William Martin 0 PIVs 2 other accounts $302.8 million -------------------------- ------------------------ ----------------- --------------- American Century: 5 RICs $2.48 billion None Wilhelmine von Turk 0 PIVs 2 other accounts $302.8 million -------------------------- ------------------------ ----------------- --------------- American Century: 13 RICs $9.39 billion Thomas Vaiana 0 PIVs None 2 other accounts $302.8 million -------------------------- ------------------------ ----------------- --------------- ----------- --------------- Wellington: 4 RICs* $1,710 million* None (12) (15) Kenneth Abrams 3 PIV $841.2 million 23 other accounts** $1,999.7 million -------------------------- ------------------------ ----------------- --------------- Wellington: 4 RICs* $1,710 million* None Daniel Fitzpatrick 3 PIV $841.2 million 16 other accounts** $1,983.4 million** - ------------------ -------------------------- ------------------------ ----------------- --------------- ----------- --------------- Growth Nick Thakore 4 RICs(c) $3.43 billion $100,001- (20) (24) 2 PIVs $244.06 million $500,000 0 other accounts - ------------------ -------------------------- ------------------------ ----------------- --------------- ----------- --------------- Income Brian Lavin 1 RIC $40.83 million $50,001- (2) (4) Opportunities 1 PIV $50.11 million $100,000 0 other accounts -------------------------- ------------------------ ----------------- --------------- Jennifer Ponce de Leon 5 RICs $7.93 billion $50,001- 1 PIV $50.11 million $100,000 10 other accounts $2.44 billion - ------------------ -------------------------- ------------------------ ----------------- --------------- ----------- --------------- Inflation Jamie Jackson 12 RICs(h) $9.13 billion $10,001-$50,000 (2) (4) Protected 6 PIVs $3.14 billion Securities 31 other account(g), $5.88 billion (i) - ------------------ -------------------------- ------------------------ ----------------- --------------- ----------- ---------------
Statement of Additional Information - Nov. 29, 2005 Page 104
- ----------------- -------------------------- ------------------------------------------ --------------- ------------ --------------- Fund Potential Structure of Portfolio Manager Other Accounts Managed Ownership of Conflicts Compensation Fund Shares of Interest - ----------------- -------------------------- ------------------------------------------ --------------- ------------ --------------- Approximate Total Net Assets Number and type of (excluding account the fund) - ------------------------------------------------------------------------------------------------------------------------------------ Large Cap Equity Nick Thakore 5 RICs(c) $6.56 billion $100,001- (20) (24) 2 PIVs $244.05 million $500,000 0 other accounts -------------------------- ------------------------ ----------------- --------------- Bob Ewing 6 RICs(c) $5.7. billion $100,001- 2 PIVs $244.05 million $500,000 1 other account $12.04 million - ----------------- -------------------------- ------------------------ ----------------- --------------- ----------- --------------- Large Cap Value Bob Ewing 6 RICs(c) $7.11. billion $500,001- (20) (24) 2 PIVs $244.05 million $1,000,000 1 other account $12.04 million - ----------------- -------------------------- ------------------------ ----------------- --------------- ----------- --------------- Limited Duration Tom Murphy 8 RICs(h) $6.85 billion $10,001-$50,000 (2) (4) Bond 3 PIVs $1.28 billion 25 other accounts $21.02 billion -------------------------- ------------------------ ----------------- --------------- Jamie Jackson 12 RICs(h) $9.15 billion $10,001-$50,000 6 PIVs $3.14 billion 48 other accounts(g), (i) $5.88 billion -------------------------- ------------------------ ----------------- --------------- Scott Kirby 11 RICs(h) $9.12 billion $10,001-$50,000 7 PIVs $2.72 billion 48 other accounts(g), $23.49 billion (i) - ----------------- -------------------------- ------------------------ ----------------- --------------- ----------- --------------- New Dimensions Gordon Fines 1 RIC(c) $2.32 billion Over (2) (25) 2 PIVs $145.9 million $1,000,000 7 other accounts $1.72 billion -------------------------- ------------------------ ----------------- --------------- Michael Nance 1 RIC(c) $2.32 billion None 1 PIV $51.35 million 13 other accounts(g) $304.2 million -------------------------- ------------------------ ----------------- --------------- ----------- --------------- Trisha Schuster 1 RIC(c) $2.32 billion $10,001-$50,000 (2), (3) (26) 0 PIVs 0 other accounts - ------------------ -------------------------- ------------------------ ----------------- --------------- ----------- --------------- For funds with fiscal period ending August 31 - ------------------------------------------------------------------------------------------------------------------------------------ Diversified Tom Murphy 8 RICs(j) $4.74 billion $100,001- (2) (4) Bond 4 PIVs $1.29 billion $500,000 23 other accounts(g), $19.82 billion (k) -------------------------- ------------------------ ----------------- --------------- Jamie Jackson 12 RICs(j) $6.85 billion $10,001-$50,000 6 PIVs $3.21 billion 31 other accounts(g), $5.59 billion (k) -------------------------- ------------------------ ----------------- --------------- Scott Kirby 11 RICs(j) $9.79 billion $10,001-$50,000 6 PIVs $2.38 billion 45 other accounts(g), $23.27 billion (k) -------------------------- ------------------------ ----------------- --------------- Jennifer Ponce de Leon 5 RICs $5.83 billion $10,001-$50,000 1 PIV $0.03 billion 10 other accounts $3.25 billion -------------------------- ------------------------ ----------------- --------------- Nicolas Pifer 4 RICs $3.02 billion $1-$10,000 4 PIVs $0.47 billion 15 other accounts(g) $4.22 billion (l) - ----------------- -------------------------- ------------------------ ----------------- --------------- ----------- ----------------
Statement of Additional Information - Nov. 29, 2005 Page 105
- ---------------- -------------------------- ------------------------------------------ --------------- ------------ --------------- Fund Potential Structure of Portfolio Manager Other Accounts Managed Ownership of Conflicts Compensation Fund Shares of Interest - ----------------- -------------------------- -------------------------- ----------------- --------------- ----------- -------------- Approximate Total Net Assets Number and type of (excluding account the fund) - ----------------- -------------------------- -------------------------- ----------------- --------------- ----------- -------------- For funds with fiscal period ending September 30 - --------------------------------------------------------------------------------------------------------------------------------- Balanced Tom Murphy 8 RICs(m) $6.51 billion $10,001- (2) (4) 4 PIVs $1.26 billion $50,000 22 other accounts(g), (n) $17.03 billion -------------------------- -------------------------- ----------------- --------------- Jamie Jackson 12 RICs(m) $8.72 billion None 7 PIVs $3.16 billion 29 other accounts(g), (n) $6.68 billion -------------------------- -------------------------- ----------------- --------------- Scott Kirby 11 RICs(m) $8.66 billion 7 PIVs $2.32 billion None 44 other accounts(g), (n) $22.72 billion -------------------------- -------------------------- ----------------- --------------- ----------- -------------- Bob Ewing 6 RICs(c) $6.08 billion $100,001- (20) (24) 2 PIVs $0.04 billion $500,000 1 other account $0.01billion - ----------------- -------------------------- -------------------------- ----------------- --------------- ----------- -------------- Mid Cap Value Warren Spitz 4 RICs(c) $9.19 billion $100,001- (2) (3) 1 PIV $0.16 billion $500,000 1 other account $0.01 billion -------------------------- --------------- Laton Spahr $10,001- $50,000 -------------------------- --------------- Steve Schroll $50,001- $100,000 - ----------------- -------------------------- -------------------------- ----------------- --------------- ----------- -------------- Diversified Warren Spitz 4 RICs(c) $5.13 billion $100,001- (2) (3) Equity Income 1 PIV $0.16 billion $500,000 1 other account $0.01 billion -------------------------- --------------- Laton Spahr None -------------------------- --------------- Steve Schroll $50,001- $100,000 - ----------------- -------------------------- -------------------------- ----------------- --------------- ----------- -------------- Stock Dimitris Bertsimas 4 RICs(c) $1.1 billion None (20) (10) 6 PIVs $0.16 billion 8 other accounts(g) $0.08 billion -------------------------- -------------------------- ----------------- --------------- Gina Mourtnizou 2 RICs(c) $0.98 billion $1- 0 PIV $0 $10,000 3 other accounts 0.04 billion -------------------------- -------------------------- ----------------- --------------- ----------- -------------- Scott Mullinix 2 other accounts $0.18 billion $10,001- (2) (27) $50,000 - ----------------- -------------------------- -------------------------- ----------------- --------------- ----------- --------------
Statement of Additional Information - Nov. 29, 2005 Page 106
- ---------------- -------------------------- ------------------------------------------ --------------- ------------ --------------- Fund Potential Structure of Portfolio Manager Other Accounts Managed Ownership of Conflicts Compensation Fund Shares of Interest - ----------------- -------------------------- -------------------------- ----------------- --------------- ----------- -------------- Approximate Total Net Assets Number and type of (excluding account the fund) - ----------------- -------------------------- -------------------------- ----------------- --------------- ----------- -------------- Tom Murphy 8 RICs(p) $6.74 billion $10,001- (2) (4) Strategic 4 PIVs $1.26 billion $50,000 Allocation 22 other accounts(g), (n) $17.03 billion - ----------------- -------------------------- -------------------------- ----------------- --------------- Jamie Jackson 12 RICs(p) $8.72 billion None 7 PIVs $3.16 billion 29 other accounts(g), (n) $6.68 billion -------------------------- -------------------------- ----------------- --------------- Scott Kirby 11 RICs(p) $8.9 billion 7 PIVs $2.32 billion $10,001- 44 other accounts(g), (n) $22.72 billion $50,000 -------------------------- -------------------------- ----------------- --------------- ----------- -------------- Dimitris Bertsimas 4 RICs(c) $2.18 billion Over (20) 6 PIV $0.16 billion $1,000,000 (10) 8 other accounts(g) $0.08 billion -------------------------- -------------------------- ----------------- --------------- ----------- -------------- Jonathan Calvert 2 RICs(c) $0.12 billion $100,001- (20) (10) 6 PIV $0.16 billion $500,000 0 other accounts $0 -------------------------- -------------------------- ----------------- --------------- ----------- -------------- Gina Mourtnizou 2 RICs(c) $2.06 billion 0 PIV $0 $50,001- (20) (10) 3 other accounts 0.04 billion $100,000 - ----------------- -------------------------- -------------------------- ----------------- --------------- ----------- --------------
* Includes 2 accounts where advisory fee is based on account performance with approximately $1,491.2 million in total net assets as of July 31, 2005. ** Includes 1 account where advisory fee is based on account performance with approximately $300.2 million in total net assets as of July 31, 2005. (a) Mr. Bergene has overall accountability for the group that monitors the subadvisers for RiverSource funds and for making recommendations to the Boards of Directors on changes to those subadvisers. (b) Ms. Keeley, who serves as Senior Vice President, Fixed Income for RiverSource Investments, and Mr. Truscott, who serves as Chief Investment Officer for RiverSource Investments, oversee the portfolio managers who manage other accounts for RiverSource Investments, including the underlying funds in which the Funds of Funds invest, and other accounts managed by RiverSource Investments and its affiliates including institutional assets, proprietary assets and hedge funds. (c) The advisory fee paid is based in part on the performance of the fund or account. (d) Effective May 30, 2005, John Seabern is the sole portfolio manager of the portion of the fund managed by RSIM. (e) Neither Christopher Davis nor Kenneth Feinberg own any shares of Fundamental Value Fund. However, both portfolio managers have over $1 million invested in the Davis Funds, which are managed in a similar style. (f) Represents the portion of assets for which the portfolio manager has primary responsibility in the accounts indicated. The accounts may contain additional assets under the primary responsibility of other portfolio managers. (g) Reflects each wrap program strategy as a single client, rather than counting each participant in the program as a separate client. (h) The advisory fee paid to RiverSource Investments on 3 of the RICs with approximately $643.57 million as of July 31, 2005 in aggregate net assets is based in part on performance. Messrs. Murphy, Jackson and Kirby manage the fixed income portion of those 3 RICs. (i) The advisory fee paid to RiverSource Investments on 1 of the other accounts is based in part on performance. As of July 31, 2005, Mr. Jackson managed $0.21 million of that account, and Mr. Kirby managed $82.58 million of that account. (j) The advisory fee paid to RiverSource Investments on 3 of the RICs with approximately $1.45 billion in aggregate net assets as of Aug. 31, 2005 is based in part on performance. (k) The advisory fee paid to RiverSource Investments on 1 of the other accounts with approximately $0.098 billion in aggregate net assets as of Aug. 31, 2005 is based in part on performance. (l) The advisory fee paid to RiverSource Investments on 1 of the other accounts with approximately $0.14 billion in aggregate net assets as of Aug. 31, 2005 is based in part on performance. (m) The advisory fee paid to RiverSource Investments on 2 of the RICs with approximately $1.03 billion in aggregate assets is based in part on performance. (n) The advisory fee paid to RiverSource Investments on 1 of the other accounts with approximately $0.098 billion in aggregate assets is based in part on performance. (p) The advisory fee paid to RiverSource Investments on 2 of the RICs with approximately $1.26 billion in aggregate assets is based in part on performance. Statement of Additional Information - Nov. 29, 2005 Page 107 Potential Conflicts of Interest (1) Management of Funds-of-Funds differs from that of the other RiverSource funds. The portfolio management process is set forth generally below and in more detail in the funds' prospectus. Management of the portfolios is based on initial asset class guidance provided by the Capital Markets Committee, a group of RiverSource Investments investment professionals, and subsequent allocation determinations by the Asset Allocation Committee and Fund Selection Committee within established guidelines set forth in the prospectus. The Asset Allocation Committee, comprised of portfolio managers Joy, Keeley and Truscott, determines each funds-of-fund's allocation among the three main asset classes (equity, fixed income and cash) and allocation among investment categories within each asset class. The Fund Selection Committee, comprised portfolio managers Bergene, Joy, Keeley and Truscott, determines each funds-of-fund's allocation among the underlying funds. These allocation determinations are reviewed by the Asset Allocation Committee and Fund Selection Committee at least quarterly. Because of the structure of the funds-of-funds, the potential conflicts of interest for the portfolio managers may be different than the potential conflicts of interest for portfolio managers who manage other funds. These potential conflicts of interest include: o The portfolio managers of the underlying funds are under the supervision of portfolio managers Keeley and Truscott. Keeley and Truscott may have influence over the management of the underlying funds through their supervision of the underlying funds' portfolio managers and/or through their ability, as part of the Asset Allocation Committee and Fund Selection Committee, to influence the allocation of funds-of-funds assets to or away from the underlying funds. o Portfolio managers Joy, Keeley and Truscott also serve as members of the Capital Markets Committee. As described above, the Capital Markets Committee provides initial guidance with respect to asset allocation, and its view may play a significant role in the asset class determinations made by the Asset Allocation Committee and, as a result, in the underlying fund determinations made by the Fund Selection Committee. (2) RiverSource Investments portfolio managers may manage one or more mutual fund as well as other types of accounts, including proprietary accounts, separate accounts for institutions and individuals, and other pooled investment vehicles. Portfolio managers make investment decisions for an account or portfolio based on its investment objectives and policies, and other relevant investment considerations. A portfolio manager may manage a separate account or other pooled investment vehicles whose fees may be materially greater than the management fees paid by the fund and may include a performance-based fee. Management of multiple funds and accounts may create potential conflicts of interest relating to the allocation of investment opportunities, and the aggregation and allocation of trades. RiverSource Investments has a fiduciary responsibility to all of the clients for which it manages accounts. RiverSource Investments seeks to provide best execution for all securities transactions and to aggregate securities transactions and then allocate securities to client accounts in a fair and timely manner. RiverSource Investments has developed policies and procedures, including brokerage and trade allocation policies and procedures, designed to mitigate and manage the potential conflicts of interest that may arise from the management of multiple types of accounts for multiple clients. (3) The portfolio manager's responsibilities also include working as a securities analyst. This dual role may give rise to conflicts with respect to making investment decisions for accounts that the portfolio manager manages versus communicating his or her analyses to other portfolio managers concerning securities that he or she follows as an analyst. Statement of Additional Information - Nov. 29, 2005 Page 108 (4) Whenever a portfolio manager manages multiple accounts, potential conflicts of interest exist, including potential conflicts between the investment strategy of each account and the investment strategy of the other accounts and potential conflicts in the allocation of investment opportunities among the accounts. In addition, in certain instances, a portfolio manager may take conflicting positions in a particular security. For example, a portfolio manager may sell short a security for one account that another account holds long, or may take a long position in a security for one account that the portfolio manager has sold short for another account. RSIM seeks to identify potential conflicts of interest resulting from a portfolio manager's management of multiple accounts, and has adopted policies and procedures, including a Code of Ethics, designed to address such conflicts. RSIM and each of the portfolio managers attempt to resolve any conflicts in a manner that is generally fair over time to all of its clients. RSIM may give advice and take actions with respect to any of its clients that may differ from advice given or the timing or nature of action taken with respect to any particular account so long as it is RSIM's policy, to the extent practicable, to allocate investment opportunities over time on a fair and equitable basis relative to other accounts. It is RSIM's policy that when the amount of securities of a particular issuer available to RSIM's client accounts in an initial public offering is insufficient to meet the requirements of each account for which a portfolio manager has determined that the purchase of such securities is appropriate, RSIM generally will allocate those securities among those accounts based on the size of each account as of the close of business on the preceding day. It is also RSIM's policy that it may aggregate sale and purchase orders of securities for accounts with similar orders being made simultaneously for other clients if, in RSIM's reasonable judgment, such aggregation is reasonably likely to result generally in lower per-share brokerage commission costs. In many instances, the purchase or sale of securities for accounts will be effected simultaneously with the purchase or sale of like securities for other accounts. Such transactions may be made at slightly different prices, due to the volume of securities purchased or sold. In such event, each client may be charged or credited, as the case may be, the average transaction price of all securities purchased or sold in such transaction. As a result, however, the price may be less favorable to a client than it would be if similar transactions were not being executed concurrently for other accounts. (5) As is typical for many money managers, potential conflicts of interest may arise related to (a) Turner's management of accounts including the Fund where not all accounts are able to participate in a desired IPO, or other limited opportunity, (b) the use of soft dollars and other brokerage practices, (c) the voting of proxies, (d) employee personal securities trading, (e) the side by side management of accounts with performance based fees and (f) accounts with fixed fees, and relating to a variety of other circumstances. In all cases, Turner believes it has written policies and procedures in place reasonably designed to prevent violations of the federal securities laws and to prevent material conflicts of interest from arising. Please see Turner's Form ADV, Part II for a description of some of its policies and procedures in this regard. (6) BB&A is a subadviser and adviser to other accounts whose investment focus may be similar to those of the fund. BB&A currently has the capacity to manage the fund and these other accounts, and the performance of the fund should not be adversely affected. Management of multiple funds and accounts may create potential conflicts of interest relating to the allocation of investment opportunities, and the aggregation and allocation of trades. BB&A endeavors at all times to manage all accounts in a fair and equitable manner by maintaining policies and procedures relating to allocation and brokerage practices. The Investment Policy Committee plans to manage mutual funds, separate accounts, wrap accounts and subadvised accounts so as not to exceed BB&A's ability to actively and proficiently manage all accounts. Statement of Additional Information - Nov. 29, 2005 Page 109 (7) The management of the fund and other accounts could result in potential conflicts of interest if the fund and other accounts have different objectives, benchmarks, and fees because the portfolio manager and his team must allocate time and investment expertise across multiple accounts, including the fund. The portfolio managers and their team manage the fund and other accounts utilizing a model portfolio approach that groups similar accounts within a model portfolio. UBS manages accounts according to the appropriate model portfolio, including where possible, those accounts that have specific investment restrictions. Accordingly, portfolio holdings, position sizes, and industry and sector exposures tend to be similar across accounts, which may minimize the potential for conflicts of interest. If a portfolio manager identifies a limited investment opportunity that may be suitable for more than one account or model portfolio, the fund may not be able to take full advantage of that opportunity due to an allocation of filled purchase or sale orders across all eligible model portfolios and accounts. To deal with these situations, UBS has adopted procedures for allocating portfolio trades across multiple accounts to provide fair treatment to all accounts. The management of personal accounts by a portfolio manager may also give rise to potential conflicts of interest. UBS and the fund have adopted Codes of Ethics that govern personal trading but there is no assurance that the Codes will adequately address all such conflicts. (8) Kenwood is an affiliate of Ameriprise Financial. The potential conflicts, responsibilities, policies and procedures described in paragraph (2) also apply to Kenwood. (9) Certain conflicts of interest may arise in connection with the management of multiple portfolios. Potential conflicts include, for example, conflicts among investment strategies and conflicts in the allocation of investment opportunities. American Century has adopted policies and procedures that are designed to minimize the effects of these conflicts. Responsibility for managing American Century client portfolios is organized according to investment discipline. Investment disciplines include, for example, quantitative equity, small- and mid-cap growth, large-cap growth, value, international, fixed income, asset allocation, and sector funds. Within each discipline are one or more portfolio teams responsible for managing specific client portfolios. Generally, client portfolios with similar strategies are managed by the same team using the same objective, approach, and philosophy. Accordingly, portfolio holdings, position sizes, and industry and sector exposures tend to be similar across similar portfolios, which minimizes the potential for conflicts of interest. For each investment strategy, one portfolio is generally designated as the "policy portfolio." Other portfolios with similar investment objectives, guidelines and restrictions are referred to as "tracking portfolios." When managing policy and tracking portfolios, a portfolio team typically purchases and sells securities across all portfolios that the team manages. American Century's trading systems include various order entry programs that assist in the management of multiple portfolios, such as the ability to purchase or sell the same relative amount of one security across several funds. In some cases a tracking portfolio may have additional restrictions or limitations that cause it to be managed separately from the policy portfolio. Portfolio managers make purchase and sale decisions for such portfolios alongside the policy portfolio to the extent the overlap is appropriate, and separately, if the overlap is not. American Century may aggregate orders to purchase or sell the same security for multiple portfolios when it believes such aggregation is consistent with its duty to seek best execution on behalf of its clients. Orders of certain client portfolios may, by investment restriction or otherwise, be determined not available for aggregation. American Century has adopted policies and procedures to minimize the risk that a client portfolio could be systematically advantaged or disadvantaged in connection with the aggregation of orders. To the extent equity trades are aggregated, shares purchased or sold are generally allocated to the participating portfolios pro rata based on order size. Because initial public offerings (IPOs) are usually available in limited supply and in amounts too small to permit across-the-board pro rata allocations, American Century has adopted special procedures designed to promote a fair and equitable allocation of IPO securities among clients over time. Fixed income securities transactions are not executed through a centralized trading desk. Instead, portfolio teams are responsible for executing trades with broker/dealers in a predominantly dealer marketplace. Trade allocation decisions are made Statement of Additional Information - Nov. 29, 2005 Page 110 by the portfolio manager at the time of trade execution and orders entered on the fixed income order management system. Finally, investment of American Century's corporate assets in proprietary accounts may raise additional conflicts of interest. To mitigate these potential conflicts of interest, American Century has adopted policies and procedures intended to provide that trading in proprietary accounts is performed in a manner that does not give improper advantage to American Century to the detriment of client portfolios. (10) Actual or apparent conflicts of interest may arise when a portfolio manager has day-to-day management responsibilities with respect to more than one portfolio or other account. More specifically, portfolio managers who manage multiple portfolios and /or other accounts are presented with the following potential conflicts: o The management of multiple portfolios and/or other accounts may result in a portfolio manager devoting unequal time and attention to the management of each portfolio and/or other account. Davis Advisors seeks to manage such competing interests for the time and attention of portfolio managers by having portfolio managers focus on a particular investment discipline. Most other accounts managed by a portfolio manager are managed using the same investment models that are used in connection with the management of the portfolios. o If a portfolio manager identifies a limited investment opportunity which may be suitable for more than one portfolio or other account, a portfolio may not be able to take full advantage of that opportunity due to an allocation of filled purchase or sale orders across all eligible portfolios and other accounts. To deal with these situations, Davis Advisors has adopted procedures for allocating portfolio transactions across multiple accounts. o With respect to securities transactions for the portfolios, Davis Advisors determines which broker to use to execute each order, consistent with its duty to seek best execution of the transaction. However, with respect to certain other accounts (such as mutual funds, other pooled investment vehicles that are not registered mutual funds, and other accounts managed for organizations and individuals), Davis Advisors may be limited by the client with respect to the selection of brokers or may be instructed to direct trades through a particular broker. In these cases, Davis Advisors may place separate, non-simultaneous, transactions for a portfolio and another account which may temporarily affect the market price of the security or the execution of the transaction, or both, to the detriment of the portfolio or the other account. o Finally, substantial investment of Davis Advisor or Davis Family assets in certain mutual funds may lead to conflicts of interest. To mitigate these potential conflicts of interest, Davis Advisors has adopted policies and procedures intended to ensure that all clients are treated fairly over time. Davis Advisors does not receive an incentive based fee on any account. (11) GSAM's portfolio managers are often responsible for managing one or more funds as well as other accounts, including proprietary accounts, separate accounts and other pooled investment vehicles, such as unregistered hedge funds. A portfolio manager may manage a separate account or other pooled investment vehicle which may have materially higher fee arrangements than the fund and may also have a performance-based fee. The side-by-side management of these funds may raise potential conflicts of interest relating to cross trading, the allocation of investment opportunities and the aggregation and allocation of trades. GSAM has a fiduciary responsibility to manage all client accounts in a fair and equitable manner. It seeks to provide best execution of all securities transactions and aggregate and then allocate securities to client accounts in a fair and timely manner. To this end, GSAM has developed policies and procedures designed to mitigate and manage the potential conflicts of interest that may arise from side-by-side management. In addition, GSAM has adopted policies limiting the circumstances under which cross-trades may be effected between a fund and another client account. GSAM conducts periodic reviews of trades for consistency with these policies. Statement of Additional Information - Nov. 29, 2005 Page 111 Due to GSAM's internal policies, GSAM portfolio managers are generally prohibited from purchasing shares of sub-advised funds for which they have primary responsibility. (12) Individual investment professionals at Wellington Management manage multiple portfolios for multiple clients. These accounts may include mutual funds, separate accounts (assets managed on behalf of institutions such as pension funds, insurance companies, foundations), bank common trust accounts, and hedge funds. The investment professionals generally manage portfolios in several different investment styles. These portfolios may have investment objectives, strategies, time horizons, tax considerations and risk profiles that differ from those of the relevant fund. The Investment Professionals make investment decisions for the relevant fund based on the investment objectives, policies, practices, benchmarks, cash flows, tax and other relevant investment considerations applicable to that portfolio. Consequently, the Investment Professionals may purchase or sell securities, including IPOs, for one portfolio and not another portfolio, and the performance of securities purchased for the relevant fund may vary from the performance of securities purchased for other portfolios. The Investment Professionals or other investment professionals at Wellington Management may place transactions on behalf of other accounts that are directly or indirectly contrary to investment decisions made on behalf of the relevant fund, or make investment decisions that are similar to those made for the relevant fund, both of which have the potential to adversely impact the fund depending on market conditions. For example, the Investment Professionals may purchase a security in one portfolio while appropriately selling that same security in another portfolio. In addition, some of these portfolios have fee structures, including performance fees, that are or have the potential to be higher, in some cases significantly higher, than the fees paid by the relevant fund to Wellington Management. Because incentive payments are tied to revenues earned by Wellington Management, and where noted, to the performance achieved by the manager in each account, the incentives associated with any given fund may be significantly higher or lower than those associated with other accounts managed by a given Investment Professional. Wellington Management's goal is to meet its fiduciary obligation to treat all clients fairly and provide high quality investment services to all of its clients. Wellington Management has adopted and implemented policies and procedures, including brokerage and trade allocation policies and procedures that it believes address the conflicts associated with managing multiple accounts for multiple clients. In addition, Wellington Management monitors a variety of areas, including compliance with primary fund guidelines, the allocation of initial public offerings, and compliance with the firm's Code of Ethics, and places additional investment restrictions on Portfolio Managers who manage hedge funds and certain other accounts. Furthermore, senior investment and business personnel at Wellington Management periodically review the performance of Wellington Management's Investment Professionals. Although Wellington Management does not track the time an Investment Professional spends on a single portfolio, Wellington Management does periodically assess whether an Investment Professional has adequate time and resources to effectively manage the Investment Professional's various client mandates. Statement of Additional Information - Nov. 29, 2005 Page 112 (13) Actual or apparent conflicts of interest may arise when the portfolio manager also has day-to-day management responsibilities with respect to one or more other accounts. These potential conflicts include: Allocation of Limited Time and Attention. Because the portfolio manager manages many accounts, he may not be able to formulate as complete a strategy or identify equally attractive investment opportunities for each of those accounts as if he were to devote substantially more attention to the management of only a few accounts. Allocation of Limited Investment Opportunities. If the portfolio manager identifies an investment opportunity that may be suitable for multiple accounts, the Fund may not be able to take full advantage of that opportunity because the opportunity may need to be allocated among all or many of these accounts or other accounts managed primarily by other portfolio managers of the GAMCO Asset Management, Inc. (GAMCO) and its affiliates. GAMCO does business under the name Gabelli Asset Management Company. Pursuit of Differing Strategies. At times, the portfolio manager may determine that an investment opportunity may be appropriate for only some of the accounts for which he exercises investment responsibility, or may decide that certain of these accounts should take differing positions with respect to a particular security. In these cases, the portfolio manager may execute differing or opposite transactions for one or more accounts, which may affect the market price of the security or the execution of the transactions, or both, to the detriment of one or more of his accounts. Selection of Broker/Dealers. Because of the portfolio manager's position with Gabelli & Company, Inc., an affiliate of GAMCO that is a registered broker-dealer, and his indirect majority ownership interest in Gabelli & Company, Inc., he may have an incentive to use Gabelli & Company, Inc. to execute portfolio transactions for the Fund even if using Gabelli & Company, Inc. is not in the best interest of the fund. Variation in Compensation. A conflict of interest may arise where the financial or other benefits available to the portfolio manager differ among the accounts that he manages. If the structure of GAMCO's management fee or the portfolio manager's compensation differs among accounts (such as where certain funds or accounts pay higher management fees or performance-based management fees), the portfolio manager may be motivated to favor certain funds or accounts over others. The portfolio manager also may be motivated to favor funds or accounts in which he has an investment interest, or in which GAMCO or its affiliates have investment interests. In Mr. Gabelli's case, GAMCO's compensation (and expenses) for the Fund are marginally greater as a percentage of assets than for certain other accounts and are less than for certain other accounts managed by Mr. Gabelli, while his personal compensation structure varies with near-term performance to a greater degree in certain performance fee based accounts than with nonperformance based accounts. In addition, he has investment interests in several of the funds managed by GAMCO and its affiliates. GAMCO and the Fund have adopted compliance policies and procedures that are designed to address the various conflicts of interest that may arise for GAMCO and its staff members. However, there is no guarantee that such policies and procedures will be able to detect and address every situation in which an actual or potential conflict may arise. Statement of Additional Information - Nov. 29, 2005 Page 113 (14) Conflicts of interest may arise in connection with the investment manager's management of the investments of the relevant fund and the investments of the other accounts. Such conflicts may arise with respect to the allocation of investment opportunities among the relevant fund and other accounts with similar investment objectives and policies. An investment manager potentially could use information concerning a fund's transactions to the advantage of other accounts and to the detriment of the relevant. To address potential conflicts of interest that may arise in connection with the investment managers' management of the investments of the relevant fund and the investments of other accounts, Lord Abbett has adopted and implemented a number of policies and procedures. Lord Abbett has adopted Policies and Procedures for Evaluating Best Execution of Equity Transactions, as well as Trading Practices/Best Execution Procedures. The objective of these policies and procedures is to ensure the fair and equitable treatment of transactions and allocation of investment opportunities on behalf of all accounts managed by Lord Abbett. In addition, Lord Abbett's Code of Ethics sets forth general principles for the conduct of employee personal securities transactions in a manner that avoids any actual or potential conflicts of interest with the interest of Lord Abbett's clients including the relevant fund. Moreover, Lord Abbett's Statement of Policy and Procedures on Receipt and Use of Inside Information sets forth procedures for personnel to follow when they have inside information. Lord Abbett is not affiliated with a full service broker-dealer and therefore does not execute any fund transactions through such an entity, a structure that could give rise to additional conflict. Lord Abbett does not conduct any investment bank functions and does not manage any hedge funds. Lord Abbett does not believe that any material conflicts of interest exist in connection with the investment managers' management of the investments of the relevant fund and the investments of other accounts. (15) The fact that Mr. Kaplan has day-to-day management responsibility for more than one client account may create actual, potential or only apparent conflicts of interest. For example, Mr. Kaplan may have an opportunity to purchase securities of limited availability. In this circumstance, Mr. Kaplan is expected to review each account's investment guidelines, restrictions, tax considerations, cash balances, liquidity needs and other factors to determine the suitability of the investment for each account and to ensure that his managed accounts are treated equitably. Mr. Kaplan may also decide to purchase or sell the same security for multiple managed accounts at approximately the same time. To address any conflicts that this situation may create, Mr. Kaplan will generally combine managed account orders (i.e., enter a "bunched" order) in an effort to obtain best execution or a more favorable commission rate. In addition, if orders to buy or sell a security for multiple accounts managed by Mr. Kaplan on the same day are executed at different prices or commission rates, the transactions will generally be allocated by Royce to each of such managed accounts at the weighted average execution price and commission. In circumstances where a bunched order is not completely filled, each account will normally receive a pro-rata portion of the securities based upon the account's level of participation in the order. Royce may under certain circumstances allocate securities in a manner other than pro-rata if it determines that the allocation is fair and equitable under the circumstances and does not discriminate against any account. (16) Donald Smith & Co., Inc. is very sensitive to conflicts of interest that could possibly arise in its capacity of serving as an investment adviser. It remains committed to resolving any and all conflicts in the best interest of its clients. Donald Smith & Co., Inc. is an independent investment advisor with no parent or subsidiary organizations. Additionally, it has no affiliated organizations, brokerage, nor any investment banking activities. Clients include mutual funds, public and corporate pension plans, endowments and foundations, and other separate accounts. Donald Smith & Co., Inc. has put in place systems, policies and procedures, which have been designed to maintain fairness in portfolio management across all clients. Potential conflicts between funds or with other types of accounts are managed via allocation policies and procedures, internal review processes, and direct oversight by Donald G. Smith, President. Statement of Additional Information - Nov. 29, 2005 Page 114 (17) Portfolio Managers at Franklin Portfolio Associates (FPA) may manage one or more mutual funds as well as other types of accounts, including proprietary accounts, separate accounts for institutions and individuals, and other pooled investment vehicles. Portfolio managers make investment decisions for an account or portfolio based on its investment objectives and policies, and other relevant investment considerations. A portfolio manager may manage a separate account or other pooled investment vehicle whose fees may be materially greater than the management fees paid by Small Cap Value Fund and may include a performance-based fee. Management of multiple funds and accounts may create potential conflicts of interest relating to the allocation of investment opportunities, and the aggregation and allocation of trades. FPA has a fiduciary responsibility to all of the clients for which it manages accounts. FPA seeks to provide best execution of all securities transactions and to aggregate securities transactions and then allocate securities to client accounts in a fair and timely manner. FPA has developed policies and procedures, including brokerage and trade allocation policies and procedures, designed to mitigate and manage the potential conflicts of interest that may arise from the management of multiple types of accounts for multiple clients. (18) BHMS's portfolio managers manage one or more mutual funds as well as other types of accounts, such as separate accounts for institutions and individuals, and other pooled investment vehicles. Portfolio managers make investment decisions for an account or portfolio based on its investment objectives and policies, and other relevant investment considerations. (19) BHMS has a fiduciary responsibility to all of the clients for which it manages accounts. BHMS seeks to provide best execution of all securities transactions and to aggregate securities transactions and then allocate securities to client accounts in a fair and timely manner. BHMS has developed policies and procedures, including brokerage and trade allocation policies and procedures, designed to mitigate and manage the potential conflicts of interest that may arise from the management of multiple types of accounts for multiple clients. All clients are managed identically whether BHMS receives an asset based fee, a performance based fee or a combination of the two. All client accounts are treated equally as all purchases and sales of securities are aggregated. (20) RiverSource Investments portfolio managers may manage one or more mutual funds as well as other types of accounts, including hedge funds, proprietary accounts, separate accounts for institutions and individuals, and other pooled investment vehicles. Portfolio managers make investment decisions for an account or portfolio based on its investment objectives and policies, and other relevant investment considerations. A portfolio manager may manage a separate account or other pooled investment vehicle whose fees may be materially greater than the management fees paid by the Fund and may include a performance-based fee. Management of multiple funds and accounts may create potential conflicts of interest relating to the allocation of investment opportunities, and the aggregation and allocation of trades. In addition, RiverSource Investments monitors a variety of areas (e.g., allocation of investment opportunities) and compliance with the firm's Code of Ethics, and places additional investment restrictions on portfolio managers who manage hedge funds and certain other accounts. RiverSource Investments has a fiduciary responsibility to all of the clients for which it manages accounts. RiverSource Investments seeks to provide best execution of all securities transactions and to aggregate securities transactions and then allocate securities to client accounts in a fair and timely manner. RiverSource Investments has developed policies and procedures, including brokerage and trade allocation policies and procedures, designed to mitigate and manage the potential conflicts of interest that may arise from the management of multiple types of accounts for multiple clients. Statement of Additional Information - Nov. 29, 2005 Page 115 Structure of Compensation (1) The compensation of RiverSource Investments employees consists of (i) a base salary, (ii) an annual cash bonus, and (iii) equity incentive awards in the form of stock options and/or restricted stock. The annual cash bonus is based on management's assessment of the employee's performance relative to individual and business unit goals and objectives which, for portfolio managers Joy, Keeley and Truscott, may be based, in part, on achieving certain investment performance goals and retaining and attracting assets under management, and for portfolio manager Bergene, on developing competitive products, managing existing products, and selecting and monitoring subadvisers for RiverSource funds. In addition, subject to certain vesting requirements, the compensation of portfolio managers Joy, Keeley and Truscott, includes an annual award based on the performance of Ameriprise Financial over rolling three-year periods. RiverSource Investments' portfolio managers are provided with a benefit package including life insurance, health insurance and participation in the company's 401(k) plan comparable to that received by other RiverSource Investments employees. Depending upon their job level, RiverSource Investments' portfolio managers may also be eligible for other benefits or perquisites that are available to all RiverSource Investments employees at the same job level. (2) The compensation of RiverSource Investments employees consists of (i) a base salary, and (ii) an annual cash bonus, a portion of which may be subject to a mandatory deferral program. The portfolio manager's annual bonus is based on (i) the fund's assets, (ii) the fund's short-term and long-term tracking error compared to the benchmark index and (iii) the tracking error of two other index funds managed by the portfolio manager compared to the relevant index. Effective Jan. 1, 2005, the portfolio manager's annual bonus will be based on the foregoing factors as well as the performance of other accounts that he manages. RiverSource Investments' portfolio managers are provided benefits packages including life insurance, health insurance and participation in the company's 401(k) plan comparable to that received by other RiverSource Investments employees. Depending upon their job level, RiverSource Investments' portfolio managers may also be eligible for other benefits or perquisites that are available to all RiverSource Investments employees at the same job level. (3) The portfolio manager's compensation as a RiverSource Investments employee consists of (i) a base salary, (ii) an annual cash bonus, a portion of which may be subject to a mandatory deferral program, and (iii) an equity incentive award in the form of stock options and/or restricted stock. The annual bonus is paid from a team bonus pool that is based on both mutual fund and institutional portfolio performance. Funding for the bonus pool is determined by a percentage of the aggregate assets under management in the accounts managed by the portfolio managers, including the Fund, and by the short term (typically one-year) and long-term (typically three year) performance of those accounts in relation to the relevant peer groups. Senior management of RiverSource Investments has the discretion to increase or decrease the size of the bonus pool and to determine the exact amount of each portfolio manager's bonus based on his/her performance as an employee. RiverSource Investments portfolio managers are provided with a benefits package, including life insurance, health insurance, and participation in the company's 401(k) plan, comparable to that received by other RiverSource Investments employees. Depending upon their job level, RiverSource Investments' portfolio managers may also be eligible for other benefits or perquisites that are available to all RiverSource Investments employees at the same job level. (4) The portfolio manager's compensation as a RiverSource Investments employee consists of (i) a base salary, (ii) an annual cash bonus, and (iii) an equity incentive award in the form of stock options and/or restricted stock. An annual bonus is paid from a team bonus pool that is based on both mutual fund and institutional portfolio performance. Funding for the bonus pool is determined by the aggregate market competitive bonus targets for the team of which the portfolio manager is a member and by the short-term (typically one year) and long-term (typically three year) performance of the accounts compared to applicable benchmarks. Senior management of RiverSource Investments has the discretion to increase or decrease the size of the bonus pool and to determine the exact amount of the portfolio manager's bonus based on his/her performance as an employee. RiverSource Investments' portfolio managers are provided Statement of Additional Information - Nov. 29, 2005 Page 116 with a benefits package including life insurance, health insurance and participation in the company's 401(k) plan comparable to that received by other RiverSource Investments employees. Depending upon their job level, RiverSource Investments' portfolio managers may also be eligible for other benefits or perquisites that are available to all RiverSource Investments employees at the same job level. (5) The portfolio manager's compensation as a RiverSource Investments employee consists of (i) a base salary, (ii) an annual cash bonus, a portion of which may be subject to a mandatory deferral program, and (iii) an equity incentive award in the form of stock options and/or restricted stock. The annual bonus is paid from a team bonus pool that is based on both mutual fund and institutional portfolio performance. Funding for the bonus pool is determined by a percentage of the aggregate assets under management in the accounts managed by the portfolio managers, including the Fund, plus a percentage of the assets of the funds they support as research analysts, and by the short-term (typically one year) and long-term (typically three year) performance of those accounts in relation to the relevant peer groups. Senior management of RiverSource Investments has the discretion to increase or decrease the size of the bonus pool and to determine the exact amount of each portfolio manager's bonus based on his performance as an employee. RiverSource Investments portfolio managers are provided with a benefits package, including life insurance, health insurance, and participation in company 401(k) plan, comparable to that received by other RiverSource Investments employees. Depending upon their job level, RiverSource Investments portfolio managers may also be eligible for other benefits or perquisites that are available to all RiverSource Investments employees at the same job level. (6) RSIM is an employee-owned investment firm. The firm has two separate investment advisory operating divisions, each with separate compensation and profit sharing structures. Each of the firm's portfolio managers is part of the Growth Group or the Value Group. Messrs. Wallace and Seabern are members of the Growth Group (the "Group"). In establishing salaries and bonuses, RSIM considers information regarding industry compensation levels, which is prepared by a leading consulting firm. RSIM sets salary and bonus levels by reference to other investment firms investing in similar categories. In consultation with RSIM's Co-Chief Executive Officers, the leaders of the Group, who include Mr. Wallace, determined all salaries and bonuses for the Group for the fiscal year ended Dec. 31, 2004. Salaries were based on industry standards, as described above. Bonuses within the Group were based on a number of factors, including (1) pre-tax investment performance for each account managed by a portfolio manager against a relevant peer group over one-and three-year periods, with an emphasis on the most recent one-year period, and (2) experience. Assets under management did not directly affect any individual's salary or bonus, although the amount of the Group's assets under management affected the fee revenue attributable to the Group, which in turn affected the maximum amount of money available for the Group's aggregate salaries and bonuses. In addition, the Group's portfolio managers participated in the profits of the Group based on their profit sharing percentages. The Group's leaders, in consultation with RSIM's Co-Chief Executive Officers, set these percentages at the beginning of each year based on a number of factors, including tenure, assets under management, long-term investment performance (compared to appropriate benchmarks), and overall contribution to the Group's investment process. Some of the Group's portfolio managers also have an equity interest in RS Investments and so participate in overall firm profits in addition to Group profits. (7) Turner's investment professionals receive a base salary commensurate with their level of experience. Turner's goal is to maintain competitive base salaries through review of industry standards, market conditions, and salary surveys. Bonus compensation, which is a multiple of base salary, is computed annually based on the one year performance of each individual's sector and portfolio assignments relative to appropriate market benchmarks. In addition, each employee is eligible for equity ownership and equity owners share the firm's profits. Most of the members of the Investment Team and all Portfolio Managers are equity owners of Turner. This compensation and ownership structure provides incentives to attract and retain highly qualified people, as each member of the firm has the opportunity to share directly in the accomplishments of the business. Statement of Additional Information - Nov. 29, 2005 Page 117 The objective performance criteria noted above accounts for 90% of the bonus calculation. The remaining 10% is based upon subjective, "good will" factors including teamwork, interpersonal relations, the individual's contribution to overall success of the firm, media and client relations, presentation skills, and professional development. Portfolio managers/analysts are reviewed on an annual basis. The Chief Investment Officer is responsible for setting base salaries, bonus targets, and making all subjective judgments related to an investment professional's compensation. The CIO is also responsible for identifying investment professionals who should be considered for equity ownership on an annual basis. (8) BB&A compensates its investment professionals with salaries, year-end profit sharing, bonuses, account retention commissions, and incentive bonuses based upon account performance. Salaries are competitive with industry standards. Account management commissions are a specific percentage of the account fees paid to the portfolio account manager(s) while the manager and account are still with the firm. Performance bonuses are paid as a specific percentage of the account fees to the portfolio manager(s) when that account's annual returns occur in the top quartile of the returns achieved by other managers having the same investment objective as the subject product. (9) The compensation received by portfolio managers at UBS includes a base salary and incentive compensation based on their personal performance. UBS's compensation and benefits programs are designed to provide its investment professionals with incentives to excel, and to promote an entrepreneurial, performance-oriented culture. They also align the interests of the investment professionals with the interests of UBS's clients. Overall compensation can be grouped into four categories: 1) Competitive salary, benchmarked to maintain competitive compensation opportunities; 2) Annual bonus, tied to individual contributions and investment performance; 3) UBS equity awards, promoting company-wide success and employee retention; 4) Partnership Incentive Program (PIP), a phantom-equity-like program for key senior staff. The base salary is used to recognize the experience, skills and knowledge that the investment professionals bring to their roles. Salary levels are monitored and adjusted periodically in order to remain competitive within the investment management industry. Annual bonuses are strictly and rigorously correlated with performance. As such, annual incentives can be highly variable, and are based on three components: 1) the firm's overall business success; 2) the performance of the respective asset class and/or investment mandate; and 3) an individual's specific contribution to the firm's results. UBS strongly believes that tying bonuses to both long-term (3-year) and shorter-term (1-year) portfolio performance closely aligns the investment professionals' interests with those of UBS's clients. Senior investment professionals, such as Messrs. Graham and Wabnik, may receive a portion of their annual performance-based incentive in the form of deferred or restricted UBS AG shares or employee stock options. UBS believes that this reinforces the critical importance of creating long-term business value and also serves as an effective retention tool as the equity shares typically vest over a number of years. Broader equity share ownership is encouraged for all employees through "Equity Plus". This long-term incentive program gives employees the opportunity to purchase UBS stock with after-tax funds from their bonus or salary. Two UBS stock options are given for each share acquired and held for two years. UBS feels this engages its employees as partners in the firm's success, and helps to maximize its integrated business strategy. (10) The portfolio managers' compensation as RiverSource Investments employees consists of (i) a base salary, (ii) an annual cash bonus, a portion of which may be subject to a mandatory deferral program, and (iii) equity incentive awards in the form of stock options and/or restricted stock. The annual bonus is paid from a team bonus pool that is based on both mutual fund, institutional portfolio and hedge fund performance. Funding for the portion of the bonus pool related to mutual fund and institutional portfolio management is determined by a percentage of the aggregate assets under management in the accounts managed by the portfolio managers, including the Fund, and by the short term (typically one-year) and long-term (typically three-year) performance of those accounts in relation to the relevant peer groups. Funding for the portion of the bonus pool related to hedge fund management is based on a Statement of Additional Information - Nov. 29, 2005 Page 118 percentage of the hedge fund performance fee. Senior management of RiverSource Investments has the discretion to increase or decrease the size of the bonus pool and to determine the exact amount of each portfolio manager's bonus based on his/her performance as an employee. RiverSource Investments portfolio managers are provided with a benefits package, including life insurance, health insurance, and participation in the company's 401(k) plan, comparable to that received by other RiverSource Investments employees. Depending upon their job level, RiverSource Investments' portfolio managers may also be eligible for other benefits or perquisites that are available to all RiverSource Investments employees at the same job level. (11) Messrs. Hurwitz and Kelley are both equity owners of Kenwood. Their compensation consists of a salary, plus a pro rata share of the annual net earnings of Kenwood, some of which derives from fees paid by the fund. Messrs. Hurwitz and Kelley are provided with a benefits package, including life insurance, health insurance, and participation in a company 401(k) plan, comparable to that received by other employees of Kenwood. Messrs. Hurwitz and Kelley are also eligible for certain benefits that are available to all equity owners of Kenwood. (12) The compensation of American Century's portfolio managers is structured to align the interests of portfolio managers with those of the shareholders whose assets they manage. It includes the components described below, each of which is determined with reference to a number of factors, such as overall performance, market competition, and internal equity. Compensation is not directly tied to the value of assets held in client portfolios. Base Salary Portfolio managers receive base pay in the form of a fixed annual salary. Bonus A significant portion of portfolio manager compensation takes the form of an annual incentive bonus tied to performance. Bonus payments are determined by a combination of factors. One factor is fund investment performance. For policy portfolios, investment performance is measured by a combination of one- and three-year pre-tax performance relative to a pre-established, internally-customized peer group and/or market benchmark. Custom peer groups are constructed using all the funds in appropriate Lipper or Morningstar categories as a starting point. Funds are then eliminated from the peer group based on a standardized methodology designed to result in a final peer group that more closely represents the fund's true peers based on internal investment mandates and that is more stable (i.e., has less peer turnover) over the long-term. In cases where a portfolio manager has responsibility for more than one policy portfolio, the performance of each is assigned a percentage weight commensurate with the portfolio manager's level of responsibility. With regard to tracking portfolios, investment performance may be measured in a number of ways. The performance of the tracking portfolio may be measured against a customized peer group and/or market benchmark as described above for policy portfolios. Alternatively, the tracking portfolio may be evaluated relative to the performance of its policy portfolio, with the goal of matching the policy portfolio's performance as closely as possible. This is the case for the Small Cap Equity Fund and Discovery Fund. In some cases, the performance of a tracking portfolio is not separately considered. Rather, the performance of the policy portfolio is the key metric. This is the case for the Aggressive Growth Fund. A second factor in the bonus calculation relates to the performance of all American Century funds managed according to a particular investment style, such as U.S. growth or value. Performance is measured for each product individually as described above and then combined to create an overall composite for the product group. These composites may measure one-year performance (equal weighted) or a combination of one- and three-year performance (asset weighted) depending on the portfolio manager's responsibilities and products managed. This feature is designed to encourage effective teamwork among portfolio management teams in achieving long-term investment success for similarly styled portfolios. Statement of Additional Information - Nov. 29, 2005 Page 119 A portion of some portfolio managers' bonuses may be tied to individual performance goals, such as research projects and the development of new products. Finally, portfolio manager bonuses may occasionally be affected by extraordinarily positive or negative financial performance by American Century Companies, Inc. (ACC), the advisor's privately-held parent company. This feature has been designed to maintain investment performance as the primary component of portfolio manager bonuses while also providing a link to the advisor's ability to pay. Restricted Stock Plans Portfolio managers are eligible for grants of restricted stock of ACC. These grants are discretionary, and eligibility and availability can vary from year to year. The size of an individual's grant is determined by individual and product performance as well as other product-specific considerations. Grants can appreciate/depreciate in value based on the performance of the ACC stock during the restriction period (generally three years). Deferred Compensation Plans Portfolio managers are eligible for grants of deferred compensation. These grants are used in very limited situations, primarily for retention purposes. Grants are fixed and can appreciate/depreciate in value based on the performance of the American Century mutual funds in which the portfolio manager chooses to invest them. (13) Kenneth Feinberg's compensation as a Davis Advisors employee consists of (i) a base salary, (ii) an annual bonus equal to a percentage of growth in Davis Advisors' profits, (iii) awards of equity ("Units") in Davis Advisors including Units, options on Units, and/or phantom Units, and (iv) an incentive plan whereby Davis Advisors purchases shares in selected funds managed by Davis Advisors. At the end of specified periods, generally five years following the date of purchase, some, all, or none of the fund shares will be registered in the employee's name based on fund performance after expenses on a pre-tax basis versus the S&P 500 Index and versus peer groups as defined by Morningstar or Lipper. Davis Advisors' portfolio managers are provided benefits packages including life insurance, health insurance, and participation in company 401(k) plan comparable to that received by other company employees. Christopher Davis's annual compensation as an employee and general partner of Davis Advisors consists of a base salary. Davis Advisors' portfolio managers are provided benefits packages including life insurance, health insurance, and participation in company 401(k) plan comparable to that received by other company employees. (14) GSAM and the GSAM Growth team's (the Growth Team) compensation package for its Portfolio Managers is comprised of a base salary and performance bonus. The performance bonus is first and foremost tied to the Growth Team's pre-tax performance for their clients and the Growth Team's total revenues for the past year, which in part is derived from advisory fees and for certain accounts, performance based fees. The Growth Team measures performance on a market cycle basis, which typically measures a three-to-seven year period, rather than being focusing on short-term gains in their strategies or short-term contributions from a Portfolio Manager in any given year. The performance bonus for Portfolio Managers is significantly influenced by the following criteria: (1) whether the team performed consistently with objectives and client commitments; (2) whether the team's performance exceeded performance benchmarks over a market cycle; (3) consistency of performance across accounts with similar profiles; and (4) communication with other Portfolio Managers within the research process. Benchmarks for measuring performance can be either broad-based or narrow-based indices, which will vary based on client expectations. The benchmark for the Fundamental Growth Fund is the Russell 1000 Growth Index. The Growth Team also considers each Portfolio Manager's individual performance, his or her contribution to the overall performance of the strategy long term, and his/her ability to work as a member of the Team. Statement of Additional Information - Nov. 29, 2005 Page 120 GSAM and the Growth Team's decision may also be influenced by the following: the performance of GSAM, the profitability of Goldman, Sachs & Co., and anticipated compensation levels among competitor firms. (15) Wellington Management's compensation structure is designed to attract and retain high-caliber investment professionals necessary to deliver high quality investment management services to its clients. Wellington Management's compensation of the investment professionals primarily responsible for the day-to-day management of the Fund includes a base salary and incentive components. The base salary for each investment professional who is a partner of Wellington Management is determined by the Managing Partners of the firm. A partner's base salary is generally a fixed amount that may change as a result of an annual review. The base salary for all other Investment Professionals is determined by the Investment Professional's experience and performance in their role as an Investment Professional. Base salaries for non-partners are reviewed annually and may be adjusted based on the recommendation of the Investment Professional's business manager, using guidelines established by Wellington Management's Compensation Committee, which has final oversight responsibility for base salaries for non-partners. Each Investment Professional is eligible to receive an incentive payment based on the revenues earned by Wellington Management from the fund managed by that Investment Professional and generally each other portfolio managed by such Investment Professional. Each Investment Professional's incentive payment relating to the fund is linked to the gross pre-tax performance of the fund compared to the appropriate benchmark or peer group over one and three year periods, with an emphasis on three year results. Wellington Management applies similar incentive structures (although the benchmarks or peer groups, time periods and rates may differ) to other portfolios managed by these Investment Professionals, including portfolios with performance fees. Portfolio-based incentives across all portfolios managed by an Investment Professional can, and typically do, represent a significant portion of an Investment Professional's overall compensation; incentive compensation varies significantly by individual and can vary significantly from year to year. Some Investment Professionals are also eligible for bonus payments based on their overall contribution to Wellington Management's business operations. Senior management at Wellington Management may reward individuals as it deems appropriate based on factors other than portfolio performance. Each partner of Wellington Management is also eligible to participate in a partner-funded retirement plan. Messrs. Abrams, Boselli and Shilling are partners of the firm. (16) Mr. Gabelli receives incentive-based variable compensation based on a percentage of net revenues received by GAMCO for managing Select Value Fund. Net revenues are determined by deducting from gross investment management fees paid by the Fund the firm's expenses (other than Mr. Gabelli's compensation) allocable to the Fund. Additionally, he receives similar incentive-based variable compensation for managing other accounts within the firm. This method of compensation is based on the premise that superior long-term performance in managing a portfolio should be rewarded with higher compensation as a result of growth of assets through appreciation and net investment activity. One of the other registered investment companies managed by Mr. Gabelli has a performance (fulcrum) fee arrangement for which his compensation is adjusted up or down based on the performance of the investment company relative to an index. Five closed-end registered investment companies managed by Mr. Gabelli have arrangements whereby GAMCO will receive only its investment advisory fee attributable to the liquidation value of outstanding preferred stock (and Mr. Gabelli would only receive his percentage of such advisory fee) if certain performance levels are met. Mr. Gabelli manages other accounts with performance fees. Compensation for managing these accounts has two components. One component of the fee is based on a percentage of net revenues received by GAMCO for managing the account. The second component is based on absolute performance of the account, with respect to which a percentage of such performance fee is paid to Mr. Gabelli. As an executive officer of the GAMCO parent company, Gabelli Asset Management Inc., Mr. Gabelli also receives ten percent of the net operating profits of the parent company. Mr. Gabelli receives no base salary, no annual bonus and no stock options. Statement of Additional Information - Nov. 29, 2005 Page 121 (17) Lord Abbett compensates its portfolio managers on the basis of salary, bonus and profit sharing plan contributions. Base salaries are assigned at a level that takes into account the portfolio manager's experience, reputation and competitive market rates. Fiscal year-end bonuses, which can be a substantial percentage of base level compensation, are determined after an evaluation of various factors. These factors include the portfolio manager's investment results and style consistency, the dispersion among funds with similar objectives, the risk taken to achieve the fund returns, the funds' size and cash flows, and similar factors. Investment results are evaluated based on an assessment of the portfolio manager's three- and five year investment returns on a pre-tax basis vs. both the appropriate style benchmarks and the appropriate peer group rankings. Finally, there is a component of the bonus that reflects leadership and management of the investment team. The evaluation does not follow a formulaic approach, but rather is reached following a review of these factors. No part of the bonus payment is based on the portfolio manager's assets under management, the revenues generated by those assets, or the profitability of the portfolio manager's unit. Lord Abbett does not manage hedge funds. Lord Abbett may designate a bonus payment to a manager for participation in the firm's senior incentive compensation plan, which provides for a deferred payout over a five-year period. The plan's earnings are based on the overall asset growth of the firm as a whole. Lord Abbett believes this incentive focuses portfolio managers on the impact their fund's performance has on the overall reputation of the firm as a whole and encourages exchanges of investment ideas among investment professionals managing different mandates. Lord Abbett provides a 401(k) profit-sharing plan for all eligible employees. Contributions to a portfolio manager's profit-sharing account are based on a percentage of the portfolio manager's total base and bonus paid during the fiscal year, subject to a specified maximum amount. The assets of this profit-sharing plan are entirely invested in Lord Abbett-sponsored funds. (18) Mr. Kaplan receives from Royce a base salary, a performance bonus, a "Partners Pool" participation based primarily on registered investment company and other client account revenues generated by Royce and a benefits package. Mr. Kaplan's compensation is reviewed and may be modified from time to time as appropriate to reflect changes in the market, as well as to adjust the factors used to determine bonuses. Base Salary - Mr. Kaplan is paid a base salary. In setting the base salary, Royce seeks to be competitive in light of Mr. Kaplan's experience and responsibilities. Performance Bonus - Mr. Kaplan receives a quarterly performance bonus that is revenue-based, and therefore in part is based on the value of the accounts' net assets, determined with reference to each of the registered investment company accounts he manages. For Mr. Kaplan, the revenue-based performance bonus applicable to the registered investment company accounts he manages is subject to upward or downward adjustment or elimination based on a combination of 3-year and 5-year risk-adjusted pre-tax returns of such accounts relative to all small-cap objective funds with three years of history tracked by Morningstar and the 5-year absolute returns of such accounts relative to 5-year U.S. Treasury Notes. Payment of the performance bonus may be deferred as described below, and any amounts deferred are forfeitable, if a portfolio manager is terminated by Royce with or without cause or resigns. The amount of the deferred performance bonus will appreciate or depreciate during the deferral period, based on the total return performance of one or more Royce registered investment company accounts selected by the portfolio manager at the beginning of the deferral period. The amount deferred will depend on the portfolio manager's total direct, indirect beneficial, and deferred unvested bonus investments in the Royce registered investment company account for which he is receiving portfolio management compensation. Statement of Additional Information - Nov. 29, 2005 Page 122 Partners Pool - Each portfolio manager, as well as other senior firm employees, participates in a quarterly pool relating to Royce's net operating revenues adjusted for some imputed expenses. A portion of this participation may be deferred for three years. The deferred portion is also forfeitable if the portfolio manager is terminated with or without cause or resigns, and appreciates or depreciates during the deferral period based on the total return of a basket of registered investment company accounts managed by Royce. Benefit Package - Each portfolio manager also receives benefits standard for all Royce employees, including health care and other insurance benefits, and participation in Royce's 401(k) Plan and Money Purchase Pension Plan. From time to time, on a purely discretionary basis, portfolio managers may also receive options to acquire stock in Royce's parent company, Legg Mason, Inc. Those options typically represent a small portion of a portfolio manager's overall compensation. (19) GSAM and the GSAM Value Team's (the Value Team) compensation package for its Portfolio Managers is comprised of a base salary and a performance bonus. The performance bonus is a function of each Portfolio Manager's individual performance and his or her contribution to overall team performance. Portfolio Managers are rewarded for their ability to outperform a benchmark while managing risk appropriately. Compensation is also influenced by the Value Team's total revenues for the past year, which in part is derived from advisory fees and for certain accounts, performance based fees. Anticipated compensation levels among competitor firms may also be considered, but is not a principal factor. The performance bonus is significantly influenced by a 3-year period of investment performance. The following criteria are considered: o Individual performance (relative, absolute) o Team Performance (relative, absolute) o Consistent performance that aligns with clients' objectives o Achievement of top rankings (relative and competitive) The investment performance mentioned above is considered only on a pre-tax basis. As it relates to relative performance, the benchmark for this Fund is the Russell 2000 Value Index. As mentioned above, performance is measured on a 3-year basis. (20) Other Compensation. GSAM offers a number of additional benefits/deferred compensation programs for all Portfolio Managers including (i) a 401(k) program that enables employees to direct a percentage of their pretax salary and bonus income into a tax-qualified retirement plan; (ii) a profit sharing program to which Goldman Sachs & Co. makes a pretax contribution; and (iii) investment opportunity programs in which certain professionals are eligible to participate subject to certain net worth requirements. Portfolio Managers may also receive grants of restricted stock units and/or stock options as part of their compensation. Certain GSAM Portfolio Managers may also participate in the firm's Partner Compensation Plan, which covers many of the firm's senior executives. In general, under the Partner Compensation Plan, participants receive a base salary and a bonus (which may be paid in cash or in the form of an equity-based award) that is linked to Goldman Sachs' overall financial performance. (21) The compensation for portfolio managers, analysts and traders at Donald Smith consists of a base salary, a partnership interest in the firm's profits, and possibly an additional, discretionary bonus. This discretionary bonus can exceed 100% of the base salary if performance for clients exceeds established benchmarks. The current benchmark utilized is the Russell 2000 Value Index. Additional distribution of firm ownership is a strong motivation for continued employment at Donald Smith & Co., Inc. Administrative personnel are also given a bonus as a function of their contribution and the profitability of the firm. Statement of Additional Information - Nov. 29, 2005 Page 123 (22) FPA's portfolio managers are encouraged and expected to work as a team. Compensation is commensurate with their performance and that of the firm. The percentage of compensation derived from base salary, bonus and other incentives varies widely across the firm and is dependent on the area of responsibility and seniority of the employee. FPA feels that the salary component of its compensation structure is competitive with other investment managers. All of our investment professionals participate in a deferred compensation arrangement; they receive a share of the firm's profits which are allocated to an account, payable at a future point in time, provided they remain with the firm. (23) In addition to base salary, all of BHMS's portfolio managers and analysts share in a bonus pool that is distributed semi-annually. The amount of bonus compensation is based on quantitative and qualitative factors. Analysts and portfolio managers are rated on the value that they add to the team-oriented investment process. Compensation is not tied to a published or private benchmark. It is important to understand that contributions to the overall investment process may include not recommending securities in an analyst's sector if there are no compelling opportunities in the industries covered by that analyst. In addition, many BHMS employees, including all portfolio managers and analysts, have equity ownership in the firm through "phantom stock" in BHMS, and participate in a long-term incentive plan with Old Mutual Asset Management (US), an affiliate of BHMS. Also, all partners of the firm receive, on a quarterly basis, a share of the firm's profits, which are, to a great extent, related to the performance of the entire investment team. (24) The portfolio manager's compensation as a RiverSource Investments employee consists of (i) a base salary, (ii) an annual cash bonus, a portion of which may be subject to a mandatory deferral program, and (iii) an equity incentive award in the form of stock options and/or restricted stock. The annual bonus is paid from a team bonus pool that is based on mutual fund, institutional portfolio and hedge fund performance. In addition, where portfolio managers invest in a hedge fund managed by RiverSource Investments, they receive a cash reimbursement for the fees charged on their hedge fund investments. With respect to mutual funds and institutional portfolios, funding for the bonus pool is determined by a percentage of the aggregate assets under management in these accounts managed by the portfolio managers, including the Fund, and by the short-term (typically one-year) and long-term (typically three-year) performance of those accounts in relation to the relevant peer groups. With respect to hedge funds, funding for the bonus pool is a percentage of performance fees earned on the hedge funds managed by the portfolio managers. The percentage of the hedge fund performance fees used to fund the bonus pool is determined annually based on the performance of the mutual funds managed by the portfolio managers. Senior management of RiverSource Investments has the discretion to increase or decrease the size of the bonus pool and to determine the exact amount of each portfolio manager's bonus based on his performance as an employee. RiverSource Investments portfolio managers are provided with a benefits package, including life insurance, health insurance, and participation in company 401(k) plan, comparable to that received by other RiverSource Investments employees. Depending upon their job level, RiverSource Investments portfolio managers may also be eligible for other benefits or perquisites that are available to all RiverSource Investments employees at the same job level. (25) The portfolio manager's compensation as a RiverSource Investments employee consists of (i) a base salary, (ii) an annual cash bonus, a portion of which may be subject to a mandatory deferral program, and (iii) an equity incentive award in the form of stock options and/or restricted stock. The annual bonus is paid from a team bonus pool that is based on both mutual fund and institutional portfolio performance. With respect to mutual funds, funding for the bonus pool is determined by a percentage of the aggregate assets under management in mutual funds managed by the portfolio managers, including the Fund, and by the short-term (typically one year) and long-term (typically three year) performance of those accounts in relation to the relevant peer groups and with respect to other accounts, by a percentage of management fees. Senior management of RiverSource Investments has the Statement of Additional Information - Nov. 29, 2005 Page 124 discretion to increase or decrease the size of the bonus pool and to determine the exact amount of each portfolio manager's bonus based on his performance as an employee. RiverSource Investments portfolio managers are provided with a benefits package, including life insurance, health insurance, and participation in company 401(k) plan, comparable to that received by other RiverSource Investments employees. Depending upon their job level, RiverSource Investments portfolio managers may also be eligible for other benefits or perquisites that are available to all RiverSource Investments employees at the same job level. (26) The portfolio manager's compensation as a RiverSource Investments employee consists of (i) a base salary, (ii) an annual cash bonus, a portion of which may be subject to a mandatory deferral program, and (iii) an equity incentive award in the form of stock options and/or restricted stock. The annual bonus is paid from a team bonus pool that is based on both mutual fund and institutional portfolio performance. With respect to mutual funds, funding for the bonus pool is determined by a percentage of the aggregate assets under management in mutual funds managed by the portfolio managers, including the Fund, plus a percentage of the assets of the funds they support as research analysts and by the short-term (typically one year) and long-term (typically three year) performance of those accounts in relation to the relevant peer groups and with respect to other accounts, by a percentage of management fees. Senior management of RiverSource Investments has the discretion to increase or decrease the size of the bonus pool and to determine the exact amount of each portfolio manager's bonus based on his performance as an employee. RiverSource Investments portfolio managers are provided with a benefits package, including life insurance, health insurance, and participation in company 401(k) plan, comparable to that received by other RiverSource Investments employees. Depending upon their job level, RiverSource Investments portfolio managers may also be eligible for other benefits or perquisites that are available to all RiverSource Investments employees at the same job level. (27) The portfolio manager's compensation as a RiverSource Investments employee consists of (i) a base salary, (ii) an annual cash bonus, a portion of which may be subject to a mandatory deferral program, and (iii) equity incentive awards in the form of stock options and/or restricted stock. The annual bonus is based on mutual fund performance. Funding for the bonus pool is determined by a market competitive bonus target for the portfolio manager and by the short-term (typically one-year) performance of the accounts compared to the relevant peer groups. Senior management of RiverSource Investments has the discretion to increase or decrease the size of the bonus pool and to determine the exact amount of the portfolio manager's bonus based on his/her performance as an employee. RiverSource Investments' portfolio managers are provided with a benefits package including life insurance, health insurance and participation in the company's 401(k) plan comparable to that received by other RiverSource Investments employees. Depending upon their job level, RiverSource Investments' portfolio managers may also be eligible for other benefits or perquisites that are available to all RiverSource Investments employees at the same job level. Statement of Additional Information - Nov. 29, 2005 Page 125 ADMINISTRATIVE SERVICES AGREEMENT Each fund has an Administrative Services Agreement with Ameriprise Financial. Under this agreement, the fund pays Ameriprise Financial for providing administration and accounting services. The fee is calculated as follows:
Table 21. Administrative Services Agreement Fee Schedule* - --------------------------------------- --------------------------------------------------------------------------------------- Fund Asset Levels And Breakpoints In Applicable Fees - --------------------------------------- -------------- ----------------- ---------------- ------------------- ----------------- $0 - $500,000,001 - $1,000,000,001 $3,000,000,001 - $12,000,000,001 500,000,000 1,000,000,000 - 3,000,000,000 12,000,000,000 + - --------------------------------------- -------------- ----------------- ---------------- ------------------- ----------------- Discovery 0.080% 0.075% 0.070% 0.060% 0.050% Emerging Markets European Equity Global Balanced Global Bond Global Equity International Aggressive Growth International Equity International Opportunity International Select Value International Small Cap Partners Small Cap Value Small Cap Advantage Small Cap Equity Small Cap Growth Small Company Index Strategic Allocation - --------------------------------------- -------------- ----------------- ---------------- ------------------- ----------------- California Tax-Exempt 0.070% 0.065% 0.060% 0.050% 0.040% Core Bond Diversified Bond High-Yield Bond Income Opportunities Inflation Protected Insured Tax-Exempt Intermediate Tax-Exempt Limited Duration Bond Massachusetts Tax-Exempt Michigan Tax-Exempt Minnesota Tax-Exempt New York Tax-Exempt Ohio Tax-Exempt Selective Short Duration U.S. Government Tax-Exempt Bond Tax-Exempt High Income U.S. Government Mortgage - --------------------------------------- -------------- ----------------- ---------------- ------------------- -----------------
Statement of Additional Information - Nov. 29, 2005 Page 126
- --------------------------------------- --------------------------------------------------------------------------------------- Fund Asset Levels And Breakpoints In Applicable Fees - --------------------------------------- -------------- ----------------- ---------------- ------------------- ----------------- $0 - $500,000,001 - $1,000,000,001 $3,000,000,001 - $12,000,000,001 500,000,000 1,000,000,000 - 3,000,000,000 12,000,000,000 + - --------------------------------------- -------------- ----------------- ---------------- ------------------- ----------------- Aggressive Growth 0.060% 0.055% 0.050% 0.040% 0.030% Balanced Cash Management Disciplined Equity Diversified Equity Dividend Opportunity Equity Value Fundamental Growth Fundamental Value Global Technology Growth Large Cap Equity Large Cap Value Mid Cap Growth Mid Cap Value New Dimensions Precious Metals Real Estate S&P 500 Index Select Value Stock Strategy Aggressive Tax-Exempt Money Market Value - --------------------------------------- -------------- ----------------- ---------------- ------------------- ----------------- Portfolio Builder Aggressive 0.020% 0.020% 0.020% 0.020% 0.020% Portfolio Builder Conservative Portfolio Builder Moderate Portfolio Builder Moderate Aggressive Portfolio Builder Moderate Conservative Portfolio Builder Total Equity - --------------------------------------- -------------- ----------------- ---------------- ------------------- -----------------
* Effective Oct. 1, 2005, the funds' Board approved a change to the Administrative Services Agreement fee schedule under the Administrative Services Agreement between Ameriprise Financial and the funds. The fee is calculated for each calendar day on the basis of net assets as of the close of the preceding business day. Fees paid in each of the last three fiscal periods are shown in the table below. The table also shows the daily rate applied to each fund's net assets as of the last day of the most recent fiscal period. The table is organized by fiscal year end. You can find your fund's fiscal year end in Table 1. Statement of Additional Information - Nov. 29, 2005 Page 127
Table 22. Administrative Fees - ------------------------------------------ ------------------------------------------------------- ------------------ Fund Daily rate Administrative services fees paid in applied to fund assets - ------------------------------------------ ------------------------------------------------------- ------------------ 2005 2004 2003 - --------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending January 31 - --------------------------------------------------------------------------------------------------------------------- Portfolio Builder Aggressive 13,785 N/A N/A 0.020 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Portfolio Builder Conservative 5,969 N/A N/A 0.020 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Portfolio Builder Moderate 23,460 N/A N/A 0.020 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Portfolio Builder Moderate Aggressive 28,002 N/A N/A 0.020 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Portfolio Builder Moderate Conservative 10,779 N/A N/A 0.020 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Portfolio Builder Total Equity 10,959 N/A N/A 0.020 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Small Company Index 784,439 731,549 737,583 0.060 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ S&P 500 Index 319,791 324,551 213,950 0.080 - --------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending March 31 - --------------------------------------------------------------------------------------------------------------------- Equity Value 454,202 451,613 503,915 0.037 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Precious Metals 51,848 52,769 36,584 0.060 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Small Cap Advantage 491,869 371,247 295,220 0.054 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Small Cap Growth 224,042 218,131 162,755 0.080 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Strategy Aggressive 369,709 441,077 507,375 0.050 - --------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending May 31 - --------------------------------------------------------------------------------------------------------------------- Aggressive Growth 24,630 7,449 254(a) 0.060 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Fundamental Growth 31,978 6,428 259(a) 0.060 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Fundamental Value 458,121 271,928 168,023 0.058 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ High Yield Bond 1,219,476 1,227,227 1,034,060 0.046 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Select Value 427,460 240,301 94,457 0.058 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Selective 477,298 598,158 738,688 0.050 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Short Duration U.S. Government 960,018 1,317,413 1,421,675 0.048 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Small Cap Equity 129,820 88,061 32,020 0.080 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Small Cap Value 824,914 676,121 470,468 0.071 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ U.S. Government Mortgage 152,145 204,741 166,561 0.050 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Value 285,752 228,212 161,752 0.060 - --------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending June 30 - --------------------------------------------------------------------------------------------------------------------- California Tax-Exempt 87,771 100,323 111,565 0.040 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Dividend Opportunity 406,110 415,515 457,055 0.037 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Insured Tax-Exempt 166,983 193,412 204,472 0.040 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Massachusetts Tax-Exempt 30,362 37,526 39,417 0.040 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Michigan Tax-Exempt 23,283 30,016 33,309 0.040 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Minnesota Tax-Exempt 163,503 176,718 182,304 0.038 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ New York Tax-Exempt 36,031 43,576 47,766 0.040 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Ohio Tax-Exempt 24,486 31,477 34,268 0.040 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Real Estate 41,449 2,235(b) N/A 0.050 - ---------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2005 Page 128
- ------------------------------------------ ------------------------------------------------------- ------------------ Fund Daily rate Administrative services fees paid in applied to fund assets - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ 2005 2004 2003 - --------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending July 31 - --------------------------------------------------------------------------------------------------------------------- Cash Management 1,016,703 1,171,667 1,445,919 0.025 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Core Bond 78,241 38,539 2,965(c) 0.050 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Disciplined Equity 29,441 6,521 939 0.050 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Discovery 97,528 106,137 85,805 0.060 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Growth 1,370,094 1,523,915 1,469,076 0.045 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Income Opportunities 164,038 81,849 3,160(c) 0.050 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Inflation Protected Securities 61,197 6,834(d) N/A 0.050 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Large Cap Equity 860,387 212,114 27,560 0.048 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Large Cap Value 67,667 41,856 11,000 0.050 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Limited Duration Bond 88,881 53,771 3,184(c) 0.050 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ New Dimensions 4,756,123 5,561,820 5,277,428 0.035 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ For funds with fiscal period ending August 31 - --------------------------------------------------------------------------------------------------------------------- Diversified Bond 1,259,427 1,460,195 1,674,570 0.046 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ For funds with fiscal period ending September 30 - --------------------------------------------------------------------------------------------------------------------- Balanced 524,986 588,644 610,513 0.039 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Diversified Equity Income 1,216,876 942,358 676,319 0.026 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Mid Cap Value 385,071 170,293 58,931 0.050 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Stock 712,884 789,200 768,983 0.034 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Strategic Allocation 383,942 390,084 381,033 0.037 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ 2004 2003 2002 - --------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending October 31 - --------------------------------------------------------------------------------------------------------------------- Emerging Markets 271,857 208,342 234,669 0.098 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ European Equity 78,835 82,084 116,212 0.060 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Global Balanced 59,047 56,559 71,921 0.060 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Global Bond 314,640 311,211 279,674 0.057 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Global Equity 284,795 304,662 463,678 0.058 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Global Technology 131,702 93,713 112,662 0.060 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ International Aggressive Growth 149,750 94,603 N/A 0.080 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ International Equity 88,536 38,014 N/A 0.080 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ International Opportunity 255,871 239,593 357,775 0.058 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ International Select Value 549,050 284,251 N/A 0.074 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ International Small Cap 46,103 13,092 N/A 0.080 - --------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending November 30 - --------------------------------------------------------------------------------------------------------------------- Intermediate Tax-Exempt 69,058 65,453 33,380 0.040 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Mid Cap Growth 1,056,445 868,316 805,649 0.047 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Tax-Exempt Bond 323,368 371,126 375,680 0.040 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Tax-Exempt High Income 1,447,459 1,546,469 1,631,443 0.032 - --------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending December 31 - --------------------------------------------------------------------------------------------------------------------- Tax-Exempt Money Market 45,528 60,388 61,883 0.030 - ------------------------------------------ ----------------- ------------------ ------------------ ------------------
(a) For the period from April 24, 2003 (when shares became publicly available) to May 31, 2003. (b) For the period from March 4, 2004 (when shares became publicly available) to June 30, 2004. (c) For the period from June 19, 2003 (when shares became publicly available) to July 31, 2003. (d) For the period from March 4, 2004 (when shares became publicly available) to July 31, 2004. Third parties with which Ameriprise Financial contracts to provide services for the fund or its shareholders may pay a fee to Ameriprise Financial to help defray the cost of providing administrative and accounting services. The amount of any such fee is negotiated separately with each service provider and does not constitute compensation for investment advisory, distribution, or other services. Payment of any such fee neither increases nor reduces fees or expenses paid by shareholders of the fund. Statement of Additional Information - Nov. 29, 2005 Page 129 TRANSFER AGENCY AGREEMENT Each fund has a Transfer Agency Agreement with RiverSource Service Corporation located at 70100 Ameriprise Financial Center, Minneapolis, MN 55474. This agreement governs RiverSource Service Corporation's responsibility for administering and/or performing transfer agent functions, for acting as service agent in connection with dividend and distribution functions and for performing shareholder account administration agent functions in connection with the issuance, exchange and redemption or repurchase of the fund's shares. Under the agreement, RiverSource Service Corporation will earn a fee from the fund determined by multiplying the number of shareholder accounts at the end of the day by a rate determined for each class per year and dividing by the number of days in the year. The fee varies depending on the investment category of the fund. You can find your fund's investment category in Table 1. Balanced, Equity, Funds-of-Funds - Equity Funds The annual per account fee accrued daily and payable monthly, for the applicable classes is as follows:
Class A Class B Class C Class D Class E Class I Class Y ------- ------- ------- ------- ------- ------- ------- $19.50 $20.50 $20.00 $19.50 $19.50 $1.00 $17.50
Funds-of-Funds - Bond, State Tax-Exempt Bond, Taxable Bond, Tax-Exempt Bond Funds The annual per account fee accrued daily and payable monthly, for the applicable classes is as follows: Class A Class B Class C Class I Class Y ------- ------- ------- ------- ------- $20.50 $21.50 $21.00 $1.00 $18.50 Money Market Funds The annual per account fee accrued daily and payable monthly, for the applicable classes is as follows. The fee for Tax-Exempt Money Market, which does not have separate classes of shares, is the same as that applicable to Class A. Class A Class B Class C Class I Class Y ------- ------- ------- ------- ------- $22.00 $23.00 $22.50 $1.00 $20.00 In addition, an annual closed-account fee of $5.00 per inactive account may be charged on a pro rata basis from the date the account becomes inactive until the date the account is purged from the transfer agent system, generally within one year. The fees paid to RiverSource Service Corporation may be changed by the Board without shareholder approval. DISTRIBUTION AGREEMENT Ameriprise Financial Services, Inc., located at 70100 Ameriprise Financial Center, Minneapolis, MN 55474, is the funds' principal underwriter. Each fund's shares are offered on a continuous basis. Under a Distribution Agreement, sales charges deducted for distributing fund shares are paid to the Distributor daily. The table is organized by fiscal year end. You can find your fund's fiscal year end in Table 1. Statement of Additional Information - Nov. 29, 2005 Page 130
Table 23. Sales Charges Paid to Distributor - ---------------------------------------- --------------------------------------- ------------------------------------------ Fund Sales charges paid to Distributor Amount retained after paying commissions and other expenses - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- 2005 2004 2003 2005 2004 2003 - --------------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending January 31 - --------------------------------------------------------------------------------------------------------------------------- Portfolio Builder Aggressive 2,689,735 N/A N/A 1,129,812 N/A N/A - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- Portfolio Builder Conservative 722,689 N/A N/A 178,650 N/A N/A - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- Portfolio Builder Moderate 3,810,185 N/A N/A 1,309,727 N/A N/A - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- Portfolio Builder Moderate Aggressive 6,114,118 N/A N/A 2,610,071 N/A N/A - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- Portfolio Builder Moderate Conservative 1,603,913 N/A N/A 530,042 N/A N/A - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- Portfolio Builder Total Equity 1,393,255 N/A N/A 509,719 N/A N/A - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- Small Company Index 1,511,932 1,717,480 2,281,660 554,278 485,006 379,830 - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- S&P 500 Index N/A - No N/A N/A N/A N/A N/A sales charge - --------------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending March 31 - --------------------------------------------------------------------------------------------------------------------------- Equity Value 740,741 798,502 1,056,778 258,954 212,373 257,505 - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- Precious Metals 141,256 146,086 116,320 58,658 46,448 (25,993) - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- Small Cap Advantage 1,972,996 2,543,371 968,618 774,287 757,410 332,344 - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- Small Cap Growth 636,221 1,140,014 1,001,802 251,743 371,324 177,635 - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- Strategy Aggressive 595,175 873,773 1,249,906 241,030 296,244 439,236 - --------------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending May 31 - --------------------------------------------------------------------------------------------------------------------------- Aggressive Growth 165,878 131,508 2,319(a) 72,142 50,690 19,790(a) - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- Fundamental Growth 108,453 87,619 5,351(a) 42,738 18,759 (18,864)(a) - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- Fundamental Value 2,807,456 2,069,259 1,337,752 1,018,799 633,428 251,037 - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- High Yield Bond 3,259,902 4,885,301 3,424,299 975,605 1,014,719 301,541 - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- Select Value 1,622,013 2,473,422 1,230,319 570,709 668,150 56,873 - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- Selective 588,090 1,034,975 1,444,382 284,661 429,635 232,740 - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- Short Duration U.S. Government 3,761,704 8,055,130 11,561,778 1,548,985 2,236,469 (2,552,775) - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- Small Cap Equity 521,747 687,100 317,549 185,766 199,371 9,860 - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- Small Cap Value 2,761,449 3,415,712 2,827,168 1,027,972 1,093,404 579,029 - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- U.S. Government Mortgage 621,406 1,414,409 2,218,546 188,075 322,339 585,001 - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- Value 826,767 1,098,734 980,177 238,721 257,673 138,732 - --------------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending June 30 - --------------------------------------------------------------------------------------------------------------------------- California Tax-Exempt 217,494 246,897 369,212 109,849 96,481 147,346 - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- Dividend Opportunity 1,560,011 1,451,779 1,198,206 478,911 537,003 449,037 - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- Insured Tax-Exempt 302,210 567,873 739,237 94,572 182,980 (34,724) - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- Massachusetts Tax-Exempt 95,312 163,094 230,570 41,176 67,903 23,080 - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- Michigan Tax-Exempt 67,704 108,759 123,009 20,037 48,877 9,420 - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- Minnesota Tax-Exempt 459,091 645,851 658,737 137,046 225,724 43,189 - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- New York Tax-Exempt 132,690 155,512 146,838 62,241 65,578 26,914 - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- Ohio Tax-Exempt 55,007 113,361 155,216 8,755 35,469 15,472 - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- Real Estate 556,057 224,344(b) N/A 223,164 95,933(b) N/A - ---------------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2005 Page 131
- ---------------------------------------- --------------------------------------- ------------------------------------------ Fund Sales charges paid to Distributor Amount retained after paying commissions and other expenses - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- 2005 2004 2003 2005 2004 2003 - --------------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending July 31 - --------------------------------------------------------------------------------------------------------------------------- Cash Management 748,512 1,556,245 2,570,091 746,839 1,554,374 2,568,224 - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- Core Bond 202,975 243,504 61,761(c) 86,520 169,705 (239,213) (c) - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- Disciplined Equity 125,953 64,957 15,207 46,636 13,620 (24,103) - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- Discovery 48,669 74,600 82,752 19,935 34,840 40,973 - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- Growth 3,363,143 5,194,048 5,319,830 1,253,105 1,979,434 1,703,248 - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- Income Opportunities 879,762 1,008,513 51,706(c) 190,393 268,488 (266,547) (c) - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- Inflation Protected Securities 421,889 218,847(d) N/A 76,043 45,591(d) N/A - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- Large Cap Equity 1,699,188 2,547,239 592,326 609,407 711,343 76,721 - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- Large Cap Value 188,831 454,971 180,263 63,877 132,559 6,677 - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- Limited Duration Bond 389,542 423,604 64,991(c) 111,318 178,177 (268,630) (c) - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- New Dimensions 11,509,625 18,985,816 20,406,015 4,338,161 6,850,376 454,955 - --------------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending August 31 - --------------------------------------------------------------------------------------------------------------------------- Diversified Bond 2,874,944 3,926,269 5,046,003 1,006,060 1,516,544 722,797 - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- For funds with fiscal period ending September 30 - --------------------------------------------------------------------------------------------------------------------------- Balanced 464,009 735,450 750,472 131,341 240,733 228,111 - ----------------------------------------- ------------ ------------ ------------- ------------- -------------- ------------ Diversified Equity Income 9,408,620 10,301,867 3,604,654 2,282,243 2,933,886 1,012,358 - ----------------------------------------- ------------ ------------ ------------- ------------- -------------- ------------ Mid Cap Value 3,017,158 2,377,837 655,293 905,204 837,278 149,937 - ----------------------------------------- ------------ ------------ ------------- ------------- -------------- ------------ Stock 433,108 831,538 980,709 135,307 329,906 337,309 - ----------------------------------------- ------------ ------------ ------------- ------------- -------------- ------------ Strategic Allocation 1,041,883 989,579 847,194 202,865 316,545 223,952 - ----------------------------------------- ------------ ------------ ------------- ------------- -------------- ------------ 2004 2003 2002 2004 2003 2002 For funds with fiscal period ending October 31 - --------------------------------------------------------------------------------------------------------------------------- Emerging Markets 556,829 243,062 325,336 (6,660,972) (2,681,731) (4,049,970) - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- European Equity 227,285 212,129 373,420 121,202 42,141 134,829 - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- Global Balanced 150,501 122,917 152,020 57,629 45,326 46,735 - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- Global Bond 956,580 1,009,917 515,760 536,364 537,388 274,717 - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- Global Equity 467,198 437,154 782,415 203,564 196,939 348,443 - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- Global Technology 591,744 543,360 717,011 208,704 150,041 262,977 - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- International Aggressive Growth 796,060 528,748 N/A 360,944 194,832 N/A - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- International Equity 456,321 329,351 N/A 175,987 82,777 N/A - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- International Opportunity 997,517 274,577 428,744 371,845 104,589 89,051 - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- International Select Value 3,105,887 1,896,607 N/A 1,220,539 527,546 N/A - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- International Small Cap 324,756 86,270 N/A 115,235 18,806 N/A - --------------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending November 30 - --------------------------------------------------------------------------------------------------------------------------- Intermediate Tax-Exempt 306,545 611,983 366,668 86,091 100,008 (44,152) - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- Mid Cap Growth 3,566,760 4,166,089 2,678,040 1,373,111 1,046,768 438,718 - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- Tax-Exempt Bond 495,541 740,644 814,931 197,028 233,789 169,809 - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- ------------- Tax-Exempt High Income 3,131,234 4,468,036 5,379,416 1,256,629 1,475,443 1,352,482 - --------------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending December 31 - --------------------------------------------------------------------------------------------------------------------------- Tax-Exempt Money Market N/A - No N/A N/A N/A N/A N/A sales charge - ---------------------------------------- ------------- ------------ ------------ ------------- -------------- -------------
(a) For the period from April 14, 2003 (when shares became publicly available) to May 31, 2003. (b) For the period from March 4, 2004 (when shares became publicly available to June 30, 2004. (c) For the period from June 19, 2003 (when shares became publicly available) to July 31, 2003. (d) For the period from March 4, 2004 (when shares became publicly available) to July 31, 2004. Part of the sales charge may be paid to selling dealers who have agreements with the distributor. The distributor will retain the balance of the sales charge. At times the entire sales charge may be paid to selling dealers. Statement of Additional Information - Nov. 29, 2005 Page 132 SHAREHOLDER SERVICE AGREEMENT For funds with Class Y shares, the fund pays the distributor a fee for service provided to shareholders by financial advisors and other servicing agents with respect to those shares. The fee is calculated at a rate of 0.10% of average daily net assets for Class Y. PLAN AND AGREEMENT OF DISTRIBUTION For funds other than money market funds To help defray the cost of distribution and servicing not covered by the sales charges received under the Distribution Agreement, each fund approved a Plan of Distribution (Plan) and entered into an agreement under the Plan pursuant to Rule 12b-1 under the 1940 Act. Under the Plan, of the type known as a reimbursement plan, the fund pays a fee up to actual expenses incurred at an annual rate as follows: The fee is based on the average daily net assets of the fund attributable to the applicable class: Class A Class B Class C Class D 0.25% 1.00% 1.00% 0.25% For Class B and Class C shares, up to 0.75% is reimbursed for distribution expenses. Up to an additional 0.25% is paid to the distributor to compensate the distributor, financial advisors and servicing agents for personal service to shareholders and maintenance of shareholder accounts. For money market funds The fee for services is equal on an annual basis to the following percentage of the average daily net assets of the fund attributable to the applicable class. The fee for Tax-Exempt Money Market, which does not have separate classes of shares, is the same as that applicable to Class A. Class A Class B 0.10% 0.85% For Class B shares, up to 0.75% is reimbursed for distribution expenses. Up to an additional 0.10% is paid to the distributor to compensate the distributor, financial advisors and servicing agents for personal service to shareholders and maintenance of shareholder accounts. Each class has exclusive voting rights on the Plan as it applies to that class. In addition, because Class B shares convert to Class A shares, Class B shareholders have the right to vote on any material increase to expenses charged under the Class A plan. Expenses covered under this Plan include sales commissions; business, employee and financial advisor expenses charged to distribution of shares; and overhead appropriately allocated to the sale of Class A, Class B, Class C and Class D shares, as applicable. These expenses also include costs of providing personal service to shareholders. A substantial portion of the costs are not specifically identified to any one of the RiverSource funds. The fee is not allocated to any one service (such as advertising, payments to underwriters, or other uses). However, a significant portion of the fee is generally used for sales and promotional expenses. The Plan must be approved annually by the Board, including a majority of the disinterested Board members, if it is to continue for more than a year. At least quarterly, the Board reviews written reports concerning the amounts expended under the Plan and the purposes for which such expenditures were made. The Plan and any agreement related to it may be terminated at any time by vote of a majority of Board members who are not interested persons of the fund and have no direct or indirect financial interest in the operation of the Plan or in any agreement related to the Plan, or by vote of a majority of the outstanding voting securities of the relevant class of shares or by the distributor. Any agreement related to the Plan will terminate in the event of its assignment, as that term is defined in the 1940 Act. The Plan may not be amended to increase the amount to be spent for distribution without shareholder approval, and all material amendments to the Plan must be approved by a majority of the Board members, including a majority of the Board members who are not interested persons of the fund and who do not have a financial interest in the operation of the Plan or any Statement of Additional Information - Nov. 29, 2005 Page 133 agreement related to it. The selection and nomination of disinterested Board members is the responsibility of the other disinterested Board members. No Board member who is not an interested person has any direct or indirect financial interest in the operation of the Plan or any related agreement. For its most recent fiscal period, each fund paid 12b-1 fees as shown in the following table. The table is organized by fiscal year end. You can find your fund's fiscal year end in Table 1.
Table 24. 12b-1 Fees - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Fund Class A Class B Class C Class D - --------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending January 31 - --------------------------------------------------------------------------------------------------------------------- Portfolio Builder Aggressive $131,509 $148,824 $14,167 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Portfolio Builder Conservative 47,394 90,296 18,476 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Portfolio Builder Moderate 207,226 306,025 37,943 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Portfolio Builder Moderate Aggressive 269,870 290,686 29,798 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Portfolio Builder Moderate Conservative 88,986 154,618 28,321 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Portfolio Builder Total Equity 103,536 123,254 10,069 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Small Company Index 1,997,297 4,471,167 N/A N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ S&P 500 Index N/A N/A N/A $169,434 - --------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending March 31 - --------------------------------------------------------------------------------------------------------------------- Equity Value 2,181,335 2,942,254 34,607 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Precious Metals 162,502 190,923 17,490 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Small Cap Advantage 1,548,853 2,477,943 123,637 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Small Cap Growth 448,569 839,539 76,227 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Strategy Aggressive 1,298,856 1,840,696 21,193 N/A - --------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending May 31 - --------------------------------------------------------------------------------------------------------------------- Aggressive Growth 53,023 48,357 3,331 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Fundamental Growth 41,230 53,576 2,998 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Fundamental Value 1,207,593 2,384,944 146,962 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ High Yield Bond 4,680,366 7,125,474 395,850 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Select Value 1,225,074 1,930,026 115,118 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Selective 1,638,968 1,516,008 49,992 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Short Duration U.S. Government 2,696,008 7,653,428 311,601 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Small Cap Equity 272,058 431,058 38,537 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Small Cap Value 1,851,124 3,558,899 222,997 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ U.S. Government Mortgage 427,918 1,109,871 125,193 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Value 678,394 1,516,583 96,685 N/A - --------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending June 30 - --------------------------------------------------------------------------------------------------------------------- California Tax-Exempt 483,557 182,416 33,536 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Dividend Opportunity 1,852,456 2,836,466 105,158 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Insured Tax-Exempt 859,029 502,493 65,596 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Massachusetts Tax-Exempt 147,943 186,463 14,622 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Michigan Tax-Exempt 136,742 59,822 18,779 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Minnesota Tax-Exempt 877,625 517,111 92,150 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ New York Tax-Exempt 196,842 120,762 16,217 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Ohio Tax-Exempt 136,871 84,836 21,311 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Real Estate 98,379 109,406 6,203 N/A - ---------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2005 Page 134
- ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Fund Class A Class B Class C Class D - --------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending October 31 - --------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending July 31 - --------------------------------------------------------------------------------------------------------------------- Cash Management 3,303,424 1,141,431 20,261 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Core Bond 153,743 100,229 4,566 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Disciplined Equity 44,025 51,693 1,420 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Discovery 366,138 129,934 280 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Growth 5,058,973 5,641,889 128,612 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Income Opportunities 484,743 713,097 64,944 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Inflation Protected Securities 151,312 322,955 28,363 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Large Cap Equity 2,866,767 5,272,525 101,520 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Large Cap Value 183,291 277,867 14,213 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Limited Duration Bond 252,631 234,566 19,297 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ New Dimensions 20,565,923 24,839,333 559,396 N/A - --------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending August 31 - --------------------------------------------------------------------------------------------------------------------- Diversified Bond 4,534,413 5,752,444 193,278 N/A - --------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending September 30 - --------------------------------------------------------------------------------------------------------------------- - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Balanced 2,607,027 1,043,188 30,859 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Diversified Equity Income 7,657,786 10,740,806 480,884 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Mid Cap Value 1,330,390 1,925,014 93,253 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Stock 3,845,677 1,296,503 28,462 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Strategic Allocation 2,265,380 972,773 51,964 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Emerging Markets 438,042 756,560 9,336 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ European Equity 220,429 388,890 15,823 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Global Balanced 136,721 320,051 7,301 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Global Bond 952,565 1,560,487 50,444 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Global Equity 894,340 1,283,273 9,589 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Global Technology 375,071 644,615 42,622 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ International Aggressive Growth 332,586 423,534 25,270 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ International Equity 205,952 192,318 13,300 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ International Opportunity 773,809 795,312 13,470 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ International Select Value 1,251,975 1,947,966 101,585 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ International Small Cap 105,681 95,201 4,458 N/A - --------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending November 30 - --------------------------------------------------------------------------------------------------------------------- Intermediate Tax-Exempt 326,960 258,071 107,144 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Mid Cap Growth 3,701,465 4,312,934 147,541 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Tax-Exempt Bond 1,800,449 429,863 52,734 N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------ Tax-Exempt High Income 10,363,982 2,912,090 293,295 N/A - --------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending December 31 - --------------------------------------------------------------------------------------------------------------------- Tax-Exempt Money Market 143,129 N/A N/A N/A - ------------------------------------------ ----------------- ------------------ ------------------ ------------------
Statement of Additional Information - Nov. 29, 2005 Page 135 CUSTODIAN AGREEMENT Custody information varies depending on the fund's investment category. You can find your fund's investment category in Table 1. For Balanced, Equity, Funds-of-Funds, Taxable Money Market and Taxable Bond Funds other than Diversified Bond, High Yield Bond and Selective: The fund's securities and cash are held by Ameriprise Trust Company, 200 Ameriprise Financial Center, Minneapolis, MN 55474, through a custodian agreement. The custodian is permitted to deposit some or all of its securities in central depository systems as allowed by federal law. For its services, the fund pays the custodian a maintenance charge and a charge per transaction in addition to reimbursing the custodian's out-of-pocket expenses. For State Tax-Exempt Bond, Tax-Exempt Bond and Tax-Exempt Money Market Funds, as well as Diversified Bond, High Yield Bond, and Selective: The fund's securities and cash are held by U.S. Bank National Association, 180 E. Fifth St., St. Paul, MN 55101-1631, through a custodian agreement. The custodian is permitted to deposit some or all of its securities in central depository systems as allowed by federal law. For its services, the fund pays the custodian a maintenance charge and a charge per transaction in addition to reimbursing the custodian's out-of-pocket expenses. For all funds: The custodian may enter into a sub-custodian agreement with the Bank of New York, 90 Washington Street, New York, NY 10286. As part of this arrangement, securities purchased outside the United States are maintained in the custody of various foreign branches of Bank of New York or in other financial institutions as permitted by law and by the fund's sub-custodian agreement. Organizational Information Each fund is an open-end management investment company. The fund's headquarters are at 901 S. Marquette Ave., Suite 2810, Minneapolis, MN 55402-3268. SHARES The shares of a fund represent an interest in that fund's assets only (and profits or losses), and, in the event of liquidation, each share of a fund would have the same rights to dividends and assets as every other share of that fund. VOTING RIGHTS As a shareholder in a fund, you have voting rights over the fund's management and fundamental policies. You are entitled to vote based on your total dollar interest in the fund. Each class, if applicable, has exclusive voting rights with respect to matters for which separate class voting is appropriate under applicable law. All shares have cumulative voting rights with respect to the election of Board members. This means that you have as many votes as the dollar amount you own, including the fractional amount, multiplied by the number of members to be elected. DIVIDEND RIGHTS Dividends paid by a fund, if any, with respect to each applicable class of shares will be calculated in the same manner, at the same time, on the same day, and will be in the same amount, except for differences resulting from differences in fee structures. Statement of Additional Information - Nov. 29, 2005 Page 136
Table 25. Fund History Table for All Publicly Offered RiverSource Funds - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Date of Date First Form of State of Fiscal Year Diversified Fund* Organization Offered to Organization Organization End Public - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ California Tax-Exempt Trust 4/7/86 Business MA 6/30 Trust(2) - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ California Tax-Exempt Fund 8/18/86 No - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Dimensions Series, Inc 2/20/68, Corporation NV/MN 7/31 6/13/86(1) - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ New Dimensions Fund 8/1/68 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Discovery Series, Inc. 4/29/81, Corporation NV/MN 7/31 6/13/86(1) - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Core Bond Fund 6/19/03 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Discovery Fund 8/24/81 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Income Opportunities Fund 6/19/03 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Inflation Protected Securities Fund 3/4/04 No - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Limited Duration Bond Fund 6/19/03 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Equity Series, Inc. 3/18/57, Corporation NV/MN 11/30 6/13/86(1) - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Mid Cap Growth Fund(7) 6/4/57 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Fixed Income Series, Inc. 6/27/74, Corporation NV/MN 8/31 6/31/86(1) - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Diversified Bond Fund(3) 10/3/74 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Global Series, Inc. 10/28/88 Corporation MN 10/31 - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Emerging Markets Fund(6) 11/13/96 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Global Balanced Fund(6) 11/13/96 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Global Bond Fund 3/20/89 No - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Global Equity Fund(4),(6) 5/29/90 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Global Technology Fund 11/13/96 No - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Government Income Series, Inc. 3/12/85 Corporation MN 5/31 - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Short Duration U.S. Government Fund(3) 8/19/85 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ U.S. Government Mortgage Fund 2/14/02 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Growth Series, Inc. 5/21/70, Corporation NV/MN 7/31 6/13/86(1) - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Disciplined Equity Fund(7) 4/24/03 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Growth Fund 3/1/72 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Large Cap Equity Fund 3/28/02 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Large Cap Value Fund 6/27/02 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ High Yield Income Series, Inc. 8/17/83 Corporation MN 5/31 - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ High Yield Bond Fund(3) 12/8/83 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ High Yield Tax-Exempt Series, Inc. 12/21/78; Corporation NV/MN 11/30 6/13/86(1) - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Tax-Exempt High Income Fund(7) 5/7/79 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Income Series, Inc. 2/10/45; Corporation NV/MN 5/31 6/13/86(1) - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Selective Fund 4/6/45 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ International Series, Inc. 7/18/84 Corporation MN 10/31 - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ European Equity Fund(6) 6/26/00 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ International Opportunity Fund(6), (7) 11/15/84 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Investment Series, Inc. 1/18/40; Corporation NV/MN 9/30 6/13/86(1) - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Balanced Fund(7) 4/16/40 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Diversified Equity Income Fund 10/15/90 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Mid Cap Value Fund 2/14/02 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------
Statement of Additional Information - Nov. 29, 2005 Page 137
- --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Date of Date First Form of State of Fiscal Year Diversified Fund* Organization Offered to Organization Organization End Public - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Managed Series, Inc. 10/9/84 Corporation MN 9/30 - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Strategic Allocation Fund(7) 1/23/85 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Market Advantage Series, Inc. 8/25/89 Corporation MN 1/31 - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Portfolio Builder Conservative Fund 3/4/04 No - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Portfolio Builder Moderate Conservative 3/4/04 No Fund - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Portfolio Builder Moderate Fund 3/4/04 No - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Portfolio Builder Moderate Aggressive 3/4/04 No Fund - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Portfolio Builder Aggressive Fund 3/4/04 No - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Portfolio Builder Total Equity Fund 3/4/04 No - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ S&P 500 Index Fund 10/25/99 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Small Company Index Fund 8/19/96 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Money Market Series, Inc. 8/22/75; Corporation NV/MN 7/31 6/13/86(1) - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Cash Management Fund 10/6/75 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Partners Series, Inc. 3/20/01 Corporation MN 5/31 - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Aggressive Growth Fund 4/24/03 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Fundamental Growth Fund(7) 4/24/03 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Fundamental Value Fund 6/18/01 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Select Value Fund 3/8/02 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Small Cap Equity Fund(7) 3/8/02 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Small Cap Value Fund 6/18/01 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Value Fund 6/18/01 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Partners International Series, Inc. 5/9/01 Corporation MN 10/31 - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ International Aggressive Growth Fund 9/28/01 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ International Equity Fund(7) 10/3/02 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ International Select Value Fund 9/28/01 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ International Small Cap Fund 10/3/02 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Sector Series, Inc. 3/25/88 Corporation MN 6/30 - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Dividend Opportunity Fund(5) 8/1/88 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Real Estate Fund 3/4/04 No - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Selected Series, Inc. 10/5/84 Corporation MN 3/31 - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Precious Metals Fund 4/22/86 No - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Special Tax-Exempt Series Trust 4/7/86 Business MA 6/30 Trust(2) - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Insured Tax-Exempt Fund 8/18/86 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Massachusetts Tax-Exempt Fund 7/2/87 No - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Michigan Tax-Exempt Fund 7/2/87 No - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Minnesota Tax-Exempt Fund 8/18/86 No - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ New York Tax-Exempt Fund 8/18/86 No - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Ohio Tax-Exempt Fund 7/2/87 No - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Stock Series, Inc. 2/10/45, Corporation NV/MN 9/30 6/13/86(1) - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Stock Fund 4/6/45 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Strategy Series, Inc. 1/24/84 Corporation MN 3/31 - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Equity Value Fund 5/14/84 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Small Cap Growth Fund 1/24/01 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Small Cap Advantage Fund 5/4/99 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Strategy Aggressive Fund 5/14/84 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------
Statement of Additional Information - Nov. 29, 2005 Page 138
- --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Date of Date First Form of State of Fiscal Year Diversified Fund* Organization Offered to Organization Organization End Public - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Tax-Exempt Series, Inc. 9/30/76, Corporation NV/MN 11/30 6/13/86(1) - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Intermediate Tax-Exempt Fund 11/13/96 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Tax-Exempt Bond Fund 11/24/76 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Tax-Free Money Series, Inc. 2/29/80, Corporation NV/MN 12/31 6/13/86(1) - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------ Tax-Exempt Money Market Fund(7) 8/5/80 Yes - --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------
* Effective Oct. 1, 2005 American Express Funds changed its name to RiverSource funds and the names Threadneedle and Partners were removed from fund names. (1) Date merged into a Minnesota corporation incorporated on April 7, 1986. (2) Under Massachusetts law, shareholders of a business trust may, under certain circumstances, be held personally liable as partners for its obligations. However, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which the trust itself is unable to meet its obligations. (3) Effective June 27, 2003, Bond Fund changed its name to Diversified Bond Fund, Federal Income Fund changed its name to Short Duration U.S. Government Fund and Extra Income Fund changed its name to High Yield Bond Fund. (4) Effective Oct. 20, 2003, Global Growth Fund changed its name to Global Equity Fund. (5) Effective Feb. 18, 2004, Utilities Fund changed its name to Dividend Opportunity Fund. (6) Effective July 9, 2004, Emerging Markets Fund changed its name to Threadneedle Emerging Markets Fund, European Equity Fund changed its name to Threadneedle European Equity Fund, Global Balanced Fund changed its name to Threadneedle Global Balanced Fund, Global Equity Fund changed its name to Threadneedle Global Equity Fund, and International Fund changed its name to Threadneedle International Fund. (7) Effective Oct. 1, 2005, Equity Select Fund changed its name to Mid Cap Growth Fund, High Yield Tax-Exempt Fund changed its name to Tax-Exempt High Income Fund, Managed Allocation Fund changed its name to Strategic Allocation Fund, Mutual changed its name to Balanced Fund, Partners Growth Fund changed its name to Fundamental Growth Fund, Partners International Core Fund changed its name to International Equity Fund, Partners Small Cap Core Fund changed its name to Small Cap Equity Fund, Quantitative Large Cap Equity Fund changed its name to Disciplined Equity Fund, Tax-Free Money Fund changed its name to Tax-Exempt Money Market Fund, and Threadneedle International Fund changed its name to International Opportunity Fund. Statement of Additional Information - Nov. 29, 2005 Page 139 Board Members and Officers Shareholders elect a Board that oversees a fund's operations. The Board appoints officers who are responsible for day-to-day business decisions based on policies set by the Board. The following is a list of each fund's Board members. Each member oversees 11 Master Trust portfolios and 90 RiverSource funds. Board members serve until the next regular shareholders' meeting or until he or she reaches the mandatory retirement age established by the Board. Under the current Board policy, members may serve until the end of the meeting following their 75th birthday, or the fifteenth anniversary of the first Board meeting they attended as members of the Board, whichever occurs first. This policy does not apply to Ms. Jones who may retire after her 75th birthday.
Table 26. Board Members Independent Board Members - ---------------------------- --------------------- -------------------------- ------------------------ -------------------- Position held with Name, address, age Fund and length Principal occupation Other Committee of service during past five years directorships memberships - ---------------------------- --------------------- -------------------------- ------------------------ -------------------- Arne H. Carlson Board member Chair, Board Services Joint Audit, 901 S. Marquette Ave. since 1999 Corporation (provides Contracts, Minneapolis, MN 55402 administrative services Executive, Age 71 to boards); former Investment Review, Governor Board Effectiveness of Minnesota - ---------------------------- --------------------- -------------------------- ------------------------ -------------------- Philip J. Carroll, Jr.* Board member Retired Chairman and Scottish Power PLC, Joint Audit, 901 S. Marquette Ave. since 2002 CEO, Fluor Corporation Vulcan Materials Executive, Minneapolis, MN 55402 (engineering and Company, Inc. Investment Review Age 67 construction) (construction materials/chemicals) - ---------------------------- --------------------- -------------------------- ------------------------ -------------------- Patricia M. Flynn Board member Trustee Professor of Investment Review, 901 S. Marquette Ave. since 2004 Economics and Joint Audit Minneapolis, MN 55402 Management, Bentley Age 54 College; former Dean, McCallum Graduate School of Business, Bentley College - ---------------------------- --------------------- -------------------------- ------------------------ -------------------- Anne P. Jones Board member Attorney and Consultant Joint Audit, 901 S. Marquette Ave. since 1985 Board Minneapolis, MN 55402 Effectiveness, Age 70 Executive, Investment Review - ---------------------------- --------------------- -------------------------- ------------------------ -------------------- Jeffery Laikind Board member Former Managing American Progressive 901 S. Marquette Ave. since 2005 Director, Shikiar Asset Insurance Minneapolis, MN 55402 Management Age 70 - ---------------------------- --------------------- -------------------------- ------------------------ -------------------- Stephen R. Lewis, Jr. Board member President Emeritus and Valmont Industries, Contracts, 901 S. Marquette Ave. since 2002 Professor of Economics, Inc. (manufactures Investment Review, Minneapolis, MN 55402 Carleton College irrigation systems) Executive, Age 65 Board Effectiveness - ---------------------------- --------------------- -------------------------- ------------------------ -------------------- Catherine James Paglia Board member Director, Enterprise Strategic Contracts, 901 S. Marquette Ave. since 2004 Asset Management, Inc. Distribution, Inc. Investment Review Minneapolis, MN 55402 (private real estate and (transportation, Age 53 asset management company) distribution and logistics consultants) - ---------------------------- --------------------- -------------------------- ------------------------ -------------------- Alan K. Simpson Board member Former three-term Investment Review, 1201 Sunshine Ave. since 1997 United States Senator Board Effectiveness Cody, WY 82414 for Wyoming Age 74 - ---------------------------- --------------------- -------------------------- ------------------------ -------------------- Alison Taunton-Rigby Board member Chief Executive Officer, Hybridon, Inc. Investment Review, 901 S. Marquette Ave. since 2002 RiboNovix, Inc. since (biotechnology) Contracts Minneapolis, MN 55402 2003 (biotechnology); Age 61 former President, Forester Biotech - ---------------------------- --------------------- -------------------------- ------------------------ --------------------
* Phillip J. Carroll, Jr. retired as a member of the Board, effective Nov. 10, 2005. Statement of Additional Information - Nov. 29, 2005 Page 140
Board Members Affiliated with Ameriprise Financial, Inc. (formerly AEFC)** - ---------------------------------- ----------------- ------------------------------------- ----------------- ---------------- Name, address, age Position held with Fund and Principal occupation Other Committee length of during past five years directorships Memberships service - ---------------------------------- ----------------- ------------------------------------- ----------------- ---------------- William F. Truscott Board member President - U.S. Asset Management Investment 53600 Ameriprise Financial Center since 2001, and Chief Investment Officer, Review Minneapolis, MN 55474 Vice President Ameriprise Financial, Inc. and Age 45 since 2002 President, Chairman of the Board and Chief Investment Officer, RiverSource Investments, LLC since 2005; Senior Vice President - Chief Investment Office, Ameriprise Financial, Inc. and Chairman of the Board and Chief Investment Officer, RiverSource Investments, LLC, 2001-2005; former Chief Investment Officer and Managing Director, Zurich Scudder - ---------------------------------- ----------------- ------------------------------------- ----------------- ----------------
** Interested person by reason of being an officer, director and/or employee of Ameriprise Financial, Inc. (formerly American Express Financial Corporation) or of RiverSource Investments, LLC, its wholly-owned subsidiary. The Board has appointed officers who are responsible for day-to-day business decisions based on policies it has established. The officers serve at the pleasure of the Board. In addition to Mr. Truscott, who is Vice President, the fund's other officers are:
Table 27. Fund Officers - ------------------------------------ ---------------- ------------------------------------- ------------------ ------------------ Name, address, age Position held with Fund and Principal occupation Other Committee length of during past five years directorships Memberships service - ------------------------------------ ---------------- ------------------------------------- ------------------ ------------------ Jeffrey P. Fox Treasurer Vice President - Investment 105 Ameriprise Financial Center since 2002 Accounting, Ameriprise Financial, Minneapolis, MN 55474 Inc., since 2002; Vice President - Age 50 Finance, American Express Company, 2000-2002; Vice President - Corporate Controller, Ameriprise Financial, Inc., 1996-2000 - ------------------------------------ ---------------- ------------------------------------- ------------------ ------------------ Paula R. Meyer President Senior Vice President - Mutual 596 Ameriprise Financial Center since 2002 Funds, Ameriprise Financial, Inc. Minneapolis, MN 55474 since 2002 and Senior Vice Age 51 President, RiverSource Investments, LLC since 2004; Vice President and Managing Director - American Express Funds, Ameriprise Financial, Inc. 2000-2002; Vice President, Ameriprise Financial, Inc. 1998-2000 - ------------------------------------ ---------------- ------------------------------------- ------------------ ------------------ Leslie L. Ogg Vice President, President of Board Services 901 S. Marquette Ave. General Corporation Minneapolis, MN 55402 Counsel, and Age 67 Secretary since 1978 - ------------------------------------ ---------------- ------------------------------------- ------------------ ------------------ Beth E. Weimer Chief Vice President and Chief Compliance 172 Ameriprise Financial Center Compliance Officer, Ameriprise Financial, Inc. Minneapolis, MN 55474 Officer since since 2001 and Chief Compliance Age 52 2004 Officer, RiverSource Investments, LLC since 2005; Vice President and Chief Compliance Officer - Asset Management and Insurance, Ameriprise Financial Services, Inc. since 2001; Partner, Arthur Andersen Regulatory Risk Services, 1998-2001 - ------------------------------------ ---------------- ------------------------------------- ------------------ ------------------
Statement of Additional Information - Nov. 29, 2005 Page 141 Responsibilities of Board with respect to fund management The Board initially approves an Investment Management Services Agreement and other contracts with RiverSource Investments and its affiliates, its subsidiaries, and other service providers. Once the contracts are approved, the Board monitors the level and quality of services including commitments of service providers to achieve expected levels of investment performance and shareholder services. In addition, the Board oversees that processes are in place to assure compliance with applicable rules, regulations and investment policies and addresses possible conflicts of interest. Annually, the Board evaluates the services received under the contracts by receiving reports covering investment performance, shareholder services, marketing, and RiverSource Investments' profitability in order to determine whether to continue existing contracts or negotiate new contracts. Several committees facilitate its work Executive Committee -- Acts for the Board between meetings of the Board. Joint Audit Committee -- Meets with the independent public accountant, internal auditors and corporate officers to review financial statements, reports, and compliance matters. Reports significant issues to the Board and makes recommendations to the independent directors regarding the selection of the independent public accountant. Investment Review Committee -- Considers investment management policies and strategies; investment performance; risk management techniques; and securities trading practices and reports areas of concern to the Board. Board Effectiveness Committee -- Recommends to the Board the size, structure and composition for the Board; the compensation to be paid to members of the Board; and a process for evaluating the Board's performance. The committee also reviews candidates for Board membership including candidates recommended by shareholders. To be considered, recommendations must include a curriculum vita and be mailed to the Chairman of the Board, RiverSource Funds, 901 Marquette Avenue South, Suite 2810, Minneapolis, MN 55402-3268. Contracts Committee -- Receives and analyzes reports covering the level and quality of services provided under contracts with the fund and advises the Board regarding actions taken on these contracts during the annual review process. This table shows the number of times the committees met during each fund's most recent fiscal period. The table is organized by fiscal year end. You can find your fund's fiscal year end in Table 1.
Table 28. Committee Meetings - ------------------------------------------------ ------------ ------------ ------------- ------------- ------------- Fiscal Period Executive Joint Investment Board Contracts Committee Audit Review Effectiveness Committee Committee Committee Committee - ------------------------------------------------ ------------ ------------ ------------- ------------- ------------- For funds with fiscal period ending January 31 1 4 4 5 5 - ------------------------------------------------ ------------ ------------ ------------- ------------- ------------- For funds with fiscal period ending March 31 1 4 3 5 5 - ------------------------------------------------ ------------ ------------ ------------- ------------- ------------- For funds with fiscal period ending May 31 1 4 4 5 5 - ------------------------------------------------ ------------ ------------ ------------- ------------- ------------- For funds with fiscal period ending June 30 1 4 3 5 6 - ------------------------------------------------ ------------ ------------ ------------- ------------- ------------- For funds with fiscal period ending July 31 1 4 4 5 6 - ------------------------------------------------ ------------ ------------ ------------- ------------- ------------- For funds with fiscal period ending August 31 1 4 4 5 6 - ------------------------------------------------ ------------ ------------ ------------- ------------- ------------- For funds with fiscal period ending September 30 2 4 5 6 7 - ------------------------------------------------ ------------ ------------ ------------- ------------- ------------- For funds with fiscal period ending October 31 1 5 4 4 7 - ------------------------------------------------ ------------ ------------ ------------- ------------- ------------- For funds with fiscal period ending November 30 1 4 4 3 6 - ------------------------------------------------ ------------ ------------ ------------- ------------- ------------- For funds with fiscal period ending December 31 1 4 4 3 7 - ------------------------------------------------ ------------ ------------ ------------- ------------- -------------
Statement of Additional Information - Nov. 29, 2005 Page 142 BOARD MEMBER HOLDINGS The following tables show the Board members' ownership of the funds. All funds. This table shows the dollar range of equity securities beneficially owned on Dec. 31, 2004 of all funds overseen by the Board member. Table 29. Board Member Holdings* - All Funds Based on net asset values as of Dec. 31, 2004 - --------------------------- ---------------------------------------------------- Board member Aggregate dollar range of equity securities of all funds overseen by Board member - --------------------------- ---------------------------------------------------- Arne H. Carlson Over $100,000 - --------------------------- ---------------------------------------------------- Philip J. Carroll, Jr.** None - --------------------------- ---------------------------------------------------- Patricia M. Flynn $10,001 - $50,000 - --------------------------- ---------------------------------------------------- Anne P. Jones Over $100,000 - --------------------------- ---------------------------------------------------- Stephen R. Lewis, Jr.** $10,001 - $50,000 - --------------------------- ---------------------------------------------------- Catherine James Paglia None - --------------------------- ---------------------------------------------------- Alan K. Simpson $50,000 - $100,000 - --------------------------- ---------------------------------------------------- Alison Taunton-Rigby Over $100,000 - --------------------------- ---------------------------------------------------- William F. Truscott Over $100,000 - --------------------------- ---------------------------------------------------- * Mr. Laikind was not a Board member prior to Sept. 30, 2005, and therefore is not included in the table. ** Two independent directors have deferred compensation invested in share equivalents. As of Dec. 31, 2004, each owned: Philip J. Carroll, Jr..........................$10,001-$50,000 Stephen R. Lewis, Jr. ........................$50,001-$100,000 Holdings in each individual fund. This table shows the dollar range of equity securities beneficially owned on Dec. 31, 2004 of each fund. Table 30. Board Member Holdings* - Individual Funds Based on net asset values as of Dec. 31, 2004
- ------------------------- ---------------------------------------------------------------------------------------------------------- Fund Dollar range of equity securities in the fund - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Carlson Carroll Flynn Jones Lewis Paglia Simpson Taunton Truscott Rigby - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Aggressive Growth None None None None None None None None None - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Balanced None None None None None None None None $50,001- $100,000 - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- California Tax-Exempt None None None None None None None None None - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Cash Management $10,001- None None None None None $1- None None $50,000 10,000 - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Core Bond None None None None None None None None None - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Disciplined Equity $10,001- None None None None None None None $10,001- $50,000 $50,000 - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Discovery None None None None None None None None None - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Diversified Bond None None None $10,001- None None None None $10,001- $50,000 $50,000 - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Diversified Equity None None None None $10,001- None None $10,001- None Income $50,000 $50,000 C - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Dividend Opportunity $10,001- None None None None None None None Over $50,000 $100,000 - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Emerging Markets None None None None None None None None $10,001- $50,000 - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Equity Value None None None None None None None None None - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- European Equity None None None None None None None None None - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
Statement of Additional Information - Nov. 29, 2005 Page 143
- ------------------------- ---------------------------------------------------------------------------------------------------------- Fund Dollar range of equity securities in the fund - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Carlson Carroll Flynn Jones Lewis Paglia Simpson Taunton Truscott Rigby - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Fundamental Growth None None None None None None None None None - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Fundamental Value $10,001- None None None None None None None None $50,000 - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Global Balanced None None None None None None None None None - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Global Bond None None None $50,001- None None None None None $100,000 - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Global Equity None None None None None None None None None - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Global Technology None A None None None None None $10,001- $10,001- $50,000 $50,000 - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Growth None None None $10,001- None None None $10,001- $50,001- $50,000 $50,000 $100,000 - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- High Yield Bond None None None Over None None None None Over $100,000 $100,000 - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Income Opportunities None None None None None None None None $10,001- $50,000 - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Inflation Protected None None None None None None None None None Securities - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Insured Tax-Exempt None None None None None None None None None - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Intermediate None None None None None None None None $50,001- Tax-Exempt $100,000 - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- International None None None None None None None None None Aggressive Growth - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- International Equity None None None None None None None None None - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- International None None None None None None $10,001- None Over Opportunity $50,000 $100,000 - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- International Select None None None None None None None None None Value - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- International Small Cap None None None None None None None None None - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Large Cap Equity None None None None None None None $10,001- Over $50,000 $100,000 - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Large Cap Value None None None None None None None $10,001- $50,001- $50,000 $100,000 - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Limited Duration Bond None None None None None None None None None - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Massachusetts Tax-Exempt None None None None None None None None Over $100,000 - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Michigan Tax-Exempt None None None None None None None None None - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Mid Cap Growth None None None None $10,001- None None None $50,001- $50,000 $100,000 - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Mid Cap Value None None None None None None None None $10,001- $50,000 - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Minnesota Tax-Exempt None None None None None None None None None - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- New Dimensions None None None Over None None None None None $100,000 - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- New York Tax-Exempt None None None None None None None None None - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Ohio Tax-Exempt None None None None None None None None None - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Portfolio Builder None None None None None None None None None Aggressive - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Portfolio Builder None None None None None None None None None Conservative - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Portfolio Builder None None None None None None None None None Moderate - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Portfolio Builder None None None None None None None None None Moderate Aggressive - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Portfolio Builder None None None None None None None None None Moderate Conservative - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
Statement of Additional Information - Nov. 29, 2005 Page 144
- ------------------------- ---------------------------------------------------------------------------------------------------------- Fund Dollar range of equity securities in the fund - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Carlson Carroll Flynn Jones Lewis Paglia Simpson Taunton Truscott Rigby - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Portfolio Builder Total None None None None None None None None None Equity - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Precious Metals None None None None None None None None None - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Real Estate None None None None None None None None $50,001- $100,000 - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- S&P 500 Index None None None None None None None None None - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Select Value $10,001- None None None None None None None None $50,000 - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Selective None None None $10,001- None None None None None $50,000 - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Short Duration U.S. None None None Over None None None None None Government $100,000 - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Small Cap Advantage None None None None None None None None None - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Small Cap Equity None None None None None None None None None - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Small Cap Growth None None None None None None None None None - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Small Cap Value None None None None None None None None None - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Small Company Index None None None Over None None None None None $100,000 - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Stock None None None None None None None None None - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Strategic Allocation $50,001- None $10,001- None None None None None $10,001- $100,000 $50,000 $50,000 - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Strategy Aggressive None None None None None None None None None - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Tax-Exempt Bond None None None $10,001- None None None None None $50,000 - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Tax-Exempt High Income None None None None None None None None $50,001- $100,000 - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Tax-Exempt Money Market None None None None None None None None None - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- U.S. Government Mortgage None None None None None None None None None - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Value None None None None None None None None None - ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
* Mr. Laikind was not a Board member prior to Sept. 30, 2005, and therefore is not included in the table. Deferred compensation invested in share equivalents: A. Carroll.......Global Technology...............$10,001-$50,000 B. Lewis ........International Opportunity.......$10,001-$50,000 Diversified Equity Income.......$50,001-$100,000 Emerging Markets................$10,001-$50,000 As of 30 days prior to the date of this SAI, the Board members and officers as a group owned less than 1% of the outstanding shares of any class of any fund. Statement of Additional Information - Nov. 29, 2005 Page 145 COMPENSATION OF BOARD MEMBERS Total compensation. The following table shows the total compensation paid to independent Board members from all the funds in the last fiscal year.
Table 31. Board Member Compensation* - All Funds - -------------------------------------------------- --------------------------------------------------------- Total Cash Compensation Board members** from RiverSource Funds and Preferred Master Trust Group Paid to Board Member - -------------------------------------------------- --------------------------------------------------------- Philip J. Carroll, Jr. $ 0 - -------------------------------------------------- --------------------------------------------------------- Livio D. DeSimone*** 0 - -------------------------------------------------- --------------------------------------------------------- Patricia M. Flynn 83,304 - -------------------------------------------------- --------------------------------------------------------- Anne P. Jones 185,892 - -------------------------------------------------- --------------------------------------------------------- Stephen R. Lewis, Jr. 149,861 - -------------------------------------------------- --------------------------------------------------------- Catherine James Paglia 157,708 - -------------------------------------------------- --------------------------------------------------------- Alan K. Simpson 138,842 - -------------------------------------------------- --------------------------------------------------------- Alison Taunton-Rigby 166,842 - -------------------------------------------------- ---------------------------------------------------------
* Mr. Laikind was not a Board member prior to Sept. 30, 2005, and therefore is not included in the table. ** Arne H. Carlson, Chair of the Board, is compensated by Board Services Corporation, a company providing administrative services to the funds. Mr. Carlson's total compensation was $373,750. Board member compensation is a combination of a base fee and meeting fees. *** Livio D. DeSimone retired as a member of the Board, effective Sept. 8, 2005. Compensation from each fund. The following table shows the compensation to the Board members from each fund during its last fiscal period.
Table 32. Board Member* Compensation - Individual Funds - ----------------------------------------------------------------------------------------------------------------------------- Fund Aggregate Compensation from Fund - ----------------------------------------------------------------------------------------------------------------------------- Carroll DeSimone** Flynn Jones Lewis Paglia Simpson Taunton- Rigby - ----------------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending January 31 - ----------------------------------------------------------------------------------------------------------------------------- Portfolio Builder Aggressive *** *** *** *** *** *** *** *** - ----------------------------------------------------------------------------------------------------------------------------- Portfolio Builder Conservative *** *** *** *** *** *** *** *** - ----------------------------------------------------------------------------------------------------------------------------- Portfolio Builder Moderate *** *** *** *** *** *** *** *** - ----------------------------------------------------------------------------------------------------------------------------- Portfolio Builder Moderate *** *** *** *** *** *** *** *** Aggressive - ----------------------------------------------------------------------------------------------------------------------------- Portfolio Builder Moderate *** *** *** *** *** *** *** *** Conservative - ----------------------------------------------------------------------------------------------------------------------------- Portfolio Builder Total Equity *** *** *** *** *** *** *** *** - ----------------------------------------------------------------------------------------------------------------------------- Small Company Index - total 1,677 1,854 533 1,954 2,104 550 1,550 1,750 Amount deferred 1,677 1,854 133 0 827 0 0 0 - ----------------------------------------------------------------------------------------------------------------------------- S&P 500 Index - total 1,169 1,345 442 1,445 1,595 417 1,042 1,242 Amount deferred 1,169 1,345 108 0 638 0 0 0 - ----------------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending March 31 - ----------------------------------------------------------------------------------------------------------------------------- Equity Value - total 1,628 1,755 692 1,905 2,005 758 1,450 1,700 Amount deferred 1,628 1,755 213 0 803 0 0 0 - ----------------------------------------------------------------------------------------------------------------------------- Precious Metals - total 979 1,105 483 1,255 1,355 492 800 1,050 Amount deferred 979 1,105 138 0 550 0 0 0 - ----------------------------------------------------------------------------------------------------------------------------- Small Cap Advantage - total 1,403 1,530 642 1,680 1,780 683 1,225 1,475 Amount deferred 1,403 1,530 200 0 722 0 0 0 - ----------------------------------------------------------------------------------------------------------------------------- Small Cap Growth - total 1,079 1,205 517 1,355 1,455 533 900 1,150 Amount deferred 1,079 1,205 150 0 590 0 0 0 - ----------------------------------------------------------------------------------------------------------------------------- Strategy Aggressive - total 1,353 1,480 592 1,630 1,730 633 1,175 1,425 Amount deferred 1,353 1,480 175 0 693 0 0 0 - -----------------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2005 Page 146
- ----------------------------------------------------------------------------------------------------------------------------- Fund Aggregate Compensation from Fund - ----------------------------------------------------------------------------------------------------------------------------- Carroll DeSimone** Flynn Jones Lewis Paglia Simpson Taunton- Rigby - ----------------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending May 31 - ----------------------------------------------------------------------------------------------------------------------------- Aggressive Growth - total 1,020 1,147 750 1,347 1,448 758 842 1,092 Amount deferred 1,020 1,147 271 0 556 0 0 0 - ----------------------------------------------------------------------------------------------------------------------------- Fundamental Growth - total 1,428 1,555 992 1,755 1,857 1,033 1,250 1,500 Amount deferred 1,428 1,555 375 0 715 0 0 0 - ----------------------------------------------------------------------------------------------------------------------------- Fundamental Value - total 1,270 1,397 892 1,597 1,748 917 1,142 1,392 Amount deferred 1,270 1,397 333 0 670 0 0 0 - ----------------------------------------------------------------------------------------------------------------------------- High Yield Bond - total 1,529 1,655 1,000 1,855 2,007 1,050 1,400 1,650 Amount deferred 1,529 1,655 375 0 765 0 0 0 - ----------------------------------------------------------------------------------------------------------------------------- Select Value - total 1,320 1,447 900 1,647 1,798 933 1,192 1,442 Amount deferred 1,320 1,447 333 0 686 0 0 0 - ----------------------------------------------------------------------------------------------------------------------------- Selective - total 1,129 1,255 800 1,455 1,607 817 1,000 1,250 Amount deferred 1,129 1,255 292 0 613 0 0 0 - ----------------------------------------------------------------------------------------------------------------------------- Short Duration U.S. Government - 1,395 1,522 908 1,722 1,873 950 1,267 1,517 total Amount deferred 1,395 1,522 333 0 711 0 0 0 - ----------------------------------------------------------------------------------------------------------------------------- Small Cap Equity - total 1,029 1,155 750 1,355 1,507 758 900 1,150 Amount deferred 1,029 1,155 271 0 575 0 0 0 - ----------------------------------------------------------------------------------------------------------------------------- Small Cap Value - total 1,595 1,722 1,050 1,922 2,073 1,108 1,467 1,717 Amount deferred 1,595 1,722 396 0 792 0 0 0 - ----------------------------------------------------------------------------------------------------------------------------- U.S. Government Mortgage - total 1,129 1,255 800 1,455 1,607 817 1,000 1,250 Amount deferred 1,129 1,255 292 0 613 0 0 0 - ----------------------------------------------------------------------------------------------------------------------------- Value - total 1,220 1,347 850 1,547 1,698 875 1,092 1,342 Amount deferred 1,220 1,347 313 0 648 0 0 0 - ----------------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending June 30 - ----------------------------------------------------------------------------------------------------------------------------- California Tax-Exempt - total 1,079 1,205 808 1,405 1,557 867 900 1,200 Amount deferred 1,079 1,205 300 0 583 0 0 0 - ----------------------------------------------------------------------------------------------------------------------------- Dividend Opportunity - total 1,579 1,705 1,100 1,905 2,057 1,200 1,400 1,700 Amount deferred 1,579 1,705 425 0 769 0 0 0 - ----------------------------------------------------------------------------------------------------------------------------- Insured Tax-Exempt - total 1,204 1,330 875 1,530 1,682 950 1,025 1,325 Amount deferred 1,204 1,330 325 0 628 0 0 0 - ----------------------------------------------------------------------------------------------------------------------------- Massachusetts Tax-Exempt - total 1,079 1,205 808 1,405 1,557 867 900 1,200 Amount deferred 1,079 1,205 300 0 583 0 0 0 - ----------------------------------------------------------------------------------------------------------------------------- Michigan Tax-Exempt - total 1,079 1,205 808 1,405 1,557 867 900 1,200 Amount deferred 1,079 1,205 300 0 583 0 0 0 - ----------------------------------------------------------------------------------------------------------------------------- Minnesota Tax-Exempt - total 1,279 1,405 925 1,605 1,757 1,000 1,100 1,400 Amount deferred 1,279 1,405 300 0 583 0 0 0 - ----------------------------------------------------------------------------------------------------------------------------- New York Tax-Exempt - total 1,079 1,205 808 1,405 1,557 867 900 1,200 Amount deferred 1,079 1,205 300 0 583 0 0 0 - ----------------------------------------------------------------------------------------------------------------------------- Ohio Tax-Exempt - total 1,079 1,205 808 1,405 1,557 867 900 1,200 Amount deferred 1,079 1,205 300 0 583 0 0 0 - ----------------------------------------------------------------------------------------------------------------------------- Real Estate 727 877 808 1,027 1,172 867 625 925 Amount deferred 727 877 300 0 489 0 0 0 - -----------------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2005 Page 147
- ----------------------------------------------------------------------------------------------------------------------------- Fund Aggregate Compensation from Fund - ----------------------------------------------------------------------------------------------------------------------------- Carroll DeSimone** Flynn Jones Lewis Paglia Simpson Taunton- Rigby - ----------------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending July 31 - ----------------------------------------------------------------------------------------------------------------------------- Cash Management - total 3,681 3,754 2,700 4,004 4,155 2,975 3,500 3,800 Amount deferred 3,681 3,754 1,138 0 1,515 0 0 0 - ----------------------------------------------------------------------------------------------------------------------------- Core Bond - total 1,081 1,154 967 1,404 1,555 1,025 900 1,200 Amount deferred 1,081 1,154 379 0 562 0 0 0 - ----------------------------------------------------------------------------------------------------------------------------- Disciplined Equity - total 938 1,088 967 1,288 1,433 1,025 783 1,083 Amount deferred 938 1,088 379 0 554 0 0 0 - ----------------------------------------------------------------------------------------------------------------------------- Discovery - total 1,081 1,154 967 1,404 1,555 1,025 900 1,200 Amount deferred 1,081 1,154 379 0 562 0 0 0 - ----------------------------------------------------------------------------------------------------------------------------- Growth - total 1,681 1,754 1,367 2,004 2,155 1,475 1,500 1,800 Amount deferred 1,681 1,754 554 0 782 0 0 0 - ----------------------------------------------------------------------------------------------------------------------------- Income Opportunities - total 1,140 1,213 1,025 1,463 1,614 1,083 958 1,258 Amount deferred 1,140 1,213 408 0 584 0 0 0 - ----------------------------------------------------------------------------------------------------------------------------- Inflation Protected Securities - 1,081 1,154 967 1,404 1,555 1,025 900 1,200 total 1,081 1,154 379 0 562 0 0 0 Amount deferred - ----------------------------------------------------------------------------------------------------------------------------- Large Cap Equity - total 2,198 2,271 1,700 2,521 2,672 1,850 2,017 2,317 Amount deferred 2,198 2.271 700 0 970 0 0 0 - ----------------------------------------------------------------------------------------------------------------------------- Large Cap Value - total 1,081 1,154 967 1,404 1,555 1,025 900 1,200 Amount deferred 1,081 1,154 379 0 562 0 0 0 - ----------------------------------------------------------------------------------------------------------------------------- Limited Duration Bond - total 1,081 1,154 967 1,404 1,555 1,025 900 1,200 Amount deferred 1,081 1,154 379 0 562 0 0 0 - ----------------------------------------------------------------------------------------------------------------------------- New Dimensions - total 4,256 4,329 2,958 4,579 4,730 3,317 4,075 4,375 Amount deferred 4,256 4,329 1,225 0 1,716 0 0 0 - ----------------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending August 31 - ----------------------------------------------------------------------------------------------------------------------------- Diversified Bond - total 2,838 2,938 2,308 3,188 3,339 2,517 2,683 2,983 Amount deferred 2,838 2,938 975 0 1,196 0 0 0 - ----------------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending September 30 - ----------------------------------------------------------------------------------------------------------------------------- Balanced - total 1,304 1,454 1,300 1,704 1,905 1,425 1,200 1,500 Amount deferred 1,304 1,454 538 0 660 0 0 0 - ----------------------------------------------------------------------------------------------------------------------------- Diversified Equity Income - total 1,779 1,929 1,708 2,179 2,380 1,867 1,675 1,975 Amount deferred 1,779 1,929 725 0 829 0 0 0 - ----------------------------------------------------------------------------------------------------------------------------- Mid Cap Value - total 1,279 1,429 1,292 1,679 1,880 1,408 1,175 1,475 Amount deferred 1,279 1,429 538 0 652 0 0 0 - ----------------------------------------------------------------------------------------------------------------------------- Stock - total 1,529 1,679 1,475 1,929 2,130 1,625 1,425 1,725 Amount deferred 1,529 1,679 613 0 739 0 0 0 - ----------------------------------------------------------------------------------------------------------------------------- Strategic Allocation - total 1,204 1,354 1,217 1,604 1,805 1,333 1,100 1,400 Amount deferred 1,204 1,354 500 0 625 0 0 0 - -----------------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2005 Page 148
- ----------------------------------------------------------------------------------------------------------------------------- Fund Aggregate Compensation from Fund - ----------------------------------------------------------------------------------------------------------------------------- Carroll DeSimone** Flynn Jones Lewis Paglia Simpson Taunton- Rigby - ----------------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending October 31 - ----------------------------------------------------------------------------------------------------------------------------- Emerging Markets - total 1,035 1,062 0 1,162 1,312 0 1,008 1,108 Amount deferred 1,035 1,062 0 514 0 0 - ----------------------------------------------------------------------------------------------------------------------------- European Equity - total 1,069 1,104 0 1,204 1,354 0 1,050 1,150 Amount deferred 1,069 1,104 0 532 0 0 - ----------------------------------------------------------------------------------------------------------------------------- Global Balanced - total 1,069 1,104 0 1,204 1,354 0 1,050 1,150 Amount deferred 1,069 1,104 0 532 0 0 - ----------------------------------------------------------------------------------------------------------------------------- Global Bond - total 1,069 1,104 0 1,204 1,354 0 1,050 1,150 Amount deferred 1,069 1,104 0 532 0 0 - ----------------------------------------------------------------------------------------------------------------------------- Global Equity - total 1,069 1,104 0 1,204 1,354 0 1,050 1,150 Amount deferred 1,069 1,104 0 532 0 0 - ----------------------------------------------------------------------------------------------------------------------------- Global Technology - total 977 1,004 0 1,104 1,254 0 950 1,050 Amount deferred 977 1,004 0 495 0 0 - ----------------------------------------------------------------------------------------------------------------------------- International Aggressive Growth - 1,185 1,220 0 1,320 1,470 0 1,167 1,267 total 1,185 1,220 0 571 0 0 Amount deferred - ----------------------------------------------------------------------------------------------------------------------------- International Equity - total 1,069 1,104 0 1,204 1,354 0 1,050 1,150 Amount deferred 1,069 1,104 0 532 0 0 - ----------------------------------------------------------------------------------------------------------------------------- International Opportunity - total 1,194 1,237 0 1,337 1,487 0 1,183 1,283 Amount deferred 1,194 1,237 0 581 0 0 - ----------------------------------------------------------------------------------------------------------------------------- International Select Value - total 1,085 1,137 0 1,237 1,387 0 1,083 1,183 Amount deferred 1,085 1,137 0 552 0 0 - ----------------------------------------------------------------------------------------------------------------------------- International Small Cap - total 910 887 0 887 1,037 0 783 833 Amount deferred 910 887 0 342 0 0 - ----------------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending November 30 - ----------------------------------------------------------------------------------------------------------------------------- Intermediate Tax-Exempt - total 1,077 1,104 208 1,204 1,404 158 1,050 1,150 Amount deferred 1,077 1,104 0 0 506 0 0 0 - ----------------------------------------------------------------------------------------------------------------------------- Mid Cap Growth - total 2,335 2,362 317 2,462 2,662 267 2,308 2,408 Amount deferred 2,335 2,362 0 0 945 0 0 0 - ----------------------------------------------------------------------------------------------------------------------------- Tax-Exempt Bond - total 1,485 1,512 242 1,612 1,812 192 1,458 1,558 Amount deferred 1,485 1,512 0 0 652 0 0 0 - ----------------------------------------------------------------------------------------------------------------------------- Tax-Exempt High Income - total 1,977 2,004 283 2,104 2,304 233 1,950 2,050 Amount deferred 1,977 2,004 0 0 823 0 0 0 - ----------------------------------------------------------------------------------------------------------------------------- For funds with fiscal period ending December 31 - ----------------------------------------------------------------------------------------------------------------------------- Tax-Exempt Money Market - total 977 1,154 208 1,154 1,304 167 950 1,000 Amount deferred 977 1,154 0 0 430 0 0 0 - -----------------------------------------------------------------------------------------------------------------------------
* Arne H. Carlson, Chair of the Board, is compensated by Board Services Corporation. Mr. Laikind was not a Board member prior to Sept. 30, 2005, and therefore is not included in the table. ** Livio D. DeSimone retired as a Board member, effective Sept. 8, 2005. *** Funds-of-Funds do not pay additional compensation to the Board members for attending meetings. Compensation is paid directly from the underlying funds in which each Funds-of-Funds invests. Statement of Additional Information - Nov. 29, 2005 Page 149 Master portfolios. For funds that are part of a master/feeder structure, Board members also received compensation from the master portfolios during the last fiscal period as shown in the following table:
Table 32A. Board Member* Compensation - Master Portfolios - ----------------------------------- ----------------------------------------------------------------------------- ----------- Portfolio Aggregate Compensation from Portfolio - ----------------------------------- ---------- ------------ ---------- --------- ---------- ---------- ---------- ----------- Carroll DeSimone** Flynn Jones Lewis Paglia Simpson Taunton- Rigby - ----------------------------------- ---------- ------------ ---------- --------- ---------- ---------- ---------- ----------- For portfolios with fiscal period ending May 31 - ----------------------------------------------------------------------------------------------------------------- ----------- Government Income*** - total 1,937 2,064 1,200 2,264 2,415 1,283 1,808 2,058 Amount deferred 1,937 2,064 458 0 920 0 0 0 - ----------------------------------- ---------- ------------ ---------- --------- ---------- ---------- ---------- ----------- High Yield*** - total 2,129 2,255 1,300 2,455 2,607 1,400 2,000 2,250 Amount deferred 2,129 2,255 500 0 993 0 0 0 - ----------------------------------- ---------- ------------ ---------- --------- ---------- ---------- ---------- ----------- Quality Income - total 1,429 1,555 950 1,755 1,907 992 1,300 1,550 Amount deferred 1,429 1,555 354 0 727 0 0 0 - ----------------------------------------------------------------------------------------------------------------- ----------- For portfolios with fiscal period ending July 31 - ----------------------------------------------------------------------------------------------------------------- ----------- Growth - total 2,423 2,496 1,842 2,746 2,897 2,017 2,242 2,542 Amount deferred 2,423 2,496 758 0 1,052 0 0 0 - ----------------------------------- ---------- ------------ ---------- --------- ---------- ---------- ---------- ----------- Growth Trends - total 8,173 8,246 5,608 8,496 8,647 6,283 7,992 8,292 Amount deferred 8,173 8,246 2,392 0 3,155 0 0 0 - ----------------------------------------------------------------------------------------------------------------- ----------- For portfolios with fiscal period ending September 30 - ----------------------------------------------------------------------------------------------------------------- ----------- Balanced - total 1,629 1,779 1,558 2,029 2,230 1,717 1,525 1,825 Amount deferred 1,629 1,779 650 0 775 0 0 0 - ----------------------------------- ---------- ------------ ---------- --------- ---------- ---------- ---------- ----------- Equity - total 2,004 2,154 1,883 2,404 2,605 2,067 1,900 2,200 Amount deferred 2,004 2,154 800 0 908 0 0 0 - ----------------------------------- ---------- ------------ ---------- --------- ---------- ---------- ---------- ----------- Equity Income - total 2,554 2,704 2,367 2,954 3,155 2,583 2,450 2,750 Amount deferred 2,554 2,704 1,025 0 1,103 0 0 0 - ----------------------------------- ---------- ------------ ---------- --------- ---------- ---------- ---------- ----------- Total Return - total 1,504 1,654 1,467 1,904 2,105 1,608 1,400 1,700 Amount deferred 1,504 1,654 613 0 731 0 0 0 - ----------------------------------------------------------------------------------------------------------------- ----------- For portfolios with fiscal period ending October 31 - ----------------------------------------------------------------------------------------------------------------- ----------- Emerging Markets**** - total 1,077 1,112 0 1,212 1,362 0 1,058 1,158 Amount deferred 1,077 1,112 0 535 0 0 - ----------------------------------- ---------- ------------ ---------- --------- ---------- ---------- ---------- ----------- World Growth**** - total 1,160 1,204 0 1,304 1,454 0 1,150 1,250 Amount deferred 1,160 1,204 0 570 0 0 - ----------------------------------- ---------- ------------ ---------- --------- ---------- ---------- ---------- ----------- World Income**** - total 1,169 1,220 0 1,320 1,470 0 1,167 1,267 Amount deferred 1,169 1,220 0 580 0 0 - ----------------------------------- ---------- ------------ ---------- --------- ---------- ---------- ---------- ----------- World Technologies - total 1,069 1,104 0 1,204 1,354 0 1,050 1,150 Amount deferred 1,069 1,104 0 532 0 0 - ----------------------------------------------------------------------------------------------------------------- ----------- For portfolios with fiscal period ending November 30 - ----------------------------------------------------------------------------------------------------------------- ----------- Tax-Free High Yield*** - total 3,019 3,045 367 3,145 3,345 317 2,992 3,092 Amount deferred 3,019 3,045 0 0 1,194 0 0 0 - ----------------------------------- ---------- ------------ ---------- --------- ---------- ---------- ---------- -----------
* Arne H. Carlson, Chair of the Board, is compensated by Board Services Corporation. ** Livio D. DeSimone retired as a Board member, effective Sept. 8, 2005. *** Ceased operation on Oct. 18, 2005. **** Ceased operation on Nov. 8, 2005. Statement of Additional Information - Nov. 29, 2005 Page 150 Control Persons and Principal Holders of Securities The following table identifies those investors who, as of 30 days after the end of the fund's fiscal period, owned 5% or more of any class of a fund's shares and those investors who owned 25% or more of a fund's shares (all share classes taken together). Investors who own more than 25% of a fund's shares are presumed to control the fund and would be able to determine the outcome of most issues that are submitted to shareholders for vote. The table is organized by fiscal year end. You can find your fund's fiscal year end in Table 1. Table 33. Control Persons and Principal Holders of Securities as of 30 days after the end of the fund's fiscal period
- ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Fund Shareholder name, Class A Class B Class C Class I Class Y Percent of city and state Fund (if greater than 25%) - ----------------------------------------------------------------------------------------------------------------------------------- Funds with fiscal period ending January 31 - ----------------------------------------------------------------------------------------------------------------------------------- Portfolio Builder Ameriprise Financial, Inc. 11.44% Aggressive Minneapolis, MN --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Charles Schwab & Co., Inc. 88.56% (Charles Schwab) a brokerage firm in San Francisco, CA - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Ameriprise Financial 100.00% Conservative - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Ameriprise Financial 46.90% Moderate --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Charles Schwab 53.10% - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Ameriprise Financial 21.82% Moderate Aggressive --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Charles Schwab 78.18% - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Ameriprise Financial 100.00% Moderate Conservative - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Total Ameriprise Financial 12.34% Equity --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Charles Schwab 87.66% - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Small Company Index Charles Schwab 9.96% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Ameriprise Trust Company 65.78% Minneapolis, MN --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Asbestos Workers Local 34 25.78% Minneapolis, MN - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ S&P 500 Index*** Clients of American Enterprise Investment Services, Inc. (AEIS), a brokerage firm, Minneapolis, MN - ----------------------------------------------------------------------------------------------------------------------------------- Funds with fiscal period ending March 31 - ----------------------------------------------------------------------------------------------------------------------------------- Equity Value Ameriprise Financial 100.00% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Ameriprise Trust Company 98.74% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ John C. Mullarkey 6.37% Willowbrook, IL - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Precious Metals Charles Schwab 17.51% 95.29% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ John E. Bridgman 6.10% Minneapolis, MN --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Richard L. and 5.71% Susan Angela Venerable Argyle, TX - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------
Statement of Additional Information - Nov. 29, 2005 Page 151
- ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Fund Shareholder name, Class A Class B Class C Class I Class Y Percent of city and state Fund (if greater than 25%) - ----------------------------------------------------------------------------------------------------------------------------------- Small Cap Advantage Charles Schwab 17.79% 99.46% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Aggressive 19.88% Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate Fund 20.83% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 32.40% Aggressive Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 5.90% Conservative Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Total Equity 19.15% Fund - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Small Cap Growth Charles Schwab 15.25% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Aggressive 19.88% Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate Fund 20.83% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 32.39% Aggressive Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 5.91% Conservative Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Total Equity 19.16% Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Ameriprise Trust Company 69.43% - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Strategy Aggressive Ameriprise Financial 100.00% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Met Life 93.94% Jersey City, NJ - ----------------------------------------------------------------------------------------------------------------------------------- Funds with fiscal period ending May 31 - ----------------------------------------------------------------------------------------------------------------------------------- Aggressive Growth Charles Schwab 5.02% 58.52% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ AEIS 5.10% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Roger J., Sylvia Ann and 11.31% Matthew Thompson Eagle, ID --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate Fund 20.70% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 32.87% Aggressive Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Aggressive 19.66% Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Total Equity 19.10% Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 5.89% Conservative Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Ameriprise Financial 41.49% - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Fundamental Growth Charles Schwab 7.00% 44.41% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ AEIS 5.91% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate Fund 20.72% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 32.87% Aggressive Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Aggressive 19.62% Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Total Equity 19.09% Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 5.92% Conservative Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Terry H. Henson 8.46% Fairmount, GA --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Nancy P. Kofranek 5.50% Oxnard, CA --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Ameriprise Financial 55.60% 73.50%* - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------
Statement of Additional Information - Nov. 29, 2005 Page 152
- ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Fund Shareholder name, Class A Class B Class C Class I Class Y Percent of city and state Fund (if greater than 25%) - ----------------------------------------------------------------------------------------------------------------------------------- Fundamental Value Charles Schwab 14.97% 98.09% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate Fund 20.73% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 32.89% Aggressive Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Aggressive 19.61% Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Total Equity 19.09% Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 5.91% Conservative Fund - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ High Yield Bond Charles Schwab 11.00% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Ameriprise Financial 100.00% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Met Life 50.50% - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Select Value Charles Schwab 11.34% 76.29% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate Fund 20.78% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 32.82% Aggressive Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Aggressive 19.62% Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Total Equity 18.99% Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 5.99% Conservative Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Ameriprise Financial 23.71% - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Selective Portfolio Builder Conservative 15.80% Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate Fund 35.47% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 32.15% Aggressive Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 13.84% Conservative Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Ameriprise Financial 97.47% - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Short Duration Charles Schwab 10.00% U.S. Gov't --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Conservative 29.71% Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Aggressive 24.34% Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 45.92% Conservative Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Ameriprise Financial 22.34% - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Small Cap Equity Charles Schwab 21.21% 91.36% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate Fund 20.87% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 32.65% Aggressive Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Aggressive 19.66% Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Total Equity 19.08% Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 5.89% Conservative Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Ameriprise Financial 8.64% - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------
Statement of Additional Information - Nov. 29, 2005 Page 153
- ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Shareholder name, Class A Class B Class C Class I Class Y Percent of Fund city and state Fund (if greater than 25%) - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Small Cap Value Charles Schwab 21.84% 94.45% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate Fund 20.92% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 32.79% Aggressive Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Aggressive 19.46% Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Total Equity 19.06% Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 5.88% Conservative Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Ameriprise Financial 5.55% - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ U.S. Gov't Mortgage Charles Schwab 15.46% 70.83% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Ameriprise Financial 100.00% - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Value Charles Schwab 12.97% 93.22% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate Fund 20.70% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 32.86% Aggressive Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Aggressive 19.65% Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Total Equity 19.11% Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 5.92% Conservative Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Ameriprise Financial 6.78% - ----------------------------------------------------------------------------------------------------------------------------------- Funds with fiscal period ending June 30 - ----------------------------------------------------------------------------------------------------------------------------------- Dividend Opportunity Charles Schwab 10.51% 100.00% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Ameriprise Financial 100.00% - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Insured Tax-Exempt J. Haley Stephens and Lynne S. 7.19% Kelly as the Trustees of the Mary M. Stephens Irrevocable Trust, Calhoun, GA --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Ameriprise Financial 100.00% - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ California Tax-Exempt Arthur Mendel and Dorothy 6.50% Mendel as the Trustees of the Dorothy M. Mendel Irrevocable Trust, Richmond, CA - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Massachusetts Charles Schwab 6.56% Tax-Exempt --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ June P. Venette and Norman E. 9.24% Venette as the Trustees of the Norman E. Venette Revocable Trust, Orange, MN --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Donal A. Simard and Claire G. 7.14% Simard, Ipswich, MA --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Alphonse A. Di Nardo and Linda 6.30% Di Nardo, Leominster, MA --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Harvey W. Levin and Phyllis 6.10% Levin, Swampscott, MA --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Rita Hashem, Tewksbury, MA 5.18% - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------
Statement of Additional Information - Nov. 29, 2005 Page 154
- ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Shareholder name, Class A Class B Class C Class I Class Y Percent of Fund city and state Fund (if greater than 25%) - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ - ----------------------------------------------------------------------------------------------------------------------------------- Michigan Tax-Exempt Charles Schwab 5.39% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Chester V. Mysliwiec and Rose 7.02% M. Mysliwiec as the Trustees of the Rose M. Mysliwiec Living Trust, Grand Rapids, MI --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Barry J. Fishman and Teresa A. 10.96% McMahon, as Trustees for the Barry J. Fishman Living Trust, AnnArbor, MI --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Ray W. Butler and Gertrude E. 7.04% Butler, Clarkston, MI --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ R. Paul Minger and Diane E. 5.55% Minger, Huntley, IL - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ New York Tax-Exempt Charles Schwab 5.11% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Dana Brandwein and Daniel 7.80% Oates, Sharon, CT --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Arthur Ezersky and Sandra 7.28% Ezersky, Woodbury, NY --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Charles D. Adler and Judith E. 5.91% Adler, New York, NY - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Ohio Tax-Exempt Charles Schwab 5.54% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Sandra K. Ogle, Strongsville, OH 5.14% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Richard L. Sears, Parma, OH 6.32% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Joseph A. Sears, Berea, OH 6.32% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ James N. Sears, Columbus, OH 6.32% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ David A. Sears, Brunswick, OH 6.10% - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Real Estate Charles Schwab 10.23% 62.53% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Ameriprise Financial 37.47% 37.38%* --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Aggressive 15.20% Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Conservative 5.32% Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate Fund 25.63% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 31.33% Aggressive Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 10.35% Conservative Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Total Equity 12.14% Fund - ----------------------------------------------------------------------------------------------------------------------------------- Funds with fiscal period ending July 31 - ----------------------------------------------------------------------------------------------------------------------------------- Cash Management Ameriprise Trust Company 96.61% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Jerry J. and Roma J. Meyer, 10.41% Williamsburg, IN - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Core Bond IDS Life Insurance Company, 17.56% 9.64% Minneapolis, MN --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Charles Schwab 13.23% 90.36% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Frank S. Gregory, Derry, NH 6.27% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Conservative 12.18% Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate Fund 41.33% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 32.45% Aggressive Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 10.22% Conservative Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Ameriprise Financial 73.57%* - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------
Statement of Additional Information - Nov. 29, 2005 Page 155
- ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Shareholder name, Class A Class B Class C Class I Class Y Percent of Fund city and state Fund (if greater than 25%) - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Disciplined Equity Charles Schwab 10.87% 60.92% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Emanuel A. and Kelly D. 9.56% Madeira, S. Dartmouth, MA --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Brian L. and Mary Jane Hopp, 8.25% Beldenville, WI --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Linda L. Lane, Bay Pines, FL 6.29% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Paul M. and Nikki S. Farmer, 5.48% Franklin, TN --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Evelyn F. and Steven Couture, 5.10% Plymouth, MN --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Aggressive 19.61% Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate Fund 20.63% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 33.09% Aggressive Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 5.85% Conservative Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Total Equity 19.09% Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Ameriprise Financial 7.02% 39.08% 68.54%* - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Discovery Ameriprise Trust Company 100.00% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Hal C. Beckley and William A. 67.22% Beckley, Branford, CT --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Teresa M. and Carl Greenfield, 12.28% Seattle, WA --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Terence J. Benka, Milwaukee, WI 8.37% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Ameriprise Financial 7.91% - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Growth Charles Schwab 6.58% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Ameriprise Trust Company 98.98% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Aggressive 19.66% Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate Fund 20.71% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 33.04% Aggressive Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 5.79% Conservative Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Total Equity 19.08% Fund - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Income Opportunities Charles Schwab 19.59% 97.45% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Aggressive 12.71% Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate Fund 53.17% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 24.77% Aggressive Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 9.33% Conservative Fund - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Inflation Protected Charles Schwab 18.04% Securities --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ IDS Life Insurance Company, 100.00% Minneapolis, MN --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Conservative 10.20% Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate Fund 37.97% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 31.86% Aggressive Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 19.95% Conservative Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Ameriprise Financial 28.37%* - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------
Statement of Additional Information - Nov. 29, 2005 Page 156
- ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Shareholder name, Class A Class B Class C Class I Class Y Percent of Fund city and state Fund (if greater than 25%) - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Large Cap Equity Charles Schwab 5.48% 76.80% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Ameriprise Financial 5.53% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Wells Fargo Bank as Tr of the 17.67% Holland American Line, Minneapolis, MN --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Aggressive 19.57% Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate Fund 20.74% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 33.37% Aggressive Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 5.61% Conservative Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Total Equity 19.05% Fund - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Large Cap Value Charles Schwab 15.35% 90.06% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Aggressive 19.72% Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate Fund 20.66% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 33.08% Aggressive Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 5.74% Conservative Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Total Equity 19.05% Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Ameriprise Financial 9.94% 27.93%* - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Limited Duration Bond Charles Schwab 18.26% 83.70% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Donald and Elizabeth L. Snow, 7.22% Derry, NH --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Sylvia Cohen, Stockton, CA 5.33% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Aggressive 17.24% Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Conservative 14.41% Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate Fund 14.27% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 23.98% Aggressive Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 30.10% Conservative Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ IDS Life Insurance Company, 16.30% Minneapolis, MN --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Ameriprise Financial 42.41%* - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ New Dimensions Charles Schwab 5.32% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Ameriprise Trust Company 82.79% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Aggressive 19.67% Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate Fund 20.73% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 33.04% Aggressive Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 5.83% Conservative Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Total Equity 19.00% Fund - ----------------------------------------------------------------------------------------------------------------------------------- Funds with fiscal period ending August 31 - ----------------------------------------------------------------------------------------------------------------------------------- Diversified Bond Charles Schwab 6.35% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Ameriprise Financial 100.00% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Ameriprise Trust Company 96.62% - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------
Statement of Additional Information - Nov. 29, 2005 Page 157
- ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Shareholder name, Class A Class B Class C Class I Class Y Percent of Fund city and state Fund (if greater than 25%) - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Funds with fiscal period ending September 30 - ----------------------------------------------------------------------------------------------------------------------------------- Balanced Ameriprise Trust Company 99.75% - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Diversified Equity Charles Schwab 14.71% Income --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Aggressive 19.55% Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate Fund 20.65% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 32.82% Aggressive Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 5.94% Conservative Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Total Equity 19.24% Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Ameriprise Trust Company 48.32% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Wells Fargo Bank, Minneapolis, 26.69% MN --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Holland American Life, 18.68% Minneapolis, MN - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Mid Cap Value Charles Schwab 23.23% 98.04% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Aggressive 19.70% Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate Fund 20.63% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 32.79% Aggressive Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 5.89% Conservative Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Total Equity 19.15% Fund - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Stock Portfolio Builder Aggressive 19.51% Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate Fund 20.77% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 32.83% Aggressive Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 5.86% Conservative Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Total Equity 19.19% Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Ameriprise Trust Company 99.43% - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Strategic Allocation Ameriprise Trust Company 86.71% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Charles Schwab 10.88% - ----------------------------------------------------------------------------------------------------------------------------------- Funds with fiscal period ending October 31 - ----------------------------------------------------------------------------------------------------------------------------------- Emerging Markets Charles Schwab 9.72% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ AEIS 6.40% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Aggressive 19.95% Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate Fund 21.88% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 33.15% Aggressive Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 6.86% Conservative Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Total Equity 18.13% Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Ameriprise Trust Company 95.28% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Raymond T. Snapp 5.59% Bedford, IN - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ European Equity Charles Schwab 13.66% 86.15% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Ameriprise Financial 100.00% 13.86% - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------
Statement of Additional Information - Nov. 29, 2005 Page 158
- ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Shareholder name, Class A Class B Class C Class I Class Y Percent of Fund city and state Fund (if greater than 25%) - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Global Balanced Charles Schwab 9.68% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Ameriprise Trust Company 99.96% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Sherman D and Carol A Deponte, 6.35% Trustees - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Global Bond Portfolio Builder Moderate 42.46% Aggressive Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Charles Schwab 100.00% - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Global Equity Ameriprise Trust Company 90.29% - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Global Technology Charles Schwab 11.74% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Ameriprise Trust Company 92.26% - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ International Charles Schwab 33.80% 92.74% Aggressive Growth --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Aggressive 19.89% Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate Fund 20.96% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 32.22% Aggressive Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 6.66% Conservative Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Total Equity 17.73% Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Ameriprise Financial 7.26% - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ International Equity Ameriprise Financial 28.46% 35.45%* --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Charles Schwab 9.13% 82.96% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Aggressive 19.53% Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate Fund 21.23% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 32.28% Aggressive Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 6.73% Conservative Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Total Equity 17.69% Fund - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ International Charles Schwab 9.92% Opportunity --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Aggressive 19.53% Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate Fund 21.19% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 32.34% Aggressive Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 6.73% Conservative Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Total Equity 17.69% Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Tomorrow's Scholar 66.88% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Roger J. Thompson 5.71% Eagle, ID - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ International Select Charles Schwab 17.28% 96.92% Value --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Aggressive 19.25% Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate Fund 21.44% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 32.47% Aggressive Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 6.77% Conservative Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Total Equity 17.55% Fund - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------
Statement of Additional Information - Nov. 29, 2005 Page 159
- ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Shareholder name, Class A Class B Class C Class I Class Y Percent of Fund city and state Fund (if greater than 25%) - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ International Small Cap Ameriprise Financial 27.47% 18.17% 33.69%* --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Charles Schwab 14.79% 81.83% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Aggressive 19.71% Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate Fund 21.00% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 32.40% Aggressive Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Moderate 6.68% Conservative Fund --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Portfolio Builder Total Equity 17.73% Fund - ----------------------------------------------------------------------------------------------------------------------------------- Funds with fiscal period ending November 30 - ----------------------------------------------------------------------------------------------------------------------------------- Intermediate Charles Schwab 12.26% Tax-Exempt --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Ameriprise Financial 100.00% - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Mid Cap Growth Charles Schwab 7.07% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Ameriprise Trust Company 68.09% - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Tax-Exempt Bond AEIS 6.57% --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Ameriprise Financial 100.00% - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Tax-Exempt Ameriprise Financial 100.00% High Income - ----------------------------------------------------------------------------------------------------------------------------------- Funds with fiscal period ending December 31 - ----------------------------------------------------------------------------------------------------------------------------------- Tax-Exempt None Money Market - ------------------------- --------------------------------- ----------- ----------- ---------- ----------- ----------- ------------
* Combination of Ameriprise Financial initial capital for Class A shares and Portfolio Builder Fund investments in Class I shares. ** Ameriprise Trust Company is not the beneficial owner of these shares. The shares are held of record by Ameriprise Trust Company and are normally voted by various retirement plans and retirement participants. *** American Enterprise Investment Services, Inc. (AEIS), Minneapolis, MN holds of record 100% of Class D shares and 85.59% of Class E shares. A fund may serve as an underlying investment of the RiverSource Portfolio Builder Series, a group of six funds-of-funds (the Portfolio Builder Funds) that principally invest in shares of other RiverSource funds (the underlying funds). The underlying funds and the Portfolio Builder Funds share the same officers, directors, and investment manager, RiverSource Investments. The Portfolio Builder Funds do not invest in an underlying fund for the purpose of exercising management or control; however, from time to time, investments by the Portfolio Builder Funds in a fund may represent a significant portion of a fund. Because the Portfolio Builder Funds may own a substantial portion of the shares of a fund, procedures have been put into place to assure that public shareholders will determine the outcome of all actions taken at underlying fund shareholder meetings. In proxy voting, the Portfolio Builder Funds will vote on each proposal in the same proportion that other shareholders vote on the proposal. In addition, Ameriprise Financial or an affiliate may own shares of a fund as a result of an initial capital investment at the inception of the fund or class. To the extent RiverSource Investments, as manager of the Portfolio Builder Funds, may be deemed a beneficial owner of the shares of an underlying fund held by the Portfolio Builder Funds, and such shares, together with any initial capital investment by Ameriprise Financial or an affiliate represent more than 25% of a fund, RiverSource Investments and its affiliated companies may be deemed to control the fund. Independent Registered Public Accounting Firm The financial statements contained in a fund's Annual Report were audited by the independent registered public accounting firm, KPMG LLP, 4200 Wells Fargo Center, 90 S. Seventh St., Minneapolis, MN 55402-3900. The independent registered public accounting firm also provides other accounting and tax-related services as requested by the fund. Statement of Additional Information - Nov. 29, 2005 Page 160 Appendix A DESCRIPTION OF RATINGS Standard & Poor's Long-Term Debt Ratings A Standard & Poor's corporate or municipal debt rating is a current assessment of the creditworthiness of an obligor with respect to a specific obligation. This assessment may take into consideration obligors such as guarantors, insurers, or lessees. The debt rating is not a recommendation to purchase, sell, or hold a security, inasmuch as it does not comment as to market price or suitability for a particular investor. The ratings are based on current information furnished by the issuer or obtained by S&P from other sources it considers reliable. S&P does not perform an audit in connection with any rating and may, on occasion, rely on unaudited financial information. The ratings may be changed, suspended, or withdrawn as a result of changes in, or unavailability of such information or based on other circumstances. The ratings are based, in varying degrees, on the following considerations: o Likelihood of default capacity and willingness of the obligor as to the timely payment of interest and repayment of principal in accordance with the terms of the obligation. o Nature of and provisions of the obligation. Protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights. Investment Grade Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is extremely strong. Debt rated AA has a very strong capacity to pay interest and repay principal and differs from the highest rated issues only in a small degree. Debt rated A has a strong capacity to pay interest and repay principal, although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher-rated categories. Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher-rated categories. Speculative Grade Debt rated BB, B, CCC, CC, and C is regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal. BB indicates the least degree of speculation and C the highest. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major exposures to adverse conditions. Debt rated BB has less near-term vulnerability to default than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions that could lead to inadequate capacity to meet timely interest and principal payments. The BB rating category also is used for debt subordinated to senior debt that is assigned an actual or implied BBB- rating. Debt rated B has a greater vulnerability to default but currently has the capacity to meet interest payments and principal repayments. Adverse business, financial, or economic conditions will likely impair capacity or willingness to pay interest and repay principal. The B rating category also is used for debt subordinated to senior debt that is assigned an actual or implied BB or BB- rating. Statement of Additional Information - Nov. 29, 2005 Page 161 Debt rated CCC has a currently identifiable vulnerability to default and is dependent upon favorable business, financial, and economic conditions to meet timely payment of interest and repayment of principal. In the event of adverse business, financial, or economic conditions, it is not likely to have the capacity to pay interest and repay principal. The CCC rating category also is used for debt subordinated to senior debt that is assigned an actual or implied B or B- rating. Debt rated CC typically is applied to debt subordinated to senior debt that is assigned an actual or implied CCC rating. Debt rated C typically is applied to debt subordinated to senior debt that is assigned an actual or implied CCC rating. The C rating may be used to cover a situation where a bankruptcy petition has been filed, but debt service payments are continued. The rating CI is reserved for income bonds on which no interest is being paid. Debt rated D is in payment default. The D rating category is used when interest payments or principal payments are not made on the date due, even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. The D rating also will be used upon the filing of a bankruptcy petition if debt service payments are jeopardized. Moody's Long-Term Debt Ratings Aaa -- Bonds that are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk. Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa -- Bonds that are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present that make the long-term risk appear somewhat larger than in Aaa securities. A -- Bonds that are rated A possess many favorable investment attributes and are to be considered as upper-medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present that suggest a susceptibility to impairment some time in the future. Baa -- Bonds that are rated Baa are considered as medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba -- Bonds that are rated Ba are judged to have speculative elements -- their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B -- Bonds that are rated B generally lack characteristics of a desirable investment. Assurance of interest and principal payments or maintenance of other terms of the contract over any long period of time may be small. Caa -- Bonds that are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca -- Bonds that are rated Ca represent obligations that are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C -- Bonds that are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Statement of Additional Information - Nov. 29, 2005 Page 162 Fitch's Long-Term Debt Ratings Fitch's bond ratings provide a guide to investors in determining the credit risk associated with a particular security. The ratings represent Fitch's assessment of the issuer's ability to meet the obligations of a specific debt issue in a timely manner. The rating takes into consideration special features of the issue, its relationship to other obligations of the issuer, the current and prospective financial condition and operating performance of the issuer and any guarantor, as well as the economic and political environment that might affect the issuer's future financial strength and credit quality. Fitch ratings do not reflect any credit enhancement that may be provided by insurance policies or financial guaranties unless otherwise indicated. Fitch ratings are not recommendations to buy, sell or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature of taxability of payments made in respect of any security. Fitch ratings are based on information obtained from issuers, other obligors, underwriters, their experts, and other sources Fitch believes to be reliable. Fitch does not audit or verify the truth or accuracy of such information. Ratings may be changed, suspended, or withdrawn as a result of changes in, or the unavailability of, information or for other reasons. Investment Grade AAA: Bonds considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events. AA: Bonds considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA categories are not significantly vulnerable to foreseeable future developments, short-term debt of these issuers is generally rated F-1+. A: Bonds considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings. BBB: Bonds considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds and, therefore, impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings. Speculative Grade BB: Bonds are considered speculative. The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified, which could assist the obligor in satisfying its debt service requirements. B: Bonds are considered highly speculative. While bonds in this class are currently meeting debt service requirements, the probability of continued timely payment of principal and interest reflects the obligor's limited margin of safety and the need for reasonable business and economic activity throughout the life of the issue. CCC: Bonds have certain identifiable characteristics that, if not remedied, may lead to default. The ability to meet obligations requires an advantageous business and economic environment. Statement of Additional Information - Nov. 29, 2005 Page 163 CC: Bonds are minimally protected. Default in payment of interest and/or principal seems probable over time. C: Bonds are in imminent default in payment of interest or principal. DDD, DD, and D: Bonds are in default on interest and/or principal payments. Such bonds are extremely speculative and should be valued on the basis of their ultimate recovery value in liquidation or reorganization of the obligor. DDD represents the highest potential for recovery on these bonds, and D represents the lowest potential for recovery. SHORT-TERM RATINGS Standard & Poor's Commercial Paper Ratings A Standard & Poor's commercial paper rating is a current assessment of the likelihood of timely payment of debt considered short-term in the relevant market. Ratings are graded into several categories, ranging from A-1 for the highest quality obligations to D for the lowest. These categories are as follows: A-1 This highest category indicates that the degree of safety regarding timely payment is strong. Those issues determined to possess extremely strong safety characteristics are denoted with a plus sign (+) designation. A-2 Capacity for timely payment on issues with this designation is satisfactory. However, the relative degree of safety is not as high as for issues designated A-1. A-3 Issues carrying this designation have adequate capacity for timely payment. They are, however, more vulnerable to the adverse effects of changes in circumstances than obligations carrying the higher designations. B Issues are regarded as having only speculative capacity for timely payment. C This rating is assigned to short-term debt obligations with doubtful capacity for payment. D Debt rated D is in payment default. The D rating category is used when interest payments or principal payments are not made on the date due, even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. Standard & Poor's Muni Bond and Note Ratings An S&P municipal bond or note rating reflects the liquidity factors and market-access risks unique to these instruments. Notes maturing in three years or less will likely receive a note rating. Notes maturing beyond three years will most likely receive a long-term debt rating. Note rating symbols and definitions are as follows: SP-1 Strong capacity to pay principal and interest. Issues determined to possess very strong characteristics are given a plus (+) designation. SP-2 Satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of the notes. SP-3 Speculative capacity to pay principal and interest. Municipal bond rating symbols and definitions are as follows: Standard & Poor's rating SP-1 indicates very strong or strong capacity to pay principal and interest. Those issues determined to possess overwhelming safety characteristics will be given a plus (+) designation. Standard & Poor's rating SP-2 indicates satisfactory capacity to pay principal and interest. Standard & Poor's rating SP-3 indicates speculative capacity to pay principal and interest. Statement of Additional Information - Nov. 29, 2005 Page 164 Moody's Short-Term Ratings Moody's short-term debt ratings are opinions of the ability of issuers to repay punctually senior debt obligations. These obligations have an original maturity not exceeding one year, unless explicitly noted. Moody's employs the following three designations, all judged to be investment grade, to indicate the relative repayment ability of rated issuers: Issuers rated Prime-l (or supporting institutions) have a superior ability for repayment of senior short-term debt obligations. Prime-l repayment ability will often be evidenced by many of the following characteristics: (i) leading market positions in well-established industries, (ii) high rates of return on funds employed, (iii) conservative capitalization structure with moderate reliance on debt and ample asset protection, (iv) broad margins in earnings coverage of fixed financial charges and high internal cash generation, and (v) well established access to a range of financial markets and assured sources of alternate liquidity. Issuers rated Prime-2 (or supporting institutions) have a strong ability for repayment of senior short-term debt obligations. This will normally be evidenced by many of the characteristics cited above, but to a lesser degree. Earnings trends and coverage ratios, while sound, may be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. Issuers rated Prime-3 (or supporting institutions) have an acceptable ability for repayment of senior short-term obligations. The effect of industry characteristics and market compositions may be more pronounced. Variability in earnings and profitability may result in changes in the level of debt protection measurements and may require relatively high financial leverage. Adequate alternate liquidity is maintained. Issuers rated Not Prime do not fall within any of the Prime rating categories. Moody's Short-Term Muni Bonds and Notes Short-term municipal bonds and notes are rated by Moody's. The ratings reflect the liquidity concerns and market access risks unique to notes. Moody's MIG 1/VMIG 1 indicates the best quality. There is present strong protection by established cash flows, superior liquidity support or demonstrated broad-based access to the market for refinancing. Moody's MIG 2/VMIG 2 indicates high quality. Margins of protection are ample although not so large as in the preceding group. Moody's MIG 3/VMIG 3 indicates favorable quality. All security elements are accounted for but there is lacking the undeniable strength of the preceding grades. Liquidity and cash flow protection may be narrow and market access for refinancing is likely to be less well established. Moody's MIG 4/VMIG 4 indicates adequate quality. Protection commonly regarded as required of an investment security is present and although not distinctly or predominantly speculative, there is specific risk. Statement of Additional Information - Nov. 29, 2005 Page 165 Fitch's Short-Term Ratings Fitch's short-term ratings apply to debt obligations that are payable on demand or have original maturities of generally up to three years, including commercial paper, certificates of deposit, medium-term notes, and municipal and investment notes. The short-term rating places greater emphasis than a long-term rating on the existence of liquidity necessary to meet the issuer's obligations in a timely manner. Fitch short-term ratings are as follows: F-1+: Exceptionally Strong Credit Quality. Issues assigned this rating are regarded as having the strongest degree of assurance for timely payment. F-1: Very Strong Credit Quality. Issues assigned this rating reflect an assurance of timely payment only slightly less in degree than issues rated F-1+. F-2: Good Credit Quality. Issues assigned this rating have a satisfactory degree of assurance for timely payment, but the margin of safety is not as great as for issues assigned F-1+ and F-1 ratings. F-3: Fair Credit Quality. Issues assigned this rating have characteristics suggesting that the degree of assurance for timely payment is adequate, however, near-term adverse changes could cause these securities to be rated below investment grade. F-S:Weak Credit Quality. Issues assigned this rating have characteristics suggesting a minimal degree of assurance for timely payment and are vulnerable to near-term adverse changes in financial and economic conditions. D: Default. Issues assigned this rating are in actual or imminent payment default. Statement of Additional Information - Nov. 29, 2005 Page 166 Appendix B STATE TAX-EXEMPT FUNDS STATE RISK FACTORS California Tax-Exempt Fund, Massachusetts Tax-Exempt Fund, Michigan Tax-Exempt Fund, Minnesota Tax-Exempt Fund, New York Tax-Exempt Fund and Ohio Tax-Exempt Fund invest primarily in the municipal securities issued by a single state and political sub-divisions that state. Each Fund will be particularly affected by political and economic conditions and developments in the state in which it invests. This vulnerability to factors affecting the state's tax-exempt investments will be significantly greater than that of more geographically diversified funds, which may result in greater losses and volatility. Because of the relatively small number of issuers of tax-exempt securities, the Fund may invest a higher percentage of assets in a single issuer and, therefore, be more exposed to the risk of loss by investing in a few issuers than a fund that invests more broadly. At times, the Fund and other accounts managed by the investment manager may own all or most of the debt of a particular issuer. This concentration of ownership may make it more difficult to sell, or to determine the fair value of, these investments. In addition, a Fund may concentrate in a segment of the tax-exempt debt market, such as revenue bonds for health care facilities, housing or airports. These investments may cause the value of a fund's shares to change more than the values of funds' shares that invest in more diversified investments. The yields on the securities in which the Fund invests generally are dependent on a variety of factors, including the financial condition of the issuer or other obligor, the revenue source from which the debt service is payable, general economic and monetary conditions, conditions in the relevant market, the size of a particular issue, the maturity of the obligation, and the rating of the issue. In addition to such factors, geographically concentrated securities will experience particular sensitivity to local conditions, including political and economic changes, adverse conditions to an industry significant to the area, and other developments within a particular locality. Because many tax-exempt bonds may be revenue or general obligations of local governments or authorities, ratings on tax-exempt bonds may be different from the ratings given to the general obligation bonds of a particular state. Certain events may adversely affect all investments within a particular market segment of the market. Examples include litigation, legislation or court decisions, concerns about pending or contemplated litigation, legislation or court decisions, or lower demand for the services or products provided by a particular market segment. Investing mostly in state-specific tax-exempt investments makes the Fund more vulnerable to that state's economy and to factors affecting tax-exempt issuers in that state than would be true for more geographically diversified funds. These risks include, among others: o the inability or perceived inability of a government authority to collect sufficient tax or other revenues to meet its payment obligations; o natural disasters and ecological or environmental concerns; o the introduction of constitutional or statutory limits on a tax-exempt issuer's ability to raise revenues or increase taxes; o the inability of an issuer to pay interest on or repay principal or securities in which the funds invest during recessionary periods; and o economic or demographic factors that may cause a decrease in tax or other revenues for a government authority or for private operators of publicly financed facilities. More information about state specific risks may be available from official state resources. Statement of Additional Information - Nov. 29, 2005 Page 167 Appendix C INSURED TAX-EXEMPT FUND Insurance The Fund's entire portfolio of municipal obligations will at all times be fully insured as to the scheduled payment of all installments of principal and interest thereon, except as noted below. This insurance feature minimizes the risks to the Fund and its shareholders associated with any defaults in the municipal obligations owned by the Fund. Each insured municipal obligation in the Fund's portfolio will be covered by either a mutual fund Portfolio Insurance Policy issued by Financial Guaranty Insurance Company (Financial Guaranty), MBIA Insurance Corporation (MBIA) or a comparable insurer or a New Issue Insurance Policy obtained by the issuer of the obligation at the time of its original issuance. If a municipal obligation is already covered by a New Issue Insurance Policy then the obligation is not required to be additionally insured under a Portfolio Insurance Policy. A New Issue Insurance Policy may have been written by Financial Guaranty or other insurers. Premiums are paid from the Fund's assets, and will reduce the current yield on its portfolio by the amount thereof. Currently, there are no issuers insured under a Portfolio Insurance Policy. Both types of policies discussed above insure the scheduled payment of all principal and interest on the municipal obligations as they fall due. The insurance does not guarantee the market value of the municipal obligations nor the value of the shares of the Fund and, except as described above, has no effect on the net asset value or redemption price of the shares of the Fund. The insurance of principal refers to the face or par value of the municipal obligation, and is not affected by the price paid by the Fund or by the market value. The Fund may purchase municipal obligations on which the payment of interest and principal is guaranteed by an agency or instrumentality of the U.S. government or which are rated Aaa, MIG-1 or Prime-1 by Moody's or AAA, A-1 or SP-1 by S&P, in either case without being required to insure the municipal obligations under the Portfolio Insurance Policy. New Issue Insurance. The New Issue Insurance Policies, if any, have been obtained by the respective issuers or underwriters of the municipal obligations and all premiums respecting the securities have been paid in advance by the issuers or underwriters. The policies are noncancelable and will continue in force so long as the municipal obligations are outstanding and the respective insurers remain in business. Since New Issue Insurance remains in effect as long as the insured municipal obligations are outstanding, the insurance may have an effect on the resale value of municipal obligations so insured in the Fund's portfolio. Therefore, New Issue Insurance may be considered to represent an element of market value in regard to municipal obligations thus insured, but the exact effect, if any, of this insurance on market value cannot be estimated. The Fund will acquire municipal obligations subject to New Issue Insurance Policies only where the insurer is rated Aaa by Moody's or AAA by S&P. Portfolio Insurance. The Portfolio Insurance Policy to be obtained by the Fund from Financial Guaranty will be effective only so long as the Fund is in existence, the insurer is still in business, and the municipal obligations described in the Portfolio Insurance Policy continue to be held by the Fund. In the event of a sale of any municipal obligation by the Fund or payment prior to maturity, the Portfolio Insurance Policy terminates as to that municipal obligation. Currently, there are no issuers insured under a Portfolio Insurance Policy. In determining whether to insure any municipal obligation, the insurer applies its own standards, which are not necessarily the same as the criteria used in regard to the selection of municipal obligations by the Fund's investment manager. The insurer's decision is made prior to the Fund's purchase of the municipal obligations. Contracts to purchase municipal obligations are not covered by the Portfolio Insurance Policy although municipal obligations underlying the contracts are covered by this insurance upon their physical delivery to the Fund or its Custodian. Secondary Market Insurance. The Fund may at any time purchase from MBIA, Financial Guaranty or a comparable insurer a secondary market insurance policy (Secondary Market Policy) on any municipal obligation currently covered by the Portfolio Insurance Policy. The coverage and obligation to pay monthly premiums under the Portfolio Insurance Policy would cease with the purchase by the Fund of a Secondary Market Policy. Statement of Additional Information - Nov. 29, 2005 Page 168 By purchasing a Secondary Market Policy, the Fund would, upon payment of a single premium, obtain insurance against nonpayment of scheduled principal and interest for the remaining term of the municipal obligation, regardless of whether the Fund then owned the obligation. This insurance coverage would be noncancelable and would continue in force so long as the municipal obligations so insured are outstanding. The purpose of acquiring such a Policy would be to enable the Fund to sell a municipal obligation to a third party as a Aaa/AAA rated insured obligation at a market price higher than what otherwise might be obtainable if the obligation were sold without the insurance coverage. This rating is not automatic, however, and must specifically be requested for each obligation. Any difference between the excess of an obligation's market value as a Aaa/AAA rated security over its market value without this rating and the single premium payment would inure to the Fund in determining the net capital gain or loss realized by the Fund upon the sale of the obligation. Since the Fund has the right to purchase a Secondary Market Policy for an eligible municipal obligation even if the obligation is currently in default as to any payments by the issuer, the Fund would have the opportunity to sell the obligation rather than be obligated to hold it in its portfolio in order to continue the Portfolio Insurance Policy in force. Because coverage under the Portfolio Insurance Policy terminates upon sale of a municipal obligation insured thereunder, the insurance does not have an effect on the resale value of the obligation. Therefore, it is the intention of the Fund to retain any insured municipal obligations which are in default or in significant risk of default, and to place a value on the insurance which will be equal to the difference between the market value of similar obligations which are not in default. Because of this policy, the Fund's investment manager may be unable to manage the Fund's portfolio to the extent that it holds defaulted municipal obligations, which may limit its ability in certain circumstances to purchase other municipal obligations. While a defaulted municipal obligation is held in the Fund's portfolio, the Fund continues to pay the insurance premium but also collects interest payments from the insurer and retains the right to collect the full amount of principal from the insurer when the municipal obligation comes due. This would not be applicable if the Fund elected to purchase a Secondary Market Policy discussed above with respect to a municipal obligation. The following information regarding these insurers has been derived from information furnished by the insurers. The Fund has not independently verified any of the information, but the Fund is not aware of facts which would render such information inaccurate. Financial Guaranty is a New York stock insurance company regulated by the New York State Department of Insurance and authorized to provide insurance in 50 states and the District of Columbia. Financial Guaranty is a subsidiary of FGIC Corporation, a Delaware holding company, which is a subsidiary of General Electric Capital Corporation. Financial Guaranty, in addition to providing insurance for the payment of interest on and principal of Municipal Bonds held in unit investment trust and mutual fund portfolios, provides New Issue Insurance and insurance for secondary market issues of Municipal Bonds and for portions of new and secondary market issues of Municipal Bonds. The claims-paying ability of Financial Guaranty is rated "AAA" by Standard & Poor's Ratings Services ("S&P) and Fitch Ratings. ("Fitch") and "Aaa" by Moody's Investor Service, Inc. ("Moody's") (collectively, the "Rating Agencies"). MBIA, formerly known as Municipal Bond Investors Assurance Corporation, is the principal operating subsidiary of MBIA Inc., a New York Stock Exchange listed company. MBIA is domiciled in the State of New York and licensed to do business in all 50 states and the District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of Northern Mariana Islands, the Virgin Islands of the United States and the Territory of Guam. The claims-paying ability of MBIA is rated "AAA" by S&P and Fitch and "Aaa" by Moody's. Government Securities The Fund may invest in securities guaranteed by an agency or instrumentality of the United States government. These agencies include Federal National Mortgage Association and Federal Housing Administration (FHA). In the case of a default on a FHA security, the outstanding balance is subject to an assignment fee and interest payments may be delayed. This will reduce the return to the Fund. Statement of Additional Information - Nov. 29, 2005 Page 169 Appendix D S&P 500 INDEX FUND ADDITIONAL INFORMATION ABOUT THE S&P 500 INDEX The Fund is not sponsored, endorsed, sold or promoted by S&P. S&P makes no representation or warranty, express or implied, to the shareholders of the Fund or any member of the public regarding the advisability of investing in securities generally or in the Fund particularly or the ability of the S&P 500 Index to track general stock market performance. S&P's only relationship to the Fund is the licensing of certain trademarks and trade names of S&P and of the S&P 500 Index, which are determined, composed and calculated by S&P without regard to the Fund. S&P has no obligation to take the needs of the Fund or its shareholders into consideration in determining, composing or calculating the S&P 500 Index. S&P is not responsible for and has not participated in the determination of the prices and amount of the Fund or the timing of the issuance or sale of the Fund or in the determination or calculation of the equation by which the Fund's shares are to be converted into cash. S&P has no obligation or liability in connection with the administration, marketing or trading of Fund shares. S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN (THE S&P INDEX) AND S&P SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE FUND, ITS SHAREHOLDERS OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P INDEX OR ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. S-6500 D (11/05) Statement of Additional Information - Nov. 29, 2005 Page 170 EX-99.17E ANNUAL RPT 6 ex17e-s6495.txt ANNUAL REPORT FOR THE PERIOD ENDED AUG. 31, 2005 FOR RIVERSOURCE DIVERSIFIED BOND FUND Annual Report (logo) RiverSource(SM) Investments RiverSource(SM) Diversified Bond Fund Annual Report for the Period Ended Aug. 31, 2005 > RiverSource Diversified Bond Fund (formerly AXP(R) Diversified Bond Fund) seeks to provide shareholders with a high level of current income while conserving the value of the investment for the longest period of time. Table of Contents Fund Snapshot 3 Performance Summary 4 Questions & Answers with Portfolio Management 5 The Fund's Long-term Performance 10 Investments in Securities 12 Financial Statements 25 Notes to Financial Statements 28 Report of Independent Registered Public Accounting Firm 41 Federal Income Tax Information 42 Fund Expenses Example 45 Board Members and Officers 47 Approval of Investment Management Services Agreement 50 Proxy Voting 52 [DALBAR LOGO] American Express(R) Funds'* reports to shareholders have been awarded the Communications Seal from Dalbar Inc., an independent financial services research firm. The Seal recognizes communications demonstrating a level of excellence in the industry. * As of Oct. 1, 2005, the RiverSource brand replaced "American Express" as the name of the American Express Funds. - -------------------------------------------------------------------------------- 2 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT Fund Snapshot AT AUG. 31, 2005 PORTFOLIO MANAGERS Portfolio managers Since Years in industry Jamie Jackson, CFA 6/03 17 Scott Kirby 2/03 19 Tom Murphy, CFA 2/03 19 Nicholas Pifer, CFA 2/03 15 Jennifer Ponce de Leon 2/03 16 FUND OBJECTIVE For investors seeking a high level of current income while conserving the value of the investment for the longest period of time. Inception dates by class A: 10/3/74 B: 3/20/95 C: 6/26/00 I: 3/4/04 Y: 3/20/95 Ticker symbols by class A: INBNX B: ININX C: AXBCX I: -- Y: IDBYX Total net assets $2.479 billion Number of holdings 399 Weighted average life(1) 6.10 years Effective duration(2) 3.8 years Weighted average bond rating(3) AA+ STYLE MATRIX Shading within the style matrix indicates areas in which the Fund generally invests. DURATION SHORT INT. LONG X HIGH X MEDIUM QUALITY X LOW SECTOR COMPOSITION Percentage of portfolio assets (PIE CHART) Mortgage-Backed 36.9% Corporate Bonds* 21.6% U.S. Government Obligations & Agencies 20.6% Commercial Mortgage-Backed 11.0% Short-Term Securities** 4.2% Asset-Backed 3.8% Foreign Government 1.8% Other 0.1% * Includes 7.8% Financials, 5.2% Telecommunication, 3.2% Utilities, 2.0% Consumer Discretionary, 1.4% Industrials, 0.7% Health Care, 0.5% Energy, 0.5% Materials and 0.3% Consumer Staples. ** Of the 4.2%, 0.7% is due to security lending activity and 3.5% is the Fund's cash equivalent position. CREDIT QUALITY SUMMARY Percentage of bond portfolio assets AAA bonds 76.2% AA bonds 6.4 A bonds 5.8 BBB bonds 7.8 Non-investment grade bonds 3.8 Individual security ratings are based on information from Standard & Poor's Corp. and Moody's Investors Service. If a rating is unavailable, the rating is determined through an internal analysis, if appropriate. 0.3% of the portfolio rating above was determined through internal analysis. (1) Weighted average life measures a bond's maturity, which takes into consideration the possibility that the issuer may call the bond before its maturity date. (2) Effective duration measures the sensitivity of a security's price to parallel shifts in the yield curve (the graphical depiction of the levels of interest rates from two years out to 30 years). Positive duration means that as rates rise, the price decreases, and negative duration means that as rates rise, the price increases. (3) Weighted average bond rating represents the average credit quality of the underlying bonds in the portfolio. Investment products, including shares of mutual funds, involve investment risks including possible loss of principal and fluctuation in value. There are risks associated with an investment in a bond fund, including the impact of interest rates and credit. These and other risk considerations are discussed in the fund's prospectus. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer-term securities. Lower-rated bonds generally have more volatile prices and carry more risk to principal and income than investment grade securities. Fund holdings are subject to change. - -------------------------------------------------------------------------------- 3 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT Performance Summary [BAR CHART] PERFORMANCE COMPARISON For the year ended Aug. 31, 2005 +4.38% +4.15% +4.38% +4.38% = RiverSource Diversified Bond Fund Class A (excluding sales charge) +4.15% = Lehman Brothers Aggregate Bond Index (unmanaged) +4.38% = Lipper Intermediate Investment Grade Index (see "The Fund's Long-term Performance" for Index descriptions)- The performance information shown represents past performance and is not a guarantee of future results. The investment return and principal value of your investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance information shown. You may obtain performance information current to the most recent month-end by calling (800) 862-7919 or visiting www.riversource.com/investments. The 4.75% sales charge applicable to Class A shares of the Fund is not reflected in the bar chart. If reflected, returns would be lower than those shown. The performance of other classes may vary from that shown because of differences in expenses. The indices do not reflect the effects of sales charges, expenses (excluding Lipper) and taxes.
AVERAGE ANNUAL TOTAL RETURNS Class A Class B Class C Class I Class Y (Inception dates) (10/3/74) (3/20/95) (6/26/00) (3/4/04) (3/20/95) After After NAV(1) POP(2) NAV(1) CDSC(3) NAV(1) CDSC(4) NAV(5) NAV(6) at Aug. 31, 2005 1 year +4.38% -0.58% +3.39% -1.61% +3.60% +2.60% +4.53% +4.34% 3 years +4.94% +3.25% +4.15% +2.91% +4.22% +4.22% N/A +5.11% 5 years +5.66% +4.64% +4.86% +4.53% +4.86% +4.86% N/A +5.83% 10 years +5.86% +5.34% +5.06% +5.06% N/A N/A N/A +6.01% Since inception +9.41% +9.24% +5.74% +5.74% +5.20% +5.20% +4.00% +6.70% at Sept. 30, 2005 1 year +2.88% -2.00% +2.11% -2.84% +2.12% +1.13% +3.24% +3.05% 3 years +4.32% +2.64% +3.53% +2.27% +3.60% +3.60% N/A +4.48% 5 years +5.39% +4.37% +4.60% +4.26% +4.60% +4.60% N/A +5.52% 10 years +5.61% +5.10% +4.81% +4.81% N/A N/A N/A +5.76% Since inception +9.35% +9.18% +5.59% +5.59% +4.92% +4.92% +3.19% +6.55%
(1) Excluding sales charge. (2) Returns at public offering price (POP) reflect a sales charge of 4.75%. (3) Returns at maximum contingent deferred sales charge (CDSC). CDSC applies as follows: first year 5%; second and third year 4%; fourth year 3%; fifth year 2%; sixth year 1%; no sales charge thereafter. (4) 1% CDSC applies to redemptions made within the first year of purchase. (5) Sales charge is not applicable to these shares. Shares available to eligible investors only, currently limited to RiverSource Portfolio Builder Funds, six affiliated funds-of-funds. (6) Sales charge is not applicable to these shares. Shares available to institutional investors only. - -------------------------------------------------------------------------------- 4 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT Questions & Answers WITH PORTFOLIO MANAGEMENT Below, the portfolio management team for RiverSource Diversified Bond Fund (formerly AXP Diversified Bond Fund) discusses the Fund's results and positioning for the annual period ended Aug. 31, 2005. Q: How did RiverSource Diversified Bond Fund perform for the fiscal year? A: RiverSource Diversified Bond Fund's Class A shares gained 4.38%, excluding sales charge, for the 12 months ended Aug. 31, 2005. The Fund outperformed its benchmark, the Lehman Brothers Aggregate Bond Index (Lehman Index), which rose 4.15%, and performed in line with the Lipper Intermediate Investment Grade Index, representing the Fund's peer group, which advanced 4.38%. Q: What market conditions were present during the annual period? A: Overall, the fixed income yield curve flattened significantly during the fiscal year, with long-term rates falling while short-term rates rose. This dramatic reshaping of the yield curve was driven by the Federal Reserve Board's (the Fed) decision to tighten monetary policy a total of eight times during the period. This put upward pressure on short-term bond yields, and moderate economic growth put downward pressure on intermediate/long-term bond yields. Strong global demand for U.S. financial assets -- notably from foreign central banks -- also contributed to keeping intermediate bond yields low. High yield and emerging market debt outperformed other fixed income assets during the period, as these sectors benefited from both solid fundamentals and a strong demand for the extra yield these sectors historically can provide. Investment grade corporate bonds also performed well for the fiscal year, but stumbled significantly in March and April. SEC YIELDS At Aug. 31, 2005 by class A: 3.61% B: 3.03% C: 3.04% I: 4.12% Y: 3.95% At Sept. 30, 2005 by class A: 3.65% B: 3.08% C: 3.08% I: 4.18% Y: 3.97% The Securities and Exchange Commission (SEC) yield is calculated by dividing anticipated net investment income during a 31-day period by the public offering price (POP) per share on the last day of the period, and converting the results to yearly figures. See Average Annual Total Returns on page 4 for additional performance information. - -------------------------------------------------------------------------------- 5 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT Questions & Answers [BEGIN CALLOUT QUOTE]> The Fund's returns were also helped by a modest position in non-U.S. dollar bonds. [END CALLOUT QUOTE] Mortgages performed well during the period because the environment was generally positive for mortgages, as volatility declined significantly and prepayments were fairly predictable. Somewhat offsetting these positives were important changes in the agencies, such as Fannie Mae and Freddie Mac, which began to shrink their portfolio of mortgage-backed securities in response to increased oversight from Congress. Also, the dramatic flattening of the yield curve lessened the incentive for banks and other financers to borrow via short rates and invest in longer maturities. Q: What factors most significantly affected Fund performance? A: On the positive side, the Fund maintained a shorter duration than the Lehman Index throughout the period, since we believed interest rates were headed higher as the economy gained traction and the Fed continued to tighten monetary policy as a result. The Fund's duration was 3.8 years as of Aug. 31, 2005. In addition, for the first half of the fiscal year, we emphasized longer maturity bonds and cash over short- to intermediate-term maturities. As the yield curve flattened through the second half of the period, with short-term rates rising more than long-term rates, the portfolio benefited from this strategy. The Fund benefited from its exposure to high quality commercial mortgage-backed securities, which are securities based on pools of commercial mortgages, and asset-backed securities. The Fund had a sizable exposure to investment grade corporate bonds for most of the fiscal year, and strong issue selection helped the Fund's results. A modest allocation to high yield bonds further boosted the Fund's performance, as this sector as a whole performed well during the period. The Fund's returns were also helped by a modest position in non-U.S. dollar bonds. We successfully were able to add value when the U.S. dollar weakened in the latter months of 2004. Although the dollar fully regained its ground in the first seven months of 2005, it weakened again in August. As the value of the U.S. dollar decreases, the dollar value of foreign investments typically increases and vice versa. - -------------------------------------------------------------------------------- 6 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT Questions & Answers Detracting somewhat from Fund returns were the Fund's holdings within the mortgage sector. The Fund maintained a defensive profile within this sector of higher coupon securities and bonds that we believed would hold their values as rates migrated higher. However, the path to higher rates was quite gradual during the fiscal period. This defensive positioning did not provide a significant performance advantage. Q: What changes did you make to the Fund and how is it currently positioned? A: We kept the Fund's duration shorter than the Lehman Index throughout the period, but we made minor adjustments to portfolio duration based on changing market conditions. As the yield curve flattened dramatically, we reduced the portfolio's sensitivity to changes in interest rates. We did this by seeking exposure to securities with maturities more evenly distributed across the yield curve. In our view, the yield curve flattening had largely run its course. The Fund's sector positioning remained generally unchanged. Through the year, we did adjust the Fund's exposure to high yield securities in response to shifts in the difference between the yields of these securities and U.S. Treasuries. We ended the fiscal year with the Fund near its lowest allocation to high yield bonds held during the 12 months. Generally, though, we continued to favor more conservative alternatives, such as AAA-rated commercial mortgage-backed securities, asset-backed securities and certain mortgage products, which, in our view, offer attractive yield as well as the kind of defensive characteristics we want in the current market environment. In all, the Fund's portfolio turnover was high but added value to the portfolio. A significant portion of the Fund's 300% turnover rate this past fiscal year was the result of "roll" transactions in liquid derivatives and U.S. Treasury notes. In the derivative securities, positions in expiring contracts are liquidated and simultaneously replaced with positions in new contracts with equivalent characteristics. For U.S. Treasury notes, existing holdings are sold and newly minted securities with better liquidity are purchased. These transactions affect the Fund's turnover rate but do not change the risk exposure or result in material transaction costs. Q: How do you intend to manage the Fund in the coming months? A: We intend to maintain the Fund's duration shorter than that of the benchmark, the Lehman Index, for the near term. Our best assessment at this time leads us to believe that the devastation caused by Hurricane Katrina will have only a transitory impact on the - -------------------------------------------------------------------------------- 7 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT Questions & Answers [BEGIN CALLOUT QUOTE]> We will continue to monitor job creation and inflation numbers, as they remain key indicators for the economy in the coming months -- especially so in the aftermath of Hurricane Katrina. [END CALLOUT QUOTE] U.S. economy overall. We expect energy shortages to be temporary and oil prices to recede as refining and production capacities come back in line. We expect the Fed to focus on the risks to higher inflation caused by higher energy prices, supply-chain disruptions and the strain on resources resulting from the massive rescue, relief and rebuilding efforts now underway. As a result, we expect the Fed to continue to raise the targeted federal funds rate through the balance of 2005. We believe fixed income yields will move higher in the months ahead. From a sector perspective, we intend to cautiously increase the Fund's allocation to investment grade corporate bonds, though, importantly, we continue to be very selective in adding names to the portfolio. We intend to maintain our position in commercial mortgage-backed securities and asset-backed securities because they offer higher yields. In mortgages, we plan to remain defensively positioned, emphasizing premium coupons, 15-year mortgages and attractive structural attributes. We intend to maintain the Fund's modest position in high yield bonds and may increase it if the market offers opportunities. Finally, we intend to maintain the Fund's moderate exposure to non-U.S. dollar bonds. The U.S. dollar's pressured path may experience fits and starts with short-lived periods of currency strength. However, we believe the U.S. dollar will likely remain at relatively weak levels going forward, as we expect the currency's structural problems to continue. - -------------------------------------------------------------------------------- 8 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT Questions & Answers We will continue to monitor job creation and inflation numbers, as they remain key indicators for the economy in the coming months -- especially so in the aftermath of Hurricane Katrina. As always, we will maintain a disciplined focus on individual security selection with a goal of having larger positions than the Lehman Index in bonds that offer the greatest potential for outperforming the Lehman Index. - -------------------------------------------------------------------------------- 9 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT The Fund's Long-term Performance The chart on the facing page illustrates the total value of an assumed $10,000 investment in RiverSource Diversified Bond Fund Class A shares (from 9/1/95 to 8/31/05) as compared to the performance of two widely cited performance indices, the Lehman Brothers Aggregate Bond Index and the Lipper Intermediate Investment Grade Index. In comparing the Fund's Class A shares to these indices, you should take into account the fact that the Fund's performance reflects the maximum sales charge of 4.75%, while such charges are not reflected in the performance of the indices. Returns for the Fund include the reinvestment of any distribution paid during each period. The performance information shown represents past performance and is not a guarantee of future results. The investment return and principal value of your investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance information shown. You may obtain performance information current to the most recent month-end by calling (800) 862-7919 or visiting www.riversource.com/investments. Also see "Past Performance" in the Fund's current prospectus. DISTRIBUTION SUMMARY The table below details the Fund's income and capital gain distributions for the fiscal years shown. More information on the other classes can be found in the Financial Highlights section of this report's Notes to Financial Statements. Class A Short-term Long-term Fiscal year ended Income capital gains capital gains Total Aug. 31, 2005 $0.19 $-- $-- $0.19 Aug. 31, 2004 0.17 -- -- 0.17 Aug. 31, 2003 0.20 -- -- 0.20 Aug. 31, 2002 0.26 -- -- 0.26 Aug. 31, 2001 0.32 -- -- 0.32 - -------------------------------------------------------------------------------- 10 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT [LINE CHART]
VALUE OF A HYPOTHETICAL $10,000 INVESTMENT IN RIVERSOURCE DIVERSIFIED BOND FUND RiverSource Diversified Bond Fund Class A (includes sales charge) $9,525 $10,074 $11,289 $12,011 $12,210 $12,781 $14,120 $14,562 $15,277 $16,123 $16,830 Lehman Brothers Aggregate Bond Index(1) $10,000 $10,411 $11,452 $12,663 $12,764 $13,729 $15,424 $16,675 $17,402 $18,469 $19,236 Lipper Intermediate Investment Grade Index(2) $10,000 $10,394 $11,391 $12,473 $12,528 $13,352 $14,996 $15,873 $16,727 $17,754 $18,532 `95 `96 `97 `98 `99 `00 `01 `02 `03 `04 `05
COMPARATIVE RESULTS Results at Aug. 31, 2005 Since 1 year 3 years 5 years 10 years inception(3) RiverSource Diversified Bond Fund (includes sales charge) Class A Cumulative value of $10,000 $9,942 $11,007 $12,546 $16,829 $140,598 Average annual total return -0.58% +3.25% +4.64% +5.34% +9.24% Lehman Brothers Aggregate Bond Index(1) Cumulative value of $10,000 $10,415 $11,537 $14,012 $19,236 N/A Average annual total return +4.15% +4.88% +6.98% +6.76% N/A Lipper Intermediate Investment Grade Index(2) Cumulative value of $10,000 $10,438 $11,676 $13,875 $18,532 N/A Average annual total return +4.38% +5.30% +6.77% +6.36% N/A
Results for other share classes can be found on page 4. (1) The Lehman Brothers Aggregate Bond Index, an unmanaged index, is made up of a representative list of government, corporate, asset-backed and mortgage-backed securities. The index is frequently used as a general measure of bond market performance. The index reflects reinvestment of all distributions and changes in market prices, but excludes brokerage commissions or other fees. (2) The Lipper Intermediate Investment Grade Index includes the 30 largest investment grade funds tracked by Lipper Inc. The index's returns include net reinvested dividends. (3) Fund data is from Oct. 3, 1974. The Fund began operating before the inception of the Lehman Brothers Aggregate Bond Index and its Lipper peer group. - -------------------------------------------------------------------------------- 11 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT Investments in Securities RiverSource Diversified Bond Fund Aug. 31, 2005 (Percentages represent value of investments compared to net assets) Bonds (98.7%) Issuer Coupon Principal Value(a) Rate Amount Sovereign (1.9%) Bundesrepublik Deutschland (European Monetary Unit) 01-04-07 6.00% 18,818,000(c) $24,359,708 United Kingdom Treasury (British Pound) 12-07-06 7.50 8,906,000(c) 16,710,308 United Mexican States 09-27-34 6.75 4,880,000(c) 5,289,920 Total 46,359,936 U.S. Government Obligations & Agencies (21.2%) Federal Farm Credit Bank 10-10-08 4.25 9,800,000 9,856,046 Federal Home Loan Bank 04-18-08 4.13 5,615,000 5,626,926 Federal Home Loan Mtge Corp 06-15-08 3.88 51,935,000 51,671,170 10-15-08 5.13 33,750,000 34,775,089 03-18-09 3.76 6,890,000 6,807,065 07-12-10 4.13 42,370,000 42,293,692 Federal Natl Mtge Assn 04-13-06 2.15 33,200,000 32,835,265 08-15-08 3.25 86,170,000 84,227,728 U.S. Treasury 05-15-15 4.13 18,590,000(r) 18,709,813 08-15-15 4.25 32,765,000 33,384,455 08-15-23 6.25 90,504,000(p) 112,147,217 02-15-26 6.00 56,232,000 68,958,876 U.S. Treasury Inflation-Indexed Bond 01-15-15 1.63 25,602,511(h) 25,572,008 Total 526,865,350 Asset-Backed (4.0%) Aesop Funding II LLC Series 2002-1A Cl A1 (AMBAC) 10-20-06 3.85 2,363,333(d,l) 2,363,187 Series 2004-2A Cl A1 (FGIC) 04-20-08 2.76 2,000,000(d,l) 1,959,323 Bonds (continued) Issuer Coupon Principal Value(a) Rate Amount Asset-Backed (cont.) AmeriCredit Automobile Receivables Trust Series 2002-C Cl A4 (FSA) 02-12-09 3.55% $2,660,000(l) $2,647,671 Series 2004-CA Cl A3 (AMBAC) 03-06-09 3.00 5,500,000(l) 5,438,983 Series 2005-BM Cl A3 (MBIA) 02-06-10 4.05 8,750,000(l) 8,710,354 ARG Funding Series 2005-1A Cl A3 (MBIA) 04-20-10 4.29 6,300,000(d,l) 6,257,918 Capital Auto Receivables Asset Trust Series 2004-1 09-15-10 2.84 3,000,000 2,924,645 Series 2005-1 Cl A4 07-15-09 4.05 7,100,000 7,110,792 Capital One Auto Finance Trust Series 2005-BSS Cl A3 11-15-09 4.08 4,700,000 4,668,510 Carmax Auto Owner Trust Series 2005-1 Cl A4 03-15-10 4.35 2,400,000 2,406,635 Honda Auto Receivables Owner Trust Series 2005-1 Cl A3 10-21-08 3.53 4,500,000 4,453,740 Long Beach Auto Receivables Trust Series 2004-C Cl A3 (FSA) 09-15-09 3.40 4,000,000(l) 3,958,280 Metris Master Trust Series 2001-2 Cl C 11-20-09 5.51 3,425,000(d,m) 3,425,000 Series 2004-2 Cl D 10-20-10 6.86 1,200,000(d,m) 1,218,000 Series 2004-2 Cl M 10-20-10 4.00 2,700,000(m) 2,702,565 Series 2005-1A Cl D 03-21-11 5.51 1,375,000(d,m) 1,374,995 Morgan Stanley Auto Loan Trust Series 2004-HB2 Cl A3 03-16-09 2.94 4,300,000 4,236,506 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 12 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) Rate Amount Asset-Backed (cont.) Nissan Auto Lease Trust Series 2004-A Cl A3 08-15-07 2.90% $3,000,000 $2,968,921 Nissan Auto Receivables Owner Trust Series 2005-A Cl A3 10-15-08 3.54 5,475,000 5,418,443 Popular ABS Mtge Pass-Through Trust Series 2005-A Cl AF2 06-25-35 4.49 2,660,000 2,647,942 Residential Asset Securities Series 2002-KS1 Cl AI4 (AMBAC) 11-25-29 5.86 1,178,876(l) 1,176,306 Triad Auto Receivables Owner Trust Series 2005-A Cl A3 (AMBAC) 03-12-10 4.05 7,600,000(l) 7,561,696 WFS Financial Owner Trust Series 2004-3 Cl A3 03-17-09 3.30 5,000,000 4,952,182 World Omni Auto Receivables Trust Series 2005-A Cl A3 06-12-09 3.54 7,500,000 7,423,950 Total 98,006,544 Commercial Mortgage-Backed(f) (11.2%) Banc of America Commercial Mtge Series 2005-1 Cl A4 11-10-42 5.03 3,600,000 3,699,823 Bank of America-First Union NB Commercial Mtge Series 2001-3 Cl A1 04-11-37 4.89 3,308,970 3,344,098 Bear Stearns Commercial Mtge Securities Series 2004-T16 Cl A3 02-13-46 4.03 3,240,000 3,194,726 Series 2005-PWR8 Cl A1 06-11-41 4.21 7,410,978 7,392,006 California State Teachers' Retirement System Trust Series 2002-C6 Cl A3 11-20-14 4.46 6,645,827(d) 6,660,137 CDC Commercial Mtge Trust Series 2002-FX1 Cl A2 11-15-30 5.68 4,500,000 4,747,593 Citigroup Commercial Mtge Trust Series 2005-EMG Cl A1 09-20-51 4.15 12,141,109(d) 12,098,072 Commercial Mtge Pass-Through Ctfs Series 2004-CNL Cl A1 09-15-14 3.79 6,000,000(d,m) 5,973,120 Bonds (continued) Issuer Coupon Principal Value(a) Rate Amount Commercial Mortgage-Backed(f) (cont.) CS First Boston Mtge Securities Series 2002-CKS4 Cl A1 11-15-36 4.49% $4,931,045 $4,938,080 Series 2004-C1 Cl A2 01-15-37 3.52 3,000,000 2,933,706 Federal Natl Mtge Assn #385683 02-01-13 4.83 6,321,619 6,438,261 Federal Natl Mtge Assn #385717 11-01-12 4.84 1,172,908 1,192,226 Federal Natl Mtge Assn #386599 11-01-10 4.47 1,645,633 1,638,888 Federal Natl Mtge Assn #555264 02-01-13 5.02 5,743,751 5,915,413 Federal Natl Mtge Assn #555806 10-01-13 5.11 537,301 557,756 GE Capital Commercial Mtge Series 2004-C2 Cl A2 03-10-40 4.12 3,000,000 2,958,600 Series 2005-C3 Cl A1 07-10-45 4.59 4,590,000 4,624,331 Series 2005-C3 Cl A2 07-10-45 4.85 3,460,000 3,517,649 General Electric Capital Assurance Series 2003-1 Cl A3 05-12-35 4.77 7,650,000(d) 7,725,504 General Electric Capital Commercial Mtge Series 2001-3 Cl A1 06-10-38 5.56 3,516,761 3,612,410 GMAC Commercial Mtge Securities Series 1999-C1 Cl B 05-15-33 6.30 5,800,000 6,143,449 Series 2004-C3 Cl A4 12-10-41 4.55 4,700,000 4,690,168 Series 2005-C1 Cl A1 05-10-43 4.21 3,632,143 3,620,863 Greenwich Capital Commercial Funding Series 2004-GG1 Cl A5 06-10-36 4.88 2,400,000 2,443,639 Series 2005-GG3 Cl A1 08-10-42 3.92 3,387,067 3,363,019 Series 2005-GG3 Cl A3 08-10-42 4.57 7,225,000 7,229,214 GS Mtge Securities II Series 2004-GG2 Cl A4 08-10-38 4.96 4,300,000 4,383,521 Series 2005-GG4 Cl A1 07-10-39 4.37 5,797,892 5,801,369 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 13 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) Rate Amount Commercial Mortgage-Backed(f) (cont.) JPMorgan Chase Commercial Mtge Securities Series 2002-CIB5 Cl A1 10-12-37 4.37% $3,784,852 $3,786,302 Series 2003-CB6 Cl A1 07-12-37 4.39 7,651,905 7,613,646 Series 2003-CB6 Cl A2 07-12-37 5.26 4,200,000 4,376,803 Series 2003-LN1 Cl A1 10-15-37 4.13 3,457,029 3,406,364 Series 2003-ML1A Cl A1 03-12-39 3.97 3,029,203 2,979,707 Series 2004-CBX Cl A3 01-12-37 4.18 3,000,000 2,967,024 Series 2004-CBX Cl A5 01-12-37 4.65 5,000,000 5,021,358 Series 2005-CB11 Cl A3 08-12-37 5.20 4,700,000 4,863,327 Series 2005-LDP2 Cl A1 07-15-42 4.33 5,721,867 5,737,144 LB-UBS Commercial Mtge Trust Series 2002-C2 Cl A3 06-15-26 5.39 7,360,000 7,640,829 Series 2002-C4 Cl A4 09-15-26 4.56 5,200,000 5,206,430 Series 2002-C4 Cl A5 09-15-31 4.85 6,000,000 6,100,501 Series 2003-C8 Cl A2 11-15-27 4.21 7,500,000 7,452,300 Series 2003-C8 Cl A3 11-15-27 4.83 5,250,000 5,322,765 Series 2004-C2 Cl A3 03-15-29 3.97 3,275,000 3,165,026 Series 2004-C4 Cl A3 06-15-29 5.16 3,000,000(m) 3,099,411 Series 2004-C6 Cl A2 08-15-29 4.19 5,250,000 5,208,945 Series 2004-C6 Cl A4 08-15-29 4.58 4,425,000 4,440,719 Series 2004-C7 Cl A2 10-15-29 3.99 5,400,000 5,304,420 Series 2004-C8 Cl A2 12-15-29 4.20 5,800,000 5,748,496 Series 2005-C3 Cl A1 07-15-30 4.39 3,902,242 3,910,475 Series 2005-C5 Cl A2 09-15-40 4.89 4,600,000 4,667,988 Bonds (continued) Issuer Coupon Principal Value(a) Rate Amount Commercial Mortgage-Backed(f) (cont.) Merrill Lynch Mtge Trust Series 2005-MCP1 Cl A1 06-12-43 4.22% $4,569,849 $4,557,707 Morgan Stanley Capital I Series 2003-IQ4 Cl A1 05-15-40 3.27 5,400,919 5,165,854 Series 2004-HQ4 Cl A5 04-14-40 4.59 3,600,000 3,597,948 Series 2004-IQ8 Cl A2 06-15-40 3.96 4,884,318 4,840,891 Morgan Stanley, Dean Witter Capital I Series 2002-TOP7 Cl A2 01-15-39 5.98 10,900,000 11,768,644 Prudential Commercial Mtge Trust Series 2003-PWR1 Cl A1 02-11-36 3.67 4,340,476 4,241,613 Wachovia Bank Commercial Mtge Trust Series 2005-C16 Cl A2 10-15-41 4.38 2,000,000 1,992,985 Series 2005-C16 Cl A3 10-15-41 4.62 5,500,000 5,515,590 Total 280,538,853 Mortgage-Backed(f,n) (38.0%) Adjustable Rate Mtge Trust Series 2004-2 Cl 6A1 02-25-35 5.27 5,603,629(k) 5,666,421 Series 2005-3 Cl 7A1 07-25-35 5.10 6,139,038(k) 6,178,417 Banc of America Mtge Securities Series 2004-E Cl B1 06-25-34 4.04 2,942,734(k) 2,902,977 Series 2004-F Cl B1 07-25-34 4.14 5,294,199(k) 5,252,851 Bank of America Alternative Loan Trust Series 2003-11 Cl 1A1 01-25-34 6.00 7,291,347 7,393,134 Series 2003-11 Cl 4A1 01-25-19 4.75 3,708,501 3,698,494 Series 2004-3 Cl 1A1 04-25-34 6.00 11,556,909 11,845,831 Bear Stearns Adjustable Rate Mtge Trust Series 2004-10 Cl 13A1 01-25-35 5.03 7,520,943(k) 7,536,103 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 14 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) Rate Amount Mortgage-Backed(f,n) (cont.) Countrywide Alternative Loan Trust Series 2003-11T1 Cl A1 07-25-18 4.75% $4,435,623 $4,410,359 Series 2005-6CB Cl 1A1 04-25-35 7.50 5,997,930 6,286,825 Countrywide Home Loans Series 2004-12 Cl 1M 08-25-34 4.63 3,544,824(k) 3,485,568 Series 2005-R2 Cl 2A1 06-25-35 7.00 8,176,043(d) 8,669,161 CS First Boston Mtge Securities Series 2003-29 Cl 8A1 11-25-18 6.00 3,715,185 3,786,886 Series 2004-AR5 Cl CB1 06-25-34 4.42 3,367,444(k) 3,314,749 Federal Home Loan Mtge Corp Collateralized Mtge Obligation 01-15-18 6.50 3,873,181 4,125,454 03-15-22 7.00 1,660,835 1,658,043 02-15-27 5.00 10,070,000 10,191,724 10-15-27 5.00 21,553,000 21,792,004 06-15-28 5.00 13,925,000 14,095,999 12-15-28 5.50 6,005,000 6,166,619 02-15-33 5.50 9,099,150 9,433,938 Collateralized Mtge Obligation Interest Only 02-15-14 7.40 3,690,563(i) 229,036 08-01-20 8.00 10,223,903(i) 1,763,521 10-15-22 14.56 10,672,675(i) 610,196 Collateralized Mtge Obligation Principal Only 08-01-20 4.60 10,223,903(j) 8,399,754 Federal Home Loan Mtge Corp #290970 04-01-17 8.00 15,808 16,875 Federal Home Loan Mtge Corp #C00356 08-01-24 8.00 624,134 669,664 Federal Home Loan Mtge Corp #C00666 10-01-28 7.00 80,935 84,827 Federal Home Loan Mtge Corp #C53878 12-01-30 5.50 2,337,257 2,366,188 Federal Home Loan Mtge Corp #C78031 04-01-33 5.50 11,745,658 11,922,489 Federal Home Loan Mtge Corp #C79930 06-01-33 5.50 8,300,923 8,400,785 Federal Home Loan Mtge Corp #C90767 12-01-23 6.00 11,556,730 11,904,523 Federal Home Loan Mtge Corp #D96300 10-01-23 5.50 6,534,781 6,651,761 Bonds (continued) Issuer Coupon Principal Value(a) Rate Amount Mortgage-Backed(f,n) (cont.) Federal Home Loan Mtge Corp #E01127 02-01-17 6.50% $1,941,898 $2,010,138 Federal Home Loan Mtge Corp #E01419 05-01-18 5.50 4,549,999 4,651,301 Federal Home Loan Mtge Corp #E90216 05-01-17 6.00 2,069,339 2,135,147 Federal Home Loan Mtge Corp #E96516 05-01-13 4.50 3,126,398 3,122,161 Federal Home Loan Mtge Corp #E98725 08-01-18 5.00 14,419,765 14,549,256 Federal Home Loan Mtge Corp #E99684 10-01-18 5.00 9,250,763 9,335,142 Federal Home Loan Mtge Corp #G01108 04-01-30 7.00 5,093,691(g) 5,332,408 Federal Home Loan Mtge Corp #G01535 04-01-33 6.00 8,624,579 8,916,929 Federal Home Loan Mtge Corp #G30225 02-01-23 6.00 15,199,368 15,661,912 Federal Natl Mtge Assn 09-01-20 4.50 4,550,000(g) 4,511,607 09-01-20 6.00 24,000,000(g) 24,765,000 12-01-33 5.50 5,958,396 6,025,189 12-01-33 6.50 16,903,129 17,491,196 07-01-34 6.50 9,483,434 9,801,139 Collateralized Mtge Obligation 12-25-26 8.00 4,115,274 4,372,293 Collateralized Mtge Obligation Interest Only 12-25-12 13.29 3,083,805(i) 128,336 12-25-31 1.19 2,997,188(i) 490,517 Federal Natl Mtge Assn #190899 04-01-23 8.50 691,252 745,517 Federal Natl Mtge Assn #190944 05-01-24 6.00 8,425,530 8,659,748 Federal Natl Mtge Assn #190988 06-01-24 9.00 592,157 640,068 Federal Natl Mtge Assn #231309 09-01-23 6.50 167,530 174,136 Federal Natl Mtge Assn #231310 09-01-23 6.50 530,658 551,582 Federal Natl Mtge Assn #250330 09-01-25 8.00 445,666 477,876 Federal Natl Mtge Assn #250495 03-01-26 7.00 1,019,300 1,072,872 Federal Natl Mtge Assn #252498 06-01-29 7.00 8,820 9,257 Federal Natl Mtge Assn #253883 08-01-16 6.00 4,640,029 4,792,353 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 15 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) Rate Amount Mortgage-Backed(f,n) (cont.) Federal Natl Mtge Assn #254608 12-01-17 6.50% $1,339,393 $1,388,487 Federal Natl Mtge Assn #254802 07-01-18 4.50 3,971,772 3,944,369 Federal Natl Mtge Assn #254916 09-01-23 5.50 10,454,827 10,639,996 Federal Natl Mtge Assn #268071 01-01-24 6.50 163,729 170,185 Federal Natl Mtge Assn #303226 02-01-25 8.00 201,866 216,503 Federal Natl Mtge Assn #313049 08-01-11 8.50 1,847,533 1,953,848 Federal Natl Mtge Assn #323654 04-01-14 6.50 1,105,313 1,146,548 Federal Natl Mtge Assn #323933 09-01-29 7.00 6,009,746 6,307,656 Federal Natl Mtge Assn #455791 01-01-29 6.50 674,373 700,032 Federal Natl Mtge Assn #489888 05-01-29 6.50 3,487,023 3,617,671 Federal Natl Mtge Assn #496029 01-01-29 6.50 4,246,764 4,408,597 Federal Natl Mtge Assn #50700 03-01-08 7.00 1,499,358 1,546,308 Federal Natl Mtge Assn #545342 04-01-13 7.00 4,627,493 4,772,395 Federal Natl Mtge Assn #545869 07-01-32 6.50 2,312,018 2,403,683 Federal Natl Mtge Assn #545910 08-01-17 6.00 7,295,950 7,554,568 Federal Natl Mtge Assn #555343 08-01-17 6.00 1,825,352 1,885,417 Federal Natl Mtge Assn #555375 04-01-33 6.00 25,228,537 26,013,313 Federal Natl Mtge Assn #555458 05-01-33 5.50 22,096,938 22,366,300 Federal Natl Mtge Assn #555734 07-01-23 5.00 7,351,062 7,363,536 Federal Natl Mtge Assn #555740 08-01-18 4.50 8,178,587 8,119,484 Federal Natl Mtge Assn #555794 09-01-28 7.50 1,301,201 1,383,293 Federal Natl Mtge Assn #567840 10-01-30 7.00 2,157,244 2,264,181 Federal Natl Mtge Assn #587859 12-01-16 5.50 7,033,699 7,189,301 Federal Natl Mtge Assn #597374 09-01-31 7.00 1,003,150 1,061,237 Bonds (continued) Issuer Coupon Principal Value(a) Rate Amount Mortgage-Backed(f,n) (cont.) Federal Natl Mtge Assn #638969 03-01-32 5.50% $1,951,630 $1,975,290 Federal Natl Mtge Assn #646147 06-01-32 7.00 3,519,163 3,704,808 Federal Natl Mtge Assn #646446 06-01-17 6.50 1,556,345 1,613,391 Federal Natl Mtge Assn #649068 06-01-17 6.50 2,780,638 2,892,464 Federal Natl Mtge Assn #649263 08-01-17 6.50 2,834,879 2,948,868 Federal Natl Mtge Assn #654208 10-01-32 6.50 2,862,683 2,964,719 Federal Natl Mtge Assn #654682 10-01-32 6.00 1,981,337 2,036,797 Federal Natl Mtge Assn #654689 11-01-32 6.00 1,966,180 2,021,184 Federal Natl Mtge Assn #656908 09-01-32 6.50 2,800,382 2,917,397 Federal Natl Mtge Assn #662809 09-01-17 6.50 3,244,057 3,362,963 Federal Natl Mtge Assn #667787 02-01-18 5.50 2,591,140 2,648,678 Federal Natl Mtge Assn #670382 09-01-32 6.00 15,960,099 16,351,933 Federal Natl Mtge Assn #670387 08-01-32 7.00 1,554,656 1,631,151 Federal Natl Mtge Assn #678028 09-01-17 6.00 1,359,078 1,403,800 Federal Natl Mtge Assn #678065 02-01-33 6.50 664,741 693,492 Federal Natl Mtge Assn #678937 01-01-18 5.50 4,146,084 4,245,988 Federal Natl Mtge Assn #678941 02-01-18 5.50 5,003,683 5,124,238 Federal Natl Mtge Assn #678944 01-01-18 5.50 2,401,887 2,459,769 Federal Natl Mtge Assn #679095 04-01-18 5.00 7,305,388 7,362,964 Federal Natl Mtge Assn #681400 03-01-18 5.50 7,352,297 7,522,689 Federal Natl Mtge Assn #683274 02-01-18 5.50 3,212,613 3,287,078 Federal Natl Mtge Assn #684586 03-01-33 6.00 5,096,687 5,235,207 Federal Natl Mtge Assn #687051 01-01-33 6.00 13,160,407 13,473,208 Federal Natl Mtge Assn #687302 11-01-32 7.00 1,455,078 1,526,178 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 16 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) Rate Amount Mortgage-Backed(f,n) (cont.) Federal Natl Mtge Assn #689093 07-01-28 5.50% $2,839,252 $2,873,672 Federal Natl Mtge Assn #694628 04-01-33 5.50 5,834,454 5,917,620 Federal Natl Mtge Assn #694795 04-01-33 5.50 7,515,706 7,629,798 Federal Natl Mtge Assn #694988 03-01-33 5.50 15,430,151 15,620,402 Federal Natl Mtge Assn #695202 03-01-33 6.50 6,246,202 6,463,510 Federal Natl Mtge Assn #695385 03-01-18 5.50 9,243,583 9,488,435 Federal Natl Mtge Assn #695909 05-01-18 5.50 3,288,547 3,367,835 Federal Natl Mtge Assn #709901 06-01-18 5.00 7,588,174 7,653,818 Federal Natl Mtge Assn #710823 05-01-33 5.50 879,427 891,965 Federal Natl Mtge Assn #720006 07-01-33 5.50 8,817,572 8,916,417 Federal Natl Mtge Assn #720378 06-01-18 4.50 6,275,690 6,232,392 Federal Natl Mtge Assn #723687 08-01-28 5.50 5,180,382 5,243,184 Federal Natl Mtge Assn #725232 03-01-34 5.00 21,324,820 21,240,157 Federal Natl Mtge Assn #725684 05-01-18 6.00 10,990,068 11,351,538 Federal Natl Mtge Assn #725719 07-01-33 4.85 6,242,791(k) 6,207,707 Federal Natl Mtge Assn #725737 08-01-34 4.53 6,327,018(k) 6,330,940 Federal Natl Mtge Assn #730153 08-01-33 5.50 875,217 885,029 Federal Natl Mtge Assn #735160 12-01-34 4.40 2,586,904(k) 2,581,575 Federal Natl Mtge Assn #743262 10-01-18 5.00 4,693,966 4,730,506 Federal Natl Mtge Assn #747786 10-01-18 6.00 2,452,852 2,533,798 Federal Natl Mtge Assn #753074 12-01-28 5.50 9,902,895 10,022,948 Federal Natl Mtge Assn #753919 12-01-33 4.95 7,758,768(k) 7,789,310 Federal Natl Mtge Assn #759342 01-01-34 6.50 1,248,772 1,297,598 Federal Natl Mtge Assn #765759 12-01-18 5.00 6,108,349 6,156,491 Bonds (continued) Issuer Coupon Principal Value(a) Rate Amount Mortgage-Backed(f,n) (cont.) Federal Natl Mtge Assn #766641 03-01-34 5.00% $5,900,296(g) $5,868,236 Federal Natl Mtge Assn #776962 04-01-29 5.00 17,655,239 17,544,567 Federal Natl Mtge Assn #790759 09-01-34 4.84 1,759,706(k) 1,766,256 Federal Natl Mtge Assn #811925 04-01-35 4.92 6,121,823(k) 6,163,315 Federal Natl Mtge Assn #837258 09-01-35 4.92 3,360,503(g,k) 3,378,213 First Horizon Alternative Mtge Securities Series 2004-AA4 Cl A1 10-25-34 5.41 5,233,780(m) 5,338,613 Series 2005-AA2 Cl 2A1 04-25-35 5.43 6,015,205(m) 6,111,388 Series 2005-AA3 Cl 3A1 05-25-35 5.41 6,223,717(m) 6,291,244 Govt Natl Mtge Assn 09-01-35 5.00 13,650,000(g) 13,692,656 Collateralized Mtge Obligation Interest Only Series 2002-70 Cl IC 08-20-32 0.00 10,214,633(i) 1,337,623 Collateralized Mtge Obligation Interest Only Series 2002-80 Cl CI 01-20-32 0.00 2,303,524(i) 246,989 Govt Natl Mtge Assn #345538 02-15-24 8.00 217,162 233,213 Govt Natl Mtge Assn #398831 08-15-26 8.00 244,458 262,806 Govt Natl Mtge Assn #425004 10-15-33 5.50 4,552,190 4,644,658 Govt Natl Mtge Assn #426170 06-15-26 8.00 220,818 237,392 Govt Natl Mtge Assn #604708 10-15-33 5.50 9,918,654 10,120,131 Harborview Mtge Loan Trust Series 2004-3 Cl B1 05-19-34 4.39 4,328,576(k) 4,273,123 IndyMac Index Mtge Loan Trust Series 2005-AR3 Cl 3A1 04-25-35 5.34 3,671,672(k) 3,710,669 Series 2005-AR8 Cl AX1 Collateralized Mtge Obligation Interest Only 04-25-35 4.50 192,739,443(i,k) 2,379,128 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 17 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) Rate Amount Mortgage-Backed(f,n) (cont.) Master Adjustable Rate Mtge Trust Series 2004-5 Cl B1 07-25-34 4.40% $4,154,484(k) $4,100,060 Master Alternative Loans Trust Series 2004-2 Cl 4A1 02-25-19 5.00 6,477,592 6,514,029 Series 2004-4 Cl 2A1 05-25-34 6.00 1,556,968 1,589,773 Series 2004-7 Cl 8A1 08-25-19 5.00 4,969,254 4,972,384 Series 2004-8 Cl 7A1 09-25-19 5.00 6,808,338 6,814,057 Structured Adjustable Rate Mtge Loan Trust Series 2004-3AC Cl B1 03-25-34 4.93 5,562,433(k) 5,545,078 Series 2004-5 Cl B1 05-25-34 4.61 4,235,971(k) 4,173,872 Structured Asset Securities Series 2003-33H Cl 1A1 10-25-33 5.50 14,679,726 14,763,922 Washington Mutual Series 2003-AR10 Cl A7 10-25-33 4.07 6,650,000(k) 6,666,218 Series 2004-CB2 Cl 6A 07-25-19 4.50 4,278,238 4,175,688 Series 2004-CB4 Cl 22A 12-25-19 6.00 5,135,060 5,296,976 Series 2005-AR11 Cl A1B1 08-25-45 3.93 12,675,000(k) 12,675,000 Wells Fargo Mtge Backed Securities Trust Series 2005 10-25-35 5.00 12,000,000(g) 12,061,875 Series 2005-5 Cl 2A1 05-25-35 5.50 10,678,903 10,828,805 Series 2005-AR1 Cl 1A1 02-25-35 4.56 9,806,695(k) 9,764,134 Total 944,124,154 Aerospace & Defense (0.1%) L-3 Communications 06-15-12 7.63 2,000,000 2,120,000 07-15-13 6.13 190,000 191,900 Moog Sr Sub Nts 01-15-15 6.25 165,000 165,000 Total 2,476,900 Bonds (continued) Issuer Coupon Principal Value(a) Rate Amount Automotive (0.2%) DaimlerChrysler NA Holding 11-15-13 6.50% $2,125,000 $2,285,544 Ford Motor 02-01-29 6.38 2,300,000 1,681,261 Total 3,966,805 Banking (4.2%) Bank of America Sr Unsecured 08-01-10 4.50 11,120,000 11,157,819 Banknorth Group Sr Nts 05-01-08 3.75 3,960,000 3,916,876 Citigroup 08-03-10 4.63 32,600,000 32,873,285 Sr Nts 05-29-15 4.70 2,665,000 2,661,911 HSBC Bank USA Sub Nts 08-15-35 5.63 5,500,000 5,674,202 KFW Intl Finance 10-17-05 2.50 18,400,000(c) 18,370,852 M&I Marshall & Ilsley Bank Sub Nts 06-16-15 4.85 2,575,000 2,592,958 Wells Fargo Bank NA Sub Nts 02-01-11 6.45 24,007,000 26,369,865 Total 103,617,768 Building Materials (--%) Norcraft Companies LP/Finance Sr Sub Nts 11-01-11 9.00 570,000 598,500 Chemicals (0.2%) Airgas 10-01-11 9.13 1,500,000 1,612,500 Compass Minerals Group 08-15-11 10.00 1,000,000 1,095,000 Georgia Gulf Sr Nts 12-15-13 7.13 1,525,000 1,582,188 MacDermid 07-15-11 9.13 575,000 618,125 Total 4,907,813 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 18 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) Rate Amount Diversified Manufacturing (0.7%) Tyco Intl Group 02-15-11 6.75% $15,205,000(c) $16,744,172 Electric (3.1%) CMS Energy Sr Nts 01-15-09 7.50 1,275,000 1,345,125 Consumers Energy 1st Mtge 09-15-35 5.80 5,340,000 5,566,800 Dayton Power & Light 1st Mtge 10-01-13 5.13 3,305,000 3,403,459 Dominion Resources 06-15-35 5.95 5,620,000 5,870,191 DPL Sr Nts 09-01-11 6.88 2,755,000 3,016,725 Exelon 06-15-35 5.63 4,320,000 4,348,287 IPALCO Enterprises Secured 11-14-08 8.38 400,000 429,000 11-14-11 8.63 3,680,000 4,140,000 NorthWestern Energy Secured 11-01-14 5.88 645,000(d) 666,045 Ohio Edison 06-15-09 5.65 4,005,000(d) 4,123,548 Sr Nts 05-01-15 5.45 1,195,000 1,235,972 Ohio Power Sr Nts Series H 01-15-14 4.85 7,395,000 7,451,498 Pacific Gas & Electric 03-01-34 6.05 4,580,000 5,018,718 Pacificorp 1st Mtge 06-15-35 5.25 2,825,000 2,842,190 Potomac Edison 1st Mtge 11-15-14 5.35 3,195,000(d) 3,310,308 08-15-15 5.13 2,275,000(d) 2,326,160 Southern California Edison 1st Mtge 07-15-35 5.35 5,710,000 5,830,875 Tenaska Alabama Partners LP Secured 06-30-21 7.00 360,000(d) 375,548 Bonds (continued) Issuer Coupon Principal Value(a) Rate Amount Electric (cont.) Utilicorp Canada Finance 06-15-11 7.75% $1,915,000(c) $2,001,175 Westar Energy 1st Mtge 07-01-14 6.00 11,450,000 12,464,563 Total 75,766,187 Entertainment (0.5%) Time Warner 05-15-29 6.63 4,940,000 5,374,068 United Artists Theatre 07-01-15 9.30 7,739,913 7,662,514 Total 13,036,582 Food and Beverage (0.3%) Burns Philp Capital Property Sr Sub Nts 02-15-11 10.75 940,000(c) 1,048,100 Cott Beverages 12-15-11 8.00 1,135,000 1,197,425 Kraft Foods 06-01-12 6.25 4,991,000 5,477,343 Total 7,722,868 Gaming (0.5%) Boyd Gaming Sr Sub Nts 12-15-12 7.75 375,000 399,375 04-15-14 6.75 455,000 464,669 Caesars Entertainment Sr Nts 04-15-13 7.00 2,535,000 2,833,569 MGM MIRAGE 10-01-09 6.00 670,000 670,000 Sr Nts 02-27-14 5.88 720,000 694,800 07-15-15 6.63 2,165,000(d,g) 2,186,650 Mohegan Tribal Gaming Authority Sr Nts 02-15-13 6.13 540,000 546,750 Sr Sub Nts 04-01-12 8.00 750,000 798,750 Station Casinos Sr Nts 04-01-12 6.00 1,000,000 1,007,500 Sr Sub Nts 03-01-16 6.88 1,515,000(d,g) 1,556,663 Total 11,158,726 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 19 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) Rate Amount Gas Pipelines (0.2%) ANR Pipeline 03-15-10 8.88% $875,000 $954,587 Colorado Interstate Gas Sr Nts 03-15-15 5.95 470,000(d) 466,475 El Paso Natural Gas Sr Nts Series A 08-01-10 7.63 735,000 786,823 Southern Natural Gas 03-15-10 8.88 875,000 954,587 Southern Star Central Secured 08-01-10 8.50 645,000 696,600 Transcontinental Gas Pipe Line Series B 08-15-11 7.00 1,915,000 2,058,624 Total 5,917,696 Health Care (0.7%) Cardinal Health 06-15-15 4.00 15,779,000 14,604,269 HCA Sr Nts 03-15-14 5.75 1,000,000 988,267 Triad Hospitals Sr Nts 05-15-12 7.00 1,000,000 1,035,000 Total 16,627,536 Home Construction (0.3%) DR Horton 12-01-07 7.50 1,000,000 1,054,672 01-15-09 5.00 990,000 986,494 Sr Nts 02-15-15 5.25 4,290,000 4,121,039 Meritage Homes 03-15-15 6.25 445,000 416,631 Standard-Pacific Sr Nts 08-15-15 7.00 930,000 916,050 Total 7,494,886 Independent Energy (0.3%) Chesapeake Energy 01-15-15 7.75 1,275,000 1,370,625 Sr Nts 06-15-14 7.50 152,000 164,160 Sr Unsecured 08-15-17 6.50 1,860,000(d) 1,897,200 Bonds (continued) Issuer Coupon Principal Value(a) Rate Amount Independent Energy (cont.) Encore Acquisition Sr Sub Nts 04-15-14 6.25% $590,000 $587,050 Newfield Exploration Sr Nts 03-01-11 7.63 2,500,000 2,725,000 Sr Sub Nts 08-15-12 8.38 380,000 413,250 Plains Exploration & Production Sr Nts 06-15-14 7.13 790,000 841,350 Total 7,998,635 Life Insurance (2.1%) ASIF Global Financing XIX Secured 01-17-13 4.90 5,748,000(d) 5,826,575 ING Security Life Institutional Funding 01-15-10 4.25 11,475,000(d) 11,397,326 Metlife Sr Nts 06-15-35 5.70 9,600,000 9,974,506 Metropolitan Life Global Funding I Sr Nts 08-19-10 4.63 3,360,000(d) 3,386,154 Pricoa Global Funding I 06-25-12 4.63 16,125,000(d) 16,154,880 Prudential Financial 06-13-35 5.40 4,720,000 4,698,788 Total 51,438,229 Lodging (0.1%) Hilton Hotels 12-01-12 7.63 1,250,000 1,434,175 ITT 11-15-15 7.38 635,000 695,325 Total 2,129,500 Media Cable (0.2%) Comcast 03-15-11 5.50 3,635,000 3,758,408 DIRECTV Holdings LLC/Finance Sr Nts 03-15-13 8.38 406,000 445,585 Videotron Ltee 01-15-14 6.88 530,000(c) 544,575 Total 4,748,568 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 20 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) Rate Amount Media Non Cable (0.7%) Corus Entertainment Sr Sub Nts 03-01-12 8.75% $395,000(c) $424,625 Dex Media West LLC/Finance Sr Nts Series B 08-15-10 8.50 1,340,000 1,448,875 Emmis Operating Sr Sub Nts 05-15-12 6.88 400,000 400,000 Lamar Media 01-01-13 7.25 375,000 394,688 Sr Sub Nts 08-15-15 6.63 805,000(d) 821,100 News America 12-15-34 6.20 9,392,000 9,731,812 Quebecor Media Sr Nts 07-15-11 11.13 640,000(c) 704,000 Radio One Series B 07-01-11 8.88 1,000,000 1,068,750 Sun Media 02-15-13 7.63 745,000(c) 786,906 Susquehanna Media Sr Sub Nts 04-15-13 7.38 900,000 943,875 Total 16,724,631 Metals (0.1%) Peabody Energy Series B 03-15-13 6.88 1,640,000 1,707,650 Oil Field Services (0.2%) Halliburton 10-15-10 5.50 3,450,000 3,608,327 Key Energy Services Series C 03-01-08 8.38 1,250,000 1,293,750 Offshore Logistics 06-15-13 6.13 195,000 190,125 Pride Intl Sr Nts 07-15-14 7.38 495,000 537,075 Total 5,629,277 Bonds (continued) Issuer Coupon Principal Value(a) Rate Amount Other Financial Institutions (0.9%) HSBC Finance 06-30-15 5.00% $15,705,000 $15,786,776 Residential Capital 06-30-10 6.38 6,745,000(d) 6,885,431 Total 22,672,207 Packaging (0.1%) Owens-Illinois Glass Container 05-15-11 7.75 1,100,000 1,166,000 Silgan Holdings Sr Sub Nts 11-15-13 6.75 615,000 628,069 Total 1,794,069 Paper (0.1%) Crown Paper Sr Sub Nts 09-01-05 11.00 6,950,000(b,o,q) ---- Louisiana-Pacific Sr Nts 08-15-10 8.88 2,260,000 2,554,354 Total 2,554,354 Pharmaceuticals (0.1%) Merck & Co 03-01-15 4.75 1,450,000 1,437,452 Property & Casualty (0.1%) Willis Group North America 07-15-15 5.63 3,370,000 3,421,831 Railroads (0.5%) Union Pacific 04-15-12 6.50 7,390,000 8,151,495 05-01-14 5.38 2,995,000 3,118,403 Total 11,269,898 REITS (0.6%) Archstone-Smith Operating Trust 05-01-15 5.25 7,660,000 7,781,533 ERP Operating LP 04-01-13 5.20 2,815,000 2,871,337 Simon Property Group LP 06-15-15 5.10 4,975,000(d) 4,956,543 Total 15,609,413 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 21 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) Rate Amount Retailers (0.4%) United Auto Group 03-15-12 9.63% $455,000 $488,556 Wal-Mart Stores 09-01-35 5.25 1,395,000(g) 1,407,644 09-01-35 5.25 4,175,000 4,212,843 Series C 06-29-11 8.88 3,500,000 3,533,355 Total 9,642,398 Transportation Services (0.2%) ERAC USA Finance 05-01-15 5.60 5,075,000(d) 5,241,490 Greater Beijing First Expressways Sr Nts 06-15-07 9.50 3,640,000(b,c,o,q) ---- Total 5,241,490 Wireless (0.3%) Nextel Communications Sr Nts Series E 10-31-13 6.88 1,875,000 2,008,262 US Cellular Sr Nts 12-15-33 6.70 5,835,000 6,254,583 Total 8,262,845 Wirelines (4.4%) BellSouth Sr Unsecured 11-15-34 6.00 2,775,000 2,929,690 Qwest 03-15-12 8.88 1,075,000 1,174,438 Sprint Capital 01-30-11 7.63 26,465,000 30,247,456 11-15-28 6.88 892,000 1,022,183 Telecom Italia Capital 09-30-34 6.00 6,265,000(c,d) 6,431,687 TELUS 06-01-11 8.00 20,552,500(c) 23,906,730 Verizon Pennsylvania Series A 11-15-11 5.65 41,125,000 43,003,178 Total 108,715,362 Total Bonds (Cost: $2,434,999,571) $2,446,929,085 Other (0.1%) Issuer Shares Value(a) Wayland Investment LLC 6,000,000(b,e,o) $3,053,100 Total Other (Cost: $6,671,880) $3,053,100 Short-Term Securities (4.3%)(s) Issuer Effective Amount Value(a) Yield Payable at Maturity U.S. Government Agency (1.0%) Federal Home Loan Mtge Corp Disc Nt 09-20-05 3.43% $25,000,000 $24,952,500 Commercial Paper (3.3%) Jupiter Securitization 09-29-05 3.60 10,000,000(t) 9,971,080 Kitty Hawk Funding 09-07-05 3.51 9,310,000(t) 9,303,646 Morgan Stanley & Co 09-01-05 3.57 2,900,000 2,899,712 Park Avenue Receivables 09-22-05 3.55 15,000,000(t) 14,967,550 Thames Asset Global Securitization 09-21-05 3.55 25,000,000(t) 24,948,374 Thunder Bay Funding LLC 10-07-05 3.61 20,000,000(t) 19,926,000 Total 82,016,362 Total Short-Term Securities (Cost: $106,979,365) $106,968,862 Total Investments in Securities (Cost: $2,548,650,816)(u) $2,556,951,047 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 22 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT Notes to Investments in Securities (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) Non-income producing. For long-term debt securities, item identified is in default as to payment of interest and/or principal. (c) Foreign security values are stated in U.S. dollars. For debt securities, principal amounts are denominated in U.S. dollar currency unless otherwise noted. At Aug. 31, 2005, the value of foreign securities represented 4.7% of net assets. (d) Represents a security sold under Rule 144A, which is exempt from registration under the Securities Act of 1933, as amended. This security has been determined to be liquid under guidelines established by the Fund's Board of Directors. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At Aug. 31, 2005, the value of these securities amounted to $135,734,200 or 5.5% of net assets. (e) The share amount for Limited Liability Companies (LLC) or Limited Partnerships (LP) represents capital contributions. (f) Mortgage-backed securities represent direct or indirect participations in, or are secured by and payable from, mortgage loans secured by real property, and include single- and multi-class pass-through securities and collateralized mortgage obligations. These securities may be issued or guaranteed by U.S. government agencies or instrumentalities, or by private issuers, generally originators and investors in mortgage loans, including savings associations, mortgage bankers, commercial banks, investment bankers and special purpose entities. The maturity dates shown represent the original maturity of the underlying obligation. Actual maturity may vary based upon prepayment activity on these obligations. Unless otherwise noted, the coupon rates presented are fixed rates. (g) At Aug. 31, 2005, the cost of securities purchased, including interest purchased, on a when-issued and/or other forward-commitment basis was $74,442,316. (h) U.S. Treasury inflation-indexed bonds are securities in which the principal amount is adjusted for inflation and the semiannual interest payments equal a fixed percentage of the inflation-adjusted principal amount. (i) Interest only represents securities that entitle holders to receive only interest payments on the underlying mortgages. The yield to maturity of an interest only is extremely sensitive to the rate of principal payments on the underlying mortgage assets. A rapid (slow) rate of principal repayments may have an adverse (positive) effect on yield to maturity. The principal amount shown is the notional amount of the underlying mortgages. Interest rate disclosed represents yield based upon the estimated timing and amount of future cash flows at Aug. 31, 2005. (j) Principal only represents securities that entitle holders to receive only principal payments on the underlying mortgages. The yield to maturity of a principal only is sensitive to the rate of principal payments on the underlying mortgage assets. A slow (rapid) rate of principal repayments may have an adverse (positive) effect on yield to maturity. Interest rate disclosed represents yield based upon the estimated timing of future cash flows at Aug. 31, 2005. (k) Adjustable rate mortgage; interest rate varies to reflect current market conditions; rate shown is the effective rate on Aug. 31, 2005. (l) The following abbreviations are used in the portfolio security descriptions to identify the insurer of the issue: AMBAC -- Ambac Assurance Corporation FGIC -- Financial Guaranty Insurance Company FSA -- Financial Security Assurance MBIA -- MBIA Insurance Corporation (m) Interest rate varies either based on a predetermined schedule or to reflect current market conditions; rate shown is the effective rate on Aug. 31, 2005. (n) Comparable securities are held to satisfy future delivery requirements of the following open forward sale commitments at Aug. 31, 2005: Security Principal Settlement Proceeds Value amount date receivable Federal Natl Mtge Assn 09-01-20 5.00% $13,150,000 9-19-05 $13,139,726 $13,240,406 09-01-20 5.50 7,000,000 9-19-05 7,111,563 7,148,750 09-01-35 5.00 21,300,000 9-14-05 20,837,391 21,153,563 09-01-35 5.50 72,550,000 9-14-05 72,436,641 73,275,500 09-01-35 6.00 5,000,000 9-14-05 5,091,406 5,115,625 09-01-35 6.50 19,870,000 9-14-05 20,507,237 20,528,194 - -------------------------------------------------------------------------------- 23 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT Notes to Investments in Securities (continued) (o) Identifies issues considered to be illiquid as to their marketability (see Note 1 to the financial statements). These securities are valued at fair value according to methods selected in good faith by the Fund's Board of Directors. Information concerning such security holdings at Aug. 31, 2005, is as follows: Security Acquisition Cost dates Crown Paper 11.00% Sr Sub Nts 2005 02-10-00 thru 02-14-00 $4,216,724 Greater Beijing First Expressways 9.50% Sr Nts 2007 09-16-98 -- Wayland Investment LLC 05-19-00 6,671,880 (p) Partially pledged as initial deposit on the following open interest rate futures contracts (see Note 6 to the financial statements): Type of security Notional amount Purchase contracts U.S. Long Bond, Dec. 2005, 20-year $ 41,400,000 Sale contracts U.S. Treasury Note, Sept. 2005, 5-year 19,900,000 U.S. Treasury Note, Sept. 2005, 10-year 13,300,000 U.S. Treasury Note, Dec. 2005, 5-year 66,300,000 U.S. Treasury Note, Dec. 2005, 10-year 141,900,000 (q) Negligible market value. (r) At Aug. 31, 2005, security was partially or fully on loan. See Note 5 to the financial statements. (s) Cash collateral received from security lending activity is invested in short-term securities and represents 0.7% of net assets. See Note 5 to the financial statements. 3.6% of net assets is the Fund's cash equivalent position. (t) Commercial paper sold within terms of a private placement memorandum, exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, and may be sold only to dealers in that program or other "accredited investors." This security has been determined to be liquid under guidelines established by the Fund's Board of Directors. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At Aug. 31, 2005, the value of these securities amounted to $79,116,650 or 3.2% of net assets. (u) At Aug. 31, 2005, the cost of securities for federal income tax purposes was $2,549,111,156 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $ 29,407,129 Unrealized depreciation (21,567,238) ----------- Net unrealized appreciation $ 7,839,891 ------------ How to find information about the Fund's portfolio holdings (i) The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (Commission) for the first and third quarters of each fiscal year on Form N-Q; (ii) The Fund's Forms N-Q are available on the Commission's website at http://www.sec.gov; (iii) The Fund's Forms N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, DC (information on the operations of the Public Reference Room may be obtained by calling 1-800-SEC-0330); and (iv) The Fund's complete schedule of portfolio holdings, as disclosed in its annual and semiannual shareholder reports and in its filings on Form N-Q, can be found at www.riversource.com/investments. - -------------------------------------------------------------------------------- 24 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Financial Statements Statement of assets and liabilities RiverSource Diversified Bond Fund Aug. 31, 2005 Assets Investments in securities, at value (Note 1)* (identified cost $2,548,650,816) $2,556,951,047 Capital shares receivable 479,976 Accrued interest receivable 15,852,024 Receivable for investment securities sold 206,792,872 Unrealized appreciation on swap transactions, at value (Note 7) 878,275 ------- Total assets 2,780,954,194 ------------- Liabilities Disbursements in excess of cash on demand deposit 887,631 Dividends payable to shareholders 451,716 Capital shares payable 164,578 Payable for investment securities purchased 140,630,243 Payable upon return of securities loaned (Note 5) 18,330,000 Accrued investment management services fee 33,907 Accrued distribution fee 538,031 Accrued service fee 553 Accrued transfer agency fee 2,626 Accrued administrative services fee 3,122 Other accrued expenses 324,785 Forward sale commitments, at value (proceeds receivable $139,123,964) (Note 1) 140,462,038 ----------- Total liabilities 301,829,230 ----------- Net assets applicable to outstanding capital stock $2,479,124,964 ============== Represented by Capital stock -- $.01 par value (Note 1) $ 5,068,498 Additional paid-in capital 2,579,293,685 Undistributed net investment income 5,270,078 Accumulated net realized gain (loss) (Note 9) (117,341,155) Unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (Note 6) 6,833,858 --------- Total -- representing net assets applicable to outstanding capital stock $2,479,124,964 ============== Net assets applicable to outstanding shares: Class A $1,774,392,052 Class B $ 484,320,317 Class C $ 18,092,300 Class I $ 9,963 Class Y $ 202,310,332 Net asset value per share of outstanding capital stock: Class A shares 362,799,390 $ 4.89 Class B shares 99,003,330 $ 4.89 Class C shares 3,693,765 $ 4.90 Class I shares 2,037 $ 4.89 Class Y shares 41,351,259 $ 4.89 ---------- -------------- *Including securities on loan, at value (Note 5) $ 18,115,920 --------------
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 25 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Statement of operations RiverSource Diversified Bond Fund Year ended Aug. 31, 2005 Investment income Income: Interest $120,064,422 Fee income from securities lending (Note 5) 361,192 ------- Total income 120,425,614 ----------- Expenses (Note 2): Investment management services fee 13,003,467 Distribution fee Class A 4,534,413 Class B 5,752,444 Class C 193,278 Transfer agency fee 4,365,376 Incremental transfer agency fee Class A 239,386 Class B 149,792 Class C 5,897 Service fee -- Class Y 198,919 Administrative services fees and expenses 1,259,427 Compensation of board members 22,793 Custodian fees 207,936 Printing and postage 619,638 Registration fees 109,340 Audit fees 45,000 Other 105,201 ------- Total expenses 30,812,307 Expenses waived/reimbursed by Ameriprise Financial (fomerly AEFC) (Note 2) (2,024,845) ---------- 28,787,462 Earnings credits on cash balances (Note 2) (117,177) -------- Total net expenses 28,670,285 ---------- Investment income (loss) -- net 91,755,329 ---------- Realized and unrealized gain (loss) -- net Net realized gain (loss) on: Security transactions (Note 3) 29,398,036 Foreign currency transactions (215,482) Futures contracts 208,446 Swap transactions (467,823) -------- Net realized gain (loss) on investments 28,923,177 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (14,927,428) ----------- Net gain (loss) on investments and foreign currencies 13,995,749 ---------- Net increase (decrease) in net assets resulting from operations $105,751,078 ============
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 26 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Statements of changes in net assets RiverSource Diversified Bond Fund Year ended Aug. 31, 2005 2004 Operations and distributions Investment income (loss) -- net $ 91,755,329 $ 105,192,832 Net realized gain (loss) on investments 28,923,177 (4,621,473) Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (14,927,428) 68,359,517 ----------- ---------- Net increase (decrease) in net assets resulting from operations 105,751,078 168,930,876 ----------- ----------- Distributions to shareholders from: Net investment income Class A (70,478,732) (72,912,216) Class B (17,993,962) (21,667,704) Class C (605,297) (659,148) Class I (421) (1,353) Class Y (8,081,878) (8,189,423) ---------- ---------- Total distributions (97,160,290) (103,429,844) ----------- ------------ Capital share transactions (Note 4) Proceeds from sales Class A shares (Note 2) 259,770,664 251,088,529 Class B shares 84,427,800 89,582,880 Class C shares 4,052,182 5,454,766 Class I shares -- 821,608 Class Y shares 41,037,278 71,322,514 Reinvestment of distributions at net asset value Class A shares 56,221,455 56,831,525 Class B shares 15,935,666 18,955,456 Class C shares 543,915 580,863 Class I shares -- 1,139 Class Y shares 6,719,948 6,500,832 Payments for redemptions Class A shares (480,335,355) (699,205,028) Class B shares (Note 2) (245,851,411) (397,699,256) Class C shares (Note 2) (7,443,384) (12,180,164) Class I shares -- (814,281) Class Y shares (49,568,951) (147,874,937) ----------- ------------ Increase (decrease) in net assets from capital share transactions (314,490,193) (756,633,554) ------------ ------------ Total increase (decrease) in net assets (305,899,405) (691,132,522) Net assets at beginning of year 2,785,024,369 3,476,156,891 ------------- ------------- Net assets at end of year $2,479,124,964 $2,785,024,369 ============== ============== Undistributed net investment income $ 5,270,078 $ 6,413,116 -------------- --------------
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 27 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT Notes to Financial Statements RiverSource Diversified Bond Fund (formerly AXP Diversified Bond Fund) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Fund is a series of AXP Fixed Income Series, Inc. and is registered under the Investment Company Act of 1940 (as amended) as a diversified, open-end management investment company. AXP Fixed Income Series, Inc. has 10 billion authorized shares of capital stock that can be allocated among the separate series as designated by the board. The Fund invests primarily in bonds and other debt securities including securities issued by the U.S. government, corporate bonds and mortgage- and asset-backed securities. The Fund offers Class A, Class B, Class C and Class Y shares. o Class A shares are sold with a front-end sales charge. o Class B shares may be subject to a contingent deferred sales charge (CDSC) and automatically convert to Class A shares during the ninth year of ownership. o Class C shares may be subject to a CDSC. o Class Y shares have no sales charge and are offered only to qualifying institutional investors. The Fund offers an additional class of shares, Class I, exclusively to certain institutional investors. Class I shares have no sales charge and are made available through a separate prospectus supplement provided to investors eligible to purchase the shares. At Aug. 31, 2005, Ameriprise Financial, Inc. (Ameriprise Financial) (formerly American Express Financial Corporation) owned 100% of Class I shares. All classes of shares have identical voting, dividend and liquidation rights. The distribution fee, transfer agency fees and service fee (class specific expenses) differ among classes. Income, expenses (other than class specific expenses) and realized and unrealized gains or losses on investments are allocated to each class of shares based upon its relative net assets. The Fund's significant accounting policies are summarized below: Use of estimates Preparing financial statements that conform to U.S. generally accepted accounting principles requires management to make estimates (e.g., on assets, liabilities and contingent assets and liabilities) that could differ from actual results. Valuation of securities All securities are valued at the close of each business day. Securities traded on national securities exchanges or included in national market systems are valued at the last quoted sales price. Debt securities are generally traded in the over-the-counter market and are valued at a price that reflects fair value as quoted by dealers in these securities or by an independent pricing service. Securities for which market quotations are not readily available are valued at fair value according to methods selected in good faith by the board. Short-term securities maturing in more than 60 days from the valuation date are valued at the market price or approximate market value based on current interest rates; those maturing in 60 days or less are valued at amortized cost. - -------------------------------------------------------------------------------- 28 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT Illiquid securities At Aug. 31, 2005, investments in securities included issues that are illiquid which the Fund currently limits to 10% of net assets, at market value, at the time of purchase. The aggregate value of such securities at Aug. 31, 2005 was $3,053,100 representing 0.12% of net assets. These securities are valued at fair value according to methods selected in good faith by the board. According to board guidelines, certain unregistered securities are determined to be liquid and are not included within the 10% limitation specified above. Assets are liquid if they can be sold or disposed of in the ordinary course of business within seven days at approximately the value at which the asset is valued by the Fund. Securities purchased on a forward-commitment basis Delivery and payment for securities that have been purchased by the Fund on a forward-commitment basis, including when-issued securities and other forward-commitments, can take place one month or more after the transaction date. During this period, such securities are subject to market fluctuations, and they may affect the Fund's net assets the same as owned securities. The Fund designates cash or liquid securities at least equal to the amount of its forward-commitments. At Aug. 31, 2005, the Fund has entered into outstanding when-issued securities of $57,643,652 and other forward-commitments of $16,798,664. The Fund also enters into transactions to sell purchase commitments to third parties at current market values and concurrently acquires other purchase commitments for similar securities at later dates. As an inducement for the Fund to "roll over" its purchase commitments, the Fund receives negotiated amounts in the form of reductions of the purchase price of the commitment. Option transactions To produce incremental earnings, protect gains, and facilitate buying and selling of securities for investments, the Fund may buy and write options traded on any U.S. or foreign exchange or in the over-the-counter market where completing the obligation depends upon the credit standing of the other party. The Fund also may buy and sell put and call options and write covered call options on portfolio securities as well as write cash-secured put options. The risk in writing a call option is that the Fund gives up the opportunity for profit if the market price of the security increases. The risk in writing a put option is that the Fund may incur a loss if the market price of the security decreases and the option is exercised. The risk in buying an option is that the Fund pays a premium whether or not the option is exercised. The Fund also has the additional risk of being unable to enter into a closing transaction if a liquid secondary market does not exist. Option contracts are valued daily at the closing prices on their primary exchanges and unrealized appreciation or depreciation is recorded. The Fund will realize a gain or loss when the option transaction expires or closes. When options on debt securities or futures are exercised, the Fund will realize a gain or loss. When other options are exercised, the proceeds on sales for a written call option, the purchase cost for a written put option or the cost of a security for a purchased put or call option is adjusted by the amount of premium received or paid. - -------------------------------------------------------------------------------- 29 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT Futures transactions To gain exposure to or protect itself from market changes, the Fund may buy and sell financial futures contracts traded on any U.S. or foreign exchange. The Fund also may buy and write put and call options on these futures contracts. Risks of entering into futures contracts and related options include the possibility of an illiquid market and that a change in the value of the contract or option may not correlate with changes in the value of the underlying securities. Upon entering into a futures contract, the Fund is required to deposit either cash or securities in an amount (initial margin) equal to a certain percentage of the contract value. Subsequent payments (variation margin) are made or received by the Fund each day. The variation margin payments are equal to the daily changes in the contract value and are recorded as unrealized gains and losses. The Fund recognizes a realized gain or loss when the contract is closed or expires. Foreign currency translations and foreign currency contracts Securities and other assets and liabilities denominated in foreign currencies are translated daily into U.S. dollars. Foreign currency amounts related to the purchase or sale of securities and income and expenses are translated at the exchange rate on the transaction date. The effect of changes in foreign exchange rates on realized and unrealized security gains or losses is reflected as a component of such gains or losses. In the statement of operations, net realized gains or losses from foreign currency transactions, if any, may arise from sales of foreign currency, closed forward contracts, exchange gains or losses realized between the trade date and settlement date on securities transactions, and other translation gains or losses on dividends, interest income and foreign withholding taxes. The Fund may enter into forward foreign currency exchange contracts for operational purposes and to protect against adverse exchange rate fluctuation. The net U.S. dollar value of foreign currency underlying all contractual commitments held by the Fund and the resulting unrealized appreciation or depreciation are determined using foreign currency exchange rates from an independent pricing service. The Fund is subject to the credit risk that the other party will not complete its contract obligations. Forward sale commitments The Fund may enter into forward sale commitments to hedge its portfolio positions or to sell mortgage-backed securities it owns under delayed delivery arrangements. Proceeds of forward sale commitments are not received until the contractual settlement date. During the time a forward sale commitment is outstanding, equivalent deliverable securities, or an offsetting forward purchase commitment deliverable on or before the sale commitment date, are used to satisfy the commitment. Unsettled forward sale commitments are valued at the current market value of the underlying securities, generally according to the procedures described under "Valuation of securities" above. The forward sale commitment is "marked-to-market" daily and the change in market value is recorded by the Fund as an unrealized gain or loss. If the forward sale commitment is closed through the acquisition of an offsetting purchase commitment, the Fund realizes a gain or loss. If the Fund delivers securities under the commitment, the Fund realizes a gain or a loss from the sale of the securities based upon the market price established at the date the commitment was entered into. Forward sale commitments outstanding at period end are listed in the "Notes to investments in securities." - -------------------------------------------------------------------------------- 30 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT Total return swap transactions The Fund may enter into swap agreements to earn the total return on a specified security or index of fixed income securities. Under the terms of the swaps, the Fund either receives or pays the total return on a reference security or index applied to a notional principal amount. In return, the Fund agrees to pay or receive from the counterparty a floating rate, which is reset periodically based on short-term interest rates, applied to the same notional amount. The notional amounts of swap contracts are not recorded in the financial statements. Swaps are valued daily, and the change in value is recorded as unrealized appreciation (depreciation) until the termination of the swap, at which time realized gain (loss) is recorded. Payments received or made are recorded as realized gains (losses). Total return swaps are subject to the risk that the counterparty will default on its obligation to pay net amounts due to the Fund. Guarantees and indemnifications Under the Fund's organizational documents, its officers and directors are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, certain of the Fund's contracts with its service providers contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown since the amount of any future claims that may be made against the Fund cannot be determined and the Fund has no historical basis for predicting the likelihood of any such claims. Federal taxes The Fund's policy is to comply with all sections of the Internal Revenue Code that apply to regulated investment companies and to distribute substantially all of its taxable income to shareholders. No provision for income or excise taxes is thus required. Net investment income (loss) and net realized gains (losses) may differ for financial statement and tax purposes primarily because of the deferred losses on certain futures contracts, the recognition of certain foreign currency gains (losses) as ordinary income (loss) for tax purposes and losses deferred due to "wash sale" transactions. The character of distributions made during the year from net investment income or net realized gains may differ from their ultimate characterization for federal income tax purposes. Also, due to the timing of dividend distributions, the fiscal year in which amounts are distributed may differ from the year that the income or realized gains (losses) were recorded by the Fund. On the statement of assets and liabilities, as a result of permanent book-to-tax differences, undistributed net investment income has been increased by $4,261,923 and accumulated net realized loss has been increased by $4,261,923. - -------------------------------------------------------------------------------- 31 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT The tax character of distributions paid for the years indicated is as follows: Year ended Aug. 31, 2005 2004 Class A Distributions paid from: Ordinary income $70,478,732 $72,912,216 Long-term capital gain -- -- Class B Distributions paid from: Ordinary income 17,993,962 21,667,704 Long-term capital gain -- -- Class C Distributions paid from: Ordinary income 605,297 659,148 Long-term capital gain -- -- Class I* Distributions paid from: Ordinary income 421 1,353 Long-term capital gain -- -- Class Y Distributions paid from: Ordinary income 8,081,878 8,189,423 Long-term capital gain -- -- * Inception date is March 4, 2004. At Aug. 31, 2005, the components of distributable earnings on a tax basis are as follows: Undistributed ordinary income $ 1,823,333 Accumulated long-term gain (loss) $(104,817,787) Unrealized appreciation (depreciation) $ (1,791,049) Dividends to shareholders Dividends from net investment income, declared daily and payable monthly, when available, are reinvested in additional shares of the Fund at net asset value or payable in cash. Capital gains, when available, are distributed along with the last income dividend of the calendar year. Other Security transactions are accounted for on the date securities are purchased or sold. Dividend income is recognized on the ex-dividend date or upon receipt of ex-dividend notification in the case of certain foreign securities. Interest income, including amortization of premium, market discount and original issue discount using the effective interest method, is accrued daily. 2. EXPENSES AND SALES CHARGES Under an Investment Management Services Agreement, RiverSource Investments, LLC (the Investment Manager) determines which securities will be purchased, held or sold. Prior to Oct. 1, 2005, investment management services were provided by Ameriprise Financial. The management fee is a percentage of the Fund's average daily net assets that declines from 0.52% to 0.395% annually as the Fund's assets increase. - -------------------------------------------------------------------------------- 32 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT Under the current Administrative Services Agreement, the Fund pays Ameriprise Financial a fee for administration and accounting services at a percentage of the Fund's average daily net assets that declines from 0.05% to 0.025% annually as the Fund's assets increase. Effective Oct. 1, 2005, the fee percentage of the Fund's average daily net assets declines from 0.07% to 0.04% annually as the Fund's assets increase. A minor portion of additional administrative service expenses paid by the Fund are consultants' fees and fund office expenses. Under this agreement, the Fund also pays taxes, audit and certain legal fees, registration fees for shares, compensation of board members, corporate filing fees and any other expenses properly payable by the Fund and approved by the board. Under a Deferred Compensation Plan (the Plan), non-interested board members may defer receipt of their compensation. Deferred amounts are treated as though equivalent dollar amounts had been invested in shares of the Fund or other RiverSource funds. The Fund's liability for these amounts is adjusted for market value changes and remains in the Fund until distributed in accordance with the Plan. Under a separate Transfer Agency Agreement, RiverSource Service Corporation (formerly American Express Client Service Corporation) (the Transfer Agent) maintains shareholder accounts and records. The Fund pays the Transfer Agent an annual fee per shareholder account for this service as follows: o Class A $20.50 o Class B $21.50 o Class C $21.00 o Class Y $18.50 The incremental transfer agency fee is the amount charged to the specific classes for the additional expense above the fee for Class Y. Class I pays a transfer agency fee at an annual rate per shareholder account of $1. This amount is included in the transfer agency fee on the statement of operations. Beginning May 20, 2005, the Transfer Agent implemented an annual closed account fee of $5 per inactive account, charged on a pro rata basis for 12 months from the date the account becomes inactive. These fees were insignificant for the year ended Aug. 31, 2005 and are included in the transfer agency fees on the statement of operations. The Fund has agreements with Ameriprise Financial Services, Inc. (formerly American Express Financial Advisors Inc.) (the Distributor) for distribution and shareholder services. Under a Plan and Agreement of Distribution pursuant to Rule 12b-1, the Fund pays a fee at an annual rate up to 0.25% of the Fund's average daily net assets attributable to Class A shares and up to 1.00% for Class B and Class C shares. Under a Shareholder Service Agreement, the Fund pays the Distributor a fee for service provided to shareholders by financial advisors and other servicing agents. The fee is calculated at a rate of 0.10% of the Fund's average daily net assets attributable to Class Y shares. Sales charges received by the Distributor for distributing Fund shares were $2,348,664 for Class A, $521,325 for Class B and $4,955 for Class C for the year ended Aug. 31, 2005. - -------------------------------------------------------------------------------- 33 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT For the year ended Aug. 31, 2005, Ameriprise Financial and its affiliates waived certain fees and expenses to 0.94% for Class A, 1.70% for Class B, 1.70% for Class C and 0.78% for Class Y. Of these waived fees and expenses, the transfer agency fees waived for Class A, Class B, Class C and Class Y were $1,354,764, $493,492, $17,606 and $158,983, respectively. In addition, Ameriprise Financial and its affiliates agreed to extend the current agreement to waive certain fees and expenses through Sept. 30, 2005. Beginning Oct. 1, 2005, a new agreement to waive certain fees and expenses is effective until Aug. 31, 2006, such that net expenses will not exceed 0.89% for Class A, 1.65% for Class B, 1.66% for Class C, 0.59% for Class I and 0.73% for Class Y of the Fund's average daily net assets. During the year ended Aug. 31, 2005, the Fund's custodian and transfer agency fees were reduced by $117,177 as a result of earnings credits from overnight cash balances. 3. SECURITIES TRANSACTIONS Cost of purchases and proceeds from sales of securities (other than short-term obligations) aggregated $7,427,796,615 and $7,752,415,139, respectively, for the year ended Aug. 31, 2005. Realized gains and losses are determined on an identified cost basis. 4. CAPITAL SHARE TRANSACTIONS Transactions in shares of capital stock for the years indicated are as follows:
Year ended Aug. 31, 2005 Class A Class B Class C Class I Class Y Sold 53,307,133 17,309,061 829,459 -- 8,423,475 Issued for reinvested distributions 11,524,807 3,264,247 111,266 -- 1,376,611 Redeemed (98,492,883) (50,438,583) (1,524,135) -- (10,161,026) ------------ ----------- ---------- -------- ----------- Net increase (decrease) (33,660,943) (29,865,275) (583,410) -- (360,940) ------------ ----------- ---------- -------- ----------- Year ended Aug. 31, 2004 Class A Class B Class C Class I* Class Y Sold 51,888,177 18,469,701 1,122,760 166,209 14,733,853 Issued for reinvested distributions 11,728,875 3,911,848 119,675 231 1,341,478 Redeemed (144,542,248) (82,296,004) (2,511,111) (164,403) (30,501,584) ------------ ----------- ---------- -------- ----------- Net increase (decrease) (80,925,196) (59,914,455) (1,268,676) 2,037 (14,426,253) ------------ ----------- ---------- -------- -----------
* Inception date is March 4, 2004. 5. LENDING OF PORTFOLIO SECURITIES At Aug. 31, 2005, securities valued at $18,115,920 were on loan to brokers. For collateral, the Fund received $18,330,000 in cash. Cash collateral received is invested in short-term securities, which are included in the short-term section of the "Investments in securities." Income from securities lending amounted to $361,192 for the year ended Aug. 31, 2005. The risks to the Fund of securities lending are that the borrower may not provide additional collateral when required or return the securities when due. - -------------------------------------------------------------------------------- 34 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT 6. INTEREST RATE FUTURES CONTRACTS At Aug. 31, 2005, investments in securities included securities valued at $1,734,797 that were pledged as collateral to cover initial margin deposits on 414 open purchase contracts and 2,414 open sale contracts. The notional market value of the open purchase contracts at Aug. 31, 2005 was $48,864,938 with a net unrealized gain of $696,969. The notional market value of the open sale contracts at Aug. 31, 2005 was $267,507,820 with a net unrealized loss of $1,700,150. See "Summary of significant accounting policies" and "Notes to investments in securities." 7. SWAP CONTRACTS
At Aug. 31, 2005, the Fund had the following open total return swap contracts: Termination Notional Unrealized date principal appreciation (depreciation) Receive total return on Lehman Brothers Aaa 8.5+ Commercial Mortgage-Backed Securities Index and pay a floating rate based on 1-month LIBOR less 0.55%. Counterparty: Citigroup 09/01/05 $10,500,000 $228,249 Receive total return on Lehman Brothers AAA 8.5+ Commercial Mortgage-Backed Securities Index and pay a floating rate based on 1-month LIBOR less 0.20%. Counterparty: Citigroup 10/01/05 7,000,000 150,056 Receive total return on Lehman Brothers Aaa 8.5+ Commercial Mortgage-Backed Securities Index and pay a floating rate based on 1-month LIBOR less 0.40%. Counterparty: Citigroup 10/01/05 9,100,000 196,640 Receive total return on Lehman Brothers Aaa 8.5+ Commercial Mortgage-Backed Securities Index and pay a floating rate based on 1-month LIBOR less 0.30%. Counterparty: Citigroup 11/01/05 10,200,000 303,330 -------- ---------- ------- Total $878,275 --------
8. BANK BORROWINGS The Fund has a revolving credit agreement with a syndicate of banks headed by The Bank of New York, whereby the Fund may borrow for the temporary funding of shareholder redemptions or for other temporary or emergency purposes. The agreement went into effect Sept. 21, 2004. The Fund must maintain asset coverage for borrowings of at least 300%. The agreement, which enables the Fund to participate with other RiverSource funds, permits borrowings up to $500 million, collectively. Interest is charged to each Fund based on its borrowings at a rate equal to either the higher of the Federal Funds Effective Rate plus 0.50% or the Prime Lending Rate. Borrowings are payable within 60 days after such loan is executed. The Fund also pays a commitment fee equal to its pro rata share of the amount of the credit facility at a rate of 0.09% per annum. Prior to this agreement, the Fund had a revolving credit agreement that permitted borrowings up to $500 million with Deutsche Bank. The Fund had no borrowings outstanding during the year ended Aug. 31, 2005. Effective Sept. 20, 2005, the Fund entered into a new revolving credit agreement with a syndicate of banks headed by JPMorgan Chase Bank, N.A., whereby the Fund is permitted to have bank borrowings for temporary or emergency purposes, including funding shareholder redemptions. - -------------------------------------------------------------------------------- 35 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT 9. CAPITAL LOSS CARRY-OVER For federal income tax purposes, the Fund had a capital loss carry-over of $104,817,787 at Aug. 31, 2005, that if not offset by capital gains will expire as follows: 2009 2010 $78,698,873 $26,118,914 It is unlikely the board will authorize a distribution of any net realized capital gains until the available capital loss carry-over has been offset or expires. 10. FINANCIAL HIGHLIGHTS The tables below show certain important financial information for evaluating the Fund's results.
Class A Per share income and capital changes(a) Fiscal period ended Aug. 31, 2005 2004 2003 2002 2001 Net asset value, beginning of period $4.87 $4.78 $4.75 $4.86 $4.70 ----- ----- ----- ----- ----- Income from investment operations: Net investment income (loss) .18 .18 .20 .25 .31 Net gains (losses) (both realized and unrealized) .03 .08 .03 (.10) .17 ----- ----- ----- ----- ----- Total from investment operations .21 .26 .23 .15 .48 ----- ----- ----- ----- ----- Less distributions: Dividends from net investment income (.19) (.17) (.20) (.25) (.32) Tax return of capital -- -- -- (.01) -- ----- ----- ----- ----- ----- Total distributions (.19) (.17) (.20) (.26) (.32) ----- ----- ----- ----- ----- Net asset value, end of period $4.89 $4.87 $4.78 $4.75 $4.86 ----- ----- ----- ----- ----- Ratios/supplemental data Net assets, end of period (in millions) $1,774 $1,933 $2,280 $2,438 $2,390 Ratio of expenses to average daily net assets(b) .94%(c) .98%(c) .97% .95% .94% Ratio of net investment income (loss) to average daily net assets 3.67% 3.55% 4.16% 5.17% 6.51% Portfolio turnover rate (excluding short-term securities) 300% 279% 256% 169% 115% Total return(d) 4.38% 5.54% 4.91% 3.13% 10.48%
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (c) Ameriprise Financial and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class A would have been 1.02% and 1.00% for the years ended Aug. 31, 2005 and 2004, respectively. (d) Total return does not reflect payment of a sales charge. - -------------------------------------------------------------------------------- 36 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Class B Per share income and capital changes(a) Fiscal period ended Aug. 31, 2005 2004 2003 2002 2001 Net asset value, beginning of period $4.88 $4.78 $4.75 $4.86 $4.70 ----- ----- ----- ----- ----- Income from investment operations: Net investment income (loss) .15 .14 .16 .21 .27 Net gains (losses) (both realized and unrealized) .01 .09 .03 (.10) .17 ----- ----- ----- ----- ----- Total from investment operations .16 .23 .19 .11 .44 ----- ----- ----- ----- ----- Less distributions: Dividends from net investment income (.15) (.13) (.16) (.21) (.28) Tax return of capital -- -- -- (.01) -- ----- ----- ----- ----- ----- Total distributions (.15) (.13) (.16) (.22) (.28) ----- ----- ----- ----- ----- Net asset value, end of period $4.89 $4.88 $4.78 $4.75 $4.86 ----- ----- ----- ----- ----- Ratios/supplemental data Net assets, end of period (in millions) $484 $628 $902 $1,047 $954 Ratio of expenses to average daily net assets(b) 1.70%(c) 1.73%(c) 1.73% 1.71% 1.70% Ratio of net investment income (loss) to average daily net assets 2.92% 2.78% 3.40% 4.40% 5.74% Portfolio turnover rate (excluding short-term securities) 300% 279% 256% 169% 115% Total return(d) 3.39% 4.95% 4.12% 2.35% 9.65%
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (c) Ameriprise Financial and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class B would have been 1.78% and 1.75% for the years ended Aug. 31, 2005 and 2004, respectively. (d) Total return does not reflect payment of a sales charge. - -------------------------------------------------------------------------------- 37 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Class C Per share income and capital changes(a) Fiscal period ended Aug. 31, 2005 2004 2003 2002 2001 Net asset value, beginning of period $4.88 $4.78 $4.75 $4.86 $4.71 Income from investment operations: Net investment income (loss) .15 .14 .16 .21 .27 Net gains (losses) (both realized and unrealized) .02 .09 .03 (.10) .16 Total from investment operations .17 .23 .19 .11 .43 Less distributions: Dividends from net investment income (.15) (.13) (.16) (.21) (.28) Tax return of capital -- -- -- (.01) -- Total distributions (.15) (.13) (.16) (.22) (.28) Net asset value, end of period $4.90 $4.88 $4.78 $4.75 $4.86 Ratios/supplemental data Net assets, end of period (in millions) $18 $21 $27 $24 $10 Ratio of expenses to average daily net assets(b) 1.70%(c) 1.73%(c) 1.74% 1.72% 1.70% Ratio of net investment income (loss) to average daily net assets 2.93% 2.79% 3.34% 4.33% 5.62% Portfolio turnover rate (excluding short-term securities) 300% 279% 256% 169% 115% Total return(d) 3.60% 4.95% 4.11% 2.35% 9.43%
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (c) Ameriprise Financial and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class C would have been 1.79% and 1.75% for the years ended Aug. 31, 2005 and 2004, respectively. (d) Total return does not reflect payment of a sales charge. - -------------------------------------------------------------------------------- 38 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Class I Per share income and capital changes(a) Fiscal period ended Aug. 31, 2005 2004(b) Net asset value, beginning of period $4.88 $4.91 ----- ----- Income from investment operations: Net investment income (loss) .20 .11 Net gains (losses) (both realized and unrealized) .02 (.04) ----- ----- Total from investment operations .22 .07 ----- ----- Less distributions: Dividends from net investment income (.21) (.10) ----- ----- Net asset value, end of period $4.89 $4.88 ----- ----- Ratios/supplemental data Net assets, end of period (in millions) $-- $-- Ratio of expenses to average daily net assets(c) .60% .59%(d) Ratio of net investment income (loss) to average daily net assets 4.01% 3.13%(d) Portfolio turnover rate (excluding short-term securities) 300% 279% Total return(e) 4.53% 1.43%(f)
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Inception date is March 4, 2004. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (d) Adjusted to an annual basis. (e) Total return does not reflect payment of a sales charge. (f) Not annualized. - -------------------------------------------------------------------------------- 39 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Class Y Per share income and capital changes(a) Fiscal period ended Aug. 31, 2005 2004 2003 2002 2001 Net asset value, beginning of period $4.88 $4.78 $4.75 $4.86 $4.70 ----- ----- ----- ----- ----- Income from investment operations: Net investment income (loss) .19 .18 .21 .25 .32 Net gains (losses) (both realized and unrealized) .02 .10 .03 (.10) .17 ----- ----- ----- ----- ----- Total from investment operations .21 .28 .24 .15 .49 ----- ----- ----- ----- ----- Less distributions: Dividends from net investment income (.20) (.18) (.21) (.25) (.33) Tax return of capital -- -- -- (.01) -- ----- ----- ----- ----- ----- Total distributions (.20) (.18) (.21) (.26) (.33) ----- ----- ----- ----- ----- Net asset value, end of period $4.89 $4.88 $4.78 $4.75 $4.86 ----- ----- ----- ----- ----- Ratios/supplemental data Net assets, end of period (in millions) $202 $203 $268 $297 $533 Ratio of expenses to average daily net assets(b) .78%(c) .81%(c) .81% .78% .78% Ratio of net investment income (loss) to average daily net assets 3.85% 3.70% 4.34% 5.30% 6.66% Portfolio turnover rate (excluding short-term securities) 300% 279% 256% 169% 115% Total return(d) 4.34% 5.92% 5.08% 3.29% 10.65%
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (c) Ameriprise Financial and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class Y would have been 0.86% and 0.83% for the years ended Aug. 31, 2005 and 2004, respectively. (d) Total return does not reflect payment of a sales charge. - -------------------------------------------------------------------------------- 40 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT Report of Independent Registered Public Accounting Firm THE BOARD AND SHAREHOLDERS AXP FIXED INCOME SERIES, INC. We have audited the accompanying statement of assets and liabilities, including the schedule of investments in securities, of RiverSource Diversified Bond Fund (a series of AXP Fixed Income Series, Inc.) as of August 31, 2005, the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period ended August 31, 2005, and the financial highlights for each of the years in the five-year period ended August 31, 2005. These financial statements and the financial highlights are the responsibility of fund management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of August 31, 2005, by correspondence with the custodian and brokers or by other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of RiverSource Diversified Bond Fund as of August 31, 2005, and the results of its operations, changes in its net assets and the financial highlights for each of the periods stated in the first paragraph above, in conformity with U.S. generally accepted accounting principles. KPMG LLP Minneapolis, Minnesota October 20, 2005 - -------------------------------------------------------------------------------- 41 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT Federal Income Tax Information (UNAUDITED) The Fund is required by the Internal Revenue Code of 1986 to tell its shareholders about the tax treatment of the dividends it pays during its fiscal year. The dividends listed below are reported to you on Form 1099-DIV, Dividends and Distributions. Shareholders should consult a tax advisor on how to report distributions for state and local tax purposes. RiverSource Diversified Bond Fund Fiscal year ended Aug. 31, 2005 Class A Income distributions -- taxable as dividend income: Qualified Dividend Income for individuals 0.00% Dividends Received Deduction for corporations 0.00% Payable date Per share Sept. 24, 2004 $0.01500 Oct. 25, 2004 0.01511 Nov. 24, 2004 0.01499 Dec. 22, 2004 0.01775 Jan. 27, 2005 0.01500 Feb. 24, 2005 0.01600 March 30, 2005 0.01600 April 28, 2005 0.01700 May 26, 2005 0.01700 June 29, 2005 0.01600 July 28, 2005 0.01600 Aug. 29, 2005 0.01576 Total distributions $0.19161 Class B Income distributions -- taxable as dividend income: Qualified Dividend Income for individuals 0.00% Dividends Received Deduction for corporations 0.00% Payable date Per share Sept. 24, 2004 $0.01200 Oct. 25, 2004 0.01181 Nov. 24, 2004 0.01197 Dec. 22, 2004 0.01494 Jan. 27, 2005 0.01135 Feb. 24, 2005 0.01318 March 30, 2005 0.01260 April 28, 2005 0.01412 May 26, 2005 0.01430 June 29, 2005 0.01258 July 28, 2005 0.01310 Aug. 29, 2005 0.01249 Total distributions $0.15444 - -------------------------------------------------------------------------------- 42 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT Class C Income distributions -- taxable as dividend income: Qualified Dividend Income for individuals 0.00% Dividends Received Deduction for corporations 0.00% Payable date Per share Sept. 24, 2004 $0.01201 Oct. 25, 2004 0.01183 Nov. 24, 2004 0.01199 Dec. 22, 2004 0.01496 Jan. 27, 2005 0.01137 Feb. 24, 2005 0.01319 March 30, 2005 0.01263 April 28, 2005 0.01414 May 26, 2005 0.01432 June 29, 2005 0.01260 July 28, 2005 0.01312 Aug. 29, 2005 0.01258 Total distributions $0.15474 Class I Income distributions -- taxable as dividend income: Qualified Dividend Income for individuals 0.00% Dividends Received Deduction for corporations 0.00% Payable date Per share Sept. 24, 2004 $0.01652 Oct. 25, 2004 0.01669 Nov. 24, 2004 0.01646 Dec. 22, 2004 0.01910 Jan. 27, 2005 0.01635 Feb. 24, 2005 0.01738 March 30, 2005 0.01766 April 28, 2005 0.01837 May 26, 2005 0.01832 June 29, 2005 0.01753 July 28, 2005 0.01729 Aug. 29, 2005 0.01729 Total distributions $0.20896 - -------------------------------------------------------------------------------- 43 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT Class Y Income distributions -- taxable as dividend income: Qualified Dividend Income for individuals 0.00% Dividends Received Deduction for corporations 0.00% Payable date Per share Sept. 24, 2004 $0.01568 Oct. 25, 2004 0.01587 Nov. 24, 2004 0.01567 Dec. 22, 2004 0.01839 Jan. 27, 2005 0.01583 Feb. 24, 2005 0.01665 March 30, 2005 0.01678 April 28, 2005 0.01766 May 26, 2005 0.01761 June 29, 2005 0.01678 July 28, 2005 0.01667 Aug. 29, 2005 0.01649 Total distributions $0.20008 - -------------------------------------------------------------------------------- 44 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT Fund Expenses Example (UNAUDITED) As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments; and (2) ongoing costs, including management fees; distribution and service (12b-1) fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the six months ended Aug. 31, 2005. Actual Expenses The first line of the table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading titled "Expenses paid during the period" to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The second line of the table provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads). Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. - -------------------------------------------------------------------------------- 45 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Beginning Ending Expenses account value account value paid during Annualized March 1, 2005 Aug. 31, 2005 the period(a) expense ratio Class A Actual(b) $1,000 $1,022.20 $4.79(c) .94% Hypothetical (5% return before expenses) $1,000 $1,020.47 $4.79(c) .94% Class B Actual(b) $1,000 $1,018.30 $8.65(c) 1.70% Hypothetical (5% return before expenses) $1,000 $1,016.64 $8.64(c) 1.70% Class C Actual(b) $1,000 $1,018.30 $8.65(c) 1.70% Hypothetical (5% return before expenses) $1,000 $1,016.64 $8.64(c) 1.70% Class I Actual(b) $1,000 $1,023.90 $3.06(c) .60% Hypothetical (5% return before expenses) $1,000 $1,022.18 $3.06(c) .60% Class Y Actual(b) $1,000 $1,023.00 $3.98(c) .78% Hypothetical (5% return before expenses) $1,000 $1,021.27 $3.97(c) .78%
(a) Expenses are equal to the Fund's annualized expense ratio as indicated above, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). (b) Based on the actual return for the six months ended Aug. 31, 2005: +2.22% for Class A, +1.83% for Class B, +1.83% for Class C, +2.39% for Class I and +2.30% for Class Y. (c) Effective Oct. 1, 2005, the Fund's Board of Directors approved a change to the fee schedule under the Administrative Services Agreement between Ameriprise Financial and the Fund. Ameriprise Financial and its affiliates have contractually agreed to waive certain fees and to absorb certain expenses until Aug. 31, 2006, unless sooner terminated at the discretion of the Board. Under this expense cap/fee waiver agreement, net expenses will not exceed 0.89% for Class A; 1.65% for Class B; 1.66% for Class C; 0.59% for Class I; and 0.73% for Class Y. If the revised fee schedule under the Administrative Services Agreement and the cap/fee waiver agreement had been in place for the entire six-month period ended Aug. 31, 2005, the actual expenses paid would have been $4.54 for Class A, $8.39 for Class B, $8.44 for Class C, $3.01 for Class I and $3.72 for Class Y; the hypothetical expenses paid would have been $4.53 for Class A, $8.39 for Class B, $8.44 for Class C, $3.01 for Class I and $3.72 for Class Y. - -------------------------------------------------------------------------------- 46 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT Board Members and Officers Shareholders elect a Board that oversees the Fund's operations. The Board appoints officers who are responsible for day-to-day business decisions based on policies set by the Board. The following is a list of the Fund's Board members. Each member oversees 14 Master Trust portfolios and 90 RiverSource funds. Board members serve until the next regular shareholders' meeting or until he or she reaches the mandatory retirement age established by the Board. Under the current Board policy, members may serve until the end of the meeting following their 75th birthday, or the fifteenth anniversary of the first Board meeting they attended as members of the Board, whichever occurs first. This policy does not apply to Ms. Jones who must retire after her 75th birthday.
Independent Board Members Name, address, age Position held Principal occupation during Other directorships with Fund and past five years length of service - -------------------------------------- ------------------ ------------------------------ --------------------- Arne H. Carlson Board member Chair, Board Services 901 S. Marquette Ave. since 1999 Corporation (provides Minneapolis, MN 55402 administrative services to Age 71 boards); former Governor of Minnesota - -------------------------------------- ------------------ ------------------------------ --------------------- Philip J. Carroll, Jr. Board member Retired Chairman and CEO, Scottish Power PLC, 901 S. Marquette Ave. since 2002 Fluor Corporation Vulcan Materials Minneapolis, MN 55402 (engineering and Company, Inc. Age 67 construction) (construction materials/chemicals) - -------------------------------------- ------------------ ------------------------------ --------------------- Patricia M. Flynn Board member Trustee Professor of 901 S. Marquette Ave. since 2004 Economics and Management, Minneapolis, MN 55402 Bentley College; former Age 54 Dean, McCallum Graduate School of Business, Bentley College - -------------------------------------- ------------------ ------------------------------ --------------------- Anne P. Jones Board member Attorney and Consultant 901 S. Marquette Ave. since 1985 Minneapolis, MN 55402 Age 70 - -------------------------------------- ------------------ ------------------------------ --------------------- Stephen R. Lewis, Jr. Board member President Emeritus and Valmont Industries, 901 S. Marquette Ave. since 2002 Professor of Economics, Inc. (manufactures Minneapolis, MN 55402 Carleton College irrigation systems) Age 65 - -------------------------------------- ------------------ ------------------------------ --------------------- Catherine James Paglia Board member Director, Enterprise Asset Strategic 901 S. Marquette Ave. since 2004 Management, Inc. (private Distribution, Inc. Minneapolis, MN 55402 real estate and asset (transportation, Age 53 management company) distribution and logistics consultants) - -------------------------------------- ------------------ ------------------------------ --------------------- Alan K. Simpson Board member Former three-term United 1201 Sunshine Ave. since 1997 States Senator for Wyoming Cody, WY 82414 Age 74 - -------------------------------------- ------------------ ------------------------------ --------------------- Alison Taunton-Rigby Board member Chief Executive Officer, Hybridon, Inc. 901 S. Marquette Ave. since 2002 RiboNovix, Inc. since 2003 (biotechnology) Minneapolis, MN 55402 (biotechnology); former Age 61 President, Forester Biotech - -------------------------------------- ------------------ ------------------------------ ---------------------
- -------------------------------------------------------------------------------- 47 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Board Member Affiliated with Ameriprise Financial, Inc. (formerly AEFC)* Name, address, age Position held Principal occupation during Other directorships with Fund and past five years length of service - -------------------------------------- ------------------ ------------------------------ --------------------- William F. Truscott Board member President - U.S. Asset 53600 Ameriprise Financial Center since 2001, Management and Chief Minneapolis, MN 55474 Vice President Investment Officer of Age 45 since 2002 Ameriprise Financial, Inc. and President, Chairman of the Board and Chief Investment Officer of RiverSource Investments, LLC since 2005. Senior Vice President - Chief Investment Officer of Ameriprise Financial, Inc. and Chairman of the Board and Chief Investment Officer of RiverSource Investments, LLC, 2001-2005; former Chief Investment Officer and Managing Director, Zurich Scudder - -------------------------------------- ------------------ ------------------------------ ---------------------
* Interested person by reason of being an officer, director and/or employee of Ameriprise Financial, Inc. (formerly American Express Financial Corporation) or of RiverSource Investments, LLC, its wholly owned subsidiary. - -------------------------------------------------------------------------------- 48 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT The Board has appointed officers who are responsible for day-to-day business decisions based on policies it has established. The officers serve at the pleasure of the Board. In addition to Mr. Truscott, who is Vice President, the Fund's other officers are:
Fund Officers Name, address, age Position held Principal occupation during Other directorships with Fund and past five years length of service - -------------------------------------- ------------------ ------------------------------ --------------------- Jeffrey P. Fox Treasurer Vice President - Investment 105 Ameriprise Financial Center since 2002 Accounting, Ameriprise Minneapolis, MN 55474 Financial, Inc., since 2002; Age 50 Vice President - Finance, American Express Company, 2000-2002; Vice President - Corporate Controller, Ameriprise Financial, Inc., 1996-2000 - -------------------------------------- ------------------ ------------------------------ --------------------- Paula R. Meyer President Senior Vice President - 596 Ameriprise Financial Center since 2002 Mutual Funds, Ameriprise Minneapolis, MN 55474 Financial, Inc., since 2002 Age 51 and Senior Vice President, RiverSource Investments, LLC since 2004; Vice President and Managing Director - American Express Funds, Ameriprise Financial, Inc., 2000-2002; Vice President, Ameriprise Financial, Inc., 1998-2000 - -------------------------------------- ------------------ ------------------------------ --------------------- Leslie L. Ogg Vice President, President of Board Services 901 S. Marquette Ave. General Counsel, Corporation Minneapolis, MN 55402 and Secretary Age 67 since 1978 - -------------------------------------- ------------------ ------------------------------ --------------------- Beth E. Weimer Chief Compliance Vice President and Chief 172 Ameriprise Financial Center Officer since Compliance Officer, Minneapolis, MN 55474 2004 Ameriprise Financial, Inc., Age 52 since 2001 and Chief Compliance Officer, RiverSource Investments, LLC since 2005; Vice President and Chief Compliance Officer - Asset Management and Insurance, Ameriprise Financial Services, Inc., since 2001; Partner, Arthur Andersen Regulatory Risk Services, 1998-2001 - -------------------------------------- ------------------ ------------------------------ ---------------------
The SAI has additional information about the Fund's directors and is available, without charge, upon request by calling (800) 862-7919. - -------------------------------------------------------------------------------- 49 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT Approval of Investment Management Services Agreement During the period covered by this report, Ameriprise Financial, Inc. (formerly American Express Financial Corporation or AEFC) (the investment manager), a wholly-owned subsidiary of American Express Company, served as the investment manager to the Fund. Under an Investment Management Services Agreement (the Agreement), the investment manager provides investment advice and other services to the Fund. Throughout the year, the Funds' Board of Directors and the Board's Investment Review Committee monitor these services. Each year the Board determines whether to continue the Agreement by evaluating the quality and level of service received and the costs associated with those services. The investment manager prepares detailed reports for the Board and its Contracts Committee in March and April and provides data prepared by independent organizations to assist the Board in making this determination. The Board gives considerable weight to the work, deliberations and conclusions of the Contracts and Investment Review Committees in determining whether to continue the Agreement. On February 1, 2005, American Express Company announced its intention to pursue a spin-off of AEFC by distributing shares of the common stock of AEFC to shareholders of American Express Company. At a meeting held in person on April 14, 2005, the Board, including a majority of the independent members, approved the continuation of the Agreement for an interim period, not to exceed one year, ending on the later of (i) the effective date of the spin-off or (ii) the approval by the Fund's shareholders of a new investment management services agreement with the investment manager (the Interim Period). The spin-off will not result in an "assignment" of the Agreement under the Investment Company Act of 1940 and, therefore, will not cause the termination of the Agreement according to its terms. In connection with the spin-off the investment manager has proposed that going forward, services under the Agreement be provided by an affiliate, RiverSource Investments, LLC (RiverSource Investments). Independent counsel advised the Board that it would be prudent, in connection with the spin-off, to consider a new agreement with RiverSource Investments and to seek shareholder approval of that agreement as soon as practical thereafter. Investment performance is a major factor in the evaluation process, and the Board reviewed the Fund's performance over a range of different periods by comparing its performance to relevant Lipper and broader market indices. The Board considered that over time the Fund's investment performance should be above median for a peer group of funds with similar investment goals and noted that the Fund's investment performance in 2004 exceeded the median. The Board noted that, in addition to portfolio management and investment research, the investment manager provides portfolio trading, daily net asset value calculation, management of cash flow, product development, administration of its compliance and legal departments, access to distribution, accounting and recordkeeping, and reporting to the Board and shareholders. To evaluate these services, the Board referred to surveys and benchmarks established by commercial providers, trade associations and the investment manager's internal processes. The Board concluded that the services provided were consistent with services provided by investment managers to comparable mutual funds. - -------------------------------------------------------------------------------- 50 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT The Board also evaluated the price paid for the services provided by the investment manager, noting the existence of a pricing philosophy, established by the Board and the investment manager, that seeks to maintain total Fund expenses within a range of the median expenses charged to comparable funds sold through financial advisors. The Board considered detailed information set forth in an annual report on fees and expenses, including, among other things, data showing a comparison of the Fund's expenses with median expenses paid by funds in its comparison group and data showing the Fund's contribution to the investment manager's profitability. The Board determined that while the Fund's expenses are higher than the median for its comparison group, the existing fee waiver has been increased to reduce further the expenses the Fund will pay. The Board considered the economies of scale that might be realized by the investment manager as the Fund grew and took note of the extent to which Fund shareholders also might benefit from such growth. The Board considered that the Agreement provided for lower fees as assets increase at pre-established breakpoints and concluded that the Agreement satisfactorily provided for sharing these economies of scale. The Board took into account the Contracts Committee's discussion comparing the fees the investment manager charges to the Fund with those it charges to institutional clients, noting that the relatively higher fees paid by the Fund were principally attributable to the additional services required to manage a regulated mutual fund, like the Fund, and the operation of a large mutual fund family. The Board also considered the profitability realized by the investment manager and its affiliates from its relationship with the Fund. The Board took into account the services acquired by the investment manager through the use of commission dollars paid by the Fund on portfolio transactions. The Board concluded that the investment manager's overall costs and profitability were appropriate, although profitability may be too low on an ongoing basis. The Board noted that the fees paid by the Fund should permit the investment manager to offer competitive compensation to its personnel, make necessary investments in its business and earn an appropriate profit. Based on the foregoing, the Board concluded that the fees paid to the investment manager under the Agreement were fair and reasonable and determined to approve renewal of the Agreement for the Interim Period. Following the period covered by this report, on September 8, 2005, the Board approved a new investment management agreement with RiverSource Investments and recommended its approval by shareholders. The agreement will be considered by shareholders at a meeting scheduled to be held on February 15, 2006. If approved, the new agreement would take effect shortly after such approval. The Board based its approval on, among other factors, its determination that RiverSource Investments, following the spin-off, would be in a position to continue to provide the Fund with a level and quality of services that would meet expectations. The Board also determined that fees to be paid under the new agreement were fair and reasonable in light of the services to be provided. - -------------------------------------------------------------------------------- 51 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT Proxy Voting The policy of the Board is to vote all proxies of the companies in which the Fund holds investments. The procedures are stated in the Statement of Additional Information (SAI). You may obtain a copy of the SAI without charge by calling (800) 862-7919; by looking at the website www.riversource.com/investments; or by searching the website of the Securities and Exchange Commission (SEC) at http://www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available without charge by calling the Fund's administrator, Board Services Corporation, collect at (612) 330-9283; by looking at the website www.riversource.com/investments; or by searching the website of the SEC at www.sec.gov. - -------------------------------------------------------------------------------- 52 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT (logo) RiverSource(SM) Investments RiverSource Investments 200 Ameriprise Financial Center Minneapolis, MN 55474 This report must be accompanied or preceded by the Fund's current prospectus. Distributed by Ameriprise Financial Services, Inc. (formerly known as American Express Financial Advisors Inc.). Member NASD. EX-99.17G ANNUAL RPT 7 ex17g-s6376.txt ANNUAL REPORT FOR THE PERIOD ENDED MAY 31, 2005 FOR RIVERSOURCE SELECTIVE FUND AXP(R) Selective Fund Annual Report for the Period Ended May 31, 2005 AXP Selective Fund seeks to provide shareholders with current income and preservation of capital. (logo) (logo) American AMERICAN Express(R) EXPRESS Funds (R) Table of Contents Fund Snapshot 3 Performance Summary 4 Questions & Answers with Portfolio Management 5 The Fund's Long-term Performance 8 Investments in Securities 10 Financial Statements (Portfolio) 18 Notes to Financial Statements (Portfolio) 21 Report of Independent Registered Public Accounting Firm (Portfolio) 26 Financial Statements (Fund) 27 Notes to Financial Statements (Fund) 30 Report of Independent Registered Public Accounting Firm (Fund) 40 Federal Income Tax Information 41 Fund Expenses Example 44 Board Members and Officers 46 Approval of Investment Management Services Agreement 49 Proxy Voting 50 [DALBAR LOGO] American Express(R) Funds' reports to shareholders have been awarded the Communications Seal from Dalbar Inc., an independent financial services research firm. The Seal recognizes communications demonstrating a level of excellence in the industry. - -------------------------------------------------------------------------------- 2 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Fund Snapshot AT MAY 31, 2005 PORTFOLIO MANAGERS Portfolio managers Since Years in industry Jamie Jackson, CFA 6/03 17 Scott Kirby 6/03 24 Tom Murphy, CFA 2/03 19 FUND OBJECTIVE For investors seeking current income and preservation of capital. Inception dates by class A: 4/6/45 B: 3/20/95 C: 6/26/00 I: 7/15/04 Y: 3/20/95 Ticker symbols by class A: INSEX B: ISEBX C: ASLCX I: ASTIX Y: IDEYX Total net assets $913.9 million Number of holdings 261 Weighted average life(1) 6.1 years Effective duration(2) 3.7 years Weighted average bond rating(3) AA+ (1) Weighted average life measures a bond's maturity, which takes into consideration the possibility that the issuer may call the bond before its maturity date. (2) Effective duration measures the sensitivity of a security's price to parallel shifts in the yield curve (the graphical depiction of the levels of interest rates from two years out to 30 years). Positive duration means that as rates rise, the price decreases, and negative duration means that as rates rise, the price increases. (3) Weighted average bond rating represents the average credit quality of the underlying bonds in the portfolio. STYLE MATRIX Shading within the style matrix indicates areas in which the Fund generally invests. DURATION SHORT INT. LONG X HIGH MEDIUM QUALITY LOW SECTOR COMPOSITION Percentage of portfolio assets [PIE CHART] Mortgage-backed securities 35.4% U.S. government obligations & agencies 26.2% Corporate bonds* 17.2% CMBS/ABS** 13.7% Short-term securities*** 5.5% Foreign government bonds 2.0% * Includes 7.6% Financials, 1.9% Telecommunications services, 1.7% Industrials, 1.7% Information technology, 1.1% Consumer discretionary, 0.9% Energy, 0.9% Utilities, 0.5% Consumer staples, 0.5% Health care and 0.4% Materials. ** Commercial mortgage-backed/Asset-backed securities *** Of the 5.5%, 2.5% is due to security lending activity and 3.0% is the Portfolio's cash equivalent position. CREDIT QUALITY SUMMARY Percentage of bond portfolio assets AAA bonds 80.6% AA bonds 5.9% A bonds 3.9% BBB bonds 9.6% Individual security ratings are based on information from Standard & Poor's Corp. and Moody's Investors Service. If a rating is unavailable, the rating is determined through an internal analysis, if appropriate. Fund holdings are subject to change. - -------------------------------------------------------------------------------- 3 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Performance Summary [BAR CHART] PERFORMANCE COMPARISON For the year ended May 31, 2005 +6.06% +6.82% +7.26% +6.06% = AXP Selective Fund Class A (excluding sales charge) +6.82% = Lehman Brothers Aggregate Bond Index (unmanaged) +7.26% = Lipper Corporate Debt - A rated Funds Index (see "The Fund`s Long-term Performance" for Index descriptions) The performance information shown represents past performance and is not a guarantee of future results. The investment return and principal value of your investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance information shown. You may obtain performance information current to the most recent month-end by calling (800) 862-7919 or visiting www.americanexpress.com/funds. The 4.75% sales charge applicable to Class A shares of the Fund is not reflected in the bar chart. If reflected, returns would be lower than those shown. The performance of other classes may vary from that shown because of differences in expenses. The indices do not reflect the effects of sales charges, expenses (excluding Lipper) and taxes.
AVERAGE ANNUAL TOTAL RETURNS Class A Class B Class C Class I Class Y (Inception dates) (4/6/45) (3/20/95) (6/26/00) (7/15/04) (3/20/95) After After NAV(1) POP(2) NAV(1) CDSC(3) NAV(1) CDSC(4) NAV(5) NAV(6) at May 31, 2005 1 year +6.06% +1.02% +5.26% +0.26% +5.26% +4.26% N/A +6.24% 3 years +3.59% +1.92% +2.81% +1.54% +2.81% +2.81% N/A +3.72% 5 years +5.38% +4.36% +4.59% +4.26% N/A N/A N/A +5.53% 10 years +5.37% +4.86% +4.58% +4.58% N/A N/A N/A +5.51% Since inception +6.71% +6.62% +5.17% +5.17% +4.38% +4.38% +5.25%* +6.11% at June 30, 2005 1 year +6.01% +0.98% +5.22% +0.22% +5.22% +4.22% N/A +6.32% 3 years +4.17% +2.49% +3.38% +2.12% +3.38% +3.38% N/A +4.33% 5 years +5.03% +4.01% +4.24% +3.90% +4.24% +4.24% N/A +5.20% 10 years +5.34% +4.83% +4.54% +4.54% N/A N/A N/A +5.49% Since inception +6.71% +6.62% +5.16% +5.16% +4.38% +4.38% +5.68%* +6.11%
(1) Excluding sales charge. (2) Returns at public offering price (POP) reflect a sales charge of 4.75%. (3) Returns at maximum contingent deferred sales charge (CDSC). CDSC applies as follows: first year 5%; second and third year 4%; fourth year 3%; fifth year 2%; sixth year 1%; no sales charge thereafter. (4) 1% CDSC applies to redemptions made within the first year of purchase. (5) Sales charge is not applicable to these shares. Shares available to eligible investors only, currently limited to AXP Portfolio Builder Series funds, six affiliated funds-of-funds. (6) Sales charge is not applicable to these shares. Shares available to institutional investors only. * Not annualized. - -------------------------------------------------------------------------------- 4 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Questions & Answers WITH PORTFOLIO MANAGEMENT Below the Fund's portfolio management team discusses the Fund's results and positioning for the period. Q: How did AXP Selective Fund perform for the 12-month period ended May 31, 2005? A: AXP Selective Fund's Class A shares (excluding sales charge) gained 6.06% for the 12 months ended May 31, 2005. The Lehman Brothers Aggregate Bond Index (Lehman Index) rose 6.82%, while the Lipper Corporate Debt - A rated Funds Index, representing the Fund's peer group, advanced 7.26%. Q: What factors most significantly affected performance during the annual period? A: Several factors contributed positively to the Fund's performance. As the Federal Reserve Board (the Fed) raised interest rates eight times during the annual period, bringing the targeted federal funds rate to 3%, short-term Treasury rates rose dramatically. However, longer-term interest rates fell sharply, as global growth moderated and inflation pressures appeared to remain contained. As a result, the yield spread between two-year and 30-year maturity Treasuries narrowed significantly causing a flattening of the yield curve. We had prudently positioned the Fund with a modest exposure to shorter maturity bonds in favor of longer maturity securities, which outperformed. The Fund's sector allocation also helped relative returns for the annual period. Specifically, the Fund's positioning in mortgages, commercial mortgage-backed securities (CMBS) and asset-backed securities benefited performance. These high-quality spread sectors fared well during the fiscal year, as investors sought incremental yield from these securities. Within the mortgage sector, the Fund's relative results were also boosted by strong issue selection and a better-than-Lehman Index yield profile. While investment grade credit was the laggard of the spread sectors due mainly to a series of high-profile earnings and cash flow warnings by both General Motors and Ford, the Fund benefited from our tactical allocation shifts and issue selection within investment grade credit over the fiscal year. In particular, key holdings in cable, telecommunications and healthcare issues outperformed the Lehman Index. The Fund's performance was also modestly helped during the fiscal year by its small global bond position, which included holdings denominated in euros. These global bonds advanced due to the significant strengthening of the euro vs. the U.S. dollar in late 2004, even though the euro fell back to lower levels toward SEC YIELDS At May 31, 2005 by class A: 3.43% B: 2.85% C: 2.85% I: 3.95% Y: 3.77% At June 30, 2005 by class A: 3.48% B: 2.91% C: 2.91% I: 4.00% Y: 3.83% The Securities and Exchange Commission (SEC) yield is calculated by dividing anticipated net investment income during a 31-day period by the public offering price (POP) per share on the last day of the period, and converting the results to yearly figures. See Average Annual Total Returns on page 4 for additional performance information. - -------------------------------------------------------------------------------- 5 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Questions & Answers [BEGIN CALLOUT QUOTE]> We had prudently positioned the Fund with a modest exposure to shorter maturity bonds in favor of longer maturity securities, which outperformed. [END CALLOUT QUOTE] the end of the period. A weaker dollar increases the value of the Fund's foreign currency denominated securities when expressed in U.S. dollar terms. Partially offsetting these positives was the Fund's focus within the mortgage sector on higher coupon bonds. While these bonds offered both attractive yields and potential protection from higher rates, lower coupon bonds outperformed for the 12 months. Also detracting from the Fund's relative results was its moderate position within agencies, which performed well over the period. Furthermore, the Fund's investment strategy precludes it from owning high yield corporate or emerging market bonds. These two sectors, held by many funds in our peer group, significantly outpaced the Lehman Index for the annual period. Overall, the Fund's conservative risk profile hurt relative returns at a time when shorter-term securities underperformed and long-term bonds rallied. We believed rates would move more aggressively than they did and sought to reduce the Fund's exposure to volatility when possible. The Fund's duration positioning had a rather neutral effect on its relative performance, as the yield on five-year Treasuries, a good proxy for the duration of the Lehman Index, was essentially unchanged from the beginning to end of the fiscal year. Q: What changes did you make to the Fund and how is it currently positioned? A: As the yield curve flattened dramatically, we removed some of the Fund's yield curve flattening bias and reduced the portfolio's sensitivity to changes in interest rates. While we kept duration shorter than the Lehman Index throughout the annual period, we made minor adjustments to portfolio duration and yield curve positioning as market conditions changed relative to our view on interest rates. Within the spread sectors, we maintained the Fund's significant exposure to CMBS and asset-backed securities throughout the fiscal year, as we believe these sectors offer attractive yield as well as the kind of defensive characteristics we want in the current market environment. However, in mortgages and investment grade credit, we tactically shifted Fund allocations as our opinion of sector relative value evolved. We also increased the Fund's cash position, patiently seeking opportunities to invest in the market at higher yield levels. - -------------------------------------------------------------------------------- 6 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Questions & Answers [BEGIN CALLOUT QUOTE]> We will continue to monitor inflation numbers, as they remain the key indicator for the economy in the coming months. [END CALLOUT QUOTE] Throughout the period, we constantly re-evaluated all of the Fund's positions as we sought to have the best risk/reward opportunities in the Fund across sectors, with an eye toward holding greater positions in securities that may offer the highest likelihood of outperforming the Lehman Index. Overall, the opportunistic changes we made in response to valuations or market developments resulted in an annual portfolio turnover rate of 297%. At the end of the annual period, the Fund had a modest exposure to investment grade credit and mortgage securities in favor of CMBS and asset-backed securities and a small position in global bonds. Q: How do you intend to manage the Fund in the coming months? A: We intend to position the Fund for ongoing U.S. economic recovery and still higher interest rates, as these themes are likely to continue to weigh on the fixed income markets through the summer. There may be cause for the Fed to deviate from its measured pace and increase interest rates more vigorously than the market currently anticipates. Indeed, we will continue to monitor inflation numbers, as they remain the key indicator for the economy in the coming months. In addition, we anticipate that the yield curve may flatten a bit more in the near term but that after an extended period of yield curve flattening, the difference between short- and long-term maturities may stabilize somewhat in the months ahead with more parallel shifts across the yield curve. Based on this view, we intend to maintain the Fund's duration shorter than that of the Lehman Index for the near term. In the spread sectors, we intend to maintain the Fund's modest exposure to investment grade credit and to maintain a defensive position in mortgages by emphasizing premium coupons, 15-year mortgages and attractive structural attributes. We further intend to maintain our emphasis on defensive investments such as AAA-rated CMBS and asset-backed securities as high-quality substitutes for corporate bonds. As always, we maintain a disciplined focus on individual security selection. - -------------------------------------------------------------------------------- 7 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT The Fund's Long-term Performance The chart on the facing page illustrates the total value of an assumed $10,000 investment in AXP Selective Fund Class A shares (from 6/1/95 to 5/31/05) as compared to the performance of two widely cited performance indices, the Lehman Brothers Aggregate Bond Index and the Lipper Corporate Debt - A rated Funds Index. In comparing the Fund's Class A shares to these indices, you should take into account the fact that the Fund's performance reflects the maximum sales charge of 4.75%, while such charges are not reflected in the performance of the indices. Returns for the Fund include the reinvestment of any distribution paid during each period. The performance information shown represents past performance and is not a guarantee of future results. The value of your investment and returns will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Returns do not reflect taxes payable on distributions and redemptions. Current performance may be lower or higher than the performance information shown. You may obtain performance information current to the most recent month-end by calling (800) 862-7919 or visiting www.americanexpress.com/funds. Also see "Past Performance" in the Fund's current prospectus. You should consider the investment objectives, risks, and charges and expenses of the Fund carefully before investing. DISTRIBUTION SUMMARY The table below details the Fund's income and capital gain distributions for the fiscal years shown. More information on the other classes can be found in the Financial Highlights section of this report's Notes to Financial Statements. Class A Short-term Long-term Fiscal year ended Income capital gains capital gains Total May 31, 2005 $0.32 $ -- $ -- $0.32 May 31, 2004 0.28 -- -- 0.28 May 31, 2003 0.33 0.01 0.03 0.37 May 31, 2002 0.40 -- 0.02 0.42 May 31, 2001 0.52 -- -- 0.52 - -------------------------------------------------------------------------------- 8 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT [LINE CHART]
VALUE OF A HYPOTHETICAL $10,000 INVESTMENT IN AXP SELECTIVE FUND AXP Selective Fund Class A (includes sales charge) $ 9,525 $ 9,936 $10,738 $11,828 $12,265 $12,367 $13,791 $14,460 $15,335 $15,155 $16,074 Lehman Brothers Aggregate Bond Index(1) $10,000 $10,438 $11,306 $12,540 $13,085 $13,362 $15,115 $16,339 $18,231 $18,151 $19,389 Lipper Corporate Debt - A rated Funds Index(2) $10,000 $10,385 $11,227 $12,490 $12,815 $12,877 $14,521 $15,521 $17,264 $17,209 $18,459 `95 `96 `97 `98 `99 `00 `01 `02 `03 `04 `05
COMPARATIVE RESULTS Results at May 31, 2005 Since 1 year 3 years 5 years 10 years inception(3) AXP Selective Fund (includes sales charge) Class A Cumulative value of $10,000 $10,102 $10,587 $12,379 $16,074 $472,624 Average annual total return +1.02% +1.92% +4.36% +4.86% +6.62% Lehman Brothers Aggregate Bond Index(1) Cumulative value of $10,000 $10,682 $11,866 $14,511 $19,389 N/A Average annual total return +6.82% +5.87% +7.73% +6.85% N/A Lipper Corporate Debt - A rated Funds Index(2) Cumulative value of $10,000 $10,726 $11,893 $14,336 $18,459 N/A Average annual total return +7.26% +5.95% +7.47% +6.32% N/A
Results for other share classes can be found on page 4. (1) The Lehman Brothers Aggregate Bond Index, an unmanaged index, is made up of a representative list of government, corporate, asset-backed and mortgage-backed securities. The index is frequently used as a general measure of bond market performance. The index reflects reinvestment of all distributions and changes in market prices, but excludes brokerage commissions or other fees. However, the securities used to create the index may not be representative of the bonds held in the Fund. (2) The Lipper Corporate Debt - A rated Funds Index includes the 30 largest corporate debt A rated funds tracked by Lipper Inc. The index's returns include net reinvested dividends. (3) Fund data is from April 6, 1945. The Fund began operating before the inception of the Lehman Brothers Aggregate Bond Index and Lipper peer group. - -------------------------------------------------------------------------------- 9 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Investments in Securities Quality Income Portfolio May 31, 2005 (Percentages represent value of investments compared to net assets) Bonds (100.4%) Issuer Coupon Principal Value(a) rate amount Foreign government (2.1%) Bundesrepublik Deutschland (European Monetary Unit) 01-04-07 6.00% 4,673,000(c) $6,092,942 Pemex Project Funding Master Trust (U.S. Dollar) 12-15-14 7.38 3,857,000(c) 4,321,769 United Kingdom Treasury (British Pound) 12-07-06 7.50 3,223,000(c) 6,131,094 United Mexican States (U.S. Dollar) 09-27-34 6.75 2,485,000(c) 2,625,403 Total 19,171,208 U.S. government obligations & agencies (27.8%) Federal Home Loan Bank 05-22-06 2.88 14,730,000 14,620,438 08-11-06 3.25 7,050,000 7,013,199 04-18-08 4.13 2,585,000 2,603,144 06-14-13 3.88 10,500,000 10,299,933 Federal Home Loan Mtge Corp 09-15-06 3.63 7,265,000 7,257,938 06-15-08 3.88 18,350,000 18,367,800 03-18-09 3.76 2,810,000 2,789,962 07-15-09 4.25 10,000,000 10,112,073 01-15-12 5.75 14,425,000 15,750,831 Federal Natl Mtge Assn 05-15-11 6.00 3,520,000 3,859,184 Overseas Private Investment U.S. Govt Guaranty Series 1996A 09-15-08 6.99 3,888,889 4,068,944 U.S. Treasury 12-31-05 1.88 3,000,000(l) 2,975,976 08-15-07 2.75 9,000,000 8,837,226 02-15-08 3.38 11,740,000 11,659,745 04-15-10 4.00 13,910,000(m) 14,053,440 05-15-10 3.88 5,425,000(m) 5,454,669 02-15-15 4.00 11,065,000(m) 11,039,064 05-15-15 4.13 12,975,000 13,100,702 08-15-23 6.25 19,435,000 23,944,522 Bonds (continued) Issuer Coupon Principal Value(a) rate amount U.S. government obligations & agencies (cont.) U.S. Treasury (cont.) 02-15-26 6.00% $52,654,000(l) $63,964,342 02-15-31 5.38 2,080,000 2,408,900 Total 254,182,032 Commercial mortgage-backed(f)/ Asset-backed securities (14.6%) AAA Trust Series 2005-2 Cl A1 11-26-35 3.19 7,041,361(d,i) 7,041,360 Aesop Funding II LLC Series 2004-2A Cl A1 (FGIC) 04-20-08 2.76 825,000(d,e) 808,603 AmeriCredit Automobile Receivables Trust Series 2004-CA Cl A3 (AMBAC) 03-06-09 3.00 2,000,000(e) 1,982,188 Series 2004-DF Cl A3 (FSA) 07-06-09 2.98 1,500,000(e) 1,477,970 Series 2005-BM Cl A3 (MBIA) 02-06-10 4.05 3,000,000(b,e) 2,992,968 ARG Funding Series 2005-1A Cl A3 (MBIA) 04-20-10 4.29 2,250,000(d,e) 2,242,002 Banc of America Commercial Mtge Series 2004-5 Cl A4 11-10-41 4.94 1,300,000 1,331,447 Series 2005-1 Cl A4 11-10-42 5.03 1,250,000 1,288,599 Bear Stearns Commercial Mtge Securities Series 2003-T10 Cl A1 03-13-40 4.00 3,024,821 2,976,818 Series 2004-PWR6 Cl A6 11-11-41 4.83 1,750,000 1,775,918 Series 2004-T16 Cl A3 02-13-46 4.03 600,000 595,113 California State Teachers' Retirement System Trust Series 2002-C6 Cl A3 11-20-14 4.46 5,368,616(d) 5,407,821 Capital Auto Receivables Asset Trust Series 2005-1 Cl A4 07-15-09 4.05 2,800,000(b) 2,801,750 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 10 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Commercial mortgage-backed(f)/ Asset-backed securities (cont.) Capital One Auto Finance Trust Series 2005-BSS Cl A3 11-15-09 4.08% $1,600,000(b) $1,599,927 Carmax Auto Owner Trust Series 2005-1 Cl A4 03-15-10 4.35 900,000 906,227 Citigroup Commercial Mtge Trust Series 2005-EMG Cl A1 09-20-51 4.15 4,500,000(d) 4,490,508 Commercial Mtge Pass-Through Ctfs Series 2004-CNL Cl A1 09-15-14 3.31 3,280,000(d,i) 3,280,328 Series 2004-LB3A Cl A3 07-10-37 5.09 3,500,000 3,607,917 Series 2004-LB3A Cl A4 07-10-37 5.23 906,000 941,740 CS First Boston Mtge Securities Series 2002-CKS4 Cl A1 11-15-36 4.49 1,922,104 1,934,633 Series 2004-C1 Cl A2 01-15-37 3.52 1,550,000 1,517,608 Federal Natl Mtge Assn 11-01-10 4.47 559,054 559,272 11-01-12 4.84 1,830,898 1,895,584 GE Capital Commercial Mtge Series 2001-3 Cl A1 06-10-38 5.56 2,826,726 2,924,241 Series 2004-C2 Cl A2 03-10-40 4.12 3,250,000 3,223,253 GMAC Commercial Mtge Securities Series 1999-C1 Cl B 05-15-33 6.30 2,200,000 2,347,532 Series 2004-C3 Cl A4 12-10-41 4.55 1,700,000 1,703,342 Series 2004-C3 Cl A5 12-10-41 4.86 1,800,000 1,828,044 Greenwich Capital Commercial Funding Series 2005-GG3 Cl A1 08-10-42 3.92 1,242,393 1,238,268 Honda Auto Receivables Owner Trust Series 2005-1 Cl A3 10-21-08 3.53 1,400,000 1,393,126 JPMorgan Chase Commercial Mtge Securities Series 2002-CIB5 Cl A1 10-12-37 4.37 1,345,246 1,351,545 Bonds (continued) Issuer Coupon Principal Value(a) rate amount Commercial mortgage-backed(f)/ Asset-backed securities (cont.) JPMorgan Chase Commercial Mtge Securities (cont.) Series 2003-CB6 Cl A2 07-12-37 5.26% $1,500,000 $1,565,945 Series 2003-LN1 Cl A1 10-15-37 4.13 1,290,694 1,277,434 Series 2003-ML1A Cl A1 03-12-39 3.97 1,113,017 1,099,182 Series 2004-CBX Cl A3 01-12-37 4.18 1,000,000 993,776 Series 2004-CBX Cl A5 01-12-37 4.65 1,500,000 1,509,350 Series 2005-CB11 Cl A3 08-12-37 5.20 1,557,000 1,616,425 LB-UBS Commercial Mtge Trust Series 2002-C2 Cl A3 06-15-26 5.39 2,790,000 2,917,832 Series 2002-C4 Cl A4 09-15-26 4.56 1,800,000 1,810,012 Series 2003-C8 Cl A2 11-15-27 4.21 5,130,000 5,126,305 Series 2003-C8 Cl A3 11-15-27 4.83 1,150,000 1,173,748 Series 2004-C2 Cl A3 03-15-29 3.97 1,200,000 1,165,548 Series 2004-C4 Cl A3 06-15-29 4.99 1,000,000(i) 1,037,265 Series 2004-C6 Cl A2 08-15-29 4.19 1,995,000 1,983,090 Series 2004-C6 Cl A4 08-15-29 4.58 450,000 453,135 Series 2004-C7 Cl A2 10-15-29 3.99 1,000,000 987,500 Series 2004-C8 Cl A2 12-15-29 4.20 2,300,000 2,292,916 Long Beach Auto Receivables Trust Series 2004-C Cl A3 (FSA) 09-15-09 3.40 1,400,000(e) 1,390,060 Metris Master Trust Series 2004-2 Cl M 10-20-10 3.48 1,000,000(i) 1,000,650 Morgan Stanley Auto Loan Trust Series 2004-HB2 Cl A3 03-16-09 2.94 1,500,000 1,478,513 Morgan Stanley Capital I Series 2003-IQ4 Cl A1 05-15-40 3.27 4,331,446 4,148,087 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 11 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Commercial mortgage-backed(f)/ Asset-backed securities (cont.) Morgan Stanley Capital I (cont.) Series 2004-HQ4 Cl A5 04-14-40 4.59% $1,350,000 $1,357,655 Series 2004-IQ8 Cl A2 06-15-40 3.96 2,200,000 2,186,024 Morgan Stanley, Dean Witter Capital I Series 2002-TOP7 Cl A2 01-15-39 5.98 2,235,000 2,426,912 Nissan Auto Lease Trust Series 2004-A Cl A3 08-15-07 2.90 1,450,000 1,434,456 Nissan Auto Receivables Owner Trust Series 2003-A Cl A4 07-15-08 2.61 980,000 966,691 Series 2005-A Cl A3 10-15-08 3.54 1,900,000 1,888,619 Popular ABS Mtge Pass-Through Trust Series 2005-A Cl AF2 06-25-35 4.49 955,000 957,316 Prudential Commercial Mtge Trust Series 2003-PWR1 Cl A1 02-11-36 3.67 1,539,505 1,506,232 Residential Asset Securities Series 2002-KS1 Cl AI4 (AMBAC) 11-25-29 5.86 843,801(e) 844,113 Triad Auto Receivables Owner Trust Series 2005-A Cl A3 (AMBAC) 03-12-10 4.05 2,700,000(e) 2,702,052 Wachovia Bank Commercial Mtge Trust Series 2005-C16 Cl A2 10-15-41 4.38 1,500,000 1,502,545 Series 2005-C16 Cl A3 10-15-41 4.62 1,962,000 1,973,328 WFS Financial Owner Trust Series 2004-1 Cl D 08-22-11 3.17 1,260,191 1,247,631 Series 2004-3 Cl A3 03-17-09 3.30 5,000,000 4,955,410 World Omni Auto Receivables Trust Series 2005-A Cl A3 06-12-09 3.54 2,750,000 2,736,443 Total 133,177,852 Mortgage-backed securities (37.6%)(f,k) Adjustable Rate Mtge Trust Series 2004-2 Cl 6A1 02-25-35 5.28 2,086,882(j) 2,118,197 Bonds (continued) Issuer Coupon Principal Value(a) rate amount Mortgage-backed securities (cont.) Banc of America Mtge Securities Series 2004-F Cl B1 07-25-34 4.14% $1,835,249(j) $1,858,152 Bank of America Alternative Loan Trust Series 2003-11 Cl 1A1 01-25-34 6.00 2,476,547 2,522,586 Series 2003-11 Cl 4A1 01-25-19 4.75 1,401,362 1,401,513 Bear Stearns Adjustable Rate Mtge Trust Series 2004-12 Cl 3A1 02-25-35 5.19 2,166,044(j) 2,191,863 Chaseflex Trust Series 2005-2 Cl 2A2 06-25-35 6.50 3,453,833 3,574,717 Countrywide Alternative Loan Trust Series 2003-11T1 Cl A1 07-25-18 4.75 1,599,027 1,594,559 Series 2005-6CB Cl 1A1 04-25-35 7.50 2,238,341 2,353,501 Countrywide Home Loans Series 2004-12 Cl 1M 08-25-34 4.65 1,173,689(j) 1,177,069 CS First Boston Mtge Securities Series 2004-AR5 Cl CB1 06-25-34 4.43 1,191,711(j) 1,176,018 Federal Home Loan Mtge Corp 05-01-13 4.50 2,129,169 2,137,222 11-01-14 7.50 1,768,937 1,886,044 07-01-16 8.00 142 153 01-01-17 8.00 1,038 1,127 03-01-17 8.50 12,705 13,798 06-01-17 8.50 4,163 4,522 07-01-17 7.00 5,912,492 6,204,201 05-01-18 5.50 1,962,852 2,016,935 09-01-18 5.00 3,704,708 3,754,184 10-01-18 5.00 5,809,495 5,882,930 01-01-19 5.50 794,006 815,884 09-01-19 8.50 36,615 39,867 04-01-21 9.00 107,581 117,366 03-01-22 8.50 232,099 253,610 08-01-22 8.50 213,851 233,767 02-01-25 8.00 304,288 329,803 01-01-32 6.50 4,278,916 4,461,572 03-01-32 6.50 1,587,287 1,655,795 06-01-32 7.00 1,461,576 1,546,635 07-01-32 7.00 5,097,801 5,374,965 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 12 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Mortgage-backed securities (cont.) Federal Home Loan Mtge Corp (cont.) 04-01-33 6.00% $5,788,878 $6,003,597 06-01-33 5.50 3,506,704 3,563,294 12-01-33 5.00 2,999,300 2,999,768 Collateralized Mtge Obligation 04-15-15 4.50 4,850,000 4,881,380 01-15-18 6.50 1,453,071 1,550,085 02-15-27 5.00 4,000,000 4,049,854 10-15-27 5.00 7,425,000 7,576,364 06-15-28 5.00 4,625,000 4,725,150 12-15-28 5.50 2,175,000 2,240,123 02-15-33 5.50 3,551,116 3,662,691 Interest Only 02-15-14 7.40 1,474,250(g) 109,183 Federal Natl Mtge Assn 04-01-14 6.00 2,563,871 2,659,617 06-01-15 5.50 4,600,000(b) 4,738,445 03-01-17 6.50 3,044,497 3,177,931 04-01-17 6.50 1,367,657 1,427,598 08-01-17 6.00 5,967,578 6,186,569 09-01-17 6.00 6,663,434 6,907,959 04-01-18 5.00 5,725,252 5,808,123 05-01-18 5.50 4,622,627 4,757,964 05-01-18 6.00 4,240,149 4,396,174 06-01-18 4.50 1,686,147 1,682,127 06-01-18 5.00 1,933,820 1,961,271 08-01-18 4.50 5,619,941 5,601,940 10-01-18 4.50 3,105,666 3,098,262 01-01-19 5.50 974,763 1,001,954 02-01-19 5.00 2,637,351 2,669,866 06-01-20 5.50 4,500,000(b) 4,619,529 06-01-20 6.00 9,000,000(b) 9,323,441 07-01-23 5.00 2,890,984 2,912,594 07-01-23 5.50 3,366,992 3,438,720 09-01-23 5.50 3,621,190 3,698,334 12-01-26 8.00 419,391 453,479 04-01-27 7.50 442,884 475,677 08-01-27 8.00 469,587 507,446 01-01-28 6.50 261,912 273,951 07-01-28 5.50 1,860,394 1,895,252 11-01-28 5.50 3,242,514 3,303,267 04-01-29 5.00 3,596,936 3,596,835 01-01-30 8.00 368,788 397,761 06-01-31 7.00 3,868,363 4,107,784 03-01-32 7.50 566,246 606,250 04-01-32 7.50 397,172 424,908 Bonds (continued) Issuer Coupon Principal Value(a) rate amount Mortgage-backed securities (cont.) Federal Natl Mtge Assn (cont.) 05-01-32 7.50% $573,968 $614,699 06-01-32 7.50 1,364,799 1,460,107 07-01-32 6.50 1,034,085 1,079,934 08-01-32 6.50 6,100,410 6,365,411 08-01-32 7.00 651,536 688,379 09-01-32 6.50 2,456,792 2,556,035 11-01-32 6.50 1,329,503 1,390,369 01-01-33 6.00 4,439,520 4,577,162 02-01-33 6.00 9,170,032 9,476,708 04-01-33 5.50 20,908,591 21,281,458 04-01-33 6.00 9,840,429 10,210,997 05-01-33 5.50 5,640,146 5,731,855 07-01-33 4.85 2,267,564(j) 2,269,151 07-01-33 5.50 3,467,471 3,519,797 08-01-33 5.50 815,065 827,365 11-01-33 7.00 2,721,762 2,873,773 01-01-34 6.50 1,514,497 1,581,582 09-01-34 4.84 3,940,838(j) 3,976,716 12-01-34 4.40 1,029,324(j) 1,026,905 12-01-34 6.50 3,232,068 3,359,353 Collateralized Mtge Obligation 12-25-26 8.00 1,578,516 1,673,448 Interest Only 12-25-12 13.29 1,315,628(g) 68,593 12-25-22 3.19 1,178,687(g) 162,427 12-25-31 1.19 1,412,165(g) 227,696 Principal Only 09-01-18 4.72 27,473(h) 24,115 First Horizon Alternative Mtge Securities Series 2004-AA4 Cl A1 10-25-34 5.43 2,002,221 2,043,788 Series 2005-AA2 Cl 2A1 04-25-35 5.45 2,619,895 2,676,301 Series 2005-AA3 Cl 3A1 05-25-35 5.44 2,380,039 2,421,238 Series 2005-AA4 Cl B1 06-25-35 5.40 724,909 735,669 Govt Natl Mtge Assn 05-15-26 7.50 679,575 730,627 12-15-32 6.00 9,762,847 10,095,530 07-15-33 5.00 2,541,253 2,563,921 10-15-33 5.00 2,595,756 2,618,480 10-15-33 5.50 4,102,369 4,194,641 Collateralized Mtge Obligation Interest Only 01-20-32 0.00 1,012,063(g) 108,337 08-20-32 0.00 4,267,118(g) 595,315 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 13 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Mortgage-backed securities (cont.) IndyMac Index Mtge Loan Trust Series 2005-AR3 Cl 3A1 04-25-35 5.34% $1,393,575(j) $1,414,576 Series 2005-AR8 Cl AX1 Interest Only 04-25-35 4.50 80,370,000(g,j) 1,054,856 Master Adjustable Rate Mtge Trust Series 2004-5 Cl B1 07-25-34 4.41 1,459,135(j) 1,464,461 Master Alternative Loans Trust Series 2004-4 Cl 2A1 05-25-34 6.00 3,856,207 3,957,047 Series 2004-7 Cl 8A1 08-25-19 5.00 1,735,610 1,744,791 Series 2004-8 Cl 7A1 09-25-19 5.00 2,445,120 2,458,862 Series 2005-1 Cl 2A1 02-25-35 6.00 3,173,446 3,265,202 Structured Adjustable Rate Mtge Loan Series 2004-5 Cl B1 05-25-34 4.62 1,346,417(j) 1,331,876 Structured Asset Securities Series 2003-33H Cl 1A1 10-25-33 5.50 5,539,682 5,567,174 Washington Mutual Series 2003-AR10 Cl A7 10-25-33 4.07 2,375,000(j) 2,376,823 Series 2004-CB2 Cl 6A 07-25-19 4.50 1,684,910 1,651,835 Wells Fargo Mtge Backed Securities Trust Series 2005-5 Cl 2A1 05-25-35 5.50 3,993,925 4,063,908 Series 2005-AR1 Cl 1A1 02-25-35 4.57 3,636,512(j) 3,636,730 Total 343,967,095 Automotive & related (0.3%) Lear Series B 08-01-14 5.75 2,625,000 2,392,953 Nissan Motor Acceptance 03-08-10 4.63 600,000(d) 600,354 Total 2,993,307 Bonds (continued) Issuer Coupon Principal Value(a) rate amount Banks and savings & loans (3.1%) Banknorth Group Sr Nts 05-01-08 3.75% $3,370,000(l) $3,342,467 JPMorgan Chase & Co 03-01-15 4.75 2,440,000 2,428,993 KFW Intl Finance (U.S. Dollar) 10-17-05 2.50 6,275,000(c) 6,250,540 Washington Mutual Bank FA Sub Nts 06-15-11 6.88 2,175,000 2,428,031 08-15-14 5.65 2,875,000 3,042,153 Wells Fargo Bank NA Sub Nts 02-01-11 6.45 9,949,000 10,940,248 Total 28,432,432 Broker dealers (0.3%) Goldman Sachs Group 07-15-13 4.75 2,115,000 2,106,773 Morgan Stanley 03-01-13 5.30 900,000 928,881 Total 3,035,654 Cable (0.6%) Comcast 03-15-11 5.50 4,915,000 5,123,543 Energy (0.4%) Nexen (U.S. Dollar) 03-10-35 5.88 1,705,000(c) 1,683,096 Occidental Petroleum Sr Nts 01-15-12 6.75 1,975,000 2,223,876 Total 3,906,972 Energy equipment & services (0.5%) Halliburton 10-15-10 5.50 4,405,000 4,606,027 Finance companies (0.9%) Citigroup Sr Nts 05-29-15 4.70 8,525,000(b) 8,545,622 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 14 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Financial services (1.9%) Archstone-Smith Operating Trust 05-01-15 5.25% $3,070,000 $3,113,781 Capital One Financial 06-01-15 5.50 2,555,000 2,576,403 Pricoa Global Funding I 06-15-08 4.35 2,435,000(d) 2,444,618 01-15-10 4.20 9,325,000(d) 9,270,543 Total 17,405,345 Food (0.6%) Kraft Foods 11-01-11 5.63 2,345,000 2,469,121 06-01-12 6.25 2,810,000 3,073,968 Total 5,543,089 Health care services (0.5%) Cardinal Health 06-15-15 4.00 5,350,000 4,939,805 Industrial transportation (0.9%) ERAC USA Finance 05-01-15 5.60 1,750,000(d) 1,795,917 Union Pacific 04-15-12 6.50 2,520,000 2,778,751 05-01-14 5.38 3,145,000 3,265,110 Total 7,839,778 Insurance (1.8%) Allstate Sr Nts 05-09-35 5.55 1,750,000 1,805,027 ASIF Global Financing XIX 01-17-13 4.90 5,015,000(d) 5,059,884 ING Security Life Institutional Funding 01-15-10 4.25 5,350,000(d) 5,327,873 Metropolitan Life Global Funding I Sr Nts 05-05-10 4.50 3,215,000(d) 3,231,110 Pacific Life 09-15-33 6.60 635,000(d) 740,969 Total 16,164,863 Media (0.3%) News America 12-15-34 6.20 2,360,000 2,439,995 Bonds (continued) Issuer Coupon Principal Value(a) rate amount Multi-industry (0.9%) Tyco Intl Group (U.S. Dollar) 02-15-11 6.75% $7,710,000(c) $8,531,639 Paper & packaging (0.4%) Weyerhaeuser 03-15-12 6.75 3,565,000 3,917,094 Telecom equipment & services (1.8%) Sprint Capital 01-30-11 7.63 4,120,000 4,685,351 11-15-28 6.88 2,965,000 3,363,591 TELUS (U.S. Dollar) 06-01-11 8.00 7,367,500(c) 8,593,039 Total 16,641,981 Utilities -- electric (0.9%) Dayton Power & Light 1st Mtge 10-01-13 5.63 515,000(d) 534,081 Florida Power 1st Mtge 03-01-13 4.80 660,000 665,999 Ohio Power Sr Nts Series H 01-15-14 4.85 2,545,000 2,570,272 Westar Energy 1st Mtge 07-01-14 6.00 4,150,000 4,510,888 Total 8,281,240 Utilities -- telephone (2.1%) Deutsche Telekom Intl Finance (U.S. Dollar) 07-22-13 5.25 1,240,000(c) 1,280,709 Telecom Italia Capital (U.S. Dollar) 09-30-34 6.00 1,275,000(c,d) 1,293,092 Verizon Pennsylvania Series A 11-15-11 5.65 15,740,000 16,422,959 Total 18,996,760 Total bonds (Cost: $910,141,301) $917,843,333 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 15 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Short-term securities (5.9%)(n) Issuer Effective Amount Value(a) yield payable at maturity U.S. government agencies (1.3%) Federal Home Loan Mtge Corp Disc Nt 06-28-05 2.97% $10,000,000 $9,976,939 Federal Natl Mtge Assn Disc Nt 06-22-05 2.74 1,600,000 1,597,323 Total 11,574,262 Short-term securities (continued) Issuer Effective Amount Value(a) yield payable at maturity Commercial paper (4.6%) Barton Capital 06-02-05 3.02% $10,000,000 $9,998,322 HSBC Finance 06-01-05 3.07 2,000,000 1,999,829 Kitty Hawk Funding 06-01-05 3.02 15,000,000 14,998,742 Societe Generale North America 06-27-05 3.04 15,000,000 14,965,913 Total 41,962,806 Total short-term securities (Cost: $53,541,373) $53,537,068 Total investments in securities (Cost: $963,682,674)(o) $971,380,401 Notes to investments in securities (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) At May 31, 2005, the cost of securities purchased, including interest purchased, on a when-issued and/or other forward-commitment basis was $28,606,835. (c) Foreign security values are stated in U.S. dollars. For debt securities, principal amounts are denominated in the currency indicated. At May 31, 2005, the value of foreign securities represented 5.1% of net assets. (d) Represents a security sold under Rule 144A, which is exempt from registration under the Securities Act of 1933, as amended. This security has been determined to be liquid under guidelines established by the Fund's Board of Directors. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At May 31, 2005, the value of these securities amounted to $53,569,063 or 5.9% of net assets. (e) The following abbreviations are used in the portfolio security descriptions to identify the insurer of the issue: AMBAC -- Ambac Assurance Corporation FGIC -- Financial Guaranty Insurance Company FSA -- Financial Security Assurance MBIA -- MBIA Insurance Corporation (f) Mortgage-backed securities represent direct or indirect participations in, or are secured by and payable from, mortgage loans secured by real property, and include single- and multi-class pass-through securities and collateralized mortgage obligations. These securities may be issued or guaranteed by U.S. government agencies or instrumentalities, or by private issuers, generally originators and investors in mortgage loans, including savings associations, mortgage bankers, commercial banks, investment bankers and special purpose entities. The maturity dates shown represent the original maturity of the underlying obligation. Actual maturity may vary based upon prepayment activity on these obligations. Unless otherwise noted, the coupon rates presented are fixed rates. (g) Interest only represents securities that entitle holders to receive only interest payments on the underlying mortgages. The yield to maturity of an interest only is extremely sensitive to the rate of principal payments on the underlying mortgage assets. A rapid (slow) rate of principal repayments may have an adverse (positive) effect on yield to maturity. The principal amount shown is the notional amount of the underlying mortgages. Interest rate disclosed represents yield based upon the estimated timing and amount of future cash flows at May 31, 2005. - -------------------------------------------------------------------------------- 16 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Notes to investments in securities (continued) (h) Principal only represents securities that entitle holders to receive only principal payments on the underlying mortgages. The yield to maturity of a principal only is sensitive to the rate of principal payments on the underlying mortgage assets. A slow (rapid) rate of principal repayments may have an adverse (positive) effect on yield to maturity. Interest rate disclosed represents yield based upon the estimated timing of future cash flows at May 31, 2005. (i) Interest rate varies either based on a predetermined schedule or to reflect current market conditions; rate shown is the effective rate on May 31, 2005. (j) Adjustable rate mortgage; interest rate varies to reflect current market conditions; rate shown is the effective rate on May 31, 2005. (k) Comparable securities are held to satisfy future delivery requirements of the following open forward sale commitments at May 31, 2005: Security Principal Settlement Proceeds Value amount date receivable Federal Natl Mtge Assn 06-20-20 4.50% $ 3,425,000 6-16-05 $ 3,377,906 $ 3,408,944 06-01-35 5.50 22,000,000 6-13-05 22,142,344 22,295,636 06-01-35 6.00 9,000,000 6-13-05 9,215,156 9,247,500 06-01-35 6.50 16,700,000 6-13-05 17,362,188 17,347,125 (l) Partially pledged as initial deposit on the following open interest rate futures contracts (see Note 5 to the financial statements): Type of security Notional amount Purchase contracts U.S. Treasury Note, Sept. 2005, 5-year $20,000,000 Sale contracts U.S. Treasury Note, Sept. 2005, 10-year 70,600,000 (m) At May 31, 2005, security was partially or fully on loan. See Note 4 to the financial statements. (n) Cash collateral received from security lending activity is invested in short-term securities and represents 2.7% of net assets. See Note 4 to the financial statements. 3.2% of net assets is the Portfolio's cash equivalent position. (o) At May 31, 2005, the cost of securities for federal income tax purposes was $964,717,950 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $10,583,157 Unrealized depreciation (3,920,706) ---------- Net unrealized appreciation $ 6,662,451 ----------- How to find information about the Fund's portfolio holdings (i) The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (Commission) for the first and third quarters of each fiscal year on Form N-Q; (ii) The Fund's Forms N-Q are available on the Commission's website at http://www.sec.gov; (iii) The Fund's Forms N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, DC (information on the operations of the Public Reference Room may be obtained by calling 1-800-SEC-0330); and (iv) The Fund's complete schedule of portfolio holdings, as disclosed in its annual and semiannual shareholder reports and in its filings on Form N-Q, can be found at www.americanexpress.com/funds. - -------------------------------------------------------------------------------- 17 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Financial Statements
Statement of assets and liabilities Quality Income Portfolio May 31, 2005 Assets Investments in securities, at value (Note 1)* (identified cost $963,682,674) $ 971,380,401 Dividends and accrued interest receivable 7,252,470 Receivable for investment securities sold 74,507,301 ---------- Total assets 1,053,140,172 ------------- Liabilities Disbursements in excess of cash on demand deposit 8,527 Payable for investment securities purchased 61,498,339 Payable upon return of securities loaned (Note 4) 24,565,000 Accrued investment management services fee 52,004 Other accrued expenses 82,191 Forward sale commitments, at value (proceeds receivable $52,097,594) (Note 1) 52,299,205 ---------- Total liabilities 138,505,266 ----------- Net assets $ 914,634,906 ============== * Including securities on loan, at value (Note 4) $ 24,139,420 --------------
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 18 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Statement of operations Quality Income Portfolio Year ended May 31, 2005 Investment income Income: Interest $42,248,895 Fee income from securities lending (Note 4) 160,492 ------- Total income 42,409,387 ---------- Expenses (Note 2): Investment management services fee 4,922,235 Compensation of board members 11,748 Custodian fees 114,200 Audit fees 33,000 Other 45,780 ------ Total expenses 5,126,963 Earnings credits on cash balances (Note 2) (2,043) ------ Total net expenses 5,124,920 --------- Investment income (loss) -- net 37,284,467 ---------- Realized and unrealized gain (loss) -- net Net realized gain (loss) on: Security transactions (Note 3) 3,371,857 Foreign currency transactions (15,574) Futures contracts (2,636,370) ---------- Net realized gain (loss) on investments 719,913 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 21,053,971 ---------- Net gain (loss) on investments and foreign currencies 21,773,884 ---------- Net increase (decrease) in net assets resulting from operations $59,058,351 ===========
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 19 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Statements of changes in net assets Quality Income Portfolio Year ended May 31, 2005 2004 Operations Investment income (loss) -- net $ 37,284,467 $ 43,667,562 Net realized gain (loss) on investments 719,913 10,488,305 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 21,053,971 (66,112,279) ---------- ----------- Net increase (decrease) in net assets resulting from operations 59,058,351 (11,956,412) ---------- ----------- Proceeds from contributions 50,501,206 8,835,237 Fair value of withdrawals (184,551,000) (465,582,594) ------------ ------------ Net contributions (withdrawals) from partners (134,049,794) (456,747,357) ------------ ------------ Total increase (decrease) in net assets (74,991,443) (468,703,769) Net assets at beginning of year 989,626,349 1,458,330,118 ----------- ------------- Net assets at end of year $ 914,634,906 $ 989,626,349 ============= ==============
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 20 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Notes to Financial Statements Quality Income Portfolio 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Quality Income Portfolio (the Portfolio) is a series of Income Trust (the Trust) and is registered under the Investment Company Act of 1940 (as amended) as a diversified, open-end management investment company. The Portfolio invests primarily in investment-grade bonds. The Declaration of Trust permits the Trustees to issue non-transferable interests in the Portfolio. The Portfolio's significant accounting policies are summarized below: Use of estimates Preparing financial statements that conform to U.S. generally accepted accounting principles requires management to make estimates (e.g., on assets, liabilities and contingent assets and liabilities) that could differ from actual results. Valuation of securities All securities are valued at the close of each business day. Securities traded on national securities exchanges or included in national market systems are valued at the last quoted sales price. Debt securities are generally traded in the over-the-counter market and are valued at a price that reflects fair value as quoted by dealers in these securities or by an independent pricing service. Securities for which market quotations are not readily available are valued at fair value according to methods selected in good faith by the board. Short-term securities maturing in more than 60 days from the valuation date are valued at the market price or approximate market value based on current interest rates; those maturing in 60 days or less are valued at amortized cost. Securities purchased on a forward-commitment basis Delivery and payment for securities that have been purchased by the Portfolio on a forward-commitment basis, including when issued securities and other forward-commitments, can take place one month or more after the transaction date. During this period, such securities are subject to market fluctuations, and they may affect the Portfolio's net assets the same as owned securities. The Portfolio designates cash or liquid securities at least equal to the amount of its forward-commitments. At May 31, 2005, the Portfolio has entered into outstanding when-issued securities of $23,873,387 and other forward-commitments of $4,733,448. The Portfolio also enters into transactions to sell purchase commitments to third parties at current market values and concurrently acquires other purchase commitments for similar securities at later dates. As an inducement for the Portfolio to "roll over" its purchase commitments, the Portfolio receives negotiated amounts in the form of reductions of the purchase price of the commitment. - -------------------------------------------------------------------------------- 21 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Option transactions To produce incremental earnings, protect gains and facilitate buying and selling of securities for investments, the Portfolio may buy and write options traded on any U.S. or foreign exchange or in the over-the-counter market where completing the obligation depends upon the credit standing of the other party. The Portfolio also may buy and sell put and call options and write covered call options on portfolio securities as well as write cash-secured put options. The risk in writing a call option is that the Portfolio gives up the opportunity for profit if the market price of the security increases. The risk in writing a put option is that the Portfolio may incur a loss if the market price of the security decreases and the option is exercised. The risk in buying an option is that the Portfolio pays a premium whether or not the option is exercised. The Portfolio also has the additional risk of being unable to enter into a closing transaction if a liquid secondary market does not exist. Option contracts are valued daily at the closing prices on their primary exchanges and unrealized appreciation or depreciation is recorded. The Portfolio will realize a gain or loss when the option transaction expires or closes. When options on debt securities or futures are exercised, the Portfolio will realize a gain or loss. When other options are exercised, the proceeds on sales for a written call option, the purchase cost for a written put option or the cost of a security for a purchased put or call option is adjusted by the amount of premium received or paid. Futures transactions To gain exposure to or protect itself from market changes, the Portfolio may buy and sell financial futures contracts traded on any U.S. or foreign exchange. The Portfolio also may buy and write put and call options on these futures contracts. Risks of entering into futures contracts and related options include the possibility of an illiquid market and that a change in the value of the contract or option may not correlate with changes in the value of the underlying securities. Upon entering into a futures contract, the Portfolio is required to deposit either cash or securities in an amount (initial margin) equal to a certain percentage of the contract value. Subsequent payments (variation margin) are made or received by the Portfolio each day. The variation margin payments are equal to the daily changes in the contract value and are recorded as unrealized gains and losses. The Portfolio recognizes a realized gain or loss when the contract is closed or expires. Foreign currency translations and foreign currency contracts Securities and other assets and liabilities denominated in foreign currencies are translated daily into U.S. dollars. Foreign currency amounts related to the purchase or sale of securities and income and expenses are translated at the exchange rate on the transaction date. The effect of changes in foreign exchange rates on realized and unrealized security gains or losses is reflected as a component of such gains or losses. In the statement of operations, net realized gains or losses from foreign currency transactions, if any, may arise from sales of foreign currency, closed forward contracts, exchange gains or losses realized between the trade date and settlement date on securities transactions, and other translation gains or losses on dividends, interest income and foreign withholding taxes. - -------------------------------------------------------------------------------- 22 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT The Portfolio may enter into forward foreign currency exchange contracts for operational purposes and to protect against adverse exchange rate fluctuation. The net U.S. dollar value of foreign currency underlying all contractual commitments held by the Portfolio and the resulting unrealized appreciation or depreciation are determined using foreign currency exchange rates from an independent pricing service. The Portfolio is subject to the credit risk that the other party will not complete its contract obligations. Forward sale commitments The Portfolio may enter into forward sale commitments to hedge its portfolio positions or to sell mortgage-backed securities it owns under delayed delivery arrangements. Proceeds of forward sale commitments are not received until the contractual settlement date. During the time a forward sale commitment is outstanding, equivalent deliverable securities, or an offsetting forward purchase commitment deliverable on or before the sale commitment date, are used to satisfy the commitment. Unsettled forward sale commitments are valued at the current market value of the underlying securities, generally according to the procedures described under "Valuation of securities" above. The forward sale commitment is "marked-to-market" daily and the change in market value is recorded by the Portfolio as an unrealized gain or loss. If the forward sale commitment is closed through the acquisition of an offsetting purchase commitment, the Portfolio realizes a gain or loss. If the Portfolio delivers securities under the commitment, the Portfolio realizes a gain or a loss from the sale of the securities based upon the market price established at the date the commitment was entered into. Forward sale commitments outstanding at period end are listed in the "Notes to investments in securities." Guarantees and indemnifications Under the Portfolio's organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Portfolio. In addition, certain of the Portfolio's contracts with its service providers contain general indemnification clauses. The Portfolio's maximum exposure under these arrangements is unknown since the amount of any future claims that may be made against the Portfolio cannot be determined and the Portfolio has no historical basis for predicting the likelihood of any such claims. Federal taxes For federal income tax purposes the Portfolio qualifies as a partnership and each investor in the Portfolio is treated as the owner of its proportionate share of the net assets, income, expenses and realized and unrealized gains and losses of the Portfolio. As a "pass-through" entity, the Portfolio therefore does not pay any income dividends or capital gain distributions. Other Security transactions are accounted for on the date securities are purchased or sold. Dividend income is recognized on the ex-dividend date or upon receipt of ex-dividend notification in the case of certain foreign securities. Interest income, including amortization of premium, market discount and original issue discount using the effective interest method, is accrued daily. - -------------------------------------------------------------------------------- 23 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT 2. FEES AND EXPENSES The Trust, on behalf of the Portfolio, has an Investment Management Services Agreement with American Express Financial Corporation (AEFC) to manage its portfolio. Under this agreement, AEFC determines which securities will be purchased, held or sold. The management fee is a percentage of the Portfolio's average daily net assets that declines from 0.52% to 0.395% annually as the Portfolio's assets increase. Under the agreement, the Trust also pays taxes, brokerage commissions and nonadvisory expenses, which include custodian fees, audit and certain legal fees, fidelity bond premiums, registration fees for units, office expenses, consultants' fees, compensation of trustees, corporate filing fees, expenses incurred in connection with lending securities of the Portfolio and any other expenses properly payable by the Trust or Portfolio and approved by the board. Under a Deferred Compensation Plan (the Plan), non-interested trustees may defer receipt of their compensation. Deferred amounts are treated as though equivalent dollar amounts had been invested in shares of the underlying Fund or other American Express mutual funds. The Portfolio's liability for these amounts is adjusted for market value changes and remains in the Portfolio until distributed in accordance with the Plan. During the year ended May 31, 2005, the Portfolio's custodian fees were reduced by $2,043 as a result of earnings credits from overnight cash balances. According to a Placement Agency Agreement, American Express Financial Advisors Inc. acts as placement agent of the Trust's units. 3. SECURITIES TRANSACTIONS Cost of purchases and proceeds from sales of securities (other than short-term obligations) aggregated $2,647,379,968 and $2,763,783,105, respectively, for the year ended May 31, 2005. Realized gains and losses are determined on an identified cost basis. 4. LENDING OF PORTFOLIO SECURITIES At May 31, 2005, securities valued at $24,139,420 were on loan to brokers. For collateral, the Portfolio received $24,565,000 in cash. Cash collateral received is invested in short-term securities, which are included in the short-term section of the "Investment in securities." Income from securities lending amounted to $160,492 for the year ended May 31, 2005. The risks to the Portfolio of securities lending are that the borrower may not provide additional collateral when required or return the securities when due. 5. INTEREST RATE FUTURES CONTRACTS At May 31, 2005, investments in securities included securities valued at $296,543 that were pledged as collateral to cover initial margin deposits on 200 open purchase contracts and 706 open sale contracts. The notional market value of the open purchase contracts at May 31, 2005 was $21,753,126 with a net unrealized gain of $66,388. The notional market value of the open sale contracts at May 31, 2005 was $79,965,535 with a net unrealized loss of $258,843. See "Summary of significant accounting policies" and "Notes to investments in securities." - -------------------------------------------------------------------------------- 24 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT 6. FINANCIAL HIGHLIGHTS The table below shows certain important financial information for evaluating the Portfolio's results.
Ratios/supplemental data Fiscal period ended May 31, 2005 2004 2003 2002 2001 Ratio of expenses to average daily net assets(a) .54% .54% .52% .53% .52% Ratio of net investment income (loss) to average daily net assets 3.93% 3.62% 4.33% 4.89% 6.44% Portfolio turnover rate (excluding short-term securities) 297% 292% 263% 389% 150% Total return(b) 6.49% (.77%) 6.56% 5.34% 12.06%
(a) Expense ratio is based on total expenses of the Portfolio before reduction of earnings credits on cash balances. The ratio does not include feeder fund expenses. (b) Total return is based on a calculated Portfolio net asset value and does not reflect payment of a sales charge. - -------------------------------------------------------------------------------- 25 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Report of Independent Registered Public Accounting Firm THE BOARD OF TRUSTEES AND UNITHOLDERS INCOME TRUST We have audited the accompanying statement of assets and liabilities, including the schedule of investments in securities, of Quality Income Portfolio (a series of Income Trust) as of May 31, 2005, the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period ended May 31, 2005, and the financial highlights for each of the years in the five-year period ended May 31, 2005. These financial statements and the financial highlights are the responsibility of portfolio management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of May 31, 2005, by correspondence with the custodian and brokers or by other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Quality Income Portfolio as of May 31, 2005, and the results of its operations, changes in its net assets and the financial highlights for each of the periods stated in the first paragraph above in conformity with U.S. generally accepted accounting principles. KPMG LLP Minneapolis, Minnesota July 20, 2005 - -------------------------------------------------------------------------------- 26 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Financial Statements Statement of assets and liabilities AXP Selective Fund May 31, 2005 Assets Investment in Portfolio (Note 1) $914,505,520 Capital shares receivable 89,312 ------ Total assets 914,594,832 ----------- Liabilities Dividends payable to shareholders 397,638 Capital shares payable 213,724 Accrued distribution fee 30,297 Accrued service fee 552 Accrued transfer agency fee 11,045 Accrued administrative services fee 4,996 Other accrued expenses 74,007 ------ Total liabilities 732,259 ------- Net assets applicable to outstanding capital stock $913,862,573 ============ Represented by Capital stock -- $.01 par value (Note 1) $ 1,051,806 Additional paid-in capital 938,558,301 Excess of distributions over net investment income (271,668) Accumulated net realized gain (loss) (Note 5) (32,767,478) Unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 7,291,612 --------- Total -- representing net assets applicable to outstanding capital stock $913,862,573 ============ Net assets applicable to outstanding shares: Class A $591,107,900 Class B $124,736,789 Class C $ 4,242,590 Class I $143,290,359 Class Y $ 50,484,935 Net asset value per share of outstanding capital stock: Class A shares 68,029,020 $ 8.69 Class B shares 14,357,845 $ 8.69 Class C shares 488,313 $ 8.69 Class I shares 16,490,222 $ 8.69 Class Y shares 5,815,214 $ 8.68 --------- ------------
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 27 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Statement of operations AXP Selective Fund Year ended May 31, 2005 Investment income Income: Interest $42,243,400 Fee income from securities lending 160,469 ------- Total income 42,403,869 ---------- Expenses (Note 2): Expenses allocated from Portfolio 5,124,235 Distribution fee Class A 1,638,968 Class B 1,516,008 Class C 49,992 Transfer agency fee 1,198,674 Incremental transfer agency fee Class A 82,348 Class B 39,027 Class C 1,551 Service fee -- Class Y 64,993 Administrative services fees and expenses 477,298 Compensation of board members 9,573 Printing and postage 175,100 Registration fees 49,840 Audit fees 11,000 Other 16,615 ------ Total expenses 10,455,222 Expenses waived/reimbursed by AEFC (Note 2) (665,654) -------- 9,789,568 Earnings credits on cash balances (Note 2) (29,958) ------- Total net expenses 9,759,610 --------- Investment income (loss) -- net 32,644,259 ---------- Realized and unrealized gain (loss) -- net Net realized gain (loss) on: Security transactions 3,371,309 Foreign currency transactions (15,572) Futures contracts (2,636,009) ---------- Net realized gain (loss) on investments 719,728 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 21,051,280 ---------- Net gain (loss) on investments and foreign currencies 21,771,008 ---------- Net increase (decrease) in net assets resulting from operations $54,415,267 ===========
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 28 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Statements of changes in net assets AXP Selective Fund Year ended May 31, 2005 2004 Operations and distributions Investment income (loss) -- net $ 32,644,259 $ 36,407,873 Net realized gain (loss) on investments 719,728 10,487,801 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 21,051,280 (66,106,407) ---------- ----------- Net increase (decrease) in net assets resulting from operations 54,415,267 (19,210,733) ---------- ----------- Distributions to shareholders from: Net investment income Class A (23,912,310) (26,365,292) Class B (4,361,239) (5,744,369) Class C (144,617) (180,386) Class I (2,796,739) -- Class Y (2,459,415) (4,136,231) ---------- ---------- Total distributions (33,674,320) (36,426,278) ----------- ----------- Capital share transactions (Note 3) Proceeds from sales Class A shares (Note 2) 45,644,903 79,211,532 Class B shares 11,147,044 22,932,095 Class C shares 642,495 1,212,212 Class I shares 153,620,994 -- Class Y shares 12,950,585 34,353,219 Reinvestment of distributions at net asset value Class A shares 19,053,522 21,394,439 Class B shares 3,923,698 5,231,020 Class C shares 127,953 159,927 Class I shares 2,725,902 -- Class Y shares 2,448,606 4,205,827 Payments for redemptions Class A shares (195,290,057) (311,025,257) Class B shares (Note 2) (83,730,597) (142,694,010) Class C shares (Note 2) (2,216,368) (4,975,937) Class I shares (13,407,549) -- Class Y shares (53,143,328) (123,235,606) ----------- ------------ Increase (decrease) in net assets from capital share transactions (95,502,197) (413,230,539) ----------- ------------ Total increase (decrease) in net assets (74,761,250) (468,867,550) Net assets at beginning of year 988,623,823 1,457,491,373 ----------- ------------- Net assets at end of year $ 913,862,573 $ 988,623,823 ============= ==============
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 29 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Notes to Financial Statements AXP Selective Fund 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Fund is a series of AXP Income Series, Inc. and is registered under the Investment Company Act of 1940 (as amended) as a diversified, open-end management investment company. AXP Income Series, Inc. has 10 billion authorized shares of capital stock that can be allocated among the separate series as designated by the board. The Fund offers Class A, Class B, Class C and Class Y shares. o Class A shares are sold with a front-end sales charge. o Class B shares may be subject to a contingent deferred sales charge (CDSC) and automatically convert to Class A shares during the ninth year of ownership. o Class C shares may be subject to a CDSC. o Class Y shares have no sales charge and are offered only to qualifying institutional investors. Effective July 15, 2004, the Fund offers an additional class of shares, Class I, exclusively to certain institutional investors. Class I shares have no sales charge and are made available through a separate prospectus supplement provided to investors eligible to purchase the shares. At May 31, 2005, AEFC and the AXP Portfolio Builder Series funds owned 100% of Class I shares, which represents 15.68% of the Fund's net assets. All classes of shares have identical voting, dividend and liquidation rights. The distribution fee, transfer agency fees and service fee (class specific expenses) differ among classes. Income, expenses (other than class specific expenses) and realized and unrealized gains or losses on investments are allocated to each class of shares based upon its relative net assets. Investment in Quality Income Portfolio The Fund invests all of its assets in Quality Income Portfolio (the Portfolio), a series of Income Trust (the Trust), an open-end investment company that has the same objectives as the Fund. The Portfolio invests primarily in investment-grade bonds. The Fund records daily its share of the Portfolio's income, expenses and realized and unrealized gains and losses. The financial statements of the Portfolio are included elsewhere in this report and should be read in conjunction with the Fund's financial statements. The Fund records its investment in the Portfolio at the value that is equal to the Fund's proportionate ownership interest in the Portfolio's net assets. The percentage of the Portfolio owned by the Fund at May 31, 2005 was 99.99%. - -------------------------------------------------------------------------------- 30 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT All securities held by the Portfolio are valued at the close of each business day. Securities traded on national securities exchanges or included in national market systems are valued at the last quoted sales price. Debt securities are generally traded in the over-the-counter market and are valued at a price that reflects fair value as quoted by dealers in these securities or by an independent pricing service. Securities for which market quotations are not readily available are valued at fair value according to methods selected in good faith by the board. Short-term securities maturing in more than 60 days from the valuation date are valued at the market price or approximate market value based on current interest rates; those maturing in 60 days or less are valued at amortized cost. Use of estimates Preparing financial statements that conform to U.S. generally accepted accounting principles requires management to make estimates (e.g., on assets, liabilities and contingent assets and liabilities) that could differ from actual results. Guarantees and indemnifications Under the Fund's organizational documents, its officers and directors are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, certain of the Fund's contracts with its service providers contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown since the amount of any future claims that may be made against the Fund cannot be determined and the Fund has no historical basis for predicting the likelihood of any such claims. Federal taxes The Fund's policy is to comply with all sections of the Internal Revenue Code that apply to regulated investment companies and to distribute substantially all of its taxable income to the shareholders. No provision for income or excise taxes is thus required. Net investment income (loss) and net realized gains (losses) may differ for financial statement and tax purposes primarily because of deferred losses on certain futures contracts, the recognition of certain foreign currency gains (losses) as ordinary income (loss) for tax purposes, and losses deferred due to "wash sale" transactions. The character of distributions made during the year from net investment income or net realized gains may differ from their ultimate characterization for federal income tax purposes. Also, due to the timing of dividend distributions, the fiscal year in which amounts are distributed may differ from the year that the income or realized gains (losses) were recorded by the Fund. On the statement of assets and liabilities, as a result of permanent book-to-tax differences, undistributed net investment income has been increased by $983,881 and accumulated net realized loss has been increased by $983,881. - -------------------------------------------------------------------------------- 31 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT The tax character of distributions paid for the years indicated is as follows: Year ended May 31, 2005 2004 Class A Distributions paid from Ordinary income $23,912,310 $26,365,292 Long-term capital gain -- -- Class B Distributions paid from: Ordinary income 4,361,239 5,744,369 Long-term capital gain -- -- Class C Distributions paid from: Ordinary income 144,617 180,386 Long-term capital gain -- -- Class I* Distributions paid from: Ordinary income 2,796,739 N/A Long-term capital gain -- N/A Class Y Distributions paid from: Ordinary income 2,459,415 4,136,231 Long-term capital gain -- -- * Inception date was July 15, 2004 At May 31, 2005, the components of distributable earnings on a tax basis are as follows: Undistributed ordinary income $ 182,805 Accumulated long-term gain (loss) $(29,747,019) Unrealized appreciation (depreciation) $ 4,214,318 Dividends to shareholders Dividends from net investment income, declared daily and payable monthly, when available, are reinvested in additional shares of the Fund at net asset value or payable in cash. Capital gains, when available, are distributed along with the last income dividend of the calendar year. 2. EXPENSES AND SALES CHARGES In addition to the expenses allocated from the Portfolio, the Fund accrues its own expenses as follows: The Fund has an agreement with AEFC to provide administrative services. Under an Administrative Services Agreement, the Fund pays AEFC a fee for administration and accounting services at a percentage of the Fund's average daily net assets that declines from 0.05% to 0.025% annually as the Fund's assets increase. A minor portion of additional administrative service expenses paid by the Fund are consultants' fees and fund office expenses. Under this agreement, the Fund also pays taxes, audit and certain legal fees, registration fees for shares, compensation of board members, corporate filing fees and any other expenses properly payable by the Fund and approved by the board. - -------------------------------------------------------------------------------- 32 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Under a Deferred Compensation Plan (the Plan), non-interested board members may defer receipt of their compensation. Deferred amounts are treated as though equivalent dollar amounts had been invested in shares of the Fund or other American Express mutual funds. The Fund's liability for these amounts is adjusted for market value changes and remains in the Fund until distributed in accordance with the Plan. Under a separate Transfer Agency Agreement, American Express Client Service Corporation (AECSC) maintains shareholder accounts and records. The Fund pays AECSC an annual fee per shareholder account for this service as follows: o Class A $20.50 o Class B $21.50 o Class C $21.00 o Class Y $18.50 The incremental transfer agency fee is the amount charged to the specific classes for the additional expense above the fee for Class Y. Class I pays a transfer agency fee at an annual rate per shareholder account of $1. This amount is included in the transfer agency fee on the statement of operations. In addition, AECSC is entitled to charge an annual closed account fee of $5 per inactive account, charged on a pro rata basis from the date the account becomes inactive until the date the account is purged from the transfer agent system generally within one year. However, the closed account fee is currently not effective. The Fund has agreements with American Express Financial Advisors Inc. (the Distributor) for distribution and shareholder services. Under a Plan and Agreement of Distribution pursuant to Rule 12b-1, the Fund pays a fee at an annual rate up to 0.25% of the Fund's average daily net assets attributable to Class A shares and up to 1.00% for Class B and Class C shares. Under a Shareholder Service Agreement, the Fund pays the Distributor a fee for service provided to shareholders by financial advisors and other servicing agents. The fee is calculated at a rate of 0.10% of the Fund's average daily net assets attributable to Class Y shares. Sales charges received by the Distributor for distributing Fund shares were $377,503 for Class A, $209,403 for Class B and $1,184 for Class C for the year ended May 31, 2005. For the year ended May 31, 2005, AEFC and its affiliates waived certain fees and expenses to 0.94% for Class A, 1.69% for Class B, 1.69% for Class C, 0.63% for Class I and 0.77% for Class Y. Of these waived fees and expenses, the transfer agency fees waived for Class A, Class B, Class C and Class Y were $481,790, $127,820, $4,547 and $51,497, respectively. Beginning June 1, 2005, AEFC and its affiliates have agreed to waive certain fees and expenses until May 31, 2006. Under this agreement, net expenses will not exceed 0.89% for Class A, 1.64% for Class B, 1.64% for Class C, 0.59% for Class I and 0.72% for Class Y of the Fund's average daily net assets. During the year ended May 31, 2005, the Fund's transfer agency fees were reduced by $29,958 as a result of earnings credits from overnight cash balances. - -------------------------------------------------------------------------------- 33 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT 3. CAPITAL SHARE TRANSACTIONS Transactions in shares of capital stock for the years indicated are as follows:
Year ended May 31, 2005 Class A Class B Class C Class I* Class Y Sold 5,297,822 1,289,751 74,421 17,736,298 1,500,618 Issued for reinvested distributions 2,202,977 453,875 14,795 314,693 283,580 Redeemed (22,628,707) (9,719,218) (256,820) (1,560,769) (6,147,313) ----------- ---------- -------- ---------- ---------- Net increase (decrease) (15,127,908) (7,975,592) (167,604) 16,490,222 (4,363,115) ----------- ---------- -------- ---------- ---------- * Inception date was July 15, 2004. Year ended May 31, 2004 Class A Class B Class C Class I Class Y Sold 9,074,746 2,637,527 139,541 N/A 3,953,216 Issued for reinvested distributions 2,467,221 603,159 18,441 N/A 485,010 Redeemed (35,892,994) (16,404,096) (573,651) N/A (14,229,946) ----------- ----------- -------- ------ ----------- Net increase (decrease) (24,351,027) (13,163,410) (415,669) N/A (9,791,720) ----------- ----------- -------- ------ ----------
4. BANK BORROWINGS The Fund has a revolving credit agreement with a syndicate of banks headed by The Bank of New York, whereby the Fund may borrow for the temporary funding of shareholder redemptions or for other temporary or emergency purposes. The agreement went into effect Sept. 21, 2004. The Fund must maintain asset coverage for borrowings of at least 300%. The agreement, which enables the Fund to participate with other American Express mutual funds, permits borrowings up to $500 million, collectively. Interest is charged to each Fund based on its borrowings at a rate equal to either the higher of the Federal Funds Effective Rate plus 0.50% or the Prime Lending Rate. Borrowings are payable within 60 days after such loan is executed. The Fund also pays a commitment fee equal to its pro rata share of the amount of the credit facility at a rate of 0.09% per annum. Prior to this agreement, the Fund had a revolving credit agreement that permitted borrowings up to $500 million with Deutsche Bank. The Fund had no borrowings outstanding during the year ended May 31, 2005. 5. CAPITAL LOSS CARRY-OVER For federal income tax purposes, the Fund had a capital loss carry-over of $29,747,019 at May 31, 2005, that if not offset by capital gains will expire as follows: 2011 2013 2014 $24,224,582 $5,017,493 $504,944 It is unlikely the board will authorize a distribution of any net realized capital gains until the available capital loss carry-over has been offset or expires. - -------------------------------------------------------------------------------- 34 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT 6. FINANCIAL HIGHLIGHTS The tables below show certain important financial information for evaluating the Fund's results.
Class A Per share income and capital changes(a) Fiscal period ended May 31, 2005 2004 2003 2002 2001 Net asset value, beginning of period $8.50 $8.88 $8.74 $8.74 $8.32 ----- ----- ----- ----- ----- Income from investment operations: Net investment income (loss) .31 .28 .33 .40 .52 Net gains (losses) (both realized and unrealized) .20 (.38) .18 .02 .42 ----- ----- ----- ----- ----- Total from investment operations .51 (.10) .51 .42 .94 ----- ----- ----- ----- ----- Less distributions: Dividends from net investment income (.32) (.28) (.33) (.40) (.52) Distributions from realized gains -- -- (.04) (.02) -- ----- ----- ----- ----- ----- Total distributions (.32) (.28) (.37) (.42) (.52) ----- ----- ----- ----- ----- Net asset value, end of period $8.69 $8.50 $8.88 $8.74 $8.74 ----- ----- ----- ----- ----- Ratios/supplemental data Net assets, end of period (in millions) $591 $707 $955 $1,042 $1,004 Ratio of expenses to average daily net assets(b) .94%(c) 1.00% .98% .98% .97% Ratio of net investment income (loss) to average daily net assets 3.54% 3.17% 3.89% 4.45% 6.01% Portfolio turnover rate (excluding short-term securities) 297% 292% 263% 389% 150% Total return(d) 6.06% (1.17%) 6.05% 4.85% 11.52%
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (c) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so, the annual ratio of expenses for Class A would have been 1.02% for the year ended May 31, 2005. (d) Total return does not reflect payment of a sales charge. - -------------------------------------------------------------------------------- 35 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Class B Per share income and capital changes(a) Fiscal period ended May 31, 2005 2004 2003 2002 2001 Net asset value, beginning of period $8.50 $8.88 $8.74 $8.74 $8.32 ----- ----- ----- ----- ----- Income from investment operations: Net investment income (loss) .24 .21 .27 .33 .45 Net gains (losses) (both realized and unrealized) .20 (.38) .18 .02 .42 ----- ----- ----- ----- ----- Total from investment operations .44 (.17) .45 .35 .87 ----- ----- ----- ----- ----- Less distributions: Dividends from net investment income (.25) (.21) (.27) (.33) (.45) Distributions from realized gains -- -- (.04) (.02) -- ----- ----- ----- ----- ----- Total distributions (.25) (.21) (.31) (.35) (.45) ----- ----- ----- ----- ----- Net asset value, end of period $8.69 $8.50 $8.88 $8.74 $8.74 ----- ----- ----- ----- ----- Ratios/supplemental data Net assets, end of period (in millions) $125 $190 $315 $342 $264 Ratio of expenses to average daily net assets(b) 1.69%(c) 1.76% 1.74% 1.73% 1.73% Ratio of net investment income (loss) to average daily net assets 2.78% 2.40% 3.12% 3.67% 5.25% Portfolio turnover rate (excluding short-term securities) 297% 292% 263% 389% 150% Total return(d) 5.26% (1.92%) 5.25% 4.06% 10.69%
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (c) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so, the annual ratio of expenses for Class B would have been 1.78% for the year ended May 31, 2005. (d) Total return does not reflect payment of a sales charge. - -------------------------------------------------------------------------------- 36 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Class C Per share income and capital changes(a) Fiscal period ended May 31, 2005 2004 2003 2002 2001(b) Net asset value, beginning of period $8.50 $8.88 $8.74 $8.74 $8.40 ----- ----- ----- ----- ----- Income from investment operations: Net investment income (loss) .24 .21 .27 .33 .42 Net gains (losses) (both realized and unrealized) .20 (.38) .18 .02 .34 ----- ----- ----- ----- ----- Total from investment operations .44 (.17) .45 .35 .76 ----- ----- ----- ----- ----- Less distributions: Dividends from net investment income (.25) (.21) (.27) (.33) (.42) Distributions from realized gains -- -- (.04) (.02) -- ----- ----- ----- ----- ----- Total distributions (.25) (.21) (.31) (.35) (.42) ----- ----- ----- ----- ----- Net asset value, end of period $8.69 $8.50 $8.88 $8.74 $8.74 ----- ----- ----- ----- ----- Ratios/supplemental data Net assets, end of period (in millions) $4 $6 $10 $9 $4 Ratio of expenses to average daily net assets(c) 1.69%(d) 1.76% 1.75% 1.74% 1.73%(e) Ratio of net investment income (loss) to average daily net assets 2.79% 2.40% 3.07% 3.64% 5.16%(e) Portfolio turnover rate (excluding short-term securities) 297% 292% 263% 389% 150% Total return(f) 5.26% (1.92%) 5.24% 4.06% 9.27%(g)
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Inception date was June 26, 2000. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (d) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so, the annual ratio of expenses for Class C would have been 1.79% for the year ended May 31, 2005. (e) Adjusted to an annual basis. (f) Total return does not reflect payment of a sales charge. (g) Not annualized. - -------------------------------------------------------------------------------- 37 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Class I Per share income and capital changes(a) Fiscal period ended May 31, 2005(b) Net asset value, beginning of period $8.55 ----- Income from investment operations: Net investment income (loss) .29 Net gains (losses) (both realized and unrealized) .15 ----- Total from investment operations .44 ----- Less distributions: Dividends from net investment income (.30) ----- Net asset value, end of period $8.69 ----- Ratios/supplemental data Net assets, end of period (in millions) $143 Ratio of expenses to average daily net assets(c) .63%(d) Ratio of net investment income (loss) to average daily net assets 3.92%(d) Portfolio turnover rate (excluding short-term securities) 297% Total return(e) 5.25%(f) (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Inception date was July 15, 2004. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (d) Adjusted to an annual basis. (e) Total return does not reflect payment of a sales charge. (f) Not annualized. - -------------------------------------------------------------------------------- 38 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Class Y Per share income and capital changes(a) Fiscal period ended May 31, 2005 2004 2003 2002 2001 Net asset value, beginning of period $8.49 $8.88 $8.74 $8.74 $8.32 ----- ----- ----- ----- ----- Income from investment operations: Net investment income (loss) .32 .29 .35 .42 .53 Net gains (losses) (both realized and unrealized) .20 (.39) .18 .02 .42 ----- ----- ----- ----- ----- Total from investment operations .52 (.10) .53 .44 .95 ----- ----- ----- ----- ----- Less distributions: Dividends from net investment income (.33) (.29) (.35) (.42) (.53) Distributions from realized gains -- -- (.04) (.02) -- ----- ----- ----- ----- ----- Total distributions (.33) (.29) (.39) (.44) (.53) ----- ----- ----- ----- ----- Net asset value, end of period $8.68 $8.49 $8.88 $8.74 $8.74 ----- ----- ----- ----- ----- Ratios/supplemental data Net assets, end of period (in millions) $50 $86 $177 $188 $218 Ratio of expenses to average daily net assets(b) .77%(c) .84% .82% .81% .82% Ratio of net investment income (loss) to average daily net assets 3.70% 3.30% 4.04% 4.61% 6.16% Portfolio turnover rate (excluding short-term securities) 297% 292% 263% 389% 150% Total return(d) 6.24% (1.13%) 6.22% 5.02% 11.70%
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (c) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so, the annual ratio of expenses for Class Y would have been 0.86% for the year ended May 31, 2005. (d) Total return does not reflect payment of a sales charge. - -------------------------------------------------------------------------------- 39 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Report of Independent Registered Public Accounting Firm THE BOARD AND SHAREHOLDERS AXP INCOME SERIES, INC. We have audited the accompanying statement of assets and liabilities of AXP Selective Fund (a series of AXP Income Series, Inc.) as of May 31, 2005, the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period ended May 31, 2005, and the financial highlights for each of the years in the five-year period ended May 31, 2005. These financial statements and the financial highlights are the responsibility of fund management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of AXP Selective Fund as of May 31, 2005, and the results of its operations, changes in its net assets and the financial highlights for each of the periods stated in the first paragraph above, in conformity with U.S. generally accepted accounting principles. KPMG LLP Minneapolis, Minnesota July 20, 2005 - -------------------------------------------------------------------------------- 40 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Federal Income Tax Information (UNAUDITED) The Fund is required by the Internal Revenue Code of 1986 to tell its shareholders about the tax treatment of the dividends it pays during its fiscal year. The dividends listed below are reported to you on Form 1099-DIV, Dividends and Distributions. Shareholders should consult a tax advisor on how to report distributions for state and local tax purposes. AXP Selective Fund Fiscal year ended May 31, 2005 Class A Income distributions -- taxable as dividend income: Qualified Dividend Income for individuals 0.00% Dividends Received Deduction for corporations 0.00% Payable date Per share June 25, 2004 $0.02401 July 26, 2004 0.02400 Aug. 25, 2004 0.02494 Sept. 24, 2004 0.02500 Oct. 25, 2004 0.02587 Nov. 24, 2004 0.02641 Dec. 22, 2004 0.02736 Jan. 27, 2005 0.02650 Feb. 24, 2005 0.02800 March 30, 2005 0.02800 April 28, 2005 0.02800 May 26, 2005 0.02800 Total distributions $0.31609 Class B Income distributions -- taxable as dividend income: Qualified Dividend Income for individuals 0.00% Dividends Received Deduction for corporations 0.00% Payable date Per share June 25, 2004 $0.01871 July 26, 2004 0.01849 Aug. 25, 2004 0.01960 Sept. 24, 2004 0.01966 Oct. 25, 2004 0.02034 Nov. 24, 2004 0.02106 Dec. 22, 2004 0.02235 Jan. 27, 2005 0.01993 Feb. 24, 2005 0.02297 March 30, 2005 0.02196 April 28, 2005 0.02286 May 26, 2005 0.02301 Total distributions $0.25094 - -------------------------------------------------------------------------------- 41 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Class C Income distributions -- taxable as dividend income: Qualified Dividend Income for individuals 0.00% Dividends Received Deduction for corporations 0.00% Payable date Per share June 25, 2004 $0.01867 July 26, 2004 0.01856 Aug. 25, 2004 0.01964 Sept. 24, 2004 0.01966 Oct. 25, 2004 0.02036 Nov. 24, 2004 0.02107 Dec. 22, 2004 0.02236 Jan. 27, 2005 0.01997 Feb. 24, 2005 0.02298 March 30, 2005 0.02199 April 28, 2005 0.02289 May 26, 2005 0.02300 Total distributions $0.25115 Class I Income distributions -- taxable as dividend income: Qualified Dividend Income for individuals 0.00% Dividends Received Deduction for corporations 0.00% Payable date Per share July 26, 2004 0.00854 Aug. 25, 2004 0.02657 Sept. 24, 2004 0.02739 Oct. 25, 2004 0.02828 Nov. 24, 2004 0.02859 Dec. 22, 2004 0.02896 Jan. 27, 2005 0.02933 Feb. 24, 2005 0.03017 March 30, 2005 0.03070 April 28, 2005 0.03043 May 26, 2005 0.03031 Total distributions $0.29927 - -------------------------------------------------------------------------------- 42 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Class Y Income distributions -- taxable as dividend income: Qualified Dividend Income for individuals 0.00% Dividends Received Deduction for corporations 0.00% Payable date Per share June 25, 2004 $0.02497 July 26, 2004 0.02523 Aug. 25, 2004 0.02621 Sept. 24, 2004 0.02618 Oct. 25, 2004 0.02707 Nov. 24, 2004 0.02761 Dec. 22, 2004 0.02847 Jan. 27, 2005 0.02787 Feb. 24, 2005 0.02912 March 30, 2005 0.02935 April 28, 2005 0.02914 May 26, 2005 0.02910 Total distributions $0.33032 - -------------------------------------------------------------------------------- 43 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Fund Expenses Example (UNAUDITED) As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments; and (2) ongoing costs, including management fees; distribution and service (12b-1) fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the six months ended May 31, 2005. Actual Expenses The first line of the table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading titled "Expenses paid during the period" to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The second line of the table provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads). Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. - -------------------------------------------------------------------------------- 44 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Beginning Ending Expenses account value account value paid during Annualized Dec. 1, 2004 May 31, 2005 the period(a) expense ratio Class A Actual(b) $1,000 $1,023.80 $4.79(c) .95% Hypothetical (5% return before expenses) $1,000 $1,020.19 $4.78(c) .95% Class B Actual(b) $1,000 $1,020.00 $8.56(c) 1.70% Hypothetical (5% return before expenses) $1,000 $1,016.45 $8.55(c) 1.70% Class C Actual(b) $1,000 $1,020.00 $8.56(c) 1.70% Hypothetical (5% return before expenses) $1,000 $1,016.45 $8.55(c) 1.70% Class I Actual(b) $1,000 $1,025.50 $3.13 .62% Hypothetical (5% return before expenses) $1,000 $1,021.84 $3.13 .62% Class Y Actual(b) $1,000 $1,024.70 $3.94(c) .78% Hypothetical (5% return before expenses) $1,000 $1,021.04 $3.93(c) .78%
(a) Expenses are equal to the Fund's annualized expense ratio as indicated above, multiplied by the average account value over the period, multiplied by 182/365 (to reflect the one-half year period). (b) Based on the actual return for the six months ended May 31, 2005: +2.38% for Class A, +2.00% for Class B, +2.00% for Class C, +2.55% for Class I and +2.47% for Class Y. (c) Beginning June 1, 2005, AEFC and its affiliates have contractually agreed to waive certain fees and to absorb certain expenses until May 31, 2006, unless sooner terminated at the discretion of the Fund's Board of Directors. Under this agreement, net expenses will not exceed 0.89% for Class A; 1.64% for Class B; 1.64% for Class C and 0.72% for Class Y. If this agreement had been in place for the entire six-month period ended May 31, 2005, the actual expenses paid would have been: $4.49 for Class A, $8.26 for Class B, $8.26 for Class C and $3.63 for Class Y; the hypothetical expenses paid would have been: $4.48 for Class A, $8.25 for Class B, $8.25 for Class C and $3.63 for Class Y. - -------------------------------------------------------------------------------- 45 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Board Members and Officers Shareholders elect a board that oversees the Fund's operations. The board appoints officers who are responsible for day-to-day business decisions based on policies set by the board. The following is a list of the Fund's board members. Each member oversees 14 Master Trust portfolios and 90 American Express mutual funds. Board members serve until the next regular shareholders' meeting or until he or she reaches the mandatory retirement age established by the board.
Independent Board Members Name, address, age Position held Principal occupation during Other directorships with Fund and past five years length of service - -------------------------------------- --------------- ------------------------------ ----------------------------- Arne H. Carlson Board member Chair, Board Services 901 S. Marquette Ave. since 1999 Corporation (provides Minneapolis, MN 55402 administrative services to Age 70 boards). Former Governor of Minnesota - -------------------------------------- --------------- ------------------------------ ----------------------------- Philip J. Carroll, Jr. Board member Retired Chairman and CEO, Scottish Power PLC, Vulcan 901 S. Marquette Ave. since 2002 Fluor Corporation Materials Company, Inc. Minneapolis, MN 55402 (engineering and (construction Age 67 construction) since 1998 materials/chemicals) - -------------------------------------- --------------- ------------------------------ ----------------------------- Livio D. DeSimone Board member Retired Chair of the Board Cargill, Incorporated 30 Seventh Street East since 2001 and Chief Executive Officer, (commodity merchants and Suite 3050 Minnesota Mining and processors), General Mills, St. Paul, MN 55101-4901 Manufacturing (3M) Inc. (consumer foods), Age 71 Vulcan Materials Company (construction materials/ chemicals), Milliken & Company (textiles and chemicals), and Nexia Biotechnologies, Inc. - -------------------------------------- --------------- ------------------------------ ----------------------------- Patricia M. Flynn Board member Trustee Professor of BostonFed Bancorp, Inc. 901 S. Marquette Ave. since 2004 Economics and Management, (holding company) and its Minneapolis, MN 55402 Bentley College since 2002; subsidiary Boston Federal Age 54 former Dean, McCallum Savings Bank Graduate School of Business, Bentley College from 1999 to 2002 - -------------------------------------- --------------- ------------------------------ ----------------------------- Anne P. Jones Board member Attorney and Consultant 901 S. Marquette Ave. since 1985 Minneapolis, MN 55402 Age 70 - -------------------------------------- --------------- ------------------------------ ----------------------------- Stephen R. Lewis, Jr. Board member Retired President and Valmont Industries, Inc. 901 S. Marquette Ave. since 2002 Professor of Economics, (manufactures irrigation Minneapolis, MN 55402 Carleton College systems) Age 66 - -------------------------------------- --------------- ------------------------------ -----------------------------
- -------------------------------------------------------------------------------- 46 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Independent Board Members (continued) Name, address, age Position Principal occupation during Other directorships held with past five years Fund and length of service - -------------------------------------- --------------- ------------------------------- ---------------------------- Catherine James Paglia Board member Director, Enterprise Asset Strategic Distribution, 901 S. Marquette Ave. since 2004 Management, Inc. (private Inc. (transportation, Minneapolis, MN 55402 real estate and asset distribution and logistics Age 52 management company) since 1999 consultants) - -------------------------------------- --------------- ------------------------------- ---------------------------- Alan K. Simpson Board member Former three-term United 1201 Sunshine Ave. since 1997 States Senator for Wyoming Cody, WY 82414 Age 73 - -------------------------------------- --------------- ------------------------------- ---------------------------- Alison Taunton-Rigby Board member Founder and Chief Executive Hybridon, Inc. 901 S. Marquette Ave. since 2002 Officer, RiboNovix, Inc. (biotechnology) Minneapolis, MN 55402 since 2004; President, Age 61 Forester Biotech since 2000; prior to that, President and CEO, Aquila Biopharmaceuticals, Inc. - -------------------------------------- --------------- ------------------------------- ---------------------------- Board Member Affiliated with AEFC* Name, address, age Position held Principal occupation during Other directorships with Fund and past five years length of service - -------------------------------------- --------------- ------------------------------- ---------------------------- William F. Truscott Board member Senior Vice President - Chief 53600 AXP Financial Center since 2001, Investment Officer of AEFC Minneapolis, MN 55474 Vice President since 2001. Former Chief Age 44 since 2002 Investment Officer and Managing Director, Zurich Scudder Investments - -------------------------------------- --------------- ------------------------------- ----------------------------
* Interested person by reason of being an officer, director and/or employee of AEFC. - -------------------------------------------------------------------------------- 47 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT The board has appointed officers who are responsible for day-to-day business decisions based on policies it has established. The officers serve at the pleasure of the board. In addition to Mr. Truscott, who is vice president, the Fund's other officers are:
Other Officers Name, address, age Position held Principal occupation during Other directorships with Fund and past five years length of service - -------------------------------------- --------------- ------------------------------- ---------------------------- Jeffrey P. Fox Treasurer Vice President - Investment 105 AXP Financial Center since 2002 Accounting, AEFC, since Minneapolis, MN 55474 2002; Vice President - Age 50 Finance, American Express Company, 2000-2002; Vice President - Corporate Controller, AEFC, 1996-2000 - -------------------------------------- --------------- ------------------------------- ---------------------------- Paula R. Meyer President Senior Vice President and 596 AXP Financial Center since 2002 General Manager - Mutual Minneapolis, MN 55474 Funds, AEFC, since 2002; Vice Age 51 President and Managing Director - American Express Funds, AEFC, 2000-2002; Vice President, AEFC, 1998-2000 - -------------------------------------- --------------- ------------------------------- ---------------------------- Leslie L. Ogg Vice President of Board Services 901 S. Marquette Ave. President, Corporation Minneapolis, MN 55402 Age 66 General Counsel, and Secretary since 1978 - -------------------------------------- --------------- ------------------------------- ---------------------------- Beth E. Weimer Chief Vice President and Chief 172 AXP Financial Center Compliance Compliance Officer, AEFC, Minneapolis, MN 55474 Officer since since 2001; Vice President Age 52 2004 and Chief Compliance Officer, AEFA, 2001-2005; Partner, Arthur Andersen Regulatory Risk Services, 1998-2001 - -------------------------------------- --------------- ------------------------------- ----------------------------
The SAI has additional information about the Fund's directors and is available, without charge, upon request by calling (800) 862-7919. - -------------------------------------------------------------------------------- 48 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Approval of Investment Management Services Agreement American Express Financial Corporation (AEFC), a wholly-owned subsidiary of American Express Company, serves as the investment manager to the Fund. Under an Investment Management Services Agreement (the Agreement), AEFC provides investment advice and other services to the Fund. Throughout the year, the Funds' Board of Directors and the Board's Investment Review Committee monitor these services. Each year the Board determines whether to continue the Agreement by evaluating the quality and level of service received and the costs associated with those services. AEFC prepares detailed reports for the Board and its Contracts Committee in March and April and provides data prepared by independent organizations to assist the Board in making this determination. The Board gives considerable weight to the work, deliberations and conclusions of the Contracts and Investment Review Committees in determining whether to continue the Agreement. On February 1, 2005, American Express Company announced its intention to pursue a spin-off of AEFC by distributing shares of the common stock of AEFC to shareholders of American Express Company. At a meeting held in person on April 14, 2005, the Board, including a majority of the independent members, approved the continuation of the Agreement for an interim period, not to exceed one year, ending on the later of (i) the effective date of the spin-off or (ii) the approval by the Fund's shareholders of a new investment management services agreement with AEFC (the Interim Period). The spin-off will not result in an "assignment" of the Agreement under the Investment Company Act of 1940 and, therefore, will not cause the termination of the Agreement according to its terms. In connection with the spin-off AEFC has proposed that going forward, services under the Agreement be provided by an affiliate, RiverSource Investments, LLC (RiverSource). Independent counsel advised the Board that it would be prudent, in connection with the spin-off, to consider a new agreement with RiverSource and to seek shareholder approval of that agreement as soon as practical thereafter. Investment performance is a major factor in the evaluation process, and the Board reviewed the Fund's performance over a range of different periods by comparing its performance to relevant Lipper and broader market indices. The Board considered that over time the Fund's investment performance should be above the median for a peer group of funds with similar investment goals and noted that the Fund's investment performance in 2004 approximated the median. The Board noted that, in addition to portfolio management and investment research, AEFC provides portfolio trading, daily net asset value calculation, management of cash flow, product development, administration of its compliance and legal departments, access to distribution, accounting and recordkeeping, and reporting to the Board and shareholders. To evaluate these services, the Board referred to surveys and benchmarks established by commercial providers, trade associations and AEFC's internal processes. The Board concluded that the services provided were consistent with services provided by investment managers to comparable mutual funds. - -------------------------------------------------------------------------------- 49 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT The Board also evaluated the price paid for the services provided by AEFC, noting the existence of a pricing philosophy, established by the Board and AEFC, that seeks to maintain total Fund expenses within a range of the median expenses charged to comparable funds sold through financial advisors. The Board considered detailed information set forth in an annual report on fees and expenses, including, among other things, data showing a comparison of the Fund's expenses with median expenses paid by funds in its comparison group and data showing the Fund's contribution to AEFC's profitability. The Board determined that while the Fund's expenses are relatively high for its comparison group, the existing fee waiver has been increased to reduce further the expenses the Fund will pay. The Board considered the economies of scale that might be realized by AEFC as the Fund grew and took note of the extent to which Fund shareholders also might benefit from such growth. The Board considered that the Agreement provided for lower fees as assets increase at pre-established breakpoints and concluded that the Agreement satisfactorily provided for sharing these economies of scale. The Board took into account the Contracts Committee's discussion comparing the fees AEFC charges to the Fund with those it charges to institutional clients, noting that the relatively higher fees paid by the Fund were principally attributable to the additional services required to manage a regulated mutual fund, like the Fund, and the operation of a large mutual fund family. The Board also considered the profitability realized by AEFC and its affiliates from its relationship with the Fund. The Board took into account the services acquired by AEFC through the use of commission dollars paid by the Fund on portfolio transactions. The Board concluded that AEFC's overall costs and profitability were appropriate, although profitability may be too low on an ongoing basis. The Board noted that the fees paid by the Fund should permit AEFC to offer competitive compensation to its personnel, make necessary investments in its business and earn an appropriate profit. Based on the foregoing, the Board concluded that the fees paid to AEFC under the Agreement were fair and reasonable and determined to approve renewal of the Agreement for the Interim Period. Proxy Voting The policy of the Board is to vote all proxies of the companies in which the Fund holds investments. The procedures are stated in the Statement of Additional Information (SAI). You may obtain a copy of the SAI without charge by calling (800) 862-7919; by looking at the website americanexpress.com/funds; or by searching the website of the Securities and Exchange Commission http://www.sec.gov. You may view the Fund's voting record for all portfolio companies whose shareholders meetings were completed the previous quarter on americanexpress.com/funds or obtain a copy by calling the Fund's administrator, Board Services Corporation, collect at (612) 330-9283. In addition, information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available at http://www.sec.gov. - -------------------------------------------------------------------------------- 50 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT (logo) AMERICAN EXPRESS (R) American Express Funds 70100 AXP Financial Center Minneapolis, MN 55474 This report must be accompanied or preceded by the Fund's current prospectus. Distributed by American Express Financial Advisors Inc. Member NASD. American Express Company is separate from American Express Financial Advisors Inc. and is not a broker-dealer. -----END PRIVACY-ENHANCED MESSAGE-----