-----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, CnGPk1jY60TCKRqUXAcvAbNQ9Wu4ym+p2i6KJOrqcVXCEggu7ahZpgbD+gIrsoB0 +TuMhaHDd4NnNVofFH6vPw== 0000820027-06-000747.txt : 20060503 0000820027-06-000747.hdr.sgml : 20060503 20060503165935 ACCESSION NUMBER: 0000820027-06-000747 CONFORMED SUBMISSION TYPE: N-CSRS PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20060228 FILED AS OF DATE: 20060503 DATE AS OF CHANGE: 20060503 EFFECTIVENESS DATE: 20060503 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-CSRS SEC ACT: 1940 Act SEC FILE NUMBER: 811-02503 FILM NUMBER: 06804649 BUSINESS ADDRESS: STREET 1: 50606 AMERIPRISE FINANCIAL CENTER STREET 2: H27/5228 CITY: MINNEAPOLIS STATE: MN ZIP: 55474 BUSINESS PHONE: 6126714321 MAIL ADDRESS: STREET 1: 50606 AMERIPRISE FINANCIAL CENTER STREET 2: H27/5228 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 0000049697 S000003362 RiverSource Diversified Bond Fund C000009231 RiverSource Diversified Bond Fund Class I RDBIX C000009232 RiverSource Diversified Bond Fund Class A INBNX C000009233 RiverSource Diversified Bond Fund Class B ININX C000009234 RiverSource Diversified Bond Fund Class C AXBCX C000009235 RiverSource Diversified Bond Fund Class Y IDBYX N-CSRS 1 fixedincome-ncsrs.txt AXP FIXED INCOME SERIES, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-2503 ------------ AXP FIXED INCOME SERIES, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in charter) 50606 AXP Financial Center, Minneapolis, Minnesota 55474 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Leslie L. Ogg - 901 S. Marquette Avenue, Suite 2810, Minneapolis, MN 55402-3268 - -------------------------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: (612) 330-9283 ----------------- Date of fiscal year end: 8/31 -------------- Date of reporting period: 2/28 -------------- Semiannual Report [LOGO RiverSource(SM) Investments] RIVERSOURCE(SM) DIVERSIFIED BOND FUND - -------------------------------------------------------------------------------- SEMIANNUAL REPORT FOR THE PERIOD ENDED FEB. 28, 2006 > 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 Investments in Securities .................................................. 10 Financial Statements ....................................................... 24 Notes to Financial Statements .............................................. 27 Fund Expenses Example ...................................................... 41 Approval of Investment Management Services Agreement ....................... 43 Proxy Voting ............................................................... 47 Results of Meeting of Shareholders ......................................... 48
[Dalbar LOGO] RiverSource Funds' shareholder reports 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 | RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT FUND SNAPSHOT AT FEB. 28, 2006 - -------------------------------------------------------------------------------- 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: RDBIX Y: IDBYX Total net assets $2.259 billion Number of holdings 387 Weighted average life(1) 6.1 years Effective duration(2) 4.2 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 rating represents the average credit quality of the underlying bonds in the portfolio. - -------------------------------------------------------------------------------- SECTOR COMPOSITION - -------------------------------------------------------------------------------- Percentage of portfolio assets [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] Mortgage-Backed 41.9% U.S. Government Obligations & Agencies 24.2% Corporate Bonds* 16.2% Commercial Mortgage-Backed 10.4% Short-Term Securities** 3.7% Asset-Backed 2.0% Foreign Government 1.6%
* Includes 4.9% Telecommunication, 3.0% Consumer Discretionary, 2.8% Utilities, 1.7% Financials, 1.5% Consumer Staples, 1.1% Health Care, 0.7% Industrials, 0.3% Energy and 0.2% Materials. ** Of the 3.7%, 2.4% is due to security lending activity and 1.3% is the Fund's cash equivalent position. - -------------------------------------------------------------------------------- CREDIT QUALITY SUMMARY - -------------------------------------------------------------------------------- Percentage of bond portfolio assets AAA bonds 81.4% AA bonds 1.8 A bonds 4.9 BBB bonds 9.0 Non-investment grade bonds 2.9
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. 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 as of the date given, are subject to change at any time and are not recommendations to buy or sell any security. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT | 3 PERFORMANCE SUMMARY PERFORMANCE COMPARISON For the six-month period ended Feb. 28, 2006 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIAL.] RiverSource Diversified Bond Fund Class A (excluding sales charge) -0.08% Lehman Brothers Aggregate Bond Index(1) (unmanaged) -0.11% Lipper Intermediate Investment Grade Index(2) -0.15%
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/funds. (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. 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. - -------------------------------------------------------------------------------- SEC YIELDS - -------------------------------------------------------------------------------- At Feb. 28, 2006 by class A: 4.16% B: 3.60% C: 3.59% I: 8.11% Y: 4.53% At March 31, 2006 by class A: 4.15% B: 3.59% C: 3.58% I: 4.76% Y: 4.53% 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 5 for additional performance information. - -------------------------------------------------------------------------------- STYLE MATRIX - -------------------------------------------------------------------------------- [GRAPHIC OMITTED] Shading within the style matrix indicates areas in which the Fund generally invests. - -------------------------------------------------------------------------------- 4 | RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT QUESTIONS & ANSWERS WITH PORTFOLIO MANAGEMENT Below, RiverSource Diversified Bond Fund's portfolio management team discusses the Fund's results and positioning for the semiannual period ended Feb. 28, 2006. On March 10, 2006, the assets of RiverSource Selective Fund were merged into RiverSource Diversified Bond Fund. This reorganization was completed after shareholders of RiverSource Selective Fund approved the merger plan on Feb. 15, 2006. Q: How did RiverSource Diversified Bond Fund perform for the first half of the fiscal year? A: RiverSource Diversified Bond Fund's Class A shares fell 0.08%, excluding sales charge, for the six months ended Feb. 28, 2006. The Fund outperformed its benchmark, the Lehman Brothers Aggregate Bond Index (Lehman Index), which decreased 0.11%. The Fund also outperformed the Lipper Intermediate - -------------------------------------------------------------------------------- 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 FEB. 28, 2006 - --------------------------------------------------------------------------------------------------------------------- 6 months* -0.08% -4.83% -0.45% -5.34% -0.45% -1.43% +0.28% +0.01% - --------------------------------------------------------------------------------------------------------------------- 1 year +2.14% -2.70% +1.38% -3.53% +1.38% +0.39% +2.68% +2.31% - --------------------------------------------------------------------------------------------------------------------- 3 years +3.25% +1.59% +2.47% +1.21% +2.47% +2.47% N/A +3.42% - --------------------------------------------------------------------------------------------------------------------- 5 years +4.34% +3.33% +3.55% +3.21% +3.55% +3.55% N/A +4.46% - --------------------------------------------------------------------------------------------------------------------- 10 years +5.30% +4.79% +4.51% +4.51% N/A N/A N/A +5.45% - --------------------------------------------------------------------------------------------------------------------- Since inception +9.28% +9.11% +5.43% +5.43% +4.65% +4.65% +3.13% +6.39% - --------------------------------------------------------------------------------------------------------------------- AT MARCH 31, 2006 - --------------------------------------------------------------------------------------------------------------------- 6 months* -0.03% -4.78% -0.41% -5.30% -0.62% -1.60% +0.33% +0.05% - --------------------------------------------------------------------------------------------------------------------- 1 year +1.97% -2.88% +1.21% -3.69% +1.20% +0.22% +2.51% +2.14% - --------------------------------------------------------------------------------------------------------------------- 3 years +2.90% +1.24% +2.13% +0.86% +2.05% +2.05% N/A +3.07% - --------------------------------------------------------------------------------------------------------------------- 5 years +4.08% +3.08% +3.30% +2.95% +3.25% +3.25% N/A +4.21% - --------------------------------------------------------------------------------------------------------------------- 10 years +5.27% +4.76% +4.48% +4.48% N/A N/A N/A +5.42% - --------------------------------------------------------------------------------------------------------------------- Since inception +9.22% +9.05% +5.30% +5.30% +4.37% +4.37% +2.58% +6.25% - ---------------------------------------------------------------------------------------------------------------------
(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 affiliated funds-of-funds. (6) Sales charge is not applicable to these shares. Shares available to institutional investors only. * Not annualized. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT | 5 QUESTIONS & ANSWERS > THE PORTFOLIO BENEFITED FROM HAVING ONLY A MODEST POSITION IN MORTGAGE-BACKED SECURITIES EARLY IN THE PERIOD, WHEN THIS SECTOR STRUGGLED DUE TO HIGHER INTEREST RATES AND WEAK INVESTOR DEMAND. Investment Grade Index, representing the Fund's peer group, which declined 0.15%. Q: What market conditions were present during the semiannual period? A: The modestly negative returns of the fixed income market virtually across the board were the result of sharply rising interest rates, particularly in short-term securities. Interest rates rose during the period largely in reaction to continued policy tightening by the Federal Reserve Board (the Fed), which hiked interest rates four more times, bringing the targeted federal funds rate to 4.50% by the end of February 2006. Rates also rose in response to signs that economic growth had rebounded strongly in the third calendar quarter and looked to be gaining momentum into the fourth quarter and 2006. Counterbalancing these fixed income market headwinds, core inflation was modest, foreign demand for U.S. assets remained strong and the Fed made changes to its policy statement that seemed to open the door for a pause or a stop in its rate hikes in the near future. These factors kept yields on longer-term bonds fairly contained, prompting a slight inversion of the yield curve between two-year and ten-year Treasury notes. An inversion occurs when short-term interest rates are higher than long-term rates. The inversion -- though modest to date -- left market participants to contemplate whether the market was signaling a dramatic economic slowdown in the coming months or just reflecting robust demand for long-dated U.S. assets on the part of foreign investors, central banks and pension funds. Q: What factors most significantly affected Fund performance? A: As rates rose during the period, particularly in the two-year to five-year part of the yield curve, the Fund benefited from its comparatively short duration positioning. Duration is a measure of the Fund's sensitivity to changes in interest rates. From a sector perspective, a sizable allocation to commercial mortgage-backed securities (CMBS) and - -------------------------------------------------------------------------------- 6 | RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT QUESTIONS & ANSWERS asset-backed securities helped the Fund's results, as both of these sectors outperformed Treasuries during the six months ended Feb. 28, 2006. Exposure to high yield corporate bonds -- and effective issue selection within this sector -- further boosted the Fund's returns. High yield corporate bonds were among the best-performing fixed income sectors during the period. Tactical sector positioning within mortgage-backed securities helped Fund performance as well. The portfolio benefited from having only a modest position in mortgage-backed securities early in the period, when this sector struggled due to higher interest rates and weak investor demand. The portfolio then benefited from a shift near the end of 2005 to a more significant exposure to these securities, as mortgage-backed securities began to rebound. The Fund's position in Treasury Inflation Protected Securities (TIPS) further helped its results, as TIPS outperformed nominal Treasury securities, or non-inflation protected Treasury securities, during the semiannual period. Conversely, detracting from the Fund's results was its positioning in non-U.S. dollar bonds, or bonds denominated in foreign currencies. The U.S. dollar strengthened vs. the euro and the British pound during the period, eroding the value of the portfolio's non-U.S. dollar bond holdings in U.S. dollar terms. Remember, a strengthening U.S. dollar decreases the value of the Fund's foreign currency denominated securities when expressed in U.S. dollar terms and vice versa. Also, defensive positioning within the Fund's allocation to mortgage-backed securities detracted from its results -- in particular, exposure to higher-coupon securities, adjustable rate mortgages (ARMs) and mortgages with attractive structural attributes. These securities overall underperformed the mortgage sector as a whole. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT | 7 QUESTIONS & ANSWERS > WE INTEND TO POSITION THE FUND FOR ONGOING U.S. ECONOMIC EXPANSION AND STILL HIGHER INTEREST RATES, AS THESE THEMES ARE LIKELY TO CONTINUE TO WEIGH ON THE FIXED INCOME MARKETS FOR SOME TIME. Q: What changes did you make to the Fund and how is it currently positioned? A: We maintained a defensive duration position for the majority of the period of approximately half a year shorter than the Lehman Index. At the end of the period -- due to higher rates -- we became less defensive and moved the Fund's duration to approximately a quarter of a year shorter than the Lehman Index. We added to the Fund's exposure to two-year U.S. Treasuries, based on our view that short-term maturities had become an increasingly attractive value. We maintained the Fund's more moderate allocation to ten-year Treasuries and its more significant position in 25- to 30-year maturity bonds. As mentioned earlier, we also added to the Fund's allocation to mortgage-backed securities -- primarily in higher coupon securities -- upon weakness in the sector. We had started to see better value in these securities, and we believed they looked increasingly attractive. We sold the Fund's TIPS holdings, as these securities reached the price targets we had set for them. In addition, we further reduced the Fund's already modest position in corporate bonds. During 2005, corporate bonds saw the downgrade to "junk" status of its two largest issuers -- Ford and General Motors -- and a general rise in negative event risk, such as merger and acquisition activity, leveraged buyouts and share buybacks. In all, the Fund's portfolio turnover was 130% for the semiannual period. 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 expansion and still higher interest rates, as these themes are likely to continue to weigh on the fixed income markets for some time. We expect the combination of solid economic growth and higher inflation risks to push the Fed to raise rates higher than is implied by prevailing bond yields. We believe the recent yield curve inversion -- and the resultant fears of an impending recession -- are fleeting and generally not supported by recent - -------------------------------------------------------------------------------- 8 | RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT QUESTIONS & ANSWERS economic data. Though we believe the Fed is likely to pause when the targeted federal funds rate reaches 5% or so, we also believe the economy will continue to expand at a brisk pace for at least the first three quarters of 2006. Strong economic growth -- and little excess productive capacity -- will, in our view, force a revival of inflation pressures, in turn putting upward pressure on longer-term interest rates. Based on this view, we intend to maintain the Fund's duration shorter than that of the Lehman Index for the near term. We believe fixed income yields will move materially higher in the months ahead. In the non-Treasury sectors, we intend to maintain a less-than-Lehman Index allocation to corporate bonds. In mortgages, we plan to remain defensively positioned, emphasizing premium coupons, ARMs and attractive structural attributes. We intend to maintain the Fund's sizable positions in CMBS and asset-backed securities, as valuations remain attractive in those sectors. We also intend to maintain the Fund's modest positions in high yield corporate bonds and in non-U.S. dollar bonds. Within high yield corporate bonds, we continue to emphasize securities rated BB and bonds that in our view have investment-grade quality fundamentals. As for non-U.S. dollar bonds, we believe sustained dollar strength seems very unlikely, so we are maintaining our current position. We continue to monitor job creation and inflation numbers, as they remain key indicators for the economy in the coming months. As always, we will maintain a disciplined focus on individual security selection. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT | 9 INVESTMENTS IN SECURITIES RiverSource Diversified Bond Fund FEB. 28, 2006 (UNAUDITED) (Percentages represent value of investments compared to net assets) - -------------------------------------------------------------------------------- BONDS (101.5%) - --------------------------------------------------------------------------------
COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) SOVEREIGN (1.7%) Bundesrepublik Deutschland (European Monetary Unit) 01-04-07 6.00% 18,818,000(c) $ 23,010,522 United Kingdom Treasury (British Pound) 12-07-06 7.50 8,906,000(c) 15,985,745 -------------- Total 38,996,267 - -------------------------------------------------------------------------------- U.S. GOVERNMENT OBLIGATIONS & AGENCIES (25.6%) Federal Farm Credit Bank 10-10-08 4.25 9,800,000 9,651,344 Federal Home Loan Bank 01-18-08 4.63 36,820,000 36,630,009 04-18-08 4.13 25,615,000 25,224,141 Federal Home Loan Mtge Corp 06-15-08 3.88 36,935,000 36,112,458 10-15-08 5.13 21,950,000 22,058,170 12-19-08 4.63 8,000,000 7,938,320 03-18-09 3.76 6,890,000 6,649,608 07-12-10 4.13 47,870,000 46,371,047 Federal Natl Mtge Assn 01-15-08 4.63 5,215,000 5,183,848 08-15-08 3.25 86,170,000 82,934,316 10-15-08 4.50 11,800,000 11,678,849 U.S. Treasury 06-30-07 3.63 6,745,000 6,649,619 11-30-07 4.25 4,131,000 4,099,855 01-15-11 4.25 10,750,000 10,583,698 02-28-11 4.50 5,660,000(g) 5,634,796 02-28-11 4.50 5,985,000 5,958,349 11-15-15 4.50 54,095,000(p) 53,706,165 02-15-16 4.50 46,565,000(p) 46,390,381 08-15-23 6.25 79,219,000(n) 93,670,287 02-15-26 6.00 50,482,000 59,004,775 02-15-31 5.38 1,050,000 1,168,822 -------------- Total 577,298,857 - -------------------------------------------------------------------------------- ASSET-BACKED (2.0%) Aesop Funding II LLC Series 2004-2A Cl A1 (FGIC) 04-20-08 2.76 2,000,000(d,k) 1,957,327 - -------------------------------------------------------------------------------- BONDS (CONTINUED) - -------------------------------------------------------------------------------- COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) ASSET-BACKED (CONT.) AmeriCredit Automobile Receivables Trust Series 2005-DA Cl A3 12-06-10 4.87% $ 2,200,000 $ 2,190,375 ARG Funding Series 2005-1A Cl A3 (MBIA) 04-20-11 4.29 6,300,000(d,k) 6,078,761 Capital Auto Receivables Asset Trust Series 2004-1 09-15-10 2.84 3,000,000 2,908,699 Capital One Auto Finance Trust Series 2005-BSS Cl A3 11-15-09 4.08 4,700,000 4,618,737 Carmax Auto Owner Trust Series 2005-1 Cl A4 03-15-10 4.35 2,400,000 2,362,144 Countrywide Asset-Backed Ctfs Series 2005-10 Cl AF6 02-25-36 4.92 1,375,000 1,324,376 Long Beach Auto Receivables Trust Series 2004-C Cl A3 (FSA) 09-15-09 3.40 4,000,000(k) 3,959,920 Metris Master Trust Series 2004-2 Cl D 10-20-10 7.82 1,200,000(d,i) 1,212,240 Metris Master Trust Series 2005-1A Cl D 03-21-11 6.47 1,375,000(d,i) 1,378,309 Morgan Stanley Auto Loan Trust Series 2004-HB2 Cl A3 03-16-09 2.94 4,300,000 4,210,879 Popular ABS Mtge Pass-Through Trust Series 2005-A Cl AF2 06-25-35 4.49 2,660,000 2,604,119 Renaissance Home Equity Loan Trust Series 2005-4 Cl A3 02-25-36 5.57 3,420,000 3,418,461 Residential Asset Securities Series 2006-KS1 Cl A2 02-25-36 4.72 7,225,000(i) 7,222,745 -------------- Total 45,447,092 - --------------------------------------------------------------------------------
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 10 | RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT - -------------------------------------------------------------------------------- BONDS (CONTINUED) - --------------------------------------------------------------------------------
COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) COMMERCIAL MORTGAGE-BACKED (11.0%)(F) Banc of America Commercial Mtge Series 2005-1 Cl A4 11-10-42 4.88% $ 3,600,000 $ 3,567,001 Banc of America Commercial Mtge Series 2005-6 Cl A4 09-10-47 5.18 5,875,000 5,852,870 Banc of America Large Loan Series 2005-BOCA Cl A1 12-15-16 4.69 2,824,731(d,i) 2,825,363 Banc of America Large Loan Series 2005-BOCA Cl A2 12-15-16 4.74 3,700,000(d,i) 3,701,703 Bear Stearns Commercial Mtge Securities Series 2004-T16 Cl A3 02-13-46 4.03 3,240,000 3,117,101 Bear Stearns Commercial Mtge Securities Series 2005-PW10 Cl A4 12-11-40 5.41 4,425,000 4,456,531 Bear Stearns Commercial Mtge Securities Series 2005-PWR8 Cl A1 06-11-41 4.21 6,939,351 6,793,000 Bear Stearns Commercial Mtge Securities Series 2005-T20 Cl E 10-12-42 5.16 2,400,000 2,346,000 California State Teachers' Retirement System Trust Series 2002-C6 Cl A3 11-20-14 4.46 6,574,344(d) 6,425,621 CDC Commercial Mtge Trust Series 2002-FX1 Cl A2 11-15-30 5.68 4,500,000 4,584,350 CDC Commercial Mtge Trust Series 2006-CD2 01-15-46 5.42 6,500,000(g) 6,532,442 Citigroup Commercial Mtge Trust Series 2005-EMG Cl A1 09-20-51 4.15 7,587,065(d) 7,433,025 Citigroup/Deutsche Bank Commercial Mtge Trust Series 2005-CD1 Cl A4 07-15-44 5.23 7,000,000 7,005,319 Citigroup/Deutsche Bank Commercial Mtge Trust Series 2005-CD1 Cl ASB 07-15-44 5.23 2,225,000 2,224,437 Commercial Mtge Pass-Through Ctfs Series 2006-CN2A Cl BFL 02-05-19 4.90 1,950,000(d,i) 1,950,000 CS First Boston Mtge Securities Series 2002-CKS4 Cl A1 11-15-36 4.49 4,760,372 4,656,573 - -------------------------------------------------------------------------------- BONDS (CONTINUED) - -------------------------------------------------------------------------------- COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) COMMERCIAL MORTGAGE-BACKED (CONT.) CS First Boston Mtge Securities Series 2005-C5 Cl A2 08-15-38 5.10% $ 2,225,000 $ 2,213,507 Federal Natl Mtge Assn #385683 02-01-13 4.83 6,273,695 6,131,474 Federal Natl Mtge Assn #555806 10-01-13 5.11 533,704 529,652 GE Capital Commercial Mtge Series 2004-C2 Cl A2 03-10-40 4.12 3,000,000 2,890,320 GE Capital Commercial Mtge Series 2005-C3 Cl A1 07-10-45 4.59 4,381,131 4,316,702 General Electric Capital Assurance Series 2003-1 Cl A3 05-12-35 4.77 7,650,000(d) 7,478,546 GMAC Commercial Mtge Securities Series 1999-C1 Cl B 05-15-33 6.30 5,800,000 5,962,669 GMAC Commercial Mtge Securities Series 2004-C3 Cl A4 12-10-41 4.55 4,700,000 4,533,023 GMAC Commercial Mtge Securities Series 2005-C1 Cl A1 05-10-43 4.21 3,425,693 3,355,692 Greenwich Capital Commercial Funding Series 2004-GG1 Cl A5 06-10-36 4.88 2,400,000 2,361,656 GS Mtge Securities II Series 2004-GG2 Cl A4 08-10-38 4.96 4,300,000 4,239,141 GS Mtge Securities II Series 2005-GG4 Cl A1 07-10-39 4.37 5,642,378 5,531,227 JPMorgan Chase Commercial Mtge Securities Series 2002-CIB5 Cl A1 10-12-37 4.37 5,082,174 4,978,919 JPMorgan Chase Commercial Mtge Securities Series 2003-CB6 Cl A1 07-12-37 4.39 7,311,135 7,084,929 JPMorgan Chase Commercial Mtge Securities Series 2003-CB6 Cl A2 07-12-37 5.26 4,200,000 4,188,070 JPMorgan Chase Commercial Mtge Securities Series 2003-LN1 Cl A1 10-15-37 4.13 3,358,808 3,225,648
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT | 11 - -------------------------------------------------------------------------------- BONDS (CONTINUED) - --------------------------------------------------------------------------------
COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) COMMERCIAL MORTGAGE-BACKED (CONT.) JPMorgan Chase Commercial Mtge Securities Series 2003-ML1A Cl A1 03-12-39 3.97% $ 2,964,557 $ 2,855,200 JPMorgan Chase Commercial Mtge Securities Series 2004-CBX Cl A3 01-12-37 4.18 3,000,000 2,896,449 JPMorgan Chase Commercial Mtge Securities Series 2005-LDP2 Cl A1 07-15-42 4.33 5,338,657 5,244,003 JPMorgan Chase Commercial Mtge Securities Series 2005-LDP5 Cl A4 12-15-44 5.18 8,675,000 8,656,674 LB-UBS Commercial Mtge Trust Series 2002-C2 Cl A3 06-15-26 5.39 7,360,000 7,406,289 LB-UBS Commercial Mtge Trust Series 2002-C4 Cl A4 09-15-26 4.56 5,200,000 5,054,077 LB-UBS Commercial Mtge Trust Series 2002-C4 Cl A5 09-15-31 4.85 6,000,000 5,862,540 LB-UBS Commercial Mtge Trust Series 2004-C2 Cl A3 03-15-29 3.97 3,275,000 3,068,511 LB-UBS Commercial Mtge Trust Series 2004-C4 Cl A3 06-15-29 4.98 3,000,000 2,993,417 LB-UBS Commercial Mtge Trust Series 2004-C6 Cl A4 08-15-29 4.58 4,425,000 4,293,830 LB-UBS Commercial Mtge Trust Series 2004-C7 Cl A2 10-15-29 3.99 5,400,000 5,188,212 LB-UBS Commercial Mtge Trust Series 2004-C8 Cl A2 12-15-29 4.20 5,800,000 5,616,256 LB-UBS Commercial Mtge Trust Series 2005-C3 Cl A1 07-15-30 4.39 2,597,917 2,565,132 LB-UBS Commercial Mtge Trust Series 2005-C5 Cl A2 09-15-30 4.89 4,600,000 4,539,786 Merrill Lynch Mtge Trust Series 2005-MCP1 Cl A1 06-12-43 4.22 4,227,426 4,141,781 Morgan Stanley Capital I Series 2003-IQ4 Cl A1 05-15-40 3.27 2,835,277 2,707,260 - -------------------------------------------------------------------------------- BONDS (CONTINUED) - -------------------------------------------------------------------------------- COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) COMMERCIAL MORTGAGE-BACKED (CONT.) Morgan Stanley Capital I Series 2003-T11 Cl A2 06-13-41 4.34% $ 3,325,000 $ 3,236,603 Morgan Stanley Capital I Series 2004-HQ4 Cl A5 04-14-40 4.59 3,600,000 3,478,644 Morgan Stanley Capital I Series 2005-IQ10 Cl A4A 09-15-42 5.23 4,525,000 4,497,323 Morgan Stanley, Dean Witter Capital I Series 2002-TOP7 Cl A2 01-15-39 5.98 10,900,000 11,309,953 Prudential Commercial Mtge Trust Series 2003-PWR1 Cl A1 02-11-36 3.67 4,221,599 4,034,516 Wachovia Bank Commercial Mtge Trust Series 2005-C16 Cl A2 10-15-41 4.38 2,000,000 1,942,917 Wachovia Bank Commercial Mtge Trust Series 2005-C20 Cl A5 07-15-42 5.09 3,417,000 3,379,760 -------------- Total 247,461,644 - -------------------------------------------------------------------------------- MORTGAGE-BACKED (44.2%)(F,L) Adjustable Rate Mtge Trust Collateralized Mtge Obligation Series 2005-12 Cl 2A1 03-25-36 5.74 7,737,915(h) 7,749,157 Adjustable Rate Mtge Trust Collateralized Mtge Obligation Series 2005-3 Cl 7A1 07-25-35 5.09 5,573,552(h) 5,501,626 Adjustable Rate Mtge Trust Collateralized Mtge Obligation Series 2006-1 Cl 2A1 03-25-36 5.99 8,775,000(h) 8,836,355 Banc of America Funding Collateralized Mtge Obligation Series 2006-A Cl 3A2 02-20-36 5.96 6,079,190(h) 6,126,303 Banc of America Mtge Securities Collateralized Mtge Obligation Series 2004-E Cl B1 06-25-34 4.03 2,928,895(h) 2,949,603 Banc of America Mtge Securities Collateralized Mtge Obligation Series 2004-F Cl B1 07-25-34 4.13 5,269,071(h) 5,095,772
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 12 | RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT - -------------------------------------------------------------------------------- BONDS (CONTINUED) - --------------------------------------------------------------------------------
COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Bank of America Alternative Loan Trust Collateralized Mtge Obligation Series 2003-11 Cl 1A1 01-25-34 6.00% $ 6,547,136 $ 6,500,914 Bank of America Alternative Loan Trust Collateralized Mtge Obligation Series 2003-11 Cl 4A1 01-25-19 4.75 3,435,172 3,334,264 Bank of America Alternative Loan Trust Series 2004-3 Cl 1A1 04-25-34 6.00 10,446,173 10,563,693 Bear Stearns Adjustable Rate Mtge Trust Collateralized Mtge Obligation Series 2004-10 Cl 13A1 01-25-35 5.01 6,667,370(h) 6,547,671 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2003-11T1 Cl A1 07-25-18 4.75 3,988,158 3,871,006 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2005-54CB Cl 2A3 11-25-35 5.50 5,331,187 5,264,963 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2005-54CB Cl 3A7 11-25-35 5.50 5,395,690 5,325,220 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2005-64CB Cl 1A1 12-25-35 5.50 9,445,065 9,401,874 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2005-6CB Cl 1A1 04-25-35 7.50 5,382,499 5,557,736 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2005-85CB Cl 2A2 02-25-36 5.50 3,444,483 3,427,188 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2006-2CB Cl A11 03-25-36 6.00 7,955,998 7,929,786 Countrywide Home Loans Collateralized Mtge Obligation Series 2004-12 Cl 1M 08-25-34 4.59 3,541,042(h) 3,437,149 - -------------------------------------------------------------------------------- BONDS (CONTINUED) - -------------------------------------------------------------------------------- COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Countrywide Home Loans Collateralized Mtge Obligation Series 2005-R2 Cl 2A1 06-25-35 7.00% $ 7,105,082(d) $ 7,362,139 Countrywide Home Loans Collateralized Mtge Obligation Series 2006-HYB1 Cl 1A1 03-20-36 5.42 5,188,002(h) 5,169,947 CS First Boston Mtge Securities Collateralized Mtge Obligation Series 2004-AR5 Cl CB1 06-25-34 4.39 3,354,699(h) 3,251,685 CS First Boston Mtge Securities Collateralized Mtge Obligation Series 2005-10 Cl 4A1 11-25-35 6.50 8,370,930 8,495,726 CS First Boston Mtge Securities Collateralized Mtge Obligation Series 2005-12 Cl 3A1 01-25-36 7.00 9,845,482 10,083,826 CS First Boston Mtge Securities Collateralized Mtge Obligation Series 2005-8 Cl 7A1 09-25-35 7.00 10,596,601 10,812,752 CS First Boston Mtge Securities Series 2003-29 Cl 8A1 11-25-18 6.00 3,125,906 3,122,929 Downey Savings & Loan Assn Mtge Loan Trust Collateralized Mtge Obligation Interest Only Series 2005-AR5 Cl X1 08-19-45 6.38 65,461,783(j) 920,556 Federal Home Loan Mtge Corp #290970 04-01-17 8.00 15,138 16,139 Federal Home Loan Mtge Corp #C00356 08-01-24 8.00 543,919 582,720 Federal Home Loan Mtge Corp #C00666 10-01-28 7.00 67,626 70,040 Federal Home Loan Mtge Corp #C53878 12-01-30 5.50 2,163,110 2,152,955 Federal Home Loan Mtge Corp #C78031 04-01-33 5.50 10,958,935 10,912,531 Federal Home Loan Mtge Corp #C79930 06-01-33 5.50 7,140,209 7,094,915 Federal Home Loan Mtge Corp #C90767 12-01-23 6.00 9,989,280 10,149,952 Federal Home Loan Mtge Corp #D96300 10-01-23 5.50 6,167,946 6,172,622
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT | 13 - -------------------------------------------------------------------------------- BONDS (CONTINUED) - --------------------------------------------------------------------------------
COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Home Loan Mtge Corp #E01127 02-01-17 6.50% $ 1,668,109 $ 1,709,433 Federal Home Loan Mtge Corp #E01419 05-01-18 5.50 3,998,408 4,016,152 Federal Home Loan Mtge Corp #E90216 05-01-17 6.00 1,894,415 1,926,564 Federal Home Loan Mtge Corp #E96516 05-01-13 4.50 2,778,369 2,702,943 Federal Home Loan Mtge Corp #E98725 08-01-18 5.00 12,648,134 12,511,030 Federal Home Loan Mtge Corp #E99684 10-01-18 5.00 8,494,319 8,400,812 Federal Home Loan Mtge Corp #G01108 04-01-30 7.00 4,258,594 4,407,097 Federal Home Loan Mtge Corp #G01535 04-01-33 6.00 7,723,539 7,851,927 Federal Home Loan Mtge Corp #G30225 02-01-23 6.00 13,077,649 13,295,863 Federal Home Loan Mtge Corp Collateralized Mtge Obligation 01-15-18 6.50 3,514,873 3,654,341 03-15-22 7.00 1,266,569 1,264,664 10-15-27 5.00 21,553,000 21,261,224 06-15-28 5.00 13,925,000 13,733,304 12-15-28 5.50 6,005,000 5,996,389 02-15-33 5.50 8,687,494 8,709,750 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only 02-15-14 17.16 2,988,591(j) 162,848 10-15-22 14.56 8,936,496(j) 500,341 Federal Natl Mtge Assn 03-01-21 6.00 6,000,000(g) 6,114,372 03-01-36 6.00 24,725,000(g) 24,949,059 03-01-36 6.50 23,000,000(g) 23,546,251 04-01-36 6.00 9,000,000(g) 9,078,750 Federal Natl Mtge Assn #190899 04-01-23 8.50 599,496 639,488 Federal Natl Mtge Assn #190944 05-01-24 6.00 7,343,982 7,429,694 Federal Natl Mtge Assn #190988 06-01-24 9.00 521,019 560,977 Federal Natl Mtge Assn #231309 09-01-23 6.50 163,589 168,333 Federal Natl Mtge Assn #231310 09-01-23 6.50 406,125 417,903 Federal Natl Mtge Assn #250330 09-01-25 8.00 364,893 389,636 - -------------------------------------------------------------------------------- BONDS (CONTINUED) - -------------------------------------------------------------------------------- COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #250495 03-01-26 7.00% $ 820,265 $ 851,404 Federal Natl Mtge Assn #252498 06-01-29 7.00 7,593 7,867 Federal Natl Mtge Assn #253883 08-01-16 6.00 4,001,070 4,080,172 Federal Natl Mtge Assn #254608 12-01-17 6.50 1,082,508 1,112,054 Federal Natl Mtge Assn #254802 07-01-18 4.50 3,625,698 3,531,130 Federal Natl Mtge Assn #254916 09-01-23 5.50 9,419,583 9,419,756 Federal Natl Mtge Assn #268071 01-01-24 6.50 158,124 162,710 Federal Natl Mtge Assn #303226 02-01-25 8.00 164,925 176,149 Federal Natl Mtge Assn #313049 08-01-11 8.50 1,455,275 1,518,280 Federal Natl Mtge Assn #323933 09-01-29 7.00 5,137,147 5,322,811 Federal Natl Mtge Assn #455791 01-01-29 6.50 586,430 603,146 Federal Natl Mtge Assn #489888 05-01-29 6.50 2,883,056 2,964,129 Federal Natl Mtge Assn #496029 01-01-29 6.50 3,707,896 3,814,628 Federal Natl Mtge Assn #50700 03-01-08 7.00 1,069,809 1,087,499 Federal Natl Mtge Assn #545342 04-01-13 7.00 3,526,417 3,584,730 Federal Natl Mtge Assn #545869 07-01-32 6.50 1,986,652 2,045,815 Federal Natl Mtge Assn #545910 08-01-17 6.00 6,497,557 6,636,241 Federal Natl Mtge Assn #555343 08-01-17 6.00 1,602,223 1,633,899 Federal Natl Mtge Assn #555375 04-01-33 6.00 21,959,421 22,310,210 Federal Natl Mtge Assn #555458 05-01-33 5.50 20,543,055 20,401,924 Federal Natl Mtge Assn #555734 07-01-23 5.00 6,966,168 6,832,945 Federal Natl Mtge Assn #555740 08-01-18 4.50 7,455,727 7,260,888 Federal Natl Mtge Assn #555794 09-01-28 7.50 1,073,014 1,126,078 Federal Natl Mtge Assn #567840 10-01-30 7.00 1,794,098 1,858,940
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 14 | RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT - -------------------------------------------------------------------------------- BONDS (CONTINUED) - --------------------------------------------------------------------------------
COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #587859 12-01-16 5.50% $ 6,094,385 $ 6,127,982 Federal Natl Mtge Assn #597374 09-01-31 7.00 894,347 933,900 Federal Natl Mtge Assn #606882 10-01-31 7.00 1,168,706 1,210,204 Federal Natl Mtge Assn #638969 03-01-32 5.50 1,597,589 1,587,874 Federal Natl Mtge Assn #646147 06-01-32 7.00 2,981,313 3,103,810 Federal Natl Mtge Assn #646446 06-01-17 6.50 1,369,276 1,406,649 Federal Natl Mtge Assn #649068 06-01-17 6.50 2,530,863 2,607,020 Federal Natl Mtge Assn #649263 08-01-17 6.50 2,549,186 2,625,898 Federal Natl Mtge Assn #654208 10-01-32 6.50 2,495,544 2,560,279 Federal Natl Mtge Assn #654682 10-01-32 6.00 1,487,894 1,509,522 Federal Natl Mtge Assn #654689 11-01-32 6.00 1,738,076 1,762,860 Federal Natl Mtge Assn #656908 09-01-32 6.50 2,487,483 2,571,569 Federal Natl Mtge Assn #662809 09-01-17 6.50 2,831,530 2,908,815 Federal Natl Mtge Assn #667787 02-01-18 5.50 2,403,591 2,415,831 Federal Natl Mtge Assn #670382 09-01-32 6.00 13,508,532 13,658,183 Federal Natl Mtge Assn #670387 08-01-32 7.00 1,346,120 1,393,948 Federal Natl Mtge Assn #678028 09-01-17 6.00 1,218,330 1,242,416 Federal Natl Mtge Assn #678065 02-01-33 6.50 565,431 581,225 Federal Natl Mtge Assn #678937 01-01-18 5.50 3,610,644 3,632,861 Federal Natl Mtge Assn #678941 02-01-18 5.50 4,589,329 4,617,690 Federal Natl Mtge Assn #678944 01-01-18 5.50 2,188,011 2,201,525 Federal Natl Mtge Assn #679095 04-01-18 5.00 6,611,748 6,536,246 Federal Natl Mtge Assn #681400 03-01-18 5.50 6,527,475 6,568,085 Federal Natl Mtge Assn #683274 02-01-18 5.50 3,109,495 3,128,805 - -------------------------------------------------------------------------------- BONDS (CONTINUED) - -------------------------------------------------------------------------------- COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #684586 03-01-33 6.00% $ 4,435,543 $ 4,496,081 Federal Natl Mtge Assn #687051 01-01-33 6.00 12,182,883 12,296,055 Federal Natl Mtge Assn #689093 07-01-28 5.50 2,609,102 2,593,236 Federal Natl Mtge Assn #694628 04-01-33 5.50 5,209,590 5,182,374 Federal Natl Mtge Assn #694795 04-01-33 5.50 6,757,973 6,722,131 Federal Natl Mtge Assn #694988 03-01-33 5.50 13,808,209 13,721,811 Federal Natl Mtge Assn #695202 03-01-33 6.50 5,270,540 5,399,815 Federal Natl Mtge Assn #695385 03-01-18 5.50 8,008,483 8,085,719 Federal Natl Mtge Assn #695909 05-01-18 5.50 2,935,136 2,952,811 Federal Natl Mtge Assn #709901 06-01-18 5.00 6,967,127 6,891,021 Federal Natl Mtge Assn #710823 05-01-33 5.50 810,523 806,337 Federal Natl Mtge Assn #712057 07-01-18 4.50 4,473,880 4,357,189 Federal Natl Mtge Assn #720006 07-01-33 5.50 7,911,071 7,855,035 Federal Natl Mtge Assn #720378 06-01-18 4.50 5,890,226 5,736,593 Federal Natl Mtge Assn #723687 08-01-28 5.50 4,672,010 4,643,600 Federal Natl Mtge Assn #725232 03-01-34 5.00 19,679,246 19,190,169 Federal Natl Mtge Assn #725425 04-01-34 5.50 22,195,177 22,037,965 Federal Natl Mtge Assn #725684 05-01-18 6.00 9,858,675 10,053,923 Federal Natl Mtge Assn #725719 07-01-33 4.84 5,867,716(h) 5,740,386 Federal Natl Mtge Assn #725737 08-01-34 4.54 5,976,199(h) 5,924,087 Federal Natl Mtge Assn #725813 12-01-33 6.50 14,121,078 14,467,440 Federal Natl Mtge Assn #730153 08-01-33 5.50 794,752 789,123 Federal Natl Mtge Assn #735057 01-01-19 4.50 9,159,593 8,920,686 Federal Natl Mtge Assn #735160 12-01-34 4.34 2,252,328(h) 2,189,646
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT | 15 - -------------------------------------------------------------------------------- BONDS (CONTINUED) - --------------------------------------------------------------------------------
COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #743262 10-01-18 5.00% $ 4,303,720 $ 4,256,098 Federal Natl Mtge Assn #747786 10-01-18 6.00 2,307,475 2,353,139 Federal Natl Mtge Assn #753074 12-01-28 5.50 9,261,365 9,205,048 Federal Natl Mtge Assn #753091 12-01-33 5.50 5,448,317 5,409,726 Federal Natl Mtge Assn #753919 12-01-33 4.94 7,042,311(h) 6,894,701 Federal Natl Mtge Assn #759342 01-01-34 6.50 1,090,057 1,127,077 Federal Natl Mtge Assn #765759 12-01-18 5.00 5,394,039 5,332,443 Federal Natl Mtge Assn #766641 03-01-34 5.00 5,241,451 5,102,682 Federal Natl Mtge Assn #776962 04-01-29 5.00 16,423,617 15,958,462 Federal Natl Mtge Assn #790759 09-01-34 4.81 1,450,965(h) 1,433,382 Federal Natl Mtge Assn #793188 07-01-34 6.50 7,882,041 8,072,425 Federal Natl Mtge Assn #811925 04-01-35 4.92 5,690,009(h) 5,643,833 Federal Natl Mtge Assn #821378 05-01-35 5.04 5,402,091(h) 5,380,022 Federal Natl Mtge Assn #837258 09-01-35 4.92 3,289,913(h) 3,252,375 Federal Natl Mtge Assn #845070 12-01-35 5.10 5,711,253(h) 5,667,262 Federal Natl Mtge Assn Collateralized Mtge Obligation 12-25-26 8.00 3,448,277 3,657,017 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only 12-25-12 0.21 2,205,470(j) 86,925 12-25-31 9.42 2,647,531(j) 431,039 First Horizon Alternative Mtge Securities Collateralized Mtge Obligation Series 2005-AA2 Cl 2A1 04-25-35 5.41 5,231,852(i) 5,247,024 First Horizon Alternative Mtge Securities Collateralized Mtge Obligation Series 2005-AA3 Cl 3A1 05-25-35 5.39 5,325,906(i) 5,308,756 Govt Natl Mtge Assn #345538 02-15-24 8.00 181,643 194,542 - -------------------------------------------------------------------------------- BONDS (CONTINUED) - -------------------------------------------------------------------------------- COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Govt Natl Mtge Assn #398831 08-15-26 8.00% $ 221,927 $ 237,949 Govt Natl Mtge Assn #425004 10-15-33 5.50 4,251,235 4,267,856 Govt Natl Mtge Assn #426170 06-15-26 8.00 178,399 191,279 Govt Natl Mtge Assn #604708 10-15-33 5.50 9,037,824 9,073,160 Govt Natl Mtge Assn #606844 09-15-33 5.00 11,776,196 11,604,064 Govt Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2002-70 Cl IC 08-20-32 16.68 8,388,752(j) 1,338,447 Govt Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2002-80 Cl CI 01-20-32 20.00 1,753,535(j) 170,339 Harborview Mtge Loan Trust Collateralized Mtge Obligation Series 2004-3 Cl B1 05-19-34 4.39 4,245,992(h) 4,128,762 Harborview Mtge Loan Trust Collateralized Mtge Obligation Series 2005-16 Cl 3A1B 01-19-36 4.91 8,757,179(h) 8,753,330 IndyMac Index Mtge Loan Trust Collateralized Mtge Obligation Interest Only Series 2005-AR8 Cl AX1 04-25-35 4.50 153,074,399(j) 1,674,251 IndyMac Index Mtge Loan Trust Collateralized Mtge Obligation Series 2005-AR25 Cl 1A21 12-25-35 5.90 8,169,298(h) 8,218,761 IndyMac Index Mtge Loan Trust Collateralized Mtge Obligation Series 2005-AR3 Cl 3A1 04-25-35 5.32 2,978,368(h) 2,954,735 Master Adjustable Rate Mtge Trust Collateralized Mtge Obligation Series 2004-5 Cl B1 07-25-34 4.40 4,139,217(h) 4,069,719
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 16 | RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT - -------------------------------------------------------------------------------- BONDS (CONTINUED) - --------------------------------------------------------------------------------
COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Master Alternative Loans Trust Collateralized Mtge Obligation Series 2004-2 Cl 4A1 02-25-19 5.00% $ 5,660,737 $ 5,600,592 Master Alternative Loans Trust Collateralized Mtge Obligation Series 2004-4 Cl 2A1 05-25-34 6.00 1,381,654 1,382,676 Master Alternative Loans Trust Collateralized Mtge Obligation Series 2004-7 Cl 8A1 08-25-19 5.00 4,477,903 4,393,226 Master Alternative Loans Trust Collateralized Mtge Obligation Series 2004-8 Cl 7A1 09-25-19 5.00 6,112,909 5,997,559 Structured Adjustable Rate Mtge Loan Trust Collateralized Mtge Obligation Series 2004-3AC Cl B1 03-25-34 4.93 5,548,810(h) 5,487,773 Structured Adjustable Rate Mtge Loan Trust Collateralized Mtge Obligation Series 2004-5 Cl B1 05-25-34 4.60 4,230,304(h) 4,121,712 Structured Asset Securities Collateralized Mtge Obligation Series 2003-33H Cl 1A1 10-25-33 5.50 12,765,795 12,535,499 Washington Mutual Alternative Mtge Loan Trust Pass-Through Certificates Collateralized Mtge Obligation Interest Only Series 2005-AR1 Cl X2 12-25-35 7.10 53,556,090(j) 610,874 Washington Mutual Collateralized Mtge Obligation Series 2003-AR10 Cl A7 10-25-33 4.07 6,650,000(h) 6,451,017 Washington Mutual Collateralized Mtge Obligation Series 2004-CB2 Cl 6A 07-25-19 4.50 4,042,723 3,861,650 Washington Mutual Collateralized Mtge Obligation Series 2004-CB4 Cl 22A 12-25-19 6.00 4,549,503 4,585,328 - -------------------------------------------------------------------------------- BONDS (CONTINUED) - -------------------------------------------------------------------------------- COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Washington Mutual Collateralized Mtge Obligation Series 2005-AR17 Cl A1C1 12-25-45 4.77% $ 4,506,666(h) $ 4,506,656 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2005-10 Cl A1 10-25-35 5.00 11,868,332 11,343,871 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2005-5 Cl 2A1 05-25-35 5.50 10,279,464 10,118,847 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2005-AR1 Cl 1A1 02-25-35 4.55 8,965,589(h) 8,815,954 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2005-AR16 Cl 6A3 10-25-35 5.00 6,352,399(h) 6,251,332 -------------- Total 998,241,890 - -------------------------------------------------------------------------------- AEROSPACE & DEFENSE (0.1%) DRS Technologies 02-01-16 6.63 1,645,000 1,653,225 L-3 Communications 06-15-12 7.63 1,340,000 1,410,350 -------------- Total 3,063,575 - -------------------------------------------------------------------------------- AUTOMOTIVE (0.2%) DaimlerChrysler NA Holding 11-15-13 6.50 2,125,000 2,193,616 GMAC 08-28-07 6.13 2,475,000 2,357,477 -------------- Total 4,551,093 - -------------------------------------------------------------------------------- BANKING (1.0%) Banknorth Group Sr Nts 05-01-08 3.75 3,960,000 3,852,367 HSBC Bank USA Sub Nts 08-15-35 5.63 8,420,000 8,271,134 Sovereign Bank Sub Nts 03-15-13 5.13 1,525,000 1,489,640 Washington Mutual Bank Sub Nts 08-15-14 5.65 8,976,000 9,048,257 -------------- Total 22,661,398 - --------------------------------------------------------------------------------
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT | 17 - -------------------------------------------------------------------------------- BONDS (CONTINUED) - --------------------------------------------------------------------------------
COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) CHEMICALS (0.1%) Airgas 10-01-11 9.13% $ 1,500,000 $ 1,591,875 MacDermid 07-15-11 9.13 575,000 606,625 -------------- Total 2,198,500 - -------------------------------------------------------------------------------- DIVERSIFIED MANUFACTURING (0.4%) Tyco Intl Group 02-15-11 6.75 8,975,000(c) 9,415,493 - -------------------------------------------------------------------------------- ELECTRIC (2.5%) Aquila Canada Finance 06-15-11 7.75 1,915,000(c) 1,977,238 CMS Energy Sr Nts 01-15-09 7.50 1,275,000 1,316,438 Consumers Energy 1st Mtge 02-15-17 5.15 4,020,000 3,854,537 Consumers Energy 1st Mtge Series H 02-17-09 4.80 4,115,000 4,057,962 Dayton Power & Light 1st Mtge 10-01-13 5.13 4,460,000 4,401,498 Detroit Edison 1st Mtge 10-01-37 5.70 2,195,000 2,161,072 Dominion Resources Sr Unsecured Series C 07-15-15 5.15 3,785,000 3,636,049 DPL Sr Nts 09-01-11 6.88 2,755,000 2,891,984 Exelon 06-15-10 4.45 4,155,000 4,005,383 IPALCO Enterprises Secured 11-14-08 8.38 400,000 426,500 11-14-11 8.63 3,680,000 4,075,600 Metropolitan Edison Sr Nts 03-15-10 4.45 2,610,000 2,516,489 Mirant North America LLC Sr Nts 12-31-13 7.38 330,000(d) 338,663 Nevada Power 03-15-16 5.95 290,000(d) 291,088 - -------------------------------------------------------------------------------- BONDS (CONTINUED) - -------------------------------------------------------------------------------- COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) ELECTRIC (CONT.) NRG Energy Sr Nts 02-01-14 7.25% $ 1,395,000 $ 1,429,875 02-01-16 7.38 665,000 684,950 Ohio Edison 06-15-09 5.65 6,005,000(d) 6,032,982 Ohio Edison Sr Nts 05-01-15 5.45 1,195,000 1,184,974 Pacific Gas & Electric 03-01-34 6.05 2,590,000 2,676,713 PacifiCorp 1st Mtge 06-15-35 5.25 2,220,000 2,076,244 PSI Energy 10-15-35 6.12 5,540,000 5,664,494 -------------- Total 55,700,733 - -------------------------------------------------------------------------------- ENTERTAINMENT (0.3%) United Artists Theatre Circuit 07-01-15 9.30 7,033,277 6,962,944 - -------------------------------------------------------------------------------- FOOD AND BEVERAGE (1.5%) Cadbury Schweppes US Finance LLC 10-01-08 3.88 3,765,000(d) 3,632,005 Cott Beverages USA 12-15-11 8.00 1,135,000 1,166,213 Kraft Foods 06-01-12 6.25 15,711,000 16,436,879 Kraft Foods Sr Unsecured 11-01-11 5.63 13,585,000 13,714,058 -------------- Total 34,949,155 - -------------------------------------------------------------------------------- GAMING (0.4%) Caesars Entertainment Sr Nts 04-15-13 7.00 2,535,000 2,682,506 MGM MIRAGE 10-01-09 6.00 670,000 664,975 07-15-15 6.63 2,165,000 2,173,118 MGM MIRAGE Sr Nts 02-27-14 5.88 720,000 693,000 Mohegan Tribal Gaming Authority Sr Nts 02-15-13 6.13 540,000 535,275
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 18 | RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT - -------------------------------------------------------------------------------- BONDS (CONTINUED) - --------------------------------------------------------------------------------
COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) GAMING (CONT.) Mohegan Tribal Gaming Authority Sr Sub Nts 04-01-12 8.00% $ 750,000 $ 788,438 Station Casinos Sr Nts 04-01-12 6.00 1,000,000 1,000,000 Station Casinos Sr Sub Nts 03-01-16 6.88 1,515,000 1,541,513 -------------- Total 10,078,825 - -------------------------------------------------------------------------------- GAS PIPELINES (0.5%) ANR Pipeline 03-15-10 8.88 875,000 935,000 Colorado Interstate Gas Sr Nts 03-15-15 5.95 470,000 463,641 11-15-15 6.80 830,000(d) 863,200 Copano Energy LLC Sr Nts 03-01-16 8.13 225,000(d) 234,000 Kinder Morgan Finance 01-05-16 5.70 4,160,000(d) 4,160,566 Pacific Energy Partners LP/Finance 09-15-15 6.25 620,000 616,900 Southern Natural Gas 03-15-10 8.88 875,000 935,918 Southern Star Central Secured 08-01-10 8.50 750,000 800,625 Transcontinental Gas Pipe Line Series B 08-15-11 7.00 1,915,000 2,010,750 Williams Sr Nts 07-15-19 7.63 535,000 588,500 -------------- Total 11,609,100 - -------------------------------------------------------------------------------- HEALTH CARE (1.0%) Cardinal Health 06-15-15 4.00 11,184,000 10,006,414 12-15-17 5.85 2,690,000 2,724,012 HCA Sr Nts 03-15-14 5.75 1,000,000 956,194 - -------------------------------------------------------------------------------- BONDS (CONTINUED) - -------------------------------------------------------------------------------- COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) HEALTH CARE (CONT.) Omnicare Sr Sub Nts 12-15-13 6.75% $ 1,315,000 $ 1,338,013 12-15-15 6.88 540,000 550,800 Triad Hospitals Sr Nts 05-15-12 7.00 1,285,000 1,310,700 WellPoint 01-15-11 5.00 6,645,000 6,559,951 -------------- Total 23,446,084 - -------------------------------------------------------------------------------- INDEPENDENT ENERGY (0.3%) Chesapeake Energy 08-15-17 6.50 1,860,000 1,871,625 Encore Acquisition Sr Sub Nts 04-15-14 6.25 1,520,000 1,489,600 Newfield Exploration Sr Nts 03-01-11 7.63 2,500,000 2,693,750 Newfield Exploration Sr Sub Nts 08-15-12 8.38 380,000 407,550 Plains Exploration & Production Sr Nts 06-15-14 7.13 790,000 823,575 -------------- Total 7,286,100 - -------------------------------------------------------------------------------- INTEGRATED ENERGY (--%) Denbury Resources Sr Sub Nts 12-15-15 7.50 100,000 105,000 - -------------------------------------------------------------------------------- LODGING (0.1%) ITT 11-15-15 7.38 1,255,000 1,361,675 - -------------------------------------------------------------------------------- MEDIA CABLE (1.3%) Comcast 03-15-11 5.50 9,010,000 8,983,691 03-15-16 5.90 10,720,000(g) 10,766,337 03-15-16 5.90 7,670,000 7,703,153 DIRECTV Holdings LLC/Financing Sr Nts 03-15-13 8.38 406,000 437,465 Videotron Ltee 01-15-14 6.88 530,000(c) 541,925 12-15-15 6.38 330,000(c) 326,700 -------------- Total 28,759,271 - --------------------------------------------------------------------------------
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT | 19 - -------------------------------------------------------------------------------- BONDS (CONTINUED) - --------------------------------------------------------------------------------
COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MEDIA NON CABLE (0.6%) Dex Media West LLC/Finance Sr Nts Series B 08-15-10 8.50% $ 560,000 $ 593,600 Lamar Media 01-01-13 7.25 375,000 386,719 News America 12-15-35 6.40 10,210,000(d) 10,274,078 Radio One Series B 07-01-11 8.88 1,000,000 1,050,000 Sun Media 02-15-13 7.63 745,000(c) 768,281 -------------- Total 13,072,678 - -------------------------------------------------------------------------------- METALS (0.1%) Peabody Energy Series B 03-15-13 6.88 1,640,000 1,685,100 - -------------------------------------------------------------------------------- OIL FIELD SERVICES (--%) Pride Intl Sr Nts 07-15-14 7.38 495,000 528,413 - -------------------------------------------------------------------------------- OTHER FINANCIAL INSTITUTIONS (0.6%) Residential Capital Sr Unsecured 06-30-10 6.38 13,510,000 13,641,128 - -------------------------------------------------------------------------------- PACKAGING (--%) Plastipak Holdings Sr Nts 12-15-15 8.50 90,000(d) 92,925 - -------------------------------------------------------------------------------- PAPER (--%) Crown Americas LLC/Capital Sr Nts 11-15-15 7.75 750,000(d) 781,875 - -------------------------------------------------------------------------------- PHARMACEUTICALS (0.2%) AmerisourceBergen 09-15-15 5.88 1,225,000(d) 1,232,779 Merck & Co 03-01-15 4.75 2,600,000 2,489,742 -------------- Total 3,722,521 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- BONDS (CONTINUED) - -------------------------------------------------------------------------------- COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) PROPERTY & CASUALTY (0.1%) Marsh & McLennan Companies Sr Unsecured 09-15-15 5.75% $ 2,770,000 $ 2,770,139 - -------------------------------------------------------------------------------- RETAILERS (0.9%) CVS 09-15-09 4.00 2,700,000 2,587,818 09-15-14 4.88 6,275,000 6,002,370 May Department Stores 07-15-34 6.70 6,765,000 7,232,285 Wal-Mart Stores Series C 06-29-11 8.88 3,500,000 3,533,670 -------------- Total 19,356,143 - -------------------------------------------------------------------------------- TRANSPORTATION SERVICES (0.2%) ERAC USA Finance 05-01-15 5.60 3,555,000(d) 3,529,909 11-15-15 5.90 230,000(d) 233,353 Greater Beijing First Expressways Sr Nts 06-15-07 9.50 3,640,000(b,c,m,o) -- Hertz Sr Nts 01-01-14 8.88 580,000(d) 606,100 -------------- Total 4,369,362 - -------------------------------------------------------------------------------- WIRELESS (0.4 %) Nextel Communications Sr Nts Series F 03-15-14 5.95 4,855,000 4,879,989 US Cellular Sr Nts 12-15-33 6.70 3,485,000 3,512,221 -------------- Total 8,392,210 - -------------------------------------------------------------------------------- WIRELINES (4.2%) Qwest 03-15-12 8.88 1,075,000 1,204,000 Qwest Sr Nts 06-15-15 7.63 620,000 664,950 Sprint Capital 01-30-11 7.63 7,860,000 8,593,747 11-15-28 6.88 6,165,000 6,717,618 Telecom Italia Capital 11-15-33 6.38 11,125,000(c) 11,006,663
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 20 | RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT - -------------------------------------------------------------------------------- BONDS (CONTINUED) - --------------------------------------------------------------------------------
COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) WIRELINES (CONT.) TELUS 06-01-11 8.00% $ 21,031,500(c) $ 23,465,980 Verizon Pennsylvania Series A 11-15-11 5.65 42,600,000 42,479,443 -------------- Total 94,132,401 - -------------------------------------------------------------------------------- TOTAL BONDS (Cost: $2,319,721,681) $2,292,139,591 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- OTHER (--%) - -------------------------------------------------------------------------------- ISSUER SHARES VALUE(A) Wayland Investment LLC 6,000,000(e,m) $ 568,020 - -------------------------------------------------------------------------------- TOTAL OTHER (Cost: $791,383) $ 568,020 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SHORT-TERM SECURITIES (3.9%)(Q) - -------------------------------------------------------------------------------- AMOUNT EFFECTIVE PAYABLE AT ISSUER YIELD MATURITY VALUE(A) COMMERCIAL PAPER Bear Stearns Companies 03-21-06 4.52% $ 15,000,000 $ 14,960,538 Chesham Finance LLC 03-01-06 4.57 3,700,000 3,699,530 Kitty Hawk Funding 03-27-06 4.54 15,000,000(r) 14,949,094 Park Avenue Receivables 03-14-06 4.52 10,000,000(r) 9,982,462 Sheffield Receivable 03-01-06 4.51 25,000,000(r) 24,996,868 Variable Funding Capital 03-03-06 4.50 20,000,000(r) 19,992,500 - -------------------------------------------------------------------------------- TOTAL SHORT-TERM SECURITIES (Cost: $88,592,111 ) $ 88,580,992 - -------------------------------------------------------------------------------- TOTAL INVESTMENTS IN SECURITIES (Cost: $2,409,105,175)(s) $2,381,288,603 ================================================================================
- -------------------------------------------------------------------------------- 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 Feb. 28, 2006, the value of foreign securities represented 3.8% 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 Feb. 28, 2006, the value of these securities amounted to $80,106,557 or 3.5% 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 Feb. 28, 2006, the cost of securities purchased, including interest purchased, on a when-issued and/or other forward-commitment basis was $86,566,452. (H) Adjustable rate mortgage; interest rate varies to reflect current market conditions; rate shown is the effective rate on Feb. 28, 2006. (I) Interest rate varies either based on a predetermined schedule or to reflect current market conditions; rate shown is the effective rate on Feb. 28, 2006. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT | 21 - -------------------------------------------------------------------------------- NOTES TO INVESTMENTS IN SECURITIES (CONTINUED) - -------------------------------------------------------------------------------- (J) 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 Feb. 28, 2006. (K) The following abbreviations are used in the portfolio security descriptions to identify the insurer of the issue: FGIC -- Financial Guaranty Insurance Company FSA -- Financial Security Assurance MBIA -- MBIA Insurance Corporation (L) Comparable securities are held to satisfy future delivery requirements of the following open forward sale commitments atFeb. 28, 2006:
PRINCIPAL SETTLEMENT PROCEEDS SECURITY AMOUNT DATE RECEIVABLE VALUE -------------------------------------------------------------------------- Federal Natl Mtge Assn 03-01-21 5.00% $ 13,150,000 03-16-06 $ 12,926,039 $12,973,290 03-01-21 5.50 5,250,000 03-16-06 5,263,984 5,272,969 04-01-35 5.00 20,000,000 04-12-06 19,350,000 19,406,240 03-01-36 5.50 72,000,000 03-13-06 70,969,063 71,325,000
(M) Identifies issues considered to be illiquid as to their marketability (see Note 1 to the financial statements). These securities may be valued at fair value according to methods selected in good faith by the Fund's Board of Directors. Information concerning such security holdings at Feb. 28, 2006, is as follows:
ACQUISITION SECURITY DATES COSt -------------------------------------------------------------------------- Greater Beijing First Expressways 9.50% Sr Nts 2007 09-16-98 $ -- Wayland Investment LLC 05-19-00 791,383
(N) 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, June 2006, 20-year $ 41,400,000 U.S. Treasury Note, June 2006, 2-year 52,000,000 SALE CONTRACTS U.S. Treasury Note, March 2006, 5-year 22,800,000 U.S. Treasury Note, March 2006, 10-year 40,400,000 U.S. Treasury Note, June 2006, 5-year 6,400,000
(O) Negligible market value. (P) At Feb. 28, 2006, security was partially or fully on loan. See Note 5 to the financial statements. (Q) Cash collateral received from security lending activity is invested in short-term securities and represents 2.5% of net assets. See Note 5 to the financial statements. 1.4% of net assets is the Fund's cash equivalent position. (R) 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 Feb. 28, 2006, the value of these securities amounted to $69,920,924 or 3.1% of net assets. - -------------------------------------------------------------------------------- 22 | RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT - -------------------------------------------------------------------------------- NOTES TO INVESTMENTS IN SECURITIES (CONTINUED) - -------------------------------------------------------------------------------- (S) At Feb. 28, 2006, the cost of securities for federal income tax purposes was approximately $2,409,105,000 and the approximate aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $ 8,976,000 Unrealized depreciation (36,792,000) ---------------------------------------------------------------- Net unrealized depreciation $ (27,816,000) ----------------------------------------------------------------
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/funds. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT | 23 FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES RiverSource Diversified Bond Fund FEB. 28, 2006 (UNAUDITED) - ---------------------------------------------------------------------------------------------------------------- ASSETS - ---------------------------------------------------------------------------------------------------------------- Investments in securities, at value (Note 1)* (identified cost $2,409,105,175) $ 2,381,288,603 Cash in bank on demand deposit 119,846 Foreign currency holdings (identified cost $1,948,524) (Note 1) 1,931,622 Capital shares receivable 664,343 Accrued interest receivable 15,255,596 Receivable for investment securities sold 184,366,083 - ---------------------------------------------------------------------------------------------------------------- Total assets 2,583,626,093 - ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- LIABILITIES - ---------------------------------------------------------------------------------------------------------------- Dividends payable to shareholders 260,421 Capital shares payable 427,684 Payable for investment securities purchased 156,841,523 Unrealized depreciation on swap transactions, at value (Note 7) 23,774 Payable upon return of securities loaned (Note 5) 57,432,500 Accrued investment management services fee 31,015 Accrued distribution fee 432,222 Accrued service fee 369 Accrued transfer agency fee 3,973 Accrued administrative services fee 3,903 Other accrued expenses 307,206 Forward sale commitments, at value (proceeds receivable $108,509,086) (Note 1) 108,977,499 - ---------------------------------------------------------------------------------------------------------------- Total liabilities 324,742,089 - ---------------------------------------------------------------------------------------------------------------- Net assets applicable to outstanding capital stock $ 2,258,884,004 ================================================================================================================ - ---------------------------------------------------------------------------------------------------------------- REPRESENTED BY - ---------------------------------------------------------------------------------------------------------------- Capital stock -- $.01 par value (Note 1) $ 4,713,173 Additional paid-in capital 2,408,237,687 Undistributed net investment income 4,398,461 Accumulated net realized gain (loss) (Note 9) (130,678,117) Unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (Note 6) (27,787,200) - ---------------------------------------------------------------------------------------------------------------- Total -- representing net assets applicable to outstanding capital stock $ 2,258,884,004 ================================================================================================================ Net assets applicable to outstanding shares: Class A $ 1,666,606,791 Class B $ 439,844,426 Class C $ 16,581,505 Class I $ 357,530 Class Y $ 135,493,752 Net asset value per share of outstanding capital stock: Class A shares 347,758,197 $ 4.79 Class B shares 91,760,498 $ 4.79 Class C shares 3,454,857 $ 4.80 Class I shares 74,546 $ 4.80 Class Y shares 28,269,211 $ 4.79 - ---------------------------------------------------------------------------------------------------------------- *Including securities on loan, at value (Note 5) $ 55,638,640 - ----------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 24 | RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT STATEMENT OF OPERATIONS RiverSource Diversified Bond Fund SIX MONTHS ENDED FEB. 28, 2006 (UNAUDITED) - ---------------------------------------------------------------------------------------------------- INVESTMENT INCOME - ---------------------------------------------------------------------------------------------------- Income: Interest $ 55,744,336 Fee income from securities lending (Note 5) 86,568 - ---------------------------------------------------------------------------------------------------- Total income 55,830,904 - ---------------------------------------------------------------------------------------------------- Expenses (Note 2): Investment management services fee 5,808,863 Distribution fee Class A 2,114,422 Class B 2,308,307 Class C 85,979 Transfer agency fee 1,799,574 Incremental transfer agency fee Class A 113,891 Class B 63,218 Class C 2,679 Service fee -- Class Y 71,594 Administrative services fees and expenses 740,538 Compensation of board members 10,917 Custodian fees 123,110 Printing and postage 223,050 Registration fees 61,066 Audit fees 22,500 Other 40,867 - ---------------------------------------------------------------------------------------------------- Total expenses 13,590,575 Expenses waived/reimbursed by the Investment Manager and its affiliates (Note 2) (1,484,961) - ---------------------------------------------------------------------------------------------------- 12,105,614 Earnings credits on cash balances (Note 2) (78,153) - ---------------------------------------------------------------------------------------------------- Total net expenses 12,027,461 - ---------------------------------------------------------------------------------------------------- Investment income (loss) -- net 43,803,443 - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) -- NET - ---------------------------------------------------------------------------------------------------- Net realized gain (loss) on: Security transactions (Note 3) (17,927,418) Foreign currency transactions (29,806) Futures contracts 4,390,488 Swap transactions 229,774 - ---------------------------------------------------------------------------------------------------- Net realized gain (loss) on investments (13,336,962) Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (34,621,058) - ---------------------------------------------------------------------------------------------------- Net gain (loss) on investments and foreign currencies (47,958,020) - ---------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations $ (4,154,577) ====================================================================================================
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT | 25 STATEMENTS OF CHANGES IN NET ASSETS RiverSource Diversified Bond Fund
FEB. 28, 2006 SIX MONTHS ENDED AUG. 31, 2005 (UNAUDITED) YEAR ENDED - ------------------------------------------------------------------------------------------------------------ OPERATIONS AND DISTRIBUTIONS - ------------------------------------------------------------------------------------------------------------ Investment income (loss) -- net $ 43,803,443 $ 91,755,329 Net realized gain (loss) on investments (13,336,962) 28,923,177 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (34,621,058) (14,927,428) - ------------------------------------------------------------------------------------------------------------ Net increase (decrease) in net assets resulting from operations (4,154,577) 105,751,078 - ------------------------------------------------------------------------------------------------------------ Distributions to shareholders from: Net investment income Class A (33,910,157) (70,478,732) Class B (7,515,532) (17,993,962) Class C (279,110) (605,297) Class I (280) (421) Class Y (2,969,981) (8,081,878) - ------------------------------------------------------------------------------------------------------------ Total distributions (44,675,060) (97,160,290) - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ CAPITAL SHARE TRANSACTIONS (NOTE 4) - ------------------------------------------------------------------------------------------------------------ Proceeds from sales Class A shares (Note 2) 147,835,545 259,770,664 Class B shares 46,994,628 84,427,800 Class C shares 2,058,102 4,052,182 Class I shares 346,914 -- Class Y shares 7,057,793 41,037,278 Reinvestment of distributions at net asset value Class A shares 27,126,000 56,221,455 Class B shares 6,627,911 15,935,666 Class C shares 247,291 543,915 Class I shares 27 -- Class Y shares 2,899,761 6,719,948 Payments for redemptions Class A shares (247,225,807) (480,335,355) Class B shares (Note 2) (88,368,811) (245,851,411) Class C shares (Note 2) (3,454,854) (7,443,384) Class Y shares (73,555,823) (49,568,951) - ------------------------------------------------------------------------------------------------------------ Increase (decrease) in net assets from capital share transactions (171,411,323) (314,490,193) - ------------------------------------------------------------------------------------------------------------ Total increase (decrease) in net assets (220,240,960) (305,899,405) Net assets at beginning of period 2,479,124,964 2,785,024,369 - ------------------------------------------------------------------------------------------------------------ Net assets at end of period $ 2,258,884,004 $ 2,479,124,964 ============================================================================================================ Undistributed net investment income $ 4,398,461 $ 5,270,078 - ------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 26 | RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT NOTES TO FINANCIAL STATEMENTS RiverSource Diversified Bond Fund (Unaudited as to Feb. 28, 2006) 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 Feb. 28, 2006, Ameriprise Financial, Inc. (Ameriprise Financial) and the affiliated fund-of-funds owned 100% of Class I shares, which represents 0.02% 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. 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. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT | 27 ILLIQUID SECURITIES At Feb. 28, 2006, 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 Feb. 28, 2006 was $568,020 representing 0.03% 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 Feb. 28, 2006, the Fund has entered into outstanding when-issued securities of $86,566,452. 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. - -------------------------------------------------------------------------------- 28 | RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL 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. At Feb. 28, 2006, foreign currency holdings consisted of European monetary units and British pounds. 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 - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT | 29 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." 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 Subchapter M of the Internal Revenue Code that applies 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. 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. - -------------------------------------------------------------------------------- 30 | RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT 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. Effective March 1, 2006, the fee percentage of the Fund's average daily net assets declines from 0.48% to 0.29% annually as the Fund's assets increase. 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 0.07% to 0.04% annually as the Fund's assets increase. Prior to Oct. 1, 2005, the fee percentage of the Fund's average daily net assets declined from 0.05% to 0.025% annually as the Fund's assets increased. 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 (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. The Transfer Agent charges 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 are included in the transfer agency fees on the statement of operations. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT | 31 The Fund has agreements with Ameriprise Financial Services, 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 $1,156,040 for Class A, $415,059 for Class B and $1,912 for Class C for the six months ended Feb. 28, 2006. For the six months ended Feb. 28, 2006, the Investment Manager and its affiliates waived certain fees and expenses to 0.90% for Class A, 1.66% for Class B, 1.67% for Class C, 0.58% for Class I and 0.74% 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 $942,827, $270,392, $9,679 and $70,492, respectively and the management fees waived at the Fund level were $191,571. Under this agreement, which was effective until Feb. 28, 2006, net expenses would 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. Effective as of March 1, 2006, the Investment Manager and its affiliates have agreed to waive certain fees and expenses until Aug. 31, 2006, unless sooner terminated at the discretion of the Board, such that net expenses will not exceed 0.89% for Class A, 1.65% for Class B, 1.66% for Class C, 0.54% for Class I and 0.73% for Class Y of the Fund's average daily net assets. During the six months ended Feb. 28, 2006, the Fund's custodian and transfer agency fees were reduced by $78,153 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 $2,881,392,157 and $2,954,011,318, respectively, for the six months ended Feb. 28, 2006. Realized gains and losses are determined on an identified cost basis. 4. CAPITAL SHARE TRANSACTIONS Transactions in shares of capital stock for the periods indicated are as follows:
SIX MONTHS ENDED FEB. 28, 2006 CLASS A CLASS B CLASS C CLASS I CLASS Y - ------------------------------------------------------------------------------------------------------------- Sold 30,766,100 9,771,871 427,636 72,503 1,464,390 Issued for reinvested distributions 5,653,861 1,381,478 51,491 6 604,384 Redeemed (51,461,154) (18,396,181) (718,035) -- (15,150,822) - ------------------------------------------------------------------------------------------------------------- Net increase (decrease) (15,041,193) (7,242,832) (238,908) 72,509 (13,082,048) - -------------------------------------------------------------------------------------------------------------
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) - -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 32 | RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT 5. LENDING OF PORTFOLIO SECURITIES At Feb. 28, 2006, securities valued at $55,638,640 were on loan to brokers. For collateral, the Fund received $57,432,500 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 $86,568 for the six months ended Feb. 28, 2006. 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. 6. INTEREST RATE FUTURES CONTRACTS At Feb. 28, 2006, investments in securities included securities valued at $1,655,391 that were pledged as collateral to cover initial margin deposits on 674 open purchase contracts and 696 open sale contracts. The notional market value of the open purchase contracts at Feb. 28, 2006 was $99,958,313 with a net unrealized gain of $140,381. The notional market value of the open sale contracts at Feb. 28, 2006 was $74,357,439 with a net unrealized gain of $400,295. See "Summary of significant accounting policies" and "Notes to investments in securities." 7. SWAP CONTRACTS At Feb. 28, 2006, the Fund had the following open total return swap contracts:
UNREALIZED TERMINATION NOTIONAL APPRECIATION DATE PRINCIPAL (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 0.25% Counterparty: Citigroup 05/01/06 $13,450,000 $ (23,774)
8. BANK BORROWINGS The Fund has a revolving credit agreement with a syndicate of banks headed by JPMorgan Chase Bank, N.A. (JPMCB), 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. 20, 2005. 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 0.40% or the JPMCB Prime Commercial 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 0.07% per annum. Prior to this agreement, the Fund had a revolving credit agreement that permitted borrowings up to $500 million with The Bank of New York. The Fund had no borrowings outstanding during the six months ended Feb. 28, 2006. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT | 33 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. INFORMATION REGARDING PENDING AND SETTLED LEGAL PROCEEDINGS In December 2005, without admitting or denying the allegations, American Express Financial Corporation (AEFC, which is now known as Ameriprise Financial, Inc. (Ameriprise Financial)), the parent company of RiverSource Investments, LLC (RiverSource Investments), entered into settlement agreements with the Securities and Exchange Commission (SEC) and Minnesota Department of Commerce (MDOC) related to market timing activities. In connection with these matters, the SEC and MDOC issued orders (the Orders) alleging that AEFC violated certain provisions of the federal and Minnesota securities laws by failing to adequately disclose market timing activities by allowing certain identified market timers to continue to market time contrary to disclosures in mutual fund and variable annuity product prospectuses. The Orders also alleged that AEFC failed to implement procedures to detect and prevent market timing in 401(k) plans for employees of AEFC and related companies and failed to adequately disclose that there were no such procedures. Pursuant to the MDOC Order, the MDOC also alleged that AEFC allowed inappropriate market timing to occur by failing to have written policies and procedures and failing to properly supervise its employees. As a result of the Orders, AEFC was censured and ordered to cease and desist from committing or causing any violations of certain provisions of the Investment Advisers Act of 1940, the Investment Company Act of 1940, and various Minnesota laws. Pursuant to the terms of the Orders, AEFC agreed to pay disgorgement of $10 million and civil money penalties of $7 million. AEFC also agreed to make presentations at least annually to its board of directors and the relevant mutual funds' board that include an overview of policies and procedures to prevent market timing, material changes to these policies and procedures and whether disclosures related to market timing are consistent with the SEC order and federal securities laws. AEFC also agreed to retain an independent distribution consultant to assist in developing a plan for distribution of all disgorgement and civil penalties ordered by the SEC in accordance with various undertakings detailed at http://www.sec.gov/litigation/admin/ia-2451.pdf. In addition, AEFC agreed to complete and submit to the MDOC a compliance review of its procedures regarding market timing within one year of the MDOC Order, including a summary of actions taken to ensure compliance with applicable laws and regulations and certification by a senior officer regarding compliance and supervisory procedures. Ameriprise Financial and its affiliates have cooperated with the SEC and the MDOC in these legal proceedings, and have made regular reports to the RiverSource Funds' Boards of Directors/Trustees. - -------------------------------------------------------------------------------- 34 | RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT Ameriprise Financial and certain of its affiliates have historically been involved in a number of legal or arbitration proceedings, including routine litigation, class actions, and governmental actions, concerning matters arising in connection with the conduct of their business activities. Ameriprise Financial believes that the Funds are not currently the subject of, and that neither Ameriprise Financial nor any of its affiliates are the subject of, any pending legal or arbitration proceedings that are likely to have a material adverse effect on the Funds or the ability of Ameriprise Financial or its affiliates to perform under their contracts with the Funds. Ameriprise Financial is required to make 10-Q, 10-K and, as necessary, 8-K filings with the Securities and Exchange Commission on legal and regulatory matters that relate to Ameriprise Financial and its affiliates. Copies of these filings may be obtained by accessing the SEC website at www.sec.gov. There can be no assurance that these matters, or the adverse publicity associated with them, will not result in increased fund redemptions, reduced sale of fund shares or other adverse consequences to the Funds. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT | 35 11. 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, 2006(G) 2005 2004 2003 2002 Net asset value, beginning of period $ 4.89 $ 4.87 $ 4.78 $ 4.75 $ 4.86 - ------------------------------------------------------------------------------------------------------------------------------ INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .09 .18 .18 .20 .25 Net gains (losses) (both realized and unrealized) (.09) .03 .08 .03 (.10) - ------------------------------------------------------------------------------------------------------------------------------ Total from investment operations -- .21 .26 .23 .15 - ------------------------------------------------------------------------------------------------------------------------------ LESS DISTRIBUTIONS: Dividends from net investment income (.10) (.19) (.17) (.20) (.25) Tax return of capital -- -- -- -- (.01) - ------------------------------------------------------------------------------------------------------------------------------ Total distributions (.10) (.19) (.17) (.20) (.26) - ------------------------------------------------------------------------------------------------------------------------------ Net asset value, end of period $ 4.79 $ 4.89 $ 4.87 $ 4.78 $ 4.75 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ RATIOS/SUPPLEMENTAL DATA - ------------------------------------------------------------------------------------------------------------------------------ Net assets, end of period (in millions) $1,667 $ 1,774 $1,933 $2,280 $ 2,438 - ------------------------------------------------------------------------------------------------------------------------------ Ratio of expenses to average daily net assets(b) .90%(c),(d) .94%(c) .98%(c) .97% .95% - ------------------------------------------------------------------------------------------------------------------------------ Ratio of net investment income (loss) to average daily net assets 3.94%(d) 3.67% 3.55% 4.16% 5.17% - ------------------------------------------------------------------------------------------------------------------------------ Portfolio turnover rate (excluding short-term securities) 130% 300% 279% 256% 169% - ------------------------------------------------------------------------------------------------------------------------------ Total return(e) (.08%)(f) 4.38% 5.54% 4.91% 3.13% - ------------------------------------------------------------------------------------------------------------------------------
(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) The Investment Manager 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 1.03% for the six months ended Feb. 28, 2006 and 1.02% and 1.00% for the years ended Aug. 31, 2005 and 2004, respectively. (d) Adjusted to an annual basis. (e) Total return does not reflect payment of a sales charge. (f) Not annualized. (g) Six months ended Feb. 28, 2006 (Unaudited). - -------------------------------------------------------------------------------- 36 | RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT
CLASS B - ------------------------------------------------------------------------------------------------------------------------------ PER SHARE INCOME AND CAPITAL CHANGES(A) - ------------------------------------------------------------------------------------------------------------------------------ Fiscal period ended Aug. 31, 2006(G) 2005 2004 2003 2002 Net asset value, beginning of period $ 4.89 $ 4.88 $ 4.78 $ 4.75 $ 4.86 - ------------------------------------------------------------------------------------------------------------------------------ INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .08 .15 .14 .16 .21 Net gains (losses) (both realized and unrealized) (.10) .01 .09 .03 (.10) - ------------------------------------------------------------------------------------------------------------------------------ Total from investment operations (.02) .16 .23 .19 .11 - ------------------------------------------------------------------------------------------------------------------------------ LESS DISTRIBUTIONS: Dividends from net investment income (.08) (.15) (.13) (.16) (.21) Tax return of capital -- -- -- -- (.01) - ------------------------------------------------------------------------------------------------------------------------------ Total distributions (.08) (.15) (.13) (.16) (.22) - ------------------------------------------------------------------------------------------------------------------------------ Net asset value, end of period $ 4.79 $ 4.89 $ 4.88 $ 4.78 $ 4.75 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ RATIOS/SUPPLEMENTAL DATA - ------------------------------------------------------------------------------------------------------------------------------ Net assets, end of period (in millions) $ 440 $ 484 $ 628 $ 902 $ 1,047 - ------------------------------------------------------------------------------------------------------------------------------ Ratio of expenses to average daily net assets(b) 1.66%(c),(d) 1.70%(c) 1.73%(c) 1.73% 1.71% - ------------------------------------------------------------------------------------------------------------------------------ Ratio of net investment income (loss) to average daily net assets 3.18%(d) 2.92% 2.78% 3.40% 4.40% - ------------------------------------------------------------------------------------------------------------------------------ Portfolio turnover rate (excluding short-term securities) 130% 300% 279% 256% 169% - ------------------------------------------------------------------------------------------------------------------------------ Total return(e) (.45%)(f) 3.39% 4.95% 4.12% 2.35% - ------------------------------------------------------------------------------------------------------------------------------
(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) The Investment Manager 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 1.79% for the six months ended Feb. 28, 2006 and 1.78% and 1.75% for the years ended Aug. 31, 2005 and 2004, respectively. (d) Adjusted to an annual basis. (e) Total return does not reflect payment of a sales charge. (f) Not annualized. (g) Six months ended Feb. 28, 2006 (Unaudited). - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT | 37
CLASS C - ------------------------------------------------------------------------------------------------------------------------------ PER SHARE INCOME AND CAPITAL CHANGES(A) - ------------------------------------------------------------------------------------------------------------------------------ Fiscal period ended Aug. 31, 2006(G) 2005 2004 2003 2002 Net asset value, beginning of period $ 4.90 $ 4.88 $ 4.78 $ 4.75 $ 4.86 - ------------------------------------------------------------------------------------------------------------------------------ INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .08 .15 .14 .16 .21 Net gains (losses) (both realized and unrealized) (.10) .02 .09 .03 (.10) - ------------------------------------------------------------------------------------------------------------------------------ Total from investment operations (.02) .17 .23 .19 .11 - ------------------------------------------------------------------------------------------------------------------------------ LESS DISTRIBUTIONS: Dividends from net investment income (.08) (.15) (.13) (.16) (.21) Tax return of capital -- -- -- -- (.01) - ------------------------------------------------------------------------------------------------------------------------------ Total distributions (.08) (.15) (.13) (.16) (.22) - ------------------------------------------------------------------------------------------------------------------------------ Net asset value, end of period $ 4.80 $ 4.90 $ 4.88 $ 4.78 $ 4.75 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ RATIOS/SUPPLEMENTAL DATA - ------------------------------------------------------------------------------------------------------------------------------ Net assets, end of period (in millions) $ 17 $ 18 $ 21 $ 27 $ 24 - ------------------------------------------------------------------------------------------------------------------------------ Ratio of expenses to average daily net assets(b) 1.67%(c),(d) 1.70%(c) 1.73%(c) 1.74% 1.72% - ------------------------------------------------------------------------------------------------------------------------------ Ratio of net investment income (loss) to average daily net assets 3.17%(d) 2.93% 2.79% 3.34% 4.33% - ------------------------------------------------------------------------------------------------------------------------------ Portfolio turnover rate (excluding short-term securities) 130% 300% 279% 256% 169% - ------------------------------------------------------------------------------------------------------------------------------ Total return(e) (.45%)(f) 3.60% 4.95% 4.11% 2.35% - ------------------------------------------------------------------------------------------------------------------------------
(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) The Investment Manager 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 1.80% for the six months ended Feb. 28, 2006 and 1.79% and 1.75% for the years ended Aug. 31, 2005 and 2004, respectively. (d) Adjusted to an annual basis. (e) Total return does not reflect payment of a sales charge. (f) Not annualized. (g) Six months ended Feb. 28, 2006 (Unaudited). - -------------------------------------------------------------------------------- 38 | RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT
CLASS I - ------------------------------------------------------------------------------------------------------------------------------ PER SHARE INCOME AND CAPITAL CHANGES(A) - ------------------------------------------------------------------------------------------------------------------------------ Fiscal period ended Aug. 31, 2006(H) 2005 2004(B) Net asset value, beginning of period $ 4.89 $ 4.88 $ 4.91 - ------------------------------------------------------------------------------------------------------------------------------ INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .10 .20 .11 Net gains (losses) (both realized and unrealized) (.09) .02 (.04) - ------------------------------------------------------------------------------------------------------------------------------ Total from investment operations .01 .22 .07 - ------------------------------------------------------------------------------------------------------------------------------ LESS DISTRIBUTIONS: Dividends from net investment income (.10) (.21) (.10) - ------------------------------------------------------------------------------------------------------------------------------ Net asset value, end of period $ 4.80 $ 4.89 $ 4.88 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ RATIOS/SUPPLEMENTAL DATA - ------------------------------------------------------------------------------------------------------------------------------ Net assets, end of period (in millions) $ -- $ -- $ -- - ------------------------------------------------------------------------------------------------------------------------------ Ratio of expenses to average daily net assets(c) .58%(d),(e) .60% .59%(e) - ------------------------------------------------------------------------------------------------------------------------------ Ratio of net investment income (loss) to average daily net assets 6.61%(e) 4.01% 3.13%(e) - ------------------------------------------------------------------------------------------------------------------------------ Portfolio turnover rate (excluding short-term securities) 130% 300% 279% - ------------------------------------------------------------------------------------------------------------------------------ Total return(f) .28%(g) 4.53% 1.43%(g) - ------------------------------------------------------------------------------------------------------------------------------
(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) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratio of expenses for Class I would have been 0.62% for the six months ended Feb 28, 2006. (e) Adjusted to an annual basis. (f) Total return does not reflect payment of a sales charge. (g) Not annualized. (h) Six months ended Feb. 28, 2006 (Unaudited). - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT | 39
CLASS Y - ------------------------------------------------------------------------------------------------------------------------------ PER SHARE INCOME AND CAPITAL CHANGES(A) - ------------------------------------------------------------------------------------------------------------------------------ Fiscal period ended Aug. 31, 2006(G) 2005 2004 2003 2002 Net asset value, beginning of period $ 4.89 $ 4.88 $ 4.78 $ 4.75 $ 4.86 - ------------------------------------------------------------------------------------------------------------------------------ INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .10 .19 .18 .21 .25 Net gains (losses) (both realized and unrealized) (.10) .02 .10 .03 (.10) - ------------------------------------------------------------------------------------------------------------------------------ Total from investment operations -- .21 .28 .24 .15 - ------------------------------------------------------------------------------------------------------------------------------ LESS DISTRIBUTIONS: Dividends from net investment income (.10) (.20) (.18) (.21) (.25) Tax return of capital -- -- -- -- (.01) - ------------------------------------------------------------------------------------------------------------------------------ Total distributions (.10) (.20) (.18) (.21) (.26) - ------------------------------------------------------------------------------------------------------------------------------ Net asset value, end of period $ 4.79 $ 4.89 $ 4.88 $ 4.78 $ 4.75 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ RATIOS/SUPPLEMENTAL DATA - ------------------------------------------------------------------------------------------------------------------------------ Net assets, end of period (in millions) $ 135 $ 202 $ 203 $ 268 $ 297 - ------------------------------------------------------------------------------------------------------------------------------ Ratio of expenses to average daily net assets(b) .74%(c),(d) .78%(c) .81%(c) .81% .78% - ------------------------------------------------------------------------------------------------------------------------------ Ratio of net investment income (loss) to average daily net assets 4.07%(d) 3.85% 3.70% 4.34% 5.30% - ------------------------------------------------------------------------------------------------------------------------------ Portfolio turnover rate (excluding short-term securities) 130% 300% 279% 256% 169% - ------------------------------------------------------------------------------------------------------------------------------ Total return(e) .01%(f) 4.34% 5.92% 5.08% 3.29% - ------------------------------------------------------------------------------------------------------------------------------
(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) The Investment Manager 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 0.85% for the six months ended Feb. 28, 2006 and 0.86% and 0.83% for the years ended Aug. 31, 2005 and 2004, respectively. (d) Adjusted to an annual basis. (e) Total return does not reflect payment of a sales charge. (f) Not annualized. (g) Six months ended Feb. 28, 2006 (Unaudited). - -------------------------------------------------------------------------------- 40 | RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL 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 Feb. 28, 2006. 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. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT | 41
BEGINNING ENDING EXPENSES ACCOUNT VALUE ACCOUNT VALUE PAID DURING ANNUALIZED SEPT. 1, 2005 FEB. 28, 2006 THE PERIOD(A) EXPENSE RATIO Class A Actual(b) $1,000 $ 999.20 $4.46(c) .90% Hypothetical (5% return before expenses) $1,000 $1,020.33 $4.51(c) .90% Class B Actual(b) $1,000 $ 995.50 $8.21(c) 1.66% Hypothetical (5% return before expenses) $1,000 $1,016.56 $8.30(c) 1.66% Class C Actual(b) $1,000 $ 995.50 $8.26(c) 1.67% Hypothetical (5% return before expenses) $1,000 $1,016.51 $8.35(c) 1.67% Class I Actual(b) $1,000 $1,002.80 $2.88(c) .58% Hypothetical (5% return before expenses) $1,000 $1,021.92 $2.91(c) .58% Class Y Actual(b) $1,000 $1,000.10 $3.67(c) .74% Hypothetical (5% return before expenses) $1,000 $1,021.12 $3.71(c) .74%
(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 181/365 (to reflect the one-half year period). (b) Based on the actual return for the six months ended Feb. 28, 2006: -0.08% for Class A, -0.45% for Class B, -0.45% for Class C, +0.28% for Class I and +0.01% for Class Y. (c) Effective as of March 1, 2006, the Investment Manager and its affiliates have contractually agreed to waive certain fees and expenses until Aug. 31, 2006, unless sooner terminated at the discretion of the Board, such that net expenses will not exceed 0.89% for Class A; 1.65% for Class B; 1.66% for Class C; 0.54% for Class I; and 0.73% for Class Y of the Fund's average daily net assets. In addition, on Feb. 15, 2006, shareholders approved a change to the Investment Management Services Agreement. If the revised fee schedules under the Investment Management Services Agreement and the cap/fee waiver agreement had been in place for the entire six-month period ended Feb. 28, 2006, the actual expenses paid would have been $4.41 for Class A, $8.16 for Class B, $8.21 for Class C, $2.68 for Class I and $3.62 for Class Y; the hypothetical expenses paid would have been $4.46 for Class A, $8.25 for Class B, $8.30 for Class C, $2.71 for Class I and $3.66 for Class Y. - -------------------------------------------------------------------------------- 42 | RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT APPROVAL OF INVESTMENT MANAGEMENT SERVICES AGREEMENT RiverSource Investments, LLC (RiverSource), a wholly-owned subsidiary of Ameriprise Financial, Inc. (Ameriprise Financial, formerly, American Express Financial Corporation), serves as the investment manager to the Fund. Under an investment management services agreement (the IMS Agreement), the investment manager provides investment advice and other services to the Fund. Throughout the year, the Fund's Board of Directors (the Board) and the Board's Investment Review and Contracts Committees monitor these services. Ameriprise Financial had served as investment manager to the Fund until Sept. 29, 2005. On that date, and pursuant to the consent of the Board, Ameriprise Financial transferred its rights, title, and interest and its burdens and obligations under the IMS Agreement to RiverSource, its wholly-owned subsidiary. Each year, the Board determines whether to continue the IMS Agreement by evaluating the quality and level of services received and the costs associated with those services. To assist the Board in making this determination, the investment manager prepares detailed reports for the Board and its Contracts Committee in March and April and provides data prepared by independent organizations. The Board gives considerable weight to the work, deliberations and conclusions of the Contracts and Investment Review Committees in determining whether to continue the IMS Agreement. BACKGROUND This past year, prior to the Board's annual review process, on Feb. 1, 2005, American Express Company, the former parent of Ameriprise Financial, announced its intention to pursue a spin-off of Ameriprise Financial by distributing shares of the common stock of Ameriprise Financial to shareholders of American Express Company. Following this announcement, the Board determined to proceed with its annual review process and, 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 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 with Ameriprise Financial 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 IMS Agreement with Ameriprise Financial (or its subsidiary) by the shareholders of the Fund, but in no event for a period longer than one year. During the course of the six-month period following the April 2005 meeting, the Board evaluated whether to approve new investment management services agreements for each of the funds within the Ameriprise Financial fund complex (together, the Funds) with post-spin Ameriprise Financial (or RiverSource). Independent counsel, Schulte Roth & Zabel LLP (Schulte), assisted the Boards in fulfilling their statutory and other responsibilities associated with the spin-off and the resulting consideration of new contracts, including the new IMS Agreement. The Board and its committees were provided with a wealth of written and oral information in this regard. Furthermore, in connection with the Board's considerations as to whether post-spin Ameriprise Financial, as an entity independent from American Express Company, would be capable of continuing to provide a high quality of services to the Funds, - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT | 43 the Board's independent members retained their own financial adviser, Credit Suisse First Boston LLC (CSFB), to assist them in analyzing the capital adequacy of post-spin Ameriprise Financial. (The costs of independent counsel and CSFB and of additional meetings of the Boards were borne by Ameriprise Financial as part of the commitment of the 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.) At a meeting of the Board held on Sept. 8, 2005, the Board, including all of its independent members, approved, and recommended that shareholders approve, a proposed new IMS Agreement with RiverSource (the New IMS Agreement). At a meeting of the Fund's shareholders held on Feb. 15, 2006, shareholders approved the New IMS Agreement. The following section, "Board Considerations Related to the New IMS Agreement," provides a detailed discussion of the Board's considerations and determinations respecting the New IMS Agreement. BOARD CONSIDERATIONS RELATED TO THE NEW IMS AGREEMENT In carrying out its legal responsibilities associated with the consideration of the New IMS Agreement, the Board evaluated the following factors: 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 conclusion 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 Funds and its determination to renew the IMS Agreement for the interim period. However, the Board also recognized the need to supplement this assessment with an evaluation of whether the spin-off or other factors would result in changes to the advisory services being provided under the current IMS Agreement. The Board focused its evaluation on the following factors potentially impacting the nature, extent and quality of advisory services to be provided by Ameriprise Financial: (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 re-brand its products and services. Based on extensive presentations and reports by Ameriprise Financial, CSFB and Schulte, the Board concluded that the proposed capital structure (which includes certain indemnification commitments made by American Express Company) should enable RiverSource to continue to provide a high quality and level of advisory services to the Fund. In making this determination, the Board took into account representations by management of Ameriprise Financial that projected capital levels would allow Ameriprise Financial and RiverSource to meet legal and compliance responsibilities, build their 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 the asset management business. The Board accorded significant weight to CSFB's confirmation as to the reasonableness of the proposed capital structure. 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. - -------------------------------------------------------------------------------- 44 | RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT The Board concluded that, based on all of the materials and information provided, post-spin Ameriprise Financial (including RiverSource) would be in a position to continue to provide a high quality and level of advisory services to the Fund. 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 to relevant Lipper and market indices. The Board took into account its determination in April 2005 that investment performance in 2004 exceeded the median. The Board also considered that it had been receiving monthly performance reports for the Fund and that there had been no significant deviations from April's overall performance data. Cost of Services Provided The Board evaluated comparative fees and the costs of services under the current IMS Agreement and the New IMS Agreement, including fees charged by Ameriprise Financial (including RiverSource and other subsidiaries) to institutional clients. The Board observed that the proposed advisory fee changes are designed to work in tandem with proposed changes to administrative services fees and that advisory fees under the New IMS Agreement would decrease. The Board studied RiverSource's effort (i.e., its "pricing philosophy") to set substantially all Funds' total expense ratios at or below the median expense ratio of comparable mutual funds (as compiled by Lipper). It also noted that RiverSource has agreed to voluntarily impose expense caps or waivers to achieve this pricing objective whenever the expense ratio exceeded the median expense ratio by more than three basis points. The Board next considered the expected profitability to Ameriprise Financial and RiverSource 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 Ameriprise Financial would allow it to operate effectively and, at the same time, reinvest in RiverSource and its other asset management businesses. The Board also considered that the proposed changes in advisory fees and the mergers of certain other Funds would result in revenue gains to Ameriprise Financial, but that these increases would not materially alter profit margins due to expected increases in costs associated with the spin-off, particularly re-branding 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 (and its subsidiaries) to institutional clients as well as the fees paid to, and charged by, 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 DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT | 45 Economies of Scale The Board also considered the "breakpoints" in fees that would be triggered as Fund net asset levels grew and the extent to which shareholders would benefit from such growth. The Board observed that the revised fee schedules under the proposed New 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 New 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 New 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 New IMS Agreement. In this regard, the Board evaluated the circumstances under which it would consider the retention of an investment adviser different from RiverSource Investments. 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, Ameriprise Financial 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. - -------------------------------------------------------------------------------- 46 | RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL 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/funds; 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/funds; or by searching the website of the SEC at www.sec.gov. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT | 47 RESULTS OF MEETING OF SHAREHOLDERS RIVERSOURCE DIVERSIFIED BOND FUND REGULAR MEETING OF SHAREHOLDERS HELD ON FEB. 15, 2006 (UNAUDITED) A brief description of each proposal voted upon at the meeting and the votes cast for, against or withheld, as well as the number of abstentions and broker non-votes as to each proposal is set forth below. A vote is based on total dollar interest in a fund.
ELECTION OF BOARD MEMBERS AFFIRMATIVE WITHHOLD Kathleen Blatz 1,518,639,338.21 43,630,439.78 Arne H. Carlson 1,515,446,110.81 46,823,667.18 Patricia M. Flynn 1,519,108,255.53 43,161,522.46 Anne P. Jones 1,516,147,262.18 46,122,515.81 Jeffrey Laikind 1,517,730,845.61 44,538,932.38 Stephen R. Lewis, Jr. 1,519,049,064.14 43,220,713.85 Catherine James Paglia 1,519,553,801.94 42,715,976.05 Vikki L. Pryor 1,518,830,533.98 43,439,244.01 Alan K. Simpson 1,512,374,955.08 49,894,822.91 Alison Taunton-Rigby 1,519,190,537.04 43,079,240.95 William F. Truscott 1,517,779,034.30 44,490,743.69
AMEND THE ARTICLES OF INCORPORATION TO PERMIT THE BOARD TO ESTABLISH THE MINIMUM ACCOUNT VALUE AND TO CHANGE THE NAME OF THE CORPORATION
AFFIRMATIVE AGAINST ABSTAIN BROKER NON-VOTES 1,486,115,060.47 45,754,383.36 30,255,422.16 144,912.00
APPROVE AN INVESTMENT MANAGEMENT SERVICES AGREEMENT WITH RIVERSOURCE INVESTMENTS, LLC
AFFIRMATIVE AGAINST ABSTAIN BROKER NON-VOTES 1,495,698,657.77 35,595,619.56 30,830,588.66 144,912.00
- -------------------------------------------------------------------------------- 48 | RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT APPROVE CHANGES IN FUNDAMENTAL INVESTMENT POLICIES
DIVERSIFICATION AFFIRMATIVE AGAINST ABSTAIN BROKER NON-VOTES 1,482,073,977.08 41,740,084.28 38,310,804.63 144,912.00 TEN PERCENT LIMITATION IN SINGLE ISSUER AFFIRMATIVE AGAINST ABSTAIN BROKER NON-VOTES 1,484,905,329.37 43,554,189.37 33,665,347.25 144,912.00 LENDING AFFIRMATIVE AGAINST ABSTAIN BROKER NON-VOTES 1,471,450,522.18 51,940,401.04 38,733,942.77 144,912.00 BORROWING AFFIRMATIVE AGAINST ABSTAIN BROKER NON-VOTES 1,472,038,725.40 51,939,088.79 38,147,051.80 144,912.00
- -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND | 2006 SEMIANNUAL REPORT | 49 [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. RiverSource Funds are managed by RiverSource Investments, LLC and distributed by Ameriprise Financial Services, Inc., Member NASD. Both companies are part of Ameriprise Financial, Inc. CONTACT INFORMATION AND SERVICES INTERNET Receive 24-hour access to your account information at www.riversource.com/funds. CLIENT SERVICE Obtain fund performance, fund prices, account values, recent account transactions, and make account inquiries by calling Ameriprise Financial Services at (800) 862-7919 or TTY: (800) 846-4852. TELEPHONE TRANSACTION SERVICE For sales and exchanges, dividend payments, or reinvestments and automatic payment arrangements contact Ameriprise Financial Services at (800) 862-7919. FIND AN AMERIPRISE FINANCIAL ADVISOR If you are an existing Ameriprise Financial client who has recently moved and would like to speak with a new advisor, please call your local Client Service Coordinator at (800) 803-6284. - -------------------------------------------------------------------------------- THIS PAGE IS NOT PART OF THE SEMIANNUAL REPORT RIVERSOURCE(SM) DIVERSIFIED BOND FUND 70100 Ameriprise Financial Center Minneapolis, MN 55474 RIVERSOURCE.COM/FUNDS [LOGO RiverSource(SM) RiverSource Funds are managed by RiverSource Investments] Investments, LLC and distributed by Ameriprise Financial Services, Inc., Member NASD. Both companies are part of Ameriprise Financial, Inc. Item 2. Code of Ethics. Not applicable for semi-annual reports. Item 3. Audit Committee Financial Expert. Not applicable for semi-annual reports. Item 4. Principal Accountant Fees and Services. Not applicable for semi-annual reports. Item 5. Audit Committee of Listed Registrants. Not applicable. Item 6. The complete schedule of investments is included in Item 1 of this Form N-CSR. Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Not applicable. Item 8. Portfolio Managers of Closed-End Management Investment Companies. Not applicable. Item 9. Purchase of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. Not applicable. Item 10. Submission of matters to a vote of security holders. Not applicable. Item 11. Controls and Procedures. (a) Based upon their evaluation of the registrant's disclosure controls and procedures as conducted within 90 days of the filing date of this Form N-CSR, the registrant's Principal Financial Officer and Principal Executive Officer have concluded that those disclosure controls and procedures provide reasonable assurance that the material information required to be disclosed by the registrant on this report is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. (b) There were no changes in the registrant's internal controls over financial reporting that occurred during the registrant's last fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Item 12. Exhibits. (a)(1) Not applicable for semi-annual reports. (a)(2) Separate certification for the Registrant's principal executive officer and principal financial officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 30a-2(a) under the Investment Company Act of 1940, are attached as EX.99.CERT. (a)(3) Not applicable. (b) A certification by the Registrant's principal executive officer and principal financial officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Rule 30a-2(b) under the Investment Company Act of 1940, is attached as EX.99.906 CERT. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) AXP Fixed Income Series, Inc. By /s/ Paula R. Meyer ------------------ Paula R. Meyer President and Principal Executive Officer Date May 3, 2006 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By /s/ Paula R. Meyer ------------------ Paula R. Meyer President and Principal Executive Officer Date May 3, 2006 By /s/ Jeffrey P. Fox ------------------ Jeffrey P. Fox Treasurer and Principal Financial Officer Date May 3, 2006 EX-99.CERT 2 cert.txt CERTIFICATION PURSUANT TO 270.30A-2 OF THE INVESTMENT COMPANY ACT OF 1940 Certification Pursuant to 270.30a-2 of the Investment Company Act of 1940 I, Paula Meyer, certify that: 1. I have reviewed this report on Form N-CSR of AXP Fixed Income Series, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of a date within 90 days prior to the filing date of this report based on such evaluation; d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: April 25, 2006 /s/ Paula R. Meyer ---------------------- Name: Paula R. Meyer Title: President and Chief Executive Officer Certification Pursuant to 270.30a-2 of the Investment Company Act of 1940 I, Jeffrey Fox, certify that: 1. I have reviewed this report on Form N-CSR of AXP Fixed Income Series, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of a date within 90 days prior to the filing date of this report based on such evaluation; d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: April 25, 2006 /s/ Jeffrey P. Fox -------------------- Name: Jeffrey P. Fox Title: Treasurer and Chief Financial Officer EX-99.906 CERT 3 cert906.txt CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION AXP FIXED INCOME SERIES, INC. (the Registrant) Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Each of the undersigned below certifies that 1. This report on Form N-CSR of the Registrant (the Report) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Date: April 25, 2006 /s/ Paula R. Meyer ------------------- Paula R. Meyer President and Chief Executive Officer Date: April 25, 2006 /s/ Jeffrey P. Fox ------------------- Jeffrey P. Fox Treasurer and Chief Financial Officer A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906, OR OTHER DOCUMENT AUTHENTICATING, ACKNOWLEDGING, OR OTHERWISE ADOPTING THE SIGNATURE THAT APPEARS IN TYPED FORM WITHIN ELECTRONIC VERSION OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906, HAS BEEN PROVIDED TO THE REGISTRANT AND WILL BE RETAINED BY THE REGISTRANT AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST. This certification is being furnished to the Commission solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Form N-CSR filed with the Commission. -----END PRIVACY-ENHANCED MESSAGE-----