N-CSR 1 c53711nvcsr.txt N-CSR 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 RIVERSOURCE DIVERSIFIED INCOME SERIES, INC. ------------------------------------------------- (Exact name of registrant as specified in charter) 50606 Ameriprise Financial Center, Minneapolis, Minnesota 55474 --------------------------------------------------------------- (Address of principal executive offices) (Zip code) Scott R. Plummer - 5228 Ameriprise Financial Center, Minneapolis, MN 55474 -------------------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: (612) 671-1947 Date of fiscal year end: 8/31 Date of reporting period: 8/31 Annual Report and Prospectus (RIVERSOURCE INVESTMENTS LOGO) RIVERSOURCE DIVERSIFIED BOND FUND ANNUAL REPORT FOR THE PERIOD ENDED AUGUST 31, 2009 (Prospectus also enclosed) RIVERSOURCE 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. This annual report includes a prospectus that describes in detail the Fund's objective, investment strategy, risks, sales charges, fees and other matters of interest. Please read the prospectus carefully before you invest or send money. (SINGLE STRATEGY FUNDS ICON)
TABLE OF CONTENTS -------------------------------------------------------------- Your Fund at a Glance.............. 2 Manager Commentary................. 5 The Fund's Long-term Performance... 14 Fund Expenses Example.............. 16 Portfolio of Investments........... 19 Statement of Assets and Liabilities...................... 45 Statement of Operations............ 47 Statements of Changes in Net Assets........................... 49 Financial Highlights............... 51 Notes to Financial Statements...... 57 Report of Independent Registered Public Accounting Firm........... 79 Federal Income Tax Information..... 81 Board Members and Officers......... 82 Approval of Investment Management Services Agreement............... 86 Proxy Voting....................... 89
-------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT 1 YOUR FUND AT A GLANCE ---------------------------------------------------------- FUND SUMMARY -------------------------------------------------------------------------------- > RiverSource Diversified Bond Fund (the Fund) Class A shares (excluding sales charge) rose 7.05% for the 12 months ended Aug. 31, 2009. > The Fund underperformed its benchmark, the unmanaged Barclays Capital U.S. Aggregate Bond Index, which gained 7.94%. > The Fund outperformed its peer group, as represented by the Lipper Intermediate Investment Grade Index, which returned 6.91% during the same period. ANNUALIZED TOTAL RETURNS (for period ended Aug. 31, 2009) --------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS --------------------------------------------------------------------- RiverSource Diversified Bond Fund Class A (excluding sales charge) +7.05% +4.47% +3.88% +4.80% --------------------------------------------------------------------- Barclays Capital U.S. Aggregate Bond Index (unmanaged) +7.94% +6.35% +4.96% +6.31% --------------------------------------------------------------------- Lipper Intermediate Investment Grade Index +6.91% +4.36% +3.81% +5.50% ---------------------------------------------------------------------
(See "The Fund's Long-term Performance" for Index descriptions) The performance information shown represents past performance and is not a guarantee of future results. The investment return and principal value of your investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance information shown. You may obtain performance information current to the most recent month-end by contacting your financial intermediary, visiting riversource.com/funds or calling 1(800) 221-2450. The 4.75% sales charge applicable to Class A shares of the Fund is not reflected in the table above. If reflected, returns would be lower than those shown. The performance of other classes may vary from that shown because of differences in expenses. The Fund's returns reflect the effect of fee waivers/expense reimbursements, if any. Without such waivers/reimbursements, the Fund's returns would be lower. See the Average Annual Total Returns table for performance of other share classes of the Fund. The indices do not reflect the effects of sales charges, expenses (excluding Lipper) and taxes. It is not possible to invest directly in an index. -------------------------------------------------------------------------------- 2 RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS --------------------------------------------------------------------------------
AT AUG. 31, 2009 SINCE Without sales charge 1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION* Class A (inception 10/3/74) +7.05% +4.47% +3.88% +4.80% N/A --------------------------------------------------------------------------- Class B (inception 3/20/95) +6.24% +3.68% +3.06% +4.01% N/A --------------------------------------------------------------------------- Class C (inception 6/26/00) +6.25% +3.68% +3.05% N/A +4.20% --------------------------------------------------------------------------- Class I (inception 3/4/04) +7.67% +4.84% N/A N/A +4.12% --------------------------------------------------------------------------- Class R2 (inception 12/11/06) +6.92% N/A N/A N/A +3.82% --------------------------------------------------------------------------- Class R3 (inception 12/11/06) +7.19% N/A N/A N/A +4.09% --------------------------------------------------------------------------- Class R4 (inception 3/20/95) +7.35% +4.59% +3.98% +4.95% N/A --------------------------------------------------------------------------- Class R5 (inception 12/11/06) +7.62% N/A N/A N/A +4.41% --------------------------------------------------------------------------- Class W (inception 12/01/06) +6.95% N/A N/A N/A +3.79% --------------------------------------------------------------------------- With sales charge Class A (inception 10/3/74) +1.96% +2.79% +2.88% +4.29% N/A --------------------------------------------------------------------------- Class B (inception 3/20/95) +1.24% +2.75% +2.71% +4.01% N/A --------------------------------------------------------------------------- Class C (inception 6/26/00) +5.25% +3.68% +3.05% N/A +4.20% ---------------------------------------------------------------------------
Class A share performance reflects the maximum initial sales charge of 4.75%. Class B share performance reflects a contingent deferred sales charge (CDSC) applied as follows: first year 5%; second year 4%; third and fourth years 3%; fifth year 2%; sixth year 1%; no sales charge thereafter. Class C shares may be subject to a 1% CDSC if shares are sold within one year after purchase. Sales charges do not apply to Class I, Class R2, Class R3, Class R4, Class R5 and Class W shares. Class I, Class R2, Class R3, Class R4 and Class R5 are available to qualifying institutional investors only. Class W shares are offered through qualifying discretionary accounts. * For classes with less than 10 years performance. -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT 3 YOUR FUND AT A GLANCE (continued) ---------------------------------------------- STYLE MATRIX --------------------------------------------------------------------------------
DURATION SHORT INT. LONG X HIGH X MEDIUM QUALITY LOW
Shading within the style matrix approximates areas in which the Fund is designed to generally invest. The style matrix can be a valuable tool for constructing and monitoring your portfolio. It provides a frame of reference for distinguishing the types of stocks or bonds owned by a mutual fund, and may serve as a guideline for helping you build a portfolio. Investment products, including shares of mutual funds, are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value. PORTFOLIO STATISTICS -------------------------------------------------------------------------------- Weighted average life(1) 5.68 years --------------------------------------- Effective duration(2) 4.25 years --------------------------------------- Weighted average bond rating(3) AA ---------------------------------------
(1) WEIGHTED AVERAGE LIFE measures a bond's maturity, which takes into consideration the possibility that the issuer may call the bond before its maturity date. (2) EFFECTIVE DURATION measures the sensitivity of a security's price to parallel shifts in the yield curve (the graphical depiction of the levels of interest rates from two years out to 30 years). Positive duration means that as rates rise, the price decreases, and negative duration means that as rates rise, the price increases. (3) WEIGHTED AVERAGE BOND RATING represents the average credit quality of the underlying bonds in the portfolio. There are risks associated with an investment in a bond fund, including credit risk, interest rate risk, and prepayment and extension risk. See the Fund's prospectus for information on these and other risks associated with the Fund. In general, bond prices rise when interest rates fall and vice versa. This effect is more pronounced for longer-term securities. Non-investment grade securities, commonly called "high-yield" or "junk" bonds, have more volatile prices and carry more risk to principal and income than investment grade securities. -------------------------------------------------------------------------------- 4 RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT MANAGER COMMENTARY ------------------------------------------------------------- Dear Shareholder, RiverSource Diversified Bond Fund (the Fund) Class A shares (excluding sales charge) rose 7.05% for the 12 months ended Aug. 31, 2009. The Fund underperformed its benchmark, the unmanaged Barclays Capital U.S. Aggregate Bond Index (Barclays Index), which gained 7.94%. However, the Fund outperformed its peer group, as represented by the Lipper Intermediate Investment Grade Index, which returned 6.91% during the same period. SIGNIFICANT PERFORMANCE FACTORS The 12 months ended Aug. 31, 2009 was largely a tale of two distinct periods. Through late-March 2009, the worsening financial crisis and the rapid deterioration of economic conditions dominated the psychology of the fixed income market. Such investor sentiment sent many running in a classic flight to quality to what many consider the safest investments in the world -- U.S. Treasury securities. As investor risk aversion reached new heights, prices of U.S. Treasury securities rose, and yields tumbled. SECTOR DIVERSIFICATION(1) (at Aug. 31, 2009; % of portfolio assets) ---------------------------------------------------------------------
Asset-Backed 4.4% ------------------------------------------------ Commercial Mortgage-Backed 4.3% ------------------------------------------------ Consumer Discretionary 0.9% ------------------------------------------------ Consumer Staples 1.0% ------------------------------------------------ Energy 1.6% ------------------------------------------------ Financials 2.6% ------------------------------------------------ Foreign Government 0.6% ------------------------------------------------ Health Care 0.7% ------------------------------------------------ Industrials 1.3% ------------------------------------------------ Materials 0.9% ------------------------------------------------ Residential Mortgage-Backed 36.3% ------------------------------------------------ Telecommunication 6.1% ------------------------------------------------ U.S. Government Obligations & Agencies 16.1% ------------------------------------------------ Utilities 8.2% ------------------------------------------------ Other(2) 15.0% ------------------------------------------------
(1) Percentages indicated are based upon total investments (excluding Investments of Cash Collateral Received for Securities on Loan) as of Aug. 31, 2009. The Fund's composition is subject to change. (2) Cash & Cash Equivalents. -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT 5 MANAGER COMMENTARY (continued) ------------------------------------------------- In addition to heightened risk aversion, shorter-maturity U.S. Treasury yields were driven significantly lower by the dramatic actions of the Federal Reserve System (the Fed). Between the end of August 2008 and the end of December 2008, the Fed lowered the targeted federal funds rate from 2% to a historically unprecedented range of 0% to 0.25%. Aggressive Fed easing traditionally has a bigger impact on the short-term end of the yield curve, and this time was no exception. Investor sentiment improved meaningfully from late-March through the end of the fiscal year. The pace of economic decline slowed, second quarter corporate earnings reports exceeded expectations in most areas, and readings on the housing market, consumer spending and employment improved. The probability of economic growth during the second half of 2009 appeared to increase as these data releases provided some "green shoots" that seemed to indicate better times ahead. The Fed maintained its highly accommodative stance by keeping the federal funds target rate between 0% and 0.25%, with no indication that it would raise rates any time soon. The Fed provided additional support to economic recovery efforts by implementing a quantitative easing program, which authorized the purchase of up to $1.25 trillion in mortgage-backed securities, $300 billion in U.S. Treasuries and $200 billion of agency debt. The QUALITY BREAKDOWN (at Aug. 31, 2009; % of portfolio assets excluding cash equivalents and equities) ---------------------------------------------------------------------
AAA bonds 68.5% ------------------------------------------------ AA bonds 1.2% ------------------------------------------------ A bonds 7.4% ------------------------------------------------ BBB bonds 16.4% ------------------------------------------------ Non-investment grade bonds 6.1% ------------------------------------------------ Non-rated bonds 0.4% ------------------------------------------------
Bond ratings apply to the underlying holdings of the Fund and not the Fund itself. Whenever possible, the Standard and Poor's rating is used to determine the credit quality of a security. Standard and Poor's rates the creditworthiness of corporate bonds, with 15 categories, ranging from AAA (highest) to D (lowest). Ratings from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories. If Standard and Poor's doesn't rate a security, then Moody's rating is used. RiverSource Investments, LLC, (the Investment Manager), rates a security using an internal rating system when Moody's doesn't provide a rating. Ratings for 0.3% of the bond portfolio assets were determined through internal analysis. -------------------------------------------------------------------------------- 6 RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- intent of the program is to help keep consumer rates -- and specifically mortgage rates -- at low levels during the early stage of economic recovery. The equity market rallied during these months, driven by investor sentiment relief as financing markets normalized, liquidity improved and the wave of new regulatory programs slowed. Overall, then, higher-quality fixed income sectors outperformed during the crisis of the fall of 2008 as investors sought to hoard cash. However, spread, or non-Treasury, sectors bounced back strongly following the spring 2009 release of the Fed's Supervisory Capital Assessment Program (SCAP) report on what was commonly called the "stress tests" of the 19 largest U.S. bank holding companies. Relief about the near-term health of the U.S. banking system, combined with improved economic data and traction from the various Treasury Department liquidity programs and the Fed's quantitative easing efforts, buoyed hopes for the sustainability of the nascent economic recovery. For the fiscal year as a whole, high yield corporate bonds and high yield bank loans performed best within the fixed income market. Asset-backed securities, emerging market debt and investment grade corporate bonds also fared well, as investors became more comfortable taking risk. U.S. Treasury debt, which, as the highest-quality fixed income sector, was the best performing fixed income area during the first half of the fiscal year, lagged for the 12-month period overall, though it still produced overall positive returns. Indeed, Treasury yields moved lower across the yield curve, or spectrum of maturities, but more meaningfully in short-term maturity U.S. The primary contributor to the Fund's performance was effective individual issue selection within investment grade corporate bonds. -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT 7 MANAGER COMMENTARY (continued) ------------------------------------------------- Treasuries. For example, yields on two-year U.S. Treasuries fell 140 basis points (1.40%), while yields on five-year U.S. Treasuries decreased 70 basis points (0.70%) and yields on ten-year U.S. Treasury securities dropped 41 basis points (0.41%). Yields on 30-year U.S. Treasuries declined just 25 basis points (0.25%). As short-term rates declined more dramatically than longer-term rates, the yield curve steepened, meaning long-term yields were higher than short-term yields. Short-term rates appeared anchored by the low federal funds target rate and language that indicates this target will be in place for an extended period of time. Rates across the remainder of the yield curve were left to vacillate based on investors' concerns about the U.S. dollar and foreign central banks' appetite for U.S. dollar-denominated securities, the impact of a net $2 trillion of U.S. Treasury security issuance for 2009, inflationary pressures, and cash flows between Treasury and non-Treasury fixed income securities. Treasury Inflation Protected Securities ( TIPS) was the worst performing area of fixed income, as deflationary expectations dominated the second half of the year, thus decreasing demand for inflation-linked securities. The primary contributor to the Fund's performance was effective individual issue selection within investment grade corporate bonds. We steered away from the financial sector, which continued to be pressured by loan losses and a general lack of transparency. Instead, we focused positions on utilities and less- cyclical industrials. To a more modest degree, having a significant allocation to investment grade corporate bonds also proved effective, as spreads (the difference in yields between these securities and U.S. Treasuries) tightened significantly year-to-date in 2009. Indeed, after a choppy first quarter of 2009, investment grade corporate bonds recorded their three best months of excess returns of the last twenty years in April, May and July of 2009 versus similar-duration Treasury securities. An increasingly meaningful exposure to high yield corporate bonds and high yield bank loans helped the Fund's results as well, for as mentioned, these were the best performing segments of the fixed income market during the fiscal year. Detracting most from the Fund's results was issue selection within mortgage- backed securities. The Fund's short duration positioning relative to the Barclays Index also hurt performance, as interest rates declined -------------------------------------------------------------------------------- 8 RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- substantially over the fiscal year as a whole. That said, the Fund's short duration positioning benefited the Fund during the first quarter of 2009, when Treasury yields moved higher across the yield curve despite the Fed's quantitative easing. Duration is a measure of the Fund's sensitivity to changes in interest rates. The Fund's exposure to TIPS further detracted from its performance, for as mentioned, TIPS were the worst performing area of the fixed income market during the fiscal year. Yields on TIPS moved higher with the deflationary numbers reported and growing investors' risk appetites. CHANGES TO THE FUND'S PORTFOLIO Between October 2008 and January 2009, amidst the worst of the financial crisis, we materially increased the Fund's allocations to corporate bonds -- both investment grade and high yield -- as well as to high yield bank loans. We believed valuations for these fixed income areas were incorporating expectations for default rates that were excessive, even in the face of global financial markets being brought back from the precipice of collapse by extraordinary coordinated measures by global central banks. In our view, these valuations were not supported by our more constructive view of underlying fundamentals. Further, we liked the transparency that investment grade and high yield corporate bonds offered in comparison to structured asset sectors, such as asset-backed securities, mortgage-backed securities and commercial mortgage-backed securities (CMBS). We felt uncertainties about the lingering impact of the recession on these latter fixed income segments were comparatively greater, and thus we correspondingly reduced the Fund's exposure to non-agency mortgage-backed securities and commercial mortgage-backed securities during these months. These changes in fixed income sector allocation boosted the Fund's results. Investment grade and high yield corporate bonds turned in exceptional performance through the first eight months of 2009. Mortgage-backed securities and CMBS, while generating positive returns for the fiscal year, lagged in comparison. Toward the end of the reporting period, we modestly reduced the Fund's exposure to both high yield and investment grade corporate bonds, given the strong rally these areas had enjoyed but still maintained a greater-than-Barclays Index weighting in investment grade corporate bonds and a material exposure to higher-quality high yield corporate bonds. -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT 9 MANAGER COMMENTARY (continued) ------------------------------------------------- During the fiscal year, we increased the Fund's exposure to agency mortgage- backed securities. We eliminated the Fund's allocation to TIPS, as we believed prices began to imply a more reasonable assessment of future inflation. The Fund's portfolio turnover rate for the 12-month period, including mortgage dollar rolls, was 371%.* OUR FUTURE STRATEGY Clearly, at the end of August, we were in the midst of a tug of war between the optimists and the pessimists on the state of the markets and the economy. The disagreement was fundamentally grounded in a differing view of where the economy stood along the recovery continuum. Over the last few months of the reporting period, the economy seemed to be stabilizing, with encouraging data coming from both the manufacturing and housing sectors. However, uncertainty remained regarding both the strength and sustainability of any upcoming recovery. Given the large amounts of government stimulus programs put into place earlier in the year, as well as a housing market that showed signs of stabilization, we feel it is reasonable to expect positive economic growth for the remainder of 2009. At the same time, we remain concerned about the durability of the recovery based on a couple of key factors. First, recent improvements in residential real estate and home prices could prove fleeting as the growing pipeline of bank- owned properties inevitably flood the market over the next few quarters. In addition, the commercial real estate market remains a troubled area for the U.S. economy, as significant drops in commercial real estate values over the past year and a half or so have the potential to reignite large losses at banks. All told, while we would agree with most that numerous U.S. and global economic statistics, including housing indicators, have presented a mosaic that may best be described as "less bad" than seen just a few months prior, we are of the view that the dramatic recovery in valuations characterizes a market that may have come "too far, too fast." We also remain concerned by the fact that lower- quality assets have rallied the most. Still, while markets might have overshot a bit, the probability of a repeat of 2008 is, in our view, fairly low. Interest rates, though likely to be volatile, will probably trend higher over the intermediate to long term. -------------------------------------------------------------------------------- 10 RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- Given this view, we intend to maintain the Fund's shorter-than-Barclays Index duration positioning for the near term. Going forward, we continue to believe that the best risk-reward opportunities in the fixed income market are in corporate bonds, both investment grade and high yield. We continue to prefer the transparency of corporate bonds to structured or securitized assets and feel that the credit markets must lead the economy out of its malaise and on the road to recovery. Within investment grade corporate bonds, we intend to continue to focus on the asset-rich, non-cyclical industries and names within the space that our analysts favor. Our analysts research in depth each issuer's competitive position, corporate strategy, liquidity and capital adequacy. We also analyze factors such as credit quality, interest rate outlook and price to select what we consider to be the most attractive securities within each area. In our view, at the end of August, the premiums available in the market for bonds in more cyclical industries were not enough to compensate for risk, given the still uncertain economic conditions. Within the high yield corporate bond market, we intend to continue to focus on those select higher-quality bonds where we think valuations warrant a position. Toward the end of the period, we began to increase the liquidity of the Fund in order that we might seek to take advantage of the next opportunity that emerges within the fixed income market. Of course, we will continue to closely monitor Fed policy shifts, economic data releases, supply/demand factors and interest rate movements and adjust the portfolio's holdings and duration We continue to prefer the transparency of corporate bonds to structured or securitized assets and feel that the credit markets must lead the economy out of its malaise and on the road to recovery. -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT 11 MANAGER COMMENTARY (continued) ------------------------------------------------- stance if necessary. Given current market conditions, our goal is to maintain an attractive yield profile, with an emphasis on high quality assets. As always, we will maintain a disciplined focus on individual security selection. Tom Murphy, CFA(R) Scott Schroepfer, CFA(R) Todd White Portfolio Manager Portfolio Manager Portfolio Manager
* A significant portion of the turnover was the result of "roll" transactions in the liquid derivatives and Treasury securities. In the derivative transactions, positions in expiring contracts are liquidated and simultaneously replaced with positions in new contracts with equivalent characteristics. In the Treasury transactions, existing holdings are sold to purchase newly issued securities with slightly longer maturity dates. Although these transactions affect the turnover rate of the portfolio, they do not change the risk exposure or result in material transactions costs. The remaining turnover resulted from strategic reallocations and relative value trading. After transaction costs, we expect this activity to enhance the returns on the overall Fund. Any specific securities mentioned are for illustrative purposes only and are not a complete list of securities that have increased or decreased in value. The views expressed in this statement reflect those of the portfolio manager(s) only through the end of the period of the report as stated on the cover and do not necessarily represent the views of RiverSource Investments, LLC (RiverSource) or any subadviser to the Fund or any other person in the RiverSource or subadviser organizations. Any such views are subject to change at any time based upon market or other conditions and RiverSource disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for a fund in the RiverSource Family of Funds are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any fund in the RiverSource Family of Funds. -------------------------------------------------------------------------------- 12 RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT THIS PAGE LEFT BLANK INTENTIONALLY THE FUND'S LONG-TERM PERFORMANCE ----------------------------------------------- The chart on the facing page illustrates the total value of an assumed $10,000 investment in RiverSource Diversified Bond Fund Class A shares (from 9/1/99 to 8/31/09) as compared to the performance of two widely cited performance indices, the Barclays Capital U.S. Aggregate Bond Index and the Lipper Intermediate Investment Grade Index. In comparing the Fund's Class A shares to these indices, you should take into account the fact that the Fund's performance reflects the maximum sales charge of 4.75%, while such charges are not reflected in the performance of the indices. Returns for the Fund include the reinvestment of any distributions paid during each period. The performance information shown represents past performance and is not a guarantee of future results. The table below and the chart on the facing page do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. 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 contacting your financial intermediary or visiting riversource.com/funds. Also see "Past Performance" in the Fund's current prospectus. COMPARATIVE RESULTS --------------------------------------------------------------------------------
Results at Aug. 31, 2009 1 YEAR 3 YEARS 5 YEARS 10 YEARS RIVERSOURCE DIVERSIFIED BOND FUND (INCLUDES SALES CHARGE) Class A Cumulative value of $10,000 $10,196 $10,861 $11,523 $15,214 ------------------------------------------------------------------------------------------ Average annual total return +1.96% +2.79% +2.88% +4.29% ------------------------------------------------------------------------------------------ BARCLAYS CAPITAL U.S. AGGREGATE BOND INDEX(1) Cumulative value of $10,000 $10,794 $12,027 $12,740 $18,435 ------------------------------------------------------------------------------------------ Average annual total return +7.94% +6.35% +4.96% +6.31% ------------------------------------------------------------------------------------------ LIPPER INTERMEDIATE INVESTMENT GRADE INDEX(2) Cumulative value of $10,000 $10,691 $11,365 $12,055 $17,078 ------------------------------------------------------------------------------------------ Average annual total return +6.91% +4.36% +3.81% +5.50% ------------------------------------------------------------------------------------------
Results for other share classes can be found on page 3. -------------------------------------------------------------------------------- 14 RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- (VALUE OF A HYPOTHETICAL $10,000 INVESTMENT IN RIVERSOURCE DIVERSIFIED BOND FUND LINE GRAPH)
RIVERSOURCE DIVERSIFIED BOND FUND CLASS A BARCLAYS CAPITAL LIPPER INTERMEDIATE (INCLUDES SALES U.S. AGGREGATE INVESTMENT GRADE CHARGE) BOND INDEX(1) INDEX(2) ----------------------- ---------------- ------------------- 8/99 $ 9,525 $10,000 $10,000 11/99 9,635 10,153 10,137 2/00 9,704 10,192 10,164 5/00 9,562 10,292 10,207 8/00 9,971 10,756 10,658 11/00 10,126 11,073 10,938 2/01 10,609 11,563 11,464 5/01 10,673 11,642 11,517 8/01 11,016 12,084 11,970 11/01 11,127 12,309 12,154 2/02 11,222 12,449 12,280 5/02 11,262 12,586 12,386 8/02 11,361 13,065 12,666 11/02 11,489 13,212 12,816 2/03 11,919 13,683 13,305 5/03 12,275 14,043 13,713 8/03 11,918 13,633 13,348 11/03 12,136 13,897 13,646 2/04 12,470 14,305 14,029 5/04 12,202 13,981 13,723 8/04 12,576 14,470 14,167 11/04 12,693 14,514 14,227 2/05 12,843 14,653 14,391 5/05 13,003 14,934 14,634 8/05 13,127 15,070 14,788 11/05 12,951 14,862 14,570 2/06 13,117 15,054 14,765 5/06 12,980 14,863 14,586 8/06 13,343 15,327 15,027 11/06 13,663 15,745 15,432 2/07 13,973 15,888 15,592 5/07 13,949 15,853 15,533 8/07 14,082 16,134 15,695 11/07 14,425 16,697 16,174 2/08 14,551 17,049 16,381 5/08 14,459 16,946 16,168 8/08 14,210 17,079 15,975 11/08 13,145 16,988 14,877 2/09 13,677 17,400 15,235 5/09 14,480 17,855 16,169 8/09 15,214 18,435 17,078
(1) The Barclays Capital U.S. 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. (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. -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT 15 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, which may include management fees; distribution and service (12b-1) fees; and other Fund fees and 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. In addition to the ongoing expenses which the Fund bears directly, the Fund's shareholders indirectly bear the expenses of the funds in which it invests (also referred to as "acquired funds"), including affiliated and non-affiliated pooled investment vehicles (including mutual funds and exchange traded funds). The Fund's indirect expense from investing in the acquired funds is based on the Fund's pro rata portion of the cumulative expenses charged by the acquired funds using the expense ratio of each of the acquired funds as of the acquired fund's most recent shareholder report. The example is based on an investment of $1,000 invested at the beginning of the period and held for the six months ended August 31, 2009. 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. -------------------------------------------------------------------------------- 16 RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT --------------------------------------------------------------------------------
BEGINNING ENDING EXPENSES ACCOUNT VALUE ACCOUNT VALUE PAID DURING ANNUALIZED MARCH 1, 2009 AUG. 31, 2009 THE PERIOD(a) EXPENSE RATIO ------------------------------------------------------------------------------------------ Class A ------------------------------------------------------------------------------------------ Actual(b) $1,000 $1,112.30 $4.44(c) .83% ------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,021.14 $4.25(c) .83% ------------------------------------------------------------------------------------------ Class B ------------------------------------------------------------------------------------------ Actual(b) $1,000 $1,108.10 $8.49(c) 1.59% ------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,017.28 $8.13(c) 1.59% ------------------------------------------------------------------------------------------ Class C ------------------------------------------------------------------------------------------ Actual(b) $1,000 $1,108.20 $8.44(c) 1.58% ------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,017.33 $8.08(c) 1.58% ------------------------------------------------------------------------------------------ Class I ------------------------------------------------------------------------------------------ Actual(b) $1,000 $1,114.20 $2.52(c) .47% ------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,022.96 $2.41(c) .47% ------------------------------------------------------------------------------------------ Class R2 ------------------------------------------------------------------------------------------ Actual(b) $1,000 $1,112.10 $6.64(c) 1.24% ------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,019.06 $6.34(c) 1.24% ------------------------------------------------------------------------------------------ Class R3 ------------------------------------------------------------------------------------------ Actual(b) $1,000 $1,113.40 $5.41(c) 1.01% ------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,020.22 $5.17(c) 1.01% ------------------------------------------------------------------------------------------ Class R4 ------------------------------------------------------------------------------------------ Actual(b) $1,000 $1,112.70 $4.12(c) .77% ------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,021.44 $3.94(c) .77% ------------------------------------------------------------------------------------------ Class R5 ------------------------------------------------------------------------------------------ Actual(b) $1,000 $1,114.10 $2.79(c) .52% ------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,022.71 $2.67(c) .52% ------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT 17 FUND EXPENSES EXAMPLE (continued) ----------------------------------------------
BEGINNING ENDING EXPENSES ACCOUNT VALUE ACCOUNT VALUE PAID DURING ANNUALIZED MARCH 1, 2009 AUG. 31, 2009 THE PERIOD(a) EXPENSE RATIO ------------------------------------------------------------------------------------------ Class W ------------------------------------------------------------------------------------------ Actual(b) $1,000 $1,111.80 $4.92(c) .92% ------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,020.68 $4.71(c) .92% ------------------------------------------------------------------------------------------
(a) Expenses are equal to the annualized expense ratio for each class as indicated above, multiplied by the average account value over the period, multiplied by 185/365 (to reflect the one-half year period). (b) Based on the actual return for the six months ended Aug. 31, 2009: +11.23% for Class A, +10.81% for Class B, +10.82% for Class C, +11.42% for Class I, +11.21% for Class R2, +11.34% for Class R3, +11.27% for Class R4, +11.41% for Class R5 and +11.18% for Class W. (c) RiverSource Investments, LLC (the Investment Manager) and its affiliates have contractually agreed to waive certain fees and to absorb certain expenses until Oct. 31, 2010, unless sooner terminated at the discretion of the Fund's Board, such that net expenses (excluding fees and expenses of acquired funds), will not exceed 0.85% for Class A, 1.61% for Class B, 1.60% for Class C, 0.49% for Class I, 1.29% for Class R2, 1.04% for Class R3, 0.79% for Class R4, 0.54% for Class R5 and 0.94% for Class W. Any amounts waived will not be reimbursed by the Fund. This change was effective Sept. 1, 2009. Had this change been in place for the entire six month period ended Aug. 31, 2009, the actual expenses paid would have been $4.55 for Class A, $8.60 for Class B, $8.55 for Class C, $2.63 for Class I, $6.90 for Class R2, $5.57 for Class R3, $4.23 for Class R4, $2.89 for Class R5 and $5.03 for Class W; the hypothetical expenses paid would have been $4.35 for Class A, $8.23 for Class B, $8.18 for Class C, $2.51 for Class I, $6.60 for Class R2, $5.32 for Class R3, $4.05 for Class R4, $2.77 for Class R5 and $4.81 for Class W. -------------------------------------------------------------------------------- 18 RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT PORTFOLIO OF INVESTMENTS ------------------------------------------------------- AUG. 31, 2009 (Percentages represent value of investments compared to net assets) INVESTMENTS IN SECURITIES
BONDS (107.0%) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) FOREIGN AGENCIES (0.2%)(C) Pemex Project Funding Master Trust 03-01-18 5.75% $1,790,000(m) $1,736,300 06-15-35 6.63 2,543,000(m) 2,316,119 Petroleos de Venezuela 04-12-17 5.25 4,359,000 2,397,450 --------------- Total 6,449,869 ------------------------------------------------------------------------------------- SOVEREIGN (0.6%)(c) Emirate of Abu Dhabi Sr Unsecured 08-02-12 5.50 200,000(d) 209,191 Republic of Argentina 09-12-13 7.00 2,762,000 1,992,783 Republic of Argentina Sr Unsecured 12-15-35 0.00 3,350,000(e) 175,875 Republic of El Salvador 06-15-35 7.65 1,313,000(d) 1,207,960 Republic of Indonesia Sr Unsecured 01-17-18 6.88 1,522,000(d) 1,567,660 10-12-35 8.50 987,000(d) 1,110,375 01-17-38 7.75 850,000(d) 875,500 Republic of Philippines 01-15-16 8.00 425,000 483,969 01-14-31 7.75 1,979,000(m) 2,159,584 Republic of Turkey 09-26-16 7.00 450,000 475,875 04-03-18 6.75 1,429,000 1,473,656 03-17-36 6.88 3,506,000 3,361,378 Republic of Turkey Sr Unsecured 11-07-19 7.50 1,400,000 1,512,000 Republic of Uruguay 05-17-17 9.25 678,000(m) 798,345 Republic of Venezuela 02-26-16 5.75 1,579,000 1,081,615 05-07-23 9.00 1,600,000 1,115,200 Republic of Venezuela Sr Unsecured 10-08-14 8.50 715,000(m) 600,600 Republica Orient Uruguay Sr Unsecured 03-21-36 7.63 1,592,000 1,627,820 Russian Federation 03-31-30 7.50 1,658,880(d) 1,698,278 --------------- Total 23,527,664 ------------------------------------------------------------------------------------- SUPRANATIONAL (--%)(c) Corp Andina de Fomento Unsecured 01-12-17 5.75 140,000 138,741 ------------------------------------------------------------------------------------- U.S. GOVERNMENT OBLIGATIONS & AGENCIES (20.3%) Federal Farm Credit Bank 10-17-12 4.50 1,060,000(m) 1,142,782 02-07-13 3.40 240,000 249,516 Federal Home Loan Banks 05-20-11 2.63 250,000 258,054 11-17-17 5.00 70,000 75,739 Federal Home Loan Mtge Corp 05-28-10 2.38 1,160,000 1,176,545 08-24-11 1.55 57,960,000 58,197,809 02-24-12 2.00 28,120,000 28,225,169 02-24-12 2.05 36,000,000 36,123,192 08-17-12 2.25 56,910,000 57,047,267 07-17-15 4.38 75,935,000 81,219,012 04-16-37 6.00 30,230,000 30,361,712 Federal Natl Mtge Assn 06-09-10 3.26 200,000 204,154 08-17-12 2.24 28,350,000 28,463,646 01-02-14 5.13 13,000 13,765 03-13-14 2.75 20,850,000(m) 21,086,856 05-15-14 2.50 14,305,000(m) 14,225,965 04-15-15 5.00 18,160,000 20,059,028 10-15-15 4.38 18,900,000 20,156,472 07-15-37 5.63 5,345,000 5,817,885
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT 19 PORTFOLIO OF INVESTMENTS (continued) -------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) U.S. GOVERNMENT OBLIGATIONS & AGENCIES (CONT.) U.S. Treasury 11-30-10 1.25% $4,490,000 $4,529,813 07-31-11 1.00 2,600,000 2,603,656 05-15-12 1.38 16,705,000 16,711,532 02-15-14 4.00 30,000 32,351 04-30-14 1.88 1,710,000(m) 1,680,208 07-31-14 2.63 67,915,000(m) 68,721,490 08-31-14 2.38 43,870,000(m) 43,839,159 02-15-15 4.00 17,535,000 18,807,655 07-31-16 3.25 7,670,000 7,787,443 08-15-17 4.75 7,780,000 8,613,308 05-15-19 3.13 9,185,000(m) 8,966,856 08-15-19 3.63 146,610,000(m) 149,358,937 11-15-24 7.50 19,000,000(m) 26,445,625 02-15-39 3.50 52,085,000(m) 46,013,868 05-15-39 4.25 23,525,000(m) 23,785,986 U.S. Treasury Principal Strip 05-15-37 0.00 1,850,000 571,374 --------------- Total 832,573,829 ------------------------------------------------------------------------------------- ASSET-BACKED (5.5%) American Express Credit Account Master Trust Series 2005-4 Cl A 01-15-15 0.34 6,225,000(i) 6,084,791 American Express Credit Account Master Trust Series 2006-2 Cl A 01-15-14 5.35 10,025,000 10,666,167 American Express Credit Account Master Trust Series 2006-3 Cl A 03-17-14 0.29 5,575,000(i) 5,490,635 AmeriCredit Automobile Receivables Trust Series 2007-DF Cl A3A (FSA) 07-06-12 5.49 4,509,544(h) 4,558,438 Bank of America Credit Card Trust Series 2008-A5 Cl A5 12-16-13 1.47 11,175,000(i) 11,197,027 BMW Vehicle Lease Trust Series 2009-1 Cl A2 04-15-11 2.04 11,400,000 11,451,032 Capital Auto Receivables Asset Trust Series 2006-SN1A Cl D 04-20-11 6.15 4,775,000(d) 4,766,327 Capital One Multi-Asset Execution Trust Series 2006-A10 Cl A10 06-16-14 5.15 3,450,000 3,652,729 Carmax Auto Owner Trust Series 2009-1 Cl A4 12-16-13 5.81 5,200,000 5,505,124 Caterpillar Financial Asset Trust Series 2008A Cl A3 04-25-14 4.94 110,000 111,128 Centex Home Equity Series 2002-D Cl M2 12-25-32 2.32 305,481(i) 42,412 CIT Equipment Collateral Series 2009-VT1 Cl A2 06-15-11 2.20 12,050,000(d) 11,920,189 Citibank Omni Master Trust Series 2007-A9A Cl A9 12-23-13 1.37 14,650,000(d,i) 14,631,478 Citigroup Mtge Loan Trust Collateralized Mtge Obligation Series 2009-6 Cl 13A1 01-25-37 0.35 14,318,266(d,i) 12,643,709 Countrywide Asset-Backed Ctfs Series 2005-1 Cl MV1 07-25-35 0.67 10,107,958(i) 9,799,898 Countrywide Asset-Backed Ctfs Series 2005-10 Cl AF6 02-25-36 4.92 1,890,001 1,042,915 Countrywide Asset-Backed Ctfs Series 2006-4 Cl 1A1M 07-25-36 0.53 1,474,074(i) 811,949 CPS Auto Trust Series 2007-A Cl A3 (MBIA) 09-15-11 5.04 2,596,003(d,h) 2,581,292 Deutsche Mtge Securities Collateralized Mtge Obligation Series 2009-RS2 Cl 4A1 04-26-37 0.42 18,213,087(d,i) 16,164,114 Dunkin Securitization Series 2006-1 Cl A2 (AMBAC) 06-20-31 5.78 9,650,000(d,h) 9,295,073
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- 20 RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT --------------------------------------------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) ASSET-BACKED (CONT.) Equifirst Mtge Loan Trust Series 2003-1 Cl IF1 12-25-32 3.51% $145,956(i) $119,666 GSAA Trust Series 2005-12 Cl AF4 09-25-35 5.34 100,000(i) 61,878 Irwin Home Equity Corp Series 2005-A Cl A3 02-25-34 0.65 77,618(i) 67,792 JPMorgan Reremic Collateralized Mtge Obligation Series 2009-5 Cl 4AI 04-26-37 0.38 7,449,761(d,i) 6,813,683 Keycorp Student Loan Trust Series 2003-A Cl 2A2 (MBIA) 10-25-25 0.81 781,389(h,i) 766,076 Merrill Lynch First Franklin Mtge Loan Trust Series 2007-2 Cl A2A 05-25-37 0.38 15,014,202(i) 14,333,113 Merrill Lynch First Franklin Mtge Loan Trust Series 2007-3 Cl A2A 06-25-37 0.32 11,419,621(i) 10,873,940 Natl Collegiate Student Loan Trust Collateralized Mtge Obligation Interest Only Series 2006-2 Cl AIO 08-25-11 17.54 9,525,000(j) 904,875 Natl Collegiate Student Loan Trust Collateralized Mtge Obligation Interest Only Series 2006-3 Cl AIO 01-25-12 5.88 15,000,000(j) 2,203,125 Natl Collegiate Student Loan Trust Collateralized Mtge Obligation Interest Only Series 2006-4 Cl AIO 02-27-12 28.52 11,700,000(j) 1,289,925 RAAC Series Series 2007-SP1 Cl A1 03-25-37 0.42 9,059,000(i) 7,954,917 RBSSP Resecuritization Trust Collateralized Mtge Obligation Series 2009-9 Cl 10A1 10-26-36 0.37 7,745,000(d,i) 7,435,200 Renaissance Home Equity Loan Trust Series 2005-4 Cl A3 02-25-36 5.57 2,815,224 2,504,862 Renaissance Home Equity Loan Trust Series 2007-2 Cl M4 06-25-37 6.31 1,575,000(r) 82,835 Renaissance Home Equity Loan Trust Series 2007-2 Cl M5 06-25-37 6.66 1,030,000(r) 45,340 Renaissance Home Equity Loan Trust Series 2007-2 Cl M6 06-25-37 7.01 1,505,000(r) 54,598 Santander Drive Auto Receivables Trust Series 2007-1 Cl A4 (FGIC) 09-15-14 0.32 11,510,895(i,h) 10,941,679 Santander Drive Auto Receivables Trust Series 2007-3 Cl A3 (FGIC) 08-15-12 5.42 5,756,859(h) 5,713,475 Saxon Asset Securities Trust Series 2007-2 Cl A2A 05-25-47 0.37 2,614,215(i) 2,442,975 Triad Auto Receivables Owner Trust Series 2007-B Cl A3A (FSA) 10-12-12 5.24 2,135,000(h) 2,005,977 Volkswagen Auto Lease Trust Series 2009-A Cl A3 04-16-12 3.41 5,875,000 6,028,501 --------------- Total 225,060,859 ------------------------------------------------------------------------------------- COMMERCIAL MORTGAGE-BACKED (5.4%)(f) Bear Stearns Commercial Mtge Securities Series 2003-T10 Cl A1 03-13-40 4.00 1,361,795 1,329,453 Bear Stearns Commercial Mtge Securities Series 2004-PWR5 Cl A3 07-11-42 4.57 2,220,000 2,216,564 CDC Commercial Mtge Trust Series 2002-FX1 Cl A2 11-15-30 5.68 12,775,000 13,106,508
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT 21 PORTFOLIO OF INVESTMENTS (continued) -------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) COMMERCIAL MORTGAGE-BACKED (CONT.) Citigroup Commercial Mtge Trust Series 2006-C5 Cl A4 10-15-49 5.43% $3,150,000 $2,837,338 Citigroup/Deutsche Bank Commercial Mtge Trust Series 2005-CD1 Cl A4 07-15-44 5.40 6,500,000(i) 6,287,926 Citigroup/Deutsche Bank Commercial Mtge Trust Series 2005-CD1 Cl ASB 07-15-44 5.40 3,225,000 3,327,313 Commercial Mtge Pass-Through Ctfs Series 2006-CN2A Cl BFL 02-05-19 0.59 2,700,000(d,i) 1,948,432 CS First Boston Mtge Securities Series 2001-CP4 Cl A4 12-15-35 6.18 7,356,505 7,645,639 CS First Boston Mtge Securities Series 2004-C1 Cl A4 01-15-14 4.75 4,375,000 4,267,272 CS First Boston Mtge Securities Series 2004-C2 Cl A1 05-15-36 3.82 1,005,145 997,229 Federal Natl Mtge Assn #725217 02-01-14 4.78 989,132 1,041,521 Federal Natl Mtge Assn #735029 09-01-13 5.32 349,348 357,271 GE Capital Commercial Mtge Corp Series 2001-3 Cl A2 06-10-38 6.07 6,900,000 7,251,236 GE Capital Commercial Mtge Series 2005-C1 Cl A5 06-10-48 4.77 400,000 371,386 General Electric Capital Assurance Series 2003-1 Cl A4 05-12-35 5.25 3,078,642(d) 3,104,669 Greenwich Capital Commercial Funding Series 2003-C1 Cl A3 07-05-35 3.86 5,650,000 5,385,597 Greenwich Capital Commercial Funding Series 2004-GG1 Cl A5 06-10-36 4.88 3,550,000 3,535,299 GS Mtge Securities II Series 2005-GG4 Cl A4A 07-10-39 4.75 13,000,000 12,045,094 GS Mtge Securities II Series 2006-GG6 Cl A4 04-10-38 5.55 375,000 329,397 GS Mtge Securities II Series 2007-EOP Cl J 03-06-20 1.13 9,050,000(d,i) 6,745,191 GS Mtge Securities II Series 2007-GG10 Cl F 08-10-45 6.00 9,800,000 1,357,075 JPMorgan Chase Commercial Mtge Securities Series 2003-LN1 Cl A1 10-15-37 4.13 2,221,203 2,258,436 JPMorgan Chase Commercial Mtge Securities Series 2003-ML1A Cl A1 03-12-39 3.97 1,483,550 1,503,515 JPMorgan Chase Commercial Mtge Securities Series 2003-ML1A Cl A2 03-12-39 4.77 7,419,000 7,239,062 JPMorgan Chase Commercial Mtge Securities Series 2004-C2 Cl A2 05-15-41 5.28 4,635,000 4,591,589 JPMorgan Chase Commercial Mtge Securities Series 2004-CBX Cl A3 01-12-37 4.18 3,700,896 3,704,206 JPMorgan Chase Commercial Mtge Securities Series 2004-LN2 Cl A1 07-15-41 4.48 7,456,338 7,546,790 JPMorgan Chase Commercial Mtge Securities Series 2005-LDP5 Cl A4 12-15-44 5.34 3,825,000 3,695,185 JPMorgan Chase Commercial Mtge Securities Series 2006-LDP6 Cl ASB 04-15-43 5.49 12,380,000 11,981,748 JPMorgan Chase Commercial Mtge Securities Series 2006-LDP8 Cl A4 05-15-45 5.40 50,000 41,533 JPMorgan Chase Commercial Mtge Securities Series 2007-CB20 Cl A4 02-12-51 5.79 6,000,000 4,919,495 JPMorgan Chase Commercial Mtge Securities Series 2007-CB20 Cl E 02-12-51 6.40 4,725,000(d) 348,515
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- 22 RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT --------------------------------------------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) COMMERCIAL MORTGAGE-BACKED (CONT.) JPMorgan Chase Commercial Mtge Securities Series 2007-LDPX Cl A3 01-15-49 5.42% $6,700,000 $5,623,920 LB-UBS Commercial Mtge Trust Series 2004-C2 Cl A3 03-15-29 3.97 4,700,000 4,367,696 LB-UBS Commercial Mtge Trust Series 2004-C6 Cl A6 08-15-29 5.02 3,500,000 3,183,241 LB-UBS Commercial Mtge Trust Series 2006-C4 Cl AAB 06-15-32 6.05 5,100,000 5,026,224 LB-UBS Commercial Mtge Trust Series 2007-C6 Cl A4 07-15-40 5.86 4,475,000 3,494,110 Merrill Lynch Mtge Trust Series 2005-CKI1 Cl A1 11-12-37 5.08 470,143 472,620 Merrill Lynch Mtge Trust Series 2008-C1 Cl A1 02-12-51 4.71 2,180,704 2,192,458 Morgan Stanley Capital I Series 2003-T11 Cl A2 06-13-41 4.34 1,407,364 1,419,053 Morgan Stanley Capital I Series 2004-HQ4 Cl A5 04-14-40 4.59 5,200,000 4,982,453 Morgan Stanley Capital I Series 2006-T23 Cl AAB 08-12-41 5.97 3,675,000 3,627,342 TIAA Seasoned Commercial Mtge Trust Series 2007-C4 Cl A2 08-15-39 5.79 3,900,000(i) 3,948,702 TIAA Seasoned Commercial Mtge Trust Series 2007-C4 Cl A3 08-15-39 6.07 2,850,000 2,874,786 Wachovia Bank Commercial Mtge Trust Series 2003-C7 Cl A2 10-15-35 5.08 20,500,000(d) 20,341,534 Wachovia Bank Commercial Mtge Trust Series 2005-C16 Cl A2 10-15-41 4.38 2,783,858 2,790,696 Wachovia Bank Commercial Mtge Trust Series 2005-C20 Cl A5 07-15-42 5.09 5,342,000 5,411,794 Wachovia Bank Commercial Mtge Trust Series 2006-C24 Cl A3 03-15-45 5.56 9,425,000 8,943,122 Wachovia Bank Commercial Mtge Trust Series 2006-C24 Cl APB 03-15-45 5.58 3,200,000 3,198,995 Wachovia Bank Commercial Mtge Trust Series 2006-C27 Cl APB 07-15-45 5.73 5,475,000 5,395,345 --------------- Total 220,611,575 ------------------------------------------------------------------------------------- RESIDENTIAL MORTGAGE-BACKED (45.8%)(f,p) Banc of America Alternative Loan Trust Collateralized Mtge Obligation Series 2004-3 Cl 1A1 04-25-34 6.00 7,517,279 6,781,999 Banc of America Funding Collateralized Mtge Obligation Series 2007-8 Cl 1A1 10-25-37 6.00 1,744,750 914,494 Banc of America Mtge Securities Commercial Mtge Obligation Series 2004-F Cl 1A1 07-25-34 4.09 69,961(i) 61,950 BCAP LLC Trust Collateralized Mtge Obligation Series 2009-RR1 Cl 2A2 05-26-35 3.73 13,823,234(d,i) 1,244,091 Bear Stearns Adjustable Rate Mtge Trust Collateralized Mtge Obligation Series 2005-8 Cl A4 08-25-35 5.10 6,475,000(d,i) 5,130,924 Bear Stearns Alt-A Trust Collateralized Mtge Obligation Series 2005-2 Cl 2A2B 04-25-35 4.13 81,657(i) 14,970 Chase Mtge Finance Collateralized Mtge Obligation Series 2002-S6 Cl M 05-25-32 6.30 430,483 416,884
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT 23 PORTFOLIO OF INVESTMENTS (continued) -------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) RESIDENTIAL MORTGAGE-BACKED (CONT.) ChaseFlex Trust Collateralized Mtge Obligation Series 2005-2 Cl 2A2 06-25-35 6.50% $1,720,540 $1,409,767 Citigroup Mtge Loan Trust Collateralized Mtge Obligation Series 2009-3 Cl 3A2 01-19-34 4.69 16,045,000(d,i) 14,645,154 Citigroup Mtge Loan Trust Collateralized Mtge Obligation Series 2009-4 Cl 13A3 10-25-35 4.32 2,046,982(d,i) 245,638 Citigroup Mtge Loan Trust Collateralized Mtge Obligation Series 2009-5 Cl 3A2 06-25-36 5.50 4,547,358(d) 545,683 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Interest Only Series 2007-8CB Cl A13 05-25-37 44.25 4,881,979(j) 439,828 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2003-11T1 Cl A1 07-25-18 4.75 2,641,359 2,620,724 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2005-50CB Cl 2A1 11-25-35 6.00 10,542,657 6,790,954 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2006-22R Cl 1A2 05-25-36 6.00 5,336,075 4,004,662 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2006-45T1 Cl 2A5 02-25-37 6.00 6,296,130 4,106,261 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2007-OH1 Cl A1A 04-25-47 0.36 2,407,442(i) 1,939,266 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2007-OH3 Cl A3 09-25-47 0.77 15,236,645(i) 1,649,999 Countrywide Home Loans Collateralized Mtge Obligation Series 2005-R2 Cl 2A1 06-25-35 7.00 5,374,077(d) 4,526,611 Countrywide Home Loans Collateralized Mtge Obligation Series 2006-HYB1 Cl 1A1 03-20-36 5.31 3,412,862(i) 1,775,092 Downey Savings & Loan Assn Mtge Loan Trust Collateralized Mtge Obligation Interest Only Series 2005-AR5 Cl X1 08-19-45 13.12 1(b,j,t) -- Federal Home Loan Mtge Corp 09-01-24 4.50 200,000(g) 205,500 09-01-24 5.50 200,000(g) 210,250 09-01-39 5.00 57,962,897(g) 59,502,507 09-01-39 5.50 26,900,000(g) 28,026,438 09-01-39 6.00 30,000,000(g) 31,593,750 Federal Home Loan Mtge Corp #170216 03-01-17 8.50 4,364 4,734 Federal Home Loan Mtge Corp #1G2547 12-01-36 6.09 308,068(i) 326,039 Federal Home Loan Mtge Corp #1Q0140 08-01-36 6.16 312,681(i) 331,816 Federal Home Loan Mtge Corp #284190 01-01-17 8.00 204 223 Federal Home Loan Mtge Corp #290970 04-01-17 8.00 4,053 4,392 Federal Home Loan Mtge Corp #295114 06-01-17 8.50 3,182 3,452 Federal Home Loan Mtge Corp #540861 09-01-19 8.50 30,100 32,822 Federal Home Loan Mtge Corp #A00304 04-01-21 9.00 33,468 37,087 Federal Home Loan Mtge Corp #A12692 10-01-32 6.00 67,452 72,601 Federal Home Loan Mtge Corp #A13854 09-01-33 6.00 106,979 114,863
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- 24 RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT --------------------------------------------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) RESIDENTIAL MORTGAGE-BACKED (CONT.) Federal Home Loan Mtge Corp #A75929 04-01-38 7.00% $158,086 $171,077 Federal Home Loan Mtge Corp #B10254 10-01-18 5.50 303,088 322,988 Federal Home Loan Mtge Corp #B12280 02-01-19 5.50 178,867 190,610 Federal Home Loan Mtge Corp #C00103 03-01-22 8.50 72,531 82,019 Federal Home Loan Mtge Corp #C00144 08-01-22 8.50 76,593 87,547 Federal Home Loan Mtge Corp #C00356 08-01-24 8.00 280,687 317,800 Federal Home Loan Mtge Corp #C00666 10-01-28 7.00 32,640 35,865 Federal Home Loan Mtge Corp #C53878 12-01-30 5.50 1,294,339 1,357,311 Federal Home Loan Mtge Corp #C59161 10-01-31 6.00 94,837 100,907 Federal Home Loan Mtge Corp #C62993 01-01-32 6.50 786,626 846,142 Federal Home Loan Mtge Corp #C63552 01-01-32 6.50 1,149,576 1,235,967 Federal Home Loan Mtge Corp #C64703 03-01-32 6.50 711,254 770,234 Federal Home Loan Mtge Corp #C67723 06-01-32 7.00 602,858 667,291 Federal Home Loan Mtge Corp #C77372 03-01-33 6.00 206,313 221,131 Federal Home Loan Mtge Corp #C78031 04-01-33 5.50 6,725,899 7,060,957 Federal Home Loan Mtge Corp #C79930 06-01-33 5.50 5,395,729 5,653,396 Federal Home Loan Mtge Corp #C90767 12-01-23 6.00 5,349,730 5,730,399 Federal Home Loan Mtge Corp #D96300 10-01-23 5.50 4,018,258 4,244,429 Federal Home Loan Mtge Corp #E01127 02-01-17 6.50 690,675 741,024 Federal Home Loan Mtge Corp #E01419 05-01-18 5.50 2,779,874 2,961,687 Federal Home Loan Mtge Corp #E74288 12-01-13 6.00 70,525 75,133 Federal Home Loan Mtge Corp #E79810 11-01-14 7.50 557,252 604,931 Federal Home Loan Mtge Corp #E90216 05-01-17 6.00 713,547 763,295 Federal Home Loan Mtge Corp #E96624 05-01-18 5.00 874,447 923,935 Federal Home Loan Mtge Corp #E98725 08-01-18 5.00 6,670,300 7,045,007 Federal Home Loan Mtge Corp #E99684 10-01-18 5.00 6,918,974 7,339,057 Federal Home Loan Mtge Corp #G00286 02-01-25 8.00 109,363 123,823 Federal Home Loan Mtge Corp #G01108 04-01-30 7.00 2,032,892 2,232,147 Federal Home Loan Mtge Corp #G01410 04-01-32 7.00 222,423 243,455 Federal Home Loan Mtge Corp #G01441 07-01-32 7.00 1,913,291 2,094,212 Federal Home Loan Mtge Corp #G01535 04-01-33 6.00 7,875,012 8,448,299 Federal Home Loan Mtge Corp #G02757 06-01-36 5.00 22,522,667(m) 23,211,105 Federal Home Loan Mtge Corp #G03419 07-01-37 6.00 8,019,443 8,465,054 Federal Home Loan Mtge Corp #G30225 02-01-23 6.00 7,106,216 7,617,638 Federal Home Loan Mtge Corp #H01724 09-01-37 6.00 1,212,685 1,277,583 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 2795 Cl IY 07-15-17 41.78 196,957(j) 7,863 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 2817 Cl SA 06-15-32 26.19 4,645,254(j) 363,561 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Series 2576 Cl KJ 02-15-33 5.50 4,570,505 4,691,150
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT 25 PORTFOLIO OF INVESTMENTS (continued) -------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) RESIDENTIAL MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn 09-01-24 4.50% $35,500,000(g) $36,498,438 09-01-24 5.00 121,695,000(g) 126,829,069 09-01-39 4.50 81,600,000(g) 82,033,459 09-01-39 5.00 104,975,000(g) 107,730,594 09-01-39 5.50 272,400,000(g) 283,551,512 09-01-39 6.00 213,400,000(g) 224,536,919 09-01-39 7.00 30,000,000(g) 32,578,140 Federal Natl Mtge Assn #125479 04-01-27 7.50 163,233 181,900 Federal Natl Mtge Assn #190899 04-01-23 8.50 234,789 255,901 Federal Natl Mtge Assn #190944 05-01-24 6.00 4,020,711 4,259,425 Federal Natl Mtge Assn #190988 06-01-24 9.00 198,615 216,077 Federal Natl Mtge Assn #231309 09-01-23 6.50 61,584 66,522 Federal Natl Mtge Assn #231310 09-01-23 6.50 344,211 371,809 Federal Natl Mtge Assn #250330 09-01-25 8.00 192,661 217,595 Federal Natl Mtge Assn #250495 03-01-26 7.00 372,082 409,064 Federal Natl Mtge Assn #250765 12-01-26 8.00 151,730 171,464 Federal Natl Mtge Assn #251116 08-01-27 8.00 204,220 230,877 Federal Natl Mtge Assn #252440 05-01-29 7.00 155,261 170,983 Federal Natl Mtge Assn #252498 06-01-29 7.00 4,310 4,747 Federal Natl Mtge Assn #253883 08-01-16 6.00 1,712,474 1,832,400 Federal Natl Mtge Assn #254236 03-01-17 6.50 1,029,857 1,110,078 Federal Natl Mtge Assn #254383 06-01-32 7.50 289,643 322,084 Federal Natl Mtge Assn #254587 12-01-22 5.50 369,593 390,530 Federal Natl Mtge Assn #254802 07-01-18 4.50 1,929,868 2,024,954 Federal Natl Mtge Assn #254916 09-01-23 5.50 7,473,916 7,896,658 Federal Natl Mtge Assn #256901 09-01-37 6.50 316,558 337,895 Federal Natl Mtge Assn #268071 01-01-24 6.50 95,218 102,852 Federal Natl Mtge Assn #303226 02-01-25 8.00 78,566 88,665 Federal Natl Mtge Assn #313049 08-01-11 8.50 94,991 97,444 Federal Natl Mtge Assn #323715 05-01-29 6.00 298,059 317,415 Federal Natl Mtge Assn #323933 09-01-29 7.00 2,776,775 3,057,958 Federal Natl Mtge Assn #408207 01-01-28 6.50 94,520 102,196 Federal Natl Mtge Assn #455791 01-01-29 6.50 254,182 275,286 Federal Natl Mtge Assn #489888 05-01-29 6.50 1,160,697 1,255,615 Federal Natl Mtge Assn #493945 04-01-29 6.50 63,844 68,536 Federal Natl Mtge Assn #496029 01-01-29 6.50 1,455,672 1,577,442 Federal Natl Mtge Assn #518159 09-01-14 7.00 224,712 240,686 Federal Natl Mtge Assn #545008 06-01-31 7.00 1,940,171 2,151,201 Federal Natl Mtge Assn #545342 04-01-13 7.00 122,879 126,806 Federal Natl Mtge Assn #545684 05-01-32 7.50 227,885 254,124 Federal Natl Mtge Assn #545868 08-01-32 7.00 73,557 81,058 Federal Natl Mtge Assn #545869 07-01-32 6.50 1,427,161 1,548,513 Federal Natl Mtge Assn #545885 08-01-32 6.50 2,807,900 3,057,972 Federal Natl Mtge Assn #545910 08-01-17 6.00 2,901,402 3,124,638 Federal Natl Mtge Assn #555340 04-01-33 5.50 220,261 232,742
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- 26 RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT --------------------------------------------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) RESIDENTIAL MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #555343 08-01-17 6.00% $2,823,763 $3,023,280 Federal Natl Mtge Assn #555375 04-01-33 6.00 17,731,176 19,047,322 Federal Natl Mtge Assn #555458 05-01-33 5.50 16,243,745 16,939,140 Federal Natl Mtge Assn #555528 04-01-33 6.00 11,074,208 11,769,157 Federal Natl Mtge Assn #555734 07-01-23 5.00 6,324,666 6,601,942 Federal Natl Mtge Assn #555794 09-01-28 7.50 621,356 691,762 Federal Natl Mtge Assn #567840 10-01-30 7.00 1,032,159 1,136,678 Federal Natl Mtge Assn #582154 05-01-31 6.50 76,667 82,793 Federal Natl Mtge Assn #587859 12-01-16 5.50 2,467,645 2,627,348 Federal Natl Mtge Assn #597374 09-01-31 7.00 587,949 651,660 Federal Natl Mtge Assn #606882 10-01-31 7.00 591,729 650,609 Federal Natl Mtge Assn #611831 02-01-31 7.50 26,579 29,628 Federal Natl Mtge Assn #615135 11-01-16 6.00 176,529 188,892 Federal Natl Mtge Assn #634650 04-01-32 7.50 113,942 126,704 Federal Natl Mtge Assn #638969 03-01-32 5.50 1,053,721 1,108,979 Federal Natl Mtge Assn #643362 04-01-17 6.50 305,474 329,270 Federal Natl Mtge Assn #646147 06-01-32 7.00 2,393,063 2,651,905 Federal Natl Mtge Assn #646446 06-01-17 6.50 792,664 854,409 Federal Natl Mtge Assn #649068 06-01-17 6.50 1,274,121 1,373,215 Federal Natl Mtge Assn #649263 08-01-17 6.50 1,317,046 1,423,092 Federal Natl Mtge Assn #650009 09-01-31 7.50 47,731 53,206 Federal Natl Mtge Assn #654208 10-01-32 6.50 1,648,553 1,779,246 Federal Natl Mtge Assn #654682 10-01-32 6.00 622,906 667,577 Federal Natl Mtge Assn #654689 11-01-32 6.00 1,142,857 1,224,684 Federal Natl Mtge Assn #656908 09-01-32 6.50 1,309,819 1,428,826 Federal Natl Mtge Assn #661815 10-01-32 6.00 101,496 108,751 Federal Natl Mtge Assn #662061 09-01-32 6.50 2,064,322 2,227,976 Federal Natl Mtge Assn #667604 10-01-32 5.50 204,769 214,516 Federal Natl Mtge Assn #667787 02-01-18 5.50 1,090,770 1,163,068 Federal Natl Mtge Assn #670382 09-01-32 6.00 7,660,209 8,140,918 Federal Natl Mtge Assn #670387 08-01-32 7.00 986,098 1,083,870 Federal Natl Mtge Assn #677089 01-01-33 5.50 405,381 424,676 Federal Natl Mtge Assn #678028 09-01-17 6.00 3,721,719 3,984,681 Federal Natl Mtge Assn #678065 02-01-33 6.50 362,376 395,199 Federal Natl Mtge Assn #678937 01-01-18 5.50 1,756,160 1,881,854 Federal Natl Mtge Assn #678941 02-01-18 5.50 2,222,166 2,381,303 Federal Natl Mtge Assn #679095 04-01-18 5.00 3,774,997(o) 3,993,357 Federal Natl Mtge Assn #680961 01-01-33 6.00 473,160 506,920 Federal Natl Mtge Assn #681080 02-01-18 5.00 658,836 696,945 Federal Natl Mtge Assn #681166 04-01-32 6.50 297,230 320,979 Federal Natl Mtge Assn #681400 03-01-18 5.50 3,375,544 3,600,463 Federal Natl Mtge Assn #682825 01-01-33 6.00 1,250,353 1,328,817
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT 27 PORTFOLIO OF INVESTMENTS (continued) -------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) RESIDENTIAL MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #683100 02-01-18 5.50% $120,876 $129,432 Federal Natl Mtge Assn #683116 02-01-33 6.00 201,587 214,238 Federal Natl Mtge Assn #684586 03-01-33 6.00 2,478,405 2,656,027 Federal Natl Mtge Assn #686172 02-01-33 6.00 1,937,635 2,059,230 Federal Natl Mtge Assn #686528 02-01-33 6.00 2,586,694 2,772,081 Federal Natl Mtge Assn #687051 01-01-33 6.00 7,389,650 7,780,252 Federal Natl Mtge Assn #689026 05-01-33 5.50 930,432 980,222 Federal Natl Mtge Assn #689093 07-01-28 5.50 2,486,417 2,616,808 Federal Natl Mtge Assn #694628 04-01-33 5.50 5,089,508 5,349,390 Federal Natl Mtge Assn #694795 04-01-33 5.50 5,985,167(o) 6,307,516 Federal Natl Mtge Assn #694988 03-01-33 5.50 8,359,391 8,808,994 Federal Natl Mtge Assn #695202 03-01-33 6.50 2,465,936 2,658,347 Federal Natl Mtge Assn #695909 05-01-18 5.50 1,497,340 1,603,123 Federal Natl Mtge Assn #699424 04-01-33 5.50 3,490,972 3,679,312 Federal Natl Mtge Assn #702427 04-01-33 5.50 2,872,851 3,033,626 Federal Natl Mtge Assn #704005 05-01-33 5.50 805,386 843,594 Federal Natl Mtge Assn #705655 05-01-33 5.00 372,105 383,945 Federal Natl Mtge Assn #709093 06-01-33 6.00 116,951 124,143 Federal Natl Mtge Assn #709901 06-01-18 5.00 355,698 377,507 Federal Natl Mtge Assn #710823 05-01-33 5.50 540,364 570,325 Federal Natl Mtge Assn #711503 06-01-33 5.50 82,165 86,370 Federal Natl Mtge Assn #720070 07-01-23 5.50 1,900,310 2,007,796 Federal Natl Mtge Assn #723687 08-01-28 5.50 2,944,061 3,098,452 Federal Natl Mtge Assn #725232 03-01-34 5.00 14,798,381 15,269,213 Federal Natl Mtge Assn #725424 04-01-34 5.50 1,315,185 1,377,579 Federal Natl Mtge Assn #725425 04-01-34 5.50 19,914,974 20,860,832 Federal Natl Mtge Assn #725431 08-01-15 5.50 76,639 81,336 Federal Natl Mtge Assn #725684 05-01-18 6.00 6,537,575 7,018,189 Federal Natl Mtge Assn #725813 12-01-33 6.50 7,857,282 8,470,365 Federal Natl Mtge Assn #726940 08-01-23 5.50 67,451 71,114 Federal Natl Mtge Assn #730153 08-01-33 5.50 808,225 846,568 Federal Natl Mtge Assn #735212 12-01-34 5.00 15,769,217 16,261,081 Federal Natl Mtge Assn #735224 02-01-35 5.50 24,929,974 26,112,688 Federal Natl Mtge Assn #735578 06-01-35 5.00 15,206,010 15,666,051 Federal Natl Mtge Assn #738921 11-01-32 6.50 759,073 826,073 Federal Natl Mtge Assn #743262 10-01-18 5.00 2,405,859 2,553,228 Federal Natl Mtge Assn #743347 10-01-33 6.00 72,108 76,551 Federal Natl Mtge Assn #743579 11-01-33 5.50 226,918 237,683 Federal Natl Mtge Assn #745355 03-01-36 5.00 14,813,662 15,261,833 Federal Natl Mtge Assn #745563 08-01-34 5.50 1,146,027 1,200,396 Federal Natl Mtge Assn #747642 11-01-28 5.50 1,953,954 2,056,422 Federal Natl Mtge Assn #753074 12-01-28 5.50 6,024,704 6,340,648
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- 28 RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT --------------------------------------------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) RESIDENTIAL MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #753091 12-01-33 5.50% $3,417,750 $3,579,893 Federal Natl Mtge Assn #757581 01-01-19 5.50 729,302 777,641 Federal Natl Mtge Assn #759342 01-01-34 6.50 1,265,982 1,377,251 Federal Natl Mtge Assn #765759 12-01-18 5.00 2,397,862 2,536,563 Federal Natl Mtge Assn #766641 03-01-34 5.00 5,098,467 5,257,495 Federal Natl Mtge Assn #776962 04-01-29 5.00 14,008,905 14,523,787 Federal Natl Mtge Assn #779676 06-01-34 5.00 1,718,559 1,772,163 Federal Natl Mtge Assn #804442 12-01-34 6.50 1,113,174 1,197,597 Federal Natl Mtge Assn #831870 11-01-36 6.50 1,182,327 1,267,191 Federal Natl Mtge Assn #844445 12-01-35 5.50 12,162,482 12,716,682 Federal Natl Mtge Assn #845109 05-01-36 6.00 21,109,519 22,289,096 Federal Natl Mtge Assn #868574 04-01-36 5.50 59,956 62,595 Federal Natl Mtge Assn #881886 04-01-36 5.36 170,021(i) 178,423 Federal Natl Mtge Assn #882063 06-01-36 6.50 2,654,650 2,848,119 Federal Natl Mtge Assn #886291 07-01-36 7.00 5,701,675 6,263,891 Federal Natl Mtge Assn #889150 01-01-38 5.50 7,463,695 7,783,963 Federal Natl Mtge Assn #894547 05-01-35 4.01 6,398,795(i) 6,515,246 Federal Natl Mtge Assn #909214 07-01-38 7.00 1,666,103 1,811,862 Federal Natl Mtge Assn #915770 03-01-37 6.50 2,495,194 2,673,122 Federal Natl Mtge Assn #934324 06-01-38 5.50 433,115 451,540 Federal Natl Mtge Assn #937672 06-01-37 5.50 423,803 441,988 Federal Natl Mtge Assn #967656 12-01-37 6.50 421,033 451,056 Federal Natl Mtge Assn #967739 12-01-37 5.50 4,117,012 4,293,674 Federal Natl Mtge Assn #968411 01-01-38 5.50 2,676,299 2,791,140 Federal Natl Mtge Assn #976421 03-01-23 4.50 6,446,452 6,642,196 Federal Natl Mtge Assn #AA4180 03-01-39 5.50 496,034 517,086 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2003-63 Cl IP 07-25-33 5.89 11,949,903(j) 2,000,431 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2003-71 Cl IM 12-25-31 5.34 2,353,080(j) 284,635 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2004-84 Cl GI 12-25-22 7.82 577,921(j) 49,196 Federal Natl Mtge Assn Collateralized Mtge Obligation Principal Only Series 43 Cl 1 09-01-18 2.72 9,351(k) 8,618 Govt Natl Mtge Assn 09-01-39 4.50 65,000,000(g) 65,528,125 09-01-39 6.00 44,000,000(g) 46,378,728 Govt Natl Mtge Assn #425004 10-15-33 5.50 3,018,118 3,176,451 Govt Natl Mtge Assn #595256 12-15-32 6.00 4,823,256 5,139,123 Govt Natl Mtge Assn #604580 08-15-33 5.00 2,911,257 3,019,406 Govt Natl Mtge Assn #604708 10-15-33 5.50 7,646,645 8,047,795 Govt Natl Mtge Assn #606844 09-15-33 5.00 7,271,468 7,541,592
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT 29 PORTFOLIO OF INVESTMENTS (continued) -------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) RESIDENTIAL MORTGAGE-BACKED (CONT.) Govt Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2002-70 Cl IC 08-20-32 8.72% $5,058,821(j) $639,153 Govt Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2002-80 Cl CI 01-20-32 68.86 578,179(j) 17,829 GSR Mtge Loan Trust Commercial Mtge Obligation Series 2005-AR4 Cl 4A1 07-25-35 5.35 272,848(i) 220,090 Harborview Mtge Loan Trust Collateralized Mtge Obligation Series 2005-16 Cl 2A1A 01-19-36 0.52 236,901(i) 120,834 Homestar Mtge Acceptance Corporation Commercial Mtge Obligation Series 2004-1 Cl A1 03-25-34 0.59 114,382(i) 74,301 IndyMac Index Mtge Loan Trust Collateralized Mtge Obligation Interest Only Series 2005-AR8 Cl AX1 04-25-35 0.00 65,790,560(b,j) 1 IndyMac Index Mtge Loan Trust Collateralized Mtge Obligation Interest Only Series 2006-AR25 Cl 3A3 09-25-36 20.00 27,979,403(j) 288,683 IndyMac Index Mtge Loan Trust Collateralized Mtge Obligation Series 2005-AR25 Cl 1A21 12-25-35 5.69 5,468,414(i) 3,528,211 Indymac Index Mtge Loan Trust Commercial Mtge Obligation Series 2006-AR3 Cl 2A1B 03-25-36 5.83 447,748(i) 212,782 Jefferies & Co Collateralized Mtge Obligation Series 2009-R10 Cl 1A1 06-26-47 0.42 5,852,610(d,i) 5,662,400 Jefferies & Co Collateralized Mtge Obligation Series 2009-R10 Cl 2A1 05-26-48 0.36 10,196,376(d,i) 9,864,994 JPMorgan Mtge Trust Collateralized Mtge Obligation Series 2005-A3 Cl 3A2 06-25-35 5.03 4,964,468(i) 4,749,804 MASTR Alternative Loan Trust Collateralized Mtge Obligation Series 2004-2 Cl 4A1 02-25-19 5.00 4,634,749 4,366,802 MASTR Alternative Loan Trust Collateralized Mtge Obligation Series 2004-4 Cl 2A1 05-25-34 6.00 2,491,441 2,159,109 MASTR Alternative Loan Trust Collateralized Mtge Obligation Series 2004-7 Cl 8A1 08-25-19 5.00 3,622,434 3,244,052 MASTR Alternative Loan Trust Collateralized Mtge Obligation Series 2004-8 Cl 7A1 09-25-19 5.00 5,150,050 5,108,816 MASTR Alternative Loan Trust Collateralized Mtge Obligation Series 2005-3 Cl 1A2 04-25-35 5.50 950,000 692,375 Structured Adjustable Rate Mtge Loan Trust Collateralized Mtge Obligation Series 2006-5 Cl 4A1 06-25-36 5.89 575,422(i) 376,082 Structured Asset Securities Corp Series 2003-18XS Cl A6 06-25-33 4.04 348,462 311,915 Structured Asset Securities Collateralized Mtge Obligation Series 2003-33H Cl 1A1 10-25-33 5.50 5,173,960 4,986,606
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- 30 RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT --------------------------------------------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) RESIDENTIAL MORTGAGE-BACKED (CONT.) Washington Mutual Mtge Pass-Through Ctfs Collateralized Mtge Obligation Series 2004-AR9 Cl A6 08-25-34 2.96% $20,555,572(i) $20,228,051 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2005-14 Cl 2A1 12-25-35 5.50 1,747,443 1,509,422 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2007-8 Cl 2A7 07-25-37 6.00 26,032,443 24,569,310 Wells Fargo Mtge Backed Securities Trust Commercial Mtge Obligation Series 2004-K Cl 2A3 07-25-34 4.72 202,564(i) 185,793 --------------- Total 1,873,004,669 ------------------------------------------------------------------------------------- AEROSPACE & DEFENSE (0.1%) L-3 Communications 06-15-12 7.63 3,615,000 3,651,150 ------------------------------------------------------------------------------------- BANKING (2.7%) American Express Sr Unsecured 05-20-19 8.13 4,235,000(m) 4,739,511 Bank of America Sr Unsecured 05-01-18 5.65 17,450,000 16,924,695 06-01-19 7.63 7,195,000 7,940,404 Citigroup 05-22-19 8.50 15,360,000(m) 16,789,678 Citigroup Sr Unsecured 05-15-18 6.13 9,105,000(m) 8,560,940 Export-Import Bank of Korea Sr Unsecured 10-17-12 5.50 165,000(c) 170,592 Goldman Sachs Group Sr Unsecured 02-15-19 7.50 12,535,000 14,411,592 ICICI Bank 10-03-12 6.63 150,000(c,d) 152,438 JPMorgan Chase & Co Sr Unsecured 01-15-18 6.00 6,490,000 6,974,758 04-23-19 6.30 6,980,000(m) 7,666,127 Morgan Stanley Sr Unsecured 04-01-18 6.63 6,920,000(m) 7,394,290 05-13-19 7.30 5,250,000 5,846,563 Wells Fargo & Co Sr Unsecured 12-11-17 5.63 13,055,000(m) 13,678,663 --------------- Total 111,250,251 ------------------------------------------------------------------------------------- BROKERAGE (--%) Lehman Brothers Holdings Sr Unsecured 05-02-18 6.88 10,135,000(b,r) 1,862,306 ------------------------------------------------------------------------------------- CHEMICALS (0.8%) Airgas 10-01-18 7.13 2,695,000(d,m) 2,695,000 Ashland 06-01-17 9.13 1,450,000(d,m) 1,522,500 Chemtura 06-01-16 6.88 2,710,000(b) 2,466,100 Dow Chemical Sr Unsecured 05-15-19 8.55 20,890,000 22,754,537 INVISTA Sr Unsecured 05-01-12 9.25 2,066,000(d) 2,055,670 Nalco Sr Nts 05-15-17 8.25 1,815,000(d,m) 1,896,675 --------------- Total 33,390,482 ------------------------------------------------------------------------------------- CONSUMER PRODUCTS (0.1%) Jarden 05-01-16 8.00 2,410,000 2,470,250 Visant Holding Sr Disc Nts 12-01-13 10.25 2,015,000 2,040,188 --------------- Total 4,510,438 -------------------------------------------------------------------------------------
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT 31 PORTFOLIO OF INVESTMENTS (continued) -------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) ELECTRIC (6.8%) Arizona Public Service Sr Unsecured 10-15-11 6.38% $4,446,000 $4,715,597 CenterPoint Energy Houston Electric LLC Series U 03-01-14 7.00 10,895,000 12,124,476 Cleveland Electric Illuminating 1st Mtge 11-15-18 8.88 22,950,000(m) 28,858,270 Consumers Energy 1st Mtge 03-15-15 5.00 7,070,000 7,457,217 09-15-18 5.65 2,170,000 2,311,896 09-15-19 6.70 3,880,000(m) 4,461,162 04-15-20 5.65 2,155,000 2,305,667 Detroit Edison Sr Secured 10-01-13 6.40 6,325,000 6,980,782 Dominion Resources Sr Nts 01-15-19 8.88 1,265,000 1,589,925 DTE Energy Sr Unsecured 05-15-14 7.63 15,710,000 17,013,537 Duke Energy Carolinas LLC Sr Unsecured Series D 03-01-10 7.38 9,880,000 10,185,865 Edison Mission Energy Sr Unsecured 06-15-13 7.50 2,040,000(m) 1,815,600 06-15-16 7.75 1,235,000 1,006,525 Exelon Sr Unsecured 06-15-10 4.45 11,905,000 12,179,125 FirstEnergy Sr Unsecured Series B 11-15-11 6.45 5,945,000 6,421,016 Indiana Michigan Power Sr Nts 03-15-19 7.00 7,845,000 8,958,362 Indiana Michigan Power Sr Unsecured 03-15-37 6.05 8,855,000 9,115,302 Interstate Power & Light Sr Unsecured 07-15-39 6.25 1,570,000 1,696,889 Jersey Central Power & Light Sr Unsecured 02-01-19 7.35 1,630,000 1,907,850 Kansas Gas & Electric 1st Mtge 06-15-19 6.70 5,900,000(d) 6,667,543 KCP&L Greater Missouri Operations Sr Unsecured 07-01-12 11.88 1,675,000 1,901,125 Majapahit Holding 10-17-16 7.75 480,000(c,d) 481,200 Nevada Power 04-15-12 6.50 1,000,000 1,069,789 08-01-18 6.50 8,400,000 9,138,430 Nevada Power Series L 01-15-15 5.88 21,308,000 22,700,285 Nevada Power Series M 03-15-16 5.95 4,575,000 4,840,451 NiSource Finance 11-15-10 7.88 2,450,000 2,576,631 03-01-13 6.15 5,390,000 5,603,961 09-15-17 5.25 6,280,000 5,834,798 03-15-18 6.40 1,890,000 1,866,606 01-15-19 6.80 11,135,000 11,292,416 09-15-20 5.45 3,205,000 2,905,246 NRG Energy 02-01-16 7.38 5,555,000 5,311,969 Ohio Edison Sr Unsecured 05-01-15 5.45 2,280,000 2,370,869 Oncor Electric Delivery Sr Secured 05-01-12 6.38 2,225,000 2,422,967 PacifiCorp 1st Mtge 09-15-13 5.45 5,095,000 5,497,459 Portland General Electric 03-15-10 7.88 3,165,000 3,254,702
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- 32 RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT --------------------------------------------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) ELECTRIC (CONT.) Potomac Electric Power 1st Mtge 04-15-14 4.65% $1,035,000 $1,076,784 06-01-35 5.40 3,160,000 3,101,960 PPL Electric Utilities 1st Mtge 11-30-13 7.13 7,935,000 9,154,742 Sierra Pacific Power Series M 05-15-16 6.00 16,645,000 17,292,424 Tampa Electric Sr Unsecured 05-15-18 6.10 6,825,000 7,348,307 Toledo Edison 1st Mtge 05-01-20 7.25 1,790,000 2,087,090 --------------- Total 276,902,817 ------------------------------------------------------------------------------------- ENTERTAINMENT (0.2%) Regal Cinemas 07-15-19 8.63 1,510,000(d) 1,532,650 Speedway Motorsports Sr Unsecured 06-01-16 8.75 3,520,000(d,m) 3,608,000 United Artists Theatre Circuit Pass-Through Ctfs 07-01-15 9.30 4,665,160(l) 4,779,457 --------------- Total 9,920,107 ------------------------------------------------------------------------------------- ENVIRONMENTAL (0.5%) Allied Waste North America Sr Unsecured 04-15-13 7.88 13,775,000 14,257,125 Republic Services Sr Unsecured 09-15-19 5.50 4,350,000(d,g) 4,318,898 --------------- Total 18,576,023 ------------------------------------------------------------------------------------- FOOD AND BEVERAGE (1.2%) Anheuser-Busch InBev Worldwide 01-15-19 7.75 2,890,000(d) 3,383,878 ConAgra Foods Sr Unsecured 09-15-11 6.75 412,000 447,984 HJ Heinz Finance 08-01-39 7.13 6,820,000(d) 8,008,324 Molson Coors Capital Finance 09-22-10 4.85 15,215,000(c) 15,685,326 SABMiller 01-15-14 5.70 19,845,000(c,d) 21,150,622 --------------- Total 48,676,134 ------------------------------------------------------------------------------------- GAMING (0.1%) Boyd Gaming Sr Sub Nts 02-01-16 7.13 2,244,000 1,868,130 MGM MIRAGE Sr Secured 11-15-17 11.13 2,345,000(d,m) 2,556,050 --------------- Total 4,424,180 ------------------------------------------------------------------------------------- GAS PIPELINES (3.6%) CenterPoint Energy Resources Sr Unsecured 02-15-11 7.75 15,535,000 16,635,965 CenterPoint Energy Resources Sr Unsecured Series B 04-01-13 7.88 3,780,000 4,247,514 Colorado Interstate Gas Sr Unsecured 11-15-15 6.80 37,961,000 41,795,099 El Paso Sr Unsecured 12-12-13 12.00 3,075,000 3,474,750 Northwest Pipeline Sr Unsecured 06-15-16 7.00 6,514,000 7,381,066 04-15-17 5.95 10,330,000 10,943,815 Southern Natural Gas Sr Unsecured 04-01-17 5.90 25,946,000(d,m) 26,579,134 Southern Star Central Sr Nts 03-01-16 6.75 1,460,000 1,365,100 TransCapitalInvest for Transneft Secured 08-07-18 8.70 650,000(c,d) 682,500
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT 33 PORTFOLIO OF INVESTMENTS (continued) -------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) GAS PIPELINES (CONT.) Transcontinental Gas Pipe Line LLC Sr Unsecured 04-15-16 6.40% $17,114,000 $18,715,391 Transcontinental Gas Pipe Line LLC Sr Unsecured Series B 08-15-11 7.00 12,410,000 13,348,035 --------------- Total 145,168,369 ------------------------------------------------------------------------------------- HEALTH CARE (0.8%) Cardinal Health Sr Unsecured 06-15-12 5.65 3,860,000 4,130,200 CareFusion Sr Nts 08-01-19 6.38 10,150,000(d) 10,860,652 DaVita 03-15-13 6.63 5,285,000 5,126,450 HCA Secured Pay-in-kind 11-15-16 9.63 3,714,000(s) 3,751,140 Omnicare 12-15-13 6.75 3,240,000(m) 3,061,800 Select Medical 02-01-15 7.63 4,360,000 3,967,600 --------------- Total 30,897,842 ------------------------------------------------------------------------------------- HEALTH CARE INSURANCE (0.1%) Coventry Health Care Sr Unsecured 08-15-14 6.30 3,370,000 3,071,441 03-15-17 5.95 1,690,000 1,506,676 WellPoint Sr Unsecured 01-15-16 5.25 87,000 88,105 --------------- Total 4,666,222 ------------------------------------------------------------------------------------- INDEPENDENT ENERGY (1.9%) Anadarko Petroleum Sr Unsecured 09-15-16 5.95 25,352,000 26,364,330 Chesapeake Energy 01-15-16 6.63 2,750,000(m) 2,499,063 Denbury Resources 03-01-16 9.75 2,055,000(m) 2,162,888 EnCana Sr Unsecured 11-01-11 6.30 17,330,000(c) 18,820,951 Forest Oil Sr Nts 02-15-14 8.50 3,930,000(d,m) 3,949,650 Nexen Sr Unsecured 11-20-13 5.05 8,455,000(c) 8,694,085 PetroHawk Energy Sr Nts 08-01-14 10.50 1,670,000(d,m) 1,786,900 Quicksilver Resources 08-01-15 8.25 3,358,000 3,164,915 Range Resources 05-15-19 8.00 5,775,000(m) 5,890,500 Ras Laffan Liquefied Natural Gas II Sr Secured 09-30-20 5.30 360,000(c,d) 357,491 SandRidge Energy 06-01-18 8.00 2,235,000(d) 1,977,975 --------------- Total 75,668,748 ------------------------------------------------------------------------------------- INTEGRATED ENERGY (0.1%) Hess Sr Unsecured 08-15-11 6.65 2,000,000 2,147,890 Petro-Canada Sr Unsecured 07-15-13 4.00 1,515,000(c) 1,515,479 TNK-BP Finance 03-13-18 7.88 545,000(c,d) 502,081 --------------- Total 4,165,450 ------------------------------------------------------------------------------------- LODGING (--%) Starwood Hotels & Resorts Worldwide Sr Unsecured 10-15-14 7.88 2,015,000(m) 2,004,925 ------------------------------------------------------------------------------------- MEDIA CABLE (0.6%) Comcast 03-15-11 5.50 13,485,000 14,199,233 05-15-18 5.70 60,000 63,358
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- 34 RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT --------------------------------------------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) MEDIA CABLE (CONT.) CSC Holdings Sr Unsecured 02-15-19 8.63% $1,085,000(d) $1,101,275 DIRECTV Holdings LLC/Financing 05-15-16 7.63 3,505,000 3,689,013 Time Warner Cable 06-15-39 6.75 4,450,000(m) 4,746,695 --------------- Total 23,799,574 ------------------------------------------------------------------------------------- MEDIA NON CABLE (2.4%) DISH DBS 02-01-16 7.13 2,945,000 2,827,200 Lamar Media Sr Nts 04-01-14 9.75 2,445,000(d) 2,567,250 Liberty Media LLC Sr Unsecured 05-15-13 5.70 4,308,000(m) 4,092,600 News America 12-15-35 6.40 5,543,000 5,500,507 11-15-37 6.65 5,232,000(m) 5,380,306 01-09-38 6.75 10,725,000 10,873,927 Nielsen Finance LLC 08-01-14 10.00 1,790,000(m) 1,691,550 Rainbow Natl Services LLC 09-01-12 8.75 1,850,000(d) 1,868,500 Reed Elsevier Capital 08-01-11 6.75 12,130,000 13,039,319 RR Donnelley & Sons Sr Unsecured 04-01-14 4.95 4,140,000 3,851,997 01-15-17 6.13 25,827,000 23,970,736 Thomson Reuters 07-15-13 5.95 3,320,000(c) 3,575,504 10-01-14 5.70 16,015,000(c) 17,484,889 --------------- Total 96,724,285 ------------------------------------------------------------------------------------- METALS (0.1%) Freeport-McMoRan Copper & Gold Sr Unsecured 04-01-17 8.38 3,390,000 3,534,075 ------------------------------------------------------------------------------------- NON CAPTIVE DIVERSIFIED (0.5%) General Electric Capital Sr Unsecured 01-10-39 6.88 19,855,000 19,691,732 ------------------------------------------------------------------------------------- OIL FIELD SERVICES (0.1%) Gaz Capital Secured 11-22-16 6.21 1,825,000(c,d) 1,642,500 KazMunaiGaz Finance 07-02-18 9.13 720,000(c,d) 691,489 --------------- Total 2,333,989 ------------------------------------------------------------------------------------- PACKAGING (0.2%) Ball 09-01-16 7.13 240,000(m) 240,000 09-01-19 7.38 255,000(m) 254,363 Crown Americas LLC/Capital 11-15-15 7.75 4,475,000(m) 4,430,250 Owens-Brockway Glass Container 05-15-13 8.25 3,935,000 3,974,350 --------------- Total 8,898,963 ------------------------------------------------------------------------------------- PAPER (--%) Georgia-Pacific LLC 01-15-17 7.13 1,970,000(d) 1,891,200 ------------------------------------------------------------------------------------- RAILROADS (0.5%) Canadian Pacific Railway Sr Unsecured 05-15-19 7.25 8,260,000(c) 9,434,059 CSX Sr Unsecured 03-15-12 6.30 2,455,000 2,628,338 04-01-15 6.25 8,144,000 9,023,194 --------------- Total 21,085,591 ------------------------------------------------------------------------------------- TRANSPORTATION SERVICES (0.6%) Erac USA Finance 10-15-17 6.38 24,090,000(d) 23,582,746 ------------------------------------------------------------------------------------- TREASURY (--%) Govt of Indonesia (Indonesian Rupiah) Series FR43 07-15-22 10.25 15,000,000,000(c) 1,417,753 -------------------------------------------------------------------------------------
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT 35 PORTFOLIO OF INVESTMENTS (continued) -------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) WIRELESS (0.8%) CC Holdings GS V LLC/Crown Castle GS III Sr Secured 05-01-17 7.75% $4,985,000(d) $5,034,850 Cricket Communications Sr Secured 05-15-16 7.75 3,845,000(d,m) 3,691,200 Nextel Communications Series D 08-01-15 7.38 2,330,000 1,989,238 SBA Telecommunications 08-15-16 8.00 650,000(d) 648,375 08-15-19 8.25 650,000(d,m) 653,250 Sprint Nextel Sr Nts 08-15-17 8.38 3,750,000(m) 3,571,875 US Cellular Sr Unsecured 12-15-33 6.70 13,854,000 14,215,700 Wind Acquisition Finance Sr Nts 07-15-17 11.75 1,945,000(c,d) 2,110,325 --------------- Total 31,914,813 ------------------------------------------------------------------------------------- WIRELINES (4.4%) AT&T Sr Unsecured 03-15-11 6.25 14,811,000 15,761,377 02-01-18 5.50 65,000 68,110 01-15-38 6.30 8,605,000 8,974,295 02-15-39 6.55 9,075,000(m) 9,902,105 Embarq Sr Unsecured 06-01-13 6.74 2,250,000 2,406,350 Frontier Communications Sr Unsecured 05-01-14 8.25 3,100,000(m) 3,076,750 Qwest Sr Unsecured 10-01-14 7.50 7,220,000 7,156,825 06-15-15 7.63 2,030,000 2,014,775 Telecom Italia Capital 11-15-13 5.25 5,080,000(c) 5,314,955 Telefonica Europe 09-15-10 7.75 19,171,000(c) 20,327,299 TELUS Sr Unsecured 06-01-11 8.00 43,171,000(c) 46,987,317 Verizon New York Sr Unsecured Series A 04-01-12 6.88 33,857,000 36,888,251 Verizon New York Sr Unsecured Series B 04-01-32 7.38 13,597,000 14,716,400 Verizon Pennsylvania Sr Unsecured Series A 11-15-11 5.65 3,290,000 3,512,222 Windstream 08-01-16 8.63 3,635,000 3,648,631 --------------- Total 180,755,662 ------------------------------------------------------------------------------------- TOTAL BONDS (Cost: $4,277,813,786) $4,372,733,033 ------------------------------------------------------------------------------------- SENIOR LOANS (0.4%)(n) COUPON PRINCIPAL BORROWER RATE AMOUNT VALUE(a) CHEMICALS (--%) Hexion Specialty Chemicals Tranche C1 Term Loan 05-05-13 2.88% $2,118,983 $1,609,834 Hexion Specialty Chemicals Tranche C2 Term Loan 05-05-13 2.88 462,890 351,667 --------------- Total 1,961,501 ------------------------------------------------------------------------------------- MEDIA CABLE (0.1%) Charter Communications Operating LLC Term Loan 03-05-14 6.25 6,343,755 5,886,497 -------------------------------------------------------------------------------------
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- 36 RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT --------------------------------------------------------------------------------
SENIOR LOANS (CONTINUED) COUPON PRINCIPAL BORROWER RATE AMOUNT VALUE(a) WIRELINES (0.3%) Fairpoint Communications Tranche B Term Loan 03-31-15 5.00% $9,630,444 $7,286,009 ------------------------------------------------------------------------------------- TOTAL SENIOR LOANS (Cost: $12,328,917) $15,134,007 -------------------------------------------------------------------------------------
COMMON STOCKS (--%) ISSUER SHARES VALUE(a) PAPER & FOREST PRODUCTS Crown Paper Escrow 6,950,000(b,l) $7 ------------------------------------------------------------------------------------- TOTAL COMMON STOCKS (Cost: $--) $7 ------------------------------------------------------------------------------------- MONEY MARKET FUND (18.9%) SHARES VALUE(a) RiverSource Short-Term Cash Fund, 0.28% 772,014,015(q) $772,014,015 ------------------------------------------------------------------------------------- TOTAL MONEY MARKET FUND (Cost: $772,014,015) $772,014,015 ------------------------------------------------------------------------------------- INVESTMENTS OF CASH COLLATERAL RECEIVED FOR SECURITIES ON LOAN (10.2%) SHARES VALUE(a) CASH COLLATERAL REINVESTMENT FUND(5.2%) JPMorgan Prime Money Market Fund 214,687,144 $214,687,144 -------------------------------------------------------------------------------------
COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) ASSET-BACKED COMMERCIAL PAPER (1.1%) Belmont Funding LLC 09-01-09 0.48% $14,999,800 $14,999,801 Ebbets Funding LLC 09-08-09 0.50 9,998,889 9,998,889 Elysian Funding LLC 09-01-09 0.42 9,999,883 9,999,883 Grampian Funding LLC 09-21-09 0.40 9,996,333 9,996,333 --------------- Total 44,994,906 ------------------------------------------------------------------------------------- CERTIFICATES OF DEPOSIT (3.2%) Banco Popular Espanol 09-04-09 0.76 4,993,272 4,993,272 09-23-09 0.63 1,997,849 1,997,849 10-05-09 0.51 2,997,367 2,997,367 Banco Santander NY 11-09-09 0.41 3,000,000 3,000,000 Banco Santander Madrid 10-13-09 0.45 7,000,000 7,000,000 Bank of Nova Scotia Singapore 10-30-09 0.40 10,000,000 10,000,000 Bayrische Hypo und Vereinsbank NY 09-14-09 0.30 5,000,000 5,000,000 Caisse de Depots et Consignment Paris 10-19-09 0.43 7,991,028 7,991,028 Caixa Geral Dep London 10-26-09 0.57 4,000,000 4,000,000 Credit Indusrial et Comm London 10-13-09 0.52 8,988,056 8,988,056 Danske Bank AS 11-24-09 0.32 5,000,000 5,000,000 ING Bank London 10-13-09 0.50 10,000,000 10,000,000 Mit UFJ Trust New York 09-21-09 0.35 5,000,000 5,000,000 Mizuho London 10-29-09 0.49 3,000,000 3,000,000 Monte de Paschi NY 09-14-09 0.51 4,000,035 4,000,035 Nederlandse Waterschapsbank 10-20-09 0.40 7,991,831 7,991,831 Norinchukin Bank NY 11-20-09 0.41 10,000,000 10,000,000 Raiffeisen Zentralbank Oest Vienna 09-10-09 0.41 10,000,000 10,000,000 San Paolo Imi Ireland 10-07-09 0.40 4,995,005 4,995,005
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT 37 PORTFOLIO OF INVESTMENTS (continued) -------------------------------------------
INVESTMENTS OF CASH COLLATERAL RECEIVED FOR SECURITIES ON LOAN (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) CERTIFICATES OF DEPOSIT (CONT.) Sumitomo Mitsui Banking Corp Brussels 11-19-09 0.44% $12,000,000 $12,000,000 Svenska Singapore 10-15-09 0.45 4,000,000 4,000,000 --------------- Total 131,954,443 ------------------------------------------------------------------------------------- COMMERCIAL PAPER (0.7%) Citigroup Funding 09-08-09 0.39 11,998,570 11,998,570 Natixis Commercial Paper 09-08-09 0.32 6,998,009 6,998,009 Royal Bank of Scotland Group 09-10-09 0.47 7,993,211 7,993,211 --------------- Total 26,989,790 ------------------------------------------------------------------------------------- TOTAL INVESTMENTS OF CASH COLLATERAL RECEIVED FOR SECURITIES ON LOAN (Cost: $418,626,283) 418,626,283 ------------------------------------------------------------------------------------- TOTAL INVESTMENTS IN SECURITIES (Cost: $5,480,783,001)(u) $5,578,507,345 =====================================================================================
INVESTMENTS IN DERIVATIVES FUTURES CONTRACTS OUTSTANDING AT AUG. 31, 2009
NUMBER OF UNREALIZED CONTRACTS NOTIONAL EXPIRATION APPRECIATION CONTRACT DESCRIPTION LONG (SHORT) MARKET VALUE DATE (DEPRECIATION) ------------------------------------------------------------------------------------- U.S. Long Bond, 20-year 439 $52,570,250 Dec. 2009 $211,980 U.S. Treasury Note, 2- 285 61,657,969 Jan. 2010 182,152 year U.S. Treasury Note, 5- 589 67,882,250 Jan. 2010 348,835 year U.S. Treasury Note, 10- 265 31,062,969 Dec. 2009 235,618 year ------------------------------------------------------------------------------------- Total $978,585 -------------------------------------------------------------------------------------
CREDIT DEFAULT SWAP CONTRACTS OUTSTANDING AT AUG. 31, 2009
REFERENCED BUY/SELL PAY/RECEIVE EXPIRATION NOTIONAL UNREALIZED COUNTERPARTY ENTITY PROTECTION FIXED RATE DATE AMOUNT APPRECIATION ------------------------------------------------------------------------------------------------------------ JPMorgan Chase Bank Cardinal Health Buy .225% June 20, 2012 $3,860,000 $10,722
FORWARD FOREIGN CURRENCY CONTRACTS OPEN AT AUG. 31, 2009
CURRENCY TO CURRENCY TO UNREALIZED UNREALIZED EXCHANGE DATE BE DELIVERED BE RECEIVED APPRECIATION DEPRECIATION --------------------------------------------------------------------------------------------- Oct. 7, 2009 7,490,000 12,198,072 $5,590 $-- British Pound U.S. Dollar --------------------------------------------------------------------------------------------- Oct. 7, 2009 5,671,000 8,138,169 7,551 -- European Monetary Unit U.S. Dollar ---------------------------------------------------------------------------------------------
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- 38 RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- FORWARD FOREIGN CURRENCY CONTRACTS OPEN AT AUG. 31, 2009 (CONTINUED)
CURRENCY TO CURRENCY TO UNREALIZED UNREALIZED EXCHANGE DATE BE DELIVERED BE RECEIVED APPRECIATION DEPRECIATION --------------------------------------------------------------------------------------------- Oct. 7, 2009 21,507,000 20,354,719 $38,859 $-- Swiss Franc U.S. Dollar --------------------------------------------------------------------------------------------- Oct. 7, 2009 20,337,582 24,226,000 93,180 -- U.S. Dollar Australian Dollar --------------------------------------------------------------------------------------------- Oct. 7, 2009 8,144,287 8,968,000 47,874 -- U.S. Dollar Canadian Dollar --------------------------------------------------------------------------------------------- Oct. 7, 2009 12,195,414 73,367,000 -- (13,061) U.S. Dollar Norwegian Krone --------------------------------------------------------------------------------------------- Total $193,054 $(13,061) ---------------------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS (a) Securities are valued by using policies described in Note 2 to the financial statements. (b) Non-income producing. For long-term debt securities, item identified is in default as to payment of interest and/or principal. (c) Foreign security values are stated in U.S. dollars. For debt securities, principal amounts are denominated in U.S. dollar currency unless otherwise noted. At Aug. 31, 2009, the value of foreign securities represented 5.1% of net assets. (d) Represents a security sold under Rule 144A, which is exempt from registration under the Securities Act of 1933, as amended. This security may be determined to be liquid under guidelines established by the Fund's Board of Directors. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At Aug. 31, 2009, the value of these securities amounted to $319,482,656 or 7.8% of net assets. (e) This is a variable rate security that entitles holders to receive only interest payments. Interest is paid annually. The interest payment is based on the Gross Domestic Product (GDP) level of the previous year for the respective country. To the extent that the previous year's GDP exceeds the "base case GDP'', an interest payment is made equal to 0.012225 of the difference. (f) Mortgage-backed securities represent direct or indirect participations in, or are secured by and payable from, mortgage loans secured by real property, and include single- and multi-class pass-through securities and collateralized mortgage obligations. These securities may be issued or guaranteed by U.S. government agencies or instrumentalities, or by private issuers, generally originators and investors in mortgage loans, including savings associations, mortgage bankers, commercial banks, investment bankers and special purpose entities. The maturity dates shown represent the original maturity of the underlying obligation. Actual maturity may vary based upon prepayment activity on these obligations. Unless otherwise noted, the coupon rates presented are fixed rates. (g) At Aug. 31, 2009, the cost of securities purchased, including interest purchased, on a when-issued and/or other forward-commitment basis was $1,119,736,012 See Note 2 to the financial statements. -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT 39 PORTFOLIO OF INVESTMENTS (continued) ------------------------------------------- NOTES TO PORTFOLIO OF INVESTMENTS (CONTINUED) (h) The following abbreviations are used in the portfolio security descriptions to identify the insurer of the issue: AMBAC -- Ambac Assurance Corporation FGIC -- Financial Guaranty Insurance Company FSA -- Financial Security Assurance MBIA -- MBIA Insurance Corporation
(i) Interest rate varies either based on a predetermined schedule or to reflect current market conditions; rate shown is the effective rate on Aug. 31, 2009. (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 security 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. The interest rate disclosed represents yield based upon the estimated timing and amount of future cash flows at Aug. 31, 2009. (k) Principal only represents securities that entitle holders to receive only principal payments on the underlying mortgages. The yield to maturity of a principal only is sensitive to the rate of principal payments on the underlying mortgage assets. A slow (rapid) rate of principal repayments may have an adverse (positive) effect on yield to maturity. Interest rate disclosed represents yield based upon the estimated timing of future cash flows at Aug. 31, 2009. (l) Identifies issues considered to be illiquid as to their marketability (see Note 2 to the financial statements). The aggregate value of such securities at Aug. 31, 2009 was $4,779,464, representing 0.1% of net assets. Information concerning such security holdings at Aug. 31, 2009 is as follows:
ACQUISITION SECURITY DATES COST --------------------------------------------------------------------- Crown Paper Escrow 04-16-07 $-- United Artists Theatre Circuit Pass-Through Ctfs 9.30% 2015 02-23-96 thru 08-12-96 4,516,092
(m) At Aug. 31, 2009, security was partially or fully on loan. See Note 7 to the financial statements. (n) Senior loans have rates of interest that float periodically based primarily on the London Interbank Offered Rate ("LIBOR") and other short-term rates. Remaining maturities of senior loans may be less than the stated maturities shown as a result of contractual or optional prepayments by the borrower. Such prepayments cannot be predicted with certainty. (o) At Aug. 31, 2009, investments in securities included securities valued at $4,229,927 that were partially pledged as collateral to cover initial margin deposits on open interest rate futures contracts. -------------------------------------------------------------------------------- 40 RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- NOTES TO PORTFOLIO OF INVESTMENTS (CONTINUED) (p) Represents comparable securities held to satisfy future delivery requirements of the following open forward sale commitments at Aug. 31, 2009:
PRINCIPAL SETTLEMENT PROCEEDS SECURITY AMOUNT DATE RECEIVABLE VALUE ------------------------------------------------------------------------------ Federal Natl Mtge Assn 09-01-24 5.50% $13,000,000 09-17-09 $13,555,547 $13,678,444
(q) Affiliated Money Market Fund -- See Note 8 to the financial statements. The rate shown is the seven-day current annualized yield at Aug. 31, 2009. (r) This position is in bankruptcy. (s) Pay-in-kind securities are securities in which the issuer makes interest or dividend payments in cash or in additional securities. The securities usually have the same terms as the original holdings. (t) Negligible market value. (u) At Aug. 31, 2009, the cost of securities for federal income tax purposes was $5,499,395,155 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $148,984,428 Unrealized depreciation (68,547,908) ------------------------------------------------------------ Net unrealized appreciation $80,436,520 ------------------------------------------------------------
The industries identified above are based on the Global Industry Classification Standard (GICS), which was developed by and is the exclusive property of Morgan Stanley Capital International Inc. and Standard & Poor's, a division of The McGraw-Hill Companies, Inc. -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT 41 PORTFOLIO OF INVESTMENTS (continued) ------------------------------------------- FAIR VALUE MEASUREMENTS Statement of Financial Accounting Standards No. 157 (SFAS 157) requires disclosure regarding the inputs and valuation techniques used to measure fair value and any changes in valuation inputs or techniques. In addition, investments shall be disclosed by major category. SFAS 157 establishes a fair value hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by prioritizing that the most observable input be used when available. Observable inputs are those that market participants would use in pricing an investment based on market data obtained from sources independent of the reporting entity. Unobservable inputs are those that reflect the Fund's assumptions about the information market participants would use in pricing an investment. An investment's level within the fair value hierarchy is based on the lowest level of any input that is deemed significant to the asset or liability's fair value measurement. When a valuation uses multiple inputs from varying levels of the hierarchy, the hierarchy level is determined based on the lowest level input or inputs that are significant to the fair value measurement in its entirety. The input levels are not necessarily an indication of the risk or liquidity associated with investments at that level. For example, certain U.S. government securities are generally high quality and liquid, however, they are reflected as Level 2 because the inputs used to determine fair value may not always be quoted prices in an active market. Fair value inputs are summarized in the three broad levels listed below: - Level 1 -- Valuations based on quoted prices for investments in active markets that the Fund has the ability to access at the measurement date. Valuation adjustments are not applied to Level 1 investments. - Level 2 -- Valuations based on other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risks, etc.). - Level 3 -- Valuations based on significant unobservable inputs (including the Fund's own assumptions and judgment in determining the fair value of investments). Inputs that are used in determining fair value of an investment may include price information, credit data, volatility statistics, and other factors. These inputs can be either observable or unobservable. The availability of observable inputs can vary between investments, and is affected by various factors such as the type of investment, and the volume and level of activity for that investment or similar investments in the marketplace. The inputs will be considered by the Fund Administrator, along with any other relevant factors in the calculation of an investment's fair value. The Fund uses prices and inputs that are current as of the measurement date, which may include periods of market dislocations. During these periods, the availability of prices and inputs may be reduced for many investments. This condition could cause an investment to be reclassified between the various levels within the hierarchy. Non-U.S. equity securities actively traded in foreign markets may be reflected in Level 2 despite the availability of closing prices, because the Fund evaluates and determines whether those closing prices reflect fair value at the close of the New York Stock Exchange (NYSE) or require adjustment, as described in Note 2 to the financial statements -- Valuation of securities. -------------------------------------------------------------------------------- 42 RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- FAIR VALUE MEASUREMENTS (CONTINUED) Investments falling into the Level 3 category are primarily supported by quoted prices from brokers and dealers participating in the market for those investments. However, these may be classified as Level 3 investments due to lack of market transparency and corroboration to support these quoted prices. Additionally, valuation models may be used as the pricing source for any remaining investments classified as Level 3. These models rely on one or more significant unobservable inputs and/or significant assumptions by the Fund Administrator. Inputs used in a valuation model may include, but are not limited to, financial statement analysis, discount rates and estimated cash flows, and comparable company data. The following table is a summary of the inputs used to value the Fund's investments as of Aug. 31, 2009:
FAIR VALUE AT AUG. 31, 2009 -------------------------------------------------------------------- LEVEL 1 LEVEL 2 QUOTED PRICES OTHER LEVEL 3 IN ACTIVE SIGNIFICANT SIGNIFICANT MARKETS FOR OBSERVABLE UNOBSERVABLE DESCRIPTION IDENTICAL ASSETS INPUTS INPUTS TOTAL ----------------------------------------------------------------------------------------------- Bonds Foreign Government Obligations & Agencies $1,115,200 $29,001,074 $-- $30,116,274 U.S. Government Obligations & Agencies 427,897,889 404,675,940 -- 832,573,829 Asset-Backed Securities -- 187,845,169 37,215,690 225,060,859 Commercial Mortgage- Backed Securities -- 220,611,575 -- 220,611,575 Residential Mortgage- Backed Securities -- 1,848,961,599 24,043,070 1,873,004,669 Corporate Debt Securities -- 1,186,586,370 4,779,457 1,191,365,827 ----------------------------------------------------------------------------------------------- Total Bonds 429,013,089 3,877,681,727 66,038,217 4,372,733,033 ----------------------------------------------------------------------------------------------- Equity Securities Common Stocks(a) -- -- 7 7 ----------------------------------------------------------------------------------------------- Total Equity Securities -- -- 7 7 ----------------------------------------------------------------------------------------------- Other Senior Loans -- 15,134,007 -- 15,134,007 Affiliated Money Market Fund(b) 772,014,015 -- -- 772,014,015 Investments of Cash Collateral Received for Securities on Loan(c) 214,687,144 203,939,139 -- 418,626,283 ----------------------------------------------------------------------------------------------- Total Other 986,701,159 219,073,146 -- 1,205,774,305 ----------------------------------------------------------------------------------------------- Investments in Securities 1,415,714,248 4,096,754,873 66,038,224 5,578,507,345 Other Financial Instruments(d) 978,585 190,715 -- 1,169,300 ----------------------------------------------------------------------------------------------- Total $1,416,692,833 $4,096,945,588 $66,038,224 $5,579,676,645 -----------------------------------------------------------------------------------------------
(a) All industry classifications are identified in the Portfolio of Investments. -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT 43 PORTFOLIO OF INVESTMENTS (continued) ------------------------------------------- FAIR VALUE MEASUREMENTS (CONTINUED) (b) Money market fund that is a sweep investment for cash balances in the Fund at Aug. 31, 2009. (c) Asset categories for Investments of Cash Collateral are identified in the Portfolio of Investments. (d) Other Financial Instruments are derivative instruments, which are valued at the unrealized appreciation (depreciation) on the instrument. Derivative descriptions are located in the Investments in Derivatives section of the Portfolio of Investments. The following table is a reconciliation of Level 3 assets for which significant unobservable inputs were used to determine fair value.
RESIDENTIAL ASSET- MORTGAGE- CORPORATE BACKED BACKED DEBT COMMON SECURITIES SECURITIES SECURITIES STOCKS TOTAL ----------------------------------------------------------------------------------------------- Balance as of Aug. 31, 2008 $3,180,765 $81,896,281 $5,157,491 $7 $90,234,544 Accrued discounts/premiums (959,819) 237,972 17,441 -- (704,406) Realized gain (loss) 270,392 (16,179,539) 2,042 -- (15,907,105) Change in unrealized appreciation (depreciation)* 781,244 6,241,491 146,910 -- 7,169,645 Net purchases (sales) 35,233,033 (2,598,950) (544,427) -- 32,089,656 Transfers in and/or out of Level 3 (1,289,925) (45,554,185) -- -- (46,844,110) ----------------------------------------------------------------------------------------------- Balance as of Aug. 31, 2009 $37,215,690 $24,043,070 $4,779,457 $7 $66,038,224 -----------------------------------------------------------------------------------------------
* Change in unrealized appreciation (depreciation) relating to securities held at Aug. 31, 2009 was $26,866,218. HOW TO FIND INFORMATION ABOUT THE FUND'S QUARTERLY 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 filed on Form N-Q, can be obtained without charge, upon request, by calling the RiverSource Family of Funds at 1(800) 221-2450. -------------------------------------------------------------------------------- 44 RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT STATEMENT OF ASSETS AND LIABILITIES -------------------------------------------- AUG. 31, 2009
ASSETS Investments in securities, at value Unaffiliated issuers* (identified cost $4,290,142,703) $4,387,867,047 Affiliated money market fund (identified cost $772,014,015) 772,014,015 Investments of cash collateral received for securities on loan (identified cost $418,626,283) 418,626,283 --------------------------------------------------------------------------------- Total investments in securities (identified cost $5,480,783,001) 5,578,507,345 Cash 510,518 Capital shares receivable 11,615,606 Dividends and accrued interest receivable 33,983,970 Receivable for investment securities sold 147,737,859 Variation margin receivable on futures contracts 694,313 Unrealized appreciation on forward foreign currency contracts 193,054 Unrealized appreciation on swap contracts 10,722 Other receivables 7,419 --------------------------------------------------------------------------------- Total assets 5,773,260,806 --------------------------------------------------------------------------------- LIABILITIES Forward sale commitments, at value (proceeds receivable $13,555,547) 13,678,444 Dividends payable to shareholders 2,717,704 Capital shares payable 5,523,398 Payable for investment securities purchased 125,984,619 Payable for securities purchased on a forward-commitment basis 1,119,736,012 Payable upon return of securities loaned 418,626,283 Unrealized depreciation on forward foreign currency contracts 13,061 Accrued investment management services fees 147,970 Accrued distribution fees 701,270 Accrued transfer agency fees 41,194 Accrued administrative services fees 19,828 Accrued plan administration services fees 15,653 Other accrued expenses 348,035 --------------------------------------------------------------------------------- Total liabilities 1,687,553,471 --------------------------------------------------------------------------------- Net assets applicable to outstanding capital stock $4,085,707,335 ---------------------------------------------------------------------------------
-------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT 45 STATEMENT OF ASSETS AND LIABILITIES (continued) -------------------------------- AUG. 31, 2009
REPRESENTED BY Capital stock -- $.01 par value $ 8,593,314 Additional paid-in capital 4,250,612,589 Excess of distributions over net investment income (3,547,347) Accumulated net realized gain (loss) (268,721,785) Unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 98,770,564 --------------------------------------------------------------------------------- Total -- representing net assets applicable to outstanding capital stock $4,085,707,335 --------------------------------------------------------------------------------- *Including securities on loan, at value $ 466,722,174 ---------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE NET ASSETS SHARES OUTSTANDING NET ASSET VALUE PER SHARE Class A $2,402,834,582 505,515,125 $4.75(1) Class B $ 191,468,923 40,286,990 $4.75 Class C $ 52,650,113 11,074,642 $4.75 Class I $ 787,166,241 165,384,786 $4.76 Class R2 $ 287,638 60,428 $4.76 Class R3 $ 9,829 2,067 $4.76 Class R4 $ 72,569,590 15,286,568 $4.75 Class R5 $ 296,257 62,408 $4.75 Class W $ 578,424,162 121,658,362 $4.75 -------------------------------------------------------------------------------------------
(1) The maximum offering price per share for Class A is $4.99. The offering price is calculated by dividing the net asset value by 1.0 minus the maximum sales charge of 4.75%. The accompanying Notes to Financial Statements are an integral part of this statement. -------------------------------------------------------------------------------- 46 RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT STATEMENT OF OPERATIONS ------------------------------------------------------- YEAR ENDED AUG. 31, 2009
INVESTMENT INCOME Income: Interest $ 181,414,773 Income distributions from affiliated money market fund 1,906,239 Income from securities lending 1,126,998 Less foreign taxes withheld (19,246) -------------------------------------------------------------------------------- Total income 184,428,764 -------------------------------------------------------------------------------- Expenses: Investment management services fees 15,648,683 Distribution fees Class A 4,876,489 Class B 2,344,842 Class C 378,881 Class R2 135 Class R3 23 Class W 1,433,055 Transfer agency fees Class A 2,991,064 Class B 386,127 Class C 59,573 Class R2 13 Class R3 4 Class R4 33,855 Class R5 5 Class W 1,146,444 Administrative services fees 2,122,615 Plan administration services fees Class R2 67 Class R3 23 Class R4 169,275 Compensation of board members 110,167 Custodian fees 146,077 Printing and postage 219,500 Registration fees 216,534 Professional fees 115,951 Other 163,320 -------------------------------------------------------------------------------- Total expenses 32,562,722 Expenses waived/reimbursed by the Investment Manager and its affiliates (3,276,919) Earnings and bank fee credits on cash balances (8,655) -------------------------------------------------------------------------------- Total net expenses 29,277,148 -------------------------------------------------------------------------------- Investment income (loss) -- net 155,151,616 --------------------------------------------------------------------------------
-------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT 47 STATEMENT OF OPERATIONS (continued) ------------------------------------------- YEAR ENDED AUG. 31, 2009
REALIZED AND UNREALIZED GAIN (LOSS) -- NET Net realized gain (loss) on: Security transactions $(136,839,296) Foreign currency transactions 1,741,873 Futures contracts (33,595,241) Swap transactions 216,409 -------------------------------------------------------------------------------- Net realized gain (loss) on investments (168,476,255) Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 266,074,461 -------------------------------------------------------------------------------- Net gain (loss) on investments and foreign currencies 97,598,206 -------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations $ 252,749,822 --------------------------------------------------------------------------------
The accompanying Notes to Financial Statements are an integral part of this statement. -------------------------------------------------------------------------------- 48 RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT STATEMENTS OF CHANGES IN NET ASSETS --------------------------------------------
YEAR ENDED AUG. 31, 2009 2008 OPERATIONS AND DISTRIBUTIONS Investment income (loss) -- net $ 155,151,616 $ 152,258,368 Net realized gain (loss) on investments (168,476,255) 4,060,405 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 266,074,461 (142,483,859) ------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 252,749,822 13,834,914 ------------------------------------------------------------------------------------------------- Distributions to shareholders from: Net investment income Class A (90,380,371) (84,539,939) Class B (9,169,639) (10,768,502) Class C (1,472,729) (828,277) Class I (31,440,870) (22,019,428) Class R2 (1,352) (290) Class R3 (427) (308) Class R4 (3,205,438) (3,476,394) Class R5 (1,163) (328) Class W (26,235,706) (18,133,130) ------------------------------------------------------------------------------------------------- Total distributions (161,907,695) (139,766,596) -------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT 49 STATEMENTS OF CHANGES IN NET ASSETS (continued) --------------------------------
YEAR ENDED AUG. 31, 2009 2008 CAPITAL SHARE TRANSACTIONS Proceeds from sales Class A shares $ 798,738,888 $ 346,346,586 Class B shares 69,159,291 80,268,108 Class C shares 25,116,806 20,510,381 Class I shares 283,744,737 193,548,806 Class R2 shares 121,281 -- Class R4 shares 26,687,126 31,152,017 Class W shares 198,551,036 529,049,476 Fund merger (Note 10) Class A shares 5,580,981 52,349,504 Class B shares 1,349,679 13,151,218 Class C shares 3,053,759 1,247,150 Class I shares -- 250,084,366 Class R2 shares 152,202 4,925 Class R3 shares -- 4,925 Class R4 shares -- 11,052 Class R5 shares 285,712 4,913 Class W shares -- 4,890 Reinvestment of distributions at net asset value Class A shares 75,554,842 71,053,046 Class B shares 8,300,291 9,967,093 Class C shares 1,237,207 747,742 Class I shares 31,051,811 22,202,710 Class R2 shares 512 -- Class R4 shares 3,175,416 3,527,696 Class W shares 26,019,994 18,163,448 Conversions from Class B to Class A Class A shares 56,523,003 40,155,833 Class B shares (56,523,003) (40,155,833) Payments for redemptions Class A shares (515,636,632) (458,212,241) Class B shares (89,958,627) (102,268,711) Class C shares (10,142,901) (6,555,566) Class I shares (237,020,240) (137,684,266) Class R4 shares (33,900,640) (34,245,276) Class W shares (306,545,978) (92,614,678) ------------------------------------------------------------------------------------------------- Increase (decrease) in net assets from capital share transactions 364,676,553 811,819,314 ------------------------------------------------------------------------------------------------- Total increase (decrease) in net assets 455,518,680 685,887,632 Net assets at beginning of year 3,630,188,655 2,944,301,023 ------------------------------------------------------------------------------------------------- Net assets at end of year $4,085,707,335 $3,630,188,655 ------------------------------------------------------------------------------------------------- Undistributed (excess of distributions over) net investment income $ (3,547,347) $ 1,974,902 -------------------------------------------------------------------------------------------------
Certain line items from the prior year have been renamed to conform to the current year presentation. The accompanying Notes to Financial Statements are an integral part of this statement. -------------------------------------------------------------------------------- 50 RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT FINANCIAL HIGHLIGHTS ----------------------------------------------------------- The following tables are intended to help you understand the Fund's financial performance. Certain information reflects financial results for a single share of a class held for the periods shown. For periods ended 2007 and after, per share amounts are calculated based on average shares outstanding during the period. Total returns assume reinvestment of all dividends and distributions. Total returns do not reflect payment of sales charges, if any, and are not annualized for periods of less than one year.
YEAR ENDED AUG. 31, CLASS A ------------------------------------------------------ PER SHARE DATA 2009 2008 2007 2006 2005 Net asset value, beginning of period $4.65 $4.81 $4.77 $4.89 $4.87 --------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .20 .22 .21 .19 .18 Net gains (losses) (both realized and unrealized) .11 (.17) .05 (.11) .03 --------------------------------------------------------------------------------------------------------- Total from investment operations .31 .05 .26 .08 .21 --------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.21) (.21) (.21) (.20) (.19) Tax return of capital -- -- (.01) -- -- --------------------------------------------------------------------------------------------------------- Total distributions (.21) (.21) (.22) (.20) (.19) --------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.75 $4.65 $4.81 $4.77 $4.89 --------------------------------------------------------------------------------------------------------- TOTAL RETURN 7.05% .93% 5.54% 1.64% 4.38% --------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(a) Gross expenses prior to expense waiver/reimbursement .94% .95% .97% .99% 1.02% --------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(b) .83% .89% .89% .89% .94% --------------------------------------------------------------------------------------------------------- Net investment income (loss) 4.44% 4.68% 4.43% 4.09% 3.67% --------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA Net assets, end of period (in millions) $2,403 $1,920 $1,937 $2,013 $1,774 --------------------------------------------------------------------------------------------------------- Portfolio turnover rate(c) 371% 226% 295% 281% 300% ---------------------------------------------------------------------------------------------------------
See accompanying Notes to Financial Highlights. -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT 51 FINANCIAL HIGHLIGHTS (continued) -----------------------------------------------
YEAR ENDED AUG. 31, CLASS B ------------------------------------------------- PER SHARE DATA 2009 2008 2007 2006 2005 Net asset value, beginning of period $4.65 $4.81 $4.77 $4.89 $4.88 ---------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .17 .19 .18 .16 .15 Net gains (losses) (both realized and unrealized) .10 (.18) .04 (.12) .01 ---------------------------------------------------------------------------------------------------- Total from investment operations .27 .01 .22 .04 .16 ---------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.17) (.17) (.18) (.16) (.15) Tax return of capital -- -- (.00)(d) -- -- ---------------------------------------------------------------------------------------------------- Total distributions (.17) (.17) (.18) (.16) (.15) ---------------------------------------------------------------------------------------------------- Net asset value, end of period $4.75 $4.65 $4.81 $4.77 $4.89 ---------------------------------------------------------------------------------------------------- TOTAL RETURN 6.24% .16% 4.74% .88% 3.39% ---------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(a) Gross expenses prior to expense waiver/reimbursement 1.70% 1.71% 1.73% 1.76% 1.78% ---------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(b) 1.59% 1.65% 1.65% 1.65% 1.70% ---------------------------------------------------------------------------------------------------- Net investment income (loss) 3.71% 3.91% 3.66% 3.31% 2.92% ---------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA Net assets, end of period (in millions) $191 $254 $304 $402 $484 ---------------------------------------------------------------------------------------------------- Portfolio turnover rate(c) 371% 226% 295% 281% 300% ----------------------------------------------------------------------------------------------------
YEAR ENDED AUG. 31, CLASS C ------------------------------------------------- PER SHARE DATA 2009 2008 2007 2006 2005 Net asset value, beginning of period $4.65 $4.81 $4.77 $4.90 $4.88 ---------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .17 .19 .18 .16 .15 Net gains (losses) (both realized and unrealized) .10 (.18) .04 (.13) .02 ---------------------------------------------------------------------------------------------------- Total from investment operations .27 .01 .22 .03 .17 ---------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.17) (.17) (.18) (.16) (.15) Tax return of capital -- -- (.00)(d) -- -- ---------------------------------------------------------------------------------------------------- Total distributions (.17) (.17) (.18) (.16) (.15) ---------------------------------------------------------------------------------------------------- Net asset value, end of period $4.75 $4.65 $4.81 $4.77 $4.90 ---------------------------------------------------------------------------------------------------- TOTAL RETURN 6.25% .16% 4.73% .66% 3.60% ---------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(a) Gross expenses prior to expense waiver/reimbursement 1.69% 1.70% 1.73% 1.76% 1.79% ---------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(b) 1.58% 1.65% 1.65% 1.66% 1.70% ---------------------------------------------------------------------------------------------------- Net investment income (loss) 3.68% 3.93% 3.67% 3.31% 2.93% ---------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA Net assets, end of period (in millions) $53 $32 $17 $17 $18 ---------------------------------------------------------------------------------------------------- Portfolio turnover rate(c) 371% 226% 295% 281% 300% ----------------------------------------------------------------------------------------------------
See accompanying Notes to Financial Highlights. -------------------------------------------------------------------------------- 52 RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT --------------------------------------------------------------------------------
YEAR ENDED AUG. 31, CLASS I ------------------------------------------------- PER SHARE DATA 2009 2008 2007 2006 2005 Net asset value, beginning of period $4.65 $4.82 $4.78 $4.89 $4.88 ---------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .22 .24 .23 .21 .20 Net gains (losses) (both realized and unrealized) .11 (.18) .04 (.11) .02 ---------------------------------------------------------------------------------------------------- Total from investment operations .33 .06 .27 .10 .22 ---------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.22) (.23) (.22) (.21) (.21) Tax return of capital -- -- (.01) -- -- ---------------------------------------------------------------------------------------------------- Total distributions (.22) (.23) (.23) (.21) (.21) ---------------------------------------------------------------------------------------------------- Net asset value, end of period $4.76 $4.65 $4.82 $4.78 $4.89 ---------------------------------------------------------------------------------------------------- TOTAL RETURN 7.67% 1.07% 5.90% 2.19% 4.53% ---------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(a) Gross expenses prior to expense waiver/reimbursement .54% .55% .56% .55% .60% ---------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(b) .47% .53% .54% .54% .60% ---------------------------------------------------------------------------------------------------- Net investment income (loss) 4.80% 5.09% 4.80% 4.59% 4.01% ---------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA Net assets, end of period (in millions) $787 $693 $386 $276 $-- ---------------------------------------------------------------------------------------------------- Portfolio turnover rate(c) 371% 226% 295% 281% 300% ----------------------------------------------------------------------------------------------------
YEAR ENDED AUG. 31, CLASS R2 ----------------------------- PER SHARE DATA 2009 2008 2007(e) Net asset value, beginning of period $4.65 $4.80 $4.81 -------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .17 .21 .14 Net gains (losses) (both realized and unrealized) .13 (.16) (.02) -------------------------------------------------------------------------------- Total from investment operations .30 .05 .12 -------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.19) (.20) (.13) Tax return of capital -- -- (.00)(d) -------------------------------------------------------------------------------- Total distributions (.19) (.20) (.13) -------------------------------------------------------------------------------- Net asset value, end of period $4.76 $4.65 $4.80 -------------------------------------------------------------------------------- TOTAL RETURN 6.92% .84% 2.70% -------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(a) Gross expenses prior to expense waiver/reimbursement 1.35% 1.34% 1.32%(f) -------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(b) 1.21% 1.08% 1.32%(f) -------------------------------------------------------------------------------- Net investment income (loss) 3.67% 4.53% 4.06%(f) -------------------------------------------------------------------------------- SUPPLEMENTAL DATA Net assets, end of period (in millions) $-- $-- $-- -------------------------------------------------------------------------------- Portfolio turnover rate(c) 371% 226% 295% --------------------------------------------------------------------------------
See accompanying Notes to Financial Highlights. -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT 53 FINANCIAL HIGHLIGHTS (continued) -----------------------------------------------
YEAR ENDED AUG. 31, CLASS R3 ----------------------------- PER SHARE DATA 2009 2008 2007(e) Net asset value, beginning of period $4.65 $4.80 $4.81 -------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .20 .23 .15 Net gains (losses) (both realized and unrealized) .11 (.17) (.02) -------------------------------------------------------------------------------- Total from investment operations .31 .06 .13 -------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.20) (.21) (.14) Tax return of capital -- -- (.00)(d) -------------------------------------------------------------------------------- Total distributions (.20) (.21) (.14) -------------------------------------------------------------------------------- Net asset value, end of period $4.76 $4.65 $4.80 -------------------------------------------------------------------------------- TOTAL RETURN 7.19% 1.11% 2.90% -------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(a) Gross expenses prior to expense waiver/reimbursement 1.08% 1.08% 1.06%(f) -------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(b) .91% .83% 1.06%(f) -------------------------------------------------------------------------------- Net investment income (loss) 4.40% 4.79% 4.33%(f) -------------------------------------------------------------------------------- SUPPLEMENTAL DATA Net assets, end of period (in millions) $-- $-- $-- -------------------------------------------------------------------------------- Portfolio turnover rate(c) 371% 226% 295% --------------------------------------------------------------------------------
YEAR ENDED AUG. 31, CLASS R4 ------------------------------------------------- PER SHARE DATA 2009 2008 2007 2006 2005 Net asset value, beginning of period $4.64 $4.80 $4.77 $4.89 $4.88 ---------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .20 .23 .22 .20 .19 Net gains (losses) (both realized and unrealized) .12 (.17) .04 (.12) .02 ---------------------------------------------------------------------------------------------------- Total from investment operations .32 .06 .26 .08 .21 ---------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.21) (.22) (.22) (.20) (.20) Tax return of capital -- -- (.01) -- -- ---------------------------------------------------------------------------------------------------- Total distributions (.21) (.22) (.23) (.20) (.20) ---------------------------------------------------------------------------------------------------- Net asset value, end of period $4.75 $4.64 $4.80 $4.77 $4.89 ---------------------------------------------------------------------------------------------------- TOTAL RETURN 7.35% 1.03% 5.49% 1.81% 4.34% ---------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(a) Gross expenses prior to expense waiver/reimbursement .84% .85% .83% .82% .86% ---------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(b) .77% .76% .73% .73% .78% ---------------------------------------------------------------------------------------------------- Net investment income (loss) 4.53% 4.81% 4.53% 4.24% 3.85% ---------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA Net assets, end of period (in millions) $73 $75 $78 $173 $202 ---------------------------------------------------------------------------------------------------- Portfolio turnover rate(c) 371% 226% 295% 281% 300% ----------------------------------------------------------------------------------------------------
See accompanying Notes to Financial Highlights. -------------------------------------------------------------------------------- 54 RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT --------------------------------------------------------------------------------
YEAR ENDED AUG. 31, CLASS R5 ----------------------------- PER SHARE DATA 2009 2008 2007(e) Net asset value, beginning of period $4.64 $4.80 $4.81 -------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .23 .24 .17 Net gains (losses) (both realized and unrealized) .10 (.18) (.02) -------------------------------------------------------------------------------- Total from investment operations .33 .06 .15 -------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.22) (.22) (.16) Tax return of capital -- -- (.00)(d) -------------------------------------------------------------------------------- Total distributions (.22) (.22) (.16) -------------------------------------------------------------------------------- Net asset value, end of period $4.75 $4.64 $4.80 -------------------------------------------------------------------------------- TOTAL RETURN 7.62% 1.22% 3.25% -------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(a) Gross expenses prior to expense waiver/reimbursement .59% .59% .59%(f) -------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(b) .52% .58% .57%(f) -------------------------------------------------------------------------------- Net investment income (loss) 5.01% 5.02% 4.81%(f) -------------------------------------------------------------------------------- SUPPLEMENTAL DATA Net assets, end of period (in millions) $-- $-- $-- -------------------------------------------------------------------------------- Portfolio turnover rate(c) 371% 226% 295% --------------------------------------------------------------------------------
YEAR ENDED AUG. 31, CLASS W ----------------------------- PER SHARE DATA 2009 2008 2007(g) Net asset value, beginning of period $4.65 $4.81 $4.82 -------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .20 .22 .15 Net gains (losses) (both realized and unrealized) .10 (.17) -- -------------------------------------------------------------------------------- Total from investment operations .30 .05 .15 -------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.20) (.21) (.16) Tax return of capital -- -- (.00)(d) -------------------------------------------------------------------------------- Total distributions (.20) (.21) (.16) -------------------------------------------------------------------------------- Net asset value, end of period $4.75 $4.65 $4.81 -------------------------------------------------------------------------------- TOTAL RETURN 6.95% .82% 2.71% -------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(a) Gross expenses prior to expense waiver/reimbursement .99% .99% .98%(f) -------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(b) .92% .98% .97%(f) -------------------------------------------------------------------------------- Net investment income (loss) 4.37% 4.56% 4.32%(f) -------------------------------------------------------------------------------- SUPPLEMENTAL DATA Net assets, end of period (in millions) $578 $655 $223 -------------------------------------------------------------------------------- Portfolio turnover rate(c) 371% 226% 295% --------------------------------------------------------------------------------
See accompanying Notes to Financial Highlights. -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT 55 FINANCIAL HIGHLIGHTS (continued) ----------------------------------------------- NOTES TO FINANCIAL HIGHLIGHTS (a) In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the acquired funds in which it invests. Such indirect expenses are not included in the above reported expense ratios. (b) The Investment Manager and its affiliates have agreed to waive/reimburse certain fees and expenses (excluding fees and expenses of acquired funds). (c) Includes mortgage dollar rolls. If mortgage dollar roll transactions were excluded, the portfolio turnover would have been 184% and 122% for the years ended Aug. 31, 2009 and 2008, respectively. (d) Rounds to zero. (e) For the period from Dec. 11, 2006 (inception date) to Aug. 31, 2007. (f) Annualized. (g) For the period from Dec. 1, 2006 (inception date) to Aug. 31, 2007. The accompanying Notes to Financial Statements are an integral part of this statement. -------------------------------------------------------------------------------- 56 RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT NOTES TO FINANCIAL STATEMENTS -------------------------------------------------- 1. ORGANIZATION RiverSource Diversified Bond Fund (the Fund) is a series of RiverSource Diversified Income Series, Inc. and is registered under the Investment Company Act of 1940, as amended (the 1940 Act) as a diversified, open-end management investment company. RiverSource Diversified Income Series, Inc. has 10 billion authorized shares of capital stock that can be allocated among the separate series as designated by the Fund's Board of Directors (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, Class I, Class R2, Class R3, Class R4, Class R5 and Class W shares. - Class A shares are offered with a front-end sales charge, which may be waived under certain circumstances. - Class B shares may be subject to a contingent deferred sales charge (CDSC) and automatically convert to Class A shares one month after the completion of the eighth year of ownership if originally purchased in a RiverSource fund on or after May 21, 2005 or originally purchased in a Seligman fund on or after June 13, 2009. Class B shares originally purchased in a RiverSource fund prior to May 21, 2005 will convert to Class A shares in the ninth calendar year of ownership. Class B shares originally purchased in a Seligman fund prior to June 13, 2009 will convert to Class A shares in the month prior to the ninth year of ownership. - Class C shares may be subject to a CDSC. - Class I, Class R2, Class R3, Class R4 and Class R5 shares are offered without a front-end sales charge or CDSC to qualifying institutional investors. - Class W shares are offered without a front-end sales charge or CDSC and are offered through qualifying discretionary accounts. At Aug. 31, 2009, RiverSource Investments, LLC (RiverSource Investments or the Investment Manager) and the affiliated funds-of-funds in the RiverSource Family of Funds owned 100% of Class I shares and the Investment Manager owned 100% of Class R3 shares. All classes of shares have identical voting, dividend and liquidation rights. Class specific expenses (e.g., distribution and service fees, transfer agency fees, plan administration services fees) 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. -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT 57 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------- 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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 business of the New York Stock Exchange (NYSE). 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 by an independent pricing service using an evaluated bid. When market quotes are not readily available, the pricing service, in determining fair values of debt securities, takes into consideration such factors as current quotations by broker/dealers, coupon, maturity, quality, type of issue, trading characteristics, and other yield and risk factors it deems relevant in determining valuations. Foreign securities are valued based on quotations from the principal market in which such securities are normally traded. The procedures adopted by the Board generally contemplate the use of fair valuation in the event that price quotations or valuations are not readily available, price quotations or valuations from other sources are not reflective of market value and thus deemed unreliable, or a significant event has occurred in relation to a security or class of securities (such as foreign securities) that is not reflected in price quotations or valuations from other sources. A fair value price is a good faith estimate of the value of a security at a given point in time. Many securities markets and exchanges outside the U.S. close prior to the close of the NYSE and therefore the closing prices for securities in such markets or on such exchanges may not fully reflect events that occur after such close but before the close of the NYSE, including significant movements in the U.S. market after foreign exchanges have closed. Accordingly, in those situations, Ameriprise Financial, Inc. (Ameriprise Financial), parent company of the Investment Manager, as administrator to the Fund, will fair value foreign securities pursuant to procedures adopted by the Board, including utilizing a third party pricing service to determine these fair values. These procedures take into account multiple factors, including movements in the U.S. securities markets, to determine a good faith estimate that reasonably reflects the current market conditions as of the close of the NYSE. Swap transactions are valued through an authorized pricing service, broker, or an internal model. 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 -------------------------------------------------------------------------------- 58 RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- rates. Typically, those maturing in 60 days or less that originally had maturities of more than 60 days at acquisition date are valued at amortized cost using the market value on the 61st day before maturity. Short-term securities maturing in 60 days or less at acquisition date are valued at amortized cost. Amortized cost is an approximation of market value. Investments in money market funds are valued at net asset value. FOREIGN CURRENCY TRANSLATIONS 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. ILLIQUID SECURITIES At Aug. 31, 2009, investments in securities included issues that are illiquid which the Fund currently limits to 15% of net assets, at market value, at the time of purchase. The aggregate value of such securities at Aug. 31, 2009 was $4,779,464 representing 0.12% of net assets. Certain illiquid securities may be valued, in good faith, by management at fair value according to procedures approved by the Board. According to Board guidelines, certain unregistered securities are determined to be liquid and are not included within the 15% limitation specified above. Assets are liquid if they can be sold or disposed of in the ordinary course of business within seven days at approximately the value at which the asset is valued by the Fund. SECURITIES PURCHASED ON A FORWARD-COMMITMENT BASIS Delivery and payment for securities that have been purchased by the Fund on a forward-commitment basis, including when-issued securities and other forward- commitments, can take place one month or more after the transaction date. During this period, such securities are subject to market fluctuations, and they may affect the Fund's net assets the same as owned securities. The Fund designates cash or liquid securities at least equal to the amount of its forward- commitments. At Aug. 31, 2009, the Fund has outstanding when-issued securities of $1,119,736,012. The Fund also enters into transactions to sell purchase commitments to third parties at current market values and concurrently acquires other purchase -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT 59 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------- 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. The Fund records the incremental difference between the forward purchase and sale of each forward roll as realized gain or loss. Losses may arise due to changes in the value of the securities or if a counterparty does not perform under the terms of the agreement. If a counterparty files for bankruptcy or becomes insolvent, the Fund's right to repurchase or sell securities may be limited. FORWARD SALE COMMITMENTS The Fund may enter into forward sale commitments to hedge its portfolio positions or to sell mortgage-backed securities it owns under delayed delivery arrangements. Proceeds of forward sale commitments are not received until the contractual settlement date. During the time a forward sale commitment is outstanding, equivalent deliverable securities, or an offsetting forward purchase commitment deliverable on or before the sale commitment date, are used to satisfy the commitment. Unsettled forward sale commitments are valued at the current market value of the underlying securities, generally according to the procedures described under "Valuation of securities" above. The forward sale commitment is "marked-to- market" daily and the change in market value is recorded by the Fund as an unrealized gain or loss. If the forward sale commitment is closed through the acquisition of an offsetting purchase commitment, the Fund realizes a gain or loss. If the Fund delivers securities under the commitment, the Fund realizes a gain or a loss from the sale of the securities based upon the market price established at the date the commitment was entered into. Forward sale commitments outstanding at period end are listed in the Notes to Portfolio of Investments. 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 the 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 (which includes net short-term capital gains) to shareholders. No provision for income or excise taxes is thus required. -------------------------------------------------------------------------------- 60 RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- Management of the Fund has concluded that there are no significant uncertain tax positions that would require recognition in the financial statements. Generally, the tax authorities can examine all the tax returns filed for the last three years. 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. On Aug. 24, 2009, an additional dividend was paid before the merger (see Note 10) to ensure that current shareholders of RiverSource Diversified Bond Fund would not experience a dilution in their share of the Fund's income or capital gains. OTHER Security transactions are accounted for on the date securities are purchased or sold. Dividend income, if any, 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. SECURITY LITIGATION SETTLEMENTS Litigation proceeds from Enron Corp. related to portfolio securities no longer included in the portfolio are recorded as realized gains. Proceeds received during the year ended Aug. 31, 2009 were $133,574. 3. INVESTMENTS IN DERIVATIVES The Fund may invest in certain derivative instruments, which are transactions whose values depend on or are derived from (in whole or in part) the value of one or more other assets, such as securities, currencies, commodities or indices. Such derivative instruments may be used to maintain cash reserves while maintaining exposure to certain other assets, to offset anticipated declines in values of investments, to facilitate trading, to reduce transaction costs, and to pursue higher investment returns. The Fund may also use derivative instruments to mitigate certain investment risks, such as foreign currency exchange rate risk, interest rate risk, and credit risk. FORWARD FOREIGN CURRENCY CONTRACTS The Fund may enter into forward foreign currency contracts in connection with settling purchases or sales of securities, to hedge the currency exposure associated with some or all of the Fund's securities or as part of its investment strategy. A forward foreign currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT 61 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------- value of a forward foreign currency contract fluctuates with changes in foreign currency exchange rates. Forward foreign currency contracts are marked to market daily based upon foreign currency exchange rates from an independent pricing service and the change in value is recorded as unrealized appreciation or depreciation. The Fund will record a realized gain or loss when the forward foreign currency contract is closed. The risks of forward foreign currency contracts include movement in the values of the foreign currencies relative to the U.S. dollar (or other foreign currencies) and the possibility that the counterparty will not complete its contractual obligation, which may be in excess of the amount reflected in the Statement of Assets and Liabilities. FUTURES TRANSACTIONS The Fund may buy and sell financial futures contracts traded on any U.S. or foreign exchange to produce incremental earnings, hedge existing positions or protect against market changes in the value of equities, interest rates or foreign currencies. The Fund may also buy and write put and call options on these futures contracts. A futures contract represents a commitment for the future purchase or sale of an asset at a specified price on a specified date. Futures and options on futures are valued daily based upon the last sale price at the close of the market on the principal exchange on which they are traded. 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. Upon entering into futures contracts, the Fund bears the risk of interest rates, exchange rates or securities prices moving unexpectedly, in which case, the Fund may not achieve the anticipated benefits of the futures contracts and may realize a loss. Additional risks include counterparty credit risk, 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. CREDIT DEFAULT SWAP TRANSACTIONS The Fund may enter into credit default swap transactions to increase or decrease its credit exposure to an issuer of debt securities, a specific debt security, or an index of issuers or debt securities. Additionally, credit default swaps may be used to hedge the Fund's exposure on a debt security that it owns or in lieu of selling such debt security. -------------------------------------------------------------------------------- 62 RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- As the purchaser of a credit default swap contract, the Fund purchases protection by paying a periodic interest rate on the notional amount to the counterparty. The interest amount is accrued daily as a component of unrealized appreciation (depreciation) and is recorded as a realized loss upon payment. If the credit event specified in the contract occurs, the Fund will be required to deliver either the reference obligation or an equivalent cash amount to the protection seller and in exchange, the Fund will receive the notional amount from the seller. The difference between the value of the obligation delivered and the notional amount received will be recorded as a realized gain (loss). As the seller of a credit default swap contract, the Fund sells protection to a buyer and will generally receive a periodic interest rate on the notional amount. The interest amount is accrued daily as a component of unrealized appreciation (depreciation) and is recorded as a realized gain upon receipt of the payment. If the credit event specified in the contract occurs, the Fund will receive the reference obligation or an equivalent cash amount in exchange for the payment of the notional amount to the protection buyer. The difference between the value of the obligation received and the notional amount paid will be recorded as a realized gain (loss). As a protection seller, the Fund bears the risk of loss from the credit events specified in the contract. Although specified events are contract-specific, credit events are generally defined as bankruptcy, failure to pay, restructuring, obligation acceleration, obligation default, or repudiation/moratorium. The notional amounts of credit default swap contracts are not recorded in the financial statements. Any premium paid or received by the Fund upon entering into a credit default swap contract is recorded as an asset or liability and amortized daily as a component of realized gain (loss) in the Statement of Operations. At Aug. 31, 2009, there were no credit default swap contracts outstanding which had a premium paid or received by the Fund. Credit default swap contracts are valued daily, and the change in value is recorded as unrealized appreciation (depreciation) until the termination of the swap, at which time a realized gain (loss) is recorded. Credit default swap contracts can involve greater risks than if a fund had invested in the reference obligation directly since, in addition to general market risks, credit default swaps are subject to counterparty credit risk, leverage risk, hedging risk, correlation risk and liquidity risk. The Fund will enter into credit default swap agreements only with counterparties that meet certain standards of creditworthiness. EFFECTS OF DERIVATIVE TRANSACTIONS ON THE FINANCIAL STATEMENTS The following tables are intended to provide additional information about the effect of derivatives on the financial statements of the Fund including: the fair -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT 63 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------- value of derivatives by risk category and the location of those fair values in the Statement of Assets and Liabilities; the impact of derivative transactions on the Fund's operations over the period including realized gains or losses and unrealized gains or losses. The derivative schedules following the Portfolio of Investments present additional information regarding derivative instruments outstanding at the end of the period, if any. FAIR VALUES OF DERIVATIVE INSTRUMENTS AT AUG. 31, 2009
ASSET DERIVATIVES LIABILITY DERIVATIVES ------------------------------- ------------------------------------- STATEMENT OF ASSETS STATEMENT OF ASSETS RISK EXPOSURE AND LIABILITIES AND LIABILITIES CATEGORY LOCATION FAIR VALUE LOCATION FAIR VALUE ---------------------------------------------------------------------------------------- Credit contracts Unrealized appreciation on swap transactions $ 10,722 N/A N/A ---------------------------------------------------------------------------------------- Foreign exchange Unrealized Unrealized contracts appreciation on depreciation on forward foreign forward foreign currency contracts 193,054 currency contracts $13,061 ---------------------------------------------------------------------------------------- Interest rate Net assets -- contracts unrealized appreciation 978,585* N/A N/A ---------------------------------------------------------------------------------------- TOTAL $1,182,361 $13,061 ----------------------------------------------------------------------------------------
* Includes cumulative appreciation (depreciation) of futures contracts as reported in the Futures Contracts Outstanding table following the Portfolio of Investments. Only the current day's variation margin is reported in receivables or payables in the Statement of Assets and Liabilities. EFFECT OF DERIVATIVE INSTRUMENTS ON THE STATEMENT OF OPERATIONS FOR THE YEAR ENDED AUG. 31, 2009
AMOUNT OF REALIZED GAIN OR (LOSS) ON DERIVATIVES RECOGNIZED IN INCOME -------------------------------------------------------------------------------- RISK EXPOSURE FORWARD FOREIGN CATEGORY CURRENCY CONTRACTS FUTURES SWAPS TOTAL -------------------------------------------------------------------------------- Credit contracts $ -- $ -- $216,409 $ 216,409 -------------------------------------------------------------------------------- Foreign exchange contracts 1,738,107 -- -- $ 1,738,107 -------------------------------------------------------------------------------- Interest rate contracts -- (33,595,241) -- $(33,595,241) -------------------------------------------------------------------------------- Total $1,738,107 $(33,595,241) $216,409 $(31,640,725) --------------------------------------------------------------------------------
-------------------------------------------------------------------------------- 64 RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION OR (DEPRECIATION) ON DERIVATIVES RECOGNIZED IN INCOME ------------------------------------------------------------------------------------- FORWARD FOREIGN RISK EXPOSURE CATEGORY CURRENCY CONTRACTS FUTURES SWAPS TOTAL ------------------------------------------------------------------------------------- Credit contracts $ -- $ -- $(350,319) $ (350,319) ------------------------------------------------------------------------------------- Foreign exchange contracts 365,841 -- -- $ 365,841 ------------------------------------------------------------------------------------- Interest rate contracts -- 3,169,954 -- $3,169,954 ------------------------------------------------------------------------------------- Total $365,841 $3,169,954 $(350,319) $3,185,476 -------------------------------------------------------------------------------------
VOLUME OF DERIVATIVES FORWARD FOREIGN CURRENCY CONTRACTS The gross notional amount of forward foreign currency contracts was $79.0 million at Aug. 31, 2009. The monthly average gross notional amount for these contracts was $70.0 million for the year ended Aug. 31, 2009. The fair value of these contracts at Aug. 31, 2009 is set forth in the table above. FUTURES The gross notional amount of long futures contracts was $213.2 million at Aug. 31, 2009. The monthly average gross notional amounts for long and short contracts were $129.6 million and $422.9 million, respectively, for the year ended Aug. 31, 2009. The fair value of such contracts at Aug. 31, 2009 is set forth in the table above. SWAPS The gross notional amount of swap contracts was $3.9 million at Aug. 31, 2009. The monthly average gross notional amount for these contracts was $17.1 million for the year ended Aug. 31, 2009. The fair value of such contracts at Aug. 31, 2009 is set forth in the table above. 4. EXPENSES AND SALES CHARGES INVESTMENT MANAGEMENT SERVICES FEES Under an Investment Management Services Agreement, the Investment Manager determines which securities will be purchased, held or sold. The management fee is an annual fee that is equal to a percentage of the Fund's average daily net assets that declines from 0.48% to 0.29% as the Fund's net assets increase. The management fee for the year ended Aug. 31, 2009 was 0.45% of the Fund's average daily net assets. ADMINISTRATIVE SERVICES FEES Under an Administrative Services Agreement, the Fund pays Ameriprise Financial an annual fee for administration and accounting services equal to a percentage of the Fund's average daily net assets that declines from 0.07% to 0.04% as the Fund's net assets increase. The fee for the year ended Aug. 31, 2009 was 0.06% of the Fund's average daily net assets. -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT 65 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------- OTHER FEES Other expenses are for, among other things, certain expenses of the Fund or the Board including: Fund boardroom and office expense, employee compensation, employee health and retirement benefits, and certain other expenses. Payment of these Fund and Board expenses is facilitated by a company providing limited administrative services to the Fund and the Board. For the year ended Aug. 31, 2009, other expenses paid to this company were $19,107. COMPENSATION OF BOARD MEMBERS Under a Deferred Compensation Plan (the Plan), the board members who are not "interested persons" of the Fund under the 1940 Act 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 funds in the RiverSource Family of Funds. The Fund's liability for these amounts is adjusted for market value changes and remains in the funds until distributed in accordance with the Plan. TRANSFER AGENCY FEES Under a Transfer Agency Agreement, RiverSource Service Corporation (the Transfer Agent) maintains Fund shareholder accounts and records and provides Fund shareholder services. The Fund pays the Transfer Agent an annual account-based fee at a rate equal to $20.50 for Class A, $21.50 for Class B and $21.00 for Class C for this service. The Transfer Agent also charges an annual fee of $3 per account serviced directly by the Fund or its designated agent for Class A, Class B and Class C shares. The Fund also pays the Transfer Agent an annual asset-based fee at a rate of 0.05% of the Fund's average daily net assets attributable to Class R2, Class R3, Class R4 and Class R5 shares and an annual asset-based fee at a rate of 0.20% of the Fund's average daily net assets attributable to Class W shares. The Transfer Agent charges an annual fee of $5 per inactive account, charged on a pro rata basis for the 12 month period from the date the account becomes inactive. These fees are included in the transfer agency fees in the Statement of Operations. In connection with the acquisition of the Seligman Core Fixed Income Fund (see Note 10), the Fund assumed the obligations of the Seligman Core Fixed Income Fund, which, together with certain other associated investment companies (together, the Guarantors), has severally, but not jointly, guaranteed the performance and observance of all terms and conditions of a lease entered into by Seligman Data Corp. (SDC), the former transfer agent of the Seligman Core Fixed Income Fund, including the payment of rent by SDC (the Guaranty). The lease and the Guaranty expire in January 2019. As of Aug. 31, 2009, the Fund's total potential future obligation over the life of the Guaranty is $27,600. The Seligman Core Fixed Income Fund expensed $15,416 related to the Guaranty -------------------------------------------------------------------------------- 66 RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- prior to acquisition by the Fund. This amount is included within other accrued expenses in the Fund's Statement of Assets and Liabilities. PLAN ADMINISTRATION SERVICES FEES Under a Plan Administration Services Agreement with the Transfer Agent, the Fund pays an annual fee at a rate of 0.25% of the Fund's average daily net assets attributable to Class R2, Class R3 and Class R4 shares for the provision of various administrative, recordkeeping, communication and educational services. DISTRIBUTION FEES The Fund has an agreement with RiverSource Fund Distributors, 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 of up to 0.25% of the Fund's average daily net assets attributable to Class A, Class R3 and Class W shares, a fee at an annual rate of up to 0.50% of the Fund's average daily net assets attributable to Class R2 shares and a fee at an annual rate of up to 1.00% of the Fund's average daily net assets attributable to Class B and Class C shares. For Class B and Class C shares, of the 1.00% fee, up to 0.75% is reimbursed for distribution expenses. The amount of distribution expenses incurred by the Distributor and not yet reimbursed (unreimbursed expense) was approximately $8,045,000 and $228,000 for Class B and Class C shares, respectively. These amounts are based on the most recent information available as of July 31, 2009, and may be recovered from future payments under the distribution plan or CDSC. To the extent the unreimbursed expense has been fully recovered, the distribution fee is reduced. SALES CHARGES Sales charges, including front-end and CDSCs, received by the Distributor for distributing Fund shares were $1,775,669 for Class A, $131,276 for Class B and $16,004 for Class C for the year ended Aug. 31, 2009. EXPENSES WAIVED/REIMBURSED BY THE INVESTMENT MANAGER AND ITS AFFILIATES For the year ended Aug. 31, 2009, the Investment Manager and its affiliates waived/reimbursed certain fees and expenses such that net expenses (excluding fees and expenses of acquired funds*) were as follows: Class A............................................. 0.83% Class B............................................. 1.59 Class C............................................. 1.58 Class I............................................. 0.47 Class R2............................................ 1.21 Class R3............................................ 0.91 Class R4............................................ 0.77 Class R5............................................ 0.52 Class W............................................. 0.92
-------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT 67 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------- The waived/reimbursed fees and expenses for the transfer agency fees at the class level were as follows: Class A.......................................... $839,376 Class B.......................................... 102,287 Class C.......................................... 17,572
The waived/reimbursed fees and expenses for the plan administration services fees at the class level were as follows: Class R2.......................................... $ 10 Class R3.......................................... 10 Class R4.......................................... 1,140
The management fees waived/reimbursed at the Fund level were $2,316,524. Under an agreement which was effective until Aug. 31, 2009, the Investment Manager and its affiliates contractually agreed to waive certain fees and expenses such that net expenses (excluding fees and expenses of acquired funds*) would not exceed the following percentage of the class' average daily net assets: Class A............................................. 0.83% Class B............................................. 1.59 Class C............................................. 1.58 Class I............................................. 0.47 Class R2............................................ 1.27 Class R3............................................ 1.02 Class R4............................................ 0.77 Class R5............................................ 0.52 Class W............................................. 0.92
Effective Sep. 1, 2009, the Investment Manager and its affiliates have contractually agreed to waive certain fees and expenses until Oct. 31, 2010, unless sooner terminated at the discretion of the Board, such that net expenses (excluding fees and expenses of acquired funds*), will not exceed the following percentage of the class' average daily net assets: Class A............................................. 0.85% Class B............................................. 1.61 Class C............................................. 1.60 Class I............................................. 0.49 Class R2............................................ 1.29 Class R3............................................ 1.04 Class R4............................................ 0.79 Class R5............................................ 0.54 Class W............................................. 0.94
* In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the funds in which it invests (also referred to as "acquired funds"), -------------------------------------------------------------------------------- 68 RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- including affiliated and non-affiliated pooled investment vehicles (including mutual funds and exchange traded funds). Because the acquired funds have varied expense and fee levels and the Fund may own different proportions of acquired funds at different times, the amount of fees and expenses incurred indirectly by the Fund will vary. EARNINGS AND BANK FEE CREDITS During the year ended Aug. 31, 2009, the Fund's custodian and transfer agency fees were reduced by $8,655 as a result of earnings and bank fee credits from overnight cash balances. Effective Dec. 15, 2008, the Fund pays custodian fees to JPMorgan Chase Bank, N.A. For the period from Sept. 1, 2008 to Dec. 15, 2008, the Fund paid custodian fees amounting to $17,995 to Ameriprise Trust Company, a subsidiary of Ameriprise Financial. 5. SECURITIES TRANSACTIONS Cost of purchases and proceeds from sales of securities (other than short-term obligations, but including mortgage dollar rolls) aggregated $14,561,816,029 (including $11,588,641* from Seligman Core Fixed Income Fund that was acquired in the fund merger as described in Note 10) and $14,024,847,740, respectively, for the year ended Aug. 31, 2009. Realized gains and losses are determined on an identified cost basis. * This purchase amount is excluded for purposes of calculating the Fund's portfolio turnover rate. 6. CAPITAL SHARE TRANSACTIONS Transactions in shares of capital stock for the periods indicated are as follows:
YEAR ENDED AUG. 31, 2009 2008 ------------------------------------------------------------------- CLASS A Sold 177,639,922 71,856,624 Converted from Class B shares* 12,026,422 8,471,695 Fund merger 1,176,850 10,921,606 Reinvested distributions 16,887,199 14,809,220 Redeemed (115,359,046) (95,553,562) ------------------------------------------------------------------- Net increase (decrease) 92,371,347 10,505,583 ------------------------------------------------------------------- CLASS B Sold 15,511,457 16,633,194 Fund merger 284,690 2,743,904 Reinvested distributions 1,862,327 2,076,386 Converted to Class A shares* (12,026,422) (8,471,695) Redeemed (20,110,399) (21,310,095) ------------------------------------------------------------------- Net increase (decrease) (14,478,347) (8,328,306) -------------------------------------------------------------------
-------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT 69 NOTES TO FINANCIAL STATEMENTS (continued) --------------------------------------
YEAR ENDED AUG. 31, 2009 2008 ------------------------------------------------------------------- CLASS C Sold 5,598,507 4,270,266 Fund merger 643,818 260,158 Reinvested distributions 276,438 156,349 Redeemed (2,261,573) (1,369,182) ------------------------------------------------------------------- Net increase (decrease) 4,257,190 3,317,591 ------------------------------------------------------------------- CLASS I Sold 62,793,894 40,548,778 Fund merger -- 52,110,117 Reinvested distributions 6,933,962 4,637,299 Redeemed (53,308,213) (28,465,148) ------------------------------------------------------------------- Net increase (decrease) 16,419,643 68,831,046 ------------------------------------------------------------------- CLASS R2 Sold 26,201 -- Fund merger 32,051 1,027 Reinvested distributions 109 -- ------------------------------------------------------------------- Net increase (decrease) 58,361 1,027 ------------------------------------------------------------------- CLASS R3 Fund merger -- 1,027 ------------------------------------------------------------------- Net increase (decrease) -- 1,027 ------------------------------------------------------------------- CLASS R4 Sold 5,947,185 6,464,647 Fund merger -- 2,309 Reinvested distributions 712,141 736,110 Redeemed (7,634,086) (7,142,397) ------------------------------------------------------------------- Net increase (decrease) (974,760) 60,669 ------------------------------------------------------------------- CLASS R5 Fund merger 60,341 1,027 ------------------------------------------------------------------- Net increase (decrease) 60,341 1,027 ------------------------------------------------------------------- CLASS W Sold 44,273,622 110,115,534 Fund merger -- 1,020 Reinvested distributions 5,831,507 3,800,802 Redeemed (69,416,918) (19,306,233) ------------------------------------------------------------------- Net increase (decrease) (19,311,789) 94,611,123 -------------------------------------------------------------------
* Automatic conversion of Class B shares to Class A shares based on the original purchase. -------------------------------------------------------------------------------- 70 RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- 7. LENDING OF PORTFOLIO SECURITIES Effective Dec. 1, 2008, the Fund has entered into a Master Securities Lending Agreement (the Agreement) with JPMorgan Chase Bank, National Association (JPMorgan). The Agreement authorizes JPMorgan as lending agent to lend securities to authorized borrowers in order to generate additional income on behalf of the Fund. Pursuant to the Agreement, the securities loaned are secured by cash or U.S. government securities equal to at least 100% of the market value of the loaned securities. Any additional collateral required to maintain those levels due to market fluctuations of the loaned securities is delivered the following business day. Cash collateral received is invested by the lending agent on behalf of the Fund into authorized investments pursuant to the Agreement. The investments made with the cash collateral are listed in the Portfolio of Investments. The values of such investments and any uninvested cash collateral balance are disclosed in the Statement of Assets and Liabilities along with the related obligation to return the collateral upon the return of the securities loaned. At Aug. 31, 2009, securities valued at $466,722,174 were on loan, secured by U.S. government securities valued at $55,609,277 and by cash collateral of $418,626,283 invested in short-term securities or in cash equivalents. Risks of delay in recovery of securities or even loss of rights in the securities may occur should the borrower of the securities fail financially. Risks may also arise to the extent that the value of the securities loaned increases above the value of the collateral received. JPMorgan will indemnify the Fund from losses resulting from a borrower's failure to return a loaned security when due. Such indemnification does not extend to losses associated with declines in the value of cash collateral investments. Loans are subject to termination by the Fund or the borrower at any time, and are, therefore, not considered to be illiquid investments. Pursuant to the Agreement, the Fund receives income for lending its securities either in the form of fees or by earning interest on invested cash collateral, net of negotiated rebates paid to borrowers and fees paid to the lending agent for services provided and any other securities lending expenses. Income of $1,122,505 earned from securities lending from Dec. 1, 2008 through Aug. 31, 2009 is included in the Statement of Operations. The Fund also continues to earn interest and dividends on the securities loaned. Prior to Dec. 1, 2008, the Investment Manager served as securities lending agent for the Fund under the Securities Lending Agency Agreement pursuant to which the Fund agreed to reimburse the Investment Manager for expenses incurred by it in connection with the lending program. Expenses paid to the Investment Manager as securities lending agent were $1,161 through Nov. 30, 2008 and are included in other expenses in the Statement of Operations. Cash collateral -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT 71 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------- received on loaned securities had been invested in an affiliated money market fund. Income of $4,493 earned from securities lending from Sept. 1, 2008 through Nov. 30, 2008 is included in the Statement of Operations. 8. AFFILIATED MONEY MARKET FUND The Fund may invest its daily cash balance in RiverSource Short-Term Cash Fund, a money market fund established for the exclusive use of the funds in the RiverSource Family of Funds and other institutional clients of RiverSource Investments. The cost of the Fund's purchases and proceeds from sales of shares of RiverSource Short-Term Cash Fund aggregated $2,377,133,517 and $1,934,972,211, respectively, for the year ended Aug. 31, 2009. The income distributions received with respect to the Fund's investment in RiverSource Short-Term Cash Fund can be found in the Statement of Operations and the Fund's invested balance in RiverSource Short-Term Cash Fund at Aug. 31, 2009, can be found in the Portfolio of Investments. 9. BANK BORROWINGS The Fund has entered into a revolving credit facility with a syndicate of banks led by JPMorgan Chase Bank, N.A. (the Administrative Agent), whereby the Fund may borrow for the temporary funding of shareholder redemptions or for other temporary or emergency purposes. The credit facility became effective on Oct. 16, 2008, replacing a prior credit facility. The credit facility agreement, which is a collective agreement between the Fund and certain other funds in the RiverSource Family of Funds, severally and not jointly, permits collective borrowings up to $475 million. The borrowers shall have the right, upon written notice to the Administrative Agent to request an increase of up to $175 million in the aggregate amount of the credit facility from new or existing lenders, provided that the aggregate amount of the credit facility shall at no time exceed $650 million. Participation in such increase by any existing lender shall be at such lender's sole discretion. Interest is charged to each Fund based on its borrowings at a rate equal to the federal funds rate plus 0.75%. Each borrowing under the credit facility matures no later than 60 days after the date of borrowing. The Fund also pays a commitment fee equal to its pro rata share of the amount of the credit facility at a rate of 0.06% per annum, in addition to an upfront fee equal to its pro rata share of 0.02% of the amount of the credit facility. The Fund had no borrowings during the year ended Aug. 31, 2009. Under the prior credit facility which was effective until Oct. 15, 2008, the Fund had entered into a revolving credit facility with a syndicate of banks headed by JPMorgan Chase Bank, N.A., whereby the Fund was permitted to borrow for the temporary funding of shareholder redemptions or for other temporary or emergency purposes. The credit facility agreement, which was a collective -------------------------------------------------------------------------------- 72 RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- agreement between the Fund and certain other RiverSource funds, severally and not jointly, permitted collective borrowings up to $500 million. Interest was charged to each Fund based on its borrowings at a rate equal to the federal funds rate plus 0.30%. Each borrowing under the credit facility matured no later than 60 days after the date of borrowing. The Fund also paid a commitment fee equal to its pro rata share of the amount of the credit facility at a rate of 0.06% per annum. 10. FUND MERGERS At the close of business on Aug. 28, 2009, RiverSource Diversified Bond Fund acquired the assets and assumed the identified liabilities of Seligman Core Fixed Income Fund. The reorganization was completed after shareholders approved the plan on June 2, 2009. The aggregate net assets of RiverSource Diversified Bond Fund immediately before the acquisition were $4,064,386,305 and the combined net assets immediately after the acquisition were $4,074,808,638. The merger was accomplished by a tax-free exchange of 1,510,167 shares of Seligman Core Fixed Income Fund valued at $10,422,333. In exchange for the Seligman Core Fixed Income Fund shares and net assets, RiverSource Diversified Bond Fund issued the following number of shares:
SHARES ------------------------------------------------------------ Class A.......................................... 1,176,850 Class B.......................................... 284,690 Class C.......................................... 643,818 Class R2*........................................ 32,051 Class R5*........................................ 60,341
* Effective Aug. 29, 2009, Class R and Class I shares were redesignated as Class R2 and Class R5 shares, respectively. The components of Seligman Core Fixed Income Fund's net assets after adjustments for any permanent book-to-tax differences at the merger date were as follows:
EXCESS OF DISTRIBUTIONS OVER TOTAL CAPITAL UNREALIZED ACCUMULATED NET NET INVESTMENT NET ASSETS STOCK DEPRECIATION REALIZED LOSS INCOME ----------------------------------------------------------------------------------------------- Seligman Core Fixed Income Fund............ $10,422,333 $12,500,877 $(451,697) $(1,618,941) $(7,906)
At the close of business on March 14, 2008, RiverSource Diversified Bond Fund acquired the assets and assumed the identified liabilities of RiverSource Core -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT 73 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------- Bond Fund. The reorganization was completed after shareholders approved the plan on Jan. 29, 2008. The aggregate net assets of RiverSource Diversified Bond Fund immediately before the acquisition were $3,162,732,908 and the combined net assets immediately after the acquisition were $3,479,595,851. The merger was accomplished by a tax-free exchange of 33,460,754 shares of RiverSource Core Bond Fund valued at $316,862,943. In exchange for the RiverSource Core Bond Fund shares and net assets, RiverSource Diversified Bond Fund issued the following number of shares:
SHARES ------------------------------------------------------------ Class A......................................... 10,921,606 Class B......................................... 2,743,904 Class C......................................... 260,158 Class I......................................... 52,110,117 Class R2........................................ 1,027 Class R3........................................ 1,027 Class R4........................................ 2,309 Class R5........................................ 1,027 Class W......................................... 1,020
The components of RiverSource Core Bond Fund's net assets after adjustments for any permanent book-to-tax differences at the merger date were as follows:
EXCESS OF DISTRIBUTIONS OVER TOTAL CAPITAL UNREALIZED ACCUMULATED NET NET INVESTMENT NET ASSETS STOCK DEPRECIATION REALIZED LOSS INCOME -------------------------------------------------------------------------------------------------- RiverSource Core Bond Fund........ $316,862,943 $322,093,199 $(3,350,834) $(1,764,611) $(114,811)
11. FEDERAL TAX INFORMATION Net investment income (loss) and net realized gains (losses) may differ for financial statement and tax purposes primarily because of futures and options contracts, foreign currency transactions, recognition of unrealized appreciation (depreciation) for certain derivative investments, post-October losses, market discount and losses deferred due to wash sales. 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. -------------------------------------------------------------------------------- 74 RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- In the Statement of Assets and Liabilities, as a result of permanent book-to-tax differences, excess of distributions over net investment income has been decreased by $1,241,736 and accumulated net realized loss has been decreased by $55,005,835 resulting in a net reclassification adjustment to decrease paid-in capital by $56,247,571. The tax character of distributions paid for the years indicated is as follows:
YEAR ENDED AUG. 31, ---------------------------------------------------------------------- 2009 2008 ---------------------------------- ---------------------------------- LONG-TERM CAPITAL LONG-TERM CAPITAL ORDINARY INCOME GAIN ORDINARY INCOME GAIN ------------------------------------------------------------------------------------------- Class A............ $90,380,371 $-- $84,539,939 $-- Class B............ 9,169,639 -- 10,768,502 -- Class C............ 1,472,729 -- 828,277 -- Class I............ 31,440,870 -- 22,019,428 -- Class R2........... 1,352 -- 290 -- Class R3........... 427 -- 308 -- Class R4........... 3,205,438 -- 3,476,394 -- Class R5........... 1,163 -- 328 -- Class W............ 26,235,706 -- 18,133,130 --
At Aug. 31, 2009, the components of distributable earnings on a tax basis are as follows: Undistributed ordinary income................... $ 1,208,037 Undistributed accumulated long-term gain........ $ -- Accumulated realized loss....................... $(248,546,506) Unrealized appreciation (depreciation).......... $ 76,557,605
For federal income tax purposes, the Fund had a capital loss carry-over of $72,303,513 at Aug. 31, 2009 that if not offset by capital gains will expire as follows:
2010 2012 2013 2014 2017 $49,658,521 $5,227,159 $3,354,885 $10,357,129 $3,705,819
Because the measurement periods for a regulated investment company's income are different for excise tax purposes versus income tax purposes, special rules are in place to protect the amount of earnings and profits needed to support excise tax distributions. As a result, the Fund is permitted to treat net capital losses realized between Nov. 1, 2008 and its fiscal year end (post-October loss) as occurring on the first day of the following tax year. At Aug. 31, 2009, the Fund had a post-October loss of $176,242,993 that is treated for income tax purposes as occurring on Sept. 1, 2009. -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT 75 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------- For the year ended Aug. 31, 2009, $56,247,571 of capital loss carry-over expired unused. 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. There is no assurance that the Fund will be able to utilize all of its capital loss carry-over before it expires. 12. SUBSEQUENT EVENTS Management has evaluated Fund related events and transactions that occurred during the period from the date of the Statement of Assets and Liabilities through Oct. 21, 2009, the date of issuance of the Fund's financial statements. There were no events or transactions that occurred during the period that materially impacted the amounts or disclosures in the Fund's financial statements. 13. INFORMATION REGARDING PENDING AND SETTLED LEGAL PROCEEDINGS In June 2004, an action captioned John E. Gallus et al. v. American Express Financial Corp. and American Express Financial Advisors Inc. was filed in the United States District Court for the District of Arizona. The plaintiffs allege that they are investors in several American Express Company (now known as RiverSource) mutual funds and they purport to bring the action derivatively on behalf of those funds under the Investment Company Act of 1940. The plaintiffs allege that fees allegedly paid to the defendants by the funds for investment advisory and administrative services are excessive. The plaintiffs seek remedies including restitution and rescission of investment advisory and distribution agreements. The plaintiffs voluntarily agreed to transfer this case to the United States District Court for the District of Minnesota. In response to defendants' motion to dismiss the complaint, the Court dismissed one of plaintiffs' four claims and granted plaintiffs limited discovery. Defendants moved for summary judgment in April 2007. Summary judgment was granted in the defendants' favor on July 9, 2007. The plaintiffs filed a notice of appeal with the Eighth Circuit Court of Appeals on August 8, 2007. On August 6, 2009, defendants filed a writ of certiorari with the U.S. Supreme Court, asking the U.S. Supreme Court to stay the District Court proceedings while the U.S. Supreme Court considers and rules in a case captioned Jones v. Harris Associates, which involves issues of law similar to those presented in the Gallus case. In December 2005, without admitting or denying the allegations, American Express Financial Corporation (AEFC, which is now known as Ameriprise Financial, Inc. (Ameriprise Financial)), entered into settlement agreements with the Securities and Exchange Commission (SEC) and Minnesota Department of Commerce (MDOC) related to market timing activities. As a result, AEFC was -------------------------------------------------------------------------------- 76 RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- 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. AEFC agreed to pay disgorgement of $10 million and civil money penalties of $7 million. 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. 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. On November 7, 2008, RiverSource Investments, LLC, a subsidiary of Ameriprise Financial, Inc., acquired J. & W. Seligman & Co. Incorporated (Seligman). In late 2003, Seligman conducted an extensive internal review concerning mutual fund trading practices. Seligman's review, which covered the period 2001-2003, noted one arrangement that permitted frequent trading in certain open-end registered investment companies managed by Seligman (the Seligman Funds); this arrangement was in the process of being closed down by Seligman before September 2003. Seligman identified three other arrangements that permitted frequent trading, all of which had been terminated by September 2002. In January 2004, Seligman, on a voluntary basis, publicly disclosed these four arrangements to its clients and to shareholders of the Seligman Funds. Seligman also provided information concerning mutual fund trading practices to the SEC and the Office of the Attorney General of the State of New York (NYAG). In September 2006, the NYAG commenced a civil action in New York State Supreme Court against Seligman, Seligman Advisors, Inc. (now known as RiverSource Fund Distributors), Seligman Data Corp. and Brian T. Zino (collectively, the Seligman Parties), alleging, in substance, that the Seligman Parties permitted various persons to engage in frequent trading and, as a result, the prospectus disclosure used by the registered investment companies then managed by Seligman was and had been misleading. The NYAG included other related claims and also claimed that the fees charged by Seligman to the Seligman Funds were excessive. On March 13, 2009, without admitting or denying any violations of law or wrongdoing, the Seligman Parties entered into a stipulation of settlement with the NYAG and settled the claims made by the NYAG. Under the terms of the settlement, Seligman paid $11.3 million to four Seligman Funds. This settlement resolved all outstanding matters between the Seligman Parties and the NYAG. In addition to the foregoing matter, the New York staff of the SEC indicated in September 2005 that it was considering recommending to the Commissioners of the SEC the instituting of a formal -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT 77 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------- action against Seligman and Seligman Advisors, Inc. relating to frequent trading in the Seligman Funds. Seligman responded to the staff in October 2005 that it believed that any action would be both inappropriate and unnecessary, especially in light of the fact that Seligman had previously resolved the underlying issue with the Independent Directors of the Seligman Funds and made recompense to the affected Seligman Funds. There have been no further developments with the SEC on this matter. Ameriprise Financial and certain of its affiliates have historically been involved in a number of legal, arbitration and regulatory 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, arbitration or regulatory 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. Further, although we believe proceedings are not 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, these proceedings are subject to uncertainties and, as such, we are unable to estimate the possible loss or range of loss that may result. An adverse outcome in one or more of these proceedings could result in adverse judgments, settlements, fines, penalties or other relief that could have a material adverse effect on the consolidated financial condition or results of operations of Ameriprise Financial. -------------------------------------------------------------------------------- 78 RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ------------------------ TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF RIVERSOURCE DIVERSIFIED BOND FUND: We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of RiverSource Diversified Bond Fund (the Fund) of the RiverSource Diversified Income Series, Inc. as of August 31, 2009, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the three years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The financial highlights of the Fund for the periods presented through August 31, 2006, were audited by other auditors whose report dated October 20, 2006, expressed an unqualified opinion on those financial highlights. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Fund's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of August 31, 2009, by correspondence with the custodian and brokers, or by other appropriate auditing procedures where replies from brokers were not received. We believe that our audits provide a reasonable basis for our opinion. -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT 79 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (continued) ------------ In our opinion, the financial statements and financial highlights audited by us as referred to above present fairly, in all material respects, the financial position of RiverSource Diversified Bond Fund of the RiverSource Diversified Income Series, Inc. at August 31, 2009, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the three years in the period then ended, in conformity with U.S. generally accepted accounting principles. /s/ Ernst & Young LLP Minneapolis, Minnesota October 21, 2009 -------------------------------------------------------------------------------- 80 RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT FEDERAL INCOME TAX INFORMATION ------------------------------------------------- (UNAUDITED) The Fund is required by the Internal Revenue Code of 1986 to tell its shareholders about the tax treatment of the dividends it pays during its fiscal year. The dividends listed below are reported to you on Form 1099-DIV, Dividends and Distributions. Shareholders should consult a tax advisor on how to report distributions for state and local tax purposes. Fiscal year ended Aug. 31, 2009
INCOME DISTRIBUTIONS - the Fund designates the following tax attributes for distributions: Qualified Dividend Income for individuals.................... 0.00% Dividends Received Deduction for corporations................ 0.00% U.S. Government Obligations.................................. 100.00%
The Fund also designates as distributions of long-term gains, to the extent necessary to fully distribute such capital gains, earnings and profits distributed to shareholders on the redemption of shares. -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT 81 BOARD MEMBERS AND OFFICERS ----------------------------------------------------- Shareholders elect a Board that oversees the Fund's operations. The Board appoints officers who are responsible for day-to-day business decisions based on policies set by the Board. The following is a list of the Fund's Board members. The RiverSource Family of Funds that each Board member oversees consists of 132 funds, which includes 100 RiverSource funds and 32 Seligman funds. Board members serve until the next regular shareholders' meeting or until he or she reaches the mandatory retirement age established by the Board. INDEPENDENT BOARD MEMBERS
NAME, POSITION HELD ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION OTHER AGE LENGTH OF SERVICE DURING PAST FIVE YEARS DIRECTORSHIPS ------------------------------------------------------------------------------------------------------------------------------ Kathleen Blatz Board member since Chief Justice, Minnesota Supreme Court, 1998-2006; None 901 S. Marquette Ave. 2006 Attorney Minneapolis, MN 55402 Age 55 ------------------------------------------------------------------------------------------------------------------------------ Arne H. Carlson Board member since Chair, RiverSource Family of Funds, 1999-2006; former None 901 S. Marquette Ave. 1999 Governor of Minnesota Minneapolis, MN 55402 Age 75 ------------------------------------------------------------------------------------------------------------------------------ Pamela G. Carlton Board member since President, Springboard -- Partners in Cross Cultural None 901 S. Marquette Ave. 2007 Leadership (consulting company) Minneapolis, MN 55402 Age 55 ------------------------------------------------------------------------------------------------------------------------------ Patricia M. Flynn Board member since Trustee Professor of Economics and Management, Bentley None 901 S. Marquette Ave. 2004 College; former Dean, McCallum Graduate School of Minneapolis, MN 55402 Business, Bentley University Age 58 ------------------------------------------------------------------------------------------------------------------------------ Anne P. Jones Board member since Attorney and Consultant None 901 S. Marquette Ave. 1985 Minneapolis, MN 55402 Age 74 ------------------------------------------------------------------------------------------------------------------------------ Jeffrey Laikind, CFA Board member since Former Managing Director, Shikiar Asset Management American Progressive 901 S. Marquette Ave. 2005 Insurance Minneapolis, MN 55402 Age 74 ------------------------------------------------------------------------------------------------------------------------------ Stephen R. Lewis, Jr. Chair of the Board President Emeritus and Professor of Economics, Carleton Valmont Industries, 901 S. Marquette Ave. since 2007, College Inc. (manufactures Minneapolis, MN 55402 Board member since irrigation systems) Age 70 2002 ------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- 82 RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- INDEPENDENT BOARD MEMBERS (CONTINUED)
NAME, POSITION HELD ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION OTHER AGE LENGTH OF SERVICE DURING PAST FIVE YEARS DIRECTORSHIPS ------------------------------------------------------------------------------------------------------------------------------ John F. Maher Board member since Retired President and Chief Executive Officer and None 901 S. Marquette Ave. 2008 former Director, Great Western Financial Corporation Minneapolis, MN 55402 (financial services), 1986-1997 Age 66 ------------------------------------------------------------------------------------------------------------------------------ Catherine James Paglia Board member since Director, Enterprise Asset Management, Inc. (private None 901 S. Marquette Ave. 2004 real estate and asset management company) Minneapolis, MN 55402 Age 57 ------------------------------------------------------------------------------------------------------------------------------ Leroy C. Richie Board member since Counsel, Lewis & Munday, P.C. since 1987; Vice Digital Ally, Inc. 901 S. Marquette Ave. 2008 President and General Counsel, Automotive Legal (digital imaging); Minneapolis, MN 55402 Affairs, Chrysler Corporation, 1990-1997 Infinity, Inc. (oil Age 68 and gas exploration and production); OGE Energy Corp. (energy and energy services) ------------------------------------------------------------------------------------------------------------------------------ Alison Taunton-Rigby Board member since Chief Executive Officer and Director, RiboNovix, Inc. Idera 901 S. Marquette Ave. 2002 since 2003 (biotechnology); former President, Forester Pharmaceuticals, Minneapolis, MN 55402 Biotech Inc. Age 65 (biotechnology); Healthways, Inc. (health management programs) ------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT 83 BOARD MEMBERS AND OFFICERS (continued) ----------------------------------------- BOARD MEMBER AFFILIATED WITH RIVERSOURCE INVESTMENTS*
NAME, POSITION HELD ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION OTHER AGE LENGTH OF SERVICE DURING PAST FIVE YEARS DIRECTORSHIPS ------------------------------------------------------------------------------------------------------------------------------ William F. Truscott Board member since President -- U.S. Asset Management and Chief Investment None 53600 Ameriprise 2001, Officer, Ameriprise Financial, Inc. since 2005; Financial Center Vice President since President, Chairman of the Board and Chief Investment Minneapolis, MN 55474 2002 Officer, RiverSource Investments, LLC since 2001; Age 49 Director, President and Chief Executive Officer, Ameriprise Certificate Company since 2006; Chairman of the Board and Chief Executive Officer, RiverSource Distributors, Inc. since 2006 and of RiverSource Fund Distributors, Inc. since 2008; Senior Vice President -- Chief Investment Officer, Ameriprise Financial, Inc., 2001-2005 ------------------------------------------------------------------------------------------------------------------------------
* Interested person by reason of being an officer, director, security holder and/or employee of RiverSource Investments or Ameriprise Financial. The SAI has additional information about the Fund's Board members and is available, without charge, upon request by calling the RiverSource Family of Funds at 1(800) 221-2450; contacting your financial intermediary; or visiting riversource.com/funds. The Board has appointed officers who are responsible for day-to-day business decisions based on policies it has established. The officers serve at the pleasure of the Board. In addition to Mr. Truscott, who is Vice President, the Fund's other officers are: FUND OFFICERS
NAME, POSITION HELD ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION AGE LENGTH OF SERVICE DURING PAST FIVE YEARS -------------------------------------------------------------------------------------------------------- Patrick T. Bannigan President since 2006 Director and Senior Vice President -- Asset Management, 172 Ameriprise Financial Products and Marketing, RiverSource Investments, LLC Center and Director and Vice President -- Asset Management, Minneapolis, MN 55474 Products and Marketing, RiverSource Distributors, Inc. Age 43 since 2006 and of RiverSource Fund Distributors, Inc. since 2008; Managing Director and Global Head of Product, Morgan Stanley Investment Management, 2004- 2006; President, Touchstone Investments, 2002-2004 --------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- 84 RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- FUND OFFICERS (CONTINUED)
NAME, POSITION HELD ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION AGE LENGTH OF SERVICE DURING PAST FIVE YEARS -------------------------------------------------------------------------------------------------------- Michelle M. Keeley Vice President since Executive Vice President -- Equity and Fixed Income, 172 Ameriprise Financial 2004 Ameriprise Financial, Inc. and RiverSource Investments, Center LLC since 2006; Vice President -- Investments, Minneapolis, MN 55474 Ameriprise Certificate Company since 2003; Senior Vice Age 45 President -- Fixed Income, Ameriprise Financial, Inc., 2002-2006 and RiverSource Investments, LLC, 2004-2006 -------------------------------------------------------------------------------------------------------- Amy K. Johnson Vice President since Chief Administrative Officer, RiverSource Investments, 5228 Ameriprise Financial 2006 LLC since 2009; Vice President -- Asset Management and Center Minneapolis, MN Trust Company Services, RiverSource Investments, LLC, 55474 2006-2009; Vice President -- Operations and Compliance, Age 44 RiverSource Investments, LLC, 2004-2006; Director of Product Development -- Mutual Funds, Ameriprise Financial, Inc., 2001-2004 -------------------------------------------------------------------------------------------------------- Jeffrey P. Fox Treasurer since 2002 Vice President -- Investment Accounting, Ameriprise 105 Ameriprise Financial Financial, Inc. since 2002; Chief Financial Officer, Center RiverSource Distributors, Inc. since 2006 and of Minneapolis, MN 55474 RiverSource Fund Distributors, Inc. since 2008 Age 54 -------------------------------------------------------------------------------------------------------- Scott R. Plummer Vice President, Vice President and Chief Counsel -- Asset Management, 5228 Ameriprise Financial General Counsel and Ameriprise Financial, Inc. since 2005; Chief Counsel, Center Secretary since 2006 RiverSource Distributors, Inc. and Chief Legal Officer Minneapolis, MN 55474 and Assistant Secretary, RiverSource Investments, LLC Age 50 since 2006; Chief Counsel, RiverSource Fund Distributors, Inc. since 2008; Vice President, General Counsel and Secretary, Ameriprise Certificate Company since 2005; Vice President -- Asset Management Compliance, Ameriprise Financial, Inc., 2004-2005; Senior Vice President and Chief Compliance Officer, USBancorp Asset Management, 2002-2004 -------------------------------------------------------------------------------------------------------- Eleanor T.M. Hoagland Chief Compliance Chief Compliance Officer, RiverSource Investments, LLC, 100 Park Avenue Officer since 2009 Kenwood Capital Management LLC, Ameriprise Certificate New York, NY 10010 Company and RiverSource Service Corporation since 2009; Age 58 Chief Compliance Officer for each of the Seligman funds since 2004; Anti-Money Laundering Prevention Officer and Identity Theft Prevention Officer for each of the Seligman funds since 2008; Managing Director, J. & W. Seligman & Co. Incorporated and Vice-President for each of the Seligman funds, 2004-2008 -------------------------------------------------------------------------------------------------------- Neysa M. Alecu Money Laundering Vice President -- Compliance, Ameriprise Financial, 2934 Ameriprise Financial Prevention Officer Inc. since 2008; Anti-Money Laundering Officer, Center since 2004 Ameriprise Financial, Inc. since 2004; Compliance Minneapolis, MN 55474 Director, Ameriprise Financial, Inc., 2004-2008 Age 45 --------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT 85 APPROVAL OF INVESTMENT MANAGEMENT SERVICES AGREEMENT ---------------------------------------------------------------------- RiverSource Investments, LLC ("RiverSource Investments" or the "investment manager"), a wholly-owned subsidiary of Ameriprise Financial, Inc. ("Ameriprise Financial"), serves as the investment manager to the Fund. Under an investment management services agreement (the "IMS Agreement"), RiverSource Investments provides investment advice and other services to the Fund and all funds in the RiverSource Family of Funds (collectively, the "Funds"). On an annual basis, the Fund's Board of Directors (the "Board"), including the independent Board members (the "Independent Directors"), considers renewal of the IMS Agreement. RiverSource Investments prepared detailed reports for the Board and its Contracts Committee in March and April 2009, including reports based on data provided by independent organizations to assist the Board in making this determination. In addition, throughout the year, the Board (or its committees) reviews information prepared by RiverSource Investments addressing the services RiverSource Investments provides and Fund performance. The Board accords particular weight to the work, deliberations and conclusions of the Contracts, Investment Review and Compliance Committees in determining whether to continue the IMS Agreement. At the April 7-8, 2009 in-person Board meeting, independent legal counsel to the Independent Directors reviewed with the Independent Directors various factors relevant to the Board's consideration of advisory agreements and the Board's legal responsibilities related to such consideration. Following an analysis and discussion of the factors identified below, the Board, including all of the Independent Directors, approved renewal of the IMS Agreement. Nature, Extent and Quality of Services Provided by RiverSource Investments: The Board analyzed various reports and presentations it had received detailing the services performed by RiverSource Investments, as well as its expertise, resources and capabilities. The Board specifically considered many developments during the past year concerning the services provided by RiverSource Investments, including, in particular, the continued investment in, and resources dedicated to, the Fund's operations, most notably, the large investment made in the acquisition of J. & W. Seligman & Co. Incorporated, including its portfolio management operations, personnel and infrastructure (including the addition of two new offices in New York City and Palo Alto). Further, in connection with the Board's evaluation of the overall package of services provided by RiverSource Investments, the Board considered the quality of the administrative and transfer agency services provided by RiverSource Investments' affiliates to the Fund. The Board also reviewed the financial condition of RiverSource Investments (and its affiliates) and each entity's ability -------------------------------------------------------------------------------- 86 RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- to carry out its responsibilities under the IMS Agreement. Further, the Board considered RiverSource Investments' ability to retain key personnel and its expectations in this regard. The Board also discussed the acceptability of the terms of the IMS Agreement (including the relatively broad scope of services required to be performed by RiverSource Investments). The Board concluded that the services being performed under the IMS Agreement were of a reasonably high quality, particularly in light of recent market conditions. Based on the foregoing, and based on other information received (both oral and written, including the information on investment performance referenced below) and other considerations, the Board concluded that RiverSource Investments and its affiliates were in a position to continue to provide a high quality and level of services to the Fund. Investment Performance: For purposes of evaluating the nature, extent and quality of services provided under the IMS Agreement, the Board carefully reviewed the investment performance of the Fund. In this regard, the Board considered: (i) detailed reports containing data prepared by an independent organization showing, for various periods, the performance of the Fund, the performance of a benchmark index, the percentage ranking of the Fund among its comparison group and the net assets of the Fund; and (ii) a report detailing the Fund's performance over various periods, recent Fund inflows (and outflows) and a comparison of the Fund's net assets from December 2007 to December 2008. The Board observed that the Fund's investment performance was appropriate in light of the particular management style and the exceptionally challenging market conditions involved. Further, the Board noted that appropriate measures have been taken to remove and add certain portfolio managers. Comparative Fees, Costs of Services Provided and the Profits Realized By RiverSource Investments and its Affiliates from their Relationships with the Fund: The Board reviewed comparative fees and the costs of services to be provided under the IMS Agreement. The Board members considered detailed comparative information set forth in an annual report on fees and expenses, including, among other things, data (prepared by an independent organization) showing a comparison of the Fund's expenses with median expenses paid by funds in its peer group, as well as data showing the Fund's contribution to RiverSource Investments' profitability. They also reviewed information in the report comparing the fees charged to the Fund by RiverSource Investments to fees charged to other client accounts (with similar investment strategies to those of the Fund). -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT 87 APPROVAL OF INVESTMENT MANAGEMENT SERVICES AGREEMENT (continued) ---------------------------------------------------------- The Board accorded particular weight to the notion that the level of fees should reflect a rational pricing model applied consistently across the various product lines in the Funds' family, while assuring that the overall fees for each fund are generally in line with the "pricing philosophy" (i.e., that the total expense ratio of each fund (excluding the effect of a performance incentive adjustment, if applicable), with few exceptions, is at or below the median expense ratio of funds in the same comparison group). The Board took into account that the Fund's total expense ratio (after considering proposed expense caps/waivers) approximated the peer group's median expense ratio. The Board also considered the expected profitability of RiverSource Investments and its affiliates in connection with RiverSource Investments providing investment management services to the Fund. In this regard, the Board referred to a detailed profitability report, discussing the profitability to RiverSource Investments and Ameriprise Financial from managing and operating the Fund, including data showing comparative profitability over the past two years. The Board also considered the services acquired by the investment manager through the use of commission dollars paid by the Funds on portfolio transactions. The Board noted that the fees paid by the Fund should permit the investment manager to offer competitive compensation to its personnel, make necessary investments in its business and earn an appropriate profit. The Board concluded that profitability levels were reasonable. Economies of Scale to be Realized: The Board also considered the economies of scale that might be realized by RiverSource Investments as the Fund grows and took note of the extent to which Fund shareholders might also benefit from such growth. The Board considered that the IMS Agreement provides for lower fees as assets increase at pre-established breakpoints and concluded that the IMS Agreement satisfactorily provided for sharing these economies of scale. Based on the foregoing, the Board, including all of the Independent Directors, concluded that the investment management service fees were fair and reasonable in light of the extent and quality of services provided. In reaching this conclusion, no single factor was determinative. On April 8, 2009, the Board, including all of the Independent Directors, approved the renewal of the IMS Agreement for an additional annual period. -------------------------------------------------------------------------------- 88 RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT PROXY VOTING ------------------------------------------------------------------- The policy of the Board is to vote the proxies of the companies in which the Fund holds investments consistent with the procedures as stated in the Statement of Additional Information (SAI). You may obtain a copy of the SAI without charge by calling the RiverSource Family of Funds at 1(800) 221-2450; contacting your financial intermediary; visiting riversource.com/funds; or 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 is filed with the SEC by August 31 for the most recent 12-month period ending June 30 of that year, and is available without charge by visiting riversource.com/funds; or searching the website of the SEC at www.sec.gov. -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2009 ANNUAL REPORT 89 RIVERSOURCE DIVERSIFIED BOND FUND 734 Ameriprise Financial Center Minneapolis, MN 55474 RIVERSOURCE.COM/FUNDS This report must be accompanied or preceded by the Fund's current prospectus. RiverSource(R) mutual funds are distributed by RiverSource Fund Distributors, Inc., Member FINRA, and managed by RiverSource Investments, LLC. RiverSource is part of Ameriprise Financial, Inc. (RIVERSOURCE INVESTMENTS LOGO) (C)2009 RiverSource Investments, LLC. S-6495 AD (10/09)
Item 2. (a) The Registrant has adopted a code of ethics that applies to the Registrant's principal executive officer and principal financial officer. A copy of the code of ethics is filed as an exhibit to this form N-CSR. (b) During the period covered by this report, there were not any amendments to the provisions of the code of ethics adopted in 2(a) above. (c) During the period covered by this report, there were not any implicit or explicit waivers to the provisions of the code of ethics adopted in 2(a). Item 3. The Registrant's board of directors has determined that independent directors Pamela G. Carlton, Jeffrey Laikind, John F. Maher and Anne P. Jones, each qualify as audit committee financial experts. Item 4. Principal Accountant Fees and Services Fund - Related Fees (a) Audit Fees. The fees for the year ended Aug. 31, to Ernst & Young LLP for professional services rendered for the audit of the annual financial statements for RiverSource Diversified Income Series, Inc. were as follows: 2009 - $26,431 2008 - $26,125 (b) Audit-Related Fees. The fees for the year ended Aug. 31, to Ernst & Young LLP for additional audit-related services rendered for RiverSource Diversified Income Series, Inc. were as follows: 2009 - $375 2008 - $375 (c) Tax Fees. The fees for the year ended Aug. 31, to Ernst & Young LLP for tax compliance related services rendered for RiverSource Diversified Income Series, Inc. were as follows: 2009 - $4,257 2008 - $3,498 (d) All Other Fees. The fees for the year ended Aug. 31, to Ernst & Young LLP for additional professional services rendered for RiverSource Diversified Income Series, Inc. were as follows: 2009 - $0 2008 - $0 (e) (1) Audit Committee Pre-Approval Policy. Pursuant to Sarbanes-Oxley pre-approval requirements, all services to be performed by Ernst & Young LLP for the registrant and to the registrant's investment adviser and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant must be pre-approved by the audit committee. (e) (2) 100% of the services performed for items (b) through (d) above during 2009 and 2008 were pre-approved by the audit committee. (f) Not applicable. (g) Non-Audit Fees. The fees for the year ended Aug. 31, to Ernst & Young LLP by the registrant for non-audit fees and by the registrant's investment adviser, and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the registrant were as follows: 2009 - $827,118 2008 - $617,073 (h) 100% of the services performed in item (g) above during 2009 and 2008 were pre-approved by the Ameriprise Financial Audit Committee and/or the RiverSource Mutual Funds Audit Committee. Item 5. Audit Committee of Listed Registrants. Not applicable. Item 6. Investments. (a) The complete schedule of investments is included in Item 1 of this Form N-CSR. (b) Not applicable. 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) Code of ethics as applies to the Registrant's principal executive officer and principal financial officer, as required to be disclosed under Item 2 of Form N-CSR, is attached as Ex. 99.CODE ETH. (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) RiverSource Diversified Income Series, Inc. By /s/ Patrick T. Bannigan ---------------------------------- Patrick T. Bannigan President and Principal Executive Officer Date November 4, 2009 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/ Patrick T. Bannigan ---------------------------------- Patrick T. Bannigan President and Principal Executive Officer Date November 4, 2009 By /s/ Jeffrey P. Fox ---------------------------------- Jeffrey P. Fox Treasurer and Principal Financial Officer Date November 4, 2009